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https://www.courtlistener.com/api/rest/v3/opinions/4475468/	OPINION. ARUndell, Judge: The sole issue in regard to the petitioner’s tax liability for the fiscal year ended May 31, 1944, concerns the amount petitioner may properly accrue and deduct for Oregon corporation excise taxes in that year. Respondent concedes that the petitioner is entitled to deduct the sum of $20,965.01 which represents the tax originally reported by the petitioner in its state tax return and the amount claimed by the petitioner as a deduction in its Federal tax returns for that year. Petitioner, on the other hand, contends that it is entitled to accrue and deduct the amount of $20,040.49 representing the total tax as disclosed in an amended state tax return which it filed on or about November 30, 1946. Petitioner concedes that the additional state excise tax of $5,075.48 results from the elimination of the deduction for “Post-war Reconversion Expense” in the amount of $253,774.13 claimed in its Oregon corporation excise tax return as originally filed, and agrees with the respondent that the issue herein is governed by the so-called “contested tax” rule. See Dixie Pine Products Co. v. Commissioner, 320 U. S. 516; Security Flour Mills Co. v. Commissioner. 321 U. S. 281. The parties differ as to whether petitioner’s claim of the deduction for post-war reconversion expense on its Oregon excise tax return, in the face of advice to it that this item was not properly deductible, constituted a “contest” of its liability for the additional tax which would otherwise have been due. The right to accrue a liability for tax comes with the occurrence of all the events which fix the amount of the tax and determine the liability of the taxpayer to pay it. United States v. Anderson, 269 U. S. 422; see G. C. M. No. 25298, 1947-2 C. B. 39. In cases involving taxpayers who contest the imposition of a tax by court action, it has been consistently held that the right to accrue such expense must be postponed until such time as the taxpayer’s liability for the tax and the amount thereof has been finally determined. Dixie Pine Products Co. v. Commissioner, supra; Security Flour Mills Co. v. Commissioner, supra. However, it is not necessary that a taxpayer institute legal proceedings in order to “contest” his liability for a tax. In Great Island Holding Corp., 5 T. C. 150, 160, we stated that: We do not agree with petitioner’s contention that the “contested tax” rule is applicable only in cases where the dispute has been carried to the courts. In our view, it is sufficient if the taxpayer does not accrue the items on its books and denies its liability therefor. The petitioner herein did not accrue the tax in question on its books, nor can it fairly take the position that it did not deny its liability for any additional tax when it claimed the benefit of the deduction for post-war reconversion expense. The additional tax which petitioner now seeks to accrue and deduct in the fiscal year 1944 was not the result of innocent error or oversight on the part of the petitioner but was the direct result of its deliberate and affirmative claim to a deduction in the amount of $253,774.13. The petitioner, with clarity and in all apparent sincerity, claimed the deduction on its state tax return, which had the practical effect of denying tax liability in any greater amount than reported. It is of no moment now to learn that petitioner’s officers had been forewarned as to the unlawfulness of the deduction or tliat they were unwilling to press the claim should it be disallowed, for these facts were in no manner reflected on the returns. The important considerations are that the deduction and the resulting lower tax were in fact claimed and that at no time prior to the filing of its amended return on November 30,1946, did the petitioner in any manner recognize or concede its liability for taxes in any greater amount than originally reported and paid. Therefore, it is our opinion that the petitioner is not entitled to accrue and deduct in computing its net taxable income for the fiscal year ended May 31,1944, the additional tax in the amount of $5,075.48 which it admitted as owing for the first time on its amended return filed in 1946. The parties state that our decision on the first issue is determinative of the second issue relating to petitioner’s claim that it is entitled to a deduction for the fiscal year ended May 31, 1945, in the amount of $8,901.89 representing interest on deficiencies in Federal income and excess profits tax for the fiscal year ended May 31, 1944, arising out of the respondent’s disallowance of the same deduction of $253,774.13 for post-war reconversion expense which petitioner claimed on its Federal tax returns for the latter year. We agree. It is clear the petitioner did not accrue this interest expense on its books during the fiscal year ended May 31, 1945, and there is no evidence that it had at any time in that year recognized or conceded its liability for the deficiencies in tax and the interest which were ultimately determined by the respondent in respect to the petitioner’s tax liability for the fiscal year ended May 31, 1944. For the reasons we have discussed above, we are of the opinion that petitioner is not entitled to accrue and deduct interest expense of $8,901.89 in the fiscal year ended May 31, 1945. Lehigh Valley Railroad Co., 12 T. C. 977, 1000. The principal issue herein relates to the correctness of the petitioner’s reported closing inventory for the fiscal year ended May 31, 1945. Petitioner purported to value its closing inventory at cost or market, whichever was lower, and reported a closing inventory of $1,060,2S9.05 as of May 31,1945, including therein “Work in Progress” on the uncompleted vessels covered by Contracts 1847 and 1964 at a “market” value of $41,857 and zero, respectively, whereas the actual cost of the materials and labor expended by the petitioner on such contracts totaled $196,887.44 and $177,388.33, respectively, as of May 31,1945. In the notice of deficiency respondent held that the market value of such “Work in Progress” was not less than the actual cost of the materials and labor expended, and accordingly increased the petitioner’s closing inventory and thereby its net income by the amount of $332,418.77. The statute directly grants to the Commissioner the responsibility and the authority for determining the need and the methods to be followed for the taxpayer’s use of inventories in determining income for Federal tax purposes. Section 22 (c), Internal Revenue Code. Pursuant to this authority, the Commissioner, in Regulations 111, section 29.22 (c)7l, has held that inventories are necessary in every business where the production, purchase, or sale of merchandise is an income-producing factor and that such inventories shall include finished goods, partially finished goods, and raw materials and supplies which have been acquired for sale or Avhich will physicallly become a part of merchandise intended for sale. However, the Commissioner’s regulations provide that “Merchandise shall be included in the inventory only if title thereto is vested in the taxpayer.” There is nothing novel about the Commissioner’s requirement that a taxpayer hold title to the merchandise he seeks to inventory as this position is generally supported by the recognized authorities on accounting. See Accountant’s Handbook, Second Edition, page 451, and Third Edition, pages 551-552, 558; Principles of Accounting, Third Edition, by H. A. Finney, ch. 15, page 250; Mer-tens, Law of Federal Income Taxation, Yol. 2, ch. 16, section 16.26, page 544, and cases cited therein. By the express terms of Contracts 1847 and 1964, petitioner had no title to the materials supplied by the Government for use in the .construction of the harbor tugs and lighters, and for that matter during the process of construction had no title in the materials or equipment it acquired for installation in the vessels. Under these circumstances it was appropriate that the contracts provided that the petitioner was prohibited from insuring the vessels, or any of the materials or equipment used in the construction thereof. Moreover, the contract was nonassignable by the petitioner. Thus, it is clear that the petitioner held no title or interest in the vessels, materials or equipment as such, nor did it possess any product which it could sell in its own right at any stage of completion. In our opinion, the interest of petitioner in the vessels and the materials and equipment consisted of nothing more than a contractual right to receive a fixed fee for carrying out the construction of the vessels in the manner specified in the contracts. The petitioner’s contractual interest was not the equivalent of title to and ownership of finished goods, partially finished goods, or raw materials, and in our opinion for that reason did not constitute property of a nature includible in inventories as contemplated by the Commissioner in his Regulations, and the accounting authorities in their discussions of accepted inventory practices. Moreover, it was not until the petitioner concluded that it would probably incur losses upon completion of Contracts 1847 and 1964 in the following taxable year that it undertook to anticipate such losses by inventorying its “work and progress” under the contracts at a “market” figure which was $332,418.77 less than the actual costs. Petitioner entered into both contracts shortly after the beginning of the fiscal year ended May 31,1945, and during that year completed three of the ten lighters covered by Contract 1964. In its Federal tax returns, petitioner for that year included in its gross income $122*025 representing the contract price of the three completed lighters, and in its costs the sum of $160,709.29 representing the actual cost of materials and labor expended in the construction of the three lighters completed and delivered during that year. Under the terms of the contract, petitioner was entitled to receive partial payments aggregating $119,619 and $58,492.50 on account of the five tugs and the seven lighters, respectively, which were not completed during the fiscal year ended May 31, 1945. However, these partial payments were not included by petitioner in its gross income for that year but were recorded as “customer deposits” on petitioner’s books and treated as deferred income on its tax returns. It may well be that had the petitioner chosen to report its income from these contracts on the so-called percentage of completion basis and had discovered that the costs incurred in connection with the contracts were running ahead of receipts, it could have accrued and deducted the loss reflected thereby as of the close of its taxable year. However, petitioner did not choose to employ the percentage of completion basis. Instead, it appears from the petitioner’s method of handling the income and costs attributable to the three lighters completed in the fiscal year 1944 and the testimony of its accountant that petitioner elected to defer its income and costs until the various units covered by the contracts were completed and delivered, at which time it would take into income the contract price of the completed unit and include in its costs the portion of the total contract costs allocable to the completed unit. The sole purpose of petitioner’s including the materials and labor supplied under Contracts 1847 and 1964 in its closing inventory for the fiscal year 1945 at a nominal “market” value rather than cost was to record during the fiscal year ending May 31, 1945, the loss it expected to incur on the contracts in the following taxable year. Recognition of the device employed by the petitioner would be clearly violative of the long established rule that the revenue laws only permit the deduction of realized losses and not anticipated losses. Weiss v. Wiener, 279 U. S. 333; Lucas v. American Code Co., 280 U. S. 445. This rule applies with equal effect to those taxpayers properly employing inventories. Ewing Thomas Converting Co. v. McCaughn, 43 Fed. (2d) 503, certiorari denied, 282 U. S. 897; Adams-Roth Baking Co., 8 B. T. A. 458; Higginbotham-Bailey-Logan Co., 8 B. T. A. 566. Therefore, we conclude that the Commissioner did not err in determining that there should be restored to the petitioner’s income for the fiscal year ended May 31,1945, the sum of $332,418.77, representing the petitioner’s write-off in that year of unrealized losses which it expected to incur in connection with Contracts 1847 and 1964 in the following taxable year. Various adjustments which the parties have agreed to will be given effect under Rule 50. Decision will be entered under Rule 50.	01-04-2023	01-16-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622253/	James Petroleum Corporation, Petitioner, v. Commissioner of Internal Revenue, RespondentJames Petroleum Corp. v. CommissionerDocket No. 91885United States Tax Court40 T.C. 166; 1963 U.S. Tax Ct. LEXIS 143; April 26, 1963, Filed 143 Decision will be entered under Rule 50. Losses. -- Held, deductions taken for the years 1927, 1928, and 1929 for theft losses were properly taken in those years and petitioner cannot take a deduction in 1958 for the same loss, either as a bad debt or as an embezzlement loss. Watson Washburn, for the petitioner.Michael D. Weinberg, for the respondent. Black, Judge. BLACK 166 Respondent determined deficiencies in the income tax of petitioner as follows:YearAmount1956$ 736.191957404.9819584,043.29Total5,184.46The adjustment and explanation of the adjustment for 1958 are set forth in the notice of deficiency as follows:Adjustments to incomeNet loss disclosed by return($ 125,722.38)Additional income and unallowable deductions: (a) Bad debt139,200.00 Taxable income as adjusted13,477.62 Explanation of adjustment(a) It is determined that the bad debt deduction of $ 139.200.00 claimed in your income tax return for the taxable year 1958 is not allowable since you have not shown that the debt became worthless in 1958 nor have you established any basis in the debt for which a deduction is allowable.The years 1956 and 1957 are involved solely because of claimed net operating loss deductions for those years based145 on a carryback from 1958. Petitioner deducted the amount of $ 139,200 as a bad debt in 1958 and in an amendment to the petition, petitioner increased the claimed deduction to $ 149,600.The issue presented for our decision is whether petitioner is entitled to a deduction either as an embezzlement loss deduction or as a bad debt deduction for the year 1958 and, if so, the amount.FINDINGS OF FACTMost of the facts have been stipulated by the parties and the stipulation, together with exhibits attached thereto, is incorporated herein by this reference. There also was some oral testimony. As to the 167 facts included in the stipulation only those that seem necessary to an understanding of the case will be included here.Petitioner James Petroleum Corp. is a Delaware corporation incorporated in 1927 with its principal office at Tulsa, Okla. It filed its income tax returns for 1956, 1957, and 1958 with the district director of internal revenue at Oklahoma City, Okla. Petitioner is and has been an accrual basis taxpayer.Robert Jackson, sometimes hereinafter called Jackson, was the chief organizer of the corporation and he served as its president and treasurer from June 15, 1927, 146 until January 9, 1930. Unknown to the stockholders, Jackson used for his personal benefit the following amounts of the proceeds of a sale of petitioner's stock:YearAmount1927$ 44,291.881928219,751.941929103,265.70367,309.52Early in 1930 the stockholders discovered that Jackson had used substantial sums belonging to the corporation for his own benefit. After Jackson's resignation an audit was made which fixed the amounts taken by Jackson. Jackson embezzled the total amount of $ 367,309.52 from the corporation during the period 1927, 1928, and 1929.Petitioner deducted $ 103,265.70 as an embezzlement loss in its 1929 income tax return which was filed on or about October 4, 1930, which deduction was allowed by the examining revenue agent and by the Commissioner of Internal Revenue. Petitioner also obtained refunds for 1927 and 1928 based on the deduction of $ 44,291.88 and $ 219,751.94, respectively, as embezzlement losses for those years. These deductions were allowed by the examining revenue agent who recommended the refunds which were allowed by the Commissioner.Jackson was adjudicated a bankrupt on September 8, 1930, on a petition for involuntary 147 bankruptcy. The schedules annexed showed assets of $ 804,703.48 and liabilities of $ 1,238,719.40. Petitioner's claim against Jackson was scheduled in the bankruptcy but its claim was not discharged thereby. In August 1931 the trustee in bankruptcy sued certain transferees to recover paintings which Jackson had preferentially transferred to certain creditors in 1929. The suit was settled for $ 20,000 and in May 1934 petitioner received notice that the gross receipts of the proceeding merely covered fees and expenses leaving nothing for creditors.During 1930, Jackson delivered properties to petitioner valued at $ 38,763. Petitioner charged off $ 328,546.52 against surplus in 1930 168 which amount represented $ 367,309.52 minus credit for the $ 38,763 worth of property.On August 4, 1932, petitioner served Jackson with a summons and complaint in an action for an accounting in the State of New York. An agreement of settlement was executed by the parties on June 19, 1933. By the terms of the agreement Jackson delivered a check to petitioner for $ 15,000 and 13 non-interest-bearing promissory notes with the following due dates and in the following amounts:Note for $ 5,000148 due August 15, 1933Note for 5,000 due September 15, 1933Note for 5,000 due October 15, 1933Note for 5,000 due November 15, 1933Note for 5,000 due December 15, 1933Note for 5,000 due January 15, 1934Note for 5,000 due February 15, 1934Note for 10,000 due April 30, 1934Note for 10,000 due July 31, 1934Note for 10,000 due October 15, 1934Note for 10,000 due January 10, 1935Note for 10,000 due April 15, 1935Note for 100,000 due April 15, 1936Petitioner did not report any income in the year 1933 upon the execution of the settlement agreement nor did it report income upon the receipt of the notes executed by Jackson. Petitioner did not include the notes in its assets but its balance sheet for 1933 did contain the following footnote:The Corporation holds notes from Robert Jackson in the amount of$ 170,000Less: Contingent collection fees34,000Net proceeds, if collected136,000Jackson defaulted on April 18, 1934, when he failed to pay the $ 5,000 note due February 15, 1934, and his default continued thereafter.In 1934 petitioner commenced an action against the First National Bank of Concord, N.H., in the State of New Hampshire. Petitioner claimed149 that the bank had transferred petitioner's funds for Jackson's benefit. Petitioner was willing to settle the claim for $ 5,000 to $ 10,000. The court had denied petitioner's motion to amend the complaint. The suit against the bank was finally terminated in 1941 when the statute of limitations ran on petitioner's claim.On July 18, 1935, an interlocutory judgment was entered requiring Jackson to account because he was in default. On November 2, 1941, he was found in contempt for failing to account but he was never punished for contempt.Petitioner collected the following amounts from Jackson pursuant to the agreement: 169 YearGross collectionExpenseNet collection1933$ 30,150.00$ 8,030.00$ 22,120.00193426,450.005,209.0021,160.0019356,178.441,235.604,942.8419363,900.00780.003,120.0019374,800.00960.003,840.0019382,730.00546.002,184.0019394,700.00940.003,760.0019401,000.00200.00800.001941265.0053.00212.001942435.0087.00348.0019432,630.00526.002,104.0019442,100.00420.001,680.001945100.0020.0080.001946500.00100.00400.001947-480 0 0 1949630.00126.00504.001950100.0020.0080.001951-550 0 0 19562,000.00400.001,600.0019571,000.00200.00800.00Total89,668.4419,933.6069,734.84150 In 1958 petitioner still held notes against Jackson aggregating $ 140,000.During the period 1933 to 1956, petitioner reported net collections from the payments made by Jackson in its gross income. In the statutory notice of deficiency respondent determined that net collections for 1956 be eliminated from gross income as a nontaxable recovery.Petitioner's attorneys continued to make many attempts to collect from Jackson during the period 1946-57. In 1940 petitioner attempted to settle the claim for $ 15,000 but Jackson could not raise that amount. In 1942 petitioner tried to settle for $ 10,000 and for $ 7,500 in 1950 but Jackson could not raise the money. In 1956 and 1957 petitioner tried to settle the claim for $ 5,000 and Jackson agreed to a settlement for that amount and borrowed $ 3,000 which he paid to petitioner pursuant to this settlement attempt but the remainder was never paid.OPINIONPetitioner contends that it suffered a loss of $ 149,600 in 1958, notwithstanding prior deductions for the losses in 1927, 1928, and 1929 due to the worthlessness of its claims against Jackson. Petitioner contends that it is immaterial whether the loss was an embezzlement loss deduction151 or a bad debt deduction on the notes Jackson gave to petitioner in 1933. Petitioner claims that 1958 is the proper year for the deduction because it was the first year since 1933 in which there were neither any payments received nor any negotiations regarding future payments. Furthermore, petitioner claims that Jackson's advanced age in 1958 made it unlikely that he would raise any additional funds. Therefore, contends petitioner, it was in 1958 that its claim against Jackson became completely worthless.170 Respondent contends that petitioner is not entitled to a deduction in 1958 either as a bad debt or as an embezzlement loss. Respondent argues that if the deduction is classified as an embezzlement loss it was worthless in 1930 or at least prior to 1958. As to the notes received in 1933, respondent argues that no independent deduction could be taken for the notes because they were merely in recognition for the underlying embezzlement claims which had already been taken as losses. Alternatively, respondent contends that since the notes were never included in income petitioner is prevented from claiming a loss on these notes as a matter of law.As a general rule, a taxpayer152 may not claim a deduction at will in any year he may select but he must take the deduction in the proper year, and any item incorrectly reported can, subject to the statute of limitations, be corrected by the Commissioner. A deduction incorrectly taken in one year will be corrected by eliminating it for the year in which it was taken and allowing it for the year it should have been taken, (C.A. 6, 1956). Cf. . Petitioner claims that it incorrectly wrote off the embezzlement loss in 1930 1 and incorrectly took deductions for embezzlement loss in 1927, 1928, and 1929, and that the proper year is 1958. Since the prior years of deduction (1927, 1928, and 1929) are now closed by the statute of limitations it would seem that corrections of prior errors, if any, would have to be made through the operation of sections 1311-1315 of the 1954 Code. Both parties agree, however, that the mitigating sections of the 1954 Code, sections 1311-1315, are not applicable here since it is specifically provided in section 1314(d) 153 2 that erroneous deductions in years prior to 1932 cannot be corrected by operation of section 1311. 3154 Our Findings of Fact show that, unknown to the stockholders, Jackson used for his personal benefit the following amounts of the stock sales:YearAmount1927$ 44,291.881928219,751.941929103,265.70171 Furthermore, these Findings of Fact show that petitioner in its income tax return for 1929 claimed an embezzlement loss of $ 103,265.70 for that year and that the Commissioner allowed the loss. The Findings of Fact further show that refund claims were filed for 1927 and 1928 based on the embezzlement losses for those years and that these refund claims were allowed.The question presented here, therefore, requires us to determine whether or not petitioner properly took the deductions in 1927, 1928, and 1929. If the deductions were properly taken in those years petitioner, it seems to us, would not be entitled to the same deduction again in 1958; we know of no law that would permit it.Petitioner relies on (C.A. 6, 1959), reversing , for the proposition that an embezzlement loss should not be taken in the year of discovery where155 a valuable claim for reimbursement against the embezzler exists. Comparing the Scofield case with the instant case, some patent distinctions appear. In the Scofield case the loss had not been deducted once and an attempt made to deduct it again in a later year. The suits had been instituted in the year of discovery of the embezzlement, whereas in the instant case suit was not instituted against Jackson until 1932 or against the Concord bank until 1934. Foresight in 1930 as to chances of recovery and not hindsight is the test by which to view the facts. In Scofield the embezzlers in the year of discovery had a valuable interest in trust property. In contrast, Jackson's financial condition in 1930, the year the embezzlement was discovered, was very poor. On February 14, 1930, Jackson's creditors filed an involuntary petition in bankruptcy. He was adjudicated a bankrupt on September 8, 1930, and obtained a discharge on January 10, 1935. His liabilities were in excess of assets to the extent of more than $ 400,000, which amount was determined without consideration of the amount of petitioner's claim. Other documents submitted to petitioner in 1930 indicated insolvency156 to the extent of $ 600,000.This comparison of facts is such that we do not believe the decision in the Scofield case would require us to find that petitioner in the instant case improperly took deductions for the embezzlement losses as described in our Findings of Fact in 1927, 1928, and 1929. At the time the embezzlement was discovered in 1930 it was reasonable for petitioner to assume that its loss would not be recovered and that it could properly write it off. Cf. (C.A. 2, 1934). The fact that petitioner did collect some money from Jackson over a 25-year period does not, we think, make the deductions taken in 1927, 1928, and 1929 improper. Viewing the situation as it existed in 1930 it was reasonable for petitioner to write off the losses as described in our Findings of Fact. Nor do we believe that the receipt of notes from Jackson in 1933 qualifies petitioner to 172 take a bad debt deduction in 1958. These notes were merely evidence of the underlying claim against Jackson for the funds embezzled. Petitioner had only one claim against Jackson and that was for reimbursement for its embezzlement*157 losses. In this case the loss had previously been deducted and petitioner, upon receipt of the embezzler's notes, did not enter them in its books as an asset or report the notes as income in the year received.We hold that petitioner's claim against Jackson was properly deducted in 1927, 1928, and 1929 as an embezzlement loss and that the loss cannot be deducted again in 1958 as a bad debt or as an embezzlement loss under the facts of this case.Decision will be entered under Rule 50. Footnotes1. In 1930, the year petitioner discovered the embezzlement, it obtained deductions for the years 1927, 1928, and 1929, the years in which the embezzlements actually occurred. This was in accordance with the then existing law.↩2. SEC. 1314. AMOUNT AND METHOD OF ADJUSTMENT.(d) Periods for Which Adjustments May Be Made. -- No adjustment shall be made under this part in respect of any taxable year beginning prior to January 1, 1932.↩3. SEC. 1311. CORRECTION OF ERROR.(a) General Rule. -- If a determination (as defined in section 1313) is described in one or more of the paragraphs of section 1312 and, on the date of the determination, correction of the effect of the error referred to in the applicable paragraph of section 1312 is prevented by the operation of any law or rule of law, other than this part and other than section 7122 (relating to compromises), then the effect of the error shall be corrected by an adjustment made in the amount and in the manner specified in section 1314.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622254/	Joan D. Lane (formerly Joan L. Fillet) v. Commissioner.Lane v. CommissionerDocket No. 6020-65.United States Tax CourtT.C. Memo 1967-46; 1967 Tax Ct. Memo LEXIS 216; 26 T.C.M. (CCH) 240; T.C.M. (RIA) 67046; March 9, 1967216 Eugene H. Feldman, for the petitioner. Agatha Vorsanger, for the respondent. RAUMMemorandum Findings of Fact and Opinion RAUM, Judge: The Commissioner determined a $2,084.03 deficiency in petitioner's income tax for 1962. Two related questions are before us for decision: the availability of a $600 exemption for petitioner's infant child and a deduction of $3,380 for medical expenses incurred in respect of that child. Facts stipulated by the parties are incorporated herein by reference. During 1962 petitioner was married to Henry Fillet, and resided with him in an apartment in New York City. The household consisted of the spouses, two children and a nurse. Petitioner and her husband separated in 1963 and were subsequently divorced. She filed her separate income tax return for 1962 in New York. Petitioner was employed as an executive at an annual salary of $26,000. Her husband's income was approximately the same. Their child Adam was born on September 5, 1960, and resided with them throughout 1962 as did petitioner's son by a former marriage. The husband paid the rent, utilities and milk bills in 1962 which amounted to $4,100, $575, and $183.26 respectively. The217 wife paid the food bills, amounting to $5,200, as well as charges for diapers and child's clothing, amounting to $360, and doctor's expenses, amounting to $205. She also paid nurse's wages as hereinafter set forth. Adam was a defective child, suffering with cerebral palsy, and it was necessary to have a full time nurse look after him. A nurse named Mae Lawrence was hired for this purpose. She had been trained in Ireland and was a registered nurse in that country, but was not registered as such in the United States. She lived in petitioner's apartment, sharing a room with Adam and caring for him on a 24-hour basis six days a week under the general supervision of a physician. She was paid $65 a week, or a total of $3,380 for 1962. It is undisputed that petitioner made such payments to the nurse. However, respondent contends that she was reimbursed therefor by her then husband. The issue is one of fact, and we are satisfied on the evidence before us that he did not reimburse her therefor either directly or indirectly. We so find as a fact. Our finding in respect of the foregoing item goes far to settle the question as to the dependency exemption. On the basis of the entire record*218 we hereby find as a fact that petitioner paid more than one-half of Adam's support for 1962, and that the nurse's wages represented a medical expense. Accordingly, we conclude that petitioner was entitled to the $600 exemption for Adam, and that the $3,380 paid by her to Adam's nurse qualifies as a medical expense in respect of which she is entitled to a deduction. Decision will be entered for the petitioner.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622257/	Maple Leaf Farms, Inc., Petitioner v. Commissioner of Internal Revenue, RespondentMaple Leaf Farms, Inc. v. CommissionerDocket No. 8314-73United States Tax Court64 T.C. 438; 1975 U.S. Tax Ct. LEXIS 125; June 19, 1975, Filed 125 Decision will be entered under Rule 155. Held, since petitioner participated sufficiently in the process and risk of loss involved in growing ducks, it qualifies as a farmer within the meaning of sec. 1.471-6(a), Income Tax Regs., and therefore is entitled to file its income tax returns on the cash receipts and disbursements method of accounting. Robert N. Davies and Richard E. Aikman, for the petitioner.Thomas J. Meyer, for the respondent. Tannenwald, Judge. TANNENWALD126 438 Respondent determined the following deficiencies in petitioner's Federal income tax: 439 TYE Nov. 30 --Amount1967$ 240,921.60196882,394.011969154,122.63Other issues having been settled, the only issue for our determination is whether petitioner is a farmer, as opposed to a processor, and is therefore entitled to report its income by the cash receipts and disbursements method instead of the accrual method of accounting in accordance with section 1.471-6(a), Income Tax Regs.1127 FINDINGS OF FACTCertain facts have been stipulated and are found accordingly. The stipulation of facts and exhibits attached thereto are incorporated herein by this reference.Petitioner is an Indiana corporation with its principal office in Milford, Ind., at the time it filed its petition herein. For the taxable years in issue, petitioner filed its Federal corporate income tax returns with the Internal Revenue Service Center, Covington, Ky.Petitioner reported its income for the taxable years in issue by the cash receipts and disbursements method of accounting. It also maintained records of inventories, accounts receivable, and accounts payable during the taxable years in issue and had its accountants prepare yearly profit-and-loss statements and balance sheets by the accrual method of accounting.From 1967 to 1969, petitioner raised an average of approximately 10,000 ducks per month on its property. On this same property, it also slaughtered and processed an average of 100,000 ducks per month. The excess of ducks slaughtered and processed over ducks grown was raised by growers working, during the years in issue, exclusively for and under oral contracts with petitioner. The128 number of growers under contract with petitioner varied between 16 and 22 and their farms were all within a 25-mile radius of petitioner's. In 1970, petitioner prepared a standard written agreement which contained substantially the same terms and conditions as the prior oral contracts.440 Pertinent parts of this Duck Growing Agreement (hereinafter agreement) provided:This agreement is made and entered into this -- day of --, 19 -- by and between -- herein after called the "Grower" and Maple Leaf Farms, Inc., herein after called the "Owner". This agreement shall be for -- years from date hereof.In consideration of mutual promises herein contained, the respective parties hereby agree as follows:The Owner Agrees:1. To supply at a charge to the Grower [a specified number] (more or less) day old ducklings for the houses on the Growers premises, located at [grower's address].Acts of God, wind, fire, plant loss, the inability of the hatchery to deliver the agreed number, or any losses beyond the immediate control of the Owner may alter the above agreed number.2. To supply at a charge to the grower for growing these ducklings all feed, medication and vaccines.3. To provide129 periodically a supplementary agreement, covering the cost of feeds, day old ducklings, medication, and the amount of money to be credited to the Grower for live birds.4. To provide transportation for these ducklings to and from the Grower's premises.5. To take possession from the Grower at approximately 7 weeks of age all U.S.D.A. inspected and approved ducklings.6. The Owner will not accept any duck condemned for: 1. Tuberculosis, 2. Leukosis, 3. Septicaemia and Toxemia, 4. Synovitis, 5. Tumors, 6. Bruises, 7. Airsacculitis. The ducks condemned will be taken from the USDA Poultry Condemnation Certificate. These ducks will be deducted from the total live weight at the rate of six pounds per duck. All other condemns which are of plant origin will be taken as approved ducks.7. To advance to the Grower 2 cents per pound for total pounds received at 7 weeks of age, for Summer production and 3 cents per pound for Winter production, the balance to be paid at the end of the fiscal year, after the Grower's account has been closed for the year. If an indebtedness is incurred by the Grower, said debt will be carried to their next project year.8. To pay all property taxes and insurance130 covering these ducklings, feed and medican [sic], for fire, lightning, smoke, wind, hail, explosion, earthquake, rioting, flood, fallen aircraft or objects there from, collision or over turn while trucking to plant.The Grower Agrees:1. To furnish suitable buildings and/or pools, equipment, and facilities for growing these ducklings.2. To furnish all labor required to care for these ducklings.3. To provide, in case of his inability to properly care for the ducklings, competent help that will meet with the approval of the Owner.4. To remove all ducks going to slaughter from feed in adequate time to assure completely empty crops and intestines before ducks are removed from Growers premises.441 5. To provide adequate loading ramps and labor to load these ducklingsc [sic] onto the Owner's transportation.6. To notify the Owner immediately if ducklings become unhealthy or appear to be suffering from a disease or ailment.7. Not to sell or transfer any of the ducklings, feed, or other materials supplied by the Owner to any other person or Company without prior consent of the Owner.8. To follow all recommendations of the service man and management program outlined below.A. That131 premises, including feed room, brooding area, pools, lots, and ground surrounding the buildings and pools shall be thoroughly cleaned and disinfected prior to arrival of ducklings.B. To provide at least one brooder stove for every 500 ducklings placed.C. To use only approved types of litter, pine shavings preferred.D. Ducklings shall not be crowded. Provide at least 3/4 square feet of house area per bird from day old to two weeks of age, and 1 1/4 square feet of house area per bird from two weeks to four weeks of age. If birds are to be grown from four weeks to seven weeks inside a building, provide at least three square feet per bird.E. To provide one pool for each 2000 ducks. Pool size should be approximately 100 ft. long, 10 ft. wide with a 50 ft. long drinker. Lot size should be no less than 40,000 square ft., per pool, with good drainage.F. To provide supplementary waterers for the first two days after ducklings are placed.G. To provide adequate water space during the growing period, at least 16 linear ft. per 500 birds till four weeks of age and 32 linear ft. per 500 birds after four weeks of age, properly placed.H. That feed will be kept in a clean, dry place, free132 of free flying birds, and rodents.I. That feed will not be fed on the floor or ground. Supply adequate feeder space. Feed must be fed in an approved type of feeder, that will eliminate feed waste and provide adequate feed storage.J. That wild animal and rodent control must be carried out in and around buildings and lots.K. That buildings will be bedded at least once a day with clean, dry bedding, more often if necessary to keep litter dry and birds comfortable.L. That proper ventilation will be carried on in buildings as required; mechanical ventilation is preferred.M. That at least 8 gal. of water per minute will be supplied to each pool 24 hours a day while pools are in use.N. That pools will be drained and scrubbed each day while in use.O. That all perimeter fences around lots will be at least 5 ft. in height, and of a mesh so constructed as to restrict wild animals.P. That adequate lighting will be provided at each loading ramp.Q. That loading ramps will be constructed, maintained, and positioned as recommended.R. That weeds and brush will be kept cut around loading ramps and along the drives leading to and from these ramps or feed bins.442 S. That weeds and133 brush be kept cut along the outside of all perimeter fences.T. That roads or drives to loading ramps and feed containers will be constructed in such a manner so as to provide for the free access and movement of live duck trucks and feed trucks.U. That adequate lot fences will be maintained to keep all age groups separate at all times.It is mutually agreed that:1. All ducks being slaughttered [sic] will be weighed on the Owner's scales by qualified personnel approved and provided by the Owner.* * 3. This agreement shall be void if the Grower does not fulfull [sic] the management requirements in previous paragraphs.4. This agreement shall be void if the quality of ducklings grown does not meet the standards set by the Owner, as follows:A. Live weights must average above 6 lbs. per duck.B. Grower condemnations not to exceed 1% of total live weight.C. Grades must be above 85% A Grade as determined by USDA Grader.5. The Owner shall retain title to all materials delivered to the Grower under this agreement.6. Should either party desire to discontinue this agreement, he may do so at the completion of any brood, provided: he has given notice to the other party at least -- days134 prior to the next placement date.Petitioner purchased 1-day-old ducklings from Wayne Duck Farm & Hatchery, Inc., of Wayne, Ohio (hereinafter referred to as the Hatchery), and, under paragraph 1 (The Owner Agrees, p. 440, supra) of the agreement, supplied them "at a charge" 2 to the growers. Employees of petitioner scheduled the time of delivery of the ducklings -- occasionally, from the Hatchery to petitioner's own property and then to the growers or, usually, directly to the growers. The contract between petitioner and the Hatchery provided for a price of 28 cents per duckling during 1968 and 29 cents per duckling during 1969 3 and that "Title to all ducklings sold pursuant to this agreement shall pass at the Buyer's dock." Petitioner paid the Hatchery directly for each duckling delivered to its growers.135 Under paragraph 2 (The Owner Agrees, p. 440, supra) of the agreement, petitioner furnished, "at a charge" to each grower, all feed, medications, and vaccines needed in the growing process. Petitioner selected all feed and medications it determined to be necessary and paid the suppliers for these items. As his supply of 443 feed ran low, each grower notified the feed mill and ordered the feed to be delivered directly to his premises. As medication was needed, each grower would notify petitioner, who would authorize delivery of such medication from the supplier to the grower.Petitioner retained legal title to "all materials delivered to the Grower" pursuant to paragraph 5 (mutual agreements, p. 442, supra) of the agreement, which included the ducks, feed, medications, etc. Petitioner carried and paid for insurance and paid all Indiana personal property taxes on the ducks and feed in the possession of the growers.Petitioner did not lease any land of any of the growers for the purpose of raising ducks. The growers provided, on their own premises, the services called for in the eight paragraphs of the agreement under "The Grower Agrees." Periodically, an employee of136 petitioner, known as a fieldman, would visit each grower and would check the facilities to be sure the requirements of the agreement were being met. On these trips, he would often give criticism and make recommendations.When the ducks raised by the growers reached the age of 7 weeks, petitioner would arrange to pick them up and truck them to the slaughtering and processing plant on its own premises. Once there, the birds were killed, defeathered, eviscerated, packaged, and frozen. Any ducks condemned by the USDA were not accepted by petitioner.Petitioner used growers to raise a majority of its ducks, instead of raising them on its own land, for three primary reasons: (1) The growers were generally former poultrymen who had unused land and buildings which petitioner could take advantage of more economically than buying its own land and constructing new facilities, (2) having the ducks dispersed was advantageous for disease-control purposes, and (3) petitioner found that it got better quality work from independent, profit-motivated growers than it could get from employees on its own farm. The growers often preferred raising ducks for petitioner rather than as independent businessmen137 because: (1) It provided an established market, considerably reducing the growers' risks and (2) they often lacked the necessary capital to purchase and carry the feed and ducks.Petitioner did not consider the growers as its employees and did not include them in its profit-sharing or medical plans. Petitioner 444 withheld F.I.C.A. and income taxes from salaries to its employees but did not withhold either item from payments to its growers.For each grower, a grower's project account was opened and thereafter maintained by petitioner. Debits to each account were made by petitioner at the time of delivery of ducklings, feed, and medication purchased by petitioner and delivered to the particular grower. At the end of the 7-week growing cycle, when the ducks were delivered back to petitioner's plant, a credit was made to the grower's account for each pound of live, uncondemned duck delivered. The credits to the growers were reduced by petitioner by charges for trucking from their premises to petitioner's processing plant in 1967 and 1968, but, with a minor exception, this was not the case in 1969. The amount of such debits for ducklings, feed, and medication and credits for138 pounds of live, uncondemned duck was set at the beginning of each growing year although the credits were occasionally varied. 4 During the 3 years in issue, petitioner made cash advances of 1.5 cents to 2.5 cents per pound for each pound of live, uncondemned duck delivered. 5 The credit for delivered ducks was then reduced by the amount of such cash advance.The amount the growers were debited often differed139 from the amount petitioner had paid for that item. For example, in 1968 and 1969, each grower was debited 28 1/2 cents for each duckling delivered, although petitioner's cost for ducklings in those years was 28 cents and 29 cents, respectively. Also, each grower's account was debited $ 92 per ton for starter feed delivered in 1967, 1968, and 1969, although the feed cost petitioner only $ 71 per ton in those years. No debits were made to the grower's account for the insurance premiums or personal property taxes paid by petitioner (see p. 443, supra). In the event of a fire or other insured loss on the premises of a grower, the insurance company would pay petitioner for the loss in respect of its feed and ducks and petitioner would then credit the account of the grower for the amount previously debited for the ducks and feed destroyed.445 Since, at the beginning of each year, each grower knew what amounts he would be charged and the amount he would be credited for each pound of delivered duck, he could figure approximately what he could earn during the year -- changes in the poultry and grain prices would not affect him -- and then decide whether he wanted to participate140 that year. Both petitioner and its growers made some prediction about the expected percentage of ducks that would die or be condemned in any given year. Growers used this prediction to project their probable income from growing. In the event of an abnormal or unusually large loss, the growers generally believed that petitioner would help them absorb some of it. 6During the years in issue, petitioner credited the growers with the following amounts per pound of live, uncondemned duck: 71st quarter2d quarter3d quarter4th quarter19678141 24 cents and21 cents21 cents and21 cents 24 cents 196824 cents21 cents21 cents21 cents and24 cents 196924 cents24 cents and21 cents and21 cents 22 cents 22 centsAt the end of petitioner's fiscal year, each grower's project account was closed and adjustments were made for feed or ducklings charged to the grower but still on hand. After adjustments, each grower's balance was determined. If a grower had a credit balance at yearend, he would be paid that amount in cash. If a grower had a debit balance at yearend, and continued to grow for petitioner during the subsequent year, the balance would be carried forward as the opening balance in that subsequent year. (See par. 7 (The Owner Agrees, p. 440, supra) of the agreement.) If, however, the grower did not continue to grow for petitioner in the ensuing year, no attempt was made by petitioner to collect a debit balance. Neither petitioner nor the grower considered it to be an outstanding debt owing. 9142 The Foster Duck Farm, located in Wayne, Ohio, is both a grower and processor of ducks, which, like petitioner, processes many more ducks than it grows. (During the years in issue, it 446 raised approximately 3,000 ducks every other week and processed approximately 5,000 to 6,000 per week.) Unlike petitioner, however, the Foster Duck Farm had no interest in the ducks delivered to it by independent growers prior to the actual delivery. The table below reflects the prices it paid per pound, during the years in issue, for 7-week-old ducks. No adjustments were made by the Foster Duck Farm for condemnations, barring a major case. Herb Culver grows ducks in Middlebury, Ind., and sells them to the C&D Duck Co. in Wisconsin. Culver breeds and maintains his ducks and furnishes all his own feed, medications, and transportation to the C&D processing plant. (Culver delivered approximately 150,000 ducks per year to C&D during the years in issue.) The table below also reflects the prices per pound paid Culver by C&D for 7-week-old ducks delivered to C&D. C&D adjusted its payments for condemned ducks.19671st quarter2d quarter3d quarter4th quarter10 Foster X 22 1/2 cents20 1/2 cents21 cents andand 21 cents and 21 cents 23 cents 11 Culver 24.47 cents22.75 cents 22.23 cents 24.40 cents 1968FosterX 23 cents and21 1/2 cents21 cents and21 1/2 cents and 21 cents 23 cents CulverX 24.35 cents 24.17 cents 24.87 cents 1969FosterX 23 cents 23 cents 23 cents and24 cents Culver24.82 cents24.64 cents 23.81 cents 24.47 cents 143 Petitioner sold its frozen packaged ducks to poultry distributors and national or regional retail chainstore buyers. During the years in issue, petitioner employed three salespersons who were active throughout the United States. The only substantial consumer market in the United States during the years in issue was for cleaned and frozen duck. There was no substantial consumer market for live ducks and only about 5 percent of the ducks purchased by consumers during the years in issue were cleaned and chilled.ULTIMATE FINDING OF FACTPetitioner was a farmer within the meaning of section 1.471-6(a), Income Tax Regs., and is entitled to use the cash receipts and disbursements method of accounting.447 OPINIONRespondent has determined144 that the cash receipts and disbursements method, consistently used by petitioner for income tax purposes, did not clearly reflect income because it failed to take substantial inventories into account. Sec. 471; sec. 1.471-1, Income Tax Regs. To account for these inventories, respondent has recomputed petitioner's income by the accrual method. Ignoring the potential issue of whether the cash method clearly reflected income, petitioner justifies his use of it solely on the "historical concession by the Secretary and the Commissioner" 12 that farmers may use the cash method regardless of inventories or a potential distortion of income. Secs. 1.471-6(a)13 and 1.61-4, Income Tax Regs.145 There is no question but that the duck-growing process constitutes "farming" and that the place where it is conducted is a "farm." See secs. 175(c)(2), 180(b), 182(c), 6420(c)(2) and (3); secs. 1.61-4(d), 1.175-3, 1.180-1(b), 1.182-2, Income Tax Regs. Neither the degree of mechanization ( United States v. Chemell, 243 F.2d 944">243 F.2d 944, 948 (5th Cir. 1957), affg. Dodd v. United States, an unreported case ( N.D. Ga. 1956, 51 AFTR 1405, 56-2 USTC par. 9673)) nor the size and scope of operation ( Auburn Packing Co., 60 T.C. 794">60 T.C. 794, 802 (1973); W. P. Garth, 56 T.C. 610">56 T.C. 610, 619 (1971)) has any bearing on this question. "The breadth of the definition cannot be denied." Hi-Plains Enterprises, Inc., 60 T.C. 158">60 T.C. 158, 162 (1973), affd. 496 F.2d 520">496 F.2d 520 (10th Cir. 1974).The question before us is whether the petitioner was a "farmer." Section 1.61-4(d), Income Tax Regs., provides in part:(d) Definition of "farm". As used in this section, the term "farm" embraces the farm in the ordinarily accepted sense, and includes146 stock, dairy, poultry, fruit, and truck farms; also plantations, ranches, and all land used for farming * . All individuals, partnerships, or corporations that cultivate, operate, or manage farms for gain or profit, either as owners or tenants, are designated as farmers. * *448 Section 1.175-3, Income Tax Regs., provides in part:A taxpayer is engaged in the business of farming if he cultivates, operates, or manages a farm for gain or profit, either as owner or tenant. For the purpose of section 175, a taxpayer who receives a rental (either in cash or in kind) which is based upon farm production is engaged in the business of farming. However, a taxpayer who receives a fixed rental (without reference to production) is engaged in the business of farming only if he participates to a material extent in the operation or management of the farm. * Undoubtedly the growers involved herein were "farmers." Hi-Plains Enterprises, Inc., supra.If petitioner had carried on the growing process without the intervention of the growers it seems clear that it too would be considered a "farmer," irrespective of the fact that it did not conduct the147 growing activities on its own land. Maple v. Commissioner, 440 F.2d 1055">440 F.2d 1055, 1071 (9th Cir. 1971), affg. T.C. Memo. 1968-194; United States v. Chemell, 243 F.2d at 947; Peterson Produce Co. v. United States, 229">205 F. Supp. 229 (W.D. Ark. 1962), affd. 313 F.2d 609">313 F.2d 609 (8th Cir. 1963); W. P. Garth, supra. This is one end of the spectrum. At the other end is the situation which would exist if petitioner had in no way been involved in the growing of the ducks but had simply purchased matured ducks from growers and processed them; in such circumstances, it would not be considered a "farmer." Cf. N.L.R.B. v. Strain Poultry Farms, Inc., 405 F.2d 1025">405 F.2d 1025, 1028 (5th Cir. 1969). Our problem is to determine whether, during the taxable years in issue, petitioner was sufficiently near the "grower" end of the spectrum to justify the conclusion that it should be considered in the business of raising ducks, i.e., a "farmer." We conclude that it was. 14148 As we see it, petitioner satisfies the two essential elements reflected in the decided cases -- i.e., it participated to a significant degree in the growing process and it bore a substantial risk of loss from that process.In respect of the first element, petitioner selected and purchased the ducklings and determined all necessary feed and medication required by the growers, who served petitioner exclusively. It retained title to all ducks, feed, and medication while in the growers' possession. It exercised substantial 449 supervision and control over the growing process. The entire second section of the agreement, especially paragraphs 8.A through U. (see pp. 441-442, supra), stands as testimony to this. The specificity of these provisions goes far beyond the usual "quality control provisions" found in franchising arrangements -- an analogy which respondent would have us apply herein. If any requirement was not complied with, paragraph 3 (mutual agreements, p. 442, supra) of the agreement makes it clear that the agreement is void. Additionally, petitioner employed a fieldman who periodically visited each grower to make sure the requirements of the agreement were149 met and who gave the growers criticism and made recommendations as to their activities. We find this to be both "substantial and regular" within the meaning of United States v. Chemell, 243 F.2d at 947. In that case, the Court of Appeals said (p. 947): "to be considered to be farming or raising poultry, it is not necessary for a taxpayer to show that he did everything that was done in the raising of the poultry." Finally, section 1.175-3 of respondent's regulations recognizes that one need not participate on a day-to-day basis to be considered a farmer; a landowner receiving a fixed rental need only participate to "a material extent" and one receiving a rental based on production need not participate at all.With respect to the second element, respondent argues that since petitioner credited the growers only for pounds of live, uncondemned duck, the growers took all the risks of mortality and condemnation. We see no reason to review in summary form all that we have laid out in detail in our findings concerning petitioner's accounting system. While we do not agree with petitioner that the debits and credits to the growers' accounts were "arbitrary," 150 neither do we agree with respondent that they reflect nothing more than sales of ducklings, feed, and medication to the growers and independent purchases of the live 7-week-old ducks. Rather, we view the financial arrangements as reflecting a method whereby petitioner simply made compensatory accounting entries to reflect the net amount due to the growers for efficient services in respect of its ducks.Percentage tables, based on prior experience, were used by petitioner and the growers to project an acceptable level of condemnations and mortality for the ensuing year. This was a major factor in setting in advance the measure of the debits and credits for each year upon the basis of which the petitioner and 450 the grower could each decide whether to participate for that year. In a very real sense, each party discounted in advance its risk of normal loss during that year. Of course, if a grower was consistently inefficient, he would incur a large debit balance but the arrangements between him and petitioner operated in such a fashion that a substantial out-of-pocket financial impact fell upon the petitioner.The unforeseen loss of a flock is the major risk in poultry raising, 151 not normal mortality. Maple v. Commissioner, supra. If fire were to strike a grower, petitioner would clearly have suffered the loss. The grower would lose nothing on the ducklings, feed, or medicine as the debits would be reversed by petitioner, who carried and paid for insurance against such a catastrophe. The risk of an unusual mortality or condemnation rate due to a communicable disease was not insurable and, in theory, the risk was on the grower through the elimination of condemned ducks. Such eventuality rarely occurred, but it appears that when it did, petitioner absorbed a portion of the loss. 15Respondent argues that the debit balance was, in actuality, a debt of the grower due petitioner which could have been collected pursuant to the agreement, which refers to "an indebtedness * * * incurred by the Grower." (Paragraph 7 (The Owner Agrees, p. 440, supra) of the agreement.) The uncontroverted evidence is, however, that a debit balance was never152 collected and the parties to the agreement considered it uncollectible. Thus, if the grower quit after a disease-filled year, petitioner alone suffered the loss. If the grower continued in the succeeding year, the debit balance would, however, be carried forward. In this event, the grower still would be entitled to be paid the cash advance and to be credited with the full per pound price for live, uncondemned ducks, but he would receive no payment until he had eliminated the debit balance. The net effect of this was simply to reduce the compensation and incentive rewards that the grower could obtain in the future; it did not require any out-of-pocket payment by the grower to petitioner.Another risk assumed by petitioner involved market uncertainties. Petitioner could have been caught in the middle of rising or falling prices for the ducklings, feed, and medication it purchased and the ducks it sold, as its debits and credits to 451 growers were unaffected by such changes. By way of contrast, the grower knew in advance what the measure of the debits and credits to his account would be. That spread was locked up and, indeed, the lack of risk thus effectuated was a primary153 reason for the grower to participate. Respondent points to paragraph 3 (The Owner Agrees, p. 440, supra) of the agreement and argues that petitioner could always adjust its prices or even terminate pursuant to paragraph 6 (mutual agreements, p. 442, supra). In point of fact, however, the supplemental agreements referred to in paragraph 3 were provided and revised annually. There is no evidence to the contrary, nor do we have any reason to believe, that petitioner viewed or utilized the termination clause as a means of shifting the market risks.Obviously, the grower also bore some risks of loss from the growing process, e.g., nonpayment for condemned ducks and out-of-pocket costs for labor, etc. But, on balance, we believe that the petitioner assumed a risk of loss from the growing process of sufficient magnitude to satisfy this element of the "farmer" formula. One need not bear all the risks of loss to be considered a farmer.The primary emphasis of respondent's argument herein is that petitioner had no profit interest in the growing, no interest at all, in fact, except as a source of supplying its processing plant, to which, he contends, petitioner looked for all154 its profit. To substantiate this argument, he compares petitioner's credits for live, uncondemned ducks to the amounts paid by Foster Duck Farm and C&D Duck Co. and concludes that since the prices were consistently comparable, petitioner could not possibly have had any greater profit interest in the growing than did Foster or C&D. But this result does not follow, since Foster and C&D, as best we can conclude from the record, were solely processors. They were not in any way involved in the growing process and the amounts they paid represented their total cost of ducks. Petitioner, on the other hand, was integrally involved in the growing process, expending time and money and assuming substantial risks. Its cost was far different and can only be calculated by considering its hatchery expenses, feed, and medicine costs, its payments to growers, and other expenses (such as its fieldman's salary). The mere happenstance that the prices credited by petitioner to the growers for the live ducks were substantially the same as the prices paid by the processors is a totally insufficient 452 counterweight. 16155 Moreover, we note that, under the circumstances herein, the growing process as such could not produce a profit, since, by hypothesis, the ducks were not sold immediately after the completion of the process. They were processed into frozen ducks and thus it can be said that it was the freezing process and the subsequent distribution that produced the profit. If respondent were correct in his contention, only participation in a "farming" part of an overall operation, the last step in which also constituted "farming," would permit the conclusion that the participant was a "farmer." This appears to have been the factual situation in the decided cases. See Maple v. Commissioner, supra;United States v. Chemell, supra;Peterson Produce Co. v. United States, supra;Hi-Plains Enterprises, Inc., supra;W. P. Garth, supra.But nothing in those cases indicates that the definition of a "farmer" should be so restricted and we find nothing in the instant situation to justify imposing such a restriction on this petitioner.Recognizing that the resolution of*156 the issue before us is not entirely free from doubt, we conclude on the basis of the facts and circumstances of this case that petitioner's participation in the activities of its growers was sufficient to constitute it a "farmer," and accordingly it may use the cash receipts and disbursements method of accounting in respect of its ducks.Decision will be entered under Rule 155. Footnotes1. All Code section references herein shall refer to the Internal Revenue Code of 1954, as amended and in effect during the years in issue, unless otherwise indicated, and all references to the Income Tax Regulations shall refer to those regulations promulgated pursuant thereto.↩2. As used herein, the word "charged" or "charge" refers to debits to a grower's account with petitioner as explained at pp. 443-444, infra↩.3. There is no evidence in the record of the price petitioner may have paid for ducklings in 1967.↩4. The credits seem to have been fixed at 24 cents per pound for ducks delivered during the "winter" months and 21 cents per pound during the remaining months, except that during the "summer" months of 1968 and 1969 and the "fall" months of 1969, petitioner voluntarily increased the 21 cents to 22 cents (see table at p. 445, infra↩) because it was having a profitable year but the growers were not doing as well as had been expected due to (1) increased disease level, (2) processing running behind schedule, and (3) inferior quality feed.5. Compare with agreement, par. 7 (The Owner Agrees, p. 440, supra↩).6. In a year prior to the years in issue, petitioner aided one grower who had an abnormally large number of condemned ducks by not making the full reduction for the condemnations.↩7. The figures are the beginning and ending figures for each quarter year. Where a single figure appears, price was constant throughout the period.↩8. No evidence was presented for this quarter.9. In one instance where a grower stopped growing for petitioner for the 2 years after incurring a debit balance, but then began again, the earlier debit balance was not carried forward to the new project account.↩10. Foster's figures are beginning and ending figures for the particular quarter. Where only a single figure appears, the price was constant for that quarter. "x" indicates that there were no sales reported for a particular quarter.↩11. Culver's figures are quarterly averages.↩12. United States v. Catto, 384 U.S. 102">384 U.S. 102, 116 (1966). See W. Cleve Stokes, 22 T.C. 415">22 T.C. 415, 424↩ (1954). It is presumably for this reason that respondent has renounced any reliance on sec. 446 herein.13. Sec. 1.471-6. Inventories of livestock raisers and other farmers.(a) A farmer may make his return upon an inventory method instead of the cash receipts and disbursements method. It is optional with the taxpayer which of these methods of accounting is used but, having elected one method, the option so exercised will be binding upon the taxpayer for the year for which the option is exercised and for subsequent years unless another method is authorized by the Commissioner as provided in paragraph (e) of section 1.446-1↩.14. We note that a certain part of petitioner's activities (it grows some crops on its land and raised 10 percent of the ducks it processed) are conceded by respondent to be farming activities. However the evidence submitted does not permit an allocation to this part; hence, we must treat this case as it has been framed, i.e., an "all or nothing" proposition.↩15. See n. 6 supra↩.16. Respondent's reliance on the unexplained reference to profit-sharing in United States v. Chemell, 243 F.2d 944">243 F.2d 944 (5th Cir. 1957), is beside the point. If one examines the arrangement that actually existed in that case it is apparent that the Circuit Court of Appeals was referring to the grower's participation in the taxpayer's profit on the subsequent sales, not vice versa. We interpret respondent's use of the phrase "for gain or profit" in secs. 1.61-4(d) and 1.175-3, Income Tax Regs.↩, as providing the foundation for precluding losses on hobby farming and not as a basis for requiring a direct profit element in every stage of what is clearly a farming business.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622259/	WILLIAM J. MCCORMACK, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.McCormack v. CommissionerDocket Nos. 88920, 96054.United States Board of Tax Appeals43 B.T.A. 924; 1941 BTA LEXIS 1434; March 13, 1941, Promulgated 1434 1. TRUST INCOME TAXABLE TO GRANTOR. - Income of short term trust taxable to grantor, following Helvering v. Clifford,309 U.S. 331">309 U.S. 331. 2. GIFT TAX - INCOMPLETE GIFT. - Gift was incomplete until termination of trust where dependent upon beneficiary-donee being alive at termination of trust. 3. Id. - Gift was incomplete until termination of trust where dependent upon whether or not grantor trustee, with power to use any or all income for support, maintenance, and well-being of children beneficiaries, would permit any income to remain accumulated at termination of trust. Milton J. Levitt, Esq., for the petitioner. George R. Sherriff, Esq., for the respondent. MURDOCK 924 The Commissioner determined a deficiency of $18,806.73 in income taxes for the year 1934 and a deficiency of $15,830.91 in gift taxes for the year 1936. The questions for decision are (1) whether 925 or not the income for 1934 of two trusts created by the petitioner for his two children may be included in the petitioner's gross income for that year under either section 22(a) or section 167(a) of the Revenue Act of 1934, and (2) whether the1435 petitioner made completed gifts of the accumulated income of those trusts at the time the trusts terminated in 1936. FINDINGS OF FACT. The petitioner, an individual, resides at New York, New York. He has two children, Julia Irene McCormack, born in 1920, and William J. McCormack, II, born in 1924. The petitioner executed two trust instruments on November 30, 1931, one for the benefit of each of his children. Each instrument provided for the conveyance to the petitioner, as trustee, of 327 1/2 shares of stock of McCormack Securities Corporation. Certificates for those shares were issued in the name of the petitioner, as trustee for the children, on the same date. The pertinent provisions of the two trust instruments, which were identical except for the names of the beneficiaries, are as follows: 1. The TRUSTEE shall receive, hold, manage, sell, invest and reinvest the same, and the proceeds of the disposition of any property at any time constituting the principal of this trust, or any part thereof, with the right from time to time to change the investment thereof. He shall collect and receive the income and profits thereof and therefrom, and after the payment of all1436 charges and expenses, the TRUSTEE shall apply to the use of his said daughter, JULIA IRENE MCCORMACK, at such times, in such amounts and in such manner as said TRUSTEE may, in his uncontrolled discretion, decide, so much of the net income from this trust fund as in the sole and absolute discretion of the TRUSTEE may be necessary and proper for the maintenance, education and well-being of said JULIA IRENE MCCORMACK, and shall accumulate the balance of such net income, if any, for the benefit of said JULIA IRENE MCCORMACK. The discretion herein given to the TRUSTEE with regard to the manner of application of income, and the net amount thereof which is to be used for said purpose, shall be subject to no other control than that of the judgment of the TRUSTEE, and neither said JULIA IRENE MCCORMACK, nor any other person on her behalf, or otherwise, shall have any right or power to control the exercise of said TRUSTEE'S discretion, or to compel him to make any application of the income from this trust in any manner other than that which said TRUSTEE may decide upon. In addition to the foregoing, whenever, and from time to time, in the TRUSTEE'S absolute discretion, if the net income1437 and accumulations thereof are insufficient for the needs of said JULIA IRENE MCCORMACK, said TRUSTEE may apply to the use of said JULIA IRENE MCCORMACK, so much of the principal hereof as he may determine, and upon any such application, the principal of this trust shall thereupon be and become diminished by the amount so used by the said TRUSTEE for such purpose. [Here there are provisions authorizing payment of income or principle to the mother of the beneficiary for the use of the beneficiary if the trustee so desired.] 926 II. This trust shall terminate five years from the date hereof, or upon the death of the GRANTOR, or upon the death of said JULIA IRENE MCCORMACK, whichever earliest happens. Upon the termination of this trust, if the same does not terminate by reason of the death of said JULIA IRENE MCCORMACK, all accumulations, if any, shall be held by her surviving parents or parent, for, and when she reaches the age of twenty-one years, be paid over to, said JULIA IRENE MCCORMACK. Upon said termination of this trust, the principal thereof, as then constituted, shall be assigned, paid over and delivered, absolutely, to the GRANTOR, individually, if he is1438 then living, or if said GRANTOR is not then living, then to the estate of the GRANTOR, to be distributed as part thereof. III. [Provision is here made for the substitution as trustee of his executors in case the grantor should die.] IV. [The trustee is authorized to retain the securities in their present form and to make additions and retain those.] V. [The trustee is given power to sell, exchange, and keep the funds invested in any property that he sees fit without regard to whether or not it is legal trust property. He is also given the right to keep any part of the funds uninvested and to borrow money.] VI. [The trustee is authorized in his sole discretion to make distributions in kind or in money.] VII. [The trustee is authorized to have the securities registered in his own name or in any other way that suits his convenience.] VIII. [The trustee is empowered to employ counsel and agents.] IX. [The trustee is authorized to pay taxes.] X. [All stock dividends, extraordinary dividends, and gains of capital nature are to be considered a part of the corpus.] XI. [The trustee is not required to set aside a sinking fund for securities purchased1439 at a premium.] XII. [The trustee is empowered to vote the stock and participate in reorganizations just as an individual owner would.] XIII. [This trust is irrevocable.] XIV. [The trustee shall not be held liable except for willful wrongdoing.] XV. [The trustee shall not be required to furnish bond.] The petitioner, on January 5, 1932, added 360 shares of stock of the Alpha Holding Corporation to the principal of each trust and certificates for the shares were transferred to his name, as trustee, on the same day. One of the petitioner's purposes in creating the trusts for his children was to build up a fund to be made available to each of them when they reached twenty-one years of age. Another purpose was to provide for their "maintenance, education and well-being" in the event that for any reason he should not be able to provide for them out of his personal funds. He believed that the income from the trusts would be more than enough to support the children and expected the accumulated income of the trusts not used for that purpose would provide a fund for each child of about $100,000. Special bank accounts were poened for each trust in the petitioner's1440 name as trustee, and the income of the trusts was deposited in those accounts. Some of the income was invested from time to time in 927 securities, including stock of the Comprehensive Omnibus Corporation and the East Side Omnibus Corporation, companies in which the petitioner was an officer, director, and stockholder. None of the trust income was ever commingled with the petitioner's personal funds. The petitioner distributed to his wife, on December 19, 1932, $35,000 of the income of each trust to be applied to the maintenance, education, and well-being of his children. He did not intend that all of that amount should be used for that purpose in the year 1932, but expected that it would be sufficient to take care of the needs of each child for an indefinite period. The wife deposited each of those amounts in separate bank accounts opened in her name for each child. Some of the $70,000 so distributed was used by the wife for the support and maintenance of the children, but the record does not show what part of the distribution was used for that purpose or in what way the balance has been expended. The wife withdrew $17,775 in May 1933 from each of the special bank1441 accounts created by her for the children. The record does not show the purpose for which those withdrawals were made. There was no distribution of the income of the trusts other than the $70,000 above mentioned. Most of the expenditures incurred for the maintenance and education of the children during the term of the trusts were paid by the petitioner from his personal funds. The annual income and accumulated net income of each trust are shown by the following tables. Julia Irene McCormackYearIncomeTaxesDistributionsAccumulations1931$30,000.00$30,000.00193272,456.08$1,780.02$35,00035,676.0619338,943.435,386.453,556.98193425,813.72238.5025,575.2219353,821.843,021.28800.5619362,652.8092.682,560.12Total143,687.8710,518.9335,00098,168.94Less: Liberty bond interest included in income but not received due to prior redemption63.75Loss on sale of income investments300.50364.25Total97,804.69William J. McCormack, IIYearIncomeTaxesDistributionsAccumulations1931$30,000.00$30,000.00193272,921.29$1,780.66$35,000.0036,141.2319339,937.505,378.774,558.73193426,101.83238.2625,863.5719353,718.992,936.56782.4319362,920.0058,762,861.24Total$145,599.6110,392.4135,000.00100,207.201442 928 The trusts terminated on November 30, 1936, and the securities and other property forming the principal of the trusts were transferred back to the name of the petitioner, individually. The cash and securities representing the accumulated income of the trusts were retained in the name of the petitioner, as trustee, and were held by him solely for the benefit of his children, neither of whom at that time had reached the age of twenty-one years. The income of the trusts for 1934 was reported on income tax returns filed for each trust for that year with the collector of internal revenue for the third district of New York. The petitioner filed a personal gift tax return for the year 1936 with the same collector. The Commissioner held in his notice of deficiency that the income of each trust for 1934 was taxable to the petitioner in that year, citing article 166-1 of Regulations 86, as amended by Treasury Decision 4629, published in Cumulative Bulletin XV-1, p. 141, and explained: "Since it is apparent that you have not made a permanent and definite disposition of your property, the income from the trusts created for your minor children is held to be properly taxable1443 to you." He held in his notice of deficiency for the year 1936 that the petitioner made gifts of the accumulated income of each trust when it terminated in that year and included $217,693.45 in the petitioner's gross gifts, from which he allowed two $5,000 exclusions and a specific exemption of $40,000. His explanation is as follows: Careful consideration has been given to your protest. However, as at any time during the life of the trusts the accumulated income could be used for your benefit, it is determined that the gifts were made when the trusts terminated during the calendar year 1936. OPINION. MURDOCK: The income of these trusts for the year 1934 is taxable to the petitioner upon authority of Helvering v. Clifford,309 U.S. 331">309 U.S. 331. The slight differences between this case and the Clifford case are immaterial and do not serve to distinguish the two cases. Commissioner v. Berolzheimer, 116 Fed.(2d) 628; Helvering v. Hormel, 111 Fed.(2d) 1; Penn v. Commissioner, 109 Fed.(2d) 954. Thus, it is unnecessary to decide whether or not the income would be taxable to the petitioner under section1444 167(a) of the Revenue Act of 1934. The only other issue for decision relates to gift taxes for 1936. The income actually distributed under the trusts is not involved in this issue. The question is, Were there for the first time in 1936 completed gifts of the amounts accumulated in these trusts, which accumulated amounts were to be held for and turned over to the beneficiaries when they became twenty-one years of age? The parties have agreed upon the amount of the accumulated income in each trust. The parties agree that the petitioner made gifts through the 929 medium of these trusts. The fact that the income is taxable to the grantor is, of course, no reason for holding that the accumulations could not be the subject of a taxable gift in 1936. The petitioner contends, however, that the gifts were completed prior to 1936 and nothing happened in 1936 which would be subject to tax as a gift in that year. We have come to the conclusion that the gifts of the accumulated income were complete for the first time in 1936. This conclusion can be supported on each of two grounds. The first is that there was to be no gift unless the beneficiaries survived the trusts and the1445 second is that the petitioner retained the power during the continuance of the trusts to expend all of the income of the trusts and thus avoid the gift of any accumulations. The only provision for a transfer by gift of the accumulations under either trust is in that part of paragraph II, which provides that the " accumulations, if any", are to be held for the beneficiary, "if" the trust does not terminate by the death of the beneficiary. There is no express provision disposing of the accumulated income of either trust in case of termination by the death of the beneficiary. Thus, following the principle of inclusio unius est exclusio alterius, there was to be no gift in either trust unless the beneficiary survived the trust. In case the trust was terminated by the death of the beneficiary, the accumulated income, like the corpus of the trust, was to go back to the petitioner. The gift tax applies only to consummated gifts, absolute transfers. Since it was not apparent prior to the termination of these trusts that the beneficiaries would be alive, and therefore entitled to take the accumulations, obviously, they, as donees, should not be personally liable for the gift tax1446 under section 510 of the Revenue Act of 1932 until 1936, when the trusts terminated while they were still alive. There was not a completed gift of the accumulated income until the trusts terminated, but there was a completed gift of the accumulated income of each trust at that time. Carl J. Schmidlapp,43 B.T.A. 829">43 B.T.A. 829; Margaret White Marshall,43 B.T.A. 99">43 B.T.A. 99; Marrs McLean,41 B.T.A. 1266">41 B.T.A. 1266; Emily Trevor,40 B.T.A. 1241">40 B.T.A. 1241; William T. Walker,40 B.T.A. 762">40 B.T.A. 762; Lorraine Manville Gould Dresselhuys,40 B.T.A. 30">40 B.T.A. 30. Cf. Helvering v. Hallock,309 U.S. 106">309 U.S. 106; Klein v. United States,283 U.S. 231">283 U.S. 231; Sanford v. Commissioner,308 U.S. 39">308 U.S. 39; Hughes v. Commissioner, 104 Fed.(2d) 144; Hesslein v. Hoey, 91 Fed.(2d) 954; certiorari denied, 302 U.S. 756">302 U.S. 756; Van Vranken v. Helvering, 115 Fed.(2d) 709. The second reason why the gifts of the accumulated income were not complete until 1936 is based upon the retained power of the petitioner to determine whether or not there would be any1447 accumulations at the termination of the trusts. There was no way of determining, prior to the termination of the trusts, how much of the 930 income the petitioner would see fit to expend or distribute and how much he would permit to accumulate. The decision to use or accumulate the income of these trusts was not required to be made annually. Thus, even though at the end of any particular year some income remained undistributed, nevertheless, there was no assurance that it would not be expended or distributed later. Although the petitioner anticipated that a substantial amount of the income would be accumulated and although his expectations may have been reasonable ones, still, there was no certainty that there would be accumulations and there was no way of determining how much the accumulations might amount to in dollars at the end of the trusts. The petitioner had extremely broad powers to decide whether or not he would expend or distribute the income; that is, he could use the income in any way that he deemed "necessary and proper for the maintenance, education and well-being" of the beneficiaries. The Commissioner argues that this gave him the power to use all of the1448 income up to the very last moment of the life of the trusts to discharge his own obligation to support and maintain his minor children and, consequently, there was no completed gift of any accumulated income from the petitioner to the children until the termination of his power to use that income. Clearly, he could have used much more of the income than he did use. An indication of his power in this connection is found in the fact that the amount which he actually distributed to the mother of the children in 1932 was more than he deemed necessary for their needs during the remaining life of the trusts. Furthermore, there was always the possibility that the income of the trusts might be completely exhausted by some unforeseen need, as for example an expensive illness. A transfer in trust by a father merely for the purpose of using such of the income as might be necessary for the support of his minor child during infancy would not be a taxable gift, since the father would part with nothing. Martin Beck,43 B.T.A. 147">43 B.T.A. 147. 1 He would simply have provided that a part of his income was to be used to discharge his own obligation. But if a father directed that the income1449 of a trust should be accumulated during the minority of his child and paid over to the child at maturity, there would be at the creation of the trust a completed gift of an estate for years in the trust property. See cases above cited. The present trusts have some of the characteristics of each of the hypothetical trusts just mentioned. But since it was impossible to say in 1931, when these trusts were created, whether or not there would be any accumulated income upon termination of the trusts, there was no taxable gift of the accumulations at that time. There was at that 931 time no absolute transfer of the donor's dominion and control over the subject matter. Emily Trevor, supra.There is, however, some analogy between this case and those cases holding that the termination of the power of a grantor over trust property gives rise to a completed gift. Cf. Hesslein v. Hoey, supra;Burnet v. Guggenheim,288 U.S. 280">288 U.S. 280; Sanford v. Commissioner, supra.The gifts of the accumulations were not complete until 1936, when the powers of the petitioner over those accumulations ceased. *1450 We have assumed for the purposes of this decision that the trusts were valid and enforceable under the laws of New York and that the beneficiaries had vested interests in whatever income might be produced during the terms of the trusts. Yet, for the reasons already given, it does not follow that there was any completed gift in 1931 of the accumulated income, as that income was actually disclosed at the termination of the trust. Cf. Marrs McLean, supra.The cases of Estate of Giles W. Mead,41 B.T.A. 424">41 B.T.A. 424, and Jack L. Warner,42 B.T.A. 954">42 B.T.A. 954, are not in point. The Board held in those cases that annual payments of income to beneficiaries of trusts subject to change were not taxable gifts in the year of payment. The trust deeds in those cases provided for annual payments of income to beneficiaries and it was upon that point that our decisions rested. Here the trustee was not required to make distributions annually or to do anything else upon an annual basis, but could accumulate or distribute at any time and in any amount as he saw fit. Decision will be entered under Rule 50.Footnotes1. This point was not decided in Commissioner v. Krebs, 90 Fed.(2d) 880, mentioned in the Beck↩ case.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622262/	WILLIAM and ANNE MORIARTY, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentMoriarty CommissionerDocket No. 19915-83.United States Tax CourtT.C. Memo 1984-539; 1984 Tax Ct. Memo LEXIS 129; 48 T.C.M. (CCH) 1345; T.C.M. (RIA) 84539; October 9, 1984. 129 Held: Petitioners failed to establish that they made any charitable contributions to the Universal Life Church, Inc., of Modesto, California, or that the contributions they made to their own Universal Life Church "congregations" qualified as charitable contributions. Held further: Petitioners are liable for additions to tax under sec. 6653(a), and damages are awarded to the United States under sec. 6673. Gary J. Joslin, for the petitioners. Julie E.130 Tamuleviz, for the respondent. SWIFT MEMORANDUM FINDINGS OF FACT AND OPINION SWIFT, Judge: By statutory notice of deficiency dated April 15, 1983, respondent determined deficiencies in petitioners' Federal income tax liabilities and additions to tax as follows: Additions to TaxYearDeficiencyI.R.C. Section 6653(a) 11979$3,642.00$182.1019804,889.84244.49Trial of this case was held in Salt Lake City, Utah, on June 12, 1984. Also pending before the Court is respondent's Motion for Summary Judgment or Alternatively To Dismiss on Failure to Adduce Evidence At Trial, filed pursuant to Rules 121 and 149(b). The issues for decision are whether petitioners are entitled to deduct alleged charitable contributions, whether petitioners are liable for the additions to tax set forth above, whether damages should be awarded to the United States pursuant to section 6673, and whether respondent's131 alternative motion for summary judgment or dismissal should be granted. FINDINGS OF FACT Some of the facts have been stipulated and are so found. Petitioners William and Anne Moriarty are husband and wife and resided in Sandy, Utah, when the petition herein was filed. Petitioners timely filed their Federal income tax returns for 1979 and 1980. On their 1979 and 1980 Federal income tax returns, petitioners claimed deductions for charitable contributions made to the Universal Life Church, Inc., of Modesto, California (ULC Modesto), in the amounts of $12,200 and $11,750 for 1979 and 1980, respectively. Respondent disallowed the entire deduction for each year and issued its notice of deficiency. Petitioners timely filed their petition with respect thereto on July 12, 1983. At the trial petitioners refused to testify, invoking their Fifth Amendment rights against self-incrimination. Petitioners called as their sole witness Bishop Robert E. Imbeau, Vice President and member of the Board of Directors of ULC Modesto. Petitioners also submitted as evidence certain receipts for contributions allegedly made by them to ULC Modesto and to various "local congregations" of132 the Universal Life Church (local ULCs).One receipt, issued by local ULC Charter No. 25,829 and signed by petitioner Anne M. Moriarty, as the secretary/treasurer of the local ULC, reflected a $12,000 "contribution" by petitioners in 1979 to local ULC Charter No. 25,829. Two other receipts, issued by ULC Modesto and signed by Mr. Imbeau, reflected "contributions" of $12,200 and $11,750 and 1979 and 1980, respectively, by petitioners to ULC Modesto. Those receipts were issued by ULC Modesto without any reasonable procedure for verification that the contributions were actually made. Respondent submitted as evidence photocopies of bank checks that petitioners wrote to various local ULCs, namely "Church of the First Light," Kilpatrick Street Universal Life Church," "Church of the Hills," "Universal Life Church #25,829," and "Universal Life Church." Those checks reflect payments totalling $12,200 in 1979 and $11,750 in 1980. The photocopies indicate that each check was endorsed by a local ULC, principally local ULC Charter No. 25,829, and was deposited in the local ULC's account. 2 There is no evidence in the record with respect to how such "contributions" were expended133 by the local ULCs. Prior to trial, petitioners resisted all attempts by respondent to discover relevant information concerning the financial activities of the various local ULCs to which petitioners allegedly made contributions. Specifically, petitioners refused to produce any documents with respect to the use by local ULCs of the amounts "contributed" by petitioners in 1979 and 1980, and petitioners attempted to excuse their noncompliance with the requests for production of documents by asserting that the records were in the possession of ULC Modesto. In further explanation, petitioners submitted a copy of a letter to them dated March 13, 1984 from ULC Modesto containing the following edict: You are hereby instructed not to comply with the request for production134 of records from Mr. J. A. Lopata, Attorney for the Internal Revenue Service, for the Records and accounts of the Universal Life Church, Inc., that may inadvertently be in your possession. The records requested by respondent pertained to the financial operations of the local ULCs and not to ULC Modesto and the letter by ULC Modesto can only be viewed as a blatant attempt to preclude relevant evidence from being made available to this Court. At the close of trial, respondent filed his written motion for damages of $5,000 and orally moved for summary judgment. Respondent thereafter filed with the Court a written motion for summary judgment or, in the alternative, dismissal on June 28, 1984. Petitioners filed a response to the motion for damages but did not file a response to the motion for summary judgment or dismissal. OPINION Generally, section 170 3 allows deductions for charitable contributions provided the taxpayer proves that he made an unconditional gift to a qualified entity. Davis v. Commissioner,81 T.C. 806">81 T.C. 806, 817 (1983). A qualified entity, among other requirements, is one that is organized and operated exclusively for religious or charitable135 purposes, the net earnings of which do not inure to the personal benefit of any private individual. Section 170(c)(2). Therefore, in order to prevail, petitioners must establish that their "contributions" were actually made to ULC Modesto, which, as to the years in suit, apparently enjoyed tax exempt status. 4Universal Life Church, Inc v. United States,372 F. Supp. 770">372 F. Supp. 770 (E.D. Calif. 1974). In the alternative, petitioners must prove that their payments to the local ULCs qualify as deductions under section 170 on the grounds that the local ULCs were organized and operated exclusively for religious purposes and that no part of the local ULCs' net earnings inured to petitioners' personal benefit. 136 Petitioners apparently do not contend that the specific Federal tax-exempt status previously granted to ULC Modesto in Universal Life Church, Inc. v. United States,supra, constitutes a group exemption that includes all local ULCs. 5 Rather, petitioners contend that ULC Modesto and the local ULCs are "one church;" that any charitable contributions made to local ULCs are actually made to ULC Modesto and are thus deductible. Respondent apparently concedes that ULC Modesto in 1979 and 1980 was a qualifying entity as described in section 170(C)(2), and that contributions to it were deductible. See Universal Life Church, supra.Respondent contends, however, that petitioners made no payments to ULC Modesto, and that the payments petitioners made to local ULCs were not "charitable contributions" as defined by section 170(c). We agree with respondent on both points. 137 Petitioners rely on the testimony of Mr. Robert E. Imbeau, an officer of ULC Modesto, in order to establish that the funds they transferred to local ULCs were, in actuality, charitable contributions to ULC Modesto. Mr. Imbeau testified in extremely vague and conclusory terms that every local ULC is part of ULC Modesto. No documentation supporting petitioners' contention on this point was offered in evidence. We reject Mr. Imbeau's testimony and find that local ULCs are separate and distinct taxable entities that would have to qualify for a Federal tax-exemption on their own accord. Basic Bible Church v. Commissioner,74 T.C. 846">74 T.C. 846, 855-856 (1980); Universal Life Church, Inc. (Full Circle) v. Commissioner, 83 T.C. , (p. 7 slip opinion filed Aug. 30, 1984). We will not allow local ULCs to reduce the taxable income of their members through spurious "contributions" using ULC Modesto's then-current tax-exempt status. Petitioners' cancelled bank checks clearly establish that each "contribution" made by petitioners was deposited in the bank account of a local ULC, principally local ULC Charter No. 25,829 (which received $23,750 of the $23,950 allegedly contributed138 and of which petitionerAnne Moriarty was secretary/treasurer). There is no credible evidence to suggest that any portion of these funds was thereafter transferred to ULC Modesto. Petitioners assert that the receipts issued by ULC Modesto substantiate petitioners' alleged contributions to ULC Modesto. We do not agree. Mr. Imbeau acknowledged that local ULCs exercise practical autonomy to disburse funds received by local ULCs. The local ULCs report to ULC Modesto in summary fashion that "contributions" were made by certain individuals to local ULCs, and based solely on those unverified and summary reports, Mr. Imbeau or other officer, issue receipts on behalf of ULC Modesto, for such "contributions." Mr. Imbeau also conceded that the receipts issued by ULC Modesto do not mean that the funds reported thereon were physically deposited to the account of ULC Modesto. See Mustain v. Commissioner,T.C. Memo. 1982-670 at fn. 6 (45 T.C.M. (CCH) 153">45 T.C.M. 153, 155, 51 P-H Memo T.C. par. 82,670, at 2968-82), for a further explanation of ULC Modesto's practice of issuing receipts to local ULCs. With respect specifically to petitioners herein, Mr. Imbeau stated that he did not139 know if any of the $23,950 petitioners allegedly contributed during the two years in controversy were ever physically received by ULC Modesto. Although Mr. Imbeau testified generally that petitioners had made contributions totalling $23,950 to ULC Modesto, the evidence clearly establishes that his testimony was not based upon actual knowledge that petitioners had transferred funds from the local ULCs to ULC Modesto. In sum, we are convinced that petitioners' payments to various local ULCs did not constitute contributions to ULC Modesto. Even assuming that petitioners made "contributions" to ULC Modesto, we would still disallow the deductions because petitioners have not established that the net earnings of the recipient organization did not inure to petitioners' personal benefit. Indeed, we are inclined to believe that there was in fact such personal benefit herein in light of the amount of the "contributions" in relation to petitioners' income, the fact that petitioner Anne Moriarty issued one of the receipts, the failure of petitioners to offer any reliable evidence to disprove the receipt of personal benefit from the funds "contributed," and the strong negative inference140 we draw from petitioners' refusal to testify. See Bresler v. Commissioner,65 T.C. 182">65 T.C. 182, 188 (1975); Wichita Terminal Elevator Co. v. Commissioner,6 T.C. 1158">6 T.C. 1158, 1165 (1946), affd. 162 F.2d 513">162 F.2d 513 (10th Cir. 1947). Based upon that negative inference, we assume that petitioners' testimony would indicate that such funds, although initally transferred to local ULCs, were used by petitioners in some personal endeavor. We therefore sustain respondent's determination disallowing the deductions claimed in 1979 and 1980 for charitable contributions to ULC Modesto. Respondent also determined that petitioners were liable for additions to tax under section 6653(a) for negligence or intentional disregard of the rules and regulations of the Internal Revenue Service. This Court has repeatedly sustained the section 6653(a) addition in cases involving alleged charitable contributions to a "church" that used the funds for personal or family expenses. Davis v. Commissioner,supra at 820-821. 6 There is no evidence to suggest that petitioners' "contributions" were used by the local ULCs for any religious or charitable purpose. 141 We are satisfied that the negligence addition is fully justified in this case, and we sustain respondent on that issue. Respondent further moved this Court to award damages to the United States in the amount of $5,000 pursuant to section 6673. 7 The provisions of section 6673 allow damages not exceeding $5,000 to be awarded to the United States whenever it appears to this Court that theproceedings were instituted or maintained by a taxpayer primarily for delay or that the taxpayer's position in such proceedings was frivolous and groundless. 142 Petitioners assert that they were surprised by respondent's motion for damages when that motion was filed with the Court at trial, in spite of their acknowledgement that respondent had informed petitioners on two earlier occasions of his intent to move for damages. Petitioner also argues that in filing that motion, respondent has asserted a new matter at trial in the nature of an Amended Answer, contrary to the provisions of Rule 41 8 or that respondent improperly joined a new issue, contrary to the provisions of Rule 38. 9143 After athorough examination of the record herein, we reject petitioners' arguments. Petitioners were allowed 30 days from the date of trial in which to file an objection to respondent's motion for damages, and they did in fact file an objection. Petitioners also were given an opportunity in their written objection to explain why an evidentiary hearing on respondent's motion was appropriate. Petitioner's objection contains no such explanation. Moreover, according to the language of section 6673, damages may be awarded whenever it appears to this Court that the proceedings before it were instituted and maintained primarily for delay or are frivolous or groundless. This Court has properly awarded damages under section 6673 upon its own motion after trial, Sydnes v. Commissioner,74 T.C. 864">74 T.C. 864, 872 (1980), affd. 647 F.2d 813">647 F.2d 813 (8th Cir. 1981), 10 and we therefore reject petitioners' contention that respondent's motion is untimely. 144 We find this action to be frivolous and to have been instituted primarily to delay the payment of Federal income taxes. Indeed, it appears that petitioners' participation in the local ULCs was significantly related to an extensive scheme of tax avoidance. 11 As we have previously stated-- our tolerance for taxpayers who establish churches solely for tax-avoidance purposes is reaching a breaking point. Not only do these taxpayers use the pretext of a church to avoid paying their fair share of taxes, even when their brazen schemes are uncovered, many of them resort to the courts in a shameless attempt to vindicate themselves. ( Miedaner v. Commissioner,81 T.C. 272">81 T.C. 272, 282 (1983))Petitioners herein have abused the processes of this Court and wasted its resources, and we hereby grant respondent's motion for damages and award damages to the United States in the amount of $2,500 pursuant to section 6673.145 Respondent's alternative motion for summary judgment or dismissal is rendered moot in light of our disposition of this case on the merits. We therefore deny the motion. To reflect the foregoing, An appropriate order will be issued and decision entered for the respondent.Footnotes1. Unless otherwise indicated, all section references are to the Internal Revenue Code of 1954, as amended and in effect during the years in controversy, and all Rule references are to the Tax Court Rules of Practice and Procedure.↩2. Petitioners' bank checks demonstrate that the following amounts were deposited to the accounts of local ULCs as indicated: ↩(1) $ 100Charter No. 26,104 -Church of the First Light- 1979(2) $ 100Charter No. 26,105 -Kilpatrick St. ULC- 1979(3) $12,000Charter No. 25,829 -Church of the Hills- 1979(4) $11,750Charter No. 25,829 -Church of the Hills- 19803. SEC. 170.CHARITABLE, ETC., CONTRIBUTIONS AND GIFTS. (a) Allowance of Deduction.-- (1) General rule.--There shall be allowed as a deduction any charitable contribution (as defined in subsection (c)) payment of which is made within the taxable year. * * (c) Charitable Contribution Defined.--For purposes of this section, the term "charitable contribution" means a contribution or gift to or for the use of-- * * * (2) A corporation, trust, or community chest, fund, or foundation-- (A) created or organized in the United States or in any possession thereof, or under the law of the United States, any State, the District of Columbia, or any possession of the United States; (B) organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes * * ; (C) no part of the net earnings of which inures to the benefit of any private shareholder or individual; * * ↩4. We note that the Internal Revenue Code has recently withdrawn the tax-exempt status of the Universal Life Church in Modesto. See Internal Revenue Service News Release, SF 84-32, dated August 28, 1984.↩5. Petitioners' failure to make that contention is not surprising in light of the numerous cases to the contrary. See e.g., Davis v. Commissioner,supra;Mendenhall v. Commissioner,T.C. Memo. 1983-491; Solanne v. Commissioner,T.C. Memo. 1983-67; Murphy v. Commissioner,T.C. Memo. 1983-59; Mustain v. Commissioner,T.C. Memo. 1982-670↩.6. See also Murphy v. Commissioner,supra;Mustain v. Commissioner,supra;Harcourt v. Commissioner,T.C. Memo. 1982-621; Neil v. Commissioner,T.C. Memo. 1982-562, affd. without published opinion 730 F.2d 768">730 F.2d 768↩ (9th Cir. 1984).7. Section 6673 provides: Whenever it appears to the Tax Court that proceedings before it have been instituted or maintained by the taxpayer primarily for delay or that the taxpayer's position in such proceedings is frivolous or groundless, damages in an amount not in excess of $5,000 shall be awarded to the United States by the Tax Court in its decision. Damages so awarded shall be assessed at the same time as the deficiency and shall be paid upon notice and demand from the Secretary and shall be collected as a part of the tax.↩8. Rule 41 provides in relevant part: (a) Amendments: A party may amend his pleading once as a matter of course at any time before a responsive pleading is served. If the pleading is one to which no responsive pleading is permitted and the case has not been placed on a trial calendar, he may so amend it any time within 30 days after it is served. Otherwise a party may amend his pleading only by leave of Court or by written consent of the adverse party; and leave shall be given freely when justice so requires. No amendment shall be allowed after expiration of the time for filing the petition, however, which would involve conferring jurisdiction on the Court over a matter which otherwise would not come within its jurisdiction under the petition as then on file. ↩9. Rule 38 provides in relevant part: A case shall be deemed at issue upon the filing of the answer, unless a reply is required under Rule 37, in which event it shall be deemed at issue upon the filing of a reply or the entry of an order disposing of a motion under Rule 37(c) or the expiration of the period specified in Rule 37(c) in case the Commissioner fails to move. With respect to declaratory judgment actions and disclosure actions, see Rule 214 and 224 respectively.↩10. See also Glew v. Commissioner,T.C. Memo. 1984-266; Ross v. Commissioner,T.C. Memo. 1984-27; Ballard v. Commissioner,T.C. Memo. 1982-56↩.11. See Church of Ethereal Joy v. Commissioner,83 T.C. 20">83 T.C. 20 (1984); Universal Life Church, Inc. (Full Circle) v. Commissioner, 83 T.C. (slip opinion filed August 30, 1984); Hoskinson v. Commissioner,T.C. Memo. 1984-400; Clark v. Commissioner,T.C. Memo. 1984-326; Fowler v. Commissioner,T.C. Memo. 1984-311; Beasley v. Commissioner,T.C. Memo. 1984-304; Odd v. Commissioner,T.C. Memo. 1984-180; Johnson v. Commissioner,T.C. Memo. 1984-164; Rondinelli v. Commissioner,T.C. Memo. 1984-155; Leslie v. Commissioner,T.C. Memo. 1984-61; Schreiber v. Commissioner,T.C. Memo. 1983-754; Hawbaker v. Commissioner,T.C. Memo 1983-665">T.C. Memo. 1983-665; Kiddie v. Commissioner,T.C. Memo. 1983-582; Owens v. Commissioner,T.C. Memo. 1982-671; Neil v. Commissioner,T.C. Memo. 1982-562; Harcourt v. Commissioner,T.C. Memo. 1982-621; Chumley v. Commissioner,T.C. Memo. 1982-473; Magin v. Commissioner,T.C. Memo 1982-383">T.C. Memo. 1982-383; Solander v. Commissioner,T.C. Memo. 1982-161; Notter v. Commissioner,T.C. Memo. 1982-96; Daly v. Commissioner,T.C. Memo. 1982-59; Kellman v. Commissioner,T.C.Memo. 1981-615; Riemers v. Commissioner,T.C. Memo. 1981-456; Brown v. Commissioner,T.C. Memo 1980-553">T.C. Memo. 1980-553; Ross v. Commissioner,T.C. Memo. 1980-284↩. Each of the cases cited in this footnote involved local "congregations" of the Universal Life Church and fabricated charitable contributions.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622266/	Lyta J. Morris, Formerly Lyta Jorgensen Hayman v. Commissioner. Max Hayman and Lee Titelman Hayman v. Commissioner.Morris v. CommissionerDocket Nos. 3498-64, 3537-64.United States Tax CourtT.C. Memo 1966-245; 1966 Tax Ct. Memo LEXIS 39; 25 T.C.M. (CCH) 1248; T.C.M. (RIA) 66245; October 31, 1966Martin S. Stolzoff, 9465 Wilshire Blvd., Beverly Hills, Calif., for the petitioner in Docket No. 3498-64. Bernard Shearer, 9255 Sunset Blvd., Los Angeles, Calif., for the petitioners in Docket No. 3537-64. John Schessler, for the respondent. FAYMemorandum Findings of Fact and Opinion FAY, Judge: Respondent determined deficiencies in the income taxes of petitioners41 for the years 1956, 1957, and 1958, as follows: PetitionerDocket No.YearAmountLyta J. Morris3498-641956$ 4,603.1019573,274.2419584,209.32Max Hayman andLee TitelmanHayman3537-64195811,110.79In regard to the tax year 1957, in Docket No. 3498-64, apart from the deficiency determined above, respondent made an assessment in the sum of $8,191.57 representing an erroneous refund and the interest attributable thereto. 1 In an amendment to his answer in Docket No. 3498-64, respondent sought an additional deficiency in the amount of $4,257.01 for the year 1958. The only issue presented for the year 1956 is whether respondent's determination of a deficiency against Lyta J. Morris for that year was barred by the statute of limitations. For the year 1957, the principal issue in Docket No. 3498-64 is whether respondent's determination of a deficiency for that year was timely. If so, the following supplemental issues must be resolved: (a) Whether petitioner is entitled to certain "community deductions"; (b) whether she is entitled to utilize head of42 household rates; (c) whether she is entitled to a deduction under section 214 of the Internal Revenue Code of 1954; 2 and (d) whether she is entitled to a credit for one-half of the total payments made by her then husband on his 1957 declaration of estimated tax. If respondent does not have a 6-year period in which to do so, he concedes that his assessment and collection of the erroneous refund was not timely, but urges that he may retain a right to the payment under the doctrine of Lewis v. Reynolds, 284 U.S. 281">284 U.S. 281 (1932). In 1958, respondent has alternatively determined each common issue against petitioners in both dockets. The issues, common to both dockets, are: (1) Whether Lyta J. Morris is taxable on one-half of the income earned by Max Hayman during 1958, prior to the final divorce decree on November 28, 1958, or is Max Hayman taxable on all his income. (2) Whether Max Hayman is entitled to an alimony deduction for any part of the payments made by him to petitioner Lyta J. Morris during 1958, and, conversely, whether Lyta J. Morris is43 required to include any portion of these payments in her gross income for the year 1958. (3) Whether the petitioners in Docket No. 3498-64 or in Docket No. 3537-64 may properly deduct expenditures made by Max Hayman for the following items: a. Tax payments made on his individual declaration of estimated tax. b. Interest payments. c. State tax payments. d. Legal expenses. (4) Whether Lyta J. Morris or Max Hayman is properly entitled to dependency exemptions. The last issue is whether petitioner in Docket No. 3498-64 is entitled to entertainment expenses in excess of the amount allowed by respondent. 3General Findings of Fact Some of the facts have been stipulated, and the stipulations of facts, together with the exhibits attached thereto, are incorporated herein by this reference. Lyta J. Morris, formerly Lyta Jorgensen Hayman (hereinafter referred to as Lyta), an attorney, filed her individual Federal income tax returns for the calendar years 1956, 1957, and 1958 on the cash basis with the district director of internal44 revenue at Los Angeles, California. Max Hayman (hereinafter referred to as Max), a physician, and Lee Titelman Hayman, husband and wife, filed their joint Federal income tax return for the calendar year 1958 on the cash basis with the district director of internal revenue at Los Angeles, California. Lyta and Max had been previously married to each other. On November 27, 1957, they obtained an interlocutory decree of divorce, and on November 28, 1958, a final decree was entered in said divorce proceeding. Throughout this entire period they had been residents of and domiciled in the State of California, a community property state. In the interest of clarity, individual Findings of Fact and Opinions will be made with regard to each issue presented. Issue - Statute of Limitations on Assessment and Collection for the Years 1956 and 1957, Docket No. 3498-64 Lyta did not file a timely Federal income tax return for the year 1956. On or about March 10, 1958, she filed an affidavit with the district director explaining her failure to file a timely return and requested permission to file a delinquent return for 1956 concurrently with her 1957 return. On April 15, 1958, she filed both45 the 1956 and 1957 returns and enclosed a copy of the aforementioned affidavit. In addition to attaching the copy of the affidavit to the returns, the 1956 return contained a statement of fact that the original affidavit was on file with the district director. After having filed the returns, she received a letter from the district director acknowledging his receipt of the original affidavit. The affidavit, in addition to a justification for the delinquent filing of the return for 1956, contained the following: Affiant believes that the amount previously paid on the first three installments of 1956 taxes, may be sufficient to cover her separate tax liability for 1956. However, she has as yet no information concerning the true and correct amount earned by Max Hayman from January 1, 1956, to September 1, 1956 (the date of the order for alimony pendente lite); and affiant is therefore without information concerning the amount of income which may be chargeable to her by reason of her community share of such earnings. Affiant has requested the court, and the court has granted affiant's request, that the matter be reopened for an accounting concerning 1956 and 1957 income, and concerning46 the respective obligations of the parties to each other with regard to the taxes on such income. Pending such an accounting (now scheduled to begin on or about March 20, in the courtroom of Judge Orlando Rhodes, Superior Court of the County of Los Angeles), your affiant is uncertain as to the true nature and extent of her income tax liability. She prays permission to file her separate income tax return for 1956, after the completion of said accounting. Affiant has paid, in January, 1958, the entire amount which she estimates to be her separate tax liability for the calendar year 1957; she will file her final return thereon, on or before April 15, 1958. [Emphasis supplied] For the years 1956 and 1957 Max had net professional earnings in the amount of $18,550.78 and $23,541.69, respectively. For the year 1956 Max had gross professional earnings of $48,902.02 and business deductions in connection therewith of $30,351.24. For the year 1957 Max had gross professional earnings of $43,730.17 and business deductions in connection therewith of $20,188.48. No portion of Max's net earnings was reported by Lyta on her individual income tax returns for either year. Her failure to do so47 was the result of a lack of available information as to Max's earnings for these two years. Her returns were prepared solely on the basis of her separate tax liability for each year. On April 15, 1964, more than three years after the filing of Lyta's 1956 and 1957 returns, respondent, in his statutory notice of deficiency, determined a deficiency in Lyta's income taxes for each year. In making this determination, respondent relied upon the 6-year statute of limitations prescribed in section 6501(e)(1)(A). Opinion The notice of deficiency sent April 15, 1964, was mailed more than three years after the date on which the returns were filed, April 15, 1958. Lyta contends that on these facts the deficiency is barred by section 6501(a), 4 which prescribes a 3-year statute of limitations. Respondent, however, contends that the notice was timely under section 6501(e)(1)(A), 5 having been mailed within six years of the date on which the returns were filed. Under that section, a 6-year statute of limitations will apply where the taxpayer has omitted from gross income an amount in excess of 25 percent of the amount of gross income shown on the return. However, in determining the amount48 omitted, subsection (ii) provides that - 49 there shall not be taken into account any amount which * * is disclosed in the return, or in a statement attached to the return, in a manner adequate to apprise the Secretary or his delegate of the nature and amount of such item. Lyta has conceded that amounts in excess of 25 percent were omitted from gross income. Her community share of Max's gross professional earnings was $24,451.01 in 1956 and $21,865.08 in 1957. She contends, however, that the affidavit adequately apprised respondent of that fact and, therefore, under subsection (ii), such amount must be excluded from the amount treated as "omitted." We agree with Lyta. The burden of proof with regard to the applicability of section 6501(e)(1)(A) is on the respondent. He must show that the taxpayer omitted from gross income an amount properly includable therein and that the amount so omitted was in excess of 25 percent of the gross income reported on the taxpayer's return. Estate of John Iverson 27 T.C. 786">27 T.C. 786, 792 (1957), affd. 255 F. 2d 1 (C.A. 8, 1958), certiorari denied 50 358 U.S. 893">358 U.S. 893 (1958). To prove that an amount was omitted, respondent must show that the amount was not adequately disclosed on the return or in a statement attached to the return. Respondent has failed to meet his burden of proof. Moreover, we believe the affidavit attached to both the 1956 and 1957 returns adequately disclosed the omission. In the affidavit attached to both returns, Lyta stated that she had no information concerning the nature and amount of her husband's earnings, and that because of this she was unable to determine the amount of income allocable to her by reason of her community share of such earnings. It is difficult to imagine how she could have been more specific under the circumstances. Respondent would have us ignore the affidavit because its purpose was merely to explain the delinquent filing of the 1956 return and was not specifically intended to advise respondent of omissions from gross income for the years 1956 and 1957. However, we do not believe that the intent behind the disclosure is relevant so long as the disclosure itself apparently apprises respondent of the omission. We are also of the opinion that the language of subsection (ii) 51 of the statute does not require, as respondent contends, specific disclosure of the dollar amount omitted. The statute on its face is ambiguous. The repetitious use of the word "amount" leads us to the belief that Congress was not concerned with actual disclosure of the specific dollar amount, and we must therefore look to the legislative history in order to determine the intent of Congress in this area. Our search of the relevant legislative materials reveals that Congress did not intend to limit the application of subsection (ii) to cases in which the actual dollar amount is revealed. On the contrary, it appears that Congress conceived of "adequate disclosure" in terms of "adequate information" as to a particular item, rather than a list of specific facts to be disclosed. H. Rept. No. 1337, to accompany H. R. 8300 (Pub. L. 591), 83rd Cong., 2d Sess., p. A415 (1954); S. Rept. No. 1622, to accompany H.R. 8300 (Pub. L. 591), 83rd Cong., 2d Sess., p. 584 (1954). As the Supreme Court stated in the case of Colony, Inc. v. Commissioner, 357 U.S. 28">357 U.S. 28, at p. 36 (1958) - We think that in enacting § 275(c) [now section 6501(e)(1)(A)] Congress manifested no broader purpose52 than to give the Commissioner an additional two years [now three years] to investigate tax returns in cases where, because of a taxpayer's omission to report some taxable item, the Commissioner is at a special disadvantage in detecting errors. In such instances the return on its face provides no clue to the existence of the omitted item. On the other hand, when, as here, the understatement of a tax arises from an error in reporting an item disclosed on the face of the return the Commissioner is at no such disadvantage. * * [Emphasis supplied] None of the cases relied on by respondent supply authority for the proposition that the actual dollar amount must be disclosed. See Slaff v. Commissioner, 220 F. 2d 65 (C.A. 9, 1955), reversing a Memorandum Opinion of this Court; Lawrence v. Commissioner, 258 F. 2d 562 (C.A. 9, 1958), reversing per curiam 27 T.C. 713">27 T.C. 713 (1957), and Elliott J. Roschuni, 44 T.C. 80">44 T.C. 80 (1965). Therefore, we hold that the affidavit adequately apprised the respondent of the omitted item for both 1956 and 1957.6 Because petitioner adequately apprised respondent as to the omission of community income from her return, 53 section 6501(e)(1)(A) requires that this amount be excluded in determining the amount omitted from gross income. Due to this exclusion, the omission does not equal an amount in excess of 25 percent of the gross income shown on the return as required by section 6501(e)(1)(A). Consequently, the general 3-year statute of limitations (section 6501(a)) which bars a deficiency notice mailed more than three years after the date on which the return was filed applies to the instant case and respondent's notice for the years 1956 and 1957 was untimely. For the reasons stated above, we hold for Lyta on this issue. Respondent concedes that if his notice of deficiency for 1956 and 195754 was untimely, his adjustments for those years are invalid. We agree. Issue - 1957 Erroneous Refund - Statute of Limitations on Assessment and Collection, Docket No. 3498-64. Findings of Fact On her return for the year 1956, Lyta showed an overpayment in the amount of $5,752.28. She did not, however, indicate in the appropriate space on the return whether this amount was to be refunded to her or was to be applied as a credit against her 1957 tax. In computing her 1957 tax, she applied the 1956 overpayment as a credit on her return. This had the effect of increasing the overpayment shown on her 1957 return from $2,187.56 to $7,939.84. Again she failed to indicate in the appropriate space on the return whether this latter amount should be refunded to her or should be applied against her 1958 tax liability. On May 13, 1958, Lyta received a refund check in the amount of $7,939.84 which respondent has characterized as being the overpayment shown on her 1957 return. Lyta, on receipt of the refund check and during May 1958, notified the district director, in a letter, that she could not understand why the refund check had been sent. Respondent replied, in a letter dated June 18, 1958, that55 she had every right to cash the check. On June 2, 1958, after Lyta's letter of May 1958 but prior to the respondent's letter in answer thereto of June 18, 1958, Lyta received a second refund check in the amount of $5,752.28, which was also designated as a tax refund. On June 14, 1958, prior to respondent's reply to her earlier letter, Lyta again notified respondent that the checks had been erroneously sent. Respondent never replied to this latter correspondence, and in September 1958 Lyta cashed both checks. On April 9, 1964, respondent assessed the amount of $7,817.98, representing the erroneous portion of the tax credit refunded to Lyta for the year 1957 ($5,752.28 plus interest on that amount of $2,065.70). On May 7, 1965, this amount plus a statutory addition of $373.59 (totaling $8,191.57) was collected by way of a levy on funds of Lyta on deposit at the Lytton Savings & Loan Association. Opinion Respondent has conceded that in the event we hold section 6501(e)(1)(A) to be inapplicable his assessment on April 9, 1964, was untimely and the collection by levy on May 7, 1965, was invalid. However, on brief, respondent urges that he has retained a right to this amount under56 the doctrine of Lewis v. Reynolds, supra. We find this contention to be without merit. In that case the Supreme Court held that in the defense of a suit for refund, the Commissioner may introduce evidence of additional errors in the return even though a deficiency based upon these items would be barred by the statute of limitations. The Supreme Court noted at p. 283 that - Although the statute of limitations may have barred the assessment and collection of any additional sum, it does not obliterate the right of the United States to retain payments already received when they do not exceed the amount which might have been properly assessed and demanded. [Emphasis supplied] The doctrine of Lewis v. Reynolds was originally posed and has been subsequently applied where the Commissioner had made a timely assessment and collection. See Larrabee v. United States, 37 F.R.D. 61">37 F.R.D. 61 (D.C.S.D. Cal. 1965); Estate of Ostella Carruth, 28 T.C. 871">28 T.C. 871, 880 (1957). The rationale underlying Lewis v. Reynolds is not properly applicable where, as here, the assessment and collection by the Commissioner was illegal. To apply Lewis v. Reynolds in the instant case would57 allow the Commissioner to circumvent the statute of limitations and render it a nullity. The idea that the Commissioner can illegally assess and collect a tax and later defend his action by reliance on items closed to him by the statute of limitations is repugnant to the concept of a limitations statute. We, therefore, hold that the assessment of April 9, 1964, was barred by the statute of limitations and that the doctrine of Lewis v. Reynolds is inapplicable on the facts before us. Issues Common to Both Dockets, 1958 (1) Community Income Findings of Fact For the period January 1, 1958, to November 28, 1958, the date of the final decree of divorce, Max had net professional earnings of $32,557.40. Respondent has taken the protective position of taxing the disputed income alternatively to petitioners in both dockets. Opinion Under the law of the State of California for the year 1958, the earnings of a husband, up to the date of the final divorce decree, are community property. Cal. Civil Code, section 161(a), later amended by section 169.2 (1959). See also, 58 Harrold v. Harrold, 43 Cal. 2d 77">43 Cal. 2d 77, 79, 271 P. 2d 489 (1954). Community property is allocable one-half to each spouse, and this allocation is controlling for tax purposes. United States v. Malcolm, 282 U.S. 792">282 U.S. 792 (1931); Ethel B. Dunn, 3 T.C. 319">3 T.C. 319 (1944); Marjorie Hunt, 22 T.C. 228">22 T.C. 228 (1954). The interest of the wife in the community earnings of the husband continues until the marriage is terminated by death or divorce, and an interlocutory decree of divorce, which does not adjudicate the community interests of the parties, does not terminate the community. Ethel B. Dunn, supra; In Re Williams' Estate, 36 Cal. 2d 289">36 Cal. 2d 289, 223 P. 2d 248 (1950). We hold, therefore, that one-half of Max's net professional earnings for the period January 1, 1958, to the date of the final decree of divorce, November 28, 1958, are properly allocable to Lyta. (2) Alimony Payments Findings of Fact During the entire year, Max's net professional earnings, held above to be allocable one-half to Lyta, were deposited in an account (hereinafter referred to as the community account) at the Bank of America. During the year 1958, Max paid59 to Lyta from the community account the sum of $4,933.28 pursuant to a court order providing for monthly alimony payments. Of this amount, $366.66 was paid on December 1, 1958, after the final decree of divorce had been entered. The payments were made by Max from the community account. The respondent has conceded, and properly so, that the payment on December 1, 1958, constituted gross income to Lyta under section 71(a)(1) and a deduction to Max under section 215. The balance of the payments, those made prior to the entry of the final divorce decree, represent the only amount remaining in issue. Respondent has again taken the protective position of deciding the issue adversely to petitioners in both dockets. Opinion Max contends that if one-half of that account is allocable to him, one-half of the payments from such account should be deductible by him under section 215. 7 Respondent, on the other hand, contends that section 215 applies only to payments made from the husband's income and does not extend to payments made from community income. (It might be noted that due to a change in California law in 1959, which declared that income earned by the husband after the interlocutory60 decree is his separate property, this question is rendered moot for subsequent years.) We are of the opinion that this situation is governed by our decision in Marjorie Hunt, supra. In the Hunt case, we held, inter alia, that amounts paid as support and maintenance pursuant to a court order, when paid out of community funds, were not deductible by the husband under section 215. Though the Hunt case involved a decree of separate maintenance rather than an interlocutory decree of divorce as in the present situation, there is no significant difference between it and the instant case. Although the result in Hunt was changed by an amendment to California law in 1951, section 169.1 of the California Civil Code, relating to separate maintenance decrees, the parallel amendment in reference to an interlocutory decree, section 169.2, California Civil Code, was not enacted until 1959. 61 Therefore, for the year 1958, the rationale of the Hunt case is controlling where the payments are made from community earnings. The Hunt case is merely a recognition of the precept of California law, that community property, other than by agreement of the parties or by statute, cannot be forcibly divided during the continuation of the marriage community. See Britton v. Hammell, 4 Cal. 2d 690">4 Cal. 2d 690, 52 P. 2d 221 (1935). It cannot, therefore, be said that payments are from the husband's income either totally or partially. They are, rather, from community property. We, therefore, hold that, following our decision in the Hunt case, no part of the payments in 1958, made prior to the entry of the final decree, can be deducted by Max under section 215. (3) Tax Credits and Deductions During the year, Max's net professional earnings, held to be community property, were deposited in the community account, and all payments unless specified to be otherwise were made from the community account. It is Lyta's contention that one-half of all the following payments are allocable to her. a. Estimated Tax Payments Findings of Fact During 1958, Max filed an individual declaration62 of estimated tax and made estimated tax payments in the amount of $10,577.40. Max took a tax credit for this amount on his 1958 Federal income tax return. Of this amount, $1,000 was paid from Max's separate property. The balance, $9,577.40, was paid out of the community account. Lyta also filed an individual declaration of estimated tax for the year 1958. Opinion Under section 6015(b), in order to divide estimated tax payments between a husband and wife, a joint declaration of estimated tax is required. No joint declaration was made in this case. On the contrary, the record reveals that both Lyta and Max filed individual declarations of estimated tax for the year 1958. It is, therefore, held that Lyta is not entitled to any portion of Max's estimated tax payments for the year 1958. b. Interest Payments Findings of Fact Max made interest payments during 1958, in the amount of $847.97. Of this amount, $332.97 was stipulated by the parties to be in payment of his separate obligations and, therefore, is not in issue. A second amount, $233.36, was paid by Max to his sister as interest on a loan. In 1957, Pearl Kasler, Max's sister, loaned to Max $10,000 on his personal credit63 rather than on the credit of the community. In advancing the money, Pearl looked solely to Max for payment. The balance of the interest payments, $281.64, was paid by Max to his attorneys. Just prior to payment to his attorneys, Max transferred from his separate funds an amount sufficient to cover the payment of $281.64 to his attorneys. Such transfer was made to the community account in order to enable Max to make the payment from his business account (which has been and will continue to be referred to as the community account). All of the above amounts were paid out of the community account. Opinion The burden of proof is upon Lyta to show by competent evidence that she is entitled to the deductions claimed. Ernest W. Clemens, 8 T.C. 121">8 T.C. 121 (1947). To meet this burden, she must first demonstrate that the debts were community obligations. Under California law a debt which arose during the marriage is presumed, in the absence of contrary evidence, to be a community obligation. Grolemund v. Cafferata, 17 Cal. 2d 679">17 Cal. 2d 679, 111 P. 2d 641 (1941). She must also demonstrate that these community obligations were paid with community funds. Again, under California64 law, it is presumed, in the absence of contrary evidence, that community property was used to satisfy community obligations. Huber v. Huber, 27 Cal. 2d 784">27 Cal. 2d 784, 167 P. 2d 708 (1946). The net effect of these presumptions is that Lyta's burden is merely to show that the debts arose during the marriage. If this burden is met, the presumptions will operate to conclude, first, that the debt was that of the community and, second, that the debt was satisfied with community funds. The burden is then shifted to Max to rebut the presumptions by showing either that the debt was his separate obligation or that it was paid with his separate funds. The $233.36 interest payment to Pearl Kasler is not deductible at all by Lyta since she has failed to show that this was a community debt. Also the presumption of California law, that a debt arising during the marriage is a community obligation, is overcome here by the presence of sufficient evidence to the contrary. The record reveals that the loan and the interest thereon were the separate obligations of Max. The loan was made to him solely on his individual credit, not on the credit of the community. In addition, the lender looked solely65 to Max for repayment of the loan. Under such circumstances, California law classifies the obligation as separate rather than community. See Stewart v. Stewart, 113 Cal. App. 334">113 Cal. App. 334, 298 P. 83">298 P. 83 (1931); Moulton v. Moulton, 182 Cal. 185">182 Cal. 185, 187 P. 421">187 P. 421 (1920). Since the interest paid was not a payment of a community debt, no part of said interest payment is allocable to, or deductible by, Lyta. The $281.64 interest payment by Max was made to his attorneys. The record does not reveal the nature of the obligation which gave rise to the payment. In the absence of any evidence to the contrary and since the debt arose during the marirage, it is presumed that the obligation was that of the community. Payment of this amount came from the community account. However, this payment can be traced to Max's separate funds which he transferred to the community account just prior to the time he made the payment to his attorneys. Under California law, if it can be shown that separate funds are used to pay a debt, the debt is not chargeable against the community, nor is it deductible as a community expense, whether or not the debt is paid out of the community account. 66 Thomasset v. Thomasset, 122 Cal. App. 2d 116">122 Cal. App. 2d 116, 264 P. 2d 626 (1953). It has been held that where funds are commingled, as in a single bank account and the amount of separate property contained therein is known, the separate property will not lose its separate character. Huber v. Huber, supra.Prior to payment to his attorneys, Max deposited "a like sum" in order to cover the payment Under the Huber case, this is sufficient evidence to show that separate funds were used to pay the debt. Therefore, the payment is not deductible as a community expense. Thomasset v. Thomasett, supra. c. State Tax Payments Findings of Fact Max made payments for state taxes in the year 1958 in the amount of $1,073.07. The parties have stipulated that $360.22, paid for property taxes, was properly deductible in its entirety by Max. Two of the remaining tax payments were $23, license fees, and $510 for sales and gasoline taxes. Both payments were made with funds from the community account. The record is barren as to how and when such obligations arose and when they were paid. Finally, Max made a payment of $179.85 for state income taxes during 1958. This payment67 was also made from the community account. Max allocated $150 out of these amounts to Lyta and claimed the balance as a deduction in his return. Respondent has conceded the propriety of Max's allocation. Opinion Again, Lyta has the burden of showing that the debts were (1) community obligations and (2) paid with community funds. We are of the opinion that she has failed to meet her burden. The record does not disclose any evidence that the payments for license fees and gasoline and sales taxes were payments of community debts. Nor has Lyta shown when these obligations arose. Without affirmative evidence that they arose during the marriage, we cannot presume that they are community debts. With regard to the payment of the state income taxes, Cal. Rev. and Tax. Code section 185558 states that a husband's liability for such tax on his share of community income is his separate debt unless the parties filed a joint income tax return for that year or the wife controlled, received, or spent some portion of his allocable share of that income. Lyta has not shown that they filed a joint California state income tax return nor has she produced any evidence on68 the latter conditions. She has, therefore, failed to meet her burden of showing that this amount was in satisfaction of a community debt. We, therefore, hold that the state income tax payment made by Max was the payment of his separate obligation and no part of this payment is deductible by Lyta. We, consequently, hold that Lyta has not established her right to any amount in excess of the $150 allocated to her by Max. d. Legal Expenses Findings of Fact Max made payments to his attorneys during 1958 of $7,781.64. Such payments were made from the community account. Prior to this payment, Max transferred funds, from his separate account, to the community account, in an amount sufficient to cover this payment of $7,781.64. This transfer was69 made to provide the funds necessary to cover the payment to his attorneys. The payments may be allocated as follows: (1) $2,178.86 for legal services rendered in connection with a certain action entitled "Lyta J. Hayman vs. Compton Sanitarium, Inc., No. SM 5305," Superior Court of the State of California for the County of Los Angeles (hereinafter referred to as the Compton action) and (2) $5,602.78 for legal services rendered in connection with the divorce action entitled "Lyta J. Hayman vs. Max Hayman, No. SM 14554," Superior Court of the State of California for the County of Los Angeles. Max claimed a deduction for legal fees in the amount of $6,223.66 in 1958, which was fully disallowed by respondent. The Compton action was instituted by Lyta to set aside an election of the Board of Directors of the Compton Sanitarium, Inc., in which Max had voted their jointly owned shares. Lyta and Max owned 66 2/3 percent of the outstanding stock of the sanitarium. They were also officers, directors, and salaried employees of said sanitarium. Their motive in litigating was to protect their respective salaried positions at the sanitarium. The primary issue before the California court was the70 determination as to the authority to vote the stock. This issue turned upon the type of ownership, community property or joint tenancy, in which the shares were held. Opinion Respondent maintains that, since the action involved a question of title, any fees incurred were capital expenditures rather than presently deductible expenditures. Max, on the other hand, contends that even though a question of technical title is involved, the primary issue in litigation is the right to vote the stock and therefore the expenditure is properly deductible from ordinary income as an expense under section 212. We hold that the legal expenses of the Compton action were properly deductible from ordinary income under section 212. The distinction between current expenses and capital expenditures was set forth in the case of Spangler v. Commissioner, 323 F. 2d 913 (C.A. 9, 1963), affirming a Memorandum Opinion of this Court. In the Spangler case, the legal fees arose in connection with an action to recover stock which the taxpayer had been fraudulently induced to sell. The Ninth Circuit held that such expenditures were not deductible from ordinary income but were capital expenditures. 71 It was noted at p. 919 that - It is a rule virtually as old as the federal income tax itself that costs incurred in defending or perfecting taxpayer's claim to ownership of capital assets are capital expenditures, and not expenses deductible from ordinary income. * * The gist of the controversy * * * in the estate court litigation was the ownership of the stock. * * * [Emphasis supplied] By way of a footnote to the above language the Circuit Court stated that - The present case is thus distinguishable from those in which it has been concluded that the primary issue was not ownership, but rather the right to possession * * * [Emphasis supplied] The criterion therefore is the primary issue litigated before the state court. Here the parties litigated primarily the right to vote the stock. Though this question required a determination as to the form of ownership in which the stock was held, there was never any doubt that the shares were owned equally by Lyta and Max. The gist of the controversy, therefore, was the right to enjoy or possess (i.e., vote) rather than the ownership of stock. The language of the Fifth Circuit in the case of 72 Bliss v. Commissioner, 57 F. 2d 984 (C.A. 5, 1932), remanding 20 B.T.A. 35">20 B.T.A. 35 (1930), which held that the expenses therein were deductible, is pertinent on this point. Therein, it was stated at p. 986 that - The defendants * * admitted the * * * ownership of the lands in question * * * The defendants in those suits set up claims, not to title * * , but to rights * * therein * * * The distinction between ownership and enjoyment or possession of property rights is well settled and prior court decisions which have allowed a deduction for expenses related to the latter dictate a similar result in the present controversy. Campbell v. Fields, 229 F. 2d 197 (C.A. 5, 1956); Allen v. Selig, 200 F. 2d 487 (C.A. 5, 1952); Brown-Forman Distillers Corp. v. United States, 132 F. Supp. 711">132 F. Supp. 711 (Ct. Cl., 1955); Willy Zietz, 34 T.C. 369">34 T.C. 369 (1960); Frederick E. Rowe, 24 T.C. 382">24 T.C. 382 (1955). We, therefore, are of the opinion that the present case, though involving a question as to the form of ownership, was primarily concerned with the management of the property, that is, the authority to vote the stock. Consequently, 73 the legal expenses of the Compton action are not nondeductible capital expenditures. These expenditures were incurred for the purpose of conserving and maintaining income-producing property. Max's attempt to vote the stock and the defense of his authority to do so were for the sole purpose of preserving his employment and hence his salary. Under these circumstances, it is clear that these expenses are deductible under section 212. Bertha K. Goldberg, 31 T.C. 258">31 T.C. 258 (1958); Frederick E. Rowe, supra. Of the $5,602.78 paid for legal services in connection with the divorce action, Max claimed a deduction in the amount of $4,044.80. The parties have stipulated that of this amount only $750, the amount conceded to be properly allocable to tax advice received by Max in connection with the preparation of the property settlement between the parties, is deductible. Max has abandoned any contention as to the balance. Having held that $2,178.86, the legal expenses of the Compton action, and the parties having stipulated that $750, the expense of tax advice in the divorce action, were properly deductible under section 212, we must now determine whether any portion of74 these expenses is allocable to Lyta. Both of these debts arose during the marriage and both amounts were paid out of the community account. However, as we had occasion to discuss earlier, in relation to the payment of interest by Max to his attorneys, the payment of these amounts is directly traceable to Max's separate property. Again, as we noted earlier, where separate funds of the taxpayer are used to satisfy an obligation, the debt is not chargeable against the community nor is it deductible as a community expense. Thomasset v. Thomasset, supra.It, therefore, is our opinion that no portion of the legal expenses is allocable to Lyta. (4) Dependency Exemption Findings of Fact Lyta and Max had two minor children, a son and a daughter. Both children resided with their mother in a home owned by both parents as tenants in common. Both parents contributed to the support of the children during the year 1958. For the year in question, Max supplied the following amounts for the support of the children: Support payments pursuant to court or-der, for both children for the year$3,600School supplies for the year75Vacations650Visits500Week ends250Gifts175Total support allocable to both children$5,250Allocable to support of daughter$2,625Allocable to support of son2,62575 In addition, Max paid medical expenses for his son in the amount of $75. In total, therefore, Max expended $2,625 for the support of his daughter and $2,700 for the support of his son. Max does not claim any other amounts expended for support in 1958. During the year 1958 Lyta contributed the following amounts for the support of the children: Household items, two-thirds of which were properlyallocable to the childrenTotalChildrenTaxes on home$1,800$1,200Interest on home1,8001,200Fire Insurance360240Utilities900600Telephone300200Garden & maintenance960640Garden & pool supplies240160Household help1,8001,200Laundry600400$8,760$5,840Food allocable one-half to the children3,6001,800Amounts expended solely for the children: Gifts500Clothes600$8,740AllocableAllocable toto SonDaughter$4,370$4,370Medical payments300Boys' club600Camp180Singing and ballet fees600$5,450$4,970Less that amount provided by Max via the support order1,8001,800Net contribution by Lyta3,650$3,170At some time subsequent to 1958, Max reimbursed76 Lyta for his share of the interest and tax payments on their home. Opinion Both Lyta and Max contend that they are entitled to a dependency exemption for each of the two children. Each takes the position that they, rather than the other, have contributed over one-half of the total support for each child for the year 1958. The determination of who contributed in excess of one-half of the total support is solely one of fact. The only evidence adduced in regard to this matter is the testimony of the respective petitioners which this Court has accepted in both cases at face value except in those instances noted herein. No issue has been raised as to the fair rental value of the home in the year 1958. Because of its joint ownership and because the record does not reveal that Lyta had the sole right to possession of the house, any value given would be considered as supplied equally by each parent. Max's contention that he should receive credit for one-half of the payments of the home's interest and taxes which were made by Lyta is without merit, the fact that he reimbursed such amounts in a later year notwithstanding. Under the statute, section 152(a), the amount must be received77 during the year from the taxpayer and this Court has held that this language requires more than an unfulfilled duty or obligation on the part of the taxpayer to qualify him for the allowance of the exemption. John L. Donner, Sr., 25 T.C. 1043">25 T.C. 1043 (1956), interpreting identical language in section 25(b)(3) of the Internal Revenue Code of 1939. Max, therefore, cannot be credited with any part of these payments. Also, since Lyta testified that the household help lived in during the year, it seems reasonable that the cost of food should be prorated over a household of four rather than three, as Lyta contends. In addition, we note that Lyta's testimony as to the amount of medical expenses for her son in 1958 was ambiguous. She testified at first to $500 but later stated that it was "a few hundred." We have found that an amount of $300 was a reasonable amount in light of the facts before us. We, therefore, hold that Lyta is entitled to an exemption for each of the two children for the year 1958. Issue - Entertainment Expenses, Docket No. 3498-64. Findings of Fact On her return for 1958, Lyta claimed entertainment expenses of $972.63. Respondent, in78 his statutory notice of deficiency, limited the allowable entertainment expenses to $690.63. Opinion Lyta, on brief, contends that the full amount of the entertainment expenses should be allowed under the doctrine of the case of Cohan v. Commissioner, 39 F. 2d 540 (C.A. 2, 1930). We hold for the respondent. The burden of proof is upon Lyta to show that she is entitled to the deduction claimed. Ernest W. Clemens, supra.This she has failed to do. She has not offered any evidence to support any part of the deduction claimed, and this Court can see no ground on which to determine an amount different than that allowed by the respondent. In fact, from the record before us, it would appear that respondent has already applied the Cohan rule to this situation. Decisions will be entered under Rule 50. Footnotes1. This amount has been collected by levy in May 1965.↩2. Unless otherwise indicated, all section references are to the Internal Revenue Code of 1954.↩3. It should be noted that several issues raised by the pleadings for the year 1958 have been either abandoned or conceded by the parties.↩4. SEC. 6501. LIMITATIONS ON ASSESSMENT AND COLLECTION. (a) General Rule. - Except as otherwise provided in this section, the amount of any tax imposed by this title shall be assessed within 3 years after the return was filed (whether or not such return was filed on or after the date prescribed) * * , and no proceeding in court without assessment for the collection of such tax shall be begun after the expiration of such period. ↩5. SEC. 6501(e)(1)(A). General Rule. - If the taxpayer omits from gross income an amount properly includible therein which is in excess of 25 percent of the amount of gross income stated in the return, the tax may be assessed, or a proceeding in court for the collection of such tax may be begun without assessment, at any time within 6 years after the return was filed. For purposes of this subparagraph - * (ii) In determining the amount omitted from gross income, there shall not be taken into account any amount which is omitted from gross income stated in the return if such amount is disclosed in the return, or in a statement attached to the return, in a manner adequate to apprise the Secretary or his delegate of the nature and amount of such item.↩6. Respondent has urged that for the year 1957 no disclosure is possible because the return itself bore no reference to the omission and even if the affidavit be considered it did not concern itself with 1957. Both of these contentions are without merit since we have found that the affidavit adequately disclosed the omissions for both years and that the affidavit was attached to the 1957 return when it was filed so that it constituted a "statement attached to the return" as prescribed by subsection (ii).↩7. Sec. 215(a)↩ General Rule. - In the case of a husband described in section 71, there shall be allowed as a deduction amounts includible under section 71 in the gross income of his wife, payment of which is made within the husband's taxable year. * .8. Cal. Rev. and Tax. Code: § 18555. Liability of spouses; community income; joint returns. The spouse who controls the disposition of or who receives or spends community income as well as the spouse who is taxable on such income is liable for the payment of the taxes imposed by this part on such income. Where a joint return is filed by a husband and wife, the liability for the tax on the aggregate income is joint and several. * *↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622268/	Herman Ellis v. Commissioner.Ellis v. CommissionerDocket No. 80471.United States Tax CourtT.C. Memo 1960-280; 1960 Tax Ct. Memo LEXIS 3; 19 T.C.M. (CCH) 1545; T.C.M. (RIA) 60280; December 30, 1960Herman Ellis, pro se 7643 S. Wabash Ave., Chicago, Ill. Joseph T. de Nicola, Esq., for the respondent. TIETJENSMemorandum Findings of Fact and Opinion TIETJENS, Judge: The respondent determined a deficiency in income tax of $499.59 for the calendar year 1957. The issues presented for decision are: (1) Whether the petitioner is entitled to a dependency exemption for his son; and (2) whether petitioner is entitled to the itemized deductions reported on his return. Findings of Fact The petitioner, Herman Ellis, is an individual residing in Chicago, Illinois. He filed an individual income tax return for the year 1957 with the director of internal revenue at Chicago, Illinois. On his return petitioner claimed a dependency exemption for his son, Melvin Ellis, who he stated resided with him during the entire year of4 1957. The son lived in Chicago with his grandmother for most of 1957, but for approximately three months of that year lived with his mother in California. Petitioner, in 1957, bought some clothes for his son, gave some money to the grandmother for the son's room and board, and paid his plane fare for the trip to California to visit his mother. The record does not show the aggregate amount of support petitioner provided for his son during 1957 or the total support of the son paid from other sources. Petitioner claimed itemized deductions totaling $1,558.50. This amount included church and charitable contributions, interest on installment purchases, auto license fee, gasoline and sales taxes, union dues, safety shoes and clothing and $800 which he stated to be a casualty loss arising from a burglary of his house. The respondent disallowed the claimed deductions for lack of substantiation and allowed the standard deduction. Ultimate Findings Petitioner has not proved that he contributed more than one-half of the support of his son. Petitioner is entitled to not more than $250 for itemized deductions on his 1957 income tax return. Opinion In order to be entitled to a5 dependency exemption under section 152, Internal Revenue Code of 1954, 1 the taxpayer must prove that he provided over half of the support of the individual claimed as a dependent for the taxable year. In order to establish that this requirement has been met, he has the burden of proving not only the amount of support he provided during the taxable year, but also that it represented more than one-half of the total support of the dependent from all sources. The petitioner was unable to show either the amount of support he provided or the total amount contributed from all sources and, accordingly we approve the respondent's determination on this issue. In regard to the itemized deductions, although the proof of the amounts was unsatisfactory, 6 we are convinced from the record, that the petitioner did incur some deductible expenses, but not in an amount as great as the standard deduction already allowed by the respondent. The respondent concedes that petitioner is entitled to a dependency exemption for his daughter which will be reflected in the computation under Rule 50. Decision will be entered under Rule 50. Footnotes1. SEC. 152. DEPENDENT DEFINED. (a) General Definition. - For purposes of this subtitle, the term "dependent" means any of the following individuals over half of whose support, for the calendar year in which the taxable year of the taxpayer begins, was received from the taxpayer (or is treated under subsection (c) as received from the taxpayer): (1) A son or daughter of the taxpayer, or a descendant of either, * *↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622269/	PHILIP C. GAVOSTO and BARBARA J. GAVOSTO, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentGavosto v. CommissionerDocket No. 9099-93United States Tax CourtT.C. Memo 1994-481; 1994 Tax Ct. Memo LEXIS 489; 68 T.C.M. (CCH) 827; October 3, 1994, Filed 489 For petitioners: Neal J. Hurwitz, For respondent: William J. Gregg, TANNENWALDTANNENWALDMEMORANDUM OPINION TANNENWALD, Judge: This case is before us on petitioners' motion to suppress evidence on the ground that it is grand jury material received by respondent illegally, and in violation of Rule 6(e) of the Federal Rules of Criminal Procedure (Rule 6(e)), and to vacate the deficiency. Some of the facts have been stipulated for the purposes of this motion and are found accordingly. The stipulation of facts and the stipulated exhibits are incorporated herein by this reference. From approximately 1985 to 1988, Mr. Gavosto was a subject of a grand jury investigation conducted by the U.S. Attorney for the Eastern District of New York. The investigation involved alleged kickbacks to Mr. Gavosto while he was employed by Mobil Corporation. Internal Revenue Service Agent Donald Merz assisted the U.S. Attorney in connection with this criminal investigation. He was directly involved in the development of evidence submitted to the grand jury and had access to such materials. On February 23, 1988, in the United States District Court, Eastern District of New York, Mr. Gavosto waived490 indictment and pleaded guilty to willfully making, subscribing, and filing a false joint Form 1040, U.S. Individual Income Tax Return, for the year 1981. At a sentencing hearing, on June 10, 1988, the Assistant U.S. Attorney called Mr. Merz as a witness and through him various documents and testimony considered by the grand jury (hereinafter "grand jury materials") were admitted into evidence. Mr. Merz was cross-examined at some length by Mr. Gavosto's counsel, Neal J. Hurwitz, who is petitioners' counsel herein. On September 20, 1988, the sentencing hearing continued, and both petitioners testified. On October 5, 1988, Mr. Gavosto was given a 3-year suspended sentence and sentenced to 3 years' probation, a $ 5,000 fine, 500 hours of community service, and 6 months at a community treatment center. Mr. Hurwitz appeared as Mr. Gavosto's counsel at those hearings. At none of the three hearings did Mr. Hurwitz seek to limit the potential use of the grand jury materials beyond the sentencing process. On February 5, 1993, respondent issued a notice of deficiency for 1979 and another notice of deficiency for the 1980, 1981, and 1982 taxable years. On March 7, 1993, petitioners filed491 a petition with this Court contesting, among other things, the reliability and credibility of the witnesses upon which respondent relied in preparing the notices of deficiency. In her answer, filed on June 11, 1993, respondent replied that the determination of the omission of income by petitioners was corroborated, in part, by the grand jury testimony of three witnesses. In their reply, filed on August 30, 1993, petitioners inquired whether respondent was in possession of certain grand jury testimony that is now before us as part of the grand jury materials. In her request for admissions, filed on March 14, 1994, respondent again referred to corroborating grand jury testimony. In their response to respondent's request for admissions, petitioners referred to the grand jury testimony identified in the request and asked for copies thereof. 1Although the Court had received492 some indication of a problem involving grand jury materials about 10 days before the case was called for trial at a trial session of the Court scheduled to commence in New York, New York, on April 11, 1994, it was not until the case was called for trial on that date that petitioners' motion was filed. At that time, respondent stated on the record that if petitioners' motion to suppress was granted, respondent conceded the deficiency. 2Petitioners ask this Court to suppress the grand jury materials relied493 upon by respondent, and to vacate the deficiency. Initially, we note that respondent's concession obviates the need for us to consider that portion of the motion requesting that we vacate the deficiency. In any event, invalidation of a notice of deficiency is not the proper remedy where respondent illegally uses grand jury material. Graham v. Commissioner, 82 T.C. 299">82 T.C. 299, 310-311 (1984), affd. 770 F.2d 381">770 F.2d 381 (3d Cir. 1985). Thus, the disposition of petitioners' motion turns upon whether respondent's use of the grand jury materials would violate Rule 6(e). Berkery v. Commissioner, 91 T.C. 179">91 T.C. 179, 188 (1988), affd. without published opinion 872 F.2d 411">872 F.2d 411 (3d Cir. 1989). The foundation of petitioners' position is United States v. Sells Engineering, Inc., 463 U.S. 418">463 U.S. 418 (1983), and United States v. Baggot, 463 U.S. 476">463 U.S. 476 (1983). In United States v. Sells Engineering, Inc., supra, the Department of Justice sought to disclose grand jury material to attorneys and support staff in its 494 Civil Division at the conclusion of its criminal investigation under Rule 6(e)(3)(A)(i). 3495 The Supreme Court held that Rule 6(e)(3)(A)(i) applied only to "those attorneys who conduct the criminal matters to which the materials pertain." Id. at 427. The Court explained, "This conclusion is mandated by the general purposes and policies of grand jury secrecy, by the limited policy reasons why Government attorneys are granted access to grand jury materials for criminal use, and by the legislative history of Rule 6(e)." Id. at 427. The Court concluded that attorneys in the Civil Division must secure a court order under Rule 6(e)(3)(C)(i)4 to obtain disclosure, which requires a showing of "particularized need". Id. at 442-443. In United States v. Baggot, supra, following a plea by the defendant, the Internal Revenue Service (IRS) sought disclosure of grand jury transcripts and documents, under Rule 6(e)(3)(C)(i), for use in its audit to determine the taxpayer's civil tax liability. The Supreme Court determined that an IRS investigation to determine a taxpayer's civil tax liability is not "preliminarily to or in connection with a judicial proceeding" within the meaning of Rule 6(e)(3)(C)(i) and denied disclosure. It is clear that, under Baggot and Sells Engineering, respondent could not, without a Rule 6(e) order or some other justification, utilize the grand jury materials herein. Respondent maintains that the grand jury materials were admitted into evidence at the sentencing hearing and are therefore now public, so 496 that Sells Engineering and Baggot do not apply. Petitioners dispute this, arguing that no waiver occurred at the sentencing hearing, that they received no notice, implied or otherwise, of intended disclosure of the grand jury materials to the civil attorneys and that, while the grand jury materials were marked at the sentencing hearing for use by the witness, Mr. Merz, and for use by the court in sentencing, there was no public disclosure and no authorization for such disclosure. We find no merit in petitioners' various arguments. It is well established that, once grand jury material has been admitted as evidence in a criminal trial, it becomes part of the public record and thus is not subject to Rule 6(e). In re Special February 1975 Grand Jury, 662 F.2d 1232">662 F.2d 1232, 1236-1237 n.10 (7th Cir. 1981), affd. sub nom. United States v. Baggot, 476">463 U.S. 476 (1983); Sisk v. Commissioner, 791 F.2d 58">791 F.2d 58, 60 (6th Cir. 1986), affg. an unpublished order of this Court; Bell v. Commissioner, 90 T.C. 878">90 T.C. 878, 903-904 (1988). 5 The question then becomes whether a sentencing hearing497 should be treated the same as the rest of a criminal trial. An affirmative answer to this question has been given in the context of the right of the public to know through use by the media of information admitted into evidence at a sentencing hearing. In re Washington Post Co., 807 F.2d 383">807 F.2d 383, 389 (4th Cir. 1986) (Sentencing "clearly amounts to the culmination of the [criminal] trial."); see also Application of The Herald Co., 734 F.2d 93">734 F.2d 93, 98 (2d Cir. 1984) (In discussing the public observation of a pretrial suppression hearing, the court stated, "It makes little sense to recognize a right of public access to criminal courts and then limit that right to the trial phase of a criminal proceeding").498 In a narrow context not involving the right of the public to know, the Court of Appeals for the Fourth Circuit in United States v. Manglitz, 773 F.2d 1463">773 F.2d 1463, 1467 (4th Cir. 1985), stated in connection with the need for a Rule 6(e) order with respect to the disclosure of information at a Rule 11 (guilty plea) hearing: We believe that a prosecutor, in performing his duty to enforce the criminal laws of the United States, is not required to obtain a court order prior to disclosing grand jury material at a Rule 11 hearing as long as the material introduced is relevant to the question of guilt or if it will assist the Court in sentencing the defendant. * * * [Emphasis added.]The Fourth Circuit did, however, include a warning that this might not be the case where there is evidence that such disclosure was the result of deliberate action by the Government in bad faith, i.e., involving "a pretextual use of the grand jury material that was designed to circumvent the prohibitions announced in Sells and Baggot." United States v. Manglitz, supra at 1468. 6 There is not the slightest evidence of any such bad499 faith in the instant case. Petitioners rely heavily on United States v. Alexander, 860 F.2d 508 (2d Cir. 1988). In that case, the defendant sought a reversal of his sentence on the ground that the submission of grand jury materials in a presentencing memorandum of the government, which became part of the public record, had resulted in unfavorable publicity500 in the media and thereby produced an inappropriate sentence. Although the Court of Appeals for the Second Circuit found that the disclosure did not prejudice the defendant, it voiced its concern about the disclosure as follows: We are not persuaded by the government's argument that unlimited public disclosure was permissible on the theory that the government is entitled to disclose grand jury materials in open court during sentencing proceedings even without court authorization. We reject the government's premise. Rule 6 confers no such privilege; nor are we aware of any need for the government to place grand jury materials in the open record in connection with such proceedings. With respect to sentencing, as contrasted with determinations of the defendant's guilt, there is no requirement that the court consider only evidence adduced in open court. See, e.g., Williams v. New York, 337 U.S. [241] at 250-51 * * * [(1949)]. Thus, we see no reason why the government cannot state its sentencing position in open court in terms that do not reveal matters that occurred before the grand jury, furnishing the supporting grand jury material to the501 court in a sealed filing. This would parallel the treatment given to presentence reports prepared by the federal probation office. Such reports are used by the court in sentencing; but they are not part of the public record, and they are unavailable to persons other than the court, the parties, and the probation office, except on a showing of compelling need. See generally United States v. Charmer Industries, 711 F.2d 1164 (2d Cir. 1983); Fed.R.Crim.P. 32(c). Similar treatment of grand jury materials would reflect an appropriate balancing of the limited need for disclosure and the societal interest in grand jury secrecy. We conclude that the government's motion for permission to disclose was improperly broad and that the court's granting of that motion without limitation was an abuse of discretion. United States v. Alexander, 860 F.2d at 514.]We find it unnecessary to resolve the seeming conflict between United States v. Manglitz, supra, and United States v. Alexander, supra, 7 because we think the instant case is distinguishable in that both502 those cases involved the review by the supervisory court of the action of the District Court judge who presided over the criminal proceeding. Furthermore, a broadly worded order and wide dissemination of the disclosed grand jury materials were involved in Alexander rather than a specific ruling relating to specific grand jury material as is the case herein -- a contrasting fact which has implications in terms of the availability of the element of reliance by respondent. Cf. United States v. Leon, 468 U.S. 897">468 U.S. 897 (1984); see also United States v. John Doe, Inc. I, 481 U.S. 102">481 U.S. 102, 112-113 (1987); Kluger v. Commissioner, 83 T.C. 309">83 T.C. 309, 320-321 (1984). Finally, the defendant in Alexander made his objections to the Government's disclosure to the sentencing court, something that cannot be said for petitioners herein. As we previously pointed out, see supra p. 3, petitioners' counsel made no move to limit the impact of the action by the District Court judge in the sentencing hearing. Cf. United States v. John Doe, Inc. I, 481 U.S. at 106. Indeed, the circumstances503 herein are such that one could conclude that petitioners' failure so to move and their delay in filing their motion to suppress herein were part of a strategic plan to lead respondent down the primrose path of preparation for trial and create a situation that petitioners hoped would result in a last minute ruling by this Court which would put respondent at an inescapable disadvantage. Cf. ARC Electrical Construction Co. v. Commissioner, 91 T.C. 947">91 T.C. 947, 956 (1988). In this connection, petitioners' claim that they did not and could not waive the limitations of Rule 6(e) is without merit. Any "waiver" of those limitations was created by the District Court judge's action in admitting the grand jury materials into evidence. Petitioners argue that, in contrast to a504 criminal trial, a sentencing hearing is confidential or, at least, that we should interpret the action of the sentencing judge as limiting the use of the grand jury materials to the sentencing of Mr. Gavosto. In effect, petitioners ask us to turn the requirements for disclosure set forth in United States v. Alexander, supra at 514, into implied conditions attaching to any use of grand jury materials. We are not prepared to go that far, at least under the circumstances herein. The fact of the matter is that when the sentencing judge stated "Admitted", he gave no indication that the grand jury materials were to be treated any differently from any other evidence at the hearing. We are satisfied that there can be no implied confidential (i.e., closed) sentencing hearing in the absence of action of record to that effect by the sentencing judge after satisfying himself that certain clearly defined standards had been met. In re Washington Post Co., 807 F.2d at 389-391; United States v. Byrd, 812 F. Supp. 76">812 F. Supp. 76, 78 (D.S.C. 1993). Nor are we impressed with petitioners' claim that the grand jury505 materials remained in the possession of the Government or of the Clerk of the District Court under circumstances which preclude classifying them as matters of public record. Petitioners have failed to submit probative evidence in this regard. Thus, we leave to another day resolution of the question whether such evidence would be sufficient to limit the otherwise "public record" characterization of grand jury materials admitted into evidence at a sentencing hearing. In any event, we are not prepared to substitute our judgment for that of the District Court judge, even if we were to conclude that he should have acted differently. In re Grand Jury Proceedings (Kluger), 827 F.2d 868">827 F.2d 868, 871 (2d Cir. 1987); ARC Electrical Construction Co. v. Commissioner, 91 T.C. at 952-953; see In re Grand Jury Proceedings, Miller Brewing Co., 687 F.2d 1079">687 F.2d 1079, 1095-1096 (7th Cir. 1982). Unquestionably, we have jurisdiction to review the action of the sentencing judge herein, see Kluger v. Commissioner, 83 T.C. at 316, but we are reluctant to do so herein particularly because the 506 discretion of a District Court judge is involved, see id. at 320. That discretion, which the Court of Appeals for the Second Circuit recognized in United States v. Alexander, 860 F.2d at 513-514, extends to determining, subject to certain procedural limitations, which matters arising in a sentencing hearing should not be made part of the public record, i.e., sealed. See also Basic Earth Science System, Inc. v. United States, 821 F.2d 1290">821 F.2d 1290 (7th Cir. 1987); In re Washington Post Co., 807 F.2d at 390-391; United States v. Byrd, 812 F. Supp. at 78. Finally, we are satisfied that, however broad the scope of review of that discretion by the supervisory court may be, consistent with the views of the Court of Appeals for the Second Circuit in United States v. Alexander, supra, we do not believe those views mandate that this Court, which has no supervisory power, should play such a reviewing role. Under the circumstances herein, and recognizing that the secrecy imperative in respect of grand jury proceedings507 lessens after the termination of those proceedings (in this case over 6 years has elapsed), see Douglas Oil Co. v. Petrol Stops Northwest, 441 U.S. 211">441 U.S. 211, 222 (1979), we are not prepared to conclude that Rule 6(e) prevents respondent from using the grand jury materials. Petitioners' motion will be denied. An appropriate order will be issued. Footnotes1. This belies petitioners' claim that they only knew respondent possessed the grand jury testimony because of a random statement during discovery.↩2. The following colloquy took place between the Court and respondent's counsel: THE COURT: I understand that the only issue -- and Respondent's counsel can correct me on this -- is whether these documents that he wanted in the stipulation and used in evidence are a matter of public record. Am I correct that Respondent's representation to me was that if I should find they were not part of public record he would concede the case? MR. GREGG: William J. Gregg for the Respondent. Yes, Your Honor, that's correct.↩3. Rule 6(e)(3) provides in pertinent part: (A) Disclosure otherwise prohibited by this rule of matters occurring before the grand jury, other than its deliberations and the vote of any grand juror, may be made to -- (i) an attorney for the government for use in the performance of such attorney's duty; * ↩4. Rule 6(e)(3) provides in pertinent part: (C) Disclosure otherwise prohibited by this rule of matters occurring before the grand jury may also be made -- (i) when so directed by a court preliminarily to or in connection with a judicial proceeding;↩5. See Green v. Commissioner, T.C. Memo. 1993-152↩ ("Evidence which is presented at a criminal trial is not protected by the guarantees of secrecy surrounding grand jury investigations, but rather is a matter of public record. * * Consequently, respondent is not prohibited from using evidence brought before a grand jury which was subsequently used at petitioner's criminal trial to determine petitioner's 1983 civil tax liability.").6. The Court of Appeals for the Fourth Circuit observed that the "district court is not required to seal the record after every guilty plea hearing in which a prosecutor discloses grand jury material, unless the prosecutor abuses his discretion and uses the Rule 11 hearing as a pretext for disclosing grand jury material to other government attorneys as prohibited by United States v. Sells Engineering, 463 U.S. 418">463 U.S. 418 * * * (1983), and United States v. Baggot, 463 U.S. 476">463 U.S. 476 * * * (1983)." United States v. Manglitz, 773 F.2d 1463">773 F.2d 1463, 1467↩ (4th Cir. 1985).7. An appeal in this case would lie to the Court of Appeals for the Second Circuit. Cf. Golsen v. Commissioner, 54 T.C. 742 (1970), affd. 445 F.2d 985">445 F.2d 985↩ (10th Cir. 1971).	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622270/	SUWAN NGUANTRI RATANA, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent; REBECCA C. RATANA, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentRatana v. CommissionerDocket Nos. 9581-76; 1560-77; 1135-77.United States Tax CourtT.C. Memo 1980-353; 1980 Tax Ct. Memo LEXIS 236; 40 T.C.M. (CCH) 1119; T.C.M. (RIA) 80353; September 2, 1980, Filed 236 Petitioners Mr. and Mrs. Ratana were born in Thailand and the Philippines, respectively. Both were resident aliens in the United States. During some of the years in issue Mr. Ratana worked at the Royal Thai Embassy. Mrs. Ratana worked as a nurse. In 1975 Mr. Ratana terminated his employment with the Embassy. Prior to and after leaving the Embassy Mr. Ratana earned income from the sale of narcotics. Neither the Embassy nor narcotics income was reported by petitioners on their joint returns for 1974 and 1975. Mr. Ratana and the Embassy advised Mrs. Ratana erroneously that his Thai salary was tax exempt. Petitioners were audited twice by respondent and his agents accepted this view. Held: All of Mr. Ratana's income was subject to tax under sec. 61, I.R.C. 1954. Held further: Mrs. Ratana qualifies as an innocent spouse under sec. 6013(e). Suwan Nguantri Ratana, pro se in docket Nos. 9581-76 and 1560-77. 237 Julie Noel Gilbert and Andrew D. Pike, for the petitioner in docket No. 1135-77. Charles B. Zuravin, for the respondent. STERRETTMEMORANDUM FINDINGS OF FACT AND OPINION STERRETT, Judge: Under date of December 3, 1976 respondent issued a statutory notice of deficiency to petitioners asserting deficiencies in income tax238 and additions to tax as follows: Sec. 6653(b)Calendar YearDeficiencyAddition to Tax1974$ 91,582.30$ 45,791.151975415,034.63207,517.32Rebecca C. Ratana filed a petition, in her name only, challenging said deficiency on February 7, 1977 and the petition was assigned docket number 1135-77. Suwan Nguantri ratana filed a petition, in his name only, challenging said deficiency on February 10, 1977 and that petitioner was assigned docket number 1560-77. On October 6, 1976 a jeopardy assessment, pursuant to section 6861, I.R.C. 1954, had been made with respect to the 1974-75 joint liability of petitioners. On June 8, 1976 respondent, pursuant to section 6851, made a termination assessment with respect to Mr. Ratana's income tax liability for the period January 1, 1976 to May 10, 1976. On August 3, 1976 a statutory notice of deficiency was issued to Mr. Ratana asserting a deficiency of $778,069.41 for that period. Mr. Ratana's petition challenging that assessment was assigned docket number 9581-76 and was filed October 21, 1976. These cases were called from the calendar for the trial session of the Court at Washington, 239 D.C., on April 16, 1979. At that trial no appearance was made by or on behalf of either petitioner. Respondent filed a motion for continuance and consolidation for the purposes of trial and briefs in docket Nos. 9581-76, 1135-77 and 1560-77. Respondent also filed a motion for partial summary judgment in docket No. 1560-77. After a hearing on respondent's motion for consolidation, held on May 30, 1979, the motion was granted. Further, the Court granted respondent's motion for partial summary judgment in docket No. 1560-77. The motion related to the addition to tax under section 6653(b) and only to Mr. Ratana. 240 On July 9, 1979 respondent filed a motion in docket Nos. 9581-76 and 1560-77 for an order to show cause why certain facts should not be stipulated. On July 18, 1979 the Court issued the requested show cause order and, upon failure of petitioner Suwan Nguantri Ratana to respond, made said order absolute on October 9, 1979. Therefore respondent's proposed stipulations of facts are accepted as established for the purposes of the cases at docket Nos. 9581-76 and 1560-77. FINDINGS OF FACT The foregoing metioned stipulations of facts accepted by the Court as established241 in docket Nos. 9581-76 and 1560-77 are as follows: 11. the petitioner, Suwan Nguantri Ratana, was born in Bangkok, Thailand on March 15, 1931. In 1962 he immigrated to the United States as a resident alien. The petitioner has never become a United States citizen. On December 8, 1961 as part of the process of immigrating to the United States, the petitioner executed a Waiver of Rights, Privileges, Exemptions and Immunities which estops him from claiming immunity as a foreign national for criminal violations and income tax liabilities. 2. The petitioner and his wife timely filed a joint 1974 personal income tax return. 3. The petitioner and his wife timely filed a joint 1975 personal income tax return. 4. In 1964, Suwan N. Ratana and his wife, Rebecca C. Ratana, purchased 1800 Franwall Drive, Silver Spring, Maryland in which they resided until March of 1967. The cost of the property was $18,212. Petitioner and his wife still own the property as tenants by the entirety. The property is now rented to third parties. The fair market242 value of the property is approximately $60,000. 5. In 1967, the petitioner and his wife purchased what is now the petitioner's residence, 10502 Calumet Drive in Silver Spring, Maryland. The cost of the home was $27,993.50. The petitioner and his wife still own the property as tenants by the entirety. The fair market value of the property is approximately $80,000. 6. In 1970, petitioner and his wife purchased 8412 New Hampshire Avenue in Prine Georges County, Maryland. The cost of the property was $16,500. The property is now rented to third parties. The fair market value of the property is approximately $40,000. 7. In 1973, the petitioner and his wife purchased a tract of unimproved land of approximately two acres from Joseph and Rebecca Griffin. The cost of purchase was $26,000. This property is known as Bradfords West. The fair market value of the property is approximately $35,000. 8. In 1973, the petitioner and his wife purchased a tract of unimproved land of approximately 56,000 sq. ft. from William H. Campbell. The cost of the purchase was $6,500. This property is part of a subdivision known as Snowdens Manor Enlarged. The fair market value of the property243 is approximately $15,000. 9. In the summer of 1976, the petitioner purchased condominium No. 301 located at 2306 Greenery Lane, Silver Spring, Maryland, for $27,500. The condominium is presently rented to third parties.The fair market value of the condominium is approximately $35,000. 14. From January 1, 1964 until April 30, 1975, petitioner was employed by the Royal Thai Embassy. Initially, he worked as a clerk, and as of October 1, 1968, as a bookkeeper. Mr. Ratana received the following amounts with respect to such employment: 1970 - $6,177.03; 1971 - $6,244.10; 1972 - $6,495.00; 1973 - $7,005.00; 1974 - $7,305.00; and 1975 - $2,330.00. 15. From early 1973 through the end of 1975, the petitioner was paid for services rendered as an outside sales representative for International Tour and Travel, a travel agency presently located at 1899 "L" Street, N.W., Washington, D.C.16. A net worth and expenditures computation has been prepared by the respondent with respect to the joint taxable income of the petitioner and his wife for the 1974 and 1975 tax years. 17. As of December 31, 1973, December 31, 1974 and December 31, 1975, petitioner had deposited in his bank244 accounts $3,457.81, $40,661.99 and $345,550.66, respectively. 18. The cost basis of real properties owned by the petitioner was $95,580.50 as of December 31, 1973, December 31, 1974 and December 31, 1975. 19. The petitioner is allowed a reserve for depreciation with respect to the rental properties owned by the petitioner and his wife. The depreciation reserve as of December 31, 1973, December 31, 1974 and December 31, 1975 are $6,332.72, $7,470.34 and $8,670.96, respectively. 20. As of December 31, 1973, petitioner and his wife jointly owned a 1970 Dodge Polara station wagon and a 1973 Volkswagon sedan. The sedan was titled only in Mr. Ratana's name [sic]. During 1974, petitioner and his wife sold the 1973 Volkswagon and purchased a 1965 Dodge sedan. The Dodge sedan was in turn sold in July of 1974 and petitioner and his wife jointly purchased a new 1974 Chevrolet Nova sedan. In 1975, petitioner and his wife jointly purchased a new 1975 Chevrolet Monte Carlo sedan. In September of 1975, the Ratanas sold the 1974 Chevrolet Nova sedan and purchased a used 1974 Volkswagon sedan titled in petitioner's name only. The cost of the various automobiles owned by the petitioner245 and his wife as of December 31, 1973, December 31, 1974 and December 31, 1975 was $4,000.00, $5,147.32 and $11,261.30, respectively. 21. Petitioner and his wife had no cash on hand as of December 31, 1973, December 31, 1974 and December 31, 1975. 22. The petitioner owed $4,921.59 in personal loans as of December 31, 1973. There were no outstanding personal loans as of December 31, 1974 and December 31, 1975. 23. Petitioner's mortgage loans of of December 31, 1973, December 31, 1974 and December 31, 1975 were $51,852.25, $49,808.94 and $47,926.34, respectively. 24. Petitioner and his wife enjoyed increases in their net worth during 1974 and 1975 of at least $44,178.78 and $311,747.63, respectively. 25. Petitioner had medical expenditures as of December 31, 1974 and December 31, 1975 of $3,450.12 and $2,044.59, respectively. 26. Expenditures made by the Ratanas in clothing, variety and department stores and charge accounts for 1974 and 1975 were at least $23,833.65 and $10,389.30, respectively. 27. Expenditures made by the Ratanas at food stores and drug stores in 1974 and 1975 were at least $1,579.21 and $526.54, respectively. 28. Expenditures made by246 the Ratanas for home improvement and repairs during 1974 and 1975 were at least $7,998.70 and $3,999.57, respectively. 29. Miscellaneous expenditures by the Ratanas for 1974 and 1975 were at least $3,546.52 and $7,684.97, respectively. 30. Expenditures made by the Ratanas for utilities during 1974 and 1975 were at least $1,295.44 and $1,322.16, respectively. 31. In 1975, the petitioner transferred $20,000 to his wife in order for her to purchase certificates of deposit. The certificates were in fact purchased by Rebecca C. Ratana in trust for the four children. 32. a. In 1974 and 1975, the petitioner paid interest to the Bank of Damascus in the amount of $1,093.97 and $892.09, respectively. b. In 1974 and 1975, the petitioner paid to the County Trust Company the amounts of $1,127.22 and $1,014.51, respectively. c. In 1974 and 1975, the petitioner paid to the National Permanent Savings and Loan Association the amounts of $2,449.50 and $2,005.37, respectively. d. In 1974 and 1975 the petitioner paid interest to the Perpetual Savings and Loan Association in the amounts of $834.88 and $677.43. e. In 1974 the petitioner paid a charge of of $3.50 to the National247 Savings and Trust Company. f. In 1974 and 1975 the petitioner paid to the American Security and Trust Company the amounts of $9,352.10 and $1,005.70, respectively. g. In 1974 and 1975 the petitioner paid to the Suburban Trust Co. the amounts $7.36 and $1,010.70, respectively. h. Petitioner obtained cashier checks in 1974 and 1975 in the amounts of $35,770 and $155,000, respectively. i. In 1974 and 1975, the petitioner wrote checks to the Thai Military Bank in the amounts of $20,000 and $500.00, respectively. j. In 1974 the petitioner paid $1,156.94 to the First National City Bank. k. In 1975 the petitioner wrote checks to Mr. Somsanuk totalling $59,925.00. 1. In 1974 and 1975, the petitioner utilized "money transfer documents" to send money to various individuals and institutions out of the country in the amounts of $7,017.85 and $3,890.30, respectively. 33. Income taxes paid by the Ratanas to federal and state authorities for 1974 and 1975 totalled $1,327.90 and $1,237.97, respectively. 34. Petitioner suffered a loss of $647,32 in 1975 which resulted from the sale of the 1974 Chevrolet Nova sedan. 35. Petitioner paid $1,113.75 and $1,159.00 to248 local governments in 1974 and 1975, respectively. 36. Payments made for travel and vacations by the Ratanas in 1974 and 1975 equal $15,579.29 and $18,264.62, respectively. 37. Expenditures in 1974 and 1975 by the petitioner and his wife for magazines, newspapers, periodicals, etc. were $85.08 and $147.90, respectively. 38. Expenditures made by the Ratanas to discount stores for 1974 and 1975 equal $52.59 and $44.44, respectively. 39. Payments made by the Ratanas to various individuals in 1974 and 1975 were $14,608.36 and $13,464.64, respectively. 40. Identified expenditures made by the Ratanas specifically for household items during 1974 and 1975 were $61.18 and $44.82, respectively. 41. Expenditures made by the Ratanas in 1974 and 1975 as educational expenses were $117.89 and $492.59, respectively. 42. Expenditures were made by the Ratanas in 1974 and 1975 from their various checking accounts made to indeterminate payees (illegible check copies) and/or indeterminate purposes in 1974 and 1975 in the amount of $3,070.45 and $6,391.47, respectively. 43. Checks made payable to either cash and/or the petitioner or his wife drawn on their various accounts249 in 1974 and 1975 were $11,187.20 and $2,855.00, respectively. 44. One expenditure made by the petitioner in 1974 to an individual in Thailand was in the amount of $11,800.00. 45. In addition to all other expenditures, in 1975, the Ratanas spent $18,000.00 which was withdrawn from savings accounts and never redeposited in any other account. 46. Specifically, among the above set out receipts and expenditures were: a. Payments made to Lloyd Yingling in 1975 in the amounts of $60.00 and $38.00, respectively. b. Payments made to Dr. McMahon in 1974 and 1975 in the amounts of $60.00 and $38.00, respectively. c. Payments made in 1975 by the Ratanas to Dr. Alpher in the amount of $300.00. d. Payments made by the Ratanas in 1974 and 1975 to Dr. Stoehr in the amounts of $20.00 and $25.00, respectively. e. Payments made by the Ratanas to Pediatric Associates in 1974 and 1975 in the amounts of $26.00 and $5.50, respectively. f. Payments made by the Ratanas in 1975 to Dr. Bradley in the amount of $75.00.g. Refunds made by International Tour and Travel paid to the petitioner in 1974 and 1975 in the amounts of $5,060.00 and $325.00, respectively. h. Refunds250 paid to the petitioner by the owner of International Tour and Travel, Surinder Wadhwa in 1974 and 1975 in the amounts of $8.25 and $1,115.70, respectively. i. A check written by Riggs National Bank to the petitioner in 1974 in the amount of $11,800.00.j. Money paid by the State Farm Insurance Company in 1974 to the Ratanas in the amount of $476.81. k. Payments made to the Washington Gas Light in 1975 in the amount of $99.32. l. Additional payments utilized to pay for automobiles by the Ratanas in 1974 and 1975 in the amounts of $2,100.00 and $50.00, respectively. 47. A nontaxable portion of a capital gain was enjoyed by the petitioner in 1974 in the amount of $100.00. 48. The petitioner was entitled to rental deductions in 1974 and 1975 in the amounts of $2,991.40 and $3,720.28, respectively. 49. The petitioner was entitled to a sick pay exclusion in 1974 in the amount of $675.00. 50. In 1974, the petitioner was entitled to a "loan payment write off" in the amount of $314.63. 51. The petitioner is entitled to the following itemized deductions: a. Charitable contributions made by the Ratanas in 1974 and 1975 were in the amounts of $208.00 and $211.00, 251 respectively. b. Miscellaneous itemized deductions to which the Ratanas are entitled for 1974 and 1975 are in the amounts of $400.00 and $475.00, respectively. c. Expenditures made by the Ratanas which constitute deductible interest in 1974 and 1975 are in the amounts of $2,370.72 and $1,670.45, respectively. d. Gasoline taxes allowed the petitioner by the respondent in 1974 and 1975 are in the amounts of $150.00 and $175.00, respectively. e. The Ratanas paid state and local income taxes in 1974 and 1975 in the amounts of $157.71 and $112.96, respectively. f. The Ratanas paid $457.80 as state sales taxes in both 1974 and 1975. g. The Ratanas paid real estate taxes in 1974 and 1975 in the amounts of $1,353.38 and $1,619.33, respectively. h. The Ratanas are entitled to $150.00 as an itemized deduction for medical expenses paid in 1974 and 1975. i. The Ratanas are allowed six personal exemption deductions in both 1974 and 1975. 52. Between January 1, 1976 and May 10, 1976, deposits were made in the following bank accounts and in the following amounts: a. Into the Suburban Trust Company checking account number XX-X529-5, there was deposited $785,797.83. 252 b. Into the University National Bank, checking account number X-XXX685-4, there was deposited $146.820.19. c. Into the Bank of Bethesda, checking account number X-XX-X5-482, there was deposited $31,280.00. d. Into the Citizens Bank & Trust Company, checking account number XXX3836, there was deposited $123,540.00. e. Into the American Security Bank and Trust Company checking account number XX-XXXX7163, there was deposited $11,150.00. f. Into the State National Bank checking account number XXX-079-4, there was deposited $11,600.00. g. Into the Chevy Chase Bank and Trust Company checking account number XXX-255-4, there was deposited $13,340.00. h. Into the First National Bank and Trust Company checking account number XXX-X124-8, there was deposited $58,175.00. i. Into the Union Trust Company of Maryland checking account number XXX-X3850 there was deposited $41,685.00. j. Into the First National Bank savings account XXX-X124-8-5-1 there was deposited $202.42. k. Into the American Security Bank savings account number XX-XXXX7163 there was deposited $868.48. 53. Interbank transfers between and among the various accounts belonging to the petitioner253 from January 1, 1976 until May 10, 1976 totalled $28,194.97.54. For the period January 1, 1976 until May 10, 1976, interest expenses attributable to the rental property at 8412 New Hampshire Avenue is $394.45. 55. For the period January 1, 1976 until May 10, 1976, depreciation allowed on 8412 New Hampshire Avenue, rental property, is $186.66 and the depreciation allowed on 1800 Franwall Avenue, rental property, is $192.54. 56. Checks written to Suwat Somsanuk are allowed as business expenses in the amount of $59,875.00. 57. The petitioner is entitled to five exemptions for purposes of calculating his taxable income for the terminated period ending on May 10, 1976. 58. Petitioner never received gifts of significant value from any scurce, or inherited money or property of significant value. Petitioner did not bring assets of significant value into this country when emigrating from abroad. 59. On August 11, 1976, the petitioner and his wife, Rebecca Ratana, were indicted on two counts of tax evasion, two counts of filing false returns, and one count of conspiring to file a false return. On October 20, 1976, the second day of the trial, the petitioner pled guilty254 to two counts of violating the provisions of I.R.C.§ 7201, income tax evasion. As a result, the petitioner was sentenced to two four year terms to run consecutively. 60. The great majority of the unreported income underlying the statutory notices of deficiency involved in this case resulted from petitioner's importation into the United States and sale of various quantities of heroin and/or other narcotics during the years involved. The above facts have also been accepted, by stipulation, in the case involving Mrs. Ratana, i.e., docket No. 1135-77. Those facts as well as the additional stipulations of facts involving docket No. 1135-77 are so found. The stipulations of facts and the exhibits attached thereto are incorporated herein by this reference.Mrs. Ratana was born in 1934 in Manila, Philippines. Her father was a Seventh Day Adventist minister and she was educated in the Philippines at religious schools maintained by the seventh Day Adventists. Mrs. Ratana began training as a nurse in Thailand and came to the United States in 1959 to continue her training. She has been employed as a registered nurse at Washington Adventist Hospital since255 1959. Throughout per employment Mrs. Ratana had the hospital deposit a portion of her wages directly into a savings account at the Columbia Credit Union. In 1961 Mrs. Ratana married Suwan Ratana, a citizen of Thailand. Mr. and Mrs. Ratana purchased their first house in 1964. Mrs. Ratana supplied the down payment, $2,612, from her credit union account. In 1967 they purchased another house and again the down payment, $1,993.50, was provided from the credit union account of Mrs. Ratana. In 1970 they purchased a rental house in Prince George's County, Maryland. The down payment of $2,000 was paid entirely from Mrs. Ratana's savings. Mrs. Ratana's purpose in saving a portion of her own salary, and in using these savings to buy small property, was to accumulate sufficient assets to be able to send her children to religious secondary schools and colleges. From the date of their marriage until 1974 or 1975, Mr. Ratana took care of all family financial matters and prepared all income tax returns. From 1964 through April 1975, Mr. Ratana was employed by the Royal Thai Embassy. In every tax return he prepared throughout the period of his embassy employment, Mr. Ratana omitted from256 gross income the amount of his embassy salary. This omission was based upon Mr. Ratana's belief that amounts paid by the embassy were excluded from gross income under sec. 893, I.R.C. 1954. Mrs. Ratana knew that Mr. Ratana did not report his embassy income on their tax return. She questioned him about this, and he advised her that his salary was not subject to tax since it was money from Thailand. Mrs. Ratana Did not accept her husband's explanation, and she went to the embassy toraise the question there. The person at the embassy to whom she spoke confirmed what her husband told her, and she did not question her husband on this matter again. The Federal income tax returns filed by the Ratanas for calendar years 1970 to 1973 were audited by the respondent in 1972 and 1974 respectively. The Ratanas were questioned during these audits about the omission of Mr. Ratana's embassy salary.After each audit there were minor adjustments. However, the omission of Mr. Ratana's embassy salary was accepted by the Internal Revenue Service. During 1974 and 1975 Mr. Ratana did a substantial amount of overseas traveling. Mr. Ratana's departures were often sudden and257 unannounced. As a result, Mrs. Ratana and the children were frequently unaware of where he was or when he would return. Mr. Ratana told his wife that he had started an import business in Thailand. He also told her that he was fearful that Thailand might be taken over by the Communists. Because of this fear he believed it important that he complete the sale of his Thiland property. Mrs. Ratana believed that Mr. Ratana had income from his alleged import business and sale of his property. She also had discovered that Mr. Ratana was gambling heavily. At her urging he joined Gamblers Anonymous and she joined Gam-Anon, the support organization for spouses of compulsive gamblers. Mrs. Ratana asked her husband to give her some of the money he was making so she could put it in an account for the children. Thereafter, during 1975 and 1976, Mr. Ratana gave his wife $30,000 on the understanding that it was for the benefit of their four children. She was told by her husband that these funds represented proceeds from the sale of properties in Thailand. In 1975 Mrs. Ratana purchased, in trust for the benefit of her four children, two $10,000 certificates of deposit. In April 1976 she258 purchased another $10,000 certificate of deposit for the benefit of the children.Any other funds received by Mrs. Ratana from her husband were used for the living expenses of the family. During 1974 and 1975 Mrs. Ratana made expenditures (in addition to the certificates of deposit for the children) in the following amounts and for the following purposes: 1974195Education$1,670.74$2,180.46Music Lessons and Supplies515.35210.25Reading Materials68.22176.72MedicalChecks854.50218.07Withholding386.12433.02Food (Checks)509.34472.50Bank of Damascus1,455.481,334.19Perpetual Building1,152.001,056.00County Trust Co.1,513.091,506.10National Permanent Federal2,638.162,575.71Clothing and DepartmentStore Charges968.342,415.65Other Household Items99.290Utilities990.941,115.21Photos38.6691.94Insurance304.15172.00Home Improvements7,899.274,792.28Gifts to Rebecca'sParents151.11310.00Transfers to Suwan Ratana544.996214.75Real Estate Taxes1,631.200Cash842.70900.00Miscellaneous1,508.26853.42TOTAL$25,741.91$21,028.27In addition to the above259 expenditures for food, paid by check, Mrs. Ratana also spent approximately $3,800 and $4,000 for food during 1974 and 1975, respectively. Total funds available to Mrs. Ratana from sources other than Mr. Ratana's salary were $22,270.65 and $13,569.23 for 1974 and 1975, respectively. Mr. Ratana also made expenditures for the benefit of the family. However, he did not make any gifts to Rebecca and she has never made any lavish or expensive purchases for herself. All of the funds, which Mrs. Ratana received from her husband, were used either for the support of the family or to purchase certificates of deposit for the children. OPINION Respondent's motion for partial summary judgment, with respect to the fraud issue in docket No. 1560-77, was granted on May 30, 1979. The only issue remaining, with respect to Mr. Ratana, in both docket Nos. 1560-77 and 9581-76, is the amount of taxable income received by him during 1974, 1975 and 1976 under section 61, I.R.C. 1954. Section 61 includes in gross income "all income from whatever source derived," unless otherwise provided.Mr. Ratana has not contested the amount of gross income determined by respondent. Petitioner's260 only contention is that his income from the Royal Thai Embassy is excludable from gross income under section 893. Broadly stated section 893(a) excludes from gross income compensation of any employee of a foreign government if the employee is not a citizen of the United States and the foreign country in question grants an equivalent exemption to employees of the United States performing similar services in such foreign country. Section 893(b) requires the Secretary of State to certify to the Secretary of Treasury the names of those countries which granted the required equivalent exemption. On March 1, 1965 the United States and Thailand entered into an income tax convention that would have granted such an exemption. However, during the years in issue, the agreement had not been ratified and therefore was not in effect. Accordingly, we find that Mr. Ratana's salary from the Royal Thai Embassy was required to be included in gross income in 1974 and 1975. The other major source of income for Mr. Ratana was from the importation and sale of narcotics. Even though this income may have been earned from illegal activity it must be included in gross income and is subject to tax. 261 James v. United States,366 U.S. 213">366 U.S. 213 (1961). Accordingly, we sustain respondent's determinations with respect to Mr. Ratana (i.e., docket Nos. 9581-76 and 1560-77). With respect to Mrs. Ratana the first issue is whether any of the underpayment of tax in 1974 and 1975 was due to fraud within the meaning of section 6653(b). Fraud is an actual intentional wrongdoing, the intent required is the specific purpose to evade a tax believed to be owing. McGee v. Commissioner,61 T.C. 249">61 T.C. 249, 256 (1973), affd. 519 F.2d 1121">519 F.2d 1121 (5th Cir. 1975), cert. den. 424 U.S. 967">424 U.S. 967 (1976). In order to establish that an underpayment is due to fraud, respondent must prove, by clear and convincing evidence, that petitioner had the specific purpose and intent to evade a tax believed to be owing and the underpayment of tax must be due to, or caused by, the purpose and intent to evade tax. Section 7454(a); Rule 142, Tax Court Rules of Practice and Procedure. The existence of fraudulent underpayment can be established by circumstantial evidence and reasonable inferences drawn from the entire record. Stoltzfus v. United States,398 F.2d 1002">398 F.2d 1002, 1005 (3d Cir. 1968).262 However, the mere suspicion of fraud is insufficient and it will not be imputed or presumed. Carter v. Campbell,264 F.2d 930">264 F.2d 930, 935 (5th Cir. 1959). To apply the section 6653(b) addition to tax to both spouses, in the case of a joint return, respondent must prove that some part of the underpayment is due to the fraud of both spouses. Section 6653(b). After a thorough review of the entire record we find that respondent has failed to establish that any portion of the underpayment was due to intent to defraud the Government on the part of Mrs. Ratana. Respondent does not contend that the omission of Mr. Ratana's salary from the Royal Thai Embassy was due to an intent to evade taxes. Instead he argues that Mrs. Ratana was aware of her husband's overseas business, and by knowingly omitting that income, she is liable for the section 6653(b) addition to tax. First, we note that the business to which Mrs. Ratana was "aware" did not even exist. Mr. Ratana had informed his wife that he went to Thailand to sell property he owned there and to open an import business. In fact Mr. Ratana's income came from the sale of narcotics, an activity of which Mrs. Ratana was totally263 unaware. Respondent has not established with any clarity that Mrs. Ratana was aware of her husband omitting any taxable income from their return. The record is clear that Mrs. Ratana did not believe that any taxable income had been omitted from the return. Even more clear is the fact that Mrs. Ratana did not intentionally omit income with intent to defraud the Government. Therefore, we find that petitioner Mrs. Ratana is not liable for the section 6653(b) addition to tax. The final, and only difficult, issue for decision is whether Mrs. Ratana is an innocent spouse entitled to relief from liability for tax and penalty as provided by section 6013(e).Under that section a spouse is considered to be innocent of wrongly omitting income, even though she joined in the filing of a return under section 6013(a), if three prerequisites are met: (1) there is omitted from gross income an amount properly includable, the omission is attributable to the other spouse and exceeds 25 percent of the gross income stated in the return; (2) the spouse did not know, and had no reason to know, of such omission; and (3) after considering all facts and circumstances and whether the spouse derived substantial264 benefit from the omitted income, it is inequitable to hold the spouse liable for the deficiency resulting from the omission. 2 Mrs. Ratana has the burden of proving that she satisfied each of the requirements set forth in the statute. Adams v. Commissioner,60 T.C. 300">60 T.C. 300, 303 (1973). 265 The parties have stipulated that the first condition has been met. After considering the testimony and other evidence, we conclude that Mrs. Ratana has satisfied the second and third conditions. The record clearly establishes that Mrs. Ratana lacked actual knowledge that amounts properly includable in gross income were omitted. This fact was corroborated by her testimony and she impressed us as a credible witness. Accordingly, we find that she did not have actual knowledge within the meaning of section 6013(e)(1)(B). The next question presented is whether Mrs. Ratana has established that she had no reason to know that properly includable income was omitted from the returns. The test applied is whether a reasonable taxpayer in similar circumstances would not be expected to have knowledge of the omission. Sanders v. United States,509 F.2d 162">509 F.2d 162, 166-167 (5th Cir. 1975). Further, mere ignorance of the law is not enough. As we said in McCoy v. Commissioner,57 T.C. 732">57 T.C. 732, 734 (1972), "[We] do not think section 6013(e) was designed to abate joint and several liability where the lack of knowledge of the omitted income is predicated on mere ignorance266 of the legal tax consequences of transactions the facts of which are either in the possession of the spouse seeking relief or reasonably within his reach." With respect to the embassy income of Mr. Ratana, the record clearly establishes that Mrs. Ratana acted reasonably. First she inquired of her husband with respect to the taxability of his income. She did not accept his explanation and pursued the matter by making inquiry at the Royal Thai Embassy. An Embassy official confirmed her husband's statement that the income was nontaxable. Further, respondent twice audited petitioners and made no adjustment with respect to Mr. Ratana's income, even though he was aware of Mr. Ratana's employment. In the context of this issue we see no reason to hold Mrs. Ratana more accountable for her lack of knowledge of tax law than agents of the respondent. Mrs. Ratana was generally lacking in financial knowledge. Further, her religious and cultural background instilled in her a belief that she was to abide by her husband's wishes. Under these circumstances we believe that Mrs. Ratana acted in the most prudent manner possible. With respect to the income from narcotics sales, respondent267 contends that, even though Mrs. Ratana was unaware of the activity, she should have known that her husband was earning taxable income overseas. Respondent's position is premised upon the idea that, since Mr. Ratana made expenditures which Mrs. Ratana was obviously aware of, she should have known that those expenditures were made with taxable income which had been omitted from their income tax returns. We believe the record clearly shows that Mrs. Ratana believed the funds that she received from her husband were from the sale of his property in Thailand. Further, the expenditures made by Mr. and Mrs. Ratana were for the ordinary support of the family. Such expenditures are not of a type which would apprise Mrs. Ratana of the omission of properly includable income. Section 1.6013-5(b), Income Tax Regs. and Mysse v. Commissioner,57 T.C. 680">57 T.C. 680, 698 (1972). That expenditures by Mrs. Ratana were not substantially greater than the amount she had available without assistance from Mr. Ratana further convinces us that she could not reasonably have been expected to realize the omission. Respondent contends that Mrs. Ratana's receipt of $20,000268 in 1975 and $10,000 in 1976 should have apprised her of the omissons. Under normal circumstances, receipt of a large lump-sum amount of cash should cause the taxpayer to make inquiry. Unfortunately we do not here deal with normal circumstances. We look to determine if Mrs. Ratana acted as a reasonably prudent person, with her knowledge and background, would have acted. We believe that Mrs. Ratana has satisfied the test set out in Sanders and McCoy. Mrs. Ratana, as we stated before, believed the proceeds resulted from the sale of property in Thailand. The facts "reasonably within her reach" would not have indicated to the contrary. In light of her limited financial knowledge and background Mrs. Ratana acted as prudently as possible. After a thorough review of the entire record, and on the facts of this case, we find that Mrs. Ratana did not have reason to know of the omission of prperly includable income in their 1975 and 1976 tax returns. Finally we must determine whether, after considering all the facts and circumstances and whether Mrs. Ratana derived substantial benefit from the omitted income, it is inequitable to hold her liable for the deficiency which resulted269 from the omission. We have already found that all the funds received by Mrs. Ratana from her husband were utilized for the ordinary support of the family, with the exception of the proceeds used to purchase certificates of deposit. Funds used for the ordinary support of the family do not constitute substantial benefit. Section 1.6013-5(b), Income Tax Regs.; Mysse v. Commissioner,supra at 698. Further, we find that the proceeds used to purchase the certificates of deposit do not represent substantial benefit to Mrs. Ratana. Mr. Ratana transferred these proceeds to his wife with the understanding that they would be used for the benefit of the children. The certificates of deposit were held by Mrs. Ratana as trustee with the children listed as the beneficiaries thereof. We do not believe that the mere creation of Mrs. Ratana's legal right to these funds, without more, confers substantial benefit within the meaning of section 6013(e)(1)(C). Put in the perspective of the amount here involved, it is even clearer that any benefit resulting to Mrs. Ratana was not substantial. Respondent has determined, and we have found, that Mr. *270 Ratana underreported approximately $169,000 and $633,000 in 1974 and 1975, respectively. The record shows that Mr. Ratana was a compulsive gambler and often left the country without notifying his family. On the other hand, Mrs. Ratana was a hard working, religious and dutiful parent. Her primary concern was her family. To earn extra money she often worked overtime and rarely took a vacation. To hold Mrs. Ratana liable under these facts for a deficiency that primarily resulted from her husband's illegal sale of narcotics, an activity of which she had no knowledge, would clearly be inequitable. Accordingly, we find that Mrs. Ratana satisfies the requirements of section 6013(e)(1)(C). Decisions will be entered for respondent in docket Nos. 9581-76 and 1560-77.Decision will be entered for petitioner in docket No. 1135-77. Footnotes1. References to petitioner refer to Mr. Ratana only unless stated to the contrary. References to exhibits have been deleted.↩2. Sec. 6013(e) SPOUSE RELIEVED OF LIABILITY IN CERTAIN CASES-- (1) In General Under regulations prescribed by the Secretary, if-- (A) a joint return has been made under this section for a taxable year and on such return there was omitted from gross income an amount properly includable therein which is attributable to one spouse and which is in excess of 25 percent of the amount of gross income stated in the return, (B) the other spouse establishes that in signing the return he or she did not know of, and had no reason to know of, such omission, and (C) taking into account whether or not the other spouse significantly benefited directly or indirectly from the items omitted from gross income and taking into account all other facts and circumstances, it is inequitable to hold the other spouse liable for the deficiency in tax for such taxable year attributable to such omission, then the other spouse shall be relieved of liability for tax (including interest, penalties, and other amounts) for such taxable year to the extent that such liability is attributable to such omission from gross income. (2) Special Rules--For purposes of paragraph(1)-- (A) the determination of the spouse to whom items of gross income (other than gross income from property) are attributable shall be made without regard to community property laws, and (B) the amount omitted from gross income shall be determined in the manner provided by section 6501(e)(1)(A).↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622271/	Appeal of L. ORANSKY.Oransky v. CommissionerDocket No. 2061.United States Board of Tax Appeals1 B.T.A. 1239; 1925 BTA LEXIS 2596; May 26, 1925, decided Submitted May 6, 1925. 2596 Held, that an expenditure in 1921 under the facts in this appeal is not deductible as a loss from other casualty under section 214 (a)(6) of the Revenue Act of 1921. Walter C. Barton, Esq., for the taxpayer. Robert A. Littleton, Esq., for the Commissioner. MORRIS1239 Before MARQUETTE and MORRIS. This appeal is from the determination of a deficiency in income taxes for the year 1921 amounting to $978.28, and raises the question of the deductibility of certain expenditures made in that year. From the pleadings and stipulation the Board makes the following FINDINGS OF FACT. The taxpayer is a resident of the State of Iowa and his principal place of business is at Des Moines, Iowa. On April 14, 1920, Sidney Oransky, his minor son, accidently ran down and killed Genevieve Bolender, while driving an automobile owned by the taxpayer. At the time of the accident he was not engaged in the trade or business of the taxpayer and the automobile was not being used in connection therewith. Under the laws of the State of Iowa the taxpayer is legally responsible for the negligent acts of his minor son. On or about June 22, 1920, an action2597 was instituted in the District Court of Polk County, Iowa, by Elizabeth Meyers, administratrix of the estate of Genevieve Bolender, deceased, against the taxpayer, his minor son, Sidney Oransky, O. P. Durocher, and Fred Riley, for damages against said defendants in the sum of $50,668.35, on account of alleged wrongful negligence and unlawful conduct of said defendants. Fred Riley and O. P. Durocher were made parties defendant to the suit for the alleged reason that at the time of the accident Fred Riley, with the consent and acquiescence of O. P. Durocher, was negligently driving an automobile owned by the latter, abreast of and in close proximity to the automobile being driven by the taxpayer's minor son. The taxpayer was insured by the Southern Surety Company, under a policy containing public liability coverage in the amount of $10,000. Upon the advice of counsel the case was settled out of court for $6,650,000. The insurance company disclaimed liability under the policy, but compromised with the taxpayer and paid $3,000, and the taxpayer paid the balance, namely, $3,650, to the administratrix of the estate of Genevieve Bolender, deceased. In addition to this amount the taxpayer2598 paid $38.10 as costs and $1,975,65 as attorney's fees in connection with said suit. *1240 Said payments aggregating $5,663.75 were made by the taxpayer in 1921 and he took a deduction for that amount in his incometax return for the calendar year 1921, claiming the same as a loss from other casualty. The Commissioner disallowed said deduction and determined the deficiency hereinabove stated, from which the taxpayer takes this appeal. DECISION. The determination of the Commissioner is approved. OPINION. MORRIS: In the , we held that the rule of ejusdem generis is applicable in the construction of the words "other casualty" as used in section 214(a)(6) of the Revenue Act of 1918. As the taxpayer is claiming a deduction in this appeal under an identical provision of the Revenue Act of 1921, and the casualty was not of a character similar to a fire, storm, or a shipwreck, that decision is controlling in this appeal.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622272/	Eugene Joseph and Enid Thelma Joseph v. Commissioner.Joseph v. CommissionerDocket No. 4847-65.United States Tax CourtT.C. Memo 1970-347; 1970 Tax Ct. Memo LEXIS 13; 29 T.C.M. (CCH) 1680; T.C.M. (RIA) 70347; December 23, 1970, Filed 13 1. Held, petitioners failed to carry their burden of proving that they were entitled to certain business deductions claimed with respect to the Liberty Station Wagon Service in 1960 in excess of the amounts allowed by the respondent. 2. Held, respondent reasonably estimated the amount of cash expenditures made by the petitioners in 1960, and, after deducting therefrom all cash available to petitioners from known sources, correctly determined that the $2,375.65 remainder of the cash spent by petitioners in 1960 represented unreported income in that year. 3. Respondent disallowed certain deductions claimed by petitioner Eugene for 1961 in connection with his business as a "tax accountant." Held, petitioner proved that he was entitled to deduct $920 for wages and $122 for gas and oil; however, with regard to the remainder of the deductions in issue, he failed to prove the deductibility of any amounts in excess of respondent's allowance. 4. Held, petitioner Eugene is not entitled to deduct a claimed partnership loss in 1961 because he did not substantiate by adequate proof that he actually sustained the loss. 5. and 6. Held, petitioners failed to prove that respondent's imposition14 of the negligence penalty in 1960 and 1961, and the penalty for late filing in 1961, were improper; therefore, respondent's determinations are sustained. 7. Held, respondent was not barred by the statute of limitations from assessing the tax liabilities in each of the taxable years in issue herein. 8. Respondent disallowed the exemption claimed by Eugene for his wife in 1961, but petitioner did not specifically contest this disallowance until he filed his brief. Held, since the issue was not raised by assignment of error in the petition, it was not properly before the Court for consideration. Eugene Joseph, pro se, P. O. Box 496, New York, N. Y. Stanley J. Goldberg, for the respondent. 1681 HOYT15 Memorandum Findings of Fact and Opinion HOYT, Judge: Respondent has determined a deficiency in petitioners' income tax for 1960 in the amount of $858.04, and in petitioner Eugene Joseph's income tax for 1961 in the amount of $1,243.22. Respondent also has determined a negligence penalty for each year under section 6653(a) 1 in the amount of $42.90 and $68.82, respectively, and a penalty for late filing for 1961 under section 6651(a) in the amount of $310.81. Some of the issues have been conceded, and the issues remaining for decision are as follows: (1) Whether petitioners are entitled to certain business deductions claimed with respect to the Liberty Station Wagon Service in 1960. (2) Whether petitioners failed to report $2,375.65 of income in 1960. 16 (3) Whether Eugene is entitled to certain deductions in 1961 claimed in connection with his business as a "tax accountant." (4) Whether Eugene is entitled to deduct a claimed partnership loss in 1961. (5) and (6) Whether respondent properly imposed the negligence penalty in 1960 and 1961, and the penalty for late filing in 1961. (7) Whether respondent was barred by the statute of limitations from assessing the tax liabilities in issue herein. On brief petitioner Eugene Joseph raised an issue with respect to an exemption which he had claimed for his wife in 1961. This issue was not raised by assignment of error in the petition, and is not therefore properly before the Court for consideration. Findings of Fact Eugene and Enid Thelma Joseph are husband and wife, who resided in New York, New York, at the time the petition was filed in this case. They filed a joint return for the taxable year 1960 on August 23, 1961. The return filed for 1961 (which was not filed until December 6, 1962) was solely in the name of and signed only by Eugene but was marked "Married filing joint return." A marginal notation on the 1961 return stated that Eugene's wife, Thelma, had received no income17 during the taxable year and was not filing a return. Both the 1960 and 1961 returns were filed with the district director of internal revenue, New York, New York. During 1960 Eugene operated three businesses - Businessmen's Tax Instruction, Businessmen's Tax Service, and Liberty Station Wagon Service. At trial Eugene conceded that respondent properly disallowed $292 of the $1,648 which Eugene had claimed as a deduction for the tax instruction business, and $510.92 of the $2,343.30 which he had deducted in connection with his tax service. Eugene started the Liberty Station Wagon Service (hereinafter referred to as "Liberty") in May, 1960, at which time he purchased a 1960 Chevrolet station wagon for $2,700. During 1960 Liberty was a light hauling and taxi service, and this station wagon was the only automobile which was used in the business. The taxi services included transporting passengers from the New York City area to various mountain and beach resorts. Eugene drove the station wagon himself for these purposes; however, sometimes other "independent" drivers would drive. In the latter situations, Eugene merely procured the passengers for the "independent" drivers and took a percentage18 of the fares received. Eugene did not pay any salaries or wages during 1960 in connection with Liberty. On his income tax return for 1960 Eugene claimed that his total receipts from Liberty were $1,385.40, and that he was entitled to deductions with respect to that business in the amount of $2,333.10. The amounts claimed on the return as deductions for Liberty by Eugene, together with the amounts allowed and disallowed by the respondent, are set forth below: ClaimedAllowedDisallowedRent$250.00$250.00Interest95.0095.00Licenses20.00$ 30.75* ( 10.75)Auto Damage, Parcels Lost in Transit75.0075.00Depreciation225.00200.0025.00Repairs80.008.0072.00"Other Business Expenses"Advertising240.00264.63( 24.63)Printing90.0087.312.69Telephone139.00105.4133.59Answering Service65.00104.40( 39.40)Commissions50.0050.00Auto Supplies42.0067.66( 25.66)Driver's Salary$369.00$369.00Paper Supp48.0048.00Postage42.00$4.5037.50Insurance168.00120.0048.00Gas and Oil300.10162.27137.83Auto Cleaning35.0010.0025.00 1682 19 In computing the deficiency for 1960 respondent also allowed deductions for the following items which were not claimed on the petitioners' return: Miscellaneous expenses, $58.74; office supplies, $127.85; parking, $1.50; and tolls, $20.15. Of the $2,333.10 in business deductions claimed with respect to Liberty, respondent disallowed $959.93. The evidence adduced at trial by petitioners, including a set of inaccurate and inadequate records, fails to prove that the respondent's determination with respect to these amounts was improper. During 1960 Eugene and his wife, Enid Thelma Joseph, lived with his father until May, at which time they moved to the home of his wife's aunt, where they resided for the remainder of the year. In his notice of deficiency for the taxable year 1960, respondent determined that petitioners failed to report income in the amount of $2,375.65. Respondent arrived at this figure by subtracting the amount of cash known to have been available to petitioners during 1960, $4,591.35, from the aggregate of known cash expenditures and estimated cost of living for Eugene and his wife during that year, $6,967. Respondent arrived at the latter amounts in the manner20 set forth below: 10 Cash Expenditures and Estimated Cost of Living For Eugene Joseph and Enid Thelma Joseph for 1960ItemAmountRent $60/month for 12 months$ 720.00Food $30/week for 52 weeks1,560.00Telephone $15/month for 12 months180.00Itemized deductions per return for 1960946.16Clothing200.00Cash deposit on Chevrolet automobile purchased in June, 1960600.00Education - tuition250.00Insurance300.00Miscellaneous expenses310.00Interest expense230.00Purchases ($30 sales tax claimed on return at 3% tax)1,000.00Gasoline tax210.00Medical and dental60.84Entertainment 400.00Total cash and estimated cost of living expenditures $6,967.00Cash Availability for 1960Adjusted gross income per return$1,521.00Disallowed portion of business expensesBusinessmen's Tax Instruction$292.00Businessmen's Tax Service510.92Liberty Station Wagon Service 959.93 1,762.85Sales proceeds from Mutual FundsInvestor's Planning Corp.$293.03First Investor's Corp. 310.54 603.57Net withdrawals from Carver Savings & Loanassn.103.93Loan from Commercial Bank of North America 600.00Total cash availabilityRespondent's determinations with respect to petitioners' expenditures during 1960 are entirely reasonable. Furthermore, the evidence relating to cash availability fails to prove that these expenses, to the extent that they exceeded the amount of available cash listed above, were paid from cash sources other than reportable income received by Eugene or his wife in 1960. Eugene's wife, Enid Thelma, worked in 1959, but did not work during 1960. There is no evidence as to the amount she made in 1959; furthermore, there is no convincing evidence that any portion of such amount was saved and expended for Eugene's or her expenses during 1960. Nor is there 1683 any other convincing evidence of record which would prove that petitioners' 1960 expenses were paid out of amounts loaned or savings other than those listed above or that they were paid as a gift by some other person.The only business activity described by Eugene on Schedule C of his 1961 income tax return was his business as a "tax accountant," the major activity of which was the preparation of income tax returns. He reported gross income from this business in 1961 in the amount of $6,988. Eugene deducted $4,238.09 with respect to this business, of which only $965 was allowed by respondent in his notice of deficiency. At trial respondent conceded the deductibility of an additional $424. After these concessions, the amounts claimed were allowed or disallowed as follows: 21 ItemClaimedAllowedDisallowedSalaries and Wages$ 920.00$ 920.00Rent460.00$ 460.00Interest80.0080.00Taxes on business property50.0050.00Losses of business property120.00120.00Depreciation570.00264.00306.00Repairs154.00154.00Gas and oil270.0087.00183.00Auto insurance190.0067.00123.00Auto supplies195.00195.00Other Business Expenses:Subscriptions90.006.0084.00Office supplies140.54140.54Postage135.55135.55Advertising140.00140.00Printing165.00165.00Answering service175.00175.00Accounting books65.0065.00Taxi, Bus, Train88.0088.00Telephone190.00190.00Miscellaneous 40.0040.00Total $4,238.09$1,389.00$2,849.09 The only evidence introduced at trial with respect to these deductions related to the deductions for salaries and wages, depreciation, and gas and oil. Eugene did not keep any books of general account in 1961. During the three week period immediately preceding April 15, 1961, the date on which his customers' tax returns were due to be filed, Eugene hired Vivian Campbell and Earl Romero to help in22 the preparation of returns, and paid them $300 and $620, respectively, for their services. During 1961 Eugene used the aforementioned 1960 Chevrolet station wagon onethird of the time in connection with his business as a "tax accountant" and one-sixth of the time in pursuing certain purported business activities of Honor Realty Company, a partnership in which Eugene allegedly had a one-half interest. This automobile had cost Eugene $2,700 in 1960, had a useful life of three years, and had a salvage value of $325. Respondent properly allowed the deduction of only $264 for the depreciation of this automobile during 1961. On hundred and twenty dollars of the $570 claimed as depreciation for 1961 related to certain office equipment with a five-year useful life which was purportedly acquired in 1959 for $600. Eugene conceded at trial that respondent properly disallowed a similar deduction for depreciation of $120 with respect to this equipment for the taxable year 1960. Petitioner admittedly had no records or receipts with respect to this equipment which would indicate either the cost or useful life thereof. Eugene spent a total of $366 for gas and oil during 1961. One-third of that23 amount, or $122, constituted a deductible Schedule C expense relating to Eugene's business as a "tax accountant." Eugene claimed a partnership loss on Schedule B attached to his 1961 individual income tax return in the amount of $786.12. This loss was purportedly incurred in connection with the Honor Realty Company, a partnership in which he had a half interest. Respondent disallowed this deduction in full. At the trial Eugene failed to produce any books, records, or any other convincing evidence which might have substantiated this claimed loss. Pursuant to section 6501(c)(4), I.R.C. 1954, Eugene Joseph, Enid Thelma Joseph, 1684 and the Commissioner of Internal Revenue by his duly authorized representative consented in writing on February 4, 1964 to the extension of the period of limitation for the petitioners' taxable year 1960, to June 30, 1965. Respondent's statutory notices of deficiency for the taxable years 1960 and 1961 were mailed to petitioners on June 30, 1965. In his notices of deficiency for 1960 and 1961 respondent asserted a five percent negligence penalty; and in the deficiency notice for 1961 he asserted a penalty for the delinquent filing of the 1961 income24 tax return. At some time after the Commissioner's agents completed their audits with respect to the taxable years 1960 and 1961, and had advised the petitioners of their administrative remedies, certain files and records belonging to Eugene were seized by the Internal Revenue Service. On December 16, 1964, any records or receipts relating to the issues herein which may have been taken were returned to Eugene. Opinion On his income tax return for 1960 Eugene claimed business deductions with respect to Liberty Station Wagon Service in the total amount of $2,333.10. Respondent contends that $959.93 of this amount should be disallowed for lack of substantiation. We agree with the respondent that the petitioners have failed to carry their burden of proving the deductibility of the expenses disallowed by respondent. At trial Eugene introduced a record book purporting to indicate Liberty's expenses during 1960, and other documentary evidence, including money orders, receipts, and bills. We find for various reasons, including the following, that the record book is substantially lacking in probative value. Eugene admits that he did not keep these records up to date at the time the expenses25 were supposedly incurred, and that he actually made some of the entries at the trial and in the office of respondent's counsel many years after 1960. We also find that the aggregate amount of each of the various types of expense indicated in the record book differed in every case from the amount which Eugene claimed as a deduction on his 1960 return. In about half of these categories the total expenditures recorded were less than the amounts claimed on the return; the expenditures recorded for the remaining categories were actually more than the amounts claimed on the return. In addition to the record book submitted by petitioners, we have closely scrutinized every shred of documentary evidence introduced with respect to the Liberty expenses. We have concluded that the petitioners have failed to carry their burden of proving that they are entitled to deduct any amounts claimed with respect to Liberty in 1960 in excess of the amounts allowed by the respondent, and we hold that the respondent's determination in this regard must be sustained. The next issue which is presented for our decision is whether petitioners failed to report $2,375.65 of income in 1960. Respondent determined26 the amount of cash expenditures made by the petitioners in 1960, and, after deducting therefrom all cash available to petitioners from known sources, determined that the remainder of the cash spent by petitioners in 1960 represented unreported income in that year. The respondent's determination is presumptively correct, and the petitioners have the burden of overcoming this presumption. Petitioners do not appear to seriosly contest respondent's determination that Eugene and his wife made cash expenditures during 1960 in the amount of $6,967. They did not question the validity or reasonableness of respondent's calculations with respect to any item of expenditure. As we have stated in our findings of fact, we think that respondent's determination in this regard was entirely reasonable. Respondent found that petitioners had $4,591.35 of available cash from known sources during 1960, and determined that the $2,375.65 difference between this amount and petitioners' $6,967 in total cash expenditures constituted unreported income. On brief petitioners contend that the $2,375.65 differential was paid from various sources other than taxable income, to wit, savings accumulated by him and27 his wife, loans from various named and unnamed individuals, and proceeds from some insurance policies. At the trial no evidence was presented with respect to insurance proceeds, and the only loan which was mentioned was one that respondent had included in computing petitioners' known sources of available cash. Eugene merely stated that "* * * the money was received from other sources, not earned income, from family, members principally, and from 1685 savings that I had accumulated." that he did not have any evidence to present for the purpose of substantiating this statement. He did not even state the names of the "family members" or how much money they allegedly gave to him. Nor did he tell the Court how much of the money which he and his wife had allegedly saved was spent during 1960. His wife did not even testify. We note that the respondent included certain net withdrawals from a savings account in calculating the known sources of available cash, and we find nothing in the record which convinces us that any additional savings were expended during 1960. We therefore must conclde that petitioners have failed to carry their burden of proving that they did not fail to report28 $2,375.65 of income during 1960, and we hold that respondent's determination on this issue must be sustained. We turn now to the question of whether respondent properly disallowed certain deductions claimed by Eugene on Schedule C of his 1961 individual income tax return in connection with his business as a "tax accountant." The only evidence introduced at trial with respect to these deductions related to the deductions for salaries and wages, depreciation, and gas and oil. To the extent that Eugene may still be contesting the disallowance of the remainder of the deductions in issue, he has wholly failed to carry his burden of proof, and the respondent's determinations are therefore sustained. We have found that Eugene hired Vivian Campbell and Earl Romero during 1961 to help in the preparation of tax returns in his business as a "tax accountant," and that he paid them $300 and $620, respectively, for their services. We therefore hold that petitioner Eugene is entitled to deduct $920 in 1961 for "salaries and wages" in connection with this business. Eugene claimed deductions for depreciation and gas and oil expenses with respect to his automobile on a basis of one-half business29 usage. He admits, however, that the car was used only one-third of the time in connection with his business as a "tax accountant," and that the residue of the claimed business usage (one-sixth of the total usage) related only to certain business activities of the Honor Realty Company, a partnership in which Eugene had a one-half interest. We agree with the respondent that Eugene is entitled to deduct depreciation and expenses relating to this automobile on Schedule C only on the basis of one-third business usage. The general rule is well settled, that business expenses of a partnership are not deductible by particular partners on their individual returns, except where there is an agreement among the partners that such expenses shall be borne by particular partners out of their own funds. Robert J. Wallendal, 31 T.C. 1249">31 T.C. 1249 (1959). Here there is no evidence that such an agreement existed. We therefore uphold the respondent's determination that Eugene is entitled to a deduction for depreciation on his automobile of only $264. On the basis of the evidence adduced at trial, respondent conceded that Eugene incurred a total of $266.32 in gas and oil expenses during 1961, and30 that he was entitled to a deduction of one-third of that amount. We have found that Eugene spent a total of $366 for gas and oil during that year. We therefore conclude and hold that he is entitled to deduct one-third, or $122 for these business expenses during 1961. Petitioner Eugene also deducted $120 as depreciation for certain office equipment in 1961, which amount was totally disallowed by the respondent. Eugene conceded at the trial that respondent properly disallowed a similar deduction for depreciation of this equipment for the preceding taxable year. Furthermore, Eugene admittedly had no records or receipts with respect to this equipment which would indicate either the cost or useful life thereof. Under these circumstances we think it clear that the petitioner has failed to meet his burden of proof, and we hold that the respondent's determination must be sustained. The petitioner Eugene claimed a partnership loss of $786.12 on Schedule B attached to his 1961 individual income tax return. Respondent disallowed this claimed loss for the reason that the petitioner was unable to substantiate by adequate proof that he actually sustained the loss. The only evidence which Eugene31 introduced with respect to this purported loss was a Form 1099 information return for 1961 stating in a purely conclusory manner that Eugene had incurred the above-stated loss. No books or records were presented, nor was the Honor Realty partnership income tax return introduced. Eugene's "partner" was not called as a witness. The petitioner has not shown that the determination of respondent is incorrect and has not met his burden of proof. We therefore conclude 1686 and hold that the respondent's determination on this issue must be sustained. Petitioners also contest the respondent's imposition of the five percent negligence penalty in each of the taxable years 1960 and 1961. The Commissioner's determination of negligence is presumptively correct, and petitioners have the burden of rebutting this presumption by showing that due care was exercised. Petitioners have completely failed to carry their burden of proof because no evidence was introduced with respect to this issue. Moreover, we have found that Eugene substantially understated his income and kept inadequate and inaccurate records in 1960, and failed to keep any records at all in 1961, so it appears that respondent's determination32 was well founded. We therefore hold that the imposition of the negligence penalty by respondent in each of the years in issue was proper. Respondent also imposed a penalty upon petitioner Eugene for late filing of his 1961 income tax return. Section 6651(a), I.R.C. 1954, provides for the imposition of this penalty unless it can be shown that the failure to file on the prescribed date was due to reasonable cause and not due to willful neglect. It is clear that Eugene was delinquent since he did not file his 1961 return until December 6, 1962, and no evidence of an extension of time was presented. Since Eugene also failed to produce any evidence relating to his reasons for filing late, he has not carried his burden of proof. We therefore hold that the respondent's determination with respect to this issue must be sustained. Petitioners also contend that the Commissioner was prohibited by the statute of limitations from assessing the tax liabilities in issue herein. We disagree. Section 6501, I.R.C. 1954, provides generally that the assessment must be made within three years after the return was filed, or prior to the expiration of a period for assessment to which the Secretary or33 his delegate and the taxpayer have consented in writing. The returns in the instant case, for 1960 and 1961, were filed on August 23, 1961, and December 6, 1962, respectively. A valid consent agreement was filed extending the period of limitation for the taxable year 1960 to June 30, 1965. Respondent's statutory notices of deficiency for the taxable years 1960 and 1961 were mailed to petitioners on June 30, 1965. We therefore hold that respondent was not barred by the statute of limitations in this case. Eugene claimed his wife, Enid Thelma Joseph, as an exemption on his 1961 return. Although the return was marked "Married filing joint return," it was in Eugene's name alone and his wife did not sign the return. In computing Eugene's deficiency for 1961, respondent treated Eugene as a married person filing a separate return, and disallowed the exemption for Enid Thelma. Although the petition contains the general statement that "the entire amount [the deficiency] is in dispute" it does not, as is required by Rule 7(c)(4)(B)(4), (5), Tax Court Rules of Practice, include an assignment of error or any facts applicable to the respondent's determination regarding this exemption. This34 question was not raised by petitioner Eugen until he filed his brief after trial; therefore, it is not in issue before this Court since the question of its validity was not appropriately raised in the pleadings. Earl V. Perry, 22 T.C. 968">22 T.C. 968 (1954). However, even assuming arguendo that this question was properly raised, we find that the petitioner would still have failed to carry his burden of proof. Eugene did not prove that Enid Thelma intended to file a joint return with him. Under these circumstances he must be considered a married person filing a separate return, and in the latter instance section 151(b), I.R.C. 1954, provides for an exemption of a taxpayer's spouse only where it is shown that the spouse had no gross income and was not the dependent of another taxpayer during the year in question. Petitioner failed to prove either of these essential factors. The deficiency for 1960 will be determined accordingly against petitioners but in view of our conclusion that the 1961 return was not joint the deficiency for that year will be solely against petitioner, Eugene Joseph. Decision will be entered under Rule 50. 1687 Footnotes1. All statutory references are to the Internal Revenue Code of 1954.↩. Parentheses indicate amounts allowed as deductions by respondent in excess of the amounts claimed on the return.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622273/	HELENE V. B. WURLITZER, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Wurlitzer v. CommissionerDocket No. 61690.United States Board of Tax Appeals29 B.T.A. 658; 1934 BTA LEXIS 1501; January 3, 1934, Promulgated 1501 Under the provisions of section 113(a)(2) of the Revenue Act of 1928, the basis for determining gain or loss on the sale of property acquired by gift after December 31, 1920, from a person who also acquired ownership by gift, is the cost or March 1, 1913, value of the property to the last preceding owner by whom it was not acquired by gift. Laurence Graves, Esq., for the petitioner. Allin Pierce, Esq., for the respondent. VAN FOSSAN 658 OPINION. VAN FOSSAN: This proceeding was brought to redetermine a deficiency in the income tax of the petitioner for the year 1929 in the sum of $7,517.11. The petitioner alleges that the respondent erred in determining that the basis for ascertaining the gain realized by the petitioner in 1929 from the sale of 512 shares of the capital stock of the Rudolph Wurlitzer Co., received by the petitioner on January 28, 1924, as a gift from her daughter, Louise Wurlitzer, who received the stock as a gift from her father, Howard E. Wurlitzer, prior to December 31, 659 1920, is the fair market value of such stock on March 1, 1913, in the hands of Howard E. Wurlitzer. The petitioner alleges that the proper1502 basis is either the value of the stock on January 28, 1924, or its value when received by Louise Wurlitzer. The facts were stipulated as follows: The petitioner is an individual residing in Cincinnati, Ohio. On January 28, 1924, the petitioner received as a gift from her daughter, Louise Wurlitzer, 515 shares of the common capital stock of The Rudolph Wurlitzer Company, a corporation. Of these 515 shares, 512 shares represented shares received by the said Louise Wurlitzer as gifts from her father, Howard E. Wurlitzer, on April 26, 1915, May 23, 1917, and August 31, 1918, together with stock dividends declared and received thereon. The values of the said 512 shares of stock at the time of receipt by Louise Wurlitzer, after adjustment for a stock dividend of 100 per cent in 1920 and a stock dividend of 28 per cent in 1922, were as follows: DateSharesPer Share Total ValueValueApril 26, 191576.80$312.47$23,997.69May 23, 1917179.20328.0958,793.72August 31, 1918256340.3987,139.84Total512$169,931.25Louise Wurlitzer died on February 14, 1924. The respondent determined that the gift made by said Louise Wurlitzer, 1503 deceased, to the petitioner, of the 515 shares of stock of The Rudolph Wurlitzer Company was a transfer in contemplation of death and should be included as a part of the gross estate of the said Louise Wurlitzer for Federal estate tax purposes at a value of $235 per share, or a total value of $167,375. Upon the basis of such a determination the respondent assessed against and collected from the estate of the said Louise Wurlitzer a Federal estate tax in the amount of $2,046.11, no part of which has been refunded or credited. In 1929 the petitioner sold the 515 shares of stock received from her daughter on January 28, 1924, together with other stock of The Rudolph Wurlitzer Company. In ascertaining the gain realized by the petitioner from the sale of 512 of the said 515 shares the respondent used as the petitioner's basis the basis of such stock in the hands of Howard E. Wurlitzer, from whom the said Louise Wurlitzer had received such stock as gifts, such basis being the March 1, 1913, fair market value of $107,283.40 or $209.557 per share. Section 113(a)(2) of the Revenue Act of 1928 is as follows: (a) Property acquired after February 28, 1913. - The basis for determining1504 the gain or loss from the sale or other disposition of property acquired after February 28, 1913, shall be the cost of such property; except that - * * * (2) GIFT AFTER DECEMBER 31, 1920. - If the property was acquired by gift after December 31, 1920, the basis shall be the same as it would be in the hands of the donor or the last preceding owner by whom it was not acquired by gift. If the facts necessary to determine such basis are unknown to the donee, the Commissioner shall, if possible, obtain such facts from such donor 660 or last preceding owner, or any other person cognizant thereof. If the Commissioner finds it impossible to obtain such facts, the basis shall be the fair market value of such property as found by the Commissioner as of the date or approximate date at which, according to the best information that the Commissioner is able to obtain, such property was acquired by such donor or last preceding owner. The petitioner contends that the intendment of the above statute is to place the donee in the same position as his donor, that prior to December 1, 1920, the basis of measuring gain upon its sale is the fair market value of the property at the time of1505 its acquisition by the donor and that, therefore, since the donor of Louise Wurlitzer acquired the stock prior to December 31, 1920, the petitioner's gain should be determined by the fair market value of the stock at that time. In Aaron Mendelson,18 B.T.A. 215">18 B.T.A. 215, we considered the same argument and held that the facts in that case, which in all essential respects is similar to the case at bar, brought it within the second clause of section 202(a)(2) of the Revenue Act of 1921, identical in meaning with section 113(a)(2). There, as here, the donor of the petitioner was also a donee. The original donor there happened to be the petitioner, but we see no vital difference in principle. At the time of the acquisition by the petitioner donee the situation was on all fours with the present case. Our holding in the Mendelson case was that: Under the provisions of section 202(a)(2) of the Revenue Act of 1921, the basis for determining any loss or gain in the sale of property acquired by gift after December 31, 1920, from a person who also obtained ownership by gift, is the cost of the property to the last preceding owner by whom it was not so acquired. 1506 The decision of the United States Supreme Court in Taft v. Bowers,278 U.S. 470">278 U.S. 470, is cited by counsel for both the petitioner and the respondent. We think it supports the view of the respondent rather than that of the petitioner. In that case, in which the appropriate provisions of the Revenue Act of 1921 were involved, the Supreme Court said: If, instead of giving the stock to petitioner, the donor had sold it at market value, the excess over the capital he invested (cost) would have been income therefrom and subject to taxation under the 16th Amendment. He would have been obliged to share the realized gain with the United States. He held the stock - the investment - subject to the right of the sovereign to take part of any increase in its value when separated through sale or conversion and reduced to his possession. Could he, contrary to the express will of Congress, by mere gift enable another to hold this stock free from such right, deprive the sovereign of the possibility of taxing the appreciation when actually severed, and convert the entire property into a capital asset of the donee, who invested nothing, as though the latter had purchased at the market1507 price? And, after a still further enhancement of the property, could the donee make a second gift with like effect, etc.? We think not. 661 In truth the stock represented only a single investment of capital - that made by the donor. And when through sale or conversion the increase was separated therefrom, it became income from that investment in the hands of the recipient subject to taxation according to the very words of the 16th Amendment. By requiring the recipient of the entire increase to pay a part into the public treasury, Congress deprived her of no right and subjected her to no hardship. She accepted the gift with knowledge of the statute and, as to the property received, voluntarily assumed the position of her donor. When she sold the stock she actually got the original sum invested, plus the entire appreciation, and out of the latter only was she called on to pay the tax demanded. The provision of the statute under consideration seems entirely appropriate for enforcing a general scheme of lawful taxation. To accept the view urged in behalf of petitioner undoubtedly would defeat, to some extent, the purpose of Congress to take part of all gain derived1508 from capital investments. To prevent that result and insure enforcement of its proper policy, Congress had power to require that for purposes of taxation the donee should accept the position of the donor in respect of the thing received. And in so doing, it acted neither unreasonably nor arbitrarily. See also Richard T. Keeley,15 B.T.A. 804">15 B.T.A. 804; Cooper v. United States,280 U.S. 409">280 U.S. 409. The petitioner also argues that since the respondent determined for Federal estate tax purposes that the stock in question was property transferred in contemplation of death and that the fair market value thereof at the time of transfer was $167,375, such sum should be taken as the basis of gain, for the reason that property so designated does not come within the exceptions contained in section 113. We see no merit in this contention. The fact that the respondent has denominated the stock as "property transferred in contemplation of death" makes it none the less a gift. And we are dealing with the statute that applies directly to gifts regardless of the circumstances under which they were made. Petitioner's contention is directly contrary to article 593 of*1509 Regulations 74. We approve the action of the respondent. Decision will be entered for the respondent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622274/	Estate of Isaac Goodman, Deceased, Alan S. Goodman, Executor, Petitioner, v. Commissioner of Internal Revenue, RespondentGoodman v. CommissionerDocket No. 24887United States Tax Court17 T.C. 1017; 1951 U.S. Tax Ct. LEXIS 12; December 19, 1951, Promulgated 12 Decision will be entered under Rule 50. Two days prior to his death, decedent received the proceeds from a condemnation award from the involuntary conversion of real property. Decedent realized a gain therefrom. His personal representative reinvested the money in property similar or related in service or use to the property converted, and claimed the benefits of section 112 (f), Internal Revenue Code. Respondent refused to allow postponement of the recognition of gain upon the theory that the statutory conditions can only be complied with by the taxpayer, individually. Held, the benefits of section 112 (f), permitting nonrecognition of gain in the year realized by the taxpayer, are limited to the taxpayer individually, and are not available to taxpayer's personal representative whether or not he has fully complied with the conditions imposed by the statute. Jesse A. Kline, Esq., and Maurice J. Klein, Esq., for the petitioner.William H. Best, Jr., Esq., for the respondent. Rice, Judge. RICE1017 This case involves an income tax deficiency of $ 16,255.28 for the taxable period January 1 to October 20, 1944, inclusive. The issue is whether the gain realized by decedent upon receipt of a condemnation award should be recognized, as determined by the respondent, or whether recognition of the gain should be postponed in accordance with the provisions of section 112 (f), I. R. C., relating to involuntary conversions, as contended by the petitioner.In its prayer for relief, petitioner claims that decedent's income tax for the taxable period has been overpaid.Most of the facts were stipulated.1018 FINDINGS OF FACT.The stipulated facts are so found and are incorporated herein.The petitioner is the Estate of Isaac Goodman, (also known as Isaac H. Goodman) Deceased, 14 Alan S. Goodman, Executor, of Melrose Park, Pennsylvania. The decedent's final return for the taxable year 1944 was filed by the executor on March 15, 1945, with the collector of internal revenue for the first district of Pennsylvania at Philadelphia, Pennsylvania.Isaac H. Goodman died at 8:20 p. m. on October 20, 1944.In February 1942, and for some years prior thereto, the decedent owned an undivided one-half interest in a building at 1330 Vine Street, Philadelphia, Pennsylvania.On February 9, 1942, by an act of legislature, the Commonwealth of Pennsylvania condemned all properties on Vine Street to a depth of 107 feet for the purpose of widening Vine Street, thereby condemning 107 feet of this building and leaving 51 feet of the building remaining.Condemnation proceedings were instituted pursuant to the aforesaid legislative authority, and in due course an award for the condemnation of the building was made. The share of the decedent in the proceeds of the condemnation award was $ 187,800, which was received by him on October 18, 1944.The adjusted cost basis of the undivided one-half share of the decedent in the premises at 1330 Vine Street was $ 100,480.37.On October 18, 15 1944, the decedent opened an account with the Girard Trust Company of Philadelphia, Pennsylvania, under the following designation: "Isaac H. Goodman Special Account, Alan S. Goodman, Attorney," and deposited therein proceeds in the amount of $ 169,020, which represented the award of $ 187,800 less the attorney's fee of $ 18,780. In addition there was also deposited in the Special Account a check in the amount of $ 24,000, which represented the proceeds of a mortgage held by Isaac H. Goodman on the one-half interest in the property located at 1330 Vine Street owned by Leon and Beatrice Goodman.On October 20, 1944, Alan S. Goodman, as attorney in fact for Isaac H. Goodman, issued a check on the Special Account in the amount of $ 5,000. This check was payable to the order of A. J. Bamberger Company. This check was honored by the Girard Trust Company on October 23, 1944, with the permission of Alan S. Goodman, as executor of the estate of Isaac H. Goodman.The aforesaid Special Account was closed out on October 23, 1944, at which time Alan S. Goodman, as executor, drew a check for the sum of $ 188,020 representing the balance remaining in this account and deposited the same, along16 with other funds in the amount of 1019 $ 381.26 on deposit to the credit of the decedent, in an account with the Girard Trust Company in the name of "Estate of Isaac H. Goodman, Deceased."On December 12, 1944, Alan S. Goodman, as executor of the decedent's estate, issued a check on the Estate Account in the amount of $ 55,000 to the order of Commonwealth Title Company which is identified on the face thereof as "Balance of purchase price 203-05 N. Broad Street."On December 12, 1944, Alan S. Goodman, as executor of the decedent's estate, issued a check on the Estate Account in the amount of $ 916.47 to the order of Commonwealth Title Company which is identified on the face thereof as "Balance of payment on 203-05 N. Broad Street."On November 21, 1944, Alan S. Goodman, as executor of the decedent's estate, issued a check on the Estate Account in the amount of $ 5,000 to the order of A. J. Bamberger Company which is identified on the face thereof as "Deposit on 207-09 N. Broad Street."On December 8, 1944, Alan S. Goodman, as executor of the decedent's estate, issued a check on the Estate Account in the amount of $ 75,000 to the order of Commonwealth Title Company which is identified17 on the face thereof as "Balance of purchase price 207-09 N. Broad Street."On December 8, 1944, Alan S. Goodman, as executor of the decedent's estate, issued a check on the Estate Account in the amount of $ 699.10 to the order of Commonwealth Title Company which is identified on the face thereof as "207-09 N. Broad Street Taxes and Settlement Chgs."On December 10, 1945, Alan S. Goodman, as executor of the decedent's estate, issued a check on the Estate Account in the amount of $ 3,000 to the order of John and Herman Membrino which is identified on the face thereof as "Deposit on 1913 Arch Street."On January 28, 1946, Alan S. Goodman, as executor of the decedent's estate, issued a check on the Estate Account in the amount of $ 5,000 to the order of John G. and Herman Membrino which is identified on the face thereof as "Additional payment purchase price 1913 Arch Street."On February 13, 1946, Alan S. Goodman, as executor of the decedent's estate, issued a check on the Estate Account in the amount of $ 22,000 to the order of Commonwealth Title Company which is identified on the face thereof as "Balance of purchase price 1913 Arch Street."The buildings located at 1330 Vine Street, 18 203-05 N. Broad Street, 207-09 N. Broad Street, and 1913 Arch Street, respectively, are each of the type generally known as loft buildings leased as income-producing 1020 properties, suitable for light manufacturing purposes, jobbing, printing, and the like. The occupancy of each of the buildings is similar in nature, each tenant leasing one or more floors in a building. The service rendered by way of elevator service, heat, and power is identical in each of the said buildings. The properties are each similarly constructed and are each located within the confines of the central Philadelphia, Pennsylvania, business area.The properties purchased by the petitioner on N. Broad Street and on Arch Street were "similar or related in service or use to the property" condemned on Vine Street. Petitioner acted with due diligence under the circumstances in reinvesting the proceeds of the condemnation award.Decedent's income tax return for the taxable period ending October 20, 1944, reported no gain from the receipt of the condemnation award, and the omission was explained as follows:Taxpayer owned a one-half interest in the Goodman Building, Juniper and Vine Streets, Philadelphia. 19 Income from this property is shown in Schedule "E" from Goodman Realty Company.In order to permit the widening of Vine Street, this property was condemned by the State of Pennsylvania during 1944 and the entire proceeds were immediately expended in the purchase of similar central city investment property. No gain or loss resulted from this involuntary conversion (Sec. 112 (f)).OPINION.This case presents a new facet of the tax problem that arises where property is involuntarily converted into cash. Petitioner's decedent received a condemnation award two days prior to his death. Except for the property purchased on October 20, 1944, the acquisition of which does not affect the tax problem presented, decedent was unable during this short interval to reinvest the proceeds in other property similar or related in service or use to the property so converted. Thereafter, decedent's personal representative acquired similar property and contends that decedent is entitled to the benefits of section 112 (f), I. R. C., in computing his tax liability for the taxable period ending at death. Section 112 (a), I. R. C., which states the general rule and section 112 (f), which states the 20 exception here under consideration, are set forth in the margin. 121 1021 Respondent contends that decedent is not entitled to the benefits of 112 (f) for the following reasons: (1) the section creates an exemption from taxation of income actually realized, and, while the section is to be liberally construed it cannot be expanded beyond its limitations; (2) the section contains no language specifically extending its benefits to the estate of a decedent who has realized a gain from an involuntary conversion and who has not completed the conversion during his lifetime; and (3) the original statutory provisions, relating to compulsory or involuntary conversion of property, sections 214 (a) (12) and 234 (a) (14), Revenue Act of 1921, specifically provide that the taxpayer shall expend the proceeds in the acquisition of similar property in order to be entitled to the benefits. In this connection respondent calls attention to the language of section 203 (b) (5), Revenue Act of 1924, which deleted the word "taxpayer" from the involuntary conversion provisions with the following explanation, H. Rept. No. 179, 68th Cong., 1st Sess., 1939-1 (Part 2) C. B. 241, 251:Section 203:* * * (5) Paragraph (5) corresponds to section 214 (a) 12 and 234 22 (a) 14 of the existing law. The existing law exempts from tax the proceeds from an involuntary conversion of property but fails to grant an exemption if the property is replaced in kind by the insurance company or similar person. The bill exempts the gain from an involuntary conversion whether the replacement is made by the taxpayer or by the insurance company.* * * Respondent argues that it is reasonable to infer from this amendment that Congress intended the tax benefits of the involuntary conversion section to be personal to the taxpayer. He asserts that the amendment eliminated "the taxpayer" from the statute for the sole purpose of allowing the taxpayer to reap the benefits when his insurance company made the replacement in his behalf. He submits, therefore, that petitioner's attempt to extend the tax benefits of the involuntary conversion section to the personal representative of a deceased taxpayer is unwarranted and transcends the intended scope of the statute.In addition to the foregoing contentions, respondent points out that where property is involuntarily converted "into money which is forthwith in good faith * * expended in the acquisition of other property similar23 or related in service or use to the property so 1022 converted," section 112 (f) provides that the proceeds must be expended "under regulations prescribed by the Commissioner with the approval of the Secretary, * * ." These regulations, 2 it is pointed out, repeatedly refer to "the taxpayer," and what he must do to obtain the benefits of section 112 (f). The regulations neither suggest nor intimate that other persons, such as, the executor, administrator, heirs, beneficiaries or devisees of "the taxpayer" can invoke section 112 (f) by reinvesting the proceeds or establishing a replacement fund after the death of the taxpayer. Respondent contends, therefore, that petitioner is attempting to extend the statute beyond its scope and without regard to the regulations issued pursuant to the provisions of the statute.24 Petitioner counters with the contention that section 112 (f) does not mention the word "taxpayer" but speaks, so far as here applicable, as follows: "If property * * * is compulsorily or involuntarily converted * * * into money which is forthwith in good faith * * * expended in the acquisition of other property similar or related in service or use to the property so converted, * * * no gain shall be recognized * * ." It is contended that the money received from the award was reinvested, in accordance with the requirements of section 112 (f) and respondent's regulations, by the personal representative of the deceased taxpayer and that such compliance is sufficient. Petitioner argues that the strict construction requested by respondent is diametrically opposed to the decided cases, all of which, petitioner contends, hold that section 112 (f) is a relief provision entitled to a liberal construction. It is urged that it is immaterial who expends the "money" providing the expenditure is in the manner provided by the statute.To illustrate its point that respondent's interpretation twists the statute meaning and tortures its intent, petitioner refers to that portion of the regulations25 quoted above which reads: "The taxpayer must trace the proceeds of the award into the payments for the property 1023 so purchased." The question is then posed whether respondent would seriously stand on his interpretation if the facts were that the taxpayer, after making the reinvestment as required, died, and his personal representative tried to trace the proceeds of the award into the property so purchased. Petitioner insists that the word "taxpayer," as used in respondent's regulations, is the most general of terms, and, in effect, says that taxpayer means any person standing in the shoes of the decedent who complies with the statutory requirements regarding reinvestment of the proceeds. It is insisted further that respondent has no authority, by regulation, to provide that the benefits granted by section 112 (f) shall terminate with death, for his power to promulgate regulations is limited by the statute to directing the use of the proceeds to replace the property converted, under Francis V. DuPont, 31 B. T. A. 278, 283 (1934).Both parties cite Herder v. Helvering (C. A. D. C., 1939), 106 F. 2d 153, certiorari26 denied 308 U.S. 617">308 U.S. 617, which involved section 112 (f), Revenue Act of 1934. Herder and Williams were partners in a firm that owned rice milling property that was destroyed by fire. The firm received $ 50,000 under insurance policies in settlement of the loss, and immediately distributed it to the partners pro rata. The partners intended to reinvest the insurance proceeds in the purchase or establishment of another rice mill and to carry on the same partnership business. Within two weeks of the receipt of the proceeds Herder died before anything was accomplished and neither his heirs nor his personal representatives made such a reinvestment. Williams reinvested his proceeds in a rice mill similar to the one destroyed. The benefits of section 112 (f) were denied to Herder, but allowed to Williams, see our decision in 36 B. T. A. 934 (1937), and Herder's personal representative appealed.In affirming our opinion, the Court of Appeals for the District of Columbia said, 106 F. 2d 153, 160:If, as we view it, the proceeds is income to the taxpayer prior to his death, it is taxable in the period when it 27 is received, and can only be relieved from taxation by compliance with sec. 112 (f), that is by actual reinvestment in similar property as required thereunder. The Board's action in applying sec. 112 (f) and its benefits to Williams in the present case and to Buckhardt in the case cited above [32 B. T. A. 1272] cannot have any effect on the taxability of George Herder's income in the absence of any reinvestment at all. Sec. 112 (f) is a liberal provision which may remove such income from a taxable status within the period when it was received. It is based upon the theory that taxation is deferred until a subsequent date, but only upon condition that there is a reinvestment of such income in similar property, which takes the basis for gain or loss of the property involuntarily converted. We are of the opinion that the proceeds of the insurance was taxable income received in the prior period, and, not having been reinvested, sec. 112 (f) cannot be availed of to avoid payment of taxes in the period the income was received. Upon the death of George Herder, the proceeds constituted a portion of his estate and could not be taxed as income derived by the estate. 28 1024 Petitioner stresses our finding that Herder died "before anything was accomplished and neither his heirs nor personal representatives made such a reinvestment." 36 B. T. A. 934, 935. The inference is drawn from this finding that the personal representative had the right to make such reinvestments in order to comply with the statutory requirements. Petitioner argues that the Court of Appeals' opinion, quoted in part above, is based upon "the absence of any reinvestment at all," and upon the statement therein that, "The proceeds * * not having been reinvested, sec. 112 (f) cannot be availed of to avoid payment of taxes in the period the income was received." The petitioner points out that the Court of Appeals at no place made any mention of the death of Herder as in any way bringing to an end the benefits of section 112 (f). Petitioner contends further that the Court of Appeals was not called upon to rule on the question here at issue, so that, while its decision is not controlling, it does show the interpretative thinking of the Court of Appeals on the subject.In support of its interpretation of section 112 (f) petitioner cites the language29 used in some of our earlier decisions involving prototypes of section 112 (f), I. R. C. In Washington Market Co., 25 B. T. A. 576, 584 (1932) we said: "As we view it, section 203 (b) (5) [Revenue Act of 1924] is a special or relief provision designed to prevent an inequitable incidence of taxation, * . Obviously, this section was intended not to penalize but to protect parties whose property may be taken on condemnation."Petitioner also cites Washington Railway & Electric Co., 40 B. T. A. 1249 (1939), where we granted the benefits of section 112 (f), Revenue Act of 1928, to a taxpayer operating a public utility, which made replacements in anticipation of an involuntary conversion of existing property into cash. We there conceded that the case was a close one but held that "any other conclusion would defeat the remedial intendment of the provisions in circumstances which we think were obviously intended to be embraced within it." (p. 1258).Respondent stresses the first sentence in the above quote from the Herder case. The inference he draws therefrom is that the reinvestment of the proceeds of involuntary conversion30 must be made immediately and that with the exception of the one purchase on October 20, 1944, there was no reinvestment of proceeds by the decedent during the taxable period in which the proceeds were received. Respondent states that the Herder case did not raise directly the question of the limitations confronting a personal representative who attempts to comply with the provisions of 112 (f). He contends that the Court of Appeals' opinion indicates that death is an event which would "freeze" the rights of the parties where it found them and that with the advent of death different legal rights and liabilities come into existence. He 1025 finds authority for this contention in that portion of the Court of Appeals opinion which reads: "Upon the death of George Herder, the proceeds constituted a portion of this estate and could not be taxed as income derived by the estate." Accordingly, respondent asserts, the Herder case does not inferentially extend the benefits of section 112 (f) to a decedent's personal representative, but that, on the contrary, the implications of that opinion favor his interpretation of the statute.The respective positions of the parties on statutory31 construction, on the force and effect of respondent's regulations, and on the holding in the Herder case, supra, have been set forth in detail for the reason that they bring into sharper focus the effect, if any, that the death of the taxpayer has upon the interpretation of section 112 (f). Petitioner's theory, briefly, is that so long as the money is expended in the acquisition of property, as specified in the Code, it is immaterial whether the taxpayer individually expended the money during his lifetime or the money is expended by his personal representatives or his heirs after he is dead. The important thing is that the money has been reinvested as required by statute and the benefits should be forthcoming.Petitioner's argument is appealing in that it seeks an equitable construction of section 112 (f) which will carry out the remedial purpose of Congress in enacting the statute. But we can not agree that section 112 (f) is applicable. It is plain that Congress did not intend section 112 (f) to apply to every case of involuntary conversion, for, if it had, the conditions governing its application would have been omitted. To extend the benefits of that section to the32 unusual circumstances of this case would be equivalent to legislating on our part, a field which is reserved to the Congress, and one in which we have no right to enter.The stipulated facts show that the decedent received the money from the involuntary conversion on October 18, 1944. Facts have also been stipulated whereby the amount of decedent's gain on the involuntary sale of his property can be determined. With the money in hand, decedent had several avenues open to him, any one of which he could take and by his own voluntary action place a limit on the amount of tax he would be required to pay. For example, he could pocket the realized gain and pay the tax on the entire amount. Or, he could postpone the recognition of gain and thus escape tax if, under respondent's regulations, he reinvested the money in similar or related property in service or use, or established a replacement fund for such later reinvestment in similar or related property. Or, he could replace in part and subject himself to tax on the portion of the realized gain that was unexpended. Francis v. DuPont, supra.1026 Upon the death of Isaac Goodman, the money from33 the condemnation award became a part of the assets of the estate of the decedent, Herder case, supra, and any election available to him terminated with his death. New parties in interest came into being at his death, and the money was circumscribed with the claims of creditors, the expenses of administration, and the rights of the parties entitled to take under his will. That the proceeds had become a part of the decedent's estate was recognized by the transfer on October 23, 1944, of the cash from the "Isaac H. Goodman, Special Account, Alan S. Goodman, Attorney" to the account entitled "Estate of Isaac H. Goodman, Deceased." Recognition that there had been a change in the parties at interest in the money was also evidenced by the permission given the Girard Trust Co. by Alan S. Goodman, as executor of decedent's estate, to cash the $ 5,000 check he drew on the Special Account, as decedent's attorney in fact.Upon decedent's death, his creditors, legatees, devisees, kin, and personal representative acquired legal rights with respect to his property theretofore nonexistent. Decedent's ability to create income, and to derive income from his investments, expired with him; 34 and it is not illogical to hold that since death ended his ability to receive income, it also ended the opportunity afforded by section 112 (f) of postponing the recognition of gain. The general rule in 112 (a), which is held in abeyance if decedent complied with the statutory conditions, became operative, and the gain must be recognized. In other words, death ended the opportunity to postpone recognition with the same finality that it ended decedent's right to receive income.Furthermore, this result reasonably follows in view of the consistent construction placed on section 112 (f) by respondent's regulations, the force and effect and the validity of which have been recognized by the decided cases. Winter Realty & Construction Co. v. Commissioner (C. A. 2, 1945), 149 F.2d 567">149 F.2d 567, affirming 2 T.C. 38">2 T. C. 38. The statute states specifically that the award money is to be expended under regulations prescribed by the Commissioner with the approval of the Secretary. These regulations over a period of years have consistently interpreted 112 (f) as requiring the taxpayer to do certain specific things in order to obtain the benefits35 of section 112 (f). We are unwilling to hold that the term "taxpayer" as used in respondent's regulations means any taxpayer. In our opinion it is the taxpayer who realized the gain that must comply with the conditions imposed by the statute, if he is to secure the statutory benefits. New Colonial Ice Co. v. Helvering, 292 U.S. 435 (1934). Any other construction, as we have previously stated, would extend the statute beyond the plain import of its language, and would amount to judicial legislation. And 1027 we can not forget that we are dealing with an exemption. Twinboro Corporation v. Commissioner (C. A. 2, 1945), 149 F.2d 574">149 F. 2d 574.Since the parties have agreed to allocate attorney fees in their computations under Rule 50,Decision will be entered under Rule 50. Footnotes1. SEC. 112. RECOGNITION OF GAIN OR LOSS.(a) General Rule. -- Upon the sale or exchange of property the entire amount of the gain or loss, determined under section 111, shall be recognized, except as hereinafter provided in this section.* * * (f) Involuntary Conversions. -- If property (as a result of its destruction in whole or in part, theft or seizure, or an exercise of the power of requisition or condemnation, or the threat or imminence thereof) is compulsorily or involuntarily converted into property similar or related in service or use to the property so converted, or into money which is forthwith in good faith, under regulations prescribed by the Commissioner with the approval of the Secretary, expended in the acquisition of other property similar or related in service or use to the property so converted, or in the acquisition of control of a corporation owning such other property, or in the establishment of a replacement fund, no gain shall be recognized, but loss shall be recognized. If any part of the money is not so expended, the gain, if any, shall be recognized to the extent of the money which is not so expended (regardless of whether such money is received in one or more taxable years and regardless of whether or not the money which is not so expended constitutes gain).↩2. Regulations 103, section 19.112 (f)-1 and 2 and Regulations 111, section 29.112 (f)-1 and 2. The following paragraphs appear in both regulations: * * In order to avail himself of the benefits of section 112 (f) it is not sufficient for the taxpayer to show that subsequent to the receipt of money from a condemnation award he purchased other property similar or related in use. The taxpayer must trace the proceeds of the award into the payments for the property so purchased. It is not necessary that the proceeds be earmarked, but the taxpayer must be able to prove that the same were actually reinvested in such other property similar or related in use to the property converted. The benefits of section 112 (f) cannot be extended to a taxpayer who does not purchase other property similar or related in service or use, notwithstanding the fact that there was no other such property available for purchase. * * *It is incumbent upon a taxpayer↩ "forthwith" to apply for and receive permission to establish a replacement fund in every case where it is not possible to replace immediately. If an expenditure in actual replacement would be too late, a request for the establishment of a replacement fund would likewise be too late. [Emphasis added.]	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622275/	Warner Company, Petitioner, v. Commissioner of Internal Revenue, RespondentWarner Co. v. CommissionerDocket No. 7326United States Tax Court11 T.C. 419; 1948 U.S. Tax Ct. LEXIS 83; September 27, 1948, Promulgated 83 Decision will be entered under Rule 50. On the record, held:1. Where petitioner purchased at less than face value certain of its bonds with accrued interest coupons attached, which bonds had been issued at a discount, the gain realized on the principal of the bonds is to be determined by a proportionate allocation between principal and interest.2. Where petitioner kept its books on an accrual basis, its liability for interest payments on its bonds became fixed on the dates specified in the original instrument and the interest was then properly accrued and deductible. Such interest is not a proper item of deduction in a subsequent year when actually paid.3. Pennsylvania corporate loans tax, imposed by law on the individual bondholder, is not a tax or business expense deductible by a corporation paying such tax as an inducement for the purchase of its bonds, but is, in effect, additional interest on borrowed capital.4. The amounts of $ 236,250 and $ 235,613.79 received by bankers in connection with the purchase and sale of petitioner's first preferred stock are not properly includible in equity invested capital.5. Since, in computation of net gain realized by petitioner84 on the purchase and retirement at less than par of certain of its bonds issued at a discount and includible in normal tax net income, the unamortized discount and expense are reflected by a deduction from gross gain and such net gain is excluded in the computation of excess profits net income under section 711 (a) (2) (E) of the Internal Revenue Code, such unamortized discount and expense are not again deductible in the latter computation. George E. H. Goodner,85 Esq., and Scott P. Crampton, Esq., for the petitioner.Robert H. Kinderman, Esq., for the respondent. Leech, Judge. LEECH419 This proceeding involves deficiencies in income tax for 1941 in the amount of $ 26,272.44 and excess profits tax for the year 1942 of $ 71,623.79. 420 This latter amount, the respondent, by amended answer, seeks to increase to the amount of $ 78,278.64.The issues presented are:(1) Did petitioner, upon the purchase and retirement of its own bonds, realize taxable income of $ 49,320, $ 123,991.25, and $ 110,671.66 in the respective years 1940, 1941, and 1942?(2) Is petitioner entitled to deduct from gross income for the year 1942 the amount of $ 709,380, representing the payment in that year of unpaid interest, totaling 18 per cent, on certain bonds for the years 1933, 1934, and 1935?(3) Do the amounts accrued by petitioner in 1940, 1941, and 1942 as Pennsylvania corporate loans tax for those years represent additional interest on borrowed capital?(4) Are the amounts of $ 236,250 and $ 235,613.79, received by the bankers in connection with the purchase and sale of first preferred stock of petitioner in 1929, properly includible86 in petitioner's equity invested capital?(5) Are the amounts of $ 4,514.61, $ 3,674.92, and $ 10,788.27, representing unamortized debt discount and expense originally incurred in 1929, applicable to the first mortgage bonds retired in 1940, 1941, and 1942, deductible in computing excess profits net income for each of such years?The case was submitted upon a stipulation of certain facts, oral testimony, and exhibits. The facts stipulated are so found. Additional facts are found from the evidence.FINDINGS OF FACT.Petitioner is a Delaware corporation having its principal office at Philadelphia, Pennsylvania. It is engaged in the business of furnishing building supplies to the construction industry.Petitioner keeps its books and filed its Federal income and excess profits tax returns on the accrual basis of accounting by calendar years. Petitioner's tax returns for the periods here involved were filed with the collector of internal revenue for the first district of Pennsylvania.The organization of petitioner resulted from the desire of the Charles Warner Co. (hereinafter called Warner) to acquire certain sand, gravel, and lime properties owned by the Van Sciver Corporation (hereinafter87 called Van Sciver) and to do so primarily with borrowed funds. After negotiations during the winter of 1928-29, the parties entered into a series of agreements dated February 6, 1929. Warner agreed to deliver its assets to a new corporation to be formed, which is the petitioner; Van Sciver agreed to sell its properties through an agent, F. W. Bacon, to that corporation; and certain 421 banking interests headed by Dillon, Reed & Co. made certain agreements in reference to the securities to be issued by petitioner. The securities authorized to be issued by petitioner were $ 7,000,000 first mortgage bonds; 50,000 shares of first preferred stock of $ 100 par value; 57,500 shares of second preferred stock of $ 100 par value; and not more than 350,000 shares of common stock of no par value. Part of the proceeds from the issuance of these securities was to go to Warner and part to Van Sciver for their respective properties, and part was to be retained by petitioner for operating purposes.With respect to the first preferred stock the agreement of the bankers provided, in part, that petitioner:* * * shall sell to Bankers and Bankers shall purchase from Company Twenty-three thousand88 two hundred twenty-three (23,223) shares of said first preferred stock at $ 90.00 per share, if the same be of $ 100.00 par, or Forty-six thousand four hundred forty-six (46,446) shares at $ 45.00 per share if the same be of $ 50.00 par or of no par value. Bankers may sell said stock at any price they may fix; but if in their discretion they sell said stock to the public at a price in excess of $ 98.00 per share for the $ 100.00 par stock, or in excess of $ 49.00 per share for $ 50.00 par stock or no par stock, then the Bankers will divide any excess over the sales prices mentioned per share, and accrued dividend, equally with the Company. * The agreements of February 6, 1929, were carried out, subject to two or three changes. One change included the sale of all the first preferred stock for cash. Another included the offering by the bankers of the first preferred stock to the public prior to the actual settlement or completion of the transactions. The bankers oversold petitioner's preferred stock prior to its issuance and had to borrow additional such stock from petitioner's officials to fill their commitments.On April 8, 1929, the parties made their simultaneous settlements89 pursuant to the several agreements of February 6, 1929, as revised. Petitioner came away from this settlement owning the Van Sciver properties and the assets of Warner, subject to a $ 7,000,000 first mortgage and the miscellaneous liabilities of the predecessor company. It had outstanding 31,500 shares of first preferred, 57,500 shares of second preferred and 213,000 shares of no par common stock.In 1929 the first mortgage 6 per cent sinking fund bonds of petitioner in the amount of $ 7,000,000, mentioned above, were issued and sold to the bankers at a discount. Each bond had a face value of $ 1,000. The form of the bond and the interest coupon attached reads as follows:No.$ 1,000.For value received, Warner Company (hereinafter called the "Corporation"), a corporation of the State of Delaware, hereby promises to pay to bearer, or, if this bond be registered, to the registered owner hereof, on the first day of April, 422 1944, at the principal office of Tradesmens National Bank and Trust Company, in the City of Philadelphia, Pennsylvania, or at the principal office of National Bank of Commerce in New York, in the Borough of Manhattan, City, County and State of New York, 90 or of its successor or successors, One Thousand Dollars ($ 1000), in gold coin of the United States of America of or equal to the standard of weight and fineness as it existed on April 1, 1929, and to pay interest thereon from the first day of April, 1929, at the rate of 6% per annum, in like gold coin, at the principal office of Tradesmens National Bank and Trust Company, in the City of Philadelphia, Pennsylvania, or at the principal office of National Bank of Commerce in New York, in the Borough of Manhattan, City, County and State of New York, or of its successor or successors, semi-annually, on the first day of April and the first day of October in each and every year until payment of said principal sum, but until maturity, only upon presentation and surrender of the interest coupons therefor, hereto attached, as they severally mature; and such interest hereon is payable without deduction for such part of any normal Federal Income tax as shall not exceed two per cent. (2%) thereof per annum, which the Corporation, the Trustee hereinafter mentioned, or any paying agent may be required or permitted to pay thereon or to retain or deduct therefrom under any present or future law or91 requirement of the United States of America, and without deduction for any taxes, assessments or other governmental charges payable to the Commonwealth of Pennsylvania, which the Corporation, or the Trustee hereinafter mentioned, or any paying agent, may be required or permitted to pay thereon or to retain or deduct therefrom under any present or future law or requirement of the Commonwealth of Pennsylvania, but not in any calendar year in excess of four (4) mills upon each dollar of the face value of such bonds.It is provided in the Indenture of Mortgage hereinafter referred to that the Corporation, to the extent and subject to the conditions set forth in said Indenture of Mortgage, will reimburse (a) to the owner of any bond, who may be a resident of the Commonwealth of Pennsylvania (should the law or conditions so change that such holder shall be personally liable for the return and payment of said tax) when paid by him, personal property taxes, other than estate, succession, income or inheritance taxes, paid by such owner under the laws of the said Commonwealth by reason of the ownership of said bond by such owner, provided that the Corporation shall not in any such case be obligated92 to refund in excess of four (4) mills per annum on each dollar of the taxable value of said bonds; and (b) to the owner of any bond, who may be a resident of the State of Maryland, when paid by him, personal property taxes, other than estate, succession, income or inheritance taxes, paid by such owner under the laws of the said State by reason of the ownership of said bond by said owner, provided that the Corporation shall not in any such case be obligated to refund in excess of four and one-half (4 1/2) mills per annum on each dollar of the taxable value of said bonds, provided in all such cases that the Corporation shall not be required to pay or refund taxes of more than one such State or Commonwealth on the same bond for the same calendar year.This bond is one of an authorized issue of bonds of the Corporation, known as its "First Mortgage 6% Sinking Fund Bonds," limited to the aggregate principal amount of Seven Million Dollars ($ 7,000,000), of like date, tenor and effect, issued under and all equally and ratably secured by an Indenture of Mortgage, dated as of the first day of April, 1929, executed and delivered by the Corporation to Tradesmens National Bank and Trust Company, 93 as Trustee (hereinafter called the "Trustee"), to which Indenture of Mortgage reference is hereby made for a description of the property mortgaged, the nature and extent of the security, 423 the rights of the holders of such bonds to said security, and the terms and conditions upon which said bonds are issued and secured.At the option of the Corporation all or any part of said bonds may be redeemed on any interest payment date, prior to maturity, on at least thirty days' written notice by publication once a week for four successive weeks in one daily newspaper of general circulation published in the City of Philadelphia, Pennsylvania, and in one such newspaper published in the Borough of Manhattan, City and State of New York, all as provided in said Indenture of Mortgage at the principal amount and accrued interest, together with a premium equal to the following respective percentages of the principal amount:Five per cent. if redeemed on or before April 1, 1934; four and one-half per cent. if redeemed thereafter and on or before April 1, 1935; four per cent. if redeemed thereafter and on or before April 1, 1936; three and one-half per cent. if redeemed thereafter and on or94 before April 1, 1937; three per cent. if redeemed thereafter and on or before April 1, 1938; two and one-half per cent. if redeemed thereafter and on or before April 1, 1939; two per cent. if redeemed thereafter and on or before April 1, 1940; one and one-half per cent. if redeemed thereafter and on or before April 1, 1941; one per cent. if redeemed thereafter and on or before April 1, 1942; and one-half of one per cent. if redeemed at any time thereafter and prior to maturity.As provided in said Indenture of Mortgage, this bond is also subject to redemption by operation of the sinking fund therein provided at the aforesaid redemption price.In case an event of default, as defined in said Indenture of Mortgage, shall occur, the principal of all of the bonds issued thereunder may become or be declared due and payable, in the manner, with the effect and subject to the conditions provided in said Indenture of Mortgage.This bond shall pass by delivery unless registered as to principal in the name of the owner on books to be kept at the office of the Trustee in the City of Philadelphia, Pennsylvania, such registry to be noted on this bond, and thereafter no transfer shall be valid unless95 made by the registered owner in person or by attorney and similarly noted hereon, but this bond may be discharged from registry and its transferability by delivery be restored, by like transfer to bearer noted hereon, after which it may again from time to time be registered as to principal or made transferable to bearer as before. No registration, however, shall affect the negotiability of the coupons which shall always be payable to bearer and transferable by delivery merely.The bonds are issuable as coupon bonds in the denomination of $ 1,000.No recourse shall be had for the payment of the principal of or the interest on this bond, or any part thereof, or of any claim based hereon or in respect hereof, or of said Indenture of Mortgage, against any incorporator, or any past, present or future stockholder, officer or director of the Corporation or of any predecessor or successor corporation, whether by virtue of any constitution, statute, or rule of law or by the enforcement of any assessment or penalty or otherwise, all such liability being, by the acceptance hereof and as part of the consideration for the issue hereof, expressly waived and released, as more fully provided in 96 said Indenture of Mortgage.Neither this bond nor any coupon hereto appertaining shall be valid or obligatory for any purpose until this bond shall have been authenticated by the execution of the certificate endorsed hereon by Tradesmens National Bank and Trust Company, Trustee under said Indenture of Mortgage, or its successor in said trust.424 In Witness Whereof, said Warner Company has caused this bond to be signed in its corporate name by its President or one of its Vice-Presidents, and its corporate seal to be hereunto affixed and attested by its Secretary or one of its Assistant Secretaries, and the said interest coupons, bearing the facsimile signature of its Treasurer, to be annexed hereto, and this bond to be dated as of the first day of April, 1929.Warner Company,ByPresident.Attest:Secretary.(Form of Interest Coupon)No.$ 30.00On the first day of , 19 , Warner Company shall pay to bearer, unless the bond hereinafter mentioned shall have been called for previous redemption and provision made for the payment thereof, on the surrender of this coupon, Thirty Dollars ($ 30.00) in United States gold coin of the standard of weight and fineness existing97 on April 1, 1929, at the principal office of Tradesmens National Bank and Trust Company, in the City of Philadelphia, Pennsylvania, or at the principal office of National Bank of Commerce in New York, in the Borough of Manhattan, City, County and State of New York, or of its successor or successors, without deduction for such part of any normal Federal income tax as shall not exceed two per cent. (2%) thereof per annum, being six months' interest then due on its First Mortgage 6% Sinking Fund Bond, No.Treasurer.Because of the depression starting in 1929, petitioner suffered losses of some $ 4,000,000 and was unable to pay its bond interest. As a result, petitioner, in the winter of 1932-33, began negotiations leading to a readjustment of its obligations to pay semiannual interest on its first mortgage bonds. These negotiations culminated in the execution of a supplemental indenture, providing, in part, as follows: * * Section 2. Fixed interest on the said bonds for the three years, represented by the coupons maturing April 1, 1933, October 1, 1933, April 1, 1934, October 1, 1934, April 1, 1935, and October 1, 1935, is hereby waived by all Bondholders who, before or after98 the date hereof, shall have had their bonds stamped to be subject to this supplemental indenture, in the manner hereinafter set forth, and also by all subsequent holders of the said bonds so stamped, and, as to all such consenting Bondholders, the Corporation is relieved from the payment of such fixed interest, but only to the extent hereinafter set forth. The Corporation covenants to pay interest during the three years, represented by the aforesaid coupons, hereinabove specified, on the bonds so stamped only to the extent that available earnings are sufficient for such payment but not in excess of 6% per annum; provided, however, that, if interest at less than the rate of 6% per annum is paid during the three years, represented by the aforesaid coupons, hereinabove specified, the Corporation covenants to pay any deficiency of such interest upon maturity or any other earlier redemption of the bonds. The available earnings of the Corporation for any calendar year shall be the balance, to be determined by independent certified public accountants in accordance with principles of good accounting, remaining after deducting from the gross 425 revenues of the Corporation, from all99 sources, all its operating costs, selling, general and administrative expenses, reserves for bad debts, taxes other than income taxes, ground rents, fixed interest charges, and after deducting also a reserve for depreciation and depletion in an amount which shall in no event exceed the sum of $ 600,000 per annum. During the period of the three years represented by the coupons maturing April 1, 1933, up to and including October 1, 1935, such interest will be payable only in multiples of 1%, and to the extent that in any year in said period interest actually paid shall be less than six per cent, the deficiency shall accumulate and shall be paid out of available earnings of later years; and if the total amount of such interest paid within said three year period, with respect to the interest for such period, shall be less than 18% of the principal of the bonds upon which the same is payable, the Corporation covenants to pay any deficiency of such interest upon maturity or any other earlier redemption of the bonds, or earlier, at the convenience of the Corporation. All coupons attached to the said bonds, which mature on April 1, 1936, and subsequently thereto, shall be paid as provided100 in said coupons and in the Indenture of Mortgage securing the bonds, to which the said coupons are attached, and nothing in this Supplemental Indenture shall be deemed or construed to relieve the Corporation from its obligation to pay such coupons in the manner provided in the original Indenture of Mortgage. All payments of interest hereunder shall be made without deduction for taxes in the manner and to the extent stipulated in said bonds and in the Indenture of Mortgage securing the same.Section 3. All bonds, subject or hereafter subjected to the terms of the Plan, shall be presented to the Trustee and the six coupons maturing on April 1, 1933, October 1, 1933, April 1, 1934, October 1, 1934, April 1, 1935, and October 1, 1935, shall be removed therefrom and shall be cancelled by the Trustee. In substitution therefor 18 coupons shall be attached to the said bonds and the remaining coupons thereon, which substituted coupons shall represent the obligation of the Corporation to pay interest in multiples of 1% respectively if the available earnings of the Corporation are sufficient to permit such payment as hereinabove provided. Said substituted coupons shall each be in the following101 form with the exception that they may bear an appropriate symbol or letter identifying the same:(Form of interest coupon)No.$ 10.Unless the bond to which this coupon appertains shall have been called for previous redemption and payment duly provided for, Warner Company will pay to the bearer at the principal office of Tradesmens National Bank and Trust Company, in the City of Philadelphia, Pennsylvania, or at the principal office of Guaranty Trust Company of New York, in the Borough of Manhattan, The City of New York, or of its successor or successors, upon surrender of this coupon, Ten Dollars in lawful money of the United States of America, being on account of interest on its First Mortgage 6% Sinking Fund Bond, due April 1, 1944, when such interest shall become payable according to the terms of the Supplemental Indenture of Mortgage to which the accompanying bond has been subjected, dated the tenth day of January, 1934, but in any event not later than April 1, 1944.Treasurer.Following the execution of the supplemental indenture, the first mortgage bonds were turned in to the trustee. The original semiannual coupons falling due April 1 and October 1 of 1933, 1934, and 1935, 102 426 were detached and replaced with 18 coupons of $ 10 each, as provided therein. At the time of this readjustment the outstanding first mortgage bonds amounted to $ 5,840,000 and were held by approximately 1,400 individuals.Petitioner acquired, through purchase, some of these bonds with the 18 per cent interest coupons attached as follows:YearFace value18% interest1939$ 51,000$ 9,1801940274,00049,3201941490,00088,2001942644,000115,920In purchasing these bonds petitioner in most instances paid less than face value and in a few instances paid more than face value.The gain on the acquisition of the bonds at less than face value of the principal amount of the bonds was reported in the taxable year 1941 as income. On the acquisition of the bonds at more than face value of the principal amount a net loss was claimed as a deduction in the taxable year 1942.During the years 1932, 1933, and 1934, petitioner accrued the interest on the bonds on its books and claimed deductions on its original returns for those years of the following amounts:1932$ 351,300.651933350,400.001934336,495.00In 1935 petitioner accrued on its books interest103 on the bonds in the amount of $ 237,465, but did not claim that amount as a deduction in its return for that year.Petitioner's Federal income tax returns for the years 1932 to 1935, inclusive, showed losses as follows:1932$ 1,616,662.7719331,579,467.411934945,754.451935614,119.72It became known in financial circles that petitioner was in the market to purchase its bonds for retirement in small blocks as funds were available. The purchases were handled by Alfred D. Warner, Jr., vice president and treasurer. The bonds were quoted to petitioner by brokers, investment bankers, and dealers and traders in securities at a flat price plus current interest or a flat price plus current interest and a brokerage of 1/4 of 1 per cent.Petitioner had no crystallized plan for taking care of the impending maturity and back interest which matured on April 1, 1944. On December 10, 1942, an agreement was consummated whereby the maturity 427 date of the then outstanding bonds was extended to April 1, 1951. When its bonds were purchased by petitioner, the 18 per cent unpaid back interest coupons were required to be attached to constitute good delivery. No discussion of104 the 18 per cent interest took place between petitioner and the sellers of the bonds for the reason that all parties holding, dealing in, and selling the bonds were aware that the 18 per cent back interest coupons were attached to each bond. When petitioner purchased a bond, or bonds, it issued a check for one amount, and no breakdown or allocation of this amount to principal, 18 per cent back interest, or accrued interest was shown on the check.From 1929 to December 1933 the bonds of petitioner were traded in on the New York Exchange and possibly on the Philadelphia Exchange. Subsequent to 1933, the bonds were not listed, but, continuously through 1942, were actively traded in over-the-counter. The bonds were bearer bonds, and very few were registered. Petitioner purchased no registered bonds.Except in about three instances the persons and firms from or through whom petitioner acquired its bonds were brokers, dealers, investment bankers or traders in securities. Lilley & Co., from whom petitioner bought many bonds, are traders and speculators in unlisted securities. They identify themselves with a particular security and then make a market for it. The market thus made in 105 such securities, including the bonds of petitioner, was made by barter and almost entirely by telephone. The transactions of Lilley & Co. in bonds of petitioner during the period 1939 through 1942 totaled 623. The approximate highs and lows for each of the years 1939 through 1942 in petitioner's bonds, as disclosed by the records of Lilley & Co., were as follows:YearHighLow193970 1/270 194084 69 194195 90 194297 1/491 1/2Petitioner was only one of Lilley & Co.'s patrons and they dealt with petitioner at arm's length on quoted prices. Lilley & Co. canvassed other brokers and dealers and in some cases circularized particular areas in dealing in petitioner's bonds. Their transactions with petitioner in the latter's bonds were numerically much fewer than Lilley & Co. had in the street.In its returns for the years 1941 and 1942, petitioner excluded from income subject to tax, and included in its analysis of surplus as items of nontaxable income, amounts of $ 88,200 and $ 115,920, respectively, with the explanation that they represented gain on cancellation of 18 per cent accrued interest on bonds acquired, which interest had not been106 428 effective in reducing taxable income when previously accrued and deducted in its returns. In its returns for 1939 and 1940, petitioner excluded from taxable income similar items in the amounts of $ 9,180 and $ 49,320, respectively.In 1942 petitioner was convinced it would be unable to pay its outstanding bonds and the "18 per cent interest" thereon by the maturity date in 1944. And, as heretofore stated, it negotiated for a seven-year extension. Only by agreeing to pay the 18 per cent interest was petitioner able to secure this extension. The agreement was consummated on December 10, 1942. On that date petitioner paid to the then bondholders the 18 per cent interest, amounting to the sum of $ 709,380. The maturity date was thereupon extended to April 1, 1951. None of the bonds on which the 18 per cent interest was paid were retired in 1942. In its 1942 income tax return petitioner did not claim any part of the $ 709,380 payment as a deduction. By amended petition the amount of $ 709,380 is claimed as a deduction for 1942 from normal tax net income and excess profits net income, representing accrued but unpaid interest totaling 18 per cent for the years 1933, 1934, 107 and 1935, which was thus actually paid in 1942.During the years 1940, 1941, and 1942, petitioner accrued and subsequently paid on behalf of those of its bondholders residing in Pennsylvania the Pennsylvania corporate loans taxes in the amounts of $ 9,103.58, $ 9,015.50, and $ 8,490.77. All of these amounts were deducted by petitioner in determining its normal tax net income and excess profits net income in its returns for the respective years. In his deficiency notice the respondent, in computing petitioner's excess profits tax, disallowed 50 per cent of such deductions on the ground that such amounts represented interest on borrowed capital.The Pennsylvania corporate loans taxes, referred to above, were paid by petitioner pursuant to the Pennsylvania Corporate Loans Tax Law, Act of June 22, 1935, Public Law 414, and pursuant to the provisions of the original and supplemental mortgage indentures covering the first mortgage 6 per cent bonds.In April 1929 petitioner sold to the bankers 31,500 shares of its first preferred stock. The amount received by petitioner was $ 2,850,750, representing $ 90.50 per share. The bankers in turn sold the first preferred stock for $ 98 or $ 99108 per share, realizing $ 3,087,000. The difference between what the bankers paid to petitioner and the amount received is $ 236,250. Petitioner also sold to the bankers for cash $ 7,000,000 of its first mortgage bonds. In connection with the purchase of the bonds and the first preferred stock of petitioner, the bankers received, as part compensation to the underwriters, 18,980 shares of no par common stock of petitioner, which had a fair market value of $ 40 per share when issued, aggregating $ 759,200. The fair 429 market value of the no par common stock was allocated between the bonds and first preferred stock as follows:Allocable to bonds$ 523,586.21Allocable to preferred stock235,613.79Total759,200.00The amounts so allocated represent additional cost of the issuance of the respective securities. The issuance of the common stock, the first preferred stock and the bonds and the receipt of the funds by petitioner took place simultaneously on April 8, 1929, in accordance with the original contract as amended by subsequent agreements between petitioner and the bankers.In its 1940, 1941, and 1942 returns petitioner deducted the unamortized portion 109 of the debt discount and expense originally incurred in 1929 applicable to the first mortgage bonds retired in 1940, 1941, and 1942 in the respective amounts of $ 4,514.61, $ 3,674.92, and $ 10,788.27.In his deficiency notice the respondent, in determining excess profits net income for each year, disallowed the deduction of all of such amounts, but allowed the deductions in computing petitioner's normal tax net income for each of those years.Petitioner during all the periods involved herein was solvent.OPINION.The first question presented is whether petitioner realized a taxable gain by the purchase and retirement of certain of its bonds at less than face value in the years 1940, 1941, and 1942. A determination of this issue as to 1940, pertinent in arriving at the net income for 1940, is material only for the purpose of computing the excess profits credit carry-over. Petitioner contends that the situation is controlled by Helvering v. American Dental Co., 318 U.S. 322">318 U.S. 322, and there was a gratuitous forgiveness of indebtedness of both principal and interest. The respondent argues that the facts presented require the application of the rationale110 of United States v. Kirby Lumber Co., 284 U.S. 1">284 U.S. 1.The record satisfactorily establishes that during the period involved the bonds of petitioner were actively traded in as unlisted securities in over-the-counter transactions at various quoted prices. Purchases and sales in which petitioner was not involved numerically exceeded those in which petitioner engaged. All of such trading and dealing in such securities was at arm's length and based on quoted prices. Where willing buyers and willing sellers freely trade in a given security, we think there exists an "open market." Where there exists an "open market" establishing market value, a situation is presented where the principle of forgiveness has no proper application. In such 430 circumstances, we regard it as immaterial whether the securities are acquired at less than face value in a transaction direct with the creditor, or through agents. In the recent case of Commissioner v. Jacobson, 164 Fed. (2d) 594; certiorari granted (Apr. 5, 1948), relied upon by petitioner, it is stated: "As the Tax Court found, none of these bonds were listed or had a quoted111 price and nobody was buying them except the taxpayer * ."The situation disclosed by this record requires us to hold that the instant case is controlled by United States v. Kirby Lumber Co., supra. Cf. Edmont Hotel Co., 10 T.C. 260">10 T. C. 260.There remains to be considered how the amount of realized gain on the principal of the bonds is to be determined. Each bond which petitioner purchased had attached coupons of the face value of $ 180, representing back interest for the prior years of 1933, 1934, and 1935. Such coupons were required to be attached to the bonds to constitute proper delivery. When petitioner purchased a bond or bonds it issued a check for one amount, to cover the principal, the 18 per cent accrued interest, and the current interest. Petitioner made no allocation or breakdown between principal and the 18 per cent back interest. Since it was the obligation of petitioner to pay both the principal of the bonds and the 18 per cent interest, the respondent contends that the amount paid should be appropriately allocated. He suggests two methods: (1) The application of the amounts paid, first to interest and112 the remainder to principal, or (2) the allocation of the total amount to principal and to the 18 per cent interest on a proportionate basis. The respondent argues that the latter method is the more equitable. We hold that the latter method is proper. The rule that, where an amount is paid as an unallocated unit on a debt and interest thereon, such amount should first be applied to the interest due and the balance to the principal debt, has no application where the entire debt, including the interest, is being liquidated by such unit payment. Since the basic figures are not in dispute and the allocation is purely mathematical, the appropriate amounts can readily be determined in a computation under Rule 50.We have found as a fact that petitioner received no tax benefit in the years 1933, 1934, and 1935, when it accrued on its books and claimed as a deduction the interest represented by the 18 per cent coupons attached to the bonds purchased during the period involved. Respondent concedes that, to the extent petitioner received no tax benefit from the interest deductions in the tax years 1932 to 1935, inclusive, the portion of the gain attributable to back interest should not 113 be included in petitioner's taxable income for the taxable years involved. We do not agree with the contention of petitioner that if we determine, as we have, that the purchase price is to be allocated between 431 principal and the 18 per cent interest, that portion allocated to interest constitutes a proper deduction in the respective years the bonds were purchased. The basis for our conclusion will be discussed in connection with the next issue, which also involves a claimed deduction for interest paid.The second issue presented is whether petitioner is entitled to deduct from gross income the amount of $ 709,380, as interest paid on its bonds in the taxable year 1942. This item of interest represents the 18 per cent interest coupons attached to petitioner's bonds still outstanding in 1942.The pertinent facts underlying this issue may be briefly summarized. Petitioner's bonds and the accrued 18 per cent interest coupons matured on April 1, 1944. Petitioner, realizing it would be unable to meet the maturity date, began negotiations for a seven-year extension until April 1951. Such an agreement was consummated with the then bondholders on December 10, 1942, upon condition114 that petitioner make immediate payment of the deferred interest. On December 10, 1942, petitioner paid such interest, totaling $ 709,380. Petitioner now contends that it is entitled to an interest deduction in 1942, the year of payment. Petitioner used the accrual system of accounting and concedes that its interest must be deducted when it accrues. Petitioner argues, however, that the supplemental indenture under which the 18 per cent interest coupons were substituted for the original coupons attached to the bonds which required the payment of interest semiannually on April 1 and October 1 in the years 1933, 1934, and 1935 extended the liability to pay the interest, so that the amounts of interest accrued on its books in those years were items which were properly deductible for income tax purposes in 1942 when paid. The argument, we think, is without substance. The supplemental indenture did not postpone or alter the unconditional liability to pay such interest. It merely extended the time for payment. All the events occurred which fixed the amount and determined the liability for the interest, and under petitioner's accrual system of accounting the right to deduct the amounts115 of interest became absolute in the years when accrued, notwithstanding actual payment was not made until a later date. Such rule is firmly established. United States v. Anderson, 269 U.S. 422">269 U.S. 422; American National Co. v. United States, 274 U.S. 99">274 U.S. 99; Cumberland Glass Mfg. Co. v. United States, 44 Fed. (2d) 455. The fact that petitioner in such years had other deductions, so that it would receive no tax benefit from the amounts of interest accrued in those years, is not controlling.We conclude that petitioner is not entitled to deduct the sum of $ 709,380 as interest paid in the taxable year 1942.The third issue raises the question whether certain amounts accrued 432 by petitioner as Pennsylvania corporate loans taxes represent additional interest on borrowed capital. During the years 1940, 1941, and 1942, petitioner accrued and subsequently paid on behalf of those bondholders residing in Pennsylvania the respective amounts of $ 9,103.58, $ 9,015.50, and $ 8,490.77 representing Pennsylvania corporate loans taxes. The respondent disallowed as a deduction 50 per cent of such116 amounts in computing petitioner's excess profits net income for each of those years, pursuant to section 711 (a) (2) (B) of the Internal Revenue Code. 1118 It is the respondent's position that these payments constitute interest on borrowed capital. Petitioner contends the payments are deductible, payments of tax or business expense, and that it is entitled to deductions of the entire amounts paid. It is stipulated that the Pennsylvania corporate loans taxes here involved were imposed against the individual bondholders.2 In order to make its bonds more attractive to Pennsylvania investors, petitioner's bonds provided that the 6 per cent interest shall be paid "without deduction for any taxes, assessments or other governmental charges payable to the Commonwealth of Pennsylvania, * * but not in any calendar year in excess of four (4) mills upon each dollar of the face value of such bonds." Petitioner treated these payments on its books as tax payments and so claimed deductions as payments of Pennsylvania corporate loans taxes. It is well settled that taxes are deductible only by persons against whom they are imposed. Pacific Southwest Realty Co., 45 B. T. A. 426;117 affd., 128 Fed. (2d) 815; certiorari denied, 317 U.S. 663">317 U.S. 663. The voluntary assumption of the tax liability of another does not, under that rule, render the contested item deductible as a payment of tax or as a business expense. National Piano Mfg. Co. v. Burnet, 50 Fed. (2d) 310; Robinson v. Commissioner, 53 Fed. (2d) 810. We think the payments by petitioner of the Pennsylvania loans tax in the years involved constituted, in effect, additional interest to its bondholders resident in Pennsylvania. The respondent's allowance of only 50 per cent of the amounts paid, pursuant to section 711 (a) (2) (B) of the code, is sustained.The fourth issue presents the question whether the respective amounts of $ 236,250 and $ 235,613.79 should be included in petitioner's 433 equity invested capital for the taxable years involved. The amount of $ 235,613.79 represents the allocated portion of the fair market value of 18,980 shares of petitioner's no par value common stock, having a fair market value of $ 40 per share, which petitioner issued to the bankers as commissions for the sale of its preferred stock.Petitioner admits that the case of Palomar Laundry, 7 T. C. 1300, supports the respondent's disallowance of the amount of $ 235,613.79 as equity invested capital. The facts in the instant case are indistinguishable from those in the cited case and, on the authority of Palomar Laundry, supra, we sustain respondent.The amount of $ 236,250, which is also in issue, represents the difference between the price at which the bankers received the first preferred stock from the petitioner and the 119 price at which the bankers sold the stock to the public. Petitioner relies on American Business Credit Corporation, 9 T.C. 1111">9 T. C. 1111.The material facts on which our decision in the American Business Credit Corporation case was premised are clearly distinguishable from the facts here. In the instant case, the record establishes quite plainly that the bankers purchased for their own account a specified number of shares of petitioner's first preferred stock at $ 90 per share. The agreement between petitioner and the bankers provides that petitioner "shall sell to Bankers and Bankers shall purchase from Company Twenty-three thousand two hundred twenty-three (23,223) shares of said first preferred stock at $ 90.00 per share * . Bankers may sell said stock at any price they may fix; but if in their discretion they sell said stock to the public at a price in excess of $ 98.00 per share * * then the Bankers will divide any excess over the sales prices mentioned per share, and accrued dividend, equally with the Company." Petitioner contends that this latter provision to divide the excess constitutes the bankers the agents of petitioner. We do not agree120 with this construction of the agreement. The contingency under which there was to be a division of the excess price received on a resale to the public was for the purpose of limiting the profit of the bankers. It does not change the character of the agreement as one of purchase and sale between the bankers and petitioner. In American Business Credit Corporation, supra, the broker was the mere agent of the taxpayer. We, therefore, determined that the gross proceeds received from the stockholders were to be properly included in the taxpayer's equity invested capital. It should be noted, however, that in the last cited case the facts show that, inter alia, the agreements also provided for the sale by the taxpayer and the purchase by the broker of three blocks of 20,000 shares each of common stock at the respective prices of $ 5, $ 5.50 and $ 6 per share, and a reoffering by the brokers of such shares to the public at an additional price of $ 1.25 per share. In its equity 434 invested capital the taxpayer included only the sum of $ 330,000, representing the net amount received from the broker for the 60,000 shares sold to the broker. The121 respondent made no adjustment with respect to such amount. No issue was therefore presented as to the inclusion of the additional $ 1.25 per share in taxpayer's equity invested capital.In the instant case the bankers were not agents for petitioner, taxpayer, in the purchase of the stock. They were themselves the purchasers of the stock. They bought at a discount from par, and the profit realized on a resale to the public is not to be included in petitioner's equity invested capital. Cleveland Graphite Bronze Co., 10 T. C. 974. We sustain the respondent on this issue.The fifth issue presents the question whether in computing excess profits net income the respective amounts of $ 4,514.61, $ 3,674.92, and $ 10,788.27, representing unamortized debt discount and expense originally incurred in 1929, applicable to the first mortgage bonds retired in 1940, 1941, and 1942, are deductible. 3122 When a corporation purchases any of its bonds at a price less than the issuing price, as in the instant case, the net gain or income therefrom is the difference between the purchase price and the face value minus any amount of discount not yet deducted. Expense incident to the issuance of bonds is, of course, in the same category for present purposes as the discount. This is apparently conceded. The income thus determined is to be included in gross income for normal tax purposes. Treasury Regulations 111, sec. 29.22 (a)-17 (3) (a). In determining excess profits net income, the basis for which is normal tax income, 4 income from retirement or discharge of bonds outstanding for more than 18 months, later amended to six months, 5 is to be excluded under section 711 (a) (2) (E). The amount to be so excluded in determining excess profits net income is the same amount which is included in gross income for the purposes of determining normal tax net income. Since the amount of unamortized discount is reflected in determining the net gain or income by reducing that figure for normal tax purposes, no further adjustment is necessary or proper in computing excess profits net income. 123 The correct amount of gain or income realized by petitioner upon the retirement of its bonds in the respective years involved, determined under the 435 method of allocation hereinabove adopted as proper, is includible in petitioner's gross income for the purpose of arriving at normal tax net income, and such amount is to be excluded in computing petitioner's excess profits net income.Certain other facts and figures have been stipulated, some of which are dependent upon our determination of the issues presented. In the computation under Rule 50, all stipulated facts will be considered and appropriately applied.Decision will be entered124 under Rule 50. Footnotes1. SEC. 711. EXCESS PROFITS NET INCOME.(a) Taxable Years Beginning After December 31, 1939. -- The excess profits net income for any taxable year beginning after December 31, 1939, shall be the normal-tax net income, as defined in section 13 (a) (2), for such year except that the following adjustments shall be made: * * (2) Excess profits credit computed under invested capital credit. -- If the excess profits credit is computed under section 714, the adjustments shall be as follows: * * *(B) Interest. -- The deduction for interest shall be reduced by an amount equal to 50 per centum of so much of said interest as represents interest on the indebtedness included in the daily amounts of borrowed capital (determined under section 719 (a)).↩2. Pennsylvania Corporate Tax Law, Act of June 22, 1935, Public Law 414.↩3. In computing normal tax net income, petitioner included in gross income the gross gain realized on the retirement of its bonds issued at less than par. It then took as a deduction the unamortized debt discount. In computing excess profits net income, petitioner deducted the gross↩ amount of gain realized on the retirement of its bonds issued at a discount from normal tax net income.4. See Sec. 711 (b), I. R. C.↩5. In the taxable years 1940 and 1941, section 711 (a) (2) (E)↩ required the obligations to be outstanding more than "eighteen months." The section was amended by section 207 (d) of the Revenue Act of 1942 by inserting "6 months" in lieu of "eighteen months." The amendment was made effective for the taxable years beginning after the year 1941.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622276/	WISCONSIN BRIDGE & IRON CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Wisconsin Bridge & Iron Co. v. CommissionerDocket No. 13739.United States Board of Tax Appeals13 B.T.A. 246; 1928 BTA LEXIS 3289; August 7, 1928, Promulgated 3289 The invested capital of a corporation may not be reduced in determining the extent to which a dividend is paid from current earnings of a year by a "tentative tax" theoretically set aside out of such earnings pro rata over such year because the income and profits tax does not become due and payable, and, therefore, does not accrue until the following year. L. T. Atherton, Esq., for the petitioner. J. L. Backstrom, Esq., for the respondent. SMITH247 This is a proceeding for the redetermination of deficiencies in income and profits tax for the calendar years 1920 and 1921, of $332.63 and $1,513.85, respectively. The assignments of error stated in the petition are that the Commissioner erred in determining deficiencies in the following respects: (1) Reducing the petitioner's statutory invested capital for the taxable years 1920 and 1921 by diminishing the amount of current earnings available for dividend distribution at the dates of payment of cash dividends declared after the first 60 days of each of said calendar years by the amount of a so-called "Tentative income and profits tax" alleged to have accrued as a liability for each of said3290 years: (2) Reducing the petitioner's statutory invested capital for the calendar years 1920 and 1921 by diminishing the amount of current earnings available for making purchases of its own capital stock at the dates upon which such purchases were made by the amount of a so-called "tentative income and profits tax" alleged to have accrued as liability for each of said calendar years; and (3) Reducing petitioner's statutory invested capital for the calendar year 1921 by certain items which had been used by the revenue agent as deductions in computing petitioner's invested capital for said year, thus effecting a duplicate reduction of invested capital on account of the same transactions. At the hearing of the proceeding an additional assignment of error was made as follows: That the Commissioner has erroneously reduced the petitioner's statutory invested capital for the taxable years 1920 and 1921 by giving effect to the tentative tax adjustments in arriving at the correct tax liability for 1918 and 1919 in so far as the adjusted tax liability for 1918 and 1919 affects invested capital for 1920 and 1921 in prorating out of 1920 and 1921 invested capital the adjusted tax liability3291 for the prior years 1918 and 1919. The Commissioner admits the error alleged above in paragraph (3). FINDINGS OF FACT. The petitioner, a Wisconsin corporation, made Federal income-tax returns for the years 1918, 1919, 1920, and 1921. Its earned surplus on January 1, 1920, without any adjustment for the tentative tax, was $394,095.30. The petitioner's net income for 1920 was $271,454.22. Petitioner's net income for 1921 was $84,723.83. In computing petitioner's statutory invested capital for each of the taxable years 1920 and 1921, the Commissioner first determined for 248 each of said years a so-called tentative invested capital. For the calendar year 1920 the tentative invested capital as determined by the Commissioner was $855,376.95, and for the calendar year 1921, $891,790.66. The Commissioner then computed the so-called tentative income and profits-tax liability of this petitioner for each of said taxable years as follows: For the calendar year 1920 a so-called tentative income and profits-tax liability was computed at $80,800.38, and for the calendar year 1921, $9,839.65. For the calendar years in question the Commissioner reduced the amount of current3292 earnings available to the petitioner for distribution as cash dividends declared by it and made payable after the first 60 days of said taxable year and the amount of such earnings otherwise available to it for the purchase of its own capital stock made during each of said years, by the amount of the so-called tentative income and profits-tax liability computed by the Commissioner as shown above for each of those years. In making his determinations of invested capital for the calendar years 1920 and 1921 the Commissioner determined invested capital for 1918 and 1919 in the same manner as for 1920 and 1921 and increased the tax liability for those years by reducing invested capital by a tentative tax. OPINION. SMITH: The respondent admits certain errors alleged by the petitioner in its petition filed with this Board. These relate specifically to the computation of invested capital for the year 1921. The deficiency notice upon which this proceeding is based shows that the Commissioner determined invested capital by deducting from prorated earnings available for the payment of dividends a "tentative tax" as having accrued at the date of the dividend declaration; the same is3293 true with respect to determining earnings available for the purchase of capital stock. These determinations are in conflict with the decision of the Board in . The invested capital of the petitioner for the years 1920 and 1921 should be recomputed in accordance with the decision of the Board in the above entitled case. Section 274(g) of the Revenue Act of 1926 provides: The Board in redetermining a deficiency in respect of any taxable year shall consider such facts with relation to the taxes for other taxable years as may be necessary correctly to redetermine the amount of such deficiency, but in so doing shall have no jurisdiction to determine whether or not the tax for any other taxable year has been overpaid or underpaid. The deficiency notice attached to the petition in this case, in accordance with the rules of the Board, shows that at the time the Commissioner made his determination of deficiencies for the years 1920 249 and 1921 he likewise determined overassessments for the years 1918 and 1919, and that in the making of such determinations of over-assessments for 1918 and 1919 he failed to follow the decision*3294 of the Board in The result of such failure was to overstate the tax liability determined for those years and likewise to reduce the petitioner's surplus at the beginning of the years 1920 and 1921. In the redetermination of deficiencies for the years 1920 and 1921 the surplus at the beginning of each year should be restated to comply with the decision of the Board in . Judgment will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622277/	CONSTANCE C. FRACKELTON, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Frackelton v. CommissionerDocket No. 106474.United States Board of Tax Appeals46 B.T.A. 883; 1942 BTA LEXIS 805; April 7, 1942, Promulgated 805 1. Petitioner is the beneficiary of two endowment insurance policies on the life of her husband, both of which matured in 1938. The first is a single premium policy issued on application made by the husband, who paid the single premium of $77,350 with funds furnished by petitioner. Petitioner was named beneficiary of the policy and no rights were reserved to change the beneficiary. The policy contract provided that upon the death of the insured or the maturity of the policy as an endowment the company would pay to petitioner interest at the rate of 3 percent per annum on the principal sum, plus dividends, and upon petitioner's death would pay the principal to her executors or administrators. Petitioner received no payments on the policy in the taxable year 1938. Held, that petitioner is not taxable in 1938 upon any part of the proceeds of such policy. 2. The second policy was issued upon application of the petitioner, who paid all of the annual premiums and had full ownership and control of the policy. Under an option settlement selected by petitioner five days before maturity of the policy the company became liable to pay petitioner interest of 3 percent per annum806 on the proceeds of the policy during her life and upon her death to pay the principal to her estate. The entire proceeds of the policy were payable to petitioner, upon her request, at any interest payment date. During 1938 and after maturity of the policy petitioner received in monthly installments $632.87 as interest and dividends. Held, that petitioner constructively received the proceeds of the policy in 1938 and is taxable in that year upon the difference between the maturity value of the policy and the premiums paid thereon. David A. Gaskill, Esq., for the petitioner. Thomas F. Callahan, Esq., for the respondent. SMITH 884 This is a proceeding for the redetermination of a deficiency in income tax for 1938 in the amount of $22,761.37. The questions in issue are: (1) Whether the petitioner received taxable income upon the maturity of two endowment insurance policies upon the life of her husband, which matured in 1938; and (2) Whether the petitioner is entitled to deduct from gross income $1,167.29 representing trustee's fees and miscellaneous expenses paid to the Cleveland Trust Co., Cleveland, Ohio. The facts are stipulated. 807 FINDINGS OF FACT. The petitioner is a resident of Hudson, Ohio. She filed her income tax return for 1938 with the collector of internal revenue for the eighteenth district, at Cleveland, Ohio. On or about February 5, 1923, the New England Mutual Life Insurance Co., of Boston, Mass., issued its 15-year single-premium endowment policy No. 469270 in the amount of $100,000 upon the life of petitioner's husband, Robert James Frackelton. Application for the policy was made by petitioner's husband. The single premium of $77,350 was paid by him on February 5, 1923, with funds supplied by the petitioner. In the application for the policy the petitioner was named as the beneficiary and no right to change the beneficiary was reserved. It was stated in the application that the face amount of the policy should be "Payable at death or after maturity of the endowment period under option four in monthly instalments." There was also noted on the application "Premiums to be paid by Constance Chandler Frackelton." In accordance with the instructions set forth in the application all dividends apportioned to the policy were to be applied to the purchase of paid-up additions maturing at808 the same time as the policy. 885 It was provided in the policy that upon maturity of the policy as an endowment on February 5, 1938, the maturity date, or in the event of the decease of the insured before the maturity of the policy: * * * the Company, * * * will pay annual payments in accordance with the provisions of the Fourth Option of this policy, in equivalent monthly instalments, to said Constance Chandler Frackelton, if living; said payments to continue during her lifetime, but if not living, or in the event of her subsequent decease, the principal sum, and any accrued interest, will be paid in one sum to her executors or administrators. The fourth option of the policy provided: Fourth Option. - Income equal to three percent per annum of the amount due, the first payment due one year after the surrender or maturity of this Policy or the receipt of due proof of the death of the Insured, and a like payment annually thereafter in accordance with the provisions of the clause endorsed hereon. Each annual payment will be increased by such share of surplus interest as may be apportioned thereto. With respect to the installment options the policy provided: Installment809 Options. - The net amount due upon surrender or maturity of this Policy, or upon the death of the Insured, provided such amount, after deducting any indebtedness to the Company and to any assignee, be not less than One Thousand Dollars, may be made payable in equal annual installments (or in equivalent semi-annual, quarterly or monthly payments), in accordance with whichever of the following options the Insured, or the Beneficiary in case the Insured shall not have made an election prior to his decease, shall elect by a writing filed with the Company. The Insured may, in like manner, change or revoke the election so made. In case such election is made by the Insured, the Payee shall have no right to assign, alienate or commute any of the installments so payable, unless the Insured has otherwise directed. Petitioner's husband, the insured, survived the maturity of the policy as an endowment (February 5, 1938) and thereafter New England Mutual Life Insurance Co. issued its "Certificate of Installment Settlement No. 6275," dated May 11, 1938. This certificate was attached to the back of the policy by the company and the policy bearing the certificate was returned to the petitioner. 810 The amount specified in the certificate to wit, $127,037.35, was determined by the company as follows: Amount of Policy No. 469270$100,000.00Additional insurance purchased by dividends25,845.001938 share of surplus1,192.35Total127,037.35The company has made payments to petitioner in accordance with the settlement provisions of the policy, the first installment in the amount of $322.04 having been paid to petitioner on or about February 5, 1939. No payments under the policy were made to petitioner during the calendar year 1938. 886 In the determination of the deficiency herein the respondent included in petitioner's gross income for 1938 the amount of $49,687.35, representing the difference between the value of the policy at maturity ($127,037.35) and the single premium paid therefor ($77,350). On or about May 31, 1923, the State Mutual Life Assurance Co. of Worcester, Massachusetts, issued its 15-year endowment policy No. 257770 in the amount of $25,000 upon the life of petitioner's husband, Robert J. Frackelton. Petitioner made application for the policy and paid all the premiums, which amounted in the aggregate to $23,225.81. She811 anticipated the payment of certain of the premiums. No cash dividends were paid on this policy. All dividends apportioned to the policy were left with the company at interest. This policy was made payable to petitioner or her executors, administrators or assigns, either on the maturity date, May 31, 1938, or upon the insured's death prior to that date. The petitioner was recognized as the owner of the policy, with all the rights and privileges of full ownership. The application provided with respect to the right to change the beneficial interest in the policy: "It is denied to the insured but is reserved by Constance C. Frackelton, the applicant for and sole owner of the policy." On May 26, 1938, five days before the maturity date of the policy, petitioner executed and delivered to the State Mutual Life Assurance Co. a "Nomination of Beneficiary and Request", directing that the proceeds of the policy be disposed of as follows: A If I survive the said insured and he deceases before the expiration of the endowment term, the proceeds shall be held by the Company under the conditions and provisions of Installment Option C and the interest income paid monthly to me during812 my life, the first payment to be made one year after due proof of claim has been filed with the Company at its home office. At my death the principal sum retained by the Company shall be paid in one sum to my estate. B If the said insured survives the said endowment term and I am also then living, then at the expiration of the endowment term the proceeds due under the said policy shall be retained under the said Option C and the interest income paid monthly to me during my lifetime. At my death the principal sum retained by the Company shall be paid in one sum to the said insured, if living, otherwise to my estate. If I predecease the said insured, or decease before the expiration of the endowment term and the said insured survives me, then all my right, title, and interest in and to the said policy shall pass to the said insured. Option C of the policy of State Mutual Life Assurance Co. provided as follows: The proceeds or any part of the proceeds of this policy, in even Hundreds of Dollars, to the amount of not less than One Thousand ($1,000) Dollars, 887 may be left with the Company and the person entitled thereto shall receive thereon at the end of each year813 interest at the rate of three per centum per annum. The amount so left with the Company may be withdrawn at any time when an instalment of interest is payable, unless otherwise directed by the insured during his lifetime, and if not withdrawn the said amount, together with any accumulation of interest accrued thereon from the date the last full interest instalment was payable, shall be paid in full upon satisfactory proof of the death of the beneficiary. The "Nomination of Beneficiary and Request" provided that: No person entitled to any part of the proceeds of said policy or policies, or any instalments of interest thereon, shall be permitted to commute, anticipate, encumber, alienate, or assign the same, or any part thereof * * In the "Nomination of Beneficiary and Request" the petitioner denied to herself the right to revoke it. On the same date, May 26, 1938, petitioner amended her application so as to reserve no right to change the beneficiary. The insured, Robert J. Frackelton, survived the endowment period of said policy, ending May 31, 1938, and thereafter the State Mutual Life Assurance Co. issued to petitioner its nonnegotiable certificate of indebtedness No. 814 1641, dated May 31, 1938, in the principal amount of $31,500. On or about the same date the company paid to petitioner the amount of $85.64 in cash in order that the principal amount shown by the certificate of indebtedness might be stated at even hundreds of dollars. The amount of $31,500, represented the face amount of the policy, $25,000, plus accumulated dividends and interest in the amount of $6,585.64, less the amount of $85.64 paid in cash as aforesaid. During 1938 the State Mutual Life Assurance Co. paid to petitioner, in accordance with the provisions of the policy and the certificate of indebtedness, seven monthly installments of $90.41, totaling $632.87. Each installment represented guaranteed interest of $78.75, and a monthly installment of the dividend apportioned to the policy, amounting to $11.66. The petitioner included this amount ($632.87) in her income tax return for the year 1938, and added thereto the amount of $85.64 received as aforesaid, making a total of $718.51, which she reported as interest received upon the policy. This item of $85.64 was also reported elsewhere in petitioner's return, and the respondent, in his determination of petitioner's tax815 liability for 1938, did not correct the duplication. In the determination of the deficiency herein for 1938 respondent included the amount of $1,492.50 in petitioner's gross income as income realized upon the maturity of the policy. This amount of $1,492.50 represents the difference between the principal amount of the certificate of indebtedness issued to petitioner, $31,500, and the assumed cost of the policy, $30,007.50. 888 By an amended answer the respondent seeks to increase the deficiency, alleging that the cost of the policy to petitioner was $23,507.50. Replying to the respondent's amended answer petitioner admits that the actual cost of the policy was $23,225.81. Respondent concedes that if the net income of the petitioner is thus increased she is entitled to the deduction of an increased amount for contributions. During 1938 the petitioner paid to the Cleveland Trust Co. trustee's fees and miscellaneous expenses in the amount of $1,167.29 for services for acting as trustee under three revocable trusts established by the petitioner. These payments were made for services rendered by the trustee in connection with its holding, administering, and managing816 the property held for the several trusts. The fees were computed on a percentage basis. Of the fees so paid to the Cleveland Trust Co., $698.21 is properly allocable to income taxable to the petitioner and the remainder is properly allocable to interest upon securities wholly exempt from the Federal income tax. In her return for the year 1938 the petitioner deducted from income only $698.21 of the total amount of such fees. The deduction of this amount was disallowed by the respondent in the determination of the deficiency. The petitioner's income tax return for 1938 was made upon the cash basis. OPINION. SMITH: The principal question presented by this proceeding is whether the petitioner is liable to income tax upon the difference between the cost to her of two 15-year endowment policies on the life of her husband and their maturity value in 1938. The respondent gives as his reason for including in the petitioner's gross income for 1938 the amount of $51,179.85 representing the difference between the alleged cost of the policies and their value at maturity, that the amount is taxable under the provisions of section 22(a) of the Revenue Act of 1938, which requires the817 inclusion in gross income of "gains or profits and income derived from any source whatever." Certain exclusions from gross income, however, are provided for by section 22(b). That section reads in part as follows: (b) EXCLUSIONS FROM GROSS INCOME. - The following items shall not be included in gross income and shall be exempt from taxation under this title: (1) LIFE INSURANCE. - Amounts received under a life insurance contract paid by reason of the death of the insured, whether in a single sum or otherwise (but if such amounts are held by the insurer under an agreement to pay interest thereon, the interest payments shall be included in gross income); (2) ANNUITIES, ETC. - Amounts received (other than amounts paid by reason of the death of the insured and interest payments on such amounts and other than amounts received as annuities) under a life insurance or endowment contract, but if such amounts (when added to amounts received before the taxable year under such contract) exceed the aggregate premiums or consideration 889 paid (whether or not paid during the taxable year) then the excess shall be included in gross income. Amounts received as an annuity under an annuity818 or endowment contract shall be included in gross income; except that there shall be excluded from gross income the excess of the amount received in the taxable year over an amount equal to 3 per centum of the aggregate premiums or consideration paid for such annuity (whether or not paid during such year), until the aggregate amount excluded from gross income under this title or prior income tax laws in respect of such annuity equals the aggregate premiums or consideration paid for such annuity. In the case of a transfer for a valuable consideration, by assignment or otherwise, of a life insurance, endowment, or annuity contract, or any interest therein, only the actual value of such consideration and the amount of the premiums and other sums subsequently paid by the transferee shall be exempt from taxation under paragraph (1) or this paragraph. Under section 22(b)(2) above the petitioner would be taxable in 1938 on the excess of the maturity value of the policies over the aggregate premiums paid only if she "received" the proceeds in that year. While admittedly petitioner actually received no money payment under the policies in 1938 except the interest and dividends and the $85.64819 referred to above under the policy issued by the State Mutual Life Assurance Co., respondent's contention is that she "constructively" received the entire amount of the proceeds of both the policies on the dates of their maturity. The test for applying the doctrine of constructive receipt is the availability of the income for the taxpayer's use and enjoyment in the taxable year. "The income that is subject to a man's unfettered command and that he is free to enjoy at his own option may be the taxable year. "The income that is subject to a man's unfettered Corliss v. Bowers,281 U.S. 376">281 U.S. 376. See also Loose v. United States, 74 Fed.(2d) 147, and cases there cited. Taxpayers are not permitted to shift the receipt of income from one year to another and to select the year when the income is to be taxed "by the simple expedient of withholding volition" to accept it when it is made available for their use. Harry B. Hurd,12 B.T.A. 368">12 B.T.A. 368. See also Avery v. Commissioner,292 U.S. 210">292 U.S. 210; 820 Foley v. Commissioner, 94 Fed.(2d) 958; Security First National Bank of Los Angeles et al., Executors,28 B.T.A. 289">28 B.T.A. 289; Alexander Zolotoff,41 B.T.A. 991">41 B.T.A. 991. An examination of the various Bureau rulings shows that the Commissioner has consistently treated the proceeds of matured life insurance or endowment policies which, in accordance with option settlement agreements, are to be paid out in installments over a period of years, not as taxable to the beneficiaries at the date of maturity under the constructive receipt theory or otherwise, but as taxable in each year as the installment payments are actually received. I.T. 3202, C.B. 1938-2, p. 138; G.C.M. 21666, C.B. 1940-1, p. 116; I.T. 3402, C.B. 1940-2, p. 57; I.T. 3413, C.B. 1940-2, p. 58; G.C.M. 22519, C.B. 1941-1, p. 330. 890 We consider first the policy issued by the New England Mutual Life Insurance Co. This policy was applied for by petitioner's husband. In making his application he named the petitioner as beneficiary and stated that he did not retain the right to change the beneficiary. The dividends apportioned to the policy were to821 be applied in acquiring paid-up additional insurance. The policy provided that if both the insured and the petitioner were living at the date of the maturity of the policy the petitioner was thereafter to receive income equal to 3 percent per annum of the value of the policy, which annual payment was to be increased by such share of "surplus interest" as may be apportioned thereto and upon the death of the beneficiary the principal sum and any accrued interest thereon were to be paid to her estate. At the maturity of the policy, February 5, 1938, both the insured and the beneficiary were living and the insured had not made any attempt to change the policy in any way. The petitioner received no payment on the policy in 1938, the first annual payment not being due until one year after the maturity of the policy. On brief the respondent states: With regard to the New England policy it is noted that the premium was paid by the petitioner and that the insured, by specific provision, did not reserve the right to change the beneficiary. Accordingly, it should be held that the petitioner was the real owner of the policy and the petitioner should be considered as the real applicant, 822 rather than her husband who signed the application. This being so, it is believed that the terms of the policy should be construed to hold that petitioner has the rights which the insured would otherwise have, including the right to change or revoke any election as to the manner of payment of proceeds. Therefore, it is believed that under the circumstances the petitioner had the right at the date of maturity of this policy to draw down the proceeds thereof. We do not subscribe to these views. A life insurance policy is a contract between the insurance company and the party who makes application for the policy. The application here was made by petitioner's husband. The laws of the Commonwealth of Massachusetts require the application to be attached to the policy and when so attached the policy and the application together constitute the entire contract between the parties. See ch. 175, secs. 131 and 132-3, General Laws of Massachusetts (Annotated Laws of Massachusetts, vol. 5, pp. 666, 667). Section 132-3, chapter 175, provides in part that: § 132. Life, Annuity, etc., Policies, Approval and Contents. - No policy of life or endowment insurance and no annuity or pure823 endowment policy shall be issued or delivered in the commonwealth * * unless it contains in substance the following: * * * 3. A provision that the policy and the application therefor shall constitute the entire contract between the parties, and that no statement made by the 891 insured or on his behalf shall be used in defence to a claim under the policy unless it is contained in a written application, and a copy of such application is endorsed upon or attached to the policy when issued. The policy here in question conformed to the requirements of the statute, stating upon its face that "This Policy and the application constitute the entire contract between the parties hereto." The application is signed only by "Robert James Frackelton, Applicant." It states that the amount of the policy is to be "payable at death or after maturity of the endowment period under option four in monthly instalments" to the petitioner, and the question "Do you reserve the right to change the Beneficiary?" is answered "No." The policy on its face acknowledges payment of the single premium by the petitioner and states that in the event of the maturity of the policy as an endowment the824 company "in lieu of paying One hundred thousand (100,000) dollars in one sum, will pay annual payments in accordance with the provisions of the Fourth Option of this policy, in equivalent monthly instalments, to said Constance Chandler Frackelton, if living." Option fourth, as set out above, provides only for payments to petitioner for life of interest of 3 percent annually, plus dividends. We find no provisions anywhere in the contract that permitted the petitioner as beneficiary to receive the principal amount of the policy at the maturity date or at any time during the taxable year 1938. The fact that petitioner paid the premium on the policy gave her no rights outside of those expressly contained in the contract. In Millard v. Brayton, 177 Mass. 533; 59 N.E. 436">59 N.E. 436, it was said: * * * The payment of the premiums, whether before or after the death of the wife, did not affect the nature or construction of the contract, did not make him a party to it, nor the policy his property. Swan v. Snow, 11 Allen, 224; 825 Baker v. Insurance Co.,43 N.Y. 283">43 N.Y. 283; Whitehead v. Insurance Co.,102 N.Y. 151">102 N.Y. 151; 6 N.E. 267">6 N.E. 267. * * The policy here provides that the "insured" alone should have the right to select the option settlement and that "In case such election is made by the Insured, the Payee shall have no right to assign, alienate or commute any of the instalments so payable, unless the Insured has otherwise directed." The payee (petitioner) was to have the right of election only upon failure of the insured to exercise such right prior to his decease. The fact is that the election was made, presumably by the insured, at the time the policy was issued and was never changed by the insured or any one else. In the absence of any provision to the contrary in the contract, we think that the rights of the petitioner in the proceeds of the policy became fixed upon the maturity of the policy as an endowment. Thereafter, she had no right under the contract to anything more than the interest and dividends. 892 We do not agree with respondent's contention that the petitioner should be considered the "real applicant" of the policy as well as the "real826 owner." The application reads: "I, Robert J. Frackelton, of Cleveland, Ohio, hereby apply", etc. It is signed only by "Robert James Frackelton, Applicant." The questions in the application are directed solely to the insured and are all answered by him. In Millard v.Brayton, supra, the Supreme Court of Massachusetts had under consideration the question of the respective rights of husband and wife, or persons claiming under them, in an insurance policy on the husband's life. On facts which in some respects resemble those in the instant case but in others were notably different, as pointed out below, the court decided that the policy was a contract between the insurance company and the wife. A distinction, which was emphasized by the court, is that the application there was executed by and signed by both the husband and wife, the wife being referred to therein as the "applicant" and the husband as the "insured." In its opinion the court said: * * * It appears, therefore, from the application and policy, constituting together the contract, that the wife, having an insurable interest in the life of her husband to the amount of $10,000, wished to insure that interest, and827 applied to the company for such insurance; that upon such application the policy was issued; that the basis of the contract or the thing insured was the interest of the wife in the life of her husband, as stated in the application, the contract was recognized by all parties as coming from the wife; that the promise by the insurance company, although not made in express terms to the wife, was, by fair and reasonable implication and in law, a promise to the wife; that it was a promise to pay the wife, and was made upon certain express conditions, which were to be accepted by the assured, namely, the wife, and by no one else. It follows, as a necessary consequence, that the contract was in law between the company and the wife. It was a contract by which she was insured upon her interest in the life of her husband, and not a contract by which he was insured upon his interest in his own life. In Whitehead v. Insurance Co.,102 N.Y. 143">102 N.Y. 143, 150, 6 N.E. 267">6 N.E. 267, where each of three policies in the life of the husband recited that the consideration was paid by the wife, and the money was to be paid to her, the court said: "These contracts purport upon their face to be contracts828 with the wife as the party assured, and not at all with the husband, who stands in the policy as simply the life insured; his conduct and death furnishing the contingencies upon which the liability of the insurer is made to depend. As was tersely expressed in the argument, the contract was about the husband, and not with him." * * * Further in its opinion the court distinguished Fuller v. Linzee,135 Mass. 468">135 Mass. 468; Bancroft v. Russell,157 Mass. 47">157 Mass. 47; 31 N.E. 710">31 N.E. 710; and Haskins v. Kendall,158 Mass. 224">158 Mass. 224; 33 N.E. 495">33 N.E. 495, on the ground that in those cases the policies were applied for by and procured by the husbands rather than the wives. In so far as Millard v. Brayton, supra, may be considered helpful in the determination of our present question, it establishes, contrary 893 to respondent's contention, that petitioner's husband and not petitioner was the applicant for the policy under consideration and that the policy was a contract between the insurance company and petitioner's husband. As stated above, we do not think that under any of the provisions of the insurance contract the829 petitioner had a right to receive the value of the policy at the date of maturity and therefore we are of the opinion that petitioner did not constructively receive the proceeds of the policy in 1938. Since it further appears that petitioner did not actually receive any payments of interest, dividends, or otherwise, under the policy in the taxable year 1938, she is not taxable in that year on any income therefrom. The policy issued by the State Mutual Life Assurance Co. was somewhat different. That policy was applied for by the petitioner and petitioner paid all the premiums. She and she alone had the right to select the method of settlement. Under the method so elected the company retained the principal amount of the proceeds under an agreement to pay the petitioner during her lifetime interest of 3 percent per annum, plus dividends, and upon her death to pay the principal amount over to her estate. The settlement agreement (option C above) further provides that: "The amount so left with the Company may be withdrawn at any time when an instalment of interest is payable, unless otherwise directed by the insured during his lifetime." There is no evidence that the insured ever830 directed, even if he had a right to do so, that the proceeds of the policy should not be withdrawn by the petitioner. Thus, it appears that even though petitioner may not have had the right to withdraw the entire amount of the proceeds of the policy on the maturity date, having made her election of the option C settlement five days previously, she did have that right during the taxable year 1938 when the interest payment or payments became due. She received seven monthly interest payments in 1938. In I.T. 2380 (1927) C.B. VI-2, p. 32, it was held that the proceeds of a matured endowment policy which, under an option settlement agreement, were retained by the company, but which the insured had a right to withdraw at maturity or at any "annuity-paying date", were taxable to the insured at maturity as constructively received by him. The ruling reads in part as follows: The entire amount of $1,000, called for by the policy, was available to the insured at the maturity date, and, in fact, at any annuity-paying date thereafter. Although under the settlement made it was left with the company, the insured as beneficiary receives a return thereon of 4.8 per cent, and, as before stated, 831 the principal sum may be withdrawn at any annuity-paying date. The settlement made, therefore, amounts to the constructive receipt of the proceeds of the policy at the maturity date and the reinvestment of the same in accordance 894 with the terms of the settlement. The so-called dividend of $22.67 paid to the insured at the maturity date represented merely an adjustment or refund on the last premium paid and, so treated, the net premiums paid are shown to have amounted to $861.94. As this amount of the proceeds is exempt from the income tax under the above-quoted provisions of the statute, the portion of the proceeds which constitutes taxable gain is $138.06, this being the amount by which $1,000 exceeds the net premiums paid. This amount, therefore, represents taxable income for the year 1925, subject to both the normal tax and surtax. * * Although the petitioner here was not the insured, she had complete ownership of the policy and the right to select the plan of settlement. The insured had no material rights in the policy. In I.T. 2635, C.B. XI-2, p. 63, it was held that a beneficiary who had a right to receive interest but not to withdraw the entire proceeds832 of the policy was taxable only on the interest received. In I.T. 3202, supra, it was held that where the proceeds of a matured life insurance policy are left with the company under an agreement to pay "a fixed sum equal or less than the interest and earnings on such proceeds" the contract should not be treated as an annuity contract under section 22(b)(2) of the Revenue Act of 1936. In G.C.M. 21666, supra, an "annuity" was defined as: * * a stated sum payable periodically at stated times during life, or a specified number of years, under an obligation to make the payments in consideration of a gross sum paid for such obligation, which gross sum is exhausted in the making of the periodic payment. * * * The payment of the interest and dividends under the policy here in question does not exhaust the principal amount of the policy and those payments were not annuities. The important consideration here, in relation to the constructive receipt theory, is that petitioner had the right during the taxable year, if not actually at the date of the maturity of the policy, to withdraw the full amount of the proceeds of the policy, merely upon her request to the company and without833 any additional payment to the company. It was entirely of her own volition that she permitted the funds to remain in the custody of the insurance company. For practical purposes the result was precisely the same as if she had received actual payment of the proceeds of the policy and had then returned the funds to the company to be held at her pleasure at a guaranteed interest rate of 3 percent, plus whatever additional interest or dividends the company might choose to pay. We know of no reason why under such circumstances the doctrine of constructive receipt should not be held applicable to the proceeds of the policy. We think that petitioner is taxable in 1938 upon the difference between the maturity value of the policy and the premiums paid thereon, in addition to the interest and dividends that were paid to her during the taxable year. 895 The final question is whether the amount of $1,167.29 paid to the Cleveland Trust Co. for services as trustee under revocable trusts established by the petitioner is a legal deduction from petitioner's gross income. It is not a legal deduction unless it constitutes an ordinary and necessary expense of carrying on a trade or business. *834 This issue must be decided in favor of the respondent. See Higgins v. Commissioner,312 U.S. 212">312 U.S. 212; City Bank Farmers Trust Co. v. Helvering,313 U.S. 121">313 U.S. 121; United States v. Pyne,313 U.S. 127">313 U.S. 127; Elliott v. Commissioner, 117 Fed.(2d) 1012. Reviewed by the Board. Decision will be entered under Rule 50.MELLOTT dissents on the first point.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622278/	Sebago Lumber Company, Petitioner, v. Commissioner of Internal Revenue, RespondentSebago Lumber Co. v. CommissionerDocket Nos. 49686, 53383United States Tax Court26 T.C. 1070; 1956 U.S. Tax Ct. LEXIS 90; September 19, 1956, Filed 90 Decisions will be entered under Rule 50. Petitioner was incorporated in 1913. During the taxable years 1947 through 1951 stock was outstanding, bylaws were in effect, directors held office, meetings were held and minutes kept, corporate records were maintained, and corporate income tax returns were filed. Robert R. Jordan owned 98 of its 100 shares of stock. Two shares were in the names of its other directors. Dividends were never formally declared, but Jordan distributed all petitioner's income to himself. Petitioner's income from 1947 through 1951 consisted solely of dividends, interest, rents, and capital gains. Jordan filed an individual income tax return for 1948 but not for the years prior to that and not for the 3 years subsequent to that. Held: (1) Petitioner is a corporation and is liable for corporation taxes. (2) Petitioner is a personal holding company. (3) Petitioner's distributions to Jordan constituted dividends and it is entitled to a dividends paid credit for such distributions. Armand O. LeBlanc, Esq., for the petitioner.Jack H. Calechman, Esq., for the respondent. Tietjens, Judge. TIETJENS1070 The Commissioner determined deficiencies and an addition to tax in petitioner's income tax as follows:PersonalAdditionYearIncome taxholding companyto taxsurtax1947$ 9,455.00$ 2,363.751948$ 188.159,220.801949225.2211,164.821950537.9013,052.531951741.2914,410.96The issues to be decided are: (1) Whether petitioner should be taxed as a corporation; (2) whether petitioner is a personal holding company; (3) whether petitioner was liable for personal holding company surtaxes in the years in question; and (4) whether the addition to tax for 1947 was proper. Petitioner filed its corporation tax returns for the years in question with the collector of internal revenue for the district of Maine.FINDINGS OF FACT.Some of the facts are stipulated. They are found as stipulated and are incorporated herein by this reference.Petitioner is 92 a corporation organized under the laws of the State of Maine in the year 1913. Its principal office is located in Scarborough, Maine. It has 100 shares of authorized common stock. Ever since its organization and during the years in question, Robert R. 1071 Jordan was the president and treasurer of petitioner corporation and was the owner of 98 shares of its common stock. The other 2 shares of stock were in the names of Roscoe T. Holt and Nunzi Napolitano for the sole purpose of qualifying them as directors pursuant to the State laws. These shares were endorsed in blank and were in the custody of Jordan. Holt, Napolitano, and Jordan were the corporation's three directors during the years in question.The corporation held meetings occasionally and minutes of them were kept. The corporation records were kept by Jordan, who exercised complete control over the corporation and treated and used its funds as his own.Although a graduate of Massachusetts Institute of Technology, Jordan has never made any effort to understand the Federal tax laws and has not sought advice with reference to them except when "in trouble" with the taxing authorities.Petitioner's income for the years93 in question consisted solely of income from dividends, rents, interest, and capital gains. All of petitioner's income was received by Jordan as petitioner's president and treasurer and was turned over to Jordan in his capacity as a stockholder and individual without the formality of declaring dividends. Jordan maintained corporate records and prepared the corporate income tax returns for the years in question without assistance. He also prepared, without assistance, petitioner's personal holding company returns for 1949 and 1951. Income reported in the petitioner's corporation income tax returns included both the petitioner's income and the personal income of Jordan, which in part was derived from many stocks owned by Jordan and which were in his name.Jordan filed an individual Federal income tax return for the year 1948. He did not file individual income tax returns for any years prior to 1948 or for any of the years 1949, 1950, and 1951. Jordan filed a claim for refund of income tax paid for the year 1948, his reason being that "Dividends in the amount of $ 6,371.00 reported on Form 1040 filed for 1948 were reported in error as same were included within dividends reported94 in the return of Sebago Lumber Company, a personal holding company, for the year 1948."Jordan was unable to dispose of stocks owned by petitioner without approval of petitioner's board of directors. In 1943 a special meeting was held to authorize Jordan to buy and sell securities for petitioner and to borrow money for it.No corporate meetings were ever held for the purpose of declaring dividends and none were ever formally declared.Petitioner did not have a bank account during the years in question. Its funds were deposited in a bank account under Jordan's name. Jordan withdrew money from his bank account to pay petitioner's 1072 expenses. Jordan received a salary of $ 600 per year from petitioner for the years 1947 through 1951.As a result of certain proceedings instituted in 1948, petitioner agreed on April 16, 1949, to a personal holding company surtax liability for the year 1945. The personal holding company return for 1945 was prepared for petitioner by an attorney.Petitioner was a personal holding company during the years 1947 through 1951.The distributions by petitioner of all of its income to Jordan during the years 1947 through 1951 were dividends.OPINION. 95 The petitioner's first contention is that although it is a corporation in form, in truth and in fact it is Robert R. Jordan, an individual, and therefore not liable for any corporation income taxes. This position is untenable. The petitioner has operated as a corporation at substantially all times. It was formally incorporated, stock was issued, bylaws were adopted, directors were elected, minutes of meetings were kept, corporate records were maintained, and corporation income tax returns were filed. A close relationship between a corporation and its sole stockholder standing alone is no reason for disregarding the separate entities. See Moline Properties, Inc. v. Commissioner, 319 U.S. 436">319 U.S. 436 (1943). In view of these facts, we hold that petitioner was a corporation during the years in issue.The petitioner has not introduced any evidence relating to the deficiencies in income tax as determined by the Commissioner for the years 1948 through 1951 and hence we sustain the Commissioner's determinations for those years.The petitioner's second contention, that it is not a personal holding company, is without merit. The foundation of its argument is96 that it was not a corporation but was Robert R. Jordan, an individual, and thus could not be a personal holding company. Since we hold that the petitioner was a corporation during the years in issue, petitioner's argument collapses. Petitioner unmistakably comes within the express language of the statute 1 and hence is a personal holding company. See Coshocton Securities Co., 26 T. C. 935.97 The petitioner's third contention is that it is not liable for personal holding company surtaxes in the years in question and with this we 1073 agree. The personal holding company surtax applies only to "the undistributed subchapter A net income" of personal holding companies. In computing the undistributed subchapter A net income, the amount of the dividends paid credit must be subtracted from the subchapter A net income. In this case, the amount of the dividends paid credit is equal at least to the subchapter A net income since petitioner's entire income was distributed in dividends to Robert R. Jordan and hence there is no undistributed subchapter A net income and no personal holding company surtax.The Commissioner argues that petitioner paid no dividends at all during the years in issue. He points out that petitioner's board of directors never formally declared any dividends, that in 1948 petitioner agreed to a personal holding company surtax for the year 1945, and since Jordan did not dissolve or declare dividends after that, then he must not have intended that any distributions be made. He further argues that in view of the fact that Jordan did not file individual98 income tax returns in 1947, 1949, 1950, and 1951 and that in the one year he did file, 1948, he claimed a refund because he included in his individual return dividends which had also been included in petitioner's return, then it must have been Jordan's election to incur no personal income tax liability but to have only the petitioner pay taxes.Jordan testified that none of the directors ever objected to his taking all the income; that the bylaws allowed him to do it, and it was his money since he was the "whole cheese"; that other than himself, there was nobody who received any dividends or interest; that he never bothered to declare dividends, but just took the money and recorded it in the books; that no one else was entitled to dividends; that all income was deposited in his personal bank account every week since the corporation didn't have one; that he prepared the corporation income tax returns himself, without help; that he included his own income with that of the corporation in its returns; that the Government never sent him individual tax return forms, so he didn't file such returns except in 1948; that he was never advised to file individual returns; that he had trouble with99 some 1945 corporation taxes in 1948 and that a lawyer prepared a 1948 individual income tax return for him; that the Government would not accept the check he enclosed with the 1948 individual return and it was returned to him and so he did not file any more individual returns; that he never agreed to pay a personal holding company surtax on the corporation in 1945 though he concedes he might have signed the return; that the reason for signing was that he followed the advice of counsel to prevent the sale of petitioner's property at a public auction; that 1074 he was "cloudy" about what a personal holding company return was and that he wasn't a tax specialist.In view of this testimony and the other evidence it is apparent that petitioner distributed all of its income to Jordan as it was received and that these distributions constituted dividends even though none were formally declared. Corporate earnings received by a stockholder may be dividends even though no formal declaration is made. Paramount-Richards Theatres v. Commissioner, 153 F.2d 602">153 F. 2d 602, 604 (C. A. 5, 1946), affirming a Tax Court Memorandum Opinion. On the facts we hold petitioner100 is entitled to a dividends paid credit for the amounts distributed in computing undistributed subchapter A net income. As pointed out above, this credit is equal at least to the subchapter A net income with the result that there is no personal holding company surtax due.Our conclusion that petitioner is not liable for personal holding company surtaxes for the years in question renders moot the question of whether its failure to file such returns for those years was due to reasonable cause and was not due to willful neglect.Decisions will be entered under Rule 50. Footnotes1. I. R. C. 1939.SEC. 501. DEFINITION OF PERSONAL HOLDING COMPANY.(a) General Rule. -- For the purposes of this subchapter and chapter 1, the term "personal holding company" means any corporation if -- (1) Gross income requirement. -- At least 80 per centum of its gross income for the taxable year is personal holding company income as defined in section 502; * * and(2) Stock ownership requirement. -- At any time during the last half of the taxable year more than 50 per centum in value of its outstanding stock is owned, directly or indirectly, by or for not more than five individuals.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622279/	APPEALS OF BONNEVILLE LUMBER CO., OVERLAND LUMBER CO., GEM STATE LUMBER CO., AND MORRISON-MERRILL & CO.Bonneville Lumber Co. v. CommissionerDocket Nos. 3657, 3946, 3984, 4358.United States Board of Tax Appeals2 B.T.A. 489; 1925 BTA LEXIS 2356; September 8, 1925, Decided Submitted August 1, 1925. 2356 The taxpayers were affiliated with the George E. Merrill Co. and the National Park Lumber Co. during the years 1919 and 1920. Walter G. Moyle, Esq., for the taxpayers. P. S. Crewe, Esq., for the Commissioner. 489 Before MARQUETTE and MORRIS. These appeals are from determinations of deficiencies in income and profits taxes as follows: Bonneville Lumber Co., calendar year 1919$703.92Overland Lumber Co., calendar year 191951.45Gem State Lumber Co., calendar year 1919255.20Morrison-Merrill & Co., calendar year 1920250.93The sole question involved is whether the above companies were affiliated with the George E. Merrill Co. and the National Park Lumber Co. during the years 1919 and 1920 within section 240 of the Revenue Act of 1918. From the depositions and oral and documentary evidence presented at the hearing the Board makes the following FINDINGS OF FACT. The taxpayers are all Utah corporations, with their principal offices in the office of the George E. Merrill Co. at Salt Lake City. In 1906 George E. Merrill acquired control of Morrison-Merrill & Co., a corporation engaged principally in the wholesale and2357 jobbing distribution of lumber and building material throughout the territory tributary to Salt Lake City, Utah. Closely associated with him in the acquisition of that control as a legal adviser and stockholder in the company was Andrew Howat. Incident to the operation of the company very close relations developed between Merrill, a Curtis group of Clinton, Iowa, who were sash and door manufacturers, and a Day group, who were manufacturers of cement, which groups looked to Morrison-Merrill & Co. as the medium for selling their products in that territory. In order properly to fortify the business of the wholesale company it was deemed advisable to acquire retail yards. Pursuant to that plan the Bonneville Lumber Co. was organized in 1910 to operate 490 retail yards in Utah. Shortly thereafter, in the year 1911, the same interests, including the Day and Curtis groups, orga-ized the Gem State Lumber Co. to handle the retail trade in southern Idaho territory. In 1912 they organized the George E. Merrill Co., hereinafter referred to as the parent company, as a holding company and a medium through which to exercise control and supervision over the retail units. In 1915 the2358 National Park Lumber Co. was organized to acquire retail distributing interests in eastern Oregon. In the same year the assets of another company were acquired and the Overland Lumber Co. organized to operate in southern Wyoming. The majority of the stock of the subsidiaries was held by the parent company. In addition there were two classes of stockholders, which for convenience we shall designate as investment and option agreement stockholders. The investment stockholders consisted of relatives or close business associates of the holders of the stock in the parent company. The stock was issued to them under an oral understanding that, should they thereafter desire to dispose of the same, the parent company would first be given the opportunity to purchase it. In several instances the parent company has purchased such stock. The option agreement stockholders were composed of active executives and employees of the subsidiaries who acquired their stock under a plan devised for the purpose of permitting them to participate in the profits of the enterprise in which they were interested. The purchase of the stock was financed by the parent company which held the stock as collateral. 2359 Each person so acquiring stock signed a written agreement not to hypothecate, sell, or otherwise dispose of his stock except to the parent company. Under these contracts the parent company could repurchase the stock at any time at its book value and it was obligated to repurchase stock at the holder's option. During the years 1919 and 1920 the parent company, acting under these contracts, repurchased stock in a number of instances. The percentage of stock ownership in the various companies during the years 1919 and 1920 was as follows: Morrison-MerrillGem StateBonnevilleNational Park & Co.Lumber Co.Lumber Co.Lumbar Co.19191920191919201919192019191920Parent company71.266.782.582.887.387.365.166.7Option agreement stockholders14.419.313.513.110.010.016.615.0Investment stockholders14.414.04.04.12.72.718.318.3100.0100.0100.0100.0100.0100.0100.0100.0OverlandLumber Co.19191920Parent company82.073.5Option agreement stockholders3.011.5Investment stockholders15.015.0100.0100.02360 The stock of the subsidiary companies has never been on the market, the parent company having dictated at all times who the stockholders should be. The minority stockholders have always 491 acquiesced in the action of the majority, most of them having given proxies to the officers of the parent company. The officers and directors of the parent company constituted a majority of the board of directors of each subsidiary and were the principal officers thereof. The salaries of the officers of the subsidiary companies who were also officers of the parent were paid directly by the parent, the funds necessary to cover them, as well as other factors of expense, being provided by arbitrary assessment against the subsidiaries. All the meetings of the subsidiary companies were held at the office of the parent; their books were kept by the secretary of the parent company who also did their secretarial work. The parent company transferred executives and employees from one subsidiary to another. It determined the source of supply of the merchandise requirements and controlled the manner of distribution and the volume of business placed with Morrison-Merrill & Co., the wholesale2361 unit, by its several retail units, irrespective of prices. Morrison-Merrill & Co. has at all times handled the larger portion of the wholesale requirements of the subsidiaries with the exception of the first six months of 1920, when it was able to advantageously place the available mill tonnage with purchasers other than the subsidiaries. The subsidiaries were, during that period, directed by the parent company to transfer their patronage to other wholesale sources. All banking and credit arrangements for the subsidiary companies were handled exclusively by the parent company. To more fully equalize returns on capital and by way of revision of territorial distribution, productive investments were transferred from one subsidiary to another on terms which would not have been made to anyone outside of the group. Separate returns were filed by each of the subsidiaries for the year 1919, and a consolidated return including the George E. Merrill Co., the Gem State Lumber Co., and the Bonneville Lumber Co. for the year 1920. A consolidated return was subsequently filed for 1919, including therein the above-named companies. The Commissioner ruled that the companies were not affiliated2362 in 1919, and computed the tax of Morrison-Merrill & Co. on a separate basis for the year 1920. DECISION. The taxpayers were affiliated with the George E. Merrill Co. and National Park Lumber Co. during the years 1919 and 1920. ; . The deficiencies, if any, should be computed on that basis. Final determination will be settled on consent or on 15 days' notice, under Rule 50. ARUNDELL not participating.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622283/	JOHN MORRELL & CO. (A MAINE CORPORATION), JOHN MORRELL & CO, (A DELAWARE CORPORATION), KITTERY REALTY CO., YORKSHIRE CREAMERY CO., AND OTTUMWA SERUM CO., PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.John Morrell & Co. v. CommissionerDocket Nos. 15114, 34274.United States Board of Tax Appeals14 B.T.A. 569; 1928 BTA LEXIS 2959; December 5, 1928, Promulgated 2959 Where corporations are affiliated, whether on the basis of the ownership or control of stock of one or more corporations by another corporation, or on the basis of ownership or control of the stock of two or more corporations by the same interests, or where a combination of the two classes of affiliation is involved, the limitation prescribed by the Revenue Acts of 1917, 1918, and 1921 as to the amount of intangibles acquired for stock which may be included in invested capital is measured by the total outstanding capital stock of the affiliated group, after eliminating intercompany holdings. Gould Coupler Co.,5 B.T.A. 499">5 B.T.A. 499. C. B. Stiver, Esq., for the petitioners. Malcolm E. McDowell, Esq., for the respondent. LITTLETON570 These proceedings were consolidated and submitted for decision on an agreed stipulation of facts. The Commissioner determined deficiencies in income and profits tax for the fiscal years ending March 31, 1918, 1919, 1922, and 1923 of $112, 090.17, $219,272.17, $195,221.62 and $3,932.08, respectively. FINDINGS OF FACT. John Morrell & Co., a Maine corporation, with its principal place of business and2960 office at Ottumwa, Iowa, is the principal or parent company operating two meat-packing plants, one at Ottumwa, Iowa, and one at Sioux Falls, S. Dak. John Morrell & Co., a Delaware corporation, markets the products of the Maine corporation. The Kittery Realty Co. owns the buildings, equipment, and refrigeration cars for the use of the Maine corporation. The Yorkshire Creamery Co. takes care of the butter fat and milk produced by the Maine corporation. The Ottumwa Serum Co. produces healthy animals for slaughter by the Maine corporation. The Maine corporation owns practically all the stock of the Delaware corporation. The Kittery Realty Co. owns practically all the stock of the Yorkshire Creamery Co. and the Ottumwa Serum Co. The stock of the Maine corporation and the Kittery Realty Co. is held by the same stockholders in substantially the same proportions. The several corporations, heretofore mentioned, are affiliated for the fiscal years ended March 31, 1918, and March 31, 1919, in accordance with the provisions of the Revenue Acts of 1917 and 1918 and for the fiscal years ended March 31, 1922, and March 31, 1923, in accordance with the provisions of the Revenue Act of 1921, 2961 and any deficiency that may be determined shall be assessed to the Maine corporation. In 1827 John Morrell & Co., a copartnership, started in the business of pork and beef packers, with especial reference to the curing of hams and bacon, operating continuously until December 31, 1915, when its entire affairs were transferred to the Maine corporation, the interests remaining after incorporation the same as before. The authorized, issued and outstanding stock of the Maine corporation is 166,611 shares, of a par value of $10 a share, a total of $1,666,110 at December 31, 1915, the date of reorganization, and for the years here in controversy. The entire stock was issued for a mixed aggregate of tangibles and intangibles, taking over all the assets and assuming all the liabilities of every kind and nature in any manner connected with or relating to the property, or growing out of the property of John Morrell & Co., a copartnership. The tangible property alone had a value at date of transfer of not less than $2,101,088.45. 571 The value of intangibles transferred, as agreed to and accepted by the parties hereto, was $2,165,945.07. The total outstanding stock of2962 the affiliated group, as a unit, after eliminating all intercompany holdings for all years here in controversy, is $3,236.900. The admitted and agreed, accrued, consolidated, taxable net income for the following periods is - Period endedAmount(a)(1) March 31, 1918, at 1917 rates of tax$3,215,899.65(2) For excess-profits tax3,187,222.98(3) For 1918 rates of tax3,236,382.53(b) March 31, 19192,021,529.55(c) March 31, 19222,229,443.93(d) March 31, 19231,274,568.85leaving only the sole adjustment on account of the limitation to intangibles, which issue is here in dispute. The agreed consolidated, invested capital for the fiscal periods here in controversy is as follows: Period endedAmount(a) March 31, 1918 - (1) Under 1917 law$7,192,403.65(2) Under 1918 law7,134,824.89(b) March 31, 19198,944,818.29(c) March 31, 19229,849,707.97The prewar average invested capital is2,171,108.60The prewar average income is301,470.16The foreign tax credits for the said periods are - March 31, 191849,159.55March 31, 191922,633.01March 31, 19224,567.28March 31, 19235,329.49It is further stipulated2963 by and between the parties hereto that the Board may enter an order of redetermination that there is a deficiency in tax due from the petitioner for the fiscal year ended March 31, 1923, in the amount of $3,911.69. The petitioners withdraw all other contentions and allegations of error in the petitions and leave as the only question for determination by the Board the application of the limitation on account of intangibles, that is, whether the group shall be treated as a unit and the limitation be measured by the par value of the total outstanding stock of the group, $3,236.900, or by the par value only of the outstanding stock of the parent corporation, John Morrell & Co., a Maine corporation, standing alone, $1,666,110. OPINION. LITTLETON: The sole issue is whether the limitation on account of intangibles shall be determined upon the basis of the par value of 572 the outstanding capital stock of the consolidated group, after eliminating intercompany holdings, or the par value of the outstanding stock of the Maine corporation which issued stock for the intangibles, is controlled by 2964 , wherein the Board said: It follows from what we have said that, in applying the limitation on the amount of intangibles, the group shall be treated as a unit, i.e., the limitation shall be measured by the par value of the total outstanding stock of the group. This rule should be followed in both classes of affiliation, and hence in a combination of the two. * * The parties have stipulated that "The total outstanding stock of the affiliated group, as a unit, after eliminating all intercompany holdings for 11 years here in controversy, is $3,236,900." It follows, therefore, that the foregoing amount is to be used as a measure for applying the limitation rather than the outstanding capital stock of the Maine corporation of $1,666,110. Judgment will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622285/	KATHARINA RICHTER, EXECUTRIX, ESTATE OF JACOB RICHTER, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Richter v. CommissionerDocket No. 21252.United States Board of Tax Appeals16 B.T.A. 936; 1929 BTA LEXIS 2487; June 6, 1929, Promulgated 2487 Katharina Richter for the petitioner. L. S. Pendleton, Esq., for the respondent. LITTLETON936 OPINION. LITTLETON: On September 17, 1926, the Commissioner mailed to the petitioner a notice of his determination that there was a deficiency of $10,383.64 arrived at as follows: Correct amount of tax$14,678.19Tax shown on return and paid$14,151.65Amount refunded9,857.10Tax discharged4,294.55Deficiency10,383.64937 The executrix filed a petition with the Board claiming that the Commissioner erred in including the entire value of the community property as a part of the gross estate of the decedent, who died in 1922. The claim of the petitioner is that under the laws of the State of California the wife has a present, valid, vested, undivided one-half interest in the community property and only one-half of the value of such property should be included in the decedent's gross estate. In his answer the Commissioner admitted that he had included the entire value of the property as a part of the gross estate in making his determination as set forth in his notice of September 17, 1926, and further admits2488 that petitioner filed a claim for refund of taxes which had been paid by the estate and that the amount of $9,857.10 set forth in the deficiency notice had theretofore been refunded to the estate. February 2, 1929, the executrix filed a motion asking that this proceeding be dismissed and that the Board enter a decision that there is no deficiency, upon the ground that the amount of $9,857.10, previously refunded, can not be taken into consideration in determining whether there is a deficiency, and upon the further ground that the amount of $526.54, being the difference between the amount of tax shown due upon the return and paid, $14,151.65, and the correct tax liability of $14,678.19, was paid on January 29, 1929, together with interest at 6 per cent to February 1, 1929, amounting to $170.31. There are two reasons why the motion of the petitioner for a decision of no deficiency and dismissal of the proceeding is not well taken. First, because the Commissioner's notice of September 17, 1926, irrespective of the consideration of the amount of $9,857.10 refunded, determined a deficiency of $526.54, because the amount of tax shown due on the return was less than the correct tax. *2489 The Commissioner's determination was made and the petition was filed after the passage of the Revenue Act of 1926, and the subsequent payment of additional tax does not deprive the Board of jurisdiction. Furthermore, the determination of the Commissioner under the provisions of the statute shows a statutory deficiency of $10,383.64. ; ; . On the merits of the proceeding, the claim of the petitioner that only one-half of the community property should have been included in the gross estate is not well taken and we must hold that the Commissioner correctly included the entire value thereof. ; affd., . Judgment will be entered for the respondent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622226/	Ralph E. Van Landingham and Madalyn Van Landingham v. Commissioner. Lindell K. Jarman and Martha F. Jarman v. Commissioner.Van Landingham v. CommissionerDocket Nos. 5402-68, 5403-68.United States Tax CourtT.C. Memo 1970-139; 1970 Tax Ct. Memo LEXIS 224; 29 T.C.M. 614; T.C.M. (RIA) 70139; June 2, 1970, Filed Theodore Tenny, 922 Walnut St., Kansas City, Mo., for the petitioner. David A. Pierce and Rex Guest, for the respondent. FORRESTERMemorandum Findings of Fact and Opinion FORRESTER, Judge: In these consolidated cases, respondent has determined deficiencies in petitioners' income taxes in the following amounts: Docket No.Taxable YearEndedAmount5402-6812/31/63$ 660.5312/31/651,375.505403-6812/31/63927.4512/31/6450.8812/31/651,241.471970 Tax Ct. Memo LEXIS 224">225 Concessions having been made in both dockets, the only remaining issue is whether distributions received by petitioners from a corporation were dividends taxable under section 301 1 or merely repayments of loans made by them to the corporation. Findings of Fact Some of the facts have been stipulated. The stipulations and exhibits attached thereto are incorporated herein by this reference. Petitioners in docket No. 5402-68 are Ralph E. Van Landingham (hereinafter sometimes referred to as Ralph) and his wife, Madalyn Van Landingham, both residents of Excelsior Springs, Missouri. They filed their joint income tax returns for the years 1963 and 1965 with the district director of internal revenue for the district of Missouri. In docket No. 5403-68, petitioners are Lindell K. Jarman (hereinafter sometimes referred to as Lindell) and his wife, Martha F. Jarman, both residents of Excelsior Springs, Missouri. They filed their joint Federal income tax returns for the years 1963, 1964 and 1965, with the district director of internal revenue for the district of Missouri. During1970 Tax Ct. Memo LEXIS 224">226 the years 1963 and 1965, Ralph and Madalyn Van Landingham each owned individually 25 percent of the issued capital stock of Prichard Funeral Home, Inc., a Missouri corporation (hereinafter sometimes referred to as Prichard). Also during 1963, 1964 and 1965, Lindell and Martha F. Jarman each owned 25 percent of the issued capital stock of Prichard. Ralph was president and Lindell was vice-president of Prichard. Prichard's earned surplus, as of August 31, 1963, 1964 and 1965, was $16,511.13, $12,874.85, and $24,533.68, respectively. In 1963, Ralph and Lindell each received $119.12 in oil royalty payments which were owed to Prichard. The amounts were charged on the Prichard records as a debit to the ledger account, "Due from Officers," and as a credit to an income ledger account, "Oil Royalties." In the same year both received $200 each from Prichard. These amounts were entered on the books as a debit to the ledger account "Due from Officers," and credited to the corporate checking account. In 1964 Lindell received $42.56, an amount which was debited on the corporate records 615 to "Due from Officers" and credited to an income account, "Interest Income." During 1965, Lindell1970 Tax Ct. Memo LEXIS 224">227 and Ralph received various other distributions in equal amounts from Prichard in transactions which were reflected on the corporate books. In each instance there was a debit to the ledger account "Due from Officers," and a credit to another account. These distributions to each individually were as follows: (1) payments of $3,250, which were credited to the corporate checking account; (2) transfers to each by Prichard of capital stock of Midwest National Life Insurance, Inc., valued on Prichard's books at $2,400.41 ($1,200.21 to each); (3) transfers by Prichard of capital stock of Mark Kevin Corporation, valued on Prichard's books at $1,100 ($550 to each) (in both stock transfers the ledger account "Investments" was credited); and (4) transfers of a one-half interest to each in certain oil lease investments belonging to Prichard, which investments had an original cost basis totaling $3,493.44, and an adjusted basis on Prichard's books of $1,566.54 (the adjusted basis was credited to the ledger account "Investments"). Finally, both Ralph and Lindell's portion of the credit balance of the ledger account "Due from Officers" was debited in the amount of $190.72 for each with a corresponding1970 Tax Ct. Memo LEXIS 224">228 credit to the "Pr-Need Liability Account" to correct such account. Respondent determined in his statutory notice of deficiency for each docket, that the above distributions in 1963 and 1964 to Lindell and Ralph were taxable as ordinary income to each of them. For the taxable year 1965, respondent determined that the distributions to each, (minus $3,500, representing in each case a corporate bonus which petitioners reported in their income tax returns), were dividends. Thus, the total distributions determined to be taxable to each petitioner are as follows: l031963ItemVanLandinghamJarmanOil Royalty$ 119.12$ 119.12Cash 200.00200.00 $ 319.12$ 319.12 l021964ItemInterest Income$ 42.561965ItemVanLandinghamJarmanCash3,250.003,250.00Stock-Midwest National Life Insurance, Inc1,200.211,200.21Stock - Mark Kevin Corporation550.00550.00Oil Lease Investments (computed at cost)1,746.721,746.72Total$6,937.65$6,937.65Minus 3,500.003,500.00$3,437.65$3,437.65Opinion Petitioners in both dockets received distributions from a corporation in which they had1970 Tax Ct. Memo LEXIS 224">229 significant stock interests. The only issue for our consideration is whether these distributions were taxable as dividends within the meaning of section 301 2 and 316. 3 The burden of proof is on petitioners to show that the distributions in the amounts claimed were not dividends. The only witness in these cases was Ralph, who testified on direct examination that the amounts paid by the corporation1970 Tax Ct. Memo LEXIS 224">230 were in repayment of loans made to Prichard by both petitioners. On cross-examination, he admitted, however, that he had no knowledge as to what was the basis of the alleged debt due to officers shown on Prichard's books but stated that perhaps it was an accounting matter. No evidence was forwarded to disprove that the amounts determined by the respondent were actually distributed to petitioners. Other than the above, the only tangible indication of the existence of any debts due to petitioners is in the corporate income tax returns of Prichard. For the taxable year beginning on September 1, 1962, and ending August 31, 1963, a balance sheet attached to the corporate return indicates an opening and closing deficit under "Asset," "Due from Officers," in the amounts of $6,329.93 616 and $5,691.69. The decreases for that taxable year equaled $638.24, the total of the distributions to Ralph and Lindell in 1963. In the corporate returns for the succeeding two taxable years, there were further reductions in the deficit under "Due from Officers," as indicated on the balance sheets attached to the returns; however, the reduction did not equal the distributions claimed to both petitioners. 1970 Tax Ct. Memo LEXIS 224">231 It is well established that there need be no formal declaration of dividends in order to tax amounts as a dividend, if there is a distribution out of available earnings or profits to shareholders which bestows a benefit upon them. (C.A. 9, 1959), affirming on this issue a Memorandum Opinion of this Court. The evidence in this case is far from establishing that a corporate indebtedness existed or that the distributions in issue were in repayment thereof. In the absence of such evidence, we can only conclude that petitioners are taxable on the amounts distributed in 1963, 1964 and 1965, minus respondent's offsets in 1965, for clearly they received distributions out of earnings and profits, which were a benefit to them. Decisions will be entered under Rule 50. Footnotes1. All statutory references are to the Internal Revenue Code of 1954, unless otherwise indicated.↩2. SEC. 301. DISTRIBUTIONS OF PROPERTY. (a) In General - Except as otherwise provided in this chapter, a distribution of property (as defined in section 317(a)) made by a corporation to a shareholder with respect to its stock shall be treated in the manner provided in subsection (c). * * (c) Amount Taxable. - In the case of a distribution to which subsection (a) applies - (1) Amount Constituting Dividend. - That portion of the distribution which is a dividend (as defined in section 316) shall be included in gross income. ↩3. SEC. 316. DIVIDEND DEFINED. (a) General Rule - For purposes of this subtitle, the term "dividend" means any distribution of property made by a corporation to its shareholders - (1) out of its earnings and profits accumulated after February 28, 1913 * * *↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622227/	ROCKY MOUNTAIN DEVELOPMENT COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Rocky Mountain Dev. Co. v. CommissionerDocket No. 83849.United States Board of Tax Appeals38 B.T.A. 1303; 1938 BTA LEXIS 760; December 6, 1938, Promulgated 1938 BTA LEXIS 760">760 1. Where petitioner, in exchange for oil well equipment, acquired certain oil payment contracts for stipulated amounts to be paid out of the proceeds from oil if, as, and when produced from the properties upon which the exchanged equipment was installed, and the petitioner's right to receive such future payments and thus recoup its cost and realize taxable profits, if any, was wholly contingent upon the indeterminable happening of future events, held, that petitioner is entitled to apply the payments actually received during the taxable year on each contract, respectively, in recoupment of the cost of such contract, respectively, and, further, is obligated to return as income only the excess of such payments over cost of each contract, respectively. Burnet v. Logan,283 U.S. 404">283 U.S. 404. 2. Held, that petitioner is not entitled to depletion on oil payments received in excess of the cost of its respective oil payment contracts. Cook Drilling Co.,38 B.T.A. 291">38 B.T.A. 291. Harry C. Weeks, Esq., for the petitioner. John H. Pigg, Esq., for the respondent. TYSON 38 B.T.A. 1303">1304 OPINION. TYSON: For the calendar year 19331938 BTA LEXIS 760">761 the respondent determined a deficiency of $1,374.23 in income tax and of $215,09 in excess profits tax. The errors assigned by petitioner are: (1) That respondent erred in his method of determining petitioner's taxable income received from certain "oil payments." (2) That respondent erred in failing to allow depletion with respect to sums received from "oil payments." (3) That respondent erred in determining that petitioner was liable for any excess profits tax. The respondent admits the petitioner's first assignment of error, denies petitioner's second and third assignments, and affirmatively alleges that he erred in not determining that petitioner derived gross income from "oil payments" during 1933 in the amount of $18,927.23; that from such gross income petitioner is entitled to a deduction for depletion in the amount of $6,552.66; and that petitioner derived and/or realized a net income from "oil payments" and/or from the property during 1933 in the amount of $12,374.67. The respondent also affirmatively alleges that there are additional deficiencies in income and excess profits taxes in the respective amounts of $238.95 and $86.89 and that the correct deficiencies1938 BTA LEXIS 760">762 in controversy in this proceeding are $1,613.18 in income tax and $301.98 in excess profits tax and prays that the Board redetermine the deficiencies to be in such increased amounts for the year 1933. In its reply the petitioner denies each of the respondent's affirmative allegations of his own error and also the latter's allegation as to additional income and excess profits taxes. This proceeding has been submitted upon the pleadings and a stipulation of facts which is incorporated herein by reference. Only such parts thereof as are deemed necessary to decision are set out herein. The petitioner, a Texas corporation, organized in 1932, is engaged in the business of exchanging oil well equipment for stipulated amounts to be paid from portions of the oil produced from the property upon which the exchanged equipment is to be installed. Such payments were contingent and receivable by petitioner only as, if, and when oil was produced and saved from such property. In pursuing such business, and by such method, petitioner acquired, during 1932 and 1933, 11 of the 13 oil payment contracts here involved and acquired the other two contracts from its incorporators through the issuance1938 BTA LEXIS 760">763 to them of all its capital stock. The cost to the incorporators of each of the two contracts was the actual cost, to them, of oil equipment exchanged therefor. 38 B.T.A. 1303">1305 The parties are in agreement as to the petitioner's cost basis, which in each of the 13 contracts is the actual cost of the oil equipment exchanged therefor. The stipulation sets forth a tabulation which shows as to each of the 13 oil payment contracts acquired during 1932 and 1933 (A) the lease to which the oil payment contract applied, (B) the gross amount of the oil payment contract, (C) the cost to petitioner, or its incorporators, of the equipment exchanged, and (D) the amounts of the payments received (collected) by petitioner during each of the years 1932 and 1933. In determining the deficiencies in income and excess profits tax as shown in the deficiency notice the respondent included in income the excess of the fair market value of the oil payment contracts acquired in 1933 as determined by him, over the cost thereof to petitioner, and added thereto the total oil payments received in 1933 less the portion of such payments determined by the respondent to represent a return of cost to petitioner. 1938 BTA LEXIS 760">764 The respondent now contends that the total amount of oil payments received (collected) by petitioner on all of its contracts during 1933 should be included in gross income and that on such amount the petitioner is entitled to a deduction for depletion measured either by cost depletion or percentage depletion, whichever is the greater. The petitioner contends that the oil payments received should first be applied to the recoupment of cost, that only the excess of such payments over cost should be included in income, and that upon such latter amount it is entitled to depletion at the rate of 27 1/2 percent. Upon authority of , we hold that the respondent erred in his determination that for 1933 the petitioner realized a taxable gain in an amount computed by the respondent as representing the difference between the cost of the oil payment contracts acquired in 1933 and his determined fair market value of such contracts when acquired and, further, in adding thereto the total oil payments received in 1933 less the portion of such payments determined by respondent to represent a return of cost to petitioner. 1938 BTA LEXIS 760">765 The oil payment contracts acquired during 1932 and 1933 by petitioner, in exchange for oil well equipment, provided for contingent future payments out of the proceeds of oil if, as, and when produced and saved from the properties to which those contracts applied. The petitioner's right to receive such future oil payments and thus recoup its cost and realize taxable profits, if any, was wholly contingent upon the happening of future events which, because indeterminable, might never occur. The consideration received by petitioner for its sales of equipment during 1932 and 1933, being the right to receive such contingent oil payments, was not the equivalent 38 B.T.A. 1303">1306 of cash because the promise to make such oil payments had no definitely ascertainable fair market value. The transactions were not closed in either of those years and the gain or loss on them could not have been then ascertained with any degree of certainty. As to each of its oil payment contracts, the petitioner was entitled to recover the cost thereof before being chargeable with any taxable gain thereon. 1938 BTA LEXIS 760">766 ; , affirming ; ; and . We hold that, for the purpose of determining the petitioner's taxable gain from all of its various oil payment contracts during the taxable year 1933, the payments actually received (collected) by petitioner during that year under each contract, respectively, must first be applied to petitioner's recoupment of its cost of each contract, respectively, and, further, that any excess of such payments received on each contract during 1933 over the cost of such contract, respectively, must be included in petitioner's gross income for that year. The petitioner's contention that it is entitled to a deduction for depletion at 27 1/2 percent on the excess of payments received over the cost of its contracts must be denied. In , we said: The statutory allowance for depletion is predicated upon the receipt of gross income from the operation of oil and gas wells, by one who has a capital investment1938 BTA LEXIS 760">767 in the oil and gas in place and may not be allowed to one who has no such capital investment but only an income derived from production, through a contractual relation or personal covenant with the owner of the mineral deposit. ; ; . The petitioner's oil payment contracts called only for certain payments out of oil in consideration for the equipment sold by the petitioner and did not grant or convey to petitioner an interest in the leases themselves or the oil and gas in place. The record does not disclose any assignments to petitioner of an interest in the oil and gas in place or the leases themselves. Consequently, neither prior to nor by reason of its acquisition of the oil payment contracts in question, did the petitioner own any interest in the oil and gas in place or the leases to which those contracts applied. Upon authority of 1938 BTA LEXIS 760">768 , we hold that the petitioner is not entitled to depletion on that part of the oil payments received during the taxable years which was in excess of the cost to petitioner of its respective oil payment contracts. The petitioner's assignment of error as to its liability for excess profits tax merely relates to the amount of such tax, which, being 38 B.T.A. 1303">*1307 dependent upon the redetermination of the correct amount of petitioner's taxable income, if any, for the year in question, will be determined upon the recomputation under Rule 50. Decision will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622229/	DONALD R. CAMPBELL and PATRICIA A. CAMPBELL, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentCAMPBELL v. COMMISSIONERDocket No. 6066-84.United States Tax CourtT.C. Memo 1986-569; 1986 Tax Ct. Memo LEXIS 37; 52 T.C.M. 1096; T.C.M. (RIA) 86596; November 26, 1986; Affirmed in part, Reversed in part and Remanded February 23, 1989 John P. Konvalinka and H. Wayne Grant, for the petitioners. Howard P. Levine, for the respondent. SCOTT MEMORANDUM FINDINGS OF FACT AND OPINION SCOTT, Judge: Respondent determined a deficiency in petitioners' Federal income tax for the taxable year 1979 in the amount of $59,031.68 and additions to tax under sections 6651(a)(1)1 and 6653(a) in the respective amounts of $2,951.58 and $4,045.92. Some of the issues have been disposed of by agreement of the parties, leaving for our decision the following: (1) Whether petitioners are entitled to deduct the losses shown on their return from their claimed participation in a partnership, Health Air. (2) Whether petitioners are entitled to the claimed investment tax credit on an airplane purchased by Health Air. (3) Whether amounts advanced to petitioner, Donald R. Campbell, by Area Psychological Clinic, P.C., in 1979 are loans or compensation1986 Tax Ct. Memo LEXIS 37">40 for services. (4) Whether petitioners are liable for the additions to tax provided for in sections 6651(a)(1) and 6653(a). FINDINGS OF FACTS Some of the facts have been stipulated and are found accordingly. Donald R. Campbell (petitioner) and Patricia A. Campbell, husband and wife, who resided in Walden, Tennessee, at the time of the filing of their petition in this case, filed a joint Federal income tax return for the calendar year 1979 with the Memphis Service Center, Memphis, Tennessee, on June 29, 1980.Petitioners had previously been granted an extension of time in which to file their 1979 return to June 15, 1980 (Sunday). The postmark date on the envelope in which petitioners mailed their 1979 income tax return was June 26, 1980. On June 27, 1979, a general partnership, Health Air, was formed under the laws of North Carolina. Although formed under the laws of North Carolina, the partnership was governed by the laws of Tennessee. The following1986 Tax Ct. Memo LEXIS 37">41 schedule shows the partners of Health Air partnership and their respective percentage of ownership: PartnersPercentage of OwnershipBobby G. Rouse16.5Jerry E. Gilliland16.5Donald R. Abercrombie16.5Robert T. Spalding16.5Donald R. Campbell16.5William K. Dwyer16.5Health Air, Inc.1.0100.0 Health Care Corporation (HCC) is a Tennessee corporation chartered on March 29, 1979. The following schedule shows the original shareholders and capitalization of HCC: No. ofCert. No.ShareholderSharesConsideration 1Bobby G. Rouse380$ 20,000 2Jerry E. Gilliland38020,0003Donald R. Abercrombie38020,0004Robert T. Spalding38020,0005Donald R. Campbell38020,0006William K. Dwyer10040,000Total2,000$140,000 HCC was formed to invest in and develop health care facilities, primarily in the psychiatric area. On July 8, 1981, HCC filed a Form S-1 with the Securities and Exchange Commission in Washington, D.C. On December 10, 1981, HCC merged with Hospital Corporation of America (HCA). HCC1986 Tax Ct. Memo LEXIS 37">42 survived as an entity and became a wholly owned subsidiary of HCA, the name of which was subsequently changed to HCA Psychiatric Company. On or about June 28, 1979, Health Air partnership purchased its only asset, a 1979 Beechcraft airplane, Model No. King Air C-90, from Hangar One, Inc. On June 27, 1979, the partners of Health Air partnership, individually and d/b/a Health Air, executed Aircraft Security Agreement Documents with the Commercial Credit Equipment Corporation (CCEC). The partners of Health Air partnership were personally liable on a full recourse promissory note to CCEC in the amount of $641,717. The purchase price of the airplane was $710,315.78. A cash downpayment in the amount of $68,615.78 left an unpaid balance on the purchase price of the airplane of $641,700. Title and recording fees in the amount of $17 brought the principal balance of the note to CCEC to $641,717. A finance charge in the amount of $428,140.12 was added to the amount of the note resulting in a total balance owed by Health Air partnership to CCEC of $1,069,857.12. The security agreement provided for 83 equal monthly installments of $9,680.68 due on the 10th day of each month commencing1986 Tax Ct. Memo LEXIS 37">43 in August 1979. A balloon payment in the amount of $266,360.68 was due on July 10, 1986. HCC was a guarantor on the Health Air partnership full recourse promissory note for the purchase of the airplane. HCC advanced Health Air partnership $60,000 towards the downpayment on the purchase price of the airplane. Health Air partnership accounted for the advance for the downpayment on the airplane as a credit "due to/from affiliate -- HCC" account. Although the partners of Health Air partnership executed the documents for the purchase of the airplane in Chattanooga, Tennessee, the Beechcraft airplane was registered in North Carolina, so no sales tax was paid on its purchase. Except for registering the airplane in North Carolina Health Air partnership had no activities in North Carolina. One reason for the acquisition of the airplane by Health Air partnership was to provide transportation to HCC's officers and employees. In 1978, airline service to Chattanooga, Tennessee, was curtailed by the major airlines, thus creating substantial transportation problems for local residents. For this reason HCC needed an airplane in the operation of its business. On June 23, 1981, an option agreement1986 Tax Ct. Memo LEXIS 37">44 was entered into between Health Air partnership and HCC wherein HCC was granted an option to pourchase the airplane when Health Air partnership notified HCC that it intended to sell the plane.Pursuant to the option, the purchase price of the airplane was to equal one-half of the amount by which the fair market value of the airplane at that time exceeded the sum of the outstanding purchase money indebtedness and the net amount of any advances made by HCC to Health Air partnership. This option was never exercised. On June 27, 1979, Health Air partnership entered into an agreement to lease the Beechcraft airplane to HCC until June 30, 1982. Bobby G. Rouse, Ph.D., a psychologist, was managing general partner of Health Air partnership as well as president, chief executive officer and chairman of the board of directors of HCC. The equipment lease between HCC and Health Air partnership was executed by Dr. Rouse both as a general partner of Health Air partnership and as president of HCC. HCC, the lessee, was obligated under the equipment lease to pay Health Air partnership, the lessor, $11,000 per month as rent for the lease of the Beechcraft airplane. HCC was expressly obligated under1986 Tax Ct. Memo LEXIS 37">45 the equipment lease to pay for repairs, insurance, taxes and maintenance on the airplane at its own cost and expense. There was no additional oral or written lease between Health Air partnership and HCC. The equipment lease could not be amended, altered or changed except by a written agreement signed by both parties. The term of the lease as well as the rental charges were blank when the equipment lease was initially executed by Dr. Rouse. At a later date the lease term and rental charge were inserted in the equipment lease by Dr. Rouse. These insertions showed the lease term to end on June 30, 1982 and the rental charge to be $11,000 per month. On June 27, 1979, Health Air partnership, lessor, entered into an Aircraft Operating Charter Agreement with Hangar One, Inc., lessee, for the Beechcraft airplane. On August 28, 1979, the parties executed an amendment to this agreement. For the period from July 1, 1979 through June 30, 1980, Hangar One agreed to poay Health Air partnership for a minimum of 240 hours of flight utilization or 60 hours per quarter regardless of its actual use of the airplane. The 240 hours was referred to as an "Annual Minimum Guaranteed Time." If at the1986 Tax Ct. Memo LEXIS 37">46 end of any quarter during the first year of operation, Hanger One failed to use the airplane at least 60 hours, Hangar One was to pay to Health Air partnership $120 for each unused hour. The unused hours were computed from the difference between the cumulative number of hours actually flown by Hangar One or credited to Hangar One during the quarter and 60 hours. Pursuant to the terms of the charter agreement, Health Air partnership had the exclusive use of the airplane unless Hangar One gave Health Air partnership "Forty-eight (48) hours advance notice * * * provided that said Aircraft has not been previously scheduled for use by the Lessor during any of the time of the Lessee's proposed use." If Hangar One could not utilize the airplane due to Health Air partnership's use of the airplane, the guaranteed minimum utilization was proportionately reduced by the number of hours that Hangar One would have used the airplane. HCC had the right of first refusal on the day-to-day use of the airplane. The charter agreement provided that Hanger One pay as a charter fee to Health Air partnership 70 percent of the flight revenues produced by the airplane as determined by invoices rendered to1986 Tax Ct. Memo LEXIS 37">47 Hangar One's customers. Flight revenue was calculated on a statute mile basis for revenue producing flights with the understanding that the rate was at the prevailing rate (not less than $1.45 per statute mile, excluding expenses incurred by the customer for lessee's pilot). Hangar One used the airplane a total of 9.5 hours from the period July 1, 1979 through December 31, 1979, as detailed below: Month and YearDateHoursJuly, 19797-08-793.37-21-793.4Total July6.7August, 19790September, 19799-20-791.3Total September1.3October, 19790November, 19790December, 197912-06-791.5Total December1.5Total July 1, 1979 -December 31, 19799.5Hangar One's guaranteed minimum flight utilization was reduced 202.8 hours because of prior commitment by Health Air partnership for use of the airplane from July 1, 1979 through December 31, 1979, as detailed below: Month and YearDateHoursJuly, 197907-11-792.007-18-792.507-24-795.007-26-795.007-28-794.0Total July18.50August, 197908-03-792.508-07-796.008-08-793.508-09-793.508-10-793.508-13-793.0Maintenance -08-22-79 thru08-31-796.6Unaccounted4.5Total August33.10September, 197909-04-793.009-04-793.509-05-793.509-06-793.009-07-792.509-11-795.009-13-794.509-14-797.009-16-7909-21-794.009-27-794.509-28-793.0Total September, 197943.50October, 197910-02-792.510-03-794.010-05-798.010-18-796.010-25-795.510-29-792.210-30-798.0Total October36.20November, 197911-08-796.511-12/11-14-798.011-15-793.511-20-797.011-29-795.011-30-793.5Total November33.50December, 197912-04-793.012-06-798.012-09-7912.5Maintenance -12-11/12-15-793.312-18-795.012-22-793.012-28-793.2Total December38.00Total July 1, 1979 -December 31, 1979202.801986 Tax Ct. Memo LEXIS 37">48 Health Air partnership reported gross receipts in the amount of $95,325.89 on the cash method of accounting in its 6 months of operation in 1979. Total income earned by Health Air partnership from Hangar One in 1979 was $1,951.81. The airplane was leased 340.2 hours in 1979. Golden Gallon leased the airplane 7.4 hours from Health Air partnership in 1979. Health Air partnership leased the airplane a maximum of 15.7 hours to other unrelated parties in 1979. Area Psychological Clinic leased the airplane 26.7 hours from Health Air partnership in 1979. Valley Psychiatric Hospital Corporation leased the airplane 17.1 hours from Health Air partnership in 1979. Medical Park Hospital leased the airplane 2.1 hours from Health Air partnership in 1979. HCC leased the airplane 263 hours from Health Air partnership in 1979. The airplane was leased by HCC 77 percent of the time of its total use in 1979. The airplane was leased by HCC or other related parties 91 percent of the time of its total use in 1979. Health Air partnership stored the airplane at Hangar One and maintenance on the airplane was performed by Hangar One and the cost thereof charged to Health Air. HCC made monthly1986 Tax Ct. Memo LEXIS 37">49 payments of $9,680.68 on the promissory note Health Air partnership signed for the purchase of the airplane for the last 5 months of 1979 for total payments in 1979 of $48,403.40. The rental income Health Air partnership received from HCC was reclassified and offset against the note payments made by HCC for the last 5 months of 1979. HCC also paid all expenses for the operation of the airplane. No books and records were maintained by Health Air partnership in a central office because the partnership had no official place of business. The accounting records were prepared by HCC personnel based on information supplied from the "clearing accounts" maintained at Hangar One. Health Air partnership employed no outside personnel to maintain their "accounting system." Health Air partnership's expenses were paid by: (1) monthly payments on the promissory notes were advanced by HCC to the checking account of Health Air partnership; (2) some operating expenses were offset against Hangar One's rental payments; and (3) some operating expenses were offset against HCC's rental payments. Health Air partnership reported losses for the years 1979 through 1983 as follows: 1979$77,730.771980234,043.091981227,581.07198270,006.621983124,697.571986 Tax Ct. Memo LEXIS 37">50 These losses were distributed as follows: Partner19791980198119821983Rouse($12,825.58)($38,617.11)($37,550.88)($11,551.09)($20,575.10)Gilliland($12,825.58)($38,617.11)($37,550.88)($11,551.09)($20,575.10)Abercrombie($12,825.58)($38,617.11)($37,550.88)($11,551.09)($20,575.10)Spalding($12,825.58)($38,617.11)($37,550.88)($11,551.09)($20,575.10)Campbell($12,825.58)($38,617.11)($37,550.88)($11,551.09)($20,575.10)Dwyer($12,825.58)($38,617.11)($37,550.88)($11,551.09)($20,575.10)HealthAir, Inc.($ 777.31)($ 2,340.43)($ 2,275.79)($ 700.08)($ 1,246.97)($77,730.79)($234,043.09)($227,581.07)($70,006.62)($124,697.57)In 1979, Health Air partnership claimed an investment tax credit on the purchase of the Beechcraft airplane using a basis of $872,276 which was distributed as follows: PartnerBasisITCRouse$143,925.54$14,392.55Gilliland143,925.5414,392.55Abercrombie143,925.5414,392.55Spalding143,925.5414,392.55Campbell143,925.5414,392.55Health Air, Inc.8,722.76872.30$872,276.00$87,227.60No1986 Tax Ct. Memo LEXIS 37">51 partner of Health Air partnership contributed capital to the partnership during the years 1979, 1980 or 1981. Health Air, Inc., is a North Carolina corporation which was incorporated on June 28, 1979, for the express purpose of buying or otherwise acquiring, owning, holding, exchanging and leasing, as well as operating, aircraft as a private or contract carrier. Health Air, Inc., was a one percent partner in Health Air partnership. Dr. Rouse was the president of Health Air, Inc., from its inception until he resigned some time in 1983. Health Air partnership did not advertise the availability of the airplane; however, Hangar One made attempts to market the plane. After December 10, 1981, when HCC merged with HCA, HCA paid Health Air partnership $11,000 per month for rental of the Beechcraft airplane. HCA ceased to lease the airplane from Health Air partnership when the equipment lease expired on June 30, 1982. As of December 31, 1979, in addition to the six original incorporator-shareholders of HCC, an additional shareholder, Dr. Nat T. Winston, purchased 101,091 shares of common stock of HCC for $14,000. In June 1981, HCC canceled the 101,091 shares of HCC's common stock issued1986 Tax Ct. Memo LEXIS 37">52 to Dr. Winston for $14,000 paid by HCC forgiving obligations owed it by Dr. Winston.Beginning in January 1980, Dr. Winston was executive vice president in charge of professional relations and was a director on the board of directors of HCC. In December 1979, HCC issued 21,416 shares of common stock to each Drs. Rouse, Gilliland, Spalding and Campbell (petitioner) and Mr. Abercrombie, CPA, for their combined 97 percent interest in Valley Psychiatric Hospital Corporation. As of December 31, 1980, the two additional shareholders in Valley Psychiatric Hospital Corporation were Drs. Henry C. Evans and David V. MacNaughton. In December 1980, Drs. Evans and MacNaughton exchanged their interest in Valley Psychiatric Hospital Corporation for 2,000 shares each of HCC's class A preferred stock at $5 par value. Valley Psychiatric Hospital Corporation became a wholly owned subsidiary of HCC. As of June 30, 1981, the following shareholders had the following interests in HCC: NumberPercentageShareholderof Sharesof OwnershipRouse695,23732.7Gilliland696,63732.9Abercrombie330,85415.6As of June 30, 1981, Drs. Rouse and Gilliland and Mr. Abercrombie1986 Tax Ct. Memo LEXIS 37">53 collectively owned 1,722,728 shares or 81.2 percent of the common stock of HCC, and all officers and directors as a group (six persons) owned 2,069,655 shares or 97.6 percent. Dr. Gilliland was executive vice president -- development, secretary, and on the board of directors of HCC. Mr. Abercrombie was executive vice president -- finance, treasurer and on the board of directors of HCC. Dr. Rouse, Dr. Gilliland and Mr. Abercrombie were the only three members of the executive committee of HCC. Petitioner did not discuss any aspects of buying and leasing an airplane with the other partners of Health Air partnership. Petitioner was not involved in the management of Health Air partnership but relied on Dr. Rouse, Dr. Gilliland and Mr. Abercrombie to manage the partnership. The consent of a majority of the percentage ownership of the Health Air partnership partners was required with respect to the management, conduct and operation of the business of the partnership. Without the written consent of all partners of Health Air partnership, no partner could pay or incur any obligation or expense in excess of $2,000, or make, execute or deliver a security agreement. The management of HCC1986 Tax Ct. Memo LEXIS 37">54 was identical to the management of Health Air partnership. On December 10, 1981, an escrow agreement was entered into between HCC, HCA, shareholders of HCC and the escrow agent, Third National Bank in Nashville. Pursuant to the escrow agreement, HCC's financial records were to be audited by December 10, 1981, by Arthur Young and Company. The purpose of the escrow agreement was to provide security for HCA for certain contingency obligations under the agreement entered into on September 16, 1981, between HCA and HCC which provided for the merger of HCA and HCC. Pursuant to the escrow agreement, the HCC shareholders agreed to indemnify and hold HCA harmless from and against any and all expenses or obligations incurred by HCA because of discrepancies in the actual value of HCC and the value shown by its records. The closing audit reflected directly all of the amounts of the contingent liability incurred by HCC shareholders when HCC merged with HCA. As of December 31, 1981, the outstanding accounts receivable due HCC from advances to affiliates totaled $387,607.42. The outstanding accounts receivable due HCC from Health Air partnership for advances to affiliates was $371,377.35. 1986 Tax Ct. Memo LEXIS 37">55 An adjustment was made to HCC's December 31, 1981, pre-closing trial balance to write off the $371,377.35 outstanding accounts receivable due HCC from Health Air partnership. The $371,377.35 of outstanding accounts receivable due HCC from Health Air partnership which were written off was carried over to HCC's working trial balance and consolidating balance sheet for the year ending December 31, 1981. This amount was later reinstated as an amount due HCC from Health Air partnership. An accounts receivable due HCC from Health Air partnership in the amount of $93,462 was written off the books and records of HCC on December 31, 1979. On October 21, 1982, an employment agreement was entered into between Mr. Abercrombie and HCA. As a condition procedent to the agreement, Mr. Abercrombie agreed to execute a promissory note to HCA representing 16.5 percent of the amount owed HCA by Health Air partnership. On October 1, 1982, Mr. Abercrombie and Dr. Rouse signed promissory notes and agreed to pay HCA $61,277.05. This represents 16.5 percent of the amount owed HCC by Health Air partnership. The payments were to be made as follows: $10,212.84 was due on October 1, 1983; $20,425.68 was1986 Tax Ct. Memo LEXIS 37">56 due on October 1, 1985; and $30,638.53 was due on October 1, 1986. On October 21, 1982, a similar agreement and promissory note were signed by Dr. Gilliland and HCA. On September 27, 1982, an aircraft operating lease lasting one year was entered into between Health Air partnership and Stevens Beechcraft, Inc.Health Air partnership sold the airplane to Career Aviation Sales, Inc. on March 22, 1984, for $414,000. Area Psychological Clinic, Inc. (APC), was a Tennessee corporation chartered on October 17, 1974. Dr. Rouse and Dr. Gilliland, the only two shareholders in APC each owned 50 percent of the common stock. Petitioner was employed by APC from 1975 until on or about October 30, 1980, and was a member of the board of directors of APC in 1977 and 1978. Petitioner was elected chairman of the board of directors of APC on January 18, 1979. Between 1975 and 1980, petitioner was a practicing child and adult psychiatrist. APC maintained an open-ended drawing account for petitioner. The clinic expended $32,580.78 on behalf of petitioner in 1979 for personal expenses. These amounts were not included as income in petitioner's income tax return for 1979. Of the $32,580.78 expended1986 Tax Ct. Memo LEXIS 37">57 by APC on behalf of petitioner during 1979, $24,546.92 was not deducted by APC but was reflected as "other loans" on APC's corporate income tax return for its fiscal year ending October 31, 1979. No contemporaneous notes for the personal expenses paid by APC for petitioner in 1979 were executed. The clinic's general ledger trial balance for the period October 1, 1980 to October 31, 1980, reflected a balance due from petitioner of $42,919.49. The clinic's general ledger trial balance for the period December 1, 1980 to December 31, 1980, reflected a balance due from petitioner in the amount of $48,571.38. To prevent petitioner from being available to competitors and in order to retain petitioner's services, on October 30, 1980, an agreement was entered into between petitioner, as consultant, and APC. On October 31, 1980, petitioner executed a promissory note to APC in the amount of $43,551.59. The note stated that it was in exchange "for value received." The value received in exchange for the promise to pay was not enumerated on the note. Pursuant to the terms of the note, petitioner was required to make 48 monthly installment payments of $907.32 commencing on January 1, 1982, and1986 Tax Ct. Memo LEXIS 37">58 for every consecutive month thereafter. Petitioner made no payment on the note or any other note to APC in January or February of 1982. Petitioner made no payments on the note or any other note to APC from April 1982 until November 1982. In an updated letter from the controller at Valley Hospital, petitioner was advised that a balance of $37,679.74 remained on his note to APC. Petitioner was advised that this was comprised of the original balance of $48,571.38 less payment in March 1982 of $1,814.64 and in November 1982 of $9,077. On October 30, 1982, a check drawn on the joint account of Donald R. or Patricia A. Campbell in the amount of $9,077 was written to APC. From October 15, 1982 until April 19, 1984, petitioner was involved in a legal dispute with APC, HCC and HCA. On his Federal income tax return for taxable year 1979, petitioner claimed an ordinary partnership loss in the amount of $12,825.58 as a result of being a partner in Health Air partnership. This represented petitioner's 16.5 percent ownership in Health Air partnership. On the Schedule K-1 filed by Health Air partnership for taxable year 1979, the partnership reported gross receipts in the amount of $95,325.89. 1986 Tax Ct. Memo LEXIS 37">59 The following deductions were claimed: Interest$ 18,509.71Depreciation95,763.31Amortization of carryingcharges over 83 months12,044.15Other DeductionsAirplane fuel$28,195.51Airplane supplies1,366.13Airplane landing fees296.18Airplane maintenance7,721.55Airplane insurance8,860.12Miscellaneous300.00Total Other Deductions46,739.49Total Deductions$173,056.66Ordinary Loss$ 77,730.77Respondent, in his notice of deficiency, disallowed the partnership loss claimed by petitioner with the explanation that it had not been established "that expenditures were for ordinary and necessary business expense, or were expended for the purpose designated." Respondent also increased petitioner's taxable income by the amount of $45,990.01 with the following explanation: During the taxable year ended December 31, 1979, the Area Psychological Clinic, P.C., made payments to you or for your benefit and permitted you to use corporate property without compensation. Such items are dividend income under Sections 301 and 316 of the Internal Revenue Code and are includable in your gross income1986 Tax Ct. Memo LEXIS 37">60 in the following amounts: 12-31-79Drawing account$ 4,515.26Auto's received, FMV26,989.20Auto use (operating expense)12,789.39Miscellaneous: Fowler Bros. Furniture$295.16DeWayne B. McCamish, D.D.S.395.00Commerce Union Bank - 1979 GMC402.93A. Fassnacht603.07Total miscellaneous1,696.16Total dividend income$45,990.01Therefore, your taxable income is increased $45,990.01 for the taxable year ended December 31, 1979. In his notice of deficiency respondent also disallowed $14,591.76 of petitioner's claim of an investment tax credit wit the following explanation: AssetsPurchase PriceHealth Air partnership airplane$143,925.54Area Group Investment Co. Assets1,301.60Computer Data Service690.43Total Assets$145,917.57Investment Tax Credit Rate10%Total Credit Disallowed$ 14,591.76Total Credit Per Return14,604.56Investment Credit Allowable$ 12.80In his notice of deficiency respondent determined additions to tax for petitioners' failure to timely file their return and for negligence with the following explanation: Since your income tax return[s] [sic] for the tax year1986 Tax Ct. Memo LEXIS 37">61 1979 was not filed within the time prescribed by law and you have not shown that the failure to file on time was due to reasonable cause, five (5%) percent of the tax is added as provided by Section 6651(a) of the Internal Revenue Code. Part of the underpayment of tax for the tax year ended December 31, 1979 is due to negligence or intentional disregard of rules and regulations. Consequently, the 5 percent addition to the tax is charged for that year, as provided by Section 6653(a) of the Internal Revenue Code. OPINION 1. Section 183 Issue.Respondent's primary contention is that Health Air partnership was not engaged in the trade or business of leasing an airplane and therefore its activity was an activity not engaged in for profit. Section 183 disallows certain deductions attributable to an activity not engaged in for profit. 2Section 183(c) defines an "activity not engaged in for profit" as an activity other than one for which deductions are allowable under section 162 (relating to trade or business expenses) or section1986 Tax Ct. Memo LEXIS 37">62 212(1) or (212)(2) (relating to expenses for the production or collection of income, or for the management, conservation or maintenance of property held for the production of income). 1986 Tax Ct. Memo LEXIS 37">63 It is well settled that for an activity to constitute the carrying on of a trade or business, such activity must be carried on for livelihood or profit or there must be a profit motive and some type of economic activity. Whether a profit is actually made is not controlling.However, the activity must be entered into in good faith with the dominant purpose and intent of realizing a profit. Hirsch v. Commissioner,315 F.2d 731">315 F.2d 731, 315 F.2d 731">736 (9th Cir. 1963), affg. a Memorandum Opinion of this Court; Drobny v. Commissioner,86 T.C. 1326">86 T.C. 1326, 86 T.C. 1326">1340 (1986); Flowers v. Commissioner,80 T.C. 914">80 T.C. 914, 80 T.C. 914">931 (1983). See also Dreicer v. Commissioner,78 T.C. 642">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). Whether the taxpayer possesses the required profit motive or intent is a question of fact to be decided based on all the evidence in the particular case. Section 1.183-2(b), Income Tax Regs.; Jasionowski v. Commissioner,66 T.C. 312">66 T.C. 312, 66 T.C. 312">319 (1976). In making this factual1986 Tax Ct. Memo LEXIS 37">64 determination, more weight must be given to the objective facts than to the mere statements of the parties. Engdahl v. Commissioner,72 T.C. 659">72 T.C. 659, 72 T.C. 659">666 (1979). Petitioner bears the burden of proving intent. Welch v. Helvering,290 U.S. 111">290 U.S. 111 (1933); Rule 142(a). "Profit" in this context means economic profit, independent of tax savings. Beck v. Commissioner,85 T.C. 557">85 T.C. 557, 85 T.C. 557">570 (1982); Herrick v. Commissioner,85 T.C. 237">85 T.C. 237, 85 T.C. 237">254-255 (1985). The regulations under section 183 set forth guidelines for determining whether a profit motive exists. Section 1.183-2(b), Income Tax Regs., provides a list of nine factors to be used in determining whether an activity is engaged in for profit. These factors include: (1) the manner in which the taxpayer carries on the activity; (2) the expertise of the taxpayer or his advisor; (3) the time and effort expended by the taxpayer in carrying on the activity; (4) the expectation that assets used in the activity may appreciate in value; (5) the success of the taxpayer1986 Tax Ct. Memo LEXIS 37">65 in carrying on other similar or dissimilar activities; (6) the taxpayer's history of income or losses with respect to the activity; (7) the amount of occasional profits, if any, which are earned; (8) the financial status of the taxpayer; and (9) whether elements indicating a personal pleasure or recreation are involved. Allen v. Commissioner,72 T.C. 28">72 T.C. 28, 72 T.C. 28">33-34 (1979). A record of losses over the years and the unlikelihood of achieving a profitable operation are important factors bearing on the taxpayer's true intention. Section 1.183-2(b)(6), Income Tax Regs.Respondent contends that Health Air partnership was no more than a mere passive investment or financing scheme and petitioner's activities with respect to the airplane were "not engaged in for profit" within the meaning of section 183(a). Petitioner takes the view that Health Air partnership was a trade or business entered into with the good faith intent of realizing a profit through the operation of an air charter taxi service from Chattanooga, Tennessee, to other cities in the United States. Petitioner emphasizes that he intended to realize a profit on the plane's rental proceeds. 1986 Tax Ct. Memo LEXIS 37">66 Petitioner also emphasizes that this particular plane was bought by the partnership because it was expected to appreciate in value. Petitioner notes that Health Air partnership realized a profit in 1984 in excess of $200,000. Citing section 1.183-2(b)(7), Income Tax Regs., petitioner argues that a substantial profit, even if only "ultimate" or "occasional" is indicative that the activity is engaged in for profit. In our view Health Air partnership was not operated in a manner consistent with established business practices. Petitioner argues that Health Air partnership was formed to own and lease an airplane; however, the airplane was leased primarily to HCC, a corporation controlled by the partners of Health Air partnership. HCC paid the downpayment on the purchase of the airplane as well as monthly note payments and all operating expenses. HCC and other related third parties were the predominant users of the airplane. Usage by unrelated third parties was insignificant. The only lease agreement entered into between HCC and Health Air partnership was disregarded by the parties. The purported charter agreement between Hangar One and Health Air partnership1986 Tax Ct. Memo LEXIS 37">67 was of little if any significance since HCC had first call on the use of the airplane. HCC leased the airplane 77 percent of the time of its total use in 1979. The airplane was leased by HCC or other related parties 91 percent of its total use in 1979. The record reflects no significant use of the plane by Hangar One or unrelated third parties. No formal books and recores were maintained by Health Air partnership. The partnership maintained only an informal accounting system which consisted of information supplied by "clearing accounts" at Hangar One. Health Air partnership had no employees and such records as were maintained of its activities were kept by employees of HCC. From the facts in this record we conclude that Health Air was formed solely as a tax avoidance vehicle for its partners who were the stockholders of HCC. Health Air leased the airplanes primarily to HCC because it had no interest in operating a leasing business for profit. Under the arrangement, HCC had use of an airplane and the Health Air partners, who were also the HCC stockholders, were intended to receive nothing from the arrangement but tax benefits without any cash outlay investment. We conclude1986 Tax Ct. Memo LEXIS 37">68 that Health Air partnership was not in the trade or business of leasing an airplane and its activity was an activity "not engaged in for profit" within the meaning of section 183. The only reason a profit was realized by Health Air partnership n 1984 was because it sold the Beechcraft airplane in that year and its claimed deductions for depreciation had been high enough that a profit arose from the sale. There is nothing in this record to support petitioners' contention that they believed the airplane would appreciate. In fact, it did depreciate. Insofar as this record shows, there was no feasible way that the airplane at any point could have been sold for an amount which would permit Health Air to recoup its prior year's losses. From 1979 through 1983, the partnership reported substantial losses and passed those losses through to its partners. As stated in the Form S-1, filed by the partnership, although "the partnership occasionally leases the airplane to third parties, the primary purpose of the acquisition of the plane was to provide transportation to the Company's [HCC] officers and employees." Clearly, this purpose is not a business purpose for the partnership. Since1986 Tax Ct. Memo LEXIS 37">69 the deductions claimed by Health Air in computing its loss which would be allowed other than as business expenses are less than Health Air's gross receipts, under section 183 Health Air is entitled to other deductions only to the extent of its gross receipts reduced by these otherwise allowable deductions. Respondent therefore correctly disallowed the entire loss claimed by petitioners from their investment in Health Air. 2. Investment Tax Credit.The second issue for our consideration is whether petitioners are entitled to a pro rata part of an investment tax credit claimed by Health Air on the purchase of the airplane. Since we have held that Health Air partnership was not in the trade or business of leasing an airplane, we conclude that no investment tax credit upon the purchase of the plane is allowable. Because of section 183(b), Health Air is entitled to allowable deductions as if it were engaged in a trade or business to the extent that its income exceeds the deductions to which it would be entitled whether or not it was in a trade or business. This does not mean that Health Air should be considered to be in a trade or business within the meaning of section 167(a)(1) 1986 Tax Ct. Memo LEXIS 37">70 so as to be eligible for the investment tax credit. Furthermore, Health Air, a partnership, leased the airplane and therefore is subject to the provisions of section 46(e)(3) concerning noncorporate lessors. Petitioners have totally failed to show that deductions with respect to the airplane allowable "solely by reason of section 162" exceed 15 percent of the rental income. Deductions other than those to which Health Air is entitled whether or not in a trade or business, are allowed to Health Air by section 183(b). 3. Compensation for Services.The third issue is whether amounts advanced to Dr. Campbell (petitioner) by APC in 1979 constituted compensation for services. In his notice of deficiency, respondent determined that APC made payments to petitioner and permitted him to use corporate property without compensation to the extent of $45,990.01. Respondent determined that such items constituted dividend income to petitioner pursuant to sections 301 and 316. Respondent at the trial stated his position to be that the amounts advanced to petitioner constituted compensation for services rendered rather than dividends. This position was incorporated in an amendment to answer1986 Tax Ct. Memo LEXIS 37">71 filed pursuant to leave granted at the trial. Pursuant to Rule 142(a), it is incumbent on respondent to establish that the amounts paid by APC to or for petitioner were compensation for services. Petitioner was never a shareholder in APC and respondent obviously made an error in the notice of deficiency. The factual bases and rationale required to establish that the amounts advanced by APC constituted compensation for services, differ from those required to prove it constituted dividend income as originally determined by respondent. Since respondent's new position as raised in the amended answer requires the presentation of new evidence rather than merely clarifying or developing his original position, he has the burden of establishing that the payments were compensation to petitioners. Achiro v. Commissioner,77 T.C. 881">77 T.C. 881, 77 T.C. 881">890 (1981), and cases there cited. Although respondent does not concede error in the amount shown in the notice of deficiency as income to petitioners because of payments on his behalf by APC, on brief he argues only with respect to the $32,580.78 paid by APC for personal expenses of petitioner. Respondent points out that the amount of these1986 Tax Ct. Memo LEXIS 37">72 expenditures was not included by petitioner on his 1979 Federal income tax return. Respondent argues that no contemporaneous notes were given for the advances and that the evidence shows that neither party intended these payments to be loans. Respondent concludes that the amounts were intended to compensate petitioner for valuable services rendered and thus should be included in petitioner's gross income. Petitioner argues that respondent has failed to sustain his burden of proof that advances made to petitioner by APC were compensation for services rather than loans. Petitioner argues that he intended to repay the advances from APC and that he signed a promissory note for the advances and even began paying back the alleged loan.In addition, he argues that APC's conduct demonstrates its intent that the advances be repaid. Petitioner notes that APC kept an itemized record of the expense advances which were shown as receivables on APC's books and were shown as loans on APC's corporate tax returns. Whether the amounts expended by APC for petitioner are compensation for services or loans1986 Tax Ct. Memo LEXIS 37">73 is a factual question and depends on the intent of the parties at the time the funds were expended on behalf of petitioner. Fisher v. Commissioner,54 T.C. 905">54 T.C. 905, 54 T.C. 905">909 (1970); Haber v. Commissioner,52 T.C. 255">52 T.C. 255, 52 T.C. 255">266 (1969), affd. 422 F.2d 198">422 F.2d 198 (5th Cir. 1978). An essential element of a bona fide debtor/creditor relationship is a good faith intent on the part of the recipient of the funds to make repayment and a good faith intent on the part of the person advancing the funds to enforce repayment. 54 T.C. 905">Fisher v. Commissioner,supra at 909-910, C.M. Gooch Lumber Sales Co. v. Commissioner,49 T.C. 649">49 T.C. 649, 49 T.C. 649">656 (1968). The record clearly reflects that APC expended $32,580.78 for petitioner's personal expenses which included travel, furniture, home repairs, automobile payments and a boat and that these amounts were not reported as income on petitioner's 1979 Federal income tax return. The record shows that of the $32,580.78, the amount of $24,546.92 was not deducted by APC on its tax return for its fiscal year ended October 31, 1979, but was shown on the return as "other loans." The record also shows that APC1986 Tax Ct. Memo LEXIS 37">74 maintained an open-ended drawing account for petitioner. The general ledger trial balance for the period October 1, 1980 to October 31, 1980 reflected a balance due from petitioner of $42,919.59. This amount was entitled "Draw." The general ledger trial balance for the period December 1, 1980 to December 31, 1980 reflected a balance due from petitioner in the amount of $48,571.38. This account was entitled "N/R." Petitioner was not required to execute contemporaneous notes for personal expenses paid for him by APC or for any amounts of "draw" in excess of his agreed compensation. Later petitioner did execute notes for the balance shown as due and made some repayments. Based on the record as a whole, we conclude that only the $12,033.86 of payments made on petitioner's behalf in 1979 by APC, which were not treated by APC as loans, have been shown by respondent to in fact be compensation to petitioner. 4. Additions to Tax Pursuant to Section 6651(a)(1) and Section 6653(a).The final issue for our consideration is whether petitioners are liable for the additions to tax under section 6651(a)(1) for failure to file a timely return and section 6653(a) for negligence or intentional1986 Tax Ct. Memo LEXIS 37">75 disregard of rules and regulations for the year 1979. Section 6651(a)(1) imposes an addition to tax for failure to timely file a return unless the taxpayer shows that such failure was due to reasonable cause and not willful neglect. Section 6653(a) imposes an addition to tax if any part of an underpayment of tax is due to negligence or intentional disregard of rules and regulations. In the instant case, petitioners filed their 1979 income tax return on June 29, 1980. The postmark date on the envelope in which petitioners mailed their return was June 26, 1980. Petitioners had been granted an extension of time in which to file their 1979 income tax return to June 15, 1980. The burden is on petitioners to prove that their failure to file their 1979 return by June 16, 1980, was due to reasonable cause rather than willful neglect. Rule 142(a). In our view, petitioners have offered no explanation suggesting that their failure to timely file their return was due to reasonable cause rather than willful1986 Tax Ct. Memo LEXIS 37">76 neglect. Petitioner contends that he was "out of town during most of the month of June." This vague statement is no adequate explanation for petitioners' failure to timely file their 1979 return. Petitioners' 1979 income tax return was not dated by petitioners or their income tax preparer. The record reflects no reasonable excuse for petitioners failure to file their return by Monday, June 16, 1980. Petitioners have thus failed to show that their failure to file the return for the year 1979 by the due date was due to reasonable cause rather than willful neglect. Section 6653(a) imposes an addition to tax if any part of an underpayment is due to negligence or intentional disregard of rules and regulations. The burden of proof is on petitioner to establish a lack of negligence or intentional disregard of rules and regulations. Bixby v. Commissioner,58 T.C. 757">58 T.C. 757, 58 T.C. 757">791 (1972). Petitioner argues that the addition to tax for negligence should not be assessed in the instant case because there is a bona fide dispute as to the correctness of the deficiency. We sustain respondent's1986 Tax Ct. Memo LEXIS 37">77 determination of the section 6653(a) addition in this case. In our view an individual with petitioner's extensive education, accomplishments and intelligence must have known that the transactions involving the airplane were designed to avoid income tax. Petitioner must have known that Health Air partnership had no purpose other than to bring tax benefits to its partners. As a general partner of Health Air partnership, petitioner should have been aware of the true nature of the partnership's activities. We thus sustain respondent's determination of additions to tax pursuant to sections 6651(a)(1) and 6653(a) for the taxable year 1979. Decision will be entered under Rule 155.Footnotes1. Unless otherwise indicated, all section references are to the Internal Revenue Code of 1954, as amended and in effect during the year in issue. All Rule references are to the Tax Court Rules of Practice and Procedure.↩. These figures are according to the stipulation of the parties.↩2. SEC. 183. ACTIVITIES NOT ENGAGED IN FOR PROFIT. (a) General Rule. -- In the case of an activity engaged in by an individual or an electing small business corporation (as defined in section 1371(b)), if such activity is not engaged in for profit, no deduction attributable to such activity shall be allowed under this chapter except as provided in this section. (b) Deductions Allowable. -- In the case of an activity not engaged in for profit to which subsection (a) applies, there shall be allowed -- (1) the deductions which would be allowable under this chapter for the taxable year without regard to whether or not such activity is engaged in for profit, and (2) a deduction equal to the amount of the deductions which would be allowable under this chapter for the taxable year only if such activity were engaged in for profit, but only to the extent that the gross income derived from such activity for the taxable year exceeds the deductions allowable by reason of paragraph (1).↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622230/	RICHARD M. AND ALYCE C. EVANS, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent GEORGE C. AND CAROLYN L. EVANS, Petitiones v. COMMISSIONER OF INTERNAL REVENUE, RespondentEvans v. CommissionerDocket Nos. 35870-85; 35918-85.United States Tax CourtT.C. Memo 1988-228; 1988 Tax Ct. Memo LEXIS 257; 55 T.C.M. 902; T.C.M. (RIA) 88228; May 19, 1988. John C. Coggin III and J. Richard Duke, for the petitioners. J. Craig Young, for the respondent. KORNERMEMORANDUM FINDINGS OF FACT AND OPINION KORNER, Judge: In timely statutory notices of deficiency, respondent determined deficiencies in Federal income tax for taxable year 1978 in these consolidated cases as follows: PetitionersdeficiencyRichard M. and Alyce C. Evans$ 9,608.22George C. and Carolyn L. Evans51,825.58After concessions, the issues for determination are: 1. Whether bonuses1988 Tax Ct. Memo LEXIS 257">258 authorized by their employer were constructively received by Richard and George Evans in 1978. 2. Whether petitioners adopted a change in their method of accounting for bonus income in 1978 without first securing respondent's permission as required by section 446(e). 1FINDINGS OF FACT Some of the facts have been stipulated and are so found. The stipulation of facts and exhibits attached thereto are incorporated herein by this reference. Richard and Alyce Evans are husband and wife as are George and Carolyn Evans. 2 Both couples resided in Birmingham, Alabama, at the time their petitions herein were filed. George and Richard Evans were president and vice president, respectively, of Belcher-Evans1988 Tax Ct. Memo LEXIS 257">259 Millwork Co., Inc. ("the company"). George owned 80.77 percent of the company's outstanding common stock, while Richard owned the remaining 19.23 percent of outstanding shares. Each additionally served on the company's board of directors. The company is an Alabama corporation with its principal place of business in Birmingham, Alabama. It is engaged in the business of supplying door and window units, lock sets, and other hardware to customers in the home building business. The company uses the calendar year as its tax year and maintains its books using the accrual method of accounting. The company holds its annual meeting of stockholders and directors on or about November 15 of each year. At least since 1975, it has been company practice to authorize the award of special merit performance bonuses to its officers and certain other employees at the annual meeting. Bonuses in the following amounts were authorized to be awarded to petitioners at the 1975 through 1978 annual meetings: DateAmountAuthorizedRichard EvansGeorge EvansNovember 15, 1975$ 8,000$ 20,000November 15, 197620,00050,000November 15, 197720,00060,000November 15, 197825,000100,0001988 Tax Ct. Memo LEXIS 257">260 In each year, the authorizing language of the award as contained in the minutes of the annual meeting specified that the bonuses were payable "during the calendar year * * or not later than March 15 of the following year as working capital is made available for their payment." The company accrued the bonuses on its books when authorized and deducted them in arriving at its taxable income for those years. In each of the years 1975 through 1978, the bonus authorized at that year's annual meeting was paid to petitioners in the subsequent taxable year. Richard Evans received his bonus in cash. He included the bonuses authorized in 1975, 1976, and 1977 in his taxable income during the year of authorization. The $ 25,000 bonus authorized at the 1978 annual meeting was paid to him on March 14, 1979. This bonus was included in his income for taxable year 1979. George Evans was not paid his bonus in cash due to the possible adverse consequences to the company's financial position of paying such relatively large sums in cash. Rather, George received his bonuses in the form of a series of interest-bearing promissory notes. He included the bonuses authorized in 1975, 1976, and 19771988 Tax Ct. Memo LEXIS 257">261 in his taxable income during the year authorized. In payment of the $ 100,000 bonus authorized at the 1978 annual meeting, George received ten $ 10,000 promissory notes in late February of 1979. The notes were all dated January 1, 1979. George included the $ 100,000 bonus authorized in 1978 in his taxable income in 1979, the year he received the notes. 3Respondent determined that both Richard and George Evans had erroneously failed to include the bonuses authorized in 1978 in their taxable incomes for that year. Specifically, respondent determined that petitioners were in constructive receipt of these bonuses in 1978. He thus increased the 1978 taxable income of Richard and George by $ 25,000 and $ 100,000, respectively. 4 Respondent also determined that petitioners changed their methods of accounting for bonus income1988 Tax Ct. Memo LEXIS 257">262 from the accrual to the cash method in 1978; that petitioners had failed to obtain permission from respondent for these changes as required; that petitioners must therefore use the accrual method of accounting for bonus income in 1978; and that the bonuses authorized in 1978 are properly accruable in that year. OPINION The determinations of respondent in his statutory notices of deficiency are presumptively correct and petitioners bear the burden of proving otherwise. Welch v. Helvering,290 U.S. 111">290 U.S. 111, 290 U.S. 111">115 (1933); Rule 142(a). Constructive Receipt IssueIncome is taxable when "actually or constructively" received. Sec. 1.446-1(c)(i), Income Tax Regs. A taxpayer is in constructive receipt of income in the year during which it is credited to his account, set aside for him, or otherwise made available to be drawn upon or could have been drawn upon had notice of intention1988 Tax Ct. Memo LEXIS 257">263 to do so been given. However, income is not constructively received if the taxpayer's control over its receipt is subject to "substantial limitations or restrictions." Sec. 1.451-2(a), Income Tax Regs. The purpose of the constructive receipt doctrine is to prevent a taxpayer from turning his back on income he has a right to receive and thereby select in which year he will report it. The doctrine is sparingly used and is invoked only when it is clear that the taxpayer has an unrestricted right to receive payment and his failure to do so is attributable to exercise of his own choice. Basila v. Commissioner,36 T.C. 111">36 T.C. 111, 36 T.C. 111">115-116 (1961), quoting Gullett v. Commissioner,31 B.T.A. 1067">31 B.T.A. 1067, 31 B.T.A. 1067">1069 (1935). Whether or not the constructive receipt doctrine applies is a question of fact. Hughes v. Commissioner,42 T.C. 1005">42 T.C. 1005, 42 T.C. 1005">1015 (1964). Petitioners argue that their rights to receive their bonus payments in 1978 were subject to substantial restrictions. Specifically, they contend that no bonuses could be paid until after it had been determined that the company possessed sufficient working capital to pay the bonuses without endangering its1988 Tax Ct. Memo LEXIS 257">264 financial position. They further contend that such a determination could not be made until after the company's accountant had completed the annual yearend accounting work in early 1979. Respondent maintains that there were no substantial limitations on petitioners' right to receive their bonuses during 1978. He interprets the bonus-authorizing minutes as merely requiring that sufficient working capital be available from which bonus payments could be made rather than requiring that a formal determination of working capital be made prior to any payments. Respondent points to the company's December 31, 1978 balance sheet, which he contends shows sufficient working capital on hand at December 31, 1978, with which to make bonus payments. He also contends that George was intimately familiar with the company's financial position at the end of 1978 and that Richard could have easily determined the amount of working capital available at the end of 1978. Respondent also finds significant the fact that both George and Richard had the power to write checks on the company's account without the necessity of securing a counter signature. Respondent thus attributes the failure of petitioners1988 Tax Ct. Memo LEXIS 257">265 to receive their bonuses in 1978 not to any limitations on their right to receive payment, but to their personal choice to defer payment into 1979. On the particular facts herein, we hold that neither petitioner was in constructive receipt of the bonus authorized to be paid to him in 1978 at any time in 1978. We disagree with respondent's contention that petitioners had an unfettered right to draw their bonuses in 1978. We regard the authorizing language conditioning the payment of any bonuses prior to March 15, 1979, on the availability of sufficient working capital as imposing a substantial limitation on petitioners' rights to receive payment prior to that date. The balance sheet which respondent contends shows adequate working capital on hand at December 31, 1978, could not have been prepared until after the yearend accounting work had been completed and the company's books closed. It therefore would have been unavailable for use by petitioners in ascertaining working capital before then. 5 While the bonus resolution does not require a formal determination of working capital, we think it only prudent and in keeping with management's fiduciary responsibility to the company1988 Tax Ct. Memo LEXIS 257">266 that such a formal determination be made before corporate assets were expended rather than relying on general knowledge of the company's overall financial position. Respondent's argument that the company could have borrowed the funds to pay the bonuses in unpersuasive. The bonus resolution specifically provides that the right to payment prior to March 15, 1979, is conditioned on the availability of1988 Tax Ct. Memo LEXIS 257">267 working capital. Ohio Battery & Ignition Co. v. Commissioner,5 T.C. 283">5 T.C. 283 (1945), is clearly distinguishable. In that case the controlling shareholder's right to receipt of his salary payments was unconditional. The taxpayer could not defeat application of the constructive receipt doctrine merely because the corporation had insufficient cash on hand with which to satisfy its obligation when it had the resources to readily acquire the cash through credit. Respondent places much emphasis on the fact that petitioners were controlling shareholders of the company. However, the mere authorization by a corporation of compensation to be paid to an officer does not constitute constructive receipt of the authorized amounts even through the officer has the power to cause payment at any time by virtue of his control of the corporation. Hyland v. Commissioner,175 F.2d 422">175 F.2d 422, 175 F.2d 422">424 (2d Cir. 1948). it is the possession of the right (and not merely the power) to receive funds which forms the basis of the doctrine of constructive receipt. F. D. Bisset & Son, Inc. v. Commissioer,56 T.C. 453">56 T.C. 453, 56 T.C. 453">463 (1971). The term "right" connotes an ascertainable1988 Tax Ct. Memo LEXIS 257">268 and leegally enforceable power. United States v. Byrum,408 U.S. 125">408 U.S. 125, 408 U.S. 125">137 (1972). Here petitioners had no "right" to demand payment of the bonuses prior to March 15, 1979, unless the company had sufficient working capital available. Even though it was petitioners who would make this determination, it still constitutes a significant limitation on their right to demand payment since they had a fiduciary duty as controlling shareholders and directors to make this determination in good faith and in the company's, rather than their personal, best interest. There is no evidence that petitioners acted in bad faith in deferring the bonus payments into 1979. On the contrary, the decision to do so appears to have been motivated by genuine business considerations. We thus find that there were substantial restrictions on petitioners; right to demand payment of their bonuses in 1978. Therefore, there was no constructive receipt of the bonuses in that year. 61988 Tax Ct. Memo LEXIS 257">269 Change of Accounting Method IssueRespondent also contends that petitioners used the accrual method of accounting for bonuses in years prior to 1978 and that they each changed to the cash method in 1978. Since petitioners did not seek permission to change to the cash method, respondent determined that they must continue to use the accrual method of accounting for bonuses in 1978. He determined that the bonuses authorized at the 1978 annual meeting were accruable in 1978 and increased petitioners' taxable income accordingly. Petitioners argue that they were never on the accrual method of accounting for bonuses in years prior to 1978, and that no change of accounting occurred in 1978. Rather, they argue that they erroneously applied the cash receipts method in previous years in which bonus income was reported prior to its actual receipt. Alternatively, petitioners argue that even if required to use the accrual method of accounting for bonuses, the bonuses authorized in 1978 were not accruable until 1979. Section 446(e) prohibits taxpayers form changing their method of accounting without the prior consent of respondent. A change in method of accounting includes a change1988 Tax Ct. Memo LEXIS 257">270 in the taxpayer's overall method of accounting as well as a change in the accounting treatment of any "material item." A material item is any item which involves the proper time for inclusion of the item in income. Sec. 1.446-1(c)(2)(ii)(A), Income Tax Regs. However, correction of arithmetic, posting or computational errors do not constitute a change in accounting. Sec. 1.446-1(e)(2)(ii)(b), Income Tax Regs. The purpose of the consent requirement of section 446(e) is to condition a proposed change in accounting on the taxpayer's agreement to make appropriate adjustments to remove any distortions of income which often accompany accounting changes. Witte v. Commissioner,513 F.2d 391">513 F.2d 391, 513 F.2d 391">394 (D.C. Cir. 1975), revg. and remanding T.C. Memo. 1972-232. 7 See also Woodward Iron Co. v. United States,396 F.2d 552">396 F.2d 552, 396 F.2d 552">554 (5th Cir. 1968; Commissioner v. O. Liquidating Corp.,292 F.2d 225">292 F.2d 225, 292 F.2d 225">230 (3d Cir. 1961). 1988 Tax Ct. Memo LEXIS 257">271 Neither the Code nor the regulations define the terms "accounting" or "method of accounting." However, the terms are commonly understood to encompass those practices and procedures employed by a taxpayer on a consistent basis to determine his treatment of recurring material items of income and expense, whether that treatment is proper or improper. H. F. Campbell Co. v. Commissioner,53 T.C. 439">53 T.C. 439, 53 T.C. 439">447 (1969), affd. 443 F.2d 965">443 F.2d 965 (6th Cir. 1971); Shepherd Construction Co. v. Commissioner,51 T.C. 890">51 T.C. 890, 51 T.C. 890">898 (1969). See sec. 1.446-1(e)(2)(iii) ex. (7), Income Tax Regs. Although it is clear that petitioners changed the timing of their recognition of bonus income, we hold that such change was attributable to errors in their past reporting rather than a change in their method of accounting. A change in a method of accounting presupposes that the method from which the taxpayer is changing was adopted at some point in the past. Silver Queen Motel v. Commissioner,55 T.C. 1101">55 T.C. 1101, 55 T.C. 1101">1105 (1971). We do not believe that petitioners ever "adopted" the accrual method of accounting for bonus income despite the fact that bonuses were1988 Tax Ct. Memo LEXIS 257">272 included in taxable income in the year of authorization rather than the year of receipt for tax years 1975, 1976, and 1977. It has been conceded that petitioners were on the cash method for all other items of income and expense. No explanation has been offered as to why they would have adopted the accrual method for bonus income only. Richard testified that he knew little of the financial aspects of the company business. It appears likely that Richard merely acquiesced in reporting the bonus income in the year it was reported on the form 1099 issued to him by the company's bookkeeper, rather than consciously adopting a new form of accounting. The company's accountant testified credibly that he included the notes received by George in taxable income in the year that the notes were dated since he had no knowledge that they were actually received by Richard at a later date. Inclusion of the bonuses in the year of authorization would thus have been attributable to a misapplication of the cash method rather than adoption of the accrual method. 8 In sum, we conclude that petitioners did not change their method of accounting within the meaning of section 446(e), but rather, corrected1988 Tax Ct. Memo LEXIS 257">273 inadvertent errors analogous to posting errors. Sec. 1.446-1(e)(2)(ii)(b), Income Tax Regs.; Korn Industries, Inc. v. United States,532 F.2d 1352">532 F.2d 1352, 532 F.2d 1352">1355-1356 (Ct. C1. 1976). 9The reliance respondent places in 513 F.2d 391">Witte v. Commissioner, supra, is misplaced. Witte stands for the proposition that section 446(e) requires consent from1988 Tax Ct. Memo LEXIS 257">274 respondent for a change of accounting even when the method of accounting from which the taxpayer seeks to change is an improper method. 513 F.2d 391">Witte v. Commissioner, supra at 395. Thus it presupposes that the taxpayer's prior treatment constituted a method of accounting, albeit an erroneous one. Similarly, George v. Commissioner,27 B.T.A. 765">27 B.T.A. 765 (1933), is clearly distinguishable. In George the taxpayer had consistently reported his bonus income in the year authorized. He sought to change to the cash method not out of realization that his previous treatment had been inadvertently inconsistent with his adopted method of accounting, but as a result of discovering that many of his coworkers reported their bonuses on the cash method. Since no change of accounting method has been made, permission from respondent to utilize the cash method is not required. Petitioners may thus include the bonuses authorized in 1978 in their taxable income in 1979 -- the year the bonuses were received. 101988 Tax Ct. Memo LEXIS 257">*275 To reflect the foregoing, Decision will be entered under Rule 155 in docket No. 35870-85. Decision will be entered for the petitioner in docket No. 35918-85.Footnotes1. All statutory references are to the Internal Revenue Code of 1954, as in effect in the year in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure, except as otherwise noted. ↩2. Alyce and Carolyn Evans are petitioners solely by reason of having filed joint Federal income tax returns with their husbands for the taxable year at issue. Hereinafter references to "petitioners" shall be references to Richard and George Evans only. ↩3. George considered the notes to be the equivalent of cash and thus reported them as income in the year of receipt. See Cowden v. Commissioner,289 F.2d 20">289 F.2d 20 (5th Cir. 1961), revg. and remanding 32 T.C. 853">32 T.C. 853 (1959), on remand T.C. Memo. 1961-229↩. Since neither party has questioned this assumption, we accept it. 4. Respondent also increased Richard's taxable income by $ 408.40 of unreported interest income. This adjustment has been conceded. Automatic medical expense and sales tax adjustments were also made. The propriety of these adjustments will turn on resolution of the bonus issue. ↩5. Furthermore, we are not convinced that the balance sheet conclusively establishes that the company possessed sufficient liquid assets with which to pay the bonuses. At the November 15, 1978 annual meeting, $ 165,672.65 in bonuses were authorized. The December 31, 1978 balance sheet indicates cash on hand on that date of $ 166,073 and investments of unspecified liquidity of $ 159,934. Additionally, the company had accounts payable of $ 297,719.21 and was soon to incur additional obligations with regard to proposed plant expansion and the purchase of a computer system. Under these circumstances, we think it far from clear that a prudent business manager would have concluded that the authorized bonuses could be paid without threatening the financial position of the company. ↩6. Respondent's reliance on several cases n which controlling shareholders were found to be in constructive receipt of bonuses or other compensation authorized by the board of directors to be paid to them is misplaced. Each case is clearly distinguishable. In Haack v. Commissioner,T.C. Memo. 1981-13, the taxpayer's contention that his right to receive a bonus was restricted by the corporation's "long-standing custom" of paying the bonuses two months after authorization was rejected. Here, in contrast to a mere "custom" the restriction on petitioners' right to demand immediate payment of the authorized bonus was contained in the authorizing resolution itself. Similarly, the corporate resolutions in W. C. Leonard and Co. v. United States,324 F. Supp. 422">324 F. Supp. 422 (N.D. Miss. 1971) and Cooney v. Commissionr,18 T.C. 883">18 T.C. 883 (1952), were unequivocal in granting the taxpayers an unconditional immediate right to demand payment. In W. C. Leonard and Co., the resolution authorized payment of bonuses "to the same people and in the same amounts that wre paid last year" without condition. In Cooney,↩ the resolution was equally unambiguous authorizing that $ 10,000 bonuses be paid to the president and vice president of the company in December. 7. IN Witte the Court of Appeals held that the Commissioner's consent is required under sec. 446(e) even when changing from an improper method to a proper one. Although this Court has not tended to require the Commissioner's consent in such situations, see Complete Finance Corp. v. Commissioner,80 T.C. 1062">80 T.C. 1062, 80 T.C. 1062">1072 n. 8 (1983), affd. 766 F.2d 436">766 F.2d 436↩ (10th Cir. 1985), we have not questioned the general purpose of the consent requirement. 8. See Gimbel Bros., Inc. v. United States,535 F.2d 14">535 F.2d 14, 535 F.2d 14">23↩ (Ct. C1. 1976) (failure of the taxpayers to apply the installment method to certain rotating charge accounts did not result in adoption of a hybrid accounting method but was merely an error in application of the installment method). 9. Compare Superior Coach of Florida, Inc. v. Commissioner,80 T.C. 895">80 T.C. 895 (1983) and Hooker Industries, Inc. v. Commissioner,T.C. Memo. 1982-357, in which we distinguish Korn Industries, Inc. v. Commissioner,532 F.2d 1352">532 F.2d 1352↩ (Ct. C1. 1976). In both cases we found that the taxpayer's treatment was deliberate and conscious, and not inadvertent or mistaken. We thus found that the changes sought were changes in accounting method and not merely error corrections. 10. Our holding that petitioners are entitled to use the cash method of accounting for bonuses renders unnecessary the consideration of petitioners' alternative argument -- that the bonuses were not accruable in 1978. ↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622231/	STEVEN F. SARTOR, and GWENN SARTOR, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentSartor v. CommissionerDocket No. 3629-83.United States Tax CourtT.C. Memo 1984-274; 1984 Tax Ct. Memo LEXIS 402; 48 T.C.M. 150; T.C.M. (RIA) 84274; May 22, 1984. E. DeVon Deppe, for the petitioners. James B. Ausenbaugh, for the respondent. FAYMEMORANDUM FINDINGS OF FACT AND OPINION FAY, Judge: Respondent determined a deficiency of $8,283 in petitioners' 1980 Federal income tax. After concessions, the only issue is whether the expenses petitioners incurred in connection with their airplane are deductible. FINDINGS OF FACT Some of the facts are stipulated and found accordingly. Petitioners, Steven F. Sartor and Gwenn Sartor, resided in Kaysville, Utah, when their petition was filed herein. 1984 Tax Ct. Memo LEXIS 402">403 Except for a one-year period spanning 1977 and 1978 when he was employed by a competitor, since 1970 petitioner Steven F. Sartor (petitioner) has been employed by Dixico, Inc. (herein Dixico) as an outside salesman of "packaging materials." When petitioner returned to Dixico in 1978, he was assigned the sales territory of Utah, Idaho, and Colorado. In March 1980 his sales territory was expanded to include Washington, Oregon, Montana, and Vancouver, Canada. Petitioner obtained a commercial pilot's license in 1965 and subsequently purchased a Cessna 182 airplane in 1975. He used this plane exclusively for personal purposes until 1979 when he began to use it for business. In August 1980 petitioner purchased a 50 percent interest in a newer and larger Cessna T-206 airplane (hereinafter referred to as the airplane) because it was capable of safe flights in instrument flight conditions. At this time, petitioner began aircraft qualification and instrument flight training in the airplane which he completed in February 1981. During 1980 petitioner used the airplane almost exclusively for business purposes, flying to see customers in cities throughout Idaho, Utah, Oregon, and Washington. 1984 Tax Ct. Memo LEXIS 402">404 Petitioner determined that because there were less frequent commercial flights due to the deregulation of the airlines for him to cover his large sales territory, it was necessary to use the airplane so that he could maximize his sales.By using the airplane, petitioner was able to arrange a more flexible schedule which enabled him to reach customers before his competitors. Although Dixico only reimbursed petitioner for what it would have cost him to fly commercially, it approved of his using the airplane because Dixico expected it would allow petitioner to increase his sales. Petitioner's bonus each year was based on the amount of his sales. After purchasing the airplane in 1980, his bonus increased from $4,263 in 1979 to $7,902 in 1980 and, by 1982, it was $12,591. Petitioner incurred in 1980 the following three types of expenses in connection with the airplane: (1) travel expenses to visit clients (herein the travel expenses); (2) travel expenses to entertain his clients (herein the entertainment expenses); and (3) expenses for aircraft qualification, instrument flight training, and equipment and safety checks (herein the qualification expenses). The entertainment expenses1984 Tax Ct. Memo LEXIS 402">405 included scenic airplane flights and fishing trips with clients and members of their families. Dixico did not reimburse petitioner for any part of the entertainment expenses. In 1980 petitioner maintained a flight log wherein the recorded the origin, destination, date and travel time for each of his flights. On their 1980 return petitioners deducted $14,913 of the airplane expenses as business expenses.1 In his notice of deficiency, respondent determined that petitioners were not entitled to this deduction because the airplane expenses were not ordinary and necessary business expenses and, with respect to the entertainment expenses, because petitioners failed to satisfy the substantiation requirements under section 274. 2OPINION The only issue is whether the expenses petitioner incurred in connection with the airplane are deductible. Conceding that all of the airplane expenses are ordinary within the meaning1984 Tax Ct. Memo LEXIS 402">406 of section 162, respondent argues that the travel expenses are not deductible because they are not "necessary" nor "reasonable" as required by section 162, 3 and that the entertainment expenses are not deductible because they have not been substantiated under section 274. Petitioner argues that the travel expenses were both necessary and reasonable because they allowed him to be a more successful salesman. Under section 162, the term "necessary" has been interpreted to mean appropriate and helpful in the development of the taxpayer's business. Deputy v. duPont,308 U.S. 488">308 U.S. 488 (1940). We find that the travel expenses were very helpful to petitioner in his business of being a salesman. The record shows that petitioner was given a large sales territory with customers located several hours from major airports. Due to the deregulation of the airlines, there were less frequent1984 Tax Ct. Memo LEXIS 402">407 flights to petitioner's sales areas and alternate methods of transportation were inadequate and time consuming. By using the airplane, petitioner was able to arrange a more flexible schedule which enabled him to maximize his sales opportunities. Under these circumstances, we think it is clear that petitioner's additional travel expenses incurred by using the airplane were appropriate and helpful in his business as a salesman. Thus, we conclude that the travel expenses were necessary within the meaning of section 162. Respondent's next contention is that petitioner's travel expenses were not reasonable. Generally, in order to be deductible a business expense must be reasonable in amount relative to its purpose. United States v. Haskel Engineering & Supply Company,380 F.2d 786">380 F.2d 786, 380 F.2d 786">788 (9th Cir. 1967); see also sec. 1.162-2(a), Income Tax Regs.Respondent thus argues that the travel expenses were not reasonable because they exceeded petitioner's bonus in 1980. Although as it turned out petitioner's expenses exceeded his bonus in 1980, we find that1984 Tax Ct. Memo LEXIS 402">408 the circumstances show that the expenses were reasonable. It was reasonable for petitioner to expect his bonuses to increase each year because the airplane enabled him to have a more flexible schedule to maximize his sales. Petitioner's bonuses did in fact increase substantially from $7,902 in 1980 to $12,591 in 1982. In addition, by using the airplane to increase his sales for Dixico petitioner assured himself of continued employment with the company. Thus, we find nothing to suggest that the amount of travel expenses in 1980 were unreasonable in relation to their purpose. Accordingly, we conclude that petitioner's travel expenses are necessary and reasonable business expenses deductible under section 162. 4With respect to the entertainment expenses, respondent's sole contention is that petitioner failed to satisfy the substantiation requirements of section 274(d).51984 Tax Ct. Memo LEXIS 402">409 Section 274(d) provides that no deduction shall be allowed for travel, entertainment, or gift expenses unless the taxpayer substantiates by adequate records or by sufficient evidence corroborating his own statement the amount, time, place, business purpose of the expenses and the business relationship to the taxpayer of persons entertained. Respondent only argues that petitioner failed to substantiate that there was a business purpose for the entertainment expenses. For the following reasons, we agree. 1984 Tax Ct. Memo LEXIS 402">410 In order to constitute an adequate record of business purpose, a written statement is generally required unless the business purpose is evident from the surrounding facts and circumstances. Sec. 1.274-5(c)(2)(ii)(b), Income Tax Regs. Absent adequate records, the taxpayer may establish a business purpose by other sufficient evidence including his own statement containing specific information in detail together with other corroborative evidence. Sec. 1.274-5(c)(3)(i) and (ii), Income Tax Regs.The entertainment expenses were incurred to take petitioner's clients on scenic flights and fishing trips. Petitioner has failed to present any evidence that business was ever discussed with his clients during these airplane flights or fishing trips. Petitioner's flight log only shows the name of the client who accompanied petitioner and when the trip took place. It does not include any statements concerning a business purpose. Since section 274 requires petitioner to show that the predominant purpose of the entertainment expenses was to further his business and that the mere generating of1984 Tax Ct. Memo LEXIS 402">*411 "goodwill" is not enough, Andress v. Commissioner,51 T.C. 863">51 T.C. 863, 51 T.C. 863">869 (1969), affd. 423 F.2d 679">423 F.2d 679 (5th Cir. 1970), we conclude that petitioners failed to satisfy the substantiation requirements of section 274(d) for the entertainment expenses. Accordingly, petitioners are not entitled to a deduction for these expenses under section 162.To reflect concessions and the foregoing, 6Decision will be entered under Rule 155.Footnotes1. Petitioner incurred total airplane expenses of $16,765 in 1980. Since Dixico reimbursed him $1,852, petitioner's deduction was $14,913. ↩2. All section references are to the Internal Revenue Code of 1954, as amended and in effect during the year in issue.↩3. Respondent concedes that if we find that the travel expenses were necessary and reasonable business expenses then the qualification expenses are likewise necessary and reasonable business expenses.↩4. Based on respondent's concession that all of the airplane expenses are ordinary (see text supra) and his concession in n. 3, we conclude that the qualification expenses are likewise deductible under sec. 162↩.5. Petitioner argues in his reply brief that respondent conceded this issue in the stipulation of facts. After careful consideration of the entire record, we conclude that respondent only conceded that the payment of the airplane expenses was substantiated, not that petitioners satisfied the substantiation requirements of sec. 274. See The South Bay Corporation v. Commissioner,345 F.2d 698">345 F.2d 698, 345 F.2d 698">707 (2d Cir. 1965), affg. in part and revg. and remanding in part 41 T.C. 888">41 T.C. 888 (1964); Wauwatosa Colony Inc. v. Commissioner,T.C. Memo. 1966-51↩. This conclusion is supported by the fact that petitioners addressed the substantiation issue in their opening brief.6. In his notice of deficiency, respondent disallowed petitioners' investment credit of $3,580. Respondent, however, has not addressed this issue in either one of his briefs. Since we have found that petitioner used the airplane for business purposes, we see no reason why petitioners are not entitled to an investment credit on a proportion of the purchase price of the airplane corresponding to the proportion of flying time that petitioner used the airplane for business purposes.This determination is an appropriate calculation for the parties under Rule 155, Tax Court Rules of Practice and Procedure.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622232/	Max A. Burde and Berthe C. Burde, Petitioners v. Commissioner of Internal Revenue, Respondent. Bernard Weiss and Peggy S. Weiss, Petitioners v. Commissioner of Internal Revenue, Respondent.Burde v. Commissioner of Internal RevenueDocket Nos. 1364-62, 1365-62.United States Tax Court1965 Tax Ct. Memo LEXIS 322; 24 T.C.M. 46; January 22, 1965Order On December 30, 1964, the petitioners filed a "Motion for Reconsideration of Opinion"; a "Motion to Revise Opinion and Make Additional Finding of Facts"; and a "Motion to Vacate Decision." On consideration, the "Motion for Reconsideration of Opinion" is denied except to the extent that the Opinion [mimeographed copy, 43 T.C. No. 24, filed November 30, 1964] be amended by striking page 19 in its entirety and that portion of page 20 through the end of the first sentence, and inserting the following: we must regard the invention as owned in equal shares by the members of the partnership, namely, Emory, Berthe Burde (Burde's wife), and Peggy Weiss (Weiss' wife). Looking at the transaction from this standpoint, we find that (1) prior to the transfer of the bath oil invention, Emory, Burde and Weiss each were holders of a one-third interest therein and (2) immediately after the transfer Emory, Berthe and Peggy each were owners1965 Tax Ct. Memo LEXIS 322">324 of a one-third interest in said invention. We believe that, under the particular circumstances of this case and in view of the legislative history of the applicable statutory provisions, we are justified in treating the partnership as an aggregate of individuals, rather than as an entity. When Congress enacted section 1235 into law, it clearly indicated that it did not want the benefits of capital gains treatment to be available in connection with sales of patents within essentially the same economic group. See S. Rept. No. 1622, to accompany H.R. 8300 (Pub. L. 591), 83rd Cong., 2d Sess., p. 441 (1954) and H. Rept. No. 1337, to accompany H.R. 8300 (Pub. L. 591), 83rd Cong., 2d Sess., p. A281 (1954). We must, therefore, interpret section 1235 in accord with this manifest legislative intent. Although Congress, under the 1954 Code, decided to treat partnerships for a number of purposes as entities, 6 it is clear that Congress did not intend to do so for all purposes under the Code. See the 1954 Conference Report wherein the following statement was made: Both the House provisions and the Senate amendment [section 707] provide for the use of the "entity" approach in the treatment1965 Tax Ct. Memo LEXIS 322">325 of the transactions between a partner and a partnership which are described above. No inference is intended, however, that a partnership is to be considered as a separate entity for the purpose of applying other provisions of the internal revenue laws if the concept of the partnership as a collection of individuals is more appropriate for such provisions. An illustration of such a provision is section 543(a)(6), which treats income from the rental of property to shareholders as personal holding company income under certain conditions. [Conference Report, p. 59.] In view of the legislative history of section 1235, we believe that section is another provision of the Code under which it is more appropriate to treat a partnership as a collection of individuals rather than as an entity. On the basis of the foregoing we conclude that, for purposes of section 1235, Burde and Weiss each transferred their respective one-third interests in the bath oil to their spouses and that section 1235(a) is not applicable to their transfer. Even if we were to assume that the transfer to the Partnership had satisfied the literal requirements of section 1235, 1965 Tax Ct. Memo LEXIS 322">326 we would, nevertheless, be required to determine whether the transaction satisfied those provisions of the Code dealing with transactions between controlled partnerships (section 707) before holding that Burde and Weiss were entitled to capital gains treatment on their transfer. Petitioners contend that section 1235, because it specifically deals with patents, takes precedence over any more general provisions of the Code and is the exclusive arbiter of transactions literally falling within its ambit. Petitioners also argue that, because section 1235(d) specifically describes the class of persons to whom sales may not be made, capital gains treatment is available in the case of sales to any persons not included in that description. We believe these arguments are untenable in light of Congress' intention to prevent capital gains treatment in the case of sales of patents within essentially the same economic group. It is far more reasonable, in our opinion, to interpret Congress' omission in section 1235(d) of any reference to controlled partnerships to its belief that transfers of patents from or to partnerships would be governed by section 707 rather than to an intention to permit1965 Tax Ct. Memo LEXIS 322">327 capital gains treatment upon sales of patents to controlled partnerships. It was necessary for Congress specifically to state that sales of patents between the persons described in section 1235(d) were not to qualify under section 1235(a); for there were no other Code provisions to prevent capital gains treatment in connection with such sales. However, because of the existence of section 707(b), it was not necessary for Congress to do so in the case of sales of patents involving partnerships. For this reason we believe that in order to qualify for capital gains treatment under section 1235, a transfer of a patent to a partnership must satisfy the provisions of section 707(b). In all other respects the Findings of Fact and Opinion remains as filed. And it is Ordered: That the "Motion to Revise Opinion and Make Additional Finding of Fact" and the "Motion to Vacate Decision" are denied. Footnotes6. See e.g. sec. 707 or sec. 741.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622233/	The Seagrave Corporation, Petitioner, v. Commissioner of Internal Revenue, RespondentSeagrave Corp. v. CommissionerDocket No. 68787United States Tax Court38 T.C. 247; 1962 U.S. Tax Ct. LEXIS 137; May 10, 1962, Filed 1962 U.S. Tax Ct. LEXIS 137">137 Decision will be entered under Rule 50. Held, volunteer fire companies are not political subdivisions of States where they are located and interest on their obligations is not tax-exempt interest income under section 103(a)(1), I.R.C. 1954. Allen I. Pretzman, Esq., for the petitioner.John J. Larkin, Esq., for the respondent. Mulroney, Judge. MULRONEY 38 T.C. 247">248 The respondent determined a deficiency in petitioner's income tax for the taxable year 1955 in the amount of $ 36,985.90. All issues have been settled with the exception of one issue as to whether interest accrued to petitioner in the amount of $ 1,968.28 on obligations issued by six volunteer fire departments is exempt from gross income under section 103(a)(1), I.R.C. 1954. 1FINDINGS OF FACT.Some of the facts have been stipulated and are found accordingly.Petitioner is a corporation with its principal office at 2000 South High Street, 1962 U.S. Tax Ct. LEXIS 137">138 Columbus, Ohio. Its return for the year 1955 was filed with the district director of internal revenue at Columbus, Ohio.Petitioner is engaged in the manufacture and sale of commercial firefighting equipment. During the year 1955 interest accrued on obligations in the form of interest-bearing notes issued to petitioner by the following volunteer fire departments for the purchase of firefighting equipment:West Branch Hose Company, Renovo, Pennsylvania$ 62.55Chesapeake Volunteer Fire Department, Chesapeake, West Virginia244.00East Rainelle Volunteer Fire Department, East Rainelle, West Virginia80.50Seaford Volunteer Fire Department, Seaford, Delaware890.93Hooper's Island Volunteer Fire Department, Hooper's Island, Maryland189.24Fairdale Volunteer Fire Department, Fairdale, Kentucky501.06Petitioner excluded the above amounts of interest from its gross income as interest received from obligations issued by political subdivisions of States pursuant to section 103(a)(1).The Hooper's Island Volunteer Fire Department was incorporated on April 21, 1953, as a private, nonprofit corporation pursuant to the general incorporation laws of Maryland. During the year1962 U.S. Tax Ct. LEXIS 137">139 1955, it was engaged in furnishing firefighting aid to the community of Hooper's Island, Maryland. Its membership during 1955 varied from 80 to 100 men. In order to become a member of the department, an application must be filed. The applicant is voted upon by secret ballot at a regular meeting of the department's members. Most of the funds for operation of the Hooper's Island Volunteer Fire Department come from social functions. It did receive $ 1,000 yearly from Dorchester County, Maryland, but no other financial help from any other governmental agency.The East Rainelle Volunteer Fire Department Inc. was incorporated on March 11, 1953, as a private, nonprofit corporation pursuant to the general incorporation laws of the State of West Virginia. It was 38 T.C. 247">249 engaged in furnishing firefighting aid to the community of East Rainelle, West Virginia. Its membership consists of approximately 25 active members. The East Rainelle Volunteer Fire Department also has approximately 500 to 600 associate members. In order to become a regular member of the department an application must be filed. This application must be approved by vote of a majority of the regular members of the1962 U.S. Tax Ct. LEXIS 137">140 department. A $ 2 fee is charged with each application. The associate membership is on the basis of a membership card costing $ 4 per year. In addition to funds obtained from associate members, other funds for operation are raised from social functions sponsored by the department, such as carnivals, bake sales, and dances. Members of the community served by the East Rainelle Volunteer Fire Department who are nonmembers are charged $ 100 per call. The department operates independently and without any exercise of control by either the municipality, county, or State involved.The Chesapeake Volunteer Fire Department Incorporated was incorporated on December 12, 1952, as a private, nonprofit corporation pursuant to the general incorporation laws of West Virginia. During the year 1955 it was engaged in furnishing firefighting aid to the community of Chesapeake, West Virginia. Its membership consisted of approximately 25 members. Membership is elective by two-thirds or three-fourths majority of the membership. Most of the operating funds are received from solicitation of members of the community and proceeds received from social affairs sponsored by the department. With the exception1962 U.S. Tax Ct. LEXIS 137">141 of gasoline expenses and minor equipment expenses received from the City of Chesapeake, the department received no financial assistance from the city, county, or State governments. The department operates independently and without any exercise of control by either the city, county, or State involved.West Branch Hose Company No. 2 was incorporated in February 1945, as a private, nonprofit corporation pursuant to the general incorporation laws of the Commonwealth of Pennsylvania. It was engaged in furnishing firefighting aid to the borough of Renova, Pennsylvania. Its membership consists of between 35 to 50 active members. In order to become a regular member of the department an application must be filed. The applicant serves a period of apprenticeship following which period he is accepted or rejected by secret ballot at a regular meeting of members of the department. Two dissenting votes are sufficient for rejection. Regular members are charged a fee of $ 1 per year. Operating funds were obtained from solicitations from members of the community, operation of carnivals, bingo games, lottery cards, and sales of liquor and beer through operation of a men's club. The department1962 U.S. Tax Ct. LEXIS 137">142 operates independently and without exercise of control by either the borough, county, or State involved.38 T.C. 247">250 The Seaford Volunteer Fire Department was incorporated on October 24, 1940, as a private, nonprofit corporation pursuant to the general incorporation laws of the State of Delaware. It was engaged in furnishing firefighting aid to Seaford, Delaware, and surrounding counties. Its membership consists of 40 active members and 20 active reserve members. The department is run by an executive board consisting of eight elected members. Membership must be by application and first approved by the executive board. The application is then read at a regularly scheduled meeting and approved by the department's members. The prospective member is accepted for a probation period of 6 months. Upon completion of that period, final membership is voted upon by secret ballot of the total members. An applicant must pay a $ 2 fee at the time of application with no further charge being made by the department for membership.The Fairdale Volunteer Fire Department, Inc., was incorporated on September 8, 1952, as a nonprofit corporation under the general incorporation laws of the Commonwealth1962 U.S. Tax Ct. LEXIS 137">143 of Kentucky. Operating funds were obtained principally by voluntary contributions or voluntary membership. Aid in the amount of $ 1,800 a year was received from the fiscal court of Jefferson County.Respondent determined the interest income accrued on the obligations of the above volunteer fire companies was not tax exempt.OPINIONSection 103(a)(1), I.R.C. 1954, provides in part that "Gross income does not include interest on * * * the obligations of a State * * * or any political subdivision of any" State. The sole question here is whether the volunteer fire companies are political subdivisions of the States where they are located.We hold they are not. They may be political, in the sense that "political" is synonymous with "public," 2 but they are not subdivisions of the State. It may be conceded the volunteer fire companies perform a public function in the sense that they perform the same function that is generally carried on by municipal fire departments. But the volunteer fire companies here involved are not in any sense subdivisions of the States where they are located. They were not created by any special statutes and they received no delegation of any part of the 1962 U.S. Tax Ct. LEXIS 137">144 State's power. It is not enough that they perform a public service. They cannot be called a subdivision of the State unless there has been a delegation to them of some functions of local government.38 T.C. 247">251 The volunteer fire companies were all formed under general incorporation laws of the various States. They do not render services prescribed by law. They perform services prescribed by their constitutions and bylaws as do any other corporations created under the general incorporation laws of the State. The fact that they were created by virtue of and in compliance with general incorporation laws does not mean they are clothed with any State power.The relations between the fire companies and the municipalities they serve are purely voluntary. 1962 U.S. Tax Ct. LEXIS 137">145 No power of the State could compel them to render any services and the State, or its political subdivision, the municipality, could not be compelled to accept their services. They are free associations created by the voluntary acts of their incorporators, and not by any legislative action. They can be dissolved at the will of the corporate members.Petitioner refers us to State statutes providing city, State, and county funds may or shall be contributed to support volunteer fire companies; State statutes granting exemptions from State property and excise taxes; and State statutes providing for instruction of volunteer firemen at State expense. Such statutes do not add up to any delegation of any part of State authority. All that such statutes do is recognize such companies perform a public function and should be encouraged by grants of financial aid and State tax exemptions.Petitioner cites Commissioner v. Shamberg's Estate, 144 F.2d 998, affirming 3 T.C. 131">3 T.C. 131, and Commissioner v. White's Estate, 144 F.2d 1019, affirming 3 T.C. 156">3 T.C. 156. In Shamberg it was1962 U.S. Tax Ct. LEXIS 137">146 held Port of New York Authority was a political subdivision of New York and New Jersey and in White it was held the Triborough Bridge Authority was a political subdivision of New York. The cases are not in point. In both instances the authorities were created by direct legislative Acts and they were invested with some sovereign functions.We hold for respondent on the issue presented. We understand the parties agree the interest accrued from the six volunteer fire companies in 1955 was in the total sum of $ 1,968.28. Such interest income was includible in petitioner's income for that year.Decision will be entered under Rule 50. Footnotes1. All section references are to the Internal Revenue Code of 1954, as amended, unless otherwise noted.↩2. See Commissioner v. Shamberg's Estate, 144 F.2d 998, affirming 3 T.C. 131">3 T.C. 131↩, where an attorney general's opinion is quoted, stating: "The words 'political' and 'public' are synonymous in this connection."	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622235/	JOHN SHIRLEY WARD AND CHANDLER P. WARD, EXECUTORS, ESTATE OF SHIRLEY C. WARD, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Ward v. CommissionerDocket Nos. 26580, 43616, 44877.United States Board of Tax Appeals22 B.T.A. 352; 1931 BTA LEXIS 2133; February 25, 1931, Promulgated 1931 BTA LEXIS 2133">2133 The action of the Commissioner of Internal Revenue, in holding that certain rentals paid to the wife of a lessor of property under assignment made by the latter constituted income to the husband, is sustained. Chandler P. Ward, Esq., for the petitioners. R. W. Wilson, Esq., for the respondent. LANSDON 22 B.T.A. 352">352 The respondent asserted deficiencies of $1,822.41, $2,774.53, $3,534.12, and $2,320.25 in income tax against the petitioner for the respective years 1922, 1924, 1925, and 1926, which these consolidated appeals seek to review. The docket numbers and years to which each of these appeals relate are as follows: No. 26580, year 1922; No. 43616, years 1924 and 1925; and No. 44877, year 1926. The several allegations upon which issues are joined and submitted for decision charge that the respondent committed error (1) in adding to petitioner's income for each taxable year, in the order above stated, $6,000, $16,800, $13,500, and $14,800, on account of rentals originally payable to the taxpayer under leases but legally transferred to his wife before maturity and payment, and (2) in refusing to hold that the taxpayer, in making his income tax returns1931 BTA LEXIS 2133">2134 for 1924 and 1925, overstated his income by $3,649.59 and $2,400, respectively. A further issue relating to taxable gain in 1924, 1925, and 1926, arising out of a sale of a certain real estate lease, designated as the "Boulle-Ward" lease, has been eliminated by a stipulation, made by the parties and put in the record at the hearing, which provides the basis of such determination. 22 B.T.A. 352">353 FINDINGS OF FACT. The record upon which these issues are submitted for determination includes, in addition to certain supplementary oral testimony, an agreed statement of facts, which we adopt and make a part of our findings by reference. As thus established the record shows that the decedent, Shirley C. Ward, during the years involved, was a resident of Los Angeles, Calif. His death, which occurred after the filing of these appeals on November 24, 1929, was suggested at the hearing by the executors of his estate, John Shirley Ward and Chandler P. Ward, who, by appropriate orders of substitution, have been made petitioners herein. On May 24, 1920, the decedent, Shirley C. Ward, became a subtenant of the Pohlman Leasehold Company, a corporation, under the terms of a written contract, whereby1931 BTA LEXIS 2133">2135 he acquired the unexpired portion, less one day, of a certain 99-year lease of real estate located within the corporate limits of Los Angeles, Calif. Under the terms of the sublease, the decedent, among other things, agreed to pay Philip Polhlman, the fee owner of the property, $1,500 for each of the months of May and June of 1920, and $1,600 per month thereafter during the life of the lease; also to the Pohlman Leasehold Company, his immediate lessor, $100 per month during the remainder of 1922, and $300 per month thereafter to the end of the lease. On May 26, 1920, the decedent executed a lease of the property covered by his sublease from the Pohlman Leasehold Company to the California Chocolate Shops, Inc., E. C. Quinby and P. W. Quinby, as lessees, for the unexpired portion of his said sublease, less one day. Under the terms of this last mentioned lease and a supplemental contract simultaneously made, the lessees, among other things, agreed to pay to decedent, as rentals for the use of the property, the following amounts: $2,100 per month during the period from May 1, 1920, to December 31, 1922, inclusive; and $3,600 per month thereafter during the life of the lease, excepting1931 BTA LEXIS 2133">2136 such period, not to exceed one year, as might be actually consumed in the erection of a building on the property, in accordance with the requirements of the lease, during which the rent should be $2,600 per month. A further provision relative to the method of payment of these rentals is set forth in the lease in the following language: As security to the Lessees that the ground rental called for in the original lease on the demised premises from Philip Pohlman to Shirley C. Ward, dated December 4, 1913, as modified by the agreement hereinabove mentioned of December 22, 1917, will be paid by the Lessor herein to the original lessor, Philip Pohlman, or his heirs, successors or assigns, as and when the same becomes due, and as security that the rental payable to Shirley C. Ward, as lessee to the Pohlman Leasehold Company, as Lessor, under the lease of said premises held by said Ward from the Pohlman Leasehold Company, will 22 B.T.A. 352">354 be paid as and when the same become due and payable, it is agreed that all rentals payable hereunder shall be payable to the Los Angeles Trust and Savings Bank, as Trustee, under instructions to said bank to distribute such rental in accordance with the1931 BTA LEXIS 2133">2137 rights thereto of Philip Pohlman, the original lessor, and of the Pohlman Leasehold Company, the subsequent lessor, and the remainder of such rental, after the rentals due Philip Pohlman and due the Pohlman Leasehold Company have been paid, to the Lessor herein, Shirley C. Ward. The lessor herein, or his heirs, successors or assigns, may have the privilege at any time of changing the Trustee to whom said rentals shall be payable, provided said Trustee shall at all times be a responsible trust company having an office in and doing business in the city of Los Angeles. In accordance with the provisions above quoted, the parties, on June 3, 1920, transmitted to the Los Angeles Trust & Savings Bank the lease and a copy of the supplementing rent agreement accompanied with a letter of instructions, as follows: We herewith hand you an executed original of lease between Shirley C. Ward as lessor, and the California Chocolate Shops, Inc., P. W. Quinby and E. C. Quinby, as lessees, covering the Pohlman property at the northeast corner of Seventh Street and Grand Avenue, this city, such lease having ninety-two years and six months to run from July 1, 1920. The rentals called for in such1931 BTA LEXIS 2133">2138 lease are set forth in a separate unrecorded agreement between the parties, a copy of which is hereby handed you. Under such lease and such agreement you will be paid by the lessees named in such lease, on the first day of each calendar month beginning July 1, 1920, the rentals in such agreement named, and you will pay out such rentals as provided in such lease in the following order, viz: First: Pay to Philip Pohlman, his heirs, successors and assigns, the ground rental for the leased premises called for in lease from Philip Pohlman to Shirley C. Ward, dated December 4, 1913, as modified by the agreement between said Philip Pohlman, Shirley C. Ward and the Pohlman Leasehold Company, dated December 22, 1917, a copy of which lease and agreement will be furnished you by Mr. Ward. Second: Pay to the Pohlman Leasehold Company, its successors and assigns, the rental to which it is entitled for such premises under lease from the Pohlman Leasehold Company to Shirley C. Ward, an original of which lease Mr. Ward will furnish you. Third: Pay to Shirley C. Ward, his heirs, successors and assigns, any balance that may be in your hands after paying the payments above provided for to Philip1931 BTA LEXIS 2133">2139 Pohlman and to the Pohlman Leasehold Company, and after deducting your charges for executing this trust. On September 19, 1919, the decedent was the owner of a certain city lot in Los Angeles, on which was located a structure known as the "Kinema Theatre Building." This building covered the entire surface of said lot except a strip ten feet in width extending along its south line, which formed a common boundary between it and adjoining property lying immediately south and to the east. On said date the decedent sold and conveyed said lot and theatre building to T. S. Tally of Los Angeles, in a deed which reserved to himself, heirs and assigns, "all surface rights over" and the exclusive 22 B.T.A. 352">355 use and control of the said vacant strip lying along said south line; such rights to continue only so long as the Kinema Theatre Building remained on the granted premises. On May 18, 1920, the decedent, by deed in writing, granted to the Standard Fireproof Building Company the right to use the ten-foot strip of land above referred to as a means of "rear access to and egress from" certain properties lying south and adjacent thereto on which was located a structure known as the Brack Shops1931 BTA LEXIS 2133">2140 Building. For these rights, which were to continue so long as the existing Kinema Theatre building remained, as located, a purchaser, whose identity is not disclosed, of the Standard Fireproof Building Company's long-term lease on the Brack Shops Building agreed in writing to assume payment of rent to decedent of $200 per month during the existence of such rights. On January 2, 1922, the decedent executed and delivered to his wife, Blanche C. Ward, an assignment in writing, based upon a consideration of love and affection, in which, after first reserving therefrom a permanent annuity of $250 per month in favor of his sister. Annie E. Ward, he conveyed to her all of his net interest in the rentals payable under the lease to the California Chocolate Shops, E. C. Quinby and P. W. Quinby, dated May 26, 1920; and also his "right to receive" from the Brack Shops Building the "monthly rental of $200 per month" provided for in his contract with the owners of the lease on such premises negotiated through the Standard Fireproof Building Company. In reference to the rentals first above mentioned, this instrument, after first showing the gross payments to be made under the lease, and the1931 BTA LEXIS 2133">2141 disbursements to be made by the bank, before payment of the balance to the lessor, concluded with this explanatory recital, to wit: It is my interest in such Chocolate Shops-Quinby rentals, subject to the aforegoing charges thereon, that is intended to be assigned hereby; the net rentals coming to me and so assigned hereby being as follows, viz: Until January 1, 1923, $300.00 per month; thereafter until Bruan & Bradford are paid off, $1,150.00; and thereafter until the end of the ninety-nine year lease $1,450.00 per month. Thereafter, on the 12th day of January, 1922, the decedent made a similar assignment in writing in favor of his sister, Annie E. Ward, conveying to her, out of the net rentals due him under the California Chocolate Shops lease, a perpetual annuity of $250 per month, beginning January 1, 1923. Copies of these assignments were delivered to the bank designated by the parties to receive and disburse the rentals, and the sums made payable by them to Blanche C. Ward and Annie E. Ward were thereafter duly paid to said assignees by the bank. Similar recognition was given to the assignment 22 B.T.A. 352">356 made by decedent to Blanche C. Ward of the rentals due him under1931 BTA LEXIS 2133">2142 the contract with the Fireproof Building Company, and the monthly payments of $200 each were at all times thereafter paid to her. In none of the taxable years did the decedent report in his returns any of the money paid to Blanche C. Ward or Annie E. Ward under these assignments, excepting as to the payments to Blanche C. Ward in 1924 and 1925 under the Fireproof Building Company contract. In each of these two years the decedent reported as income to him $2,400 as rentals received under such contract. The petitions allege that such inclusions were erroneously made and ask to have $2,400 for each of these years excluded in recomputation of the tax. The respondent, in auditing the decedent's income tax returns for the years involved, added to gross income for each of these years the several amounts respectively paid to Blanche C. Ward and Annie E. Ward under the assignments above referred to, excepting the rentals reported by decedent for 1924 and 1925, as shown. OPINION. LANSDON: Two items of income are affected by the assignments of error under consideration here. The first is a balance in rent payable to the decedent through the bank and the other is made up of sums paid1931 BTA LEXIS 2133">2143 direct under a written contract with decedent for easement rights. It is the contention of the petitioners that in each case the decedent, by his assignment, completely divested himself of all property rights and interests in and to the several sums paid under these contracts to his assignees, so that when paid they constituted income to such assignees and not to decedent. In support of such contention many authorities are cited by petitioners in their brief to show that under the laws of the State of California such interests are assignable; also that in similar instances the Board has so recognized them. Looking first to the payments made to decedent's assignees by the bank out of funds collected under the so-called Pohlman property lease, it is noted that they were from the residue of the rental paid by the lessees under their lease from decedent after obligations of said lessor to prior landlords were paid. This was (1) in accordance with the terms of the lease, which made the bank agent for decedent and his lessees to receive and disburse the rents, and (2) the decedent's directions to the bank to pay the net balance to his assignees. It was this residue or "net rentals, 1931 BTA LEXIS 2133">2144 " as so characterized by decedent in describing the interest intended to be assigned of the total rents paid which decedent assigned to his wife and sister, and which was paid to them by the bank after all other charges against decedent's interests were liquidated. Since the status of the decedent, as lessor, under this lease remained unchanged and all payments 22 B.T.A. 352">357 of rent were made to his nominee, it follows that when so made they belonged to him and were a part of his income when received by the bank. Ormsby McKnight Mitchel,1 B.T.A. 143">1 B.T.A. 143; Louis Cohen,5 B.T.A. 171">5 B.T.A. 171; Samuel V. Woods,5 B.T.A. 413">5 B.T.A. 413; Alfred LeBlanc,7 B.T.A. 256">7 B.T.A. 256; Ella D. King,10 B.T.A. 698">10 B.T.A. 698; Arthur Van Brunt,11 B.T.A. 406">11 B.T.A. 406; George M. Cohan,11 B.T.A. 743">11 B.T.A. 743; Mitchel v. Bowers, 9 Fed.(2d) 414; Mitchel v. Bowers,273 U.S. 759">273 U.S. 759; Bing v. Bowers, 22 Fed.(2d) 450. In each of the several decisions cited by the petitioners to sustain their contentions, the basic facts have shown not simply that the rights involved were such as could be legally1931 BTA LEXIS 2133">2145 assigned, but the further fact that the assignor had in each case actually parted with all or some part of his title to the income-producing corpus. In the present case the producer of the income was decedent's lease, not the funds after payment into the bank. And it was to portions of this fund that the decedent passed title by his assignments which, after receipt and disbursements otherwise made by the bank but not before, became accounts receivable in favor of the assignees. After these conditions were fulfilled the assignees could have maintained an action against the bank for the amounts due under the assignments; but they at no time could have sued the lessee for such under the lease, since they were neither landlords nor the holders of any interest in the legal title of the property. Murphy v. Hopcroft,142 Cal. 43">142 Cal. 43; 75 P. 567. Neither did such assignments convey an interest in a trust, as further contended by petitioners, since the bank's acceptance of them, under the circumstances, constituted no more than its mere promise to pay the sums specified out of the balance, if any, in its hands that might be found due to the assignor. 1931 BTA LEXIS 2133">2146 Deeble v. Exchange National Bank,32 Cal. App. 9; 161 P. 1010; Tatsuno v. Pedersen,21 Cal. App. 585; 132 P. 609; Hogan v. Globe Mutual,140 Cal. 610">140 Cal. 610; 74 P. 153; Pohlman v. Wilcox,146 Cal. 440">146 Cal. 440; 80 P. 625; O'Brien v. Garibaldi,15 Cal. App. 518; 115 P. 249. In respect to the second item of income, which includes the several amounts collected by decedent's assignee under the contract with the owners of the Brack Shops Building, we have only the contract made between the decedent and the Standard Fireproof Building Company, which does not set forth the terms and conditions governing the payments of rent. The agreed statement of facts made by the parties to these proceedings, however, shows that the purchasers of the lease from the Standard Fireproof Building Company agreed in writing to "assume" a payment of $200 per month to decedent for the use of "such easement," and did thereafter pay said rental to decedent until the second day of January, 1922, at which date the assignment under consideration became effective. 1931 BTA LEXIS 2133">2147 As pertaining to 22 B.T.A. 352">358 these rentals, the language of the decedent as set forth in the conveying clause of this assignment is as follows: I further hereby assign, transfer and set over to my wife my right to receive from the Brack Shops Building, 527 W. 7th St., Los Angeles, California, as consideration for rear light and entrance privileges secured by me for such building a monthly rental of $200 per month to continue as long as such rear entrance privilege and such rear light protection continues and so long as I am entitled to said $200 per month compensation therefor. Although we are without complete details respecting the owners' agreement to "assume" payments of these rentals, it is clear that by this assignment only the decedent's "right to receive" them from the Brack Shops Building so long as such right existed, was transferred to the wife, and that the assignor retained in himself full title to the basic easement and the reversion. Since rent is an incident to the reversion and passes with it, we have uniformly held that its character as income of a lessor who retained the reversion could not be changed by the bare assignment of his right to receive it when due. 1931 BTA LEXIS 2133">*2148 Fred W. Warner,5 B.T.A. 963">5 B.T.A. 963; 11 B.T.A. 406">Arthur H. Van Brunt, supra; Julius Rosenwald,12 B.T.A. 350">12 B.T.A. 350; Charles F. Colbert,12 B.T.A. 565">12 B.T.A. 565; and Bing v. Bowers, supra. Exceptional conditions in the cases cited by petitioners, which they argue point to contrary holdings, do not obtain here. The determination of the respondent is approved. Decision will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622238/	North Carolina Equipment Company v. Commissioner.North Carolina Equip. Co. v. CommissionerDocket No. 4737.United States Tax Court1945 Tax Ct. Memo LEXIS 177; 4 T.C.M. 582; T.C.M. (RIA) 45202; June 4, 1945Edgar J. Goodrich, Esq., Washington, D.C., and C. E. Elberson, C.P.A., Winston-Salem, N.C., for the petitioner. George J. LeBlanc, Esq., and P. A. Bayer, Esq., for the respondent. SMITHMemorandum Findings of Fact and Opinion SMITH, Judge: This proceeding involves deficiencies in income and excess profits tax for 1941 as follows: DeficiencyIncome Tax$ 9,537.28Declared Value Excess-Profits Tax5,433.37Excess-Profits Tax29,243.80The principal question in issue is the deduction to which petitioner is entitled as reasonable compensation for its president for the taxable year 1941. Findings of Fact Petitioner is a North Carolina corporation, organized on February 1, 1937. It filed as income and declared value excess-profits tax return for 19411945 Tax Ct. Memo LEXIS 177">178 with the collector of internal revenue for the district of North Carolina, at Greensboro. Petitioner's business is sales agent and distributor of various types of machinery used for road building, grading, and construction work. It is one of the largest distributors of such equipment. It handles the products of a number of different manufacturers including International Harvester Co., Euclid Road Machinery Co., Bucyrus-Erie Co., Jaeger Machinery Co., Galion Iron Works & Manufacturing Co., and other leading manufacturers. Petitioner's principal lines of equipment are nationally advertised and are well known to the trade. It has its main office and plant at Raleigh, North Carolina, and several branch offices in that and other southeastern states. Altogether petitioner operates in five states, North Carolina, South Carolina, Virginia, Georgia and Florida. It has the exclusive agency in certain designated sections of those states for one or more of the products which it handles. Petitioner succeeded to the business of a partnership which had operated under the same name since 1931. The partnership was composed of A. E. Finley, who became petitioner's president and general manager, 1945 Tax Ct. Memo LEXIS 177">179 H. A. Mooneyham and J. M. Gregory, all equal partners. The partnership operated in the name of "A. E. Finley trading as North Carolina Equipment Company." Finley was the only active partner. He and his two inactive partners contributed only $3,500 capital to the new venture. No further contributions to capital were ever made either to the partnership or to the successor corporation, this petitioner. A. E. Finley entered the equipment business in 1924 when he was first employed by the General Utilities Co., Norfolk, Virginia, as office manager. The General Utilities Co. was a distributor of road machinery, construction equipment, contractors' supplies, municipal and highway equipment. Finley became a salesman of this company for the eastern district of North Carolina in 1925. His compensation was $225 (later $250) per month plus 25 percent of the net profits upon equipment sold in his teritory, whether the sale was made by him or not. At the same time another salesman employed by the same company covering the western district of North Carolina was paid at the same rate, that is, a fixed salary plus 25 percent of the profits from his territory, and the president of General Utilities1945 Tax Ct. Memo LEXIS 177">180 Co. received as compensation for his services 50 percent of the net profits of the company after the deduction of all expenses. In 1928 Finley and two others formed a company which obtained the agency for caterpillar tractors. It operated under the name of North Carolina Equipment Co. In 1929 Finley, Mooneyham and Gregory organized the Raleigh Tractor & Equipment Co. with headquarters at Raleigh, N.C., for the sale of caterpillar tractors. These three men had an equal interest in the company. In 1931 Finley obtained a contract for the sale of the products of Galion Iron Works & Manufacturing Co. in the State of North Carolina. He requested his associates to permit him to devote his entire time and energies to the promotion of sales of road construction machinery and equipment and to carry on this business separately from that of the Raleigh Tractor & Equipment Co. This request was granted and the $3,500 above referred to was invested by Finley and his two associates to launch the new company. Finley still retained his one-third interest in the Raleigh Tractor & Equipment Co. which continued to be operated by Mooneyham and Gregory. Gregory had formerly been a road contractor and1945 Tax Ct. Memo LEXIS 177">181 was anxious to get back into that line of business. In 1932 or 1933 he formed a company to engage in such business. Finley and Mooneyham each had a proprietary interest in that company. After the organization of Gregory's companythe Raleigh Tractor & Equipment Co. was operated by Mooneyham. But the three associates each had an interest in the company operated by each. Finley, operating under the name of A. E. Finley trading as North Carolina Equipment Company, through his personal connections and efforts obtained exclusive territorial sales agency contracts from a number of leading manufacturers of complementary lines of equipment and using his prior experience in selling road construction machinery and equipment set about exploiting these franchises for the benefit of his company. Because these exclusive agency contracts renewable from year to year had been granted to Finley personally and because his personal efforts at exploiting them showed immediate results and because Finley alone undertook the operation of the new venture, it was agreed in 1934 among the partners that Finley should receive as compensation a small fixed salary plus 25 per cent of the net profits of the business1945 Tax Ct. Memo LEXIS 177">182 before any division of the profits among the partners. At the same time it was agreed that each of the other partners should have a similar bonus from the profits of the separate business each managed as a reward for his efforts and the results obtained. This agreement was reduced to writing on July 27, 1934. In the latter part of 1936 Finley, Mooneyham and Gregory agreed to incorporate the business which was being conducted by Finley. Finley insisted that if he was to continue single-handed the whole management, including financing of the new company and the exploitation of agency contracts which he had obtained individually, he should have stock control of the new company to the extent of approximately 51 percent. This was agreed to by Mooneyham and Gregory and Finley was permitted to acquire from them a part of their interests in the business. During the year 1941 there were outstanding 107 shares of common stock of the petitioner having a par value of $1,000 each or a total of $107,000, which were held as follows: Numberof SharesA. E. Finley, Pres. and Dir.54K. C. Eller, Vice-Pres. and Dir.1W. C. Calton, Vice-Pres. and Dir.1H. A. Mooneyham, Vice-Pres. and Dir.24W. L. Smith, Vice-Pres. and Dir.1H. B. Hatch, Sec'y-Treas. and Dir.1J. M. Gregory251071945 Tax Ct. Memo LEXIS 177">183 It was also understood by the organizers of the petitioner that the same method of compensation of Finley should be continued, that is, he was to receive a small stated salary and in addition thereto 25 percent of the net profits. As president and active general manager of the petitioner corporation in the taxable year 1941, as well as all prior years, Finley arranged for all the working funds necessary to the corporation's operations by personally obtaining and underwriting all loans needed for expansion. He also obtained renewals of all exclusive territorial distributing contracts none of which has ever been rescinded. In dealing with the petitioner corporation the manufacturers have always looked to Finley as the man with whom they were dealing and it was immaterial to them whether the contracts were with him personally or with the corporation. Finley has always dominated the business policies of the petitioner; obtained all additional territories; fixed the terms on all sales andthe trade-in values on equipment in all branches of the business. He has been responsible for the "hiring and firing" and training of personnel and has always fixed their compensation; directed all1945 Tax Ct. Memo LEXIS 177">184 sales; and in many instances called personally on customers with or without his salesmen in the territory; handled and planned all advertising, opening of new branches, and made all arrangements for the acquisition of new buildings, shop equipment and the organization of each branch of the business. He has also personally considered and passed upon every deal involving a "trade-in" of used equipment. This is an important function of management. By using good judgment he has voided a common pitfall of such businesses as that of the petitioner of accumulating a lot of used and unsaleable secondhand machinery and equipment. Over a period of years including 1941 Finley has devoted his entire time and energies to the building up of petitioner's business. He is in constant telegraphic and telephonic communication with the seven main offices of the farflung business of the petitioner and during 1941 the telegraph and telephone bills alone were in excess of $25,000. In 1940 the total net sales of the petitioner were $1,729,298.91 and in 1941 $3,572,324.71. This sharp increase was due in part to the fact that petitioner's sales territory was greatly increased in 1941 and to the fact that1945 Tax Ct. Memo LEXIS 177">185 certain new equipment sold extremely well. In 1940 petitioner held exclusive contracts for only the State of North Carolina. Late in 1940 Finley personally obtained as additional territory for the principal lines of equipment five counties in Virginia, all of South Carolina, and parts of Georgia and Florida. Petitioner's comparative balance sheet for the years 1937 to 1941 shows for each year as follows: ASSETS12/31/3712/31/3812/31/3912/31/4012/31/41CURRENT ASSETS: Cash$ 21,812.10$ 18,353.37$ 19,683.52$ 56,123.99$ 119,759.52Notes Receivable43,516.4861,452.2047,214.3874,463.98123,168.13Accounts Receivable Less Reserve87,908.3066,747.9198,503.91277,872.46230,324.90Inventories32,914.8653,723.5095,371.85171,167.03627,556.84$186,151.74$200,276.98$260,773.66$579,627.46$1,100,809.39FIXED ASSETS: Land, Buildings and Equipment$ 44,992.73$ 53,973.70$ 52,200.08$ 87,724.17$ 108,035.30Less Reserve for Depreciation2,277.306,087.609,045.1713,405.3319,336.26$ 42,715.43$ 47,887.10$ 43,154.91$ 74,318.84$ 88,699.04OTHER ASSETS$ 42,759.64$ 41,321.90$ 3,222.56$ 3,441.20$ 4,261.16TOTAL$271,626.81$289,484.98$307,151.13$657,387.50$1,193,769.59LIABILITIESCURRENT LIABILITIES: Notes Payable$ 47,275.48$ 51,175.75$ 53,376.40$126,393.50$ 496,474.22Accounts Payable60,652.7247,377.4140,447.54264,623.80221,356.75Accrued Expenses and UnearnedIncome320.5019,716.0129,091.6333,965.31164,227.15$108,248.70$118,269.17$122,915.57$424,982.61$ 882,058.12CAPITAL ACCOUNTS: Capital Stock - Common$143,000.00$143,000.00$105,000.00$105,000.00$ 107,000.00Surplus - Paid in21,450.0021,450.0021,450.0021,450.00Surplus - Earned(1,071.89)6,765.8157,785.56105,954.89204,711.47$163,378.11$171,215.81$184,235.56$232,404.89$ 311,711.47TOTAL$271,626.81$289,484.98$307,151.13$657,387.50$1,193,769.591945 Tax Ct. Memo LEXIS 177">186 The following table is a summary of petitioner's entire operations from the date of its organization until the close of 1941: 1937 1938193919401941Net Sales$748,414.71$805,433.52$1,079,860.17$1,729,298.91$3,572,324.71Cost of Sales603,944.34648,773.68874,004.921,455,549.862,885,184.77Gross Profit on Sales$144,470.37$156,659.84$ 205,855.25$ 273,749.05$ 687,139.94Income from Commissions20,436.2515,243.5118,119.4723,664.4527,880.19Other Income7,831.7611,953.5812,061.8323,631.8269,642.59Total Income$172,738.38$183,856.93$ 236,036.55$ 321,045.32$ 784,662.72Officers' Salaries, etc.$ 40,052.78$ 35,807.64$ 48,172.62$ 72,235.53$ 168,686.20Other Salaries and Wages29,792.8541,469.6148,743.8860,993.20134,337.48Other Expense63,446.4480,256.0577,657.26105,914.40214,648.95Total Expense$133,292.07$157,533.30$ 174,573.76$ 239,143.13$ 517,672.63Net Income Before Income Taxes$ 39,446.31$ 26,323.63$ 61,462.79$ 81,902.19$ 266,990.09Income Taxes7,533.565,470.2714,082.0929,697.40157,708.58Net Income After Income Taxes$ 31,912.75$ 20,853.36$ 47,380.70$ 52,204.79$ 109,281.51Dividends Paid$ 28,600.00$ 5,720.00$ 6,300.00$ 6,300.00$ 10,700.001945 Tax Ct. Memo LEXIS 177">187 The amounts of compensation, including fixed salary and bonus, which petitioner paid to Finley during the years 1937 to 1941, inclusive, were as follows: FixedAdditionalTotalYearSalaryCompensationCompensation1937 (11 months)$3,850.00$20,000.00$23,850.0019384,400.0013,200.0017,600.0019395,100.0019,937.6425,037.6419406,000.0033,033.7139,033.7119416,900.0095,353.61102,253.61During the same period other officers of the petitioner received the following compensation, including both salary and bonus: 1937Officer(11 mos.)1938193919401941OfficerK. C. Eller$ 5,602.78$ 6,115.01$ 7,656.91$11,576.22$18,950.00W. C. Calton3,300.005,852.637,587.5310,206.7415,950.00H. B. Hatch3,300.006,240.007,587.5310,206.7423,020.72H. A. Mooneyham303.011,212.121,212.12W. L. Smith7,299.75Total$16,202.78$18,207.64$23,134.98$33,201.82$66,432.59It is a common practice for distributors of such products as those sold by the petitioner to compensate keyman and salesmen by paying them a small fixed salary1945 Tax Ct. Memo LEXIS 177">188 and a share of net profits from the business arising in the territories assigned them. In some cases the net profits paid as a bonus reach as high as 50 percent. This bonus is often referred to as "incentive compensation." Petitioner pays not only its president but other officers and keymen "incentive compensation." The phenomenal growth of the petitioner is largely attributable to such method of compensation. Other officers and employees of the petitioner corporation, in addition to those whose compensation is shown in the tabulation above, received fixed salaries and bonuses in 1941 in amounts of from $5,000 to $10,000 per year. The salesmen received salaries of about $250 per month, plus bonuses of about $2,000 per year. The amounts of all salaries and bonuses were determined by Finley according to his own judgment and his knowledge of the services performed by each of the recipients. A resolution fixing the compensation of all the officers was passed at a meeting of the directors held on December 18, 1937. The minutes of that meeting read in part as follows: "The President brought to the attention of the Board the fact that the compensation for services rendered to be paid1945 Tax Ct. Memo LEXIS 177">189 to the President, Vice President, Secretary and Treasurer had not been made a matter of record in the minutes of the Corporation. Whereupon, the following resolution was made and duly adopted: "WHEREAS, at the beginning of business of the North Carolina Equipment Company as a corporation on the date of February 1, 1937 there existed an agreement as to the compensation to be paid to the President, Vice President, Secretary and Treasurer in the amounts stated below: "BE IT RESOLVED, That the Board of Directors now do declare that the schedule of compensation listed below has been in effect during the year 1937 and do hereby declare this schedule to be in full force and effect at this time and direct the Treasurer to make payments to the officers of the corporation in accordance therewith: "A. E. Finley, President - Salary of $4250.00 per annum payable at the rate of $350.00 per month; plus 25% of the net profits of the corporation for the fiscal period. "K. C. Eller, Vice President - Salary of $3000.00 per annum payable at the rate of $250.00 per month; plus 20% of the net profits of the branch office located in Statesville, N.C. for the fiscal period. "H. B. Hatch, Treasurer1945 Tax Ct. Memo LEXIS 177">190 - Salary of $3600.00 per annum payable at the rate of $300.00 per month; plus 5% of the net profits of the North Carolina Equipment Company for the fiscal period. "W. C. Calton, Secretary - Salary of $3000.00 per annum payable at the rate of $250.00 per month; plus 20% of the net profits of the territory assigned to him for the fiscal period. "The following resolution on motion was duly adopted: "RESOLVED, That the President be authorized to pay such bonus and to make such gifts at Christmas 1937 to employees of the Company as in his judgment are warranted. * * * * "RESOLVED, That the same salaries and commissions applicable to the year 1937 as set forth in the minutes of this meeting be and are hereby adopted to apply for the year 1938." Similar resolutions were adopted by the directors each year thereafter. The officers' compensation for 1941 was fixed at a meeting of the directors, consisting of Finley, Hatch and Calton, held on January 28, 1941. The resolution reads in part as follows: "BE IT RESOLVED: That the Board of Directors do now declare the following schedule of compensation of the Officers for the Year 1941, as follows: "Mr. A. E. Finley, President, 1945 Tax Ct. Memo LEXIS 177">191 - Salary of $6900. per annum, payable $500.00 per month for the first three months of the year and $600.00 per month for the remaining nine months, the additional $100.00 per month during these nine months to be paid from the Florida-Georgia Tractor Company; and in addition, 25% of the net profits of the Corporation for the fiscal year. "Mr. H. A. Mooneyham, Vice-President, a salary of $1212.12 per annum, payable at the rate of $101.01 per month "That Mr. A. E. Finley, as President of the Corporation, be and he is hereby empowered to set the rate of pay of each of the other officers; 5amely, K. C. Eller, Vice President; W. C. Calton, Vice President; and W. L. Smith, Vice President. Such rates of pay shall be left to the sound discretion of the President; and his actions in such matters are hereby ratified and adopted by the Board of Directors as official. "Mr. H. B. Hatch, Secretary-Treasurer - Salary of $3600.00 per annum, payable at the rate of $300.00 per month, plus 5% of the net profits from the Corporation"The percentage of profits of the Corporation payable to Mr. A. E. Finley, Mr. W. C. Calton and Mr. H. B. Hatch are to be computed after deducting all other expenses1945 Tax Ct. Memo LEXIS 177">192 of the Corporation, including all other bonus paid. "The President is authorized and directed to set aside monthly from the profits of the Corporation a reserve from which may be paid to the employees of the Corporation such bonus as in his judgment is fitting for the services rendered." The petitioner and Finley both keep their accounts and make their income tax returns on the accrual basis. Petitioner accrued and deducted in its return for 1941 the entire amount of Finley's compensation for that year, $102,253.61, and Finley reported that amount in his 1941 return. The respondent in his audit of the return allowed the deduction of $40,000 as a reasonable compensation for Finley and disallowed the balance of $62,253.61. Reasonable compensation for services rendered by Finley to the petitioner corporation for 1941 is the amount of his fixed salary, $6,900, plus 25 percent of the net profits of the business, computed in accordance with the resolution of the board of directors incorporated herein. During 1939 petitioner sold a parcel of improved real estate at a loss of $3,509.64, the difference between the sale price and the adjusted cost basis. The real estate in question had1945 Tax Ct. Memo LEXIS 177">193 been used by the petitioner in handling farm machinery under its contract with International Harvester Co. Petitioner found it unprofitable to handle farm machinery and discontinued that line. In 1939 it sold the property incurring the loss of $3,509.64, $1,095.91 of which is allocable to the land and the balance $2,413.73, is allocable to the buildings. The loss was allowed as a deduction of that year. In computing petitioner's excess profits credit for 1941, under the income credit method, the respondent added back to the normal tax net income for 1939 (for determining the average base period net income) that portion of the loss allocable to the land, but did not add back that portion, $2,413.73, allocable to the depreciable buildings located on the property, Petitioner alleges that the respondent erred by not also adding back the loss on the sale of the buildings. Opinion Section 23 (a), Internal Revenue Code, authorizes the deduction from gross income of: * * * 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 personal1945 Tax Ct. Memo LEXIS 177">194 services actually rendered; * * The respondent contends that the total compensation paid to A. E. Finley, the petitioner's president, for 1941 in the aggregate amount of $102,253.61 was in excess of reasonable compensation for services rendered to the extent of $62,253.61 and that the payment of such excess partakes of the nature of a distribution of profits to petitioner's principal stockholder and that therefore it is not a legal deductions from gross income. Petitioner's contentions are twofold: First, that Finley's compensation in the amount of $102,253.61 was paid pursuant to a valid agreement for the payment of compensation, and, second, that the amount thereof was reasonable in view of the personal services which Finley actually rendered, the results accomplished over a period of years, and by comparison with the compensation paid executives in similar enterprises. The payment of "incentive" compensation such as that paid by the petitioner to Finley has been said to be based upon sound business principles in that it stimulates the "activity, diligence, and ambition of the employees" and enables the corporation justly to compensate its employees without beforehand incurring1945 Tax Ct. Memo LEXIS 177">195 the obligation. Gray & Co. v. United States (Ct. Cls.), 35 Fed. (2d) 968. The respondent has recognized the prevalency of the custom, if not admitting its merit, in his promulgated regulations. Article 19.23 (a)-6 of Regulations 103 provides in part as follows: (2) The form or method of fixing compensation is not decisive as to deductibility. While any form of contingent compensation invites scrutiny as a possible distribution of earnings of the enterprise, it does not follow that payments on a contingent basis are to be treated fundamentaily on any basis different from that applying to compensation at a flat rate. Generally speaking, if contingent compensation is paid pursuant to a free bargain between the employer and the individual made before the services are rendered, not influenced by any consideration on the part of the employer other than that of securing on fair and advantageous terms the services of the individual, it should be allowed as a deduction even though in the actual working out of the contract it may prove to be greater than the amount which would ordinarily be paid. (3) In any event the allowance for the compensation paid may not exceed what is1945 Tax Ct. Memo LEXIS 177">196 reasonable under all the circumstances. It is in general just to assume that reasonable and true compensation is only such amount as would ordinarily be paid for like services by like enterprises under like circumstances. The circumstances to be taken into consideration are those existing at the date when the contract for services was made, not those existing at the date when the contract is questioned. We are of the opinion that the question presently being considered must be determined upon the basis of the reasonableness of the agreement which existed between Finley, Mooneyham and Gregory at the date that it was entered into, namely, in the year 1934. At that time Mooneyham and Gregory had contributed each only one-third of the $3,500 used to launch the business. They never contributed additional capital and never rendered important services to the business. Its success depended almost entirely upon the brains, efforts and energy of Finley. He not only acted as salesman but was also at all times the chief active officer and guiding genius. He personally obtained the exclusive sales contracts, trained and supervised the salesmen and obtained the credit upon which the business was1945 Tax Ct. Memo LEXIS 177">197 carried on and expanded. For such services he agreed with his associates that he should receive as compensation a small fixed salary plus 25 percent of the net profits. We think that in every sense this was a reasonable agreement. It allowed approximately 75 percent of the net profits to be divided among the three as earnings upon their capital investment. Mooneyham and Gregory had every reason to be satisfied with the arrangement and the evidence is that they were. They were also satisfied to continue the arrangement upon the organization of the corporation. The respondent suggests that the arrangement was originally entered into upon consideration that Mooneyham and Gregory should also have like compensation from their own companies. The evidence shows, however, that the arrangement was suggested by Finley and that he was interested only in obtaining reasonable compensation for his services. In proposing the arrangement he suggested that Mooneyham and Gregory were each entitled to like compensation from the businesses operated by them. Late in 1934 Gregory acquired the interests of Finley and Mooneyham in his separate company and the arrangement with respect to compensation which1945 Tax Ct. Memo LEXIS 177">198 he should receive from his own company was thereby abrogated. Respondent further suggests that the agreement entered into in 1934 was not an enforceable contract and therefore was not within the purview of his regulations quoted above. We do not think it is material whether the agreement was enforceable at law or not. It was acted upon by the parties in interest and carried out. The respondent further points out that the petitioner corporation was controlled by Finley through his ownership of approximately 50 percent of the stock of the petitioner and that it was in his power to make any contract with the corporation which he might wish to make. It seems plain, however, that Finley desired to own a majority of the stock solely for the purpose of controlling the exclusive sales agency contracts of the manufacturers which Finley had personally obtained and in which he claimed to have a proprietary interest. The contracts were renewable yearly and in most cases could be rescinded by either party upon about 60 days' notice. All of the evidence goes to show that it was immaterial to the manufacturers whether Finley operated as a corporation, a partnership or as sole proprietor. We1945 Tax Ct. Memo LEXIS 177">199 do not think that there is any basis for a disallowance of the deduction of any part of the compensation paid to Finley upon the ground that it was a distribution of profits to the petitioner's principal stockholder. He owned only a slight majority of the stock and there is no evidence that he acquired the controlling interest for the purpose of receiving profits in diguise as compensation. The respondent further makes the contention that in the computation of the net profits, a percentage of which was payable to Finley, the income taxes payable upon the profits of 1941 should be treated as an expense and that only 25 percent of the net profits computed in this manner should be considered as payable under the agreement. We do not think that this was the contemplation of the parties. In the computation of the net profits the income taxes should not be treated as an expense. The respondent makes the further contention that the net profits as computed by the petitioner were not in accordance with the resolution of the board of directors embodying the agreement which existed between the principal stockholders in that the bonuses paid to the salesmen and some of the keymen were not1945 Tax Ct. Memo LEXIS 177">200 treated as an expense of the business. The resolution above referred to provided that: The percentage of profits of the Corporation payable to Mr. A. E. Finley, Mr. W. C. Calton and Mr. H. B. Hatch are to be computed after deducting all other expenses of the Corporation, including all other bonus paid. Counsel for the petitioner contends that the resolution was not in accordance with the agreement had between Finley, Mooneyham and Gregory. We sustain the contention of the respondent upon this point. The real reason for respondent's disallowance of $62,253.61 of the compensation paid to Finley appears to be that the amount is excessive for personal services rendered to the extent disallowed. In a different setting there might be merit in this contention. If the agreement had been entered into in 1941 it might be considered that the amount was excessive. But the payment of the compensation was pursuant to an agreement which had been entered into many years prior to 1941 and under such agreement Finley might have received only his fixed compensation or a bonus of a small amount. We think that the reasonableness of the compensation is not to be questioned under the regulations of1945 Tax Ct. Memo LEXIS 177">201 the Commissioner above quoted. Upon this point the respondent argues that the great increase in business in 1941 was due to the erection of numerous military camps and other war projects in the territory controlled by the petitioner. What the results would have been in the absence of such conditions we can not determine. It was the opinion of Finley that the construction of military camps and other war projects did not figure importantly in the business but that that increase was largely due to other factors. Since the compensation was paid pursuant to the agreement we think it is of no importance that war conditions in a measure enhanced the profits of the petitioner corporation in 1941. As to the excess profits tax issue the question is whether that portion of the loss upon the sale of real estate in 1939 which is allocable to the building should be added back to the income of that year (base period net income) for the purpose of computing petitioner's excess profits tax credit for 1941. Section 711 (b) (1) (J), Internal Revenue Code, provides that in computing the base period net income "deductions of any class shall not be allowed if deductions of such1945 Tax Ct. Memo LEXIS 177">202 class were abnormal for the taxpayer." Subsection (b) (1) (K) provides that: (ii) Deductions shall not be disallowed under such subparagraphs unless the taxpayer establishes that the abnormality * * * is not a consequence of a change at any time in the type, manner of operation, size, or condition of the business engaged in by the taxpayer. To bring the loss in question under section 711 (b) (1) (J) petitioner must show not only that it was abnormal but that the abnormality was not a consequence of a change in the type, manner of operation, size, or condition of its business. The evidence before us is that the property in question had been used in handling a line of farm machinery and that after one year's trial petitioner decided to discontinue that line of business and sold the property. On that evidence we must conclude that the loss, even if abnormal, was the consequence of a change in the "type, manner of operation, size, or condition of the business engaged in by the taxpayer." We sustain the respondent upon this point. The parties have stipulated that if as a result of the determination of the Tax Court in this proceeding an additional tax for 1941 is determined to be1945 Tax Ct. Memo LEXIS 177">203 due from the petitioner there is also an additional income tax payable to the State of North Carolina, which tax is a legal deduction from petitioner's gross income. Decision will be entered under Rule 50. Footnotes. (11 months)↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622240/	AARON C. BUTLER, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentButler v. CommissionerDocket No. 1797-86.United States Tax CourtT.C. Memo 1987-463; 1987 Tax Ct. Memo LEXIS 459; 54 T.C.M. 516; T.C.M. (RIA) 87463; September 15, 1987. Aaron C. Butler, pro se. 1987 Tax Ct. Memo LEXIS 459">460 Gail K. Gibson, for the respondent. COUVILLIONMEMORANDUM FINDINGS OF FACT AND OPINION COUVILLION, Special Trial Judge: This case was assigned pursuant to the provisions of section 7456(d) (redesignated as section 7443A(b) by the Tax Reform Act of 1986, Pub. L. 99-514, section 1556, 100 Stat. 2755) of the Code 1 and Rules 180, 181, and 182. Respondent determined a deficiency of $ 4,815 in petitioner's 1982 Federal income tax. After concessions by the parties, the sole issue is whether petitioner is entitled to exclude from gross income any of the disability pension received by him during 1982. FINDINGS OF FACT Some of the facts have been stipulated and are found accordingly. The stipulation of facts and attached exhibits are incorporated herein by this reference. Petitioner was a resident of Wayne, Nebraska, when the petitioner was filed. Petitioner was employed by Metropolitan Community Colleges (MCC) at Kansas City, Missouri, 1987 Tax Ct. Memo LEXIS 459">461 for eight years until his retirement due to disability in October 1981. Petitioner was a professor of economic at MCC. During his tenure, he made contributions to a disability insurance plan with MCC's insurance carrier, Guardian Life Insurance Company of New York (Guardian). The parties agree that petitioner's contributions to this plan during the period of his employment were $ 8,842.46, and MCC's contributions were $ 6,441.66. During 1982, petitioner received $ 19,956 in disability payments from MCC. The payments were actually made by Guardian, the disability insurance carrier for MCC. Petitioner received a Form W-2 from MCC for 1982 reporting wages of $ 19,956. On his 1982 return, petitioner did not report any of the $ 19,956 payments received from Guardian. Later, after being informed by MCC that the payments were taxable, petitioner filed an amended return, on which he reported $ 2,739 of his pension as taxable income. 2 The record is not clear as to how petitioner reached this determination. 1987 Tax Ct. Memo LEXIS 459">462 Respondent determined in the notice of deficiency that the entire $ 19,956 was taxable income. Respondent, at trial, conceded that the $ 8,842.46 contributed by petitioner was nontaxable but claimed the remaining $ 11,113.54 was taxable. Respondent also conceded that petitioner was entitled to an additional dependency exemption for his mother, which was not claimed on petitioner's 1982 original or amended returns. OPINION Respondent's determination in the notice of deficiency is presumptively correct, and petitioner bears the burden of proving otherwise by a preponderance of the evidence. Welch v. Helvering,290 U.S. 111">290 U.S. 111, 290 U.S. 111">115 (1933); Rule 142(a). Section 72(a) generally provides that any amount received as an annuity is included in gross income except as otherwise expressly provided. Section 72(d) provides that amounts received from certain annuities may be excluded from gross income until an amount equal to the employee's "consideration for the contract" has been excluded. In the case of such a contract, if, during the first three years in which payments under the contract are made, the total amount receivable by the employee will equal or exceed the1987 Tax Ct. Memo LEXIS 459">463 consideration which was paid, all payments are excluded from gross income until such consideration has been recovered. All payments thereafter are taxable income to the recipient. Section 72(d)(1); Brittelle v. Commissioner,32 T.C. 1332">32 T.C. 1332 (1959). Pensions fall within the description of "contracts" providing for payments to which section 72(d) applies. Section 1.72-13(d), Income Tax Regs. The record reflects that petitioner recovered his $ 8,842.46 contributions to the disability pension in 1982, thus all amounts received in excess of this figure are fully taxable under section 72(d), including the $ 6,441.66 in contributions made by MCC. Petitioner contends that, in addition to the $ 8,842.46, which admittedly is nontaxable, 73 percent of all amounts in excess of $ 8,842.46 is also nontaxable, since 73 percent represented his proportionate share of the contributions by him and MCC to the plan at the time of his retirement. 3 Petitioner bases his position on Internal Revenue Publications 525 and 907 and advice he purportedly received from agents at the national office of the Internal Revenue Service at Washington, D.C. Petitioner also relies on a proposed stipulated1987 Tax Ct. Memo LEXIS 459">464 decision, which was presented to him prior to trial of this case in which the deficiency was reduced to $ 1,109 from $ 4,815 determined in the notice of deficiency. We dismiss petitioner's contentions. Our review of the Internal Revenue Publications does not lead us to the same conclusions petitioner reached. In fact, Publication 525 states specifically "If your payments are specifically applied to the cost of your disability pension, do not include the payments you made toward the purchase of the disability pension in figuring the cost of your pension or annuity for the Three-Year Rule or the General Rule. For more information on the Three-Year Rule and the General Rule, see Publication 575." The same statement also appears in Publication 907. With respect to the advice respondent's agents at the national office purportedly gave petitioner, we are satisfied from the record that such advice was given, if at all, prior to the time respondent's1987 Tax Ct. Memo LEXIS 459">465 agents or attorneys responsible for this case conceded that petitioner's contributions of $ 8,842.46 were not taxable. If petitioner was advised that the $ 8,842.46 and 73 percent of his pension in excess thereof were nontaxable, such advice was erroneous, and respondent is not estopped and is not bound by the erroneous acts or omissions of his agents. Estate of Emerson v. Commissioner,67 T.C. 612">67 T.C. 612, 67 T.C. 612">617-618 (1977); see also Automobile Club of Michigan v. Commissioner,353 U.S. 180">353 U.S. 180 (1957). The proposed stipulated decision of this case showing a deficiency of $ 1,109 is of no benefit to petitioner's position, because it does not reflect how the deficiency was arrived nor does it show what concessions, if any, were made by respondent. We conclude that petitioner was not taxable on $ 8,842.46 of the disability pension he received in 1982, but all payments received by him in excess of this amount constituted taxable income. Decision will be entered under Rule 155.Footnotes1. Unless otherwise indicated, all section references are to the Internal Revenue Code of 1954, as amended and in effect during the year at issue. All Rule references are to the Tax Court Rules of Practice and Procedure. ↩2. In an explanatory statement on the amended return, petitioner and his wife stated "We elect to treat these receipts as a pension * * *." We construe this as an irrevocable election by petitioner and his wife not to seek the exclusionary benefits of section 105(d) pursuant to section 105(d)(6) and to apply instead the annuity rules pursuant to section 72. ↩3. For the entire period of his employment, petitioner's contributions represented 58 percent of the total contributions to the plan. However, petitioner contends that, at the time he retired, he was contributing 73 percent to the plan. ↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622241/	John Fox and Olga P. Fox v. Commissioner.Fox v. CommissionerDocket No. 64833.United States Tax CourtT.C. Memo 1958-205; 1958 Tax Ct. Memo LEXIS 18; 17 T.C.M. 1006; T.C.M. (RIA) 58205; December 9, 1958Burton L. Williams, Esq., for the petitioners. J. Frost Walker, Jr., Esq., and Raymond T. Mahon, Esq., for the respondent. TIETJENSMemorandum Findings of Fact and Opinion TIETJENS, Judge: The respondent determined the following deficiencies for the years 1949 to 1953: Additions to Tax, I.R.C. of 1939IncomeSec. 294Sec. 294YearTaxSec. 291(a)Sec. 293(a)(d)(1)(A)(d)(2)1949$ 18,663.90$4,665.97$ 933.20$1,741.92$ 1,045.15195052,207.432,548.142,297.371951351,852.0617,592.6025,802.341952352,583.9417,629.2021,035.621953167,479.748,373.9929,256.00The issues remaining for decision are (1) are the petitioners entitled to deductions in 1951 and 1952 for amortization and interest resulting from1958 Tax Ct. Memo LEXIS 18">19 dealings in Appalachian Electric Power Company bonds, (2) are deductions allowable in 1952 and 1953 for interest paid in connection with a transaction in Treasury notes, (3) are dividends in 1953 from stock of North Penn Gas Company and income from certain gas leases in 1953 taxable to the petitioners or to Post Publishing Company, and (4) are the petitioners liable for the addition to tax for negligence under section 293(a) of the Internal Revenue Code of 1939 for 1950 or 1952? The taxpayers' returns were filed with the collector or the director of internal revenue at Boston, Massachusetts. Findings of Fact The stipulated facts and exhibits thereto are incorporated. The petitioners, husband and wife, reside at Newton Centre, Massachusetts. Their accounts and records were maintained and their joint income tax returns were prepared on a cash basis and for calendar years. John Fox is an attorney, admitted to practice. For a number of years he was in the brokerage business but gave that up after 1948. While in that business he bought and sold securities for customers and also on his own account. During the years 1951 to 1954 Fox had substantial investments in stocks and bonds1958 Tax Ct. Memo LEXIS 18">20 and in oil or gas leases. He owned the controlling stock of certain corporations and had substantial interests in others. On occasion he borrowed large sums on loans secured by collateral. Some of his financial dealings were with or through the agency of Standish T. Bourne, a partner in the firm of Simmons, Bourne & Co., a note brokerage firm of Boston. Standish Bourne was also one of the trustees of Dartmouth Associates Trust, an investment trust, herein sometimes referred to as Dartmouth. On September 13, 1951, Fox purchased through Dartmouth $1,500,000 of Appalachian Electric Power 3 3/4 per cent bonds at 107 3/4, which bonds had a maturity date in 1981. These bonds were callable in whole or in part on 30 days notice at any time at a general call price of 105 3/4. They were also callable on like notice for maintenance and improvement funds, or with proceeds of released property or insurance at a special call price of 102 3/8. The total purchase price for these bonds was $1,616,250 plus $16,717.50 accrued interest, making a total of $1,632,967.50. On September 18, 1951, Fox obtained a loan from Dartmouth of $1,632,967.50 to pay for the bonds. This loan bore interest at 51958 Tax Ct. Memo LEXIS 18">21 1/2 per cent. Fox gave Dartmouth a non-recourse note representing this liability, which note was due and payable on March 20, 1952 and was secured by a pledge of the $1,500,000 Appalachian Electric Power Company bonds. This note contained the following stipulations: "The undersigned hereby gives to the Trust a lien against the securities pledged, and the Trust shall have the right to rehypothecate or to use the said securities for any different purposes while they are pledged to it. "The undersigned shall have the right to order the liquidation of the securities pledged at which time interest on this note shall cease. "The undersigned shall not be called upon to furnish additional collateral at any time before the maturity of this note. "At the maturity of this note, the undersigned shall have the right to order the sale or liquidation of the securities held in pledge; the proceeds realized from this sale or liquidation, shall be applied to discharge the entire indebtedness of the undersigned. "The undersigned shall not be held liable for any deficiencies arising at the time of the sale or liquidation of the securities so held, and the Trust shall only took to the proceeds1958 Tax Ct. Memo LEXIS 18">22 from such sale or liquidation for the satisfaction of the obligation under this instrument. "On each interest date, the Trust shall credit the undersigned with interest from the coupons accruing to him on the bonds pledged as collateral, and the undersigned shall pay the interest accruing to such interest date." On December 3, 1951, Fox was obligated to pay interest of $45,904.52 to Dartmouth on his note of September 18, 1951. The Appalachian bonds paid interest of $28,125 on December 1, 1951, which was paid to Dartmouth. In addition, on December 18, 1951, Fox transferred to Dartmouth 375 shares of Western Union Class A stock which Dartmouth valued on its books at $17,779.52. On December 19, 1951, Western Union stock sold at 40 5/8 per share. On March 20, 1952, Fox renewed the note for another on the same terms payable September 21, 1952. On March 31, 1952, Fox purchased $750,000 additional of the same issue of Appalachian bonds. The total purchase price for these bonds was $810,000 plus accrued interest of $9,375 with minor adjustments for commission and taxes, which made the total purchase price $818,062.50. To finance this purchase, Fox borrowed from Dartmouth $818,062.52. 1958 Tax Ct. Memo LEXIS 18">23 This loan was secured by a non-recourse dated March 31, 1952, bearing 5 1/2 per cent interest and was secured by a pledge of the $750,000 Appalachian Electric Power Company bonds. The principal of the note was payable on October 6, 1952, and the interest was payable on June 1, 1952. As of June 2, 1952, Fox owed $18,461.65 as interest on the note which he gave to Dartmouth on September 19, 1951 in the face amount of $1,632,967.50, and on June 2, 1952, interest payable to Fox had accrued on the $1,500,000 Appalachian bonds in the amount of $29,688. On June 2, 1952, Fox sold $1,500,000 Appalachian Electric Power 3 3/4 bonds maturing in 1981 to Dartmouth at a price of 107 3/4. The total sales price was $1,616,250 plus $1,563 accrued interest, which was $15,154.50 less than the total purchase price plus interest which Fox had paid for the bonds. On that date Fox's first note, now due on September 21, 1952, was canceled. On June 1, 1952, there was $23,621.37 interest due on Fox's note dated March 31, 1952, and on June 1, 1952, interest payable to Fox had accrued on the $750,000 Appalachian bonds in the amount of $14,062.50. On July 24, 1952, Fox borrowed $63,000 from Standish T. 1958 Tax Ct. Memo LEXIS 18">24 Bourne individually. From the proceeds of this $63,000 loan, Fox paid to Standish T. Bourne individually $15,000 which, together with the interest income on the Appalachian bonds, was used to pay the interest accrued on Fox's two notes then outstanding to Dartmouth and the remaining unpaid principal amount of his note dated September 18, 1951. On October 6, 1952, Fox sold $750,000 Appalachian Electric Power 3 3/4 bonds maturing in 1981 to Dartmouth at a price of 108. The total sales price was $810,000 plus $9,765.60 accrued interest, which was $1,703.10 more than the total purchase price which Fox had paid for the bonds. Appalachian Electric Power Company bonds were trade over the counter. The bid and asked prices and the mean of such prices on the following dates were: DateBidAskedMeanSept. 7, 1951107 3/8107 3/4107 9/16March 14, 1952108108 1/2108 1/4End of May 1952107 1/2108 1/2108End of June 1952107 1/2108 1/4107 7/8End of October 1952109110109 1/2End of January 1953110 1/2110 1/2End of January 1954120 1/2121 1/2121In 1951 and 1952 the petitioners computed the amortizable bond premium on the1958 Tax Ct. Memo LEXIS 18">25 Appalachian bonds with reference to the special call price of 102 3/8. Fox did not pay any interest on indebtedness to Dartmouth Associates Trust in 1951 or 1952. Fox borrowed $48,000 from Bourne on June 15, 1952. Fox gave a mortgage for $100,000 on some property at Fairfield, Connecticut, as security for this and other advances by Bourne. Fox paid $45,000 on or about that date to Bourne, as agent for M. Eli Livingstone, doing business as Livingstone & Company, of Boston, to cover his down payment on a transaction in United States Treasury notes. Bourne paid $6,500 of this for Livingstone on July 31, 1952 and did not remit the balance until 1957. On or about July 30, 1952, Fox placed an order with Bourne for the purchase of $30,000,000 of United States Treasury 1 3/8 per cent notes due March 15, 1954 at 98-30/32. Bourne "purchased" such notes for the account of Fox through Livingstone & Company from C. J. Devine & Co., of New York, New York for $29,681.250 plus accrued interest of $154,687.50, a total of $29,835,937.50. Devine & Co. confirmed the "sale" to Livingstone & Company which in turn confirmed the purchase to Fox. Fox borrowed the balance of the purchase price, $29,790,937.501958 Tax Ct. Memo LEXIS 18">26 from Seaboard Investment Corporation, a Massachusetts corporation, incorporated in July 1952, and gave his promissory note therefor dated July 31, 1952. This note contained the following conditions: "On June 15, 1953, I promise to pay to Seaboard Investment Corp., the sum of - "TWENTY-NINE MILLION SEVEN HUNDRED NINETY THOUSAND NINE HUNDRED THIRTY-SEVEN AND 50/100 DOLLARS together with interest at the rate of 2 5/8% per annum, subject to the following rights and conditions, having deposited with the said obligee the following securities: "$30,000,000.00 U.S. Treasury 1 3/8% Notes 3/15/54. "On September 15, 1952, the undersigned shall pay to the Seaboard Investment Corp., the sum of $51,562.50, (undersigned shall receive from Seaboard Investment Corp., the full coupon interest maturing September 15, 1952 less accrued interest paid at time of purchase), which shall be applied against the interest owed by the undersigned to the Seaboard Investment Corp. "The undersigned gives to the obligee a lien against the securities pledged for the amount of the obligations set forth herein, and gives to the obligee the right to hypothecate and use the securities pledged for any purpose1958 Tax Ct. Memo LEXIS 18">27 while so pledged. "The undersigned shall not be called upon nor be liable to furnish additional collateral to the obligee at any time. "In the event of such sale or liquidation prior to the maturity of this note, the Seaboard Investment Corp., shall have the right to add interest from the date of repayment of this loan to the maturity date at the rate of 1% per annum. The addition of such interest to the maturity date shall be subject to the conditions contained in the following paragraph. "The undersigned shall not be liable for any deficiency as to the principal or interest arising at the time of such sale or liquidation from such proceeds; and payment of all obligations of the undersigned under this instrument shall be made from and only from, and be charged against and only against the proceeds of such sale or liquidation and from no other source whatsoever. The required application of such proceeds of such sale or liquidation shall be a full and complete discharge of any and all liability of the undersigned under this instrument. "The terms of this note may be extended to December 15, 1953 in the event that the market price of U.S. Treasury 1 3/8% Notes of 3/15/54 are1958 Tax Ct. Memo LEXIS 18">28 selling at 99.50 or less." On July 31, 1952, Fox instructed Livingstone & Company to deliver the notes to Seaboard and instructed Seaboard to receive them against payment of the loan. The notes were delivered to Guaranty Trust Company for the account of Livingstone as agent for Fox. Guaranty Trust Company acknowledged to Livingstone & Company receipt of the notes for Livingstone's account, and charged Livingstone & Company and credited Devine & Co. therefor. Fox had pledged the notes with Seaboard as security for his note. Livingstone & Company, as agent for Seaboard, "sold short" the notes on the same date to C. J. Devine & Co. Guaranty Trust redelivered the notes to Devine & Co., charged Devine & Co. and credited Livingstone & Company therefor, and confirmed the transaction to Livingstone. Interest paid on the United States Treasury 1 3/8 per cent notes from March 15, 1952 to September 15, 1952 (the coupon date) totaled $206,250. Of this amount, $154,687.50 represented interest accrued as of the date of the sale. On or about October 13, 1953, Fox notified Seaboard to deliver to Livingstone & Company the collateral for his loan from Seaboard (the notes) so that the collateral1958 Tax Ct. Memo LEXIS 18">29 could be sold in satisfaction of Fox's debt to Seaboard. Seaboard instructed Livingstone & Company to "buy-in" $30,000,000 of United States Treasury 1 3/8 per cent notes to cover Seaboard's short sale of July 31, 1952. Livingstone & Company purchased $30,000,000 of United States Treasury 1 3/8 per cent notes for the account of Seaboard from C. J. Devine & Co. for the sum of $29,981,250 plus accrued interest of $31,906.07, making a total purchase price of $30,013,156.07. Devine & Co. sent to Livingstone & Company a confirmation of this sale. The notes were delivered to Guaranty Trust Company which charged Livingstone and credited Devine & Co. therefor. On the same date, Livingstone & Company resold the notes to C. J. Devine & Co. on behalf of Fox to enable Fox to satisfy his debt to Seaboard. Livingstone sent Fox a confirmation of the sale. Guaranty Trust Company delivered the notes to Devine & Co. and charged Devine and credited Livingstone therefor. Following are the bid and asked prices of United States Treasury 1 3/8 per cent notes due March 15, 1954, on the dates shown: DateBidAsked5/29/5299.799.96/30/5299.399.67/31/5299.099.39/30/5399.2899.310/30/53100.2100.412/31/53100.7100.91958 Tax Ct. Memo LEXIS 18">30 The president of Seaboard was Samuel Livingstone, a brother of M. Eli Livingstone. Seaboard filed corporation income tax returns for the fiscal years ended June 30, 1953, and June 30, 1954. Its principal business activity was described in the returns as "Finance." Its balance sheet showed no assets or liabilities as of July 1, 1952. The balance sheets contained in the returns show assets and liabilities at the close of its fiscal years ended in 1953 and 1954 as follows: ASSETSJune 30, 1953June 30, 1954Cash$ 741.81$ 342.06Notes and accounts receivable$162,688,123.59Less: Reserve for bad debts1,579,968.75161,108,154.84Other assets573,672.7050.00TOTAL ASSETS$161,682,569.35$ 392.06LIABILITIESAccounts payable$ 86,550.30$119,630.34Accrued expense8,126.90Other liabilities (short sales)161,780,973.19Capital Stock: Common stock700.00700.00Earned surplus and undivided profits(193,781.04)(119,938.28)TOTAL LIABILITIES$161,682,569.35$ 392.06In its corporate income tax return for the fiscal year ended June 30, 1953, Seaboard reported total income of $1,401,106.96, consisting1958 Tax Ct. Memo LEXIS 18">31 entirely of "Gross profit where inventories are not an income-determining factor," total deductions of $1,594,863 (including "Losses" in the amount of $1,579,968.75 and salaries of two officers in the amount of $11,300), resulting in a net operating loss of $193,756.04, and no tax due. In its return for the fiscal year ended June 30, 1954, Seaboard reported total income of $430,581.89, consisting entirely of "Interest on loans, notes, mortgages, bonds, bank deposits, etc." deductions of $356,739.13 (including losses on short sales of $327,218.75), no net income after carryover of net operating loss for 1953, and no tax due. The following journal entries appear on the books of Seaboard Investment Corporation: (a) Under date of July 30, 1952 there is an entry which shows a debit to Notes Receivable - John Fox, and a credit to Accounts Receivable - L. & Co. (Livingstone & Co.) in the amount of $29,790,937.50. (b) Under date of July 30, 1952 there is an entry which shows a debit to Accounts Receivable - L. & Co. (Livingstone & Co.), and a credit to Short Sales, in the amount of $29,793,750. This short sale is also reflected in Seaboard's Sales Journal on July 30, 1952 where it1958 Tax Ct. Memo LEXIS 18">32 is shown as two short sales to Livingstone & Co. in the amounts of $19,862,500 and $9,931,250 for a total of $29,793,750. (c) Under the date of July 1, 1953 there is an entry which shows a debit to Short Sales and a credit to Notes Receivable - John Fox, in the amount of $154,687.50. The explanatory entry following this entry reads as follows: "To reduce the June 30, 1953 balance for that portion of the coupons received on the subsequent coupon date which represented accrued interest at the time the customer purchased his bonds and similarly reduce the accrued interest received on the short sale of the bonds." (d) Under the date of October 13, 1953 there is an entry which shows a multiple debit to the Short Sales, Loss on Short Sales and Interest Income accounts in the respective amounts of $29,639,062.50, $342,187.50 and $31,906.07, and a credit to Accounts Receivable - L. & Co. (Livingstone & Co.), in the amount of $30,013,156.07. This entry also appears in Seaboard's Purchase Journal on October 13, 1953 as a purchase of U.S. Treasury notes in the amount of $29,981,250. (e) Under the date of October 13, 1953 there is an entry which shows a debit to Accounts Receivable1958 Tax Ct. Memo LEXIS 18">33 - L. & Co. (Livingstone & Co.) in the amount of $30,013,156.07 and a multiple credit to Notes Receivable - John Fox and to Interest Income in the respective amounts of $29,636,250 and $376,906.07. The explanatory entry following these two General Journal entries of October 13, 1953 reads: "To record delivery of bonds from L. & Co. (Livingstone & Co.) to cover short sale and re-delivery for account of John Fox in cancellation of note and interest due." Fox did not pay any interest on indebtedness to Seaboard Investment Corporation in 1952 or 1953. In June 1952 Fox signed a contract for the purchase of the stock of the Post Publishing Company, which published the Boston Post. In September 1952, he acquired ownership of all the stock of this company. The Post Publishing Company had operated at a loss for some years. After acquiring the stock, Fox became president and treasurer and one of the three directors, and named two of his employes as the other two directors. At the time he acquired the Publishing Company Fox owned a large percentage of the preferred stock of Pennsylvania Gas and Electric Corporation which was in process of reorganization. This stock had been pledged and1958 Tax Ct. Memo LEXIS 18">34 deposited with various banks as security for loans to Fox. In the reorganization Fox was entitled to receive stock of the North Penn Gas Company, a former subsidiary of Pennsylvania Gas and Electric Corporation. The shares, when issued, were deposited with the banks as collateral. The minutes of the board of directors of the Post Publishing Company concerning meetings on the dates here listed show that all the directors were present and voted, and state in part - "January 5, 1953 "The president presented to the directors a plan whereby Post Publishing Company might possibly acquire that percentage of control of the stock of Mississippi Central Railroad Co. by the expenditure of $500,000 so that the Post and it might be able to report consolidated income tax returns which would result in earnings, which would be exempt from federal income taxes, of $300,000 per year. He suggested, therefore, that the directors authorize the purchase of Mississippi Central Railroad shares as they may come into the market from time to time. "Mrs. Doten told the meeting that in her opinion in view of Post Publishing Company's federal income tax situation it might be desirable to buy securities1958 Tax Ct. Memo LEXIS 18">35 from time to time, the profits on the sale of which would not be subject to income taxes. "Mr. Fox said that if he were assured of repayment of amounts which he might spend for the purchase of securities, he would be willing to finance the purchase of shares of Mississippi Central Railroad Co. and Keta Gas and Oil Corp."After discussion, and upon motion duly made and seconded, it was unanimously "VOTED: That the president and treasurer or either of them be and hereby is authorized to purchase for, in the name, and on behalf of the corporation shares of other corporations which may seem desirable to them as investments. "The following resolutions were unanimously voted: "RESOLVED: That the president be and hereby is authorized to hold all shares bought by him for the corporation and paid for by him as a pledge for the repayment of all amounts advanced by him for them. RESOLVED: That all shares bought by the corporation whether paid for by it or the president shall be delivered to him or to the treasurer for his account to secure the re-payment of amounts due him by reason of his open account with Post Publishing Company. "RESOLVED: That the president and treasurer or1958 Tax Ct. Memo LEXIS 18">36 either of them be and is hereby authorized to sell for and on behalf of the corporation all shares owned by it at their discretion and to apply the proceeds of such sales, first: to the repayment of the president for amounts expended by him on account of shares bought by the corporation and pledged to him, and second: to the reduction of amounts due him by reason of his open account with the corporation. "February 6, 1953 "The President announced to the meeting that a natural gas well had been completed in Benezette Township, Elk County, Penna. He reported that he had had extensive conversations with geologists and petroleum engineers who were experts concerning the geology of the area in which the well had been completed, and that they were unanimous in the opinion that the completed well initiated a new major gas field. "Mr. Fox said that he held two gas and oil leases in the new field, which in the opinion of the experts concerned were certain to be productive. He said that he was willing to donate these leases, viz: the Mason, in Gibson Township, Cameron County, and the Bartoletta in Benezette Township, Elk County, to the corporation. "There was a long discussion concerning1958 Tax Ct. Memo LEXIS 18">37 Mr. Fox's offer, particularly concerning the cost of drilling wells on the proffered leases, following which, upon motion made by Mrs. Doten and seconded by Mr. Faxon, it was unanimously. "VOTED: that the corporation accept the Mason and Bartoletta leases from Mr. Fox and drill gas wells on them to the Oriskany sand. "Mr. Fox brought to the attention of the meeting that although drilling deep wells was expensive, a successful well could be used as collateral for a bank loan by an acceptable borrower, and that there was considerable doubt whether the corporation could qualify as such. Accordingly, after an exhaustive discussion, upon motion made by Mrs. Doten and seconded by Mr. Faxon, it was unanimously "VOTED: that the Mason and Bartoletta leases be retained either in the name of Mr. Fox or another nominee of the corporation, and that the name of the corporation not be disclosed as their owner, the nominees to hold the leases as undisclosed agents for the corporation. "February 10, 1953 "After discussion concerning the cost of drilling natural gas wells on the acreage that had been acquired by the corporation from John Fox on February 6, pursuant to a vote of the Board of1958 Tax Ct. Memo LEXIS 18">38 Directors passed at a meeting held on that day, upon motion duly made and seconded, it was "VOTED: that the corporation accept Mr. Fox's offer to drill and complete all wells decided to be drilled by it at the usual prices prevailing in the respective areas at the time of drilling. "After further discussion, upon motion duly made and seconded, it was "VOTED: that the corporation drill at least one well each on the Mason and Bartoletta tracts respectively, and that if either well should be successful enough to warrant further drilling, that the treasurer be and hereby is empowered to authorize such drilling on the terms set forth in the preceding vote held this day. "February 19, 1953 "Mr. Fox explained to the meeting the advantages to the corporation, both from the standpoint of actual income and from a tax standpoint, of the acquisition by the Post of Mr. Fox's holdings of 352,595 shares of North Penn Gas Company stock. He explained that if the Post could acquire, at any time, the percentage of North Penn Gas stock necessary for the filing of consolidated Federal income tax returns, it would be of very great benefit to Post Publishing Company. "After discussion, and upon1958 Tax Ct. Memo LEXIS 18">39 motion duly made and seconded, it was "VOTED: to accept as a contribution to capital 352,595 shares North Penn Gas Company stock from Mr. Fox, which are to be added to capital at the current market value of $9.00 per share. "It was stipulated by the Directors that the present bank loans for which this stock has been pledged as collateral in numerous banks shall remain the obligations of Mr. Fox and that this stock is accepted without liability to this corporation, on account of such loans, which Mr. Fox has undertaken to pay. "After discussion, and upon motion duly made and seconded, it was "VOTED: that Mr. Fox, for and on behalf of the corporation, be authorized to acquire all shares of North Penn Gas Company stock which may come into the market for the purpose of acquiring the amount of shares necessary for consolidated reporting. "May 14, 1953 "Mrs. Doten, the treasurer, reported to the Board that the corporation's Katherine Bartoletta #1 gas well had been completed on May 11 with an initial open flow of 9,500,000 cubic feet per day, and rock pressure of 3950 pounds per square inch, which made it an extremely profitable well. "The directors examined a general map of1958 Tax Ct. Memo LEXIS 18">40 the Benezette gas field and the Bartoletta lease, and were unanimously of the opinion that a second well should be immediately commenced on the Bartoletta tract, in a location to be determined by Mr. Fox after consultation separately with Mr. Lee Minter of Bradford, Penna. and Mr. Jack Gaddess of Post Allegany, Penna., the purpose being to get the independent conclusion of each. "Mr. Fox suggested that a motion authorizing the drilling of this well was in order even though, under the vote held at the previous meeting on February 10, Mrs. Doten, the treasurer, was authorized to direct the drilling of the second Bartoletta well, without further action by the Board. "Accordingly, upon motion duly made and seconded, it was unanimously "VOTED: that Mr. Fox, through his independent drilling organization, be and hereby is directed, for and on behalf of the corporation to drill a gas well on the Bartoletta lease, to be known as 'Bartoletta #2,' but in his own name as its undisclosed agent, since he can get loans from a bank in his own name, which the corporation cannot do. "Mrs. Doten pointed out that the cost of completing deep gas wells was between $60,000 and $90,000, the approximate1958 Tax Ct. Memo LEXIS 18">41 cost of the Bartoletta #1 being in the neighborhood of $70,000. She said that in addition to having to pay for this, the corporation would have to pay for its second well on the Bartoletta tract and that it was already drilling on the Mason tract, and could be expected to drill wells in addition to the wells to be presently drilling and the one already completed. "She pointed out that the cost of these three wells, together with gathering lines, rights of way, etc. would total not far from $250,000, and that it was highly desirable, that the corporation borrow against its gas income in order to finance what looked as though it would be a very successful natural gas operation. "Mr. Fox told the Board there was only one bank in New York that had any experience and knowledge of gas wells in the Appalachian Area, viz: Bank of the Manhattan Company. He said that William R. Driver, the vice president of the bank with whom he had done business, had been strongly opposed to Mr. Fox's having anything to do with Post Publishing Company. He said that Mr. Driver had made it abundantly clear to him in numerous conversations that his bank would have nothing whatever to do with the Post, for1958 Tax Ct. Memo LEXIS 18">42 which he, Driver, apparently had a life-long dislike, having originated in Boston. In the circumstances, therefore, Mr. Fox thought it highly unlikely that it would be possible for the Post to get a loan in its own name secured by natural gas production. "Mr. Fox reminded the Board, however, that this very situation had been anticipated by the Board, and had resulted in its vote held on February 6 having circumstances similar to the very ones under discussion in mind. "All the members of the Board expressed themselves as being completely familiar with the situation since all of them knew Mr. Driver well and he had expressed his opinions concerning the Post to all of them individually on divers occasions, and accordingly "Upon motion duly made and seconded, it was "VOTED: that the corporation, from time to time, borrow from any source available, including but not limited to the Bank of the Manhattan, or other banks, for the purpose of raising money for any corporate purposes, including the repayment of debts, either to its own officers or anyone else. "Upon motion duly made and seconded, it was also "VOTED: that the president, treasurer, or any director, be, and each hereby1958 Tax Ct. Memo LEXIS 18">43 is authorized to make loans for and on behalf of the corporation but nevertheless in his or her own name as its undisclosed agent, when in the opinion of the majority of the Board such borrowing would not be possible or feasible in the name of the corporation. "Upon motion duly made and seconded, it was further "VOTED: that the authority granted by the two immediately preceding votes, although general in nature and not limited to the financing of natural gas operations, specifically confers upon the president and/or treasurer full authority to borrow in the name of either from any source for the purpose of financing the corporation's natural gas operations in the Benezette-Driftwood, Pennsylvania gas fields. "After additional discussion in which all the members of the Board took part, the Board decided that whereas John Fox, the president, had heretofore expended large amounts of money for and on behalf of the corporation and is continuing to do so, and that it may be possible for him to borrow on behalf of the corporation but in his own name, using its natural gas production or other assets as security, upon motion duly made and seconded, it was "VOTED: that a majority of1958 Tax Ct. Memo LEXIS 18">44 the Board be and they hereby are authorized to reimburse Mr. Fox from time to time, as moneys may be available to the corporation, for advances previously made by him to or on behalf of the corporation, and from time to time to make advances to him that in their judgment are necessary and/or incident to the corporation's operations of any nature, this authority to continue until revoked. "August 4, 1953 "The President reported to the meeting that the Benezette gas field had become one of the great gas fields in Pennsylvania. He said that pursuant to conversations with the several directors he had negotiated a lease of a tract in Benezette Township, Elk County, Pennsylvania, with the Pennsylvania Railroad Company several weeks earlier, and that pursuant to an oral understanding with Pennsylvania Railroad officials, although a lease had not been executed, nevertheless, because of the intensive competition existing in the filed, he had, upon the assurance of the Pennsylvania Railroad people that they would execute it, started a gas well drilling on the lease for and in behalf of the corporation, which gas well was in an advanced state of completion. "Mr. Fox said that a number of1958 Tax Ct. Memo LEXIS 18">45 persons having no connection with this corporation, who had been instrumental in the obtaining of the lease, had signified their intention of taking percentages of the lease totalling, in the aggregate, 25%. "After discussion, upon motion made by Mrs. Doten and seconded by Mr. Faxon, it was unanimously "VOTED: that the actions of the President be ratified and confirmed, and that the President authorize James H. Isherwood, Esq., counsel in the matter, to do all things necessary to complete the formalizing of the lease. "Upon motion duly made and seconded, it was further "VOTED: that the President authorize Mr. Isherwood to hold the lease in his name as nominee, since the reasons which had theretofore made it desirable that the corporation not be disclosed as a principal were still present and in full force and effect. "August 20, 1953 "The president reported that the Pennsylvania Railroad Corp. Well #1, in which the corporation had a 75% interest, and which stood in the name of James H. Isherwood, Jr., had been completed, with an initial open flow of 8,000,000 cu. ft. per day. "Mrs. Doten, the treasurer, reported to the Board that she had authorized the drilling of another1958 Tax Ct. Memo LEXIS 18">46 well on the Pennsylvania R.R. Corp. tract to be known as Pennsylvania R.R. #2, in accordance with the authority previously granted her by the Board of Directors. "September 2, 1953 "Mr. Fox reported to the meeting that in accordance with the authority granted him by the vote of the Board of Directors held on August 29, 1953, he had been the successful bidder and had entered into a contract for the purchase of 404,500 shares Trans-Penn Transit Corp. Capital stock for $650,000, and had agreed to purchase its Accounts Receivable for $328,740 from 61 Broadway Corporation, all of which had been auctioned by the Supreme Court of New York. Mr. Fox said that he had advanced $100,000 on behalf of the Post to bind the purchase, and that he had executed a note of the Post maturing October 31, 1953, for $878,740 to cover the balance of the purchase price. "October 31, 1953 "VOTED: that the corporation accept from its president, John Fox, advances sufficient to pay that part of the $978,740 purchase price of Trans-Penn Transit Corp., which the corporation had been and continued to be unable to pay. "Upon motion duly made and seconded, it was further "VOTED: that the corporation, as1958 Tax Ct. Memo LEXIS 18">47 a condition of this advance, should and hereby does assign to Mr. Fox all dividends declared or to be declared by North Penn Gas Company, to which the corporation is or may be entitled, until the full amount advanced by Mr. Fox to or on behalf of Post Publishing Company will have been repaid. "November 20, 1953 "After discussion, and upon motion which was duly made and seconded, it was "VOTED: to accept as a contribution to capital 1550 shares North Penn Gas Company Capital stock, which are to be added to capital at the current market value of $10 per share. "It was stipulated by the Directors that any bank loans for which this stock has been pledged as collateral shall remain the obligation of Mr. Fox, and that this stock is accepted without liability to this corporation on account of any such loans, which Mr. Fox has undertaken to pay. "December 8, 1953 it was unanimously: "VOTED: that the president be and hereby is authorized for and on behalf of the corporation to enter into a certain lease for the development of Pennsylvania Game Commission Tract 34-B in Benezette Township, Elk County, Penna., and to do all things incident and necessary to the execution thereof. 1958 Tax Ct. Memo LEXIS 18">48 * * "The president brought to the attention of the meeting that since a division of the Commonwealth was the lessor of the premises of which the corporation would be, after execution of the agreement with Devonian Gas & Oil Co., at best a lessee, in which case he had been advised by counsel that the leasehold interest of the corporation could not be mortgaged or in any other way encumbered, with the result that there was no reason why the lease could not stand in the name of the corporation rather than be held by it in the name of a nominee as had thitherto been done in the cases of the Mason, Bartoletta and Pennsylvania R.R. Company leases; it was accordingly the unanimous decision of the meeting that in the case of the instant agreement with Devonian Gas & Oil Co. the interest held by the corporation should be held directly by it and in its own name. "July 9, 1954 "Mr. Fox told the Board that the corporation owned more than 402,000 shares North Penn Gas Company, equal to 89.4% of the outstanding stock of that corporation, which, under the Federal income tax law, as it then stood, was not enough for consolidated income tax reporting. He said he had made a careful study1958 Tax Ct. Memo LEXIS 18">49 of the stockholders' list, and was of the opinion that it would be possible to acquire 5.6% additional shares, so as to bring the figure up to 95%, thereby gaining at least part of the year's advantage in tax savings. He said that he had arranged for a loan of $400,000 for North Penn Gas Company, which he recommended be used to make an invitation of tenders of North Penn Gas stock, which could be done through Bank of the Manhattan Company. "After discussion, upon motion duly made and seconded, it was "VOTED: that the corporation borrow $400,000 from North Penn Gas Company, and that the president and treasurer, or either of them, be and hereby are authorized to execute and deliver the corporation's note for that amount, to North Penn Gas Company. "Upon motion made and seconded, it was further "VOTED: to make an invitation of tenders of 26,000 shares North Penn Gas Company stock at $15 a share through Bank of the Manhattan Company." Fox purchased additional shares of North Penn Gas and also acquired Trans-Penn Transit Corporation and Perth Amboy Bank. For 1953 a consolidated return was filed for Post Publishing Company as parent and Trans-Penn Transit as subsidiary. For 19541958 Tax Ct. Memo LEXIS 18">50 a consolidated return was filed by Post Publishing Company as parent and North Penn Gas, Trans-Penn Transit, and Perth Amboy Bank as subsidiaries. On May 19, 1953, North Penn Gas declared a dividend of 50 cents per share on all shares outstanding. Fox received a check for $175,565 payable to him on account of this dividend. This amount was reported as dividend income by Post Publishing Company in its 1953 return. Under date of July 23, 1954, the Post Publishing Company made the following offer to the other stockholders of North Penn Gas Company: "Post Publishing Company, a Massachusetts corporation, owns 402,490 shares, equal to 89.44% of the 450,000 shares of authorized and outstanding stock of North Penn Gas Company. This is 5.56% short of the 95% necessary for Post Publishing Company to file a consolidated Federal Income Tax Return with North Penn Gas Company. "Post Publishing Company would derive substantial benefit from the ability to file a consolidated Federal Income Tax return with North Penn Gas Company. This benefit is peculiar and unique to Post Publishing Company because of its own financial and corporate situation, and is not available to any other shareholder1958 Tax Ct. Memo LEXIS 18">51 of North Penn Gas Company. "Post Publishing Company, therefore, desires to purchase 25,010 shares of North Penn Gas Company, and will pay $15.00 per share for all shares tendered up to 26,000 shares. The right is reserved by Post Publishing Company to refuse to accept for purchase stock received by its Agent, Bank of the Manhattan Company, in excess of 26,000 shares. "Stock tendered will be accepted and paid for in the order received. "Stock should be accompanied by the enclosed form of tender, and sent to Bank of the Manhattan Company, Corporate Trust Department, 40 Wall Street, New York, 15 N.Y." This offer will expire on August 5, 1954. Pursuant to this offer Post Publishing Company acquired additional shares. In November 1954 the Board of Directors of Post Publishing Company voted to distribute to its stockholders all the North Penn Gas Company stock held by it. On the following day the Board rescinded this action. The stock was not in fact distributed. Fox borrowed money from the Bank of the Manhattan Company pledging his gas leases as collateral. During 1953 payments were received by the Bank in the amount of $216,152.35 from gas sales relating to the Bartoletta1958 Tax Ct. Memo LEXIS 18">52 and Pennsylvania Railroad gas leases. The payments were credited against interest and principal upon the loan to Fox and statements were furnished him. The books of Post Publishing Company were kept at its office in Boston. The books of North Penn Gas were kept at Bradford, Pennsylvania. Fox's personal books were kept in his office in Boston. After the end of the year 1952 entries were posted in the books of Post Publishing Company showing receipt by the Post of the income from the dividend on the North Penn stock and debiting Fox for the amount thereof as applied against his advances to the Post. After 1953 entries were posted for 1953 crediting Gas Sales for the amount of sales under the gas leases and debiting Fox for the amounts received by him or received by the Banks for his account. The petitioners' income tax return for 1950 reported adjusted gross income of $63,395.47 and claimed deductions of $203,528.97 including interest of $194,261.26. A loss on a gas venture, capital gains of $142,458.97, rental income and expenses and various business operations were reported in detail, with depreciation computed on buildings, automobiles and trucks, airplanes, furniture and fixtures1958 Tax Ct. Memo LEXIS 18">53 and other business equipment. The petitioners' income tax return for 1952 reported adjusted gross income of $673,744.94 and claimed deductions of $721,131.18 including interest of $661,315.11 paid various banks and other lenders. A long-term gain of $40,875, from sale of Appalachian Bonds was reported, as well as many other capital asset gains or losses. Various schedules showed income and expenses of several business operations including natural gas and oil ventures and farm operations in Connecticut and Maine. Fox engaged a certified public accountant who was in practice in Boston to prepare the petitioners' returns for the years here involved. This accountant had assigned an employee to work in Fox's office or these tax matters. This employee became an alcoholic and in February 1953 collapsed and was hospitalized. At this time a brief case containing some of Fox's accounting records was lost. Fox requested and was granted an extension of time for filing the return for 1952. Fox and the accountant devoted considerable time and attention to reconstructing the lost records and preparing the return for 1952. Opinion On their income tax return for 1952 the petitioners deducted1958 Tax Ct. Memo LEXIS 18">54 as interest expense in connection withe the Treasury note transaction the amount of $142,006.85. Of this $99,923.83 represented interest from July 31 to September 15 on the loan from Seaboard to Fox. Interest income of $51,562.50 from this transaction was reported. The respondent disallowed the deduction of the net amount of interest, $48,361.33. On their income tax return for 1953 the petitioners reported interest income of $444,406.07 and long-term capital gain of $300,000 from the Treasury note transaction, and deducted as interest expense on the loan from Seaboard the amount of $742,576.95. The respondent disallowed deduction of $146,674.88 representing the net effect of the Treasury note transaction. The respondent alleges that the entire transaction in Treasury notes was nothing more than an elaborate and devious sham which merely satisfied the ritual requirements of a commercial transaction. The argument is as follows: Fox is a high bracket taxpayer. He entered into this transaction solely with a view to reduction of his tax liability. The plan was designed by Bourne and M. Eli&Livingstone of Livingstone & Company who handled the details. Fox was supposed to make a down1958 Tax Ct. Memo LEXIS 18">55 payment of $45,000. He borrowed this sum from Bourne, but only $6,500 was turned over to Livingstone & Company, by Bourne, the balance was not received by this concern until October 1957, and until then was carried on the books of Livingstone & Company as an account receivable from Fox. When Fox borrowed the balance of the purchase price from Seaboard on a nonrecourse note, he was out of pocket nothing and took no risk of loss. Neither Fox nor Seaboard received physical possession of the notes at any time. Seaboard had assets of only $2,250 but purportedly loaned over $160,000,000 including this transaction. Seaboard obtained the funds for the loan to Fox by selling short the same notes pledged as collateral by Fox. Fox had never heard of Seaboard prior to this transaction. Fox paid 2 5/8 per cent interest to carry the notes which paid only 1 3/8 per cent. The loan was without a legitimate business purpose and the excess of interest paid by Fox was not "compensation for the use or forbearance of money." There was no real indebtedness and the excess of what Fox paid was not truly interest and is not properly deductible. This was a transaction entered into for no other motive but to1958 Tax Ct. Memo LEXIS 18">56 escape taxation, citing Gregory v. Helvering, 293 U.S. 465">293 U.S. 465 (1935); Commissioner v. Transport, Trading & Terminal Corp., 176 Fed. (2d) 570 (C.A. 2, 1949), certiorari denied (1950), 338 U.S. 955">338 U.S. 955; and Gooding Amusement Co., Inc., 23 T.C. 408">23 T.C. 408 (1954), affd. 236 Fed. (2d) 159 (C.A. 6, 1956), certiorari denied 352 U.S. 1031">352 U.S. 1031. In Eli D. Goodstein, et al., 30 T.C. - (August 28, 1958), we held that a similar transaction in which the taxpayer purported to purchase $10,000,000 face amount of U.S. Treasury notes, giving his note for all but $15,000 of the purchase price was lacking in substance and did not create a real indebtedness and that deductions of amounts purportedly paid as interest upon his note were properly disallowed. The transaction in that case was also carried out with Seaboard Investment Company and M. Eli Livingstone operating as Livingstone & Company. It was carried out in the same manner generally as Fox's transaction. Although Goodstein paid amounts representing interest before the interest dates and1958 Tax Ct. Memo LEXIS 18">57 borrowed corresponding amounts back from the lender while Fox did not make such payments until the due dates, that fact is not sufficient to distinguish the cases. There was no more substance to the transaction in Fox's case than in the Goodstein case. It was entered into only to lend color to a claimed obligation to pay interest to support a tax deduction. There was no intention that Fox actually acquire the Treasury notes or that he would actually borrow from Seaboard. Seaboard had no funds to lend and accomplish its part only by selling short the notes purportedly bought. The money Fox actually advanced represented merely a fee or commission for arranging the transaction. The deductions claimed were properly disallowed. The petitioners claimed deductions from their income in 1952 for amortization of bond premiums and for the excess of interest paid over the interest received in connection with the Appalachian Electric Power Company bonds. The respondent disallowed the deductions claimed and contends that the two transactions involving such bonds were lacking in commercial substance and were entered into by Fox solely with a view to reducing his tax liability. Fox made no down1958 Tax Ct. Memo LEXIS 18">58 payment on the Appalachian bonds and borrowed the entire purchase price from Dartmouth for which he gave a non-recourse note bearing interest at 5 1/2 per cent and secured by the bonds. The respondent says that the arrangement under which the bonds were purchased included an option to Dartmouth to repurchase at the price Fox had paid and that the existence of such an option is borne out by the fact that Fox sold the notes to Dartmouth at exactly the prices he paid originally and also is shown in correspondence concerning the deal. Fox denied that such an option was given Dartmouth to repurchase at his cost. The correspondence referred to concerns a proposed deal including such an option which Fox considered making. He sought advice upon the proposal and was advised by investment counsel that with such an option he would have no further economic interest in the deal, since if the market price rose he would not get the bonds back from the lender and if the market price fell he would not take them back. Fox testified that upon this advice he refused to grant such an option in the actual transactions and that he sold the bonds at the market prices, which happened to be in each case the1958 Tax Ct. Memo LEXIS 18">59 price he had paid. The respondent had subpoenaed Bourne as a witness and he was present at the hearing. He was one of the trustees of Dartmouth. Fox had testified that no option to repurchase was given Dartmouth. No one called upon Bourne to testify. The notes given by Fox contain no such option as alleged and there is no affirmative evidence of it. Upon the record we cannot find that such an option was given. On his part, Fox contends that he made a real investment and had an opportunity for gain on the two transactions in Appalachian bonds. He paid $15,000 from borrowed funds and transferred shares of stock to meet his obligation for interest. He anticipated a rise in the market value of the bonds and knew he had a right to amortize the premium. He claimed a deduction in the amount of $80,625 in 1951 for amortization of the premium and the respondent says that upon the sale of the bonds in 1952 a long-term capital gain of this amount was realized which was never returned as income. Fox says that he realized a profit of $1,703.10 on the sale of the second block of these bonds. He points out that if he had held the bonds for a few months longer he could have had a substantial profit1958 Tax Ct. Memo LEXIS 18">60 as the price bid reached 115 3/4 at the end of May 1953. These factors are not sufficient to show that the transactions were substantive and with a business purpose. Fox paid nothing at the time of the purchase, borrowed the entire purchase price on the security of the bonds thus acquired, and by giving a nonrecourse note stood no risk of loss. He agreed to pay more interest than he was to receive, but he was not to be personally liable if the proceeds of the sale of the collateral were insufficient to meet the obligation. Although there is no showing whether Dartmouth "sold short" the Appalachian bonds, as the purported lender did in the Treasury note transaction, there was no more substance to these transactions than in the Treasury note case. There was no real indebtedness, no real purchase of the bonds and no real payment of interest. The respondent's disallowance of the deductions claimed was correct. See Eli D. Goodstein, supra. Fox acquired the Post Publishing Company in September 1952. He contends that in February 1953 he donated to the Post his equity in some 350,000 shares of North Penn Gas Company. This stock had been pledged with certain banks as collateral for loans1958 Tax Ct. Memo LEXIS 18">61 to Fox personally. Fox also contracted to buy other shares of North Penn Gas for the Post and advanced various other funds to it. Fox contends that a dividend of $175,565 on the North Penn stock which he received was not income to him, but was income to the Post which pursuant to agreement was turned over to him to apply upon the Post's indebtedness to him. He says that he planned to give the Post enough of the North Penn stock so that a consolidated tax return could be filed and the Post's losses offset by the North Penn income. The stock certificates had been endorsed in blank as "street" certificates and retained by the lending banks. The Cleveland Trust Company held a large amount of the pledged stock. Fox says that he was advised by an officer of the Cleveland Trust Company that the loan would be called if the bank was informed of the transfer but that Fox could hold the stock as nominee of the Post. He did not acquire for the Post 95 per cent of the North Penn Gas stock during 1953 but it appears that sufficient stock was acquired to permit the filing of a consolidated return for 1954 when the requirement was reduced to 80 per cent. The respondent determined that the dividend1958 Tax Ct. Memo LEXIS 18">62 paid on the North Penn Gas stock in 1953 was income to Fox, not to the Post. The argument is that the stock was never actually transferred to the Post and that Fox exercised all the incidents of ownership, that he never had the stock transferred on the stock records of North Penn, that the books of the Post do not show receipt of the dividend, that Fox admittedly received the dividend and the Post did not, that on November 19, 1954, all the stock purportedly held by the Post was distributed to the Post's sole stockholder (Fox) as a dividend and was transferred back the next day to the Post as a contribution to capital and was again distributed to Fox as a dividend at the end of 1954, that a dividend declared by North Penn in 1954 was not paid to the Post but was applied by North Penn against the personal indebtedness of Fox to it, and when the stock was sold in 1954 Fox received all the proceeds. Under these circumstances, the respondent contends that Fox had full command over the property and enjoyment of its economic benefits, and is the real owner for tax purposes, citing Helvering v. Clifford, 309 U.S. 331">309 U.S. 331 (1940); Helvering v. Horst, 311 U.S. 112">311 U.S. 112 (1940);1958 Tax Ct. Memo LEXIS 18">63 Helvering v. Eubank, 311 U.S. 122">311 U.S. 122 (1940); and Commissioner v. Sunnen, 333 U.S. 591">333 U.S. 591 (1948) and other cases. A similar argument is made concerning the taxability of the income received in 1953 from the sales of gas produced on the Bartoletta and Pennsylvania Railroad leases in the amount of $216,152.35. Fox says that he assigned these leases to the Post Publishing Company as a contribution to capital and contends that this income was income of the Post. The respondent contends that the Post never received the benefit of it when it was applied on his personal loans from the Bank of the Manhattan Company, that it has not been shown that the alleged transfer was ever recorded with the recorder of deeds where the leases were located, that the lessee dealt only with Fox as owner and made remittances to the Bank pursuant to Fox's instructions and that the cash book of the Post does not show receipt of this income, that even if it is assumed that he transferred the leases to the Post, he, as sole owner of the Post, completely dominated the leases and used the proceeds for his own benefit alone. The minutes of the Board of Directors of the Post show that 352,5951958 Tax Ct. Memo LEXIS 18">64 shares of North Penn stock were accepted in February 1953 as a contribution to capital. The certificates were held by various banks as collateral for loans made to Fox and hence could not be delivered to the Post. All that Fox could give the Post was his equity in the shares over and above the loans. Fox testified that he made a written assignment to the Post and also notified North Penn of the transfer. The post was later declared bankrupt and taken over by trustees. The transaction in November 1954 is explained as occurring in connection with a loan negotiated with the Bank of the Manhattan Company for the Trans-Penn Transit Company, one of the Post's subsidiaries. Counsel for the Bank were of the opinion that since North Penn was a public utility and a subsidiary of the Post the loan might run afoul of the Public Utility Holding Company Act. Fox testified that at the suggestion of the Bank the stock of North Penn was distributed to Fox as a dividend, the loan was then made and Fox returned the stock to the Post as a contribution to capital. After the bankruptcy of the Post Fox petitioned for a determination of the District Court in the bankruptcy proceeding as to the ownership of1958 Tax Ct. Memo LEXIS 18">65 the North Penn stock and these gas leases, but the record does not reveal what action was taken upon his petition. This presents the ofttimes troublesome problem of distinguishing between a corporation and an individual owning all its stock where the individual may transfer property to or from the corporation as it may suit his own purposes. The fact that the dividend was received and retained by Fox is not determinative. The receipt of the dividend was carried onto the books of the Post by a year-end entry. The records of the Board of Directors disclose the intention that the Post own the stock subject to the privilege of Fox to use it as security for loans and to apply the dividends against his advances made to the Post in greater amounts. Likewise the donation of the gas leases, the income from which was to be applied upon Fox's loan from the Bank of the Manhattan Company, is shown in the minutes of the Post's directors' meetings. There was nothing sham or unreal about the Post Publishing Company. It published a newspaper for many years in Boston. Only in exceptional circumstances is the1958 Tax Ct. Memo LEXIS 18">66 corporate entity to be disregarded. Dalton v. Bowers, 287 U.S. 404">287 U.S. 404 (1932); New Colonial Ice Co. v. Helvering, 292 U.S. 435">292 U.S. 435 (1934). The statute invoked by Fox, section 141, Internal Revenue Code of 1939, authorizes the filing of consolidated returns by an affiliated group of corporations, where stock possessing at least 95 per cent of the voting power and of the non-voting stock of each is owned directly by one or more of the others. (The corresponding provisions of the Internal Revenue Code of 1954, sections 1501-1505, require 80 per cent ownership.) The statute prescribes no test of affiliation other than stock ownership. Even if Fox's primary purpose was to reduce his own tax liabilities by offsetting the probable losses from the Post against the expected income from the dividends and gas leases through the means of a consolidated return, that is a legitimate purpose and the action is authorized by the statute. The respondent erred in determining that the dividend on North Penn stock in 1953 and the income from the Bartoletta and Pennsylvania Railroad gas leases was income to Fox. The respondent determined additions to tax1958 Tax Ct. Memo LEXIS 18">67 for 1950 and 1952 for negligence or intentional disregard of rules and regulations. The return for 1950 involved difficult accounting problems, capital gains and losses, rental income, business income and expenses and costs of a gas venture. The return reported adjusted gross income of $63,395.47, and claimed deductions exceeding this amount. The original deficiency determined was over $50,000 and this was by agreement on other issues reduced to $2,593.48. The addition of $191.91 for negligence under these circumstances is not warranted. The petitioners encountered difficulties in the preparation of their return for 1952. A brief case full of Fox's records was lost in February 1953 when an employee who had become an alcoholic was hospitalized. Fox requested and was granted an extension of time for filing the return for 1952 and devoted considerable time and attention to reconstructing the lost records and preparing the return. The return filed was complicated. It reported gross income of $673,744.94 and deductions exceeding this amount. The respondent originally determined a deficiency of $352,583.94. By stipulation this has been reduced to $164,043.18, and as a result of our conclusions1958 Tax Ct. Memo LEXIS 18">*68 upon issues in this proceeding will be further reduced. The addition to tax for negligence is not warranted under these circumstances. Decision will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622242/	New York Import and Export Exchange Corporation, Petitioner, v. Commissioner of Internal Revenue, RespondentNew York Import & Export Exchange Corp. v. CommissionerDocket No. 56467United States Tax Court28 T.C. 269; 1957 U.S. Tax Ct. LEXIS 201; April 30, 1957, Filed 1957 U.S. Tax Ct. LEXIS 201">201 Decision will be entered for petitioner. A consolidated return was filed by petitioner's parent corporation, which included the income of petitioner together with the form of consent required by the appropriate regulations. This return did not include the income or form of consent of another affiliated subsidiary, which latter filed a separate return in a collection district other than that in which the consolidated return was filed. Respondent, without giving the notice to the parent corporation, made mandatory by section 23.18 (a), Regulations 104, determined a deficiency against petitioner on the basis of a separate return. Held, such determination invalid. Fred R. Tansill, Esq., for the petitioner.Andrew Kopperud, Esq., for the respondent. 1957 U.S. Tax Ct. LEXIS 201">203 Kern, Judge. Tietjens, J., concurs in the result. Opper and Pierce, JJ., dissent. Turner, J., dissenting. Bruce and Withey, JJ., agree with this dissent. KERN 28 T.C. 269">270 OPINION.On December 17, 1954, respondent determined a deficiency in petitioner's Federal income tax for the calendar year 1947 in the sum of $ 493,501.54. In the statement attached to the notice of deficiency respondent explained this action by saying that a purported consolidated return filed for the taxable year by petitioner's parent corporation (Empire South American Industries, Inc.), which included therein the income of petitioner, "did not qualify as a consolidated return pursuant to the requirements of Section 141 of the Internal Revenue Code of 1939." He further explained his action as follows:This return did not list Empire Tractor Company, a company wholly owned by Empire South American Industries, Inc., as a member of the affiliated group, nor include its income therein. The Empire Tractor Company did not consent to the filing of the 1947 consolidated return by its parent corporation, but on the contrary, filed a separate return in which its 1947 income was reported. There1957 U.S. Tax Ct. LEXIS 201">204 was no compliance with the mandatory requirement of section 141 that all corporations which at any time during the taxable year were members of the consolidated group prior to the last day prescribed by law for filing said return consent to all the consolidated return regulations.The tax liability of New York Import and Export Exchange Corporation whose income was included in the so-called consolidated return for the calendar year 1947, therefore, is determined herein on the basis of a separate return.The statement attached to the deficiency notice also contains the following:In making this determination of your income tax liability, careful consideration has been given to the report of examination dated April 15, 1953; to your protest dated September 29, 1953, and to the statements made at the conferences held on May 24, 1954 and August 12, 1954.The petitioner alleges that respondent "erred in computing petitioner's income tax liability for the calendar year 1947 on the basis of a separate return" and "in failing to determine petitioner's income tax liability for the taxable year 1947 on a consolidated basis by including petitioner's income in that of a consolidated group of 1957 U.S. Tax Ct. LEXIS 201">205 affiliated corporations consisting of petitioner, Empire South American Industries, Inc. (the common parent), Cairns Corporation, and Empire Tractor Company."28 T.C. 269">271 A stipulation of facts was filed by the parties. We find the facts to be as stipulated and incorporate herein by this reference the stipulation and the exhibits attached thereto. In substance, the facts are as follows:Petitioner is a corporation organized under the laws of the State of New York on October 7, 1946. Its principal office during the taxable year here involved was at 521 Fifth Avenue, New York, New York, and its present address is c/o Cenco Corporation, 1700 West Irving Park Boulevard, Chicago, Illinois.During the taxable year involved herein the petitioner was engaged principally in the purchase of agricultural commodities for export.During the taxable year 1947 all of the petitioner's issued and outstanding stock, except for qualifying shares, was owned by Empire South American Industries, Inc., hereinafter referred to as South American.Empire Tractor Corporation, hereinafter referred to as Tractor, during the period here involved had 25,000 shares of preferred stock and 10,000 shares of common 1957 U.S. Tax Ct. LEXIS 201">206 stock issued and outstanding. South American purchased stock of Tractor as follows:No. ofNo. ofDatesharessharespreferredcommonMar. 24, 19473,000Apr. 11, 19475,000July 16, 19471,250Aug. 1, 19475,750Aug. 20, 194715,000Sept. 22, 19475,000South American continued to own all of the issued and outstanding preferred and common stock of Tractor until at least December 31, 1948.On July 31, 1947, South American purchased 339,700 shares of the total of 400,000 shares of issued and outstanding capital stock of Cairns Corporation, hereinafter referred to as Cairns, and this stock was retained by South American until at least December 31, 1948.During the taxable year 1947 South American, Cairns, and petitioner computed their respective incomes on a calendar year basis, using an accrual method of accounting. Tractor computed its income on the basis of a fiscal year ended July 31, using an accrual method of accounting.South American filed a so-called consolidated income tax return for the taxable year 1947 purportedly including its income and the incomes of petitioner and Cairns, but not including any income for Tractor. There is no explanation1957 U.S. Tax Ct. LEXIS 201">207 in the record of this case for the failure of South American to include the income and deductions of Tractor in the so-called consolidated return. A tentative return was 28 T.C. 269">272 filed in the name of "Empire South American Industries, Inc. and Subsidiaries" on March 15, 1948, with the collector of internal revenue for the third district of New York. An "Affiliations Schedule," Form 851, and two "Returns of Information and Authorization and Consent of Subsidiary Corporation Included in a Consolidated Income Tax Return," Form 1122, were a part of the tentative return. This affiliations schedule lists South American as the common parent corporation and petitioner and Cairns as subsidiary corporations. Petitioner and Cairns each executed one of the Forms 1122, which are dated March 1948. A final return was filed, in accordance with an extension of time granted by the collector, on July 12, 1948, with the collector of internal revenue for the third district of New York. This return was prepared by Noah Gallop and Company and was notarized by Elizabeth J. Rubino. An "Affiliations Schedule," Form 851, and two "Returns of Information and Authorization and Consent of Subsidiary Corporation1957 U.S. Tax Ct. LEXIS 201">208 Included in a Consolidated Income Tax Return," Form 1122, were a part of this return. The "Affiliations Schedule" lists South American as the common parent corporation and petitioner and Cairns as subsidiary corporations. Petitioner and Cairns each executed one of the Forms 1122, which are dated July 1948. This return was the first income tax return of South American because it was a completely new corporation which had been incorporated on January 7, 1947. The space provided on the return for an answer to the question "Did the corporation own at any time during the taxable year 50 per cent or more of the voting stock of another corporation either domestic or foreign?" was blank. There was no mention or indication on the return of the existence of any affiliate other than the two included in the return. This return did not reveal the affiliation of Tractor or its income or deductions. The return disclosed on its face a consolidated income tax liability of $ 314,914.82. It also disclosed a consolidated net income of $ 787,287.04; South American reported therein a net loss of $ 55,088.24, Cairns reported a net loss of $ 437,975.81, and petitioner reported a net income of $ 1,280,351.09. 1957 U.S. Tax Ct. LEXIS 201">209 The record does not disclose the income or loss of South American, Cairns, or the so-called consolidated return as finally determined.South American, as common parent, filed so-called consolidated income tax returns for the taxable years 1948 and 1949 with the collector of internal revenue for the third district of New York. The return for 1948 reflected no consolidated tax liability and showed a consolidated net loss of $ 1,375,109.57. As reported, the net losses consisted of the following: South American's net loss, $ 1,025,173.35; petitioner's net loss, $ 112,352.80; Cairns's net loss, $ 237,583.42. The record does not disclose the income or loss of South American, Cairns, or the so-called consolidated return as finally determined. The return for 1949 reflected no consolidated tax liability and showed a consolidated 28 T.C. 269">273 net loss of $ 163,644.34 before net operating loss deduction on account of net operating loss carryovers. As reported, the net losses consisted of the following: South American's net loss, $ 4.83; petitioner's net loss, $ 89,416.07; Cairns's net loss, $ 74,223.44. The record does not disclose the income or loss of South American, Cairns, or the so-called1957 U.S. Tax Ct. LEXIS 201">210 consolidated return as finally determined.Tractor filed separate income tax returns for the fiscal years ended July 31, 1947, and July 31, 1948, with the collector of internal revenue for the first district of Pennsylvania. A tentative return for the fiscal year ended July 31, 1947, was filed on October 15, 1947. A final return for that fiscal year was filed, in accordance with an extension of time granted by the collector, on December 15, 1947. This final return was prepared by Noah Gallop and Company and was notarized by Elizabeth J. Rubino. It stated that it was not a consolidated return and that South American owned 100 per cent of Tractor's issued stock. This final return did not show the collector's office in which the income tax return of South American was filed or the address of South American. This final return was the first one filed because Tractor commenced operations on August 1, 1946. The separate return filed by Tractor for the fiscal year ended July 31, 1947, disclosed no tax liability and showed a net loss of $ 3,993.73. The record does not show the income or loss of Tractor for this year as finally determined.A final return of Tractor for the fiscal year1957 U.S. Tax Ct. LEXIS 201">211 ended July 31, 1948, was filed on May 20, 1949. This return was prepared by Noah Gallop and Company and was notarized by Elizabeth J. Rubino. The separate return filed by Tractor for the fiscal year ended July 31, 1948, disclosed no tax liability and showed a loss of $ 760,912.81. The record does not show the income or loss of Tractor for this year as finally determined.Tractor did not file a duplicate original of Internal Revenue Service Form 1122, "Return of Information and Authorization and Consent of Subsidiary Corporation Included in a Consolidated Income Tax Return," nor was a duplicate original thereof attached to the so-called consolidated income tax return for 1947. There is no explanation in the record of this case as to the reason for the failure of Tractor to file a Form 1122.Respondent did not issue a specific formal notice to South American with reference to the fact that the income of Tractor was not included in the so-called consolidated income tax return filed by South American for the taxable year 1947 or of the fact that Tractor did not file Form 1122 for the period here involved. There is no explanation in the record of this case as to the reason for the1957 U.S. Tax Ct. LEXIS 201">212 failure of respondent to issue such a notice.The question presented for our determination may be stated as follows: Is respondent's determination of deficiency against petitioner 28 T.C. 269">274 on the basis of a separate return invalid as premature by reason of his failure to give notice pursuant to Regulations 104, section 23.18 (a), 1 to petitioner's parent corporation filing a so-called consolidated return for the taxable year which had included the income of petitioner but not the income of another affiliated corporation, and to which it had given its consent but to which the other affiliated corporation had not, to the effect that such "consolidated return" had failed to include the income of the other affiliated corporation and that such other affiliated corporation had not filed Form 1122 as required by the regulations?1957 U.S. Tax Ct. LEXIS 201">213 The pertinent statutory provisions are found in subsections (a) to (d), inclusive, of section 141 of the Internal Revenue Code of 1939. 21957 U.S. Tax Ct. LEXIS 201">214 28 T.C. 269">275 Counsel on brief have called our attention to sections 23.1 (a), 23.10 (a) (1), 23.12 (b) and (c), as well as 23.18 (a) of Regulations 104. 31957 U.S. Tax Ct. LEXIS 201">215 28 T.C. 269">276 The petitioner's contention is that "the Commissioner may not determine a separate deficiency as to this petitioner for 1947 for the reason that no notice as required by the consolidated regulations was ever issued which would have afforded the affiliated group of corporations an opportunity of curing the defects in the consolidated return filed for 1947." Its argument is adequately portrayed by the following quotations from petitioner's brief:Sec. 23.18 (a) must be read both as a necessary limitation upon the strict requirements of Sec. 23.10 (a) as well as a device to supplement and perfect the purpose of the latter section. The latter section provides that the privilege of making a consolidated return must be exercised at the time of making the return of the common parent corporation and cannot be exercised at any time thereafter. Once the election is made to file on a consolidated basis, a separate return cannot thereafter be made for such year. It would, therefore, appear that the section of the Regulations here involved must be read as permitting the correction of defects appearing on a consolidated return even though an irrevocable election to file a consolidated1957 U.S. Tax Ct. LEXIS 201">216 return is made when the return is filed and, technically speaking, these defects render the election void.The problem here presented falls squarely within the literal language of Sec. 23.18 (a). Here there was a failure to include the income of a subsidiary in the consolidated return as well as a failure to file one of the forms required by the consolidated Regulations. The section contains the word "shall" and thereby imposed a mandatory duty upon the Commissioner to advise the common parent, South American, of the defects in the consolidated return. The obvious purpose of this requirement is to afford a common parent the opportunity to cure the defects. That opportunity has not been accorded in this case. Had the appropriate notice been issued, then proper consolidated return could have been filed together with the requisite consent form. If these things had been done, then there would have been no consolidated tax liability and no consolidated deficiency. This is so because of the fact that the petitioner here was the only member of the affiliated group which had net income which would have been more than offset by current losses of the other affiliated corporations together1957 U.S. Tax Ct. LEXIS 201">217 with the net operating losses incurred in subsequent years by the affiliated group (in 1948 and 1949) which would have been available on a two-year carry-back basis. (See Exs. 1-A through 5-E).By failing to carry out his mandatory duty the Commissioner himself has in effect precluded the correction of the defects. He has simply leapfrogged over the intervening administrative procedure for correction and here attempts to tax this petitioner with a separate deficiency. In reality and equitably there should be no tax due from the affiliated group for the year 1947. * * Nor is it an adequate justification to state that the Commissioner had no way of knowing that Tractor should have been included but was not included in the consolidated return. This type of situation could always exist where Sec. 23.18 (a) is involved. Moreover, the separate returns of Tractor filed for the fiscal years 1947 and 1948 both clearly indicated that all of its stock was 28 T.C. 269">277 owned by the common parent, South American. True, the separate return of Tractor was filed with a different Collector's office than that where the consolidated return was filed. Yet all of the facts were within the peculiar1957 U.S. Tax Ct. LEXIS 201">218 knowledge of the Commissioner or his servants, and all that was involved was a matter of coordination. In addition, audit would have and must have disclosed the defects complained of. In any event, there is nothing in the Regulation itself or in its underlying rationale which would require that the Commissioner be placed on notice of an obvious defect at the time the consolidated return is filed. The significant fact is that the Commissioner quite definitely knew of the defects prior to the time that the separate statutory notice was issued to this petitioner for 1947.Respondent's position on the issue before us is adequately portrayed by the following quotations from his brief:The Commissioner was not required to give notice in this case.Section 23.18 (a) of Regulations 104 literally, simply and logically means that if a common parent includes in a consolidated return an affiliate which does not file a Form 1122 or if an affiliate files a Form 1122 but is not included in the consolidated return, then the Commissioner, having knowledge of a defect, shall send an appropriate notice to the common parent. There are two separate items involved: (1) inclusion of a subsidiary1957 U.S. Tax Ct. LEXIS 201">219 in a consolidated return; and (2) the filing by a subsidiary of a Form 1122. Section 23.18 (a) applies only where one of these two things has been done and the other has not been done. Said section reads, "If there has been a failure to include in the consolidated return the income of any subsidiary, or a failure to file any of the forms required by these regulations, notice thereof shall be given the common parent corporation by the Commissioner * * ." The section uses the disjunctive word "or" and not the conjunctive word "and".In the instant case there was a failure both to include the income of a subsidiary in the so-called consolidated return and a failure to file a Form 1122, required by the regulations.Petitioner's interpretation of section 23.18 (a) of Regulations 104 is unreasonable as the facts in the instant case well illustrate.Section 141 of the Internal Revenue Code of 1939 and the consolidated regulations repeatedly state that the effective date for consolidated return purposes is the due date of the return. Section 141 (a) states that all corporations consent to the consolidated regulations prescribed prior to the last day prescribed by law for filing such return. 1957 U.S. Tax Ct. LEXIS 201">220 Section 141 (c) states that taxes shall be determined, computed, assessed, collected and adjusted in accordance with the regulations prescribed prior to the last day prescribed by law for the filing of the return. Section 23.10 of Regulations 104 states that the privilege of making a consolidated return must be exercised at the time of making the return of the common parent corporation; the privilege cannot be exercised thereafter. Section 23.12 of Regulations 104 states that each subsidiary file a duplicate original of Form 1122 in the office of the collector for the district prescribed for the filing of a separate return by such subsidiary at or before the time the consolidated return is filed; the consent cannot be withdrawn or revoked after the consolidated return is filed.For the purposes of the instant case, the facts, consents, acts and omissions as of the filing date of the consolidated return are controlling and subsequent events are not pertinent.* * * 28 T.C. 269">278 It is apparent that the Commissioner, at the filing date of the so-called consolidated return and on the basis of the information before him, had no possible way of knowing that said return was imperfect. 1957 U.S. Tax Ct. LEXIS 201">221 It is equally apparent that the Commissioner could not be expected to give notice in regard to a matter on which he had no information. * * The interpretation suggested by petitioner would place an impossible and illogical burden on the Commissioner. The Commissioner would be required, at any and all times, to determine from independent evidence whether or not a consolidated return is proper and complete, and if he determined it was not complete, he would then need, perhaps years later, to give notice to the common parent.The respondent's position is that the regulation states that he should give notice in a situation where he has knowledge, from the face of the consolidated return or from the filing of a Form 1122, that there is an imperfection in the consolidated return. This is reasonable.Petitioner in its reply brief points out that the only defects in a consolidated return which, under the regulations, may be cured by amendment are the two referred to in section 23.18 (a), supra, and that this may be done only if respondent gives the notice required by that section.Both parties stress the importance of regulations under the statutory provisions for consolidated1957 U.S. Tax Ct. LEXIS 201">222 returns, and both assume the binding effect of these regulations upon the Commissioner as well as taxpayers.We have set out in extenso the arguments of the parties upon the precise question before us because the issue is completely novel and because there are no authorities which are even remotely helpful in its resolution.The gist of respondent's argument is that the notice which is the prerequisite to the determination of petitioner's tax liability on the basis of a separate return is required only on the occurrence of one of two conditions, i. e., (1) the failure to include in the consolidated return the income of any subsidiary, and (2) the failure to file any of the forms required by the regulations; that if both of these conditions occur rather than one of them, no notice is required of the Commissioner prior to his determination of petitioner's tax liability on the basis of a separate return; and that the justification of this construction of the regulations is that unless the income of all subsidiaries is included in the consolidated return or unless all of the forms required are filed, the Commissioner will not have the information which will make it possible for him1957 U.S. Tax Ct. LEXIS 201">223 to issue the notice made mandatory by section 23.18 (a).We are unable to agree with this argument. If an obligation is conditioned upon the occurrence of either condition A or condition B, it is our opinion that the occurrence of both conditions will give rise to the obligation. For example, if a man obligates himself to take some 28 T.C. 269">279 action upon condition that the obligee give to him five dollars or a new hat, and the obligee gives to him both five dollars and the new hat, it cannot be doubted that the man may not deny his obligation on the ground that both conditions occurred rather than one. While the use of the words "and/or" might be more meticulously precise in such an undertaking and in the section of the regulations under discussion than the word "or," it is not only objectionable from the standpoint of literary style but it is in our opinion unnecessary when referring to conditions to an obligation (as distinguished from alternative obligations) as being inferred or understood.Neither is the practical reason for respondent's construction of this section of the regulations valid. If the respondent had information sufficient to lead him to make the determination1957 U.S. Tax Ct. LEXIS 201">224 of deficiency here involved, obviously he had information sufficient to permit him to issue the notice which is, by the regulations, a prerequisite to the determination of the tax liability of petitioner on the basis of a separate return. In this case the statement attached to the notice of deficiency indicates that respondent had the required information over a year prior to the determination of deficiency herein.A consideration of the statute and the regulations relating to consolidated returns, including in such consideration the fact that section 23.18 (a) of Regulations 104, or its equivalent, has been in effect for over 15 years without legislative change, leads us to conclude that there is a congressional intent that where there has been a failure to include in a consolidated return the income of any subsidiary or a failure to file any forms required by the regulations the respondent may determine the tax liability of a member of the affiliated group on the basis of a separate return, but only after the giving of notice required by section 23.18 (a), and that the word "or" as used above in this sentence should be construed as equivalent to "and/or." Accordingly, we1957 U.S. Tax Ct. LEXIS 201">225 decide the issue presented in favor of petitioner.Decision will be entered for petitioner. TURNER Turner, J., dissenting: By subsection (b) of section 141, Congress did grant broad powers to the Commissioner to prescribe such regulations as were deemed necessary to assure the determination, assessment, and collection of the income and excess profits tax of "any affiliated group of corporations making consolidated * * * returns and of each corporation in the group * * , and in order to prevent 28 T.C. 269">280 avoidance of such tax liability." Congress did not, however, grant to the Commissioner the power to define or name the corporations whose income should be permitted consolidated treatment, but by subsections (d) and (e), specifically stated its own definition of an "affiliated group of corporations," and by subsection (a) made it clear that the filing of a return covering and consolidating the income of each and every corporation in an affiliated group, as so defined, was a prerequisite to consolidated treatment of the income of the group. Patently, therefore, there is no such thing within the contemplation of section 141 as a "partial" consolidated return, or, stated differently, 1957 U.S. Tax Ct. LEXIS 201">226 a return which covers only a part of the affiliated group of corporations is not a consolidated return within the meaning of the statute. It would accordingly seem to me to be axiomatic that any regulation which according to its language appears to change, relax, or waive the conditions which Congress itself has unequivocally set up as a prerequisite to the consolidated treatment of corporate income must either be held to be of no force or effect, or if susceptible of an interpretation which is not in conflict with the statute in respect of which it has been promulgated, it should be so interpreted.It is true, of course, that the Commissioner in section 23.18 of his regulations did provide that in the event of "failure to include in the consolidated return the income of any subsidiary * , notice thereof shall be given to the common parent * * and the tax liability of each member of the affiliated group shall be determined on the basis of separate returns unless such income is included * * * within the period prescribed in such notice." By the regulation, the Commissioner has in language having a mandatory connotation and directed to himself, indicated that in the event of failure1957 U.S. Tax Ct. LEXIS 201">227 to include the income of a subsidiary in the return filed, as Congress prescribed it must be, he will, by notice to the common parent, provide the group with a second chance to bring itself within the statute. But, even so, there is a noticeable absence of any language to the effect that a failure to give such notice will entitle those corporations which were included in the return filed to consolidated treatment of their income. A consolidated return covering all of the corporations in an affiliated group, as Congress has defined it, is still, according to the statute, that without which consolidated treatment of the income may not be had. And in the absence of clear and unequivocal language to such effect, I know of no rule which permits us, through construction, to ascribe to a regulation the doing of that which the statute says may not be done, particularly where, as in this instance, to do so would be to abrogate conditions which Congress has specifically prescribed. Surely the rule of reenactment of the statute without change does not go that far. And yet, that is what I understand the effect of the Opinion here to be.28 T.C. 269">281 Though it does appear that the respondent1957 U.S. Tax Ct. LEXIS 201">228 failed to give formal notice of the defect in the return filed, it is to me apparent on the facts that through petitioner the common parent did de facto receive notice thereof, but having had such de facto notice, has not filed nor indicated any intention to file a consolidated return for the affiliated group. Without any showing of an attempt to cure the defect, and confessing that no consolidated return within the meaning of the statute has ever been filed, the petitioner comes to this Court resisting the determination of the deficiency against it as an individual corporation, seeking thereby to obtain the same effect, taxwise, from the abortive return as would flow from a proper return under the statute.A resulting question may, of course, be, how may a group of corporations which fully intended to comply with the statute, but through inadvertence failed to do so, avoid or defend against determinations against them individually, as in this case, if the first notice of defect in the return filed is by way of a notice of deficiency. The answer, it seems to me, is in the regulation itself. By its terms, the regulation permits the filing of a proper return "within the period prescribed1957 U.S. Tax Ct. LEXIS 201">229 in such notice," and in the instant case, it does not appear that the respondent, even today, has ever prescribed the date beyond which the affiliated group herein may not take such curative action. Through the notice of deficiency, information of the defect has been present in the affiliated group since petitioner's receipt of the notice, and certainly there was ample time for the filing of the required return between the receipt of the notice of deficiency and the trial herein. The introduction of satisfactory evidence that such a return had been filed, even though belatedly, would, I should think, have been a complete defense for petitioner in this proceeding.As matters now stand, no effective consolidated return has been filed, or offered for filing, even to this date, and I do not understand there is any indication of record of any intent to file such a return. Accordingly, it would seem to me that the return filed could, at the most, be regarded as a reporting by each of the corporations covered of its individual income, and there being no consolidated return, the respondent, under the statute, would have no alternative but to determine the tax of the said corporations separately1957 U.S. Tax Ct. LEXIS 201">*230 and individually. If the return which was filed is not to be so regarded, then, on the facts, it would appear that we have here a no return case, and are left with no alternative but to enter judgment covering the tax of the instant corporation on an individual basis. Footnotes1. The wording of this regulation is practically the same as that which refers to section 1502, I. R. C. 1954. See T. D. 6140, sec. 1.1502-18, 1955-2 C. B. 317↩, 330.2. SEC. 141. CONSOLIDATED RETURNS.(a) Privilege to File Consolidated Income and Excess-Profits-Tax Returns. -- An affiliated group of corporations, shall, subject to the provisions of this section, have the privilege of making consolidated income- and excess-profits-tax returns for the taxable year in lieu of separate returns. The making of consolidated returns shall be upon the condition that the affiliated group shall make both a consolidated income-tax return and a consolidated excess-profits-tax return for the taxable year, and that all corporations which at any time during the taxable year have been members of the affiliated group making a consolidated income-tax return consent to all the consolidated income- and excess-profits-tax regulations prescribed under subsection (b) prior to the last day prescribed by law for the filing of such return. The making of a consolidated income-tax return shall be considered as such consent. In the case of a corporation which is a member of the affiliated group for a fractional part of the year, the consolidated returns shall include the income of such corporation for such part of the year as it is a member of the affiliated group. In the case of a corporation which is not a member of the affiliated group after March 31, 1942, of the last taxable year of such group which begins before April 1, 1942, such corporation shall not be considered a member of the affiliated group for consolidated income-tax-return purposes for such year but shall be considered a member of such group for consolidated excess-profits-tax-return purposes for such year, and the consent required in the case of such corporation shall relate only to the consolidated excess-profits-tax regulations.(b) Regulations. -- The Commissioner, with the approval of the Secretary, shall prescribe such regulations as he may deem necessary in order that the tax liability of any affiliated group of corporations making consolidated income- and excess-profits-tax returns and of each corporation in the group, both during and after the period of affiliation, may be returned, determined, computed, assessed, collected, and adjusted, in such manner as clearly to reflect the income- and excess-profits-tax liability and the various factors necessary for the determination of such liability, and in order to prevent avoidance of such tax liability. Such regulations shall prescribe the amount of the net operating loss deduction of each member of the group which is attributable to a deduction allowed for a taxable year beginning in 1941 on account of property considered as destroyed or seized under section 127 (relating to war losses), and the allowance of the amount so prescribed as a deduction in computing the net income of the group shall not be limited by the amount of the net income of such member.(c) Computation and Payment of Tax. -- In any case in which consolidated income-tax and excess-profits-tax returns are made or are required to be made, the taxes shall be determined, computed, assessed, collected, and adjusted in accordance with the regulations under subsection (b) prescribed prior to the last day prescribed by law for the filing of such returns; except that the tax imposed under section 15 or section 204 shall be increased by 2 per centum of the consolidated corporation surtax net income of the affiliated group of includible corporations. Only one specific exemption as provided in section 710 (b) (1) shall be allowed for the entire affiliated group of corporations for the purposes of the tax imposed by Subchapter E of Chapter 2.(d) Definition of "Affiliated Group". -- As used in this section, an "affiliated group" means one or more chains of includible corporations connected through stock ownership with a common parent corporation which is an includible corporation if -- (1) Stock possessing at least 95 per centum of the voting power of all classes of stock and at least 95 per centum of each class of the nonvoting stock of each of the includible corporations (except the common parent corporation) is owned directly by one or more of the other includible corporations; and(2) The common parent corporation owns directly stock possessing at least 95 per centum of the voting power of all classes of stock and at least 95 per centum of each class of the nonvoting stock of at least one of the other includible corporations.As used in this subsection, the term "stock" does not include nonvoting stock which is limited and preferred as to dividends.(e)Definition of "Includible Corporation". -- As used in this section, the term "includible corporation" means any corporation except -- (1) Corporations exempt under section 101 from the tax imposed by this chapter.(2)Insurance companies subject to taxation under section 201 or 207.(3) Foreign corporations.(4) Corporations entitled to the benefits of section 251, by reason of receiving a large percentage of their income from sources within possessions of the United States.(5)Corporations organized under the China Trade Act, 1922.(6)Regulated investment companies subject to tax under Supplement Q.(7) Any corporation described in section 725 (a), or in section 727 (e), (g), or (h) (without regard to the exception in the initial clause of section 727) but not including such a corporation which has made and filed a consent, for the taxable year or any prior taxable year, beginning after December 31, 1943, to be treated as an includible corporation. Such consent shall be made and filed at such time and in such manner as may be prescribed by the Commissioner with the approval of the Secretary.↩3. Sec. 23.1. Privilege of Making Consolidated Returns.(a) Sections 141 and 152 give to the corporations of an affiliated group the privilege of making a consolidated return for the taxable year in lieu of separate returns. This privilege, however, is given upon the condition that all corporations which have been members of the affiliated group at any time during the taxable year for which the return is made consent to these regulations, and any amendments thereof duly prescribed prior to the making of the return and applicable to such year; and the making of the consolidated return is considered as such consent.Sec. 23.10. Exercise of Privilege.(a) When Privilege Must be Exercised.(1) The privilege of making a consolidated return under these regulations for any taxable year of an affiliated group must be exercised at the time of making the return of the common parent corporation for such year. Under no circumstances can such privilege be exercised at any time thereafter. The filing of separate returns for a taxable year does not constitute an election binding upon the corporations in subsequent years. If the privilege is exercised at the time of making the return, separate returns cannot thereafter be made for such year. (See, however, section 23.18, relating to the improper inclusion in the consolidated return of the income of a corporation.)Sec. 23.12. Making Consolidated Return and Filing Other Forms.(b) Authorizations and Consents Filed by Subsidiaries.Each subsidiary must prepare duplicate originals of Form 1122, consenting to these regulations and authorizing the common parent corporation to make a consolidated return on its behalf for the taxable year and authorizing the common parent (or, in the event of its failure, the Commissioner or the collector) to make a consolidated return on its behalf (as long as it remains a member of the affiliated group), for each year thereafter for which, under section 23.11 (a), the making of a consolidated return is required. One of such forms as prepared by each subsidiary shall be attached to the consolidated return, as a part thereof; and the other shall be filed, at or before the time the consolidated return is filed, in the office of the collector for the district prescribed for the filing of a separate return by such subsidiary. No such consent can be withdrawn or revoked at any time after the consolidated return is filed.(c) Affiliations Schedule Filed by Common Parent Corporation.The common parent corporation shall prepare Form 851 (Affiliations Schedule), which shall be attached to the consolidated return, as a part thereof.Sec. 23.18. Failure to Comply with Regulations.(a) Exclusion of a Subsidiary from Consolidated Return.If there has been a failure to include in the consolidated return the income of any subsidiary, or a failure to file any of the forms required by these regulations, notice thereof shall be given the common parent corporation by the Commissioner, and the tax liability of each member of the affiliated group shall be determined on the basis of separate returns unless such income is included or such forms are filed within the period prescribed in such notice, or any extension thereof, or unless under section 23.11 a consolidated return is required for such year.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622243/	DAVID T. GRUMAN, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentGruman v. CommissionerDocket No. 17376-79.United States Tax CourtT.C. Memo 1982-388; 1982 Tax Ct. Memo LEXIS 355; 44 T.C.M. 420; T.C.M. (RIA) 82388; July 13, 1982. Richard S. Kestenbaum and Morton I. Cohen, for the petitioner. John E. Becker, Jr., for the respondent. NIMSNIMS, Judge: Respondent determined a deficiency in petitioner's Federal income tax for the year 1977 of $5,136. Concessions having been made by the parties, the sole issue for decision is whether petitioner's expenditure of $9,159.47 in 1977 for a pilot training course is a deductible educational expense under section 162. 1FINDINGS OF FACT Some of the facts have been stipulated. The stipulation and the exhibits attached thereto are incorporated herein by reference. 1982 Tax Ct. Memo LEXIS 355">356 Petitioner's legal address at the time of the filing of the petition in this case was Glen Ellen, California. Petitioner logged over 5,000 hours of flying time while a member of the United States Air Force, over a 12-year period which ended in October, 1966. Petitioner obtained his commercial pilot certificate with an instrument rating during 1955, and in October, 1966, commenced employment with American Airlines (a common carrier by air during the taxable year 1977). Petitioner was licensed to act as a co-pilot when he began working for American Airlines, but due to a lack of seniority, he began work as a flight engineer. In 1975, petitioner was first selected to act as a co-pilot on several flights. During both 1975 and 1976, petitioner served either as flight engineer or co-pilot on Boeing 707 aircraft. He did not fly full-time as a co-pilot because of company cutbacks and his seniority position.A co-pilot is a pilot who is second in command of the aircraft and whose duty is to assist and relieve the "first pilot" or "pilot in command" while underway during both routine and emergency situations. A co-pilot is responsible for flying the airplane at any time the pilot1982 Tax Ct. Memo LEXIS 355">357 in command leaves his seat. A co-pilot at times performs takeoffs, departures, climbing to altitude, approaches and landings. In 1977, the Federal Aviation Administration (FAA) required a co-pilot of a common carrier, such as American Airlines, to be fully capable of acting as a pilot in command of the aircraft. For this purpose a commercial pilot certificate with an instrument rating was sufficient. The FAA also required that a pilot in command of a common carrier possess an airline transport pilot certificate (ATP certificate) with an appropriate rating for the particular aircraft involved (e.g., Boeing 707). The holder of a commercial pilot certificate with an instrument rating could, however, act as pilot in command of an aircraft for compensation or hire which was not operated by a common carrier and which was not a large aircraft. Due to the long stretches in time between petitioner's co-pilot assignments, in 1977, petitioner felt that his piloting skills were deteriorating and needed improvement. Petitioner therefore took several courses to improve his proficiency and upgrade his skill levels that year. One of these courses was given by National Jet Industries. 1982 Tax Ct. Memo LEXIS 355">358 The National Jet Industries course was a ground and flight course of instruction on a Cessna Citation, which, after petitioner passed the appropriate examinations, the FAA accepted to meet the requirements for an ATP certificate for a Cessna Citation. The course did not qualify petitioner for an ATP certificate for a Boeing 707 or any other aircraft flown by American Airlines. The Cessna Citation is an eight-passenger, small, twin-engine, turbo-jet aircraft that is used mainly as a corporate jet. From 1977 through the time of trial, no common carrier flew the Cessna Citation. Petitioner could have been a pilot in command of a Cessna Citation operated for compensation or hire (but not operated by a common carrier) merely with his commercial pilot certificate and instrument rating. The National Jet Industries course maintained or improved the skills of petitioner in his job as a co-pilot of Boeing 707s. In his statutory notice of deficiency, respondent disallowed petitioner's deduction of $9,159.47 as an educational expense attributable to the National Jet Industries course. OPINION Respondent argues that the cost of the National Jet Industries course taken by petitioner1982 Tax Ct. Memo LEXIS 355">359 was not a deductible education expense because the course qualified petitioner for a new trade or business -- i.e., pilot. Petitioner, on the other hand, argues 1) that a pilot and co-pilot are not separate trades or businesses, and 2) that in any case, the course only qualified petitioner to be a pilot of a Cessna Citation, not a Boeing 707, and the ATP certificate was, as a practical matter, superfluous even for a Cessna Citation. Section 162(a) allows a deduction for all ordinary and necessary expenses of carrying on a trade or business. Section 1.162-5(a), Income Tax Regs., permits the deduction of education expenses as business expenses if the education was undertaken to meet the express requirements of the taxpayer's employer or if it maintained or improved the skills required by the taxpayer in his employment or other trade or business. In the instant case, respondent concedes that the National Jet Industries course maintained or improved petitioner's skills as a Boeing 707 co-pilot for American Airlines. However, respondent argues that the expenses of that course are still not deductible because of the requirement of section 1.162-5(b)(3)(i), Income Tax Regs., that1982 Tax Ct. Memo LEXIS 355">360 to be deductible, educational expenses may not be part of a program of study being pursued by the taxpayer which will lead to qualifying him in a new trade or business. Respondent frames the issue as "whether being qualified as a co-pilot for American Airlines is a different trade or business than being qualified as the pilot-in-command of a Cessna Citation." As we recently stated in Robinson v. Commissioner,78 T.C. 550">78 T.C. 550, 78 T.C. 550">552 (1982), [i]f the education in question qualifies the taxpayer to perform significantly different tasks and activities than he or she could perform prior to the education, then such education is deemed to qualify the taxpayer for a new trade or business. Browne v. Commissioner,73 T.C. 723">73 T.C. 723, 73 T.C. 723">726 (1980); Diaz v. Commissioner,70 T.C. 1067">70 T.C. 1067, 70 T.C. 1067">1074 (1978); Glenn v. Commissioner,62 T.C. 270">62 T.C. 270, 62 T.C. 270">275 (1974); Weiszman v. Commissioner,52 T.C. 1106">52 T.C. 1106, 52 T.C. 1106">1110 (1969), affd. 443 F.2d 29">443 F.2d 29 (9th Cir. 1971). Our inquiry is, therefore, whether the National Jet Industries course qualified petitioner to perform significantly different tasks than he could have with a commercial pilot1982 Tax Ct. Memo LEXIS 355">361 certificate with an instrument rating. In answering this question, we take a "commonsense approach." Davis v. Commissioner,65 T.C. 1014">65 T.C. 1014, 65 T.C. 1014">1019 (1976). Initially, we note that the National Jet Industries course did not qualify petitioner to be a pilot in command of a Boeing 707 or any other plane flown by American Airlines. The ATP certificate only applied to Cessna Citations. Prior to taking the course, petitioner was qualified under applicable FAA regulations to be pilot in command of a Cessna Citation operated for compensation or hire by virtue of his commercial pilot certificate and instrument rating. After taking the course, petitioner was qualified to operate a Cessna Citation as pilot in command both for compensation or hire and for a common carrier. At first blush, then, the ATP certificate appears to have considerably enlarged petitioner's piloting abilities. However, the Cessna Citation was not flown by any common carrier in either 1977 or any subsequent year up to the time of trial. As a practical matter, therefore, petitioner's ATP certificate did not expand the scope of piloting activities open to him. Even if piloting a Cessna Citation for a1982 Tax Ct. Memo LEXIS 355">*362 common carrier were a different trade or business from piloting the aircraft for compensation or hire (which we do not decide), the former trade or business simply did not exist in 1977. Common sense tells us that educational expenses are not to be disallowed on the grounds that a taxpayer's course qualified him for only a hypothetical trade or business. 2Accordingly, we hold petitioner's expenses connected with the National Jet Industries course are deductible. 3Decision will be entered under Rule 155.Footnotes1. Unless otherwise indicated, all section references are to the Internal Revenue Code of 1954 as in effect during the year before the Court.↩2. See also Mason v. Commissioner,T.C. Memo. 1982-376↩.3. We leave to another day petitioner's alternative argument that the job of pilot and co-pilot are, in any case, the same trade or business.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622245/	Burroughs Corporation, Petitioner, v. Commissioner of Internal Revenue, RespondentBurroughs Corp. v. CommissionerDocket No. 72023United States Tax Court33 T.C. 389; 1959 U.S. Tax Ct. LEXIS 26; November 30, 1959, Filed 1959 U.S. Tax Ct. LEXIS 26">26 Decision will be entered under Rule 50. 1. Under date of December 21, 1953, the petitioner, as settlor, and two individuals, as trustees, executed a trust indenture creating Burroughs Foundation Auxiliary Trust with the trust res consisting of Burroughs Farms, which is a tract of approximately 585 acres of land acquired by petitioner in 1926 or 1927 to provide a recreational area and facilities for its employees and their families. Continuously, since 1927 Burroughs Farms has been used for such purpose and it has the reputation of being one of the best recreational centers in Michigan. On December 21, 1953, the petitioner executed an instrument in the form of a warranty deed to Burroughs Farms to the trustees. Under date of December 23, 1953, the trustees and the petitioner executed an instrument in the form of a lease, which recited the leasing of Burroughs Farms to petitioner for 25 years at a stated monthly rental of $ 4,092.13, or an annual rental of $ 49,105.56, with an option to the petitioner to extend the term for a total of 30 additional years at a reduced rental. Under the indenture of December 21, 1953, the affairs of Burroughs Foundation Auxiliary Trust are administered1959 U.S. Tax Ct. LEXIS 26">27 by the trustees and a committee composed of four officers, directors, or employees of the petitioner, appointed by, responsible to, and removable by the petitioner's board of directors. The decisions and actions of the committee are binding upon all persons and are not subject to review by any court. Trust property cannot be sold without the prior approval of the committee. The committee not only has authority to remove trustees and appoint successor trustees but also has authority to terminate the Burroughs Foundation Auxiliary Trust. Under the indenture of December 21, 1953, the petitioner not only reserved to itself the right to contract with the trustees with respect to Burroughs Farms but also reserved the right upon termination of Burroughs Foundation Auxiliary Trust to reacquire Burroughs Farms "at and for a sum equal to that allowed by the Federal income tax authorities having jurisdiction in the premises as a deduction from income of the" petitioner of the year in which Burroughs Farms was conveyed by the petitioner to the trustees. Held, that the powers and control which the petitioner retained with respect to Burroughs Farms under the indenture of December 21, 1959 U.S. Tax Ct. LEXIS 26">28 1953, aside from the petitioner's power to terminate the Burroughs Foundation Auxiliary Trust and reacquire Burroughs Farms, preclude the petitioner's conveyance of the Farms to the trustees from constituting a contribution or gift of the property as contemplated by section 23(q), I.R.C. 1939, and that the petitioner did not with respect to the Farms make a contribution or gift of any amount to the Auxiliary Trust.2. Held, that a deduction taken by petitioner in its income tax return for 1953 as rent accrued with respect to Burroughs Farms was properly disallowed by the respondent. Thomas G. Long, Esq., for the petitioner.Robert B. Pierce, Esq., for the respondent. Withey, Judge. WITHEY33 T.C. 389">390 The respondent has determined a deficiency of $ 301,672.68 in the income tax of the petitioner for 1953. The only issues presented by the pleadings and not disposed of by stipulation of the parties are the correctness of the respondent's action in determining (1) that petitioner was not entitled under the provisions of section 23 (o) and (q) of the Internal Revenue Code of 1939 to deduct any amount as a contribution on account of petitioner's conveyance in 1953 of certain real estate to Burroughs Foundation Auxiliary Trust, (2) that the petitioner was not entitled under the provisions of section 23(a)(1)(A) of the Code to deduct an amount of $ 1,188.04 accrued by petitioner in 1953 as rent due Burroughs Foundation Auxiliary Trust, and (3) that Burroughs Foundation Auxiliary Trust is not exempt from Federal income tax under1959 U.S. Tax Ct. LEXIS 26">30 the provisions of section 101(6) of the Code.FINDINGS OF FACT.Some of the facts have been stipulated and are found accordingly.The petitioner is a Michigan corporation with its principal business office in Detroit, Michigan. It filed its Federal income tax return for 1953 with the director of internal revenue in Detroit, Michigan.The petitioner, formerly Burroughs Adding Machine Company, was organized in 1905 and is engaged in the production and sale of business machines.Under date of December 20, 1951, the petitioner under its then name, Burroughs Adding Machine Company, as settlor, and the Northern Trust Company, an Illinois corporation of Chicago, Illinois, as trustee, executed a trust indenture, sometimes hereinafter referred to as the indenture of December 20, 1951. Approval of the form of the indenture, authority for its execution on behalf of the petitioner, payment to the trustee of the initial corpus of the trust, $ 500,000, and the appointment of the four officers or employees of the petitioner who were to constitute the committee provided for in 33 T.C. 389">391 section 2 of the indenture were contained in resolutions adopted by the petitioner's board of directors at a 1959 U.S. Tax Ct. LEXIS 26">31 meeting held on December 20, 1951.The indenture of December 20, 1951, contained the following provisions:WITNESSETH:That the Settlor, in consideration of One Dollar ($ 1.00) in hand paid, and other good and valuable considerations, the receipt whereof is hereby acknowledged, does hereby transfer, assign, convey and quitclaim to the Trustee, and to its successor in trust, the property described in Schedule "A" hereto attached [a check for $ 500,000 drawn by petitioner on Northern Trust Company and made payable to Northern Trust Company, Trustee for Burroughs Foundation];To Have and To Hold the said property and any other property of any kind which the Trustee may at any time hereafter hold or acquire pursuant to any of the provisions hereof (all of which property is hereinafter collectively referred to as the "trust estate"), subject to the trusts, purposes and conditions hereinafter set forth:SECTION 1. The trust hereby provided for shall be known as the "BURROUGHS FOUNDATION."SECTION 2. A Committee of four adult members who shall be officers, directors and/or employees of Settlor [and sometimes hereinafter referred to as the Burroughs Corporation Committee], is hereby1959 U.S. Tax Ct. LEXIS 26">32 constituted to be appointed by the Board of Directors of Settlor. Committee members shall serve without compensation and shall hold office until their successors are appointed by said Board and qualify. Each person so appointed an original or successor member shall qualify upon filing with the Trustee his acceptance so to act, together with a certified copy of the Resolution of the Board of Directors of Settlor by which the appointment was made.The Committee may designate one of its members as Chairman and shall choose a Secretary who may but need not be a member of the Committee. Committee action may be taken either at a meeting or in writing without a meeting and meetings shall be held at such times and places and on such notice as the Chairman or Secretary of the Committee shall determine. The Secretary shall, among other duties, notify Committee members of the time and place of meetings, canvass Committee members on matters to be transacted without a meeting, transmit the actions or directions of the Committee to the Trustee, advise the Trustee in writing of the names and addresses of the Committee members from time to time acting, and keep a complete record of the proceedings1959 U.S. Tax Ct. LEXIS 26">33 of the Committee.Any Committee member may resign at any time and such resignation shall be by instrument in writing delivered to the Chairman or the Secretary of the Committee and to the Trustee, and any Committee member may be removed from office by the Board of Directors of Settlor, in which event notice thereof shall be given to the Chairman or Secretary of the Committee and the Secretary shall then give written notice thereof to the Trustee.All provisions of this Indenture relating to the Committee shall apply to all members from time to time acting. All powers of the Committee (except the power set forth in Section 13 hereof) shall be exercised by majority action, and if at any time or times the Committee shall be evenly divided, the decision of the Chairman shall control. Any decision or action by the Committee shall be binding on all persons and not subject to review by any court. No personal 33 T.C. 389">392 liability shall attach to any member of the Committee except for gross negligence or willful wrongdoing, it being the intention of this provision to protect the Committee members from personal liability based solely on errors of judgment. The status of each Committee member1959 U.S. Tax Ct. LEXIS 26">34 hereunder shall be that of a fiduciary, and no member shall have any power or authority under any circumstances to act hereunder in a non-fiduciary capacity.SECTION 3. The Trustee shall pay the entire net income from the trust estate and any part or all of the principal thereof pursuant to the direction of the Committee, but only for religious, charitable, scientific, governmental, literary or educational purposes. A beneficiary hereunder may be a corporation, trust, community chest, governmental unit or division thereof, fund or foundation created or organized in the United States or under the laws of the United States or of any State of the United States, organized and operated exclusively for charitable, scientific, governmental, literary or educational purposes (including the granting of scholarships for deserving students), no part of the net earnings of which enures to the benefit of any private shareholder or individual and no substantial part of the activities of which is the carrying on of propaganda or otherwise attempting to influence legislation.SECTION 4. The Committee shall from time to time determine the beneficiary or beneficiaries of the trust estate. 1959 U.S. Tax Ct. LEXIS 26">35 The Trustee shall, subject to the provisions of this Indenture, make payment in such amount or amounts to such beneficiary or beneficiaries and in such manner and at such times as shall be directed by the Committee in writing, and the Trustee shall not be bound to inquire into the proceedings of the Committee, but shall act solely on such written direction.SECTION 5. If during any period or periods of time there shall be no Committee qualified and acting hereunder, the Trustee during such period or periods shall make payment of the entire net income from the trust estate as follows: (a) At convenient intervals and at least quarterly, to THE UNITED FOUNDATION, 607 Shelby Street, Detroit, Michigan, its successor or successors, for its general purposes; or(b) In the event of the termination of said THE UNITED FOUNDATION and its successors by consolidation or otherwise, or the inability or refusal for other reasons of said THE UNITED FOUNDATION, or its then successor, to accept said payments in whole, then on application of the Trustee within sixty (60) days after ascertaining said termination, inability, or refusal, to a court of competent jurisdiction, the income of the trust1959 U.S. Tax Ct. LEXIS 26">36 estate shall be applied cy pres pursuant to the order or orders of said court.SECTION 6. The Settlor hereby surrenders and releases to the Trustee and forever divests itself of any and every right, privilege, option or power to revoke the trust estate or any part thereof; to borrow monies against the trust estate; to pledge, hypothecate, make purchases from, or otherwise deal with the trust estate; to receive any dividends or other distributions thereunder; to exercise any other rights, powers, options or privileges under or in relation to the trust property; and the Settlor covenants and agrees that neither any act nor attempted act on its part or behalf or on the part or behalf of its successors or assigns shall in any way defeat the transfer and delivery of the trust property to the Trustee or the trust hereby established and declared, and that no part of the trust property or the proceeds, income or avails thereof shall by virtue of any act or attempted act whatsoever revert to the Settlor, its successors or assigns, or be diverted from the charitable purposes for which the trust is established hereunder.33 T.C. 389">393 SECTION 7. The Trustee shall hold, manage, lease, 1959 U.S. Tax Ct. LEXIS 26">37 care for and protect the trust estate and collect the income therefrom, all in accordance with its best judgment and discretion, being fully authorized to cause any securities or other personal property belonging to the trust estate to be held or registered in its name or in the name of its nominee or in such other form as it deems best without disclosing the trust relationship.Said Trustee is fully authorized to invest and reinvest the trust estate in bonds, stocks, mortgages, notes and/or other personal property, irrespective of any statutes or rules of law limiting the investment of trust funds. The Trustee is given full power to sell at public or private sale and convey any and all of the trust property and any reinvestments thereof from time to time for such price and upon such terms as it shall see fit, and no purchaser shall be obliged to see to the application of any purchase money. The Trustee may vote either in person or by general or limited proxy, or refrain from voting, any corporate securities for any purpose. The Trustee may exercise or sell any subscription or conversion rights; it may consent to or join in any voting trusts, reorganizations, consolidations, mergers, 1959 U.S. Tax Ct. LEXIS 26">38 foreclosures and liquidations, and in connection therewith may deposit securities with or under the direction of any protective committee under such terms as the Trustee may deem advisable, and may accept and hold any securities or other property received through the exercise of any of the foregoing powers. The Trustee is authorized to settle, compromise, contest, prosecute or abandon claims in favor of or against the trust estate as it may deem advisable. For the purposes aforesaid, the Trustee may execute and deliver all proper and necessary instruments and may give full receipts and discharges. The Trustee shall also have the power to determine, irrespective of statute or rule of law, how all receipts and disbursements, including the Trustee's compensation, shall be credited, charged or apportioned as between income and principal, and the decision of the Trustee shall be final and not subject to question by the Committee, the Settlor, or any beneficiary of the trust.SECTION 8. The Trustee shall render to the Committee statements of account of its receipts and disbursements as Trustee hereunder at least semiannually. The Trustee shall be entitled to receive a fair and just1959 U.S. Tax Ct. LEXIS 26">39 compensation for its services hereunder and shall also be reimbursed for all reasonable expenses incurred in the management and protection of the trust estate.SECTION 9. The Committee shall be fully authorized at any time to form a corporation under the laws of any State of the United States and by writing to direct the Trustee to transfer and assign all or any part of the assets and liabilities of the trust estate to such corporation. The purposes of such corporation shall be the same as the purposes of the trust. The officers and directors of such corporation shall be elected only from Committee members from time to time acting or persons from time to time eligible for Committee membership. The provisions of this Indenture, so far as applicable in the discretion of the Committee, shall be incorporated into the Articles of Incorporation or By-laws of such corporation.The Board of Directors of such corporation shall have the power at any time to dissolve and liquidate such corporation and cause the assets and liabilities thereof to be transferred and assigned to any trust company or bank having a combined capital and surplus of not less than Five Million Dollars ($ 5,000,000) 1959 U.S. Tax Ct. LEXIS 26">40 and located in a city of the United States having a population of not less than one million (1,000,000). On acceptance of such transfer from such corporation, said transferee shall act as Trustee hereunder to the same 33 T.C. 389">394 extent and with the same rights, titles, powers and discretions given to the originally named Trustee.SECTION 10. Any Trustee at any time acting hereunder may resign at any time by written notice to the Committee, or the Committee may remove any such Trustee hereunder by written notice to the Trustee.In the event of the removal, resignation, refusal or inability to act of any Trustee acting or appointed to act hereunder, the Committee may appoint as successor Trustee any bank or trust company having a combined capital and surplus of not less than Five Million Dollars ($ 5,000,000) which shall be located in a city of the United States having a population of not less than one million (1,000,000).Any successor Trustee shall be clothed and vested with all the duties, rights, titles and powers, whether discretionary or otherwise, as if originally named as Trustee. No successor Trustee shall be liable or responsible in any way for any acts or defaults of1959 U.S. Tax Ct. LEXIS 26">41 any predecessor Trustee, nor for any loss or expense from or occasioned by anything done or neglected to be done by any predecessor Trustee, but such successor Trustee shall be liable only for his or its own acts and defaults in respect to property actually received by him or it as such Trustee; and with the consent of the Committee, the successor Trustee may accept the account rendered and the assets and property delivered to him or it by the predecessor Trustee as a full and complete discharge to the predecessor Trustee, and shall incur no liability or responsibility to any beneficiary under this Indenture by reason of so doing.Notwithstanding that the trust estate will be administered by a trust company or bank located outside of the State of Michigan, all questions pertaining to the validity, construction and administration thereof shall be determined in accordance with the laws of the State of Illinois, but this provision shall not prevent the then acting Corporate Trustee from removing the trust assets or any part thereof outside of the jurisdiction of the State of Illinois at any time and so often as it deems advisable.SECTION 11. With the consent of the Trustee or the1959 U.S. Tax Ct. LEXIS 26">42 Board of Directors of the corporation described herein in the event that the Trustee shall have transferred and assigned the trust assets and liabilities to such corporation, said Settlor or any individual or other person, association, corporation, trust or organization shall have power to assign, transfer and deliver additional personal property to the Trustee or to said corporation to be held, managed, invested and distributed as part of the trust estate or as part of the property of said corporation as the case may be and subject, in the case of the trust, to all the terms and conditions thereof.SECTION 12. Settlor declares that the Trust created hereby shall be administered by the Committee so that only such contributions to beneficiaries shall be made therefrom as would be recognized at the time the contributions are made as proper deductions from income under the applicable provisions of the United States Internal Revenue Code.SECTION 13. The Settlor hereby states that it has been advised that it could retain herein unlimited powers of revocation, amendment or alteration, but nevertheless it desires to and hereby does expressly waive all right and power to revoke, 1959 U.S. Tax Ct. LEXIS 26">43 amend or alter this Indenture or the terms of the trust hereby created in any respect, either in whole or in part; provided, however, that the Committee by a unanimous vote may at any time declare the Trust to have served its purpose and so certify to the Trustee, whereupon the Trust shall terminate and the entire Trust Estate, less charges and expenses of the 33 T.C. 389">395 Trustee, shall be paid over to such beneficiaries and in such amounts as are then determined and directed by the Committee in the manner and under the conditions set forth in Sections 3, 4 and 12 hereof.Subsequent to the execution of the indenture of December 20, 1951, the Northern Trust Company, as trustee thereunder, made application to the respondent for a ruling as to the exemption of Burroughs Foundation from Federal income tax under section 101(6) of the 1939 Code. Thereafter, in a letter dated April 24, 1953, addressed to the Northern Trust Company, as trustee, the respondent ruled that Burroughs Foundation was exempt from Federal income tax under that section of the 1939 Code and that contributions made to the foundation were deductible by the donors in computing their taxable net income in the manner and1959 U.S. Tax Ct. LEXIS 26">44 to the extent provided by section 23 (o) and (q) of the 1939 Code. At the time of the execution of the indenture of December 20, 1951, the petitioner owned approximately 585 acres of real estate situated in Michigan, known as Burroughs Farms, which were currently, and for some time prior thereto had been, devoted to recreational purposes for petitioner's employees, and which will be referred to hereinafter more fully. Following the execution of the indenture of December 20, 1951, and during 1952 and 1953, the petitioner considered making a transfer of Burroughs Farms under some arrangement whereby it could continue to have the property available to it for use for recreational purposes by its employees and whereby it could reacquire the property if it later desired.In November 1952, the petitioner approached the Northern Trust Company, trustee of Burroughs Foundation, respecting the matter of transferring Burroughs Farms to the Trust Company as a contribution to the Burroughs Foundation and then obtaining from the Trust Company a lease on Burroughs Farms for a term of years. The Trust Company pointed out to petitioner that section 6 of the indenture of December 20, 1951, provided, 1959 U.S. Tax Ct. LEXIS 26">45 in part, that --The Settlor hereby surrenders and releases to the Trustee and forever divests itself of any and every right, privilege, option or power to * * make purchases from, or otherwise deal with the trust estate * * and stated that if it be assumed that the phrase "or otherwise deal with the trust estate" included the proposed leaseback, the Trust Company nevertheless would be willing to go along with the transaction on the assumption that the lease would be bona fide and that the net rent would represent a fair rental for the property. The Trust Company expressed the hope that the lease would not be for "too long a term." The Trust Company further stated that it understood that the laws of Michigan did not permit an out-of-State bank to hold title or act as trustee with respect to Michigan real 33 T.C. 389">396 estate. The Trust Company suggested that if the arrangement went forward, title be taken in the name of one of its officers, who would act as nominee of the Trust Company and who, simultaneously with taking title, would execute a declaration of trust, declaring himself trustee of the property for the benefit of the trust, and at the same time execute a deed in blank1959 U.S. Tax Ct. LEXIS 26">46 conveying the property back to the trust. The Trust Company stated that the foregoing was the arrangement customarily used by it in taking title to real estate situated outside of the State of Illinois.Subsequently the petitioner considered the formation of a "Michigan not-for-profit corporation" with officers of the Northern Trust Company as incorporators and directors thereof, the transfer of Burroughs Farms to such corporation and the leasing by that corporation of the property to the petitioner. In September 1953, the petitioner approached the Northern Trust Company about such an arrangement and was furnished by the Trust Company the names of certain of its officers who were available for becoming incorporators and directors of the proposed corporation. In addition the petitioner was furnished an outline of provisions for a leaseback from the proposed corporation to petitioner of the property.On October 12, 1953, the board of directors of petitioner adopted the following resolution:Resolved, that the officers of this Corporation be and hereby are authorized, at such time as they may deem beneficial, to make a gift of the real estate known as Burroughs Farms situated approximately1959 U.S. Tax Ct. LEXIS 26">47 three miles westerly of the Village of Brighton, Michigan, or the equivalent thereof at their discretion, to or for the benefit of the Trustee of Burroughs Foundation as a charitable contribution thereto and that said officers be and hereby are authorized to execute and deliver all deeds, instruments and documents and to do any and all other things which may be necessary or desirable to complete such gift either directly or indirectly by this Corporation to or for the benefit of said Trustee of Burroughs Foundation.Thereafter, counsel for the petitioner by letter dated November 19, 1953, advised petitioner as follows:The matter of organizing a non-profit organization to take and hold the property known as Burroughs Farms has been given quite extended consideration. It is noted that the resolution of the Board of Directors of Burroughs Corporation was that the conveyance was to be made to the Trustee of Burroughs Foundation. It was found this could not be done because the Indenture of Trust creating Burroughs Foundation limits the property to be received and held to personal property. To now organize a corporation solely to hold Burroughs Farms and pay over the rentals, etc. therefrom1959 U.S. Tax Ct. LEXIS 26">48 will build up a somewhat cumbersome machinery to handle a simple operation. It is suggested that it would be much simpler to create a foundation auxiliary to the present Burroughs Foundation to hold the Burroughs Farms and pay over the rentals, etc. to the present Burroughs Foundation. The trust instrument creating the auxiliary foundation could be quite simple, referring to and attaching a copy of the Indenture of Trust of the present Burroughs Foundation 33 T.C. 389">397 and making as Trustees of the auxiliary foundation two or three officers of the Trustee of the present Burroughs Foundation. The Committee under the present Burroughs Foundation could have power to name successor trustees in case of vacancies from any cause. This would be a most simple way of handling the problem and by reason of the reference to and attaching of the Indenture of Trust of the present Burroughs Foundation should readily be accepted and passed by the Commissioner of Internal Revenue.The problem of how the Burroughs Farms could be gotten back if by reason of change of law or otherwise it at any time became desirable to discontinue the operation of the present Burroughs Foundation has been given much 1959 U.S. Tax Ct. LEXIS 26">49 consideration. The making of the conveyance upon condition subsequent whereby Burroughs Farms might revert was tried. This will work as far as concerns allowance of the conveyance out is concerned but it is doubtful if there could be a condition of continuing tax exemption of income in the future. It would be possible to give Burroughs Corporation the option to buy back on some basis not less favorable than the amount of deduction from income tax allowed as the value of the property in the year of conveyance to the auxiliary foundation. It does not seem proper for Burroughs Corporation to wholly divest itself of all possibility of ever again itself owning and controlling Burroughs Farms. I question whether good management and sound judgment would warrant the Directors in so doing irrespective of any present tax advantage there might be. It is largely for this reason that the option to buy back is suggested.In December 1953, Don H. McLucas and Kenneth F. Hoffmaster, both of Chicago, Illinois, were officers of the Northern Trust Company. Under date of December 21, 1953, petitioner, as settlor, and McLucas and Hoffmaster, as trustees, executed a trust indenture, sometimes hereinafter1959 U.S. Tax Ct. LEXIS 26">50 referred to as the indenture of December 21, 1953, which contained the following provisions:WITNESSETH:The Settlor heretofore, under its then name of Burroughs Adding Machine Company, made and executed to and with The Northern Trust Company, an Illinois corporation, of Chicago, Illinois, an Indenture of Trust bearing date December 20, 1951, creating a trust designated "Burroughs Foundation." A photostatic copy of one of the executed originals of said Indenture is hereto attached. The trust thereunder is now in full effect and operation. The said trust is by the terms of said Indenture not subject to revocation in whole or in part or any amendment or change whatsoever. The said trust was by letter of the Commissioner of Internal Revenue (T:S: E03-MLS) dated April 24, 1953, addressed to said Trustee, ruled to be exempt from Federal income tax under Internal Revenue Code Section 101(6) and contributions thereto deductible by donors under Internal Revenue Code Section 23 (o) and (q) and gifts and legacies of property also ruled to be non-taxable.The said trust thereunder is by the terms of said Indenture limited to personal property. Settlor now desires to subject to the trust1959 U.S. Tax Ct. LEXIS 26">51 for the same objects and purposes real property as well as personal property.Now, Therefore, Settlor in consideration of One ($ 1.00) Dollar in hand paid and other good and valuable considerations, receipt whereof is hereby acknowledged, does hereby transfer, assign, convey and quitclaim to the Trustees, and successors in trust, the real property consisting of 585 acres of land, 33 T.C. 389">398 more or less, in Genoa Township (2 North, Range 5 East), Livingston County, Michigan, more particularly described in a deed to the Trustees as grantees, executed and delivered concurrently herewith, TO HAVE AND TO HOLD the said real estate and any other property of any kind which the Trustees may at any time hereafter hold or acquire pursuant to any of the provisions hereof (all of which property is hereinafter collectively referred to as the "Trust Estate" which shall be known as "Burroughs Foundation Auxiliary Trust"), upon and subject to the trusts, purposes and conditions set forth in said Indenture of Trust of December 20, 1951, which is hereby made a part hereof with like effect as if the words and figures thereof were herein set forth at length, with, however, such changes and additions1959 U.S. Tax Ct. LEXIS 26">52 as are herein specifically set forth, but none other.The changes in and additions to said Indenture of Trust of December 20, 1951, to be operative in respect to property held by the Trustees hereunder, are as follows:1. The Trust Estate shall include any and all kinds and nature of property which may come to or be acquired by the Trustees, whether real, personal or mixed, and wherever property or personal property is mentioned in said Indenture of December 20, 1951, the same shall for the purposes of this Indenture include all other kinds and nature of property aforesaid.2. Trustee wherever appearing in said Indenture of December 20, 1951 shall for the purposes of this Indenture include the plural as well as the singular.3. The persons constituted, appointed and acting from time to time as the Committee under Section 2 of said Indenture of December 20, 1951, shall be the like Committee under this Indenture.4. The power of sale under the third sentence of Section 7 of said Indenture of December 20, 1951 shall in relation to the 585 acres of real property conveyed by the Settlor to the Trustees hereunder concurrently with the execution and delivery hereof be subject to the limitation1959 U.S. Tax Ct. LEXIS 26">53 that any sale of said 585 acres, or any part thereof, shall require the precedent approval of the Committee constituted by Section 2 of said Indenture of December 20, 1951. The Trustees are fully authorized to retain the real property conveyed to it concurrently with the execution of this Indenture and any other property which may be conveyed and delivered to the Trustees hereafter by the Settlor, even though said real property or such other property, shall not be of a type of quality nor constitute a diversification usually considered proper for trust investments. The Trustees may employ such agents, custodians, managers, and attorneys, and may delegate to any such agent, custodian, manager, or attorney such of their powers as the Trustees consider desirable and pay to any such agent, custodian, manager, or attorney, reasonable compensation for his or its services.5. The two persons named in the commencement hereof each is an officer of the corporate Trustee named in said Indenture of December 20, 1951, and so long as the trust under said Indenture of December 20, 1951 shall continue and there shall be a corporate Trustee thereof there shall be two Trustees hereunder and each 1959 U.S. Tax Ct. LEXIS 26">54 shall be a natural person and an officer of such corporate Trustee. Any individual ceasing to be such officer shall cease to be a Trustee hereunder as soon as a successor shall be appointed as provided in Section 10 of said Indenture of December 20, 1951. If the corporate Trustee named therein ceases to be Trustee thereunder, the officers of said corporate Trustee at such time serving as Trustees hereunder shall cease to be such Trustees as soon as successors shall be appointed as provided in Section 10 of said Indenture of December 20, 1951. If the trust under said Indenture of December 20, 1951 shall be terminated, the successor Trustees (immediate or remote) appointed 33 T.C. 389">399 hereunder may be a corporate Trustee and a natural person who is an officer of such successor corporate Trustee.6. The power under Section 10 of said Indenture of December 20, 1951 to appoint successor Trustees shall include the appointment of natural persons as such Trustees. The last sentence of said Section 10 shall for the purposes of this Indenture have substituted therein "Michigan" in place of "Illinois" wherever the latter appears in said Section.7. The provisions of Section Six (6) of said 1959 U.S. Tax Ct. LEXIS 26">55 Indenture of December 20, 1951 shall not preclude, in relation to said 585 acres conveyed to this trust at the creation hereof, the Trustees entering into lease or other contract relations with Settlor except there shall be no sale or contract therefor other than as in the last paragraph of this Indenture provided.8. If the trust under this Indenture shall be terminated in manner and form as provided in Section 13 of said Indenture of December 20, 1951, the Settlor shall have the right to buy back the 585 acres conveyed to this trust at the creation thereof as aforesaid at and for a sum equal to that allowed by the Federal income tax authorities having jurisdiction in the premises as a deduction from income of the Settlor of the year in which said lands were conveyed by the Settlor to said Trustees.The reason for the insertion of the provision in paragraph 8 of the indenture of December 21, 1953, whereby the petitioner reserved the right to reacquire Burroughs Farms upon termination of the Burroughs Foundation Auxiliary Trust, was that the petitioner considered that good business judgment required that it should have the right to reacquire the property in case the maintenance of 1959 U.S. Tax Ct. LEXIS 26">56 employee benefits dictated that the property should continue to be used as the site of recreational facilities for petitioner's employees. The failure of the indenture to recite a fixed or specified amount, having some relationship to the fair market value of the property, at which the petitioner could reacquire the Burroughs Farms was due to what petitioner considered a business reason, namely, that if some amount had been recited and that amount should not be allowed as a deduction from the income of the petitioner, the petitioner, nevertheless, would be required to pay such amount to the trust upon reacquiring the property, and the petitioner did not desire to be so obligated.On December 21, 1953, the petitioner executed an instrument in the form of a warranty deed to Burroughs Farms to McLucas and Hoffmaster, as trustees under the indenture of December 21, 1953.Under date of December 23, 1953, McLucas and Hoffmaster, as trustees under the indenture of December 21, 1953, and the petitioner executed an instrument in the form of a lease, and sometimes hereinafter referred to as a lease, which recited the leasing of Burroughs Farms to petitioner for a period of 25 years from the1959 U.S. Tax Ct. LEXIS 26">57 date thereof, unless sooner terminated, at a stated monthly rental of $ 4,092.13, or an annual rental of $ 49,105.56, with an option to petitioner to extend the term for additional periods of 5 years, extending to a total of 30 additional years, at a reduced monthly rental of $ 1,166.67 plus one-sixth of 1 per cent of the sums of money which the petitioner 33 T.C. 389">400 might have paid previously as rent. The amount stated as rental was determined by Clifford Zohl, real estate expert for the Northern Trust Company, who was instructed by petitioner to compute the rental on then existing maximum practice in terms of interest. The record is silent as to the amount or rate of interest as well as to all other factors and the method used by Zohl in making his computation.Burroughs Farms has continued to be held by McLucas and Hoffmaster as trustees, and the petitioner has continued to use the property in the same manner as before December 21, 1953.The following is a list of the officers, directors, and/or employees of petitioner who serve or have served as the members of Burroughs Corporation Committee appointed by resolution of the board of directors of the petitioner in accordance with1959 U.S. Tax Ct. LEXIS 26">58 the provisions of the indenture of December 20, 1951, together with the dates they served on the committee, the positions they hold or held in petitioner, dates of employment by petitioner, and compensation paid to them by petitioner:MemberDates as membersPosition in petitionerP. G. KanoldDec. 51-Nov. 57Exec. AsstL. W. BowenDec. 51-July 52Asst. to PresNov. 57-PresentAsst. Treas.T. W. KimmerlyDec. 51-PresentAsst. ControllerGen. Traffic Mgr.E. R. VollwilerDec. 51-July 52Asst. SecyW. A. DurbinJuly 52-July 55Dir. of Pub. RelL. O. BrowneJuly 52-July 53Asst. to PresNov. 58-PresentAsst. Gen. SalesMgr.D. D. ReaserJuly 53-Aug. 54Asst. to V.P., MktgK. T. BementAug. 54-Nov. 58Asst. Gen. SalesMgr.Gen. Sales Mgr.E. T. LittlejohnJuly 55-Jan. 59Dir. of Pub. RelR. O. BailyJan. 59-PresentDir. of Pub. RelCompensationMemberDate of employmentEffectiveAmountdateP. G. Kanold8-1-2912-1-51$ 11,500Trans. to Todd1-1-5212,000Div. 11-1-57.9-1-5413,5001-1-5614,5005-1-5615,50010-1-5718,000L. W. Bowen193712-1-5111,0005-1-5715,5001-1-5917,000T. W. Kimmerly191912-1-5115,0006-1-5216,00011-1-5317,0005-1-5618,000E. R. Vollwiler19375-1-5111,250W. A. Durbin19504-1-5211,000Resigned 6-30-55.1-1-5313,0007-1-5414,500L. O. Browne19407-1-528,0001-1-538,5005-1-5820,000D. D. Reaser19417-1-5312,000Trans. 7-31-54.K. T. Bement19361-1-5316,50012-1-5418,0002-1-5620,0009-1-5624,00010-1-5726,500E. T. Littlejohn19487-1-5513,000Resigned 1-31-59.1-1-5614,0006-1-5715,0006-1-5817,0001-1-5918,900R. O. Baily19471-1-5920,0001959 U.S. Tax Ct. LEXIS 26">59 33 T.C. 389">401 The Burroughs Corporation Committee is responsible directly to the board of directors of the petitioner, which has the authority to appoint and to remove members of the committee. In addition to acting with respect to contributions made by Burroughs Foundation and Burroughs Foundation Auxiliary Trust, the committee also makes recommendations to the petitioner respecting contributions from its funds. In so functioning the committee acts in accordance with certain approved and established policies and procedure. In accordance with such policies and procedure the committee determines the types of contributions to be made, makes an allocation of contributions among the various types and determines the recipients of contributions and determines the amounts of the contributions such recipients shall receive and the time when they shall receive them.In each of the years 1954 through 1958 the petitioner transmitted $ 49,105.56 to McLucas and Hoffmaster, trustees of the Burroughs Foundation Auxiliary Trust, and contributions therefrom were made to recipients, each of whom was duly qualified to receive payments or contributions deductible from the income of the payor or donor 1959 U.S. Tax Ct. LEXIS 26">60 under section 170 of the Internal Revenue Code of 1954.The procedure employed in making payment of the foregoing contributions was as follows: After Burroughs Corporation Committee had determined the recipients and the amount each was to receive, the petitioner prepared the checks therefor, the committee transmitted the checks to McLucas and Hoffmaster who signed them and returned them to the committee who then forwarded them to the intended recipients.Since they were without authority to act thereon, McLucas and Hoffmaster referred to the petitioner all solicitations from charities directed to Burroughs Foundation Auxiliary Trust received by them.The petitioner makes contributions directly to tax-exempt organizations other than Burroughs Foundation.Over the years the petitioner has endeavored to develop constantly better relationships among its employees. Among the means employed in such endeavor is Burroughs Farms, which the petitioner acquired in 1926 or 1927 to provide a recreational area and facilities for its employees and which the petitioner in 1927 established and dedicated as a recreational area for its employees and their families. Continuously since 1927 Burroughs1959 U.S. Tax Ct. LEXIS 26">61 Farms has been used for such purpose and it has the reputation of being one of the best recreational centers in Michigan.Burroughs Farms consists of approximately 585 acres of land situated in Genoa Township, Livingston County, Michigan, and is approximately 45 miles from Detroit and about 3 1/2 miles west of 33 T.C. 389">402 Brighton, Michigan. The property has a frontage of approximately 3,200 feet on a lake. One 9-hole golf course and one 18-hole golf course cover approximately 190 acres of the land. Each of the golf courses compares favorably as to layout and maintenance with the better private clubs. A cottage resort area covers about 70 acres. A portion of the land has been developed to provide a variety of other recreational facilities for the petitioner's employees. In addition to cabins provided for employees at nominal rentals and the two golf courses, Burroughs Farms has facilities for outdoor sports, such as tennis, horseshoe, archery, swimming and bathing facilities, fishing, boating, shuffleboard, gun clubs, and allied recreational activities, including a children's playground and a trailer court, as well as provision for entertainment, such as dances, movies, picnic1959 U.S. Tax Ct. LEXIS 26">62 area, restaurant, etc. The remainder of the land is not improved.At the end of 1953 there were 156 cabins on Burroughs Farms of which 117 were owned by petitioner's employees and the other 39 were owned by petitioner and were held for rental to employees for weekends, vacations, etc. During 1952 through 1958, 53 cabins were repurchased by petitioner from its employees and after having been so repurchased were resold or rented to other of petitioner's employees.Any employee of petitioner can purchase a cabin on Burroughs Farms or any employee can have a cabin built on the Farms under the supervision and to the specifications of the petitioner's real estate division. When an employee of the petitioner purchases a cabin on Burroughs Farms, an agreement is entered into between petitioner and the employee which provides, in part, that "[the] Corporation agrees to sell to the Employee one frame cabin known as No. --, located on its property known as Burroughs Farms near Brighton, Michigan," and the employee agrees to buy said cabin. The purchase price may be paid in cash or in installments. The agreement provides that the employee shall acquire no right, title, or interest in the1959 U.S. Tax Ct. LEXIS 26">63 land upon which the cabin stands but shall have the use and enjoyment of the cabin so long as he shall remain in the petitioner's employ. The petitioner also can terminate the employee's rights to a cabin by written demand, but upon termination for any reason the petitioner is required to pay the employee a minimum of 25 per cent of the original purchase price or portion thereof theretofore paid for the cabin, plus the cost price of subsequent approved improvements or the portion thereof theretofore paid by the employee. Basically similar arrangements to purchase cabins located on Burroughs Farms were entered into between the petitioner and its employees both prior to and subsequent to December 21, 1953.33 T.C. 389">403 Good employee relationship is of vital importance to petitioner because of the high manpower cost in the petitioner's products. Except in certain departments of certain subsidiaries, petitioner's employees are not represented by a labor union. In those areas in which a vote was taken the petitioner's employees in a National Labor Relations Board election in October 1951 expressed their preference by a majority of 5 to 1 for no union representation. As a result of such1959 U.S. Tax Ct. LEXIS 26">64 an expression of their preference by the employees, petitioner's management determined to continue to work diligently to maintain and improve relationships among all members of the petitioner's organization.Both prior to and subsequent to December 21, 1953, extensive publicity has been given, and company policy has been issued, to employees from time to time as to their rights and privileges with respect to Burroughs Farms. Although in the operation of Burroughs Farms the petitioner receives income from charges made for food, charges to guests of employees, and fees charged for golf tournaments, etc., it sustains a loss of from $ 100,000 to $ 150,000 a year in its operation of the property and during 1953 sustained a loss of approximately $ 150,000 in such operation.The petitioner's employees receive compensation and benefits comparable to compensation and benefits of employees of similar business enterprises and during 1951 through 1953 the compensation, including fringe benefits of petitioner's employees was as good as or higher than any comparable position in the Detroit area. The rights and privileges of petitioner's employees to the use of Burroughs Farms were a major fringe1959 U.S. Tax Ct. LEXIS 26">65 benefit both prior to and subsequent to December 21, 1953.The following is a statement of the net depreciated cost to petitioner of Burroughs Farms on December 21, 1953, as shown by petitioner's books:DepreciationNet depreciatedCostreservecostLand$ 99,205.30Less: Credit forgravelsales1,049.70$ 98,155.60Land improvements1,038.10$ 1,038.10Buildings92,495.2048,023.49191,688.9049,061.59$ 142,627.31In Schedule H of its Federal income tax return for 1953 the petitioner reported a contribution to Burroughs Foundation Auxiliary Trust of $ 700,000 on account of the arrangements it had entered into with McLucas and Hoffmaster with respect to Burroughs Farms. By reason of other items reported as contributions and the limitation 33 T.C. 389">404 contained in section 23(q) of the 1939 Code, the petitioner actually deducted only $ 571,523.08 of the amount of $ 700,000 reported as a contribution made to Burroughs Foundation Auxiliary Trust. In determining the deficiency here involved the respondent determined that Burroughs Farms had not been given or contributed by petitioner to Burroughs Foundation Auxiliary Trust and, accordingly, 1959 U.S. Tax Ct. LEXIS 26">66 disallowed the amount of $ 571,523.08 deducted by petitioner as a contribution.In its income tax return for 1953 the petitioner deducted $ 1,188.04 as accrued rent due Burroughs Foundation Auxiliary Trust with respect to Burroughs Farms for the period December 23, 1953, to the end of the year 1953. The amount was not contributed to any charity by the Auxiliary Trust during 1953 nor was it paid to the trust by petitioner during that year. The respondent determined that such amount did not constitute an allowable deduction under the provisions of section 23(a)(1)(A) of the 1939 Code.On February 18, 1955, McLucas caused to be filed with the respondent an application for exemption for Burroughs Foundation Auxiliary Trust. The application was prepared by petitioner's accountants in cooperation with petitioner's counsel. Although the application made reference to Burroughs Farms, no value was set forth therein for the property. In determining the deficiency involved herein the respondent held that Burroughs Foundation Auxiliary Trust is not exempt from Federal income tax under the provisions of section 101(6) of the 1939 Code.OPINION.The petitioner takes the position that by reason1959 U.S. Tax Ct. LEXIS 26">67 of the arrangement respecting Burroughs Farms which it entered into with McLucas and Hoffmaster as a result of its execution of the indenture of December 21, 1953, and the deed of like date it made a contribution on such date to Burroughs Foundation Auxiliary Trust of property having a then fair market value of at least $ 576,417, that, consequently, for 1953 it is entitled under section 23(q) of the 1939 Code to a deduction of such amount as a contribution, and that we should so hold. The respondent contends that by reason of the unqualified powers expressly retained by petitioner under the indenture of December 21, 1953, the petitioner did not make an absolute, unqualified, and irrevocable contribution or gift of Burroughs Farms to Burroughs Foundation Auxiliary Trust so as to be entitled to a deduction therefor as a contribution under section 23(q) of the Code.33 T.C. 389">405 Pertinent provisions of the Internal Revenue Code of 1939 are set out below 11959 U.S. Tax Ct. LEXIS 26">69 as are pertinent provisions of Regulations 118 relating to those provisions of the Code. 2 Where a contribution or gift is not made of money but of property, the basis for calculation of the amount of such contribution or gift is, 1959 U.S. Tax Ct. LEXIS 26">68 as provided in the quoted portions of Regulations 118, the fair market value of the property at the time the contribution or gift is made.1959 U.S. Tax Ct. LEXIS 26">70 The first question for determination here is what property, if any, the petitioner actually contributed or gave to Burroughs Foundation Auxiliary Trust when, on December 21, 1953, it executed the indenture of that date which created the Auxiliary Trust and executed to McLucas and Hoffmaster a deed to Burroughs Farms. Since instead of employing an independent instrument to create the Auxiliary Trust the petitioner in the indenture of December 21, 1953, incorporated therein certain portions of the indenture of December 20, 1951, made changes in other portions, and included in the indenture of December 21, 1953, matters not embraced in the indenture 33 T.C. 389">406 of December 20, 1951, it is necessary to consider both indentures.Under the indenture of December 20, 1951, which created the Burroughs Foundation, the affairs of the trust therein created are administered by the trustee and the committee provided for therein, the Burroughs Corporation Committee. Section 3 of the indenture provided that the trustee should pay the entire net income from the trust estate and any part or all of the principal thereof pursuant to the direction of the committee but only for religious, charitable, scientific, 1959 U.S. Tax Ct. LEXIS 26">71 governmental, literary, or educational purposes. By section 6 the petitioner surrendered and released to the trustee every right, privilege, or option to make purchases from, or otherwise deal with the trust estate, or to acquire or reacquire trust property. Section 7 provided that the trustee shall hold, manage, lease, care for and protect the trust estate and collect the income therefrom. The trustee was authorized to invest and reinvest the trust estate, to sell at public or private sale any and all of the trust property for such price and upon such terms as it should see fit. Further the trustee was authorized to settle, contest, prosecute, or abandon claims in favor of or against the trust estate as it might deem advisable.Respecting the Burroughs Corporation Committee, section 2 of the indenture of December 20, 1951, provided for the appointment of the committee consisting of four adult members who shall be officers, directors and/or employees of petitioner appointed by the board of directors of the petitioner. The section also provided that any committee member may resign at any time and that any committee member may be removed from office by the board of directors of1959 U.S. Tax Ct. LEXIS 26">72 the petitioner. The section further provided that any decision or action by the committee shall be binding on all persons and not subject to review by any court. Section 4 provided that the committee shall from time to time determine the beneficiary or the beneficiaries of the trust estate, that the trustee shall make payment in such amount or amounts to such beneficiary or beneficiaries and in such manner and at such times as shall be directed by the committee in writing, and that the trustee shall not be bound to inquire into the proceedings of the committee but shall act solely on such written direction. Section 10 provided that the committee may remove any trustee under the indenture and appoint a successor trustee. Section 12 provided that the committee shall administer the trust so that only such contributions to beneficiaries shall be made therefrom as would be recognized at the time contributions are made as proper deductions from income under the applicable provisions of the United States Internal Revenue Code. Section 13 provided that the committee by a unanimous vote may at any time declare 33 T.C. 389">407 the trust to have served its purpose and so certify to the trustee, 1959 U.S. Tax Ct. LEXIS 26">73 whereupon the trust shall terminate and the entire trust estate, less charges and expenses of the trustee, shall be paid over to such beneficiaries and in such amounts as are then determined and directed by the committee in the manner and under the conditions set forth in sections 3, 4, and 12 of the indenture.Since the members of the Burroughs Corporation Committee are appointed by, are responsible to, and are removable by, the petitioner's board of directors and since the trustee is removable by the committee which also has authority to appoint a successor trustee, we think it is apparent from what has been said above that the petitioner acting through its board of directors, which by reason of its control over the committee, not only has the power to direct the operations of the Burroughs Foundation trust but also has the power to terminate the trust at any time it should decide to do so, and that such action would be binding on all persons and not subject to review by any court.Because of the petitioner's unwillingness absolutely and irrevocably to divest itself of the ownership, control, and use of Burroughs Farms, the petitioner caused to be prepared and executed the indenture1959 U.S. Tax Ct. LEXIS 26">74 of December 21, 1953, which contained provisions significantly and materially different from those contained in the indenture of December 20, 1951.By section 6 of the indenture of December 20, 1951, the petitioner surrendered and released to the trustee every right, privilege, or option to make purchases from or otherwise deal with the trust estate thereby created or to acquire or reacquire property of that trust, and by section 7 the trustee of that trust was authorized to sell at public or private sale any and all of the trust property for such price and upon such terms at it should see fit. By paragraph 4 of the indenture of December 21, 1953, the power of the trustees thereunder to sell Burroughs Farms or any part thereof is subject to the limitation that any such sale shall require the precedent approval of the Burroughs Corporation Committee which constitutes the committee for the Burroughs Foundation Auxiliary Trust. Furthermore paragraph 7 of the indenture of December 21, 1953, provides that the provisions of section 6 of the indenture of December 20, 1951, shall not preclude the trustees from entering into a lease or other contract relations with the petitioner respecting1959 U.S. Tax Ct. LEXIS 26">75 Burroughs Farms except that there shall be no sale or contract therefor of Burroughs Farms other than as provided in paragraph 8 of the indenture of December 21, 1953. Under paragraph 8 of the indenture of December 21, 1953, the petitioner, upon termination of the trust therein created, the Auxiliary Trust, "shall have the right to 33 T.C. 389">408 buy back" Burroughs Farms "at and for a sum equal to that allowed by the Federal income tax authorities having jurisdiction in the premises as a deduction from income of the" petitioner "of the year in which said lands were conveyed by the" petitioner to the trustees.As we view the situation, the petitioner, under the indenture of December 21, 1953, creating the Burroughs Foundation Auxiliary Trust, not only has the same broad power to direct the operations of that trust and to terminate it as it has under the indenture of December 20, 1951, with respect to the operations and termination of the Burroughs Foundation trust, but it has additional powers, namely, (1) the power to determine whether the trustees may or may not sell Burroughs Farms, and if the petitioner decides that the trustees may sell, the petitioner has the power to determine 1959 U.S. Tax Ct. LEXIS 26">76 to whom the property may be sold as well as the price and all other terms and conditions of the sale, and (2) the power to terminate the Auxiliary Trust and reacquire Burroughs Farms. Because of the powers so retained by petitioner, we think the greatest interest the trustees acquired in Burroughs Farms was the bare legal title which they can hold only so long as the petitioner permits. It is argued that the Auxiliary Trust also acquired the right to an annual rental of $ 49,000, but we find no merit in such an argument. Due to the limited use (charitable contributions) which the trust might in any event make of the rental coupled with the fact that petitioner, through its committee, retained absolute control over the designation of the charities to which the contributions might be made, the amounts thereof, and the time when such contributions were to be made, it is apparent that the trust, whether charitable or not, acted as a mere conduit for contributions from petitioner and at no time could possess any greater incident of ownership in such rental.As was said by the United States Supreme Court in Smith v. Shaughnessy, 318 U.S. 176">318 U.S. 176,The essence1959 U.S. Tax Ct. LEXIS 26">77 of a gift by trust is the abandonment of control over the property put in trust. The separable interests transferred are not gifts to the extent that power remains to revoke the trust or recapture the property represented by any of them, Burnet v. Guggenheim, supra [288 U.S. 280], or to modify the terms of the arrangement so as to make other disposition of the property, Sanford v. Commissioner, supra [308 U.S. 39]. * * In our opinion the powers and control which the petitioner retained with respect to Burroughs Farms under the indenture of December 21, 1953, aside from the petitioner's power to terminate the Auxiliary Trust and reacquire Burroughs Farms, are sufficient to preclude the petitioner's conveyance of the Farms to McLucas and Hoffmaster from constituting a contribution or gift of the property 33 T.C. 389">409 as contemplated by section 23(q) of the 1939 Code. Consequently, regardless of the nature and character of the Auxiliary Trust and whether or not petitioner took proper corporate action leading to its creation, we hold that during 1953 the petitioner did not with respect to Burroughs Farms make a contribution or gift of any amount to Burroughs Foundation1959 U.S. Tax Ct. LEXIS 26">78 Auxiliary Trust.It is true that the indenture of December 21, 1953, contains a recital respecting the "sum" at which the petitioner shall have the right to reacquire or "buy back" Burroughs Farms upon the termination of the Auxiliary Trust. However, when the terminology of the recital is considered in connection with the evidence with respect to the recital, it appears that the recital was intended to make the petitioner's liability for the payment of any sum contingent upon such sum having first been allowed by the Federal income tax authorities as a deduction from the income of the petitioner in a determination of petitioner's income tax liability. The evidence shows that the failure of the indenture of December 21, 1953, to recite a fixed or specified amount, having some relationship to the fair market value of Burroughs Farms, at which the petitioner could reacquire the property upon a termination of the Auxiliary Trust (cf. Colorado National Bank of Denver, 30 T.C. 933">30 T.C. 933) was due to what the petitioner considered to be a business reason, namely, that if some amount had been recited and that amount should not be allowed as a deduction from the income1959 U.S. Tax Ct. LEXIS 26">79 of the petitioner, the petitioner nevertheless would be required to pay that amount to the trust upon reacquiring the property and that the petitioner did not desire to be so obligated. Since we have concluded above that, aside from the petitioner's retained power to reacquire Burroughs Farms, the other powers retained by the petitioner are such as to bar the allowance of a deduction in any amount to the petitioner as a contribution or gift on account of its conveyance of the Farms to McLucas and Hoffmaster, we think it follows that in view of the recital in question the petitioner upon termination of the Auxiliary Trust will be entitled to reacquire the Farms without the payment of any amount whatsoever.Clearly petitioner fully intended to continue to operate the Farms at a substantial annual loss after conveying it to the trust as it had done prior to the conveyance. In fact it seems apparent that there was no real difference between its relationship to the Farms before or after the conveyance except the payment of an annual amount to the trust ostensibly as rental. We think it follows that the only real purpose underlying the transactions here involved was to make available1959 U.S. Tax Ct. LEXIS 26">80 to petitioner a large charitable gift deduction in 1953 and a continuing annual deduction of $ 49,000 which was actually a 33 T.C. 389">410 further gift to charity which might be wholly or partially barred by statutory limitation, but deductible in full if successfully disguised as rental.Because of factual differences the holdings in Priscilla M. Sullivan, 16 T.C. 228">16 T.C. 228, Mattie Fair, 27 T.C. 866">27 T.C. 866, and 30 T.C. 933">Colorado National Bank of Denver, supra, cases relied on by petitioner, are inapplicable here.In its income tax return the petitioner deducted $ 1,188.04 as accrued rent due the Auxiliary Trust with respect to Burroughs Farms from December 23, 1953, the date of the lease between McLucas and Hoffmaster and the petitioner, to the end of 1953. The respondent determined that the foregoing amount was not an allowable deduction under the provisions of section 23(a)(1)(A) of the Code, pertinent portions of which are set out below. 31959 U.S. Tax Ct. LEXIS 26">81 Under the provisions of section 23(a)(1)(A) for an amount to be deductible as rental the payment of the amount must be required as a condition to the continued use or possession, for purposes of the trade or business, of property to which the taxpayer has not taken or is not taking title or in which the taxpayer has no equity. We have held above that the powers and control which the petitioner retained with respect to Burroughs Farms under the indenture of December 21, 1953, are sufficient to preclude the petitioner's conveyance of Burroughs Farms to McLucas and Hoffmaster from constituting a contribution or gift of the property as contemplated by section 23(q) of the 1939 Code. In our view the petitioner's retention of such powers and control also precludes the holding that Burroughs Farms constituted property "to which the taxpayer [petitioner] has not taken or is not taking title or in which he [petitioner] has no equity." Accordingly, we sustain the respondent's disallowance of the deduction of $ 1,188.04 taken by petitioner as accrued rent.The remaining issue is whether Burroughs Foundation Auxiliary Trust is exempt from Federal income tax under the provisions of section 101(6)1959 U.S. Tax Ct. LEXIS 26">82 of the 1939 Code. Since we have held above that during 1953 the petitioner did not with respect to Burroughs Farms make a contribution or gift of any amount to the Auxiliary Trust, it becomes unnecessary to determine whether that trust is exempt from tax under the provisions of section 101(6) of the Code.33 T.C. 389">411 Since certain adjustments in the respondent's determinations as to other issues are required as a result of the stipulation of the parties,Decision will be entered under Rule 50. Footnotes1. SEC. 23. DEDUCTIONS FROM GROSS INCOME.In computing net income there shall be allowed as deductions: * * (q) Charitable and Other Contributions by Corporations. -- In the case of a corporation, contributions or gifts payment of which is made within the taxable year to or for the use of: * * (2) A corporation, trust, or community chest, fund, or foundation, created or organized in the United States or in any possession thereof or under the law of the United States, or of any State or Territory, or of the District of Columbia, or of any possession of the United States, organized and operated exclusively for religious, charitable, scientific, veteran rehabilitation service, literary, or educational purposes or for the prevention of cruelty to children (but in the case of contributions or gifts to a trust, chest, fund, or foundation, payment of which is made within a taxable year beginning after December 31, 1948, only if such contributions or gifts are to be used within the United States or any of its possessions exclusively for such purposes), no part of the net earnings of which inures to the benefit of any private shareholder or individual, and no substantial part of the activities of which is carrying on propaganda, or otherwise attempting, to influence legislation. * ** * * ↩to an amount which does not exceed 5 per centum of the taxpayer's net income as computed without the benefits of this subsection. Such contributions or gifts shall be allowable as deductions only if verified under rules and regulations prescribed by the Commissioner, with the approval of the Secretary.2. Sec. 39.23(q)-1 Contributions or gifts by corporations. (a) A corporation may, subject to the limitations provided by section 23(q), deduct from its gross income contributions or gifts to organizations described in section 23(q). Except as otherwise provided in paragraph (c) of this section, such deduction shall, to the extent provided by section 23(q), be allowed only for the taxable year in which such contributions or gifts are actually paid, regardless of when pledged and regardless of the method of accounting employed by the corporation in keeping its books and records. * (b) The provisions of § 39.23(o)-1, relating to * * (3) the basis for calculation of the amount of a contribution or gift which is other than money, are equally applicable to claims for deductions of contributions or gifts by corporations under section 23(q).Sec. 39.23(o)-1 Contributions or gifts by individuals. * * ** * * (g) If the contribution or gift is other than money, the basis for calculation of the amount thereof shall be the fair market value of the property at the time of the contribution or gift.↩3. 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 * * rentals or other payments required to be made as a condition to the continued use or possession, for purposes of the trade or business, of property to which the taxpayer has not taken or is not taking title or in which he has no equity. * * *↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622246/	ROBERT R. YODER, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentYoder v. CommissionerDocket Nos. 2178-88; 33061-88United States Tax CourtT.C. Memo 1990-116; 1990 Tax Ct. Memo LEXIS 116; 59 T.C.M. 44; T.C.M. (RIA) 90116; March 7, 1990Robert R. Yoder, pro se. Terry Serena, for the respondent. PARR160 MEMORANDUM OPINION PARR, Judge: Respondent determined the following income tax deficiencies and additions to tax in these consolidated cases: Additions to TaxYearDeficiency§ 6651(a)(1) 1§ 6653(a)(1)§ 6653(a)(2)§ 6654(a)§ 6661(a)1985$ 6,906.00$ 1,726.50$ 345.30$ 395.751,716.5019868,269.002,067.25399.631990 Tax Ct. Memo LEXIS 116">118 By amended answer respondent asserts claims for damages under section 6673 and additions to tax for negligence under section 6653(a)(1)(A) and (B) for 1986. The issues for decision are (1) whether petitioner's unreported wages are taxable income; (2) whether petitioner is entitled to exemptions for his two children; (3) whether petitioner is liable for additions to tax as determined by respondent; and (4) whether petitioner is liable for damages under section 6673. FINDINGS OF FACT Petitioner Robert Yoder resided in Ohio and was employed by the RCA corporation during the taxable years 1985 and 1986. During this time he supported his two children and remained married to his wife. He earned $ 29,407.00 in 1985 and $ 33,672.00 in 1986. No income tax was withheld from his 1985 and 1986 wages because petitioner filed Forms W-4 on which he claimed he was exempt from withholding. In 1985 petitioner also earned $ 239.00 in1990 Tax Ct. Memo LEXIS 116">119 interest on money deposited in Citizen Commercial Bank. Petitioner's wife filed a separate income tax return for the tax years 1985 and 1986, and did not claim any exemptions for her children. Petitioner failed to file any income tax returns for the tax years 1985 and 1986. Respondent issued separate notices of deficiency to the petitioner for the tax years 1985 and 1986. Respondent did not allow any exemptions for petitioner's dependents when calculating the deficiencies and additions to tax. Petitioner timely filed separate petitions contesting the deficiencies determined by respondent. Docket no. 2178-88 pertains to 1985 and docket No. 33061-88 pertains to 1986. In his petitions, petitioner did not challenge the amount of wages that respondent determined petitioner earned. Rather, petitioner argued that his wages were not taxable. Petitioner conceded the fact that the interest earned on his bank account constituted income under section 61(a). The sole substantial issue, raised by petitioner, for the first time at trial, was whether he was entitled to exemptions for his children. Prior to filing his first petition, petitioner consulted two lawyers. After filing his1990 Tax Ct. Memo LEXIS 116">120 first petition, petitioner consulted a third lawyer. The lawyers advised petitioner that his argument that his wages are not taxable would not prevail. Approximately six months before he filed his second petition, this Court found petitioner liable 161 for an income tax deficiency in the 1984 tax year, docket No. 3066-88. There we rejected petitioner's argument that his wages were not taxable. Moreover, before this trial respondent mailed petitioner copies of cases that showed petitioner's arguments were meritless. Petitioner had ample warning that his claim would fail. After petitioner filed these petitions, and while this matter was pending, respondent garnished $ 689.80 of petitioner's wages, for taxes allegedly due for the 1986 taxable year. Respondent amended his answers in each docket once. On October 5, 1988 respondent amended his answer in docket No. 33061-88 to assert additions to tax for negligence under section 6653(a)(1)(A) and (B) for 1986. At trial respondent moved for leave to amend his answer in docket No. 2178-88 concerning 1985 to include a claim for damages under section 6673. The Court granted respondent's motion. Also at trial, respondent moved1990 Tax Ct. Memo LEXIS 116">121 for leave to file a second amendment to answer in docket No. 33061-80 for 1986 to include a claim for an addition to tax under section 6661 and damages under section 6673. The Court denied respondent's motion for two reasons. First, the claim for an addition to tax was raised unreasonably late in the course of the proceedings and would have unduly prejudiced petitioner. Second, we found respondent's claim for damages under section 6673 was not appropriate under the circumstances, since petitioner may have maintained the proceeding because he erroneously believed respondent's wrongful levy on his wages would be grounds for a judgment in petitioner's favor for 1986, or that he could obtain money damages for respondent's error. OPINION Petitioner challenged the validity of the deficiency determination. The burden of proving error in the amount of the deficiency determined by the Commissioner is on the taxpayer. Rule 142(a); Welch v. Helvering, 290 U.S. 111">290 U.S. 111 (1933). Petitioner did not challenge respondent's determination that petitioner earned $ 29,407.00 in 1985 and $ 33,672.00 in 1986. Rather, petitioner asserted three typical tax protestor arguments. 1990 Tax Ct. Memo LEXIS 116">122 First, he contends his wages are not income under section 61(a)(1). The issue of whether wages constitute income under section 61(a)(1) has been decided in the affirmative by every court in which it has been considered. See, e.g., Perkins v. Commissioner, 746 F.2d 1187">746 F.2d 1187 (6th Cir. 1984); Reading v. Commissioner, 70 T.C. 730">70 T.C. 730 (1978), affd. 614 F.2d 159">614 F.2d 159 (8th Cir. 1980); Rowlee v. Commissioner, 80 T.C. 1111">80 T.C. 1111 (1983). Accordingly, we hold that petitioner's wages for 1985 and 1986 are income. Second, petitioner asserts that the Internal Revenue Code violates the 13th Amendment of the United States Constitution. This argument has been repeatedly rejected as frivolous. Ginter v. Southern, 611 F.2d 1226">611 F.2d 1226 (8th Cir. 1979); Porth v. Brodrick, 214 F.2d 925">214 F.2d 925 (10th Cir. 1954); Kasey v. Commissioner, 54 T.C. 1642">54 T.C. 1642 (1970), affd. 457 F.2d 369">457 F.2d 369 (9th Cir. 1972). We have not changed our view. Third, petitioner claims that he is not a "taxpayer" within the meaning of I.R.C. This is also without merit. See e.g., 80 T.C. 1111">Rowlee v. Commissioner, supra at 1120. We1990 Tax Ct. Memo LEXIS 116">123 dismiss these claims with no further discussion. At trial petitioner challenged respondent's computation of the tax deficiencies. The burden of proving error in the amount of deficiency determined by the Commissioner is on the taxpayer. Rule 142(a); 290 U.S. 111">Welch v. Helvering, supra.Petitioner claimed he is entitled to exemptions for his two children. Under section 151(e), as in effect for the years in issue, every taxpayer was entitled to an exemption of $ 1,000 for each child under the age of 19. For a taxpayer to qualify for the exemption, he or she must provide more than one-half of the dependent's support during the tax year. Sec. 152(a). During 1985 and 1986 petitioner's children were both under 19 years of age, as evidenced by birth certificates presented at trial. In addition, petitioner credibly testified that he provided more than one-half of their support. The fact that petitioner failed to file any tax return does not preclude him from claiming the exemptions. Petitioner has met his burden of proof and is entitled to exemptions for his two children. In addition to presenting claims challenging respondent's determination of an income tax deficiency,1990 Tax Ct. Memo LEXIS 116">124 petitioner inappropriately petitioned this Court to try to force respondent to compensate him in an unstated amount for violating his constitutional right to due process. Petitioner's claim is grounded on respondent's garnishment of his wages for 1986 taxes while docket No. 33060-88 was pending in this Court, in apparent violation of section 6213(a). This Court has no jurisdiction to render monetary judgments of the type requested here. Burns, Stix Friedman & Co. v. Commissioner, 57 T.C. 392">57 T.C. 392 (1971). As a consequence, we may not grant petitioner the relief he seeks. 2162 Additions to Tax Section 6651(a)(1)Section 6651(a)(1) imposes additions to tax for failure to file any income tax returns. Petitioner did not file any tax returns for those tax years. Petitioner earned $ 29,407 in taxable year 1985 and $ 33,672 in taxable year 1986. Additions to tax are1990 Tax Ct. Memo LEXIS 116">125 not imposed if taxpayer can show reasonable cause for delay and not willful neglect. McCrea v. Commissioner, 184 F.2d 842">184 F.2d 842 (6th Cir. 1950); Kirchner v. Commissioner, 46 B.T.A. 578">46 B.T.A. 578 (1942). Section 301.6651-1(c)(1), Proced. & Admin Regs., states that if a taxpayer exercises ordinary business care and prudence and is nevertheless unable to file a return within the prescribed time, the delay is due to reasonable cause. Taxpayer's reliance on misguided interpretations of the Constitution does not constitute reasonable grounds for failure to file a return. Accord Edwards v. Commissioner, 680 F.2d 1268">680 F.2d 1268 (9th Cir. 1982), affg. an unreported order of this Court. We find petitioner liable for additions to tax under 6651(a)(1) for both the 1985 and 1986 tax years. Section 6653(a)Section 6653(a) imposes an addition to tax if any part of the underpayment of the tax is due to negligence or intentional disregard of rules and regulations. Negligence is defined as the lack of due care or failure to do what a reasonable and ordinarily prudent person would do under the circumstances. Neely v. Commissioner, 85 T.C. 934">85 T.C. 934, 85 T.C. 934">947 (1985).1990 Tax Ct. Memo LEXIS 116">126 The taxpayer bears the burden of proof when he/she contests items involved in the deficiency determination. Rule 142. Here, petitioner bears the burden of proving that respondent erroneously imposed an addition to tax for negligence in the 1985 tax year. The burden of proof is on respondent regarding matters raised for the first time in an amended answer. Achiro v. Commissioner, 77 T.C. 881">77 T.C. 881 (1981). Respondent thus bears the burden of proving that petitioner's underpayment of tax in the 1986 tax year was due to petitioner's negligence or intentional disregard of the rules and regulations. Petitioner says he honestly believed his wages were not income. Accordingly, he contends he was not negligent in not reporting his income. There was an abundance of precedent in existence at the time petitioner failed to file his returns which clearly held his theories were incorrect. Perkins v. Commissioner, 746 F.2d 1187">746 F.2d 1187 (6th Cir. 1984); 80 T.C. 1111">Rowlee v. Commissioner, supra; Reading v. Commissioner, 70 T.C. 730">70 T.C. 730 (1978), affd. 614 F.2d 159">614 F.2d 159 (8th Cir. 1980). Respondent repeatedly advised petitioner that his theories1990 Tax Ct. Memo LEXIS 116">127 were incorrect. Moreover, this Court put petitioner on notice that his arguments were unfounded when we rejected them in docket No. 3066-88 concerning his tax deficiency for 1984 tax year. The record supports our conclusion that petitioner is liable for additions to tax for negligence under section 6653(a)(1) and (2) for 1985 and under section 6653(a)(1)(A) and (B) for 1986 tax years. Respondent's determination that the entire amount of deficiency is due to negligence is sustained. Section 6654(a) Additions to TaxUnder section 6654(a) an individual is liable for an addition to tax in the case of any underpayment of estimated tax. No tax was withheld for income tax purposes as to petitioner's wages in the 1985 and 1986 taxable years. Petitioner is liable for additions to tax under section 6654 due to his failure to pay estimated tax for 1985 and 1986 tax years. Section 6661(a) Substantial Understatement of Tax Liability in 1985Section 6661(a) imposes an addition to tax in an amount equal to 25 percent of the amount of any underpayment attributable to a substantial understatement of income tax. An understatement is substantial when it exceeds the greater of $ 1990 Tax Ct. Memo LEXIS 116">128 5,000 or 10 percent of the tax required to be shown on the return. Section 6661(a)(1). Understatement is defined as the excess of the amount of tax required to be shown on a return over the amount of tax actually shown on the return. Section 6661(b)(2). Since no return was filed, the "amount shown" is zero. If, after taking into account the reduced deficiency due to the allowance of the exemptions for petitioner's children, the deficiency for the 1985 tax year exceeds $ 5,000, petitioner will be liable for the section 6661(a) addition to tax determined by respondent for 1985. Section 6673 DamagesSection 6673 provides that this Court shall award damages not in excess of $ 5,000 to the United States whenever the taxpayer's position is frivolous or groundless, is instituted or maintained solely for delay, or the taxpayer unreasonably failed to pursue available administrative remedies. 3 Petitioner's arguments concerning the constitutionality and proper interpretations of the Internal Revenue Code are frivolous. The fact that petitioner presented an incidental meritorious claim does not preclude us from awarding damages. The issue of petitioner's dependency exemptions was1990 Tax Ct. Memo LEXIS 116">129 163 raised for the first time at trial, and was never the gravamen of his appeal. He persisted in maintaining his frivolous arguments up to and throughout trial, even after being warned by the Court and after having received notice from this Court in a prior case. Under these circumstances we believe that an award of damages is proper and accordingly we award damages to the United States and against petitioner in the amount of $ 1,000. Decisions will be entered under Rule 155. Footnotes1. Unless otherwise indicated, all section references are to the Internal Revenue Code of 1954, as amended, and in effect for 1985 and 1986. All Rule references are to the Tax Court Rules of Practice and Procedure.↩. 50% of interest due on $ 6,906.00 ↩2. Section 6213(a) as amended by the Technical and Miscellaneous Revenue Act of 1988 authorizes this Court to enjoin the Internal Revenue Service from assessing and collecting any tax if the tax is the subject of a timely petition of this Court. Petitioner did not request an injunction.↩3. With respect to positions taken after December 31, 1989, in proceedings pending or commenced after such date, this Court may require the taxpayer to pay to the United States a penalty not in excess of $ 25,000. Revenue Reconciliation Act of 1989, Pub. L. 101-239, sec. 7731(a), 103 Stat. 2106.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622247/	LAWRENCE A. REISTER, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentReister v. CommissionerDocket No. 26643-88United States Tax CourtT.C. Memo 1995-305; 1995 Tax Ct. Memo LEXIS 303; 70 T.C.M. 31; July 12, 1995, Filed 1995 Tax Ct. Memo LEXIS 303">303 Decision will be entered under Rule 155. For petitioner: Lois C. Blaesing and Chauncey W. Tuttle, Jr.For respondent: Mary P. Hamilton, Paul Colleran, and William T. Hayes. DAWSON, WOLFEDAWSON; WOLFEMEMORANDUM FINDINGS OF FACT AND OPINION DAWSON, Judge: This case was assigned to Special Trial Judge Norman H. Wolfe pursuant to the provisions of section 7443A(b)(4) and Rules 180, 181, and 183. 1 The Court agrees with and adopts the opinion of the Special Trial Judge, which is set forth below. OPINION OF THE SPECIAL TRIAL JUDGE WOLFE, Special Trial Judge: This case is part of the Plastics Recycling group of cases. For a detailed discussion of the transactions involved in the Plastics Recycling cases, see Provizer v. Commissioner, T.C. Memo. 1992-177, affd. without published opinion 1995 Tax Ct. Memo LEXIS 303">304 996 F.2d 1216">996 F.2d 1216 (6th Cir. 1993). The facts of the underlying transaction in this case are substantially identical to those in the Provizer case. Through a second tier partnership, Efron Investors (EI), petitioner invested in the Clearwater Group limited partnership (Clearwater), the same partnership considered in the Provizer case. Pursuant to petitioner's request at trial, this Court took judicial notice of our opinion in the Provizer case. In a notice of deficiency, respondent determined deficiencies in petitioner's 1981 and 1982 Federal income taxes in the amounts of $ 11,863 and $ 2,575, respectively, and an addition to tax for 1981 under section 6659 for valuation overstatement in the amount of $ 3,559. In addition to the above deficiencies and addition to tax, respondent asserted, in an amended answer, additions to tax for 1981 in the amount of $ 558 under section 6653(a)(1) for negligence and under section 6653(a)(2) in an amount equal to 50 percent of the interest due on $ 11,157. 2 In addition, respondent asserted in the amended answer that interest on deficiencies for 1981 accruing after December 31, 1984, would be calculated at 120 1995 Tax Ct. Memo LEXIS 303">305 percent of the statutory rate under section 6621(c). 3In her opening brief, respondent asserted a deficiency in petitioner's 1981 Federal income tax in the amount of $ 11,157 and additions to tax for that year in the amount of $ 2,893 under section 6659 for valuation overstatement, in the amount of $ 558 under section 6653(a)(1) for negligence, and1995 Tax Ct. Memo LEXIS 303">306 under section 6653(a)(2) in an amount equal to 50 percent of the interest due on $ 11,157. The addition to tax under section 6659 in the amount of $ 2,893 was calculated based upon an underpayment of tax in the amount of $ 9,644 allegedly attributable to a valuation overstatement. We consider the deficiency and additions to tax for 1981 reduced to correspond to the amounts in dispute as set forth in respondent's opening brief. The only issues remaining for our decision in this case relate to the year 1981. We are not required to decide any issues with respect to petitioner's 1982 Federal income tax. The deficiency for 1982 resulted from respondent's examination with respect to the 1982 partnership returns of Hampton Investors, Ltd., and Efron Investors II (Efron II) in the respective amounts of $ 391 and $ 10,248. On February 21, 1992, the parties filed a Stipulation of Settlement of Tax Shelter Adjustments with respect to petitioner's investment in Hampton Investors, Ltd. The stipulation provided that petitioner is allowed to deduct $ 293 of the amount disallowed by respondent with respect to Hampton Investors, Ltd., that petitioner concedes the remaining amount disallowed of $ 1995 Tax Ct. Memo LEXIS 303">307 98, and that, as a result of the stipulation, all issues related to the "Harris-Winters tax shelter" are resolved. With respect to petitioner's investment in Efron II, petitioner claimed an operating loss in the amount of $ 16,264 on his 1982 Federal income tax return. In the notice of deficiency, respondent disallowed $ 10,248 of petitioner's claimed loss in Efron II. During 1982, Efron II invested in Dickinson Recycling Associates, a partnership that is subject to the provisions of sections 6221 through 6231 (the TEFRA provisions) enacted by the Tax Equity and Fiscal Responsibility Act of 1982, Pub. L. 97-248, sec. 402(a), 96 Stat. 648. The TEFRA provisions apply generally to partnerships 4 for all taxable years beginning after September 3, 1982. Sparks v. Commissioner, 87 T.C. 1279">87 T.C. 1279, 87 T.C. 1279">1284 (1986). Under the TEFRA provisions, the tax treatment of partnership items is decided at the partnership level in a unified partnership proceeding rather than separate proceedings for each partner, Boyd v. Commissioner, 101 T.C. 365">101 T.C. 365, 101 T.C. 365">369 (1993), and "affected items", items affected by the treatment of partnership items (e.g. certain1995 Tax Ct. Memo LEXIS 303">308 additions to tax), can only be assessed following the conclusion of the partnership proceeding. See sec. 6225(a); Maxwell v. Commissioner, 87 T.C. 783">87 T.C. 783, 87 T.C. 783">791 n.6 (1986). On September 19, 1994, the parties filed a Stipulation of Settled Issues concerning petitioner's investment in Efron II. The Stipulation provides that petitioner is entitled to deduct $ 2,166 of the amount disallowed by respondent with respect to petitioner's investment in Efron II, and that petitioner concedes the remaining amount disallowed of $ 8,082, and also states: As a result of this stipulation, all non-TEFRA issues pertaining to Efron Investors II Partnership for 1982 have been resolved. The TEFRA issues pertaining to Efron Investors II as a tier of Dickinson Recycling Associates, a TEFRA partnership, will be resolved in a separate proceeding.The Stipulation reflects the requirement that partnership items and affected items (TEFRA items) related to Efron II's investment 1995 Tax Ct. Memo LEXIS 303">309 in Dickinson Recycling Associates will be resolved in a proceeding other than this proceeding. Accordingly, all issues with respect to the taxable year 1982, as set forth in the pleadings and the notice of deficiency that form the basis for our jurisdiction in this case, have been resolved. The remaining issues relate to petitioner's investment in Clearwater through his investment in EI in 1981. The issues for decision with respect to 1981 are: (1) Whether expert reports and testimony offered by respondent are admissible into evidence; (2) whether petitioner is entitled to claimed deductions and tax credits with respect to Clearwater as passed through EI to petitioner; (3) whether petitioner is liable for additions to tax for negligence or intentional disregard of rules or regulations under section 6653(a)(1) and (2); (4) whether petitioner is liable for the addition to tax under section 6659 for underpayment of tax attributable to valuation overstatement; and (5) whether petitioner is liable for increased interest under section 6621(c). FINDINGS OF FACT Some of the facts have been stipulated and are so found. The stipulated facts and attached exhibits are incorporated by this reference. 1995 Tax Ct. Memo LEXIS 303">310 Petitioner resided in Hammond, Indiana, when his petition was filed. During the years in issue, petitioner was an insurance agent and broker. Petitioner's gross income for 1981 from wages, interest, dividends, capital gains, his insurance business, and other sources was in excess of $ 70,000 and, consequently, in the absence of significant deductions or credits, as a single person, he was subject to payment of Federal income taxes in substantial amounts. Petitioner did not testify at trial. Therefore, the facts have been found from a record consisting of stipulations, exhibits, and the testimony of persons other than petitioner. The testimony offered at trial concerns EI and the Clearwater transaction generally, rather than petitioner specifically. Petitioner is a limited partner in EI, which is a limited partner in Clearwater. Clearwater is the same recycling partnership that we considered in Provizer v. Commissioner, T.C. Memo. 1992-177. The underlying deficiency for 1981 in this case resulted from respondent's disallowance of claimed losses and tax credits that were passed through both Clearwater and EI to petitioner.51995 Tax Ct. Memo LEXIS 303">311 Petitioner has stipulated substantially the same facts concerning the underlying transactions as we found in Provizer v. Commissioner, supra.6 Those facts may be summarized as follows. In 1981, Packaging Industries, Inc. (PI), manufactured and sold six Sentinel expanded polyethylene (EPE) recyclers to ECI Corp. for $ 5,886,000 ($ 981,000 each). ECI Corp., in turn, resold the recyclers to F & G Corp. for $ 6,976,000 ($ 1,162,666 each). F & G Corp. then leased the recyclers to Clearwater, which licensed the recyclers to FMEC Corp., which sublicensed them back to PI. All of the monthly payments required among the entities in the above transactions offset each other. These transactions were done simultaneously. We refer to these transactions collectively as the Clearwater transaction. The fair market value of a Sentinel EPE recycler in 1981 was not in excess of $ 50,000. 1995 Tax Ct. Memo LEXIS 303">312 PI allegedly sublicensed the recyclers to entities that would use them to recycle plastic scrap. The sublicense agreements provided that the end-users would transfer to PI 100 percent of the recycled scrap in exchange for a payment from FMEC based on the quality and amount of recycled scrap. In 1981, petitioner acquired a 1.596-percent limited partnership interest in EI, and EI acquired a 43.313-percent limited partnership interest in Clearwater. As a result of passthrough from Clearwater and EI, on his 1981 Federal income tax return petitioner deducted an operating loss in the amount of $ 4,470 and claimed investment tax and business energy credits totaling $ 9,644. Respondent disallowed petitioner's claimed operating loss and credits related to EI's investment in Clearwater for 1981. 71995 Tax Ct. Memo LEXIS 303">313 EI is an Indiana limited partnership that was formed in May of 1981 by Morton L. Efron (Efron) as the general partner and Real Estate Financial Corp. (REFC) as the initial limited partner. Fred Gordon (Gordon) is the president of REFC, which is owned by members of Gordon's family. EI was formed to acquire limited partnership interests in an office building in Buffalo, New York (the office building), and a shopping center in Haslett, Michigan (the shopping center). In contemplation of these ventures, EI prepared a private placement memorandum (the original offering memorandum) and distributed it to potential limited partners. At some time in late 1981, EI abandoned the contemplated investment in the shopping center and substituted limited partnership interests in Clearwater and a K- Mart shopping center in Swansea, Massachusetts (the K-Mart investment). The revised investment objectives were presented in a revised offering memorandum (the revised offering memorandum). The revised offering memorandum indicated that EI intended to invest in 100 percent of the limited partnership interests in the office building (10 units), 43.75 percent of the limited partnership interests in Clearwater1995 Tax Ct. Memo LEXIS 303">314 (7 units), and 15.625 percent of the limited partnership interests in the K-Mart investment (2- 1/2 units). Potential EI limited partners were informed of the change in EI's investment objectives through informal conversations and the revised offering memorandum. MFA Corp. (MFA) is the ministerial agent for EI. Efron owns 50 percent of the stock of MFA, and REFC owns the remaining 50 percent. The revised offering memorandum states that Efron, as general partner of EI, and MFA, as the ministerial agent for EI, will receive substantial fees, compensation, and profits from EI. The contemplated payments to MFA include: (1) $ 100,000 for supervisory management of the office building and ministerial fees; (2) $ 100,000-$ 125,000 as loan commitment fees; (3) $ 25,000 for note collection guarantees; and (4) a maximum of $ 100,750 in investment advisory fees. In addition, MFA was also the ministerial agent for the office building limited partnership and, according to the revised offering memorandum, received substantial payments in that capacity. Efron obtained financing for the EI investments through local banks. Some of the limited partners in EI made a cash downpayment to EI and then 1995 Tax Ct. Memo LEXIS 303">315 signed installment promissory notes for the remainder of the purchase price. Thereafter, Efron pledged any promissory notes received from limited partners as security for loans to EI. In addition to lending funds directly to EI, the banks also offered loans to individual limited partners for the downpayments needed with respect to the EI investments. Petitioner subscribed to purchase one-fourth of a limited partnership unit ($ 25,000) in EI. He acquired his interest in EI in exchange for a cash payment in the amount of $ 10,081.25 and a promissory note bearing interest at the rate of 11 percent per year with payments due in the amounts of $ 10,451.25 and $ 4,467.50 on January 15, 1982, and January 15, 1983, respectively. According to the offeree questionnaire completed by petitioner, he learned of EI and the Clearwater transaction from Efron. Efron was the general partner of EI and owned limited partnership interests in EI through Efron and Efron Real Estate, a partnership owned by Efron and his wife, and AMBI Real Estate, a partnership owned by Efron and his sister. EI was the first partnership for which Efron served as a general partner. Efron organized EI so that he could earn1995 Tax Ct. Memo LEXIS 303">316 legal fees and fees for managing the partnership. He received compensation and fees as the general partner of EI and as a 50-percent shareholder of MFA. After EI abandoned the investment in the shopping center, Efron learned of the Clearwater transaction from Gordon. In 1981 Gordon was counsel to EI, to Efron as the general partner of EI, to Efron personally, and to MFA. He and Efron have known each other since meeting at the University of Michigan in 1955. In the early 1960's Efron and Gordon began investing together in the stock market, real estate, business loans, and other investments. Gordon is an attorney who holds a master's degree in business administration and at one time was employed by the Internal Revenue Service. Prior to the date of the Clearwater private placement offering, Gordon had experience involving the evaluation of tax shelters. Gordon was paid a fee in the amount of 10 percent of some investments he guided to Clearwater; however, he did not receive a fee directly from Clearwater for the EI investments. Efron was aware that Gordon received commissions from the sale of some units in recycling ventures. 8Gordon recommended investing in the Clearwater offering1995 Tax Ct. Memo LEXIS 303">317 to the investors in EI, as well as to some of Gordon's other clients. 1995 Tax Ct. Memo LEXIS 303">318 In the EI offeree questionnaire completed by petitioner, petitioner stated his educational background as follows: "B.S. Notre Dame, 1947, MBA Michigan, 1949 LIMI Purdue 1954, CLU 1955, CFP 1975". In addition, on the offeree questionnaire, petitioner indicated that in 1981 he was a "Professor on the business staff at Indiana University Northwest." The educational background listed on petitioner's offeree questionnaire for EI demonstrates that petitioner has extensive formal training in investments. In addition, on the offeree questionnaire, petitioner indicates that he has invested in "real estate, oil and gas, stocks, bonds, mutual funds" and a real estate syndication or "other investments offering possible tax shelter". He identified his previous tax shelter investments as "Oil and gas". However, petitioner does not have any education or work experience in plastics recycling or plastics materials. Petitioner did not independently investigate the Sentinel recyclers, and he did not see a Sentinel recycler or any other type of plastics recycler prior to participating in the recycling ventures. OPINION In Provizer v. Commissioner, T.C. Memo. 1992-177,1995 Tax Ct. Memo LEXIS 303">319 a test case involving the Clearwater transaction and another tier partnership, this Court (1) found that each Sentinel EPE recycler had a fair market value not in excess of $ 50,000, (2) held that the Clearwater transaction was a sham because it lacked economic substance and a business purpose, (3) upheld the section 6659 addition to tax for valuation overstatement since the underpayment of taxes was directly related to the overstatement of the value of the Sentinel EPE recyclers, and (4) held that losses and credits claimed with respect to Clearwater were attributable to tax-motivated transactions within the meaning of section 6621(c). In reaching the conclusion that the Clearwater transaction lacked economic substance and a business purpose, this Court relied heavily upon the overvaluation of the Sentinel EPE recyclers. Although petitioner has not agreed to be bound by the Provizer opinion, he has stipulated that his investment in the Sentinel EPE recyclers was similar to the investment described in Provizer, and, pursuant to his request, we have taken judicial notice of our opinion in the Provizer case. Petitioner invested in EI, a tier partnership that invested in1995 Tax Ct. Memo LEXIS 303">320 Clearwater. The underlying transaction in this case (the Clearwater transaction), and the Sentinel EPE recyclers considered in this case, are the same transaction and machines considered in Provizer. Issue 1. Admissibility of Expert Reports and TestimonyBefore addressing the substantive issues in this case, we resolve an evidentiary issue. At trial, respondent offered in evidence the expert opinions and testimony of Steven Grossman (Grossman) and Richard Lindstrom (Lindstrom). At trial and in his reply brief, petitioner objects to the admissibility of the testimony and reports. The expert reports and testimony of Grossman and Lindstrom are identical to the testimony and reports in Fine v. Commissioner, T.C. Memo. 1995-222. In addition, petitioner's arguments with respect to the admissibility of the expert testimony and reports are identical to the arguments made in the Fine case. For discussions of the reports, see Fine v. Commissioner, supra, and Provizer v. Commissioner, supra.For reasons set forth in Fine v. Commissioner, supra,1995 Tax Ct. Memo LEXIS 303">321 we hold that the reports and testimony of Grossman and Lindstrom are relevant and admissible and that Grossman and Lindstrom are experts in the fields of plastics, engineering, and technical information. We do not, however, accept Grossman or Lindstrom as experts with respect to the ability of the average person, who has not had extensive education in science and engineering, to conduct technical research, and we have limited our consideration of their reports and testimony to the areas of their expertise. We also hold that Grossman's report meets the requirements of Rule 143(f). Issue 2. Deductions and Tax Credits With Respect to EI and ClearwaterOn his 1981 Federal income tax return, petitioner claimed the following with respect to his investment in EI and EI's investment in Clearwater: (1) An operating loss in the amount of $ 4,470; (2) an investment tax credit in the amount of $ 4,822; and (3) a business energy credit in the amount of $ 4,822. Respondent disallowed these claimed deductions and tax credits. The underlying transaction in this case is substantially identical in all respects to the transaction in Provizer v. Commissioner, supra.1995 Tax Ct. Memo LEXIS 303">322 The parties have stipulated the facts concerning the deficiency essentially as set forth in our Provizer opinion, and, at petitioner's request, we have taken judicial notice of our opinion in the Provizer case. Based on this record, we hold that the Clearwater transaction was a sham and lacked economic substance. In reaching this conclusion, we rely heavily upon the overvaluation of the Sentinel EPE recyclers. Accordingly, respondent is sustained on the issue with respect to the underlying deficiency. Moreover, we note that petitioner has stated his concession of this issue on brief. The record plainly supports respondent's determination regardless of such concession. For a detailed discussion of the facts and the applicable law, see Provizer v. Commissioner, supra.Issue 3. Sec. 6653(a) NegligenceIn her first amendment to answer, respondent asserted that petitioner was liable for the negligence additions to tax under section 6653(a)(1) and (2) for 1981. Because these additions to tax were raised for the first time in respondent's amendment to answer, respondent bears the burden of proof on this issue. Rule 142(a); Vecchio v. Commissioner, 103 T.C. 170">103 T.C. 170, 103 T.C. 170">196 (1994).1995 Tax Ct. Memo LEXIS 303">323 Section 6653(a)(1) provides for an addition to tax equal to 5 percent of the underpayment if any part of an underpayment of tax is due to negligence or intentional disregard of rules or regulations. For 1981, section 6653(a)(2) provides for an addition to tax equal to 50 percent of the interest payable with respect to the portion of the underpayment attributable to negligence. Negligence is defined as the failure to exercise the due care that a reasonable and ordinarily prudent person would employ under the circumstances. Neely v. Commissioner, 85 T.C. 934">85 T.C. 934, 85 T.C. 934">947 (1985). The question is whether a particular taxpayer's actions in connection with the transactions were reasonable in light of his experience and the nature of the investment or business. See Henry Schwartz Corp. v. Commissioner, 60 T.C. 728">60 T.C. 728, 60 T.C. 728">740 (1973). Petitioner did not testify at trial. Through his briefs, he contends that he was reasonable in claiming deductions and credits with respect to EI's investment in Clearwater. To support his contention, petitioner alleges the following: (1) That claiming the deductions and credits with respect to EI's investment1995 Tax Ct. Memo LEXIS 303">324 in Clearwater was reasonable in light of the supposed oil crisis in the United States in 1981; and (2) that in claiming the deductions and credits, petitioner specifically relied upon Efron. 9 In addition, petitioner argues that respondent has failed to carry her burden of showing that petitioner is liable for the negligence additions to tax. Petitioner contends that he was reasonable in claiming the deductions and credits related to EI's investment in Clearwater because of a supposed oil crisis in the United States during 1981. Petitioner argues, in general terms, that the alleged oil crisis in the United States in 1981, and the media coverage thereof, excuses him from the negligence additions to tax 1995 Tax Ct. Memo LEXIS 303">325 with respect to his investment in Clearwater through EI. Petitioner failed to explain how the so-called oil crisis, or the media coverage thereof, provided a reasonable basis for him to invest in Clearwater and claim the associated tax deductions and credits. We find petitioner's vague, general claims concerning the so-called oil crisis to be without merit. Petitioner's reliance on Krause v. Commissioner, 99 T.C. 132">99 T.C. 132 (1992), affd. sub nom. Hildebrand v. Commissioner, 28 F.3d 1024">28 F.3d 1024 (10th Cir. 1994), is misplaced. The facts in the Krause case are distinctly different from the facts of this case. In the Krause case, the taxpayers invested in limited partnerships whose investment objectives concerned enhanced oil recovery (EOR) technology. The Krause opinion notes that during the late 1970's and early 1980's, the Federal Government adopted specific programs to aid research and development of EOR technology. 99 T.C. 132">Id. at 135-136. In holding that the taxpayers in the Krause case were not liable for the negligence additions to tax, this Court noted that one of the Government's expert witnesses1995 Tax Ct. Memo LEXIS 303">326 acknowledged that "investors may have been significantly and reasonably influenced by the energy price hysteria that existed in the late 1970s and early 1980s to invest in EOR technology." 99 T.C. 132">Id. at 177. In the present case, however, one of respondent's experts, Grossman, noted that the price of plastics materials is not directly proportional to the price of oil, that less than 10 percent of crude oil is utilized for making plastics materials, and that studies have shown that "a 300% increase in crude oil prices results in only a 30 to 40% increase in the cost of plastic products." While EOR was, according to our Krause opinion, in the forefront of national policy and the media during the late 1970's and early 1980's, there is no showing in this record that the supposed energy crisis would provide a reasonable basis for investing in recycling of polyethylene. Moreover, the taxpayers in the Krause opinion were experienced in or investigated the oil industry and EOR technology specifically. One of the taxpayers in the Krause case undertook significant investigation of the proposed investment including researching EOR technology. The other taxpayer1995 Tax Ct. Memo LEXIS 303">327 was a geological and mining engineer whose work included research of oil recovery methods and who hired an independent geologic engineer to review the offering materials. 99 T.C. 132">Id. at 166. In the present case, petitioner was not experienced or educated in plastics recycling or plastics materials, and he did not independently investigate the Sentinel recyclers. We consider petitioner's arguments with respect to the Krause case inapplicable here. Moreover, during 1980 and 1981, in addition to the media coverage of the so-called oil crisis, there was "extensive continuing press coverage of questionable tax shelter plans." Zmuda v. Commissioner, 731 F.2d 1417">731 F.2d 1417, 731 F.2d 1417">1422 (9th Cir. 1984), affg. 79 T.C. 714">79 T.C. 714 (1982). On his 1981 Federal income tax return, petitioner claimed investment tax and business energy credits related to Clearwater totaling $ 9,644, while his investment in Clearwater through EI was less than $ 6,000. 10 Therefore, like the taxpayers in Provizer v. Commissioner, T.C. Memo. 1992-177, "except for a few weeks at the beginning, * * [petitioner] never had any1995 Tax Ct. Memo LEXIS 303">328 money in the [Clearwater] deal." In light of the large tax benefits claimed on petitioner's 1981 Federal income tax return and petitioner's alleged observation of the media, we conclude that further investigation of the investment clearly was required. A reasonably prudent person would have asked a qualified independent tax adviser if this windfall were not too good to be true. McCrary v. Commissioner, 92 T.C. 827">92 T.C. 827, 92 T.C. 827">850 (1989). In fact, on brief, petitioner argues that he consulted a qualified adviser and relied upon him in claiming the disallowed losses and tax credits. Petitioner argues that his reliance on the advice of Efron insulates him from the negligence additions to tax. Under some circumstances a taxpayer may avoid liability for the additions to1995 Tax Ct. Memo LEXIS 303">329 tax for negligence under section 6653(a) if reasonable reliance on a competent professional adviser is shown. Freytag v. Commissioner, 89 T.C. 849">89 T.C. 849, 89 T.C. 849">888 (1987), affd. 904 F.2d 1011">904 F.2d 1011 (5th Cir. 1990), affd. 501 U.S. 868">501 U.S. 868 (1991). Such circumstances are not present in this case. Moreover, reliance on professional advice, standing alone, is not an absolute defense to negligence, but rather a factor to be considered. Id. In order for reliance on professional advice to excuse a taxpayer from the negligence additions to tax, the reliance must be reasonable, in good faith, and based upon full disclosure. Id.; see Weis v. Commissioner, 94 T.C. 473">94 T.C. 473, 94 T.C. 473">487 (1990); Ewing v. Commissioner, 91 T.C. 396">91 T.C. 396, 91 T.C. 396">423-424 (1988), affd. without published opinion 940 F.2d 1534">940 F.2d 1534 (9th Cir. 1991); Pritchett v. Commissioner, 63 T.C. 149">63 T.C. 149, 63 T.C. 149">174-175 (1974). We have rejected pleas of reliance when neither the taxpayer nor the advisers purportedly relied upon by the taxpayer knew anything about the nontax business 1995 Tax Ct. Memo LEXIS 303">330 aspects of the contemplated venture. Beck v. Commissioner, 85 T.C. 557">85 T.C. 557 (1985); Flowers v. Commissioner, 80 T.C. 914">80 T.C. 914 (1983); Steerman v. Commissioner, T.C. Memo. 1993-447. The record does not show that Efron possessed any special qualifications or professional skills in the recycling or plastics industries. In addition, Efron did not hire anyone with plastics or recycling expertise to evaluate the Clearwater transaction. In evaluating the Clearwater transaction, Efron contends that he relied upon (1) the offering materials, (2) Barry Swartz, an accountant, (3) various bankers who loaned funds to EI, and (4) Gordon for his expertise in taxation, finance, and investments. Although Efron testified that when making investments he knows "enough to go get an expert or somebody that knows something", Efron did not consult any plastics engineering or technical experts with respect to EI's investment in Clearwater. Efron relied heavily upon Gordon in deciding to include Clearwater as a part of the revised EI offering. Efron was aware that Gordon was an offeree representative and received commissions1995 Tax Ct. Memo LEXIS 303">331 as such from other recycling investments. Gordon testified that he did not directly receive a sales commission with respect to the EI investment in Clearwater. The record with respect to the payment of commissions on this investment is inconclusive. See supra note 8. In evaluating the Clearwater transaction Gordon relied on the offering materials and on discussions with persons involved in the transaction. Efron does not suggest that Swartz or the bankers had any peculiar or specialized knowledge of the Clearwater transaction beyond that of any accountant or banker who had read the prospectus. According to the EI offeree questionnaire completed by petitioner, he first became aware of the EI investments through Efron. In his opening brief, petitioner contends that he relied on Efron in making his investment in EI and that he should be relieved of the negligence additions to tax under section 6653(a) because of his alleged reliance on Efron. Efron testified that he advised every limited partner in EI to talk to an independent adviser. The record is devoid of any further details concerning the advice petitioner received from Efron. The offering memorandum and the revised offering1995 Tax Ct. Memo LEXIS 303">332 memorandum disclosed the fact that Efron was receiving substantial compensation and fees as the general partner of EI and as a 50-percent owner of MFA. In addition, both of the EI offering memoranda specifically warned potential investors that they were "not to consider the contents of * * [the offering memoranda] or any communication from the partnership or its general partners as legal or tax advice", and Efron testified that he advised every limited partner in EI to talk to an independent adviser. In our view petitioner's purported reliance on Efron was not reasonable, in good faith, and based on full disclosure. Accordingly, we hold that petitioner is not entitled to relief from the negligence additions to tax under section 6653(a) because of his alleged reliance on Efron. Petitioner's reliance on Heasley v. Commissioner, 902 F.2d 380">902 F.2d 380 (5th Cir. 1990), revg. T.C. Memo. 1988-408, is misplaced. The facts in the Heasley case are distinctly different from the facts of this case. In the Heasley case the taxpayers were not educated beyond high school, while in the instant case petitioner was a financially successful, 1995 Tax Ct. Memo LEXIS 303">333 sophisticated, highly educated insurance agent and broker who was also a certified financial planner. In addition, on his EI offeree questionnaire, petitioner indicated that he had extensive previous investment experience in real estate, oil and gas, stocks, bonds, and mutual funds. We consider petitioner's arguments with respect to the Heasley case inapplicable. When petitioner claimed the disallowed deductions and tax credits, he had little, if any, knowledge of the plastics or recycling industries. Petitioner did not independently investigate the Sentinel EPE recyclers. Through his investment in EI, petitioner paid approximately $ 6,000 to Clearwater and claimed a tax deduction of $ 4,470 and tax credits in the amount of $ 9,644 with respect to that investment for the first year of the investment alone. Under the circumstances of this case, petitioner should have known better than to claim the large deductions and tax credits with respect to Clearwater on his 1981 Federal income tax return. Respondent introduced evidence, including expert reports, to establish the lack of economic substance of the Clearwater transaction. We concluded on the basis of this record that the Clearwater1995 Tax Ct. Memo LEXIS 303">334 transaction was a sham and lacked economic substance. In addition, in Provizer v. Commissioner, T.C. Memo. 1992-177, an opinion of which we took judicial notice pursuant to petitioner's request, we considered the Clearwater transaction and concluded the same. In our view, the lack of economic substance in the Clearwater transaction could have been readily discovered with a modicum of due care by a taxpayer with petitioner's business education and investment experience. We conclude that petitioner was negligent in claiming the deductions and credits with respect to EI's investment in Clearwater on his 1981 Federal income tax return. We hold, upon consideration of the entire record, that petitioner is liable for the negligence additions to tax under the provisions of section 6653(a)(1) and (2) for 1981. Issue 4. Sec. 6659 Valuation OverstatementIn the notice of deficiency, respondent determined that petitioner was liable for an addition to tax in the amount of $ 3,559 for valuation overstatement under section 6659 on underpayment of his 1981 Federal income tax. In her opening brief, respondent asserted that petitioner was liable for an addition1995 Tax Ct. Memo LEXIS 303">335 to tax in the amount of $ 2,893 under section 6659 on the underpayment of his 1981 Federal income tax attributable to the investment tax credit and business energy credit claimed with respect to EI and Clearwater. As noted earlier in this opinion, the amount in dispute in this case is the reduced amount asserted in respondent's opening brief. Petitioner has the burden of proving that respondent's determination of an addition to tax is erroneous. Rule 142(a); Rybak v. Commissioner, 91 T.C. 524">91 T.C. 524, 91 T.C. 524">566 (1988). The underlying facts of this case with respect to this issue are substantially the same as those in Fine v. Commissioner, T.C. Memo. 1995-222. In addition, petitioner's arguments with respect to this issue are identical to the arguments made in the Fine case. For reasons set forth in the Fine opinion, we hold that petitioner is liable for the section 6659 addition to tax at the rate of 30 percent of the underpayment of tax attributable to the disallowed credits for 1981. Issue 5. Sec. 6621(c) Tax-Motivated Transactions In her first amendment to answer, respondent asserted that interest on deficiencies 1995 Tax Ct. Memo LEXIS 303">336 for 1981 accruing after December 31, 1984, would be calculated under section 6621(c). Because this addition to tax was raised for the first time in respondent's amendment to answer, respondent bears the burden of proof on this issue. Rule 142(a); Vecchio v. Commissioner, 103 T.C. 170">103 T.C. 196. The annual rate of interest under section 6621(c) equals 120 percent of the interest payable under section 6601 with respect to any substantial underpayment attributable to tax-motivated transactions. An underpayment is substantial if it exceeds $ 1,000. Sec. 6621(c)(2). The underlying facts of this case with respect to this issue are substantially the same as those in Fine v. Commissioner, supra. In addition, petitioner's arguments on brief with respect to this issue are verbatim copies of the arguments in the taxpayers' briefs in the Fine case. Unlike the Fine case where petitioner had the burden of proof with respect to the section 6621(c) increased interest, respondent has the burden of proof on this issue in this case. On this record, respondent has met her burden of proving that for 1981 petitioner made a substantial 1995 Tax Ct. Memo LEXIS 303">*337 underpayment attributable to tax-motivated transactions. Accordingly, for reasons set forth in the Fine opinion, we hold that the section 6621(c) increased rate of interest applies for 1981. To reflect the foregoing, Decision will be entered under Rule 155. Footnotes1. All section references are to the Internal Revenue Code in effect for the tax years at issue, unless otherwise stated. All Rule references are to the Tax Court Rules of Practice and Procedure.↩2. In her amended answer, respondent calculated the negligence additions to tax based upon a deficiency in petitioner's 1981 Federal income tax in the reduced amount of $ 11,157.↩3. Sec. 6621(c) was repealed by sec. 7721(b) of the Omnibus Budget Reconciliation Act of 1989, Pub. L. 101-239, 103 Stat. 2106, 2399, effective for tax returns due after Dec. 31, 1989 (sec. 7721(d) of the Act). The repeal does not affect the instant case. The annual rate of interest under sec. 6621(c) for interest accruing after Dec. 31, 1984, equals 120 percent of the interest payable under sec. 6601↩ with respect to any substantial underpayment attributable to tax-motivated transactions.4. See secs. 761, 6231(a)(1).↩5. Other adjustments to petitioner's 1981 Federal income tax are computational.↩6. The parties did not stipulate certain facts concerning the Provizers, facts regarding the expert opinions, and other matters that we consider of minimal significance. Although the parties did not stipulate our findings regarding the expert opinions, they stipulated our ultimate finding of fact concerning the fair market value of the recyclers during 1981.↩7. In the notice of deficiency, respondent allowed an investment tax credit in the amount of $ 914 and, therefore, disallowed investment tax and business energy credits in the amount of $ 9,648. This appears to be merely a computational error.↩8. The Clearwater offering memorandum states that the partnership will pay sales commissions and fees to offeree representatives in an amount equal to 10 percent of the price paid by the investor represented by such person. The offering memorandum further states that if such fees are not paid "they will either be retained by the general partner as additional compensation if permitted by applicable state law, or applied in reduction of the subscription price." EI's Schedule K-1 for 1981 shows that EI paid full price, $ 350,000, for its seven units of Clearwater, so the 10-percent commission was not applied to reduce the subscription price. Gordon specifically stated that in the case of EI he did not directly receive the sales commission. Efron expressed doubt that he individually had been an offeree representative in connection with Clearwater or any other transaction. There are suggestions that the commission might have been paid to MFA or offeree representatives of individual investors, but the record on this subject is inconclusive. Petitioner did not identify an offeree representative with respect to the EI investment.↩9. In his opening brief, petitioner argues that he relied upon Efron and that such reliance was reasonable. In his reply brief, however, petitioner argues that respondent has failed to carry her burden of proof with respect to this issue because she failed to prove any advisers upon whom petitioner may have relied.↩10. Calculated as follows: EI's Investment in Clearwater $ 350,000 X Petitioner's Share of EI 1.596% = $ 5,586 EI's Investment in Clearwater $ 350,000 X EI's Total Investment $ 1,550,000 X Petitioner's Investment $ 25,000 = $ 5,645↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622248/	HAMILTON INDUSTRIES, INC., SUCCESSOR OF MAYLINE COMPANY, INC. AND SUBSIDIARY, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentHamilton Industries, Inc. v. CommissionerDocket No. 24006-88United States Tax Court97 T.C. 120; 1991 U.S. Tax Ct. LEXIS 64; 97 T.C. No. 9; July 30, 1991, Filed 1991 U.S. Tax Ct. LEXIS 64">64 Decision will be entered under Rule 155. P purchased the assets of M and T in separate transactions, assigning a portion of the purchase price to inventory acquired from M and T. The value assigned to the purchased inventory was less than the value assigned to it by the targets under the first-in, first-out (FIFO) convention. Such assigned value was used as the base year cost for P's inventory under P's dollar value last-in, first-out (LIFO) method of inventory accounting. Held, R's determination that inventory purchased in the acquisitions of M and T should be separated from raw materials purchased or goods produced subsequent to such acquisitions constituted a change in method of accounting to which section 481 applied. Held further, finished inventory acquired in the purchase of M and T was includable in the same natural business unit pool as raw materials purchased or inventory produced by P subsequent to such acquisitions. UFE, Inc. v. Commissioner, 92 T.C. 1314">92 T.C. 1314 (1989), followed. Held further, inventory acquired from M and T constituted items separate from raw materials purchased or inventory produced after such acquisitions. P used the accrual acceptance1991 U.S. Tax Ct. LEXIS 64">65 method of accounting for long-term contracts. P determined inventory costs attributable to such contracts using LIFO inventory costs for the year income attributable to such contracts was taken into account. Held, R's determination that P used the long-term contract method to account for its long-term contracts was erroneous. Held further, R's determination that inventory allocable to long-term contracts constituted separate items in P's LIFO inventory pool was arbitrary. P claimed depreciation deductions on its consolidated return with respect to property acquired by a subsidiary not in existence for the full tax year of the consolidated group. Held, R properly disallowed a portion of the depreciation deduction claimed by the subsidiary. Leslie J. Schneider and Patrick J. Smith, for the petitioner. Wilton A. Baker and Dianne I. Crosby, for the respondent. WELLS, Judge. WELLS97 T.C. 120">121 Respondent determined the following deficiencies in petitioner's Federal income tax: Taxable Year Ending June 30Deficiency1977$ 31,2101980$ 755,2281981$ 1,952,9261982$ 1,464,7881983$ 197,7511984$ 129,846After concessions, the1991 U.S. Tax Ct. LEXIS 64">66 issues remaining for decision are: (1) Whether respondent's determination that inventory acquired as part of petitioner's purchases of other businesses should be treated as pools or items separate from raw materials purchased or inventory manufactured subsequent to such acquisitions constituted a change in petitioner's method of accounting for inventories; (2) whether respondent abused his discretion in making the foregoing determination; (3) whether petitioner used the completed contract method of accounting for long-term contracts; (4) whether petitioner's income was clearly reflected where it offset income from a long-term contract with LIFO inventory costs calculated in the year that it recognized income from such long-term contract; (5) whether respondent properly disallowed certain depreciation deductions claimed by petitioner. FINDINGS OF FACT Some of the facts have been stipulated for trial pursuant to Rule 91. 1 The stipulations and accompanying exhibits are incorporated in this Opinion by reference irrespective of any restatement below. 1991 U.S. Tax Ct. LEXIS 64">67 Petitioner is a corporation with its principal place of business in Des Plaines, Illinois. Prior to December 26, 1986, petitioner was a subsidiary of Mayline Company, Inc. (Mayline), and became the successor in interest of Mayline as of December 26, 1986. Mayline used an accrual method of accounting for tax purposes. For taxable years ending in 1975 and 1976, Mayline used a fiscal year ending April 30. 97 T.C. 120">122 During the taxable years in issue, Mayline's annual accounting period for tax purposes ended on June 30. Mayline was incorporated on March 12, 1975, but did not engage in business prior to May 1, 1975. On March 25, 1975, Mayline entered into an agreement to purchase substantially all of the assets, including all of the inventory, of Mayline Company, Inc. (old Mayline). The price paid for old Mayline's assets was $ 3,000,000, plus assumption of old Mayline's liabilities. The agreement specifically allocated the purchase price among the assets acquired, excepting inventory. The residue of the purchase price was allocated to inventory. On the date that the sale was closed, April 29, 1975, old Mayline valued its inventory at $ 2,034,680.48 under the first-in, first-out (FIFO) 1991 U.S. Tax Ct. LEXIS 64">68 convention. Mayline allocated $ 79,028.32 of the purchase price to the inventory purchased from old Mayline, which was further allocated among each item of inventory in proportion to its relative FIFO value in old Mayline's inventory at April 29, 1975. After the purchase, Mayline continued old Mayline's business of manufacturing drafting equipment and related furniture and accessories. Acquisition of old Mayline's inventory was necessary to continue such business. The products produced after the acquisition were identical to those produced by old Mayline prior to the sale. In maintaining its inventory records, Mayline made no distinction between inventory purchased in the acquisition of the assets of old Mayline and inventory subsequently purchased or produced. After the acquisition, Mayline also purchased drafting equipment and furniture as inventory for resale. On its return for its taxable year ended April 30, 1975, Mayline elected to use the dollar value last-in, first-out (LIFO) inventory accounting method for its entire inventory. Mayline also elected to include its entire inventory in a single natural business unit (NBU) pool and to use the double extension method in1991 U.S. Tax Ct. LEXIS 64">69 computing the LIFO value of its NBU pool. On April 30, 1975, Mayline's inventory consisted only of the inventory it had purchased from old Mayline. Mayline possessed an itemized listing of the inventory acquired from old Mayline. In subsequent years, Mayline treated the amount of the purchase price it had allocated to 97 T.C. 120">123 old Mayline's inventory as the base-year cost for inventoriable items it purchased and manufactured. Hamilton Industries, Inc. (Hamilton), was incorporated May 12, 1982, as a wholly owned subsidiary of Mayline, but did not engage in business prior to June 28, 1982. Hamilton used the accrual method of accounting to compute taxable income. On May 19, 1982, Hamilton entered into an agreement to purchase substantially all of the assets, including all of the inventory, of the Two Rivers Division of the Hamilton Division of American Hospital Supply Corporation (Two Rivers). The purchase price equalled $ 31,300,000, plus assumption of certain liabilities. After the acquisition, Hamilton continued Two Rivers' business of manufacturing laboratory and hospital case goods and furniture. Purchase of Two Rivers' inventory was necessary to continue such business. Two Rivers1991 U.S. Tax Ct. LEXIS 64">70 used the LIFO convention to value its inventory, and, as of June 28, 1982, the closing date of the sale, it valued such inventory at $ 6,550.262. The inventory also was valued under the FIFO convention at $ 16,566,320. The amount of the purchase price allocated to the inventory equalled its LIFO value in Two Rivers' hands, $ 6,550,262, which was further allocated among the items in inventory on the basis of their relative value as compared to the total inventory, determined using the FIFO convention. In keeping its inventory records, petitioner did not distinguish between inventory purchased from Two Rivers as part of the acquisition and inventory purchased or produced subsequently. On its initial tax return, filed for the taxable year ended June 30, 1982, Hamilton elected to use the dollar value LIFO method of valuing its inventory. Hamilton also elected to include its entire inventory in a single NBU pool, and to use the double extension method in computing the LIFO value of its NBU pool. On June 30, 1982, Hamilton's inventory primarily consisted of inventory purchased from Two Rivers. For taxable year ended June 30, 1982, Hamilton considered the cost of its earliest inventory1991 U.S. Tax Ct. LEXIS 64">71 acquisitions during the year to be the FIFO inventory values shown on the books of Two Rivers on June 28, 1982. In subsequent tax years, Hamilton treated the amount of the purchase 97 T.C. 120">124 price it had allocated to the inventory purchased from Two Rivers as the base year cost for such inventoriable items. Generally, petitioner's business was limited to the manufacture of goods for its customers; occasionally, however, it also contracted to install on customers' premises office furnishings petitioner manufactured. On average, such installation contracts required up to 24 months to complete, although a small number required more time. Petitioner included payments with respect to such contracts in gross income 90 days after installation was completed, when the customer was deemed to have accepted the work. Petitioner accumulated the cost of producing furniture and cabinetry pursuant to such contracts in its LIFO inventories. Petitioner allocated costs to inventory under the "full absorption" costing rules of section 1.471-11, Income Tax Regs. On its initial return, covering the taxable year ended June 30, 1982, Hamilton elected to account for income from long-term contracts under the 1991 U.S. Tax Ct. LEXIS 64">72 "accrual acceptance" method. Hamilton's audited financial statements for fiscal years ending in 1983 and 1984 stated that it used the accrual acceptance method to account for long-term contracts for tax purposes, but that it accrued income from such contracts for financial statement purposes when components of the contract were completed and shipped to the customer. Included in the assets purchased by Hamilton from Two Rivers were 3-year Accelerated Cost Recovery System (ACRS) property with a cost of $ 2,048,993 and 5-year ACRS property with a cost of $ 10,659,386. In the consolidated return for the tax year ended June 30, 1982, filed by the affiliated group of which Hamilton was a part, petitioner claimed an ACRS depreciation deduction for such property under section 168. The total amount of ACRS depreciation claimed with respect to such property was $ 2,111,156. Respondent, however, disallowed all but one-twelfth of the amount claimed. OPINION The issues in the instant case fall into three principal groups which we will discuss under separate headings: Accounting for Inventories Purchased in Acquisitions; Petitioner's Method of Accounting for Long-Term Contracts; 97 T.C. 120">125 and Depreciation1991 U.S. Tax Ct. LEXIS 64">73 of ACRS Property Acquired from Two Rivers. Accounting for Inventories Purchased in AcquisitionsRespondent determined that petitioner incorrectly combined inventory received in the old Mayline and Two Rivers acquisitions with raw materials purchased and inventory manufactured subsequent to such transactions for purposes of valuing its closing inventory. We first will discuss whether section 481 applies to respondent's change in petitioner's accounting treatment of its inventories and then, in turn, we will review respondent's section 446(b) determinations. 1. Applicability of Section 481Respondent treated his determination with respect to the old Mayline transaction as a change in petitioner's method of accounting for inventory and made a section 481(a) adjustment increasing petitioner's income with respect to the old Mayline acquisition in the taxable year ended June 30, 1981, the earliest open taxable year. The determination with respect to the treatment of inventory acquired from old Mayline affected taxable years closed by the statute of limitations, and respondent included income attributable to such years in the section 481(a) adjustment. To avoid omissions1991 U.S. Tax Ct. LEXIS 64">74 or duplications occurring solely by reason of an accounting method change, section 481 permits the Commissioner to include in the required adjustment amounts attributable to taxable years with respect to which assessment is barred by the statute of limitations. Graff Chevrolet Co. v. Campbell, 343 F.2d 568">343 F.2d 568, 343 F.2d 568">572 (5th Cir. 1965); Superior Coach of Florida, Inc. v. Commissioner, 80 T.C. 895">80 T.C. 895, 80 T.C. 895">912 (1983). In an effort to avoid application of section 481, petitioner contends that respondent's determination does not effect a change in petitioner's method of accounting. Accordingly, we must consider the nature of respondent's determination. The applicable regulations define a change in method of accounting as "a change in the overall plan of accounting for gross income or deductions or a change in the treatment of any material item used in such overall plan." Sec. 97 T.C. 120">126 1.446-1(e)(2)(ii), Income Tax Regs. A "material item" is "any item which involves the proper time for the inclusion of the item in income or the taking of a deduction." Sec. 1.446-1(e)(2)(ii)(a), Income Tax Regs. The regulations further provide that "a change in method of accounting1991 U.S. Tax Ct. LEXIS 64">75 does not include adjustment of any item of income or deduction which does not involve the proper time for the inclusion of the item of income or the taking of a deduction." Sec. 1.446-1(e)(2)(ii)(b), Income Tax Regs. Consequently, where the Commissioner's determination alters a taxpayer's practice which has resulted in the postponement of income recognition, such determination causes a change in method of accounting. Knight-Ridder Newspapers, Inc. v. United States, 743 F.2d 781">743 F.2d 781, 743 F.2d 781">797-800 (11th Cir. 1984); Wayne Bolt & Nut Co. v. Commissioner, 93 T.C. 500">93 T.C. 500, 93 T.C. 500">510 (1989). Where, however, a taxpayer entirely avoids the inclusion of income in any year, by, for instance, claiming erroneous deductions, a determination disallowing such deductions does not constitute a change in method of accounting, and section 481 is not available to correct years barred by the statute of limitations. Schuster's Express, Inc. v. Commissioner, 66 T.C. 588">66 T.C. 588, 66 T.C. 588">596-597 (1976), affd. without published opinion 562 F.2d 39">562 F.2d 39 (2d Cir. 1977). We previously have considered whether adjustments by the Commissioner to correct undervaluations1991 U.S. Tax Ct. LEXIS 64">76 of inventory constitute accounting method changes. Wayne Bolt & Nut Co. v. Commissioner, 93 T.C. 500">93 T.C. 508-512; Thomas v. Commissioner, 92 T.C. 206">92 T.C. 206, 92 T.C. 206">217-221 (1989); Superior Coach of Florida, Inc. v. Commissioner, 80 T.C. 895">80 T.C. 908-914; Primo Pants Co. v. Commissioner, 78 T.C. 705">78 T.C. 705, 78 T.C. 705">720-725 (1982). We have held that the use of a practice which results in an understatement of closing inventory postpones, and does not avoid, the inclusion of income, because the income not included due to such understatement in value eventually will be taken into account at such time as closing inventory is correctly stated, as when, for instance, a liquidation of inventory occurs. Primo Pants Co. v. Commissioner, 78 T.C. 705">78 T.C. 723-725. Consequently, a change in the method of valuing closing inventory constitutes a change in method of accounting to which section 481 applies. Sec. 1.446-1(e)(2)(ii)(a), Income Tax Regs. ("Changes in method of 97 T.C. 120">127 accounting include * * * a change involving the method or basis used in the valuation of inventories"). In the instant case, respondent determined that it was improper1991 U.S. Tax Ct. LEXIS 64">77 to include inventory purchased in the old Mayline and Two Rivers acquisitions in the same inventory pool or items as raw materials acquired and inventory manufactured subsequent to such acquisitions. Respondent determined that the combination resulted in an understatement of the value of closing inventory, in that use of the bargain acquisition cost of the purchased inventory as the base year inventory cost permitted an excessive amount of cost attributable to newly manufactured inventory to flow into cost of goods sold, thus reducing taxable income. The recognition of such income, however, merely has been postponed until such time as a sufficient liquidation of inventory occurs to permit the acquisition cost to be included in cost of goods sold. Consequently, because respondent's adjustments affect the timing of the inclusion of income deferred by petitioner, we hold that they constitute a change in method of accounting. Petitioner also argues that the combination of inventory acquired from Mayline and Two Rivers with goods purchased or produced later did not establish a method of accounting because such acquisitions were isolated transactions effected by separate taxable entities. 1991 U.S. Tax Ct. LEXIS 64">78 Petitioner also contends that the determination of when a new item comes into existence is so factual as not to rise to the level of an accounting method. We disagree. Petitioner and its predecessors consistently did not differentiate between inventory acquired from Mayline and later acquired or produced items for purposes of figuring taxable income, thus causing the combination of the two types of inventory to become a method of accounting. Furthermore, the regulations provide that a taxpayer's accounting treatment of any item constitutes an accounting method. Sec. 1.446-1(a)(1), Income Tax Regs. The inventory acquired from old Mayline constitutes an "item" within the meaning of the regulation. Accordingly, we hold that petitioner's accounting treatment of the inventory acquired from old Mayline constitutes a method of accounting. Consequently, we hold that section 48197 T.C. 120">128 permits respondent to make an adjustment with respect to closed years during the earliest open year in issue. 2. Review of Determinations Made under Section 446(b)Having decided that respondent's determination constitutes a change in petitioner's method of accounting for its inventory, we now will1991 U.S. Tax Ct. LEXIS 64">79 consider whether that determination is to be sustained. Because a taxpayer's inventory valuation constitutes a method of accounting, the treatment of inventories for tax purposes is governed by sections 446 and 471. Rockwell International Corp. v. Commissioner, 77 T.C. 780">77 T.C. 780, 77 T.C. 780">808 (1981), affd. 694 F.2d 60">694 F.2d 60 (3d Cir. 1982); Thor Power Tool Co. v. Commissioner, 64 T.C. 154">64 T.C. 154, 64 T.C. 154">165-166 (1975), affd. 563 F.2d 861">563 F.2d 861 (7th Cir. 1977), affd. 439 U.S. 522">439 U.S. 522, 58 L. Ed. 2d 785">58 L. Ed. 2d 785, 99 S. Ct. 773">99 S. Ct. 773 (1979). Sections 446 and 471 grant the Commissioner broad discretion in matters of inventory accounting and give him wide latitude to adjust a taxpayer's method of accounting for inventory so as to clearly reflect income. Thor Power Tool Co. v. Commissioner, 439 U.S. 522">439 U.S. 522, 439 U.S. 522">532-533, 58 L. Ed. 2d 785">58 L. Ed. 2d 785, 99 S. Ct. 773">99 S. Ct. 773 (1979); Thomas v. Commissioner, 92 T.C. 206">92 T.C. 220. For tax purposes, the requirement that a method of accounting clearly reflect income is paramount. Thomas v. Commissioner, 92 T.C. 206">92 T.C. 220. Even if a method of accounting comports with generally accepted accounting principles, consistently applied, where such method does not1991 U.S. Tax Ct. LEXIS 64">80 clearly reflect income, such method will not control for tax purposes. Thor Power Tool Co. v. Commissioner, 439 U.S. 522">439 U.S. at 538-544; Sandor v. Commissioner, 62 T.C. 469">62 T.C. 469, 62 T.C. 469">477 (1974), affd. 536 F.2d 874">536 F.2d 874 (9th Cir. 1976). The Commissioner's determination with respect to clear reflection of income is entitled to more than the usual presumption of correctness, and the taxpayer bears a heavy burden of overcoming a determination that a method of accounting does not clearly reflect income. Rotolo v. Commissioner, 88 T.C. 1500">88 T.C. 1500, 88 T.C. 1500">1513-1514 (1987); Peninsula Steel Products & Equipment Co. v. Commissioner, 78 T.C. 1029">78 T.C. 1029, 78 T.C. 1029">1044-1045 (1982). If a taxpayer establishes that a method of accounting clearly reflects income, however, the Commissioner may not disturb the taxpayer's choice. Rotolo v. Commissioner, 88 T.C. 1500">88 T.C. 1500 at 88 T.C. 1500">1514; Peninsula Steel Products & Equipment Co. v. Commissioner, 78 T.C. 1029">78 T.C. 1045. Whether 97 T.C. 120">129 a particular method of accounting clearly reflects income is a question of fact, and the issue must be decided on a case-by-case basis. Peninsula Steel Products & Equipment Co. v. Commissioner, 78 T.C. 1029">78 T.C. 1045.1991 U.S. Tax Ct. LEXIS 64">81 Once the Commissioner determines that a taxpayer's method does not clearly reflect income, he may select for the taxpayer a method which, in his opinion, does clearly reflect income. Sec. 446(b). The taxpayer carries the burden of showing that the method selected by the Commissioner is incorrect, and such burden is extremely difficult to carry. Photo-Sonics, Inc. v. Commissioner, 42 T.C. 926">42 T.C. 926, 42 T.C. 926">933 (1964), affd. 357 F.2d 656">357 F.2d 656 (9th Cir. 1966). The Commissioner's determination as to the proper method of accounting for inventory must be upheld unless shown to be plainly arbitrary. Lucas v. Kansas City Structural Steel Co., 281 U.S. 264">281 U.S. 264, 281 U.S. 264">271, 74 L. Ed. 848">74 L. Ed. 848, 50 S. Ct. 263">50 S. Ct. 263 (1930); Richardson Investments, Inc. v. Commissioner, 76 T.C. 736">76 T.C. 736, 76 T.C. 736">745 (1981). With the foregoing precepts in mind, we now will review respondent's specific determinations with respect to petitioner's method of valuing its inventory. a. Dollar Value LIFOTo set the stage for our review of respondent's determinations, a discussion of the dollar value LIFO method of inventory accounting, used by petitioner to determine its closing inventory, is helpful. In a manufacturing1991 U.S. Tax Ct. LEXIS 64">82 business, gross income from sales means total sales less cost of goods sold. Sec. 1.61-3(a), Income Tax Regs.; Rotolo v. Commissioner, 88 T.C. 1500">88 T.C. 1514. Cost of goods sold during a year is determined by subtracting the value of inventory on hand at the end of the year from the sum of the value of inventory on hand at the beginning of the year and the cost of purchasing or producing goods during the year. Rotolo v. Commissioner, 88 T.C. 1500">88 T.C. 1514-1515. As a general matter, keeping the ending inventory as low as possible so that the cost of goods sold, an offset to gross receipts, is made as large as possible, minimizes taxable income. Thomas v. Commissioner, 92 T.C. 206">92 T.C. 217; Peninsula Steel Products & Equipment Co. v. Commissioner, 78 T.C. 1029">78 T.C. 1053. 97 T.C. 120">130 Section 471 requires taxpayers to use inventories whenever necessary to clearly reflect income. Fox Chevrolet, Inc. v. Commissioner, 76 T.C. 708">76 T.C. 708, 76 T.C. 708">719 (1981). Maintenance of inventories is necessary where the production, purchase, and sale of merchandise is an income-producing factor. Sec. 1.471-1, Income Tax Regs. Inventories must be1991 U.S. Tax Ct. LEXIS 64">83 maintained on a basis that conforms as nearly as possible to the best accounting practice in the taxpayer's trade or business and that most clearly reflects income. Sec. 471(a); Fox Chevrolet, Inc. v. Commissioner, 76 T.C. 708">76 T.C. 719-722. Inventories are intended to ensure a clear reflection of income by matching sales during the taxable year with the costs attributable to such sales. Rotolo v. Commissioner, 88 T.C. 1500">88 T.C. 1515. Taxpayers have some choice, however, as to the manner in which inventories may be maintained. Section 472 permits taxpayers to value inventories under the last-in, first-out (LIFO) convention, which deems closing inventory to consist of the earliest purchased goods. Sec. 472(b)(1). By matching the cost of the most recently purchased goods with current sales revenue, the LIFO convention removes from current earnings any artificial profits attributable to inflationary increases in inventory costs. Amity Leather Products Co. v. Commissioner, 82 T.C. 726">82 T.C. 726, 82 T.C. 726">732 (1984). The subject inflation is the rise in the taxpayer's own inventory cost, not the overall increase of prices in the economy. Consequently, 1991 U.S. Tax Ct. LEXIS 64">84 the taxpayer's own inventory cost data generally is used to determine the degree of increase occurring in inventory costs during the taxable year. Secs. 1.472-8(e)(2) and (3), Income Tax Regs. (describing cost data to be used under dollar value LIFO and limitations on use of price indexes). Two principal methods of computing the closing inventory figure under the LIFO convention are permitted by the regulation: the specific goods method, a measure of inventory in terms of physical units of individual items, see sec. 1.472-2, Income Tax Regs., and the dollar value method, a measure of inventory in terms of dollars. See sec. 1.472-8, Income Tax Regs.; Hutzler Brothers Co. v. Commissioner, 8 T.C. 14">8 T.C. 14, 8 T.C. 14">24-25 (1947). Petitioner used the dollar value method to calculate its closing inventory under the LIFO convention. Under the dollar value method, inventory is 97 T.C. 120">131 grouped into "pools" composed of "items" for purposes of calculating changes in the dollar value of inventory carried. Sec. 1.472-8(a), Income Tax Regs. In order to determine whether inventory has increased or decreased during the year, ending inventory is valued in dollars equivalent in value to the dollars1991 U.S. Tax Ct. LEXIS 64">85 used to value beginning inventory. Amity Leather Products Co. v. Commissioner, 82 T.C. 726">82 T.C. 732. Petitioner chose the "double extension" method of computing the LIFO value of its inventory pool, one of four methods permitted by the regulations. Sec. 1.472-8(e), Income Tax Regs.Under the double extension method, the value of all items in closing inventory is calculated at both base and current year cost. Sec. 1.472-8(e)(2)(i), Income Tax Regs. "Base year cost" is the cost of items in the inventory pool for the year that the LIFO convention initially is adopted. Sec. 1.472-8(a), Income Tax Regs. Items may enter and leave the pool over time; items entering the pool after the pool has been constituted are carried either at the items' cost during the pool's base year, if the taxpayer can establish such cost, or at the items' cost in the year the items entered the pool. Sec. 1.472-8(e)(2)(iii), Income Tax Regs.Increases and decreases in closing inventory for the current year are determined by comparing the base year dollar value of the ending inventory with the base year dollar value of opening inventory. Sec. 1.472-8(e)(2)(iv), Income Tax Regs.If an increase1991 U.S. Tax Ct. LEXIS 64">86 has occurred based on a comparison of beginning and closing inventory, expressed in terms of base year dollars, such increment is added to closing inventory as a new LIFO layer. If a decrease from beginning inventory occurs in closing inventory, such decrease, expressed in base year dollars, is subtracted from opening inventory, as expressed in base year dollars, reducing in reverse order the most recently added increments to beginning inventory. Sec. 1.472-8(e)(2)(iv), Income Tax Regs.Once the total closing inventory is calculated in base year dollars, the LIFO value of each layer must be calculated. To arrive at such value, each layer of inventory, expressed in base year dollars, is multiplied by a price index representing the ratio of base year cost to the inventory cost for the year such layer was added to closing inventory. Sec. 1.472-8(e)(2)(iv), 97 T.C. 120">132 Income Tax Regs. The values for all such layers are summed to yield a closing inventory figure for the current year. Such figure then is subtracted from the sum of the values for beginning inventory and purchases during the year to produce the cost of goods sold for the current year. Fox Chevrolet, Inc. v. Commissioner, 76 T.C. 708">76 T.C. 722.1991 U.S. Tax Ct. LEXIS 64">87 The dollar value method thus ensures that any increase in the cost of property passing through the inventory during the year is reflected in the cost of goods sold; however, the method does not discriminate between cost increases attributable to inflation, which the method was intended to reflect, and increases caused by other factors. Accordingly, the proper grouping of goods into pools and items is central to the operation of the dollar value method. Wendle Ford Sales, Inc. v. Commissioner, 72 T.C. 447">72 T.C. 447, 72 T.C. 447">452-453 (1979). In order to produce a clear reflection of income, the goods contained in a taxpayer's pool and item categories must have similar characteristics, as determined under the standards applicable to each. Amity Leather Products Co. v. Commissioner, 82 T.C. 726">82 T.C. 734-735. A system which groups like goods together and separates dissimilar goods permits cost increases attributable to inflation 2 to be isolated and accurately measured. Amity Leather Products Co. v. Commissioner, 82 T.C. 726">82 T.C. 731-734. The more homogenous that each category can be made, the better it will screen out cost increases caused by non-inflationary1991 U.S. Tax Ct. LEXIS 64">88 factors, thus producing a clearer reflection of income than would be possible with categories containing heterogenous agglomerations of goods. In the instant case, respondent determined that petitioner's method of accounting for its inventory under the dollar value LIFO method did not result in a clear reflection of income because, respondent asserts, inventory purchased in the acquisitions of Mayline and Two Rivers should not have been included in the same pool or item categories as inventory manufactured after the acquisition. Accordingly, we will consider the proper scope and definition of such terms in deciding whether petitioner has carried the heavy 97 T.C. 120">133 burden of showing respondent's determination to be arbitrary. Richardson Investments, Inc. v. Commissioner, 76 T.C. 736">76 T.C. 736, 76 T.C. 736">745 (1981).1991 U.S. Tax Ct. LEXIS 64">89 b. The Inventory "Pooling" IssueWe must decide whether petitioner properly included the finished inventory manufactured by old Mayline and Two Rivers prior to their acquisition by petitioner in the LIFO inventory pool maintained for raw materials acquired and goods manufactured subsequent to such acquisitions. 3Under the dollar-value LIFO method of valuing inventories, the entire inventory investment of a business, including raw materials, work-in-process, and finished products, is to be placed in inventory pools. Sec. 1.472-8(b)(1), Income Tax Regs.1991 U.S. Tax Ct. LEXIS 64">90 The regulations governing the dollar value method of valuing LIFO inventories generally provide that the items properly includable in an inventory pool are to be determined with reference to the "natural business unit" of the taxpayer, and that each such unit will use a separate pool. Sec. 1.472-8(b), Income Tax Regs. The natural business divisions adopted by the taxpayer are important in determining the identity of its natural business units. Sec. 1.472-8(b)(2)(i), Income Tax Regs. See also Richardson Investments, Inc. v. Commissioner, 76 T.C. 736">76 T.C. 746-747; Fox Chevrolet, Inc. v. Commissioner, 76 T.C. 708">76 T.C. 727-730 (pools generally are defined by the product lines or departments within a taxpayer's business). The regulations provide, however, that a manufacturer of goods which also is engaged in wholesaling or retailing goods purchased from others must use separate pools for its manufacturing and reselling operations. Secs. 1.472-8(b) and (c), Income Tax Regs.; Amity Leather Products Co. v. Commissioner, 82 T.C. 726">82 T.C. 726, 82 T.C. 726">734-736 (1984). Previously, we have had occasion to consider the circumstances under which a taxpayer 1991 U.S. Tax Ct. LEXIS 64">91 is subject to the separate 97 T.C. 120">134 pooling requirements by virtue of being both a manufacturer and wholesaler or retailer of merchandise. In Amity Leather Products, we upheld the reasonableness of the regulations requiring separate inventory accounting for such functions, and held that, where the taxpayer manufactured leather goods and regularly purchased identical goods from a subsidiary for resale, it was required to maintain separate pools for manufactured and purchased inventory. 82 T.C. 726">82 T.C. 738. Recently, however, we have rejected an attempt by the Commissioner to apply the separate pooling requirement of section 1.472-8(b), Income Tax Regs., to a taxpayer because of the purchase of inventory occurring as part of the acquisition of a manufacturing business which the taxpayer then carried on. UFE, Inc. v. Commissioner, 92 T.C. 1314">92 T.C. 1314 (1989). In UFE, we held that the purchase and subsequent sale of such inventory did not constitute a business of the taxpayer separate from its manufacturing business. 92 T.C. 1314">92 T.C. 1321-1322. We therefore held that such activity did not constitute a "natural business unit" separate from the taxpayer's1991 U.S. Tax Ct. LEXIS 64">92 manufacturing business. UFE, Inc. v. Commissioner, 92 T.C. 1314">92 T.C. 1321-1322. Furthermore, we held that the taxpayer was not a wholesaler or retailer of goods based on a single, isolated purchase occurring in the context of the acquisition of an ongoing manufacturing business. 92 T.C. 1314">92 T.C. 1322. We therefore permitted the taxpayer to combine both its purchased and manufactured inventory in the same pool. 92 T.C. 1314">92 T.C. 1322. The instant case presents the same situation as UFE. As in UFE, in the instant case, petitioner acquired all of the inventory, comprising raw materials, work-in-process, and finished products, of its targets as part of the acquisition of the assets of such businesses. The character and class of the purchased inventory was the same as that subsequently manufactured by petitioner. Petitioner continued old Mayline's and Two Rivers' businesses, and the acquisition of the finished inventory, which was an integral part of the ongoing operations of such businesses, was essential to such continuation. UFE, Inc. v. Commissioner, 92 T.C. 1314">92 T.C. 1322. The isolated purchases of inventory occurring1991 U.S. Tax Ct. LEXIS 64">93 as part of larger business acquisitions did not 97 T.C. 120">135 render petitioner the type of "dual-function entity" that the taxpayer in Amity Leather Products was rendered. Petitioner therefore should not be subjected to the separate pooling requirement of the regulations. Accordingly, we hold that requiring separate pools would distort income, and that use of a single pool "serves the overriding purpose of the LIFO regulations, which is to match current costs against current income." UFE, Inc. v. Commissioner, 92 T.C. 1314">92 T.C. 1322. Consequently, we find that respondent abused his discretion and hold for petitioner on the inventory "pooling" issue. c. The "Item" IssueThe next issue for our consideration is whether the purchased and manufactured inventory within petitioner's natural business unit pool should be treated as the same "items" or as different items for purposes of calculating inventory value under the "double-extension method." See sec. 1.472-8(e)(2), Income Tax Regs. Respondent determined that combining inventory acquired in the old Mayline and Two Rivers acquisitions with inventory purchased or manufactured subsequently did not result in a clear reflection1991 U.S. Tax Ct. LEXIS 64">94 of income. Respondent determined that, to clearly reflect petitioner's income, inventory purchased incident to such acquisitions should be treated as items separate from inventory acquired or manufactured afterwards. Our task is to decide whether respondent abused his discretion in making that determination. While neither the Code nor the regulations define the term "item," some relevant case law exists. In Wendle Ford Sales, Inc. v. Commissioner, 72 T.C. 447">72 T.C. 447, 72 T.C. 447">455 (1979), we held that the concept of an item was flexible enough to include minor technical and stylistic changes made in a product over time. Furthermore, we have held that the definition of the term must not be so narrow as to impose unreasonable administrative burdens upon taxpayers, thus rendering impractical the taxpayer's use of the double-extension method of dollar value LIFO inventory valuation. Amity Leather Products Co. v. Commissioner, 82 T.C. 726">82 T.C. 734. In Amity Leather Products, the only case we have decided dealing with the meaning of the term in the context of a 97 T.C. 120">136 manufacturing business, we stated that the term should be construed "in a manner that most closely 1991 U.S. Tax Ct. LEXIS 64">95 satisfies the purpose of maintaining inventories, i.e., the clear reflection of income." 82 T.C. 726">82 T.C. 740. Goods may be in separate item categories because they have substantially dissimilar characteristics, whether in terms of their physical nature, Wendle Ford Sales, Inc. v. Commissioner, 72 T.C. 447">72 T.C. 459, or whether in terms of their cost. Amity Leather Products Co. v. Commissioner, 82 T.C. 726">82 T.C. 739-740. In Amity Leather Products, we cautioned that permitting the grouping of products possessing dissimilar cost characteristics within the same item category could lead to a distortion of income, stating: The nature of "items" in a pool must be similar enough to allow a comparison between ending inventory and base-year inventory. Because the change in the price of an item determines the price index and the index affects the computation of increments or decrements in the LIFO inventory, the definition and scope of an item are extremely important to the clear reflection of income. If factors other than inflation enter into the cost of inventory items, a reliable index cannot be computed. For example, if a taxpayer's inventory1991 U.S. Tax Ct. LEXIS 64">96 experiences mix changes that result in the substitution of less expensive goods for more expensive goods, the treatment of those goods as a single item increases taxable income. This occurs because any inflation in the cost of an item is offset by the reduction in cost resulting from the shift to less expensive goods. Conversely, if changes in mix of the inventory result in the substitution of more expensive goods for less expensive goods, the treatment of those goods as a single item decreases taxable income because the increase in inventory costs is eliminated from the LIFO cost of the goods as if such cost increase represented inflation.A narrower definition of an item within a pool will generally lead to a more accurate measure of inflation (i.e., price index) and thereby lead to a clearer reflection of income. * * [Amity Leather Products Co. v. Commissioner, 82 T.C. 726">82 T.C. 733-734; emphasis added].In Amity Leather Products, we were presented with a situation in which grouping two classes of goods within the same item category would have resulted in the substitution of less expensive goods for more expensive ones, thus overstating the taxpayer's1991 U.S. Tax Ct. LEXIS 64">97 income. 82 T.C. 726">82 T.C. 739-740. In the instant case, however, we are presented with the converse setting, that is, petitioner seeks to fill its inventory with goods purchased at a steep discount, and then 97 T.C. 120">137 replace them with goods purchased and produced at higher cost. The difference between petitioner's base year inventory cost and inventory cost incurred after the acquisitions is not attributable to inflation, but rather to the artificially low value assigned base year inventory as compared to the cost of subsequently purchasing or producing such inventory at prevailing market prices. The consequence of permitting such replacement is an increase in the cost of goods sold, resulting in an understatement of petitioner's income. In the old Mayline acquisition, inventory valued at $ 2,034,680.48 under the FIFO convention was given a value of $ 79,028.32, a discount of 96 percent from its preacquisition value. Such value was fixed simply by assigning to inventory the amount of the purchase price not otherwise allocated to other assets purchased. Similarly, the inventory acquired from Two Rivers was entered on petitioner's books at its LIFO value of $ 6,550,262, while1991 U.S. Tax Ct. LEXIS 64">98 its FIFO value was $ 16,566,320, a discount of over 60 per cent. 4 Petitioner's use of the FIFO values of the acquired inventory to allocate the assigned cost among the inventory items acquired from its targets and its use of the FIFO values of the inventory acquired from Two Rivers to value its first purchases of inventory after the acquisition suggest that such values were more representative of the actual cost or value of the inventory purchased in the acquisitions than the amount of the purchase price allocated to it under the purchase and sale agreements. The disparity between the value assigned and the FIFO value of the inventory acquired from old Mayline and Two Rivers indicates that1991 U.S. Tax Ct. LEXIS 64">99 petitioner purchased such inventory at a substantial discount from its replacement cost or market value, and that such inventory therefore possessed materially different cost characteristics from inventory purchased or produced after the acquisitions. We hold that the significantly large bargain element represented by such discount caused inventory acquired to assume a different character from inventory purchased or produced at market 97 T.C. 120">138 prices, as represented by the FIFO value of the inventory, after the acquisition. Petitioner argues that if it obtained a bargain on the purchase of old Mayline's and Two Rivers' assets, it is appropriate that a portion of the bargain be allocated to the inventory purchased. We agree that such an allocation is permissible under UFE, Inc. v. Commissioner, 92 T.C. 1314">92 T.C. 1314, 92 T.C. 1314">1322 (1989). We do not believe, however, that permitting a taxpayer to defer recognition of the gain realized on the disposal of such assets by means of accounting devices is appropriate under the circumstances of the instant case. If petitioner were permitted to combine the bargain cost inventory with goods carried at higher cost, representing the current costs1991 U.S. Tax Ct. LEXIS 64">100 of production, petitioner could postpone recognition of the gain realized on disposal of the bargain cost inventory until such time as it decided to permit a liquidation of inventory, thus allowing such bargain cost to flow into cost of goods sold. 5In order to clearly1991 U.S. Tax Ct. LEXIS 64">101 reflect income, petitioner should be required to recognize the gain inherent in the bargain cost inventory at the time such gain is realized, rather than at a later time of petitioner's choosing. Such a requirement is in harmony with the matching principle which is at the heart of the inventory accounting rules. To hold otherwise would permit petitioner to include the cost increases attributable to the replacement of bargain cost inventory with inventory produced at prevailing market prices in the cost of goods sold as though such cost increases were attributable to inflation. The LIFO method was not intended to permit taxpayers to include in cost of goods sold cost increases attributable to the replacement of goods with low cost characteristics with goods possessing higher cost characteristics. See Amity Leather Products Co. v. Commissioner, 82 T.C. 726">82 T.C. 733-734. 97 T.C. 120">139 Thus, even though the two classes of inventory were physically the same, the great disparity in their cost warrants separating them. Accordingly, we hold that the inventory acquired in the old Mayline acquisition and the inventory acquired in the Two Rivers acquisition should be treated as items separate1991 U.S. Tax Ct. LEXIS 64">102 from the inventory acquired or produced subsequent to such acquisitions. Such treatment avoids a distortion of petitioner's income, produces a better measure of inflation, and results in a clear reflection of petitioner's income. 6Amity Leather Products Co. v. Commissioner, 82 T.C. 726">82 T.C. 740. 1991 U.S. Tax Ct. LEXIS 64">103 Petitioner argues that distinguishing between the two types of inventory will be burdensome. We note, however, that the difficulty petitioner faces is largely of its own making. The basis for our holding that the inventory purchased from old Mayline and Two Rivers should be treated separately is that its cost characteristics were so greatly disparate from later acquired inventory that separate treatment was required in order to avoid a distortion of income. Had the cost characteristics assigned the inventory acquired in the purchases of old Mayline and Two Rivers not been so disparate from the cost of later acquired inventory, we would not have required their separation. Furthermore, we are not persuaded by petitioner's claims that separate accounting for the two items will impose an undue burden on petitioner. The inventory acquired in the purchase of old Mayline and Two Rivers was identifiable at the time of the purchases and could have been tracked as it was liquidated by sales in the course of petitioner's business. Moreover, we find that eliminating the significant distortion in petitioner's income which resulted from combining 97 T.C. 120">140 the two types of inventory warrants the burden1991 U.S. Tax Ct. LEXIS 64">104 that might be imposed on petitioner. Petitioner also argues that respondent's method of correcting its inventories might not be completely accurate. Respondent treated all of the inventory acquired from old Mayline and Two Rivers as having been sold in the first full taxable year following each acquisition, thus causing petitioner to recognize the full amount of gain from its bargain inventory purchase in such year. Petitioner points out that not all of the inventory may have been sold during such year. Petitioner, however, must do more than suggest that respondent's method is less than perfect in order to carry its burden; rather, petitioner must show respondent's action to be arbitrary. Coors v. Commissioner, 60 T.C. 368">60 T.C. 368, 60 T.C. 368">395, 60 T.C. 368">398 (1973), affd. 519 F.2d 1280">519 F.2d 1280 (10th Cir. 1975); All- Steel Equipment, Inc. v. Commissioner, 54 T.C. 1749">54 T.C. 1749, 54 T.C. 1749">1758-1759, 54 T.C. 1749">1760-1762 (1970), affd. on this issue 467 F.2d 1184">467 F.2d 1184 (7th Cir. 1972); Photo-Sonics, Inc. v. Commissioner, 42 T.C. 926">42 T.C. 926, 42 T.C. 926">933-934 (1964), affd. 357 F.2d 656">357 F.2d 656 (9th Cir. 1966). Petitioner maintained no records to show the period over which1991 U.S. Tax Ct. LEXIS 64">105 the purchased inventory actually was liquidated, and so has no basis for demonstrating the alleged inaccuracy. Under the circumstances of the instant case, we refuse to hold that respondent's assumption is arbitrary and accordingly uphold his determination with respect to the "item" issue. Petitioner's Method of Accounting for Long-Term ContractsRespondent determined that, for certain taxable years in issue, Hamilton used the completed contract method 7 of 97 T.C. 120">141 accounting for income received from long-term contracts covering the installation of Hamilton's products on customers' premises, and determined that Hamilton improperly allocated costs to such contracts under its LIFO inventory accounting system. Petitioner disputes respondent's determinations. 1991 U.S. Tax Ct. LEXIS 64">106 We first will address petitioner's contention that it did not use the completed contract method of accounting. A "long-term contract" is defined as "a building, installation, construction or manufacturing contract which is not completed within the taxable year it is entered into." Sec. 1.451-3(b)(1), Income Tax Regs. The contracts in issue called for the installation of cabinetry and office furniture manufactured by petitioner and required, on average, 24 months to complete. Consequently, such contracts constitute long-term contracts, as defined by the regulation. Petitioner contends that it used an "accrual acceptance" method to account for its long-term contracts, and that its accounting practices with respect to such contracts conformed to the principles of such method. Respondent's determination that petitioner used the completed contract method of accounting, however, is presumed correct, and petitioner has the burden of proving the contrary. Peninsula Steel Products & Equipment Co. v. Commissioner, 78 T.C. 1029">78 T.C. 1029, 78 T.C. 1029">1039 (1982). Prior to the passage of section 460 in 1986, taxpayers enjoyed a fair amount of latitude in choosing a method of accounting 1991 U.S. Tax Ct. LEXIS 64">107 for long-term contracts. Under section 1.451-3(a)(1), Income Tax Regs, income from long-term contracts could be accounted for under the completed contract method, the percentage of completion method, or "any other method." The method used by the taxpayer, however, was required to clearly reflect income. Sec. 1.451-3(a)(1), Income Tax Regs. Taxpayers, therefore, could account for long-term contracts in a manner consistent with their overall method of accounting. Peninsula Steel Products & Equipment Co. v. Commissioner, 78 T.C. 1029">78 T.C. 1038-1039; Rockwell International Corp. v. Commissioner, 77 T.C. 780">77 T.C. 780, 77 T.C. 780">804 n.12 (1981), affd. 694 F.2d 60">694 F.2d 60 (3d Cir. 1982). 897 T.C. 120">142 The question of which accounting method is used by the taxpayer is one of fact. Daley v. United States, 243 F.2d 466">243 F.2d 466, 243 F.2d 466">471 (9th Cir. 1957); Peninsula Steel Products & Equipment Co. v. Commissioner, 78 T.C. 1029">78 T.C. 1039.1991 U.S. Tax Ct. LEXIS 64">108 In distinguishing an accrual method from the completed contract method, "the controlling point is the time the costs and revenue from the contract are matched, and net income or loss ascertained." Daley v. United States, 243 F.2d 466">243 F.2d at 471. Generally, a question concerning the identity of an accounting method used by a taxpayer is resolved by examining the manner in which the method operates and by classifying that manner of operation under the recognized method it most closely resembles. Stephens Marine, Inc. v. Commissioner, 430 F.2d 679">430 F.2d 679, 430 F.2d 679">687 (9th Cir. 1970), affg. a Memorandum Opinion of this Court; Peninsula Steel Products & Equipment Co. v. Commissioner, 78 T.C. 1029">78 T.C. 1040-1042; Terminal Drilling & Production Co. v. Commissioner, 32 T.C. 926">32 T.C. 926, 32 T.C. 926">932-933 (1959); L. A. Wells Construction Co. v. Commissioner, 46 B.T.A. 302">46 B.T.A. 302, 46 B.T.A. 302">306 (1942), affd. 134 F.2d 623">134 F.2d 623 (6th Cir. 1943); Bent v. Commissioner, 19 B.T.A. 181">19 B.T.A. 181, 19 B.T.A. 181">185 (1930), affd. 56 F.2d 99">56 F.2d 99 (9th Cir. 1932). Accordingly, in order to reach a conclusion as to the method used by petitioner, we1991 U.S. Tax Ct. LEXIS 64">109 will consider how the accrual acceptance and completed contract methods operate, paying particular attention to instances in which they differ in the treatment of identical items, and then compare such treatment to the manner for which items are accounted under petitioner's method. Accrual method taxpayers who did not use either of the long-term contract methods prescribed in section 1.451-3, Income Tax Regs., generally used a method known as the "accrual shipment" method, under which income was accruable when the subject matter of the contract was "shipped, delivered, or accepted" by the buyer. 9Sec. 1.446-1(c)(1)(ii), Income Tax Regs.; Peninsula Steel Products & Equipment Co. v. Commissioner, 78 T.C. 1029">78 T.C. 1039-1040. Recognition of advance payments made with respect to long-term contracts was deferred until the time such income ordinarily would be 97 T.C. 120">143 accruable under the taxpayer's method. Sec. 1.451-5(b)(3), Income Tax Regs.1991 U.S. Tax Ct. LEXIS 64">110 The cost of goods sold from inventory was taken into account when title passed to the buyer, Sec. 1.471-1, Income Tax Regs., and noninventory costs were taken into account when allowable under the provisions of section 461. For taxable years beginning before January 1, 1987, the cost of inventoriable goods was determined under the full-absorption cost regulations. 10Sec. 1.471-11(a), Income Tax Regs. See generally H. Rept. No. 97-760, 1982-2 C.B. 600, 637 (describing accrual method as applied to long-term contracts). The accrual method does not require matching items of income with the expense incurred in earning them in the same accounting period; each item is taken into account independently when the "all events" test is met with respect to such item. 11Marquardt Corp. v. Commissioner, 39 T.C. 443">39 T.C. 443, 39 T.C. 443">453 (1962) ("accrual of an item as income in a particular year is not required merely because the expenses attributable to that item were deducted from gross income in that year"); Drazen v. Commissioner, 34 T.C. 1070">34 T.C. 1070, 34 T.C. 1070">1077-1078 (1960). 1991 U.S. Tax Ct. LEXIS 64">111 The completed contract method, on the other hand, took a significantly different approach to accounting for long-term contracts. We previously have described the completed contract method in the following terms: The accounting system employed by the petitioner is the completed-contract system. It is a modification of a strict accrual method and differs in the one respect that items of income and expense, though recorded in primary accounts when accrued or incurred, are not carried into profit and loss as earnings of the business until the contract to which they relate is completed. A separate account is kept for each contract. Any debit balance in the account represents the investment in the contract and any credit balance represents unearned income until the completion of the contract. A characteristic of this system is that income earned in one accounting period may not be accounted for until a later period. It is peculiarly adapted to a business fulfilling contracts which lap over accounting periods where the ultimate gain or loss can not be accurately determined until the completion of the contract. It may be used even though the contracts call for payment on the basis1991 U.S. Tax Ct. LEXIS 64">112 of a certain 97 T.C. 120">144 price per pound. The contracts need not run for more than a year. The Commissioner's regulations permit its use. It has been approved, for tax purposes, by the courts and by this Board. [Peninsula Steel Products and Equipment Co. v. Commissioner, 78 T.C. 1029">78 T.C. 1029, 78 T.C. 1029">1046-1047 (1982), quoting Fort Pitt Bridge Works v. Commissioner, 24 B.T.A. 626">24 B.T.A. 626, 24 B.T.A. 626">641 (1931), revd. on other grounds, 92 F.2d 825">92 F.2d 825 (3d Cir. 1937).]With the foregoing as a backdrop, we now will identify instances in which the accrual acceptance method and the completed contract method require different treatment of the same items. The first area we will examine concerns the manner of accounting for items of income under the accrual acceptance and completed contract methods. In the instant case, however, it is not possible to distinguish between the completed contract method and the accrual acceptance methods by comparing the point in time when payments made with respect to long-term contracts are taken into account for tax purposes. Under the completed contract method, income allocable to a long-term contract is taken into account for tax purposes 1991 U.S. Tax Ct. LEXIS 64">113 in the year that the contract is completed and accepted by the customer, even if payments are received prior to such time. Sec. 1.451-3(d)(1), (b)(2), Income Tax Regs.; Guy F. Atkinson Co. v. Commissioner, 814 F.2d 1388">814 F.2d 1388, 814 F.2d 1388">1391-1392 (9th Cir. 1987), affg. 82 T.C. 275">82 T.C. 275 (1984); Smith v. Commissioner, 66 T.C. 213">66 T.C. 213, 66 T.C. 213">217-218 (1976). Under the accrual acceptance method, as noted above, income is taken into account when the subject matter of the contract is accepted by the purchaser. Taxpayers using the accrual method of accounting, however, customarily must include advance payments in income in the year received, even though such payments may not be earned until later years. Schlude v. Commissioner, 372 U.S. 128">372 U.S. 128, 9 L. Ed. 2d 633">9 L. Ed. 2d 633, 83 S. Ct. 601">83 S. Ct. 601 (1963); American Automobile Association v. United States, 367 U.S. 687">367 U.S. 687, 6 L. Ed. 2d 1109">6 L. Ed. 2d 1109, 81 S. Ct. 1727">81 S. Ct. 1727 (1961); Automobile Club of Michigan v. Commissioner, 353 U.S. 180">353 U.S. 180, 1 L. Ed. 2d 746">1 L. Ed. 2d 746, 77 S. Ct. 707">77 S. Ct. 707 (1957); Hagen Advertising Displays, Inc. v. Commissioner, 407 F.2d 1105">407 F.2d 1105 (6th Cir. 1969), affg. 47 T.C. 139">47 T.C. 139 (1966); S. Garber, Inc. v. Commissioner, 51 T.C. 733">51 T.C. 733 (1969). The regulations, 1991 U.S. Tax Ct. LEXIS 64">114 however, permit taxpayers using the accrual shipment method of accounting for long-term contracts to defer recognition of advance payments received on account of such contracts until the time such income would 97 T.C. 120">145 otherwise be accrued under the taxpayer's accounting method. Sec. 1.451-5(b)(3), Income Tax Regs. Taxpayers, therefore, were not required to use the methods prescribed in section 1.451-3, Income Tax Regs., in order to defer recognition of payments under long-term contracts. Consequently, where a taxpayer uses the accrual acceptance version of the accrual shipment method, the ordinary operation of such method, coupled with the deferral rule of section 1.451-5(b)(3), Income Tax Regs., causes payments on long-term contracts to be included in income at the same time as under the completed contract method, thus eliminating one of the principal ways to distinguish between the two methods. Instances exist, however, where the accrual acceptance and completed contract methods will produce different results with respect to the same items. One area in which potential differences between the accrual acceptance method and the completed contract method exist is the point in time at which1991 U.S. Tax Ct. LEXIS 64">115 expenses allocable to long-term contracts are taken into account. Under the accrual acceptance method, expenses accumulated in inventories are taken into account when the goods are accepted by the customer. See H. Rept. No. 97-760, 1982-2 C.B. 600, 637. Noninventoriable costs are taken into account when the "all events" test is met with respect to them. Sec. 1.461-1(a)(2), Income Tax Regs. Under the completed contract method, all costs allocable to a contract are recognized when the subject matter of the contract is completed and accepted. Sec. 1.451-3(d)(1), Income Tax Regs.Additionally, the rules governing types of indirect production costs allocable to long-term contracts under the completed contract and the accrual methods differed during the years in issue. A taxpayer using the completed contract method was required to allocate a broader range of indirect costs to a contract under section 1.451-3(d)(5), Income Tax Regs., 12 than a taxpayer using the accrual method was 97 T.C. 120">146 required to allocate to inventory under the full absorption costing rules of section 1.471-11, Income Tax Regs. Consequently, a showing with respect to the taxpayer's method of recognizing1991 U.S. Tax Ct. LEXIS 64">116 expenses and capitalizing costs can assist in the identification of his method of accounting. Based upon the record in the instant case, petitioner has established the nature of the accounting method it used for long-term contracts. At trial, petitioner's1991 U.S. Tax Ct. LEXIS 64">117 financial officers testified that petitioner used the accrual acceptance method of accounting for its long-term contracts. Their description of the method used by petitioner is buttressed by additional evidence. For instance, Hamilton's audited financial statements for 1983 and 1984 stated that it used an accrual acceptance method of accounting for long-term contracts. Furthermore, petitioner calculated the product costs associated with the contracts in accordance with the full absorption costing rules of Sec. 1.471-11, Income Tax Regs., and not under the rules of section 1.451-3(d)(5), Income Tax Regs., suggesting that petitioner used an accrual method to account for long-term contracts. Petitioner's returns for the years in issue are consistent with a finding that petitioner did not use the completed contract method. Petitioner's returns do not contain any election to employ the completed contract method of accounting, which was required of taxpayers using such method under section 1.451-3(a)(2), Income Tax Regs. Furthermore, on its first return, Hamilton made an express election to report income from long-term contracts under the accrual acceptance method. Such statement1991 U.S. Tax Ct. LEXIS 64">118 appears to satisfy the requirements for a valid election, thus binding petitioner to use such method. Atlantic Veneer Corp. v. Commissioner, 85 T.C. 1075">85 T.C. 1075, 85 T.C. 1075">1082-1083 (1985), affd. 812 F.2d 158">812 F.2d 158 (4th Cir. 1987). While such election is not conclusive of the method used, it is a strong circumstance to be considered. Daley v. United States, 243 F.2d 466">243 F.2d 466, 243 F.2d 466">472 (9th Cir. 1957). We find that the absence of a statement that petitioner used the completed contract method and the presence of an election to use the accrual acceptance method furnish some evidence of petitioner's intent to use the accrual acceptance method. Waring v. Commissioner, 412 F.2d 800">412 F.2d 800, 412 F.2d 800">801 (3d Cir. 97 T.C. 120">147 1969), affg. a Memorandum Opinion of this Court; Rich Hill Insurance Agency, Inc. v. Commissioner, 58 T.C. 610">58 T.C. 610, 58 T.C. 610">618 (1972); First Savings & Loan Association v. Commissioner, 40 T.C. 474">40 T.C. 474, 40 T.C. 474">486 (1963); Kralstein v. Commissioner, 38 T.C. 810">38 T.C. 810, 38 T.C. 810">818-819 (1962). Accordingly, we hold that petitioner has shown that it did not account for installation contracts on the completed contract method and that1991 U.S. Tax Ct. LEXIS 64">119 it used the accrual acceptance method of accounting for such contracts. Therefore, we need not address petitioner's alternative contention, namely, that it is permitted under the completed contract method to use LIFO inventory costs for the year a long-term contract is completed to determine expenses allocable to such contract because regulations issued by respondent which disallow such use are invalid. Inasmuch as we have decided that petitioner used the accrual acceptance method of accounting for long-term contracts, under which use of LIFO inventories is concededly proper, see, e.g., Sec. 1.451-3(a)(5), (d)(6)(v), Income Tax Regs., we must consider respondent's alternative determination with respect to petitioner's use of inventories in connection with its long-term contracts. Respondent determined that, in the event we found use of inventories to be proper, petitioner's long-term contracts were to be treated as separate items within its inventory pool. Since such determination involves a change in petitioner's method of accounting, it must be sustained unless found to be arbitrary. Thor Power Tool Co. v. Commissioner, 439 U.S. 522">439 U.S. 522, 439 U.S. 522">532-533, 58 L. Ed. 2d 785">58 L. Ed. 2d 785, 99 S. Ct. 773">99 S. Ct. 773 (1979). The1991 U.S. Tax Ct. LEXIS 64">120 facts of the instant case demonstrate that respondent's determination is arbitrary. If the inventoriable costs allocable to each long-term contract were treated as separate items, such cost would not be taken into account until acceptance of the work occurred and a liquidation of the item took place. Such a practice, in effect, disallows use of LIFO inventories to accumulate costs and essentially forces the taxpayer to treat the inventory costs attributable to long-term contracts as deferred expenses. The accrual method, however, does not require such precise matching of income and expense. Marquardt Corp. v. Commissioner, 39 T.C. 443">39 T.C. 443, 39 T.C. 443">452-453 (1962); Drazen v. Commissioner, 34 T.C. 1070">34 T.C. 1070, 34 T.C. 1070">1077-1078 (1960). 97 T.C. 120">148 Moreover, we previously have rejected the Commissioner's attempts to impose such a regime upon taxpayers using the completed contract method. RECO Industries, Inc. v. Commissioner, 83 T.C. 912">83 T.C. 912, 83 T.C. 912">921-923 (1984); Peninsula Steel Products & Equipment Co. v. Commissioner, 78 T.C. 1029">78 T.C. 1029, 78 T.C. 1029">1047-1052 (1982). 13 We accordingly see no reason to require it of accrual method taxpayers, especially in view of1991 U.S. Tax Ct. LEXIS 64">121 the fact that the accrual method places a lesser degree of emphasis upon exact matching of income and associated expense than does the completed contract method. See Marquardt Corp. v. Commissioner, 39 T.C. 443">39 T.C. 452-453. Furthermore, treating inventory allocable to long-term contracts as separate items is not required under the principles of dollar value LIFO. The items produced for long-term contracts are the same as those otherwise produced for petitioner's customers. The only distinguishing feature is that the goods produced for long-term contracts are to be installed by petitioner, while the other goods are simply1991 U.S. Tax Ct. LEXIS 64">122 shipped to the customer. We do not find such a circumstance to be sufficient basis for separating such goods from the other items in petitioner's inventory. See Amity Leather Products Co. v. Commissioner, 82 T.C. 726">82 T.C. 726, 82 T.C. 726">738-740 (1984); Wendle Ford Sales, Inc. v. Commissioner, 72 T.C. 447">72 T.C. 447, 72 T.C. 447">459-461 (1979). We find that petitioner's income is clearly reflected under its method of accounting using LIFO inventories to accumulate costs allocable to long-term contracts. Respondent's determination disallows petitioner's use of an otherwise permissible method of accounting, substituting for it one preferred by respondent. Such a determination constitutes an abuse of discretion. Rotolo v. Commissioner, 88 T.C. 1500">88 T.C. 1500, 88 T.C. 1500">1514 (1987); Molsen v. Commissioner, 85 T.C. 485">85 T.C. 485, 85 T.C. 485">498 (1985); Peninsula Steel Products & Equipment Co. v. Commissioner, 78 T.C. 1029">78 T.C. 1058; Garth v. Commissioner, 56 T.C. 610">56 T.C. 610, 56 T.C. 610">618 (1971); Fort Howard Paper Co. v. Commissioner, 49 T.C. 275">49 T.C. 275, 49 T.C. 275">286-287 (1967). 97 T.C. 120">149 Depreciation of ACRS Property Acquired from Two RiversThe final issue we will consider1991 U.S. Tax Ct. LEXIS 64">123 in the instant case concerns respondent's disallowance of a portion of the depreciation expense deducted by Hamilton in its taxable year ending June 30, 1982. Hamilton commenced business on June 28, 1982, when it acquired the assets of Two Rivers. Included in such assets were 3-year ACRS property with a cost of $ 2,048,993 and 5-year ACRS property with a cost of $ 10,659,386. As Hamilton was a member of the Mayline consolidated group and joined in such group's consolidated return, Hamilton was required to adopt Mayline's taxable year for its first year. Sec. 1.1502-76(a)(1), Income Tax Regs. Consequently, Hamilton's first taxable year was the period running from June 28, 1982, to June 30, 1982. Secs. 443(a), 7701(a)(23). Petitioner, however, claimed the full amount of depreciation with respect to such property that would have been allowable had Hamilton been in existence for all of Mayline's taxable year. Under the authority of section 168(f)(5), respondent disallowed all but one-twelfth of the depreciation claimed. Petitioner argues that the depreciation allowance should be determined with reference to the length of time that Mayline, and not Hamilton, was in existence. 1991 U.S. Tax Ct. LEXIS 64">124 Respondent, however, points out that the consolidated return regulations require that the initial calculation of the taxable income of members of a consolidated group is to be made as if such members were separate corporations. Secs. 1.1502-11, and -12, Income Tax Regs. Some items are figured at the consolidated group level, but the depreciation allowance is not one of them. See Sec. 1.1502-12, Income Tax Regs. Consequently, the amount of depreciation allowable for Hamilton's first taxable year is to be determined as if Hamilton were a separate corporation and not a member of a consolidated group. Under section 168, as it existed during the year in issue, the depreciation deduction for recovery property in any taxable year equalled the unadjusted basis of such property multiplied by the applicable percentage for the class and year of service of such property. Sec. 168(b). Such percentage was applicable regardless of the month during the year 97 T.C. 120">150 that the property was placed in service. 14 See Staff of the J. Comm. on Taxation, General Explanation of the Economic Recovery Tax Act, at 79 (J. Comm. Print 1981). Section 168(f)(5) provides that, where a taxpayer's taxable year is 1991 U.S. Tax Ct. LEXIS 64">*125 less than 12 months, the amount of depreciation otherwise allowable under section 168 is reduced by the same proportion which the number of months in the short taxable year bears to a full year. Hence, if a taxpayer's short taxable year is one month or less, the taxpayer would be entitled to only one-twelfth of the depreciation otherwise allowable under section 168 for such year. Consequently, we find that respondent properly reduced the deduction claimed by petitioner for the short taxable year, and we sustain his determination with respect to such issue. To reflect concessions and the foregoing, Decision will be entered under Rule 155. Footnotes1. Except as otherwise noted, all section references are to the Internal Revenue Code as in effect for the years in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.↩2. The intention of the LIFO method is to allow inflation to pass into the cost of goods sold. Mohawk Liqueur Corp. v. United States, 324 F.2d 241">324 F.2d 241, 324 F.2d 241">243-244 (6th Cir. 1963); Fox Chevrolet, Inc. v. Commissioner, 76 T.C. 708">76 T.C. 708, 76 T.C. 708">722-723↩ (1981).3. Petitioner concedes that finished inventory purchased for resale after the acquisition of old Mayline should have been placed in a separate LIFO pool, but disputes respondent's computations with respect to such separate pool as shown on the notice of deficiency. No evidence has been offered concerning the nature of such dispute. At trial, we granted petitioner's motion to allow introduction of its inventory accounting records solely for purposes of making any Rule 155 computation required pursuant to our decision.↩4. By assigning an amount of the purchase price equal to the LIFO value of Two Rivers' inventory, it appears as though petitioner attempts to carry over the tax attributes of its target's inventory, which generally is possible only in the course of a liquidation of a subsidiary under section 332 or in a reorganization. Sec. 381.↩5. Petitioner's method is somewhat akin to the "base stock" method of accounting, under which an amount of inventory equal to the minimum quantity required to operate the business was carried on the taxpayer's books at an artificially low price, and all inventory costs above the base stock figure were carried into cost of goods sold. See S. Gertzman, Federal Tax Accounting, par. 7.02[2] (1988); R. Hoffman & H. Gunders, Inventories: Control, Costing, and Effect upon Income and Taxes, 169-173 (2d ed. 1970). The base stock method is not a permissible method of tax accounting because it "obscures the true gain or loss of the year and, thus, misrepresents the facts." Lucas v. Kansas City Structural Steel Co., 281 U.S. 264">281 U.S. 264, 281 U.S. 264">269, 74 L. Ed. 848">74 L. Ed. 848, 50 S. Ct. 263">50 S. Ct. 263↩ (1930).6. We do not mean to suggest that every bargain purchase of inventoriable property will require the creation of new items within the dollar value LIFO pool, as occasional purchases concluded on advantageous terms are to be expected in the course of normal business activities. Moreover, where a taxpayer uses LIFO, the gain realized upon sale of such goods probably will be recognized within a short time, unless an increase in closing inventory prevents such bargain cost from flowing into cost of goods sold. Consequently, an isolated bargain purchase in the course of an ongoing business differs materially from the case where a taxpayer attempts to value its entire base year inventory at bargain cost. Creation of a new item for tax accounting purposes on the basis of differences in cost characteristics is required only where necessary to clearly reflect income, and the issue is to be resolved on a case-by-case basis. Amity Leather Products Co. v. Commissioner, 82 T.C. 726">82 T.C. 726, 82 T.C. 726">739-740 (1984); Peninsula Steel Products and Equipment Co. v. Commissioner, 78 T.C. 1029">78 T.C. 1029, 78 T.C. 1029">1045↩ (1982).7. We note that taxpayers generally may no longer use the completed contract method in determining when to take into account income and expense allocable to a long-term contract. Sec. 460(a). Between 1986 and 1988, Congress progressively reduced the amount of income from such contracts that could be reported on the basis of accounting methods other than the percentage of completion method. See Sec. 5041, Technical and Miscellaneous Revenue Act of 1988, 102 Stat. 3673; Sec. 10203, Revenue Act of 1987, 101 Stat. 1330-394; Sec. 804, Tax Reform Act of 1986, 100 Stat. 2358. In 1989, Congress required accounting for all long-term contracts entered into after July 10, 1989 under the percentage of completion method, excepting only a limited class of construction contracts. Sec. 7621(d)(1), Revenue Reconciliation Act of 1989, Pub. L. 101-239, 103 Stat. 2376. Under the percentage of completion method, taxpayers are required to include in income in each tax year the contract is performed a percentage of the gross income derived from the contract equal to the percentage of the total estimated expense attributable to the contract incurred for such year. Sec. 460(b)↩.8. Berger Engineering Co. v. Commissioner, T.C. Memo. 1961-292↩.9. The term "accrual acceptance," therefore, denotes the version of the accrual shipment method under which income is accrued at the time the customer accepts the subject matter of the contract.↩10. For tax years beginning after December 31, 1986, the full absorption rules were replaced by the uniform capitalization rules of Sec. 263A, added to the Code by the Tax Reform Act of 1986, supra, which expanded the types of indirect costs required to be treated as inventory costs. See S. Rept. No. 99-313, 1986-3 C.B. 1↩, 133-152 (Vol. 3).11. Koebig & Koebig Inc. v. Commissioner, T.C. Memo. 1964-32↩.12. Such cost allocation rules originally were applicable to all long-term contracts accounted for under the long-term contract methods prescribed under Sec. 1.451-3, Income Tax Regs. However, T.D. 8067, 1986-1 C.B. 218, limited the application of such regulations to contracts requiring 2 years or less to complete. Such limitation applied to costs incurred in taxable years beginning after December 31, 1982 with respect to long-term contracts entered into after such date. Sec. 1.451-3(g)(1), Income Tax Regs.↩ Inasmuch as nearly all of petitioner's long-term contracts required less than 2 years to complete, such provision would have governed cost allocation to its long-term contracts had petitioner used the completed contract method.13. Shasta Industries, Inc. v. Commissioner, T.C. Memo. 1986-377. We note that the Court of Appeals for the Federal Circuit also adopted our position with respect to the use of inventories under the completed contract method. Spang Industries, Inc. v. United States, 791 F.2d 906">791 F.2d 906 (Fed. Cir. 1986), revg. 6 Cl. Ct. 38">6 Cl. Ct. 38↩ (1984).14. The foregoing rules have been changed by the Tax Reform Act of 1986. See Sec. 201(a), Pub. L. 99-514, 100 Stat. 2121.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622249/	GLENN R. SAUNIER, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentSaunier v. CommissionerDocket No. 10845-84.United States Tax CourtT.C. Memo 1985-343; 1985 Tax Ct. Memo LEXIS 289; 50 T.C.M. 398; T.C.M. (RIA) 85343; July 15, 1985. 1985 Tax Ct. Memo LEXIS 289">289 Held: Petition dismissed and deficiencies and additions to tax determined; and damages awarded pursuant to section 6673. Glenn R. Saunier, pro se. Robert Scarbrough, for the respondent. WHITAKERMEMORANDUM FINDINGS OF FACT AND OPINION WHITAKER, Judge: Deficiencies in income tax and additions to tax were determined against petitioner for the years and in the amounts as follows: Additions to TaxYearDeficiencySec. 6651(a) 1Sec. 6654Sec. 6653(a)1979$4,629.00$1,154.25$193.57$231.451980$4,092.00$ 955.00$239.05$204.601981$4,338.00$ 982.00$292.73$216.90Based upon petitioner's response to respondent's Request for Admissions and the allegations of the petition, petitioner's residence on the date of filing1985 Tax Ct. Memo LEXIS 289">290 the petition was Marshall, Arkansas. For convenience our Findings of Fact and Opinion are combined. This cause was set for trial at the regular trial session of the Court at Cleveland, Ohio. The Court's March 12, 1985 Order to Show Cause: (1) why this case should not be dismissed for failure to state a claim upon which relief can be granted; and (2) why the Court should not impose damages against petitioner under section 6673 (show cause order), was originally scheduled for hearing at Washington, D.C. The show cause order was rescheduled for hearing at Cleveland for the convenience of both parties. Petitioner was directed to file a response to the Court's show cause order on or before April 18, 1985 which response was required to set forth every fact upon which petitioner relied in opposition to the show cause order. Petitioner on April 18, 1985 filed a document styled a "Reply" which we have treated as his response to the Court's Order, although it is in the form of a reply1985 Tax Ct. Memo LEXIS 289">291 to respondent's amended answer. Respondent amended his answer in order to request the award of damages under section 6673.In his "Reply," as in virtually all other documents filed by petitioner, he reiterates that his primary issue is the protection of his constitutional rights, principally under the fifth amendment. The undisputed facts as shown by the record are that petitioner filed no Federal income tax returns for the years 1979, 1980, and 1981. The deficiencies are based principally upon respondent's determination that petitioner received wages from one employer during 1979 in the amount of almost $20,000, from four employers in 1980 aggregating slightly over $18,000 and from one employer in 1981 in the amount of almost $15,000, as well as small amounts of other income from various sources. Petitioner admitted to receiving wages from the employers specified in Form 886-A, attached to the notice of deficiency, in the years 1979 and 1980 although he has not admitted the amounts of wages determined by respondent. Petitioner denies that he received wages from the employer specified on Form 886-A by respondent in the year 1981. He does, however, admit to having received wages1985 Tax Ct. Memo LEXIS 289">292 from Prudential Insurance Company of America in 1981 in an unstated amount, an item not described in the notice of deficiency. The petition in generalities states that the notice of deficiency is based upon errors in overstating income, understating deductions, overstating taxes, understating credits, and arbitrarily computing penalties, as well as abridging petitioner's constitutional rights. Petitioner alleges that he has sufficient documentary evidence to prove a lesser amount of gross income than that determined by respondent, that he can prove additional deductions, that the tax computation method used by respondent overstates petitioner's tax liability, that petitioner was not given credits to which he is entitled against his tax liability, and that he did not disregard the rules and regulations and therefore is not subject to penalties. Petitioner further alleges that he has not been granted immunity and has had no opportunity to receive a determination as to whether certain information is subject to fourth and fifth amendment rights. Petitioner's principal thesis seems to be that he cannot complete an income tax return or furnish evidence of his income and deductions without1985 Tax Ct. Memo LEXIS 289">293 waiving his fifth amendment rights. The trial memorandum filed by petitioner with its frequent citation of cases shows petitioner's intelligence and his awareness of case law and legal analysis. Petitioner has refused to produce any documents or to engage in the stipulation process as required by Rule 91 and by our Standing Pre-Trial Order. Petitioner appeared at the calendar call and at the show cause hearing held later on the same day. He stated that he was ready for trial but attempted once more to launch into his several frivolous contentions. None of the pleadings filed by petitioner contains a single allegation of a specific basis for petitioner's asserted fear of criminal prosecution, and respondent's counsel at the hearing represented to the Court that respondent knew of no basis for any fear of criminal prosecution. Moreover, the employment admitted by petitioner was in several instances by well-known multistate or multinational corporations, and it is almost inconceivable that petitioner's employment by those employers could have had any criminal implications. The Court declined to hear petitioner's arguments and directed petitioner to address himself to the sole question1985 Tax Ct. Memo LEXIS 289">294 which the Court would hear--the determination of petitioner's correct tax liability for the years 1979, 1980, and 1981. When petitioner declined to do so, petitioner was again reminded by the Court that in his pleadings he had claimed that the deficiencies were overstated and that he had specifically denied having received any wages from one of the employers named in the statutory notice. Petitioner was warned that unless he was ready to proceed with the trial and focus on the merits of the tax controversy the Court would dismiss his petition and would sustain the deficiencies and additions to tax determined against him even though that might cause petitioner to pay a greater amount in income taxes for the 3 years than petitioner contended he owed. The Court again directed petitioner to take the stand and be sworn or have his petition dismissed for failure properly to prosecute. Petitioner refused to take the stand and be sworn and insisted that he would only continue to make his frivolous arguments to the Court. Accordingly, after ample notice to petitioner, the Court announced that the petition was dismissed and the show cause order made absolute. The Court further announced1985 Tax Ct. Memo LEXIS 289">295 that damages in the amount of $5,000 as requested by respondent in the amended answer would be imposed against petitioner. Petitioner's privilege against compulsory self-incrimination is not violated by his obligation to file an income tax return. Garner v. United States,424 U.S. 648">424 U.S. 648 (1976); United States v. Sullivan,274 U.S. 259">274 U.S. 259 (1927). With respect to petitioner's testimony, a witness may claim the protection of the fifth amendment only when he has a genuine fear of future prosecution and in that case he must provide the Court with sufficient information to enable the Court to evaluate and to protect his interest. Rechtzigel v. Commissioner,79 T.C. 132">79 T.C. 132, 79 T.C. 132">137 (1982), affd. 703 F.2d 1063">703 F.2d 1063 (8th Cir. 1983). In view of the case law cited by petitioner in his trial memorandum, we cannot believe that petitioner is not also familiar with these authorities. Although we would have been amply justified in holding the show cause hearing in Washington, D.C. and at that hearing dismissing the petition on the basis of the written responses by petitioner and respondent, since the petition clearly fails to comply with Rule 34(b), 1985 Tax Ct. Memo LEXIS 289">296 2 we gave him the benefit of the doubt. Accordingly, we continued the show cause hearing to the calendar call in order to give petitioner an opportunity to appear personally and to abandon his frivolous arguments. Since petitioner had denied receipt of wages from certain sources designated in the notice of deficiency, we hoped he could be persuaded to focus on pertinent facts bearing upon his tax liability. Due to petitioner's willful refusal to proceed to trial, we had no alternative but to dismiss the petition pursuant to Rule 123(b). Petitioner bears the burden of proof on the deficiencies and on all of the additions to tax and they are therefore determined against him as set forth in respondent's notice of deficiency. Rule 142. Section 6673 provides in pertinent part: Whenever it appears to the Tax Court that proceedings before it have been instituted or maintained by the taxpayer primarily for delay or that the taxpayer's position in such proceedings is frivolous or groundless, damages in an amount not in excess of $5,000 shall be awarded to the United States by the Tax Court in its decision. 1985 Tax Ct. Memo LEXIS 289">297 * * Petitioner's actions during the hearing as well as his pleadings demonstrate that petitioner had no desire in this case to review the correctness of the deficiencies determined against him. His sole purpose has been to attempt to frustrate respondent's counsel and his employees, to delay the inevitable time of reckoning with respondent, and to waste the resources of this Court by the assertion of frivolous arguments. As we have pointed out petitioner's contentions are both groundless and frivolous. We conclude that this proceeding was instituted and has been maintained primarily for delay. Accordingly, we award damages to the United States in the amount of $5,000 pursuant to section 6673. Abrams v. Commissioner,82 T.C. 403">82 T.C. 403 (1984). An appropriate Order and Decision will be entered.Footnotes1. All section references are to the Internal Revenue Code of 1954, as amended and in effect during the years in issue, and all rule references are to the Tax Court Rules of Practice and Procedure.↩2. See, e.g., Wellman v. Commissioner,T.C. Memo. 1985-97↩.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622251/	William T. Piper, Petitioner, v. Commissioner of Internal Revenue, RespondentPiper v. CommissionerDocket No. 4977United States Tax Court5 T.C. 1104; 1945 U.S. Tax Ct. LEXIS 36; November 27, 1945, Promulgated 1945 U.S. Tax Ct. LEXIS 36">36 Decision will be entered under Rule 50. Common stock subscription warrants were acquired by petitioner along with shares of common stock, as a unit. Held, the warrants had value when received by petitioner; held, further, under the circumstances there is no practical basis upon which an allocation of cost as between the warrants and the stock can be made. John W. Cross, Esq., and Earl C. Walck, Esq., for the petitioner.William H. Best, Jr., Esq., for the respondent. Arundell, Judge. Turner and Hill, JJ., dissent. ARUNDELL5 T.C. 1104">1105 The Commissioner has determined a deficiency of $ 4,221.63 in the petitioner's income tax liability for 1940.The questions involved are whether certain stock subscription warrants which petitioner acquired with common stock, 1945 U.S. Tax Ct. LEXIS 36">37 as a unit, had value at the time he received them and, if so, whether there is a practical basis upon which an allocation of cost between the common stock and warrants can be made for the purpose of computing the gain or loss on a sale of the warrants alone. One minor adjustment made by the respondent is not contested by petitioner and will be given effect under Rule 50.For the most part, the facts have been stipulated by the parties and we adopt the stipulation as our findings. Other facts are found from the evidence adduced at the hearing.FINDINGS OF FACT.The petitioner is an individual, residing at Lock Haven, Pennsylvania. He filed his individual income tax return for 1940 with the collector of internal revenue for the twelfth district of Pennsylvania, Scranton, Pennsylvania.In 1931 petitioner and C. G. Taylor formed the Taylor Aircraft Co., a Pennsylvania corporation, hereinafter referred to as the old company, for the manufacture and sale of airplanes. From its commencement the company made progress in the field of light airplane manufacture. Through the technical knowledge and ability of the petitioner and his organization, research, and experimentation, the company1945 U.S. Tax Ct. LEXIS 36">38 obtained the approval of the Department of Commerce for the production of 5 models of aircraft. Production increased from 20 planes in 1931 to 680 in 1937. In 1936 petitioner became the sole stockholder of the Taylor Aircraft Co.On November 13, 1937, in connection with an exchange upon which gain or loss was not recognized, all of the assets and liabilities of the Taylor Aircraft Co. were transferred to the newly organized Piper Aircraft Corporation, hereinafter called the new company, in exchange for the issuance by the latter company of 80,000 shares of its $ 1 par value common stock and 57,000 common stock subscription warrants. Originally petitioner received 60,000 warrants, but he returned 3,000 to the corporation immediately thereafter. The parties agree that such exchange was "tax free," with no change in basis. Under the plan of reorganization the stock and warrants were issued to 5 T.C. 1104">1106 the petitioner, who had surrendered his stock in the Taylor Co. to that corporation for cancellation. Shortly after the transfer above mentoined the Taylor Co. was dissolved. No allocation of value was made between the 80,000 shares of common stock and the 57,000 subscription warrants1945 U.S. Tax Ct. LEXIS 36">39 at the time they were delivered to the petitioner.Under its certificate of incorporation, as amended, the Piper Aircraft Corporation was authorized to issue 271,500 shares, divided into 21,500 shares of convertible preferred stock with no nominal or par value, having a stated capital applicable thereto of not more than $ 10 per share, and 250,000 of common stock of the par value of $ 1. The voting rights were confined to the common stock, except that if at any time after March 1, 1940, 4 or more quarterly dividends were in arrears, the preferred shareholders were entitled to elect a majority of the board of directors until the arrears in dividends and the current quarterly dividend had been paid. The three incorporators of the Piper Co. were petitioner, William T. Piper, Jr., and Theodore V. Weld.The common stock subscription warrants issued by the Piper Corporation evidenced the right of the holder thereof to subscribe at any time and from time to time on and after April 1, 1938, to April 1, 1941, for one share of $ 1 par value common stock for each warrant held, at the following prices: On or before April 1, 1939, $ 5 per share; after April 1, 1939, but on or before April 1, 1945 U.S. Tax Ct. LEXIS 36">40 1940, $ 6 per share; and after April 1, 1940, but on or before April 1, 1941, $ 7 per share.One of the major purposes of the reorganization was to obtain new capital. The new company expected to raise $ 200,000 by the issuance of convertible preferred shares, with two common stock subscription warrants attached to each share at a unit cost of $ 10. The prospectus stated that there was no present intention of offering the common stock to the public other than to the extent that the convertible preferred was initially convertible and to the extent that subscription warrants might be exercised. Petitioner wanted the subscription warrants in question issued to him so that he would have or could retain controlling interest in the corporation, in view of the fact that the 20,000 units, later changed to 21,500 units, involving rights to subscribe to a total of 105,750 shares of common stock which the corporation proposed to sell, carried rights to subscribe to 90,000 shares of the company's common stock. Petitioner would not have carried out the reorganization if there had been no method of protecting his voting control.It was originally intended that the public offering of the preferred1945 U.S. Tax Ct. LEXIS 36">41 stock warrant units would be made concurrently with the issuing of the stock and rights acquired by petitioner, but the former was held back by reason of delay in obtaining an approval from the Securities & Exchange Commission.5 T.C. 1104">1107 The balance sheet of the Piper Aircraft Corporation, as of November 13, 1937, reflected that the excess of its assets over its liabilities (excluding capital stock) was $ 80,000. It did not reflect the good will and going concern value carried over from the Taylor Co., nor did it reflect any value for the five certificates of approval issued by the Department of Commerce authorizing the manufacture of five models of airplanes, underlying which was a great amount of research, experimentation, and testing of the parts of the planes and the planes themselves, which represented a large amount of money. Another valuable intangible asset acquired by the Piper Corporation was an airplane sales organization, which was regarded as one of the best in the airplane industry. The land and buildings were carried on the books at $ 96,146.64, although the original cost to former owners a few years previous was $ 831,000. The plant was very well adapted to the1945 U.S. Tax Ct. LEXIS 36">42 purposes of the company and a large portion of floor space was available for future expansion.No stock of any kind or class other than the aforementioned 80,000 shares of common stock received by the petitioner was issued or offered for sale by Piper Aircraft Corporation until March 3, 1938, when 21,500 units, each unit representing one share of convertible preferred stock and two subscription warrants of the type above mentioned, were offered to the public at $ 10 per unit. Each share of convertible preferred stock was convertible at the holder's option into 2 1/2 shares of common stock. No allocation of value was made between the preferred stock and the warrants sold as a unit.On February 29, 1940, additional common stock of the corporation was offered for general sale at $ 8.75 per share.Between July 14, 1938, and February 27, 1939, 8,000 shares of common stock were issued by the corporation in payment of brokers' underwriting commissions in connection with the issuance of the preferred stock.The date of the first exercise of subscription warrants was December 18, 1939, when a holder exercised warrants with respect to 400 shares of common stock.The following are the market1945 U.S. Tax Ct. LEXIS 36">43 quotations on the subscription warrants in 1940: March 8, 1940, bid 3/4; October 8, 1940, bid 2 1/2; asked 3 1/2. Moody's Manual of Investments, Industrials, 1942, at page 1116, lists the price range of Piper Aircraft Corporation's common stock as follows:1941194019391938High7 9 1/244Low4 1/27 1/2115 T.C. 1104">1108 The earnings of the Piper Co. for the fiscal years 1938 through 1941 are as follows:Fiscal year ended --Net incomeTaxesEarnings pershareSept. 30, 1938$ 32,038.45$ 8,010.02$ 0.22Sept. 30, 1939117,523.4922,027.08.92Sept. 30, 1940198,186.5437,344.961.08Sept. 30, 1941323,194.80110,891.751.44Petitioner sold his 57,000 subscription warrants for $ 28,500 on March 6, 1940. Expenses incident to the sale were $ 22.80. Prior to petitioner's sale of his warrants there were no sales, in the market or otherwise, of Piper Aircraft Corporation subscription warrants.The warrants had value at the date of their receipt by petitioner, but their fair market value at that time was not ascertainable.Petitioner used a total cost basis of $ 117,757.93, and in computing his income tax liability for 19401945 U.S. Tax Ct. LEXIS 36">44 he allocated a basis of $ 37,757.93 to the subscription warrants, arriving at a total loss of $ 9,280.73. Of that amount, he deducted 50 percent as a long term capital loss. The respondent agrees that for the purposes of this proceeding a total cost basis of $ 117,757.93 may be used.The respondent disallowed the deduction and held that the subscription warrants acquired with the shares of common stock on November 13, 1937, had no fair market value at that time; that they had a basis of zero; and that the amount received, less selling expenses, on the sale of such warrants in 1940 was taxable as a capital net gain (50 percent thereof).OPINION.The petitioner exchanged his investment in the old company for shares of common stock and common stock subscription warrants in the new company. The exchange was one in which no gain or loss was recognized. No allocation of value was made between the stock and the subscription warrants at the time they were issued to petitioner. Petitioner subsequently sold the warrants in 1940, at 50 cents each, or for a total consideration of $ 28,500. The respondent takes the view that the warrants had neither fair market value nor actual value at 1945 U.S. Tax Ct. LEXIS 36">45 the date of issuance, November 13, 1937, and, consequently, that they had a basis of zero for the purpose of determining gain or loss on the sale or exchange thereof by petitioner. From that position it follows that the petitioner would be taxable upon the sale receipts at the applicable capital gains rate, and that his total investment would be represented by the shares of common stock which he has not disposed of.5 T.C. 1104">1109 The petitioner contends that the warrants had value at the time they were acquired and, while conceding that his allocation of some $ 37,000 to them was nothing more than his best guess, he argues that such amount is as appropriate as any other amount that could be determined from the facts and circumstances. In the alternative he contends that, if no allocation can be made with reasonable certainty, recognition of gain or loss should be deferred until he has recovered his cost.The Internal Revenue Code does not provide a method for allocating the cost, or other basis for determining gain or loss, to each class of securities acquired as a unit. However, the rule has become established that, where a mixed aggregate of assets is acquired in one transaction, 1945 U.S. Tax Ct. LEXIS 36">46 the total purchase price shall be fairly apportioned between each class so as to determine profit or loss on subsequent sale of specific assets in the group. If such apportionment be impractical, no profit shall be realized until the cost shall have been recovered out of the proceeds of sales. See Philip D. C. Ball, 27 B. T. A. 388, 394; affd., 69 Fed. (2d) 439, without discussion of this point; Mertens, Law of Federal Income Taxation, vol. 3, p. 378. In H. A. Green, 33 B. T. A. 824, 828, we observed that respondent's regulations had for a number of years provided for such apportionment of cost and for deferment of recognition of gain until cost was recovered where allocation is impractical. It was pointed out that article 1567 of Regulations 62 1 (interpreting the Revenue Act of 1921) had provided that allocation of cost should be made in proportion to the fair market value of each class of securities at the date of receipt, and that while subsequent regulations do not contain the exact language, the quoted provision lays down a principle equally applicable under subsequent revenue acts. 1945 U.S. Tax Ct. LEXIS 36">47 Indeed, under the revenue acts and the Sixteenth Amendment only so much of the proceeds of a sale of property as represents a realized profit over and above the cost of the property sold is taxable as income.The parties do not question the application of the rule to the instant case, and each of them has set forth the footnoted excerpt from Regulations 103, section 19.22 (a)-8, 2 as being applicable. In addition, the respondent has set forth the further provision of that section, dealing 5 T.C. 1104">1110 with the sale of rights to subscribe, which is set out in the margin. 3 It appears that the rule is given the same effect under both provisions. The latter provision seems to be specifically concerned with the sale of stock rights which are distributed1945 U.S. Tax Ct. LEXIS 36">48 by a corporation to its stockholders but which do not give rise to income under section 115 (f). The warrants in question were not distributed to petitioner in respect of any stock then held by him in the corporation, but came to him through an exchange by which he acquired the stock and the warrants as a mixed aggregate of assets.1945 U.S. Tax Ct. LEXIS 36">49 We think the respondent erred in attributing the entire cost to the shares of common stock. It can not be said that the warrants had no value simply because they could not be exercised to immediate financial advantage at the time they were issued. The right to subscribe at fixed prices over the prescribed period is the very consideration bargained for by a purchaser, and the fact that they were highly speculative and entirely prospective is no basis, in the circumstances here present, for denying to them any value. Collin v. Commissioner, 32 Fed. (2d) 753; Commissioner v. Swenson, 56 Fed. (2d) 544.Moreover, the petitioner received 80,000 shares of common stock, plus the right to subscribe to 57,000 additional shares at any time during the 4-year period. The result of the transaction was such that petitioner was assured of control of the company, at least during that period and thereafter if he chose to exercise his options under the warrants. There was a question of the future management of the company, as it would affect earnings and dividends. This right of management and control, which was vested in the1945 U.S. Tax Ct. LEXIS 36">50 common stock, was itself valuable, and must have entered into the consideration of the purchaser. Collin v. Commissioner, supra.The petitioner testified that he would not have entered into the plan unless it had been possible for him to retain voting control.The warrants occupied a status different from that of a stock interest. They were not reflected in the capital account of the corporation and did not represent an absolute equitable ownership therein. As emphasized above, their value sprang from the right or privilege of exercising them during a definite period of time and at specific prices 5 T.C. 1104">1111 to acquire a stock interest. About the only way the fair market value could be measured would be from trading experience with respect to them, that is, sales or bid and asked prices, or from the amount of savings which might have been immediately realizable from their exercise. Evidence given by the only two witnesses was that the warrants had value, but that any value which could have been placed on them at that time would have been entirely speculative. The circumstances here are such that there is no way in which we can ascertain the1945 U.S. Tax Ct. LEXIS 36">51 fair market value of the warrants for purposes of allocating the cost between them and the common stock. Unlike the situation in Philip D. C. Ball, supra, the petitioner herein has produced the available and admissible evidence, substantially all of which has been stipulated by the parties.Does it follow that the respondent must prevail if the petitioner is unable, in view of the circumstances, to establish the fair market value of the warrants at the time of their receipt? We think not. It is clearly established that they were valuable when received and that consideration was paid for them. Moreover, during the period in which they were to run they were quoted from 3/4 to 3 1/2, and the fact remains that petitioner was able to dispose of his for some $ 28,000. To deny the petitioner the benefit of the rule in this case would be an injustice, for under that very rule recognition of gain or loss is postponed if there be no practical basis upon which an allocation can be made. Surely, when it is shown that the warrants had value, even though the measurement thereof be impossible, a determination of no value by the respondent is arbitrary and should1945 U.S. Tax Ct. LEXIS 36">52 be laid aside. See Helvering v. Taylor, 293 U.S. 507">293 U.S. 507, and Miles v. Safe Deposit & Trust Co., 259 U.S. 247">259 U.S. 247.In Edwin D. Axton, 32 B. T. A. 613, we pointed out that although one of the stocks in question undoubtedly had some value, a consideration of all of the evidence indicated with reasonable certainty that no figure could be satisfactorily fixed upon to represent its value when received and that under such circumstances the entire cost should be recovered before gain or loss on the transaction was reportable. See also Kirkland v. Burnet, 57 Fed. (2d) 608; Sallie Strickland Tricou, 25 B. T. A. 713; affirmed without discussion of this point, 68 Fed. (2d) 280.There is some question regarding the market value of the common stock at the time it was received. However, in the view we take of the matter that is not now significant. For a proper allocation of cost we would have to determine the market value of both the stock and the warrants. Where there is no market value, as is the situation1945 U.S. Tax Ct. LEXIS 36">53 with respect to the warrants, there is no practical basis upon which an allocation can be made and the taxpayer is entitled to recover his 5 T.C. 1104">1112 entire original basis before gain or loss will be recognized. H. A. Green, supra.Decision will be entered under Rule 50. Footnotes1. Art. 1567. * * * the proportion of the original cost, or other basis, to be allocated to each class of new securities is that proportion which the market value of the particular class bears to the market value of all securities received on the date of the exchange. * * * ↩2. Sec. 19.22(a)-8. Sale of stock and rights↩. -- * * * If common stock is received as a bonus with the purchase of preferred stock or bonds, the total purchase price shall be fairly apportioned between such common stock and the securities purchased for the purpose of determining the portion of the cost attributable to each class of stock or securities, but if that should be impracticable in any case, no profit on any subsequent sale of any part of the stock or securities will be realized until out of the proceeds of sales shall have been recovered the total cost.3. Although the issuance by a corporation to its shareholders of rights to subscribe to its stock may not under section 115(f) give rise to taxable income, gain may be derived or loss sustained by the shareholder from the sale of such rights. In the case of stock in respect of which were acquired stock subscription rights which did not constitute income to the shareholders within the meaning of the Sixteenth Amendment to the Constitution, and in the case of such rights, the following rules are to be applied:(1) If the shareholder does not exercise, but sells, his rights to subscribe, the cost or other basis, properly adjusted, of the stock in respect of which the rights are acquired shall be apportioned between the rights and the stock in proportion to the respective values thereof at the time the rights are issued, and the basis for determining gain or loss from the sale of a right on one hand or a share of stock on the other will be the quotient of the cost or other basis, properly adjusted, assigned to the rights or the stock, divided, as the case may be, by the number of rights acquired or by the number of shares held.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622252/	Appeal of SCHLOSS BROTHERS COMPANY.Schloss Bros. Co. v. CommissionerDocket No. 467.United States Board of Tax Appeals1 B.T.A. 581; 1925 BTA LEXIS 2881; February 10, 1925, decided Submitted January 16, 1925. 1925 BTA LEXIS 2881">2881 Two corporations in which two brothers own 92.30 per cent of all the voting stock of one, and 92 per cent of all the voting stock of the other, and in which 7.70 per cent of such voting stock of one and 8 per cent of such voting stock of the other is owned by three employees of the corporations who have purchased, or have agreed to purchase, such stock and to pay for the same with the dividends which may be declared and distributed, come within the statutory definition of two corporations in which substantially all of the stock is owned or controlled by the same interests as provided in sections 240(b) of the Revenue Act of 1918, and 1331(b) of the Revenue Act of 1921. J. M. Chenoweth, Esq., and Paul S. Ragan, C.P.A., for the taxpayer. Laurence Graves, Esq. (Nelson T. Hartson, Solicitor of Internal Revenue) for the Commissioner. TRUSSELL 1 B.T.A. 581">582 Before JAMES, STERNHAGEN, TRAMMELL, and TRUSSELL. This is an appeal from a Commissioner's deficiency letter based upon an audit of the income and profits tax returns of Schloss Brothers Company of Indianapolis, Ind., and Schloss Brothers Company of Monmouth, Ill., in which the Commissioner consolidated1925 BTA LEXIS 2881">2882 the returns of said companies and computed the deficiencies upon the basis of a consolidated return. The result of the audit was as follows: For one month ending January 31, 1917, overassessment$9.31For the fiscal year ending January 31, 1918, deficiency812.61For the fiscal year ending January 31, 1919, deficiency1,679.33The appeal was argued and submitted upon stipulations of facts agreed to by counsel for the taxpayer and the Commissioner, from which the Board makes the following. FINDINGS OF FACT. Schloss Brothers Company of Indianapolis, Ind., is an Indiana corporation with its principal place of business located at Indianapolis, Ind. Schloss Brothers Company of Monmouth, Ill., is an Illinois corporation with its principal place of business located at Monmouth, Ill. The common stock of Schloss Brothers Company of Indianapolis, Ind., and Schloss Brothers Company of Monmouth, Ill., was held by the following stockholders during the fiscal years ended January 31, 1918, and January 31, 1919. Per cent of common stock held in - Stockholder's name.Indiana company.Illinois company.Sol Schloss46.1546.Eli Schloss46.1546.Sam F. Fisher5.50John Donaldson2.50John Kirwood7.70Total1001001925 BTA LEXIS 2881">2883 The above-named Fisher, Donaldson, and Kirkwood were, during the years 1917 to 1919, inclusive, employees of the respective corporations named and had purchased or agreed to purchase the shares issued to them and to pay the purchase price by having credited against them any amounts distributed as dividends upon such shares. The preferred stock of Schloss Brothers Company of Indianapolis, Ind., and Schloss Brothers Company of Monmouth, Ill., has no voting power. There were no inter-company transactions between Schloss Brothers Company of Indianapolis, Ind., and Schloss Brothers Company 1 B.T.A. 581">583 of Monmouth, Ill., during the fiscal years ended January 31, 1918, and January 31, 1919, each corporation being conducted as a separate and distinct business activity. Schloss Brothers Company of Indianapolis, Ind., and Schloss Brothers Company of Monmouth, Ill., each filed separate income and profits tax returns for each of the fiscal years ended January 31, 1919, and January 31, 1919. In separate letters dated August 30, 1924, each bearing reference, IT:CR:D-HEC, the Commissioner notified Schloss Brothers Company, of Indianapolis, Ind., and Schloss Brothers Company, of Monmouth, 1925 BTA LEXIS 2881">2884 Ill., of the deficiencies in the income and profits tax of eacn for the fiscal years ended January 31, 1918, and January 31, 1919. Said deficiencies result in part from computing the tax liability in each instance on the basis of consolidated returns. DECISION. The deficiencies as determined by the Commissioner are approved. OPINION. TRUSSELL: This appeal involves the question as to whether two corporations, both carrying on a retail clothing business, one at Indianapolis, Ind., and the other at Monmouth, Ill., were affiliated and, therefore, subject to income and profits taxes during the periods from January 1, 1917, to January 31, 1919, computed upon the basis of consolidated returns. The Commissioner has asserted that such affiliation exists and the taxpayers are denying and contesting the Commissioner's position. The alleged deficiencies involve taxes computable under the laws relating to the calendar years 1917, 1918, and 1919. The statute relating to 1917 is section 1331 of the Revenue Act of 1921, the relevant portion of which is as follows: (a) That Title II of the Revenue Act of 1917 shall be construed to impose the taxes therein mentioned upon the1925 BTA LEXIS 2881">2885 basis of consolidated returns of net income and invested capital in the case of domestic corporations and domestic partnerships that were affiliated during the calendar year 1917. (b) For the purpose of this section a corporation or partnership was affiliated with one or more corporations or partnerships * * (2) when substantially all of the stock of two or more corporations or the business of two or more partnerships was owned by the same interests. and the statute governing the years 1918 and 1919 is section 240 of the Revenue Act of 1918, the relevant portion of which is as follows: (a) That corporations which are affiliated within the meaning of this section shall, under regulations to be prescribed by the Commissioner with the approval of the Secretary, make a consolidated return of net income and invested capital for the purposes of this title and Title III, and the taxes thereunder shall be computed and determined upon the basis of such return * * * (b) For the purpose of this section two or more domestic corporations shall be deemed to be affiliated * * * (2) if substantially all the stock of two or more corporations is owned or controlled by the same interests. 1925 BTA LEXIS 2881">2886 From the provisions of these two acts it appears that the one question for determination is whether substantially all of the stock of these two corporations was, during the periods under consideration, 1 B.T.A. 581">584 owned or controlled by the same interests. All the facts concerning the ownership of the stock are clearly defined in the foregoing findings of fact and we have now only to inquire whether the ownership as shown can be held to be an ownership or control by the same intersts.It appears from the record that Sol and Eli Schloss promoted and organized these two corporations and established the business carried on by them. In organizing such businesses they selected employees at each of the two stores to whom they offered the privilege of undertaking to purchase a small number of shares of stock of the respective stores, and two of such employees at the Monmouth store and one at the Indianapolis store bought, or agreed to buy, a small number of shares with the understanding that they could pay for the same by having such dividends as might be earned by such shares credited upon the purchase price thereof. This arrangement between the promoters of the enterprise and1925 BTA LEXIS 2881">2887 their employees served to give such employees a stake in the business and to bring them into close association with the principal owners and thus to become identified with the management of the businesses. Such association, in a closely owned business like the instant case, brings these employee stockholders into such a relation with the principal owners that their interest is a negligible one, compared with that of the principal owners. Under these circumstances, substantially all the stock of the corporations in all of the years in question was owned by Sol and Eli Schloss. It has been argued in behalf of these taxpayers that the two stores were operated entirely independent of each other and in no sense as a single business unit and it must be taken for granted that the record in this case does not contain any evidence of intercompany transactions or relations between the two stores other than that they are owned, operated, and controlled by the same stockholders. The Revenue Acts of 1918 and 1921, however, use the imperative, saying in substance that when the stock of two or more corporations is owned by the same interests the tax shall be levied upon the basis of consolidated1925 BTA LEXIS 2881">2888 returns. Thus, having arrived at the conclusion that the five stockholders of these two corporations are so closely associated and their interests are so nearly identical that they must be held to be a group coming within the meaning of the same interests, we are compelled to find that under the 1918 and 1921 acts the tax must be computed upon the basis of a consolidated return.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4337610/	JAMES H. KELSO, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentKelso v. Comm'rNo. 19367-07LUnited States Tax CourtT.C. Memo 2009-125; 2009 Tax Ct. Memo LEXIS 121; 97 T.C.M. (CCH) 1659; June 1, 2009, Filed121 Stan D. Blyth, for petitioner.Christian A. Speck, for respondent.Haines, Harry A.HARRY A. HAINESMEMORANDUM OPINIONHAINES, Judge: The parties submitted this case to the Court without trial. See Rule 122. 1 Respondent made the determination to proceed to collect by levy petitioner's 2000, 2001, 2002, 2003, and 2004 (the years at issue) outstanding income tax liabilities of $ 24,980, $ 79,303, $ 66,761, $ 47,791, and $ 38,598, respectively. Petitioner seeks review of respondent's determination under section 6330.The parties' controversy poses the following issues for our consideration: (1) Whether respondent abused his discretion by rejecting petitioner's offer to enter into an installment agreement; and (2) whether respondent erred by failing to abate petitioner's addition to tax for 2002 under section 6651(a)(1).BackgroundSome of the facts have been stipulated and are so found. The stipulation of facts and the attached exhibits are incorporated herein by this reference. 122 At the time petitioner filed his petition, he resided in California.During the years at issue petitioner was self-employed as a periodontist. Petitioner did not fully pay the tax liabilities reflected on the returns he filed for the years at issue. On November 1, 2004, petitioner filed his 2002 return late.On May 11, 2005, respondent mailed to petitioner a Final Notice, Notice of Intent to Levy and Notice of Your Right to a Hearing for the unpaid liabilities for 2000, 2001, 2002, and 2003 (2000-03 notice). Petitioner made a timely request for a section 6330 hearing concerning the 2000-03 notice.On April 19, 2006, respondent mailed to petitioner a Final Notice, Notice of Intent to Levy and Notice of Your Right to a Hearing for unpaid liability for 2004 (2004 notice). Petitioner made a timely request for a section 6330 hearing concerning the 2004 notice.On February 12, 2007, respondent's Appeals officer spoke by telephone with petitioner concerning the years at issue. During the call petitioner proposed a partial payment installment agreement of $ 750 per month, to be reviewed every 3 years.Petitioner provided respondent with a variety of documents concerning petitioner's medical condition 123 and financial status to support his proposal for an installment agreement. Petitioner's Form 433-A, Collection Information Statement for Wage Earners and Self-Employed Individuals, indicated that petitioner had net income of $ 10,205 per month over an 11-month period ending November 30, 2006. Petitioner's Forms 1040, U.S. Individual Income Tax Return, for 2006 and 2007 indicated that petitioner's net income from Schedule C, Profit or Loss From Business, averaged $ 12,262 per month for 2006 and $ 11,373 per month for 2007, respectively.On July 23, 2007, respondent issued a Notice of Determination Concerning Collection Action(s) Under Section 6320 and/or 6330 that sustained the collection actions for the years at issue. In response, petitioner filed a timely petition with this Court.DiscussionI. Installment AgreementWhen a levy is proposed to be made on any property or right to property, a taxpayer is entitled to a notice of intent to levy and notice of the right to a fair hearing before an impartial officer of the Appeals Office. Secs. 6330(a) and (b), 6331(d). If the taxpayer requests a hearing, he may raise in that hearing any relevant issue relating to the unpaid tax or the proposed 124 levy, including challenges to the appropriateness of the collection action and "offers of collection alternatives, which may include the posting of a bond, the substitution of other assets, an installment agreement, or an offer-in-compromise." Sec. 6330(c)(2)(A). A determination is then made which takes into consideration those issues, the verification that the requirements of applicable law and administrative procedures have been met, and "whether any proposed collection action balances the need for the efficient collection of taxes with the legitimate concern of the person that any collection action be no more intrusive than necessary." Sec. 6330(c)(3).Petitioner disputes respondent's rejection of his proposed installment agreement. We review the rejection of the proposed installment agreement for abuse of discretion. See Lunsford v. Commissioner, 117 T.C. 183">117 T.C. 183, 185 (2001); Nicklaus v. Commissioner, 117 T.C. 117">117 T.C. 117, 120 (2001).Respondent's Appeals officer reviewed petitioners' submitted financial information and determined that an installment agreement was not appropriate. We received as exhibits the financial information presented to respondent and find that the Appeals officer could 125 have reasonably concluded that petitioner receives sufficient income to satisfy the tax liabilities without resorting to a partial payment installment agreement of $ 750 per month. Petitioner's statement of income for his dental business for 2006 indicates that he had an average net profit of $ 10,205 per month. Petitioner's 2007 return indicates that he had an average net profit of $ 11,373 per month. The medical information petitioner submitted does not indicate that petitioner's future earning potential would be drastically reduced as a result of his health problems. 2 Accordingly, we conclude that respondent's refusal to enter into an installment agreement was not an abuse of discretion.II. Section 6651(a)(1) Addition to TaxWe apply the de novo standard of review to respondent's determination to not abate the section 6651(a)(1) addition to tax. See Downing v. Commissioner, 118 T.C. 22">118 T.C. 22, 28-29 (2002). 126 Section 6651(a)(1) imposes an addition to tax for any failure to file a return by its due date. The addition is equal to 5 percent of the amount required to be shown as tax on the return for each month or portion thereof that the return is late, up to a maximum of 25 percent. See id. The addition is imposed on the net amount due, calculated by reducing the amount required to be shown as tax on the return by any part of the tax which is paid on or before its due date. See sec. 6651(b)(1).The addition will not apply if it is shown that the failure to file a timely return was due to reasonable cause and not due to willful neglect. See sec. 6651(a)(1); see also United States v. Boyle, 469 U.S. 241">469 U.S. 241, 245, 105 S. Ct. 687">105 S. Ct. 687, 83 L. Ed. 2d 622">83 L. Ed. 2d 622 (1985). A failure to file is due to reasonable cause "If the taxpayer exercised ordinary business care and prudence and was nevertheless unable to file the return within the prescribed time". Sec. 301.6651-1(c)(1), Proced. & Admin. Regs.; see United States v. Boyle, supra at 246. Willful neglect is interpreted as a "conscious, intentional failure or reckless indifference." United States v. Boyle, supra at 245.Petitioner admits that he did not file his 2002 return until November 1, 2004. 127 This fact satisfies respondent's burden of production under section 7491(c) and establishes petitioner's liability for the section 6651(a)(1) addition to tax unless petitioner can establish reasonable cause for his failure to file a timely return. See Higbee v. Commissioner, 116 T.C. 438">116 T.C. 438, 446 (2001).Petitioner argues that the late filing of his 2002 return was due to reasonable cause because he was suffering from back injuries and chronic dizziness caused by two automobile accidents in 1997 and 2003.The Court has found reasonable cause where the taxpayer experiences an illness or incapacity that prevents the taxpayer from filing his or her tax return. See, e.g., Harris v. Commissioner, T.C. Memo. 1969-49 (reasonable cause found where the taxpayer's activities were severely restricted, and the taxpayer was in and out of hospitals because of various severe medical ailments including stroke, paralysis, heart attack, bladder trouble, and breast cancer).On the other hand, the Court has not found reasonable cause where the taxpayer does not timely file but is able to continue his or her business affairs despite the illness or incapacity. See, e.g., Judge v. Commissioner, 88 T.C. 1175">88 T.C. 1175, 1189-1191 (1987)128 (no reasonable cause found where the taxpayer had a long history of delinquent filing of returns and the taxpayer was actively involved in preparing and executing business-related documents despite illness during years at issue); Watts v. Commissioner, T.C. Memo. 1999-416 (reasonable cause not found where, although the taxpayer's mother and daughter were both ill and the taxpayer frequently took them to see doctors, the taxpayer also performed extensive architectural services in the taxpayer's business).While we do not trivialize the medical problems facing petitioner, the record indicates he was able to continue his business and carry on his affairs throughout the years at issue. Petitioner's medical problems do not rise to the level necessary to find reasonable cause for failure to timely file.Petitioner also contends that he failed to timely file because he lost financial information as a result of the robberies. Petitioner has submitted evidence of only one robbery, in the form of a police report. The report indicates that on January 22, 2003, petitioner's car was broken into and two tennis rackets and a watch were stolen. The record does not indicate that petitioner's financial *129 information for 2002 was lost in this incident. 3On the basis of the foregoing, we hold that petitioner did not have reasonable cause for his failure to timely file his 2002 return. Accordingly, we hold that respondent may proceed with the collection action.In reaching our holding herein, we have considered all arguments made, and, to the extent not mentioned above, we conclude that they are moot, irrelevant, or without merit.To reflect the foregoing,Decision will be entered for respondent.Footnotes1. Unless otherwise indicated, all section references are to the Internal Revenue Code (Code), as amended, and all Rule references are to the Tax Court Rules of Practice and Procedure. Amounts are rounded to the nearest dollar.↩2. Petitioner submitted a document to the court entitled "Health Plan" in which petitioner notes that in 2006 his doctors recommended that he reduce his work week from 6 to 4 days to allow him time to exercise or attend personal training. Nevertheless, petitioner earned income in 2007 comparable to what he earned in prior years.↩3. The fact that petitioner had reason to store tennis rackets in his car also seems to indicate that his physical condition was not so dire as to preclude him from timely filing his 2002 return.↩	01-04-2023	11-14-2018
https://www.courtlistener.com/api/rest/v3/opinions/1755159/	28 S.W.3d 806 (2000) Mohammad Mehdi NAZEMI, Appellant, v. The STATE of Texas, Appellee. No. 13-99-253-CR. Court of Appeals of Texas, Corpus Christi. August 31, 2000. 808 George David Murphy, Jr., Houston, for Appellant. Calvin A. Hartmann, Asst. Dist. Atty., John B. Holmes, Jr., Dist. Atty, S. Elaine Roch, Asst. Dist. Atty., Houston, for State. Before Chief Justice SEERDEN and Justices DORSEY and YAÑEZ. OPINION Opinion by Chief Justice SEERDEN. Appellant Mohammed Mehdi Nazemi was convicted of trademark counterfeiting. On appeal, appellant contends that the State failed to allege and prove that he acted with a culpable mental state. We affirm. Background Nazemi was the owner and proprietor of Jasmeen Jewelry, a shop located in the Gulf Freeway Indoor Market, a large market containing jewelry and other retail shops. On two occasions, Nazemi or his wife sold jewelry with counterfeit trademarks to undercover officers. The jewelry consisted of charms with Disney or Warner Bros. characters, or the trademark Nike "swoosh" symbol. Nazemi was thus charged by indictment with the felony offense of trademark counterfeiting. Nazemi pleaded not guilty, and a jury found him guilty as charged in the indictment. The trial court assessed punishment at two years confinement, probated for five years, and imposed a $5,000 fine. Introduction The Texas Penal Code provides that: A person commits an offense if the person intentionally manufactures, displays, advertises, distributes, offers for sale, sells, or possesses with intent to sell or distribute a counterfeit mark or an item or service that: (1) bears or is identified by a counterfeit mark; or (2) the person knows or should have known bears or is identified by a counterfeit mark. TEX. PENAL CODE ANN. § 32.23 (Vernon Supp.2000). Nazemi was indicted under subsection (1) of the statute. Under the indictment, the State alleged that Nazemi did "intentionally possess with intent to sell and distribute items, namely one hundred sixty-nine earrings, thirty rings, thirty-nine pendants and one bracelet bearing and identified by a counterfeit mark." In his first issue, Nazemi argues that the trial court violated his right to due process by failing to quash the indictment against him for its failure to allege a culpable mental state, specifically, that "Nazemi knew that the jewelry was counterfeit." In his second issue, Nazemi argues that the jury charge failed to instruct the jury that the State was required to prove beyond a reasonable doubt that Nazemi knew the items he possessed contained a counterfeit mark. Thus, Nazemi asks this Court to construe the statute to require that Nazemi was aware that the items were counterfeit. In his third issue, assuming that this Court accepts Nazemi's construction of the statute, Nazemi argues that the State's proof was legally and factually insufficient to prove that Nazemi knew that the items were counterfeit. Intent Nazemi contends that subsection (1) of the statute, as written, creates a strict liability crime for selling goods containing counterfeit marks. We do not agree with this interpretation of the statute. Nazemi argues that the word "intentionally" in the statute's general statement modifies only specified verbs, e.g., manufactures, displays, advertises, distributes, offers for sale, sells, or possesses with intent to sell or distribute. However, we believe this language cannot be read in isolation. By reading the statutory provision in its entirety, we find that the statute expressly includes a culpable mental state by providing that a person commits an 809 offense if the person intentionally sells a counterfeit mark. TEX. PENAL CODE ANN. § 32.23 (Vernon Supp.2000)(emphasis added). Thus, subsection (1) of the statute requires the defendant to intentionally sell a counterfeit mark, whereas subsection (2) requires the defendant to either intentionally sell a counterfeit mark, or sell a mark he should have known was counterfeit. To construe the statute otherwise would be to render subsection (2) as mere surplusage. Our interpretation of the statute is consonant with section 6.02 of the penal code which provides that a culpable mental state is required unless the definition of the offense plainly dispenses with any mental element. See Tex. Penal Code Ann. § 6.02 (Vernon 1994); Aguirre v. State, 22 S.W.3d 463, 470 (Tex.Crim.App. 1999). Our interpretation is further substantiated by policy considerations underlying the distinction between strict liability crimes and those that require a culpable mental state. Aguirre, 22 S.W.3d at 471-73. We overrule Nazemi's second issue. The Indictment In his first issue, Nazemi alleges that the trial court erred by refusing to set aside the indictment because it failed to allege a culpable mental state. In general, an indictment must plead every element which must be proven at trial. Dinkins v. State, 894 S.W.2d 330, 338 (Tex.Crim.App. 1995). Naturally, this includes the culpable mental state of the offense. Id.; Thompson v. State, 697 S.W.2d 413, 415 (Tex.Crim.App.1985). If an indictment fails to allege a culpable mental state for an offense, it is defective and is subject to a motion to quash. Dinkins, 894 S.W.2d at 339; Thompson, 697 S.W.2d at 415. An indictment which tracks the language of the statute is normally sufficient to provide notice to the person charged with an offense. Thomas v. State, 621 S.W.2d 158, 161 (Tex.Crim.App.1980). We note that the language of Nazemi's indictment directly tracks the language of the statute. We read the indictment as properly alleging a required mental state. It was not error for the trial court to deny Nazemi's motion to quash. We overrule Nazemi's first issue. Legal and Factual Sufficiency of the Evidence In his third issue, Nazemi argues that the State's proof was legally and factually insufficient to prove that Nazemi knew that the items were counterfeit A legal sufficiency review calls upon the reviewing court to view the relevant evidence in the light most favorable to the verdict and determine whether any rational trier of fact could have found the essential elements of the crime beyond a reasonable doubt. Jackson v. Virginia, 443 U.S. 307, 99 S. Ct. 2781, 2789, 61 L. Ed. 2d 560 (1979); Jackson v. State, 17 S.W.3d 664, 667 (Tex.Crim.App.2000). In a legal sufficiency review, the fact finder remains the exclusive judge of the credibility of the witnesses and of the weight to be given their testimony. See Barnes v. State, 876 S.W.2d 316, 321 (Tex.Crim.App. 1994). The appellate court serves to ensure the rationality of the fact finder, but does not disregard, realign, or weigh the evidence. Moreno v. State, 755 S.W.2d 866, 867 (Tex.Crim.App.1988). These standards for review apply equally to direct and circumstantial evidence cases. Geesa v. State, 820 S.W.2d 154, 161 (Tex. Crim.App.1991). In contrast, a factual sufficiency review dictates that the evidence be viewed in a neutral light, and sets aside the verdict only if it is so contrary to the overwhelming weight of the evidence as to be clearly wrong and unjust. Clewis v. State, 922 S.W.2d 126, 134 (Tex.Crim.App. 1996). Factual sufficiency review must be appropriately deferential so as to avoid the appellate court's substituting its own judgment for that of the fact finder. Clewis, 922 S.W.2d at 133. The court's evaluation should not substantially intrude upon the jury's role as the sole judge of the weight 810 and credibility of witness testimony. Santellan v. State, 939 S.W.2d 155, 164 (Tex. Crim.App.1997). At trial, Nazemi denied any knowledge that the goods were counterfeit. However, testimonial evidence adduced at trial showed that Nazemi was relatively sophisticated and knowledgeable in retail matters. At the time of this incident, he had been a resident or citizen of the United States for more than twenty years, and had a bachelor's degree in physics. Nazemi had worked as a car salesman and clerk in a convenience store, and owned other business interests besides Jasmeen Jewelry. Nazemi's wife had previous experience with retail jewelry sales. According to the testimony at trial, it is a relatively simple matter to confirm the legitimacy of trademarked goods. One need merely visually inspect the goods to ascertain whether or not they contain a mark. There was further testimony that the depicted imagery on the counterfeit goods was not of good quality. Under these circumstances, we hold that there was legally and factually sufficient evidence of the requisite intent. Intent may be inferred from circumstantial evidence. Wolfe v. State, 917 S.W.2d 270, 275 (Tex.Crim.App.1996). Thus, proof of knowledge is an inference drawn by the trier of fact from all the circumstances. Dillon v. State, 574 S.W.2d 92, 94 (Tex. Crim.App.1978); Cantu v. State, 944 S.W.2d 669, 670 (Tex.App.-Corpus Christi 1997, pet. ref'd). A jury can infer knowledge or intent from the acts, conduct, and remarks of the accused and from the surrounding circumstances. Withers v. State, 994 S.W.2d 742, 746 (Tex.App.-Corpus Christi 1999, pet. ref'd); Menchaca v. State, 901 S.W.2d 640, 652 (Tex.App.-El Paso 1995, pet. ref'd); Ortiz v. State, 930 S.W.2d 849, 852 (Tex.App.-Tyler 1996, no pet.). In determining the legal sufficiency of the evidence to show appellant's intent, and faced with a record that supports conflicting inferences, we "must presumeeven if it does not affirmatively appear in the recordthat the trier of fact resolved any such conflict in favor of the prosecution, and must defer to that resolution." Matson v. State, 819 S.W.2d 839, 846 (Tex.Crim.App.1991). In the instant case, taking all of the evidence in the light most favorable to the verdict, any rational trier of fact could have found that Nazemi intentionally sold counterfeit goods. As for the factual sufficiency of Nazemi's intent, we cannot say that even considering Nazemi's testimony and any other evidence in his favor, the jury's verdict was against the great weight of the incriminating evidence presented at trial so as to be clearly wrong and unjust. In this regard, we note that the State introduced evidence suggesting that Nazemi failed to pay sales tax, kept two sets of accounting books, and miscalculated the quoted prices on goods to the buyer's disadvantage. The jury could have considered this evidence as tending to cast doubts on Nazemi's credibility. In short, the jury was free to reject Nazemi's rendition of the events. See Santellan v. State, 939 S.W.2d 155, 164 (Tex.Crim.App.1997). We overrule appellant's final issue. The judgment of the trial court is affirmed. Concurring Opinion by Justice J. BONNER DORSEY. DORSEY, Justice, concurring. I concur in the affirmance of the conviction; however I disagree with the analysis expressed. In my opinion the legislature denominated the crime to be the intentional selling a "counterfeit mark" or an item bearing a "counterfeit mark," without requiring knowledge on the part of the seller that the item was indeed counterfeit. It is enough that the item bear or be identified by a counterfeit mark. What the seller knew or should have known of its counterfeit status is not necessary for a violation if the State so chooses to prosecute under 811 subsection (1) of § 32.23 of the Penal Code. Of course the State could prosecute under subsection (2) that requires evidence that the seller knew or should have known that the item bears or is identified by a counterfeit mark. The trial judge denied the proposed instruction that would have required knowledge that the goods were counterfeit, or that the defendant should have known they were. Thus the necessity of the knowledge of the defendant as an element of the offense was squarely presented to the court below and to this court. I think by the clear language of the statute the legislature did not require such knowledge by the seller in order for his actions to constitute a crime. There are good reasons for the legislature to put the risk of prosecution on the seller of this type of goods. It requires care on the part of the seller to make sure what he offers for sale is genuine, for if it is not real, the seller is in peril of prosecution. Such a danger should encourage sellers to be very cautious in what they offer for sale, with the result that items of doubtful provenance will be driven from the market by the actions of conscientious and worried vendors. Given the legislature's decision that one who offers a counterfeit trinket for sale has committed a crime regardless of whether the seller knows the item is fake, is there some limitation on the legislature's authority that would prohibit such action? I find none. I believe it to be a valid exercise of the police power of the State.	01-04-2023	10-30-2013
https://www.courtlistener.com/api/rest/v3/opinions/4622288/	Hugh A. and Verna B. Brimm v. Commissioner.Brimm v. CommissionerDocket No. 1013-67.United States Tax CourtT.C. Memo 1968-231; 1968 Tax Ct. Memo LEXIS 69; 27 T.C.M. (CCH) 1148; T.C.M. (RIA) 68231; October 7, 1968. Filed Hugh A. Brimm, pro se, 1095 N. Jamestown Rd., Decatur, Ga. Dean R. Morley, III, for the respondent. DAWSONMemorandum Findings of Fact and Opinion DAWSON, Judge: Respondent determined income tax deficiencies against the petitioners for the years 1962 and 1963 in the respective amounts of $1,101.30 and $1,441.27. Petitioners have not assigned error in their petition with respect to an adjustment made by respondent to a net longterm capital gain for the year 1963. There are also adjustments in medical expense70 deductions for 1962 and 1963. These adjustments can be given effect in the Rule 50 computation. The only issue for decision is whether amounts received by petitioner Hugh A. Brimm in 1962 and 1963 from the Carver School of Missions and Social Work were gifts or taxable income. Findings of Fact Some of the facts have been stipulated by the parties and are found accordingly. Hugh A. Brimm (herein called petitioner) and his wife, Verna B. Brimm, were legal residents of Decatur, Georgia, at the time they filed their petition in this proceeding. Their joint Federal income tax returns for the years 1962 and 1963 were filed with the district directors of internal revenue at Louisville, Kentucky, and Atlanta, Georgia, respectively. The petitioner was employed as Professor of Anthropology and Human Relations at the Carver School of Missions and Social Work (herein referred to as the Carver School), Louisville, Kentucky, from 1952 to January, 1963. The Carver School was a church related, two-year graduate school supported by the Southern Baptist Convention. It had a faculty and staff of about 12 and a student body of about 175. The chairman of its board of trustees requested the71 Convention annually to provide funds for its operation. The Carver School did not get a specific allotment of funds for gifts other than scholarships and did not have a special fund for gifts in its budget. Some three or four years prior to its closing it became apparent that, because of the small student body and the high cost of operations, the Carver School would have to be closed as a separate institution. This possibility was discussed at the Convention and in the halls of the school. Although the teachers were not working under contracts, most members of the faculty chose to remain. It was necessary to maintain the faculty and staff until the time of dissolution in June, 1963, since it was decided that students 1149 who had reached a certain point in their studies should be permitted to complete the courses required for a degree. In contemplation of dissolution, the board of trustees of the Carver School adopted a resolution at a meeting held on April 23, 1962, which provided, in pertinent part, as follows: A proposed severance policy was presented to Mr. Sandidge as requested at the last meeting. Motion was made by Mr. Williams, seconded by Mrs. Durham and carried72 that the following recommendation be adopted: We recommend that the School make a gift equivalent to one year's salary to each faculty member and staff member upon termination of his or her services with the school. * * Shortly thereafter the faculty and staff learned of the official action taken by the trustees in adopting the "severance policy." An amount equal to one year's salary was paid to each faculty and staff member regardless of his length of service with the Carver School or the nature of the services rendered. All members of the faculty and staff had been adequately compensated for their services. The action of the board of trustees, pursuant to the "severance policy," was not intended to additionally compensate the faculty and staff for past services. There was no intent to require any future services from the recipients in return for the amounts given when their employment with the Carver School ended. The payments were not made in the discharge of a contractual obligation or according to the individual financial needs of the recipients. The payments were made to all members of the faculty and staff regardless of how long they had been with the Carver School73 or when they left between May, 1962, and June, 1963. The Carver School was merged into the Southern Baptist Seminary in June, 1963, and no members of the faculty were retained. The amount of $8,600, specified in the "severance policy," was paid to petitioner in two installments. The first payment was made in December, 1962, by check No. 4718, with the notation "First Half Severance Gift." The second payment was made in January, 1963, by check No. 4788, with the notation "2nd Half Severance Gift." No taxes were withheld by Carver School from the "severance gift" made to him. However, petitioner's regular salary was subject to income tax withholding. Petitioner left the Carver School and began work on a new job on January 23, 1963, in Birmingham, Alabama, for the United States Army Materiel Command. There was no tax benefit to the Carver School, a tax-exempt organization, in making the payments to petitioner. In his Federal income tax returns for the years 1962 and 1963 the amounts received by petitioner pursuant to the "severance policy" of the Carver School were not reported because he regarded them as gifts. In his notice of deficiency respondent determined that the additional74 amount of $4,300 paid to petitioner by the Carver School in each of the years 1962 and 1963 was taxable income and not a gift. Ultimate Findings 1. The board of trustees of the Carver School intended to make a gift of the amounts paid to petitioner in 1962 and 1963 in appreciation and recognition of his past services and achievements. 2. The amounts received by petitioner were non-taxable gifts. Opinion Whether the payments made to petitioner are gifts excludable from gross income under section 102(a), Internal Revenue Code of 1954, 1 or taxable income under section 61(a), is basically a factual question to be determined by the trier of the facts. Commissioner v. Duberstein, 363 U.S. 278">363 U.S. 278 (1960); Smith v. Commissioner, 305 F. 2d 778 (C.A. 3, 1962), affirming a Memorandum Opinion of this Court. The applicable principles were expressed by the Supreme Court in the Duberstein case (363 U.S. at pp. 285-286) in the following manner: The course of decision here makes it plain that the statute does not use the term "gift" 75 in the common-law sense, but in a more colloquial sense. This Court has indicated that a voluntary executed transfer of his property by 1150 one to another, without any consideration or compensation therefor, though a common-law gift, is not necessarily a "gift" within the meaning of the statute. For the Court has shown that the mere absence of a legal or moral obligation to make such a payment does not establish that it is a gift. Old Colony Trust Co. v. Commissioner, 279 U.S. 716">279 U.S. 716, 730. And, importanty, if the payment proceeds primarily from "the constraining force of any moral or legal duty," or from "the incentive of anticipated benefit" of an economic nature, Bogardus v. Commissioner, 302 U.S. 34">302 U.S. 34, 41, it is not a gift. And, conversely, "[where] the payment is in return for services rendered, it is irrelevant that the donor derives no economic benefit from it." Robertson v. United States, 343 U.S. 711">343 U.S. 711, 714. A gift in the statutory sense, on the other hand, proceeds from a "detached and disinterested generosity," Commissioner v. LoBue, 351 U.S. 243">351 U.S. 243, 246; "out of affection, respect, admiration, charity or like impulses.76 " Robertson v. United States, supra, at 714. And in this regard, the most critical consideration, as the Court was agreed in the leading case here, is the transferor's "intention." Bogardus v. Commissioner, 302 U.S. 34">302 U.S. 34, 43. "What controls is the intention with which payment, however voluntary, has been made." Id., at 45 (dissenting opinion). The Government says that this "intention" of the transferor cannot mean what the cases on the common-law concept of gift call "donative intent." With that we are in agreement, for our decisions fully support this. Moreover, the Bogardus case itself makes it plain that the donor's characterization of his action is not determinative - that there must be an objective inquiry as to whether what is called a gift amounts to it in reality. 302 U.S., at 40. It scarcely needs adding that the parties' expectations or hopes as to the tax treatment of their conduct in themselves have nothing to do with the matter. It is suggested that the Bogardus criterion would be more apt if rephrased in terms of "motive" 77 rather than "intention." We must confess to some skepticism as to whether such a verbal mutation would be of any practical consequence. We take it that the proper criterion, established by decision here, is one that inquires what the basic reason for his conduct was in fact - the dominant reason that explains his action in making the transfer. Further than that we do not think it profitable to go. [Footnotes omitted.] It is clear from the evidence that the board of trustees of the Carver School took their action in declaring and making a "severance gift" to the petitioner, as well as to other members of the small staff, because they were grateful and appreciative of the past faithful and dedicated service rendered to the school. The presence of affection, respect, admiration, and a deep sense of appreciation in the minds of trustees is demonstrated by the candid testimony of Reverend B.L. Williams, Jr., who served on the trustees' executive committee from 1957 to 1963, who was chairman78 of the board for two years, and who made the motion "that the School make a gift equivalent to one year's salary to our faculty and staff." Reverend Williams testified, in part, as follows: Q Mr. Williams, was this action, which originated with your motion, an effort to pay an additional amount of compensation for past services to the faculty and staff? A No; it was not. Q From your standpoint, having made the motion, was it your intent to require any future service from the faculty and staff in return for the gift of a year's salary? A No; none whatsoever. * * * THE COURT: And was this done in appreciation for services that these men had rendered? THE WITNESS: Yes. Appreciation for our faculty and staff. What they had meant to our students, and to our Convention. A gift of appreciation. No strings attached whatsoever. * * * Q Mr. Williams, may I ask one further question, following the question raised by his Honor: Was this action taken because it was felt that the faculty had not been sufficiently compensated in the past. A No, it wasn't, because we had done a study, when I first came on the Board of Trustees. We hired consulting company; Booz, Allen, Hamilton; to79 study our faculty; our salary schedule; and make recommendations to us. We were seeking accreditation in the Southern Association. We knew - They had standards that we had to come up to. And we felt our salaries were adequate for our staff and faculty for the work they did. 1151 There is no doubt that the Carver School's Trustees were motivated by gratitude for the petitioner's past faithful services, but, as the Supreme Court said in Bogardus v. Commissioner, 302 U.S. 34">302 U.S. 34, 44 (1937), "[a] gift is none the less a gift because inspired by gratitude for past faithful service of the recipient." Indeed, long and faithful service may create the atmosphere of goodwill and kindliness toward the recipient which tends to support a finding that a gift rather than additional compensation was intended. Cf. Schall v. Commissioner, 174 F. 2d 893 (C.A. 5, 1949); Mutch v. Commissioner, 209 F. 2d 390 (C.A. 3, 1954); Abernethy v. Commissioner, 211 F. 2d 651 (C.A.D.C., 1954), all involving payments made to retired ministers. The Commissioner announced80 acceptance of these results in Rev. Rul. 55-422, 1 C.B. 14">1955-1 C.B. 14. Some retiring or separated employees other than ministers have succeeded in their contention that the payment was a gift. See Estate of Grace G. McAdow, 12 T.C. 311">12 T.C. 311 (1949); Bank of New York v. Helvering, 132 F. 2d 773 (C.A. 2, 1943); Neville v. Brodrick, 235 F. 2d 263 (C.A. 10, 1956); and Cunningham v. Commissioner, 67 F. 2d 205 (C.A. 3, 1933). See also Rev. Rul. 55-330, 1 C.B. 236">1955-1 C.B. 236, indicating that an allowance equal to six-month's salary paid by the Government because of the death of an officer or enlisted member of the Armed Forces is a gift from the Government to the statutory beneficiaries. Clearly distinguishable are cases like Poorman v. Commissioner, 131 F. 2d 946 (C.A. 9, 1942), and Willkie v. Commissioner, 127 F. 2d 953 (C.A. 6, 1942), cited by respondent, which involved employer-employee relationships and dealt with the tax consequences flowing from the disposition of funds of a corporation conducted for the financial profit of its stockholders where the corporation got the tax benefit of81 a deduction for the payments made. Stanton v. United States, 186 F. Supp. 393">186 F. Supp. 393 (D.C. E.D., N.Y., 1960), affirmed per curiam 287 F. 2d 876 (C.A. 2, 1961). An undercurrent in such cases is a recognition that a business corporation ordinarily cannot make a "gift" of its assets without shareholder approval. The Carver School, a non-profit, tax-exempt organization was under no such restraint and was at liberty to characterize the payment as it chose. Its characterization of the payment as a "gift," even if motivated by a desire to create a tax benefit for petitioner (which is by no means established in this record), was consistent with and evidenced a feeling of affection and detached generosity toward petitioner. We cannot find that the payments made by the Carver School proceeded from the impulse of a moral or legal duty or from the incentive of anticipated economic benefit. Petitioner was adequately compensated for his work. The school was in the process of closing its doors. Unlike the situation in Tomlinson v. Hine, 329 F. 2d 462 (C.A. 5, 1964), the Carver School did not have a plan or past practice of making severance payments as employees82 terminated their employment. The so-called "severance policy" was adopted in April 1962 because the school was to be dissolved and the trustees wanted to show their deep appreciation to the faculty and staff for their past faithful services. On the basis of the documentary evidence and testimony contained in this record, we hold that the Carver School intended to make, and did make, a gift to petitioner which was made gratuitously and in exchange for nothing. Cf. Stanton v. United States, supra; United States v. Robertson, 343 U.S. 711">343 U.S. 711 (1952). This finding makes it clear that petitioner did not receive "severance pay," as that term is used in section 1.61-2(a)(1), Income Tax Regs. Therefore, the total amount received by him is not taxable. Decision will be entered under Rule 50. Footnotes1. All statutory references are to the Internal Revenue Code of 1954 unless otherwise indicated.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622289/	BERNICE E. PETERSON AND EDWARD A. PETERSON, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentPeterson v. CommissionerDocket No. 8683-80United States Tax CourtT.C. Memo 1981-599; 1981 Tax Ct. Memo LEXIS 133; 42 T.C.M. (CCH) 1437; T.C.M. (RIA) 81599; October 19, 1981. 133 Bernice E. Peterson, pro se. William S. Miller, for the respondent. HALL MEMORANDUM OPINION HALL, Judge: Respondent determined deficiencies in petitioners' income taxes, plus additions to tax under section 6653(a) 1 for negligence or intentional disregard of rules or regulations as follows: Section 6653(a)YearDeficiencyAddition to Tax1976$ 1,472$ 74197713,01565119783,385169The issues remaining for decision are: (1) whether petitioners are entitled to itemized deductions in excess of the amount agreed to by respondent; (2) whether petitioners are entitled to rental expenses (including depreciation) in excess of the amounts agreed to by respondent; and (3) whether petitioners are liable for the additions to tax under section 6653(a) for negligence or intentional disregard of rules or regulations. Some of the facts have been stipulated and are found accordingly. Bernice E. and Edward A. Peterson, husband and wife, resided in Gladstone, Oregon, when they filed their petition. The parties134 have agreed on certain itemized deductions and certain rental expenses in their stipulation. Petitioners introduced no evidence on the remaining controverted deductions and expenses at trial. Instead petitioners choose to rely on numerous constitutional and statutory arguments, all of which are frivolous. All such contentions have been fully considered by this and other courts, and decided adversely to the taxpayers. See, e.g., the cases cited in ; ; . We see no reason to reiterate the well-established principles of these cases. Since petitioners have the burden of proof on the substantiation issues of the deductibility of the claimed itemized deductions and rental expenses, ; Rule 142(a), Tex Court Rules of Practice and Procedure, and since they introduced no evidence at trial, they have failed to carry their burden of proof. The last issue is whether petitioners are liable for the additions to tax under section 6653(a) *135 for negligence or intentional disregard of rules or regulations. Here again, petitioners bear the burden of proof. . None of petitioners' arguments relieve them of liability for these additions to tax. See . To reflect allowances agreed to by respondent, Decision will be entered under Rule 155. Footnotes1. All statutory references are to the Internal Revenue Code of 1954, as in effect during the years in issue.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622290/	Robert S. Bradley, Petitioner, v. Commissioner of Internal Revenue, RespondentBradley v. CommissionerDocket No. 110186United States Tax Court1 T.C. 566; 1943 U.S. Tax Ct. LEXIS 237; February 11, 1943, Promulgated 237 Decision will be entered under Rule 50. Petitioner created identical trusts for each of his three daughters. The income from the trusts was to be paid to his daughters for life and on their death to their issue. Ultimately the corpora were to go to petitioner's grandchildren at certain ages. If there were no issue of any of the daughters surviving, one-third of the corpus of each trust was to go to petitioner's next of kin, one-third to Harvard College, and one-third as the last surviving daughter of petitioner should appoint by will, and in default of appointment, to petitioner's next of kin. In any event the trusts were to terminate 21 years after the death of the last surviving child of petitioner, the corpora then to be distributed to the persons to, or for, whom the net income should then be payable. During the taxable years the trustees were petitioner's lawyer, broker, and bookkeeper, respectively. Under the terms of each trust the trustees could revoke, alter, and amend, but not to the benefit of petitioner without the consent of the primary beneficiary or a person having a substantial interest in the disposition of the corpus or income of the trust. In their discretion238 the trustees could distribute income to the beneficiaries or withhold it. Income retained by the trustees for six months after the end of the calendar year in which it was collected was to be added to the principal. The trustees were given broad powers of investment and management. Held, income from the trusts during 1935 and 1936 was not taxable to petitioner under sections 22 (a), 166, or 167 of the Revenue Acts of 1934, and 1936. Robert G. Dodge, Esq., for the petitioner.James T. Haslam, Esq., for the respondent. Van Fossan, Judge. VAN FOSSAN 566 In his notice of deficiency respondent determined deficiencies in income taxes against petitioner for the calendar years 1935 and 1936 in the respective amounts of $ 70,600.23 and $ 165,565.98. Subsequently in his amended answer respondent prayed that the net income for the years 1935 and 1936 on which these deficiencies were based be increased by the respective amounts of $ 8,048.59 and $ 12,010.71 and that the deficiencies be increased accordingly. The first question is whether petitioner is taxable under sections 22 (a), 166 or 167 of the Revenue Acts of 1934 and 1936 on three trusts, of which he was the 239 grantor, for the benefit of his three daughters. The second question concerns the deductibility of trustees' expenses incurred in connection with the trust.FINDINGS OF FACT.Certain facts are stipulated and as so stipulated are adopted as findings of fact. In so far as material to the issues they are substantially as follows:567 Petitioner was born February 22, 1855, and at the time of the creation of the three trusts, was a widower with three daughters, namely, Rosamond, born in 1888, Leslie, born in 1890 and Frances, born in 1895. Rosamond was married to Charles A. Rheault on March 19, 1923, and has three children, born in 1924, 1925 and 1928, respectively. She and her husband lived in Canada from April 1923 to September 1923 and since then have had various homes in the United States. Leslie was married to Roger W. Cutler on December 14, 1912, and has four children, born in 1913, 1916, 1918, and 1919, respectively. Since 1915 she has owned and lived in a house in Needham, Massachusetts. She and her husband were divorced in Reno in 1928 and in Massachusetts in 1931. Frances was married to Talbot C. Chase on April 21, 1919, and has three children, born in 1920, 1922, 240 and 1928, respectively. Since the time of her marriage she and her husband have lived together in their own homes in Boston except for the winter 1923-1924, when they lived with petitioner in Boston. During various summers they lived with petitioner at his summer residence at Prides Crossing, Massachusetts, until 1929, when they acquired a summer residence at Manchester, Massachusetts, where they have since lived in the summers. Frances died suddenly on April 13, 1940.At the time of the creation of the three trusts petitioner was in good health and actively engaged in business as chairman of the board of directors and the executive committee of the American Agricultural Chemical Co. He owned a house in Boston and a summer residence at Prides Crossing, each of which he has ever since owned and maintained. So long as he continued in business he spent much of his time in New York. In August 1929, on account of advancing years and decreasing vigor, he retired from business. A few weeks later he had a nervous breakdown and was in a sanitarium in Beacon, New York, until September 1930, and again for four months in the winter of 1930-1931 and for a month in the winter of 1932. Thereafter241 he traveled much. He was in Europe from April to August 1932, in California for the winter of 1932-1933, in Europe again in the fall of 1933, since which time he has lived at his residence in Prides Crossing during the summers and has spent the winters in the south, with periods at a hotel in New York City on the way south and north.The approximate value of the assets of each of the trusts for the benefit of Rosamond and Frances was $ 1,450,000 at the time of their creation. The approximate value of the assets of the trust for the benefit of Leslie was $ 440,000 at the time of its creation. On May 7, 1934, the assets of the latter trust were increased by approximately $ 1,570,000 received from another trust on its termination. The approximate value of petitioner's remaining property after the creation of the three trusts was $ 4,000,000.568 The taxable net income and nontaxable income of the trusts reported by the beneficiaries and trustees for the taxable years was as follows:Rosamond Rheault Trust19351936Net income$ 86,756.70$ 177,150.40Nontaxable income42,981.0940,101.2543,775.6177,049.15Reported by Rosamond Rheault18,440.1323,737.92Reported by trustee25,335.4853,311.2343,775.6177,049.15Leslie B. Cutler TrustNet income$ 64,723.33$ 80,539.00Nontaxable income24,794.2822,484.6239,929.0558,054.38Reported by Leslie B. Cutler19,480.5822,555.22Reported by trustee20,448.4735,499.1639,929.0558,054.38Frances B. Chase TrustNet income$ 83,301.84$ 109,845.32Nontaxable income37,603.0629,903.6445,698.7879,941.68Reported by Frances B. Chase19,334.7327,903.12Reported by trustee26,364.0552,038.5645,698.7879,941.68242 Each of the three daughters, since the creation of the trusts, has been almost entirely dependent upon the income of her trust for the living expenses of herself and her family, the husband of each having had no substantial income from investments and having earned only relatively small amounts in proportion to the living expenses of himself and family. Prior to the creation of the trusts the daughters were in receipt of sizeable incomes from sources provided by petitioner and not available after the creation of the trusts.The trusts for the primary benefit of each of his daughters were created by petitioner on March 17, 1923. The three trusts are identical except for the names of the primary beneficiaries.The original trustees in each case were petitioner, his daughter, Rosamond, and Robert B. Stone. Each of the trust instruments provides, inter alia, that the trustees shall "pay, subject to other provisions hereof, the net income thereof to and for the benefit of" the daughter during her life and on her death, leaving issue, to and for the benefit of her issue. If she leaves no issue the net income goes to the other daughters and their issue and ultimately the corpus goes243 569 to the issue of the daughters at certain ages. If, on the death of the last survivor of all of petitioner's children, no issue of any of them survive, the corpus goes as follows: One-third to the next of kin of petitioner, one-third to Harvard College, and one-third as the last surviving daughter of petitioner shall by will appoint, and in default of appointment, to the next of kin of petitioner. The trust terminates 21 years after the death of the last surviving child of petitioner, the corpus then to be distributed to the persons to or for whom the net income shall then be payable.The trustees are not required to make payments directly to any beneficiary, but in their discretion may apply income for the benefit of a beneficiary or may accumulate it and thereafter pay it to or apply it for him or her or continue to hold it. Any accumulated income at the time of the death of the beneficiary is to become part of the principal.Any income retained by the trustees for six months after the end of the calendar year in which it is collected and not specifically reserved for some previously incurred expense or obligation other than payment to or for the benefit of any beneficiary244 is to be added to the principal.The trustees are empowered by the trust instruments to make distributions of securities or investments in their hands at such valuations as they deem fair, to hold any property whether or not it is an investment legally authorized, to hold nonproductive property, to hold a larger portion of one investment than a trust estate may ordinarily hold, and to hold the whole or any part of the trust fund in unregistered bonds, shares of stock, or of voluntary associations standing in the names of other persons and duly endorsed for transfer. The trustees are not required to withhold any income to make good any premium paid on investments or depreciation of any part of the estate. The trustees are empowered to sell at public or private sale any securities or investments composing the trust fund and to employ agents to perform acts and duties on their behalf. Each trustee is liable only for his own willful neglect and default.The original trust instruments also provided as follows:The foregoing declaration of trust, and all the terms, provisions and trusts therein contained, are hereby nevertheless made and declared on the express condition, and with the245 express reservation that all the trustees thereunder acting together so long as said Robert S. Bradley shall be alive, shall at all times, notwithstanding anything hereinbefore contained, or anything done hereunder, have full right, power and authority to revoke and cancel this declaration of trust, or add to, alter, or amend any or all of the provisions, terms or trusts thereof, and that thereafter the trust fund and all accumulated income then on hand, if any, shall be held and managed in accordance with such revocation, amendment, alteration or addition.570 On September 29, 1924, the trusts were amended to provide that thereafter the power to revoke or amend was vested in the trustees or trustee other than petitioner.On February 25, 1929, petitioner's daughter Rosamond and Robert B. Stone as trustees, amended the trusts to confer upon the trustees power to employ a bank as custodian of trust funds, to appoint a bank as trustee and to employ investment counsel.On February 26, 1929, Rosamond Rheault resigned as trustee and the remaining trustees appointed Walter N. Stillman of New York City as trustee in her place.On June 2, 1932, Walter N. Stillman and Robert B. Stone, 246 as trustees, amended the trust instrument by replacing the provision relative to the power of the trustees to revoke or amend with the following provision:The foregoing Declaration of Trust and all terms, provisions and trusts therein contained are hereby nevertheless made and declared on the express condition and with the express reservation that the trustees or trustee thereunder, other than said Robert S. Bradley and always excluding him, so long as said Robert S. Bradley shall be alive, shall at all times, notwithstanding anything hereinbefore contained or anything done hereunder, have full right, power and authority to revoke and cancel this Declaration of Trust or to add to, alter or amend any or all of the provisions, terms or trusts thereof and that thereafter the trust fund and all accumulated income then on hand, if any, shall be held and managed in accordance with such revocation, amendment, alteration or addition; provided always that no revocation, amendment, alteration, or addition shall give any beneficial interest to said Robert S. Bradley or shall operate to revest in him title to any part of the corpus of the trust unless such revocation, amendment, alteration or247 addition shall be assented to in writing by said Rosamond B. Rheault, or by some other person having a substantial interest in the disposition of the corpus of the trust or the income therefrom.On March 14, 1934, petitioner resigned as trustee and Fred M. Montgomery of Swampscott, Massachusetts, was appointed in his place.Of the trustees, Robert B. Stone has been petitioner's lawyer for many years; Walter N. Stillman, a member of a firm of stockbrokers in New York City, had acted as broker for petitioner; and Fred M. Montgomery has been petitioner's private secretary for forty-two years. Since 1934 Stone has seen petitioner only nine or ten times, but concerning matters unrelated to the trusts. Petitioner has not been in Montgomery's office since 1934. Since petitioner's resignation as trustee, the trustees have been entirely independent in the management of the trusts. They determine without consulting petitioner what shall be paid annually to the beneficiaries based upon a knowledge of the needs of the beneficiaries.571 The amendment to the trusts made in June 1932 was adopted by the trustees, Stone and Stillman, without any communication with petitioner, who was in248 Europe at the time.On November 24, 1924, petitioner, a widower, created a trust for the benefit of Lavinia H. Newell, a sister of petitioner's first wife, with the same trustees as served the trusts in question. In 1927 this trust was amended by trustees Rosamond Rheault and Robert B. Stone, whereby Lavinia H. Newell was removed as beneficiary and Florence S. Bradley, petitioner's second wife, was substituted in her place. With the exception of an amendment on January 24, 1933, the amendments, resignations, and appointments of trustees in connection with this trust were in all respects the same as those in connection with the trusts for the benefit of petitioner's daughters. In 1932 petitioner and Florence S. Bradley separated. In January 1933 Florence S. Bradley signed a separation agreement and signed a release of all her interest in the trust. In return Florence S. Bradley was paid $ 400,000 by petitioner. On January 24, 1933, this trust was amended by trustees Stone and Stillman, substituting Lavinia H. Newell as the primary beneficiary in place of Florence S. Bradley. This amendment was made without consultation with petitioner, who had gone to California. Thereafter249 the trust fund was held for the benefit of Lavinia Newell until her death in 1934, when the fund, then amounting to $ 1,570,000, was added to the trust for the daughter Leslie.OPINION.The first issue is whether income of the three trusts which petitioner created for the benefit of his three daughters is includible in his gross income for the years 1935 and 1936. Petitioner contends this income is not so includible under sections 166 or 167 of the Revenue Acts of 1934 and 1936, since, under provisions of the trusts, no part of the corpora or income therefrom could be revested in him without the consent of persons having substantial adverse interests. He also argues that the income is not taxable to him under section 22 (a) because petitioner, after the creation of the trusts, did not continue to be the real owner of the property. Respondent claims that, because of the powers in the trustees to alter, amend, or revoke, the income is taxable to petitioner. He further interprets the provisions of the trusts to mean that the trustees could revest title to the trust funds in petitioner without the consent of persons having substantial adverse interest.We do not agree with respondent250 that the trust income is taxable to petitioner under sections 166 or 167. Each of the trusts as amended on June 2, 1932, provided that the trustees, other than petitioner, 572 could revoke, alter, or amend the trusts, but not so as to benefit petitioner unless such a benefit was assented to by the primary beneficiary or "some other person having a substantial interest in the disposition of the corpus of the trust or the income therefrom." Respondent's argument that the primary beneficiaries did not have a substantial adverse interest can not be sustained. A study of the trust instruments reveals that petitioner's first purpose in creating the trusts was to provide for his children, the primary beneficiaries. The trustees themselves recognized this purpose by actually distributing income to the children in accordance with their needs. We believe, therefore, that the respective primary beneficiaries had a substantial interest in the income of the trusts, and consequently the corpora thereof, which was adverse to that of petitioner. In this respect the case is distinguishable from , wherein no interest251 under a trust could go to the grantor on revocation or amendment to the trust without the consent of his wife. The Circuit Court of Appeals for the First Circuit pointed out that the wife did not have a substantial adverse interest because the main objective of the trust was to benefit the grantor's children, not his wife, although distribution of accumulated income might, in the discretion of the trustees, have been made to the wife. See .Respondent contends that title to the trust principal could have been revested in petitioner on the consent of some person who did not have a substantial adverse interest by reason of the language, "some other person having a substantial interest in the disposition of the corpus of the trust or the income therefrom." The only persons other than the primary beneficiaries having a substantial interest in the corpus or income of the trust were the issue of the primary beneficiaries. The fact that such issue were contingent beneficiaries does not prevent their interest from being substantial. . Since a return of the corpora252 to petitioner would prevent the ripening of the contingent benefits given them under the trusts, we believe their interests were adverse to that of petitioner, within the meaning of that term as employed in sections 166 and 167.Accordingly, we hold that neither the corpora nor the income of the trusts could redound to the benefit of petitioner without the consent of persons having a substantial adverse interest. Therefore, the income therefrom is not includible in petitioner's gross income under sections 166 or 167.Respondent also contends that the income from the trusts is includible under section 22 (a) of the Revenue Acts of 1934 and 1936. The answer to this question depends on whether, as a matter of law, 573 petitioner ceased to be the substantial owner of the corpora after the trusts had been created. . In the latter case the Supreme Court, in discussing the facts peculiar to that case, concluded that:* * * the short duration of the trust, the fact that the wife was the beneficiary, and the retention of control over the corpus by respondent all lead irresistibly to the conclusion that respondent253 continued to be the owner for purposes of § 22 (a).From the above quotation it is clear that the facts in the case at bar are distinguishable from those in the Clifford case. Here the respective trusts were to continue at least for the lives of the primary beneficiaries; petitioner could not receive any of the benefits of income or principal without the consent of persons with a substantial adverse interest; petitioner retained no control or dominion over the corpora of the trusts or income therefrom; petitioner was not the trustee during the taxable years; and there was no reversion of the principal of the trust to petitioner. In view of these factors we do not believe that petitioner was in substance the owner of the corpora of the trusts. The mere fact that petitioner derived nonmaterial satisfaction out of seeing his children provided for is not sufficient to make him taxable. .Petitioner in the instant case did more to place ownership of the trust property beyond himself than did the grantor in , wherein the Circuit Court of254 Appeals for the First Circuit said:* * * Where the grantor has stripped himself of all command over the income for an indefinite period, and in all probability, under the terms of the trust instrument, will never regain beneficial ownership of the corpus, there seems to be no statutory basis for treating the income as that of the grantor under Section 22 (a) merely because he has made himself trustee with broad power in that capacity to manage the trust estate.Respondent argues in effect that the powers possessed by the trustees are attributable to petitioner because the trustees are amenable to the grantor's wishes in all matters pertaining to the trusts. As proof of this respondent points to the fact that in 1933 the trustees amended a trust identical in all pertinent respects with those before us in order to return Lavinia H. Newell, sister of petitioner's deceased wife, to her place as primary beneficiary, in lieu of Florence S. Bradley, whom petitioner had married in 1927. We are unable to agree with respondent that this amendment indicated that the trustees were amenable to the grantor's wishes. The action was taken by the trustees during petitioner's absence and without255 consulting him. It is apparent that the trustees removed Florence S. Bradley as primary beneficiary because she herself renounced her beneficial 574 interest in the trust. Apparently, this renunciation was a condition imposed upon her by a separation agreement between her and petitioner, under which agreement petitioner made a settlement on her of $ 400,000. By reason of the vacancy left by this renunciation, the trustees on their own motion returned Lavinia H. Newell to her former place as primary beneficiary.Nor is the fact that the trustees were petitioner's attorney, broker, and bookkeeper, respectively, of vital significance. It is natural that the grantor of a trust will appoint as fiduciaries persons upon whose ability and integrity he may rely. In the instant case the evidence is that petitioner never expressed to the trustees his wishes as to investment and management of the trusts. The trustees exercised their own independent judgment with regard to such matters. Nor is there any evidence on which to base a conclusion that the trustees would have abdicated their functions had petitioner sought to impose his will on them.It may well be argued that it would 256 have been an abuse of the discretionary powers given the trustees under the trust instruments for them to have followed the dictates of petitioner rather than of their own collective judgment. In the absence of evidence it would be unjustifiable to impute such an abuse to them. Taking into consideration all of the factors involved in this situation, it is our opinion that petitioner did not remain in substance the owner of the corpora of the trusts within the meaning of section 22 (a). ; ;; ; and .Respondent places great reliance on , as to the applicability of section 22 (a). We think that case clearly distinguishable. The basis for the decision there was that petitioner had not placed control of a trust created by him beyond his family circle. The trustees were petitioner's wife and a family-controlled257 corporation. The opinion in that case indicated that the corporate trustee respected the wishes of petitioner as to matters concerning the trust which he had established. Also upon the written direction of petitioner's wife, the whole trust could have been terminated and the corpus returned to petitioner. Further, the power of appointment over the corpus, which power was given to petitioner's wife, was confined to petitioner's own descendants. None of those factors are present here and it is, therefore, obvious that that case is not controlling.Accordingly, we hold petitioner not taxable on the income from the three trusts under section 22 (a).In his amended answer respondent requests that the deficiencies be increased to take into account $ 8,048.59 and $ 12,010.71 of additional 575 income for the years 1935 and 1936, respectively. These additional amounts represent expenses of management which respondent failed to disallow in his notice of deficiency. Since the request for additional deficiencies is new matter pleaded in the amended answer, respondent has the burden of proving that these expenses are not allowable. Respondent has offered no evidence that these expenses258 were incurred in connection with exempt income. We, therefore, hold for petitioner as to these items.Decision will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622293/	WARREN H. CORNING, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Corning v. CommissionerDocket No. 86898.United States Board of Tax Appeals36 B.T.A. 301; 1937 BTA LEXIS 738; July 13, 1937, Promulgated 738 Petitioner created two trusts. In each, he reserved the right to remove and substitute himself or others as trustee, and the power to control the trustee as to investment of the corpus. Each trust agreement provided that the trustee might loan money to petitioner's estate without security or invest the corpus in any way without liability for loss if it had first secured his approval. Petitioner's father, who was a possible beneficiary in case petitioner died without direct descendants, was granted the right to amend the trust at any time and change its beneficial interests. The income of both trusts was accumulated during the year 1934 and, during that year, petitioner possessed the right, after the death of his father and after a certain date, to revoke or amend both trusts. In the case of the first trust he could, by such revocation or amendment, repossess the corpus and accumulated income. In the case of the other he might repossess the corpus but could not vest title in himself to the accumulated income but could control its distribution to others or its application in payment of premiums on insurance upon his life. Petitioner's rights of revocation and amendment reserved739 were, during the tax year, subject to extinguishment through exercise by his father of the right of amendment granted him. That right of the father was not exercised. Held:(1) That under section 166 of the Revenue Act of 1934, the income of each trust for that year is taxable to petitioner since, during that year, he was vested with the right, at some future time, to revest, in himself, the corpus of each trust. (2) Since, in both trusts, petitioner retained "the substance of enjoyment" of the trust property, the income from both trusts is taxable to him. David A. Gaskill, Esq., and Earl P. Schneider, Esq., for the petitioner. T. M. Mather, Esq., for the respondent. LEECH301 OPINION. LEECH: On May 28, 1937, this Board promulgated an opinion herein - 35 B.T.A. 1162">35 B.T.A. 1162. On the 1st day of June 1937, a decision of the Board was entered pursuant to that opinion. June 11, 1937, petitioner moved for Board review, of that opinion. June 15, 1937, the Chairman granted that motion. For cause appearing of record, the following opinion is substituted for that opinion of the Board, promulgated May 28, 1937, which latter opinion740 is hereby vacated. Respondent determined a deficiency in petitioner's income tax for 1934 in the sum of $3,776.71, of which $3,713.04 is in controversy. The disputed tax arises by reason of the increasing of petitioner's 302 reported income by the amount of the income realized, but not distributed, by the trustees in that year, under two trusts created in prior years by petitioner. The facts are stipulated. The two trust instruments, together with the amendments executed, are made a part of the formal stipulation filed. Briefly stated, the facts are that petitioner in 1929 executed two trust instruments. By one he conveyed to the Union Trust Co. of Cleveland, Ohio, as trustee, certain corporate stock, such of the yearly income as the trustee might "deem advisable" to be paid to him for life, then to his wife for her life. On the death of the survivor of these two the corpus was to be divided among petitioner's direct descendants or in case there were none surviving, to be paid over to petitioner's father, if living. The trustee was given authority to sell the trust property, to invest funds of the trust, and otherwise deal with the trust corpus without legal restrictions741 otherwise applicable to trustees, and to lend money to or purchase property from petitioner's estate without security and without liability for loss. It was provided that the trustee should, before purchase or sale of securities, secure the approval, during his life, of petitioner's father and after his death of petitioner, and there was specifically reserved to petitioner the right at any time to remove the trustee and substitute another merely upon giving written notice. It was further provided by this trust that petitioner's father might, during his life, amend or terminate the trust in whole or in part and change any beneficial interest thereunder. In case of termination of the trust under this power, the corpus was to be paid over to petitioner, if living, or if not living, then to any one specified by petitioner's father. Petitioner also reserved the right, after the death of his father, but in no event prior to 1932, to amend or terminate the trust, it being provided, however, that he might not revest himself in any year with the corpus of the trust unless he had given notice in writing of his intended action not later than November 30 of the preceding year. On December 1, 1931, petitioner's742 father, Henry W. Corning, in the exercise of his power to amend the terms of the trust instrument, executed an amendment providing that the income of the trust during the life of petitioner should be accumulated and added to the corpus, and changing from 1932 to 1937 the earliest date at which petitioner might terminate the trust. On August 8, 1933, petitioner's father executed a second amendment providing that sale, lease, investment, or reinvestment of the trust estate until October 1, 1933, should be made by the trustee upon direction of petitioner, and that the trustee would be absolved from any and all responsibility for acts done under 303 such direction. By a third amendment, executed October 1, 1933, this power of direction by petitioner was extended to July 1, 1935. By the second trust certain securities were transferred by petitioner to one S. Roswell Shepherd as trustee. The beneficiaries were the same as in the first trust. The powers granted to the trustee and petitioner's father and those reserved to the petitioner were the same as in the first trust, with the one exception that petitioner was not limited as to time with respect to his right of revocation743 or amendment of the trust, except that it be subsequent to his father's death. This trust differs from the first mainly in the amendments executed by petitioner's father under the power granted him. Thus, on January 17, 1933, petitioner's father executed an amendment changing the provision for payment by the trustee in its sole discretion of all or part of the income to petitioner, to provide that the income in the sole discretion of the trustee be, during the life of petitioner, accumulated or paid to petitioner's wife, his mother, his father, and/or any descendants of his surviving. Any income not so distributed by the trustee was to be accumulated and set apart in a separate "Fund A." Upon petitioner's death "Fund A" was to be added to the corpus of the trust and the income from such corpus was to be paid over to petitioner's wife for life and upon her death to be paid in equal shares to petitioner's children, or, per stirpes, to descendants, if any, of children not then living. By this amendment it was further provided: I hereby authorize and empower my father, HENRY W. CORNING, during his life, and thereafter I reserve to myself, during my life, the right, to change or744 modify any of the administrative provisions of this agreement and to change any beneficial interest hereunder and to revoke this trust either in whole or in part, by delivering to the Trustee an instrument in writing acknowledged like a conveyance of real property entitled to record in New York, unless acknowledgment be waived by it, and in the event of the revocation of all or a part of this trust by my father, the Trustee shall pay over the principal thereof so revoked (excluding, however, the principal of the said Fund A) to me if I am then living, or if I am not then living the Trustee shall pay over the entire principal thereof (including the principal of the said Fund A) to my father or to such person or persons as he may designate in writing to the Trustee; provided, however, that, during my life, neither my father nor I shall have the power, at any time prior to January first, 1938, to revoke this trust either in whole or in part or to direct that any part of the income of the trust be paid over or held or accumulated for future distribution to me or be applied by the Trustee to the payment of premiums upon policies of insurance on my life, and provided further, that during745 my life and after January first, 1938, neither my father nor I shall have the power at any time during any taxable year within the meaning of the revenue laws of the United States to exercise any of the aforesaid powers not exercisable before said date, except that, if, during the month of December in the taxable year 1937 or during the month of December in any taxable year thereafter, my father, or in case he is not living, then if I, deliver to the Trustee during such month a written notice that it is desired 304 to have such powers during any specified time after the first day of the next succeeding taxable year, then during such specified time, but neither prior nor, except upon similar notice, subsequent thereto, my father if living and if he be not living, then I, shall have full power by instrument of the character hereinbefore specified, to revoke this trust in whole or in part or to direct that any part of the income of the trust thereafter accruing be paid over or held or accumulated for future distribution to me, or be applied by the Trustee to the payment of premiums upon policies of insurance upon my life. Anything herein to the contrary notwithstanding, neither746 my father nor I shall at any time have the right to vest in myself title to any part of the said Fund A, and the Trustee shall in no event pay over any of the principal of said Fund A to me during my life, and in the event of the revocation of this trust in whole or in part during my life any part or all of the said Fund A so affected shall be paid over by the Trustee to the persons named and in the proportions designated by my father, Henry W. Corning, if he is then living, by an instrument in writing delivered to the Trustee, and any affected part of the said Fund not validly so appointed shall be paid over to the persons named and in the proportions designated by my mother, EDITH W. CORNING, if she is then living; provided, however, that in no event shall either my father or my mother have the power to direct that any portion of said Fund A shall be paid over to me, and any affected part not validly so appointed shall be paid over to my said wife if she is then living, or if not, in equal shares per stirpes to my descendants then living, or if none, in equal shares per stirpes to my father's descendants (other than myself) then living. I also reserve the right for myself or any747 other person to increase this trust by delivering property or making insurance policies payable to the Trustee for that purpose or by bequest or devise by will. No income of the trust shall be applied to the payment of premiums upon policies of insurance on my life, unless and until direction shall be given to the Trustee therefor upon compliance with the conditions hereinbefore specified. In no case shall the duties and liabilities of the Trustee hereunder be increased without its written consent. None of the income of the two trusts for 1934 was distributed but all was accumulated by the trustees. Section 166 of the Revenue Act of 1934 provides: SEC. 166. REVOCABLE TRUSTS. Where at any time the power to revest in the grantor title to any part of the corpus of the trust is vested - (1) in the grantor, either alone or in conjunction with any person not having a substantial adverse interest in the disposition of such part of the corpus or the income therefrom, or (2) in any person not having a substantial adverse interest in the disposition of such part of the corpus or the income therefrom, then the income of such part of the trust shall be included in computing the748 net income of the grantor. Respondent, by article 166-1, Regulations 86, has construed this section as follows: ART. 166-1. Trusts, with respect to the corpus of which, the grantor is regarded as remaining in substance the owner. - * * (b) Section 166 defines with particularity instances in which the grantor is regarded as in substance the owner of the corpus by reason of the fact that 305 he has retained power to revest the corpus in himself. For the purposes of this article the grantor is deemed to have retained such power, if he, or any person not having a substantial interest in the corpus or the income therefrom adverse to the grantor, or both, may cause the title to the corpus to revest in the grantor. If the title to the corpus will revest in the grantor upon the exercise of such power, the income of the trust is attributed and taxable to the grantor regardless of - (1) whether such power or ability to retake the trust corpus to the grantor's own use is effected by means of a power to revoke, to terminate, to alter or amend or to appoint; (2) whether the exercise of such power is conditioned on the precedent giving of notice, or on the elapsing749 of a period of years, or on the happening of a specified event; (3) the time at which the title to the corpus will revest in the grantor in possession and enjoyment, whether such time is within the taxable year or not, or whether such time be fixed, determinable, or certain to come; (4) whether the power to revest in the grantor title to the corpus is in the grantor, or in any person not having a substantial interest in the corpus or income therefrom adverse to the grantor, or in both. A bare legal interest, such as that of a trustee, is never substantial and never adverse; (5) when the trust was created. Sections 166 of the Revenue Acts of 1928 and 1932 were similar to the above quoted section of the 1934 Act here applicable with the exception that the former provide that, to tax any of the trust income to the grantor, the power of revocation must exist "within the taxable year." That limitation led to the creation of trusts with the power of revocation only upon the giving of notice of that intent more than 12 months in advance. 750 Langley v. Commissioner, 61 Fed.(2d) 796; Faber v. United States,1 Fed.Supp. 859; Lewis v. White, 61 Fed.(2d) 1046, affirming 56 Fed.(2d) 390; Mabel A. Ashforth et al., Executors,26 B.T.A. 1188">26 B.T.A. 1188. It was to meet this practice and prevent this method of tax avoidance that the change was made in section 166 of the 1934 Act. 1 This provision has been reenacted without alteration in the Revenue Act of 1936 in the face of its interpretation by the Commissioner by his regulations above quoted. In the present case under his interpretation of section 166, respondent has included in the income of the petitioner all of the income of the two present trusts, for the reason that under each trust petitioner has reserved the power to revoke or amend, under certain conditions, and thus repossess the corpus. It is petitioner's contention that section 166 does not apply because his right of revocation was subject to a contingency which had not yet happened and the happening of which was beyond his power to control. That contingency was751 the death of his father without exercise of a power of amendment granted the father, which might be used to destroy petitioner's right of revocation. 306 The court in Kaplan v. Commissioner, 66 Fed.(2d) 401, in construing section 219(h) of the Revenue Act of 1924, said: * * This provision was intended, as its legislative history clearly shows, as a protection to the government against evasion of income taxes, especially surtaxes, by means of trusts whereby the grantor, although parting with the legal control of the trust property, reserved a practical control over the income of it which could, in point of fact, be exercised for his own benefit. As Kaplan named himself trustee, the large discretion given in the trust instrument to the trustee as to the accumulation and payment of income is attributable to him personally. By the terms of the trust that discretion can be exercised for his own possible benefit, within wide limits. We see no occasion for refinement of construction against the government. We think the statute means that if under any circumstances or contingencies any part of the accumulated income might inure to the benefit of the752 grantor such portion of the income is taxable to him. Section 166, here involved, and its companion section 167 of the Revenue Act of 1934, 2 were both enacted to prevent the avoidance of surtax through creation of trusts subject in some manner to the control of the grantor. They, as well as the similarly numbered sections of the 1928 and 1932 Acts, constitute a reenactment and extension of sections 219(g) and (h) of the Acts of 1924 and 1926. In Higgins v. White,18 Fed.Supp. 986, interpreting section 219(g) of those Acts, after citing the Kaplan case, supra, with approval, and quoting, substantially, the above excerpt, Judge Brewster said: * * The only essential difference between subparagraph (g) and subparagraph (h) of section 219 is that in the former the provisions relate to the grantor's control over the corpus of the trust, and in the latter over the income. This difference involves no distinction in principle. 753 The Board had already followed the reasoning in the Kaplan case in construing section 167 of the Revenue Act of 1934. Cf. Fanny M. Dravo et al., Executors,34 B.T.A. 190">34 B.T.A. 190. So, the respondent argues that since the same purpose prompted the original enactment and the quoted controlling amendment thereto in the Revenue Act of 307 1934, the same reasoning should be used in our interpretation of section 166. See Higgins v. White, supra.Therefore, it is argued that there is no occasion for a refinement of construction here against the Government in construing the latter provision. Respondent thus urges that section 166 shall be applied in taxing to the grantor, petitioner, the income of the present trusts where, as here, he has reserved to himself, at the time and under the conditions heretofore detailed, a right of revocation, even though the exercise of such right be subject to a condition precedent over which the grantor has no control. On this question we agree with respondent. Petitioner reserved to himself the power in the first trust, after his father's death and after 1932, later extended to 1937, to revoke and revest himself754 of the corpus. He retained the same power under the second trust, limited only by the death of his father. Petitioner thus reserved the vested right to revest in himself the corpus of both trusts at some time in the future. The power to exercise this right, not its existence, during the tax year, was contingent. That contingency was the failure of the father to revoke that reserved right of the petitioner. Petitioner's father could have deprived petitioner of that reserved right. But nothing in this record indicates any probability of that happening. In fact, the converse is indicated by the father's amendments of the trusts. At all events, the father has not divested petitioner of his vested right to revoke and thus revest the trust corpus in himself, specifically reserved in the trusts. And, until he is divested of that right, by the exercise of the power granted the father, petitioner stands vested with it. Kinney v. Commissioner, 80 Fed.(2d) 568, and cases cited therein. The circumstance that petitioner's right to revest the trust property in himself, was vested and not contingent - was more than "a mere possibility of reverter" - answers755 petitioner's sttack on the constitutionality of our construction of section 166, supra.Cf. Helvering v. St. Louis Union Trust Co.,296 U.S. 39">296 U.S. 39; Dort v. Helvering, 69 Fed.(2d) 836; Kaplan v. Commissioner, supra.We conclude that the respondent was right in taxing the contested income of the present trusts to petitioner under the Revenue Act of 1934, section 166, supra, and that the quoted construing regulations are reasonable in so far as they apply to the facts in this proceeding. Cf. Higgins v. White, supra;Fanny M. Dravo et al., Executors, supra.This holding extends to the accumulated income composing "Fund A" under the second trust, since that fund consisted of income on the original trust corpus before it became corpus under the provisions of the trust authorizing its accumulation. It was, therefore, taxable as such income to the grantor, under the provisions of section 308 166, supra, even though, possibly, by reason of the provisions of the trust agreement, after being accumulated and added to the corpus, it could not thereafter vest in the petitioner756 though it could be used, under certain conditions, as we read the trust instrument, in the payment of premiums on life insurance policies of the petitioner or for his other possible benefit. But, aside from the specific provisions of section 166 of the Revenue Act of 1934, supra, there is another and, we think, cogent ground supporting the respondent's contested action here. Under the rule adopted by some courts and this Board, if the two present trusts are of such character that petitioner, although transferring the legal title to a trustee, has retained in himself such general power of control and management that the trust property may be used for his own benefit to the extent that would give him the "substance of enjoyment", then the income of each trust is taxable to petitioner, either upon the theory that such trusts do not have separate taxable entities or they amount to no more than an assignment of income. Claud McCauley,17 B.T.A. 886">17 B.T.A. 886; affd., 44 Fed.(2d) 919; Jacob Schneider et al., Executors,35 B.T.A. 183">35 B.T.A. 183; 757 William C. Rands,34 B.T.A. 1107">34 B.T.A. 1107. See Douglas v. Willcuts,296 U.S. 1">296 U.S. 1. Let us consider whether, under these trusts, petitioner has reserved the substance of enjoyment to himself. Under the first trust he reserved the power to remove the trustee and appoint a successor at will by mere written notice. So, at any time, he could have substituted himself as trustee and exercised the broad and unusual powers over the corpus granted the trustee, without liability. But, aside from this specific reservation indicating the mutual understanding between father and son that the son intended to retain the control of the corpus of the trusts, the father of the petitioner, by virtue of his power to amend, on August 8, 1933, executed an amendment providing not only that the income of the trust during the life of the petitioner should be accumulated and added to the corpus, but substituting the petitioner for the father as the party upon whose orders, alone, the trustee should act, without liability, in exercising the powers granted the trustee. This amendment was in effect throughout the tax year. Thus, for the pertinent period, under either or both of758 those provisions, petitioner absolutely controlled the use of the trust corpus. He could sell or cause the sale of any or all of it to anybody on any terms or conditions. He could control the reinvestment of the proceeds of those sales in any manner. He could loan or cause the lending of any or all of the trust corpus to himself or anybody else on any terms and without security or liability or responsibility on his part or that of the trustee for the exercise of that power. In the second trust instrument, petitioner similarly reserved the power to remove the trustee at will and substitute himself or another 309 as successor. The trustee was granted like inclusive and unusual discretion as to the trust property. Not only that, but in this document is found the provision that the trustee, upon such evidence as he might consider sufficient, could determine petitioner or his father to be incompetent to direct the management of the trust property and, in that event, such incompetent party would be considered, for the purposes of the trust instrument, as "dead." Under this provision, it would appear that petitioner, at any time, through his own action, alone, could substitute759 himself as trustee and remove his father from any power to direct the management of the trust property or amend or revoke the trust instrument. These powers were supplemented, of course, by the reserved right to revoke which included the entire corpus and accumulated income of both trusts except, possibly, "Fund A", composing certain accumulated income of the second trust. But, assuming that possibility, petitioner could, subject to conditions (see Fanny M. Dravo et al., Executors, supra ), control the distribution of that fund to others or use it for the payment of his own life insurance premium liabilities. On this record, under the stated rule, we think the conclusion is inescapable that the contested income is taxable to petitioner. Claud McCauley, supra;Jacob Schneider et al., Executors, supra;William C. Rands, supra. See Douglas v. Willcuts, supra, and Burnet v. Wells,289 U.S. 670">289 U.S. 670. Reviewed by the Board. Decision will be entered for the respondent.DISNEY concurs only in the result. Footnotes1. Conference Report No. 1385, 73d Cong., 2d sess., at p. 24. ↩2. SEC. 167. INCOME FOR BENEFIT OF GRANTOR. (a) Where any part of the income of a trust - (1) is, or in the discretion of the grantor or of any person not having a substantial adverse interest in the disposition of such part of the income may be, held or accumulated for future distribution to the grantor; or (2) may, in the discretion of the grantor or of any person not having a substantial adverse interest in the disposition of such part of the income, be distributed to the grantor; or (3) is, or in the discretion of the grantor or of any person not having a substantial adverse interest in the disposition of such part of the income may be, applied to the payment of premiums upon policies of insurance on the life of the grantor (except policies of insurance irrevocably payable for the purposes and in the manner specified in section 23(o) relating to the so-called "charitable contribution" deduction): then such part of the income of the trust shall be included in computing the net income of the grantor. (b) As used in this section, the term "in the discretion of the grantor" means "in the discretion of the grantor, either alone or in conjunction with any person not having a substantial adverse interest in the disposition of the part of the income in question." ↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622294/	HALF MOON FRUIT AND PRODUCE COMPANY, ET AL., 1 Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent Half Moon Fruit & Produce Co. v. CommissionerDocket Nos. 9843-77, 9844-77, 9845-77, 9846-77, 9847-77.United States Tax CourtT.C. Memo 1980-108; 1980 Tax Ct. Memo LEXIS 477; 40 T.C.M. (CCH) 96; T.C.M. (RIA) 80108; April 8, 1980, Filed 477 P and C, farming businesses, owned rice acreage allotments throughout 1974. For many years before 1974, farmers were required to own allotments in order to market their rice and to receive price supports. However, because the supply of rice was less in 1974, farmers were permitted to market rice without owning allotments, but allotments were still required in order to receive price supports in 1974. Held, the rice allotments owned by P and C were not worthless in 1974, and hence, they are not entitled to a deduction for the loss in value of such allotments. Stephen J. Schwartz and Charles A. Lane, for the petitioners. Rebecca T. Hill, for the respondent. SIMPSONMEMORANDUM FINDINGS OF FACT AND OPINION SIMPSON, Judge: The Commissioner determined the following deficiencies in the petitioners' Federal income taxes: Taxable YearPetitionerEndingDeficiencyHal Moon Fruit andProduce Company2/28/75$26,613.00John B. Giovannetti12/31/745,350.00Ronald P. Giovannettiand Norma J.Giovannetti12/31/745,097.00Blaise E. Giovannettiand Mary E.Giovannetti12/31/745,933.00Donald P. Giovannettiand Adele M.Giovannetti12/31/744,697.00The only issue for decision479 is whether certain rice acreage allotments became worthless during 1974 so as to result in a loss deductible under section 165(a) of the Internal Revenue Code of 1954. 2FINDINGS OF FACT Some of the facts have been stipulated, and those facts are so found. The petitioners, Donald P. Giovannetti and Adele M. Giovannetti (husband and wife), Blaise E. Giovannetti and Mary E. Giovannetti (husband and wife), and John B. Giovannetti, all maintained their legal residences in Woodland, Calif., when they filed their petitions in this case. The petitioners, Ronald P. Giovannetti and Norma J. Giovannetti, husband and wife, maintained their legal residence in Yuba City, Calif., when they filed their petition. The petitioner, Half Moon Fruit and Produce Company (Half Moon), is a California corporation with its principal place of business in Woodland, Calif., when it filed its petition. Mr. and Mrs. Donald Giovannetti, Mr. and Mrs. Blaise Giovannetti, and Mr. and Mrs. Ronald Giovannetti filed joint Federal income tax returns480 for 1974 with the Internal Revenue Service Center, Fresno, Calif. John B. Giovannetti filed his individual Federal income tax return for 1974, and Half Moon filed its corporate Federal income tax return for the taxable year ending February 28, 1975, with the Internal Revenue Service Center, Fresno, Calif. practice, once a farmer obtained an allotment, he continued to receive it each year. A farmer's acreage allotment served him in two ways: Whenever the "total supply" of rice was expected to exceed the "normal supply" in a crop year, the Secretary of Agriculture was required to declare marketing quotas in effect. 7 U.S.C. sec. 1354 (1974). A farmer's marketing quota was, in general, the amount of rice he was able to produce on his acreage allotment. 7 U.S.C. sec. 1355 (1974). If a farmer produced rice in excess of his quota, a heavy penalty was assessed against the buyer of the excess so that, in effect, the excess was unmarketable. 7 U.S.C. sec. 1356 (1974). Thus, in years when quotas were in effect, a farmer needed an acreage allotment in order to market his rice. In addition, a farmer's acreage allotment served481 to qualify him for price supports, and such benefit was available even when marketing quotas were not in effect. See Agricultural Act of 1949, ch. 792, 63 Stat. 1054, 7 U.S.C. sec. 1421(c); 7 C.F.R. sec. 1421.303 (1974). Acreage allotments for rice production were commonly traded and leased for substantial consideration. When an allotment was traded, the transferee acquired the right to use the allotment for the crop year and the right to receive future allotments based thereon. In 1969, Half Moon began purchasing acreage allotments for rice production, and by 1973, it had purchased allotments covering 169.5 acres for an aggregate price of $55,725. In 1971 and 1972, the partnership also purchased allotments covering 148.1 acres for an aggregate price of $57,818. From 1938 to 1954, marketing quotas for rice were in effect for some but not all years, but from 1954 through 1973, such quotas were in effect for each year. However, in October 1973, the Secretary of Agriculture announced that he expected the total supply of rice for the year to be less than the normal supply and that accordingly marketing quotas for rice would not482 be in effect for 1974. 7 C.F.R. sec. 730.1501 (1974); see 7 U.S.C. sec. 1354 (1974). In late 1974, the Secretary of Agriculture also announced that the total supply of rice for the current year was expected to be less than the normal supply and that therefore marketing quotas for rice would not be in effect for 1975. 7 C.F.R. sec. 730.1501 (1975). The announcements for 1974 and 1975 pointed out that since marketing quotas for rice were not in effect for those years, there was no penalty on the marketing of excess rice but that to qualify for price supports for production of rice, a farmer was restricted to planting the acres allocated to him. In neither announcement did the Secretary give any indication that the enforcement of marketing quotas for rice had ended permanently; in fact, under the law then in effect, he was bound to enforce such quotas whenever the total supply of rice was greater than the normal supply. In 1976 and 1977, the Congress suspended marketing quotas for rice for crop years 1976 through 1981 and established, in lieu thereof, a "target price" system. Rice Production Act of 1975, Pub. L. 94-214, secs. 102-103, 90 Stat. 183; Food and483 Agriculture Act of 1977, Pub. L. 95-113, secs. 702-703, 91 Stat. 940. During 1974 and 1975, rice acreage allotments continued to be traded for substantial consideration. In those years, the partnership and Half Moon did not acquire any additional rice allotments, but they did follow all procedures necessary to avoid losing their rice allotments. Thus, they used such allotments by planting rice on the acres covered by them, and they filed numerous forms with the local office of the Agricultural Stabilization and Conservation Service (ASCS). On their 1974 returns, the partnership and Half Moon reported their rice allotments as a total loss in 1974 and deducted from gross income the entire amounts paid for them. On their returns, the individual petitioners reported their distributive shares of the partnership income taking into consideration the loss claimed for the rice allotments. In his notices of deficiency, the Commissioner disallowed the deductions taken by Half Moon and the partnership, and he increased the distributive shares of the individual petitioners to reflect the disallowance of the deduction claimed by the partnership. OPINION This case, in the words of Justice484 Frankfurter, "is a horse soon curried." 4 The petitioners contend that the decisions by the Secretary of Agriculture in 1973 and 1974 not to enforce marketing quotas for rice in 1974 and 1975 rendered their acreage allotments worthless in 1974. They conclude that they were entitled to deductions under section 165(a) for the losses they incurred. On the other hand, the Commissioner contends that there were no closed and completed transactions evidencing any losses and that, in any event, the allotments were not worthless.It is axiomatic that to be deductible under section 165(a), a loss must be evidenced by a closed and completed transaction. Sec. 1.165-1(b), Income Tax Regs.; Beatty v. Commissioner,46 T.C. 835">46 T.C. 835 (1966); A. J. Schwarzler Co. v. Commissioner,3 B.T.A. 535">3 B.T.A. 535 (1926). Here, the partnership and Half Moon did not sell or otherwise transfer their allotments in 1974, thus establishing that they sustained a loss in such year. Nor did they abandon the allotments in such year; in fact, they actively maintained the allotments by fulfilling the requirements485 of ASCS. We recognize that if the act of removing marketing quotas rendered the rice allotments totally worthless, such act might be sufficient to establish that a loss had been sustained. See McAvoy Co. v. Commissioner,10 B.T.A. 1017">10 B.T.A. 1017 (1928); Zakon v. Commissioner,7 B.T.A. 687">7 B.T.A. 687 (1927) (both cases allowed a deduction for the total loss in value of liquor licenses resulting from the enactment of Prohibition). However, the record contains persuasive evidence that the rice allotments were valuable assets even while marketing quotas were not in effect. At trial, the Commissioner firmly established, with reliable testimony, that rice allotments were traded and leased for substantial consideration in 1974 and 1975. It is easy to understand why there continued to be a market for rice allotments in such years. Even though allotments were not a prerequisite to marketing rice in those years, they did serve to qualify their owners for price supports. Moreover, the decisions not to enforce marketing quotas in 1974 and 1975 were clearly temporary. Enforcement had been suspended before--in 1954, and there was no reason to believe it would not resume after*486 1974 as it had resumed after 1954. Indeed, the Agricultural Adjustment Act of 1938, as in effect in those years, required the Secretary of Agriculture to re-establish marketing quotas whenever the total supply of rice exceeded the normal supply. 7 U.S.C. sec. 1354 (1974). The conclusion is inescapable that the rice allotments of the partnership and Half Moon were not worthless in 1974. It may be true that in 1974, there was some decline in the value of the allotments, but it is well settled that mere diminution in value does not result in a deductible loss. Hudspeth v. United States,519 F. 2d 1055 (5th Cir. 1975); Beatty v. Commissioner,supra at 838; Pugh v. Commissioner,17 B.T.A. 429">17 B.T.A. 429, 434 (1929), affd. 49 F. 2d 76 (5th Cir. 1931), cert. denied 284 U.S. 642">284 U.S. 642 (1931). Accordingly, we hold that the petitioners are not entitled to a deduction in 1974 on account of the rice allotments. In view of that conclusion, we do not reach the Commissioner's alternative contention that the deductions were claimed in the wrong year. Decisions will be entered for the respondent.Footnotes1. Cases of the following petitioners are consolidated herewith: John B. Giovannetti, docket No. 9844-77; Ronald P. Giovannetti and Norma J. Giovannetti, docket No. 9845-77; Blaise E. Giovannetti and Mary E. Giovannetti, docket No. 9846-77; and Donald P. Giovannetti and Adele M. Giovannetti, docket No. 9847-77.↩2. All statutory references are to the Internal Revenue Code of 1954 as in effect during the years in issue unless otherwise indicated.↩4. Olberding v. Illinois Central R. Co.,346 U.S. 338">346 U.S. 338, 340↩ (1953).	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622295/	Arkansas Louisiana Gas Company v. Commissioner.Arkansas Louisiana Gas Co. v. CommissionerDocket No. 90065.United States Tax CourtT.C. Memo 1963-77; 1963 Tax Ct. Memo LEXIS 269; 22 T.C.M. (CCH) 331; T.C.M. (RIA) 63077; March 15, 1963269 Thomas A. Harrell, Esq., First Nat'l Bank Bldg., Shreveport, La., for the petitioner. Marvin T. Scott, Esq., for the respondent. WITHEYMemorandum Opinion WITHEY, Judge: Deficiencies have been determined by the respondent in the income tax of petitioner for the calendar years 1955 and 1956 in the respective amounts of $96,856.41 and $111,263.32. Certain of the issues raised by the pleadings have been settled by the parties as set forth in their stipulation filed herein. The only remaining issue relates to the deductibility as ordinary and necessary business expenses of the costs incident to petitioner's distribution of stock dividends during each year at issue. All of the facts have been stipulated and are found as fact whether or not reiterated herein. ArkansasLouisiana Gas Company was incorporated under the laws of the State of Delaware on March 9, 1928, under the name of Southern Cities Distributing Company. On November 30, 1934, petitioner's name was changed to ArkansasLouisiana Gas Company. During the years 1955 and 1956, petitioner maintained its principal executive offices and place of business in the Slattery Building, Shreveport, Louisiana. Petitioner270 filed its corporate income tax return, Form 1120, for each of the years 1955 and 1956 with the district director of internal revenue at New Orleans, Louisiana. In each of the years before the Court the petitioner kept its books and filed its returns on an accrual method of accounting. On November 22, 1955, by a resolution of its board of directors, petitioner declared a 10 percent dividend on its common stock payable on December 23, 1955, to its stockholders of record at the close of business on December 2, 1955. The Guaranty Trust Company of New York was designated by petitioner as its agent to oversee the distribution of this stock dividend. In connection with and to effect payment of this stock dividend, petitioner accrued in 1955 and paid, as indicated, the following amounts: American Stock Exchange Listing Fee$ 1,000.00Pandick Press, Inc. - for PrintingCopies letter to Banks, Brokers and Nominees$ 82.40Copies Dividend Letter to Stockholders (19,000)368.07450.47Security Banknote Co. - for Printing20,000 Less - 100 Shs. common stock certificates5,000 - 100 Shs. common stock certificates4,500.00Guaranty Trust Company of New YorkOriginal issue tax on 380,160 shares$ 3,101.89New York State tax transfer stamps (4,438 shares)88.76Federal tax transfer stamps (4,438 shares)183.75Purchase and sale of fractional interest17.55Services disbursing common stock dividend24,052.1627,444.11Total costs$33,394.58271 On September 28, 1956, by a resolution of its board of directors, petitioner declared another 10 percent dividend on its common stock, payable on November 21, 1956, to its stockholders of record at the close of business on October 23, 1956. The First National City Bank of New York was designated by petitioner as its agent to oversee the distribution of the stock dividend. In connection with and to effect payment of this stock dividend, petitioner accrued in 1956 and paid, as indicated, the following amounts: American Stock Exchange Listing Fee$ 1,000.00First National City Bank of New YorkFederal original issue tax on 418,176 shares$ 3,334.32Purchase and sale of fractional interests16,663.31Preparation of a certified list of stockholders420.85Addressing envelopes to stockholders168.34Enclosing and mailing stock and/or order forms, companyletters and return envelopes to 12,158 stockholders1,823.70Enclosing and mailing order forms, company letters, andreturn envelopes to 4,675 stockholders70.13Issuance of order forms2,102.10Issuance of common stock certificates5,368.40Cost of envelopes93.93Cost of printing order forms, company letters and returnenvelopes638.60Cost of postage (insured and registered mail)2,448.88Cost of postage111.85Overtime to post stock dividend1,384.00Cost of stationery for stockholders lists58.7734,687.18$35,687.18272 During the years 1955 and 1956, the petitioner's capital stock authorization consisted of 5,000,000 shares of $5 par value common stock of which 3,801,601 shares were issued and outstanding as of December 23, 1955. Pursuant to the declaration of the dividend for the year 1955, 380,160 shares of petitioner's previously authorized but unissued common stock were issued to its stockholders on December 23, 1955, bringing to 4,181,769 the total number of shares issued and outstanding. Pursuant to the declaration of the dividend for the year 1956, 418,176 shares of petitioner's previously authorized but unissued common stock were issued to its stockholders on November 21, 1956, bringing to 4,599,945 the number of shares issued and outstanding. The total dollar value arrived at in connection with each dividend, whether paid in cash or stock, was debited on petitioner's books to an account captioned "Dividend Appropriations." Thereafter, at the close of the accounting year, the amount in this account was charged against current earnings for the year. The remaining balance or resulting deficit in current earnings for the year was either credited or debited to earned surplus. Upon declaration273 of each of the stock dividends the amount of each debit to the Dividend Appropriations account was determined by taking the price per share at which the stock was selling upon the American Stock Exchange on a date at or near the date of declaration, adjusting such value to reflect the issuance of the additional shares and multiplying such value by the the number of shares issued in connection with the stock dividend. In accordance with the petitioner's valuation system, each of the 380,160 shares issued in connection with the 1955 stock dividend was valued at $16 per share, which resulted in a debit to the Dividend Appropriations account in the amount of $6,082,560 and a permanent addition to the Common Capital Stock and Capital Surplus accounts in the same aggregate amount. Similarly, each of the 418,176 shares issued in connection with the 1956 stock dividend was valued at $18 per share, which resulted in a debit to the Dividend Appropriations account in the amount of $7,527,168 and a permanent addition to the Common Capital Stock and Capital Surplus accounts in the same aggregate amount. The petitioner claimed the respective amounts incurred in connection with each stock dividend274 as a business expense deduction on its return for each of the years 1955 and 1956 and they were disallowed by the Commissioner. During the years 1955 and 1956 the petitioner carried on an integrated natural gas business, including the production, purchase, gathering, transportation, distribution, and sale of natural gas in the States of Arkansas, Louisiana, and Texas. Petitioner also operated a products-extraction plant for the processing of natural gas and the sale of products derived therefrom. A division of the petitioner was engaged in the exploration for and the production of gas and oil. The amounts capitalized in connection with each stock dividend became a permanent addition to the respective capital accounts. The costs incurred by petitioner in connection with the issuance of stock dividends to its shareholders during the years 1955 and 1956 are capital in nature and not deductible as ordinary and necessary business expenses. This case is on all fours with , on appeal (C.A. 8, Feb. 25, 1963). All of the arguments raised by petitioner on brief were there raised and considered. The cited case is controlling of the*275 issue before us. For the reasons there set forth, we sustain the respondent's determination herein. Decision will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622296/	APPEAL OF ALLEN-EATON PANEL CO.Allen-Eaton Panel Co. v. CommissionerDocket No. 1639.United States Board of Tax Appeals3 B.T.A. 56; 1925 BTA LEXIS 2052; November 16, 1925, Decided Submitted September 24, 1925. 2052 Harry M. Jay, C.P.A., for the taxpayer. F. O. Graves, Esq., for the Commissioner. GRAUPNER 56 Before GRAUPNER and TRAMMELL. This is an appeal from the determination of a deficiency of $2,573.94, income and profits taxes for 1918, 1919, and 1920. The error alleged is the refusal of the Commissioner to permit the taxpayer to value tangible property at an amount in excess of cash or stock paid for the property, for the purpose of determining the invested capital and the amount deductible for depreciation. FINDINGS OF FACT. The taxpayer is a Tennessee corporation, organized in 1917, with its principal place of business at Memphis. In 1922 it changed its corporate name to the Waterproof Plywood Co., and in 1924 again changed to the Gause-Beard Plywood Co., under which name it is now operating. In April, 1917, Chester B. Allen took an option on certain land and buildings, known as Fenn Bros. plant, located in South Memphis, paying therefor the sum of $600. He had in mind at that time the formation of a corporation for the purpose of manufacturing plywood. About May, 1917, the Allen-Eaton Panel Co. was organized with an authorized capital2053 stock of $125,000. Allen subscribed for $20,000 of the stock, which he paid in cash. The corporation took over the option which Allen held on the above-mentioned property and reimbursed him therefor in the amount of $600, representing the cost to him. It later paid the balance due on the property, amounting to $11,900 and $8.40 exchange. In 1918 an appraisement of the taxpayer's property was made and the report submitted therewith showed the replacement cost of the buildings and equipment, with allowances for depreciation as of August 31, 1918, to be $135,628.75. 57 DECISION. The determination of the Commissioner is approved. OPINION. GRAUPNER: To establish the value of the taxpayer's tangible property as of the date of acquisition, counsel relied on depositions of certain stockholders of the taxpayer company, an appraisal report, and the deposition of an officer of the appraisal company. The depositions of the stockholders merely relate the circumstances surrounding the organization of the taxpayer corporation and, in one instance, the approximate rental value of near-by land. No attempt was made to show the area of land, the number, size, condition of*2054 the buildings acquired, or their market value. The officer of the appraisal company in his deposition explained that in preparing appraisal reports the notes of field engineers are sent to the home office with pricing information taken from local sources and the notes are priced in the home office. The officer frankly admitted that he had never made an examination of the taxpayer's property and that the report was not even made under his direction. Such evidence is insufficient. .	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622297/	JOSEPH WALKER WEAR, WILLIAM E. GOODMAN AND WILLIAM POTTER WEAR, EXECUTORS OF THE ESTATE OF WILLIAM POTTER, DECEASED, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Wear v. CommissionerDocket No. 47612.United States Board of Tax Appeals26 B.T.A. 682; 1932 BTA LEXIS 1271; July 20, 1932, Prlmulgated 1271 Where certain property was subject to a general power of appointment and the power was exercised by the donee of the power, such property should be included in the taxable estate of decedent donee. Claude C. Smith, Esq., for the petitioner. E. L. Corbin, Esq., and Ralph F. Staubley, Esq., for the respondent. VAN FOSSAN 683 The respondent determined a deficiency in estate tax of $14,390.53, of which amount $14,389.94 was proposed for assessment. The facts were stipulated. The question is the correctness of respondent's action in holding that certain property of a value of $194,448.34 should be included in the taxable estate under the provisions of section 302(f) of the Revenue Act of 1926. FINDINGS OF FACT. The petitioners are executors of the estate of William Potter, deceased. Thomas Potter, the father of the decedent (William Potter), died September 29, 1878, leaving a will which provided, among other things, as follows: * * * and upon the decease of the survivor of my said wife and children I direct that three judicious persons shall be appointed, by a majority of such of the male heirs and devisees of my said children1272 as shall then be of the full age of twenty-one years, to make division and partition of my said estate into as many equal parts or shares as I may have children living at the time of my decease, and the issue of any deceased child, such issue representing the part or share his, her or their deceased parent would have been entitled to if then living, one of said equal parts or shares to be assigned or conveyed by the then Trustees of my estate as may be directed, limited, and appointed by the last Will and Testament of each of my said children, or by any writing in the nature thereof, and in default of any such last Will and Testament or writing in the nature thereof, I give, devise and bequeath one of said equal parts or shares of my estate, to the heirs and legal representatives of each of my said children so dying intestate, free and clear, and discharged of, and from, all trusts and confidences whatsoever. William Potter died April 29, 1926, leaving a will dated December 3, 1925, by which, after disposing of his own property, he provided in the tenth paragraph thereof as follows: TENTH: Whereas in and by the last Will and Testament of my father, the late Thomas Potter, of the1273 City of Philadelphia, there is given to, and conferred upon me authority to direct, limit and appoint a portion of his estate. Now, by virtue of the power and authority contained in the last Will and Testament of the said Thomas Potter, deceased, and thereby vested in me, I do, in exercise thereof, by this my last Will and Testament, give and appoint all the estate, real and personal, whatsoever, over and concerning which I have the power of appointment aforesaid, unto my two daughters, ADALINE POTTER WEAR and ELIZABETH VANUXEM POTTER GOODMAN, share and share alike, absolutely, and in fee simple. Adaline Potter Wear and Elizabeth Vanuxem Potter Goodman, parties named in the tenth paragraph of William Potter's will, were on December 3, 1925, have been continuously since that time, and are now the sole issue, sole heirs and next of kin of William Potter, deceased. Pursuant to proceedings instituted in the Orphans' Court of Philadelphia County in the matter of the Estate of Thomas Potter, 684 deceased, October Term, 1878, No. 273, upon petition for review of adjudication in that estate, citation was directed against and served upon Joseph S. MacLaughlin, collector of internal1274 revenue for the First District of Pennsylvania, making him a party to the proceedings, and thereafter an answer was filed by the said Joseph S. McLaughlin, collector of internal revenue, and upon the issue raised by the pleadings a decision was rendered by the orphans' court on May 16, 1930, reversing a former determination, and holding that the attempted exercise by decedent, William Potter, of the power of appointment was a nullity and that the property in question passed to the heirs of William Potter under the provisions of the will of Thomas Potter. OPINION. VAN FOSSAN: Petitioners make two contentions - (1) that under the law of Pennsylvania the property in question passed under the will of the donor (decedent's father) to the beneficiaries; and (2) that the determination of the Orphans' Court of Philadelphia County to this effect is conclusive and thus determinative of the whole question. Even though it be conceded that the law of Pennsylvania is as contended by petitioners and that under the state law the decision of the orphans' court was correct, we are nevertheless unable to agree with petitioners that the property was improperly included in the taxable estate under1275 the provisions of section 302(f) of the Revenue Act of 1926. Petitioners concede that the power was a "general power." It is established by the facts that it was exercised. The exercise of the power brought the case within the wording and intent of the Federal tax statute and justified the respondent's action. All of the considerations urged upon us in support of petitioners' position were exhaustively considered by the Board in , and ruled adversely to petitioners. Petitioners do not attempt to distinguish the cited case, but content themselves with an attempted but unconvincing distinguishing of , one of the cases cited in support of the Hancy decision. In our opinion the decision in , is controlling. That case was based on established rulings of the Federal courts and has been approvingly cited by the Board in subsequent cases. It stands as the considered judgment of the Board. See 1276 ; ; . 685 Nor are we disturbed or hindered in reaching the above conclusion because in a case arising under the same documents it was decided by the Orphans' Court of Philadelphia County that the attempted exercise of the power of appointment was a nullity and the award should have been made to the distributees under the will of Thomas Potter. Whatever may have been the effect of this decision in the local administration of the estate, and it would seem that under the facts it was of no effect, the only announced reason for amending the earlier decision being to bring the parties within the rule announced in , this decision is not conclusive of the question before us. The Board of Tax Appeals is a Federal tribunal engaged in deciding questions presented under the Federal taxing acts. Though there are certain restricted situations in which the local law may be controlling, in the present case we are not so confined. 1277 The statute which we are here interpreting was enacted by the Congress of the United States to meet certain situations and achieve certain results. As has been said by the Supreme Court, "the Act of Congress has its own criteria," and in determining whether or not there has been a transfer under the Federal statute we must look to the interpretations adopted by the Federal courts and tribunals. See ;. ;. Decision will be entered for the respondent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622298/	James E. Peurifoy, et al., * Petitioners, v. Commissioner of Internal Revenue, RespondentPeurifoy v. CommissionerDocket Nos. 55694, 56074, 56262United States Tax Court27 T.C. 149; 1956 U.S. Tax Ct. LEXIS 47; October 31, 1956, Filed 47 Decisions will be entered under Rule 50. Deductions -- Traveling Expenses. -- Held, that the evidence establishes that the employment of the petitioners away from the places of their established residences was temporary in character and that the costs of meals, lodging, and transportation constituted deductible traveling expenses while away from home. Secs. 22 (n) and 23 (a) (1) (A), I. R. C. 1939. Daniel R. Dixon, Esq., for the petitioners.Hubert E. Kelly, Esq., for the respondent. Atkins, Judge. ATKINS149 The respondent determined deficiencies in income tax for the calendar year 1953 as follows:Jame E. Peurifoy$ 449.88Paul V. Stines and Betty O. Stines492.12John S. Hall and Doris D. Hall365.06150 The question presented is whether amounts expended by James E. Peurifoy, Paul V. Stines, and John S. Hall, hereinafter48 referred to as the petitioners, for board and lodging at a job site and for transportation therefrom to their residences after termination of employment are deductible pursuant to sections 22 (n) and 23 (a) (1) (A) of the Internal Revenue Code of 1939, or whether they constitute nondeductible personal expenditures under section 24 (a) (1).FINDINGS OF FACT.In the case of each petitioner some of the facts were stipulated and are found as stipulated, the stipulations being incorporated herein by this reference.Returns were timely filed by the petitioners for the calendar year 1953 with the district director of internal revenue for the district of North Carolina.The petitioner James E. Peurifoy is a pipe welder. Since August 13, 1951, he has been a member of local No. 329, with headquarters in Wilmington, North Carolina, of the trade union known as the United Association of Journeymen and Apprentices of the Plumbing and Pipe Fitting Industry of the United States and Canada (hereinafter referred to as the union). The petitioner Stines is a journeyman plumber and the petitioner Hall is a welder. Since 1947 and 1952, respectively, they have been members of local No. 785 of the same49 union, with headquarters at Raleigh, North Carolina. They all obtain employment through their local unions which send them to various work sites where they are then hired by the employer.Members of local unions are often sent to other jurisdictions for work. In the case of a large project journeymen workers, as distinguished from foremen or superintendents, may be drawn from various States. Where a job requires more skilled craftsmen than a local union has available in the area, the local union will deal with other local unions in the same State or other States in order to procure the necessary workers. If this does not produce sufficient workmen the national union will procure journeymen and apprentices from all over the country. A journeyman craftsman working on construction projects may have several different employers in the course of a year or even though he may work for one employer throughout a year, he may work at several different job sites. In the building and construction industry, some construction jobs such as the Atomic Energy projects, may run for a period of years, but the general run of jobs is for a period of a few weeks or for a few months.The petitioner50 Peurifoy is, and was during the year 1953, an unmarried individual. During the entire year 1953, he owned and maintained a residence at Kure Beach, North Carolina, which is about 151 20 miles from Wilmington. He actually resides there when he is employed in the vicinity of Wilmington and returns to this residence on weekends if the place of employment is within a reasonable distance. He uses his own automobile for transportation.He was first employed by the Piping Equipment Company with main offices in Greensboro, North Carolina, to work on a paper mill at Acme, North Carolina. He worked on this project from about August 13, 1951, until about March 10, 1952.He was next employed by the Grinnell Company of Charlotte, North Carolina, to work on the duPont plant at Kinston, North Carolina. He worked on this project from March 10, 1952, until November 20, 1953. While so employed he roomed and boarded near Kinston and from January 1, 1953, through November 20, 1953, he expended for room and board the sum of $ 496. The distance from his home in Kure Beach to the duPont plant is approximately 122 miles. The cost to him of driving his automobile from Kinston to Kure Beach after51 termination of this employment was $ 8.54.He was next employed by the Grinnell Company to work on the Carolina Light and Power Company plant at Mount Misery, North Carolina, situated about 7 miles from Wilmington. He worked on this project from November 30, 1953, through May 14, 1955, and while he worked on this project he resided in his residence at Kure Beach. Thereafter, in 1955, he worked at Cherry Point, North Carolina, for 3 months, at Acme, North Carolina, for 2 weeks, and at Barberton, Ohio, for about 1 week.In his return for 1953, he deducted the amount of $ 1,920.80 from gross income as "Subsistence and temporary quarters necessary for earning income, not reimbursed by employer." The respondent disallowed the entire claimed deduction on the ground that payment thereof had not been proven and that even if paid the expenditure represented personal and living expenses.The petitioners Paul V. Stines and Betty O. Stines are husband and wife. Betty O. Stines appears as a petitioner by virtue of having joined in the filing of the income tax return for 1953. During the entire year 1953 they maintained a residence in Raleigh, North Carolina, and had maintained such residence52 since sometime in 1952. Betty O. Stines and the petitioners' minor child actually resided in such residence during the entire year 1953.Since 1947, when he became a member of the union, the petitioner Paul V. Stines has had about 30 jobs ranging in duration from 2 weeks to over a year. He worked for one employer for over 2 years but on different jobs in different locations. He was employed by the Grinnell Company of Charlotte, North Carolina, to work on the duPont plant at Kinston, North Carolina, from March 26, 1952, until about April 152 10, 1953, when he was discharged. While so employed, he rented a room at Kinston, North Carolina, and ate his meals in restaurants. During 1953 he expended $ 262.50 for room and board. The distance from Raleigh to Kinston by automobile is approximately 78 miles and the distance from Kinston to the plant site is approximately an additional 8 miles. He drove his car or rode with others from his residence in Raleigh to his rooming house in Kinston and returned once a week. The cost to him, under his car-pool arrangement, for transporation from Kinston to Raleigh upon termination of his work in Kinston was $ 1.09. While employed at Kinston53 he received 14.8 cents per hour greater than the normal union scale in accordance with the agreement between the Grinnell Company and the union. All union employees received this additional amount regardless of where they were living. This extra amount was intended to compensate the employees for time expended in going from the town of Kinston to the job site and return.He was next employed by Carl B. Mims of Raleigh from about April 13, 1953, to about April 28, 1953, to work in and around the environs of Raleigh.He then worked for A. L. Wright and Company, Inc., of Portsmouth, Virginia, from about May 6, 1953, to about June 23, 1953, when he quit for personal reasons. This work was performed on the Westinghouse plant near Raleigh.His next employment was with Markowitz Bros., Inc., of Miami, Florida, to work on an airbase near Charleston, South Carolina. He worked there from about June 23, 1953, to about July 15, 1953. He went to Charleston by driving his car. The distance from Raleigh to Charleston is approximately 300 miles and the distance from his boarding house in Charleston to the plant site is approximately 11 miles. While at Charleston the petitioner expended $ 5754 for room and board. The expenses incurred for driving his car from Raleigh to Charleston and return was $ 42.He was next employed by Biemann and Rowell of Raleigh, North Carolina, from August 1, 1953, through December 31, 1953. While so employed he was loaned by his employer to Garrison and Hopkins Company, Inc., of Charlotte, North Carolina, to work on the S. H. Kress Company job in Raleigh, and to Cooper and Goodwin of Raleigh to work from December 9, 1953, through December 30, 1953, in and around the environs of Raleigh. He also worked for Garrison and Hopkins Company, Inc., at Fort Bragg, North Carolina, for approximately 7 1/2 weeks during 1953. While there he expended $ 155.63 for room and board. The distance from Raleigh to Fort Bragg is approximately 50 miles. The cost of his transportation for the round trip to Fort Bragg was approximately $ 7.153 In their return for the year 1953, the petitioners Paul V. and Betty O. Stines deducted the amount of $ 2,480 from gross income for "Subsistence and quarter [sic] non reimbursable by employer necessary to earning income." The respondent disallowed the deduction for the same reasons as in the case of the petitioner55 Peurifoy.The petitioners John S. Hall and Doris D. Hall are husband and wife. They have three minor children. During the entire year 1953 they maintained a residence in Raleigh, North Carolina. They maintained such residence for approximately 4 years ending in the early part of 1954. Doris D. Hall and the three children actually resided there during the entire year 1953.The petitioner John S. Hall was first employed in 1952 by the Grinnell Company of Charlotte, North Carolina, to work on the Burlington Mills plant at Neuse, North Carolina, and worked on this project until it was completed in that year.He was next employed by the Grinnell Company to work on the duPont plant at Kinston, North Carolina, and worked on this project from October 21, 1952, through July 10, 1953. He resigned for personal reasons. While working on the duPont plant at Kinston, he expended $ 530.13 for room and board during the period January 1, 1953, through July 10, 1953. During this time he returned to Raleigh on weekends. The cost to him of his transportation from Kinston to Raleigh after termination of his employment was $ 2.01. While he was employed on this project he received 14.8 cents per56 hour greater than the normal union scale, as explained hereinabove.He was next employed by A. L. Wright and Company, Inc., of Portsmouth, Virginia, to work on the Westinghouse plant under construction in Raleigh. He worked on this project from July 13, 1953, until the project was completed on March 5, 1954.Thereafter, in 1954 and 1955, he worked at Portsmouth, Ohio, for about 3 1/2 months, at Aiken, South Carolina, for about 2 weeks, at Hopewell, Virginia, for about 7 months, at Tarboro, North Carolina, for 1 month, and at Moncure, North Carolina, on 2 successive jobs of 3 months each.The petitioners John S. Hall and Doris D. Hall filed separate individual income tax returns for the year 1953. In his return for 1953 the petitioner John S. Hall deducted from gross income the amount of $ 1,556.60 as "Subsistence and quarters non reimbursable by employer necessary to earning income." The respondent disallowed the claimed deduction of $ 1,556.60 for the same reasons as in the case of the other petitioners herein. Although the petitioner and his wife filed separate returns for 1953 the respondent, in his notice of deficiency, gave the petitioner the benefit of joint filing by including57 in the notice of deficiency an adjustment for salary income earned by Doris 154 D. Hall in the amount of $ 270.54. No error has been assigned regarding this adjustment.The employment of the petitioners at the duPont plant at Kinston was temporary and the expenses incurred by them for food and lodging while there and for transportation therefrom to their residences upon termination of such employment were incurred while away from their homes in the pursuit of their trade.OPINION.The question presented is whether the expenses incurred by the petitioners for meals and lodging while engaged in work at the duPont plant at Kinston, and the cost of returning therefrom, upon termination of their employment, to the places of their residence, constitute allowable deductions under the provisions of sections 22 (n) and 23 (a) (1) (A) of the Internal Revenue Code of 1939, 158 or whether they are nondeductible personal, living, or family expenses within the meaning of section 24 (a) (1). 2There remains no controversy as to the amounts of any of the expenditures. The stipulation fixes some of the amounts and the parties on brief agree as to others. The amounts of expenditures which we have set forth in our Findings of Fact are limited to the amounts now claimed by the petitioners on brief, they having therein waived any claim of deductibility of certain expenditures.Ordinarily the cost of meals and lodging is personal and therefore not deductible in arriving at net income. Congress has specifically provided in section 24 (a) (1) that personal, living, or family expenses are not deductible. And commuting expenses to and from work have always been treated as nondeductible. Frank H. Sullivan, 1 B. T. A. 993. 155 Thus, it has been held that if a taxpayer chooses for reasons personal to59 him to maintain his residence at a place other than the place of his employment, his personal or living expenses at the place of employment do not lose their character as nondeductible personal expenditures. Commissioner v. Flowers, 326 U.S. 465">326 U.S. 465. See also Barnhill v. Commissioner, (C. A. 4) 148 F. 2d 913; Ford v. Commissioner, (C. A. 4) 227 F. 2d 297; and Andrews v. Commissioner, (C. A. 4) 179 F. 2d 502, each affirming a decision of this Court.In the Flowers case, supra, the Supreme Court stated that "business trips are to be identified in relation to business demands and the traveler's business headquarters. The exigencies of the business rather than the personal conveniences and necessities of the traveler must be the motivating factors." The Supreme Court there also stated that whether particular expenditures fulfill the conditions so as to entitle a taxpayer to a deduction is purely a question of fact in most instances. In the Barnhill case, supra, the court stated:It is clear in the first place that Congress, in prescribing60 the rules for the computation of net income, intended to confine the deductions for business expenses to those which are ordinary and necessary, and to prohibit the deduction of personal living or family expenses. It was recognized that the taxpayer must maintain a home for his family at his own expense even when he is absent on business, and that his personal expenses during his absence on business may fairly be regarded as expenses of the business. But it is not reasonable to suppose that Congress intended to allow as a business expense those outlays which are not caused by the exigencies of the business but by the action of the taxpayer in having his home, for his own convenience, at a distance from his business. Such expenditures are not essential to the prosecution of the business and were not within the contemplation of Congress which proceeded on the assumption that a business man would live within reasonable proximity to his business. * As we view the situation here, we do not have the case of a taxpayer who for personal reasons, as distinguished from the requirements of his business, maintains his residence at a place other than that of his actual employment. Each61 of the petitioners before us is a construction worker and each maintained a residence at a particular place, Peurifoy at Kure Beach, near Wilmington, North Carolina, and Stines and Hall at Raleigh, North Carolina. Each of them belonged to a local union at or near the place of his residence and each obtained employment through that union. The stipulated facts show that throughout a number of years, including the taxable year before us, they have worked at various job sites both at or near their residences and at distant points, sometimes in other States, for varying periods of time. There was no particular place where any one of them principally had employment, although each of them at times worked at or near the place where he maintained his residence. The record indicates that each was accustomed to return to the place of his residence 156 upon the completion of a job. Impelling reasons for the acceptance of employment away from the place of residence readily come to mind, such as the availability of work, the current pay scale, or working conditions.In this situation we are of the opinion that when any of the petitioners accepted temporary employment away from the places62 of their residence, they reasonably could not have been expected to establish a residence at the places of employment. In those instances the expenses incurred at the places of employment are considered as being due to the exigencies of the trade or business. That was the situation in Harry F. Schurer, 3 T. C. 544, and E. G. Leach, 12 T. C. 20, in which we held the traveling expenses to be deductible. The respondent recognizes that this is the proper view and concedes that the employment of the petitioner Paul V. Stines at Charleston, South Carolina, for about 3 weeks and at Fort Bragg, North Carolina, for about 7 1/2 weeks was temporary and that expenses incurred by him in traveling to those places to accept employment and returning to Raleigh and the cost of board and lodging while at those places are deductible.On the other hand, he contends that the expenses incurred by each of the petitioners in connection with employment at the duPont plant at Kinston, North Carolina, are not deductible. He argues that that job was not temporary, but was of indefinite or indeterminate duration, relying principally upon the length63 of time the petitioners were employed there, Peurifoy for about 20 1/2 months, Paul V. Stines for about 12 1/2 months, and John S. Hall for about 8 1/2 months, portions of which periods fell within the taxable year. He relies upon the line of cases in which the position has been taken that if the employment is of indefinite duration, the additional living costs and the transportation costs incurred because of failure to bring together the place of residence and the place of employment are deemed to have been occasioned by reasons of personal choice or convenience, resulting in the nondeductibility of the expenses. See Willard S. Jones, 13 T. C. 880; Beatrice H. Albert, 13 T. C. 129; Commissioner v. Andrews, supra; and Ford v. Commissioner, supra.The principal factor upon which those cases turned was the nature of the employment. In the Albert case we said that the employment "was not the sort of employment in which termination within a short period could be foreseen, as was the situation in Harry F. Schurer, 3 T. C. 544, and E. G. Leach, 12 T. C. 20.64 " In the Jones case the taxpayer was required to work for his employer until released and he could not obtain other work without a release. In the Andrews case the employment was "for the duration of the war" and was characterized by the court as being "of indefinite tenure." In the Ford case 157 the taxpayer had a regular and continuing employment with one employer over a number of years as subforeman and later as piping superintendent.The petitioners argue that any employment upon a construction project is temporary in that by its very nature it is terminable, and that hence any expense in connection therewith should be considered as deductible business expense. We think it obvious that such a flat rule cannot be adopted. Each case must be decided upon the basis of its own facts and circumstances, including those relating to the known or contemplated duration of the work, the taxpayer's intent with regard to the maintenance or establishment of business headquarters, and any facts that develop during the course of the employment. Employment which may appear to be temporary in character at the start may ripen into employment of indefinite duration. See Arnold P. Bark, 6 T. C. 851.65 Furthermore, employment may be of such relatively long actual duration as to indicate, in the absence of evidence to the contrary, that the employment was either indefinite at the start or developed into indefinite employment.Upon the record in the instant cases, we think that the employment at Kinston was of the same general nature as that involved in the Schurer and Leach cases, supra. The petitioner Hall testified that when they entered upon a job at a particular site, including the Kinston job, they were not guaranteed the job for any specified time and did not know how long they would be employed there, although there was usually some hearsay information as to the duration of the work. Thus, as to all three of the petitioners, there was no reason for them to believe that the nature of the job would be any different from that of other jobs which formed the general pattern of their employment. Each of the petitioners did, upon termination of his work at Kinston, return to the place of his residence and take employment there. On these facts the employment in question is properly to be considered as temporary in nature. In such a situation it would not be reasonable66 to expect them to shift their residences to the place of employment or to regard Kinston as their "home" for tax purposes.We conclude that the cost of board and lodging of each of the petitioners at Kinston and the cost of their transportation from Kinston to Raleigh and Kure Beach, respectively, upon termination of this particular employment constitute traveling expenses incurred while away from home in the pursuit of his trade within the intendment of section 23 (a) (1) (A), and that they are deductible under section 22 (n). See Carroll B. Mershon, 17 T.C. 861">17 T. C. 861.Decisions will be entered under Rule 50. Footnotes. Proceedings of the following petitioners are consolidated herewith: Paul V. Stines and Betty O. Stines, Docket No. 56074, and John S. Hall and Doris D. Hall, Docket No. 56262.↩1. SEC. 22 (n). Definition of "Adjusted Gross Income." -- As used in this chapter the term "adjusted gross income" means the gross income minus -- (1) Trade and business deductions. -- The deductions allowed by section 23 which are attributable to a trade or business carried on by the taxpayer, if such trade or business does not consist of the performance of services by the taxpayer as an employee;(2) Expenses of travel and lodging in connection with employment. -- The deductions allowed by section 23 which consist of expenses of travel, meals, and lodging while away from home, paid or incurred by the taxpayer in connection with the performance by him of services as an employee;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. -- * * * traveling expenses (including the entire amount expended for meals and lodging) while away from home in the pursuit of a trade or business; * * ↩2. SEC. 24. ITEMS NOT DEDUCTIBLE.(a) General Rule. -- In computing net income no deduction shall in any case be allowed in respect of -- (1) Personal, living, or family expenses, except extraordinary medical expenses deductible under section 23 (x)↩; * *	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622299/	JOHN GRIFFITHS, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Griffiths v. CommissionerDocket No. 18162.United States Board of Tax Appeals15 B.T.A. 252; 1929 BTA LEXIS 2888; February 7, 1929, Promulgated 2888 1. Held that the evidence does not establish error on the part of the respondent in determining that the petitioner was taxable in 1919 on account of amounts credited to him in that year. 2. In the light of the circumstances in this case held that the tax return filed for 1919 was wilfully fraudulent, and that the petitioner is liable to the assessment of the penalty provided by the statute for the filing of a fraudulent return. P. Tinkoff, Esq., for the petitioner. James A. O'Callaghan, Esq., for the respondent. TRAMMELL252 In this proceeding petitioner seeks a redetermination of a deficiency in income taxes for the calendar year 1919 in the amount of $37,455.55. He alleges error on the part of the Commissioner in holding that $87,926.63 was taxable income for the year 1919 instead of at the time when the liability of the corporation, John Griffiths & Son Co., arose to pay the petitioner compensation for the services rendered in signing surety bonds covering contracts entered into by the corporation. At the hearing the respondent amended his answer to allege that the 1919 return of the petitioner was false and fraudulent2889 and that the petitioner was subject to the 50 per cent fraud penalty. FINDINGS OF FACT. Petitioner is an individual residing at Chicago, Ill. He is president of John Griffiths & Son Co., an Illinois corporation engaged in the general contracting business. Petitioner is about 87 years of 253 age and has been engaged in the contracting business for over 50 years, but has been inactive for approximately 8 years. Prior to 1911 the contracting business was carried on by a partnership consisting of the petitioner and his son. Subsequently, the corporation, John Griffiths & Son Co., was formed, all of the stock of which, except one qualifying share, was owned by the petitioner and his son; the petitioner owning at all times at least 81.6 per cent of the capital stock, and his son owning the balance. The officers of the corporation were John Griffiths, president and treasurer; George W. Griffiths, vice president and assistant treasurer; and Louis C. Joyer, secretary. From 1910 John C. Reuttinger has acted as general manager in charge of construction. At all times he held one qualifying share of stock in the corporation and also participated in the profits of the company2890 under the terms of a contract of employment at rates varying from 10 per cent to 18 per cent. The petitioner and his son, George W. Griffiths, and John C. Reuttinger made up the board of directors of the corporation. Practically all of the meetings of the board of directors were informal and were not recorded in the minutes of directors' meetings except in the case of annual meetings. In the general contracting business in which John Griffiths & Son Co. was engaged it was often necessary to make to the owners a surety bond guarantying performance in respect to the contract. During the year 1916 petitioner's son, George W. Griffiths, suggested that in many cases surety bonds signed individually by himself, the petitioner and John C. Reuttinger would be acceptable to owners and that by becoming personal surety for the company these individuals could secure themselves the amounts that would otherwise be paid to surety companies. In accordance with this suggestion, at an informal meeting of the directors of John Griffiths & Son Co. it was decided that three individuals go surety on bonds in cases where such bonds would be acceptable, and that the individuals would receive for2891 such services an amount equal to the premium charged by surety companies in like instances and payable at the same time. It was further agreed that the amounts thus earned by the individuals should be divided between the three individuals in certain proportions, John C. Reuttinger being entitled to receive the same percentage of such amounts as he received from the profits under his contract of employment, and John Griffiths and George W. Griffiths having shares in the balance in accordance with the stock ownership. No amounts were placed on the books of the corporation to the credit of the individuals on account of these services until July 31, 1919, at which time George W. Griffiths instructed the bookkeeper 254 to place upon the books amounts to which the individuals were entitled, and that in computing such amounts he was to consult Mr. Douaire, who was giving surety bonds for John Griffiths & Son Co., to find out what a surety company would have charged for the same services. The bookkeeper thereupon credited the accounts with the following amounts: John Griffiths$ 87,926.63George W. Griffiths14,313.64J. C. Reuttinger22,442.98Total124,683.252892 The contracts upon which these amounts were computed were as follows: Name of contractDate of executionDate of completion(1) Paris IslandJuly 7, 19181919(2) Camp RossJune 27, 19181918(3) Chicago Union Station Co., caissonsFeb. 24, 19191920(4) Butler Building, caissonsDec. 21, 19171924 Butler BuildingApr. 9, 19191924(6) Chicago Telephone BuildingMar. 20, 19171920(7) Contagious disease hospitalOct. 30, 1917(8) Cook County power houseAug. 31, 19161921(9) Morrison Hotel, sec. 2Sept. 16, 19161917-1922Name of contractAmount Final cost toAmount of bondownercharged in1919 as bondpremium costto contract(1) Paris Island$565,000.00$2,142,182.95$29,959.45(2) Camp Ross40,200.00139,033.082,352.92(3) Chicago Union Station Co., caissons150,000.00423,595.786,223.50(4) Butler Building, caissons100,000.00308,829.274,641.88(5) Butler Building150,000.003,652,582.6247,841,63(6) Chicago Telephone Building300,000.001,619,184.4716,226.49(7) Contagious disease hospital125,000.003,775.82(8) Cook County power house50,000.00347,996.023,601.93(9) Morrison Hotel, sec. 2973,960.1210,059.632893 Name of contractWas surelybond givenName of principal and sureties(1) Paris IslandYes John Griffiths & Son Co.; John Griffiths, George W Griffiths. (2) Camp RossYes John Griffiths & Son Co.; John Griffiths, John C. Ruettinger. (3) Chicago Union Station Co., caissonsYes John Griffiths & Son Co. (4) Butler Building, caissonsYes John Griffiths & Son Co.; John Griffiths & Son Co. (5) Butler BuildingYes John Griffiths, who deposited in escrow, pre contract, $ 150,000 worth market value Liberty bonds. (6) Chicago Telephone BuildingNo Bond not executed as per contract; waived by Chicago Telephone Co. (7) Contagious disease hospitalYes John Griffiths & Son Co.; John Griffiths, John C. Ruettinger. (8) Cook County power houseYes John Griffiths & Son Co.; John Griffiths, John C. Ruettinger. (9) Morrison Hotel, sec. 2No Bond specifically waived in thecontract. 256 In the case of a surety company the premium on surety bonds became due and payable within 30 or 60 days after the signing of the bond. The ordinary rate for2894 premiums, beginning with 1917, was $1.50 per $100 at contract price, and was based upon the full amount of the contract and not on the amount of the bond. Prior to that time the rate was $1 for each $100 on the amount of the contract. As shown by the books of John Griffiths & Son Co. the balances due John Griffiths during various years were as follows: December 31, 1917$ 369,200.00December 31, 1918388,290.00December 31, 1919185,027.06December 31, 192087,027.46The surplus of John Griffiths & Son Co. and the cash balances were as follows: YearSurplusCash balances1916$735,003.74$756,752.441917475,023.58537,547.811918764,596.721,133,058.061919920,028.10679,604.29During the years 1916 to 1919 the accounting work of the corporation was handled by Louis C. Joyer and his assistant, Clarence Reeves, except during the year 1918 when Reeves was in military service. During a larger part of this period the corporation was engaged in the construction of various large projects outside the City of Chicago, including the Great Lakes Naval Training Station, Paris Island Marine Barracks, and Camp Ross. During the2895 years 1915 and 1916 dividends were declared by formal action of the board of directors, but such dividends were not recorded upon the books of the company nor credited to the accounts of the stockholders until December 31, 1917. During the years 1916 to 1919, inclusive, John Griffiths & Son Co. reported income for Federal income-tax purposes on the basis of completed contracts to the extent of the cash actually received at the time the contract was completed. In the examination of the books of John Griffiths & Son Co. by an internal revenue agent in 1921, the amount of $124,683.25 of bond premiums above referred to was allowed as an expense to the corporation chargeable against the various jobs affected, and such charges were reallocated to the years in which the respective contracts were completed. During the period prior to 1919 no accounting was had or calculation made by the petitioner or the corporation to determine what amounts were due to the petitioner on account of the bond premiums. 257 The amount of $87,926.63 credited to John Griffiths was not withdrawn by the petitioner until after 1919. Petitioner was at all times empowered to control cash disbursements2896 of John Griffiths & Son Co. and could withdraw at any time any cash he might desire. During the year here involved the petitioner filed his income-tax return on a cash receipts and disbursements basis. He did not include in his return for the year 1919 the $87,926.63 placed to his credit upon the books of the corporation July 31, 1919, nor did he include any part thereof. The tax return of the petitioner was prepared by the bookkeeper who made up the income from the check book of the petitioner upon which was entered all of his receipts and disbursements. The $87,926.63 was not entered in the check book in 1919, since it had not been actually received by the petitioner. The bookkeeper submitted the return to the petitioner's attorney, who in turn delivered it to the petitioner for signature. Petitioner did not personally check up the return, but relied on the bookkeeper and his attorney. The return of the petitioner was false and fraudulent and made with the intent to evade the tax. OPINION. TRAMMELL: The first question is whether the petitioner is taxable in 1919 on all the bond premiums to which he was entitled, or whether a portion of the amount should be taxable2897 in previous years. George W. Griffiths testified that the matter of permitting the directors to sign bonds for the company and to receive the premiums ordinarily allowed surety companies for such services first arose in 1916 and that a meeting was called at which such an agreement was reached. He also testified that even in years prior to 1916 the directors probably signed such bonds. He testified as follows: "Now before 1916 did the members of this corporation sign surety bonds for the corporation?" A. "I imagine they did. I can not say. I really do not remember that. I imagine they did." The contention is made that the contract was made in 1916 by which the directors were to receive these premiums for signing bonds and that, since Griffiths was in control of the corporation and could at any time have withdrawn any assets due him, the amounts were constructively received by him in the years when the bonds were signed. The testimony in this case is so conflicting and repugnant to facts shown by the records of the corporation that we are not convinced by a preponderance of the evidence in the first place that the agreement was actually made in 1916 as alleged or that it2898 was made at any time prior to 1919. 258 Aside from the testimony of Griffiths, we have the testimony of Ruettinger and Joyer. Griffiths does not specifically state that the agreement was made in 1916, but only that the question arose in that year and that a meeting of the directors was called. Whether it was called in 1916 the witness did not state. The fact that bonds were signed in 1916 is not convincing as to the date when it was agreed that the directors should receive premiums therefor. From the testimony it appears that even prior to 1916 these bonds had sometimes been signed in the same way. Ruettinger's testimony in a way corroborated Griffiths, but his testimony is in conflict with the facts established by documentary evidence submitted by the petitioner. Reuttinger testified that he signed bonds when the evidence showed that bonds were waived and no bonds were signed by any one. Reuttinger, according to documentary evidence, signed only three bonds, while he testified that he signed from six to ten. Joyer's testimony is so conflicting and uncertain that we can give little or no weight to it. The amount of $87,926.63 on account of these bond premiums2899 was credited to the petitioner's dividend account in 1919 and includes his pro rata share according to his stockholdings of premiums on bonds in connection with the contracts of the Chicago Union Station Co. - the Butler Building-Caissons, the Chicago Telephone Building, and the Morrison Hotel, when in none of those contracts were there any sureties on bonds. In the latter two contracts bonds were waived and none were given, yet book entries were made crediting to the accounts of the petitioner and other directors bond premiums for bonds as if bonds had been signed. In connection with the first two contracts above mentioned, credits were made to the petitioner for premiums when he signed no bonds. While there was testimony to the effect that the entries crediting the bond premiums to dividend account were erroneous, there is some evidence which would warrant such action, but there is no contention here made that the amounts were dividends in so far as the petitioner is concerned. That question was not made an issue in the case and no testimony was directed to such question. The respondent determined that the amounts of the bond premiums which were credited to the petitioner2900 in 1919 were constructively received by him in that year, while the petitioner contends that a portion was constructively received in previous years. There is a presumption that the determination of the Commissioner is correct until it is overcome by the preponderance of the testimony. There is uncontradicted testimony to the effect that the amounts were credited to the petitioner on the books of the corporation in 1919, that the amounts were not ascertained or determined 259 until that year. The corporation claimed no deduction on account of such amounts until 1919 and we are not convinced that prior to 1919 there was any definite agreement with respect thereto. There is no evidence which convinces us that any memorandum or any record was made until that year of any agreement. Reuttinger held only one qualifying share of stock and was, if the contract had been made in 1916, entitled to share in the bond premiums signed by him to the extent of 18 per cent, in accordance with his interest in the profits according to his contract of employment, yet he received nothing nor were any amounts credited to him until 1919, in so far as these premiums were concerned. Joyer testified2901 that in 1919 he was first given a memorandum with respect to the book entries to be made by him, while the following day he was recalled to the stand after a conference with counsel for the petitioner and changed his testimony. On the previous day he had repeatedly stated that this occurred in 1919, and when asked by the Board member if he was confused about the matter, stated that he was not. Considering all the testimony, we are not convinced that the determination of the respondent was erroneous. At the hearing the respondent asserted the fraud penalty for wilfully filing a false or fraudulent return. There was no contention on the part of the petitioner that the return should not in any event have included a portion of the bond premiums credited to the petitioner's account in 1919. The contention was that only a portion of the entire amount should have been included in previous returns, but the petitioner did not report any part of the amount in his returns for any of the years 1916, 1917, 1918, or 1919, nor was any disclosure of the facts made in any of the returns. Even if the petitioner's contentions had been sustained in every respect, still, according to the petitioner's2902 own testimony, a considerable portion of income admittedly taxable was omitted from his return. According to the petitioner's own theory and contention as supported by one exhibit, the amount of $38,126.73 out of the total of $87,926.63 was properly taxable in 1919. According to the dates of contracts in another exhibit, an amount in excess of $50,000 was properly taxable to petitioner under his own theory in 1919. The explanation offered as to why no amount whatever of bond premiums was included in the return is the fact that the bookkeeper for the corporation made out the return and submitted it for approval to an attorney and that the petitioner merely signed it; that the petitioner filing his return on a cash receipts and disbursements basis and the amounts not having been received in cash, the return should not be held to be fraudulent on account of the omission of such amount. We have heretofore held that a taxpayer can not avoid his responsibility by having his return prepared by another. 260 The taxpayer is responsible for his return under oath regardless of whether he personally makes it. There is no testimony, however, to the effect that the petitioner did2903 not consider the amounts taxable because they were not received in cash. On the other hand, the theory of the petitioner's case is that the amounts were taxable before received in cash and it is not contended that he should have waited until he withdrew the cash before reporting them in his income. Under the evidence he clearly could have received the entire amount in cash in 1919 if he had desired. All that he had to do was to take it. Considering all the evidence, it is our opinion that the petitioner's return for 1919 was wilfully false and fraudulent and made with the intent to evade the tax. Reviewed by the Board. Judgment will be entered under Rule 50.MURDOCK MURDOCK, dissenting: I dissent from that portion of the foregoing opinion which holds that the fraud penalty should be asserted, for the reason that I think the facts indicate no more than negligence. SMITH, TRUSSELL, VAN FOSSAN, and SIEFKIN agree with this dissent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622301/	ITEN BISCUIT COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Iten Biscuit Co. v. CommissionerDocket Nos. 16429, 20899.United States Board of Tax Appeals25 B.T.A. 880; 1932 BTA LEXIS 1459; March 15, 1932, Promulgated 1459 1. Upon the evidence, held, that the exclusion from invested capital, pursuant to the provisions of section 326 of the Revenue Act of 1918, of valuable intangibles developed in the petitioner's business creates an abnormality in capital within the meaning of section 327(d) of the Revenue Act of 1918, requiring that the petitioner's profits taxes for the years in controversy be determined under the provisions of section 328. 2. Respondent's claim for an increased deficiency for each of the years in controversy, predicated upon the grounds that he erred in allowing deductions for depreciation of returnable cans, and that he failed to include, in the gross income, the gains derived from sales of returnable cans, granted, upon authority of our decision in Iten Biscuit Co., Dockets 43667 and 45164, 25 B.T.A. 870">25 B.T.A. 870, decided this day. 3. Net income for 1919, as determined by the respondent in the deficiency notice, should be increased on account of real estate taxes of $3,073.87 stipulated by the parties to have been erroneously allowed as a deduction for that year. Ferdinand Tannebaum, Esq., for the petitioner. W. Frank Gibbs, Esq., for the1460 respondent. LANSDON 880 The respondent determined deficiencies in income and profits taxes for the years and in amounts as follows: Docket No.YearDeficiency164291918$85,967.6420899191925,488.62192033,022.83881 The deficiency determination for 1918 arises out of the respondent's partial rejection of a claim for abatement of taxes for that year. The amended petitions set forth several assignments of error, all of which have been waived, in the brief, except the following: (1) Respondent's failure to determine the profits taxes, for all of the years in controversy, under the provisions of sections 327 and 328 of the Revenue Act of 1918, or, alternatively, that the invested capital determined by the respondent is less than the invested capital prescribed by section 326; and (2) respondent erred in his determination of the pre-war income, for the purpose of determining the profits-tax credit allowed by section 311(a) of the act. As to the second assignment of error, the respondent concedes that the correct average net income for the pre-war period is $175,718.63, instead of $169,904.85, as determined in the deficiency1461 notice, and in its brief the petitioner indicates that the admission is satisfactory and disposes of the issue. The respondent claims an increased deficiency for each of the years in controversy, on the grounds that he erred in allowing deductions for depreciation of returnable cans, and in failing to include in gross income alleged gains derived from sales of returnable cans. FINDINGS OF FACT. The petitioner, a Nebraska corporation having its principal office at Omaha, was organized on July 13, 1908, by three brothers, Frank, J., John and Louis C. Iten. It is, and was during the taxable years in controversy, engaged in manufacturing and selling biscuits, cakes, cookies and crackers. In 1892 the three Iten brothers and their fathers had established a partnership under the name of L. Iten and Sons, at Clinton, Iowa, for the purpose of carrying on the business of manufacturing and selling biscuits, cakes, cookies, and crackers. On June 25, 1894, the elder Iten having died, a corporation, hereinafter referred to as the Iowa company, was organized under the laws of Iowa, with the same name as the partnership, and succeeded to the partnership business. In 1908 the name of the1462 company was changed to Iten Biscuit Company of Iowa. The Iten Biscuit Company of Oklahoma, a corporation, hereinafter referred to as the Oklahoma company, was organized under the laws of Oklahoma, on September 9, 1911, with the three Iten brothers as the majority, but not the sole, stockholders. It too was 882 engaged, until 1916, in manufacturing biscuits, cakes, cookies, and crackers. Prior to 1908 John Iten conceived and effected several improvements in the construction, machinery and manufacturing processes of cracker-baking plants. In constructing the ovens for the Iowa company at Clinton, he did not precisely follow the blue prints furnished therewith, which represented the general practice of oven construction at the time. He built air spaces in the oven walls, to better retain the heat in the ovens; and he raised or lowered the ovens and rearranged the fire boxes, to get a better bake on the crackers. He installed oven thermometers, the first to be used in the industry, for ascertaining oven temperatures; and he was the first in the industry to use thermometers for ascertaining when water for the sponge (dough) was of the proper temperature. The use of these1463 thermometers resulted in an improved product of uniform bake. He devised a new method of removing the sponge from the fermenting troughs to the mixers. The old method was to remove the sponge by hand, requiring about one-half hour of a man's time; by the new method, the sponge was set in troughs having removable ends, on the floor, and when an end of the trough was removed the sponge flowed readily into the mixer. This new method resulted in a saving in labor and in a better product, the latter because the gas from fermentation was retained in the sponge. None of the aforementioned mechanical and process improvements were patented. He invented and obtained letters patent for what are generally known in the trade as a "pan skip" and a "peel cutter." These two inventions reduced the breakage and increased production of a cracker machine at least ten barrels of flour per day. Louis C. Iten was generally regarded as one of the best cracker mixers in the territory served by the petitioner and the Iowa and Oklahoma companies. Prior to 1908 he conceived and effected an improvement in the process of packing crackers which resulted in a considerable saving of labor and in a considerable1464 reduction in the breakage of products. The improvement was not patented. John and Louis C. Iten made the cracker cutters for the Iowa plant, instead of buying them from the manufacturers of cracker machinery. One of these is known as thirteen-pin or docker cutter, which produces a much better cracker, by preventing blistering and flaking, than the nine-pin cutter, which is still being used in the industry. All of the mechanical and process improvements and patented inventions of John and Louis C. Iten were fully developed and perfected prior to 1908, and the petitioner and the Iowa and Oklahoma companies were permitted to use them without the payment to those individuals of any compensation for such use. 883 The territory of the Iowa company was developed by the use of general salesmen and so-called "specialty men." Each general salesman was allotted a definite territory, and was required to cover the whole of that territory within certain periods. He was required to call on every grocer within his territory and make an effort to sell a bill of goods; failing to accomplish that, in the case of a grocer not already a customer of his company, he was required to make1465 a special call on that grocer when he made his next periodic visit to that vicinity. It was the practice of general salesmen to serve the company's established customers first, and then to call upon prospective new customers. The specialty men performed the duties of regular salesmen and, in addition thereto, they were sent out to call upon prospective new customers, to establish new accounts and, frequently, to assist the general salesmen when the latter were unable to call upon all the trade within their territories. The Iowa company also established distributing centers, called agencies, at convenient points, where it maintained office forces for the purposes of making prompt deliveries of orders and securing additional business. Generally, these so-called agencies were established at points in undeveloped territory. About the same procedure was followed in the development of the respective territories of the petitioner and the Oklahoma company. In the case of the petitioner there were the added features of furnishing each salesman with a list of retail grocers in his territory who were entitled to credit rating, and upon whom he was required to call and, if possible, establish1466 accounts; and of sending out girl crews of house-to-house convassers to solicit orders which were turned over to retail grocers. Sales development work continued up to 1916, the capacity of the plant being increased as the necessities of the business required. In this sales development work the petitioner distributed more liberal quantities of samples than its competitors did, because when it started business its competitors had already firmly established their highly advertised lines in the territory. As to the Oklahoma company, there was the added feature of selling its products through house-to-house canvass work and special salesmen. General and special salesmen employed by the three companies were compensated by salary and/or upon a commission basis. All of the costs of sales development work were charged to expense by the three companies on their books. The books of account of the three companies show that the following amounts were charged to expenses, for advertising, cost of samples, selling expenses - cities, and selling expenses - country: PetitionerYearAdvertisingCost of samplesSelling expense - citiesSelling expense - country1908$752.95$1,888.16$16,218.3719094,130.475,971.5047,918.0619105,550.647,259.3560,196.7119116,411.87$1,174.6710,874.1078,549.2319127,861.83941.8411,302.5585,533.36191323,695.682,937.7511,493.6496,028.55191424,241.813,339.5016,262.30109,641.48191511,573.796,046.9922,201.20124,747.63Iowa Company1898$3,812.3618997,994.851900$427.838,972.671901850.7810,500.501902869.2511,068.101903870.7412,369.681904$211.07135.717,091.001905124.5072.299,085.201906296.94179.7313,370.431907267.40263.2420,189.451908808.12198.1022,277.0719092,090.71212.1829,182.1819102,000.41171.5434,726.5419112,505.83$136.831,397.9434,478.1219123,414.32496.811,464.1835,260.4519136,024.39523.233,233.0634,478.5119146,097.791,154.484,180.6234,412.3819154,709.012,352.358,650.3638,430.32Oklahoma Company1912$776.14$95.29$717.06$9,069.8919139,812.991,336.153,204.6538,680.5419143,732.221,967.984,406.7144,587.3219156,206.472,600.355,705.7653,108.891467 884 There was no change in the accounting practice after 1915 as it related to the cost of sales development work. The gross sales of the three companies for the fiscal years, January 31, 1910, to January 31, 1916, inclusive, were as follows: Fiscal yearPetitionerIowa CompanyOklahoma Company1910$660,521.02$456,649.5719111,000,593.42536,509.9019121,136,419.42492,333.2419131,381,936.76534,145.15$540,650.2619141,682,637.31654,862.36618,692.2219151,895,941.49773,456.60795,394.3419162,096,198.15832,966.621,041,100.46The net tangible assets used in the petitioner's business during 1911 to 1915, inclusive, and the earnings of the business for the same period were as follows: YearTangible assetsEarnings1911$383,883.00$92,715.451912459,995.59112,208.801913582,379.01142,372.111914753,632.22206,751.561915928,216.02202,685.51885 The petitioner's gross sales subsequent to the fiscal year 1916, to and including the calendar year 1920, were as follows: Year or periodGross salesFiscal year 1917$3,664,379.7811 mos. to 12-31-174,391,976.3619186,381,745.8719196,668,689.6919209,664,254.331468 Upon the organization of the petitioner and the Oklahoma companies, in 1908 and 1911, respectively, the Iowa company granted to those companies, without any consideration therefor, licenses to use all the trade-marks, trade brands, formulae and secret processes owned and developed by it during the period 1894 to 1908. In 1916 the Iowa company owned the trade-marks "Snow White Bakery" and "Fairy," which it had developed in its business. The first of these was registered in the Patent Office on July 7, 1914. It was well known throughout the Middle West, and frequently mail orders were received addressed to "Snow White Bakery," instead of Iten Biscuit Company. The trade-mark "Fairy" does not appear to have been registered; but it was developed by the Iowa company shortly after it began business. It was a trade-mark under which the company marketed a small soda cracker, and it was this product upon which the company had largely built its business. The same product, marketed under the same trade-mark, "Fairy," represented about 25 per cent of the total output of the petitioner's plant at Omaha. Both of these trade-marks were used by the petitioner and the Oklahoma company prior1469 to 1916 without the payment of any consideration to the Iowa company for such use. The following is a list of the trade-marks owned by the petitioner in 1916, and the date of registration thereof in the Patent Office: DescriptionRegistered"Tourist"June 29, 1909DesignFebruary 1, 1910DesignMay 31, 1910"Creme Sandwich"April 20, 1915"Echo"October 31, 1916"Enjoya"January 2, 1917These trade-marks were also used by the Iowa and Oklahoma companies. 886 At the hearing the parties filed a written stipulation, setting forth certain facts which they agree the Board may find, which is in part as follows: III. In the early part of 1916, the three corporations [the petitioner, the Iowa company and the Oklahoma company] above referred to, determined to consolidate and entered into contract, a copy of which is attached hereto as Exhibit "A" and made a part of this stipulation. While this contract provided that a new corporation was to be formed and the assets of the three corporations transferred to it, yet in order to conform to the laws of the State of Nebraska, which contains no provision for a consolidation of corporations, it1470 was decided to increase the capital stock of the Nebraska corporation [the petitioner] instead of organizing an entirely new corporation. There is attached hereto a true copy of the minutes of the meeting of the Board of Directors of the Iten Biscuit Co., held May 16, 1916. There were issued 14,547 shares of Preferred Stock of a par value of $100 each to represent the purchase price of tangible assets, fixed assets being valued at cost less depreciation to March 1, 1916, and 14,979 shares of Common Stock of a par value of $100 each for good will, patents, trademarks, formulae and other intangible assets of the three companies. At the same time, surplus of the Petitioner was credited with $407,100 for intangibles, making the total amount set up on the books of the Petitioner for intangibles $1,905,000. Exhibit "A" - Joint Exhibit "1-A".Agreement made this first day of March 1916, by and between Iten Biscuit Co., a corporation of Iowa, party of the first part, Iten Biscuit Co., a corporation of Nebraska, party of the second part, Iten Biscuit Co., a corporation of Oklahoma, party of the third part, and John J. Iten, Louis Iten, Frank J. Iten, all of Clinton, Iowa, 1471 O. N. Barmettler of Omaha, Nebraska, and H. F. Vories of Chicago, Illinois, as Trustees, parties of the Fourth part: Witnesseth, that whereas the parties of the first, second and third parts are each carrying on the business of manufacturing and selling crackers, cakes and food products of a similar nature, and Whereas considerably more than a majority of the capital stock of each of said corporations is owned by the same shareholders, and whereas the business policy of each of said companies is the same and each has been using the same trade-marks and trade-names for the product respectively manufactured and sold by them, and Whereas legal counsel has advised that the use of trade-names cannot be maintained by joint use on the part of separate corporations without jeopardizing the exclusive right to such names, and Whereas large economies in advertising will be effected and further economy in the use of one instead of three sets of labels, wrappings and the like and more increase in the value of trade-names will be gained by operating as one Company instead of by three separate entities: Now, therefore, the parties of the first, second and third parts have decided to give1472 up their separate organizations and to form one new company which is to purchase their collective business, property and good will and to that end the said parties have agreed and hereby do, each for itself, covenant and 887 agree to cause each and every one of its shareholders to assign, transfer and deliver to the parties of the fourth part all the shares of the capital stock of each of the parties of the first, second or third parts, respectively held or owned by him or her; the said parties of the fourth part to hold the same in trust for the purposes herein stated with unrestricted voting power until said Trustees are ready to deliver shares of the Capital Stock of a new corporation to be organized as hereinafter specified. It is mutually agreed that whenever the new Corporation has been organized, each of the parties of the first, second and third parts will sell, convey, transfer and assign to such new corporation all of its property real, personal and mixed, including good will and trade-names or trade-marks, by duly executing and delivering all such conveyances, documents and writing as legal counsel will advise to be necessary or desirable, and each will do this1473 promptly whenever requested by the parties of the fourth part or a majority of them. The new corporation will assume the indebtedness and obligations of each of said three existing corporations who are parties of the first, second and third part. Each shareholder of the three corporations being the parties of the first, second and third part, providing he or she has assigned and delivered his or her shares of stock to the parties of the fourth part as aforesaid, will in due course receive from the said Trustees in exchange for the shares so delivered by him or her, such a number of the preferred shares of the Capital stock of the corporation to be newly organized as will represent his or her share in the net tangible assets of that one of said three companies in which he or she now is interested by the holding of shares of stock. All computations of shareholders' interest are to be based on the net tangible assets stated upon the books of each respective one of said three companies as of January 31, 1916, it being, however, understood that in case the said Trustees after reviving the books of account of said three Companies should find the existence of any material inequality1474 in the practice of said Companies in arriving at net profits due to the use of different basic charges for Depreciation, Can Reserve and other similar accounts, the same shall be refigured so that all three will be treated as nearly alike in this respect as will seem fair and equitable. The period of time which is to govern the foregoing will be the two fiscal years ending January 31, 1916, as applied to the parties of the first and second part and the one year ending January 31, 1916, as applied to the party of the third part. In addition to aforesaid preferred shares the said parties of the first, second and third part, collectively, will be entitled to common shares of stock of such new corporation as compensation for good-will, trade-marks and tradenames. The aggregate number of shares of common stock to which they will be entitled is to equal the total number of preferred shares which will be given for aforesaid net tangible assets, and the difference in the number which each of said parties will receive is to be due to variation in their net profits of the past. The following net profit of the three Companies, respectively, shown by their books of account, to-wit: The1475 average yearly profit of first party for the two fiscal years ending January 31, 1916. The average yearly profit of second party for the two fiscal years ending January 31, 1916. The average profit of third party for the one fiscal year ending January 31, 1916. will be added together and the right of each to common shares as aforesaid will be measured by that percentage of the whole which is coincident with 888 their proportion of the aggregate net profit entering into the computation aforesaid. The individual shareholders of the parties of the first, second and third parts will in turn participate in the division of the common shares of stock which will be apportioned to that one of said three companies of which they are now stockholders, each to participate in the measure of his or her respective holding of shares. The parties of the fourth part are hereby authorized and directed to organize the new corporation under the laws of some state which they will select after conference with legal counsel; the amount of authorized capital stock, both preferred and common, to be determined by them and if possible to meet the probable needs of future augmentation; the1476 preferred shares to have a par value of $100 each and to be preferred both as to assets and dividends which latter are to be 7% cumulative, payable quarterly; the preferred shares to be subject to call and redemption at 110 on thirty days notice addressed to the post office address of the holder last entered upon the records of the company. The common shares to have par value of $100 each and to be nonassessable with voting power to the exclusion of the preferred shares. The shares of common stock are to be issued subject to the condition that during the periods of time hereinafter stated no holder thereof will sell, assign or transfer the same to others before offering the same to the Corporation which issued them. The said Corporation may thereupon elect to take such shares by paying therefor within the first two years after organization of the Company the sum of Twenty-five Dollars per share or Fifty Dollars per share within the succeeding two years or Seventy-Five Dollars per share within the next succeeding two years and One Hundred Dollars per share within the next following four years; but these rates may be changed or the entire right of option to purchase may be annulled1477 at any time by the affirmative vote of 76% of all of the authorized common stock; in which case the terms of the change so made shall govern thereafter. It will be understood that the option of purchase must be exercised within thirty days after the shares of stock are offered in writing, otherwise the holders of such shares will be at liberty to sell the same to others, but if he or she does not sell within thirty days after such right to sell to others accrued to him or her then the option of the Company to purchase will automatically reinstate itself with the same vigor and life as before. Each subscriber hereto recognizes the fact that owing to legal or other obstacles which may not have been forseen the parties of the fourth part may not be able to carry out the foregoing in every detail, but they are hereby fully authorized and empowered to exercise their best judgment and each subscriber agrees to be bound by the determination of such judgment. The determination of a majority of said Trustees shall be decisive and conclusive upon every one in interest. In all cases of apportionment of shares of stock, either preferred or common, which may in part entail a fraction of1478 one share and likewise if a fraction should be the result of a computation of the interest of any shareholder in the existing three companies which are parties of the first, second and third part, the parties of the fourth part may in their discretion require a payment by the owner of such fraction, of a sum sufficient to entitle him or her to one full share in lieu of such fraction or they may cause to be paid to such shareholder in dollars and cents the value of such fraction and thereby annul the same. Each of the said parties of the first, second and third part covenants and agrees that in the interim which shall elapse between the date of signing of this 889 agreement and the time when the assets are transferred in accordance with the direction of the parties of the fourth part, its respective business shall be conducted exactly the same as if no such transfer had been contemplated and that no changes whatever shall be made in said business or the manner of conducting it except such as are dictated by ordinary business care and judgment, but no dividend shall be declared in the said interim. In lieu of such dividend the said Trustee will, when the preferred shares1479 of the Company to be newly organized are distributed in accordance with the foregoing provisions, direct payment to the holders of said new shares of a sum which will be equivalent of a 7% per annum dividend from February 1, 1916 to the date of issuance of the shares of stock of the new Company. The said parties of the first, second and third part each covenant and agree upon request of the parties of the fourth part to cause its respective Board of Directors or its shareholders in meeting duly assembled to adopt any resolution which legal counsel may deem necessary or desirable to effectually carry out the sale and transfer aforesaid and each signatory hereto for himself, hereself or itself individually, and for his or her respective heirs or assigns, likewise covenants and agrees to sign, seal and deliver to the parties of the fourth part any paper or document which legal counsel may think necessary or desirable to remove any element of doubt or uncertainty concerning any matter in relation to such sale and transfer. Each and every signatory hereto confirms and ratifies all the terms and conditions of the foregoing and for himself, herself or itself individually and for his1480 or her respective heirs or assigns, hereby irrevocably empowers and authorizes the parties of the fourth part to carry out the plan above outlined and to deal with each and every matter and question that may arrive in connection therewith according to their best judgment and discretion, each of us hereby agreeing to abide by and conform with each and every decision, determination or requirements of said parties of the fourth part. In the event that the foregoing cannot be carried out as planned or as may be planned by said Trustees, or if it cannot become consummate by January 31, 1917, then this agreement will become void and of like effect as if never made and the parties of the fourth part shall return to each shareholder the shares of stock by him or her delivered to them; otherwise the new organization will be completed as soon as reasonably possible, the new shares of stock will be delivered to each one entitled thereto and the old ones transferred or cancelled as when the parties of the fourth part will determined. Joint Exhibit "B-2"A meeting of the Board of Directors of Iten Biscuit Company of Nebraska was held in Omaha on May 16, 1916, at 11 o'clock, A. M. Present: 1481 John J. Iten, L. C. Iten, F. J. Iten, O. H. Barmettler, H. F. Vories, R. C. Stewart. The following resolutions were offered, duly seconded, and carried in their numerical order, by unanimous vote: I. WHEREAS, the stockholders of this Company have authorized the purchase of the property, business and good will of Iten Biscuit Co. of Iowa and also that of Iten Biscuit Co. of Oklahoma, with the understanding that said two Companies will each receive for purchase price, shares of stock of this Company to be distributed among the stockholders of said two corporations, the effect 890 of which will be the making of such stockholders the holders of shares of this Company, and WHEREAS, the underlying consideration for a portion of the stock so to be issued is the surplus and good will of said two businesses, each being well established and profitable, therefore it seems only proper and just that a valuation of the good will of this Company be arrived at and that this be capitalized on a conservative basis measured by past earnings, the purpose being to place our own shareholders on a reasonable footing of equality with such new co-holders of shares of stock of this Company, 1482 therefore, BE IT RESOLVED, that the value of the good will of this Company prior to the purchase of the business and good will of Iten Biscuit Co. of Iowa and Iten Biscuit Co. of Oklahoma be and hereby is fixed at One Million Five Hundred Thousand Dollars, ($1,500,000.00) for the reason that the average net annual earnings of the Company for the two years last past have been sufficient: First, to allow for liberal deductions for depreciation; Second, to provide 7% per annum on the sum total of the Company's tangible assets; and Third, to leave a balance besides which exceeds 10% of the value fixed for good will as aforesaid, and BE IT FURTHER RESOLVED, that all outstanding shares of stock of this Company be at once called in for cancellation, and that in lieu thereof each shareholder will receive for each share of stock turned in for cancellation one and thirty-two hundredths shares of the preferred stock of this Company and one and sixty-four one hundredths shares of the common stock of this Company, provided, however, that no fractional shares of stock are to be issued, and wherever the computation of any shareholder's rights shall end with a fraction, such shareholder will receive1483 in cash from the Company the value in dollars and cents of such fraction for preferred shares and will relinquish to the Company any fractional shares of common stock, upon receipt of which such fractional right shall stand as annulled. II. WHEREAS, the Company's amended Articles of Incorporation contemplate the issuance of both preferred and common stock to the shareholders and also provide that the Board of Directors may give such preference and voting powers or restrictions or qualifications thereof as they may deem best, and further provides that the Board of Directors may have the preferred stock issued by the corporation with the reservation of the right to redeem such stock at the price of $110.00 per share by giving thirty days' notice by letter addressed to the Post Office address of the holder of such stock last entered upon the records of the corporation, and that the common stock shall be issued and accepted with the agreement and reservation that the corporation shall have the first option and right to purchase any or all of such shares whenever the holder thereof shall desire to sell or dispose of the same and it will be the duty of such holder to first offer in1484 writing to sell such stock to the corporation and the Board of Directors shall have thirty days in which to purchase the offered shares at the current market price or price to be agreed upon, and if the offer is not so accepted within such thirty days thereafter, the holder or owner thereof may dispose of same to others within thirty days thereafter, and if not so sold or disposed of within such time then the option of this corporation to purchase will automatically be reinstated with the same vigor and life as before, therefore. BE IT RESOLVED that all the shares of preferred stock are to be issued with the reservation of the right to redeem as provided in the Company's Articles of 891 Incorporation, and that the shares of common stock shall be issued with the agreement and reservation that the corporation shall have the first option and right to purchase any or all of such shares whenever the holder thereof shall desire to sell or dispose of the same, as is also provided in the Articles of Incorporation * * . Joint Exhibit C-3 is a list of the stockholders of the three companies, showing the number of shares held by each in each of those companies and the number of1485 preferred and common shares issued to each, by the petitioner, in exchange for their old shares; and the said joint exhibit is incorporated in these findings by reference thereto. The 14,547 shares of preferred stock and the 14,979 shares of common stock issued by the petitioner, as set forth in the fourth paragraph of division III of the stipulation, was issued to the stockholders of the three companies as follows: 2,807 shares of common and 3,139 shares of preferred to the stockholders of the Iowa company; 1,321 shares of common and 2,947 shares of preferred to the stockholders of the Oklahoma company; and 10,851 shares of common and 8,848 shares of preferred to the stockholders of the petitioner. In 1920 the petitioner acquired all of the capital stock of the Shelby Biscuit Company, of Memphis, Tennessee, issuing in exchange therefor 2,750 shares of its own common stock. In 1928 the petitioner sold its entire assets and business to the National Biscuit Company, receiving in payment therefor 100,000 shares of the common stock of that company. In its return for 1927 the petitioner reported a net income of $689,645.31. The written stipulation filed by the parties at the1486 hearing, contains the following: V. In computing the invested capital of the Petitioner for the years 1918 to 1920, the Respondent has allowed the sum of $159,475.30 as the value of the intangibles of the Iten Biscuit Co. of Iowa, transferred on March 1, 1916, and has disallowed the sum of $245,524.70. No allowance in invested capital has been made for any good will of the Iten Biscuit Co. of Oklahoma. The good will as of March 1, 1916, of the Iten Biscuit Co. of Iowa was determined by the Respondent on the basis of a 10% return on tangibles and capitalizing excess earnings at 20%. The actual cash value, as of the date of acquisition, of all of the intangibles acquired by the petitioner from the Iowa company in exchange for stock was $280,700. The actual cash value, as of the date of acquisition, of all of the intangibles acquired by the petitioner from the Oklahoma company in exchange for stock was $132,100. The written stipulation filed by the parties at the hearing contains the following: 892 XV. It is agreed that the salaries and bonuses paid to the officers of the petitioner in the years 1918, 1919 and 1920 were as follows: H. F. Vories$6,666.81$7,500.00$7,500.12F. J. Iten5,875.087,500.007,000.08L. C. Iten5,875.087,500.007,000.08J. J. Iten7,124.977,500.007,500.00O. H. Barmettler75,704.9662,956.5972,841.33R. C. Stewart18,193.7313,731.3512,203.141487 H. F. Vories was a director and chairman of the board of directors of the petitioner during the years in controversy, offices which he held throughout the period 1908 to 1926. Before becoming associated with the petitioner he had been secretary of the American Biscuit Company and a vice president of the National Biscuit Company. He was one of the best known men in the cracker industry. Frank J. Iten was a member of the partnership of L. Iten & Sons, the predecessor of the Iowa company. He also had been bookkeeper, office manager and manager of the Iowa company and a director and treasurer of the Oklahoma company. Louis C. Iten was a member of the partnership of L. Iten & Sons, the predecessor of the Iowa company. He became secretary-treasurer of the Iowa company when that company was organized in 1894. He was made a vice president of the petitioner and a vice president of the Oklahoma company when those companies were organized in 1908 and 1911, respectively. John J. Iten was a member of the partnership of L. Iten & Sons, the predecessor of the Iowa company. He became president of the Iowa company when that company was organized in 1894. He had supervised and constructed1488 the plants of the petitioner, the Iowa and Oklahoma companies. Otto H. Barmettler was vice president and general manager of the petitioner during the years in controversy. He had previously served in the capacities of secretary of the petitioner and manager of the petitioner's Omaha plant. He had also previously been a vice president of the Oklahoma company, in charge of buying and sales. Before becoming associated with the petitioner, he had been manager of the Clinton, Iowa, branch of the American Biscuit Company, manager of the Des Moines bakery of the Continental Biscuit Company, and in charge of the cracker sales department of the National Biscuit Company at St. Joseph, Michigan. Richard C. Stewart was manager of the petitioner's plant at Clinton, Iowa, formerly the plant of the Iowa company, during the years in controversy, a position which he occupied from 1916 to 1928. Previous to 1916 he had been cashier and bookkeeper, and also assistant manager and assistant sales manager, of the Iowa company. 893 The following is a statement of the petitioner's net income, invested capital, profits tax and percentage of profits tax to net income, for 1918, 1919 and1489 1920, as determined by the respondent in the deficiency notices: YearNet incomeInvested capitalProfits taxPercentage1918$1,127,263.08$2,117,471.58$645,120.9257.231919934,876.372,541,187.87231,044.0324.7119201,097,071.673,100,242.95264,615.0624.12At the hearing, the parties orally stipulated as follows: It is stipulated and agreed that the facts as testified to by the witnesses Otis H. Barmettler, Allen D. Speer, Ernest H. Buffet, LeRoy C. Petro, Chas. F. Peach and Willis R. Avery, in Dockets 43667 and 45164, and the documentary evidence introduced in connection therewith, covering the years 1922 to 1926, inclusive, in the hearing of these appeals held in Omaha, Nebraska, on March 3, 1931, would be the same, if said witnesses were called, sworn and testified in these proceedings for the years 1918, 1919 and 1920, under Dockets Nos. 16429 and 20899, in connection with the issue to the returnable packages and the treatment thereof. In conformance with this stipulation there is incorporated herein and made a part of these findings, by reference thereto, paragraphs 2 to 19, inclusive, of the Board's findings of fact1490 in Dockets 43667 and 45164. The written stipulation filed by the parties at the hearing contains the following: VI. The Respondent, in his determination of net income upon which the deficiencies proposed were determined has allowed as a deduction in computing net income for each of the years, depreciation on so-called "Returnable Packages" in the following amounts: 1918$43,680.15191948,592.14192069,630.88The respondent in his computation of invested capital for said years has made similar adjustment to invested capital on account of these deductions and similar deductions for prior years. It is agreed that from the evidence introduced, if the Board should find that there was in fact and in law, a sale of so-called "Returnable Packages" during the years 1918 to 1920, inclusive, that the aforesaid allowances were erroneously allowed and should be added to taxable income and the proper adjustment made to invested capital. VII. * * In 1918, there was a net credit to the Returnable Package Depreciation Reserve account of $11,370.38, which amount has not been returned as income by the Petitioner in filing its Federal account, nor has it been1491 treated as taxable income by the Respondent in his determination of deficiency for the year 1918. 894 In the year 1919 there was a similar credit to the Returnable Package Depreciation Reserve account of $30,044.57, which amount was not accounted for by either the Petitioner or Respondent as set forth with respect to the year 1918. In the year 1920, there was a net debit to the Can Liability account of $19,387.47, which net loss the Petitioner did not claim as a loss in computing its taxable income for said year nor has the Respondent allowed same as a loss during said year in his determination of the deficiency for the year 1920. * * * X. It is agreed that the taxable net income as determined by the Respondent for the year 1919 should be increased $3,073.87 for Real Estate Taxes allowed as deduction in 1918 and erroneously allowed again in 1919. In determining the war-profits tax for 1918 the respondent has allowed a war-profits credit which is based upon an average net income for the pre-war period of $169,904.85. OPINION. LANSDON: The petitioner contends it is within the provisions of section 327 of the Revenue Act of 1918, and that its profits taxes1492 for the years in controversy should be redetermined under the provisions of section 328 of that act; but should it be wrong in that contention, then it is contended that the respondent has understated invested capital, for each of those years, by excluding therefrom a substantial portion of intangibles admissible under the limitations of section 326(a)(4) of the act. The claim to special assessment is premised upon (1) respondent's inability satisfactorily to determine the invested capital, because of the manner and form of organization and the impossibility of ascertaining the cost of intangibles developed in the business; (2) an abnormality in capital resulting from the inclusion of tangible property at less than the actual cash value thereof, as of the date of acquisition, and the exclusion of valuable income-producing intangibles developed in the business; and (3) an abnormality in income, resulting from the payment of salaries to executive officers which were abnormally low and inadequate considering the qualifications of such officers and the nature of the services rendered. We are satisfied from the record before us that there is an abnormality in capital within the meaning1493 of subdivision (d) of section 327 of the Revenue Act of 1918, due to the exclusion of valuable intangibles which were substantial contributing factors in the earning of the income of the years in controversy. The history of sales promotion and development work and the record of gross sales and earnings over the period of corporate existence denote the creation and rapid enhancement in value of an intangible structure. We think the evidence warrants the conclusion that in 1916, when the 895 petitioner acquired the Iowa and Oklahoma companies, the value of the petitioner's intangibles alone was at least $1,000,000, an amount in excess of its investment in the tangible properties of the business; and there is nothing in the history of the business subsequent to 1916 which indicates any diminution in the value of those intangibles. For the five-year period 1912 to 1916, inclusive, the average net tangibles employed in the petitioner's business amounted to $621,661.17, and the average earnings of the business amounted to $252,244.48. If a return of 10 per cent be ascribed to the net tangibles, the earnings attributable to the intangibles were more than three times the earnings1494 attributable to the tangibles. No part of the value of the intangibles may be included in invested capital under the provisions of section 326 of the act, except to the extent of the actual cash expenditures in building up the intangible structure, and the amount of these expenditures, which represent but a very small portion of the whole intangible value, can not be determined from the books of account. It is unnecessary to discuss the other grounds advanced by the petitioner as the basis of its claim for special assessment. In our opinion, the exclusion from invested capital of the intangibles developed in the petitioner's business creates just such an abnormality as is contemplated by section 327 and makes mandatory the application of the provisions of section 328 for the determination of the petitioner's profits taxes for the years in controversy. Our decision on the issue of special assessment makes it unnecessary to consider the alternative issue raised by the petitioner at this time. Unless the profits tax under section 328 is greater than the tax when computed under section 301, the matters pertaining to invested capital and the war-profits credit raised in the petition1495 are moot questions and adjudication thereof is unnecessary. The remaining question for consideration is whether the petitioner is entitled, in computing taxable net income, to deductions for depreciation of can containers, so-called "returnable packages." This is the same question as was raised by the petitioner in Dockets 43667 and 45164, decided this day; and upon the authority of the decision in those proceedings, we hold that the petitioner divested itself of the ownership of returnable cans in which it shipped its products to customers; that such returnable cans were not used in the petitioner's business; and that it is not entitled to deductions representing reasonable allowances for wear, tear and exhaustion of the returnable cans, in computing the taxable net income of each of the years in controversy. The amounts of such allowances are not in controversy. Accordingly, the respondent's claim for an increased deficiency for each of the years in controversy, based upon the grounds 896 that he erred in allowing deductions for depreciation of returnable cans, and that he failed to include the gains from sales of returnable cans in gross income, is approved. In view*1496 of the stipulation of the parties that the respondent has erroneously allowed a deduction of $3,073.87 for 1919 on account of real estate taxes which were also allowed as a deduction for 1918, the net income for 1919 as determined by the respondent in the deficiency notice should be increased by that amount. Decision will be entered after other hearing under Rule 62.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622303/	JOHN E. BEHNKEN AND JUNE C. BEHNKEN, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent; JOSEPH R. BEHNKEN AND LINDA N. BEHNKEN, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentBehnken v. CommissionerDocket Nos. 7350-88, 23208-88.United States Tax CourtT.C. Memo 1990-595; 1990 Tax Ct. Memo LEXIS 666; 60 T.C.M. (CCH) 1292; T.C.M. (RIA) 90595; November 20, 1990, Filed 666 Decisions will be entered for the petitioners. Ronald D. Stanley and Douglas B. Brockhouse, for the petitioners. Michael W. Bitner, for the respondent. CLAPP, Judge.CLAPPMEMORANDUM FINDINGS OF FACT AND OPINION Respondent determined deficiencies in petitioners' Federal income taxes in the following amounts: John E. Behnken and June C. Behnken -- Docket No. 7350-88YearDeficiency1980$ 7,08019817,01419827,12819835,35219844,58319854,012Joseph R. Behnken and Linda N. Behnken -- Docket No. 23208-88YearDeficiency1980$ 8,511198318,752The deficiencies in these consolidated cases resulted from the disallowance of investment tax credits or their carryovers. From 1983 through 1985, either one or both petitioners purchased dump and tank trailers for which they claimed the credits. The deficiencies for years prior to 1983 resulted from the disallowance of excess credits carried back to those years. The issue presented is whether the terms of the trailer leases were for less than 50 percent of the useful lives of the trailers. All section references667 are to the Internal Revenue Code, as amended and in effect for the years in issue. FINDINGS OF FACT Some of the facts are stipulated and are so found. Petitioners John E. and June C. Behnken resided in New Athens, Illinois, and petitioners Joseph R. and Linda N. Behnken resided in Belleville, Illinois, at the time they filed their petitions. "Petitioners" in the plural refers to Joseph R. Behnken and John E. Behnken, who are brothers. Petitioners may also be referred to individually by their first names. During 1983 through 1985, Equity Capital Corporation (Equity Capital) owned all of the stock of Behnken Truck Services Inc. (Behnken), and Kreider Truck Services Inc. (Kreider). Behnken was in the business of transporting industrial coal in open-top dump trailers. Kreider was in the business of transporting bulk food products such as wines, vinegars, and corn syrups in 6,000-gallon tank trailers. Joseph was president of Equity Capital and Behnken and the majority shareholder of Equity Capital, and ran the daily operations of Behnken and Kreider. In 1981, John and his wife sold stock in Behnken to Joseph, and at that time executed a covenant not to compete with Behnken. 668 During 1983, John was vice president of Behnken, sat on its board, and owned stock in Equity Capital. Behnken and Kreider needed more trailers to expand their operations. It was decided that it was preferable that the corporations lease rather than purchase the required trailers because of the following financial difficulties: (1) operating losses; (2) cash-flow problems (which were caused in part by Government deregulation of the trucking industry which had resulted in more competition and lower prices); and (3) additional debt Behnken had taken on when it acquired Kreider in a leveraged buy-out. At the time Behnken purchased Kreider, it was anticipated that Behnken could reduce the buy-out debt with profits. Due to operating losses, however, this reduction had not occurred. Another reason it was preferable to lease rather than buy additional trailers was the possibility of selling the corporations. Behnken would be more marketable without having purchased new trailers because such a purchase would add even more debt to Behnken's financial position. Joseph became interested in personally purchasing dump and tank trailers. He did a study on acquiring and leasing trailers669 by projecting the income and balance sheets of the proposed endeavor. He showed this information to John, who expressed interest in purchasing the trailers. The brothers considered that the trailers could be leased to parties other than Behnken and Kreider. Joseph viewed purchasing the trailers as an investment in his portfolio. From 1983 through 1985, one or both petitioners purchased the trailers for which they claimed the investment tax credits at issue. Petitioners leased their newly purchased trailers to Behnken and Kreider. The leases were negotiated on behalf of both the lessor and the lessee by Joseph, wearing alternatively the hats of owner-lessor and corporate president-lessee. Joseph had extensive experience in leasing transactions, and he checked with various sources in negotiating the leases. From 1983 through 1987, there were three types of leases pertaining to the relevant trailers. The leases followed each other consecutively, and we will refer to them as type A, B, and C leases. These leases were in effect as of the dates and between the parties listed below: LessorLesseeDateTypeJohnBehnken11-23-83AJohnBehnken12-23-83AJosephBehnken11-23-83AJosephKreider11-20-83AJosephKreider12-23-83AJosephBehnken12-23-83AJohnBehnken11-22-84BJosephBehnken11-22-84BJosephKreider11-22-84BJohnBehnken4-1-87CJosephBehnken4-1-87C670 Title to some trailers was held in the name of the John E. Behnken Revocable Living Trust or the Joseph R. Behnken Revocable Living Trust. As petitioners retained full dominion and control over property held by their trusts and each was the sole income beneficiary during his lifetime, we refer to petitioners individually as the lessors of the trailers rather than referring to their trusts. For all type A leases, form leases were used and the blanks filled in. Each type A lease contained the following provision: TERM: This lease is for a term of 12 months, beginning and ending . All type A leases had a stated term of 1 year. The type A leases did not contain an option to renew. All type B leases contained the following paragraph -- TERM: This lease is for a term of 1 year beginning November 22, 1984. This Lease Agreement shall be extended for additional terms of one year each and upon the same terms and conditions as herein set forth provided that no notice of termination of said Lease Agreement is given by either party to the other of them, intention to so terminate shall be given prior to thirty (30) days of the end of any term.The type671 B leases were for a stated term of 1 year. The trailers leased under the type B leases included trailers leased under the prior type A leases. The provisions of the type B leases were substantively different from the provisions of the type A leases. The substantive changes made included the provisions regarding rent, maintenance costs, cost of insurance, and tire expenses. Trailers were periodically added to the type B leases through the use of schedules. When trailers were no longer needed, they were leased to unrelated parties. The type B leases were rescinded by mutual agreement of the parties in 1987. Type C leases were effective as of April 1, 1987, for a stated term of 2 years. These leases were in effect for years after petitioners had claimed the investment tax credits. Many trailers covered by the type B leases were re-leased under type C leases. The provisions of the type C leases were substantively different from the provisions of the type B leases. When renegotiating provisions of the type A, B, and C leases, Joseph considered the trailers' current maintenance and total operating expenses. Under the type A leases, all maintenance costs were paid by the lessor.672 Joseph negotiated this provision because with a new trailer, maintenance costs are anticipated to be low and thus as the lessor he was willing to assume these costs. On the part of the lessee, Joseph accepted a higher rental price because the lessee would have no maintenance expenses. Under the type B leases, maintenance costs paid by the lessor generally were capped at $ 30 or $ 40 per month. As some trailers were older and required more repairs, Joseph, as lessor, negotiated a fixed amount of maintenance costs. Under the type C leases, all maintenance costs were to be paid by the lessees. As the trailers were older, they required more maintenance and Joseph as lessor was not willing to accept the risk of maintenance costs. Though they paid all maintenance costs, the lessees had a rental amount that generally was equal to 5 percent of gross hauling revenues generated by the trailers. The financial condition of Behnken and Kreider continued to deteriorate. In April 1988, the assets of the corporations were sold. Petitioners leased some and sold others of the trailers previously leased to Behnken and Kreider to the purchaser of the corporations. OPINION The parties agree673 petitioners meet all the requirements necessary to be entitled to investment tax credits except for the requirement under section 46(e)(3)(B) that the terms of the leases must be for less than 50 percent of the useful lives of the trailers. The parties agree that the useful lives are 6 years. The stated terms of the leases pertaining to the trailers for the years in which the investment tax credits were claimed were 1 year. These terms are less than 50 percent of the 6-year useful lives of the trailers. Respondent asserts, however, that we should disregard the literal terms of the leases and find that the leases were really of an indefinite length. In deciding whether a lease is of indefinite duration or limited to the definite term specified in the lease, all the facts and circumstances are considered. .The duration of the leases is decided by the "realistic expectations of the parties at the time the lease was entered into." , affg. a Memorandum Opinion of this Court; .If it674 appears that the substance of the transaction is that the lessee will continue leasing the property beyond the period stated in the lease, then the term specified in the lease is disregarded and the lease is considered to be of indefinite length. . The types of facts and circumstances which we consider in determining whether a lease term was indefinite are: (1) the lessor has an established practice of buying equipment for the lease in order to meet the special needs of the lessee; (2) the lessor has control of the lessee; (3) the lessor leased only to the controlled lessee; (4) the lessee leased only from the lessor; (5) the leases were renewed either automatically or without renegotiation; (6) the equipment was sold once the lessee no longer needed it; (7) the purpose of the leasing arrangement was tax avoidance; and (8) the leasing was a "financing arrangement." . We apply the above eight factors to determine whether the lease terms were indefinite. First, Joseph and John bought the trailers in part in order to meet the specific needs of the lessee. Either both675 or one of them purchased the relevant trailers in the years 1983 through 1985. In these years, Behnken and Kreider needed and leased trailers petitioners purchased. Petitioners emphasize, however, that they also purchased the trailers as a personal investment. Joseph testified that while the prospect of leasing the trailers to Behnken and Kreider was considered in deciding to make the investment, the possibility of leasing the trailers to unrelated parties was also considered. Trailers were, in fact, leased to unrelated parties. We conclude that petitioners' purchase of the trailers was both a way to meet the special needs of Behnken or Kreider and was also a personal investment. Second, respondent asserts, and we agree, that petitioners controlled Behnken and Kreider. We consider the years in which the investment tax credits at issue were claimed, 1983 through 1985. Joseph owned approximately 70 percent of the stock of Equity Capital and ran and controlled Behnken and Kreider from 1983 to 1985. John was not a controlling shareholder, although he was vice president of Behnken in 1983. However, even if John was not in a position of control, we attribute Joseph's control to676 him as it was Joseph who acted as John's agent in negotiating the leases. Third, we consider whether Joseph and John leased only to the controlled lessees. Joseph testified that some trailers were leased to unrelated parties and that petitioners considered this possibility when making the decision to purchase the trailers. Respondent concedes that the trailers were leased to unrelated parties, but asserts that such leasing took place only when Behnken or Kreider no longer could use such trailers. Assuming, arguendo, that respondent is correct, we do not believe petitioners' preference for leasing to their corporations before leasing to unrelated parties undermines the fact that petitioners regarded their leasing activities as a personal business endeavor separate from the activities of Behnken and Kreider. Fourth, while there is no evidence in the record which indicates that Behnken and Kreider leased from anyone other than petitioners, this fact alone does not indicate that the parties intended that the lessees would continue leasing the property beyond the period stated in the lease. Fifth, we must consider whether the leases were renewed either automatically or without renegotiation.677 We are convinced that the terms of the leases were in fact reexamined after the prior leases expired. When negotiating on behalf of the lessor, Joseph stated that as president of Behnken, he believed it unwise for the corporations to enter into a lease for longer than 1 year because they were in a precarious financial state and were competing in a newly deregulated market. Joseph also wanted a short-term lease due to the possibility of selling the corporations and a long-term lease would be an additional financial liability making them less marketable. Joseph also wished to be able to change the terms of the leases to reflect the operating expenses of the trailers. We find Joseph's testimony on these topics credible. Also, comparing the terms of the type A, B, and C leases, we find that on the whole the provisions of the leases changed to reflect the economic realities of operating the trailers. All of these factors indicate that the leases were in fact renegotiated and were not automatically renewed. Sixth, respondent emphasized the fact that the trailers were sold once the lessees no longer needed them. It is true that petitioners sold many of the trailers to the same purchaser678 who bought Behnken and Kreider. However, other trailers were kept by petitioners after the sale and leased to the purchaser, an unrelated party. Seventh, there is no evidence that the purpose of the leasing was tax avoidance. We assume that petitioners were aware of the tax consequences of their transactions, but such awareness does not disqualify them from receiving such benefits. Eighth, we do not believe the leasing was a financing arrangement as the consecutive, renegotiated, type A, B, and C leases contained modifications that reflected the changing costs of the trailers. Respondent asserts that the type B leases were self-extending and, thus, really for an indefinite term. We disagree. Though the language of the type B leases provided that the leases would be continued on the same terms and conditions unless notice of termination was given by either party before 30 days prior to the end of any year, this language does not make the lease indefinite. The leases provided that they would be extended for additional terms of 1 year. If a type B lease was not cancelled by giving 1 month's notice prior to 30 days before the end of the 1-year term, the lease extended for another679 full year. Joseph testified that before the 1-year terms expired, he considered whether the leases should be allowed to renew for another year. Respondent's authority for the proposition that a lease which is self-extending is really indefinite is .However, the facts of Ridder are distinguishable from the instant case. The lease in Ridder was for a minimum of one month, had no stated term, and would end upon 30 days' written notice. . Respondent also makes the argument that Joseph's type A leases were shams. He bases this argument on the factual assertion that some of Joseph's trailers were included in two leases simultaneously. The documents under which the trailers were purportedly leased simultaneously are exhibits 60-BH and 61-BI. However, these exhibits do not make sense. The front pages of the documents contain the term clause of a type B lease, thus stating that the term of the lease begins November 22, 1984. However, the signature pages are dated October 1, 1983. Attached schedules also have October 1, 1983, and earlier dates. These exhibits680 were admitted in evidence as stipulated by the parties. Even so, it seems highly unlikely that documents signed October 1, 1983, would create a lease that would begin in November 1984. In their reply brief, petitioners candidly state that the discrepancies in dates are not reconcilable, and are due to all parties' negligence, and that exhibits 60-BH and 61-BI should be disregarded. It seems most likely to us that when preparing the exhibits for trial, someone made a mistake by attaching pages from different leases together. We accept petitioners' position and disregard exhibits 60-BH and 61-BI. Respondent also asserts that John leased his trailer to Behnken and Kreider because he was legally bound not to lease to unrelated parties by a covenant not to compete when he sold stock in Behnken to Joseph in 1981. We find this argument without merit as there is no provision in the covenant which prevents John from leasing trailers. In the covenant, John only agreed to refrain from competing in a business similar to the business operated by Behnken. We are satisfied on the particular record before us that all the leases of the trailers were for less than 50 percent of their useful681 lives. Accordingly, Decisions will be entered for the petitioners.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622305/	ERNEST J. TAMARY, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentTamary v. CommissionerDocket No. 4856-72.United States Tax CourtT.C. Memo 1974-35; 1974 Tax Ct. Memo LEXIS 283; 33 T.C.M. (CCH) 166; T.C.M. (RIA) 74035; February 6, 1974, Filed. 283 Held, (1) petitioner not entitled to dependency exemption for his grandmother; (2) petitioner does not qualify as a "head of household"; and (3) amount of charitable contributions determined. Ernest J. Tamary, pro se.Donald K. Cook, for the respondent. IRWINMEMORANDUM FINDINGS OF FACT AND OPINIONIRWIN, Judge: Respondent determined a deficiency of $1,983.03 in the income tax of petitioner for the taxable year 1969. The following issues are presented for our determination: (1) whether petitioner is entitled to claim a dependency exemption for his grandmother for the taxable year 1969; (2) if so, whether petitioner also qualifies as a "head of household" for such year; and (3) whether petitioner has substantiated charitable contributions for 1969 in excess of $545.20. 2 FINDINGS OF FACTSome of the facts have been stipulated and the stipulation of facts, together with the exhibits attached thereto, are found accordingly. Petitioner Ernest J. Tamary is an unmarried individual who resided in Rochester, N.Y., at the time of the filing of his petition with this Court. For the taxable year 1969 petitioner also resided in Rochester and for that year filed his individual Federal income 284 tax return with the district director of internal revenue, Buffalo, N.Y.On his 1969 return petitioner claimed Selma Imberman, his grandmother, as a dependent and filed as a "head of household."During 1969 Selma Imberman resided with her husband, Max Imberman, in Bronx, N.Y., and for that year they filed a joint Federal income tax return reporting a gross income of $2,775.87. This amount consisted of $2,044.98 which was the net profit of Max's wholesale business and $730.89 in interest. The return indicates that the interest was the joint income of Max and Selma. Max and Selma also reported a capital loss of $924.62 resulting from the sale of stock and deducted the full amount from their gross income, leaving an adjusted gross income of $1,851.25. The tax tables indicated that no income tax was due with respect to this income. The return, however, indicated that there was a 3 self-employment tax due in the amount of $141.10 for the year as a result of Max's self-employment. Both Max and Selma were over age 65 and Selma's occupation was listed as housewife. Selma received approximately $970 in Social Security Benefits for 1969.As to Selma's expenses for 1969, petitioner estimated 285 that they were as follows: rent$ 860utilities196telephone180domestic help180food830medicine and vitamins285clothing144cleaning and laundry160taxis290total$3,125This was in part substantiated by the introduction into evidence of the receipt part of Selma's checkbook covering the dates November 1969 through June 24, 1970. Selma was quite elderly and petitioner found it difficult to determine actual expenditures and receipts for the year.In 1969 petitioner gave his mother a check for $1,700. This check, dated January 29, 1969, was introduced into evidence and bore the notation that it was for the support of Selma. Neither petitioner's mother nor his grandmother testified and no evidence was presented indicating that the check in fact was used to support Selma.On petitioner's 1969 return he also claimed the following 4 charitable contributions: OrganizationAmount Mizrachi Women's Organization of America$1,245.00Mt. Eden Center385.00Rochester Community Chest55.20Cong. Beth Haknesses Hachodosh252.00United Jewish Appeal28.00Young Israel of Flatbush15.00Hillel Foundation U of R25.00Kollel America18.00Rabbi A. Teitelbaum10.00Free Loan Society5.00Cong. Mahazekei Hatorah20.00Yeshiva S. R. Hirsh10.00Hospital for Chronic Diseases5.00General Hospital Bikur Cholim5.00Dov Bar Torah Fund3.00Poor Box (weekly contribution of $7.50)390.00Other small contributions (less than $5each)200.00Total1286 $2,671.20It has been stipulated that petitioner made the following charitable contributions: OrganizationAmount Mizrachi Women's Organization$201.00Beth Haknesses Hachodosh169.00Mahazekei Hatorah20.00Mt. Eden Center18.00Hillel Foundation25.00Young Israel of Flatbush15.00Kollel America18.00Community Chest55.20Total$521.202Since respondent has allowed $545.20 of the deductions, 5 the substantiation of the amount in excess of $545.20 is in dispute. 3To substantiate the claimed deductions, petitioner introduced into evidence the following: (1) a letter from the treasurer of the Mizrachi Women's Organization stating that the Tamary Family contributed $1,245 for 1969 and that this was credited to petitioner; (2) a letter from the 287 president of the Mt. Eden Center stating that "[the] Tamary Family Account in our books reveal that their contributions" totaled $385 for 1969 and that these contributions were credited to petitioner; (3) ticket stubs showing contributions to the Mizrachi Women's Organization; and (4) a letter from Rabbi Aaron Teitelbaum thanking petitioner for a check of $10. No other relevant evidence was presented with respect to any of the other contributions.OPINIONPetitioner first contends that he is entitled to claim a dependency exemption for his grandmother, Selma Imberman, under section 151(e). 4 However, section 151(e) (2) provides as follows:(2) Exemption denied in case of certain married dependents. - No exemption shall be allowed under this subsection for any dependent who has made a joint return with his spouse under section 6013 for the taxable year beginning in the calendar year in which the taxable year of the taxpayer begins.Thus even assuming arguendo that Selma otherwise qualifies as a dependent under section 152, petitioner still cannot prevail on this point since Max and 288 Selma filed a joint return for 1969. 5 Petitioner, however, argues that the filing of the joint return was inadvertent, 6289 but the fact 7 remains that a joint return was filed. We also note that even if the filing of the joint return was not intended, a separate return would have had to be filed prior to the expiration of the time for filing the return to be effective. Section 1.6013-1(a) (1), Income Tax Regs. This was not done. Finally we note that Rev. Rul. 54-567, 2 C.B. 108">1954-2 C.B. 108 (affirmed by Rev. Rul. 65-34, 1 C.B. 86">1965-1 C.B. 86) is likewise of no assistance to petitioner. 7 Since petitioner is not entitled to a dependency exemption for his grandmother he cannot qualify as a "head of household" under section 1(b) (2). 8290 291 In addition petitioner cannot prevail 8 on this point since it has not been established that he maintained "as his home" a household which constituted the principal place of abode for his grandmother during 1969. Finally, we have the issue of the charitable contributions. We note first that the burden of proof is on petitioner, not respondent. Rule 142(a), Rules of Practice and Procedure, United States Tax Court. The primary issue on this point is whether the letters from Mizrachi Women's Organization, Mt. Eden Center and Rabbi Aaron Teitelbaum adequately substantiate the deductions claimed by petitioner with respect to these organizations.We are of the opinion that petitioner has not adequately explained the ambiguity contained in the letters from the Mizrachi Women's Organization and the Mt. Eden Center wherein the total contributions are in the name of the "Tamary Family" although "credited" to petitioner. In addition we find that 9 it 292 has not been adequately demonstrated that the ticket stubs introduced into evidence (which bore no indication as to donor) represented petitioner's contributions to the Mizrachi Women's Organization. We, therefore, are of the opinion that petitioner has not met his burden of substantiating the amount of these contributions over and above what respondent has allowed. 9 With respect to the letter from Rabbi Teitelbaum, we believe that this $10 donation was for the synagogue and not a personal gift to the Rabbi. Therefore, the deduction of this contribution should have been allowed.With respect to the other claimed deductions, petitioner has not offered any competent evidence to sustain the amounts claimed. We, therefore, must sustain respondent's *293 determination.To reflect the foregoing,Decision will be entered under Rule 155. Footnotes1. Petitioner on his 1969 return claimed a total charitable deduction of $2,716.20. The discrepancy is due to petitioner's mathematical error in totaling the contributions listed.2. All of these contributions were substantiated by canceled checks and/or receipts.↩3. While it has been stipulated that petitioner made contributions totaling $521.20, respondent in his statutory notice of deficiency allowed petitioner $545.20. No explanation was presented to account for this $24 discrepancy.↩4. All statutory references are to the Internal Revenue Code of 1954 as in effect during the year in issue. ↩5. Since we find that petitioner is not entitled to the dependency exemption because of section 151(e) (2), there is no need to determine whether or not petitioner provided over half of the support of his grandmother and whether or not the grandmother had gross income less than the amount specified under section 151(e) (1) (A) for the year 1969.↩6. At trial petitioner testified that he had an agreement with Max Imberman whereby he (petitioner) would supply $1,700 as supplementary support to Selma and that this would be considered as her entire support. It was further alleged that if petitioner supplied the $1,700, Max would not claim Selma as a dependent. Petitioner claims that Max anticipated a gross income between $2,000 and $2,500 and that this would not be enough to support the two of them. It is for this reason that petitioner was willing to assist in the support of his grandmother. In addition it is claimed that the deductions would be of little use to Max. Max, however, had a heart attack in early 1970, and petitioner contends that the joint return was inadvertently filed by an accountant. The joint return, however, gives no indication that an accountant prepared the return. Max died prior to trial and no evidence, except petitioner's testimony, was offered to prove the existence of the agreement.7. This ruling in effect provides an exception to section 151(e) (2) when section 6012 does not require that a return be filed.↩8. Respondent has referred to section 2(b). While section 2(b) of the current Code provides for the definition of head of household, during the year in issue (1969) the definition is contained in section 1(b) (2), not section 2(b). Section 1(b) (2) provides as follows:(2) Definition of head of household. - For purposes of this subtitle, an individual shall be considered a head of a household if, and only if, such individual is not married at the close of his taxable year, is not a surviving spouse (as defined in section 2(b)), and either - (A) maintains as his home a household which constitutes for such taxable year the principal place of abode, as a member of such household, of - (i) a son, stepson, daughter, or step-daughter of the taxpayer, or a descendant of a son or daughter of the taxpayer, but if such son, stepson, daughter, stepdaughter, or descendant is married at the close of the taxpayer's taxable year, only if the taxpayer is entitled to a deduction for the taxable year for such person under section 151, or(ii) any other person who is a dependent of the taxpayer, if the taxpayer is entitled to a deduction for the taxable year for such person under section 151, or(B) maintains a household which constitutes for such taxable year the principal place of abode of the father or mother of the taxpayer, if the taxpayer is entitled to a deduction for the taxable year for such father or mother under section 151.For purposes of this paragraph and of section 2(b) (1) (B), an individual shall be considered as maintaining a household only if over half of the cost of maintaining the household during the taxable year is furnished by such individual.↩9. We are at a loss to understand why petitioner gave up the safe course of writing checks for part of the contributions to these same organizations (which contributions respondent allowed) and did not do so for the remaining amounts claimed. In attempting to explain this inconsistency petitioner testified that some of these contributions were given with his mother acting as an intermediary but no evidence was presented to substantiate this.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622310/	Kenneth E. O'Harra v. Commissioner. O'Harra Transportation Company, Inc. v. Commissioner.Kenneth E. O'Harra v. CommissionerDocket Nos. 15290,15291.United States Tax Court1953 Tax Ct. Memo LEXIS 4; 12 T.C.M. (CCH) 1459; T.C.M. (RIA) 54008; December 31, 19534 John H. Pigg, Esq., for the respondent. OPPERMemorandum Findings of Fact and Opinion OPPER, Judge: In these consolidated proceedings respondent determined deficiencies in income tax, declared value excess-profits tax, excess profits tax, and penalties as follows: Kenneth E. O'Harra, Docket No. 1529025% Delinquency50% FraudYearIncome TaxPenaltyPenalty1943$3,911.50None$1,955.7519443,766.86None1,883.4319452,819.31$ 704.831,409.65O'Harra Transportation Company, Inc., Docket No. 15291Declared ValueExcess25%IncomeExcess-ProfitsProfitsDelinquency50% FraudYearTaxTaxTaxPenaltiesPenalties(Total)(Total)1943$1,625.13$8,038.89$52,762.75$13,190.69$31,213.4019445,084.764,355.6211,794.094,836.5910,617.231945773.841,655.51NoneNoneNonePetitioners having failed to appear at the hearing, and a motion for judgment in respondent's favor having been granted as to all matters on which petitioners had the burden of proof, the only remaining issue is whether the fraud penalties were properly determined. Findings5 of Fact Petitioner O'Harra Transportation Company, Inc., hereinafter sometimes referred to as "the corporation," was incorporated in 1940 under the laws of the Territory of Alaska, and was engaged in the bus transportation business, with its principal office and place of business at Anchorage, Alaska. The corporation's bus routes were between Anchorage and Fort Richardson, and other points in Alaska. Petitioner Kenneth E. O'Harra, hereinafter sometimes referred to as "petitioner," resides at Anchorage, Alaska. During the taxable years he and his wife, Audrey Richardson O'Harra, were president and secretary-treasurer, respectively, of the corporation. The corporation's income and declared value excess-profits tax returns for the taxable years 1943 and 1944 were filed with the then collector of internal revenue for the district of Washington. No excess profits tax return was filed by the corporation for either of those years. Petitioner's individual returns for the taxable years 1943 and 1944 were filed in the same collection district. On its income and declared value excessprofits tax return for the year 1943, the corporation reported gross receipts of $135,709.69, a net income6 of $3,330.76 and an income tax liability of $832.69. On its return for the year 1944, the corporation reported gross receipts of $139,072.59 and a net loss of $36,943.99. Some time after respondent's agents had commenced their investigation of the corporation's returns for the years 1943 and 1944, either petitioner or his accountant, William W. Head, delivered to one of such agents a document purporting to be an "amended return" of the corporation for the year 1943, disclosing thereon a net income of $20,382.38 and an income tax liability of $4,143.98. This undated document, though signed by petitioner and his wife in their respective capacities of president and secretary-treasurer of the corporation, was not sworn to by either of them, nor was it filed with the collector for any collection district. On his individual returns for the years 1943 and 1944, petitioner reported net losses in the respective amounts of $55.83 and $6,645.05. He did not file a return for the calendar year 1945. Except for bank statements of both the corporation and petitioner, some corporate records relating to the Star Cafe, several canceled checks, and a small number of paid bills and invoices, the7 only accounting or other records made available by petitioner or his accountant to respondent's agents during the course of their investigation were (1) a cash receipts and disbursements journal, labeled "Shaw's All-Facts Bookkeeping System," covering the period January 1, 1942, to November 30, 1943, and (2) another cash receipts and disbursements journal, labeled "Greenwood's Approved Business and Income Tax Record," covering the calendar years 1943 and 1944. All entires contained in both of these books were made by petitioner's wife, Audrey Richardson O'Harra. The "Shaw" book is the original record of the cash receipts and disbursements, as recorded by Mrs. O'Harra, resulting from the operations of the corporation during the period January 1, 1942, to November 30, 1943. The "Greenwood" book, insofar as it covers the same period as the "Shaw" book, purports to contain entries relating to the cash receipts and disbursements resulting from the same corporate transactions as those appearing in the "Shaw" book for the corresponding period. The total cash receipts by the corporation during that period as shown in the "Shaw" book is $39,461.32 greater than the amount shown by the corresponding8 rewritten entries in the "Greenwood" book. During some part of the period covered by these proceedings, petitioner served in the armed forces of the United States, and, except for a period of about six weeks, when he was on detached duty at Fairbanks, Alaska, his entire military service was performed at Fort Richardson, about six miles distant from Anchorage. In his attempted explanation of the existence of the duplicate set of book entries petitioner stated under oath to respondent's agents that he contacted the army legal officer at Fort Richardson and was advised by that officer that so long as he remained in the military service he was not required to file an individual income tax return; and further, that the purpose of the re-written entries in the "Greenwood" book was to separate his personal income from that of the corporation. No part of the income represented by the above-described discrepancy of $39,461.32 between the "Shaw" and "Greenwood" books was reported in petitioner's original individual income tax returns for the years 1943 and 1944, nor was any part of that amount reported in an amended return filed by him on or about June 13, 1946, for the year 1943. In the9 amended return, he reported $3,986.78 as salary received by him from the corporation in 1943, which amount was not reported in his original return. Respondent determined the total additions to the corporation's income as reported by it for the taxable years 1943 and 1944, as follows: Description of additions19431944Gross receipts under-stated$49,206.83$92,945.62Profits from Star Cafeomitted309.80Expenses overstated17,528.55Mathematical error30.00Capital gain unreported586.87Total additions$67,075.18$93,532.49The gross receipts item of $49,206.83 for the year 1943 was arrived at by taking the total bank deposits of the corporation for that year, and eliminating therefrom all deposits identifiable as loans, transfers, or other non-income items. The same is true with respect to the gross receipts item of $92,945.62 for the year 1944. Of the gross receipts item of $49,206.83 for the year 1943, the amount of $39,461.32 is accounted for by the discrepancy between the "Shaw" and the "Greenwood" books. Respondent determined the total additions to the individual income reported by petitioner for the years 1943 and 1944, and his10 total income for the year 1945, for which no return was filed, as follows: Description ofadditions194319441945Salary unre-ported$ 3,986.78$ 7,649.64Business lossunallowable55.838,632.47Unreportedincome9,965.375,830.51$13,266.33Total additions$14,007.98$22,112.62$13,266.33The unreported salary item for the year 1943 is the same salary shown on petitioner's "amended return" for that year. The unreported salary item for the year 1944 was arrived at by taking the total salary checks issued by the corporation to petitioner during that year. The unreported income item of $9,965.37 for the year 1943 was arrived at by taking the total of petitioner's bank deposits for that year, and subtracting therefrom all identifiable non-income items. The corresponding amounts of $5,830.51 and $13,266.33 for the years 1944 and 1945, respectively, were similarly arrived at. Petitioner and his wife, in their respective capacities of president and secretary-treasurer of the corporation, were jointly indicted on two counts, namely, (1) for willfully and knowingly aiding, assisting and counseling in the preparation and filing of a false and11 fraudulent income and declared value excess-profits tax return for the corporation for the taxable year 1943, and (2) for willfully and knowingly attempting to defeat and evade a large part of the taxes due and owing by the corporation for the same taxable year. After a jury trial in the District Court for the Territory of Alaska, Third Division, both defendants were convicted. Petitioner was fined $2,500 on each count and sentenced to imprisonment for a period of three years on each count, such imprisonment sentences to run concurrently, with both sentences, except that portion providing for the fine, suspended until further order of the Court. If he failed to pay the fine, he was to be committed to prison for a period of one day for each $2 thereof. Petitioner's wife was sentenced to imprisonment for a period of 11 months and 29 days on each count, such sentences to run concurrently, with both sentences supended until further order of the Court. The corporation's failure to report all of its gross income and to pay taxes upon its proper net income for each of the taxable years 1943 and 1944 was due to the fraud of petitioner and his wife. At least a part of each of the deficiencies*12 in income tax, declared value excess-profits tax and excess profits tax determined against the corporation for each of the years 1943 and 1944 is due to fraud with intent to evade tax. At least a part of the deficiency in income tax determined against petitioner for each of the years 1943, 1944 and 1945 is due to fraud with intent to evade tax. Opinion We think respondent's burden of proving fraud has been sustained. There was gross understatement of income of such character and magnitude as at least to require explanation. . Two sets of corporate books were kept. See . There was no appearance for either petitioner, and no attempt at any explanation. See , affd. (C.A. 10) . Accordingly, Decisions will be entered for the respondent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622311/	LENOX CLOTHES SHOPS, INC., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Lenox Clothes Shops, Inc. v. CommissionerDocket No. 101943.United States Board of Tax Appeals45 B.T.A. 1122; 1941 BTA LEXIS 1022; December 31, 1941, Promulgated 1022 1. A taxpayer making sales of clothing upon the installment basis and so keeping its books of account as correctly to reflect its net income is entitled to make income tax returns upon the installment basis. 2. In 1937 the petitioner credited its president with a salary of $6,000, but paid him during that year only $1,500. On March 1, 1938, it gave the president its promissory note for $4,500, which, on July 1, 1938, was exchanged by the president for $4,500 par value of the petitioner's capital stock. The deduction of the $4,500 was disallowed by the respondent in the determination of the deficiency. Held, that the petitioner is not entitled to the deduction of the $4,500 in question. Don M. Harlan, Esq., and T. S. Forward, C.P.A., for the petitioner. Philip M. Clark, Esq., for the respondent. SMITH 1122 OPINION. SMITH: This is a proceeding for the redetermination of deficiencies in income and excess profits tax for the calendar years 1936 and 1937 as follows: Year Income taxExcess profits tax1936$4,510.68$255.7519376,622.661,106.98The question in issue are: (1) Whether the petitioner1023 is entitled to file income tax returns for 1936 and 1937 on the installment basis. (2) Whether the respondent erred in adding to the petitioner's net incomes reported for 1936 and 1937: 19361937Accrued income$15,809.88$5,122.61Discounts earned795.3046.17Whether the respondent erred in disallowing the deduction from gross income of 1937 of: Shrinkage in invenotry$6,741.31Officers' salaries4,500.00Bad debts4,347.97For convenience of treatment the several issues will be discussed separately. 1123 Installment Basis.The petitioner is a Michigan corporation which was organized on March 1, 1936. It filed its income tax returns for 1936 and 1937 with the collector of internal revenue at Detroit. The Kelly Furniture Sales Co. is a Michigan corporation with its principal place of business in Detroit. It sells furniture and other merchandise on the installment basis and for many years has made its returns upon the installment basis. In 1935 it opened a clothing department for the sale of women's ready-to-wear. It began by selling for cash only. It found, however, that its patrons demanded credit upon1024 sales of articles of clothing the same as they were given credit in purchasing furniture and other merchandise from the company. In order to get trade the company was forced to make sales of women's ready-to-wear upon the installment basis. All of the installment sales were made under title-retaining contracts. About the beginning of 1936 the company decided to expand its clothing department and sell men's clothing as well as women's ready-to-wear. It was further decided that it would be desirable to conduct the clothing department through a separate corporation. Petitioner was organized on or about March 1, 1936, for the purpose of taking over the clothing department of the Kelly Furniture Sales Co. It acquired from that company its inventory of women's wearing apparel and also installment accounts receivable in the amount of $2,693.66. It then acquired additional merchandise, including men's clothing. It continued to make sales upon the installment basis the same as had been done by the former owner. During the years 1936 and 1937 from 85 to 90 percent of its sales were made on the installment basis. Each customer desiring to buy upon such basis signed a conditional sales1025 agreement under which it was declared that title to the merchandise remained in the petitioner until fully paid for. The installment contracts generally provided that payments could be made over a period of from three months to one year. In some cases the installment payment period was less than three months and in a few cases, such as sales of fur coats, the credit period was for more than one year. Articles of clothing sold on the installment basis were seldom repossed by the petitioner. During its entire operations to date it has taken back under its title-retaining contracts only two fur coats. The petitioner kept a card record of each article of clothing in stock. Upon this card was shown the cost of the article. Then, when a sale was made, the card showed the price at which the article was sold. The petitioner kept its books of account in such a manner as to show the gross profit realized from its collections on installment contracts. 1124 It filed income tax returns for 1936 and 1937 upon the installment basis. It included in its gross profit the allocable part of the total profit which was received upon the installment collections made during each1026 taxable year. That amount was shown, together with profits on cash sales, as its gross income. From such gross income it deducted salaries and other expenses which a taxpayer making its returns upon the installment basis is entitled to deduct. In his deficiency notice the respondent stated: On your return you reported income on the installment basis. It is found that the greater part of your sales are made on an extension of credit basis for from 2 1/2 weeks to 3 months, and therefore you do not qualify to report income upon the installment sales basis. It is also found that reporting income upon the installment sales basis does not truly reflect income for the years 1936 and 1937. Your income for said years had been computed on the accrual basis, in accordance with Section 31 of the Revenue Act of 1936 and the regulations promulgated thereunder. Inasmuch as your method of reporting income has been changed from the installment sales basis to the accrual basis the balance of deferred income at December 31, 1936 in the amount of $15,809.88 is restored to income. The deficiency notice shows the method by which the respondent determined the net income of the petitioner1027 for each of the years 1936 and 1937 as follows: 1936ADJUSTMENTS TO NET INCOMENet income as disclosed by return$1,238.16Unallowable Deductions and Additional Income:(a) Bad debts$1,419.13(b) Accrued income15,809.88(c) Discounts earned795.3018,024.31Net income as adjusted$19,262.471937ADJUSTMENTS TO NET INCOMENet income as disclosed by return$6,118.30Unallowable Deductions and Additional Income:(a) Accrued income$5,122.61(b) Inventory6,741.31(c) Discounts46.17(d) Advertising1,458.60(e) Interest196.79(f) Michigan Sales tax48.66(g) Overstatement deductions.60(h) Officers salaries4,500.00(i) Bad debts4,347.9722,462.71Total$28,581.01Nontaxable Income and Additional Deductions:(j) Unemployment insurance tax51.87(k) Capital stock tax22.9674.83Net income as adjusted$28,506.181125 It will be noted that the respondent found in his deficiency notice that the greater part of the petitioner's sales are made on an extension of credit basis for from two and one-half weeks to three months and that "therefore you do not qualify to report income upon the installment1028 sales basis." On brief the respondent contends that the evidence does not show that the extension of credit basis was for a longer period. We think, however, that it does. The president of the petitioner testified that the usual term of credit was for a period of from three months to one year. The accounts receivable at the start of business on March 1, 1936, were in the amount of $2,693.66. At December 31, 1936, they were in the amount of $32,248.69, and at December 31, 1937, $49,121.64. The credit sales for 1937 were in the amount of $122,902.56. It would appear from the above facts and other facts contained in the record that the installment sales were generally for a period exceeding three months. Section 41 of the Revenue Act of 1936 provides in part as follows: SEC. 41. GENERAL RULE. The net income shall be computed upon the basis of the taxpayer's annual accounting period (fiscal year or calendar year, as the case may be) in accordance with the method of accounting regularly employed in keeping the books of such taxpayer; but * * if the method employed does not clearly reflect the income, the computation shall be made in accordance with such method as in the1029 opinion of the Commissioner does clearly reflect the income. * * Section 44 of the same act provides in part: SEC. 44. INSTALLMENT BASIS. (a) DEALERS IN PERSONAL PROPERTY. - Under regulations prescribed by the Commissioner with the approval of the Secretary, a person who regularly sells or otherwise disposes of personal property on the installment plan may return as income therefrom in any taxable year that proportion of the installment payments actually received in that year which the gross profit realized or to be realized when payment is completed, bears to the total contract price. The respondent contends that he has authority to deny to a taxpayer the installment basis of reporting in case he determines that the net income can not be correctly reflected by such basis; that, since he has found in his deficiency notice that "reporting income upon the installment sales basis does not truly reflect income of the years 1936 and 1937", he is authorized to reject such basis of reporting. He has therefore attempted to put the petitioner upon the accrual basis. The petitioner is a dealer in personal property "who regularly sells or otherwise disposes of personal property1030 on the installment plan." 1126 Under section 44 of the Revenue Act of 1936 the petitioner is entitled to make its returns upon the installment basis, provided they correctly reflect its net income. We are satisfied that they do. We have not here the complicated situation which was considered by the Board in . There a corporation had for many years been making its returns upon the accrual basis. It changed its method of reporting from the accrual basis to the installment basis in 1918 or 1919, but continued to accrue its expenses. We held that it was entitled to make such change. The situation in the instant proceeding is much simpler. The petitioner began using the installment basis of reporting from the beginning of its business operations on March 1, 1936. In each of its returns for 1936 and 1937 it has reported as its gross income the profit included in its collections of installment sales during each year, and has made permissible deductions therefrom. This is in accordance with the Commissioner's regulations. It made some errors in the reporting, but we are satisfied that these errors can easily be corrected. 1031 The fact that the petitioner sells ready-to-wear clothing on the installment basis rather than pianos or furniture or other personal property is not material. , likewise sold men's and women's ready-to-wear upon the installment basis. To be sure, the clothing department was only one of the departments of that business, but we did not exclude the clothing department from the installment basis of reporting income. We consider first the adjustment made by the respondent by adding to the net incomes reported for 1936 $15,809.88 and for 1937 $5,122.61 as "accrued income." These amounts represented for 1936 the estimated profit to be realized upon the accounts receivable at December 31, 1936, shown in the balance sheet as "deferred income", and for 1937 the increase in such "deferred income." Under the installment basis of reporting the petitioner is not required to account for such profit until the accounts receivable have been collected. The action of the respondent in adding these amounts to the petitioner's reported net incomes for 1936 and 1937 is reversed. The respondent also added to the petitioner's gross incomes for 1936 and 1937 $795.301032 and $46.17, respectively, for "discounts earned." These amounts represent the petitioner's gross profit on collections during 1936 and 1937 of installment accounts receivable taken over from the Kelly Furniture Sales Co. at March 1, 1936, of $2,693.66. But these amounts have already been included in the net incomes reported by the petitioner in its returns. The addition of these amounts is clearly a duplication regardless of whether the returns should be made on the installment basis or upon the accrual basis. The respondent does not contend otherwise in his brief. The action of the respondent upon this point is reversed. 1127 Shrinkage in Inventory.In its return for 1937 the petitioner deducted from gross income a reduction in the inventory made at the end of the year of $6,741.31. In its income tax return for 1936 the following instruction and answer appears: 6. State whether the inventories at the beginning and end of the taxable year were valued at cost, or cost or market, whichever is lower. If other basis was used, describe fully, state why used and the date inventory was last reconciled with stock. [Answer] Cost. It is the contention of the1033 respondent herein that, inasmuch as inventories were not used by the petitioner in the computation of its net incomes for 1936 and 1937, and inasmuch as they are not necessary in the determination of the net incomes for either year, and since the petitioner in its return for 1936 elected to report its inventories on the cost basis, it may not change the basis of taking inventories for a subsequent year without the permission of the Commissioner, which clearly was not obtained in this case. It is the petitioner's contention, on the other hand, that it did not intend to exercise an election by the answer which it made to the question propounded in the 1936 return. The testimony of the president is to the effect that the answer to the question made on the 1936 return was merely for the purpose of stating a fact; that the prices of merchandise did not decrease during the year 1936 and that therefore there was no occasion for taking its inventories at December 31, 1936, at less than cost. The petitioner further submits that at the close of 1937 there was a decline in prices for merchandise, that such decline amounted on the average to at least 15 percent of the merchandise, and that1034 for 1937 it was entitled to reprice its inventory at the close of 1937 so as to show an average decline in the value of its inventory of at least 15 percent. We sustain the contention of the respondent upon this point. We think that the petitioner did elect to take its inventory in 1936 on the basis of "cost" rather than on the basis of "cost or market, whichever is lower." The petitioner may not under the regulations of the Commissioner change its basis without first having obtained permission of the Commissioner for such a change. It is further to be noted that the profits for 1937 were computed upon the basis of cost of merchandise sold. In its return for 1937 the petitioner seeks to reduce its profit upon the collections of 1937 by an assumed loss which will result from sales in the future. We are of the opinion that in the circumstances of the case the petitioner is not entitled to the claimed deduction of the $6,741.31 in question. 1128 Officers' Salaries.The next question for consideration is whether the petitioner is entitled to deduct from the gross income of 1937 $4,500 representing the part of the salary which the petitioner owed its president, 1035 Charles R. Murphy, for that year. The salary credited to Murphy's account for 1937 was $6,000. During 1937 the petitioner paid Murphy only $1,500, the balance of $4,500 was shown on the petitioner's books of account at December 31, 1937, as an account payable. On March 1, 1938, the petitioner gave Murphy a promissory note in the amount of $4,500. Thereafter petitioner's books of account showed a note payable to Murphy of $4,500 instead of an account payable. The note payable was satisfied on July 1, 1938, through the petitioner's issuance to Murphy of $4,500 par value of its stock, which was accepted by Murphy as the equivalent of $4,500 cash. The petitioner claims the right to deduct from its gross income for 1937 the $4,500 in question. The reason given by the respondent in his deficiency notice for the disallowance of the $4,500 is as follows: Included in the deductions claimed on your return for the year 1937 is accrued salary of C. R. Murphy and S. B. Murphy, his wife, in amount of $4,500.00 which was not paid during 1937 or during the first two and one-half months of 1938. It appears that the accrual of $4,500.00 additional officers' salaries for 1937 was merely1036 a tentative entry and therefore said amount does not constitute an allowable deduction from gross income within the purview of Article 22(a)-3, Regulations 94. Article 22(a)-3 of Regulations 94, referred to by the respondent in his deficiency notice, provides, so far as material: "If the services were rendered at a stipulated price, in the absence of evidence to the contrary such price would be presumed to be the fair value of the compensation received." The evidence relative to the deduction of the $4,500 salary which was disallowed by the respondent is most unsatisfactory. At the hearing of this proceeding the petitioner's president, as a witness, was asked the question: Q Was there any agreement between the corporation and yourself as to the amount of salary you were to receive for 1937? A Not on the records, no. Q You were paid, apparently according to the record here, $1,500 compensation in 1937. How was that paid, at the rate of $125 a month? A I can't tell you that. It was credited to my account. The books will show that. The respondent does not question the reasonableness of an allowance of $6,000 as compensation for the petitioner's president for 1937. 1037 The respondent claims that the $4,500 is not an allowable 1129 deduction under section 301 of the Revenue Act of 1937 because it was not paid within 2 1/2 months after the close of the calendar year 1937. This would clearly be a sufficient ground for the disallowance of the claimed deduction provided Murphy or his family owned 50 percent or more of the capital stock of the petitioner. The evidence does not show whether he owned 50 percent or more or less of the stock. The petitioner's claim for the deduction of the $4,500 in question must be denied for lack of evidence. Bad Debts.The final point in issue is whether the petitioner is entitled to deduct from gross income for 1937 bad debts in the amount of $4,347.97. We have recognized in , that a taxpayer making its returns on the installment basis is entitled to deduct bad debts from gross income, but only in the amount that the bad debt charged off represents the unrecovered cost of the merchandise included in the charge-off. The only reason given by the respondent in his deficiency notice for the disallowance of the bad debt deduction was "due to your failure to establish1038 what amounts are allowable as bad debt charge-offs during the taxable year." The evidence plainly shows uncollectible installment accounts determined as worthless and charged off by the petitioner in 1937 in the amount of $4,347.97. The charge-off was made on the card records kept by the petitioner. Many of the accounts had been turned over to an attorney for collection. After much investigation it was found that a number of installment debtors who had not made any payments on their accounts for many months had moved from the city or could not be located. It further appears that the total amount of $4,347.97 of these bad debt accounts was charged off by journal entries. In the compilation of the petitioner's tax return for 1937 the accounts charged off were treated as collected. In other words, the profit to be reported in those accounts was returned as a part of petitioner's gross income for 1937. This was in error. The petitioner was not required to include in its gross income the profit element in these bad debt charge-offs. That the petitioner had done so, however, is apparent from the following statement: Installment accounts receivable 1/1/37$32,248.69Installment sales 1937122,902.56155,151.25Installments collected 1937106,029.61Accounts receivable 12/31/3749,121.641039 The balance sheet at December 31, 1937, after the charge-offs were made, shows accounts receivable $49,121.64. It is thus apparent that 1130 the $4,347.97 bad debt charged off is included in the $106,029.61 of collections as the petitioner contends and as the petitioner's president testified. As we have indicated above, we held in , that the taxpayer was entitled to charge off as a bad debt only the unrecovered cost of the merchandise represented by the bad debts. The result of including in the petitioner's collections for 1937 the bad debts charged off in the amount of $4,347.97 was to report in the gross income the element of profit in such uncollected accounts. The gross income is subject to adjustment to eliminated such profit. The petitioner is entitled to deduct as a bad debt the unrecovered cost included in the $4,347.97. Since the petitioner is entitled to a reduction of the gross income to the extent of the profit and to a deduction of the unrecovered cost as a bad debt, the result thus obtained is the same as was obtained by the treatment accorded to the transaction by the petitioner. Accordingly, the action of the1040 respondent in disallowing the exclusion from gross income of the profit and the deduction of the bad debt is reversed. Reviewed by the Board. Decision will be entered under Rule 50.TYSON and KERN concur only in the result. MELLOTT dissents.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622312/	Presley W. Moore and Dorothy B. Moore, et al. * v. Commissioner. Moore v. CommissionerDocket Nos. 94758-94761.United States Tax CourtT.C. Memo 1964-20; 1964 Tax Ct. Memo LEXIS 314; 23 T.C.M. (CCH) 103; T.C.M. (RIA) 64020; January 30, 1964Carle E. Davis, 915 Mutual Bldg., Richmond, Va., for the petitioners. Conley G. Wilkerson, for the respondent. SCOTT Memorandum Findings of Fact and Opinion SCOTT, Judge: Respondent determined deficiencies in petitioners' income tax for the year 1957 as follows: DocketDefi-NumberPetitionersciency94758Presley W. Moore and Doro-thy B. Moore$3,232.7594759Wilson C. Hewitt and Kath-leen W. Hewitt338.4994760Woodrow O. Hewitt andKathryn S. Hewitt321.7994761John M. Moore and Jean Y.Moore1,213.74$5,106.77315 The issue for decision is whether a cancellation of shareholder indebtedness by a corporation in redemption of a part of its outstanding stock is essentially equivalent to a dividend. Findings of Fact Some of the facts have been stipulated and are found accordingly. The petitioners in each case are husband and wife who filed a joint Federal income tax return for the taxable year 1957 with the district director of internal revenue at Richmond, Virginia. Presley W. and Dorothy B. Moore and John M. and Jean Y. Moore resided during the year 1957 in Verona, Virginia. Wilson C. and Kathleen W. Hewitt and Woodrow O. and Kathryn S. Hewitt resided during the year 1957 in Waynesboro, Virginia. As of January 1, 1955, Presley W. Moore, Wilson C. Hewitt, Woodrow O. Hewitt, and John M. Moore (sometimes hereinafter referred to as petitioners) were associated in a partnership known and doing business as Moore Brothers Company (hereinafter referred to as the partnership). The partnership was engaged in the construction business. On January 1, 1955, Hewitt Company, Inc., a Virginia corporation (hereinafter sometimes referred to as the corporation) issued 12,120 shares of voting stock, 316 with a par value of $10 a share, to the partners of the partnership in exchange for partnership assets. This stock is the only stock which has been issued by the corporation. The 12,120 shares of stock of the corporation were issued to each of the partners of the partnership in the same ratio as each partner's interest in the partnership. The partner's percentage interest in the partnership and the number of shares of the corporate stock each received are as follows: Percent ofNo. of sharesinterestof corpora-in part-tion stockPartnernershipreceivedPresley W. Moore506,060John M. Moore303,636Woodrow O. Hewitt101,212Wilson C. Hewitt101,21210012,120After the transfer of its assets to the corporation, the partnership continued in business only to complete construction contracts then held by the partnership. The contracts were completed in the early part of 1956. At approximately the same time as Hewitt Company, Inc. was organized, petitioners organized another corporation, Moore Brothers, Incorporated (hereinafter referred to as Moore). Moore engaged in a construction business similar to that of the partnership317 and any new construction work which petitioners obtained was obtained for and done under contracts entered into by Moore. Hewitt Company, Inc. did not engage in construction work directly, but rented construction equipment it owned both to the partnership, enabling the partnership to complete the contracts it had under way when Hewitt Company, Inc., was created, and to Moore, enabling Moore to proceed on new contracts it had entered into. The rental charged by Hewitt Company, Inc., to the partnership for the use of equipment was at a rate determined by a manual published by the American Associated Equipment Distributors. Upon completion of its contracts, in early 1956, the partnership was indebted both to the corporation in the amount of $15,562.85, representing the balance due for the rental of the corporation's equipment, and to the Augusta National Bank in the approximate amount of $43,000, which represented a loan for working capital. In early 1956 it became necessary for the two corporations, Hewitt Company, Inc., and Moore, to obtain new credit to provide for new equipment and working capital. The performance of one contract necessitated the purchase by Hewitt Company, 318 Inc. of an asphalt plant at a cost of approximately $150,000. In order to obtain financing from the First & Merchants National Bank, Richmond, Virginia, petitioners pledged their homes as security and furnished detailed financial statements of both corporations, the partnership, and each individual petitioner. The bank representatives were critical of the two outstanding debts of the partnership. These representatives of the bank indicated that if these indebtednesses were not paid the bank might at some future time turn down requests for financial assistance either to petitioners or to their corporations. A bonding company which indemnified parties contracting with Moore was insistent that the partnership obligations to Hewitt Company, Inc., and to the Augusta National Bank be satisfied. Petitioners' bookkeeper who was also the bookkeeper for the corporation, repeatedly requested petitioners to get their partnership debts with the corporation and the bank straightened out. Following the recommendations of their attorney, petitioners satisfied the $43,000 debt to Augusta National Bank by transferring that obligation from the partnership to Moore. In return for its assumption by319 Moore, each of the partners gave Moore a note for his proportionate share of the debt. Petitioners' original intention was to pay off these notes as they considered that they had available cash to do so. Further following the recommendation of their attorney, petitioners had the corporation redeem 1,550 shares of its stock in cancellation of the indebtedness owed by the partnership to it. After these transactions had occurred, the bank and the bonding company were still not satisfied because of the obligations appearing on the partners' individual financial statements as a result of their notes to Moore. Petitioners Presley W. Moore and John M. Moore then transferred a tract of land worth $45,000 or more in which each owned a 50 percent interest to Moore in satisfaction of the debt. The other two partners, Wilson C. Hewitt and Woodrow O. Hewitt, gave John M. Moore, who owned only a 30 percent interest in the partnership, notes representing their portion of the indebtedness, 10 percent each. In effecting the stock redemption, the partners contributed the stock redeemed in proportion to their respective capital interests in the partnership which was the same as their respective percentage320 of stock ownership in the corporation. The redemption was recorded on the partnership's books as a reduction of accounts payable of $15,500 and offsetting investment contributions pro rata for the various partners totaling $15,500. On the corporation's books the redemption was recorded as a pro rata capital reduction for the shareholders, totalling $15,500 and an offsetting credit to accounts receivable. The number of shares surrendered, the amount each partner's partnership interest was increased, and the amount each partner's capital stock account in the corporation was reduced, are as follows: Amount ofpartnershipinvestment in-No. ofcrease and corre-sharessponding corpo-surren-ration invest-Partnerderedment decreasePresley W. Moore775$ 7,750John M. Moore4654,650Woodrow O. Hewitt1551,550Wilson C. Hewitt1551,5501,550$15,500At the time of the redemption of the 1,550 shares of stock on January 15, 1957, the corporation had earnings and profits in excess of $15,500. The corporation had not, prior to January 15, 1957, paid any dividends to its stockholders. Since its incorporation, the business321 of the corporation has been both profitable and expansive. Although the stock redemption took the form of a transfer of stock from the individual partners to the partnership and then by the partnership to the corporation, there was no delivery or transfer to the partnership as the stock certificates were always in the possession of the corporation, and the transfer was actually made by appropriate entries in the books of the corporation. Petitioners did not report any gain or lois on the redemption of their stock for the year 1957. Respondent increased the taxable income of petitioners in each case for the year 1957 as follows: Dwt.Amount ofNoPetitionersIncrease$ 1758Presley W. Moore and Doro-thy B. Moore$7,750$ 1759Wilson C. Hewitt and KathleenW. Hewitt4,650[1760Woodrow O. Hewitt and Kath-ryn S. Hewitt1,550$ 1761John M. Moore and Jean Y.Moore1,550Respondent's explanation in each case for his determined deficiency was that "the redemption of * * shares of stock, par value $10.00 of Hewitt Company, Inc. on January 15, 1957, constitutes taxable dividends." Opinion The issue in this case is whether the322 redemption of stock here involved qualifies under section 302 of the Internal Revenue Code of 19541 to be treated as a payment in exchange for the stock. If this transaction is to qualify under section 302, it must do so under section 302(b)(1) as a redemption which is not essentially equivalent to a dividend, as none of the other provisions of section 302(b) apply. If the redemption here involved is essentially equivalent to a dividend, the amount credited to each petitioner in cancellation of the partnership's indebtedness is taxable to such petitioner as a dividend under section 301. The redemption in this case took the form of a cancellation of indebtedness owed by a partnership, of which petitioners were the partners, to the corporation. The indebtedness arose from amounts due to the corporation from the partnership for machinery rentals for machinery used by the partnership in conducting its construction business. The proportionate interest of the partners in the partnership was identical with their proportionate stock interests in the corporation. The323 partnership's indebtedness to the corporation was cancelled when each of the shareholders surrendered stock to the corporation representing his proportionate share of the partnership and thus of the partnership's indebtedness. Whether a redemption of stock is essentially equivalent to a dividend depends on the facts and circumstances of each particular case. Ferro v. Commissioner, 242 F. 2d 838 (C.A. 3, 1957), affirming a Memorandum Opinion of this Court, and cases cited therein. Among the criteria used by the courts in determining the ultimate fact are whether: (1) There was a contraction in the corporate business; (2) the initiative for the corporate distribution came from the corporation or the shareholders; (3) there was a change in the proportionate ownership of stock by the shareholders; (4) there were prior dividends and, if so, the amounts, frequency and significance thereof; (5) there was a sufficient accumulation of earned surplus to cover the distribution; (6) there was a bona fide corporate business purpose for the distribution. Thomas Kerr, 38 T.C. 723">38 T.C. 723, 730 (1962), on appeal (C.A. 9, Nov. 26, 1962); and Genevra Heman, 32 T.C. 479">32 T.C. 479 (1959),324 affd. 283 F. 2d 227 (C.A. 8, 1960). From the record in this case we conclude that the redemption was essentially equivalent to a dividend. There was no contraction of the corporate business but rather an expansion thereof. In its 2 years of existence, at the time of the redemption, the corporation had not paid a dividend, and it had earnings and profits in excess of the amount distributed by way of debt cancellation. The most indicative factor pointing towards dividend equivalence is that the redemption of the stock was exactly pro rata among the shareholders thus leaving their proportionate interests unchanged. In Bradbury v. Commissioner, 298 F. 2d 111 (C.A. 1, 1962), affirming a Memorandum Opinion of this Court, the Court stated: The extent to which the distribution is ratably shared by the stockholders has always been one of the most conspicuous determinants of dividend equivalence. Petitioners argue that there was a bona fide corporate business purpose for the redemption and that this purpose qualifies the redemption under section 302(b)(1) as not essentially equivalent to a dividend. Petitioners' position is that the stock redemption was part325 of an overall plan whereby two partnership debts were paid off by the partners, that these debt payments were made at the insistence of a bank and a bonding company, and that through this debt satisfaction the corporation was able to maintain a line of credit with a bank. It is not every business purpose that will suffice to cause the distribution to be treated as not essentially equivalent to a dividend. A business purpose is but one factor to be considered. Bradbury v. Commissioner, supra, and Thomas Kerr, supra, and the cases cited therein at page 732. Even according to the testimony of one of the petitioners, the threat of the bank's failing to extend credit to the corporation was not immediate and not altogether certain.2 Representatives of the bank did not testify. Furthermore, it is hard to understand how the cancellation of a debt owed to the corporation improves the corporation's financial picture. Cf. J. Natwick, 36 B.T.A. 866">36 B.T.A. 866 (1937). 326 Even were we to assume that the satisfaction of the indebtedness due the corporation was mandatory as concerns the corporation's ability to secure future bank loans, there still appears to be no valid business purpose for effecting the debt cancellation in the manner it was done in this case. In evaluating a business purpose, it is relevant to look at alternative steps available to the corporation. Neff v. United States, 305 F. 2d 455 (Ct. of Claims, 1962); Ballenger v. United States, 301 F. 2d 192 (C.A. 4, 1961); Bradbury v. Commissioner, supra, and Estate of Charles Chandler, 22 T.C. 1158">22 T.C. 1158 (1954) affd. per curiam 228 F. 2d 909 (C.A. 6, 1955). It does not appear that the bank suggested or advocated that the debt cancellation be made by way of reduction in capital, i.e. a redemption of stock, Cf. Harry A. Koch, 26 B.T.A. 1025">26 B.T.A. 1025 (1932), Bona Allen, Jr., 41 B.T.A. 206">41 B.T.A. 206 (1940), and J. Natwick, supra.The normal manner for clearing the indebtedness would have been for the corporation to declare a dividend in the amount of the indebtedness and offset the dividend against the debt due. 327 Cf. Estate of Charles D. Chandler, supra. The more circuitous route taken by the corporation in this case of redeeming stock, as opposed to the declaration of a dividend, served no corporate purpose but rather, a shareholder purpose. Cf. Neff v. United States, supra, Ballenger v. United States, supra, and Bradbury v. Commissioner, supra. In the Chandler case the corporation redeemed half of its outstanding stock in order to eliminate an excessive amount of cash which it held. We there stated: An examination of the facts reveals that the Company had a large earned surplus and an unnecessary accumulation of cash from the standpoint of business requirement, both of which could have been reduced to the extent of earnings and profits by the declaration of a true dividend. The only suggested benefit accruing to the business by the distribution in cancellation of half the stock was the climination of a substantial amount of this excess cash. Ordinarily such cash would be disposed of by the payment of a dividend. Coupled with the fact that the stockholders' proportionate interests in the enterprise remained unchanged, these factors indicate that328 section 115(g) is applicable. * * In Ballenger v. United States, supra, the corporation redeemed all the preferred stock held by its sole shareholder. Taxpayer argued that there was a business purpose for the stock redemption because (1) it relieved the corporation of a duty to pay 5 percent dividends thereon which were cumulative, (2) the bonding company considered the cumulative preferred stock to be objectionable, and (3) the corporation could borrow outside funds for less than 5 percent and also get a tax deduction for interest paid under section 163. The Court, however, pointed out that these ends could have been attained without effecting a distribution of corporate earnings and profits by the expedient of the taxpayer exchanging his preferred stock for new common stock of the corporation. The Court stated that in the case of a pro rata redemption of stock, any business justification must be compelling to justify treating the redmption as not essentially equal to a dividend. In Neff v. United States, supra, the taxpayer argued the redemption of part of his stock had a business purpose because it enabled the corporation to resell the stock at a329 substantial profit, thus securing for the corporation much needed additional funds. The Court pointed out that the corporation at the time it redeemed the taxpayer's stock, held unissued stock which it could have sold to outsiders to raise the needed extra funds. In Bradbury v. Commissioner, supra, the principal shareholder was indebted to her corporation. The Court of Appeals stated in part as follows: In a proper case, the presence of a legitimate corporate business purpose may well be relevant as an offsetting factor to a determination of dividend equivalence. However, we believe that for business purpose to be of really meaningful import the dichotomy between shareholder and corporation must be more sharply drawn than is the case here. * * The record indicates that petitioner as the dominant stockholder of the Bradbury Corporation incurred the $22,000 debit balance with the corporation as a result of withdrawing money to meet her personal expenses. Had she initially redeemed her stock to obtain this money the transaction would undoubtedly be treated as a dividend. The only real distinction between such a case and the instant transaction is that it is now asserted330 that the bank's request that the indebtedness be eliminated furnishes a corporate business purpose. However, in substance there is no material distinction between the two situations; in each the redemption can be ultimately traced to the fact that the stockholder obtained an economic benefit from the corporation in satisfaction of her personal needs. No argument is made that the petitioners herein did not receive a pro rata economic benefit equal to the amount of the debt when the partnership debt to the corporation was cancelled. The indebtedness represented an expense that, except for the cancellation, would have had to have been paid by the partnership. Had the corporation permitted the partnership to use its equipment without charge in the first instance, the value of such use would clearly constitute a dividend to the stockholder partners. There is no suggestion that the partners, who were the debtors, were insolvent before the debt cancellation. Petitioners seek to distinguish redemption cases involving debt cancellations, such as Bradbury v. Commissioner, supra, on the ground that in these cases the indebtedness arose through the personal needs of the shareholders331 who would borrow corporate funds whereas in the present case the indebtedness arose as an adjunct to the business carried on by the partnership. The cause for the indebtedness to the corporation is not important. What is important is the economic benefit conferred on the shareholders when the corporation cancels the indebtedness. Among the cases relied on by petitioners are Jones v. Griffin, 216 F. 2d 885 (C.A. 10, 1954), Keefe v. Cote, 213 F. 2d 651 (C.A. 1, 1954), and Estate of Henry A. Golwynne, 26 T.C. 1209">26 T.C. 1209 (1956). Each of these cases is distinguishable on the facts from the instant case. In Jones v. Griffin, supra, the redemption was substantially disproportionate. In addition, the Court pointed out that the creditors bank insisted that preferred stock be redeemed because the preferred stock would constitute a prior claim on income should the bank extend credit to the corporation. Also, by substituting a bank loan for the outstanding preferred stock, the corporation was able to reduce its costs for borrowed funds by more than 50 percent. Keefe v. Cote, supra, and Estate of Henry A. Golwynne, supra,332 involved situations where shareholder officers received part of their salary in the form of promissory notes because the corporation was short of funds; the notes, in turn, were exchanged for stock in order to improve the financial condition of the corporation; and the stock was subsequently redeemed, which event was anticipated from the start. The courts emphasized the facts that both the issuance of the notes and their exchange for stock were motivated by valid corporate reasons, and that because the taxpayers had reported the promissory notes as taxable income on receipt there was no tax avoidance purpose, and that actually to treat the subsequent redemption as a dividend would have the effect of taxing the same income twice. 3333 The evidence in the instant case fails to establish that the redemption of petitioners' stock was not essentially equivalent to a dividend. Decision will be entered for respondent. Footnotes*. Proceedings of the following petitioners are consolidated herewith: Wilson C. Hewitt and Kathleen W. Hewitt, Docket No. 94759; Woodrow O. Hewitt and Kathryn S. Hewitt, Docket No. 94760; and John M. Moore and Jean Y. Moore, Docket No. 94761.↩1. All references herein are to the Internal Revenue Code of 1954 unless otherwise indicated.↩2. Petitioner John M. Moore testified as follows: Q. In discussing financing with the various banks, did any of the banks ever suggest to you a specific way in which you should attempt to get your accounts payable off of your books? A. No, sir; I don't think so. I think they just insisted that we get these outstanding debts cleared up because it marred our financial picture to such an extent that they were reluctant to hand us the necessary cash. Q. Did they indicate they would not let you have it if you did not - A. They indicated to the extent that if we kept coming back to them time after time after time and still have this obligation on our financial statement that they would certainly, in time, turn us down. Q. Then you feel that they indicated to you or gave you the impression that it would be necessary to get this off the books in order to make future financing. A. Yes. Q. You don't know how much more they would have allowed you? A. No, sir, I don't.↩3. There are not in evidence any of the partnership returns even though the Court at one point suggested that these returns might be helpful in understanding this case. None of the returns of the corporation is in evidence and the returns of the petitioners for 1955 and 1956 are not in evidence. The record does not show the amount of income, if any, of the partnership in 1955 or whether that income was reported on the cash or an accrual basis of accounting. It is obvious that if the partnership reported on an accrual basis and had income for 1955, the partnership income for 1955 was less by the amount of $15,500 if the total unpaid rent applied to that year than it would have been if the rentals due to the corporation had been paid. Under these circumstances petitioners would have once received a benefit from this indebtedness by a direct reduction of their pro rata share of distributable partnership income for 1955. If the partnership reported on a cash basis, no similar reduction of its income would have occurred and it is possible that some elements of double taxation might exist, particularly if the corporation were on an accrual basis and the $15,500 of accrued rents had been included in its income in computing its accumulated earnings. Since petitioners have the burden of proof and have failed to show these facts, we assume that such facts would show that the partnership, and thus petitioners, have once obtained the advantage of a reduction in income by the creation of the indebtedness for equipment rentals.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622314/	JULIAN A. SANDOVAL and ARMIDA T. SANDOVAL, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentSandoval v. CommissionerDocket No. 11611-77.United States Tax CourtT.C. Memo 1979-430; 1979 Tax Ct. Memo LEXIS 95; 39 T.C.M. (CCH) 377; T.C.M. (RIA) 79430; October 18, 1979, Filed A. Jerry Busby, for the petitioners. Harry Beckhoff, for the respondent. TIETJENSMEMORANDUM OPINION TIETJENS, Judge: Respondent determined a deficiency of $5,665.00 in petitioners' Federal income tax for 1975. The only issue for our determination is whether96 petitioners paid attorneys fees in 1975, thereby entitling them to a deduction in that year. This case was fully stipulated pursuant to Rule 122, Tax Court Rules of Practice and Procedure. The stipulation of facts and attached exhibits are incorporated herein by reference. At the time they filed their petition, petitioners resided at Tucson, Arizona. Petitioners timely filed a joint Federal income tax return for 1975 and used the cash method of accounting to compute their taxable income. On May 30, 1975, agents of the Federal Drug Enforcement Administration and the Tucson Metro Narcotics Squad seized $36,947.50 in cash belonging to the petitioners in connection with a series of narcotics trafficking arrests. Later that day, the District Director of Internal Revenue for the District of Arizona (hereinafter District Director) determined that the collection of petitioners' income tax for January 1, 1975 through May 29, 1975 was in jeopardy and terminated petitioners' tax year pursuant to section 6851. 1 Petitioners Julian A. Sandoval (hereinafter Julian) and Armida T. Sandoval (hereinafter Armida) were separately assessed in the respective amounts of $20,228.10 and $19,113.6097 for the terminated taxable period. With respect to these assessments, no statutory notices of deficiencies were issued. On May 30, 1975, moreover, following petitioners' failure or refusal to pay the assessed taxes after notice and demand for immediate payment, the District Director levied upon and subsequently received the $36,947.50 held by the Tucson Police Department. On July 14, 1975 the levy proceeds were equally divided and applied to petitioners' assessments for the terminated period. The District Director, in addition, seized Julian's pickup truck and motorcycle on June 5, 1975 and Armida's automobile on June 11, 1975. These items were sold at public auction and the proceeds from the sale ($700.00 for Julian and $680.00 for Armida) were applied, on June 26, 1975, against their respective assessments for the terminated period. On July 2, 1975 petitioners filed joint Federal income tax returns for 1974 and 1975. The return for 1974 indicated a total tax liability of $4,053.00 and was accepted by respondent. The return for the terminated98 taxable period beginning January 1, 1975 and ending May 29, 1975, indicated a total tax liability of $11,904.00. On November 20, 1975, petitioners executed four documents. The first, a financing agreement, "Arizona Uniform Commercial Code Financing Statemnt-Form UCC-1," was executed with the law firm of Debus, Busby & Green, Ltd. (hereinafter D, B & G), and filed in the Office of the Secretary of State, State of Arizona, on November 24, 1975. The document lists petitioners as debtors, D, B. & G as the secured party, and "39,000 plus in United States currency" as the property covered by the statement. 2The second document, a fee agreement executed by petitioners and D, B & G, provided the following compensation for the latter's services: costs incurred plus either one-third (1/3) by any amount recovered if from the local authorities or fifty percent (50%) of all money recovered if the money had been turned over to the Internal Revenue Service. Included in the services99 to be rendered by the law firm was a final acceptance by the Service of petitioners' 1974 and 1975 tax returns, either as filed or as eventually negotiated with the Service. The third document, denominated "Assignment" and executed by petitioners, purported to "assign and convey all right, title and interest to THIRTY-NINE THOUSAND PLUS DOLLARS ($39,000 plus) seized from the home * * * on or about May 29, 1975, to the law firm of DEBUS, BUSBY & GREEN, LTD." The last document executed on November 20, 1975 was an affidavit swearing that petitioners retained the law firm of D, B & G to acquire the over $39,000 "claimed by them and presently in the custody of the Department of Public Safety" and to act as their agent in this matter. On February 24, 1976, petitioners, with D, B & G and another law firm, Streich, Lang, Weeks, Cardon & French (hereinafter S, L, W, C & F), as attorneys of record, filed a class action 3 in the United States District Court in the District of Arizona. The District Court, on May 10, 1976, denied petitioners' motion for certification of class and, on June 14, 1976, further denied the defendant's motion for summary judgment. The litigation was ultimately100 resolved by settlement and was dismissed with prejudice by the District Court on October 12, 1976. Pursuant to the terms of the settlement, of the $38,327.50 collected by the District Director, $8,328.61 was applied to petitioners' tax liabilities as reflected on their 1974 and 1975 income tax returns, and the balance plus interest was refunded to petitioners in September and October 1976. Under the settlement, moreover, the District Director retained the right to audit the joint Federal income tax return for 1975. On September 8, 1976 and on October 8, 1976, D, B & G received $12,500.00 and $1,258.87, respectively, from petitioners pursuant to their fee arrangement. On October 8, 1976, petitioners paid $6,198.64 to S, L, W, C & F for their legal services. D, B101 & G reported the fees received from petitioners as income on the firm's corporate income tax return for the taxable year ending June 30, 1977. On August 22, 1977, respondent issued a deficiency notice to petitioners for 1975 disallowing a claimed deduction for legal fees of $19,914.00. 4Although conceding the legitimacy of the expense, respondent contends that the amounts paid by petitioners as legal fees were not deductible in 1975 since petitioners were cash basis taxpayers and the amounts were actually paid in 1976. He asserts that the assignment agreement executed in 1975 is not a payment of legal fees in that year. In addition, respondent maintains that even assuming arguendo that petitioners were in "constructive receipt" of the contingent claim in 1975, it does not follow that the doctrine of "constructive payment" applies with respect to the payment of legal fees in the same taxable year. Petitioners argue that, under state law, their assignment without reservation vested all title in the assignee,102 and, therefore, that payment occurred in 1975 when all steps were taken to create an irrevocable obligation. Petitioners also assert that failure to follow jeopardy assessment procedures rendered respondent's conduct improper from the beginning and that respondent should not benefit from its own improper conduct. We agree with respondent. Respondent's determination of a deficiency is presumptively correct; petitioners have the burden of proving such determination is wrong. Welch v. Helvering,290 U.S. 111">290 U.S. 111 (1933); Rule 142(a), Tax Court Rules of Practice and Procedure. Deductions, moreover, are matters of legislative grace and entitlement to them must be proved by the taxpayer. Interstate Transit Lines v. Commissioner,319 U.S. 590">319 U.S. 590 (1943); New Colonial Ice Co. v. Helvering,292 U.S. 435">292 U.S. 435 (1934). Although, as respondent concedes, petitioners are entitled to a deduction for legal expenses under section 212(3), they must establish that the legal fees were paid during 1975 to deduct them in that year. Section 212; section 1.212-1(a)(1), Income Tax Regs.For cash basis taxpayers, payment of legal fees occurs only in the year103 the costs are actually paid. Section 461(a); section 1.461-1(a)(1), Income Tax Regs.5 The effect of this rule is to deny to both the Government and the taxpayer the option of attributing expenses to a year other than the year of actual payment. Security Flour Mills Co. v. Commissioner,321 U.S. 281">321 U.S. 281 (1944). Since petitioners are cash basis taxpayers, they are plainly not entitled to a deduction in 1975 for legal fees actually paid in 1976. Estate of Gordon v. Commissioner,47 T.C. 462">47 T.C. 462 (1967). Petitioners' main argument, that the assignment and fee agreement which were executed in 1975 constitute actual payment of their legal fees104 in 1975, lacks merit. First, the amount under the fee agreement was ascertainable in 1975 only to the extent of $19,163.75 (50 percent of the property withheld by respondent). The amount attributable to "costs incurred" could not have constituted payment in 1975 where the litigation was not settled until 1976 and where the taxable year 1975 remained open and it was unclear what further costs would be incurred. Second, it was uncertain in 1975 whether petitioners had a valid claim. It was not until 1976 when the Supreme Court, in Laing v. United States,423 U.S. 161">423 U.S. 161 (1976), held that the Internal Revenue Service was required to issue a deficiency notice to a taxpayer within sixty days after terminating his taxable year and the making of a jeopardy assessment. Moreover, even if their recovery of the money is somehow interpreted as certain at the time petitioners instituted their action, there was no certainty that petitioners would in fact pay their attorneys fees. While the law firm may have had an enforceable claim against petitioners, they could not be certain they would ever actually be paid. See Commissioner v. Blaine, Mackay, Lee Co.,141 F.2d 201">141 F.2d 201 (3d Cir. 1944),105 reversing a Memorandum Opinion of this Court. Likewise in Emmanuel v. Commissioner,28 T.C. 1305">28 T.C. 1305 (1957), we held that the assignment of a contingent claim does not constitute payment by the assignor when the assignee is not shown to have collected the claim in the same taxable year. Although it may be found that petitioners were in "constructive receipt" of the property wrongfully seized from them, it does not necessarily follow that they had made "constructive payment" of their legal fees. See Vander Poel, Francis & Co. v. Commissioner,8 T.C. 407">8 T.C. 407 (1947). "Constructive receipt" is used to determine income and, as such, is intended as a means to tax all income; by contrast, "constructive payment" is used to effect a deduction and, since deductions are matters of legislative grace, is rarely applied. See 2 Mertens, Law of Federal Income Taxation, sec. 10.18, pp. 71-72 (1974 rev.). We sympathize with petitioners' position as it is apparent that the need for their attorneys' services in this matter was produced by the Government's impropriety. As we have repeatedly stated, however, we are not a court of equity, Commissioner v. Gooch Co.,320 U.S. 418">320 U.S. 418 (1943);106 Hays Corp. v. Commissioner,40 T.C. 436">40 T.C. 436 (1963), affd. 331 F.2d 422">331 F.2d 422 (7th Cir.) cert. denied, 379 U.S. 842">379 U.S. 842 (1964); Ternovsky v. Commissioner,66 T.C. 695">66 T.C. 695 (1976), and must reach our decisions solely on a legal, rather than equitable, basis. Decision will be entered for the respondent. Footnotes1. All statutory references are to the Internal Revenue Code of 1954 as amended and in effect for the taxable years in issue.↩2. The actual amount of cash seized was $36,947.50. An additional amount of $1,380.00 was seized by the District Director so that by November 20, 1975, a total of $38,327.50 had been seized from petitioners.↩3. The action was captioned: "Julian Angel Sandoval, and Armida Trejo Sandoval, his wife, on behalf of themselves and all other similarly situated persons, v. United States of America, William E. Simon, Secretary of the Treasury, Donald O. Alexander, Commissioner of the Internal Revenue Service, and Prescott A. Berry, the District Director of the Internal Revenue for the District of Arizona," CIV. 76-133 PHX WPC.↩4. The total amount paid for legal services was actually $19,957.51. This discrepancy with the claimed deduction was not noted or explained by either party.↩5. Section 461(a) provides as follows: The amount of any deduction or credit allowed by this subtitle shall be taken for the taxable year which is the proper taxable year under the method of accounting used in computing taxable income. Section 1.461-1(a)(1), Income Tax Regs., provides, in pertinent part, as follows: Under the cash receipts and disbursements method of accounting, amounts representing allowable deductions shall, as a general rule, be taken into account for the taxable year in which paid. * *↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622316/	GARY L. AND ELLEN B. ALLEN, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentAllen v. CommissionerDocket No. 7244-93United States Tax CourtT.C. Memo 1994-165; 1994 Tax Ct. Memo LEXIS 166; 67 T.C.M. (CCH) 2696; April 18, 1994, Filed 166 Decision will be entered for petitioner. Gary L. Allen, pro se. For respondent: Edith F. Moates. DINANDINANMEMORANDUM OPINION DINAN, Special Trial Judge: This case was heard pursuant to the provisions of section 7443A(b)(3) and Rules 180, 181, and 182. 1Respondent determined a deficiency in petitioners' Federal income tax in the amount of $ 493 for the year 1988. The issues for decision are: (1) Whether petitioners are entitled to an abandonment loss relating to the confiscation of business property by an Indian tribe; and (2), if petitioners are entitled to a loss, whether the loss is a capital loss or an ordinary loss. 2167 Some of the facts have been stipulated and are so found. The stipulations of fact and attached exhibits are incorporated herein by this reference. Petitioners resided in Tulsa, Oklahoma, on the date the petition was filed in this case. Petitioners filed a joint Federal income tax return for the year 1988 with the IRS on or about August 31, 1989, following a timely application for an extension. Neither petitioner is an American Indian. All future references to petitioner refer to petitioner Gary Allen. Petitioner is a certified public accountant. Petitioner's spouse is a school teacher. During most of 1987, petitioner worked as an accountant for the United Keetowah Band of Cherokees which operated an enterprise known as Horseshoe Bend Bingo. During 1987, a Mr. Bingham, a non-Indian, was operating the Hominy Village Bingo (hereinafter HVB) located in Hominy, Oklahoma, on the Hominy Indian Reservation under a management contract with the Hominy Indian Village Committee (hereinafter the Committee). The Committee owned the hall housing HVB and the land on which HVB was located, while Mr. Bingham owned the operating assets of HVB. In late 1987, petitioner and Mr. Bingham entered168 into negotiations for the sale of the operating assets of HVB by Mr. Bingham to petitioner. In early October of 1987, Mr. Bingham and petitioner inventoried all the operating assets of HVB in order to determine their fair market value. On October 19, 1987, as evidenced by a signed receipt, petitioner purchased the operating assets of HVB from Mr. Bingham for $ 18,000. Petitioner paid Mr. Bingham with approximately $ 12,700 borrowed from his daughter, $ 3,900 borrowed from his brother, and the remainder from personal savings. Petitioner signed demand, interest-bearing notes for the borrowed money and gave his brother and daughter a security interest in the property purchased. The security interest was filed with the State in Tulsa, Oklahoma. On October 20, 1987, petitioner signed a management contract with the Committee. The contract authorized petitioner to operate HVB four nights per week for 156 consecutive weeks. Petitioner was obligated to pay the Committee $ 1,500 each week that HVB was operated. Once the contract was signed, petitioner took over operation of HVB. The management contract, however, required approval by the Bureau of Indian Affairs (hereinafter the Bureau). 169 At the time the contract was signed, the Committee assured petitioner that they would seek the necessary approval of the contract by the Bureau. In December of 1987, after operating HVB for nearly 2 months, petitioner learned from the Committee that they had not sought approval of the management contract by the Bureau, and did not plan to seek approval of the management contract by the Bureau. Without approval of the management contract, and with no prospect of obtaining approval, in late December of 1987, petitioner closed HVB and left the reservation. In January of 1988, petitioner returned to HVB to recover HVB's operating assets -- his property. The Committee refused to allow petitioner or his representatives to reclaim HVB's operating assets or even to enter HVB. Petitioner made no further attempts to reclaim his property. Petitioner considered that any such attempts would only be futile and expensive. Without income from HVB, petitioner was unable to repay the amounts that he had borrowed, and he was forced to default on the loans to his brother and daughter. In 1990, petitioner's brother and daughter, acting in their capacity as secured creditors, retained the services170 of Dale F. McDaniel, an attorney, in unsuccessful attempts to obtain the property or damages from the Committee. Mr. McDaniel first filed a lawsuit against the Committee in a State court in Osage County, Oklahoma, which was dismissed for lack of jurisdiction. Mr. McDaniel next filed another lawsuit in Osage County against the Committee members that were signatories to the contract in their individual capacity, which was also dismissed for lack of jurisdiction. Mr. McDaniel then filed a lawsuit in the United States District Court for the Northern District of Oklahoma. That case was also dismissed for lack of jurisdiction. Finally, Mr. McDaniel contacted the Bureau of Indian Affairs, only to be informed that there were no tribal courts available to hear their claim. On petitioners' 1987 Federal income tax return, they claimed a capital loss relating to the confiscation of their property by the Committee in the amount of $ 16,884 (petitioner's basis in the assets) and an operating loss in the amount of $ 15,355. As a result of capital loss limitations, petitioners only deducted $ 3,000 of their claimed capital loss on their 1987 return, carrying the balance of the capital loss171 forward. 3Sec. 165(f); sec. 1211(b). The year 1987 is not before this Court. On petitioners' 1988 Federal income tax, again due to capital loss limitations, they only deducted a $ 3,000 capital loss, carrying the balance of the capital loss forward. Respondent disallowed the capital loss deduction contending that petitioners had not established that the amount claimed on their return was a loss, or that it was sustained by them, and, in the alternative, that such a loss occurred in later years. Deductions are strictly a matter of legislative grace, and taxpayers bear the burden of proving they are entitled to any deduction claimed on their return. Rule 142(a); New Colonial Ice Co. v. Helvering, 292 U.S. 435">292 U.S. 435, 440 (1934); Welch v. Helvering, 290 U.S. 111">290 U.S. 111, 115 (1933). Section 165(a) provides that taxpayers are allowed a deduction for "a loss sustained during a taxable year not compensated172 for by insurance or otherwise". In the case of an individual taxpayer, the deduction is limited to certain types of losses, one of which is a loss incurred in a trade or business. Sec. 165(c)(1). It is uncontested that petitioner was in the trade or business of operating a legal gambling enterprise for a profit during the year 1987. A loss may arise from a permanent withdrawal of property used in a trade or business or for the production of income. Sec. 1.165-2(c), Income Tax Regs.Section 1.165-2(c), Income Tax Regs., directs us to section 1.167(a)-8, Income Tax Regs., which provides that withdrawal of depreciable property used in a trade or business may be accomplished by several methods. See Estate of Myers v. Commissioner, T.C. Memo 1981-384">T.C. Memo. 1981-384. Withdrawal may be accomplished by sale, exchange, retirement, or "actual physical abandonment". Sec. 1.167(a)-8(a), Income Tax Regs. Where an asset or assets is (are) withdrawn by actual physical abandonment, the loss will be recognized, measured by the amount of the adjusted basis of the asset abandoned at the time of abandonment. Sec. 1.167(a)-(8)(a)(4), Income Tax Regs.In order to be entitled173 to an abandonment loss, the taxpayer must show: (1) An intention on part of the owner to abandon the asset; and (2) an affirmative act of abandonment. Citron v. Commissioner, 97 T.C. 200">97 T.C. 200, 208 (1991). The mere intention to abandon is not, nor is non-use of property alone, sufficient to accomplish abandonment. Beus v. Commissioner, 261 F.2d 176">261 F.2d 176, 180 (9th Cir. 1958), affg. 28 T.C. 1133">28 T.C. 1133 (1957). In determining a taxpayer's intent to abandon, the subjective judgment of the taxpayer is entitled to great weight, and the court is not justified in substituting its business judgment for that of the taxpayer. A. J. Industries, Inc. v. United States, 503 F.2d 660">503 F.2d 660, 670 (9th Cir. 1974); Middleton v. Commissioner, 77 T.C. 310">77 T.C. 310 (1981), affd. 693 F.2d 124">693 F.2d 124 (11th Cir. 1982). Based on the record, we conclude that petitioners are entitled to an abandonment loss in the year 1988. On October 17, 1987, petitioner purchased the operating assets of HVB, and on October 20, 1987, petitioner signed a contract, subject to approval174 by the Bureau, with the Committee authorizing him to operate HVB for 156 consecutive weeks. Petitioner immediately began the operation of HVB. Nearly 2 months later, after learning that such approval by the Bureau would not be forthcoming, petitioner closed HVB and left the reservation. In 1988, petitioner returned to the HVB to reclaim his property -- HVB's operating assets, but the Committee refused to allow him to do so. Petitioner made no further attempts to reclaim his property. Petitioner, who thoroughly understood the legal and practical difficulties faced by a non-Indian pursuing a lawsuit against an Indian tribe, especially regarding property located on Indian land, concluded that any such attempt to recover his property through legal means would be extremely costly and would most likely be ultimately useless. In short, petitioner abandoned the property in 1988. The overt act of abandonment was petitioner's conclusion not to engage in costly litigation. Petitioner's testimony is entirely consistent with the documentary evidence presented. Petitioner presented a signed receipt stating that he paid $ 18,000 for the equipment. Petitioner provided his daughter and brother175 with demand, interest-bearing notes and a security interest in the assets purchased. Respondent introduced into evidence the management agreement signed by petitioner and members of the Committee in their professional capacity. Finally, respondent introduced into evidence the financial records of the business, which further demonstrate the value of the assets abandoned. As for respondent's contention that, if there was such a loss, it occurred in years following 1988, we disagree. Petitioner stated that once he was not allowed by the Committee to retrieve his property in January of 1988, he considered the property unrecoverable. Petitioner's pragmatic decision to abandon his property, does not preclude the deduction. 4Ramos v. Commissioner, T.C. Memo. 1981-473. We will not require petitioner to do what would be an exercise in futility. 176 We note that it was not petitioner that instituted the lawsuits mentioned, supra, but the secured creditors, his brother and daughter. In our view, the lawsuits filed by petitioners' brother and daughter, only served to verify petitioner's original belief that the property was unrecoverable through legal action in 1988 once confiscated. Having concluded that petitioner is entitled to an abandonment loss for the year 1988, we turn to the issue of whether the loss is a capital loss as claimed or an ordinary loss. As stated above, section 165(a) provides the general rule that taxpayers may deduct "any loss sustained during the taxable year not compensated for by insurance or otherwise." Section 165(a) is limited by 165(f) which provides that "Losses from sales or exchanges of capital assets shall be allowed only to the extent allowed in sections 1211 and 1212." If taxpayer's loss is a capital loss, the amount of capital loss allowable for the taxable year is the lower of $ 3,000 or the excess of capital loss over capital gains. Secs. 165(f), 1211(b), 1212(b). An abandonment loss, however, is treated as an ordinary loss, unless it arises from the sale or exchange of a capital177 asset, in which case it is treated as a capital loss. The term "capital asset", by definition, does not include property used in a trade or business of a character which is subject to the allowance for depreciation provided for in section 167. Sec. 1221(2). The assets confiscated by the Committee and subsequently abandoned were assets used in petitioner's trade or business. 5 They were not capital assets, and abandonment of such assets does not give rise to a capital loss. See sec. 1.167(a)-8, Income Tax Regs. Accordingly, petitioners are entitled to an ordinary loss for the abandonment of their business property in the year of abandonment, 1988. To reflect the foregoing, Decision will be entered for petitioner. Footnotes1. Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for the taxable year in issue. All Rule references are to the Tax Court Rules of Practice and Procedure.↩2. Due solely to the increase in petitioners' adjusted gross income resulting from the disallowance of petitioners' claimed capital loss, respondent reduced petitioners' Schedule A deductions for medical expenses and miscellaneous deductions.↩3. The balance of the capital loss carried forward was $ 13,884.↩4. The case at bar is analogous to Citron v. Commissioner, 97 T.C. 200">97 T.C. 200 (1991). In Citron↩, taxpayer became a limited partner in a partnership formed to produce a movie. The executive producer, after filming the movie, refused to return the film negative to the partnership. Rather than enter into a costly and protracted legal battle, taxpayer decided to abandon his partnership interest.5. Petitioner claimed depreciation in the amount of $ 1,500 related to the operation of HVB.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622327/	THE NEWPORT COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. THE YOUNGSTOWN SHEET AND TUBE COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Newport Co. v. CommissionerDocket Nos. 28149, 35431, 35511.United States Board of Tax Appeals24 B.T.A. 1246; 1931 BTA LEXIS 1517; December 24, 1931, Promulgated 1517 1. STATUTE OF LIMITATIONS. Waivers executed on behalf of dissolved corporations after the time provided by the laws of the respective corporations' domiciles for winding up their affairs have expired, are invalid and will not extend the statute for making any assessment against such dissolved corporations. Newport Co.,22 B.T.A. 833">22 B.T.A. 833. 2. Id. Where respondent was fully advised of the several corporate dissolutions prior to the expiration of the statute of limitations, petitioners are not estopped to deny the validity of the waivers. 3. Id. Taxing acts, including provisions of limitations embodied therein, are to be construed liberally in favor of the taxpayer. United States v. Undike,281 U.S. 489">281 U.S. 489. 4. Id. The acceptance of a return containing a deduction for amortization of war facilities is not the "tentative" allowance of a deduction for amortization so as to make the statute of limitations inoperative. W. G. Duncan Coal Co.,13 B.T.A. 672">13 B.T.A. 672. 5. Id. Where several corporations in good faith file a consolidated return in which the separate gross income and deductions of each corporation are reported, 1518 the filing of such return is such a substantial compliance with the statute relating to the filing of returns as will start the statute of limitations running with respect to each corporation included therein, although it later be determined that one or more of such corporations were not affiliated with the other or others. Continental Oil Co.,23 B.T.A. 311">23 B.T.A. 311. 6. Id. Where the period of limitations for making any assessment against a taxpayer expired before the passage of the Revenue Act of 1926, section 280(b)(1) of that act is not applicable. Caroline J. Shaw, Executrix,21 B.T.A. 400">21 B.T.A. 400. 7. Id. Where the period of limitations for making any assessment against a taxpayer expired after the passage of the 1926 Act, section 280(b)(1) of that act is applicable. Louis Costanzo,16 B.T.A. 1294">16 B.T.A. 1294. Charles F. Fawsett, Esq., Joseph C. White, Esq., and Richard S. Doyle, Esq., for the petitioners. J. R. Johnston, Esq., and J. A. Lyons, Esq., for the respondent. LOVE 1247 These proceedings are for the redetermination of the liability, if any, of petitioners as transferees. Docket No. 1519 28149 is a proceeding for the redetermination of the liability, if any, of The Youngstown Sheet and Tube Company as transferee of the assets of The Northwestern Iron Company, for deficiencies in income and profits taxes of that corporation for the calendar year 1918 and the six-month period ended June 30, 1919, in the amounts of $703,539.09 and $10,944.88, respectively, as set forth in respondent's deficiency notice to the alleged transferee dated March 10, 1927. Docket No. 35431 is a proceeding for the redetermination of the liability, if any, of The Newport Company as transferee of the assets of the "Newport Mining Company and its affiliated companies" for net deficiencies in income and profits taxes of the affiliated group for the calendar year 1918 and the six-month period ended June 30, 1919, in the amounts of $1,111,003.83 and $57,874.53, respectively, as set forth in respondent's deficiency notice to the alleged transferee dated December 29, 1927, and further detailed in an attached statement as follows: Affiliated groupCalendar year 1918 deficiency (overassessment)6 months, 1919 deficiency (overassessment)Newport Mining Company$1,141,343.38($21,157.16)Dunn Iron Mining Co(20,279.88)56,769.95Newport Turpentine & Rosin Company, Inc. (Ala.)4,825.42(326.20)Newport Turpentine & Rosin Company of Florida11,021.55(983.08)Newport Chemical Works, Inc169,383.1025,815.30Harvest Farms Company665.93None.Nonaffiliated companies(195,955.67)(2,244.28)Net deficiency1,111,003.8357,874.531520 Docket No. 35511 is a proceeding for the redetermination of the liability, if any, of The Youngstown Sheet and Tube Company as transferee of the assets of the "Steel and Tube Company of America and its affiliated companies" for the same net deficiencies as shown in Docket No. 35431, but in this proceeding the said deficiencies are 1248 set forth in respondent's deficiency notice to The Youngstown Sheet and Tube Company dated December 29, 1927. The pleadings raise a number of issues, one of which is that in each proceeding the statutory period of limitations for making any assessment against either petitioner had expired before the dates on which the above mentioned deficiency notices were mailed. On October 12, 1929, a motion was granted that all three proceedings be consolidated for trial, and that the hearing in the first instance be limited to the question of the statute of limitations. Briefly, our findings which follow may be grouped under the following general headings: (1) Corporations herein involved, paragraphs 1 to 7, inclusive; (2) 1919 reorganization transactions and corporations dissolved as result thereof, 8 to 10; (3) State statutes keeping corporations1521 alive for winding up affairs after dissolution, paragraph 11; (4) Wisconsin statutes relied upon by respondent, paragraph 12; (5) 1923 reorganization transactions and the corporation dissolved as result thereof, 13 to 19; (6) official capacity of certain individuals, 20 to 34; (7) powers of attorney and authority granted, 35 to 39; (8) returns filed, 40 to 47; (9) affiliation ruling, paragraph 46; (10) waivers filed, 48 to 57; (11) notifications to respondent of corporate dissolutions, 58 to 65; and (12) abatement and refund claims filed, paragraph 66. FINDINGS OF FACT. 1. The Youngstown Sheet and Tube Company is a corporation organized and existing under the laws of the State of Ohio with its principal office and place of business at Youngstown in that State. 2. The Newport Company is a corporation organized and existing under the laws of the State of Delaware, with an office and place of business at Carrollville, Wis., and with its post office address "Post Office Box M, South Milwaukee, Wisconsin." It was incorporated on July 14, 1919. 3. The Northwestern Iron Company throughout the year 1918 and the six-month period ended June 30, 1919, was a corpoation, duly organized1522 under the laws of Wisconsin on February 9, 1854, with its principal office at Mayville in that State. During the period in controversy approximately 83 per cent of its outstanding capital stock was owned by The Newport Mining Company. 4. During the year 1918 and the first six months of 1919 The Newport Mining Company, The Newport Turpentine and Rosin Company, Inc., The Newport Turpentine and Rosin Company of Florida, The Newport Chemical Works, Inc., and The Harvest Farms Company were corporations organized under the laws of the States of Maine, Alabama, Florida, Maine and Wisconsin, respectively. 1249 Each of these corporations had its principal business offices at Milwaukee, Wis. 5. The Dunn Iron Mining Company is, and during the period here in question was, a corporation, organized under the laws of the State of Wisconsin, with its principal business office in that state. 6. The Steel and Tube Company of America was incorporated under the laws of the State of Delaware on June 14, 1918. 7. The Mayville Iron Company was organized as a corporation during March, 1923, and at that time issued a certain amount of its capital stock for cash. 8. On July 30, 1919, after1523 appropriate resolutions duly adopted at meetings of each company's stockholders and directors, two agreements were entered into: One between The Newport Mining Company, The Northwestern Iron Company, and The Steel and Tube Company of America; and the other between The Newport Mining Company, The Newport Chemical Works, Inc., The Newport Company, and two other corporations not here material. Both agreements were fully carried out, and were effective as of the close of business on June 30, 1919. As far as it is material in these proceedings the agreements provided (1) for the transfer by The Newport Mining Company of all the outstanding capital stock of The Northwestern Iron Company held by The Newport Mining Company and all the assets of The Northwestern Iron Company to The Steel and Tube Company of America in exchange for capital stock of The Steel and Tube Company of America of no greater aggregate par or face value than the capital stock of The Northwestern Iron Company; (2) for the transfer by The Newport Mining Company of all the capital stock of The Dunn Iron Mining Company to The Steel and Tube Company of America in exchange for capital stock of the latter company of no greater1524 aggregate par or face value than the capital stock of The Dunn Iron Mining Company; (3) for the transfer by The Newport Mining Company of a majority of its capital stock and the greater part of its assets, consisting of its ore properties, plants, ore inventories, timberlands, and related contracts to The Steel and Tube Company of America in exchange for capital stock of the latter company of no greater aggregate par or face value than the capital stock of The Newport Mining Company so transferred; (4) for the transfer by The Newport Mining Company of the remainder of its capital stock and the balance of its assets to The Newport Company in exchange for capital stock of the latter company of no greater aggregate par or face value than the capital stock of The Newport Mining Company so transferred; (5) for the transfer by The Newport Mining Company of all the outstanding capital stock and assets of The Newport Chemical Works, Inc., and 1250 two other corporations (not here material) to The Newport Company in exchange for capital stock of The Newport Company of no greater aggregate par or face value than the capital stock of the three old corporations; (6) for the assumption1525 by The Steel and Tube Company of America, in addition to certain other specified liabilities, of "all obligations and liabilities present or future, fixed or contingent * * of said The Newport Mining Company * * * excepting charges or liabilities which matured or became due and payable prior to July 1, 1919"; (7) for the assumption by The Steel and Tube Company of America "of all of the liabilities of said The Northwestern Iron Company of every kind and nature"; (8) for the assumption by The Newport Company of "all the liabilities of said Newport Chemical Works, Incorporated"; (9) for the assumption by The Newport Company of "all the liabilities of said The Newport Mining Company of every kind and nature, excepting only those assumed by The Steel and Tube Company of America"; and (10) for the dissolution "after the consolidation as provided for herein shall be completed" of five corporations, among which were The Northwestern Iron Company, The Newport Mining Company, and The Newport Chemical Works, Inc. Both agreements referred to the several provisions contained therein as "such reorganization, consolidation or merger." 9. At some time during the year 1919 The Newport Company1526 also took over all of the assets of The Newport Turpentine and Rosin Company, Inc., the Alabama corporation, and The Newport Turpentine and Rosin Company of Florida and agreed to assume the liabilities of the companies taken over. 10. Shortly after the execution of the two agreements mentioned in paragraph 8 above the following corporations were legally dissolved on the following dates, to wit: (1) The Northwestern Iron Company, October 15, 1919, under the laws of Wisconsin; (2) and (3) The Newport Mining Company and The Newport Chemical Works, Inc., March 1, 1920, by the Supreme Judicial Court of the State of Maine "without the appointment of a trustee or receiver"; (4) The Newport Turpentine and Rosin Company, Inc., September 10, 1919, in accordance with section 3510 of the Code of Alabama of 1907, as amended by the act of the Legislature of the State of Alabama, approved February 9, 1915; and (5) The Newport Turpentine and Rosin Company of Florida, September 12, 1919. 11. Section 1764 of the 1919 Wisconsin Statutes (now section 181.02 Wisconsin Statutes, 1929) provides in part that all corporations which shall be dissolved "shall nevertheless continue to be bodies corporate1527 for three years thereafter for the purpose of prosecuting and defending actions, and of enabling them to settle and close up 1251 their business, dispose of and convey their property and divide their assets and for no other purpose * ." Section 81 of chapter 51 of the Revised Statutes of Maine, 1916, provides that "corporations, whose charters expire or are otherwise terminated, have a corporate existence for three years thereafter; to prosecute and defend suits; to settle and close their concerns; to dispose of their property; and to divide their capitals." Section 3516 of the Alabama Code of 1907 (now section 7069 of the Code of Alabama, 1923) provides in part that corporations which are dissolved "exist as bodies corporate for the term of five years after such dissolution, for the purpose of prosecuting or defending suits, settling their business, disposing of their property, and dividing their capital stock, but not for the purpose of continuing their business * ." Section 4092 of the Florida Revised Statutes, 1920 (now section 6021 of the Compiled General Laws of Florida, 1927) provides that "all corporations shall continue bodies corporate for the term of1528 three years after the time of dissolution from any cause, for the purpose of prosecuting or defending suits by or against them and enabling them to gradually settle their concerns, to dispose of and convey their property and to divide their capital stock, but for no other purpose." 12. Section 226.02(10) of the Wisconsin Statutes, 1929, provides as follows: All foreign corporations and the officers and agents thereof doing business in this state, shall be subjected to all the liabilities and restrictions that are, or may be imposed upon corporations of like character, organized under the laws of this state, and shall have no other or greater powers. Every contract made by or on behalf of any such foreign corporation, affecting the personal liability thereof or relating to property within this state, before it shall have complied with the provisions of this section, shall be wholly void on its behalf and on behalf of its assigns, but shall be enforceable against it or them. Section 226.12 of the Wisconsin Statutes, 1929, provides as follows: Liability of Foreign, not acting. - An action for the recovery of money may be commenced and prosecuted to judgment against a corporation1529 created by or under the laws of any other state or country or of the United States although such corporation may have ceased from any cause whatever to act in whole or in part as a corporation in the same manner as though it had not so ceased to act; and satisfaction of the judgment may be enforced out of any property in this state which such corporation owns or has any interest in or would own or have any interest in had the same not ceased to act as aforesaid, whether held or controlled by such corporation or by a trustee, assignee, agent, or other person for the use and benefit in whole or in part of such corporation or the creditors thereof or both; and any attachment issued in such action may be executed on any such property. 1252 13. The principal assets of the Northwestern Iron Company mentioned in paragraph 8(1) above that were transferred to The Steel and Tube Company of America as of June 30, 1919, consisted of two blast furnaces, coke oven, plant, by-product coke oven plant and a local deposit of ore and accessories that go with a plant of that character and were known and will be referred to hereafter as the "Mayville Properties." They were located at Mayville, 1530 Wis.14. On January 6, 1923, after appropriate resolutions duly adopted at meetings of each company's stockholders and directors, an agreement was entered into between The Steel and Tube Company of America and The Youngstown Sheet and Tube Company. This agreement was fully carried out in accordance with its terms. As far as it is material here it provided for the sale, conveyance, assignment, and transfer by The Steel and Tube Company of America to The Youngstown Sheet and Tube Company of all its property and assets, franchises and business, and good will (subject in so far as affected by certain specified liens) in consideration for a cash price in the aggregate amount of (a) $14,509,953.75, (b) $110 per share for each outstanding share of preferred stock of The Steel and Tube Company of America, which number of shares should not exceed 165,424 or an amount of $18,196,640, (c) an amount equal to the unpaid accrued dividends on said preferred stock, and (d) interest at 5 per cent on $14,509,953.75, if not fully consummated before a certain date. The agreement also provided as follows: In addition to said cash Youngstown shall assume and agree to pay or perform as the case1531 may be, all the debts, obligations, and liabilities of Steel and Tube of every kind and description. Steel and Tube agrees that all returns reports and statements which shall hereafter be made by Steel and Tube or by any of its subsidiary companies with reference to federal or state taxes shall be in form approved by Youngstown or its counsel and that all claims and litigation against Steel and Tube in respect of any such taxes shall be handled under the direction of Youngstown or its counsel. Exhibit E of the said agreement set forth a list of obligations and liabilities of The Steel and Tube Company of America not shown on its books and in this list appeared the following paragraph: Possible Taxes and Expenses in connection with Newport Mining Company: In the opinion of counsel any additional liability arising out of mining assets of Newport Mining Company, out of Northwestern Iron Company, and out of Harrow Spring Company is an obligation of Steel and Tube under its 1919 Consolidation Agreements. The best estimate at present is that refunds will offset any liabilities. Exhibit A of the said agreement was a list of sixteen corporations whose capital stock at the time of1532 the agreement was either partly or wholly owned by The Steel and Tube Company of America. 1253 Among the 100 per cent owned corporations were The Dunn Iron Mining Company and The Harvest Farms Company. The record does not show how or at what time The Steel and Tube Company of America became the owner of the capital stock of The Harvest Farms Company. Paragraph ninth of the said agreement was as follows: In case Youngstown shall so elect the title to the properties to be conveyed, or any of them, shall be conveyed, assigned and transferred by Steel and Tube to any other corporation all of the stock of which, except directors' shares, shall then be owned, directly r indirectly, by Youngstown. In case Youngstown shall elect to have said properties or any part thereof, conveyed, assigned, and transferred to any such other corporation, then all or any of the debts, obligations, and liabilities of Steel and Tube which Youngstown by any of the foregoing provisions has agreed to assume may be assumed by such other corporation and the instruments of assumption thereof and indemnification there-against hereinbefore required to be executed and delivered by Youngstown may be executed1533 and delivered by such other corporation, provided that the performance of the obligations undertaken by such instrument or instruments shall be guaranteed by Youngstown. 15. The Mayville Properties mentioned in paragraph 13 above and the capital stock of The Dunn Iron Mining Company and The Harvest Farms Company were a part of the assets of The Steel and Tube Company of America for which The Youngstown Sheet and Tube Company paid the cash consideration provided for in the said agreement of January 6, 1923. Exhibit D of the said agreement of January 6, 1923, was a consolidated balance sheet of The Steel and Tube Company of America as of November 30, 1922. Among the "assets" in this balance sheet was the account "Mayville Properties $6,658,100.21." 16. On June 29, 1923, The Steel and Tube Company of America gave The Youngstown Sheet and Tube Company a receipt for $32,706,593.75, pursuant to the agreement between the parties dated January 6, 1923. 17. On June 29, 1923, all of the assets of The Steel and Tube Company of America, except The Mayville Properties, were conveyed direct to The Youngstown Sheet and Tube Company. 18. On June 29, 1923, the Mayville Properties were1534 conveyed by The Steel and Tube Company of America direct to the Mayville Iron Company. The latter corporation was organized by The Youngstown Sheet and Tube Company for the purpose of taking over The Mayville Properties and its capital stock (except for a few qualifying shares) is all owned by The Youngstown Sheet and Tube Company. At the time of the hearing The Mayville Iron Company still owned The Mayville Properties. 19. The Steel and Tube Company of America was dissolved under the laws of the State of Delaware on November 30, 1926. 1254 20. H. J. Schlesinger was president of The Northwestern Iron Company, The Newport Turpentine and Rosin Company, Inc., and The Newport Turpentine and Rosin Company of Florida up to the time of the dissolution of those corporations in the year 1919, and vice president of The Newport Mining Company up to the date of its dissolution in 1920. He was also vice president of The Newport Company up until the spring of 1922. At that time he severed his connections as an officer, director, or otherwise of The Newport Company and all of its subsidiaries and thereafter had no connection in any capacity whatever with The Newport Company or1535 any of its subsidiaries, The Youngstown Sheet and Tube Company or any of its subsidiaries, or The Newport Mining Company or any of its subsidiaries. 21. A. A. Schlesinger was president of The Newport Mining Company and The Newport Chemical Works, Inc., up to the time of the dissolution of those corporations in the spring of 1920, and was an officer of The Northwestern Iron Company at the time of its dissolution in 1919. He was also president of The Steel and Tube Company of America up until some time in 1923. After that time he was a minority stockholder and director of The Steel and Tube Company of America. He is now and has been continuously, except for a short period in 1922 and 1923, president of The Newport Company. During this period in 1922 and 1923 he was chairman of the Board of Directors of The Newport Company and one Schaeffer was president of that corporation. Schlesinger did not consult with Charles F. Fawsett in regard to tax matters prior to 1926. 22. W. J. Morris was treasurer of The Harvest Farms and The Dunn Iron Mining Company. Subsequent to the acquisition of the assets of The Steel and Tube Company of America by The Youngstown Sheet and Tube Company1536 he was one of the vice presidents of the latter corporation and, together with W. N. McDonald and J. H. Hall, handled the tax matters for that corporation. 23. A. W. Westerman was secretary for The Newport Company until about 1925. 24. James E. Kupperian is vice president, auditor, and secretary of The Newport Company and has held those positions since the latter part of 1927. Prior to that time he had charge of the accounting department of that corporation for a number of years. He did a lot of work in connection with supervising income-tax matters for the company, but did not consider himself in charge of such work. 25. Charles F. Fawsett has been general counsel for The Newport Company since its existence, and during the years 1924 and 1925 he appeared before the Income Tax Unit in relation to tax matters of that corporation and its affiliated companies. He was also retained 1255 by The Youngstown Sheet and Tube Company from about the time that corporation took over the assets of The Steel and Tube Company of America, and on October 25, 1924, was elected a director of The Steel and Tube Company of America. 26. W. E. Meub is secretary and treasurer of The1537 Youngstown Sheet and Tube Company. He has held that office for approximately ten years. He held that office in 1923 when an agreement was consummated between The Youngstown Sheet and Tube Company and The Steel and Tube Company of America. 27. J. H. Hall was the tax accountant for The Youngstown Sheet and Tube Company. He worked very closely in connection with the general counsel of that company and was under the general supervision of W. N. McDonald. He attended several conferences with the Income Tax Unit. 28. W. N. McDonald has been comptroller of The Youngstown Sheet and Tube Company since August 1, 1920. His duties consisted in part of supervising matters that camp up in reference to tax liabilities. 29. Price, Waterhouse and Company have been auditors for The Youngstown Sheet and Tube Company for twenty years. 30. W. M. Smith has been resident manager in Washington, D.C., for Price, Waterhouse and Company for about ten years. On October 3, 1925, he signed the firm name of "Price, Waterhouse & Co." to a letter addressed to the respondent enclosing several "duly executed waivers" for The Steel and Tube Company of America for the years 1918 and 1919, The Dunn1538 Iron Mining Company for the year 1919 and ten other corporations not here material. In doing so, he acted under instructions from the general counsel of The Youngstown Sheet and Tube Company, one Manchester. 31. F. P. Byerly was an employee of the firm of Price, Waterhouse and Company. 32. George F. Smithson is a conferee of the Special Advisory Committee of the Bureau of Internal Revenue, and as such has since about November, 1928, had under consideration the income-tax liability of The Northwestern Iron Company, The Steel and Tube Company of America and affiliated companies, and The Newport Mining Company and affiliated companies. 33. A meeting of the stockholders of The Steel and Tube Company of America was held on October 25, 1924, at which meeting Leonard Kennedy, H. H. Springford, A. A. Schlesinger, E. G. Wilmer and C. F. Fawsett were elected directors of that company. 34. On November 26, 1924, H. H. Springford was elected president and treasurer, Edward G. Wilmer, vice president, and Frederick 1256 R. Wahl, secretary, of The Steel and Tube Company of America. 35. On August 6, 1923, The Steel and Tube Company of America appointed William M. Smith1539 of Price, Waterhouse and Company, its true and lawful attorney in fact to represent it before the Treasury Department with respect to its liability for income and profits taxes. 36. On February 28, 1924, The Youngstown Sheet and Tube Company executed a power of attorney authorizing george B. Furman of Washington, D.C., to represent that corporation before the Internal Revenue Bureau "in connection with the Government audits which have been made of The Steel and Tube Company of America and its affiliated or subsidiary companies in respect to its Income and Excess Profits taxes for the calendar year 1918." 37. On January 30, 1925, both petitioners, The Newport Company and The Youngstown Sheet and Tube Company, executed a power of attorney appointing Charles F. Fawsett, J. F. Kupperian and F. P. Byerly "their true and lawful attorneys with full power and authority to appear for and represent them and The Newport Mining Company which was dissolved in the year 1920" or any of its subsidiaries, including The Northwestern Iron Company and The Newport Chemical Works, Inc., "severally and separately, or jointly or together" in all income-tax matters involving such corporations for the1540 years 1916 to 1919, inclusive. The last two paragraphs of this instrument are as follows: This authorization and power of attorney shall take the place of the power of attorney heretofore granted to Charles F. Fawsett, J. E. Kupperian and Charles H. Brook, dated the 5th day of September, 1923. IN WITNESS WHEREOF said The Newport Companythe Youngstown Sheet & Tube Company as successors in interest of the said Newport Mining Company and its subsidiaries have respectively caused these presents to be duly executed by their proper officers, attested by their respective secretaries under their respective corporate seals this 30th day of January, 1925. 38. On February 26, 1925, The Youngstown Sheet and Tube Company executed a power of attorney authorizing C. H. Rose, Charles F. Fawsett, J. E. Kupperian, and F. P. Byerly to represent that corporation before the Internal Revenue Bureau "in all matters pertaining to the Federal Income and Excess Profits Taxes of The Steel and Tube Company of America and its subsidiary companies, The Newport Mining Company, Dunn Iron Mining Company, Northwestern Iron Company for the years 1916 to 1919, inclusive, hereby revoking and annulling all prior1541 Powers of Attorney; and to take such steps and proceedings and do all things which said attorneys and/or any one or more of them deem necessary and proper 1257 therefor or therein to take or do, with all the powers and authorities which said principals might have if present and acting, hereby ratifying, approving and confirming all that said Attorneys-in-fact and/or any one or more of them may do." 39. A. A. Schlesinger understod that he did not have authority to bind a corporation for tax liabilities that had expired under the statute of limitations. He did not give either Westerman or Kupperian any authority to bind any of the corporations for which they transmitted certain waivers hereinafter mentioned to the Department after the statute of limitations for such years had expired. 40. On June 15, 1919, "THE NEWPORT MINING COMPANY and Affiliated Companies (as listed in Statement annexed) Controlled by the Schlesinger Interests" filed with the collector of internal revenue for the first district of Wisconsin a consolidated corporation income and profits-tax return (Form 1120) for the calendar year 1918. Approximately one hundred pages of schedules showing separately1542 for each corporation the gross income, deductions and invested capital of sixteen alleged affiliated corporations were included in this return, among which corporations were The Northwestern Iron Company, The Newport Mining Company, The Newport Chemical Works, Inc., The Newport Turpentine and Rosin Company, Inc., The Newport Turpentine and Rosin Company of Florida, The Harvest Farms Company, and The Dunn Iron Mining Company. The return was signed and sworn to by A. A. Schlesinger, president, and A. H. Springford, acting treasurer. Among the consolidated deductions claimed was an amount of $1,211,000.99 for amortization of war facilities claimed under the provision of section 234(a)(8) of the Revenue Act of 1918. 41. On June 15, 1919, a separate "Information return of subsidiary or affiliated corporation whose net income and invested capital are included in return of a parent or principal reporting corporation for purpose of income and profits taxes for calendar year 1918" (Form 1122) was filed with the collector of internal revenue for the first district of Wisconsin by each, The Northwestern Iron Company, The Newport Chemical Works, Inc., The Newport Turpentine and Rosin Company, 1543 Inc., The Newport Turpentine and Rosin Company of Florida, The Harvest Farms Company and The Dunn Iron Mining Company. Each of these returns, among other things, disclosed the following facts in connection with the corporation for which the said return was filed, to wit: (1) date and State of incorporation, (2) kind of business, (3) par value and kind of capital stock outstanding at the beginning of the year, (4) the amount of capital stock held during the taxable year by the parent corporation 1258 or the same interests, with all changes during the year, (5) name and address of parent corporation, (6) the internal revenue district in which the consolidated return was filed, and (7) the amount of income and profits taxes for the taxable year apportioned to the subsidiary or affiliated corporation making the information return. Each of these information returns was signed and sworn to by two of the principal officers of each respective corporation. 42. On April 14, 1920, "The Newport Company and Subsidiary and Affiliated Companies" filed with the collector of internal revenue for the second district of Wisconsin a consolidated corporation income and profits-tax return1544 (Form 1120) for the calendar year 1919. Attached to this return were schedules showing separately for each corporation the gross income, deductions and invested capital of ten alleged affiliated corporations, among which were The Newport Mining Company, The Newport Chemical Works, Inc., The Newport Turpentine and Rosin Company, Inc., The Newport Turpentine and Rosin Company of Florida, and The Harvest Farms Company. The return was signed and sworn to by A. A. Schlesinger, president, and H. J. Schlesinger, treasurer. 43. On April 14, 1920, separate information returns (Form 1122) for the calendar year 1919 were filed by The Newport Mining Company, The Newport Chemical Works, Inc., The Newport Turpentine and Rosin Company, Inc., The Newport Turpentine and Rosin Company of Florida, and The Harvest Farms Company, naming The Newport Company as the parent company, in whose consolidated return the net income and invested capital of each of the corporations filing a Form 1122 were included. Each of these information returns was signed and sworn to by two of the principal officers of each respective corporation. 44. On May 15, 1920, The Steel and Tube Company of America and tweleve1545 other corporations filed with the collector of internal revenue at Chicago a consolidated corporation income and profits-tax return for the calendar year 1919. Attached to this return were over sixty pages of schedules showing separately for each corporation the gross income, deductions and invested capital of thirteen alleged affiliated corporations, among which were The Steel and Tube Company of America, The Dunn Iron Mining Company and The Northwestern Iron Company. This return was signed and sworn to by two of the principal officers of The Steel and Tube Company of America. 45. An information return (Form 1122) was filed by The Northwestern Iron Company for the calendar year 1919, naming The Steel and Tube Company of America as the parent company, in whose 1259 consolidated return the net income and invested capital of The Northwestern Iron Company was included. This return was signed and sworn to by H. J. Schlesinger, president, and A. A. Schlesinger, treasurer. 46. On June 17, 1922, the respondent in a letter addressed to The Newport Company notified that company, among other things, that the following corporations were affiliated during the period from January 1, 1919, to1546 June 30, 1919: Newport Mining CompanyDunn Iron Mining Company Newport Chemical Works, Inc. The Northwestern Iron CompanyNorthwestern Light and Power CompanyNorthwestern Milling Company Northwestern Limestone and Slag Company Harrow Spring Company Newport Turpentine and Rosin Company, Inc.Newport Turpentine and Rosin Company of FloridaGogebic Steel CompanyHarvest Farms CompanyThe Milwaukee Coke and Gas Company The Milwaukee Solvay Coke Company Elkhorn Piney Coal Mining Company St. Clair Coal Mining Company This letter referred to "The Consolidated income and profits tax returns filed by your Company * * * and The Steel and Tube Company of America for the taxable years 1919 and 1920," and, after setting forth the above list of corporations which the respondent ruled were affiliated during the period January 1, 1919, to June 30, 1919, the letter stated: The above group should, therefore, have filed a consolidated income and profits tax return for the period from January 1, 1919, to June 30, 1919. This letter also contained an affiliation ruling for the period July 1, 1919, to December 31, 1919, stating that a consolidated return should have1547 been filed by such corporations during that period, and, further, that, "In the event that such returns should be needed in the audit of the case, you will be so informed by this office." 47. On or about February 28, 1924, "The Newport Mining Company Subsidiary and Affiliated Companies" filed with the respondent a consolidated corporation income and profits-tax return for the period begun January 1, 1919, and ended June 30, 1919, on which was typed the word "AMENDED." The corporations included in this alleged amended return were the same identical corporations which the respondent had ruled to be affiliated in his letter to The Newport company1260 dated June 17, 1922, and referred to in the preceding paragraph. 48. Three so-called income and profits-tax waivers were filed on behalf of The Northwestern Iron Company. Each of these waivers was filed more than three years after that corporation had been legally dissolved. The first waiver was transmitted to the respondent in a letter dated December 1, 1924, on the stationery of The Newport Company and signed "NEWPORT MINING COMPANY, By: J. E. Kupperian." The waiver itself was dated December 1, 1924, was for the years1548 1918 and 1919, and was signed "Northwestern Iron Company, Taxpayer, By H. J. Schlesinger, President." It had the word "Seal" written on it with a circle around the word and a notation on the outside of the circle, "Seal Lost." As to its effective duration the waiver provided in part as follows: This waiver is in effect from the date it is signed by the taxpayer and will remain in effect for a period of one year after the expiration of the statutory period of limitation within which assessments of taxes may be made for the year or years mentioned, or the statutory period of limitation as extended by Section 277(b) of the Revenue Act of 1924, or by any waivers already on file with the Bureau. The second waiver was transmitted to the respondent in a letter dated November 23, 1925, on the stationary of The Youngstown Sheet and Tube Company and signed "THE YOUNGSTOWN SHEET AND TUBE COMPANY, J. H. Hall, Assistant Comptroller." The waiver itself was dated November 23, 1925, was for the years 1918 and 1919, and was signed "The Youngstown Sheet and Tube Company successor in interest to NORTHWESTERN IRON COMPANY, Taxpayer, By W. E. Meub, Treasurer." Affixed to this waiver was the corporate1549 seal of The Youngstown Sheet and Tube Company. The waiver was to remain in effect until December 31, 1926. The third waiver was transmitted to the respondent in a letter dated November 5, 1926, on the stationery of The Youngstown Sheet and Tube Company and signed "THE YOUNGSTOWN SHEET AND TUBE COMPANY, W. N. McDonald, Comptroller." The waiver itself was dated November 2, 1926, was for the years 1917 and 1918 and the 6-month period ended June 30, 1919, and was signed "The Mayville Iron Company successor in Interest to Northwestern Iron Company, Taxpayer, By W. E. Meub, Secretary." Affixed to this waiver was the corporate seal of The Mayville Iron Company. As to its effective duration the waiver provided in part as follows: This waiver of the time for making any assessment as aforesaid shall remain in effect until December 31, 1927, and shall then expire except that if a notice of a deficiency in tax is sent to said taxpayer by registered mail before said 1261 date and * * if an appeal is filed with said Board then said date shall be extended by the number of days between the date of mailing of said notice of deficiency and the date of final decision by said Board. 1550 49. Four so-called income and profits-tax waivers were filed on behalf of The Newport Mining Company. Each of these waivers was filed more than three years after that corporation had been legally dissolved. The first waiver was dated December 11, 1923, was for the year 1918, and was signed "THE NEWPORT MINING COMPANY, Taxpayer, By H. J. Schlesinger, Vice-President." No seal was affixed to this waiver. As to its effective duration, the waiver provided in part as follows: This waiver is in effect for one year from the date it is signed by the taxpayer and applies to said The Newport Mining Company and the affiliated companies included in the consolidated return made by The Newport Mining Company for the year 1918. The second waiver was transmitted to the respondent in a letter dated November 28, 1924, on the stationery of The Newport Company and signed "NEWPORT MINING COMPANY By: J. E. Kupperian." The waiver itself was dated November 28, 1924, was for the years 1918 and 1919 and was signed "THE NEWPORT MINING COMPANY, Taxpayer, By H. J. Schlesinger, Vice-President." Affixed to this waiver was the seal of The Newport Mining Company. The paragraph with respect to its effective1551 duration is the same as that quoted in connection with the first waiver in paragraph 48. The third waiver was transmitted to the respondent in a letter dated November 25, 1925, on the stationery of The Newport Company and signed "C. W. Westerman, Secretary." The waiver itself was dated November 20, 1925, was for the years 1918 and 1919, and was signed "Newport Mining Company, Taxpayer, by A. A. Schlesinger, President." Affixed to this waiver was the corporate seal of The Newport Mining Company. The waiver was to remain in effect until December 31, 1926. The fourth waiver was transmitted to the respondent in a letter dated November 6, 1926, on the stationery of The Newport Company and signed "A. A. Schlesinger." The waiver itself was dated November 2, 1926, was for the years 1917 and 1918 and the 6-month period ended June 30, 1919, and was signed "The Youngstown Sheet and Tube Company, By W. E. Meub, Secretary." and "The Newport Company, By A. A. Schlesinger, President. As Successors in Interest to Newport Mining Company." Affixed to this waiver were the corporate seals of each of the so-called successors in interest. The paragraph with respect to its effective duration is1552 the same as that quoted in connection with the third waiver in paragraph 48. 1262 50. Four so-called income and profits-tax waivers were filed on behalf of The Newport Chemical Works, Inc. Each of these waivers was filed more than three years after that corporation had been legally dissolved. The first waiver was transmitted to the respondent in a letter dated February 23, 1924, on the stationery of The Newport Company and signed "C. W. Westerman, Secretary." The waiver itself was undated, but bore the stamp "Received Feb. 26, 1924." It was for the year 1918 and was signed "Newport Chemical Works, Inc., Taxpayer, By H. J. Schlesinger, Vice-President." Affixed to this waiver was the corporate seal of The Newport Chemical Works, Inc. As to its effective duration the waiver provided in part as follows: This waiver is in effect from the date it is signed by the taxpayer and will remain in effect for a 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. The second waiver1553 was transmitted to the respondent in a letter dated December 1, 1924, on the stationery The Newport Company and signed "NEWPORT MINING COMPANY, By: J. E. Kupperian." The waiver itself was dated December 1, 1924, was for the years 1918 and 1919, and was signed "Newport Chemical Works, Inc., Taxpayer, by A. A. Schlesinger, President." Affixed to this waiver was the corporate seal of The Newport Chemical Works, Inc. The paragraph with respect to its effective duration is the same as that quoted in connection with the first waiver in paragraph 48. The third waiver was transmitted to the respondent in a letter dated November 25, 1925, on the stationery of The Newport Company and signed "C. W. Westerman, Secretary." The waiver itself was dated November 20, 1925, was for the years 1918 and 1919, and was signed "Newport Chemical Works, Taxpayer, By A. A. Schlesinger, President." Affixed to this waiver was the corporate seal of The Newport Chemical Works, Inc. The waiver was to remain in effect until December 31, 1926. The fourth waiver was transmitted to the respondent in a letter dated November 6, 1926, on the stationery of The Newport Company and signed "A. A. Schlesinger." The waiver1554 itself was dated November 6, 1926, was for the years 1917 and 1918 and the 6-month period ended June 30, 1919, and was signed "The Newport Company, Taxpayer, By A. A. Schlesinger, President. As successors in Interest to the Newport Chemical Works." Affixed to this waiver was the corporate seal of The Newport Company. The paragraph with respect to its effective duration is the same as that quoted in connection with the third waiver in paragraph 48. 1263 51. Four so-called income and profits-tax waivers were filed on behalf of The Newport Turpentine and Rosin Company, Inc. (the Alabama corporation). The last three of these waivers were filed more than five years after that corporation had been legally dissolved. The first waiver was transmitted to the respondent in a letter dated February 23, 1924, on the stationery of The Newport Company and signed "C. W. Westerman, Secretary." The waiver itself was undated, but bore the stamp "Received Feb. 26, 1924." It was for the year 1918 and was signed "Newport Turpentine & Rosin Co. Inc. Ala., Taxpayer, By H. J. Schlesinger, President." Affixed thereto was the corporate seal of The Newport Turpentine and Rosin Company, Inc. 1555 The paragraph with respect to its effective duration is the same as that quoted in connection with the first waiver in paragraph 50. The second waiver was transmitted to the respondent in a letter dated December 1, 1924, on the stationery of The Newport Company and signd "NEWPORT MINING COMPANY, By: J. E. Kupperian." The waiver itself was dated December 1, 1924, was for the years 1918 and 1919, and was signed "Newport Turpentine and Rosin Company, Inc., Taxpayer, By H. J. Schlesinger, President." Affixed to this waiver was the corporate seal of The Newport Turpentine and Rosin Company, Inc. The paragraph with respect to its effective duration is the same as that quoted in connection with the first waiver in paragraph 48. The third waiver was transmitted to the respondent in a letter dated November 25, 1925, on the stationery of The Newport Company and signed "C. W. Westerman, Secretary." The waiver itself was dated November 20, 1925, was for the years 1918 and 1919, and was signed "Newport Turpentine & Rosin Co. (Alabama) Taxpayer, By A. A. Schlesinger, Vice-President." Affixed to this waiver was the corporate seal of The Newport Turpentine and Rosin Company, Inc. The waiver1556 was to remain in effect until December 31, 1926. The fourth waiver was transmitted to the respondent in a letter dated November 6, 1926, on the stationery of The Newport Company and signed "A. A. Schlesinger." The waiver itself was dated November 6, 1926, was for the years 1917 and 1918 and the 6-month period ended June 30, 1919, and was signed "The Newport Company, Taxpayer, By A. A. Schlesinger, President. As successors in Interest to the Newport Turpentine & Rosin Co. Incorporated." Affixed to this waiver was the corporate seal of The Newport Company. The paragraph with respect to its effective duration is the same as that quoted in connection with the third waiver in paragraph 48. 1264 52. Four so-called income and profits-tax waivers were filed on behalf of The Newport Turpentine and Rosin Company of Florida. Each of these waivers was filed more than three years after that corporation had been legally dissolved. The first waiver was transmitted to the respondent in a letter dated February 23, 1924, on the stationery of The Newport Company and signed "C. W. Westerman, Secretary." The waiver itself was undated but bore the stamp "Received Feb. 26, 1924." It1557 was for the year 1918 and was signed "Newport Turpentine & Rosin Co. of Fla. Taxpayer, By H. J. Schlesinger, President." Affixed to this waiver was the corporate seal of The Newport Turpentine and Rosin Company of Florida. The paragraph with respect to its effective duration is the same as that quoted in connection with the first waiver in paragraph 50. The second waiver was transmitted to the respondent in a letter dated December 1, 1924, on the stationery of The Newport Company and signed "NEWPORT MINING COMPANY By: J. E. Kupperian." The waiver itself was dated December 1, 1924, was for the years 1918 and 1919, and was signed "Newport Turpentine & Rosin Company of Florida, Taxpayer, By H. J. Schlesinger, President." It had the word "Seal" written on it with a circle around the word and a notation on the outside of the circle, "Seal Destroyed." The paragraph with respect to its effective duration is the same as that quoted in connection with the first waiver in paragraph 48. The third waiver was transmitted to the respondent in a letter dated November 25, 1925, on the stationery of The Newport Company and signed "C. W. Westerman, Secretary." The waiver itself was dated November 20, 1925, was1558 for the years 1918 and 1919 and was signed "Newport Turpentine and Rosin Company (Florida) Taxpayer, By A. A. Schlesinger, Vice-President." Affixed to this waiver was the corporate seal of The Newport Company. It also had the word "Seal" written on it with a circle around the word and a notation on the outside of the circle, "Original Seal Broken. The Newport Company by C. W. Westerman, Secretary." The waiver was to remain in effect until December 31, 1926. The fourth waiver was transmitted to the respondent in a letter dated November 6, 1926, on the stationery of The Newport Company and signed "A. A. Schlesinger." The waiver itself was dated November 6, 1926, was for the years 1917 and 1918 and the 6-month period ended June 30, 1919, and was signed "The Newport Company, Taxpayer, by A. A. Schlesinger, President As successors in Interest to the Newport Turpentine & Rosin Company, Florida." Affixed to this waiver was the corporate seal of The Newport Company. The paragraph with respect to its effective duration is the 1265 same as that quoted in connection with the third waiver in paragraph 48. 53. Three so-called income and profits-tax waivers were filed on behalf1559 of The Harvest Farms Company. The first waiver was transmitted to the respondent in a letter dated December 2, 1924, on the stationery of The Youngstown Sheet and Tube Company and signed "THE YOUNGSTOWN SHEET AND TUBE COMPANY, C. H. Rose, Auditor." The waiver itself was dated December 1, 1924, was for the years 1918 and 1919, and was signed "Harvest Farms Company, Taxpayer, By W. J. Morris, Treas." Affixed to this waiver was the corporate seal of The Harvest Farms Company. The paragraph with respect to its effective duration is the same as that quoted in connection with the first waiver in paragraph 48. The second waiver was transmitted to the respondent in a letter dated November 23, 1925, on the stationery of The Youngstown Sheet and Tube Company and signed "THE YOUNGSTOWN SHEET AND TUBE COMPANY, J. H. Hall, Assistant Comptroller." The waiver itself was dated November 23, 1925, was for the years 1918 and 1919, and was signed "HARVEST FARMS COMPANY, Taxpayer, By W. E. Meub, Assistant Treasurer." Affixed to this waiver was the corporate seal of The Harvest Farms Company. The waiver was to remain in effect until December 31, 1926. The third waiver was transmitted to the respondent1560 in a letter dated November 5, 1926, on the stationery of The Youngstown Sheet and Tube Company and signed "THE YOUNGSTOWN SHEET AND TUBE COMPANY, W. N. McDonald, Comptroller." The waiver itself was dated November 2, 1926, was for the years 1917 and 1918 and the 6-month period ended June 30, 1919, and was signed "The Mayville Iron Company Successor in Interest to Harvest Farms Company, Taxpayer, By W. E. Meub, Secretary." Affixed to this waiver was the corporate seal of The Harvest Farms. The paragraph with respect to its effective duration is the same as that quoted in connection with the third waiver in paragraph 48. 54. Five so-called income and profits-tax waivers were filed on behalf of The Dunn Iron Mining Company. The first waiver was dated February 15, 1924, was for the year 1918, and was signed "Dunn Iron Mining Company, Taxpayer, By W. J. Morris, Treas." Affixed to this waiver was the corporate seal of The Dunn Iron Mining Company. The paragraph with respect to its effective duration is the same as that quoted in connection with the first waiver in paragraph 50. The second waiver was transmitted to the respondent in a letter dated December 2, 1924, on the stationery1561 of The Youngstown Sheet and Tube Company and signed "THE YOUNGSTOWN SHEET AND TUBE 1266 COMPANY, C. H. Rose, Auditor." The waiver itself was dated December 1, 1924, was for the years 1918 and 1919, and was signed "Dunn Iron Mining Company, Taxpayer, By W. J. Morris, Treas." Affixed to this waiver was the corporate seal of The Dunn Iron Mining Company. The paragraph with respect to its effective duration is the same as that quoted in connection with the first waiver in paragraph 48. The third waiver was transmitted to the respondent in a letter dated October 3, 1925, on the stationery of Price, Waterhouse and Company and signed "Price, Waterhouse & Co." The waiver itself was dated September 29, 1925, was for the year 1919, and was signed "Dunn Iron Mining Company, Taxpayer, By W. J. Morris, Treasurer." Affixed to this waiver was a corporate seal. The waiver was to remain in effect until December 31, 1926. The fourth waiver was transmitted to the respondent in a letter dated November 23, 1925, on the stationery of The Youngstown Sheet and Tube Company and signed "THE YOUNGSTOWN SHEET AND TUBE COMPANY, J. H. Hall, Assistant Comptroller." The waiver itself was dated November 23, 1925, was1562 for the years 1918 and 1919, and was signed "DUNN IRON MINING COMPANY, Taxpayer, By W. E. Meub, Assistant Treasurer." Affixed to this waiver was the corporate seal of The Dunn Iron Mining Company. The waiver was to remain in effect until December 31, 1926. The fifth waiver was transmitted to the respondent in a letter dated November 5, 1926, on the stationery of The Youngstown Sheet and Tube Company and signed "THE YOUNGSTOWN SHEET AND TUBE COMPANY, W. N. McDonald, Comptroller." The waiver itself was dated November 2, 1926, was for the years 1917 and 1918 and the 6-month period ended June 30, 1919, and was signed "The Youngstown Sheet and Tube Company Successor in Interest to Dunn Iron Mining Company, Taxpayer, By W. E. Meub, Secretary." Affixed to this waiver was the corporate seal of The Youngstown Sheet and Tube Company. The paragraph with respect to its effective duration is the same as that quoted in connection with the third waiver in paragraph 48. 55. One so-called income and profits-tax waiver filed on behalf of The Steel and Tube Company of America. This waiver was transmitted to the respondent in a letter dated October 3, 1925, on the stationery of Price, Waterhouse1563 and Company and signed "Price, Waterhouse & Co." The waiver itself was dated September 29, 1925, was for the years 1918 and 1919, and was signed "The Youngstown Sheet and Tube Company Successors in Interest to The Steel and Tube Company of America, Taxpayer, By W. J. Morris, Vice-president." 1267 56. Each of the aforesaid waivers, with the one exception of the first waiver mentioned in paragraph 49, contained the following paragraph inserted after the signatures at the bottom of the waiver: 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, he seal, if any, of the corporation must be affixed. 57. All of the aforegoing so-called waivers were signed in accordance with requests received from the Bureau of Internal Revenue. 58. On or about April 14, 1920, The Newport Company filed with the Bureau of Internal Revenue an "Affiliated Corporations Questionnaire." Among other things this report stated in connection with The Newport Turpentine & Rosin Company, Inc., and The1564 Newport Turpentine & Rosin Company of Florida that "These companies have been dissolved and the stock cancelled." It also reported "Company in process of dissolution - Stock cancelled" with respect to The Newport Mining Company, The Newport Chemical Works, Inc., The Newport Turpentine & Rosin Company, Inc., and The Newport Turpentine & Rosin Company of Florida. 59. On August 10, 1921, "E. H. BATSON, Deputy Commissioner by L. E. Rush, Acting Chief of Subdivision," addressed a letter to "The Newport Company," which is quoted in part as follows: It is noted that on pages 10 and 11 of the questionnaire certain companies are referred to as being in process of dissolution and cancellation of stock, as follows: The Newport Mining Company, Newport Chemical Works, Inc., MaineNewport Turpentine and Rosin Company, Inc.Newport Turpentine and Rosin Company, of Florida. * * You are requested to give the exact dates on which the respective charters of the above-named companies were surrendered to the State for cancellation. 60. On August 26, 1921, The Newport Company addressed a letter to the respondent, the contents of which are as follows: In reply to your letter of1565 August 10th we beg to enclose herewith the data called for in affidavit form. Should the matters which you had in mind when writing not be fully covered hereby, please advise us and we will supplement it as desired. 61. The affidavit referred to in the proceding paragraph reads in part as follows: * * that the dates upon which said companies were dissolved by decree of the appropriate court or by certificate issued by the appropriate administrative officer are as follows: Newport Chemical Works, Inc. (Maine), March 1, 1929, Newport Chemical Works, Inc. (Maine), March 1, 1920. 1268 Newport Turpentine & Rosin Co., Inc., October 1, 1919, Newport Turpentine & Rosin Co. of Fla., September 13, 1919. That all of the aforesaid corporations were in process of dissolution from and after July 30, 1919, the interval between said date and the actual date of the decree or certificate aforesaid being necessary to accomplish transfers of property and legal formalities in connection with the dissolution * . 62. On page 3 of the letter dated June 17, 1922 (referred to in paragraph 46 above), the respondent notified The Newport Company that The Newport Mining Company1566 was not affiliated with any company "from July 1, 1919, to date of dissolution March 1, 1920," and, that it should, therefore, file a separate return for that year. (Italics supplied.) 63. On July 27, 1922, The Newport Company addressed a letter to the respondent in reply to the latter's letter dated June 17, 1922 (referred to in paragraph 62 above), the second paragraph of which reads as follows: Newport Chemical Works, Inc. (Maine) to date of dissolution, March 1st, 1920, has not been included in the return for 1920 for the reason that this Company transacted no business whatsoever during the year. We have, however, filed a separate return and forwarded same to the Collector of Internal Revenue, Milwaukee, under date of March 8th, 1921, and mentioned at that time that the Company did not operate during the year and no net income was earned. 64. On July 22, 1920, the respondent was notified in an affiliated corporations questionnaire of The Steel and Tube Company of America for the year 1919 that The Northwestern Iron Company was dissolved during the year 1919 and that its assets and business transactions were included with those of The Steel and Tube Company of America. 1567 65. On March 8, 1921, the Newport Mining Company addressed a letter to the collector of internal revenue, Milwaukee, Wisconsin, the contents of which are as follows: We are enclosing herewith form No. 1120 Corporation Income and Profits Tax Returns for the year 1920 for The Newport Mining Company. You will note that the Company did not operate during the year and hence no net income earned. You will further note that the Company's affairs have been wound up and the Company legally dissolved. The return was stamped as being received in the collector's office on March 9, 1921, and written across the face of the return were these words in red ink: "Not active. Dissolved Mar. 1, 1920. Transacted no business whatsoever during the year." Similar letters dated March 8, 1921, were mailed to the collector at Milwaukee by The Newport Chemical Works, Inc., The Newport Turpentine & Rosin Co., Inc., The Newport Turpentine & Rosin Company of Florida, and The Northwestern Iron Company. Similar notices were 1269 made in red ink on the returns of The Newport Chemical Works, Inc., showing it dissolved on March 1, 1920; The Newport Turpentine & Rosin Company, Inc., showing it1568 dissolved on October 1, 1919; The Newport Turpentine & Rosin Company of Florida, showing it dissolved on September 13, 1919; and The Northwestern Iron Company, showing it dissolved on October 21, 1919. 66. On or about December 12, 1919, a claim for abatement of taxes erroneously or illegally assessed was filed by "The Newport Mining Co., and subsidiary and affiliated Companies" for the year 1918 and was signed "THE NEWPORT MINING CO. by H. H. Springford, Secretary." On or about January 30, 1920, a claim for refund of income and profits and war taxes for the year 1918 was filed by "THE NEWPORT MINING COMPANY" and signed "THE NEWPORT MINING COMPANY By Edward G. Wilmer, Vice-Pres." On or about March 16, 1922, a claim for refund of taxes illegally collected for the year 1918 was filed with the collector of internal revenue in Wisconsin for "The Newport Co. for itself and The Steel & Tube Co. of America - Successors to The Newport Co." This claim was signed "The Newport Company by A. A. Schlesinger, President - Attest Frederick R. Wahl, Secretary." On or about March 25, 1923, "The Newport Co. and The Steel & Tube Co. of America - Successors to The Newport Mining Co. and Subsidiary and1569 Affiliated Companies" filed with the collector of internal revenue for the district of Wisconsin a claim for refund of taxes illegally collected for the calendar year 1918. A "rider" was attached to this claim which, among other things, stated that the said claim was based on an additional deduction for amortization of war facilities as follows: Name of company19181919The Newport Chemical Works, Inc$857,104.15None.Northwestern Iron Company582,447.33$111,383.21The Newport Mining Company172,726.2524,472.134 corporations (not here material)1,646,228.9457,651.40Total amortization claimed3,258,506.67193,506.74On or about March 31, 1927, claims for refund for the calendar year 1919 were filed by (1) "The Newport Co., For Itself, and/or Subsidiary and/or Affiliated Companies"; (2) "The Steel & Tube Co. of America as successor - The Newport Company as successor - and Newport Mining Company for itself"; (3) "The Newport Company as successor and Newport Chemical Works, Inc. Me. for itself"; (4) "The Newport Company, as successor and Newport Turpentine & Rosin Co., (Ala.) for itself," and (5) "The Newport Company as successor and Newport1570 Turpentine & Rosin Company, Fla. for itself." 1270 OPINION. LOVE: The only question in these proceedings to be decided at this time is that involving the statute of limitations. The notices which form the bases for the petitions filed herein propose to assess certain liabilities against petitioners as transferees under the provisions of section 280 of the Revenue Act of 1926. Subdivision (b) of this section provides in part as follows: The period of limitation for assessment of any such liability of a transferee or fiduciary shall be as follows: (1) Within one year after the expiration of the period of limitation for assessment against the taxpayer * * . The period of limitation for assessment against each taxpayer involved in these proceedings is within five years after the return was filed (sec. 250(d), 1918 and 1921 Acts; sec. 277(a)(2), 1924 Act; sec. 277(a)(3), 1926 Act) unless both the Commissioner and the taxpayer should consent in writing to a later assessment (sec. 250(d), 1921 Act; sec. 278(c) 1924 and 1926 Acts), in which event the tax could be assessed at any time prior to the expiration of the period agreed upon, unless, further, the Commissioner1571 should post a notice of deficiency by registered mail either within the five-year period or the extended period from which an appeal is filed with the Board, in which event "The period within which an assessment is required to be made * * * shall be extended * * * by the number of days between the date of the mailing of such notice and the date of the final decision by the Board." Sec. 277(b), 1924 Act. See also sections 274(a) and 277(b) of the Revenue Act of 1926. If, however, the period of limitation for assessment against the taxpayer expired before the passage of the Revenue Act of 1926, then section 280(b)(1), supra, is not applicable. Caroline J. Shaw, Executrix,21 B.T.A. 400">21 B.T.A. 400; and Barron-Anderson Co.,17 B.T.A. 686">17 B.T.A. 686, cited therein. The petitioners contend that, with but three exceptions mentioned below, all of the "consents in writing" hereinafter referred to as "waivers" were filed with the respondent at his request after the particular corporation taxpayer for which they were filed had been dissolved, which fact was known to the respondent, and after the time provided for by the laws of the corporation's domicile for winding1572 up its affairs had expired; that waivers filed under such circumstances could have no legal effect whatever; that the notices had been mailed to petitioners more than six years after the return for each of the said taxpayers had been filed; and that the period for making any assessment against either the taxpayer or the alleged transferee under the above cited statutes had, therefore, expired at the time the said notices were mailed. 1271 The three exceptions referred to in the preceding paragraph pertain to (1) The Dunn Iron Mining Company, (2) The Harvest Farms Company, and (3) The Newport Turpentine & Rosin Company, Inc. (Alabama). Petitioners concede that since The Dunn Iron Mining Company was not dissolved, the waivers given on behalf of that corporation were valid, and that, therefore, at the time the said deficiency notices were mailed the period for making any assessment against that corporation had not expired. The situation is the same with respect to The Harvest Farms Company although petitioners do not expressly concede it in their briefs. The exception as to The Newport Turpentine & Rosin Company, Inc., is found in paragraph 51 of our findings, wherein we1573 find that the first of four waivers was filed after that corporation had been legally dissolved but before the five-year period for winding up its affairs under the laws of Alabama had expired. This exception, as will appear later, becomes immaterial. The respondent contends that the notices, which form the bases for the petitions filed herein were mailed within the period of limitations provided by the above cited statutes, and in support thereof relies upon the following thirteen points: (1) That statutes of limitations should be strictly construed, and all doubts, if any, should be resolved in favor of the Government; (2) That the effect of the various successorships under the several contracts and agreements should be determined according to the rules of Federal equity jurisprudence, and that under such rules there resulted from the transactions aforesaid, with respect to the powers, duties, liabilities, etc., of petitioners, and their officers and agents, "a merger or successorship in interest, rather than the status of an assignee of the rights, privileges, and interests of the former companies"; (3) That by reason of the said mergers and/or successorships, petitioners, 1574 although proceeded against as transferees, are, nevertheless, "taxpayers" as that term is defined in section 1 of the Revenue Acts of 1918 and 1921, and, therefore, all waivers signed by either or both petitionners as successors in interest are valid; (4) That no special form of waiver is required under the statute and that a waiver signed by either or both petitioners as "Successor in Interest," but executed in the name of the dissolved corporation would be sufficient; (5) That the dissolution proceedings of the several corporations in the several States were but mere formalities in the perfection of the said mergers and/or successorships in interest, and that since the predecessor companies had been divested of all their properties they were no longer in any position to respond and petitioners were 1272 the only entities from which any unpaid taxes could have been collected; (6) That statutes of the state of origin and the general rules applicable to dissolved corporations in the respective states of origin can not be held to restrict the rights given to creditors under Wisconsin statutes as to foreign corporations which had been dissolved while doing business in Wisconsin1575 (not applicable to Docket No. 28149); (7) That foreign corporations doing business in Wisconsin which were legally dissolved in the state of their incorporation, nevertheless, continued as corporations de facto in Wisconsin and that their business was thereafter operaed in unbroken sequence by their successors in interest (Not applicable to Docket No. 28149); (8) That even if point (7) is not true, petitioners, through their officers and agents, having been responsible for and party privy to the execution of the waivers executed for each of their predecessor companies in their respective corporate names, and under their respective corporate seals, for the purpose of obtaining further consideration of their protests and claims by the respondent, for their benefit, may not now be heard to say that the waivers given as aforesaid were executed without authority; (9) That petitioners are bound by the waivers given under the law of implied agency and implied warranty of the authority of those who executed the respective waivers at petitioners' instance and under their direction, "in the absence of a showing that it (petitioners) made a full and complete disclosure - of all the1576 material facts and circumstances" which might affect their validity; (10) That the taxes imposed upon all of the corporations herein involved except The Dunn Iron Mining Company may be assessed and collected at any time under the provisions of section 278(b) of the Revenue Act of 1926; (11) That the returns mentioned in our findings 42 to 45, inclusive, were not "the returns" required by law, and were not, therefore, sufficient to start the running of the statute of limitations; (12) That a transferee of a transferee is liable for taxes imposed upon the transferor which had accrued when the first transfer was made; and (13) That an assignee of the rights of a transferee, which receives a conveyance of property as the nominee of the transferee under the contract of purchase, is not itself a transferee. In regard to the first point relied upon the respondent, it seems only necessary to quote the language of the Supreme Court in the case of United States v. Updike,281 U.S. 489">281 U.S. 489, as follows: 1273 * * * In any event, we think this is the fair interpretation of the clause, and the one which must be accepted, especially in view of the rule which1577 requires taxing acts, including provisions of limitation embodied therein, to be construed liberally in favor of the taxpayer. Bowers v. N.Y. & Albany Co.,273 U.S. 346">273 U.S. 346, 349, 47 S. Ct. 389">47 S.Ct. 389, 71 L. Ed. 676">71 L.Ed. 676. The above-mentioned points (2) to (9) inclusive, are substantially the same as were argued by the respondent in a prior proceeding entitled The Newport Company,22 B.T.A. 833">22 B.T.A. 833, which dealt with two of the corporations herein involved, except for an earlier year. The same counsel appear in both proceedings. In the earlier proceeding the respondent proposed to assess against The Newport Company as transferee a liability for a deficiency in income and excess-profits taxes of The Newport Chemical Works, Inc., for the year 1917. The petitioner resisted on the ground that the statute of limitations for making any such assessment had expired and advanced the same arguments in support thereof as have been made in the instant proceedings. A brief summary of the salient facts in the earlier proceeding will show the similarity of the questions involved there and here. All the general facts found in the instant proceedings pertaining to The Newport1578 Chemical Works, Inc., and The Newport Company relating to such matters as 1919 reorganization transactions, dissolutions, notices to respondent of dissolutions, etc., are the same in both cases. On April 1, 1918, The Newport Chemical Works, Inc., originally filed separate income and excess-profits-tax returns for the year 1917. The respondent later determined that it was affiliated with The Newport Mining Company for that year for excess-profits-tax purposes only. Six waivers were filed on behalf of The Newport Chemical Works, Inc., for 1917, the last five of which were filed after that corporation had been legally dissolved for more than three years. The first waiver was executed on December 15, 1920, was signed "Newport Chemical Works, Incorporated by Edw. G. Wilmer, Vice-President," and expired, in accordance with respondent's Mimeograph 3085, on April 1, 1924. The second waiver was executed on December 11, 1923, on behalf of "The Newport Mining Company and affiliated companies" and was signed "The Newport Mining Company Taxpayer By H. J. Schlesinger Vice-President." The next three waivers were executed on or about February 26, 1924, December 23, 1924, and January 12, 1926, respectively, 1579 and were all signed "Newport Chemical Works, Inc., Taxpayer by H. J. Schlesinger Vice-President." The sixth waiver was executed on November 6, 1926, on behalf of the "Newport Chemical Works, a taxpayer of Milwaukee, Wisconsin," and was signed "The Newport Company 1274 Taxpayer By A. A. Schlesinger, President As successors in Interest to the Newport Chemical Works." The transferee liability notice was mailed to The Newport Company on March 14, 1927. We decided for the petitioner in the earlier proceeding and held, among other things, that he last five waivers were invalid, as far as The Newport Chemical Works, Inc., was concerned, because executed more than three years after that corporation had been legally dissolved and had ceased to exist for all purposes, and that the statute of limitations for assessing any tax against eiher that corporation or The Newport Company expired on April 1, 1924. We know of no valid reason why our decision in the instant proceedings, as far as respondent's points (2) to (9), inclusive, are concerned, should not be the same as it was in the earlier one, and we, therefore, pass on to the consideration of the remaining four points. See also1580 Barron-Anderson Co., supra; petition for review dismissed September 16, 1930; Farmers & Planters Tobacco Warehouse Co.,22 B.T.A. 1331">22 B.T.A. 1331; and Continental Oil Co.,23 B.T.A. 311">23 B.T.A. 311, 327. The tenth point relied upon by the respondent is that when he disallowed the deduction for amortization of war facilities claimed by certain of the corporations on their original returns, that part of the deficiencies which result from such disallowance is "attributable to a charge in a deduction tentatively allowed under * * paragraph (8) of subdivision (a) of section 234, of the Revenue Act of 1918" and, under section 278(b) of the Revenue Act of 1926 just quoted, "may be assessed * * * at any time." He argues that the acceptance of the returns and the original assessments thereon and the acceptance of the payment of the tax as shown by the returns was a "tentative" allowance of the deductions there claimed within the meaning of the words "tentatively allowed" as used in section 278(b), supra. We have decided this contention adversely to the respondent in the cases of 1581 W. G. Duncan Coal Co.,13 B.T.A. 672">13 B.T.A. 672; and Ohio Falls Dye & Finishing Works,16 B.T.A. 1038">16 B.T.A. 1038; affirmed by the Sixth Circuit at 50 Fed.(2d) 660. The eleventh point relied upon by the respondent is that the returns mentioned in our findings at paragraphs 42 to 45, inclusive, were not such returns as would start the statute of limitations running as to any of the transferors involved herein for the 6-month period ending June 30, 1919. As shown in our preliminary statement, the only transferors against whom the respondent has determined deficiencies for his period are The Northwestern Iron Company, The Dunn Iron Mining Company, and The Newport Chemical Works, Inc. Since petitioners concede that the statute has not run (on account of valid waivers being given) as to The Dunn Iron 1275 Mining Company, we need only consider this point as it affects the other two transferors. The facts pertaining to The Northwestern Iron Company on this point are set out in full in our findings at paragraphs 44 to 47, inclusive, and those pertaining to The Newport Chemical Works, Inc., at paragraphs 42, 43, 46 and 47. 1582 It is the respondent's contention that since neither of these transferors was affiliated with either The Steel and Tube Company of America or The Newport Company for the first six months of 1919, the inclusion by them of their income and invested capital in the consolidated returns of the latter was erroneous, and that the statute of limitations for making any assessment against such transferors could not commence to run until the return mentioned in paragraph 47 was filed. This contention has been presented before this Board and the Circuit Courts many times and it is now well established that where several corporations in good faith file a consolidated return in which the separate gross income and deductions of each corporation are reported, the filing of such return is such a substantial compliance with the statute relating to the filing of returns as will start the statute of limitations running with respect to each corporation included therein, although it later be determined that one or more of such corporations were not affiliated with the other or others. 1583 F. A. Hall Co., Inc.,3 B.T.A. 1172">3 B.T.A. 1172; Matteawan Manufacturing Co.,4 B.T.A. 953">4 B.T.A. 953; Kellog Commission Co.,6 B.T.A. 771">6 B.T.A. 771; Fibre Container Co.,9 B.T.A. 575">9 B.T.A. 575; Stetson & Ellison,11 B.T.A. 397">11 B.T.A. 397, affd., 43 Fed.(2d) 553; Matteawan Manufacturing Co.,14 B.T.A. 789">14 B.T.A. 789; Converse Cooperage Co.,17 B.T.A. 1285">17 B.T.A. 1285; and Continental Oil Co., supra.If, however, the gross income and deductions of each corporation are not separately disclosed in the consolidated return, the Fifth Circuit has ruled otherwise, in United States v. National Tank & Export Co., 45 Fed.(2d) 1005; certiorari denied, 283 U.S. 839">283 U.S. 839; and Lucas v. Colmer-Green Lumber Co., 49 Fed.(2d) 234. Cf. also Paso Robles Mercantile Co. v. Commissioner, 33 Fed.(2d) 653; Myles Salt Co. v. Commissioner, 49 Fed.(2d) 232; Goldman v. Commissioner, 51 Fed.(2d) 427; and 1584 Valentine-Clark Co. v. Commissioner, 52 Fed.(2d) 346. The respondent, in support of his contention that the statute did not commence to run until the return mentioned in paragraph 47 was filed, has cited Pilliod Lumber Co.,281 U.S. 245">281 U.S. 245; Norwich Woolen Mills Corp.,18 B.T.A. 303">18 B.T.A. 303; Sweets Co. of America,12 B.T.A. 1285">12 B.T.A. 1285; Green River Distilling Co.,16 B.T.A. 395">16 B.T.A. 395; Fidelity National Bank & Trust Co. v. Commissioner, 39 Fed.(2d) 58; and Lucas v. St. Louis National Baseball Club, 42 Fed.(2d) 984. 1276 The question in the first case just cited was whether the filing of an unsigned and unsworn return would start the statute running where section 239 of the Revenue Act of 1918 specifically provided that "The return shall be sworn to by the president, vice president, or other principal officer and by the treasurer or assistant treasurer." The Supreme Court held in the negative. But this question is not involved in the instant proceedings, as all the returns in question met this requirement of the statute. The second case cited by the respondent is not1585 in point, for the reason that the petitioner there was contending that a return filed by a corporation for the 9-month period ending December 31, 1920, should, nevertheless, be considered a return for 12 months ending March 31, 1921, in order that the statute might start to run from the date of the filing of such return as to income earned between January 1, 1921, and March 7, 1921, when the corporation was dissolved. The other four cases cited by the respondent do not involve the question of whether the return filed in those cases was such a return as would start the statute running, and, therefore, need not be further considered. As stated in our findings, the gross income and deductions of The Northwestern Iron Company and The Newport Chemical Works, Inc., were fully reported in considerable detail in the consolidated returns of The Steel and Tube Company of America and The Newport Company, respectively, and, in view of what we have said above, we hold that the statute of limitations for making any assessment against such transferors started to run when the consolidated returns mentioned in paragraphs 42 to 45, inclusive, were filed. The last two points relied upon by the1586 respondent concern principally the determination whether The Youngstown Sheet and Tube Company or The Mayville Iron Company is the final transferee of the assets of The Northwestern Iron Company. As recited in our preliminary statement, the questions to be decided at this time were, by motion duly made and granted, limited to those arising under the statute of limitations. In view of our holding on the question of the statute of limitations respecting the deficiencies determined against The Northwestern Iron Company, we do not deem it necessary to further discuss these points even if they were, at this time, properly before us. Applying the principles discussed above to the essential facts set out in our findings, we hold that the assessment of any taxes against the several transferors was or was not barred by the statute of limitations on the respective dates that the transferee notices were mailed to petitioners as set forth in the schedule below: (Table omitted) 1277 There is no evidence that any of the deficiencies shown in column (3) above were ever assessed against any of the said transferors, and since, as shown in column (10) above, the period within which1587 an assessment of any taxes against any of the said transferors (except The Dunn Iron Mining Company and The Harvest Farms Company) expired prior to the passage of the Revenue Act of 1926, the assessment and collection of the proposed liabilities for such taxes against petitioners as transferees are also barred. Caroline J. Shaw, Executrix, supra.The period within which an assessment could be made against The Harvest Farms Company did not expire until after the passage of the Revenue Act of 1926, and, therefore, the extra year provided for in section 280(b)(1), supra, of the Revenue Act of 1926 is applicable. Louis Costanzo,16 B.T.A. 1294">16 B.T.A. 1294; J. A. Kemp,20 B.T.A. 875">20 B.T.A. 875. The respondent, therefore, had until December 31, 1927, to notify a transferee of its liability for unpaid taxes of this corporation. Petitioners were notified on December 29, 1927, and, therefore, if they are liable as transferees, the notices to them were timely. We, therefore, hold that the assessment and collection of all of the proposed liabilities against petitioners are barred by the statute of limitations except those relating to The Dunn Iron Mining1588 Company 1278 (which petitioners have conceded are not barred provided they are liable as transferees) and The Harvest Farms Company. Reviewed by the Board. Further proceedings may be had upon the remaining issues contained in the pleadings.SMITH SMITH, dissenting: In holding that our decision in The Newport Co.,22 B.T.A. 833">22 B.T.A. 833, controlled the issue presented by these proceedings, I believe that the prevailing opinion ignores certain salient facts involved herein. I do not agree with the holding that the petitioners' liabilities were barred by the statute of limitations. The facts set forth in paragraph nine of our findings show that the transferees assumed all liabilities of the transferors. Thereafter, the parties concerned treated the tax questions as matters to be settled by the transferees (see p. 11, et seq ). The transferees became, by succession, the "taxpayers." See Routzahn v. Tyroler, 36 Fed.(2d) 208. In United States v. Updike,281 U.S. 489">281 U.S. 489; 1589 50 Sup.Ct. 367, 369, the Supreme Court said: * * Indeed, when used to connote payment of a tax, it puts no undue strain upon the word "taxpayer" to bring within its meaning that person whose property, being impressed with a trust to that end, is subjected to the burden. Certainly it would be hard to convince such a person that he had not paid a tax. In this view of the case, the transferees as taxpayers executed waivers which, under Stange v. United States,282 U.S. 270">282 U.S. 270; 51 Sup.Ct. 145, I consider sufficient to prevent the bar of the statute of limitations. In this case, we may disregard those waivers executed in the name of the dissolved corporations, and consider only those waivers executed by either petitioner as "successor in interest." The parties to these waivers benefited by the determinations and deliberations thereunder, and, without advancing any thought as to an equitable estoppel (but see Lucas v. Hunt, 45 Fed.(2d) 781), I believe that they were valid waivers. In the Stange case, where as here the tax liability was barred prior to the execution of the waivers, the Supreme Court said: 1590 * * That the parties at the time may have believed that collection was possible independent of any waiver, does not make less effective the instrument given for the purpose of tolling the limitation on the ultimate determination and collection of the tax. It must be assumed that an effective and not a futile act was intended.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622328/	HALLET E. WATSON and NANCY J. WATSON, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentWatson v. CommissionerDocket No. 12117-77.United States Tax CourtT.C. Memo 1979-192; 1979 Tax Ct. Memo LEXIS 330; 38 T.C.M. (CCH) 810; T.C.M. (RIA) 79192; May 17, 1979, Filed Hallet E. Watson, pro se. Ruth E. Salek, for the respondent. DAWSONMEMORANDUM FINDINGS OF FACT AND OPINION DAWSON, Judge: This case was assigned to and heard by Special Trial Judge Lehman C. Aarons, pursuant to the331 provisions of section 7456(c) of the Internal Revenue Code of 1954, 1 as amended, and General Order No. 6 of this Court, 69 T.C. XV. 2 The Court agrees with and adopts the Special Trial Judge's opinion which is set forth below. OPINION OF SPECIAL TRIAL JUDGE AARONS, Special Trial Judge: Respondent determined deficiencies in petitioners' federal income tax for 1973 and 1974 in the respective amounts of $836 and $382. With respect to 1973, petitioners filed a claim for refund (which was disallowed by respondent) and which was made a part of the petition herein. All issues raised by the pleadings have been conceded by petitioners with the exception of certain bad debts claimed, under section 166(a)(1) of the Code, as business bad debrs by the petitioners in their refund claim for 1973 and in their returns as a "miscellaneous deduction" for 1974. Respondent332 concedes that the debts in question became worthless in the respective years, but maintains that they constituted nonbusiness bad debts. That is the only issue in this case. FINDINGS OF FACT Some of the facts are stipulated and are found accordingly. At the time of filing their petition the petitioners resided in South Gate, California. Since Nancy J. Watson is a petitioner herein only by virtue of having filed joint returns with her husband, the word "petitioner," as used herein in the singular, refers to Hallet E. Watson. In or about the year 1956 petitioner organized V and W Aircraft Castings, Inc. (V and W), a California corporation which operated an aluminum foundry. In December 1968 petitioner sold all the stock of V and W to Stellar Industries, Inc. (Stellar) for a total purchase price of approximately $370,000. The sales proceeds to petitioner, after a down payment of approximately 30%, were evidenced by a promissory note in the amount of $263,729.50. In the taxable years at issue a balance of approximately $160,000 remained due under a new note which, in 1970, had been substituted for the original promissory note. From the time of the sale of stock in 1968333 through the taxable years at issue petitioner was president of V and W and devoted his full time to that position. His salary was $27,035 in 1973 and $28,656 in 1974. Petitioner's employment agreement with V and W was for an original term ending October 31, 1971, and continuing thereafter, subject to termination by either party on 30 days notice. In March 1973 Stellar sold the V and W stock to Aeroceanic Corporation. Stellar had immediate problems thereafter in collecting the proceeds of that sale and in meeting the terms of its purchase obligation with petitioner. The sale to Aeroceanic was viewed with some alarm by V and W's creditors--in particular, the suppliers of the casting patters--and those creditors looked primarily to the credibility of petitioner for assurance in continuing to do business with V and W and in forbearing pursuit of their claims as creditors. In December 1969 petitioner had organized Jack A. Bennett Laboratories, Inc., a dental laboratory, hereinbelow referred to as Labs. Although petitioner's stock investment in Labs was small, he invested over $100,000 in Labs' equipment and plumbing and in loans to that corporation. Labs' business commenced334 to go downhill, and in July 1972 petitioner sold all the outstanding Labs stock to one Steve Martin for a small fraction of petitioner's loans and capital contributions to Labs. In August 1972 petitioner loaned $4000 to Labs in an effort to save the failing business. Petitioner was guarantor of the debts of Labs to Bank of America and paid Bank of America $41,568.09 on account of such guarantee in 1973. Petitioner was also primarily liable for lease obligations of Labs, and in 1973 he paid $1049.50 to the lessor of the laboratory premises and $245.45 to an automobile leasing company in satisfaction of such liability. In February 1974 petitioner paid $1500 to Travelers Insurance Company, on behalf of Labs, pursuant to a California State Board of Equalizaiton sales tax bond. In September 1972 Labs and its new owners were forced into involuntary bankruptcy, and all their potential indebtedness to petitioner by virtue of any payments he would be required to make under his guarantees or direct liabilities became worthless. The above payments which petitioner was called upon to make on Labs' behalf were made by him for the purpose of preserving his credit status and his business335 reputation. Had petitioner asserted legal defenses against, or otherwise resisted such payments, the suppliers and creditors of V and W might well have lost confidence in him and might have ceased doing business with V and W. If that had occurred, V and W's credit position would have been adversely affected, and the collectibility of the balance of the Stellar note, evidencing the sales price of petitioner's stock, would have been jeopardized. The continuance of petitioner's employment with V and W was a minor consideration in this picture. Petitioner's dominant motivation was maintaining the viability of V W until he could collect the balance due on the sale of his stock to Stellar. OPINION Even if we were to acknowledge fully the validity of petitioner's cause-and-effect rationale for the payments on Labs' behalf, there is simply no basis for treating these debts (which respondent concedes as worthless debts in the years claimed by petitioner) as anything other than nonbusiness bad debts. The path to this conclusion has been delineated clearly by the United States Supreme Court. Under Putnam v. Commissioner,352 U.S. 82">352 U.S. 82 (1956), a guarantor's loss on a336 payment under his guaranty, which gives him a right by subrogation against a principal debtor who is insolvent, becomes a worthless bad debt and is not deductible under any other section of the Code. The bad debt is deductible in full under section 166(a)(1) if it is a business bad debt. It is deductible as a short term capital loss under section 166(d) if it is a nonbusiness bad debt. Section 166(d)(2) defines "nonbusiness debt" as a debt other than one created or acquired in connection with the taxpayer's trade or business, or other than one the loss from the worthlessness of which is incurred in the taxpayer's trade or business. The Supreme Court in Whipple v. Commissioner,373 U.S. 193">373 U.S. 193 (1963), made clear that the devoting of time and energy to the affairs of a corporation in order to obtain income or gain from an investment is not a trade or business for purposes of the 1939 Code predecessor of section 166. Under Whipple, a taxpayer who seeks to deduct as a business bad debt his worthless debts from a corporation (in that case a controlled corporation) must demonstrate that he was seeking more than an investor's return in making the loans or advances which337 eventuated in the worthless debt. And the Court further held in Whipple that the fact that the taxpayer furnished management and other services to the corporation which he organized did not automatically convert his bad debts into business bad debts. Finally, in United States v. Generes,405 U.S. 93">405 U.S. 93, (1972), the Supreme Court held that an individual who is both an investor and an employee who advances funds to his corporation can deduct the amount of the debt as a business bad debt only if his "dominant motivation" was to protect his trade or business (i.e. his employment) rather than his investment. Petitioner herein negated the protection of his position as president of V and W as his dominant motivation. Even had he asserted that he was thus dominantly motivated, the disparity in the amounts of his salary (around $28,000) and his investment stake in V and W (around $160,000), coupled with the month-to-month term of his employment, would have negated such contention. Applying the measure prescribed for us in Generes, we conclude that petitioner's dominant motivation in paying (either as guarantor or as direct obligor) the debts of Labs was an investor's338 motivation (i.e. collecting the proceeds of his sale of the V and W stock) and not a trade or business motivation within the meaning of section 166 of the Code. 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 noted. ↩2. Pursuant to General Order No. 6 dated March 8, 1978, the post-trial procedures set forth in Rule 182 of this Court's Rules of Practice and Procedure are not applicable to this case.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622329/	James C. Williamson v. Commissioner.Williamson v. CommissionerDocket No. 21081.United States Tax Court1949 Tax Ct. Memo LEXIS 30; 8 T.C.M. (CCH) 1001; T.C.M. (RIA) 49272; November 28, 194930 Harry C. Blanton, Esq., Sikeston, Mo., for the petitioner. George E. Gibson, Esq., for the respondent. JOHNSON Memorandum Findings of Fact and Opinion JOHNSON, Judge: Respondent determined deficiencies in income tax for the calendar years 1945 and 1946 in the respective amounts of $1,347.53 and $8,103.34. The sole question at issue is whether respondent erred in not allowing as part of the cost of goods sold the portions of the amounts paid by petitioner for the purchase of lumber during the taxable years involved which exceeded the O.P.A. ceiling prices for such lumber. A portion of the facts has been stipulated. Findings of Fact Petitioner is an individual residing at Dexter, Missouri, and filed his returns for the periods here involved with the collector of internal revenue for the first district of Missouri. Throughout the years 1945 and 1946 petitioner was engaged in the lumber business. Almost all of his business was in lumber which he purchased by the truck load at saw mill sites and hauled directly to his customers without further handling. During 1945 petitioner sold lumber for which he paid the total amount of $32,836.24, which amount was submitted31 by petitioner as the cost of the lumber in reporting his gross profit from the sale of lumber in his 1945 return. Respondent determined that the maximum O.P.A. ceiling prices for such lumber totaled $28,983.23, or $3,853.11 less than the amount paid by petitioner therefor, and disallowed said amount, stating in the notice of deficiency: "In 1945 you purchased lumber for resale for which you paid the amount of $3,853.11 in excess of the ceiling prices established by the Office of Price Administration. This amount is held not to be either part of the cost of goods sold or a business expense deduction. Your net income is being increased accordingly." During 1946 petitioner sold lumber for which he paid the total amount of $62,705.34. which amount was submitted by petitioner as the cost of the lumber in reporting his gross profit from the sale of lumber in his 1946 return. Respondent determined that the maximum O.P.A. ceiling prices for such lumber totaled $41,110.29, or $21,595.05 less than the amount paid by petitioner therefor, and disallowed said amount, stating in the notice of deficiency: "In 1946 you purchased lumber for resale for which you paid the amount of $21,595.05 in32 excess of the ceiling prices established by the Office of Price Administration. This amount is held not to be either part of the cost of goods sold or a business expense deduction. Your net income is being increased accordingly." The above amounts submitted by petitioner as the cost of lumber sold by him in 1945 and 1946 are the amounts shown by petitioner's books and records in which separate entries were made showing the O.P.A. ceiling prices of the lumber purchased by petitioner and the amounts paid by petitioner in excess of such ceiling prices. Petitioner was aware at the time he bought the lumber, both in 1945 and 1946, that he was paying amounts in excess of O.P.A. ceiling prices, but in both years he was unable to buy lumber at lower prices. The cost to petitioner of lumber sold by him in 1945 was $32,836.34, of which the sum of $3,853.11 was paid by petitioner in excess of the ceiling prices established by the Office of Price Administration. The cost to petitioner of lumber sold by him in 1946 was $62,705.34, of which the sum of $21,595.05 was paid by petitioner in excess of the ceiling prices established by the Office of Price Administration. Opinion The facts33 in the instant case closely parallel those in (on appeal, C.C.A., 5th Cir.), and are even more favorable to petitioner than were the facts in that case to the taxpayer therein. This Court there held that amounts paid by the taxpayer to wholesale meat packing firms for meats purchased from them in excess of the O.P.A. prices in effect at the time of the purchases were correctly included by the taxpayer as part of the cost of goods sold. Accordingly, we have found as a fact that the cost to petitioner herein of lumber sold by him in 1945 and 1946 included the amounts paid by petitioner in excess of the O.P.A. ceiling prices for such lumber, and, on the authority of the Sullenger case, we hold that respondent erred in failing to include such amounts in the cost of goods sold. Decision will be entered for the petitioner.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622330/	Walker B. Hough and Kathleen Hough v. Commissioner.Hough v. CommissionerDocket No. 84168.United States Tax CourtT.C. Memo 1962-70; 1962 Tax Ct. Memo LEXIS 239; 21 T.C.M. (CCH) 370; T.C.M. (RIA) 62070; March 29, 1962239 Walker B. Hough, 200 E. 66th St., New York, N. Y., pro se. Robert D. Whoriskey, Esq., for the respondent. RAUMMemorandum Opinion RAUM, Judge: The Commission determined a deficiency in petitioners' 1956 income tax in the amount of $1,167.24. Petitioners, husband and wife, reside in New York, and filed their 1956 joint return with the district director in Manhattan. The husband will sometimes hereinafter be referred to as petitioner. Petitioner, a consulting engineer, was self-employed during 1956, and practiced out of his residence. The principal items in controversy relate to two adjustments made by the Commissioner. Petitioner had claimed deductions in the amount of $10,133 for travel and entertainment expenses, and $1,733.90 as advertising expenses. The Commissioner disallowed approximately 30 percent of these deductions, $3,080.63 and $547.65, respectively, for lack of substantiation. He also stated that in the case of the travel and entertainment expenses, the amount disallowed, even if proved, would constitute nondeductible personal expenses. We have before us a lengthy stipulation of facts which was supplemented by further evidence presented by petitioner240 at the hearing. It appears that petitioner was able to substantiate considerably less than 70 percent of the deductions claimed by him, and that the Commissioner's allowance of approximately 70 percent of such deductions was substantially in excess of what he has proved. The Commissioner in substance has applied the so-called Cohan rule ( (C.A. 2)), and we agree, on the record before us, that he has applied it generously in petitioner's favor in this case. We find no error in his determination in respect of these two items. The evidence presented by petitioner was loose and confusing. He has shown no error in respect of these two items. Although he did introduce some cancelled checks in addition to those previously presented to the Commissioner, they were of such magnitude that, if they did represent proper deductions, they were already covered by the amounts allowed by the Commissioner. An issue relating to a foreign tax credit has been conceded by the Government. In an amended pleading petitioner claimed a deduction of 20 percent of the annual rent of his apartment as a business expense. The amount thus claimed is $736. The*241 stipulation shows that petitioner paid a monthly rental of $305 for his apartment; that he incurred a $20 expense for an air conditioner for that apartment in September of 1956; and that he practiced his profession "out of his residence". No evidence was presented in connection with this item beyond that appearing in the stipulation. We have no way of knowing whether the apartment was used in any substantial or significant degree for business purposes. Yet it does seem clear that it was used to some extent for business purposes. In the absence of clarifying evidence we find as a fact that $500 of the expenses incurred for the apartment in 1956 were related to petitioner's business; that amount is deductible. Cf. Decision will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622331/	ETELA CUCKER, INC., Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentEtela Cucker, Inc. v. CommissionerDocket No. 18316-89United States Tax CourtT.C. Memo 1991-68; 1991 Tax Ct. Memo LEXIS 87; 61 T.C.M. (CCH) 1949; T.C.M. (RIA) 91068; February 25, 1991, Filed 87 An appropriate order and decision will be entered. Held: Respondent's motion for summary judgment granted and petitioner's cross-motion for summary judgement denied. A Form 872-A consent to extend the period for assessment pertaining to petitioner's taxable year 1978 was not terminated by issuance of an invalid deficiency notice or by an attempted assessment based upon the invalid deficiency notice. Coffey v. Commissioner, 96 T.C. 161">96 T.C. 161, 1991 U.S. Tax Ct. LEXIS 7">1991 U.S. Tax Ct. LEXIS 7, 96 T.C. No. 7">96 T.C. No. 7 (1991), controlling. Held further: Petitioner is deemed to have conceded the deficiency and the increased rate of interest under section 6621(c)(1) determined by respondent. Donald Jay Pols, for the petitioner. Lewis J. Abrahams and Janet F. Appel, for the respondent. HALPERN, Judge. HALPERNMEMORANDUM OPINION By statutory notice dated May 2, 1989, respondent determined a deficiency in petitioner's Federal income tax for the taxable year 1978 of $ 46,289. Respondent also determined that petitioner is liable for the increased rate of interest on a substantial underpayment attributable to a tax motivated transaction. See sec. 6621(c)(1). 1 Petitioner was a partner in a partnership that engaged in certain community antennae television88 (CATV) activities (the partnership). Respondent disallowed petitioner's claimed distributive share of losses from the partnership on the grounds that the CATV activities were not entered into for profit, that petitioner was not the owner for Federal income tax purposes of the CATV assets, and that transactions pertaining to the CATV assets were shams and devoid of economic substance. This case is before us on the parties' cross-motions for summary judgment, submitted pursuant to Rule 121. The parties agree, and we find, that no genuine issue of material fact exists. Thus, this case is appropriately decided by summary adjudication. Rule 121; Naftel v. Commissioner, 85 T.C. 527">85 T.C. 527, 529 (1985). Petitioner has not assigned error to the correctness of respondent's determinations. Instead, 89 petitioner asserts that the period for assessing tax for its 1978 tax year has expired, and that no such assessment now may be made. See sec. 6501(a) and (c)(4). On that basis, petitioner asks for summary judgment. Petitioner makes three arguments in support of its motion. In each, petitioner asserts that a Form 872-A consent agreement (the consent agreement) extending the period for assessments on petitioner's taxable year 1978 terminated as a result of certain actions taken by respondent prior to institution of this case, and that respondent failed to make a valid assessment within the period for assessing tax remaining after such termination. Specifically, petitioner claims that the consent agreement was terminated either: (1) when respondent mailed an earlier, invalid, notice of deficiency; (2) when respondent attempted to assess a deficiency based upon the invalid deficiency notice; or (3) when respondent failed to issue a second, valid notice of deficiency within 90 days of being notified that the first had been sent to an incorrect address for petitioner. Respondent, on the other hand, argues that none of the events enumerated terminated the consent agreement and that90 he is entitled to summary judgment on the termination issue. Further, respondent argues that he is also entitled to summary adjudication as to his determinations of deficiency and increased interest under section 6621(c)(1) because petitioner failed in its petition and reply to assign error to those adjustments. Other relevant facts are as follows: Petitioner, a corporation with its principal place of business in Brooklyn, New York, timely filed its Federal income tax return for 1978. That return was selected for audit, and, on January 15, 1982, petitioner and respondent executed a Form 872-A consent agreement, which provides for an indefinite extension of the period for assessing taxes for 1978. 2 On May 16, 1984, respondent mailed a notice of deficiency pertaining to petitioner's 1978 taxable year (the first notice) to an address that was not petitioner's last known address. Because it was not mailed to petitioner's last known address, the first notice was invalid. See sec. 6212(b). Petitioner did not file a petition in this Court with respect to the first notice. Respondent attempted to assess a deficiency for 1978 based upon the first notice. Petitioner filed a claim 91 for abatement and respondent abated that attempted assessment, acknowledging that the first deficiency notice was invalid. Some 4 or 5 years later, on May 2, 1989, respondent mailed to petitioner a second notice of deficiency (the second notice) pertaining to 1978. The second notice was properly addressed. On June 24, 1989, petitioner timely filed a petition with respect to the second notice, initiating the present case. Subsequently, respondent and petitioner filed the cross-motions for summary judgment currently before us. The termination provisions of the consent agreement under consideration here are identical to termination provisions contained in a Form 872-A consent agreement that, recently, we considered in a reviewed decision. Coffey v. Commissioner, 96 T.C. 161 (1991). Coffey was decided after submission92 of the briefs in this case and, consequently, has not been addressed by the parties. In both cases, the consent agreements were standard form agreements providing that permission to extend the period for assessments terminates: on or before the 90th (ninetieth) day after: (a) the Internal Revenue Service office considering the case receives Form 872-T, Notice of Termination of Special Consent to Extend the Time to Assess Tax, from the taxpayer(s); (b) the Internal Revenue Service mails Form 872-T to the taxpayer(s); or (c) the Internal Revenue Service mails a notice of deficiency for such period(s); except that if a notice of deficiency is sent to the taxpayer(s), the time for assessing the tax for the period(s) stated in the notice of deficiency will end 60 days after the period during which the making of an assessment was prohibited. * * * (2) This agreement ends on the earlier of the above expiration date or the assessment date of an increase in the above tax that reflects the final determination of tax and the final administrative appeals consideration. * * * Some assessments do not reflect a final determination and appeals consideration and therefore will not terminate93 the agreement before the expiration date. * * We need not set forth in detail petitioner's first two arguments. It is sufficient to note that those arguments assert that either the invalid deficiency notice or the abated assessment terminated the consent agreement. On facts that do not materially differ, we considered and rejected identical arguments in Coffey. Coffey is controlling. See also Hubbard v. Commissioner, 872 F.2d 183 (6th Cir. 1989); Holof v. Commissioner, 872 F.2d 50 (3d Cir. 1989); Roszkos v. Commissioner, 850 F.2d 514 (9th Cir. 1988). Petitioner's third argument is not precisely addressed in Coffey. Petitioner argues that, by requesting abatement of respondent's initial assessment, petitioner was acknowledging respondent's intent to terminate the consent agreement. Such acknowledgement, argues petitioner, gave rise to a reasonable expectation that respondent either would mail a notice of deficiency within 90 days or allow the statute of limitations to expire. Thus, concludes petitioner, since respondent did not mail a second notice of deficiency within 90 days, we should hold that the94 statute of limitations did indeed expire. Petitioner cites no authority in support of this "expectations" theory. Such a theory contradicts the reasoning of the Courts of Appeals in Hubbard, Holof, and Roszkos, as cited above, that an invalid notice of deficiency was a nullity or was ineffective for purposes of the Form 872-A agreement. See Coffey v. Commissioner, 96 T.C. 161">96 T.C. 161 at (slip op. at 8-9) (reciting and adopting the reasoning of the Courts of Appeals). Accordingly, we reject petitioner's third argument. For all of the reasons stated above, petitioner's motion for summary judgment is denied and respondent's motion for summary judgment on the termination issue is granted. We also grant respondent's motion for summary judgment with respect to the adjustments set forth in respondent's second deficiency notice. Respondent's notice of deficiency is presumed to be correct and petitioner has the burden of proving it erroneous. Rule 142(a). Further, under Rule 34(b)(4), petitioner is deemed to concede any issue not raised in its assignment of errors. Nowhere in its petition or its reply to respondent's answer did petitioner assign error to the correctness of95 either the deficiency or the increased rate of interest under section 6621(c)(1). Petitioner restricted its assignments of error, and its arguments on brief, to the issue of termination of the consent agreement. Thus, petitioner is deemed to have conceded the correctness of respondent's determinations as set forth in the second notice of deficiency. Rule 34(b)(4). Accordingly, respondent is entitled to summary judgment with respect to the deficiency and the increased rate of interest under section 6621(c)(1). An appropriate order and decision will be entered. Footnotes1. Unless otherwise noted, all section references are to the Internal Revenue Code of 1954 as amended and in effect for the year in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.↩2. The consent, however, was a restricted consent, limiting any assessment to that resulting from the effects of adjustments to any prior tax returns or adjustments pertaining to the partnership.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622332/	WILLIAM A. RICHARDS, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Richards v. CommissionerDocket No. 17374.United States Board of Tax Appeals15 B.T.A. 800; 1929 BTA LEXIS 2784; March 12, 1929, Promulgated 2784 1. The return filed for 1920 was not signed or sworn to and the date of filing is not in evidence. Held, deficiency not barred by limitation. 2. An individual taxpayer acquired by will in 1915 an interest in real property which decedent acquired by purchase in 1906. Held, the basis for gain or loss from sale by taxpayer in 1920 is not the cost to decedent in 1906 but the value at the time of acquisition by taxpayer. Charles A. Guernsey, Esq., for the petitioner. Byron M. Coon, Esq., for the respondent. STERNHAGEN 801 OPINION. STERNHAGEN: This proceeding involves a deficiency of $2,887.20 income and profits taxes for 1920. The parties filed the following stipulation, and submitted under Rule 29: It is stipulated and agreed by and between the parties hereto that the following is a full, complete and accurate Statement of Facts upon which this Cause is based: STATEMENT OF FACTS. The assessment of tax from which this appeal is taken is disclosed in notice of deficiency dated April 15, 1926, and for the year 1920. Under the notice of deficiency the sum of $22,285.57 is added to the taxable income of the petitioner for2785 the year mentioned on account of his share as one of the residuary legatees of William Washington Cole, deceased, in an alleged profit of $86,666.67 reported in the original return, Form 1041 filed for the estate of William Washington Cole by the Executor thereof for the year 1923, the alleged profit arising from the sale of real estate in the year 1920 by the Executor of the estate of William Washington Cole, deceased. William Washington Cole died on or about the 10th day of March, 1915, seized of the real estate hereinbefore mentioned which he had acquired by purchase from the Bank of Metropolis of New York in 1906 for a consideration of $1,500,000. The real estate was appraised for the purposes of New York Transfer Tax (Inheritance tax) at $800,000 as of the date of the death of William Washington Cole, and was sold by the Executor of the estate of William Washington Cole under power conferred on it by the Last Will and Testament of said William Washington Cole, in 1920 to one Dora Kessler for a consideration of $1,000,845, of which $310,000 was paid in cash and the balance in two first bonds and mortgages which were of the fair and reasonable value of $613,333.33 at the time2786 they were received in payment of said real estate. That the depreciation on said building for the fourteen years from the date of acquirement by Cole to the date of sale by the Executor amounted to $135,833.33. That the real estate hereinbefore referred to constituted a part of the residuary estate of said William Washington Cole, deceased, and the interest of the petitioner in the estate of William Washington Cole and in said real estate and the proceeds thereof and the rights of the Executor in connection therewith arises from and is based on the following provisions in the Last Will and Testament of said William Washington Cole, deceased, which was duly probated, to wit: X. All the rest, residue and remainder of my estate, real, personal and mixed, whatsoever and wheresoever the same may be, I authorize my executor to divide into eight equal shares, and pay over two of such shares to my wife, Margaret C. Cole, and I give to each of the following named six persons one of said shares and should either of said persons predecease me then I give the share of the one so dying to his or her heirs or next of kind; the six persons now intended to be benefited are as follows: 2787 George Ernest Cooke, now of U.S.A., my cousin, son of my uncle Alfred Cooke, deceased Rosina Cooke Adams, now of U.S.A., my cousin, daughter of my uncle Henry Cooke; 802 John William Cooke, Fleet, Hants, England, my cousin, son of my uncle William Cooke, deceased; John Henry Cooke, Edinburgh, Scotland, my cousin, son of my uncle Henry Cooke; Jessie Richards, widow of Albert E. Richards, Fostoria, Ohio. William A. Richards, Fostoria, Ohio, son of Jessie and Albert E. Richards. In case of the death of my wife Margaret C. Cole before the time when my executor may be able to pay in full these residuary terms, then such two shares or any portion of the two shares of this residuum hereunder above designated for her in the hands of my executor shall be distributed equally among the above six persons, on the same terms that each of said six persons takes his or her share aforesaid. XIII. I hereby nominate and appoint the Union Trust Company of New York (now of 80 Broadway, Borough of Manhattan, New York City) Executor of this my Will; and I hereby authorize, direct and empower my said Executor to sell any or all real estate of which I may die seized or possessed2788 at such times, on such terms and in such manner as may seem best to my said Executor for the purpose of executing most effectually this Will, and to make, sign, seal, acknowledge and deliver (as fully as I could myself do if living) all deeds, conveyances and other writings necessary to carry out such sales, I also authorize and empower my said Executor to lease any or all of my real estate on such terms as to it may seem best and consistent with this Will, though the period of any such lease need not be limited by the date within which I have provided my estate shall be settled. That the Commissioner has heretofore determined that no part of the alleged profit arising from the sale of said real estate in the year 1920 by the Executor of the estate of William Washington Cole, deceased, reported in the original return form 1041 filed by the estate of said William Washington Cole, deceased, for the year 1920, was assessable against said estate, and that all of said alleged profit should be assessed as taxable income for the year 1920 against the residuary devisees of said estate, including the petitioner, according to their respective shares in said residuary estate. The no-tax2789 return Form 1040-a filed by the petitioner for the taxable year 1920 was not signed or sworn to by the petitioner and no filing date is shown. That under date of February 11th, 1926, the petitioner received an office letter from the Commissioner of Internal Revenue to the effect that the tax hereinbefore referred to would be assessed against him in accordance with Section 274(d) of the Revenue Act of 1924 and would be subject to abatement claim. That in the statement accompanying the notice of deficiency above referred to and being a part thereof is a statement that because of the enactment of the Revenue Act of 1926 assessment was made in accordance with Section 279 of that act and that the letter of the Commissioner of April 15, 1926, being the notice of deficiency above referred to, superseded the office letter of February 11, 1926, above referred to. That the Bureau used the appraised value of the property as of the death of the decedent amounting to $800,000 in determining the profit from the sale in 1920 instead of the original cost of the property in 1906, and if the basis of computation adopted by the Bureau is correct, the amount of the deficiency is correctly computed. 2790 803 The petitioner contests the assessment only on two grounds: - First, that the assessment is barred by the Statute of Limitations and second, that the original cost of the property of $1,500,000 in 1906 should be used in determining the profit from the sale instead of the appraised value of the property as of the date of the death of decedent. It is further stipulated and agreed by the parties hereto that this cause shall be submitted on the above and foregoing Statement of Facts. The petitioner contends that any deficiency for 1920 for which he might otherwise have been liable has lapsed with the expiration of the limitation period of section 277(a)(3), Revenue Act of 1926. But the facts stipulated are not enough. Something called a "no-tax return Form 1040-a" was filed by petitioner for 1920. We may not assume this to be the statutory return, and the lack of signature or oath is such a defect as to deprive petitioner of the statutory limitation. ; . The absence of proof of date of filing is also fatal to this contention. The petitioner's2791 second contention is that a gain was erroneously attributed to him by respondent as his share of the profit resulting from the sale in 1920 of real estate purchased in 1906 by Cole and devised by Cole in 1915 as part of his residuary estate, in which petitioner had an interest. Petitioner contends that the original cost of $1,500,000 to Cole in 1906 reduced by intervening depreciation must be used as the basis for determining gain or loss from the sale in 1920, and not the transfer tax valuation of $800,000 in 1915. There is no dispute that the transfer tax valuation is the correct value at the time of death, and since respondent has used it we take it as his official determination of value and correct. For the purpose of the decision we also assume petitioner's view that upon Cole's death he acquired a direct interest in the title to the real estate in question. But petitioner must nevertheless fail. Since, as in , and , the decedent and his executor are treated as separate tax persons, and the basis for gain or loss by the executor is value at acquisition2792 and not cost to decedent, a fortiori, the direct beneficiary does not stand in the shoes of decedent so as to succeed to his cost basis, but measures his gain upon the new basis of value at acquisition. Judgment will be entered for the respondent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622333/	Kenneth R. Hovatter v. Commissioner.Hovatter v. CommissionerDocket No. 1087-68.United States Tax CourtT.C. Memo 1969-169; 1969 Tax Ct. Memo LEXIS 126; 28 T.C.M. (CCH) 846; T.C.M. (RIA) 69169; August 18, 1969. Filed Kenneth R. Hovatter, pro se, 1645 Sweetbriar Dr., San Jose, Cali;. Nicholas G. Stucky, for the respondent. DAWSONMemorandum Opinion DAWSON, Judge: Respondent determined a deficiency of $760.80 in petitioner's income tax for the year 1964. The only issue for decision is whether petitioner is entitled to deduct, pursuant to section 217, 1 moving expenses incurred in 1963 when he and his family moved from their home in South Carolina to his new place of employment in California. The parties agree that two other adjustments127 made in the notice of deficiency are correct. All of the facts have been stipulated and are found accordingly. Kenneth R. Hovatter (herein called petitioner) was a legal resident of San Jose, California, at the time he filed his petition in this case. He and his wife, Ann, filed a joint Federal income tax return for the year 1964 with the district director of internal revenue at San Francisco, California. During the year 1964 petitioner was on the cash basis of accounting and used a calendar year reporting period. During the first part of 1963 petitioner and his family resided in Columbia, South Carolina. On August 19, 1963, petitioner was employed by Aerojet General 847 corporation (herein called Aerojet) to begin work at its plant in Azusa, California. On or about October 18, 1963, the North American Van Lines Moving Company picked up the household goods and personal effects of the petitioner and his family in Columbia, South Carolina, and delivered them on October 25, 1963, to the petitioner's new residence in Glendora, California, which is near128 Azusa. The cost of transporting the household goods and personal effects was $1,843.08. North American Van Lines billed Aerojet for this charge by an invoice dated December 5, 1963. Aerojet paid the invoice by a check dated January 20, 1964. North American Van Lines billed Aerojet for an additional $14.50 appliance service charge by an invoice dated January 27, 1964. Aerojet paid this invoice by a check dated February 18, 1964. The services giving rise to this billing were performed by North American in 1963 at petitioner's Glendora, California, residence. On February 14, 1964, petitioner submitted a relocation expense reimbursement voucher to Aerojet for the cost of moving his family from Columbia, South Carolina, to Azusa, California. The family had traveled by automobile, leaving Columbia on October 18, 1963, and arriving in Azusa October 24, 1963. The voucher submitted by petitioner listed expenses totaling $437.96, which amount was paid by Aerojet to petitioner in 1964. All of the expenses included in the voucher related to moving petitioner's family in 1963, and consist of the following: Mileage: From Columbia, S.C., to Azusa, Calif. - 2412 miles at 8 cents a mile$192.96Lodging - 7 days at $15.00 a day105.00Meals - 7 days at $20.00 a day 140.00In January 1964, Aerojet billed petitionerIn January 1964, Aerojet billed petitioner for $419.84, representing petitioner's share of the moving bill previously paid by Aerojet. Petitioner had agreed to bear the cost of shipping household goods in excess of 8,000 pounds, and the charge of $419.84 represented that cost. Petitioner paid the amount to Aerojet in 1964.Aerojet included the net amount of moving and family relocation expenses which it paid, totaling $1,875.70, in petitioner's withholding (W-2) form as gross income for the year 1964. The $1,875.70 was computed as follows: 129 Moving expenses - household goods$1,843.08Applicance service charge14.50Moving expenses - petitioner's family 437.96$2,295.54Less: Amount paid by petitioner 419.84 $1,875.70 On his 1964 Federal income tax return petitioner deducted from gross income the moving expenses paid by Aerojet in the estimated amount of $1,703.47. (The actual amount paid by Aerojet was $1,875.70). In addition, petitioner deducted the $419.84 which he paid as his share of the moving expenses due to excessive weight. All of the moving expenses deducted by petitioner on his 1964 Federal income tax return were incurred in 1963. Respondent disallowed the entire amount of the claimed deduction. Prior to 1964 it was established in several cases that a person undertaking employment with a new employer could neither deduct moving expenses necessitated by such employment nor exclude from gross income the amount of the moving expenses paid by his employer directly to him or to third parties. See United States v. Woodall, 255 F. 2d 370 (C.A. 10, 1958), certiorari denied 358 U.S. 824">358 U.S. 824 (1958); Koons v. United States, 315 F. 2d 542 (C.A. 9, 130 1963); Alan J. Vandermade, 36 T.C. 607">36 T.C. 607 (1961); and Willis B. Ferebee, 39 T.C. 801">39 T.C. 801 (1963). Section 217(a), which was added to the law by section 213 of the Revenue Act of 1964, Public Law 88-272, allows "as a deduction moving expenses paid or incurred during the taxable year in connection with the commencement of work by the taxpayer as an employee at a new principal place of work." But section 213(d) of the Revenue Act of 1964, specifically provides that the moving expense deduction "shall apply to expenses incurred after December 31, 1963, in taxable years ending after such date." Identical language is used in the reports of the House and Senate committees. See H. Rept. No. 749, 88th Cong., 1st Sess., p. A60, xxxx; and S. Rept. No. 830, 88th Cong., 2d Sess., p. 73. In addition, section 1.217-1(a)(1), Income Tax Regs., provides that the moving expense deduction "is allowable only for expenses incurred after December 31, 1963, in the taxable years ending after such date." In this case the petitioner accepted new employment in 1963. As a result, he and 848 his family moved from South Carolina to California. The entire move was131 planned, arranged and completed in 1963. All services of the moving company were performed in 1963 and, with the exception of a nominal appliance service charge, were billed to petitioner's employer in 1963. The expenses of transporting petitioner and his family across the country in October 1963 (automobile expenses, meals and lodging) are all of a type normally paid for at the time the service or product is obtained. It is therefore clear that all of the moving expenses in question were incurred in 1963. Thus the treatment of the petitioner's moving expenses is governed by the law as it existed prior to the addition of section 217 to the Code. See Commissioner v. Dodd, 410 F. 2d 132 (C.A. 5, 1969), where the Court of Appeals said: The Revenue Act of 1964 added section 217 to the Code, 26 U.S.C.A. § 217, which eliminated the distinction previously drawn between reimbursed and unreimbursed moving expenses. The effect of this section was to permit employees to deduct unreimbursed moving expenses from their gross income, but this was expressly limited to expenses incurred after December 31, 1963. * * The taxpayers argue that it is unfair and*132 inequitable to allow deduction of unreimbursed moving expenses incurred after 1963 but to deny those incurred during or before 1963. The answer is that the tax law is statutory and equitable considerations are inapplicable. Estate of Dupree v. United States, 5 Cir. 1968, 391 F. 2d 753; Carlton v. 385 F.2d 238">385 F. 2d 238. In any event, it 385 F. 2d 238, In any event, it would be no less unfair and inequitable to grant the taxpayers a special benefit not available to other taxpayers who incurred unreimbursed moving expenses prior to or during 1963. Since petitioner's moving expenses were incurred in 1963, we hold that the expenses paid by him and his employer are not deductible in 1964 under the provisions of section 217(a). Likewise, the amount received from Aerojet is not excludable from gross income. Cf. Commissioner v. Mendel, 351 F. 2d 580 (C.A. 4, 1965); Commissioner v. Starr, 399 F. 2d 675 (C.A. 10, 1968); England v. United States, 345 F. 2d 414 (C.A. 7, 1965); and Norvel Jeff McLellan, 51 T.C. 462">51 T.C. 462 (1968). Accordingly, Decision will be entered for the respondent. Footnotes1. All statutory references herein are to the Internal Revenue Code of 1954 as amended, unless otherwise indicated.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622334/	J. E. Vincent, et al., 1 Petitioners, v. Commissioner of Internal Revenue, RespondentVincent v. CommissionerDocket Nos. 27877, 27878, 27879, 27880, 30435United States Tax Court19 T.C. 501; 1952 U.S. Tax Ct. LEXIS 11; December 24, 1952, Promulgated 11 Decisions will be entered under Rule 50. 1. Accrual Accounting -- Reserves for Backfilling. -- Estimated amounts for backfilling strip-mined coal lands are not deductible as accrued expenses where no backfilling has been done several years after completion of mining operations and where the obligation to do the backfilling has been assumed by others. Ralph L. Patsch, 19 T. C. 189, followed.2. Deductions -- Overriding Royalties; Rental of Tipple. -- Deductions for overriding coal royalties and for rental of coal tipple held deductible on showing that accrued amounts were reasonable.3. Depletion -- Gross Income from the Property. -- Amounts paid to strippers of coal on a per ton basis for coal mined and transported to railroad loading point, held, not to result in an economic interest in the strippers and amounts paid to them are not to be excluded from operators' gross income from the property in the computation of depletion deductions. Morrisdale Coal Mining Co., 19 T. C. 208, followed; James Ruston, 19 T. C. 284, distinguished.4. Income -- Fair Market Value of Note -- 12 Depletion. -- Note given as part consideration for assignment of leases held to have had fair market value equal to face amount and includible in income in year of receipt. Held, further, that the note did not give payee an economic interest in properties and depletion is not allowable in respect of the income.5. Assignment of Income from Mining. -- A corporation controlled by the individual petitioner was organized for the purpose of operating coal properties under lease to the individual. The principal lease, by its terms, was not assignable to the corporation. The petitioner contracted with the corporation to continue to operate the properties, pay rentals and royalties, and to turn over the remainder of coal sales proceeds to the corporation which was to pay for the stripping. The petitioner continued to hold other properties in connection with the lease. Held, the petitioner retained sufficient rights in the income producing properties to warrant treating as his income all income from sales of coal, without reduction for amounts turned over to the corporation.6. Depreciation -- Basis. -- Basis of coal tipple held to be the cost thereof at the time of 13 acquisition even though prior owner's cost was a smaller amount. Sidney B. Gambill, Esq., for the petitioners.George C. Lea, Esq., for the respondent. Arundell, Judge. ARUNDELL502 The respondent determined deficiencies in income and profits taxes for the periods and in the amounts as follows:PetitionerDocket No.Year or periodJ. E. Vincent278771945J. E. Vincent278781947J. E. Vincent Co., Inc278795-1-47 to 4-30-48Gregory Run Coal Co278806-11-45 to 12-31-451946J. E. Vincent Co., Inc304355-1-48 to 1-3-49PetitionerKind of taxAmountJ. E. VincentIncome$ 3,385.50J. E. VincentIncome211,117.12J. E. Vincent Co., IncIncome11,789.69Income4,022.10Gregory Run Coal CoDeclared value excess profits7,976.38Excess profits50,163.63Income17,111.53J. E. Vincent Co., IncIncome37,090.6214 The principal issues are whether Gregory Run Coal Company is entitled to deductions for estimated costs of backfilling strip-mined coal lands, and for overriding royalties and tipple rental; whether J. E. Vincent realized income on the receipt of a note in connection with assignment of leases; whether Gregory Run Coal Company, J. E. Vincent, and J. E. Vincent Company, Inc., should exclude from gross income from the mining properties the sums paid to coal strippers for mining and transporting coal; whether sums received by J. E. Vincent from sales of coal and paid over by him to J. E. Vincent Company, Inc., were income to J. E. Vincent or to the payee corporation; and whether for depreciation purposes the basis of a tipple purchased by 503 J. E. Vincent Company, Inc., was cost or the basis in the hands of the transferor.Some of the facts have been stipulated and, as stipulated, are found as facts.FINDINGS OF FACT.General Facts.1. The petitioner J. E. Vincent, sometimes referred to herein as Vincent, is an individual who resides at Clarksburg, West Virginia. His wife is Grace Ott Vincent, who signs her name G. O. Vincent. His son, J. E. Vincent, Jr., was 27 years of age 15 at the time of the hearing of these proceedings. Prior to the son's entrance into military duty in World War II, he had worked with his father in the coal business.2. During the taxable years, the petitioner Vincent was engaged in the business of strip mining of coal in the area of Clarksburg, West Virginia. He pursued that business individually, under trade names, and as a stockholder and president of various corporations which he organized. Among the corporations that Vincent organized were Gregory Run Coal Company, Summit Fuel Company, and J. E. Vincent Company, Inc.3. The petitioner Gregory Run Coal Company was organized under the laws of West Virginia on June 11, 1945. Its first Federal income tax return was filed for the period June 11, 1945 to December 31, 1945. Its subsequent returns were filed on the calendar year basis. Its books were kept and its returns were filed on the accrual method of accounting.4. The petitioner J. E. Vincent Company, Inc., was organized under the laws of West Virginia on April 30, 1947. It filed its Federal income tax returns on a fiscal year basis beginning on May 1 and ending on April 30 of each fiscal year. Its first return was filed16 for the fiscal year beginning May 1, 1947, and ending April 30, 1948. Its books were kept and its returns were filed on the accrual method of accounting.5. The petitioner J. E. Vincent filed his income tax returns on a calendar year basis and on the cash receipts and disbursements method of accounting.6. The Federal income tax returns of all of the petitioners were filed with the collector of internal revenue at Parkersburg, West Virginia.Backfilling Reserve (Gregory Run Coal Company).7. Prior to the organization of Gregory Run Coal Company, the petitioner J. E. Vincent had acquired a number of coal leases which entitled him to strip mine coal on Gregory's Run in Eagle and Sardis 504 Districts of Harrison County, West Virginia, which leases, for present purposes, are summarized as follows:(a) A lease dated May 9, 1945, from Dawson Coal Company, a corporation, granted mining rights along an outcrop of approximately 17,750 feet and containing 25 to 30 acres. The original lease was for a term of two years with a provision for renewal for two additional years. The royalty provisions were a payment of 12 cents for each ton (2,000 pounds) of coal removed, with a minimum17 royalty of $ 250 a month beginning with July 25, 1945. The lessee, Vincent, was required to give the bond required by statute and to secure the required State permit for the strip-mining operations. The lease contained a provision against assignment or subletting, except that within 60 days from the date of the lease, the lessee could assign to a corporation "to be organized and controlled by him, which corporation shall expressly assume all the obligations" of the lease.(b) A lease dated May 29, 1945, from Ai D. Ash and wife, granted strip-mining rights in Sardis District, Harrison County, West Virginia, at a royalty rate of 10 cents per ton of coal removed.(c) A lease dated April 25, 1945, from Ernest L. Simpson and wife, granted the right to strip-mine some 82.746 acres in Harrison County, West Virginia, in consideration of the payment of 10 cents per ton of strippable coal mined and removed from the tract.(d) A lease dated May 1, 1945, whereby persons surnamed Lindsay granted the right to strip-mine coal in consideration of 10 cents per ton of all coal mined, and one cent (1 cent) per ton of all coal transported over the land of the lessors.8. By agreement dated May 9, 1945, 18 the petitioner J. E. Vincent agreed to sell to J. H. Weaver Company, a corporation, "all of the strip coal that may be produced" by Vincent from the above leased premises. The J. H. Weaver Company agreed to pay to the petitioner J. E. Vincent for all coal mined, loaded into cars and accepted by the Weaver Company, "the prevailing maximum sale price of said coal, whether fixed by the Office of Price Administration or established by market conditions, less twenty-five cents (25 cents) a net ton of 2,000 pounds." The agreement contained provisions for adjustment in case of a decrease in the then maximum price of coal, or the production of coal that was not salable to Weaver Company's customers. Weaver Company was to pay Vincent on the 20th of each month for the coal accepted and sold by Weaver during the preceding month.Vincent was to pay all rentals or royalties due to his lessors for the coal produced and sold to Weaver Company. Vincent was to use his best efforts to produce 25,000 tons of coal monthly from his stripping operations. Weaver Company was to use its best efforts to take all of the merchantable coal that Vincent could produce and load but did not guarantee to do so. 19 505 9. The Dawson lease, referred to in finding No. 7, related to a vein of outcropping coal which had been deep mined from the back. In deep mining it is ordinarily impossible to mine all the way to the surface, because the nature of the terrain is such that it will not support the roof of the mine. Where there has been deep mining, the vein may have been mined, or the part of the vein that remains and can be strip-mined may have deteriorated and become soft by reason of water running into it. In such a case, the quantity and quality of the coal in the vein cannot be determined until the overburden is removed by stripping.10. Prior to incorporation of Gregory Run Coal Company on June 11, 1945, the petitioner Vincent, using stripping equipment rented from J. B. Williamson, had removed the overburden from a strip on the Dawson lease about 4,000 feet in length and 6 feet in width. That stripping disclosed the existence of coal estimated to amount to between 50,000 and 60,000 tons. The coal was in excellent condition and had not deteriorated by reason of the deep mining operations on the tract.11. The petitioner Vincent had rented Williamson's equipment on a month-to-month20 basis. When Vincent had removed the overburden on the Dawson lease as described in finding No. 10, Williamson advised Vincent that he proposed to move his equipment to a job that he had in Pennsylvania. Stripping equipment at that time was scarce and Vincent could not find any other that was available to enable him to carry out his obligations under his coal leases. After considerable discussion, Vincent and Williamson worked out an arrangement under the broad lines of which a corporation would be organized to which Vincent would transfer his leases and Williamson would transfer his equipment. The detailed arrangements were as follows:(a) Gregory Run Coal Company was to be organized under the laws of West Virginia. One-half of the stock was to be issued to Vincent and one-half to Williamson in consideration of the payment into the corporation of $ 500 by each of them.(b) Vincent was to assign and transfer to the corporation all of the leases he then had and which he might later acquire; and also his agreement with J. H. Weaver Company to sell to it the coal mined from the leases. The considerations for such assignment and transfer were to be the assumption by the company of21 all rental and royalty payments under the leases, the assumption, performance and observation of all other payments, and obligations of covenants, conditions, and agreements of Vincent under the leases; the issuance of the company's negotiable promissory note to Vincent in the amount of $ 10,000 payable on or before July 1, 1947, with 6 per cent interest; and the payment of a royalty of 40 cents per ton of run of mine coal strip-mined, removed, and marketed from the leased properties.506 (c) Williamson was to sell to Gregory Run Coal Company his strip-mining equipment at O. P. A. ceiling prices, payment therefor to be made by the corporation with its notes for $ 10,000 and $ 63,142.50.12. Carrying out the arrangement between Vincent and Williamson, Gregory Run Coal Company was incorporated on June 11, 1945. On the following day, Vincent, Williamson and their attorneys were elected directors. Upon election of directors, Vincent offered to assign to the corporation his mining leases and others that might thereafter be acquired by him, and also his agreement with J. H. Weaver Company. Vincent's offer included the following provisions:The consideration therefor shall be the22 assumption by Gregory Run Coal Company of all payments of rental and royalty becoming due to the respective lessors in each of said leases; the assumption performance and observation by said company of all other payments and obligations and of all covenants, conditions and agreements contained in said instruments on the part of the undersigned, J. E. Vincent, to be paid, kept, performed and observed; the sum of ten thousand dollars ($ 10,000.00), represented by a negotiable promissory note executed by said company to the undersigned, J. E. Vincent, in said sum of ten thousand dollars ($ 10,000.00), payable on or before July 1, 1947, with 6% interest, to be secured by a deed of trust on all of the foregoing properties; and also the payment by you to the undersigned, J. E. Vincent, as rental and royalty for said coal and mining rights and privileges to be assigned to you, a royalty of forty cents (40 cents) per ton of two thousand (2,000) pounds of run of mine coal mined by the strip mining process and removed and marketed from the above described premises, which said royalty payments shall be paid monthly to the undersigned, J. E. Vincent, not later than the 25th day of each month, 23 for the coal mined and removed during the preceding month.13. The directors of Gregory Run Coal Company formally accepted Vincent's offer, and Vincent, on the same date, June 12, 1945, made a formal assignment to the corporation of the properties described in his offer.14. By written assignment dated July 2, 1945, J. B. Williamson conveyed to Gregory Run Coal Company his strip-mining equipment, which was listed and described in detail, at a price of $ 73,142.50. The purchase price was evidenced by the company's two promissory notes, one in the amount of $ 10,000 and the other in the amount of $ 63,142.50. In order to provide for the payment of the larger note, it was provided therein that the company would pay Williamson the sum of 23.8 cents per ton of coal mined from the leased properties, the payments to be made not later than the 25th of each month upon coal mined during the preceding month. This note was secured by a deed of trust to Williamson on the equipment purchased.15. On July 2, 1945, Mrs. J. B. Williamson (described in the instrument as R. M. Williamson) formally conveyed to Gregory Run Coal Company equipment owned by her, which is listed and described in the bill24 of sale. The consideration therefor was $ 13,100, which was evidenced by the company's note in the amount of $ 13,100. Gregory 507 Run Coal Company agreed to pay the note by the application thereto of 6 cents per ton of the coal mined from the leased properties. The note was secured by a deed of trust on the equipment.16. In the leases assigned by Vincent to Gregory Run Coal Company, it was provided that Vincent would comply with all the laws and regulations of the State of West Virginia regarding the proper working of strip-mines and the backfilling and regrading after the coal was removed. The laws of West Virginia required the operator of a strip-mine to cover the face of the coal, regrade the overburden or other strata so as to refill any ditches, trenches, or excavations made in the stripping operation, and to plant trees, shrubs, grasses, or vines on the lands affected. Some of the leases provided for backfilling so as to restore the former contour of the land as nearly as might be practicable. In one lease the lessee was required to backfill so that all coal faces would be covered with at least three feet of settled clay, and upon completion of mining operations25 he was to backfill and regrade so that no water would accumulate or stand over, adjacent to or near the unmined coal.17. On June 11, 1945, J. E. Vincent caused the incorporation of Summit Fuel Company under the laws of West Virginia. Vincent and Williamson each acquired 50 per cent of the stock of that corporation. On June 12, 1945, an agreement was entered into between Gregory Run Coal Company and Summit Fuel Company, which recited Gregory's holding of leases acquired from Vincent, Gregory's ownership of strip-mining equipment and possession of a tipple, Summit's ownership of motor vehicles and possession of labor personnel, and that Gregory and Summit had entered into a joint agreement for the mining on the leased properties, and the transportation and loading of the coal. It was provided that Gregory was to furnish all machinery and equipment for the use of Summit in the strip-mining operations. Summit was to provide all materials and motor vehicles for transportation of the coal, and all labor, and, with Gregory's machinery and equipment, was to mine and haul the coal and dump it at the Gregory tipple. Summit was to process the coal through the tipple and load it into railroad26 cars. Gregory was to market the coal. Gregory was to obtain the permit required by state law before mining operations were begun, and was to bear the expense of the bond. Section 13 of the agreement provided as follows:Summit shall refill, regrade and recondition the surface of the mined area in accordance with the requirements of the laws of the State of West Virginia and all regulations duly issued thereunder, and in accordance with the requirements of the aforesaid leases, assignments and agreements, but the cost thereof shall be paid by Gregory.18. Gregory Run Coal Company in its Federal income tax return for the period June 11, 1945, to December 31, 1945, and in its return 508 for 1946, respectively, claimed deductions for reserves for backfilling in the respective amounts of $ 14,352.15 and $ 22,354.30. The amounts of such reserves were computed by the company on the basis of an estimated cost of 10 cents per ton of coal mined during the respective periods. No backfilling was done by or for Gregory Run Coal Company during either of the taxable periods. The respondent disallowed the claimed deductions.19. On February 24, 1947, Gregory Run Coal Company assigned 27 to Coal Service Corporation all of its coal leases, including those acquired from Vincent in 1945. The assignee agreed to substitute its bonds for those filed by Gregory Run Coal Company with the West Virginia Department of Mines in connection with strip mining permits for the purpose of "exoneration of the Assignor (Gregory Run) from liability under said bonds * * ." Gregory Run Coal Company agreed to indemnify the assignee against loss or liability arising out of Gregory Run's operations on the leased premises except with respect to claims of lessors "based on alleged failure by the Assignor to comply with the requirements of said leases as to backfilling and restoring the property * ."Overriding Royalty Deduction (Gregory Run Coal Company).20. Part of the consideration for the assignment by J. E. Vincent of his leases and coal sales contract to Gregory Run Coal Company on June 12, 1945, was the agreement of Gregory Run Coal Company to pay to Vincent "as rental and royalty" the following: * * a royalty of forty cents (40 cents) per ton of two thousand (2,000) pounds of run of mine coal mined by the strip mining process and removed and marketed from the above described28 premises, which said royalty payments shall be paid monthly to * * J. E. Vincent * * .21. In the arrangement between Vincent and Williamson which resulted in the organization of the Gregory Run Coal Company, it was agreed that Vincent was to receive from the company 20 cents per ton of coal mined as part of the consideration for his assignment of properties to it, and that Williamson was to receive 20 cents per ton as rental for the use by Gregory Run Coal Company of a tipple owned by Williamson. The amount of 20 cents per ton was reasonable for the use of the tipple. The amount of 20 cents per ton was a reasonable overriding royalty for assignment of the leases by Vincent to Gregory Run Coal Company.22. Williamson did not want it known at that time that he was the recipient of rental for his tipple, and it was arranged that Vincent was to receive the 20 cents per ton rental payable to Williamson in addition to his own 20 cents per ton overriding royalty. As a step in carrying out that arrangement, Vincent, on July 9, 1945, executed 509 a declaration of trust. The trust declaration referred to the assignment of June 12, 1945, from Vincent to Gregory Run Coal Company, 29 to a supplemental assignment to Gregory Run Coal Company dated July 9, 1945, and to the overriding royalty reserved to Vincent. It then provided in material part as follows:WHEREAS, in each of said transactions the said J. E. Vincent was acting for himself and for J. B. Williamson, * .NOW, THEREFORE, I, The said J. E. Vincent, do hereby certify and declare that the Assignment dated the 12th day of June, 1945, * * and the Supplemental Assignment dated the 9th day of July, 1945, * * * were executed and delivered as aforesaid, by the said J. E. Vincent, namely, myself, as trustee as herein set forth; and that in the execution and delivery of said instruments I, J. E. Vincent, acted as trustee for myself and for the said J. B. Williamson, and I hold all royalties and other moneys derived therefrom for the following persons:1. J. E. VincentOne-half2. J. B. WilliamsonOne-halfI further certify and declare that I do not have, nor claim to have any personal or beneficial interest of any kind, nature or description in or to the undivided one-half interest in said property owned by the said J. B. Williamson.I hereby agree to receive all money due as royalties under said30 instruments or any other instrument executed agreeable thereto, and to disburse the same as follows:1. Deposit all of said money in a special bank account as such trustee.2. Pay all expenses, including legal fees, taxes, etc., incident to the operation of this trust.3. Distribute the balance forthwith, one-half to myself, J. E. Vincent, and one-half to J. B. Williamson.23. In December 1945 Gregory Run Coal Company accrued on its books the sum of $ 57,449.66 as payable to J. E. Vincent pursuant to the provisions of the assignment from Vincent to it on June 12, 1945. It deducted that amount as royalties on its return for the period June 11 to December 31, 1945. The respondent disallowed the deduction. On March 13, 1946, Gregory Run Coal Company paid $ 57,449.66 to J. E. Vincent, trustee. On the same date, March 13, 1946, Vincent paid to J. B. Williamson one-half of said amount, namely, $ 28,724.83.24. J. E. Vincent filed a fiduciary return for the year 1946 in which he reported the receipt of $ 57,449.66. He claimed a deduction for percentage depletion in the amount of $ 2,872.48, and reported the balance as distributable to himself and J. B. Williamson in the equal amounts31 of $ 27,288.59. In J. E. Vincent's individual income tax return for 1946, he reported the receipt of $ 27,288.54 (a difference of 5 cents) as income from a trust.25. In March 1946 J. B. Williamson's 50 per cent stock interest in Gregory Run Coal Company was acquired by that corporation. No amounts were accrued or paid by Gregory Run Coal Company as overriding royalties after 1945. Neither Gregory Run nor Summit 510 Fuel ever paid any dividends. Both corporations were liquidated in 1947 and their assets were distributed to Vincent.26. The amount of $ 57,449.66, representing overriding royalties to Vincent at 20 cents per ton of coal mined in the taxable year ended December 31, 1945, and rentals to Williamson at 20 cents per ton of coal mined in that period, was an ordinary and necessary expense incurred by Gregory Run Coal Company for that period, and the respondent's disallowance of a deduction therefor was erroneous.Depletion Allowable to Gregory Run (Exclusion from Gross Income of Payments to Summit Fuel).27. The contract dated June 12, 1945, between Gregory Run Coal Company and Summit Fuel Company set forth the rights and obligations as to both corporations 32 in the conduct of strip-mining operations under the leases assigned to Gregory Run by Vincent on June 12, 1945. It recited that the two corporations had entered into a "joint agreement" for the mining, transporting, and loading of coal at the tipple. Gregory Run was to furnish at its expense all machinery and equipment, except motor vehicles. Summit Fuel was to furnish at its expense all materials, tools, parts, motor vehicles for transportation of the coal, and all labor, and with the machinery and equipment furnished by Gregory Run, was to do all things necessary to strip-mine, haul, and dump at the tipple all of the mineable and merchantable coal. Summit Fuel was also to process the coal through the tipple and load it into railroad cars. Summit Fuel was to use its best efforts to keep the work continuously in operation, protect adjoining properties, and to observe all conditions of the leases, except for the payment of rents and royalties which were to be paid by Gregory Run. Summit Fuel was to carry workmen's compensation and public liability and property damage insurance. It was to indemnify and save Gregory Run harmless from all claims arising out of its operations.Gregory33 Run was to obtain at its expense the necessary state mining permit, and was to bear the expense of the required bond. It was to market the coal through such selling agent as it might select.Provisions as to disposition of proceeds of coal sales, and cancelation were as follows:All money arising from the sale of said coal shall be paid to Gregory, and for its participation in this joint adventure Summit shall receive one and 55/100 dollars ($ 1.55) per net ton for all coal mined, transported and loaded by it, which shall be paid to it on the 25th day of each month for all coal mined and loaded during the preceding month. It is understood, however, that if either Gregory or Summit are dissatisfied with this distribution, then the dissatisfied party may serve written notice upon the other party to cancel this agreement, and thirty days after the service of said notice the agreement shall be cancelled and all rights hereunder terminated, except that in case Gregory serves said 511 notice upon Summit, then Summit shall have the right to mine and remove all coal under which the overburden has been removed at that time, irrespective of said thirty day limitation.The contract contained34 additional provisions permitting cancelation of the contract by either party in the event of default by the other.28. During the period June 11, 1945, to December 31, 1945, Summit Fuel Company stripped and hauled coal from the leased properties, for which operations Gregory Run Coal Company paid it a total amount of $ 222,617.43. In 1946, Summit Fuel Company performed both stripping and hauling operations until July 1. Beginning July 1, 1946, Gregory Run Coal Company performed the stripping and Summit Fuel Company did only the hauling. For the calendar year 1946, Gregory Run paid to Summit Fuel $ 189,005.63 for stripping and $ 86,367.19 for hauling. The amounts set forth in this paragraph were reported as income by Summit Fuel Company for the years 1945 and 1946, and were claimed as deductions from gross income by Gregory Run Coal Company for 1945 and 1946 in computing net income from the property.29. In the computation of percentage depletion allowable to Gregory Run Coal Company for the period June 11 to December 31, 1945, and for the calendar year 1946, the respondent determined that the amounts set forth in finding No. 28 should be excluded from gross income from the property. 35 30. Summit Fuel Company did not claim depletion deductions in its income tax returns.$ 10,000 Note from Gregory Run to J. E. Vincent. Whether Income to Vincent, and if so, Whether Subject to Depletion.31. The note of Gregory Run Coal Company to J. E. Vincent, issued as part consideration for Vincent's assignment of properties to Gregory Run, was in the principal amount of $ 10,000. It was payable on or before July 1, 1947, with interest. The rate of interest was not specified in the note. The agreement between Vincent and Gregory Run provided for interest at the rate of 6 per cent, and also provided that the note was to be secured by a deed of trust on all of the property assigned by Vincent to Gregory Run.32. Among the assets owned by Gregory Run at the time it executed the note to Vincent was the contract with J. H. Weaver Company whereby Weaver Company agreed to pay the prevailing maximum sale price for all coal produced and loaded into cars. Gregory Run also had the leases assigned to it by Vincent, on which the overburden had been removed from some 50,000 or 60,000 tons of coal of good quality. Sales of coal by Gregory Run in the period June 11 to December 31, 36 1945, amounted to $ 377,750.67. Gregory Run paid its note to Vincent in February 1946.512 33. The note of Gregory Run Coal Company to J. E. Vincent dated June 12, 1945, in the amount of $ 10,000 was issued as part of the consideration for the assignment to it of coal leases and other property. The note had a fair market value of $ 10,000 on the date it was received by Vincent.Item of $ 808,064.46 Paid by Vincent to J. E. Vincent Company; Deduction Therefor by Vincent.34. On October 29, 1945, J. E. Vincent entered into an agreement and lease with Dawson Coal Company, a corporation, wherein Vincent acquired the right to strip mine "All of the Pittsburg or Nine Foot vein or seam of coal remaining unmined which can or may be mined and removed by strip mining * * * situate along the outcrop of the coal on Lambert's Run in Eagle District, Harrison County, West Virginia, having a length along said outcrop of approximately 36,000 feet (being approximately 14,750 feet of solid coal outcrop, and 21,250 feet along the outcrop of areas previously deep-mined), and containing approximately 50 acres, more or less, of strippable coal * * ." The term of the lease was for two years, 37 with the right of renewal for two more years on condition that Vincent should have removed at least 200,000 tons of coal in each year of the initial two-year period. Vincent was to pay to the lessor as "rental or royalty" 12 cents per ton of coal mined and removed, with a minimum of $ 500 a month. If such minimum monthly amount exceeded the amount payable on a tonnage basis, the excess was to be applied to rentals or royalties for subsequent months on a tonnage basis. Vincent was required to mine so as to obtain the maximum amount of coal recoverable, complying with all laws of the United States and West Virginia, and all regulations thereunder, regarding the proper working of strip-mines and the backfilling and regrading to be done after removal of the coal. Vincent was to give the bond and obtain the permit required by state law. He was to commence strip-mining operations at once and to pursue them with diligence and dispatch. Vincent was permitted, without releasing himself, to assign the lease within 60 days to a corporation to be organized and controlled by him, in which event the corporation was to assume all the obligations of the lease. He could also, without releasing38 himself, sublet or subcontract the stripping operations on not to exceed 50 per cent of the coal crop exposure covered by the lease.35. On September 1, 1945, J. E. Vincent acquired from J. L. Thrasher and wife a lease covering the surface rights over the coal that was the subject of the Dawson Coal Company lease of October 29, 1945. Under that lease the lessee was to pay to the lessor "as compensation for said mining and stripping rights and privileges and 513 other rights herein leased, eight (8 cents) cents a net ton" for coal not owned by the lessors which was mined from the leased premises, and if any coal owned by the lessors was mined, the lessee was to pay an additional sum of 15 cents for each ton mined. The lease was to inure to the benefit of and be binding on the heirs and assigns of the parties.36. By written contract dated December 24, 1945, J. E. Vincent employed Swaney Contracting Company, a West Virginia corporation, to strip-mine coal covered by the Dawson and related leases on Lambert's Run. Swaney Contracting Company was to strip-mine the coal, and to haul it to a railroad siding and dump it into cars or onto a tipple at the siding. Vincent was to provide39 a suitable sidetrack and tipple, and he was to have complete charge of the tipple; he was to furnish and pay the men required for the operation of the tipple and sidetrack; he was to have complete charge of the coal after it was loaded or dumped at the tipple.37. Under the agreement, Swaney Contracting Company was to conduct strip-mining operations with diligence and dispatch; it was to furnish adequate machinery, equipment, and employees to mine and haul 25,000 tons of coal a month; production was to be as continuous and uniform as practicable and reasonably possible. Swaney Contracting Company, in conducting mining operations and in backfilling and restoration, was to be bound by and comply with all of the terms of the leases under which Vincent was the lessee. It was to furnish to Vincent a performance bond in the penal sum of $ 2,500.38. Vincent was to pay Swaney Contracting Company for its services the sum of $ 2 a net ton for all merchantable coal strip mined by Swaney and hauled to and loaded or dumped at the tipple or tipples provided by Vincent. There were provisions for adjustment of the basic payment of $ 2 per ton in the event of either a reduction or increase in 40 the sale price of the coal.39. Swaney Contracting Company was to secure and pay for all bonds required by the state and to secure the necessary state mining permits. In all respects, Swaney was to "operate as an independent contractor in conducting its operations" under the agreement. Swaney was to secure and keep in force, at its expense, adequate public liability and property damage insurance against loss or liability arising out of its operations. Vincent was to carry insurance in connection with his tipple and sidetrack operations.40. Swaney Contracting Company was to be paid for its services on the basis of all coal accepted and paid for by Vincent's sales agent, Weaver Coal Company, but the failure of the sales agent to pay Vincent was not to relieve Vincent from his obligation to pay Swaney for its services.41. Under the contract, Vincent was responsible for the payment of royalties for the coal and surface rights under his leases. The contract 514 was not cancelable except on specified defaults by the parties, or in the event of reduction in sales price of the coal below $ 2.76 per ton and failure of the parties to renegotiate the contract. The contract provided41 for arbitration of disputed matters.42. On April 26, 1947, J. E. Vincent entered into a coal stripping agreement with B. H. Swaney and Son, Inc., another West Virginia corporation, herein sometimes called Swaney, Inc., with respect to the Lambert's Run property. Under that contract Swaney, Inc., was "employed as contractor for the purpose of stripping, loading and hauling to said tipple [operated by Vincent] all the coal leased" to Vincent by Dawson Coal Company which is "not now being operated by another contractor under a prior agreement * * ." The provisions of the contract were similar to those of the contract of December 24, 1945, between Vincent and Swaney Contracting Company, except that the compensation to Swaney, Inc., was to be at the rate of $ 2.18 per ton for coal mined and hauled to Vincent's tipple. 2 Provision was made for adjustment of compensation in the event of changes in the sale price of the coal. Vincent reserved the option to cancel the contract if the price he received for the coal was reduced to the point where operations were unprofitable to him.42 43. Swaney Contracting Company and B. H. Swaney and Son, Inc., complied with the terms of their agreements with Vincent. Each of the companies filed with the state the bond required as a condition of the operation of strip-mines. The market price of coal increased during the period that the two Swaney companies were engaged in strip-mining on the Vincent leases, and each of the companies received compensation for their services in excess of the base amount per ton that was specified in the contracts.44. Prior to April 30, 1947, J. E. Vincent had been engaged in the business affairs. His son, J. E. Vincent, Jr., returned from military E. Vincent Company. After he had operated for a while on the Lambert's Run property under the Dawson Coal Company lease of October 29, 1945, he became ill and was unable to look after his business affairs. His son, J. E. Vincent, Jr., returned from military service and did some work on the Lambert's Run property. Vincent felt that his son should have an interest in the business, and decided to, and did, organize J. E. Vincent Company, Inc., on April 30, 1947. Upon organization of that corporation, J. E. Vincent acquired 60 shares of its stock 43 and his wife and son each acquired 10 shares. The purpose of organizing the corporation was to have it take over Vincent's interest in the Lambert's Run property and to operate the property under the leases.515 45. J. E. Vincent requested Dawson Coal Company to permit an assignment to J. E. Vincent Company, Inc., of the strip-mine lease on the Lambert's Run property. Dawson Coal Company refused to permit the assignment. Vincent so reported to the directors of J. E. Vincent Company, Inc., at a meeting on May 15, 1947. The directors thereupon agreed "that the corporation would operate the said coal without a formal assignment of the leases * * * on the same basis as said operations would have been conducted if said assignment had been made * * ."46. On the same date as the meeting of the directors, May 15, 1947, an agreement was entered into between J. E. Vincent and J. E. Vincent Company, Inc. (herein sometimes called Vincent, Inc.). Under the agreement, Vincent leased to Vincent, Inc., a tipple, sidetrack, buildings, ground, and appurtenances thereto, and granted to it the right to load over the tipple the coal mined from the properties under lease to Vincent on Lambert's44 Run and any other coal in that territory under lease to Vincent. For the use of the tipple and related properties Vincent, Inc., was to pay a rental or royalty of 5 cents for each ton of coal loaded at the tipple, which sum was to be retained by Vincent from each monthly settlement that he was to make with Vincent, Inc. Costs of operating and maintaining the tipple and appurtenant properties were to be borne by Vincent, Inc. Vincent was to continue to operate in his own name the Lambert's Run strip-mines, and was to "be regarded as the operator of said coal" subject only to the contract between him and B. H. Swaney and Son, Inc., dated April 26, 1947. Vincent was to receive payment "from his sales agent" for all coal loaded over his tipple and sidetrack, and out of the proceeds of such sales he was to "pay brokerage, royalties for coal, surface rights, rights of way, rental on sidetrack property and buildings, and other similar royalties." After deducting all such payments and charges, Vincent was to pay the net proceeds from sales of coal to Vincent, Inc. The term "net proceeds" was stated to mean the amount left in the hands of Vincent "after paying all such royalties and rentals45 and after deducting taxes chargeable by the State of West Virginia on mining operations." Out of such net proceeds, Vincent, Inc., was to pay to B. H. Swaney and Son, Inc., the amounts payable to it under its stripping agreement with Vincent. The contract between Vincent and Vincent, Inc., was cancelable by either party on 30 days' notice.47. In 1947, between the time the contract of May 15, 1947, was entered into by Vincent and Vincent, Inc., and December 31, 1947, Vincent paid to Vincent, Inc., the sum of $ 808,064.46 as representing the "net proceeds" of sale of coal as defined in the contract. The 516 payments were made by checks drawn by Vincent on his bank account on the dates and in the amounts as follows:DateAmountJune 30, 1947$ 74,399.16July 31, 1947103,009.01Aug. 31, 19471,382.08Aug. 31, 194793,443.83Sept. 30, 1947108,969.19Oct. 31, 1947129,780.00Nov. 30, 1947131,100.29Dec. 31, 1947165,980.90Total $ 808,064.46In addition to the above payments, Vincent paid to Vincent, Inc., the sum of $ 146,823.40 in January 1948, which sum represented the net proceeds from sales of coal that were made in December of 1947 but not collected46 until January of 1948.48. J. E. Vincent paid Swaney Contracting Company $ 242,225.36 and B. H. Swaney and Son, Inc., $ 6,368.96 for coal stripping that they did prior to May 1, 1947, pursuant to his contracts with them dated December 24, 1945, and April 26, 1947.49. In the periods May 1, 1947, to December 31, 1947, and January 1, 1948, to April 30, 1948, J. E. Vincent Company, Inc., paid to the Swaney companies for coal stripping that those companies performed the following amounts:May 1, 1947, toJan. 1, 1948, toDec. 31, 1947April 30, 1948Swaney Contracting Co.$ 101,669.65$ 153,829.60B. H. Swaney & Son, Inc.346,709.60121,159.30The amounts of $ 101,669.65 and $ 346,709.60 that were paid to the Swaney companies in 1947 were among amounts claimed as deductions from gross income by J. E. Vincent Company, Inc., in its return for the fiscal year ended April 30, 1948. Total deductions claimed by J. E. Vincent Company, Inc., for the period May 1 to December 31, 1947, as expenses paid, amounted to $ 565,743.67. 347 J. E. Vincent Company, Inc., maintained a complete set of books showing the results of its operations. It maintained its own bank account.50. On December 1, 1947, Vincent gave written notice to Vincent, Inc., of his election to cancel and terminate, effective January 1, 1948, the agreement between them dated May 15, 1947. At about that time Vincent was given to understand that Dawson Coal Company would 517 offer no objection to an assignment of the lease by Vincent to Vincent, Inc. By agreement of January 2, 1948, Vincent assigned to Vincent, Inc., his strip-mining and surface leases on the Lambert's Run properties, including all grants or leases of rights of way or easements in any manner appurtenant to the Lambert's Run operations. The assignment was specifically subject to the strip-mining employment contract between Vincent and B. H. Swaney and Son, Inc., of April 26, 1947. After the assignment Vincent, Inc., collected for the sales of coal.51. The amounts aggregating $ 808,064.46 that were paid by Vincent to Vincent, Inc., in 1947 constituted income of Vincent.52. During the period May 1, 1948, to January 3, 1949, B. H. Swaney and Son, Inc., performed strip-mining48 operations on the Lambert's Run property. In that period it received compensation for such services from J. E. Vincent Company, Inc., in the amount of $ 509,765.46. The services were performed pursuant to the contract of April 26, 1947, between J. E. Vincent and B. H. Swaney and Son, Inc.In determining the amount of depletion allowable to Vincent, Inc., for the period May 1, 1948, to January 3, 1949, the respondent excluded from income from the property the amount of $ 509,765.46 paid to B. H. Swaney and Son, Inc.53. In January 1949 B. H. Swaney and Son, Inc., purchased from Vincent, Inc., the strip-mine leases on the Lambert's Run property.54. Vincent, Inc., was liquidated on January 3, 1949. J. E. Vincent reported a capital gain of $ 82,644.02 as realized on the liquidation of his stock in the corporation.Basis for Depreciation of Tipple (J. E. Vincent Co., Inc.).55. By instrument dated January 2, 1948, J. E. Vincent sold to J. E. Vincent Company, Inc., his coal tipple, appurtenant screening plant, railroad siding, and leases at Erie, West Virginia, herein called the Erie tipple. The consideration for the sale was $ 125,000 which was paid to Vincent. A gain on the 49 sale was reported in the joint income tax return of Vincent and his wife for the year 1948.56. The tipple was on the main line of a railroad. It had been constructed by Vincent in 1946 on the site of an old tipple where there had been a deep mine. There were cement piers in place and they were utilized by Vincent. About half of the needed grading for a railroad siding had been done. Vincent completed the grading, constructed the siding with material purchased by him, improved an access road, and constructed a 60-ton bin and a crusher with belt feed between them. The total cost to Vincent of the Erie tipple, siding, and appurtenances was $ 78,440.518 57. During the calendar year 1948, there were 257,525 tons of coal handled over the Erie tipple. The coal was sold for $ 1,253,733.42, an average price of $ 4.86 per ton. Unscreened run of mine coal sold at an average price of $ 3.82 a ton in 1948. The cost of operating the tipple was about 20 cents per ton of coal handled over it.58. Fire insurance policies on the Erie tipple at the time of its sale to Vincent, Inc., were in the face amount of $ 30,000. The tipple was valued for local tax purposes at $ 30,000.59. J. 50 E. Vincent Company, Inc., was liquidated on January 3, 1949, and the Erie tipple, with appurtenances, was distributed to its stockholders. The stockholders shortly thereafter sold the tipple and appurtenances for the sum of $ 24,000.60. J. E. Vincent Company, Inc., in its income tax return for the fiscal year ended April 30, 1948, claimed a deduction for depreciation of the Erie tipple (under the designation of "Amortization of Leasehold Improvements") in the amount of $ 22,000. The explanation given was that the rate was determined: * * by amount of strippable coal available and now under lease. At present production levels, all coal will be stripped and loaded prior to September 1, 1949. No further leases available within economical hauling distance of tipple and siding.In its return for the period ended January 3, 1949, (the date of liquidation) Vincent, Inc., claimed a deduction for depreciation of the Erie tipple (under the designation of "Amortization of Leasehold") in the amount of $ 78,000. The explanation given was:Amortization taken on Erie Tipple and Siding in the amount of $ 78,000.00 to adjust book value to Engineers estimate of salvage or sales value of $ 51 25,000.00 at close of operations, January 3, 1949.61. For the fiscal year ended April 30, 1948, and the period ended January 3, 1949, the respondent allowed, respectively, the amounts of $ 4,897.64 and $ 9,795.24 as deductions for amortization of the Erie tipple. The explanation in the notices of deficiency for both periods was that the basis for the tipple, scales, and railroad siding was $ 44,488.03, "the same as in the hands of the transferor, J. E. Vincent, and that this basis, less $ 20,000.00 salvage value is recoverable over a twenty-month period."62. In the joint income tax return of J. E. Vincent and his wife for the calendar year 1949, the sale of the Erie tipple and siding for $ 24,000 was reported, and the basis was shown as being in the amount of $ 25,000.63. The basis of the Erie tipple and appurtenances to J. E. Vincent Company, Inc., for depreciation was the cost thereof in the amount of $ 125,000.519 OPINION.The parties have settled by stipulation issues which involved comparatively small amounts and which concerned deductions for traveling expenses and the cost of small tools. An error alleged as to amortization of leaseholds in Docket No. 27880 was withdrawn52 by the petitioner.The remaining issues will be considered in the order in which they are presented by the parties in their briefs.Deductions for Reserves for Backfilling.In its returns for 1945 and 1946, Gregory Run Coal Company deducted as items representing a part of the cost of sales, the respective sums of $ 14,352.12 and $ 22,354.30 which were designated "Cost of Back Fill." The respondent restored those amounts to income in his determination of the deficiencies, and his action in that respect is assigned as error by Gregory Run Coal Company in Docket No. 27880.The claimed deductions have their origin in statutes of West Virginia concerning strip-mining, and leases under which J. E. Vincent was granted the right to strip-mine coal on several tracts in the Eagle and Sardis Districts of Harrison County, West Virginia.The statutes of West Virginia4 make it unlawful for anyone to engage in the strip-mining of coal without obtaining a permit from the Department of Mines. They require the payment of a registration fee and the posting of a penal bond of $ 500 per acre conditioned on faithful performance of the requirements with respect to backfilling. They impose on the53 operator the duties, among others, of covering the face of the coal on mined areas, regarding the overburden removed in a manner approved by the Department of Mines and agricultural experiment station, and to fertilize and plant trees, shrubs, grasses, or vines on the lands affected in accordance with regulations of the Department of Mines and agricultural experiment station. If an operator fails to comply with the provisions of the statute, his permit may be revoked and his bond forfeited.Vincent's leases required him to comply with state law and regulations as to backfilling and regrading, and some required restoration of the original contour of the land. By the acceptance by Gregory Run Coal Company of Vincent's assignment of his leases, that company assumed the performance of all of his obligations.The amounts claimed as deductions by Gregory Run Coal Company do not represent expenditures for backfilling. They are estimates of such cost computed at54 the rate of 10 cents per ton of coal mined. It was stipulated by the parties that at the time of the hearing of these 520 proceedings no backfilling had been done by or on behalf of the Gregory Run Coal Company.We conclude that the respondent properly disallowed the claimed deductions for the estimated costs of backfilling. The basic facts in these proceedings are not distinguishable from those in the case of Ralph L. Patsch, 19 T. C. 189. In both cases the lessees were obligated by the terms of their leases and by state law to backfill areas that had been strip-mined. In both, the obligation had been assumed by others, at least partially. In both, backfilling had not been completed several years after mining operations had been completed, despite time limitations imposed by state law. In the Patsch case, we pointed out that the obligation that is necessary to support an accrued deduction is an obligation to pay. An obligation to perform services at some indefinite time in the future will not justify the current deduction of a dollar amount as an accrual. See cases cited and discussed in the Patsch case, supra.The petitioner, 55 Gregory Run Coal Company, relies on the case of Harrold v. Commissioner, 192 F. 2d 1002, to support its claim for allowance of the deductions. The decision of the Circuit Court of Appeals in that case rests on facts that are different from those before us. There the mine operator made an estimate at the end of the year in which operations were completed, the amount of which was based on a number of years of experience of one of the mining partners. The backfilling was actually started as early in the following year as weather conditions would permit, and was completed within that year. The amount claimed as a deduction was limited to the amount actually expended for backfilling, although a larger estimated amount had been claimed in the return that was filed for the year prior to that in which the backfilling was done. The Circuit Court, in allowing the deduction, called attention to cases cited by the Supreme Court in Lucas v. American Code Co., 280 U.S. 445">280 U.S. 445, where although liability to pay an ascertained amount had not been incurred with unalterable finality, nevertheless there was an imminent, recognized56 liability to pay a sum susceptible of reasonable ascertainment as to amount, and payment was actually made shortly thereafter. Cases of this kind were recognized by the Supreme Court in the American Code Co. case as constituting an exception to the general rule under which deductions for expenses, taxes, and similar items are allowed under the accrual method only where the facts establish the existence of a definite liability to pay an established or ascertainable amount. The Circuit Court in the Harrold case apparently found that the facts before it were sufficient to bring the case within the exception recognized in the American Code Co. case. In these proceedings, we are unable to find facts sufficient to say that in the years 1945 and 1946 Gregory Run 521 Coal Company had incurred a definite liability to pay a fixed or reasonably ascertainable amount for the backfilling of the mined areas. These proceedings come within the purview of the case of Ralph L. Patsch, supra, and cases cited therein, principally Brown v. Helvering, 291 U.S. 193">291 U.S. 193; Spencer, White & Prentis v. Commissioner, 144 F. 2d 45;57 Amalgamated Housing Corporation, 37 B. T. A. 817; and Atlas Mixed Mortar Co., 23 B. T. A. 245.There is present here, as in the Patsch case, the element of assumption of liability by others. As shown by the findings, Summit Fuel Company, as a part of its mining operations, undertook to backfill the mined areas. True, any backfilling performed by it was to be at the expense of Gregory. But Gregory's liability under that agreement was only one of reimbursement to Summit if and when Summit backfilled. This is far from fixing on Gregory in the taxable years a definite liability to pay a fixed or ascertainable amount. Further, in 1947, Coal Service Corporation came into the picture and relieved Gregory Run of its liability to backfill.Accordingly, the issue as to deductions by Gregory Run Coal Company for estimates of cost of backfilling is decided for the respondent.Gregory Run Coal Company -- Deductions for Overriding Royalties to J. E. Vincent; and for Tipple Rental to J. B. Williamson.The issue here is whether Gregory Run Coal Company may deduct, as royalties and rentals, the gross sum of $ 57,449.66, which58 was paid to Vincent in March 1946, and which in turn he divided with Williamson.It is the undisputed testimony of Vincent that at the time Gregory Run Coal Company was organized it was understood that he was to receive an overriding royalty of 20 cents per ton for each ton of coal mined, and that Williamson was to receive an equal amount for each ton that went over his tipple, cleaning plant and siding. Vincent's agreement with Gregory Run Coal Company stated that he was to receive 40 cents per ton of coal mined. Thereafter, on July 9, 1945, Vincent executed a declaration of trust whereby he declared himself to be a trustee for Williamson to the extent of one-half of the proceeds from the 40 cents royalty to be received from the leases that he assigned to Gregory Run Coal Company.Royalties, on the accrual method, under the assignment by Vincent, amounted to $ 57,449.66 which the respondent disallowed as a deduction to Gregory Run Coal Company. The respondent's position, in brief, is that said amount did not represent bona fide royalties and rentals but instead amounted to a division of profits between Vincent and Williamson.522 We think that the respondent erred in his59 disallowance of the claimed deduction. It may be that under other circumstances Gregory Run would not have paid an overriding royalty of 20 cents per ton, nor 20 cents per ton for the rental of a tipple. But we must take the facts as we find them and we do not find therein any evidence to establish a lack of bona fides. Vincent had leases that he was required to operate in order to retain them. At his own expense he had uncovered a large block of merchantable coal. He was entitled to some consideration for that work which added to the value of Gregory Run's holdings. The respondent points to the royalties payable to Vincent's lessors as an indication that a 20 cent overriding royalty was not within reason. The most substantial of the leases had been entered into prior to the completion of Vincent's exploratory work. The others in the Eagle and Sardis districts appear to have been fill-in leases made to round out the Dawson lease which was the major one. Royalties under other leases made in the year 1945 in the same county ranged from 25 cents to 49 cents per ton for mineral and surface rights.Williamson's tipple was available for use by Gregory Run Coal Company, and the 60 evidence is that there was only one other that could have been used and its use would have cost much more than the 20 cents per ton charged by Williamson. There is some evidence that one other tipple, a smaller one, had been rented at the rate of 5 cents per ton, but the owner soon found that that rate was too low and canceled the rental agreement. Gregory Run Coal Company used Williamson's tipple and paid for such use at the rate of 20 cents per ton of coal loaded over it. We are satisfied that that was a reasonable rental, and the amount paid was an ordinary and necessary business expense.Exclusion from the Statutory Definition of "Gross Income from the Property" of Amounts Paid to Summit Fuel Company.The findings of fact that we have made show that for the period ended December 31, 1945, Gregory Run Coal Company paid the sum of $ 222,617.43 to Summit Fuel Company for the strip-mining of coal from the Dawson and related leases. For the calendar year 1946, amounts aggregating $ 275,372.82 were either paid or properly accrued. There is some discussion, and some evidence, on the point of whether all of the amount paid for 1946 was for strip-mining or whether some part of61 it was paid for only hauling. These matters are beside the point for decision.The starting point for the computation of the amount allowable for depletion of coal mines is "the gross income from the property during the taxable year * ." Internal Revenue Code, section 114 (b) (4) (A). In applying that term to oil and gas properties, it has 523 been said that it means "gross income from oil and gas * * * and the term should be taken in its natural sense." Helvering v. Mountain Producers Corporation, 303 U.S. 376">303 U.S. 376. Section 29.23 (m)-1 (f) of Regulations 111, Supplement, provides in part as follows:In the case of a crude mineral product other than oil and gas, "gross income from the property" * * * means the gross income from mining. * * If the taxpayer sells the crude mineral product of the property in the immediate vicinity of the mine, "gross income from the property" means the amount for which such product was sold, * .We think that in determining Gregory Run's gross income from the Eagle and Sardis district properties, the respondent erred in excluding the amounts that were paid to Summit Fuel Company. The contract between62 Gregory Run and Summit Fuel contained the following provision:Gregory shall market said coal through such selling agent as it may select.The respondent does not contend that Gregory Run did not sell the coal that was produced in the years 1945 and 1946. His argument, summarized, is that Summit Fuel Company had an economic interest in the coal which entitles it to deductions for depletion. This argument is based in part on statements in the contract between Gregory Run and Summit Fuel wherein the parties refer to "each joint adventurer," and that they have contributed to the "joint enterprise." These expressions are not conclusive of the intent of the parties judged by the provisions of the contract as a whole. As we have shown, the contract provided that Gregory Run was to sell the coal. It was also provided that all money arising from the sale of the coal was to be paid to Gregory Run. Summit's only interest was to receive $ 1.55 per net ton for coal that it mined, transported, and loaded. The wording on this point is carefully spelled out. It is:* * * for its participation in this joint adventure Summit shall receive one and 55/100 dollars ($ 1.55) per net ton for 63 all coal mined, transported and loaded by it * .In Morrisdale Coal Mining Co., 19 T. C. 208, we held that the respondent erred in excluding from a mining lessee's income from coal properties the amounts that it paid to strippers under several contracts. The contracts there under consideration were generally similar to that between Gregory Run and Summit Fuel in that under them the stripping contractor was engaged to strip-mine coal from designated tracts, and to haul and load it into railroad cars at specified points. For such services, the stripping contractors were to receive a specified amount per net ton of coal strip-mined and loaded into railroad cars. There were minor points of distinction between the several contracts in that case, such as the facts that gave rise to a right of termination, the amount of overburden required to be removed, and 524 the right of the employing operator to designate points of mining and loading.Upon examination of the several stripping contracts in the Morrisdale Coal case, supra, we concluded that none of them granted to the stripping contractors an economic interest in the coal in place, and64 for that reason no apportionment of the gross income from the property was to be made between the employing contractor and the stripping contractor. In that case, analyzing two of the stripping contracts, we said in part:Most of the cases in which depletion has been allowed to an independent contractor have involved situations where the producer or miner of the mineral or other depletable asset has received payment either in kind or as a percentage of the ultimate selling price or profit derived from the sale of the commodity. Spalding v. United States (C. A. 9, 1938), 97 F. 2d 697, certiorari denied 305 U.S. 644">305 U.S. 644 (1938); cf. Edward J. Hudson, 11 T. C. 1042 (1948), affd. (C. A. 5, 1950) 183 F.2d 180">183 F. 2d 180.Neither of such situations is present in the instant case. The independent contractors received a stated amount per ton for coal of good merchantable quality satisfactory to petitioner. The amount they were to receive per ton was not dependent upon the market nor upon the price petitioner received upon the sale of such coal. Payment was made at stated intervals65 provided in the contract and was entirely independent of whether or when petitioner sold the coal. The contractors assumed no risk as to the market price, they received no payment in coal, and they had no right to sell any coal to other parties.The factors mentioned in the above quotation exist in this case. Summit Fuel was not to receive payment in kind or as a percentage of the selling price or profit; it was to receive a stated price per ton of coal; payment was to be made at stated intervals and was independent of whether or when Gregory Run sold the coal.The case of James Ruston, 19 T. C. 284, is distinguishable on the facts. In the Ruston case, the lessee of coal property contracted with a strip-mining contractor for the mining, loading, and shipping of the coal. The contractor was granted the sole and exclusive right to use and occupy the leaseholds; the lessee agreed not to engage in any stripping operations on the leaseholds, and not to grant any mining rights to others during the term of the contract. The contractor was to furnish at its cost and expense all materials, tools, machinery, equipment, and labor, to build all necessary66 roads, to make all necessary improvements incident to its operations, and to maintain and keep in proper repair and working order the tipple, screens, loading ramps, sidings, etc., on the property, and to screen, produce, load, clean, and ship the coal at its own expense. The contractor was also required to carry fire insurance on some of the lessee's property, workmen's compensation on its own employees, and public liability and property damage insurance on the operations. The lessee had the right to sell the coal, but it was provided that the interest of 525 the contractor "in coal produced and shipped shall be 83 per cent of the net selling price" of the coal as received by the lessee, less a selling commission of 15 cents per ton to be deducted from the gross selling price. In actual practice, the selling agent forwarded directly to the stripping contractor its 83 per cent share of the net sales price.On the facts in the Ruston case, outlined above, we concluded that by the contract between the parties the lessee transferred to the stripping contractor an economic interest in the coal in place which entitled the stripper to percentage depletion on its gross income67 from the severance and sale of coal. The rights, duties and liabilities of Summit Fuel Company were so far different from those in the Ruston case as to require a different conclusion as to the relation of the stripper with the lessee of the coal lands. We think the relation of Gregory Run Coal Company and Summit Fuel Company was simply that of employer and employee, which gave the employee no more than an economic advantage derived from production rather than an economic interest in the coal.We conclude that the contract between Gregory Run Coal Company and Summit Fuel Company did not give to Summit Fuel any economic interest in the coal in place. Accordingly, the amounts paid to it by Gregory Run should not be excluded from the latter's gross income from the property.Inclusion in J. E. Vincent's Income of the Amount of the Note for $ 10,000 Executed by Gregory Run Coal Company, Dated June 12, 1945; Depletion Deduction.As a part of the deal that was consummated in June 1945, between Vincent and Williamson, Gregory Run Coal Company issued its note to Vincent in the amount of $ 10,000. The note was negotiable and interest bearing. The company paid the note in February68 1946.The petitioner's resistance to inclusion of the face amount of the note in income for 1945 is based primarily on his contention that it had no fair market value at the time he received it. The argument is that Gregory Run Coal Company was engaged in a hazardous business; only $ 1,000 had been paid as capital; its equipment was mortgaged to secure the purchase price, and the payment of Vincent's note was subordinate to the payment of the equipment notes. Both parties make some argument as to the effect of an agreement dated July 9, 1945, between Vincent and Gregory Run Coal Company wherein was set forth the order in which Gregory Run would discharge its obligations. Whatever the effect of that agreement as to Gregory's several creditors thereafter, it is not decisive of the question of the fair market value of Vincent's note at the time he received it on June 12, 1945.526 The respondent has included the face amount of the note in income. That action is presumptively correct. The evidence does not establish to our satisfaction that the note had any lesser value. Simultaneously with the issuance of the note, Gregory acquired Vincent's coal leases which presumably both69 Vincent and Williamson thought were valuable. On one of them a large block of merchantable coal had been uncovered by Vincent. The company had available machinery to do the mining, and it had an agreement for the sale of coal.We find no error in including the sum of $ 10,000 in Vincent's income for 1945.The petitioner Vincent contends that if the $ 10,000 note was income for 1945, then he is entitled to a depletion deduction of 5 per cent thereof. His theory is that the amount of the note was a cash bonus in the nature of an advance royalty. He cites Murphy Oil Co. v. Burnet, 287 U.S. 299">287 U.S. 299; Palmer v. Bender, 287 U.S. 551">287 U.S. 551; Sunray Oil Co., 3 T.C. 251">3 T. C. 251, affd., 147 F. 2d 962. The respondent's position is that the note was part of the consideration paid for the transfer of the leases, and that such payments are not subject to deductions for depletion. He cites Helvering v. Elbe Oil Land Development Co., 303 U.S. 372">303 U.S. 372; Anderson v. Helvering, 310 U.S. 404">310 U.S. 404.We hold that the petitioner is not70 entitled to the claimed deduction for depletion. The transaction between Vincent and Gregory Run Coal Company was a sale by Vincent of his leases and his marketing agreement. His right to receive payment of the note did not give him an economic interest in the coal in place. The note was secured by a deed of trust upon the properties that he conveyed, and its payment was not made dependent on production of coal. Receipts from sales of mineral properties, not dependent on production, are not subject to deductions for depletion. Anderson v. Helvering, supra; Mertens, Law of Federal Income Taxation, Vol. 4, section 24.23.Income from Lambert's Run Property, Period May 1, 1947 to December 31, 1947 (Case of J. E. Vincent, Dkt. No. 27878).The question for decision under this issue is who is to be taxed on the amount of $ 808,064.46 that Vincent turned over to J. E. Vincent, Inc., between May 1, 1947 and December 31, 1947. The respondent disallowed that amount as a deduction to Vincent and thereby treated it as his income. The corporation included in its income the amount in dispute, and its reported income has not been reduced on account71 thereof by the respondent.The $ 808,064.46 is, of course, income either to Vincent or Vincent, Inc., but not to both. Both are before us in these proceedings and the issues are so framed as to require us to make the decision.J. E. Vincent, as an individual, had acquired leases on the Lambert's Run property. He had also, as an individual, negotiated contracts 527 for the stripping of the coal with the two Swaney companies, and for the sale of the coal with the Weaver Company. Vincent wanted to assign the Lambert's Run lease to his controlled corporation but the Dawson Company, the principal lessor, would not consent to the assignment. Vincent so reported to his corporation. Thereupon it became necessary to work out a different arrangement. This was done by the adoption of a resolution by the directors of Vincent, Inc., and the simultaneous execution of an agreement between Vincent and Vincent, Inc. The resolution recited that the corporation would operate the coal properties without assignment of the leases. However, the agreement between Vincent and the corporation, simultaneously entered into, was entirely different. Under the agreement, Vincent, and not the corporation, 72 was to continue to operate the strip-mines in his own name and he was to be regarded as the operator of the coal. It further provided that he was to receive payment from his sales agent for all coal that he had under lease, and that out of the proceeds of such sales he was to pay brokerage, royalties for coal, surface rights, rights of way, rental on sidetrack property and buildings, and other similar royalties, and state taxes on mining operations. The remainder of the sales proceeds, which was described in the contract as "net proceeds" was to be paid over by Vincent to Vincent, Inc., and was so paid in 1947.Under neither the resolution nor the agreement did Vincent purport to convey to Vincent, Inc., any rights or obligations incidental to the Dawson lease. The Thrasher lease, which granted surface rights, was not mentioned. Neither the stripping contracts nor the contract for the sale of coal were assigned. Apparently Vincent and his corporation decided that if they could not effect a transfer of the underlying Dawson lease, there would be no point in transferring incidental rights and obligations.The net result of the arrangement between Vincent and Vincent, Inc., was 73 that Vincent paid over to the corporation income earned by him as an operator of coal properties and as an owner of coal leases and other properties in connection therewith. This does not relieve him of tax liability on such income. Lucas v. Earl, 281 U.S. 111">281 U.S. 111; Helvering v. Horst, 311 U.S. 112">311 U.S. 112; Harrison v. Schaffner, 312 U.S. 579">312 U.S. 579.Even if the agreement between Vincent and Vincent, Inc., can be regarded as vesting in the latter a property right of some kind, nevertheless Vincent's retention of the Dawson lease in his own name, and the retention of other rights and obligations would require the taxation of the income to him. Among the rights that he had was the right of cancelation of the contract on 30 days' notice. Through this he could control the flow of income. Under these facts, the income must be regarded as his. Commissioner v. Sunnen, 333 U.S. 591">333 U.S. 591.528 We conclude that the respondent properly included in Vincent's income for 1947 the income that he received in that year from operation of the Lambert's Run property and that he74 paid over to Vincent, Inc.As Vincent reported income on the cash basis, the amount of $ 146,823.40 which he collected in January 1948 on account of sales made in December 1947 and paid over to Vincent, Inc., in January 1948 should be included in his income for the year 1948 and excluded from the income of Vincent, Inc., for 1947. There is no dispute between the parties as to amounts to be allowed as expenses in connection with the earning of the above amounts of income from the Lambert's Run property.Depletion; Gross Income from the Property; Exclusion of Amounts Paid to Strippers (Case of J. E. Vincent for 1947, Vincent, Inc., for Year Ended April 30, 1948 and Period Ended Jan. 3, 1949).In computing the amounts allowable for depletion in the cases of J. E. Vincent for the year 1947, and of J. E. Vincent Company, Inc., for the year ended April 30, 1948, and the period ended January 3, 1949, the respondent excluded from gross income from the coal properties the amounts paid to the contract strippers, Swaney Contracting Company and B. H. Swaney and Sons, Inc. Such exclusions are assigned as errors by the petitioners.We have discussed a similar issue as to amounts paid75 by Gregory Run Coal Company to Summit Fuel Company for stripping coal from other leased properties. Under the contracts with the Swaney companies, as under the Summit Fuel contract, the important feature was that the stripping contractors were employed by the operator to strip-mine coal and haul it to the loading point at a price per ton to be paid by the operator. In Vincent's contracts with the Swaney companies, there were provisions for reduction or increase of the basic price per ton to be paid to the strippers if the current zone market of the price of coal was reduced below or increased above specified amounts per ton. They also contained a provision for cancellation by Vincent if the market price was reduced below a stated figure and if the parties failed to renegotiate the contracts. None of these provisions gave the stripping contractors an economic interest in the coal in place. The sliding price merely provided for adjustment of the price per ton to be paid to the strippers upon the coal that they mined and hauled. The Swaney companies were not dependent on the sale of coal by Vincent for their compensation, as both contracts provided that the failure of the sales76 agent to pay Vincent should not relieve Vincent of his obligation to pay the Swaneys the price agreed upon at the times and on the basis provided in the agreements. The 529 contracts here were more like those involved in the Morrisdale Coal Co. case, supra, than those in James Ruston, supra.For reasons given above under the issue as to payments by Gregory Run Coal Company to Summit Fuel Company, we hold that this issue is governed by our decision in the Morrisdale Coal case, and that the amounts paid to the stripping contractors should not be excluded from the gross income from the property in computing depletion deductions allowable to J. E. Vincent and J. E. Vincent Company, Inc.Depreciation Deductions in re Erie Tipple, Scales and Siding (Case of Vincent, Inc., for Year Ended April 30, 1948, and Period Ended Jan. 3, 1949).In determining the deficiencies in the case of J. E. Vincent Company, Inc., for the fiscal year ended June 30, 1948, and the period ended January 3, 1949, the respondent disallowed portions of the depreciation deductions claimed with respect to the company's Erie tipple, scales and railroad siding. 77 In reducing the depreciation deductions claimed, the respondent explained in the notices of deficiency that the basis for the properties in the hands of Vincent, Inc., was the same as in the hands of its transferor, namely, $ 44,488.03.The petitioner does not object to the respondent's determination that the salvage value of the properties was $ 20,000, and that the basis was recoverable over a 20-month period. The only issue is the basis.The tipple and appurtenant properties were acquired by Vincent, Inc., on January 2, 1948, from its controlling stockholder, J. E. Vincent, at a price of $ 125,000 for which amount it gave its check. That amount, on the face of things, was the cost to the petitioner and, in the absence of any recognized exception or unusual circumstance, would be the basis for depreciation. Code section 113 (a); Majestic Securities Corporation, 42 B. T. A. 698, affd. 120 F.2d 12">120 F. 2d 12. The petitioner maintains that the amount paid in this case was the basis. However, it apparently recognizes that transactions between corporations and controlling stockholders may be open to question, Majestic Securities Corporation, supra,78 and has introduced evidence directed toward establishing that the fair market value of the properties was not less than $ 125,000 at the time of the purchase. That was the testimony of several witnesses who were familiar with the properties and had at least some knowledge of costs of construction and values of tipples and the customary appurtenant properties.The respondent says that the sale of the properties by Vincent to his controlled corporation was not a bona fide transaction and would not give the corporation a basis of the amount that it paid. He points to Vincent's treatment of the properties in his returns for 1946 and 1947 wherein he reported costs of the properties at $ 54,000 and some $ 61,000, 530 respectively, and claimed depreciation at rates of 33 1/2 per cent on the theory that available coal would be exhausted within three years. We think that those matters are of little importance, particularly in view of the evidence which shows that actual cost to Vincent was in excess of $ 78,000 and that the ownership and operation of the properties were beneficial to the purchaser in the conduct of its business. Also, the petitioner Vincent, in his 1948 return, reported79 a gain of over $ 88,000 on the sale of the properties.We conclude that the basis of the properties in the hands of J. E. Vincent Company, Inc., was $ 125,000 and that depreciation deductions should be computed and allowed on that basis.The parties have stipulated figures to be used in computing allowable depletion deductions in the cases of J. E. Vincent, Docket No. 27878, J. E. Vincent Company, Inc., Docket No. 27879, and Gregory Run Coal Company, Docket No. 27880, after our decision of other issues. Effect will be given thereto in the recomputations.Decisions will be entered under Rule 50. Footnotes1. Proceedings of the following petitioners are consolidated herewith: J. E. Vincent, Docket No. 27878; J. E. Vincent Company, Inc., Docket No. 27879; Gregory Run Coal Company, Docket No. 27880; and J. E. Vincent Company, Inc., Docket No. 30435.↩2. The rate under the Swaney Company contract was $ 2 per ton. Finding No. 38.↩3. In determining the deficiency in the case of J. E. Vincent for the calendar year 1947, the Commissioner treated as an "unallowable deduction" the $ 808,064.46 that Vincent paid to Vincent, Inc., and he allowed as "additional deductions" the amount of $ 565,743.67 that Vincent, Inc., had paid as expenses in the period ended December 31, 1947. The Commissioner did not make corresponding adjustments in the income and deductions of Vincent, Inc.↩4. West Virginia Code, Mining Laws, chapter 22, article 2A.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622335/	S. L. BECKER, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Becker v. CommissionerDocket No. 9949.United States Board of Tax Appeals8 B.T.A. 65; 1927 BTA LEXIS 2962; September 12, 1927, Promulgated 2962 1. Fair market value of accounts receivable at the time of the dissolution of a corporation determined. 2. Revenue agents' reports not shown to have been used by the Commissioner in the determination of the deficiency held to be irrelevant and immaterial to the issue. Frank Reagam, Esq., for the petitioner. M. N. Fisher, Esq., for the respondent. MURDOCK 65 Individual income taxes for the year 1918 in the amount of $6,792.85 are in controversy. The petitioner alleges that the Commissioner erred in determining (1) that certain assets received by the petitioner in 1918 upon the dissolution of the Union Furniture Co. produced a profit which is taxable to the petitioner, even though the petitioner had made a corporation return and paid a tax on the cash realized from these assets; (2) that the fair market value of the accounts receivable taken over by the petitioner from the Union Furniture Co. at the time of its dissolution in 1918, was equal to their face value; (3) that petitioner's opening inventory as of October 1, 1918, amounted to $14,374.54 instead of $6,619.75; (4) that the amount of merchandise purchased by the petitioner was2963 only $6,683.81 instead of $14,638.62, as shown by his books, and (5) that all of the alleged surplus included in the corporation's net worth as of September 30, 1918, and taxed by the Commissioner against the petitioner as a liquidating dividend in the amount of $44,388.04 was earned subsequent to March 1, 1913, instead of determining that of this amount $23,636.51 was earned prior to March 1, 1913. The Commissioner and the petitioner have agreed upon certain other items of the petitioner's income and with these we are not concerned in the present case. FINDINGS OF FACT. The petitioner is an individual residing in Macon, Ga. Since 1902, he has been engaged in the retail furniture business, selling largely on the installment-credit plan. On or about February 15, 1912, the petitioner, Louis Snyder and H. D. Kaplan, organized and incorporated the Union Furniture Co., with a capital stock of $5,000. At that time they entered into an agreement which provided that the petitioner and Snyder should each own 8 shares of stock and that Kaplan should 66 own the remaining 34 shares. The petitioner and Snyder were to pay $800 cash for their stock at the time of the organization2964 of the corporation. Thereafter each of them was to receive a salary of $75 per month, $40 of which was to be withdrawn and the remaining $35 was to be paid to H. D. Kaplan as payment on the purchase by each of additional stock at par and as payment of 7 per cent interest on the balance of the purchase price thereof until each should own 16 shares, leaving Kaplan with 18 shares. In the course of time the petitioner acquired all of the corporation's capital stock. He paid for this stock as follows: On or about January 25, 1912$520.00By monthly payments of $35 on 16 shares1,080.00In 1916 in payment for 8 of Snyder's 16 shares2,900.00In July, 1918, in payment for the remaining 26 shares, all of which were owned by Kaplan10,000.00Total14,500.00Throughout its entire existence the corporation kept its books and made its annual income and profits-tax returns by the cash receipts and disbursements method, which the respondent concedes was the correct method under the circumstances. Petitioner has always made his individual income-tax returns by the cash receipts and disbursements method. The corporation conducted a retail furniture business selling2965 largely on the installment credit plan, up to and including the 30th day of September, 1918. On that day it surrendered its charter and a few days later was dissolved. From October 1 to December 31, 1918, the petitioner continued to conduct the business using the same store, the same books and the same name as the corporation had previously used. On October 1, the petitioner took over the assets of the corporation. At that time he did not take an inventory or close the books of the corporation. Thereafter he kept no separate account of collections made on the corporation's accounts receivable, nor of the receipts from the sales of merchandise which he acquired from the corporation and thereafter sold. The last inventory that had been taken was taken at the beginning of the calendar year 1918. Early in 1919, the petitioner consulted the Internal Revenue Agent in charge at Macon, Ga., and on the latter's advice the petitioner made a corporation income-and-profits-tax return on Form 1120 in the name of the Union Furniture Co. for the full 12-month period, covering the calendar year 1918. This return showed that tax was due in the amount of $239.90, and that $80 of this amount2966 was paid at the time of filing the return. Attached to the return was an affidavit of the petitioner stating that the Union Furniture Co. was dissolved 67 on October 2, 1918, but that the return was for the entire year 1918. The peitioner did not file an individual income-tax return for 1918, believing that the corporation return was all that was necessary. The balance sheet as of December 30, 1918, which was used by the Commissioner in determining the net worth of the corporation at the date of dissolution, is as follows: ASSETSCash in bank$1,120.33Cash on hand435.53Accounts receivable41,847.85Inventory14,374.54Horses and wagons300.00Fixtures175.00Auto truck930.0059,183.25LIABILITIESNotes payable (H. D. Kaplan)$5,266.25Notes payable1,145.16Accounts payable8,170.68Reserve for depreciation213.12Net worth44,388.0459,183.25In this balance sheet accounts receivable were included at their face value. From the net worth as thus determined the Commissioner deducted $14,500 as the cost of the stock and included the remainder in the petitioner's income for 1918 as a liquidating dividend. OPINION. 2967 MURDOCK: The petitioner's first allegation of error was denied by the respondent, is not supported by the evidence and, if we understand it correctly, is without merit. The petitioner filed a corporation income-tax return for the full year and paid some tax on the basis of this return, whereas the corporation should have filed a corporation income-tax return for a portion of the year and the petitioner should have reported the income from this same business for the last three months of the year in his individual income return for that year. In such a situation he is not relieved from paying his tax computed on a proper basis merely because the corporation paid tax calculated on an improper basis. Apparently his third allegation of error was abandoned. At any rate it is not supported by the evidence, for revenue agents' reports which have not been shown to have been used by the Commissioner in determining the deficiency are irrelevant and immaterial to this issue. In support of the fourth allegation of error it was proven that after September 30, 1918, the petitioner's books showed that $14,638.62 had been paid for goods purchased. But the testimony of the petitioner himself2968 in regard to these purchases was so confusing that we are unable to say whether the goods were purchased by the 68 corporation or by the petitioner as an individual. In addition we have never been shown what the Commissioner did in regard to these purchases and we are unable to say that what he did was in error. The petitioner's fifth contention was denied and to support it a reconstructed balance sheet of the corporation as of March 1, 1913, was offered in evidence. This balance sheet was supposed to show the earnings of the corporation as of that date, but on cross-examination it was shown to contain material errors. Even had it been accurate we would need to know other facts before we could decide that earnings of years prior to March 1, 1913, were distributed in 1918. On all of the above points we sustain the Commissioner. There is left for our further consideration only the second allegation of error in regard to the fair market value of the accounts receivable at the time they were taken over by the petitioner as an individual. The petitioner called two witnesses and also testified himself to prove that these accounts receivable were worth only 45 per cent2969 of their face value. Each of the three witnesses was allowed to testify without objection that in his opinion these particular accounts receivable had a fair market value of not more than 45 cents on the dollar. Each witness was familiar with the accounts receivable of the Union Furniture Co. on September 30, 1918. Each had had experience buying and selling other accounts of a similar nature. Their testimony was not weakened on cross-examination and was not contradicted or qualified in any way. Therefore, we hold that these accounts receivable should be taken at 45 per cent of their face value in determining the profit which the petitioner received from the corporation at the time of its dissolution. Judgment will be entered in accordance with the foregoing opinion on notice of 15 days, under Rule 50.Considered by STERNHAGEN and ARUNDELL.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622336/	Arthur D. McDonald and Jessie L. McDonald, Petitioners v. Commissioner of Internal Revenue, RespondentMcDonald v. CommissionerDocket No. 429-67United States Tax Court52 T.C. 82; 1969 U.S. Tax Ct. LEXIS 154; April 16, 1969, Filed 154 Decision will be entered under Rule 50. 1. The petitioner, who owned all of the outstanding nonvoting preferred stock of E & M and substantially all of its outstanding common stock, entered into an agreement with Borden, under which E & M redeemed his preferred stock at par and thereafter Borden acquired all of E & M's outstanding stock in exchange for its own stock. Held, the redemption of the petitioner's preferred stock was not essentially equivalent to a dividend.2. The petitioner failed to show that he is entitled to any part of a deduction for legal fees disallowed by the respondent. H. Milton Innerfield, for the petitioners.Ferdinand J. Lotz III, for the respondent. Simpson, Judge. SIMPSON82 The respondent determined a deficiency of $ 26,545.90 in the petitioners' income tax for the taxable year ending December 31, 1961. There are two issues for decision: (1) Whether a redemption of stock by a corporation pursuant to a plan for the acquisition 83 of such corporation is essentially equivalent to a distribution of a dividend; and (2) whether, on the facts presented, a legal fee is deductible under section 212 of the Internal Revenue Code of 19541 or under any other section of that Code.157 FINDINGS OF FACTSome of the facts have been stipulated, and those facts are so found. 2The petitioners, Arthur D. and Jessie L. McDonald, are husband and wife and resided at Middleport, N.Y., at the time the petition was filed in this case. They filed their joint Federal income tax return for the year ending December 31, 1961, using the cash receipts and disbursements method of accounting, with the district director of internal revenue, Buffalo, N.Y. Arthur D. McDonald will be referred to hereinafter as the petitioner.E & M Enterprises, Inc. (E & M), whose place of business was and is in Middleport, N.Y., was organized on January 9, 1947. E & M was the successor by a tax-free incorporation of a partnership in which the petitioner158 as one of two equal partners had a tax basis of $ 43,600. For his share of the partnership assets, the petitioner received in exchange 10 shares of the common stock of E & M with a par value and basis in the petitioner's hands of $ 10 per share and 435 shares of E & M's 870 noncumulative, nonvoting preferred stock with a par value and basis in the petitioner's hands of $ 100 per share. Upon incorporation, the petitioner's equal partner, William L. Carnegie, received 435 shares of the preferred stock and 10 shares of the common stock in exchange for his interest in the partnership. At the same time, the petitioner's brother, Stanley D. McDonald, who worked for, but had no interest in, the partnership, received 1 share of the common stock.On April 3, 1948, the petitioner entered into an agreement with E & M regarding the disposition of his preferred stock. This agreement provided that on the petitioner's death, E & M would purchase such stock at its book value. It further provided that in the event the petitioner desired to sell such stock during his life, he was required to notify E & M, which was given an option to purchase such stock at its then book value. A similar agreement159 was executed between Mr. Carnegie and E & M. In 1954, E & M redeemed all of Mr. Carnegie's stock, preferred and common, and his interest was eliminated. 84 Thereafter, and until the transactions with the Borden Co. hereinafter described, the petitioner owned all of the stock of E & M except for Stanley's one share of common. The petitioner continued to be, as he had been before the termination of Mr. Carnegie's interest, the dominant figure in E & M's operations.E & M was engaged in the manufacture of tools, dies, and special equipment. From 1958 to 1961, its volume of business was approximately $ 1 million per year. It employed an average of 65 to 70 people, reaching a peak of 92 people, and had an average weekly payroll of $ 8,000. E & M's operations required substantial amounts of cash, much of which was obtained by loans from the Marine Trust Co. of Middleport.From the date of its incorporation until April 21, 1961, E & M paid formal dividends on its preferred stock in the total amount of $ 11,745. Such dividends were paid at the rate of 6 percent on the 870 shares of preferred stock outstanding prior to the redemption of Mr. Carnegie's interest, and were paid in160 quarterly amounts of $ 1,305 for nine quarters from April 1951 through April 1953. After April 1953, no formal dividends were paid on the preferred stock.In late 1960, the Borden Co., a large corporation whose one class of stock was listed on the New York Stock Exchange, expressed an interest in acquiring some of E & M's assets. Though the petitioner discussed an asset purchase with Borden, no offer on such terms was ever made. In March 1961, after auditing E & M's books and viewing its legal documents, Borden made a verbal offer to purchase the petitioner's preferred and common stock and Stanley's common stock in exchange for 5,500 shares of Borden's common stock. Although the petitioner accepted such offer, it was never consummated. After the March offer, Borden's representatives took copies of E & M's records back to Borden's New York City office. In early April, Borden submitted to the petitioner an offer to purchase the E & M stock for Borden stock -- a proposed "Plan of Reorganization." This plan was accepted and executed by the petitioner, Stanley, E & M, and Borden on April 12, 1961. It recited the existence of the April 3, 1948, agreement between the petitioner and161 E & M and provided that prior to closing, the petitioner would offer to E & M, and E & M would redeem, his 435 shares of preferred stock for its book value of $ 43,500. The plan further provided that on closing, the petitioner would transfer his 10 shares of E & M common stock in exchange for 4,399 shares of Borden's common stock, and that Stanley would transfer to Borden his 1 share of E & M common stock in exchange for 440 shares of Borden's common stock. The difference between the 5,500 shares of Borden common stock originally offered for the business and the 4,839 shares agreed 85 on in the plan represents the amount of $ 43,500 to be paid to the petitioner by E & M in redemption of his preferred stock. Closing was set for April 28, 1961.During the discussions concerning the plan, the petitioner pointed out to Borden that E & M did not have sufficient cash to carry out the redemption. As a result, on Borden's recommendation, the petitioner had E & M obtain a short-term bank loan from the Marine Trust Co. of Middleport in the amount of $ 60,000 on April 21, 1961. This transaction was not reflected in the plan of reorganization. Of this loan, $ 43,500 was to be used162 to effectuate the redemption of the petitioner's stock, and the balance was to be used to satisfy bonus and back-pay obligations of E & M. At the time the loan was made, the bank had a copy of the April 12 agreement and knew that Borden was shortly to assume ownership of E & M.On April 21, 1961, E & M, pursuant to the terms of the April 3, 1948, agreement, elected to and did redeem the 435 shares of the petitioner's preferred stock for $ 43,500, an amount equal to the petitioner's basis in that stock. As of that date, E & M had earnings and profits of not less than $ 237,149.29. After the redemption, the petitioner's 10 shares and Stanley's 1 share of E & M's common stock constituted all the outstanding stock of the company.On April 28, 1961, the deal was closed in New York City. The petitioner exchanged his 10 shares of E & M's common stock for 4,399 shares of Borden's common stock, and Stanley exchanged his 1 share of E & M's common for 440 shares of Borden common. Borden thereupon took over the operations of the company and continued to run it to the date of the trial in this case. The petitioner was retained as an employee of E & M until December 1962, and thereafter continued163 to do odd jobs at Borden's request.At the closing, Borden gave the petitioner a check in the amount of $ 96,000 payable to E & M for deposit with the Marine Trust Co. of Middleport. Of that amount, $ 60,000 was used to pay off the April 21 bank loan, and the balance was used for operating cash.Prior to the reorganization, E & M paid the petitioner approximately $ 40,000 a year as salary and bonus. He had no need for the cash received on the redemption of his preferred stock. The petitioner in 1961 wanted to sell his business to Borden but was indifferent as to whether he received 5,500 shares of Borden stock or received $ 43,500 in cash from E & M on redemption plus the 4,399 shares of Borden stock. Both the idea of redemption of the E & M preferred stock and the idea of obtaining a bank loan to accomplish it originated with Borden. To the date of the trial in this case, the petitioner continued to hold the 4,399 shares of Borden stock received in the transaction.86 On his tax return for 1961, the petitioner reported the redemption of his preferred stock in E & M as the sale or exchange of a capital asset held for more than 6 months in which the amount received, $ 43,500, 164 equaled his basis in such stock, giving rise to no gain or loss. He reported the exchange of his E & M common stock for Borden common stock as a tax-free exchange.In 1961, the petitioner paid $ 832.94 to the law firm of Lewis, Sims, and May, Esqs., for various legal services rendered to him. The bulk of such legal fees was for services in connection with the exchange of stock with Borden. No part of such fees was shown to be paid for services giving rise to an income tax deduction in 1961.OPINIONWe are presented with the vexing problem of deciding whether a redemption of corporate stock in the circumstances of this case should be treated as a sale or as the distribution of a dividend. The respondent considers the redemption of the petitioner's preferred stock and his exchange of E & M common stock for the Borden stock to be separate transactions and therefore concedes that the exchange constituted a tax-free reorganization within the meaning of section 368(a)(1)(B). Therefore, we do not have before us any issue as to the propriety of treating the exchange with Borden as tax free. Instead, he attacks the petitioner's treatment of the redemption as a sale of his preferred stock. 165 Accordingly, we will dispose of the case on the basis of the issue so presented.Under section 302(a), a redemption is to be treated as a sale of the stock if any one of the tests in subsection (b)(1), (2), (3), or (4) is satisfied. The petitioner agrees that there has not been a complete termination of his interest within the meaning of section 302(b)(3); rather, he contends that the plan of reorganization of which the redemption was a part resulted in such a termination of his interest as to indicate that the redemption was not essentially equivalent to a dividend within the meaning of section 302(b)(1).In a forlorn attempt to provide some certainty in this area of the law, the House, when it passed section 302, provided definite tests for determining when a redemption would be treated as a sale, such as those tests now appearing in paragraphs (2) and (3) of section 302(b). However, the Senate found those tests to be too restrictive and restored the not essentially equivalent to a dividend test. At the same time, the Senate added section 302(b)(5) which provides in part:In determining whether a redemption meets the requirements of paragraph (1), the fact that such redemption166 fails to meet the requirements of paragraph (2), (3), or (4) shall not be taken into account. * * *87 Furthermore, when the Senate restored the dividend equivalency test, it used essentially the language of section 115(g) of the 1939 Code and stated that it intended to reinstate the existing tests as to whether a redemption is essentially equivalent to a dividend. S. Rept. No. 1622, to accompany H.R. 8300 (Pub. L. 591), 83d Cong., 2d Sess., p. 44 (1954). Under section 115(g), a substantial change in ownership or a termination of interest was indicative that a redemption was not the equivalent of a dividend. Sec. 29.115-9, Regs. 111; Northup v. United States, 240 F. 2d 304 (C.A. 2, 1957). Thus, section 302(b)(5) and the legislative history make clear that a redemption resulting in a substantial change in ownership or a termination of interest may qualify under section 302(b)(1) even though it does not come within the precise terms of section 302(b) (2) or (3).The petitioner seeks to bring his case within the rationale of Zenz v. Quinlivan, 213 F. 2d 914 (C.A. 6, 1954), decided under the 1939 Code. 167 In that case, the taxpayer, who owned all the stock of a corporation, wished to sell it. She found a purchaser who was interested in acquiring the business of the corporation but did not wish to purchase all its stock; accordingly, they agreed upon a plan under which the purchaser bought part of her stock, and thereafter the remainder was redeemed by the corporation. The court held that since the redemption terminated her interest in the corporation, it was not essentially equivalent to a dividend. The respondent agrees that a redemption under the circumstances involved in the Zenz case constitutes a termination of interest within the meaning of section 302(b)(3). Rev. Rul. 55-745, 2 C.B. 223">1955-2 C.B. 223. In addition, we think that the Zenz rationale is still applicable in determining whether a redemption is essentially equivalent to a dividend within the meaning of section 302(b)(1).In Zenz, the shareholder sold her stock in a taxable transaction, and after the sale and redemption, she had no continuing interest in the business. The respondent argues that since the acquisition by Borden was a tax-free reorganization, the petitioner168 must have had a continuity of interest, and that since he had a continuity of interest, his interest was not terminated within the Zenz doctrine. We think that this reasoning substitutes fiction for fact.The record in this case establishes clearly that the redemption was merely a step in the plan of Borden for the acquisition of E & M, so that it is the results of the plan that are significant to us. Howard P. Blount, 51 T.C. 1023">51 T.C. 1023 (1969); see United States v. Carey, 289 F.2d 531">289 F. 2d 531, 532 fn. 2 (C.A. 8, 1961). Before the reorganization, the petitioner owned virtually all of the stock in, and had complete control over, E & M. For all practical purposes, his direct interest in E & M was terminated after the reorganization. He continued to serve E & M as an employee for a short time and as a consultant, but those services appear to have been minimal. By means of the redemption and stock 88 swap, he had liquidated his interest in his company; he had cash and the marketable securities of a large publicly held company and virtually no control or influence whatever over the destiny of the Borden Co. or E & M. 169 Thus, the fact is that the petitioner's investment was changed radically as a result of the completion of the plan of reorganization, even though the exchange of stock may have been tax free.Our ultimate objective in applying section 302 is to determine whether the redemption so alters the shareholder's interest in the corporation as to resemble a sale or whether it merely distributes corporate earnings with no significant alteration of his interest in the corporation. Obviously, when a redemption results in a complete termination of the shareholder's interest, it is clear that the redemption is not the equivalent of a dividend. Zenz v. Quinlivan, supra.Moreover, when the redemption results in a substantial reduction in the interest of a shareholder, the change is also indicative that the redemption is not merely a dividend. Northup v. United States, supra.In applying section 302, it is immaterial whether the redemption resulted in an absolute termination of the shareholder's interest, if it resulted in such a substantial change in his interest as to indicate that it was not the equivalent of a dividend. 170 Nor does it make any difference under section 302 whether the exchange of E & M and Borden stock was taxable or tax free or whether the redemption preceded the exchange. See United States v. Carey, supra; Bittker & Eustice, Federal Income Taxation of Corporations and Shareholders 295 (2d ed. 1966); 1 Mertens, Law of Federal Income Taxation, sec. 9.104, p. 234. Had there been a redemption which reduced the petitioner's interest from that of 90 percent to 10 percent of the stock of the corporation, no one would contend that the redemption was a dividend. Yet, the change wrought in the petitioner's investment by the reorganization plan was at least as extensive.We have found that the petitioner did not care whether he received all Borden stock or some Borden stock and some cash for his E & M stock and that it was Borden who suggested and decided upon the redemption of his preferred stock. This finding is based upon the evidence offered by the petitioner. The respondent asks us not to believe the testimony. However, we cannot find the petitioner's testimony to be incredible per se -- that is, we cannot say that it is beyond the pale of believability, 171 and the respondent has produced no evidence that contradicts the petitioner's testimony. We wonder why he did not call as a witness the Borden representative in these negotiations, if his version of what happened differs from the petitioner's testimony; instead, the respondent asks us, even though the evidence is not inconsistent, to conclude that the petitioner perjured himself. Under these circumstances, we accept as true the petitioner's description of the negotiations.89 The petitioner accepted the original proposal by Borden under which he would have received only Borden stock -- no cash, and he was willing to go through with the reorganization irrespective of whether he received all stock or some stock and some cash. These circumstances make it indisputably clear to us that this was not a redemption arranged by the petitioner to withdraw corporate earnings at capital gains rates. We do not mean to imply that if the petitioner had suggested the form of the acquisition, our holding would necessarily be different; we will leave the decision of that case to a later date, when it is presented to us.The respondent gives as a reason for his position that a decision in favor172 of the petitioner would allow him to withdraw substantial corporate earnings at no tax (or, if his basis in the redeemed stock were less than the amount distributed, at capital gains rates). That may be true, but such result does not require us to hold that the distribution is a dividend. Zenz v. Quinlivan, supra.Taking into account all the circumstances of this case, we conclude that the redemption and the reorganization effected such a substantial change in the petitioner's interest in E & M as to establish that the redemption was not essentially equivalent to a dividend.Our disposition of the case makes it unnecessary for us to consider the many other arguments raised by the parties with regard to the characterization of the redemption.The petitioner deducted $ 832.94 on his tax return as amounts paid for legal services in 1961, and the respondent disallowed the deduction in full. The petitioner now concedes that "a substantial part" of this amount was related to legal services incident to the reorganization and is nondeductible, but contends that some part thereof was attributable to estate planning and general business advice and is therefore173 deductible. The record is absolutely barren of evidence as to what amount if any was spent for deductible legal advice, and we must hold for the respondent on this issue.Decision will be entered under Rule 50. Footnotes1. All statutory references are to the Internal Revenue Code of 1954, unless otherwise indicated.↩2. At trial, it appeared that par. 9 of the joint stipulation contained an error regarding dividends paid by E & M Enterprises, Inc. The correct facts were brought out at trial and agreed to by the parties. Such correction to the stipulation will be reflected in these Findings of Fact.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622337/	HAZEL T. POWER, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Power v. CommissionerDocket Nos. 39032, 40737, 46620.United States Board of Tax Appeals23 B.T.A. 428; 1931 BTA LEXIS 1876; May 27, 1931, Promulgated 1876 The assignment of future income by the petitioner herein to her husband under the facts of this case does not divest her of the liability for payment of the tax thereon. W. H. Oppenheimer, Esq., for the petitioner. Brooks Fullerton, Esq., for the respondent. MORRIS428 These three proceedings, consolidated for hearing, are for the redetermination of deficiencies in income tax of $1,788.61 for 1924, $10,256.78 for 1926, and $3,792.07 for 1927, and the petitioner assigns as error the inclusion in her gross income for said years of that portion of the income from a trust estate which would have been receivable by her under the terms of her mother's will but for the assignment thereof by her to her husband. 429 FINDINGS OF FACT. The petitioner, a resident of Center City, Minn., is named Hazel Thompson Power, but she sometimes signs her name as Hazel E. Power. Abigail I. Thompson, a resident of St. Paul, Minn., died in 1923, leaving a last will and testament which was duly admitted to probate in the probate court of the County of Ramsey, Minnesota. The said will provides, inter alia, that the residue of her estate, consisting1877 of personal property, shall be held in trust and further that: (b) The trust property shall be held by the Trustees undivided during the joint life of my daughters, said Hazel E. Power and said Florence Wheeler Jefferson, and the life of the survivor of them. So long as they both live, the income thereof, first deducting the sums, if any, paid Mary E. Stewart as above provided, shall be paid over to them annually, or at such shorter intervals as the Trustees shall find convenient, in equal shares. In case the one first dying leaves her surviving any lawful issue, whether of the first or succeeding generations, then thereafter so long as any such issue and the remaining daughter shall live, such issue shall receive one-half of the income and the remaining daughter the other one-half. But, in the event such issue of the deceased daughter shall die during the life of the remaining daughter, then thereafter the whole income shall be paid to such remaining daughter until her death. Upon the death of the remaining daughter, the property shall be divided and turned over one-half thereof to the living issue of each daughter, if there then be such issue of each, whether of the first or1878 succeeding generations. But, if there then be such issue of one daughter only, that issue shall take the whole of the Trust Estate. The terms of the said will placed no limitations or restrictions on alienation of the right to receive the income from the trust estate, by the life beneficiaries. On or about September 27, 1923, the petitioner executed before a notary public a written document which makes reference to the provisions of the said will as to the creation of the trust and the distribution of the income therefrom and then provides as follows: NOW, THEREFORE, For Value Received and in consideration of the natural love and affection I bear unto my husband, Charles E. Power, the undersigned, Hazel E. Power, does hereby assign, transfer and set over unto said Charles E. Power, one-third of the income of the trust estate of said Abigail I. Thompson to which the undersigned, Hazel E. Power, may be or may become entitled to under and by virtue of the terms of the Last Will and Testament of Abigail I. Thompson and the Codicils thereto, and the trust therein created. This assignment of income is expressly made subject to the following conditions subsequent, namely: That1879 should the said Charles E. Power, alienate or dispose of any anticipated income or income payable in the future, to which he may be entitled under this assignment, if any, or if by reason of insolvency or any other means whatsoever said income can no longer be personally enjoyed by the said Charles E. Power, either in whole or in part, but because of such fact or facts the same would, if this assignment were to be permitted to continue, become vested in or payable 430 to some other person, then this assignment of said income so to become payable in the future after the happening of such event shall be deemed terminated and the interest of said Charles E. Power therein shall immediately cease and determine, and the said income shall revert to and belong to the undersigned, Hazel E. Power. The interest of the assignee hereunder in future and undistributed income shall not be assignable. On the same date the petitioner served upon the trustees of the said trust estate the following written instrument, executed before a notary public: To - C. K. Blandin, Watson P. Davidson, Ira C. Oehler, W. H. Oppenheimer, Trustees under the Last Will and Testament of Abigail I. 1880 Thompson, Late of Saint Paul, Minnesota. The undersigned, Hazel E. Power, has this day executed and delivered to her husband, Charles E. Power, an assignment of a one-third interest in the income to which she will become entitled under the terms of the trust estate created by her mother. A duplicate original of said assignment is hereto attached and made a part hereof. The undersigned hereby requests that in distributing the income to which the undersigned may become entitled to receive under the terms of said will and the trust thereby created, that at the time of distribution, you distribute the same in two checks, one for two-thirds of the amount to the undersigned, Hazel E. Power, and one for one-third of the amount to my husband, Charles E. Power. You are authorized to continue making such payments irrespective of the conditions subsequent contained in said assignment until written notice from me of the happening of any fact putting into operation the said conditions subsequent and the termination of said assignment. That is to say, you are not charged or to be charged with the duty of investigating whether or not any facts have arisen putting said conditions subsequent1881 into operation, but may rely upon such condition not having arisen until I serve written notice upon you to the contrary. In consideration of your recognizing said assignment of a one-third interest in said income to my husband, I hereby agree to protect and save you harmless from any costs, damages, liability or expense of any kind, character or description, which you may be put to by reason of making payments to my husband, Charles E. Power, in accordance with said assignment and this notice. IN WITNESS WHEREOF, I have hereunto set my hand and seal this 27th day of September, 1923. HAZEL E. POWER. In Presence of: FLORENCE T. JEFFERSON. A. C. JEFFERSON. Subsequently the following written instrument was executed by petitioner and her husband: WHEREAS, under date of September 27th, 1923, the undersigned, Hazel E. Power, did assign, transfer and set over unto her husband, Charles E. Power, 431 one-third of the income of the trust estate created for the undersigned, Hazel E. Power, under the terms of the will of her mother, Abigail I. Thompson: NOW, THEREFORE, this document evidences the fact that subsequent to the date of such agreement, and at a date1882 which can be fixed by checks passing from the undersigned, Hazel E. Power, and by the bank accounts of the respective parties, the interest of said Charles E. Power in said income was increased from one-third to one-half, it being the intent hereof to evidence by this writing that previous verbal understanding between the parties that the agreement above referred to was, has been and is modified so that the interest of Charles E. Power in the income of said trust estate has been and is one-half instead of one-third. April 13, 1927. HAZEL E. POWER. C. E. POWER. Throughout the years in question the said instruments have remained in full force and effect, have been recognized by the trustees of the said trust estate and have not been revoked at any time up to the date of the hearing on these proceedings. The said trustees acted upon the instructions of both the petitioner and her husband and paid over to them one-half of the net income of the trust by issuing checks to a designated bank as payee for deposit to their joint bank account. In her income-tax return for the year 1924, the petitioner reported two-thirds of her share, under the terms of the will, of the income1883 from the trust estate and her husband reported the other one-third. For the years 1926 and 1927 the petitioner and her husband each reported one-half of the said income. In each of the said years the tax was paid accordingly, but the respondent proposes to include in petitioner's gross income for each of the said years the total amounts constituting her share, under the terms of the will, of the income from the trust estate, thus giving rise to the deficiencies in controversy. OPINION. MORRIS: The petitioner alleges and contends that that portion of the income here in controversy which would have been received by her from the estate of Abigail I. Thompson had it not been previously assigned by her to her husband, is not taxable to her. The rule is well established that notwithstanding the document of grant or assignment itself may be perfectly valid and enforceable between the parties thereto, the liability for income tax upon future income or profits which will or may accrue to the assignor by reason of the ownership of or an interest in property can not be avoided by the assignor or grantor through the grant or assignment of such income or profits to another. 1884 ; affd., ; ; certiorari denied, ; ; petition for review 432 dismissed, ; ; ; ; and , holding the assigned income taxable to the assignor or grantor. The same general rule was announced and followed in ; affd., , although a different conclusion was reached, because something more than the mere assignment of future income was accomplished - namely, an assignment of an interest in the property itself from which the income flowed; also, in , reversed at , the Board held that "what was assigned was a right to profits after they had arisen rather than any principal or asset which gave rise to the profits;" but the Circuit Court1885 of Appeals reversed the decision of the Board on the ground that the instrument not only assigned the right to receive future income, but it also carried with it the right, title and interest in and to the property itself, i.e., a certain syndicate agreement. The rule stated seems to be perfectly reasonable and sound. If it were possible for a taxpayer to assign his future taxable income (assuming, of course, that he accomplishes nothing more), and by such assignment indirectly effect an assignment of his tax liability thereon, thus permitting him to plead the assignment and compel the Government to seek redress from the assignee, there would be nothing to prevent the original assignee from dividing a portion of his right to receive by further assignment to others, and so on ad infinitum, until the individual liabilities for the tax would be so multiplied and scattered that collection of the tax would be rendered absolutely impossible in a vast majority of cases. Under such circumstances income, as such, would cease to be an object of taxation. 1886 To absolve the assignor of complete liability for tax upon assigned income would, as the dissenting opinion in Marshall Field, infra, states, "distort the income tax by making it depend upon the disposition of income," or, as the court said in : To permit the assignor of future income from his own property to escape taxation thereon by a gift grant in advance of the receipt by him of such income would be indirection enlarge the limited class of deductions established by statute. As long as he remains the owner of the property, the income therefrom should be taxable to him as fully, when he grants it as a gift in advance of its receipt, as it clearly is despite a gift thereof immediately after its receipt. In , sustaining the decision of the Board that notwithstanding an agreement between the taxpayer and his wife to create a joint tenancy in future income the income was taxable to the husband, the court said: 433 But this case is not to be decided by attenuated subtleties. It turns on the import and reasonable construction1887 of the taxing act. There is no doubt that the statute could tax salaries to those who earned them and provide that the tax could not be escaped by anticipatory arrangements and contracts however skillfully devised to prevent the salary when paid from vesting even for a second in the man who earned it. That seems to us the import of the statute before us and we think that no distinction can be taken according to the motives leading to the arrangement by which the fruits are attributed to a different tree from that on which they grew. We have held in a very similar line of cases that the assignment of dividends upon capital stock, interest upon promissory notes, and rents from properties, etc., does not relieve the assignor or grantor of liability for payment of the tax upon such dividends, interest, or rents where the ownership of said stock, promissory notes, or other properties remained in the assignor. ; ; affirmed in these respects, 1888 ; certiorari denied, ; ; ; ; , certiorari denied, . Also see ; ; ; ; ; . Counsel for the petitioner cites , as controlling of the issue here and states that the instant case "is far stronger" than that, but he does not indicate why he so believes. We are of the opinion that the two cases are clearly distinguishable. In the instant case the petitioner revocably assigned, with a restraint upon alienation, 1889 "one-third of the income of the trust estate" which she "may be or may become entitled to," while in the Clark case there was an absolute irrevocable assignment to the assignee "and to his heirs and assigns forever," of "one-half interest in all income, rents, interest, reversion, remainder and remainders which may from time to time be payable to me or to which I may be hereafter entitled." In other words, the assignor there was completely divested of every right in and to a portion of the trust property and the income therefrom, while here there was a mere revocable assignment of income, with a restraint upon alienation, which, as the assignment states, was "to become payable in the future." The petitioner also cites ; affirmed upon the point in question in . In that case Field, having an interest in income of a certain trust, executed in instrument to his wife assigning to her "an undivided two-thirds (2/3rds) interest in all the net 434 income of the two-fifths (2/5ths) of the residuary estate of Marshall Field, deceased, * * intending1890 hereby to convey to and vest in the said party of the second part [his wife] an undivided two-thirds (2/3rds) interest in all the net income adjudicated to belong" to him. The Board said, holding the assignor nontaxable with respect to the income so assigned, that, "The petitioner by such assignment completely divested himself of any interest in the right to receive such income and it follows that he may not be taxed therefor." In the instant case there was no complete divestiture upon the part of the petitioner as to the one-third of the income assigned, for the reason that the assignee was deprived of the most important attribute of ownership, namely, his right of alienation and complete personal enjoyment. Furthermore, in the Field case there is a clear intention to pass an immediate irrevocable property right in and to the trust income, whereas here the assignment is revocable and is predicated upon "anticipated income or income payable in the future." For the same reasons just given with respect to the Field case, we are of the opinion that 1891 ; petition for review to Circuit Court of Appeals, First Circuit, dismissed January 17, 1930, can not be followed. Not that we question the motives impelling the assignor to make this assignment, but we must satisfy ourselves from the evidence in each of these cases, where husband and wife are concerned, each enjoying and sharing in the properties of the other without material distinctions of ownership (it will be observed from the findings of fact that the assigned income was deposited in a joint bank account), that there has been a really bona fide assignment of a property right in praesenti and not a mere assignment of future income in the guise of a property right designed for the purpose of defeating taxes justly due. To adopt a less stringent policy would permit the shifting of income from husband to wife and vice versa to suit the convenience of the individual taxpayer. As the Circuit Court said in , "If such indefinite transactions are approved, it will open wide the door by which men, without the high purposes that the government admits actuated petitioner, may enter and1892 defraud the government of its taxes." The instrument in question can not be construed as an attempt on the part of the assignor to completely divest herself of one-third of her property right in the trust, when considered in the light of the conditions imposed upon the assignment. That the assignment constituted nothing more than an attempt to assign future income, as, if, and when earned and payable by the trust, is borne out by such language in the instrument as "anticipated income or income payable 435 in the future, to which he may be entitle * * * if any." Furthermore, there could have been no absolute divestiture of a property right by reason of the condition that "If by reason of insolvency or any other means whatsoever said income can no longer be personally enjoyed by the said Charles E. Power" the assignment should cease and determine, the said income reverting to the assignor. For the above and foregoing reasons the respondent's determination is approved. Reviewed by the Board. Judgment will be entered for the respondent.TRUSSELL dissents.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622338/	GERALD HABLE AND SHERRY HABLE, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentHable v. CommissionerDocket No. 24541-82.United States Tax CourtT.C. Memo 1984-485; 1984 Tax Ct. Memo LEXIS 185; 48 T.C.M. (CCH) 1079; T.C.M. (RIA) 84485; September 11, 1984. Gerald Hable and Sherry Hable, pro se. Sue Ann Nelson, for the respondent. CLAPPMEMORANDUM FINDINGS OF FACT AND OPINION CLAPP, Judge: Respondent determined deficiencies in and additions to petitioners' Federal income tax as follows: Additions to TaxYearIncome TaxSec. 6653(a) 11979$15,766.27$788.311980$17,069.41$853.47After concessions, the issues for decision are (1) whether petitioners are entitled to deduct certain farm expenses in excess of the amount186 allowed by respondent; (2) whether petitioners are subject to an increase in self-employment tax for the taxable years in issue; (3) whether petitioners are entitled to any additional expenses, depreciation, or credits in excess of the amounts allowed by respondent, and (4) whether petitioners are liable for additions to tax under section 6653(a) for negligence or intentional disregard of rules and regulations. 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 Gerald Hable and Sherry Habl, husband and wife, resided in Bloomer, Wisconsin, at the time they filed the petition in this case. They filed joint Federal income tax returns for the taxable years 1979 and 1980 based on the cash receipts and disbursements method of accounting. During the years at issue, petitioners operated a dairy farm in Bloomer, Wisconsin. Included in their return for each year was a Schedule F reflecting farm income, expenses, and depreciation. Respondent issued a notice of deficiency, dated September 22, 1982, for taxable years 1979 and 1980, disallowing, inter alia, farm expenses claimed on187 the return. Subsequent to the issuance of the notice, respondent determined revised income tax computations for those years based upon a thorough examination of petitioners' books and records, resulting in lower deficiencies and additions to tax. 1. Farm ExpensesOne of the major remaining issues in dispute is respondent's disallowance of certain farm expenses on the grounds that petitioners have not adequately substantiated the expenses. The items discussed below were addressed at trial. It is important to note at the outset that deductions are a matter of legislative grace. New Colonial Ice Co. v. Helvering,292 U.S. 435">292 U.S. 435, 440 (1934). Petitioners bear the burden of proving that they are entitled to each of the claimed deductions. Welch v. Helvering,290 U.S. 111">290 U.S. 111 (1933); Rule 142(a) 2. A. Labor HiredGerald Hable testified that the deductions claimed as labor hired on the Schedule F in both 1979 and 1980 in the respective amounts of $4,858.11 and $9,029.61188 consisted of wages paid to petitioners' minor children. Compensation is deductible if it is reasonable in amount, based on services actually rendered and paid or incurred. The fact that payments are made to minor children by a related party does not preclude their deductibility. Eller v. Commissioner,77 T.C. 934">77 T.C. 934, 962 (1981). The payments, however, must not be compensation for services which are in the nature of routine family chores. Denman v. Commissioner,48 T.C. 439">48 T.C. 439, 450 (1967); Harrison v. Commissioner,18 T.C. 540">18 T.C. 540, 543 (1952). Petitioners failed to produce any admissible evidence to substantiate these payments. Petitioners maintained no contemporaneous records of the number of hours their children worked. Mr. Hable did not specify what services his children performed nor did he present any probative evidence to demonstrate payment. Accordingly, respondent's determination is sustained. B. Deduction For Wages Paid to Sherry HablePetitioners also claimed on the Schedule F a deduction of $9,000 in 1979 and $5,000 in 1980189 as wages paid to Sherry Hable. Petitioners included the respective amounts on the Form 1040. Because of lack of substantiation, respondent disallowed the deductions on the Schedule F and made corresponding adjustments to the income entries on the Form 1040. No evidence was presented by petitioners to indicate the services rendered or to substantiate the payment of wages. Accordingly, respondent's determination is sustained. C. RepairsPetitioners deducted repair expenses on the Schedule F for the year 1979 in the amount of $2,845.48, of which respondent has conceded $823.21. Remaining in dispute is the amount of $2,022.27. Petitioners incurred an expenditure of $900 for the replacement of shingles on the barn roof which had blown off during a hail storm. Respondent disallowed this expenditure as a current expense but allowed it as a capital expenditure resulting in a depreciation deduction. We find that the roof patching job was made to maintain the property and not to improve or prolong the life of the barn. Accordingly, petitioner is entitled to deduct the repair as a current expense in the year 1979. 3 The appropriate adjustment will have to be made to the depreciation190 schedules for the years 1979 and 1980. Petitioners did not present any additional evidence to support the remaining claimed repair expenses. Therefore, with the exception of the $900 roof repair expense, respondent's determination is sustained. D. Vehicle UsePetitioners deducted $3,186 in 1979 and $3,685.41 in 1980 as farm-related vehcile use. After concessions, respondent allowed $1,769.34 and $2,070.00, respectively. Mr. Hable admitted that the disallowed mileage ultimately involved fishing and hunting trips. However, he considered these trips to be compensation for his children. As discussed above in 1A, petitioners failed to substantiate the services performed by their children. We believe that, with the exception noted below, the trips were of a personal or family nature and not for payment for services rendered. Mr. Hable testified that approximately one quarter of the disallowed mileage was farm-related in that business was conducted on route to the final destination, e.g., picking up a tractor part. We find Mr. Hable to be a credible witness in this regard. 191 Based on his testimony, we find that 25 percent of the disallowed mileage was for farm-related purposes and should be allowed. E. Storage AreaPetitioners claimed on the Schedule F an amount of $1,000 for each of the tax years in issue for "storage area." Mr. Hable stated at one point that this amount constituted depreciation on a building beside the barn. He could produce, however, no evidence as to its cost or basis. At another point, Mr. Hable stated that the storage area was the basement of his house. In view of the conflicting testimony as to this item as well as the lack of supporting documentation, we find petitioners have failed to meet their burden of proof. Rule 142(a). Petitioners introduced no evidence with respect to any of the other farm expenses disallowed by respondent and, therefore, respondent's determinations with respect to those are sustained. 2. Self-Employment TaxBecause of the adjustments to petitioners' farm expenses and the resulting increase to net farm earnings, petitioners are subject to an increase in their self-employment tax liabilities for the years at issue under sections 1401 and 1402. 3. Other Adjustments to the Notice192 of DeficiencyPetitioners did not produce any evidence with respect to any of the other adjustments made in the notice of deficiency and which respondent has not conceded. Inasmuch as petitioners have failed to meet their burden of proof, respondent's determinations are sustained. 4. Section 6653(a)Respondent determined that petitioners were liable for additions to tax under section 6653(a) for each of the years at issue. That section applies when part of an underpayment is "due to negligence or intentional disregard of rules and regulations." Section 6653(a). Petitioners have the burden of proof with respect to this issue. Enoch v. Commissioner,57 T.C. 781">57 T.C. 781 (1972). Petitioners introduced no evidence that would show that respondent's determination is erroneous. To the contrary, Mr. Hable admitted at trial that he did not maintain adequate records. Accordingly, petitioners are liable for the additions to tax under section 6653(a) for the years 1979 and 1980. Because of concessions and to reflect the foregoing, Decision will be entered under Rule 155.193 Footnotes1. All section references are to the Internal Revenue Code of 1954, as amended and in effect during the years in issue.↩2. All rule reference are to the Tax Court Rules of Practice and Procedure.↩3. See Gerald W. Pontel Family Estate v. Commissioner,T.C. Memo. 1981-303↩.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622339/	Estate of Tom L. Burnett, Deceased, Anne V. Burnett Hall, Executrix, Petitioner, v. Commissioner of Internal Revenue, RespondentBurnett v. CommissionerDocket No. 109742United States Tax Court2 T.C. 897; 1943 U.S. Tax Ct. LEXIS 40; October 18, 1943, Promulgated 40 Decision will be entered under Rule 50. 1. Decedent during the last year of his life executed certain oil and gas leases and received in part consideration therefor certain bonuses on which he was allowed percentage depletion. He died prior to any oil or gas having been produced from the leases. At the time of decedent's death six of these leases had not ceased or terminated, nor had they been abandoned, and the rights acquired by the lessees thereunder were in nowise diminished, curtailed, or impaired. Held, the respondent erred in restoring to income, under article 23 (m)-10 (c) of Regulations 101, the percentage depletion which he had allowed on the bonuses received with respect to these six leases. Estate of Emma Louise G. Seeligson, 1 T.C. 736">1 T. C. 736, followed.2. Decedent was a cattle raiser and reported on the cash receipts and disbursements basis. At the time of his death he owned certain livestock and feed that he had raised on his ranches. No part of this livestock or feed had ever been reported as income. The expenses incurred in producing the livestock and feed were deducted in the taxable year or period in which paid. Held,41 that, none of such livestock and feed having been sold or exchanged at the time of decedent's death and no one being indebted to decedent for the fair market value of such livestock and feed or any part thereof at the time of his death, the fair market value of such livestock and feed did not represent income accrued up to the date of decedent's death within the purview of section 42 of the Revenue Act of 1938, and was not includible in computing the net income of decedent for the taxable period in which fell the date of his death. R. B. Cannon, Esq., for the petitioner.Angus Roy Shannon, Jr., Esq., for the respondent. Black, Judge. BLACK 897 OPINION.This proceeding involves the determination by the respondent of individual income tax deficiencies against Tom L. Burnett, deceased, for the calendar year 1937 and the period January 1 to December 26, 1938, in the amounts of $ 6,106.43 and $ 124,694.47, respectively.The parties have stipulated that the deficiency for the year 1937 is the amount of $ 4,419.93. Effect will be given to that stipulation under Rule 50.For the period in 1938 the respondent increased the net income as disclosed by the return by seven adjustments, 42 (a) to (g), inclusive, and decreased the net income as disclosed by the return by five adjustments, (h) to (l), inclusive. By appropriate assignments of error petitioner contests a part of adjustment (a) "Depletion restored 898 $ 15,572.35" and all of adjustment (b) "Inventories $ 160,800.50." In a statement attached to the deficiency notice the respondent explains adjustments (a) and (b) as follows:(a) Depletion on lease bonuses restored to income. The amount of depletion allowed on lease bonuses, received in 1937 and 1938, on leases which expired in 1938 or which, insofar as the taxpayer is concerned, terminated with his death, has been restored to income in accordance with the provisions of article 23 (m)-10 (c) of Regulations 101.(b) Raised livestock and feed on hand at the time of the decedent's death have been included in income for the taxable period in which the date of his death falls under the provisions of section 42 of the Revenue Act of 1938 and of the Internal Revenue Code. The adjustment is shown as follows:Inventory of raised livestock at date of death of taxpayer$ 154,820.00Inventory of feed at date of death of taxpayer5,980.50Total $ 160,800.5043 Petitioner has paid the greater part of the deficiency for the period in 1938 and, based upon the above mentioned assignments of error, claims an overpayment of taxes for the period in 1938.The facts were stipulated. We adopt as our findings of fact the stipulation, which is substantially as follows:Tom L. Burnett, petitioner's decedent, was an individual residing at Iowa Park, Texas. He died December 26, 1938. Thereafter petitioner was appointed independent executrix of the will and estate of Tom L. Burnett, deceased. She qualified as such and at all times since has been and now is the duly appointed, qualified, and acting independent executrix of the will and estate of Tom L. Burnett, deceased.Throughout his lifetime Tom L. Burnett kept his books and records and filed his Federal income tax returns upon a cash receipts and disbursements basis, and upon the basis of a calendar year.In the calendar year 1938 decedent executed various oil and gas leases covering lands, or undivided interests in land, owned by him in fee and in connection therewith he received cash oil and gas lease bonuses totaling $ 56,306.61, which he duly included in taxable income. He claimed and was allowed44 statutory percentage depletion thereon, computed at 27 1/2 percent, in the amount of $ 15,484.32.At December 26, 1938, six of such leases were outstanding and were recognized by decedent as constituting valid and subsisting oil and gas leases, and no one of them had at December 26, 1938, expired by its own terms or had been released, forfeited, or abandoned by the grantee therein because of failure to obtain production thereunder or otherwise The lands covered by the said six oil and gas leases were still owned by decedent at December 26, 1938, and all rights acquired by the lessees under each of the said six oil and gas leases 899 were in nowise diminished, curtailed, or impaired because of decedent's death.Respondent, for the taxable period ended with decedent's death, "restored to income" depletion in the amount of $ 4,189.19, which sum constituted a part of depletion in the sum of $ 15,572.35 restored to income for various reasons in the notice of deficiency from which this appeal was taken. The sum of $ 4,189.19 represented depletion "restored" with respect to the six leases referred to in the preceding paragraph. In making such restoration the respondent proceeded 45 on the theory that in so far as decedent was concerned the six leases "terminated with his death."For a number of years prior to his death the principal business of Tom L. Burnett was cattle ranching. He owned large cattle ranches located in Wichita, Cottle, Foard, and Hardeman Counties, Texas. In keeping his books and records on the basis of cash receipts and disbursements, he thereby charged off the cost of raising livestock and feed as an expense.Decedent was a cattle raiser as distinguished from a cattle feeder. That is to say, his purchases of cattle were confined to purchase of breeding stock. He made no purchases of cattle for resale. It was his practice to "top" the female calf crop each year (i. e., to select and hold back for breeding purposes a sufficient number of the better female calves to maintain and build up his herd of breed cows) and to annually, or oftener, sell all steer calves and all inferior female calves raised within the year, aged bulls, and aged, injured, or otherwise unproductive cows, so that at all times all cows and bulls on hand were held solely for breeding purposes. A few horses were raised by decedent for work stock.When decedent first commenced46 operating as a rancher and cattle raiser, which was prior to 1937, he adopted and thereafter continuously followed the practice of accounting for income from ranching operations in the following way: As purchased livestock was sold, the depreciated cost of each particular animal sold was deducted from the sale price and the excess treated as income from livestock sales for the year in which collected in cash. The entire proceeds of raised livestock were treated as gain in the year sold, there being no capitalized cost. All expenditures for wages for ranch hands, ranch supplies, pasture rents, and similar items were charged to expense and deducted from income when and as paid in cash. At no time during his lifetime did decedent use an inventory or inventories in the computation of gain from cattle sales.At December 26, 1938, decedent owned livestock having a total fair market value of $ 171,408, of which livestock of the value of $ 16,588 had been acquired by purchase and the remainder, or livestock having 900 a fair market value of $ 154,820, had been raised by decedent as follows:Total fairClassNumberValue eachmarket valueCows3,271$ 35$ 114,485Calves1,4961522,440Heifers3633512,705Horses102303,060Mares4120820Colts5215780Hogs865430Poultry100Total $ 154,82047 Decedent also had on hand raised feed stuffs having a fair market value of $ 5,980.50In the notice of deficiency upon which this proceeding is based the respondent held and determined that the entire fair market value of the above described raised livestock and feed stuffs in the total amount of $ 160,800.50 represented "gross income" that had "accrued up to the date of his death" and that the amount thereof was properly includable in decedent's net taxable income for the taxable period in which the date of his death fell, under the provisions of section 42 of the Revenue Act of 1938.Decedent's 1937 income tax return, as filed, disclosed a tax liability of $ 7,163.29, which was paid in equal quarterly installments on March 15, June 15, September 15, and December 15, 1938, respectively.On or about May 15, 1939, under an extension of time theretofore duly granted, an individual income tax return was filed for Tom L. Burnett, deceased, for the calendar year 1938. The said return disclosed an income tax liability of $ 103,808.44, which (together with interest for late payment in the amount of $ 259.52) was paid on the following dates:Date of paymentAmountMay 15, 1939Tax$ 25,952.11Interest259.52$ 26,211.63June 14, 193925,952.11September 13, 193925,952.11December 12, 193925,952.11Total 104,067.9648 Thereafter, payments were made by petitioner with respect to the 1938 deficiency as follows:Date of paymentTaxInterestJan. 21, 1942$ 83,161.10June 20, 1942$ 14,219.41July 20, 194273.43Total 83,161.1014,292.84901 That part of adjustment (a) contested by petitioner is the restoration to income in the period January 1 to December 26, 1938, of depletion in the amount of $ 4,189.19 which had been allowed on the bonuses received on the above mentioned six oil and gas leases which were outstanding on December 26, 1938, the date of decedent's death. Up to the date of decedent's death there had been no production from any of these six leases, but all rights acquired by the lessees thereunder were in nowise diminished, curtailed, or impaired because of decedent's death. The leases had not expired or terminated, nor had any of them been abandoned. We hold the respondent erred in restoring to income the above mentioned amount of $ 4,189.19. Estate of Emma Louise G. Seeligson, 1 T. C. 736 (on appeal, C. C. A., 5th Cir.).We shall now consider adjustment (b), "Inventories $ 160,800.50," all of which is contested by49 petitioner. This amount represents the stipulated fair market value on the date of decedent's death of all livestock and feed stuffs which had been raised by decedent up to the date of his death but had never been reported as income by him during his lifetime because he had always reported upon the cash receipts and disbursements basis. The respondent contends that this amount of $ 160,800.50 must be included in computing net income for the taxable period in which falls the date of decedent's death under the last sentence of section 42 of the Revenue Act of 1938, which provides as follows: * * In the case of the death of a taxpayer there shall be included in computing net income for the taxable period in which falls the date of his death, amounts accrued up to the date of his death if not otherwise properly includable in respect of such period or a prior period.This language first appeared in section 42 of the Revenue Act of 1934. Section 43 of the same act carried similar provisions with reference to accrued deductions to be allowed a decedent. The Report of the Committee on Ways and Means which accompanied the House Bill which contained these provisions said of them as follows: 50 Sections 42 and 43. Income accrued and accrued deductions of decedents: The courts have held that income accrued by a decedent on the cash basis prior to his death is not income, to the estate, and under the present law, unless such income is taxable to the decedent, it escapes income tax altogether. By the same reasoning, expenses accrued prior to death cannot be deducted by the estate. Section 42 has been drawn to require the inclusion in the income of a decedent of all amounts accrued up to the date of his death regardless of the fact that he may have kept his books on a cash basis. Section 43 has also been changed so that expenses accrued prior to the death of the decedent may be deducted.The Report of the Senate Finance Committee on these same provisions is similar to that of the House Ways and Means Committee.Petitioner contends that the above amount of $ 160,800.50 does not 902 constitute gross income of decedent "accrued up to the date of his death" within the purview of section 42, supra, for the reason that, as stated in her brief, "in the absence of a sale or exchange, there neither is, nor can be, any gross income derived from mere ownership of property." 51 The income tax return of decedent for the period January 1 to dDecember 26, 1938, is in evidence and it apparently includes as a part of decedent's gross income proceeds from the sales of some cattle which had been made during the period in question but for which payments had not yet been received at the time of his death, and also it apparently includes as deductions some expenses and taxes which had been incurred but not yet paid at the date of decedent's death. Concerning these there is no issue in this proceeding. The return contained the following statement:In prior years this return has been filed on cash basis, but taxpayer died on December 26, 1938, and items of income and expense have been accrued as at that date, but cattle on hand are not included as gross income.As far as we have been able to ascertain the exact question here presented has never been litigated. The decided cases arising under the above provision of section 42 and its prototype in other revenue acts are collected and analyzed in Mertens, Law of Federal Income Taxation, vol. 2, secs. 12.100 and 12.101. The leading case on the subject is Helvering v. Enright's Estate, 312 U.S. 636">312 U.S. 636.52 In that case it was held that there should be included in computing the net income of the decedent there involved for the taxable period ending with his death his share of the profits of a law partnership earned and capable of an approximate valuation but not yet received, when both the decedent and the partnership reported on the cash receipts and disbursements basis. The Supreme Court, among other things, pointed out that the word "accrued" as used in section 42, supra, had a broader meaning than that usually given to the term and in that connection said:It is to be noted that no change was made by the 1934 Act in the § 48 definition of "accrued". Yet, it is obvious that the definition is inapplicable since a taxpayer on a cash basis cannot have a "method of accounting" by which the meaning of accrual is fixed. Consequently it is beside the point to give weight to provisions of the regulations or accounting practices which do not recognize accruals until a determination of compensation. Such provisions when applied bring the income into succeeding years. It has been frequently said, and correctly, that § 42 was aimed at putting the cash receipt taxpayer on the accrual 53 basis. But that statement does not answer the meaning of accrual in this section. Accounts kept consistently on a basis other than cash receipts might treat accruals quite differently from a method designed to reflect the earned income of a cash receipt taxpayer. Accruals here are to be construed in furtherance of the intent of Congress to cover into income the assets of decedents, earned during their life and unreported as income, which on a cash return, would appear in the estate returns. Congress sought a fair reflection of income.903 The Supreme Court, in the Enright case, also pointed out in a footnote:It is immaterial that all possibility of escaping an income tax is not barred, as for instance the increased value of asset items in an estate return. Act, § 113 (a)(5), 26 U. S. C. A. Int. Rev. Acts, page 697 "* * * the entire field of proper legislation [need not] be covered by a single enactment." [Citing authorities.]In Estate of G. Percy McGlue, 41 B. T. A. 1186, we held where an executor in the District of Columbia was not entitled to certain fees until completion of the administration of the estate and the allowance of such54 fees by the Probate Court, that such fees were not includible under section 42 of the 1934 Act in computing the net income of the executor who died during the administration of the estate for which he was acting as executor, as representing income "accrued" up to the date of the executor's death. In reversing our decision the Fourth Circuit, in Helvering v. McGlue's Estate, 119 Fed. (2d) 167, said in part:It was the intention of Congress in enacting section 42 to reach all income earned during the life of a decedent that would otherwise escape the income tax. In giving recognition to this congressional intent, and this was the rationale of the Enright case, the Board must be reversed on the question of executors' fees. See H. Rep. No. 704, 73d Cong. 2d. Sess., p. 24; S. Rep. No. 558, 73d Cong. 2d Sess., p. 28.We do not think that the instant case is controlled by the Enright case or by the McGlue case. We have here no situation comparable to the facts which were present in those cases. We have here simply the ownership of certain livestock and farm products which had been produced by the decedent on his ranches during his lifetime. 55 This property had not been sold or exchanged by decedent at the time of his death. It was simply owned. No one was indebted to him for its fair market value or any part thereof. We do not think that the mere ownership of this property by decedent at the time of his death, even though it had been produced on his ranches during his lifetime, caused it to be gross income accrued to him up to the date of his death within the meaning of the language used in section 42 of the Revenue Act of 1938. It may be within the power of Congress to include such property as accrued income in a decedent's gross income for the period ending with his death, but we do not think that it has manifested any intention to do so in section 42 of the Revenue Act of 1938 which is applicable here. On this issue the Commissioner is reversed.It is perhaps appropriate at the conclusion of this opinion that we point out that the Revenue Act of 1942 in section 134 amends section 42 of the Internal Revenue Code and adds new section 126 to the Internal Revenue Code. These new provisions of the Revenue Act of 1942 tax income of decedents heretofore covered by the last sentence 904 of section 42 to the persons56 who receive it, whether such persons be the executors of the decedents or his heirs, instead of to the estate of a decedent for the period ending with his death. These amendments are effective with respect to final income tax returns of decedents for taxable years beginning after December 31, 1942, and with respect to returns of persons entitled to the income of decedents (estates, testamentary trusts and heirs) for taxable years which end after December 31, 1942. The amendments are also retroactive to returns of decedents for prior years (after December 31, 1933) if the persons entitled to the income will file consents that they will recompute the tax for their taxable years as if, with respect to such amounts, provisions corresponding to these new provisions were a part of the applicable revenue laws. No such consents as provided in subdivision (g) of section 126, Revenue Act of 1942, have been filed in this proceeding or with the Commissioner in so far as we have been advised. Therefore, we have decided this case under section 42, Revenue Act of 1938, without reference to the amendments made by the Revenue Act of 1942. Neither party to this proceeding has contended that we*57 should do otherwise.Decision will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622340/	Fred W. Isaacs v. Commissioner. Inez W. Isaacs v. Commissioner.Isaacs v. CommissionerDocket Nos. 525-64; 1922-64.United States Tax CourtT.C. Memo 1968-249; 1968 Tax Ct. Memo LEXIS 49; 27 T.C.M. (CCH) 1315; T.C.M. (RIA) 68249; October 29, 1968. Filed Jerry Lee Jarvis, Durham, N.C., for petitioner in Docket No. 1922-64. J. Randall Groves, for respondent. ATKINSMemorandum Findings of Fact and Opinion ATKINS, Judge: The respondent determined deficiencies in income tax, and additions to tax on account of fraud pursuant to section 6653(b) of the Internal Revenue Code of 1954, as follows: YearDeficiencyAddition to TaxSec. 6653(b)1956$ 5,295.11$2,647.55195710,630.825,315.4119585,115.972,557.9819597,059.093,529.54196013,609.756,804.8819619,765.244,882.6250 Since the petitioners, as husband and wife, filed joint Federal income tax returns for the years in question, the respondent mailed duplicate original notices of deficiency to each of the petitioners on November 15, 1963, and each petitioner filed a separate petition. In determining the deficiencies, the respondent employed the net worth method. In their respective petitions the petitioners each contested only a portion of each of the deficiencies, denied liability for additions to tax on account of fraud, and raised the issue of the statute of limitations with respect to the taxable years 1956 through 1958. The limitations issue will depend upon whether the returns filed for those years were false and fraudulent with intent to evade tax. Section 6501(c) of the Code. In his answer to the petition in each docket, the respondent set forth affirmative allegations of fact in support of his determination of both the deficiencies in tax and the additions to tax under section 6653(b) of the Code. Neither petitioner filed a reply as provided in Rule 15 of the Rules of Practice of this Court. Thereupon the respondent moved, pursuant to Rule 18(c) of such rules, that the affirmative allegations51 contained in the answer in each docket be deemed admitted by each petitioner. By order dated February 3, 1965, the respondent's motion was granted, and it was ordered that such affirmative allegations in the respondent's answer should be deemed admitted. The respondent now concedes that the deficiencies in tax for the taxable years 1957, 1958, 1959, and 1961 are, respectively, $8,384.74, $5,025.72, $6,231.45, and $9,229.21, and that the amounts of additions to tax under section 6653(b) for such years are, respectively, $4,192.37, $2,512.86, $3,115.72, and $4,614.61. When the cases were called from the trial calendar, there was no appearance by or on behalf of the petitioner Fred Isaacs. The petitioner Inez Isaacs appeared through counsel who stated, in effect, that the 1316 deficiencies in tax were not contested and that no evidence would be presented on her behalf. He requested that any evidence offered by the respondent as to Fred Isaacs be taken into consideration in the case of Inez Isaacs, and conceded that if it should be decided that Fred Isaacs is liable for additions to tax on account of fraud then she is also liable for such additions because of having filed joint52 returns. At the trial the respondent adduced testimony and other evidence, and upon the basis of such evidence and the affirmative allegations deemed to be admitted, we find the facts set forth hereinafter. Findings of Fact During the taxable years 1956 through 1961 the petitioners were husband and wife living together, and timely filed joint Federal income tax returns with the district director of internal revenue, Greensboro, North Carolina. At the time of filing their petitions they resided in Durham, North Carolina. During the years in question the petitioner Fred Isaacs practiced the profession of podiatry and had income from that source as well as from rents, dividends, and from sales of securities. The petitioner Inez Isaacs had income from investments, sales of assets, and from an estate. The petitioners kept separate accounts of their income and neither transferred funds to the other except certain amounts which Fred contributed toward the maintenance of their household. The respondent has not raised any question as to the proper reporting of the income of petitioner Inez Isaacs in the joint returns. We will hereinafter refer to the petitioner Fred Isaacs as the petitioner. 53 In August 1962 an internal revenue agent commenced an investigation of the petitioners' tax liability. In September a special agent was assigned to assist in the investigation of the petitioners' liability. The petitioner furnished the agents some records consisting of check stubs, bank statements, cancelled checks, and various posting books. Such records, however, were not complete. In the practice of his profession of podiatry the petitioner charged his patients fees of $4 or $5. Checks received during each day were recorded by his secretary in a daily posting book and were retained by her and deposited in the petitioner's bank account two or three times per month. At the end of each day the petitioner would himself take any cash received from patients and such cash was not recorded in the daily posting book. During the years 1959 to 1961, inclusive, the petitioner made only one deposit of currency (a deposit of $800 on July 1, 1960) in the North Carolina National Bank, the bank wherein he normally deposited the proceeds of his professional practice. The petitioner also sold custommade shoes to his patients. Such shoes cost the petitioner from $40 to $45 a pair and were sold54 for $80 to $85 a pair. Income from shoe sales was recorded in a separate book of account called "the shoe book." During all the years in question the petitioner shared his office with another specialist in the same field, a Doctor Julian. The original arrangement with Julian was that petitioner would receive 50 percent of Julian's fees and that the petitioner would pay all the expenses of the office. However, in practice, all the fees due Julian were paid to the petitioner and then the petitioner turned over one-half of such receipts to Julian. The amounts paid by Julian's patients were recorded in records kept by Julian. None of petitioner's records contained entries of amounts which he received from Julian's patients. Each year the petitioner paid an accountant a fee to prepare the joint Federal income tax return. Just prior to the time for filing the return for each year, the petitioner gave the accountant a schedule containing a lump-sum total as representing his professional income, and such amount was used by the accountant in preparing petitioners' returns. Petitioner did not submit his books and records to the accountant. The petitioner's secretary prepared the professional55 expense schedule for his tax return. In his returns for the taxable years in question the petitioner reported gross professional fees and net professional income as follows: Gross Professional FeesNet Professional Income1956$13,446.15$ 3,182.78195717,661.674,777.35195817,384.985,314.26195917,426.004,378.96196013,073.90(1,039.60)196118,602.00(869.00)The petitioner did not reveal to the accountant all the stock transactions which he consummated during the taxable years in question, and, therefore, the returns for such years do not accurately reflect his capital gains and losses. Nor did the petitioner furnish the revenue agents any records pertaining 1317 to his stock transactions. The agents asked the petitioner to furnish the names of all the brokerage houses with which he maintained trading accounts. The petitioner named some with which he maintained trading accounts. However, upon investigation, the agents found that the petitioner had failed to name 5 brokerage houses with which he had trading accounts. As the result of transactions made through these undisclosed brokerage accounts, the revenue agents increased56 the capital gains reported in the returns for the taxable years 1957 through 1961. For the taxable year 1956 the petitioner did not report any capital transactions. However, he had reported for 1955 a net capital loss of $4,481.53. He therefore carried over to 1956 that amount plus $5,223.92 of unused capital losses claimed for the taxable years 1952 through 1954, or a total carryover to 1956 of $9,705.45, of which he claimed a deduction in 1956 of $1,000. However, the revenue agents discovered that for 1955 the petitioner had failed to report a securities transaction which resulted in a capital gain of $10,849.83, and had also underreported the gain on another securities transaction by $2,875. These two amounts totalling $13,724.83 were sufficient to offset all the capital losses claimed for 1952 through 1955, leaving no net capital loss which could be carried forward to 1956. Accordingly, the respondent disallowed the $1,000 loss claimed by the petitioner for 1956 and instead allowed a capital loss deduction of $906.60. In his return for 1957 the petitioner reported two securities transactions in each of which a capital loss was claimed, the total being $2,037.55. He continued57 to carry forward net capital losses from prior years and claimed for 1957 a deduction of $1,000. Actually, the petitioner had capital gains in 1957, the taxable portion of which amounted to $3,168.83, and since there was no net capital loss carryover from prior years, the full amount of the taxable portion of the capital gains in 1957 should have been reported as income. The petitioner continued to claim a capital loss of $1,000 in each of the taxable years 1958, 1959, 1960, and 1961, whereas in such years he had capital gains, the taxable portion of which amounted to $1,885.76, $6,876.84, $15,780.64, and $5,821.30, respectively. The following tabulation shows the capital losses reported for each of the taxable years 1956 through 1961, the correct amount of taxable income or loss from capital transactions, and the net understatement of income from capital transactions: YearCapital LossesReportedCorrect Taxable Gainor (Loss)Net Under-statement1956[1,000.00)$ H[ 906.60)$ 93.401957(1,000.00)3,168.834,168.831958(1,000.00)1,885.762,885.761959(1,000.00)6,876.847,876.841960(1,000.00)15,780.6416,780.641961 (1,000.00)5,821.306,821.30Total [6,000.00)$32,626.77$38,626.7758 The petitioner did not furnish the accountant information as to dividends received; rather he gave him an incomplete list of stock from which the accountant computed the amount of dividends included in the returns. Nor did the petitioner furnish the agents any records pertaining to his dividend income. The agents obtained the list of stocks which petitioner had submitted to the accountant and, by contacting the various brokerage houses, found the list to be incomplete. Throughout the taxable years in question the petitioner owned stocks and securities of an average cost of about $150,000. The agents computed the amount of taxable dividends which the petitioner had received upon the stock actually owned. The amounts of dividends actually received, and the amounts reported (some of which were reported as being nontaxable) by the petitioner from 1956 through 1961 were as follows: YearAmountReceivedAmountReported1956$3,342.60$1,238.5019 574,666.152,235.0019584,727.052,691.0019594,182.932,406.2519603,901.571,430.2019613,191.701,378.00By contacting tenants in the office building owned by the petitioner, the agents determined59 that the petitioner had understated his rental income for the years 1959 and 1960 by the respective amounts of $200 and $1,305. Upon determining that the petitioner had not maintained adequate and complete books and records, the agents proceeded to compute the joint taxable income of the petitioners upon the net worth method. In preparing the net worth statement, the agents examined the public records of the Registrar of Deeds of Durham, North Carolina, the records of various brokerage houses, real estate brokers, automobile dealers and banks, and interviewed former employees and business associates of the petitioner. 1318 The petitioner told the agents that he kept very little cash on hand. He also told them he had never received any income from inheritances, devises, or gifts. In the net worth statement, the agents eliminated all nontaxable receipts. They allowed personal exemptions and itemized deductions. In computing the nondeductible personal expenditures, the agents made an analysis of disbursements by check, and with respect to personal living expenses paid by cash relied upon statements made by petitioners and upon certain records furnished by the petitioner Inez60 Isaacs. The following tabulation shows for the taxable years in question the taxable income of the petitioners, the taxable income or loss shown in the income tax returns, and the understatement of taxable income in the returns: YearTaxable IncomeReceivedTaxable In- comePer ReturnsUnder- statementof Taxable Income1956$20,448.95$ (84.89)$20,533.84195729,664.543,879.0325,785.51195822,849.875,840.6917,009.18195925,187.274,943.8420,243.43196038,312.91(2,135.65)40,448.56196129,564.55(925.72)30,490.27In April 1963, the petitioners signed a consent extending the time for assessment of taxes for the taxable year 1959 to June 30, 1964. In September 1963, the respondent made jeopardy assessments against the petitioners for each of the years in question and collected the amount of $78,263.46. For each of the taxable years in question the petitioners underpaid the tax required to be shown on their returns. Some part of the underpayment of tax for each of the taxable years 1956 through 1961 was due to fraud within the contemplation of section 6653(b) of the Internal Revenue Code of 1954. 61 The petitioners' returns for the taxable years 1956 through 1958 were false and fraudulent with intent to evade tax within the contemplation of section 6501(c) of the Internal Revenue Code of 1954. Opinion The respondent's determination of the deficiencies herein is presumed to be correct and the burden of proof was upon the petitioners to show error therein. Welch v. Helvering, 290 U.S. 111">290 U.S. 111; Burent v. Houston, 283 U.S. 223">283 U.S. 223; Bond v. Commissioner, (C.A. 4) 232 F.2d 822">232 F. 2d 822, certiorari denied 351 U.S. 878">351 U.S. 878, affirming a Memorandum Opinion of this Court; and Carmack v. Commissioner, (C.A. 5) 183 F.2d 1">183 F. 2d 1, certiorari denied 340 U.S. 875">340 U.S. 875, affirming a Memorandum Opinion of this Court. The petitioners adduced no evidence whatever to show error in the respondent's determination. Furthermore, the petitioners failed to file replies to the respondent's answers which contain affirmative allegations of fact in support of his determination of deficiencies, and pursuant to Rule 18(c) of the Rules of Practice of this Court it was ordered that such affirmative allegations be deemed admitted. The facts62 deemed admitted sustain such determination. We accordingly approve the deficiencies in tax determined by the respondent, as modified by concessions made at the trial by counsel for the respondent. In their petitions the petitioners allege that assessment and collection of any deficiencies for the taxable years 1956, 1957, and 1958 are barred by the 3-year statute of limitations provided in section 6501(a) of the Internal Revenue Code of 1954. The respondent, however, has determined additions to tax for fraud under section 6653(b) of the Code for each of the taxable years involved herein, and he contends that the returns for the taxable years 1956, 1957, and 1958 were false or fraudulent with intent to evade tax within the meaning of section 6501(c) of the Code, which provides that in such case the tax may be assessed and collected at any time. Upon the issue of fraud, the burden of proof is upon the respondent. Section 7454 of the Internal Revenue Code of 1954. Fraud is never presumed, but must be shown by clear and convincing evidence. Bond v. Commissioner, supra; Archer v. Commissioner, (C.A. 5) 227 F. 2d 270,63 affirming a Memorandum Opinion of this Court; and W. A. Shaw, 27 T.C. 561">27 T.C. 561. The respondent's allegations of fact which are deemed to be admitted, and other evidence adduced at the trial, affirmatively established the amount of the petitioners' taxable income and tax liability for each of the years in question. For each of the taxable years such taxable income was many times greater than the taxable income reported in the return. While the omission of taxable income, standing alone, is not sufficient to sustain a charge of fraud, it is 1319 well established that proof of consistent and substantial understatements of income over a period of years may constitute persuasive and convincing evidence of fraud. Holland v. United States, 348 U.S. 121">348 U.S. 121; Gatling v. Commissioner, (C.A. 4) 286 F.2d 139">286 F. 2d 139, affirming a Memorandum Opinion of this Court; Lipsitz v. Commissioner, (C.A. 4) 220 F.2d 871">220 F. 2d 871, certiorari denied 350 U.S. 845">350 U.S. 845, affirming 21 T.C. 917">21 T.C. 917; Shahadi v. Commissioner, (C.A. 3) 266 F.2d 495">266 F. 2d 495, certiorari denied 361 U.S. 874">361 U.S. 874, affirming 29 T.C. 1157">29 T.C. 1157; Anderson v. Commissioner, (C.A. 5) 250 F.2d 242">250 F. 2d 242,64 certiorari denied 356 U.S. 950">356 U.S. 950, affirming a Memorandum Opinion of this Court; and Schwarzkopf v. Commissioner, (C.A. 3) 246 F. 2d 731, affirming a Memorandum Opinion of this Court. The record, moreover, shows that the petitioner omitted specific items of income. In furnishing information to the accountant who prepared his returns, the petitioner failed to disclose all the securities which he owned, with the result that the returns failed to reflect in each year large amounts of dividends received. The returns for the taxable years 1957 through 1961 also failed to show large amounts of capital gains from transactions in securities. The petitioner failed to reveal to the accountant all his stock transactions. These specific omissions of income were too large, too consistent, and over too long a period to be attributable to mere inadvertence or error. Bond v. Commissioner, supra.Furthermore, there are other indications of a fraudulent intent on the part of the petitioner. When the agents asked the petitioner to furnish the names of all the brokerage houses with which he maintained trading accounts, he named some but failed to name 5 brokerage houses65 with which he had trading accounts. And the petitioner did not enter in his daily posting book cash payments received from his patients and did not maintain records of his share of the fees paid by Julian's patients. These facts, we think evidence an intent on the part of the petitioner to conceal a part of his income. It is our conclusion, and we have found as a fact, that some part of the underpayment in tax for each of the taxable years was due to fraud, and we therefore approve the respondent's determination of additions to tax, as modified by his concessions at the trial, on account of fraud pursuant to section 6653(b) of the Code. 1 In reaching this conclusion, we have not relied to any extent upon any presumption in favor of the correctness of the respondent's determination of deficiencies in tax. We have also concluded, and found as a fact, that the returns for the taxable years 1956, 1957, 66 and 1958 were false or fraudulent with intent to evade tax within the contemplation of section 6501(c) of the Code. It follows that assessment and collection of the deficiencies and additions to tax for those years are not barred by the statute of limitations. Decisions will be entered in accordance with the foregoing. Footnotes1. Section 6653(b) of the Code provides in part as follows: Fraud. - If any part of any underpayment (as defined in subsection (c)) of tax required to be shown on a return is due to fraud, there shall be added to the tax an amount equal to 50 percent of the underpayment. * *↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622341/	John R. Dean and Florence Dean, Petitioners v. Commissioner of Internal Revenue, RespondentDean v. CommissionerDocket No. 22565-80United States Tax Court83 T.C. 56; 1984 U.S. Tax Ct. LEXIS 47; 83 T.C. No. 6; July 19, 1984. July 19, 1984, Filed 47 Decision will be entered for the respondent. Petitioners claimed losses in connection with a limited partnership which obtained all the rights to an original paperback book for a stated amount of $ 877,500 of which $ 742,500 was a nonrecourse note, payable solely from proceeds from these rights and due in 7 years. When obtained by the partnership, estimated receipts from all the rights to the paperback book did not exceed $ 58,500, and the value of such rights was significantly less than that amount. The partnership was syndicated by a brokerage house which controlled it. The amount of the nonrecourse note was determined by a formula used by the brokerage house to inflate depreciation deductions. Held, none of the claimed losses are deductible because the partnership's activities were not engaged in for profit within the meaning of sec. 183, I.R.C. 1954, and interest paid on the $ 742,500 nonrecourse note is not deductible because there was no genuine indebtedness due to the fact that both the purchase price and the note unreasonably exceeded the value of the property acquired. Marvin S. Lieber, Charles B. Gibbons, and Harry F. Klodowski, Jr., for the petitioners. 50 Francis J. Emmons and Robert B. Marino, for the respondent. Featherston, Judge. Pajak, Special Trial Judge. FEATHERSTON; PAJAK57 This case was assigned to and heard by Special Trial Judge John J. Pajak, pursuant to the provisions of section 7456(c) of the Code and Rules 180 and 181. 1 The Court agrees with and adopts the Special Trial Judge's opinion which is set forth below.OPINION OF THE SPECIAL TRIAL JUDGEPajak, Special Trial Judge: Respondent determined deficiencies in petitioners' Federal income taxes for 1976 and 1977 in the amounts of $ 9,042 and $ 4,051, respectively. Respondent disallowed the distributable share of losses from a limited partnership, The Season Co., claimed on petitioners' returns.The issues for decision are: (1) Whether the partnership was51 engaged in for profit; (2) whether the partnership may deduct interest on certain nonrecourse indebtedness; (3) whether the partnership was a sham organized to create artificial tax deductions; (4) whether the nonrecourse indebtedness should be included in the bases of the partnership and the partners; (5) whether the partnership properly depreciated rights in an original paperback book, "The Season"; (6) whether the partnership was entitled to deduct various miscellaneous items under either section 162 or section 212; and (7) whether the agreement between the partnership and Pinnacle Books, Inc., constituted a sale of the partnership's interest in the manuscript or a "lease of section 1245 property" within the meaning of section 465(c)(1)(C). 2This case is one of two groups of cases which were heard pursuant to test case procedures for purposes52 of judicial 58 economy of benefit to petitioners, respondent, and the Court. For the same reason, since most of the witnesses had testimony relevant to each of the groups, the test cases of Fuchs, docket No. 18961-81, and Genstein, docket No. 18962-81, both decided this day in Fuchs v. Commissioner, 83 T.C. 79">83 T.C. 79 (1984), were consolidated for trial at the same special session of the Court as was this case. The Fuchs case pertains to a limited partnership involving "The Chinese Ultimatum" original paperback book and rights thereto. This case pertains to a limited partnership involving "The Season" original paperback book and rights thereto. 353 FINDINGS OF FACTSome of the facts have been stipulated. The stipulation of facts and the exhibits attached thereto are incorporated herein by this reference.Petitioners John R. Dean and Florence Dean resided in Wexford, PA, when their petition was filed. On their 1976 and 1977 Federal income tax returns, petitioners deducted losses of $ 16,501 and $ 7,408, respectively, in connection with The Season Co. (Season Co.), a limited partnership formed under the laws of Pennsylvania. Respondent disallowed these loss deductions.59 "The Season"; an Original Paperback BookPatricia Hornung (Hornung) was the former spouse of Paul Hornung, the star halfback of the Vince Lombardi Green Bay Packers. Apparently in 1975, she contacted Robin Moore (Moore) to seek assistance in writing a book about professional football as seen through the eyes of the wives and girlfriends of the players. Moore is the author or coauthor of such best selling books as "The Green Berets," "The French Connection" (coauthor), and "The Happy Hooker" (coauthor), all three of which became highly successful motion pictures. Moore often used coauthors or ghostwriters to write books. Moore contacted Howard54 Liss (Liss) for his opinion and assistance. Liss is a professional writer who was the ghostwriter of several books for Moore.Liss found Hornung's initial draft unpublishable. Liss and Hornung met in the summer of 1975 so that Liss could write an original paperback book, "The Season." Liss kept Hornung and Moore apprised of the progress being made on the draft, provided them with copies of work completed, and discussed with Moore future work on the paperback book. Moore did little, if any, of the actual writing. The cover of "The Season" lists as authors "Patricia Hornung & Robin Moore."During early 1976, Liss accompanied Moore to the office of Jack Klein (Klein), Moore's accountant, where a discussion occurred involving tax shelters. In February 1976, Moore contacted Liss and requested that Liss complete the book as fast as he could do so. Liss finished the book in about 2 weeks and gave it to Moore toward the end of February 1976.Moore had copyrighted 14 books in the 5 years 1971 through 1975. "The Season" was one of 24 books subject to copyright in Moore's name in 1976. Many more books were subject to copyright under Moore's name in subsequent years.Babbitt Tax Shelter55 DepartmentBabbitt, Meyers & Co. (Babbitt) was a regional member firm of the New York Stock Exchange, with its headquarters in Pittsburgh, PA, and with branch offices located throughout western Pennsylvania. During 1976, Robert E. Rose (Rose) was the manager of Babbitt's tax shelter department. His function 60 was to seek out, review, and coordinate the distribution of tax-advantaged investments to Babbitt's customers.Babbitt's practice was to enter into an agreement on behalf of a partnership to be formed. If the offering was successful, the legal formalities of organizing a partnership were followed.In late 1975 or early 1976, Babbitt began the development of tax shelter programs using books. Since neither Rose nor anyone else at Babbitt had any expertise in the publishing industry, Rose discussed the development of this program with George Mack (Mack) and others. Mack introduced Babbitt to the law firm of Regan, Goldfarb, Heller, Wetzler & Quinn (Regan Goldfarb), New York, NY. Marty Heller of Regan Goldfarb represented Moore. Heller introduced Rose to Moore in January or February 1976. Babbitt used Regan Goldfarb in developing book tax shelter programs. In 1976, 56 Babbitt syndicated at least three limited partnerships which utilized paperback books bearing the name of Moore and different coauthors.Season Co. Private Placement MemorandumBabbitt offered $ 200,000 of limited partnership interests in the Season Co. by a private placement memorandum dated March 2, 1976. The Season Co. was established in the manner described in this memorandum. The memorandum stated in pertinent part that:THIS INVESTMENT IS AVAILABLE ONLY TO THOSE OFFEREES WHOSE NET WORTH EXCLUSIVE OF HOME AND PERSONAL EFFECTS IS AT LEAST $ 200,000 OR SOME PORTION OF WHOSE CURRENT ANNUAL GROSS INCOME WOULD BE SUBJECT TO FEDERAL INCOME TAX AT A RATE OF 50% OR HIGHER AND WHOSE NET WORTH IS $ 100,000 OR MORE. * * Offering: $ 200,000 of Limited Partnership Interests to be offered by Babbitt, Meyers & Co. as exclusive agent for the Partnership; 25 Limited Partnership Interests of $ 8,000 each. Minimum purchase is one Limited Partnership Interest [which] requires (i) the payment of $ 2,000 in cash at the time of subscription, and (ii) the execution of a negotiable promissory note in the principal amount of $ 6,000 due in installments on September 1, 1976 and January 31, 57 1977. * * Partnership Business: The acquisition, publication and other exploitation of the copyright to and the manuscript entitled THE SEASON written by 61 ROBIN MOORE with PATRICIA (MRS. PAUL) HORNUNG ("THE WORK") * * Compensation to General Partner: The General Partner will be paid a guaranteed initial management fee of $ 2,000 in 1977 which he will contribute to the capital of the Partnership. * ** * * Purchase Price and Leverage: The Partnership will purchase the Work for $ 877,500, of which an aggregate of $ 135,000 is payable in cash and a short-term nonrecourse promissory note and the balance of $ 742,500 by delivery of the Partnership's 7-year, 8% nonrecourse purchase money note with required prepayments (i) to December 31, 1976 out of 100% of Partnership receipts attributable to the publication or other exploitation of the copyright and the Work associated therewith after the first $ 2,000 of such Partnership receipts to pay accrued interest to December 31, 1976 and out of 50% of Partnership receipts in excess thereof to pay principal on the Partnership's 7-year nonrecourse note, (ii) from January 1, 1977 to March 31, 1977 (assuming a closing on58 April 1, 1977) out of 100% of such Partnership receipts to the extent of accrued interest on such 7-year nonrecourse note for such period and out of 50% of such Partnership receipts to pay principal on such note and (iii) thereafter out of 50% of such Partnership receipts to be applied first to the payment of interest on such 7-year nonrecourse note and then to the principal thereof. In addition, the Partnership may prepay interest in the amount of $ 5,050 * * ** * * Application of proceeds:Gross proceeds$ 200,000Less selling commissions30,000Amount available for partnership170,000Cash payment for work135,000Guaranteed management fee2,000Legal fee25,000Accounting fee2,000Interest on 6% nonrecourse note5,050Working capital950Total application of proceeds$ 200,000 * * The Partnership will secure its short-term nonrecourse promissory note in the amount of $ 110,000 due in installments on September 1, 1976 and January 31, 1977 to be delivered to the seller of the Work, by all of the investors' negotiable promissory notes. In addition, the Seller shall be granted a security interest in the Work as collateral for the due payment of59 the Partnership's short-term and long-term nonrecourse notes. Thus, if any one investor should fail to pay the Partnership the full amount of his Note so that the Partnership shall be unable to pay its short-term note to the seller 62 of the Work, the copyright and the Work shall revert to the Seller. Such a reversion would constitute a disposition of the Work by the Partnership and would have a materially adverse effect on the Partnership including materially adverse tax consequences on the investors. * ** * * Babbitt, Meyers & Co. * * as exclusive agent for the Partnership, * * * will receive aggregate commissions of $ 30,000.* * * In any event, only a small percentage of all literary properties result in sales sufficient to return a profit * * there is a substantial degree of risk that exploitation of the Work will not yield profits to the Partnership and the Limited Partners, and that investors may not recoup * * * their capital contributions * * ** * * The ultimate commercial success of the Work's publication will depend in large part on the quality of the Publisher of the Work and its ability to obtain sufficient retail shelf space * ** * * *60 the Publisher would be required to effect sales of approximately 1,700,000 copies of the Work for the royalties payable to the Partnership to be sufficient for the Limited Partners to recover their capital contributions and approximately 5,640,000 copies for the royalties payable to the Partnership to be sufficient to pay the principal and related interest on the Partnership's 8% nonrecourse purchase money note in the amount of $ 742,500. 4 For the year ended December 31, 1975, approximately ten literary properties were published as paperback originals of which approximately four sold 1,000,000 copies and one sold 2,000,000 copies or more and none of which sold more than 5,000,000 copies. * * The Partnership and its publisher will be in competition with numerous other literary property owners and publishers which have substantial financial resources, large distribution staffs and long established histories of publication of paperback originals, none of which may be possessed by the Partnership or its publisher. * * *63 William F. Aull, Jr., the General Partner, * * has had no prior experience as an investor or otherwise in ventures created to exploit literary properties61 such as the Work.The synopsis of the work to be purchased entailed 5 1/2 lines in the private placement memorandum.At least 32 of the 62 numbered pages of the private placement memorandum were devoted to the tax aspect of the transaction. In addition, Exhibit A contained 12 pages of tax projections and Exhibit C was a 47-page legal opinion about Federal income tax consequences.The private placement memorandum contained a number of schedules entitled "PROJECTED NET AFTER TAX BENEFIT PER INVESTMENT UNIT." Those were based upon payments of $ 4,000 in 1976 and of another $ 4,000 in 1977 and were listed in a column captioned "Investment." These schedules included data as shown on page 64.Petitioner's Subscription of Interest in Season Co.Babbitt solicited petitioner John R. Dean (petitioner) and others to purchase interests in Season Co. After receipt of the private placement memorandum, petitioner signed a document captioned62 "SUBSCRIPTION AGREEMENT AND INVESTMENT LETTER." In that letter, he agreed to make a $ 2,000 downpayment to the Season Co.'s escrow account, to execute a promissory note in the amount of $ 6,000 due in installments on September 1, 1976, and January 31, 1977, and to deliver executed copies of the Certification Signature Page. On March 10, 1976, petitioner executed a document captioned "CERTIFICATION SIGNATURE PAGE." Apparently on the same day, petitioner executed the $ 6,000 promissory note and paid $ 2,000 to Babbitt by a check dated March 8, 1976.Petitioner also executed a private placement questionnaire, which referred to his "participation in tax shelter offerings," and stated that his net worth was at least $ 200,000, his annual income was at least $ 50,000, and he was in a Federal income tax bracket of at least 50 percent.Petitioner made two other payments, a $ 2,000 check dated August 23, 1976, and a $ 4,000 check dated January, 8, 1977, to Babbitt to acquire a 3.96-percent interest in Season Co. 64 Tax savingsProjectedTaxable income(detriment)copies soldYearInvestmentor (loss)at 50% bracket68,3751976$ 4,000($ 16,268)$ 8,134 (minimal revenue)19774,000(15,461)7,732 19780(1,082)541 19790(756)378 19800(755)377 19810(755)378 19820(755)377 1983029,177 (14,589)Totals8,000(6,655)3,328 1,710,00019764,000(9,401)4,701 (number needed to19774,000(8,816)4,408 cover cash payments19780(911)455 made by partners)19790(565)283 19800(565)282 19810(565)283 19820(565)282 1983023,293 (11,647)Totals8,0001,905 (953)5,640,00019764,00011,092 (5,546)(number needed to19774,00011,886 (5,943)cover Season Co.'s19780(98)49 $ 742,500 nonrecourse19790454 (227)note)19800454 (227)19810454 (227)19820453 (227)198301,073 (536)Totals8,00025,768 (12,884)63 Net after-tax benefitProjected(detriment) from investmentcopies soldYearCashflowCurrentCumulative68,37519760$ 4,134 $ 4,134 (minimal revenue)1977$ 333,765 7,899 19787548 8,447 19798386 8,833 19808385 9,218 19818386 9,604 19828385 9,989 19838(14,581)(4,592)Totals801,710,00019763,1383,839 3,839 (number needed to19774,3354,743 8,582 cover cash payments1978178633 9,215 made by partners)1979198481 9,696 1980198480 10,176 1981198481 10,657 1982198480 11,137 1983198(11,449)(312)Totals8,6415,640,000197613,3843,838 3,838 (number needed to197714,2724,329 8,167 cover Season Co.'s1978588637 8,804 $ 742,500 nonrecourse1979738511 9,315 note)1980738511 9,826 1981738511 10,337 1982738511 10,848 19831,307711 11,619 Totals32,50365 Season Co.The Season Co. was formed by Babbitt in the manner described in the private placement memorandum.One of the persons interested in "The Season" transaction was64 Moore. In December 1975, Klein, acting on behalf of Moore, asked Jack Letheren (Letheren) to serve as a consultant on a project. Moore and Letheren had at least one prior business dealing since Moore, Letheren, and another person were to share in sums due in connection with the publication of a book entitled "Valency Girl."On March 18, 1976, a filing was made with the Pennsylvania Securities Commission pursuant to section 203(d) of the Pennsylvania Securities Act of 1972 regarding Season Co. in which it was stated that Monte E. Wetzler of Regan Goldfarb was the counsel of the issuer and the person to whom correspondence regarding the filing should be sent.Moore hired Letheren to prepare a narrative report captioned "Current Practices and Conditions in the Paperback Industry" and to obtain three appraisals for "The Season." The narrative report, dated April 7, 1976, was sent to Rose at Babbitt. Rose had Letheren give a preliminary appraisal of "The Season" based on an outline of the book. Letheren's preliminary appraisal showed "The Season" as having a fair market value of 1.1 to 1.2 million dollars.Babbitt used Regan Goldfarb to prepare a form "endorsement letter" which Letheren65 forwarded to three appraisers. The appraisers, Jill Hausrath, Herbert J. Moore, and Roger M. Darnio, filled in the blanks. By three separate letters, dated March 19, 1976, addressed to Season Co., each "appraiser" represented in prepared, identical language that "the present fair market value of the work is at least equal to the purchase price of $ 877,500 plus the contingent payment from release of the motion picture based on the work." Jill Hausrath, Herbert J. Moore, and Letheren were engaged in business together as Jack Letheren & Associates from about 1975 to 1979. Stanley B. Stetzer (petitioner's expert witness) began working with Letheren in 1976.William F. Aull, Jr. (Aull), was the first general partner of Season Co. He had no experience in the publishing industry. He served as a general partner to facilitate the formation of 66 the partnership for Babbitt's tax shelter department. Aull did not take part in any transactions relating to the acquisition of "The Season" nor with the publishing company. Aull merely reviewed and signed documents given to him by Rose of Babbitt. The duties and functions of the general partner were handled largely by personnel of Babbitt. 66 The 1976 Federal partnership return reported that Season Co. commenced business on March 31, 1976. As of that date, a certificate of limited partnership regarding Season Co. was signed by Aull as general partner and Sally Diehl as "nominee, limited partner." Diehl was a Babbitt employee.Aull resigned as general partner on August 29, 1977, and until March 1979, Season Co. had no formal general partner. In March 1979, Robert C. Arthurs (Arthurs), a general partner of Babbitt, assumed the position of general partner of Season Co. Arthurs sometimes functioned in the guise of BMC Management Corp., a wholly owned subsidiary of Babbitt. During all relevant times, Arthurs managed 20 to 25 tax shelters.Acquisition of Rights to "The Season" by Season Co.Season Co. obtained all of the worldwide rights to "The Season" by two separately executed purchase agreements dated May 19, 1976, one signed by Moore and Hornung as the "Sellers" and the other by Aull as General Partner for Season Co., as the "Purchaser." These rights included motion picture, television, and commercial rights. All payments to sellers were to be made to Klein. Under the agreement, Season Co. was to enter into a 67 contract whereby a publisher would publish "The Season" as a "paperback original" by July 1976, pay Season Co. 15 percent of the cover price of all such paperbacks sold, exclusive of returns, and pay royalties due with respect to sales through October 31, 1976, not later than December 31, 1976.The agreement provided in part that:12(a) In consideration of the rights and property sold to Purchaser hereunder, Purchaser agrees to pay to Sellers the sum of Eight Hundred Seventy-Seven Thousand, Five Hundred Dollars ($ 877,500.00) payable as follows:(i) The sum of Twenty-Five Thousand Dollars ($ 25,000.00) at the closing by bank or certified check.67 (ii) By delivery to the Sellers at the closing of a nonrecourse promissory note of the Purchaser in the amount of One Hundred Ten Thousand Dollars ($ 110,000.00) bearing interest at 6% per annum and payable in installments as follows: (a) Eighteen Thousand Dollars ($ 18,000.00) on September 1, 1976 and (b) Ninety-Two Thousand Dollars ($ 92,000.00) on January 31, 1977 with all interest due on this note to be paid on January 31, 1977 provided that the Purchaser shall have the right to prepay said interest at any time without penalty. 68 (iii) The balance of the purchase price by delivery to Sellers at the closing of a non-recourse promissory note (the "Note") of the Purchaser in the amount of Seven Hundred Forty-Two Thousand Five Hundred Dollars ($ 742,500.00) in the form annexed hereto as Exhibit "A".(b) As security for the payment of the note referred to in (ii) of paragraph 12(a) above, the Purchaser hereby grants to Sellers a security interest in all of the recourse notes executed by the limited partners of the Purchaser in partial payment of their capital contributions to the limited partnership. * * ** * * (e) In the event a motion picture is produced based wholly or in part on the Property, then in addition to the above mentioned payments, Purchaser will pay to the Sellers a sum equal to five percent (5%) of Purchaser's share of the gross receipts or net profits of the said motion picture, as the case may be, earned by the said motion picture within two (2) years of the general release of the picture in the United States of America. * * [(f)(i)] When the [$ 742,500 nonrecourse] Note becomes due and payable upon maturity, if there remains any unpaid principal amount and accrued interest thereon Sellers69 shall be entitled to repossess the Property securing the Note and recover legal title thereto and Purchaser shall have no further interest in the Property or the receipts thereof. Sellers shall have no recourse whatsoever against the Purchaser, the Purchaser's other assets or the General or Limited Partners in the event of a default in the payment of the Note.* * * [13(b)] The share of the gross receipts received by Purchaser shall, after making the payments set forth in paragraph 12(e) above, be applied as follows:(i) From the closing date to and including December 31, 1976 one hundred percent (100%) of such gross receipts in excess of the first Two Thousand Dollars ($ 2,000.00) will be paid to the Sellers to the extent of interest due on the Note for the period from the closing date to and including December 31, 1976. During the said period from the closing date to and including December 31, 1976 fifty percent (50%) of the balance of such gross receipts in excess of the said sum of Two Thousand Dollars ($ 2,000.00) and all of the 68 foregoing interest paid to Sellers shall be paid to Sellers in reduction of the principal of the Note and fifty percent (50%) of such gross70 receipts shall be retained by the Purchaser.(ii) From January 1, 1977 through and including a date occurring one year after the closing date, one hundred percent (100%) of the gross receipts shall be paid to the Sellers to the extent of interest due on the Note for such period and previously accrued but unpaid interest. After all such interest has been paid to the Sellers, fifty percent (50%) of gross receipts shall be paid to Sellers and fifty percent (50%) of such gross receipts shall be retained by the Purchaser, it being agreed that any such payments to Sellers shall be deemed first credited to interest and then to principal. Purchaser shall make such payments to Sellers of Sellers' share of the gross receipts (as set forth in subdivision (i) of this subparagraph (b)) on July 1 and December 1 of each year in respect of all receipts received during such periods commencing with the first publication of the Property. * * 5* * * 20. * * the sellers have agreed to pay to George Mack in consideration of Mr. Mack introducing the Sellers to the Purchaser a finder's fee in the amount of Thirty-Five Thousand Dollars ($ 35,000.00) * * *71 The $ 742,500 figure for the nonrecourse note was derived by multiplying 5.5 times the $ 135,000 cash payment. This formula was used by Babbitt with respect to a number of books bearing Moore's name involved in limited partnerships syndicated by Babbitt.Two nonrecourse promissory notes payable to Moore and Hornung, dated May 19, 1976, were executed by Aull on behalf of the Season Co. as part of the closing. The first note was for $ 110,000 payable in installments of $ 18,000 and $ 92,000 on September 1, 1976, and January 31, 1977, respectively, together with interest at 6 percent per annum on the unpaid balance due on January 31, 1977. Under the agreement, this note was secured by the recourse notes of the limited partners. This note was paid to Moore and Hornung in accordance with its terms, including $ 3,886.68 as interest.69 The second nonrecourse note for $ 742,500 was due on May 19, 1983, with interest at 8 percent on the balance outstanding. In 1977, Season Co. paid Moore and Hornung $ 37,311.10, of which $ 36,678.69 was applied to interest due on this note for the period May 19, 1976, through December 31, 1976, and $ 632.41 was applied against principal. In 1978, 72 Season Co. paid Moore and Hornung $ 11,100.11 against interest due and in 1980 paid them $ 5,126.89 against interest due. Over almost the full 7-year period, Season Co. paid a total of $ 52,905.69 against the approximately $ 415,500 of interest accrued on the second note and $ 632.41 against the $ 742,500 principal.The Publisher and Season Co.Prior to Season Co.'s acquisition of "The Season," Moore had contacted Andrew Ettinger (Ettinger), vice president of Pinnacle Books Inc. (Pinnacle), with respect to several books, including "The Season" and the "The Chinese Ultimatum."During 1976, Pinnacle was in the bottom third of the 18 mass-market paperback publishers. Pinnacle then held about a 2-percent market share, generated 7 to 8 million dollars in sales, and published at least 144 titles of the approximately 3,000 paperbacks published annually.Ettinger was willing to publish "The Season," even though two books bearing Moore's name and coauthored by Liss which previously were published by Pinnacle were not successful. These books were "The London Switch," which had final net sales of 37,000, and "The Italian Connection," which had only 20,000 in net sales. Eventually Mack, 73 Rose, and others entered into the discussions with Ettinger about "The Season."On March 10, 1976, a manuscript of "The Season" was delivered to Pinnacle. On March 17, 1976, an agreement naming Season Co. as the "Author" and Pinnacle as the publisher was signed by Aull on behalf of Season Co. Subsequently, that agreement was signed by Pinnacle. Ultimately, it was redated May 19, 1976, and two inconsequential changes were made.The agreement provided for a $ 10,500 advance against all earnings from a 15-percent royalty on the retail price of all original paperback copies sold. Pinnacle paid the $ 10,500 advance to Season Co. The agreement also included a provision in which Season Co. agreed to share with Pinnacle 10 percent 70 of the revenues derived from motion picture and television rights. It was not customary in the mass market industry to make royalty payments for the period August 1976 through October 31, 1976, by December 31, 1976. Pinnacle nevertheless agreed to make such payments to Season Co.Pinnacle promoted "The Season" as an original paperback book to the best of its efforts. Hornung assisted Pinnacle in promoting the book by making publicity tours to 2674 cities during August through October 1976.Receipts from "The Season""The Season" was originally published by Pinnacle in August 1976 with an initial print of 390,000 copies. New cover art was used when 68,561 copies of "The Season" were republished by Pinnacle in September 1977. "The Season" was distributed throughout the United States and Canada by Independent News Co., a wholly owned subsidiary of Warner Communications, Inc. The book also had some export sales and sales to U.S. military posts which were also handled by Independent News. Sales of the German language rights were a minor source of revenue for Season Co.The most current royalty figures provided by the Pinnacle to Season Co. for sales through June 30, 1982, indicated that 410,459 copies of "The Season" were distributed, with net sales of 196,252 units, a 47.8-percent sale.The Season Co. also derived revenue from the sales of options to purchase motion picture/television rights to "The Season." During 1977-78, Zeitman Productions of Beverly Hills, CA, paid $ 7,500 for option rights. In 1980, Jack Haley Jr. Productions, Inc., paid $ 1,000 for a 3-month option. During 1980-81, Lorimar Productions paid a total75 of $ 4,100 for an option and extensions thereof. A total of $ 12,600 was generated from the sale of these options.During the years 1976 through June 30, 1982, Season Co. received $ 58,065.10 in royalties from book sales. Through 1981, $ 12,600 was received from the sale of television/movie options. These figures total $ 70,665.10, of which $ 53,538.10 was paid to Moore and Hornung under the terms of the May 19, 1976, agreement.71 Valuation of "The Season"An April 8, 1983, valuation report by petitioner's witness, Stanley B. Stetzer (Stetzer), stated that in his opinion based on potential earnings foreseeable in the summer of 1976, the net proceeds from the sale of all rights to "The Season" could reasonably have been expected to be $ 927,484. An October 27, 1982, valuation report by respondent's witness, Robert Sachs (Sachs), estimated a fair market value for "The Season" as of May 19, 1976, at $ 16,700. A December 28, 1982, valuation report by respondent's witness, Stephen Conland (Conland), stated that his opinion was that the fair market value of "The Season" as of May 19, 1976, was $ 2,000. The reports of these three persons indicated the following in comparison76 to the actual figures:StetzerConlandSachsActual"The Season" paperbackEstimated print1,675,000100,000none given458,561.00Net sales (copies)1,500,80050,000160,000 196,252.00Return percentage (books not10.4%50% none given57.2%sold)Value of booknone given$ 2,000$ 16,700 Estimated receipts by Season Co. from rights to "The Season"Dollar value of royalties$ 438,984$ 14,625$ 46,800 $ 57,343.52Book club sales55,00000 0 Foreign language receipts36,50000 721.58Serial excerpts receipts22,00000 0 Motion picture receipts375,00000 12,600.00Total927,48414,62546,800 70,665.10On May 16, 1976, net sales of "The Season" would at best be expected to be in the 160,000 to 200,000 range. The value of other rights on that date was so speculative as to be unable to be estimated. On May 16, 1976, estimated receipts from all the rights to "The Season" did not exceed $ 58,500, and the value of all such rights was significantly less than $ 58,500. On that date, there was no possibility that Season Co. would generate enough revenues to return petitioners' cash payments and that the77 $ 742,500 nonrecourse note would be paid by its due date.72 Season Co.'s Reported LossesSeason Co. was a cash basis taxpayer and filed partnership returns for years ending December 31. For years 1976 through 1978, Season Co. elected the income forecast method of depreciation. Season Co. switched to the straight line method for 1979 and 1980. The partnership returns, Forms 1065, filed with the Internal Revenue Service by Season Co. for 1976 through 1980, reported the following:19761977197819791980Gross receipts$ 39,944 $ 13,655 $ 10,098 0 $ 2,652 Interest income0 895 917 $ 1,327 1,472 Other income250 0 0 0 0 Total income40,194 14,550 11,015 1,327 4,124 Interest expense0 41,198 0 0 0 Depreciation446,374 151,980 112,845 25,214 25,214 Amortization0 6,000 0 0 0 Other deductions10,500 2,457 500 4,640 1,658 Total deductions456,874 201,635 113,345 29,854 26,872 Ordinary loss(416,680)(187,085)(102,330)(28,527)(22,748)Petitioners paid Babbitt $ 4,000 in 1976 and $ 4,000 in 1977 for their interest in "The Season." Petitioners78 deducted partnership losses from Season Co. in 1976 and 1977 in the amounts of $ 16,501 and $ 7,408, respectively. Respondent disallowed both deductions.OPINIONPetitioners claim Season Co. was engaged in business for profit and that it was entitled to an interest deduction in 1977. Respondent contends, among other things, that Season Co. did not conduct its activities for profit and that it was not entitled to interest deductions on nonrecourse notes.I. Section 183At the outset, we accept the fact that Pinnacle, as the publisher, fully utilized its resources as a small mass-marketing publishing house to sell "The Season." Accordingly, we have not dwelt extensively upon that aspect of this case in our findings of fact. Our inquiry is not directed, as petitioners 73 would have us believe, to the question of whether Pinnacle did its job. The first critical question before us is whether the partnership, Season Co., was an activity engaged in for profit within the meaning of section 183. 679 An "activity not engaged in for profit" is defined in section 183(c) 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." If the activity is not engaged in for profit, then section 183(b) separates the claimed deductions into two groups. Section 183(b)(1) allows only those deductions which are not dependent upon a profit objective, e.g., interest and taxes. Section 183(b)(2) allows the balance of the deductions which would otherwise be permitted if the activity was engaged in for profit, but only to the extent that the gross income derived from the activity exceeds the deductions allowed under paragraph (1).It is well established that: (1) Section 183 is not a disallowance section; (2) section 183 allows a limited partner to take deductions otherwise not allowable where the partnership is not engaged in a trade or business under section 162 or in an activity not encompassed by paragraphs (1) and (2) of section 212; and (3) the question of whether the partnership is "not engaged in for profit" under section 183 is determined at the partnership level. Fox v. Commissioner, 80 T.C. 972">80 T.C. 972, 1006 (1983),80 affd. by order (2d Cir., Jan. 23, 1984), affd. sub nom. Barnard v. Commissioner, 731 F.2d 230 (4th Cir. 1984), affd. sub nom. Kratsa v. Commissioner, in an unpublished order, 74 734 F.2d 6">734 F.2d 6 (3d Cir. 1984), affd. sub nom. Hook v. Commissioner, in an unpublished order 734 F.2d 5">734 F.2d 5 (3d Cir. 1984); 7Brannen v. Commissioner, 78 T.C. 471">78 T.C. 471, 499-500, 505 (1982), affd. 722 F.2d 695">722 F.2d 695 (11th Cir. 1984); Siegel v. Commissioner, 78 T.C. 659">78 T.C. 659, 696-698 (1982). Thus, petitioners' argument that they invested in the Season Co. with a bona fide objective to make a profit is of little significance to our analysis under the instant facts since a limited partner has no control over partnership activities or the business deductions of the partnership. Brannen v. Commissioner, supra;Fox v. Commissioner, supra;Resnik v. Commissioner, 66 T.C. 74">66 T.C. 74, 81 (1976), affd. per curiam 555 F.2d 634">555 F.2d 634 (7th Cir. 1977).81 Petitioners must show that Season Co. engaged in the exploitation of the rights to "The Season" with the "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). While a reasonable expectation of profit is not required, Season Co.'s actual and honest objective of making a profit must be bona fide. Fox v. Commissioner, 80 T.C. at 1006. Section 1.183-2(b), Income Tax Regs., lists some of the relevant factors to be considered in determining whether an activity is engaged in for profit.The issue is one of fact to be resolved not on the basis of any one factor, but on the basis of all the facts and circumstances. Allen v. Commissioner, 72 T.C. 28">72 T.C. 28, 34 (1979); Jasionowski v. Commissioner, 66 T.C. 312">66 T.C. 312, 321 (1976). Greater weight is given to objective facts than to the parties' mere statement of their intent. Siegel v. Commissioner, supra at 699; Engdahl v. Commissioner, 72 T.C. 659">72 T.C. 659, 666 (1979).82 In determining Season Co.'s intent, we focus on the intent of the general partner and the promoters of Season Co. since it is these individuals who actually controlled the partnership's activities. Fox v. Commissioner, 80 T.C. at 1007-1008. In this case, it is clear that Babbitt organized and controlled Season Co. Aull was only a strawman for Babbitt which carried on the duties of the general partner. Eventually Arthurs, a Babbitt employee, formally assumed the mantle of the general partner.75 Based on the record before us, we are convinced that Babbitt organized Season Co. as a limited partnership in order to create artificial losses which the limited partners could use to reduce their taxes. The essence of this transaction was to transfer all rights to "The Season" for 7 years to the partnership for a grossly inflated price in the form of an outright sale, to use the facade of the distribution of an original paperback book via Pinnacle, and to use a grossly exaggerated nonrecourse note to create large tax losses for the limited partners through unwarranted depreciation deductions.Babbitt attempted to paper as a business activity the formation83 and operation of Season Co. Some of this paper was specious, as in the case of the three identical appraisals Letheren supplied to Babbitt. Babbitt made sure, contrary to normal publishing practices, that the initial royalties would be paid before December 31, 1976, so that a loss could be claimed in 1976 under the income forecast method of depreciation. See Siegel v. Commissioner, supra at 693. In addition, Babbitt puffed up the depreciation deductions by an excessive nonrecourse note which bore no relationship to reality other than that it equaled 5.5 times the cash payments made to Moore and Hornung, the same factor used by Babbitt with respect to a number of books bearing Moore's name.Petitioners' expert witness so exaggerated his estimates of the value of the rights to "The Season" that his testimony was incredible, i.e., not credible. We found Sachs, one of respondent's expert witnesses, the most impressive in terms of his knowledge of the book business and valuation of the prospects of "The Season" as of May 1976. We are satisfied that on May 19, 1976, it was obvious that at best "The Season" would have modest net sales of 160,000 to 200,00084 copies. Net sales of 200,000 copies with a royalty of 29.25 cents per copy would result in $ 58,500 in income. Most of the other rights were without value and the movie rights were so speculative as to be incapable of being valued. It is obvious that the value of all rights to "The Season" was significantly less than $ 58,500. We question whether, aside from tax motivations, Season Co., or anyone else in an arm's-length transaction, would agree on a price of $ 874,500 for a return of $ 58,500. We are convinced that the Season Co. transactions were not economically sound and lacked a commercial objective.76 We can contrast what happened here with what would have happened in a straight economic transaction if Moore and Hornung had contracted directly with Pinnacle. Moore and Hornung would have received a total of about $ 71,000 over the 7-year period. Instead, via Season Co., Moore and Hornung received approximately $ 157,000, principally within the first year after publication. The interposition of Season Co. only served to fatten the purses of Moore, Hornung, Babbitt, Regan Goldfarb, and others by offering unwarranted paper losses to limited partners.The factual sequence85 can be simplified. Hornung contacted Moore with respect to her rough draft of a concept for a book. Moore had Liss write a book for publication as a paperback original. Moore contacted Pinnacle to have it publish a mass-market paperback original. Pinnacle was willing to sign the requisite documents with a limited partnership.Moore, Babbitt, Regan Goldfarb, and others engaged in a cooperative effort to set up the tax scheme known as Season Co. The private placement memorandum demonstrates that the sole purpose of Season Co. was to create substantial after-tax benefits in 1976 and 1977 no matter how many book sales actually occurred. Under the facts of this case, the only conclusion that could be drawn in 1976 was that these after-tax benefits would be substantial paper losses used to reduce other income of the limited partners.Pinnacle published the original paperback after Moore and Hornung purportedly transferred all their rights in "The Season" to Season Co. Nevertheless, over 75 percent of the $ 70,655.10 of royalties and movie option income flowed to Moore and Hornung while these rights were held by Season Co. As anticipated, most of the revenues were derived in 86 the first 2 years.There was no prospect whatsoever that the $ 742,500 nonrecourse note would be paid off on or before May 19, 1983. The actual payments made by date of trial, which included nonsubstantial payments against interest due on that nonrecourse note and a de minimis payment against principal, were not such as to lend economic substance to that nonrecourse note.In summary, based upon the facts in this record, petitioners have failed to sustain their burden of showing that Season Co. was engaged in the exploitation of the rights to "The Season" 77 for profit. Accordingly, all deductions claimed by petitioners, other than interest expenses in 1977, are allowable only to the extent that gross income exceeds the deductions allowable under section 183(b)(1).Since there were no section 183(b)(1) deductions in 1976, there was no distributable loss in 1976. Accordingly, respondent's determination is sustained as to 1976.II. Section 163For 1977, Season Co. claimed a total interest deduction of $ 41,197.78 which included $ 36,678.69 as interest on the $ 742,500 nonrecourse note. We agree with respondent that this $ 36,678.69 was not deductible interest under section87 163. 8To qualify for a section 163 deduction, the taxpayer must pay for the use or forbearance of money upon a genuine indebtedness. Autenreith v. Commissioner, 115 F.2d 856">115 F.2d 856, 858 (3d Cir. 1940), affg. 41 B.T.A. 319">41 B.T.A. 319 (1940); Norton v. Commissioner, 474 F.2d 608">474 F.2d 608, 610 (9th Cir. 1973), affg. a Memorandum Opinion of this Court; Fox v. Commissioner, 80 T.C. at 1019-1020. This Court explained in Fox v. Commissioner, 80 T.C. at 1019,88 that "There are various approaches which may be taken in establishing whether a purchaser may treat a nonrecourse liability as a bona fide debt." The approach we follow is the one recently stated in Flowers v. Commissioner, 80 T.C. 914">80 T.C. 914, 942 (1983), as follows:Where both the purchase price and the lesser principal amount of the nonrecourse note which makes up a portion of such purchase price unreasonably exceed the value of the property acquired, then no "genuine indebtedness" exists and no "investment in the property" occurs. Estate of Franklin v. Commissioner, 544 F.2d 1045 (9th Cir. 1976), affg. 64 T.C. 752">64 T.C. 752 (1975); Odend'hal v. Commissioner, 80 T.C. 588">80 T.C. 588, 604 (1983); Hager v. Commissioner, 76 T.C. 759">76 T.C. 759, 788 (1981); Narver v. Commissioner, 75 T.C. 53 (1980), affd. per curiam 670 F.2d 855">670 F.2d 855 (9th Cir. 1982); Beck v. Commissioner, 74 T.C. 1534">74 T.C. 1534 (1980), affd. 678 F.2d 818">678 F.2d 818 (9th Cir. 1982).Here, too, both the purchase price89 and the $ 742,500 nonrecourse note unreasonably exceeded the value of the property 78 acquired. 9We have found that on May 16, 1976, the maximum estimated receipts from90 all rights to "The Season" totaled $ 58,500 and the value of such rights was substantially less than that amount. We contrast that with the purchase price of $ 877,500 and the nonrecourse note of $ 742,500. It is obvious that both the purchase price and the $ 742,500 nonrecourse obligation were both grossly inflated and far in excess of the value of the rights to "The Season." We have discussed above the tax factors motivating the structuring of the Season Co.'s activities and showing the artificial nature of the $ 742,500 nonrecourse note. Suffice it to say that that note is not a genuine indebtedness and does not support Season Co.'s claimed interest deduction. 10 Accordingly, there was no distributable loss for 1977 and respondent's determination for that year is sustained.91 When we view this case as a whole we can only conclude that the recent statement by the Court of Appeals in Barnard v. Commissioner, 731 F.2d 230">731 F.2d 230, 232-233 (4th Cir. 1984), affg. Fox v. Commissioner, supra, is apposite:79 The long and short of it all is that the parties demeaned themselves in entering so dishonest a venture, unquestionably structured to garner for each of the taxpayers tax advantages to which they were not entitled and devoid of any realistic business purpose. In this case we confront only risk-takers who believed they proceeded on a no-loss path; if they got away with it, well and good from their misguided point of view, and, if they did not, they would be no worse off than had they never sought the unjustified benefits in the first place. We refrain from any expression of opinion as to whether the taxpayers have exposed themselves to the risk of criminal prosecution. However, even assuming that perhaps they have not, they, by their conduct, nevertheless reveal a malaise which a healthy United States of America cannot sanction. It is a frightening prospect when our wealthy citizens, those in *92 the highest income tax brackets, seek to take indefensible advantage of the country and their fellow citizens, especially those who have far less from which to meet their tax responsibilities. [Fn. refs. omitted.]In light of our disposition of this case, we find it unnecessary to discuss the other arguments raised by respondent in support of the disallowance of petitioners' deductions relating to Season Co.Decision will be entered for the respondent. Footnotes1. All section references are to the Internal Revenue Code of 1954 in effect during the taxable years in question unless otherwise indicated. All references to a Rule are to the Tax Court Rules of Practice and Procedure.↩2. Although petitioners raised an income averaging issue for 1976 in their petition, this issue was not raised at trial or on brief and we deem it conceded by petitioners.↩3. As noted above, by agreement of the parties, this case is a test case for certain other cases with respect to all issues relating to the adjustment regarding "The Season Limited Partnership." The parties have stipulated that they will be bound by the final decision in this case on those issues. The petitioners and docket numbers of those cases are: Gaetano Dentici, docket No. 7235-81; Stephen J. Takach and Irene Takach, docket No. 14465-81; William C. Vernocy and M. Irene Vernocy, docket No. 19636-81; S. Dale Kinnan and Natalie Kinnan, docket No. 19637-81; Myron Friedlander and Bernice Friedlander, docket No. 19638-81; Allen J. Cousin and Winnie A. Cousin, docket No. 20631-81; John R. Dean and Florence Dean, docket No. 16447-82; Noralco Corp., docket No. 20578-82; Louis D. Pappan and Panagiota L. Pappan, docket No. 23502-82; and Myron Friedlander and Bernice Friedlander, docket No. 29147-82.By stipulation, the cases listed in this paragraph are some of the cases bound on the statute of limitations issue by the final decisions in the test cases of Bridges, docket No. 14292-81, and Wood, docket No. 14294-81, in which we issued an opinion entitled Bridges v. Commissioner, T.C. Memo 1983-763">T.C. Memo. 1983-763: Myron Friedlander and Bernice Friedlander, docket No. 19638-81; Noralco Corp., docket No. 20578-82; and Myron Friedlander and Bernice Friedlander, docket No. 29147-82.Since other issues remain in some of the cases which are not automatically resolved by resolution of the statute-of-limitations issue in Bridges v. Commissioner, supra↩, and/or of "The Season Limited Partnership" issues in this case, the following cases will be restored to the general docket for resolution of those other issues: Gaetano Dentici, docket No. 7235-81; Allen J. Cousin and Winnie A. Cousin, docket No. 20631-81; Louis D. Pappan and Panagiota L. Pappan, docket No. 23502-82; and Noralco Corp., docket No. 20578-82.4. These projections are based on a 15-percent royalty on a sales price of $ 1.95 per copy.↩5. By its terms, the nonrecourse note was payable solely out of gross receipts as defined in par. 13 of the May 19, 1976, agreement. We note that the provisions of par. 13(b)(ii) of that agreement set forth above differ somewhat from those in the private placement memorandum set forth above under the heading Purchase Price and Leverage↩. The parties to the agreement apparently misunderstood the agreement and the memorandum as to the requirement for complete payment of accrued interest for the period beginning Jan. 1, 1977. On Dec. 29, 1980, Arthurs wrote to Frank Sturges, an agent of Moore, stating that: "Per the sales agreement and the offering memorandum we were to retain the first $ 2,000.00, pay the authors 100 percent of all revenues to April 30, 1977, and then 50 percent of any revenues beyond that point."6. Sec. 183 provides in part as follows:SEC. 183. ACTIVITIES NOT ENGAGED IN FOR PROFIT.(a) General Rule. -- In the case of an activity engaged in by an individual or an electing small business corporation (as defined in section 1371(b)), if such activity is not engaged in for profit, no deduction attributable to such activity shall be allowed under this chapter except as provided in this section.(b) Deductions Allowable. -- In the case of an activity not engaged in for profit to which subsection (a) applies, there shall be allowed -- (1) the deductions which would be allowable under this chapter for the taxable year without regard to whether or not such activity is engaged in for profit, and(2) a deduction equal to the amount of the deductions which would be allowable under this chapter for the taxable year only if such activity were engaged in for profit, but only to the extent that the gross income derived from such activity for the taxable year exceeds the deductions allowable by reason of paragraph (1).(c) Activity Not Engaged in for Profit Defined. -- For purposes of this section, the term "activity not engaged in for profit" means any activity other than one with respect to which deductions are allowable for the taxable year under section 162 or under paragraph (1) or (2) of section 212↩.7. An appeal of this case would lie to the Third Circuit.↩8. Also included in the total claimed deduction was $ 3,886.68 of interest paid on the $ 110,000 note. In light of our findings, we deem it unnecessary to consider whether the $ 3,886.68 is deductible under sec. 163↩ since it is less than the reported gross income of $ 14,550. The remaining $ 632.41 of the total claimed interest deduction is the principal payment made in 1977 on the $ 742,500 nonrecourse note. Obviously, that is not deductible interest.9. We note that in Brannen v. Commissioner, 78 T.C. 471">78 T.C. 471, 493 (1982), affd. 722 F.2d 695">722 F.2d 695 (11th Cir. 1984), this Court stated that the test was whether the stated purchase price unreasonably exceeded the value of the property whereas in Hager v. Commissioner, 76 T.C. 759">76 T.C. 759, 773-774 (1981), this Court stated that the test was whether the principal amount of the nonrecourse indebtedness unreasonably exceeded the value of the property. We need not decide which test is appropriate on the facts before us (see Brannen v. Commissioner, 78 T.C. at 513-514↩ (Chabot, J., concurring)), because we find that both the purchase price and the principal amount of the nonrecourse debt unreasonably exceeded the value of the rights to "The Season."10. Our conclusion is not changed by the opinion of the Supreme Court in Commissioner v. Tufts, 461 U.S. 300">461 U.S. 300 (1983), which held that where a taxpayer disposes of property encumbered by nonrecourse indebtedness in an amount that exceeds the fair market value of the property, the Commissioner may require him to include the outstanding amount of the nonrecourse obligation in the amount realized by him. That case involved the symmetrical treatment to be accorded where nonrecourse liability has been properly included in basis initially and must thereafter also be included in the amount realized on disposition of the encumbered property. The Supreme Court, relying upon the Commissioner's treatment and over 35 years of judicial sanction, held that the nonrecourse loan should be treated as a true debt in that situation.The instant case does not fit within the context of Tufts and Crane v. Commissioner, 331 U.S. 1">331 U.S. 1 (1947). Our issue is whether or not the nonrecourse obligation is genuine indebtedness so that it can be properly included in basis at the front-end of the transaction. We have found that it was not genuine indebtedness and could not properly be included in the basis of the rights to "The Season." Our decision is based on the unreasonably and artificially inflated amount of the nonrecourse indebtedness at the outset. That was not the fact in either Tufts or Crane. Fox v. Commissioner, 80 T.C. 972">80 T.C. 972, 1023 n. 25 (1983), affd. by order (2d Cir., Jan. 23, 1984), affd. sub nom. Barnard v. Commissioner, 731 F.2d 230">731 F.2d 230 (4th Cir. 1984), affd. sub nom. Kratsa v. Commissioner, in an unpublished order, 734 F.2d 6">734 F.2d 6 (3d Cir. 1984), affd. sub nom. Hook v. Commissioner, in an unpublished order 734 F.2d 5">734 F.2d 5 (3d Cir. 1984); Rice's Toyota World, Inc. v. Commissioner, 81 T.C. 184">81 T.C. 184, 196↩ n. 9 (1983), on appeal (4th Cir., Feb. 27, 1984).	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622342/	Lyman A. Stanton and Bertha W. Stanton, Petitioners, v. Commissioner of Internal Revenue, Respondent. Estate of Louis F. Springer, Deceased, Mary E. Springer, Executrix, Petitioner, v. Commissioner of Internal Revenue, RespondentStanton v. CommissionerDocket Nos. 18215, 18246United States Tax Court14 T.C. 217; 1950 U.S. Tax Ct. LEXIS 278; February 14, 1950, Promulgated 278 Decision will be entered under Rule 50. A and B were members of a partnership established in 1943 to engage in the business of handling coarse flour on a brokerage basis and the purchase and sale of millfeed. On January 4, 1944, each conveyed the whole of his partnership interest to himself as trustee under a declaration of trust in which a member of his immediate family was named as sole beneficiary. Immediately thereafter A and B, as trustees, together with the other partners, formed a new partnership which continued without interruption the operation of the business in the same manner and under the same name as the prior partnership. Held, that the income realized in 1944 from the partnership interests conveyed in trust was taxable to A and B rather than to the trusts and the beneficiaries named therein. L. P. Mattingly, Esq., and Leo W. Crown, Esq., for the petitioners.William Schwerdtfeger, Esq., for the respondent. Arundell, Judge. ARUNDELL217 These cases, consolidated for trial and opinion, involve deficiencies in individual income tax for the calendar year 1944 in the following amounts: Docket No. 18215, $ 52,863.24; and Docket No. 18246, $ 46,228.13.The sole issue presented is whether the income realized in 1944 from partnership interests transferred in that year by Lyman A. Stanton and Louis F. Springer, deceased, to trusts created by them was taxable to the petitioners or to the trusts and the beneficiaries named therein.The petitioners do not contest various other adjustments made by the respondent to their tax liabilities for 1944 in the notice of deficiency.FINDINGS OF FACT.Lyman A. Stanton, hereinafter sometimes referred to as Stanton, and Bertha W. Stanton are husband and wife, residing in Chicago, Illinois, and their joint income tax return for the calendar year 1944 was filed with the collector of internal revenue for the first district of Illinois.The decedent, Louis F. Springer, hereinafter sometimes referred280 to as Springer, prior to his death on January 24, 1946, was a resident of Chicago, Illinois. He filed his individual income tax return for the calendar year 1944 with the collector of internal revenue for the first district of Illinois.218 During the taxable year in question, Stanton was an independent rye and malt broker and a director and general manager of Red Wing Malting Co., a corporation with its office in Chicago, Illinois. The other directors of the Red Wing Malting Co. were the following:Hall Adams, secretary and sales manager of Guardian Safety Seal Co., of Chicago, Illinois, manufacturers of bottle caps, seals, and labels for distilleries and wineries.A. L. Burdick, residing in Minneapolis, Minnesota, in charge of the Electric Steel Elevator Division of the Russell Miller Milling Co. His duties consisted of supervising the handling, warehousing, merchandising, billing, and selling of the company's grain at its terminal in Minneapolis.Frank M. Leahy, a resident of New York was the purchasing agent for the National Distillers Co., one of the three largest distilling companies in the country.Louis F. Springer, a resident of Chicago, Illinois, and general purchasing281 agent for Allied Mills, manufacturers of commercial feed for livestock and poultry.Each of the foregoing directors owned approximately 20 per cent of the stock of the Red Wing Malting Co.In the latter part of 1942 there was a shortage of corn. For that reason, Stanton concluded that distillers would be required to use granular flour (a wheat product) instead of corn for the production of the large quantities of alcohol required in the manufacture of munitions.At a meeting of the board of directors of the Red Wing Malting Co., in December, 1942, Stanton advised his fellow members of the board that a fairly good volume of business could, in his opinion, be developed in the sale of granular flour. It was Stanton's opinion that little capital would be required, because it was the type of business ordinarily conducted on a straight brokerage basis. Upon Stanton's recommendation, a partnership was formed and a written partnership agreement, executed under date of January 8, 1943, was entered into for a term of two years. The agreement provided that the business would be conducted under the name of "Feed Sales Company," that it would begin business with a paid-in capital of $ 500, 282 and that the income and losses were to be shared by the partners in proportion to their capital contributions, which were as follows:Hall Adams5.00%A. L. Burdick23.75%F. M. Leahy23.75%Louis F. Springer23.75%Lyman A. Stanton23.75%Under the terms of the partnership agreement, Stanton was appointed manager of the partnership business, on a part time basis, at a salary of $ 7,200 per year, and it was provided that a successor manager might be appointed by the partners at any time without prior 219 notice to Stanton. The partnership agreement provided that: "No partner shall sell or assign all or any part of his interest in the partnership without the consent in writing of all of the other partners to such sale or assignment."The Feed Sales Co. had no warehouse and no inventory. The partnership shared office space with the Red Wing Malting Co. and with Stanton in his capacity as an independent grain broker. Stanton and the office force would divide their time between the three businesses as the circumstances required.Upon the organization of Feed Sales Co., Stanton, as its manager, contacted the Russell Miller Milling Co., Standard Milling Co., Kansas283 City Flour Mills, Shallenberger, Schultz & Bejohn, the Rickard Co., and four or five smaller mills and made arrangements to sell their production of granular flour as a broker for the customary brokerage of 50 cents per ton. At the same time he arranged for Feed Sales Co. to buy millfeed, a byproduct of the manufacture of granular flour, from these mills and resell it at O. P. A. prices. All agreements were oral only. The reason the millfeed was not sold on a brokerage basis was that under O. P. A. regulations the mills were not allowed to pay brokerage for its sale. O. P. A. regulations did permit a purchaser at O. P. A. ceiling to resell this product at an advance in price of 50 cents per ton.Flour mills were receptive to Stanton's solicitation for the reason that they had no sales force trained in the sale of these products and felt that by engaging Feed Sales Co. they were avoiding the need for new sales personnel in that field.The business of Feed Sales Co. succeeded beyond the expectations of the partners. The great demand for granular flour and millfeed continued until the end of the war in 1945. All sales of granular flour and millfeed were in carload lots and without284 exception were shipped direct from the mills to the purchaser. The Feed Sales Co. would receive payment from its customers on the granular flour or millfeed it handled within four or five days.The original paid-in capital of $ 500 was sufficient until April or May, 1943, at which time the partnership found it necessary to borrow funds for the purchase of millfeed. At that time it borrowed approximately $ 35,000 from the Red Wing Malting Co. which it repaid within 30 to 45 days. Thereafter, and during the taxable year in question, the brokerage commissions and earnings were sufficient to carry the business without further financing from outside sources.Burdick advised Stanton that the Russell Miller Milling Co. had an idle mill, and suggested that he contact its executive vice president with the view to having this mill placed in operation for the production of granular flour, and to negotiate an arrangement for Feed Sales 220 Co. to sell its product. The Russell Miller Milling Co. subsequently opened its idle mill and sold its products through the Feed Sales Co.Springer, as purchasing agent for Allied Mills, purchased approximately 60 per cent of all the millfeed handled285 by Feed Sales Co. during the taxable year. Leahy, as purchasing agent for National Distillers, bought large quantities of granular flour from the partnership.On January 4, 1944, Lyman A. Stanton transferred his entire 23.75 per cent interest in Feed Sales Co. to himself as trustee under a declaration of trust in which his mother, Bertha A. Stanton, was named as the sole beneficiary. Because of the provision in the partnership agreement which required that no partnership interest in Feed Sales Co. could be assigned without the consent of all of the other partners, the other partners were necessarily advised, in advance, of Stanton's contemplated action. Thereupon, Louis F. Springer and A. L. Burdick also decided to transfer their partnership interests to trusts under which their respective wives were named beneficiaries.The pertinent provisions of the Stanton trust were as follows:1. The Trustee shall pay the grantor's mother, Bertha Aldrich Stanton, from the net income of the trust estate, the sum of Two Hundred Dollars ($ 200.00) each month, and in addition thereto, at the end of each calendar year, or as soon thereafter as the amount thereof can be determined, shall pay to286 her out of the balance of the net income of the trust estate, if any, for the preceding calendar year, one-half of the said remaining net income.2. Out of the income of the trust estate for each calendar year, if any, remaining after the distributions * * , there shall be paid any Federal income taxes due on said undistributed income, and the balance shall become a part of and be added to the principal of the trust estate.3. This trust shall continue in full force and effect for the period of fifteen (15) years from the date hereof, at which date it shall cease and determine, provided, however, that if the death of the grantor's mother, Bertha Aldrich Stanton, occurs prior to the expiration of fifteen (15) years from the date hereof, then and in that event, the trust shall cease and terminate with her death.4. Upon the expiration of this trust, if Bertha Aldrich Stanton then be living, the Trustee shall pay over to her, as her sole and absolute property, the entire principal of the trust estate, together with all accumulations of income not theretofore distributed. In the event this trust terminates with the death of the said Bertha Aldrich Stanton, as provided in paragraph three287 (3) hereof, the entire principal of the trust estate, together with all undistributed income thereof, shall be distributed as the said Bertha Aldrich Stanton may have appointed by her last will and testament, or if she shall have failed to exercise the power of appointment, hereby conferred upon her, the said entire trust estate shall be transferred and conveyed to her issue, and if there be no issue surviving her, then to her lawful heirs.5. This declaration of trust and assignment and transfer to himself, as Trustee of the trust property, is made by the grantor without reserving to himself any right, power or authority to annul, cancel or revoke the same.6. The Trustee shall have, with respect to any and all property at any time held by him, hereunder, the following powers:(a) To retain any such property as an investment without regard to the proportion such property, or property of a similar character, so held, may bear 221 to the entire amount of the trust estate, whether or not such property is of the class in which trustees are authorized by law or any rule of court to invest trust funds;(b) To sell at either public or private sale, and to grant options to purchase, 288 any such property, either for cash or on credit, or partly for cash and partly on credit; also to exchange any such property;(c) To invest and reinvest in, and to acquire by exchange, property of any character, including, but not being limited to, bonds, notes, debentures, mortgages, certificates of deposit, and common and preferred stocks, without being limited to the class of securities in which trustees are authorized by law or any rule of court to invest trust funds;(d) To participate in any plan of reorganization, consolidation, merger, combination or similar plan, to consent to such plan and any action thereunder, or to any contract, lease, mortgage, purchase, sale, or other action by any corporation; to deposit any such property with any protective, reorganization, or similar committee, to delegate discretionary power thereto, and to share in payment of its expenses and compensation, and to pay any assessments levied with respect to such property; and to accept and retain any property which may be received under such plan, whether or not of the class in which trustees are authorized by law or any rule of court to invest trust funds.(e) To exercise all conversion, subscription, 289 voting and other rights of whatever nature pertaining to any such property, and to grant proxies, discretionary or otherwise, with respect thereto; and to retain any property which may be acquired by the exercise of such rights, whether or not the same is of the class in which trustees are authorized by law or any rule of court to invest trust funds.(f) To do all such acts, take all such proceedings, and exercise all such rights and privileges, although not hereinbefore specifically mentioned, with relation to such property as if the absolute owner thereof, and in connection therewith to enter into any covenants or agreements binding the trust estate.(g) To make division or distribution of property in kind and for such purposes to determine the value thereof.7. In the event of the death of the undersigned, or of his resignation or inability to act as trustee, then City National Bank & Trust Co., of Chicago, Illinois, shall become the trustee hereunder, with all the rights and duties herein conferred upon the trustee with respect to the receipt and distribution of income and principal of the trust estate, provided, however, that all funds coming into the hands of the said successor290 trustee, and not currently distributed under the terms hereof, shall be invested and reinvested only in bonds rated "Class A" or better.* * * Under date of January 4, 1944, Louis F. Springer conveyed to himself as trustee all right, title and interest in and to his entire 23.75 per cent interest in the partnership, Feed Sales Co., under a declaration of trust identical in all material provisions to the declaration of trust executed on the same date by Stanton, except for the following provisions:1. The Trustee shall pay the grantor's wife, Mary Ethel Springer, from the net income of the trust estate, the sum of One Hundred Dollars ($ 100.00) each month, and in addition thereto, at the end of each calendar year, or as soon thereafter as the amount thereof can be determined, shall pay to her out of the balance of the net income of the trust estate, if any, for the preceding calendar year, one-half of the said remaining net income. * * *222 3. This trust shall continue in full force and effect for the period of ten (10) years from the date hereof, at which date it shall cease and determine, provided, however, that if the death of the grantor's wife, Mary Ethel Springer, 291 occurs prior to the expiration of ten (10) years from the date hereof, then and in that event, the trust shall cease and terminate with her death.4. Upon the expiration of this trust, if Mary Ethel Springer then be living, the Trustee shall pay over to her, as her sole and absolute property, the entire principal of the trust estate, together with all accumulations of income not theretofore distributed. In the event this trust terminates with the death of the said Mary Ethel Springer, as provided in paragraph three (3) hereof, the entire principal of the trust estate, together with all undistributed income thereof, shall be distributed as the said Mary Ethel Springer may have appointed by her last will and testament, or if she shall have failed to exercise the power of appointment, hereby conferred upon her, the said entire trust estate shall be transferred and conveyed to her lawful heirs.The money which Mrs. Springer received from the L. F. Springer trust was placed on deposit in a bank account in Mrs. Springer's name created for that purpose. The only withdrawals from this account were used to pay income taxes on such funds.Under date of January 4, 1944, the partnership agreement292 executed January 8, 1943, and under which the business of Feed Sales Co. had been conducted was terminated and a new partnership agreement was executed for the term of one year, adopting in all respects the provisions of the first partnership agreement, excepting that the partners and their respective interests in the capital and income of the partnership were:Hall Adams5.00%F. M. Leahy23.75%A. L. Burdick, as trustee for Helen S. Burdick under a declarationof trust dated Jan. 1, 194423.75%L. F. Springer, as trustee for Mary E. Springer under declarationof trust dated Jan. 4, 194423.75%L. A. Stanton, as trustee for Bertha A. Stanton under declarationof trust dated Jan. 4, 194423.75%The trust established by Burdick, with his wife as beneficiary, was essentially similar to that established by Stanton and Springer.At the expiration of the term of the partnership agreement in January, 1945, it was extended for the term of one year. At the expiration of the term of the partnership as extended, the partnership business was continued without written extension until the death of Louis F. Springer on January 24, 1946, as of which date, on advice of counsel, 293 the Springer trust was withdrawn from the partnership. On April 1, 1946, on advice of counsel, the Stanton trust withdrew from the partnership. At or about the same date, the Burdick trust withdrew from the partnership. Upon their withdrawal, the trusts received their proportionate share of the partnership assets.After the withdrawal of the trusts from the partnership, a new partnership was organized under the name "Feed Sales Company," in 223 which Adams, Burdick, Leahy, and Stanton were members. With the end of World War II, the demand for granular flour terminated and the supply of millfeed ceased and the character of the business changed.The principal purpose of Lyman A. Stanton in establishing the trust for his mother was to provide her with a source of financial security which, in the event of his death, would not be subject to possible litigation. He and his wife were estranged and his wife and mother were not on friendly terms. Federal income tax saving was also a factor. At the time the trust was established, Stanton was supporting his mother and she had no other source of income. When the trust was created, his mother was 78 years of age and Stanton was her294 only child.The balance sheet for the Feed Sales Co. for the year ended December 31, 1943, disclosed assets, liabilities, and partners' capital accounts in the following amounts:ASSETSCash on hand and in banks$ 24,305.54Accounts receivable29,673.62Total assets53,979.16LIABILITIES AND NET WORTHLiabilities:Accrued taxes$ 82.90Partners' capital:H. Adams$ 1,587.30F. M. Leahy7,352.24A. L. Burdick7,652.24L. F. Springer19,652.24L. A. Stanton17,652.24Total partners' capital53,896.26Total liabilities and net worth53,979.16The balance sheet for the Feed Sales Co. for the year ended December 31, 1944, disclosed assets, liabilities, and partners' capital accounts in the following amounts:ASSETSCash on hand and in banks$ 65,017.30Accounts receivable41,362.66Total assets106,379.96LIABILITIES AND NET WORTHLiabilities:Accrued taxes519.50Partners' capital:H. Adams$ 2,794.26F. M. Leahy13,266.55A. L. Burdick, trustee13,266.55L. F. Springer, trustee13,266.55L. A. Stanton, trustee63,266.55Total partners' capital$ 105,860.46Total liabilities and net worth106,379.96295 224 In its partnership return for 1944, Feed Sales Co. reported ordinary net income in the amount of $ 265,885.46, distributed as follows:Hall Adams$ 13,294.26Allan L. Burdick, trustee63,147.80L. F. Springer, trustee63,147.80Lyman A. Stanton, Jr., trustee63,147.80Frank M. Leahy63,147.80Total265,885.46The full distributable shares of partnership income were reported in fiduciary income tax returns filed by the trustees of the Stanton and Springer trusts for 1944, which returns also disclosed that distributions of $ 32,598.90 to Bertha A. Stanton and $ 32,023.90 to Mary E. Springer had been made in 1944. These amounts were reported by the above named beneficiaries in their individual income tax returns for 1944.In each case the notice of deficiency issued by the respondent held that the income of the Feed Sales Co. in the amount of $ 63,147.80, which was reported by the trust, was taxable to the petitioner under the provisions of section 22 (a) of the Internal Revenue Code.OPINION.The only issue in this proceeding involves the taxability of income derived in 1944 from partnership interests which were conveyed by Stanton and Springer to trusts296 established by them for the benefit of members of their immediate families.In the case of both Stanton and Springer, all right, title, and interest in and to their respective partnership interests passed irrevocably to the trust each established. The trust instruments conferred on each in his fiduciary capacity as sole trustee full and unlimited control and dominion over the interest conveyed. The record discloses that, following the creation of the trusts, Stanton, Springer, and Burdick, as trustees, immediately entered into a new partnership agreement for the term of one year with Adams and Leahy, continuing without interruption the operation of the business in the same manner as it had been conducted prior to the transfer of their interests to to the trusts.225 In taxing to the petitioners the $ 63,147.80 received by each trust from the Feed Sales Co. in 1944, respondent claims that his determination may be supported by either of two established tax principles. Relying upon the rationale of Helvering v. Clifford, 309 U.S. 331">309 U.S. 331, the respondent contends that Stanton and Springer retained such effective control and dominion over the trust297 corpora, consisting of their respective partnership interests, that they were in substance, even after executing the trust agreements, still partners in the firm. Respondent submits, as an alternative argument, based upon cases such as Lucas v. Earl, 281 U.S. 111">281 U.S. 111, and Helvering v. Horst, 311 U.S. 112">311 U.S. 112, that the income distributed to the trusts was taxable to Stanton and Springer because they were the persons who in reality earned the income of the partnership.The petitioners challenge the respondent's determination, contending that in establishing the trusts Stanton and Springer divested themselves of every material attribute of ownership in the partnership interests conveyed. In support of the argument that this feature defeats their tax liability for the trust income, the petitioners rely on cases such as Simmons v. Commissioner, 164 Fed. (2d) 220; Henson v. Commissioner, 174 Fed. (2d) 846; Clifford R. Allen, Jr., 12 T.C. 227">12 T. C. 227.The fact that Stanton and Springer, in creating the trusts in question, completely298 surrendered all ownership of their partnership interests is not controlling. Where income is derived from capital, the tax liability for such income follows ownership. Harrison v. Schaffner, 312 U.S. 579">312 U.S. 579; Helvering v. Horst, supra;Helvering v. Clifford, supra.Where income flows from labor, the issue is, Who "earned" the income? Commissioner v. Tower, 327 U.S. 280">327 U.S. 280; Doll v. Commissioner, 149 Fed. (2d) 239; Helvering v. Horst, supra;Lucas v. Earl, supra.Where the income stems from combined labor and capital, the test is the personality who or which "produced" the income. Doll v. Commissioner, supra;Burnet v. Leininger, 285 U.S. 136">285 U.S. 136.In our opinion, the facts of the instant case bring it within the third category and narrow the question presented to one involving a determination of the persons or elements responsible for the production of the income respondent seeks to tax to Stanton299 and Springer.The record is replete with evidence that the income of the Feed Sales Co. was primarily due to the personal efforts of its five original partners and the use to which they put the capital invested rather than the capital contribution each made upon the formation of the partnership. Their contacts and experience in the industry, and the fact that the principal occupations of at least four of the five partners involved the purchase or sale of the products handled by the 226 partnership were the factors primarily responsible for the unusual success of the business.The relative unimportance of capital is best illustrated by the fact that the five original partners contributed only $ 500 in establishing the business. Coarse flour, which was used in large quantities by distillers in the manufacture of alcohol, was handled by the partnership on a straight brokerage basis. Apparently the only occasion upon which the business found it necessary to raise additional capital was early in its existence, when it borrowed $ 35,000 from the Red Wing Malting Co. to finance the first purchases of millfeed. Payment for the goods it sold was customarily received by the partnership300 within 4 or 5 days and the particular loan from the Red Wing Malting Co. was discharged within 30 or 45 days thereafter. At the time the trusts in question were established, the business had sufficient cash accumulated to finance all purchases of millfeed on its own account.Moreover, the partnership had no employees or offices of its own, but instead shared those employed by the Red Wing Malting Co. and Stanton's individual brokerage business. It had no tangible assets other than miscellaneous office furniture, cash on hand, and accounts receivable.It is also interesting to note that the original capital contribution of Hall Adams, the only partner whose principal occupation was wholly unrelated to the business of the partnership, was 5 per cent of the total paid-in capital of $ 500, in contrast to the 23.75 per cent interest held by each of the other four partners. However, on this nominal investment of $ 25, Adams realized distributable profits from the business of $ 13,294.26 in 1944. The relation of the percentage of profits realized to the amount of capital committed is further evidence of the unimportance of capital in the business as compared with the ability, experience, 301 and business acumen of the partners themselves.Petitioners contend that the Feed Sales Co. was not a personal service business, arguing that the participation of Stanton or any of the other partners was not essential to its continued success. They point out that the demand for the products it handled far exceeded the supply and that the principal task was not to locate purchasers, but to effect an equitable distribution of the available supplies among its many customers. This evidence, in our opinion, does not establish the fact that the partnership was not a personal service business but, at most, shows that the artificial demand created by war conditions did not require the partners to devote the care and attention to the business which would have been necessary under normal economic conditions.Nor do we consider the circumstance that Stanton received a salary of $ 7,200 from the partnership during the taxable year as controlling 227 of the issue herein. In cases analogous to this, we have disregarded the fact that a salary was paid to the transferor or to an independent manager where the evidence indicated that the transferor in substance continued to be the person responsible302 for the production of the income flowing from the property conveyed. Cf. J. H. Henson, 10 T. C. 491 (reversed, Henson v. Commissioner, supra); Robert E. Werner, 7 T.C. 39">7 T. C. 39.In conveying their partnership interests to the trusts in question, both Stanton and Springer invested themselves, as trustees, with the fullest possible control over the trust property; specifically, to do all such acts, take all such proceedings and exercise all such rights and privileges with relation to the property as if they were the absolute owners thereof.The reservation of such powers and the naming of themselves as trustees, in our opinion, is clear evidence that neither Stanton nor Springer intended the transfers to result in the withdrawal of the partnership interests from the business or the introduction of outside parties into the management of its affairs. The trust instruments preserved the right of each to participate in the control and management of the partnership to the same extent as if he were still the actual owner of the partnership interest. In short, the execution of the trust instruments effected no substantial 303 change in the business or the relation of the parties to it other than the bare transfer of the ownership of Stanton's and Springer's partnership interests from themselves as individuals to themselves as trustees. Had the income in question been derived primarily from the ownership of the interests so conveyed rather than from the use or employment of such interests, the tax consequences for which the petitioners contend might well have followed.Moreover, Stanton's and Springer's conveyance of their respective partnership interests to the trusts did not deprive them of the opportunity to recapture the going business at a later date. The partnership agreement under which the trusts came into the business as partners was only for the term of one year. Although this original agreement was extended in January, 1945, for an additional year, it is interesting to note that all three trusts withdrew from the partnership within a short time after the death of Springer in January, 1946, and the business was thereafter continued by a new partnership, consisting of Stanton, Burdick, Adams, and Leahy, under the same name of Feed Sales Co.In our opinion, all of the evidence herein leads irresistibly304 to the conclusion that the $ 63,147.80 paid over by the Feed Sales Co. to the Stanton and Springer trusts in 1944 was "produced" by the concerted efforts of the five original members of the partnership through their unique knowledge, experience, and contacts in the industry. Here, 228 as in Robert E. Werner, supra, the bare legal title to the property involved was not the essential element in the production of the income under the circumstances shown. The law is now well established that income is taxable to the person or persons who earn it and that such persons may not shift to another or relieve themselves of their tax liability by the assignment of such income, whether by a gift in trust or otherwise. Lucas v. Earl, supra;Helvering v. Horst, supra; Dolly v. Commissioner, supra; Robert Lubets, 5 T. C. 954 (appeal dismissed, CCA-1); Louis Visintainer, 13 T. C. 805; cf. Albert Nelson, 6 T. C. 764; Hogle v. Commissioner, 132 Fed. (2d) 66. Therefore, 305 the respondent's determination, that the net incomes of Stanton and Springer for 1944 should each be increased by the amount of $ 63,147.80 representing the profits paid by the partnership to each trust, is sustained.Our decision herein makes it unnecessary to treat the question of whether trust income in 1944 is taxable to the petitioner under the principles of Helvering v. Clifford, supra. However, our conclusion would be the same regardless of the fact that the trust instruments might be regarded as effecting a complete and irrevocable disposition of the partnership interests of Stanton and Springer within the meaning of the Clifford doctrine.Decisions will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622345/	DEL REY FRATERNITY, INC., Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentDel Rey Fraternity, Inc. v. CommissionerDocket No. 8036-73.United States Tax CourtT.C. Memo 1975-206; 1975 Tax Ct. Memo LEXIS 169; 34 T.C.M. (CCH) 886; T.C.M. (RIA) 750206; June 26, 1975, Filed John I. Jefsen, for the petitioner. Peter D. Bakutes, for the respondent. RAUMMEMORANDUM OPINION RAUM, Judge: The Commissioner determined deficiencies in petitioner's income taxes as follows: YearDeficiency1968$ 36.33196972.631970349.551971516.70170 The only issue is whether scholarships paid by petitioner in each of those years were ordinary and necessary expenses paid in carrying on any trade or business. All of the facts have been stipulated. Petitioner, Del Rey Fraternity, Inc., is a corporation organized under the laws of California, which at the time of filing the petition herein had its principal place of business in Berkeley, California. In 1903 the Del Rey Club (later known as the Del Rey Fraternity) was founded as a fraternal club at the University of California campus in Berkeley, California. To own and operate the real property to be used as their fraternity house, members of the club organized petitioner in 1924 under the name Del Rey Club, Incorporated. By an amendment to its articles of incorporation in 1940, petitioner was converted into a non-profit corporation with members rather than stockholders, and its name was changed to Del Rey Fraternity, Inc. In 1924 petitioner acquired certain property located at 1727 Euclid Avenue in Berkeley which served as the club's fraternity house until June of 1967, the last year of the club's existence. The property was sold on or about October 11, 1967. Although no longer171 needed for its original purpose, petitioner was not dissolved. Instead, restated articles of incorporation were filed with the secretary of state of California on September 16, 1969. The new articles provide that the primary purpose of the corporation is -- To support education at the University of California (all campuses) through the media, but not confined to, grants and scholarships, for the purpose of improving and developing both the quality, quantity and availability of collegiate education and for the purpose of improving and developing the capabilities of those individuals studying and teaching at any campus of the University of California, and, further To create, maintain and continue a fraternal brotherhood and organization amongst the present and future members of this corporation. Since the sale of the club's fraternity house, petitioner's assets have consisted solely of cash and a note received from the purchaser. Interest on the deposit of this cash and the principal balance of the note were its only sources of income during the years 1968 through 1971. At the close of each of those years petitioner's books reflected total assets ranging from $101,480 to $116,353, 172 and no liabilities. Since the year 1968 petitioner's only activity, aside from collecting interest, has been the distribution from time to time of amounts as scholarships to undergraduate students enrolled at various campuses of the University of California. Petitioner has not engaged in any active advertising of its scholarships, but no applicant has been refused. Interested students who applied for scholarships during the taxable years at issue were required to complete and submit an application which, inter alia, provided that -- Awards are made on a competitive basis and on the following priority: a. Child of a member of Del Rey Fraternity b. Grandchild of a member of Del Rey Fraternity c. Blood relation of a member of Del Rey Fraternity d. Person recommended by a member of Del Rey Fraternity. During the years 1968 through 1971 seven students received scholarships from petitioner. Of the seven, three were children, and two, grandchildren of its members. The other two, however, were not related to any of the members. Each recipient received an identical amount for any particular scholastic quarter. For the period September 24, 1940, to December 31, 1967, petitioner173 was exempt from Federal income tax under the provisions of section 101(14), I.R.C. 1939, and section 501(c)(2), I.R.C. 1954. Since January 1, 1968, however, petitioner has not been an organization which qualifies for exemption from Federal income tax. On its income tax returns for the years 1968 through 1971, petitioner claimed deductions for the following amounts paid during each of those years as scholarships: YearAmount Paid1968$ 150.001969300.0019701,550.0019712,350.00 In his notice of deficiency respondent disallowed these deductions stating that -- these amounts do not represent ordinary and necessary expenditures incurred in the conduct of a trade or business * * * [and] do not constitute charitable deductions since they are not paid to recipients which would qualify the amounts paid as charitable contributions. Section 162 of the Internal Revenue Code provides in pertinent part that "[there] shall be allowed as a deduction all of the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business". Petitioner contends174 that during the relevant years it was engaged in the trade or business of supporting education through scholarships and grants, and that since the scholarships it paid furthered this trade or business, they constituted ordinary and necessary expenses deductible under section 162. 1 Respondent disagrees. In his view petitioner's activities were not conducted with the intention of making a profit and therefore did not constitute a trade or business. Furthermore, if petitioner was engaged in some trade or business, respondent argues that the scholarships were not ordinary and necessary expenses thereof. We hold for the respondent. Petitioner correctly observes that whether expenditures are ordinary and necessary business expenses deductible under section 162 is in the nature of a question of fact. But petitioner erroneously concludes that therefore the purposes set forth in its restated articles of incorporation conclusively define a trade or business it carried on during the relevant years. Such articulations of corporate purposes at best175 identify trades or businesses which a particular corporate taxpayer may have conducted. It is the corporation's actual conduct that is of critical importance in determining what if any business it may have carried on. Cf. Arthur H. Eppler,58 T.C. 691">58 T.C. 691, 698-699. Of the limited activities in which petitioner actually engaged only the collection of interest on its cash deposits and the note from the purchaser of the fraternity house produced or could have been expected to produce income, and thus might conceivably form the basis for a contention that it constituted a trade or business. But even if that activity should be regarded as qualifying as a trade or business, petitioner has failed to establish that the scholarships it paid were ordinary and necessary expenses thereof. Petitioner presented no evidence which suggests, let alone convincingly demonstrates that the scholarships facilitated, promoted, protected or were required by its income producing activities. Without such evidence it cannot reasonably be said that the scholarships were appropriate and helpful to the conduct of any trade or business conducted by petitioner and thus were necessary as required176 by section 162. Cf. Welch v. Helvering,290 U.S. 111">290 U.S. 111, 113. Nor does anything in the record suggest that the scholarships were ordinary expenses of such a trade or business in the sense that they were "normal, usual or customary". Deputy v. duPont,308 U.S. 488">308 U.S. 488, 495; Welch v. Helvering,supra,290 U.S. at 114-116. Indeed, it appears that the scholarships were not actually "expenses" as that word is commonly understood. Rather they were a means of distributing some of petitioner's interest income largely for the benefit of children and grandchildren of its members. Congress has not seen fit to permit such gratuitous but self-interested distributions to qualify as deductible charitable contributions. Section 170(c). Likewise, they are not deductible under section 162 merely as a consequence of having been labeled "expenses", where they bore no direct relationship to any business of the petitioner and were not paid with any demonstrated expectation of a commensurate financial return. Cf. 177 Arthur H. Eppler,58 T.C. 691">58 T.C. 691, affirmed per order (C.A. 7, October 24, 1973); Hirsch v. Commissioner,315 F. 2d 731 (C.A. 9); sec. 1.162-15(b), Income Tax Regs. Accordingly, Decision will be entered for the respondent.Footnotes1. Petitioner does not contest that the scholarships do not qualify as charitable contributions deductible under section 170 of the Code.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622346/	J. A. CARTER, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentCarter v. CommissionerDocket No. 27417-83.United States Tax CourtT.C. Memo 1985-360; 1985 Tax Ct. Memo LEXIS 270; 50 T.C.M. (CCH) 463; T.C.M. (RIA) 85360; July 22, 1985. 270 Held, P is liable for the addition to tax for fraud under sec. 6653(b), I.R.C. 1954, for 1981. Frederick W. Vollrath, for the petitioner. Willie Fortenberry, for the respondent. SIMPSONMEMORANDUM FINDINGS OF FACT AND OPINION SIMPSON, Judge: The Commissioner determined a deficiency of $8,349.00 in the petitioner's Federal income tax for 1981 and an addition to tax of $4,175.00 pursuant to section 6653(b) of the Internal Revenue Code of 1954. 1 The sole issue for decision is whether the petitioner is liable for the addition to tax for fraud under section 6653(b) for 1981. 271 FINDINGS OF FACT Some of the facts have been stipulated, and those facts are so found. The petitioner, J. A. Carter, was a legal resident of Seffner, Fla., at the time he filed his petition in this case. He filed tax protestor type documents in lieu of a proper Federal income tax return for 1981. During 1981 and 1982, the petitioner was a member of the Keystone Society, an organization that advocated that wages are not taxable income. During 1981, he received wages totaling $28,024.24, and he received dividend income of $279.00 and interest income of $63.00. The petitioner timely received from his employer a Form W-2 which showed the wages paid to him in 1981. However, he reported none of such income on the documents that he filed for 1981. Prior to 1981, the petitioner filed Federal income tax returns which reported his wages as income. During 1981 and 1982, the petitioner submitted Forms W-4 (Employee's Withholding Allowance Certificate) to his employer. On such forms, he claimed that he was exempt from Federal income tax withholding. In his notice of deficiency, the Commissioner determined that the petitioner had received $28,166 in unreported taxable income in272 1981. In addition, he determined that the petitioner was liable for the addition to tax for fraud under section 6653(b) for 1981. OPINION The petitioner has conceded that he is liable for the deficiency as determined by the Commissioner. Thus, the sole issue for decision is whether the petitioner is liable for the addition to tax for fraud for 1981. Section 6653(b) provides that if any part of any underpayment of tax required to be shown on a return is due to fraud, there shall be added to the tax an amount equal to 50 percent of the underpayment. The Commissioner has the burden of proving, by clear and convincing evidence, that some part of the underpayment for each year was due to fraud. Sec. 7454(a); Rule 142(b), Tax Court Rules of Practice and Procedure; Levinson v. United States,496 F.2d 651">496 F.2d 651, 654-655 (3d Cir. 1974); Miller v. Commissioner,51 T.C. 915">51 T.C. 915, 918 (1969). The Commissioner will carry his burden if he shows that the taxpayer intended to evade taxes which he knew or believed that he owed by conduct intended to conceal, mislead, or otherwise prevent the collection of such taxes. Stoltzfus v. United States,398 F.2d 1002">398 F.2d 1002, 1004 (3d Cir. 1968);273 Webb v. Commissioner,394 F.2d 366">394 F.2d 366, 377-378 (5th Cir. 1968), affg. a Memorandum Opinion of this Court; Acker v. Commissioner,26 T.C. 107">26 T.C. 107, 111-112 (1956). The existence of fraud is a question of fact to be resolved upon consideration of the entire record. Gajewski v. Commissioner,67 T.C. 181">67 T.C. 181, 199 (1976), affd. without published opinion 578 F.2d 1383">578 F.2d 1383 (8th Cir. 1978). Fraud is never presumed, but rather must be established by affirmative evidence. Beaver v. Commissioner,55 T.C. 85">55 T.C. 85, 92 (1970). Circumstantial evidence is permitted where direct evidence of fraud is not available. Spies v. United States,317 U.S. 492">317 U.S. 492, 499 (1943); Rowlee v. Commissioner,80 T.C. 1111">80 T.C. 1111, 1123 (1983); Gajewski v. Commissioner,67 T.C. at 200. Fraud may properly be inferred where an entire course of conduct establishes the necessary intent. Rowlee v. Commissioner,supra;Stone v. Commissioner,56 T.C. 213">56 T.C. 213, 223-224 (1971). The precise amount of underpayment resulting from fraud need not be proved. Otsuki v. Commissioner,53 T.C. 96">53 T.C. 96, 105 (1969).274 The statute requires only a showing that "any part" of an underpayment results from fraud.However, the Commissioner must show fraud resulting in an underpayment for each taxable year in which fraud has been asserted. Otsuki v. Commissioner,supra.In the present case, the evidence in the record clearly and convincingly establishes that the petitioner fraudulently underpaid his tax during 1981. He properly filed returns for years prior to 1981; yet, the documents that he submitted for 1981 clearly did not constitute a return within the meaning of section 6011 and the regulations thereunder. See Jarvis v. Commissioner,78 T.C. 646">78 T.C. 646 (1982); Thompson v. Commissioner,78 T.C. 558">78 T.C. 558 (1982); Reiff v. Commissioner,77 T.C. 1169">77 T.C. 1169 (1981). In addition, during 1981 and 1982, the petitioner submitted to his employer false Forms W-4. On such forms, he falsely claimed that he was exempt from withholding. While failure to file is not conclusive evidence of fraud, it is a factor worthy of consideration, particularly when coupled with the submission of false Forms W-4. Hebrank v. Commissioner,81 T.C. 640">81 T.C. 640, 642 (1983);275 Habersham-Bey v. Commissioner,78 T.C. 304">78 T.C. 304, 312-314 (1982). The petitioner seeks to avoid imposition of the addition to tax for fraud by claiming that he had no fraudulent intent to underpay his Federal income tax for 1981. He contends that he naively believed the position advocated by the Keystone Society, that wage income was not taxable. Since that time, he has come to realize that the position advocated by the Keystone Society is erroneous. We do not find the petitioner's contention to be convincing. He filed proper returns in prior years; he knew that his fellow citizens paid Federal income taxes on their wages. The petitioner was clearly aware of his obligation to file a proper income tax return, and it is also clear that he knowingly and willfully failed to fulfill such obligation for 1981. See Hebrank v. Commissioner,supra at 641-644; Rowlee v. Commissioner,supra at 1123-1126. The determination of whether there was fraud is based on the circumstances existing at the time of underpayment; the fact that the petitioner subsequently realized that he had made a mistake does not alter his intent at the time he underpaid*276 his tax for 1981. Bennett v. Commissioner,30 T.C. 114">30 T.C. 114, 122-123 (1958); Hirschman v. Comissioner,12 T.C. 1223">12 T.C. 1223, 1228-1230 (1949). Based on the record in the present case, we hold that the Commissioner has, by clear and convincing evidence, proved that the underpayment of the petitioner's tax for 1981 was due to fraud. Decision will be entered for the respondent.Footnotes1. All statutory references are to the Internal Revenue Code of 1954 as in effect during 1981.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622348/	PAUL J. DeVINE and FANNY K. DeVINE, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentDe Vine v. CommissionerDocket No. 3867-74.United States Tax CourtT.C. Memo 1976-8; 1976 Tax Ct. Memo LEXIS 395; 35 T.C.M. (CCH) 23; T.C.M. (RIA) 760008; January 8, 1976, Filed Paul J. DeVine, pro se. James E. Dunn, Jr., for the respondent. SCOTT MEMORANDUM FINDINGS OF FACT AND OPINION SCOTT, Judge: Respondent determined a deficiency in Federal income tax of petitioners, Paul J. and Fanny K. DeVine, for the calendar year 1972 in the amount of $760.53. The issue for decision is whether petitioners may deduct amounts in excess of those allowed by respondent for business expenses under section 162, I.R.C. 1954, 1 for medical expenses under section 213, for charitable contributions under section 170 and for a casualty loss under section 165. FINDINGS OF FACT Paul J. DeVine and Fanny K. DeVine were residents of Findlay, Ohio at the time of the filing of their petition in this case. They filed their397 joint Federal income tax return for the calendar year 1972 with the District Director of Internal Revenue, Cleveland, Ohio. From January 1, 1972 through November 30, 1972, petitioners resided in LaGrange Park, Illinois. Petitioner, Paul J. DeVine (hereinafter Paul), purchased a topcoat for $125. Sometime thereafter, Paul took a customer to lunch at a restaurant and while they were having lunch, his topcoat disappeared from the cloakroom where he had left it. The value of his coat was less than $100 at the time of its disappearance. Paul attended church weekly and made cash donations of approximately $2 each Sunday. During special holy weeks he would donate approximately $5 each Sunday. Fanny K. DeVine (hereinafter Fanny) attended church several times each week and gave donations on her own account. Paul made some cash contributions to organizations such as Red Cross, Kiwanis and the Girl Scouts when he was personally asked for such a donation. During 1972 petitioners paid $19 to a local hospital for services rendered to Paul. During 1971 petitioners paid approximately $140 for medical services rendered to Fanny while she was in Germany. Paul had $5.50 deducted from his payroll398 check by his employer, Swift Chemical Company, for each week during 1972 for hospitalization insurance. Paul visisted the dentist twice and Fanny three times during 1972. For his visits Paul paid an aggregate amount of $16 to their family dentist and for her visits Fanny paid $74 to the same dentist. Paul purchasd three pairs of eye glasses and Fanny purchased one pair of glasses in 1972 at a total cost of $88. In 1972 Paul purchased three elastic braces and a number of elastic bandages and paid therefor the aggregate amounts of $46 and $19, respectively. Fanny at times used a taxicab to go to her medical appointments. Paul or Fanny, depending on who went to the store, purchased and paid for vitamins that were prescribed for Fanny. Paul was employed during 1972 as a salesman for Swift Chemical Company selling adhesive and chemical products. He used one room of his 4-room apartment as an office. This room was for no purpose other than as Paul's office. Paul paid $180.50 per month from January 1, 1972 through November 30, 1972, for rent of his apartment in LaGrange Park, Illinois. In addition, he paid $97.56 for electricity and $15.40 for gas for the apartment during this period. The399 monthly service charge for the telephone installed in his apartment was $5.65 and Paul paid approximately $71 for the use of a telephone for local calls at the LaGrange Park apartment for the period petitioners resided there. In 1972 Paul paid a total of $450 for weekly cleaning of the apartment and $90 for household insurance. The furnishings used by Paul in his office accounted for 20 percent of the total value of the furnishings in the apartment. For use in his business as a salesman, Paul purchased notebooks, pens and paper, books concerning chemicals and adhesives, a brief case for $70 (which was damaged during the year to such an extent that it became unusable), safety equipment for his car, travel insurance, safety glasses, and a smock. He also bought a pair of sunglasses which he used for both business and personal driving. On petitioners' joint Federal income tax return for the calendar year 1972 they deducted the amount of $1,359 for total miscellaneous deductions of which the amount of $10 was for a safe deposit box and the following amounts were claimed to be attributable to Paul's work as a salesman: Miscellaneous (notebooks,paper, pens, etc.)$ 150Books75Brief Case70Travel Insurance155Safety Equipment for Car40Safety Glasses38Sunglasses for Driving25Smock16$ 569Apartment-OfficeApartment Rent$2,364Utilities132Phone84Cleaning450Insurance90$3,1201/4 X $3,120780$1,349400 Petitioners additionally deducted on their joint Federal income tax return the amount of $1,731.79 for business expenses of Fanny; the amount $565of for contributions; the amount of $85 for a theft loss; and the amount of $661.56 for medical and dental expenses which were computed on the basis of the following expenditures: Health Insurance $316Medicine & Drugs365Medical Expenses140Dental Expenses90Eye Glasses88Ace Bandages18Body Braces46Transportation40 Petitioners also excluded from gross income the amount of $450 for "sick pay." Respondent in his notice of deficiency disallowed the total amount of Fanny's claimed business expenses; all of the miscellaneous deductions, except the $10 for the safe deposit box, and $300 of Paul's claimed business expenses composed of $50 for notebooks, papers, pens, et cetera, $40 for safety equipment, $38 for safety glasses, $16 for a smock and $156 for apartment-office expenses; all of the claimed medical expenses except $150; all of the claimed charitable contributions except $78; and the casualty loss. Respondent determined that petitioners were not entitled to an exclusion of $450 under section401 105. OPINION Respondent's position is that petitioners have failed to substantiate any amounts of expenditures and charitable contributions in excess of the amounts he has allowed and that under section 165 petitioners are not entitled to a casualty loss. Petitioners concede that they are not entitled to an exclusion under section 105 from gross income for compensation received during the period of Paul's illness. Section 162(a) allows a deduction for all the ordinary and necessary expenses paid during the taxable year in carrying on any trade or business. In order for petitioners to be entitled to a deduction under this section greater than that allowed by respondent, they must show that the amounts of the claimed expenditures were made and that the expenditures were made for a business purpose. This record is devoid of evidence with respect to the amount of any expenditures made relating to any business in which Fanny might have engaged. Therefore, we conclude that petitioners are not entitled to deduct any amount as expense of any business conducted by Fanny. We sustain respondent's disallowance of the amount of $1,731.79 claimed by petitioners as business expenditures of402 Fanny's business. Although the record is not completely clear, we conclude that Paul paid rent on the apartment in which he and Fanny resided in LaGrange Park for the first eleven months of 1972 in the amount of $1,985.50 and in addition paid the amount of approximately $113 for utilities used in this apartment during this period. He also paid $450 for having the apartment cleaned. Petitioners paid household insurance of $90 of which 20 percent was attributable to the furnishings of Paul's office. Approximately 25 percent of the floor space in petitioners' apartment was attributable to the office used by Paul. Paul's use of an office in his business activity as a salesman was a helpful, appropriate and usual business expenditure. We, therefore, conclude that petitioners are entitled to deduct under section 162(a) the amount of $673 for expenses of maintaining an office at home for Paul's use including the cost of use of the telephone in lieu of the $156 allowed by respondent. Respondent did not disallow deductions for amounts petitioners claimed as deductible business expense for safety equipment, safety glasses, and a smock. Respondent allowed $50 of the amount petitioners claimed403 to be deductible for notebooks, paper and pens. We have found that petitioners purchased notebooks, paper and pens. However, petitioners have not established the amount actually paid for such articles. In our view the amount allowed by respondent is a reasonable approximation of the amount petitioners expended for notebooks, paper and pens and therefore we hold that petitioners are not entitled to deduct any amount for this expenditure in excess of the amount allowed by respondent. There is no evidence in this record from which we can approximate the cost of the books bought by Paul or determine whether these books were of a type to be properly considered as related to Paul's business. While the evidence as to the purchase of a brief case is sketchy, we conclude on the basis of this record that petitioners did expend $70 in 1972 for a brief case and they may properly deduct this amount under section 162. Petitioners have not shown that any amount was paid for sunglasses for Paul and in any event the amount, if any, paid for sunglasses is not a proper deduction under section 162 as, notwithstanding that Paul wore the sunglasses for driving during the pursuit of his business, such expenditure404 was a personal expense. See Donald W. Fausner,T.C. Memo. 1971-277, affd. per curiam 472 F. 2d 561 (5th Cir. 1973). We conclude that respondent properly disallowed the amount claimed by petitioners to be deductible for travel insurance since petitioners have not shown that this amount was paid for such insurance or that such insurance was an ordinary and necessary business expense for either of them. Respondent has allowed a deduction of $150 under section 213(a)(2) for expenses paid by petitioners during the taxable year for insurance for medical care. Section 213(a)(1) provides generally that there shall be allowed a deduction for amounts of medical expenses not compensated by insurance paid during the taxable year (reduced by any amount deductible under section 213(a)(2)) for medical care for the taxpayer or his spouse in excess of 3 percent of his adjusted gross income. A deduction is allowable only with respect to medical expenses actually paid during the taxable year. Section 1.213-1(a)(1), Income Tax Regs. Consequently, petitioners are not entitled to any deduction in the calendar year 1972 for medical expenses incurred and paid by Fanny while405 she was in Germany in 1971. The evidence shows a payment by petitioners in the calendar year 1972 of $286 for health insurance. However, from respondent's concession that one-half of petitioners' payments for health insurance was not less than $150 deductible under section 213(a)(2), we consider this to be a concession that petitioners' total payment for health insurance was at least $300. We, therefore, hold that petitioners are entitled to include $150 for insurance for medical care as a part of their medical expense under section 213(a)(1). Petitioners paid the amount of $19 for hospital treatment of Paul, $90 for dental care for Paul and Fanny, $88 for glasses, and $65 for elastic bandages, all of which are includable as medical expenses under section 213(a)(1). Petitioners paid for vitamins prescribed by a doctor for Fanny but have not shown the amount of this payment. We have no basis to make an estimate of the amount paid for such vitamins. Fanny paid for her transportation by taxicab to her dental appointments but petitioners have not shown the actual amount she paid nor produced evidence from which we can reasonably approximate the amount of such expense. We conclude that406 petitioners are entitled to deduct under section 213(a)(1) the amount of $412 to the extent it is in excess of 3 percent of their adjusted gross income. Section 170 generally allows a deduction of any charitable contribution that is paid by a taxpayer within the taxable year. Petitioners presented no evidence of the amounts they claimed to have paid to such organizations as Kiwanis, Red Cross or the Girl Scouts, and there is no basis in the evidence from which we can reasonably estimate the amounts of such contributions. The evidence shows that Paul gave cash contributions of $2 each week and of $5 during those weeks that had particularly religious significance to him to the Catholic Church and that Fanny gave some amount of cash contributions to the church. Based on the evidence, we conclude that petitioners made contributions to their church of approximately $3 per week and therefore hold that petitioners are entitled to deduct $156 under section 170 for charitable contributions to their church. Petitioners contend that they are entitled to deduct the amount of $85 as a theft loss under section 165(a) and (b). Petitioners contend that the $85 was the value of a topcoat which407 was stolen from Paul and that the loss was incurred in Paul's trade or business. Respondent's position is that petitioners are not entitled to a deduction under section 165(a) as the amount of petitioners' loss was not in excess of the limitation of $100 provided for losses of property not connected with an individual taxpayer's trade or business under section 165(c)(3). We conclude that petitioners have not shown that they sustained any theft loss in the calendar year 1972. See section 1.165-1(d)(2), Income Tax Regs. Assuming arguendo a theft occurred, the record does not show the theft occurred in the calendar year 1972 and, if it occurred in 1972, there was no prospect at that time for recovery by insurance or otherwise and that there has been no compensation for the theft loss. Consequently, we conclude petitioners are not entitled to deduct any amount for the calendar year 1972 for the alleged theft of Paul's topcoat. In any event a topcoat that is not distinctive in appearance but suitable for general ordinary wear and not specifically required as a condition of employment is personal property and not business property. Louis M. Roth,17 T.C. 1450">17 T.C. 1450, 1455 (1952).408 Therefore, if petitioners sustained a loss from the theft of Paul's topcoat in 1972, the value of the personal property which was lost did not exceed the limitation of $100 applicable under section 165(c)(3) to property not used in a trade or business or for income-producing purposes. We, therefore, hold that petitioners are not entitled to any deduction under section 165 for the loss of Paul's topcoat. Decision will be entered under Rule 155.Footnotes1. All references are to the Internal Revenue Code of 1954, as amended.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622349/	Hobart M. Conway, Jr. and Rebecca K. Conway v. Commissioner.Conway v. CommissionerDocket No. 584-80.United States Tax CourtT.C. Memo 1982-358; 1982 Tax Ct. Memo LEXIS 388; 44 T.C.M. (CCH) 269; T.C.M. (RIA) 820358; June 24, 1982388 P purchased an aircraft in 1973, sold it in 1976, and purchased another aircraft on which he claimed an investment tax credit. P received income from his closely held corporation pursuant to an informal arrangement for the use of his aircraft. Held, P is not entitled to an investment tax credit since he failed to prove that the arrangement with the corporation was not a lease and that the lease met the requirements of sec. 46(c)(3)(B), I.R.C. 1954, relating to noncorporate lessors. Held, further, R had the burden of proving that P realized a taxable gain on the sale of the first aircraft, and he failed to carry that burden. William E. Frantz and Clarence H. Glover, Jr., 3390 Peachtree Road N. E., Atlanta, Ga., for the petitioners. Julian A. Fortuna, for the respondent. SIMPSON269 Memorandum Findings of Fact and Opinion SIMPSON, Judge: The Commissioner determined deficiencies in the petitioners' Federal income taxes of $2,025 for 1973 and $3,719 for 1976. The issues for decision are: (1) Whether section 46(e)(3) of the Internal Revenue Code of 1954, 1 relating to noncorporate lessors, denies the petitioners an investment tax credit for an aircraft which they purchased and allowed 389 their corporation to use under an informal arrangement; and (2) whether the petitioners are required to recognize a gain on the sale of an aircraft. Findings of Fact Some of the facts have been stipulated, and those facts are so found. The petitioners, Hobart M. and Rebecca K. Conway, husband and wife, maintained their legal residence in Atlanta, Ga., at the time they filed their petition in this case. They filed their joint Federal income tax returns for 1973 and 1976 with the Internal Revenue Service Center, Chamblee, Ga.Mr. Conway was a corporate executive, and in 1976, he was connected with three corporations: Conway Publications, Inc. (Publications), of which he owned 92 percent of the stock, Conway Research, Inc. (Research), of which he owned all of the stock, 2 and Conway Florida, Inc. (Florida), of which he owned 90 percent of the stock. These corporations were all engaged in the business of making economic studies and designs for airports and related developments and publishing magazines and books on such subjects. All corporations had their principal offices in Atlanta, 390 Ga., although Florida also maintained an office in Daytona Beach, Fla., in 1976. 270 According to certain returns, 3 the corporations reported the following amounts of gross receipts and taxable income: PublicationsResearchFloridaGrossTaxableGrossTaxableGrossTaxableYearReceiptsIncomeReceiptsIncomeReceiptsIncome19731974$409,021$ (28,717)$32,923$7,561 19751976305,272(18,566)$93,268$9,212 14,123(5,069)1977368,997(17,032)26,390(42)3,480(286) Mr. Conway reported the following amounts of salary from Publications: YearAmount1973$25,000197425,000197528,333197625,000197735,000For such years, he reported no salary from Research of Florida. Mr. Conway decided it would be helpful to have an aircraft 391 to use in his businesses. In 1973, he purchased a twin-engine Beech aircraft for $39,000, and in 1974, he had a radio installed in such aircraft at a cost of $1,300. There was no written agreement regarding the use of such aircraft in the businesses. However, Mr. Conway discussed with the bookkeeper of Publications the cost of the aircraft and its estimated useful life, and they decided that Publications should pay him $800 a month so that he could recover its cost over its useful life. Publications also paid all costs of maintaining and operating the aircraft. Mr. Conway was a pilot, and he always served as the pilot of the aircraft, although other employees of Publications did serve as copilot on occasion. Mr. Conway personally supervised the maintenance of the aircraft. In the course of a prior audit, the accounting department of Publications wrote to the Internal Revenue Service and stated: This is to confirm that this company during 1974 paid a monthly lease fee of $800.00 to Mr. H. McKinley Conway for the use of the airplane. [Emphasis added.] In December 1975, the petitioners made a deposit of $5,000 on a single-engine Mooney aircraft with Ray Bell, president of Bellcraft, 392 Inc. The purchase order for the Mooney aircraft indicated that its total cost was $44,000 -- $5,000 down and the balance to be payable not later than January 21, 1976. The purchase order did not indicate the existence of any trade-in arrangement, and Mr. Bell was not involved in any exchange of another aircraft for the Mooney aircraft. In January 1976, Mrs. Conway wrote a check for $39,000 to Bellcraft for the balance of the purchase price of the Mooney aircraft. In February 1976, Mr. Conway delivered the Beech aircraft to a man in Florida. Thereafter, the arrangement between Mr. Conway and Publications regarding the use of the Mooney aircraft was substantially the same as they had maintained with regard to the Beech aircraft, except that the monthly payment to Mr. Conway was reduced to $500. In 1978, Mr. Conway wrote to his accountant regarding the acquisition and use of the aircraft and said: when the company needed another airplane several years ago and the company did not have the money, I put up the cash. Because the amount was large, and the fact that I do not own all of Conway Publications, Inc., it seemed more prudent to buy the airplane in my name and lease it back. Also, 393 you may recall that I have been furnishing services and covering costs relative to the management and supervision of our flight operations. Small as they are, we take pride in our safety record which we maintain via systematic checks and service, updating pilot proficiency, and sound flight planning. In short, we try to handle our operations in a professional manner. [Emphasis added.] On their Federal income tax return for 1976, the petitioners reported that the Beech aircraft had been "traded," and they reported no gain or loss from the trade. During the course of an audit of the petitioners' 1976 return, Mr. Conway told the IRS that there was a 5-year lease of the Mooney aircraft to Publications. He also 271 told the agent that he was allowed a "trade-in allowance" of $40,000 on the Beech aircraft and that the basis of the Mooney aircraft was $26,842. At a later date, the petitioners' accountant also told the IRS that Mr. Conway had "traded an airplane with an adjusted bases [sic] of $22,842 and paid $4,000 to arrive at a basis for the new airplane of $26,847 [sic]." On their Federal income tax returns for 1973 through 1977, the petitioners reported the following amounts of income 394 and expenses relating to their aircraft: InterestNet IncomeYearIncomeDepreciationExpenseor (Loss)1973$7,200$4,833$1,037$1,330 19749,6006,0601,3842,156 19759,6006,0601,4992,041 19766,6004,5091,864227 19773,0004,368(1,368)For 1973, such information was reported as income of Conway Aviation on Schedule C. However, for 1974 through 1977, such information was reported as supplemental rental income on Schedule E. On their 1976 return, the petitioners claimed an investment credit of $2,867 based on the purchase of the Mooney aircraft. In his notice of deficiency, the Commissioner disallowed such credit on the ground that the petitioners failed to comply with the noncorporate lessor rules of section 46(e)(3). At trial, the Commissioner was allowed to amend his answer to claim an additional deficiency for 1976 based on his allegation that the petitioners had sold their Beech aircraft and that such sale resulted in a gain to be treated as ordinary income under section 1245. Opinion The first issue for decision is whether the Conways are entitled to an investment credit on their purchase of the Mooney aircraft. Section 38 allows a credit against tax for investments in certain depreciable property 395 in an amount determined under section 46. However, section 46(e)(3) provides, in part: (e) Limitations with Respect to Certain Persons. -- * * (3) Noncorporate lessors. -- A credit shall be allowed by section 38 to a person which is not a corporation with respect to property of which such person is the lessor only if -- * * * (B) the term of the lease (taking into account options to renew) is less than 50 percent of the useful life of the property, and for the period consisting of the first 12 months after the date on which the property is transferred to the lessee the sum of the deductions with respect to such property which are allowable to the lessor solely by reason of section 162 (other than rents and reimbursed amounts with respect to such property) exceeds 15 percent of the rental income produced by such property. The petitioners have the burden of proving that they are entitled to the credit. Rule 142(a), Tax Court Rules of Practice and Procedure; Welch v. Helvering [3 USTC P1164], 290 U.S. 111">290 U.S. 111 (1933); Bloomberg v. Commissioner [Dec. 37,285], 74 T.C. 1368">74 T.C. 1368 (1980). In their attempt to meet such burden, the petitioners argue that their agreement with Publications was not in 396 fact a lease and that they were in the trade or business of providing a transportation service to the corporation. They maintain that they transferred more than possession of the aircraft to the corporation; in addition, Mr. Conway served as the pilot and supervised the maintenance of the aircraft. However, the record fails to support adequately their position. In general, a lease of tangible personal property is a contract by which the owner of such property grants to another the right to possess, use, and enjoy it for a specified period of time in exchange for a periodic payment of a stipulated price referred to as rent. See Black's Law Dictionary, p. 800 (5th ed. 1979). Since the arrangement between the petitioners and Publications was informal and not in writing, it is difficult for us to determine at this time the precise terms of the arrangement, but when we examine and weigh all the evidence, it is clear that the petitioners have failed to prove that the arrangement was not a lease. In several occasions, both Mr. Conway and the corporation referred to the arrangement as a lease, and they 272 used that term before this litigation arose and before they appreciated the consequences 397 of a lease of the aircraft. Moreover, the amount of the payments to Mr. Conway was fixed with reference to the cost and useful life of the aircraft; there is no evidence that such payments were to compensate him for his services as a pilot or for the maintenance of the aircraft. There is nothing to indicate that when he performed those services, he was acting in a separate trade or business rather than as an employee of Publications. Indeed, the fact that other employees of Publications occasionally served as the copilot tends to suggest that Mr. Conway was acting in his capacity as an employee of Publications when he served as the pilot of the aircraft. Under these circumstances, we must treat the arrangement as a lease subject to the requirements of section 46(e)(3). Ridder v. Commissioner [Dec. 37,944], 76 T.C. 867">76 T.C. 867 (1981); Bloomberg v. Commissioner, supra; McNabb v. United States, an unreported case ( W.D. Wash., June 2, 1980, 81-1 USTC P9143, A.F.T.R. 2d 81-513). In Ridder v. Commissioner, supra, we were also concerned with the applicability of section 46(e)(3), and we observed: In general, Congress was concerned that individuals might be tempted to use investment credits to 398 finance the acquisition and leasing of depreciable property as tax shelters. S. Rept. 92-437 (1971), 1 C.B. 559">1972-1 C.B. 559, 583. * * * [76 T.C. at 872.] We pointed out that to prevent such possibility, Congress adopted the specific requirements set forth in section 46(e)(3). Here, we have no reason to believe that the petitioners were attempting to design any "tax shelter," but we must apply the statutory requirements to the record made by them. The facts are that the petitioners leased the aircraft to Publications, and they have offered no evidence to show that the lease satisfied the requirements of section 46(e)(3)(B). Accordingly, we must conclude and hold that they are not entitled to an investment credit by reason of the purchase of the Mooney aircraft. The second issue for decision is whether the petitioners sold the Beech aircraft and must recognize a gain as a result of such sale. The Commissioner takes the position that the record reveals that they did sell such aircraft for $40,000 and that the gain realized on such sale must be recognized as ordinary income under section 1245. Since this issue was not raised in the notice of deficiency, the Commissioner has the burden of 399 proof. Rule 142(a), Tax Court Rules of Practice and Procedure; Jasionowski v. Commissioner [Dec. 33,828], 66 T.C. 312">66 T.C. 312, 318 (1976). In support of his position that the disposition of the Beech aircraft did not qualify as a tax-free exchange under section 1031, the Commissioner called Mr. Bell, the salesman of the Mooney aircraft, who testified that his records indicated no trade-in and that he had no recollection of an exchange of aircraft. At one point, Mr. Conway himself testified that he "sold" his Beech aircraft to an individual in Florida and bought the Mooney aircraft from a factory in Texas through Mr. Bell. Such evidence is sufficient to establish that there was no exchange of the Beech aircraft for the Mooney aircraft and that there was a sale of the Beech aircraft. Swaim v. United States [81-2 USTC P9575], 651 F. 2d 1066 (5th Cir. 1981). Yet, for the Commissioner to prevail on this issue, he must also establish the amount realized as a result of the sale of the Beech aircraft. Sec. 1001. He produced no direct evidence showing the amount received by the petitioners for the sale of such aircraft; instead, he relied on the statement of Mr. Conway that he had received a credit 400 of $40,000 in exchanging the Beech aircraft for the Mooney aircraft and the statement of the accountant that Mr. Conway had paid an additional $4,000 to purchase the Mooney aircraft. Since we have already concluded that there was no exchange of aircraft, these statements reflect some confusion or failure of memory as to what actually happened; clearly, such statements are insufficient to carry the Commissioner's burden of proving the amount realized on the sale of the Beech aircraft. Consequently, we must hold that the Commissioner has failed to carry his burden of proving that the petitioners realized a gain on the sale of the Beech aircraft. Decision will be entered for the respondent for the amounts set forth in the notice of deficiency. Footnotes1. All statutory references are to the Internal Revenue Code of 1954 as in effect during the years in issue.↩2. Publications was once known as Conway Research, Inc. However, at some time before 1976, its name was changed to Conway Publications, Inc., and in 1976, a new corporation was formed and named Conway Research, Inc. For convenience, we shall refer to Conway Publications, Inc., as Publications at all times, although it may have borne the earlier name at some of the times.↩3. We have no records of any returns filed by Publications for 1973 and 1975, for Research for 1973, 1974, and 1975, and for Florida for 1975.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622350/	WILLIAM PURIFICATO AND MARIE PURIFICATO, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent; JOHN PURIFICATO AND CATHERINE PURIFICATO, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentPurificato v. CommissionerDocket Nos. 40369-86, 40447-861United States Tax CourtT.C. Memo 1992-580; 1992 Tax Ct. Memo LEXIS 614; 64 T.C.M. (CCH) 942; September 29, 1992, Filed 614 Decisions will be entered for respondent. For Petitioners: Thomas W. Ostrander and Joshua Sarner. For Respondent: John E. Becker, Jr. RUWERUWEMEMORANDUM FINDINGS OF FACT AND OPINION RUWE, Judge: Respondent determined deficiencies and additions to tax in petitioners' Federal income taxes as follows: William Purificato and Marie Purificato docket No. 40369-86 Additions to TaxYearDeficiencySec. 6653(a)(1)Sec. 6653(a)(2)Sec. 66611981$ 197,422$ 9,87250 percent of-- the interest dueon $ 197,4221982156,7417,83750 percent of$ 15,674the interest dueon $ 156,7411983166,0438,30250 percent of16,604the interest dueon $ 166,043John Purificato and Catherine Purificato docket No. 40447-86 Additions to TaxYearDeficiencySec. 6653(a)(1)Sec. 6653(a)(2)Sec. 66611981$ 207,542$ 10,37750 percent of-- the interest dueon $ 207,5421982164,6598,23350 percent of$ 16,466the interest dueon $ 164,6591983178,9658,94850 percent of17,897the interest dueon $ 178,965The sole issue for decision is whether petitioners Marie and Catherine615 Purificato are entitled to relief from liability for deficiencies in Federal income tax and additions to tax under the so-called innocent spouse provisions of section 6013(e). 2FINDINGS OF FACT Some of the facts have been stipulated and are so found. The stipulation of facts and attached exhibits are incorporated herein by this reference. All petitioners resided in Philadelphia, Pennsylvania, at the time they filed their petitions. Petitioners William and Marie Purificato are husband and wife, as are petitioners John and Catherine Purificato. William and John Purificato are brothers. The deficiencies determined by respondent arise from unreported income of Apollo Caterers, Inc., an S corporation owned by William and John Purificato. Apollo Caterers, Inc. (Apollo), operated lunch trucks that served616 various businesses and factories in the Philadelphia area. Respondent determined that Apollo had unreported income for taxable years 1981, 1982, and 1983 in the amounts of $ 655,620, $ 668,064, and $ 731,254, respectively. Respondent issued notices of deficiency allocating this unreported income to William and Marie Purificato, and to John and Catherine Purificato, based on each brother's percentage of ownership in Apollo. William Purificato owned 49 percent of the stock of the corporation, and John Purificato owned 51 percent. Petitioners dispute respondent's determinations. However, for purposes of settlement, the parties have stipulated that the amounts of the deficiencies and additions to tax are as follows: William Purificato and Marie Purificato docket No. 40369-86 Additions to TaxYearDeficiencySec. 6653(a)(1)Sec. 6653(a)(2)Sec. 66611981$ 95,459$ 4,77350 percent of-- the interest dueon $ 95,459198281,3984,07050 percent of$ 16,280the interest dueon $ 81,398198383,3104,16650 percent of16,662the interest dueon $ 83,310John Purificato and Catherine Purificato docket No. 40447-86 Additions to TaxYearDeficiencySec. 6653(a)(1)Sec. 6653(a)(2)Sec. 66611981$ 101,191$ 5,06050 percent of-- the interest dueon $ 101,191198286,2404,31250 percent of$ 17,248the interest dueon $ 86,240198392,8554,64350 percent of18,571the interest dueon $ 92,855617 Marie PurificatoAt the time of trial, Marie Purificato was 52 years old. She has been married to William Purificato since 1961. She has a 10th-grade education and generally did not work outside the home. Marie was not involved with the operation of Apollo during the years in issue. Marie and her husband lived in a three-bedroom row house, held in Marie's name, which they purchased in 1968 for $ 9,000. In addition to their personal residence, William and Marie owned two other residential properties, one on Weymouth Street in Philadelphia, where Marie's mother-in-law lived, and one on Iris Road in Millville, New Jersey, where Marie's mother lived. The Weymouth Street property was a small two-bedroom home that they purchased in 1972 for $ 6,000. The Millville property was a three-bedroom bungalow that they purchased in 1976 for $ 5,000. Marie Purificato was responsible for the household finances during the years in issue. She wrote checks to pay the mortgage, automobile loans, utilities, property taxes, pharmacy bills, and insurance. She testified that she spent approximately $ 75 a week on groceries. Some of the expenditures made by Marie and her husband are summarized618 in the schedules below: 1981Mortgage (VNB)$ 1,411.96Taxes:City of Philadelphia197.28IRS83.00Pennsylvania65.00Commercial Township228.86Utilities:Atlantic Electric236.41Philadelphia Electric919.55Philadelphia Gas787.93Insurance:Homeowners37.71Auto545.43Life215.50Car payments (GM)2,979.72Telephone:Pennsylvania Bell266.13New Jersey Bell156.47Rent to Mattson2,220.00Attorney's fees2,137.00Classic T-Bird Club28.00Eyeglasses17.41Laurel Lake Assoc.110.00Pa. Transportation Dept.78.50Miscellaneous91.86Food3,900.00Total$ 16,713.721982Mortgage (VNB)$ 1,470.60Taxes:City of Philadelphia221.14IRS745.62Pennsylvania150.00Commercial Township521.60Utilities:Atlantic Electric227.28Philadelphia Electric977.63Philadelphia Gas1,043.21Insurance:Homeowners74.14Auto1,558.00Fire4.00Life517.20Car payments (GM)2,979.85Telephone:Pennsylvania Bell434.38New Jersey Bell94.84Rent to Mattson2,220.00Attorney's fees2,500.00Classic T-Bird Club6.00Eyeglasses15.91Laurel Lake Assoc.110.00Pa. Transportation Dept.48.00Miscellaneous996.70Food3,900.00Sun Electric Corp.560.28U.S. savings bonds600.00Total$ 21,976.38619 1983Mortgage (VNB)$ 1,327.15Taxes:City of Philadelphia372.77IRS240.00Pennsylvania303.00Commercial Township600.05Utilities:Atlantic Electric471.57Philadelphia Electric974.23Philadelphia Gas934.23Insurance:Homeowners40.60Auto2,678.75Life948.20Medical910.08Other153.16Unreimbursed medical380.45Car payments:GM2,979.72Ford3,776.16Telephone:Pennsylvania Bell336.91New Jersey Bell138.56Rent to Mattson2,035.00Attorney's fees194.00Classic T-Bird Club152.00Laurel Lake Assoc.120.00Pa. Transportation Dept.121.00Miscellaneous281.44Food3,900.00U.S. savings bonds600.00Total$ 24,969.03William and Marie claimed exemptions for three dependent children on their 1981 tax return. On their 1982 and 1983 tax returns, they claimed exemptions for two dependent children and William's mother. During the years in issue, Marie and William owned five automobiles: A 1978 Lincoln Mark V, a Chrysler Cordoba, a Chevrolet Blazer, a used Cadillac of unknown vintage, and a 1983 Lincoln Mark VI. The 1983 Lincoln was purchased in 1983 for $ 27,662.15. William620 Purificato received credit of $ 5,858 on the trade-in of their 1978 Lincoln, made a cash downpayment of $ 4,243, and financed $ 17,957 of the remaining purchase price. In response to respondent's interrogatories, William and Marie supplied the following information regarding their bank accounts and investments. In 1981, they acquired five certificates of deposit (CD's), four in the amount of $ 10,000, and one with a balance of $ 10,092.83. Three of the CD's acquired in 1981, totaling $ 30,000, were closed in 1982. In 1982, they acquired another $ 10,000 CD and $ 40,320 was deposited in their joint savings account. The CD was closed in 1982 and the savings account was apparently closed in 1983. William also apparently acquired an additional CD (account No. 241283739) of unknown amount in 1982. During 1983, $ 73,452 was deposited in their joint "Gold Edge" bank account. William also acquired a $ 10,000 CD in 1983. The CD purchased in 1983 was apparently closed out in that same year. With the exception of the CD of unknown amount acquired in 1982, and the $ 10,000 CD acquired in 1983, each of the above accounts was in the name of both William and Marie Purificato. William 621 and Marie Purificato reported adjusted gross income for taxable years 1981, 1982, and 1983 in the amounts of $ 18,670, $ 19,838, and $ 14,694, respectively. These returns reflect interest income for the years 1981, 1982, and 1983 in the respective amounts of $ 6,820, $ 7,642, and $ 3,436. 3 George Schrader, petitioners' accountant, prepared William and Marie Purificato's individual income tax returns as well as Apollo's returns for the years in issue and for all years since 1970. The extent of Marie Purificato's involvement in the preparation of the returns was to save any papers that said "Tax Information" until Mr. Schrader called to say she should send such information to Apollo. After Mr. Schrader prepared their individual returns, he mailed them to William and Marie's home622 with instructions to sign at the "X" and to mail them to the Internal Revenue Service. Upon receipt of the tax returns, Marie would look for the "X" and sign there. Marie did not review any of the figures on the tax returns before signing them, nor did she discuss them with her husband. During the years in issue, Marie experienced numerous problems with her family. Her husband, William, had a severe drinking problem and gambled. Their son, William, who was 18 years old in 1981, had a drug abuse problem and was the subject of several criminal proceedings which included charges of rape, escape from custody, possession of a handgun, and assault. Marie had similar problems with her son, Michael, who had quit school and was using drugs at age 13. Michael was charged with delinquency in 1982, and charged and convicted of theft and receiving stolen property in 1983. Their daughter, Denise, returned home to escape an abusive husband. In addition, Marie's mother and mother-in-law were in poor health during the years in issue. Catherine PurificatoAt the time of trial, Catherine Purificato was 50 years old. She has been married to John Purificato since she was 17. Catherine623 was not involved in the operation of Apollo during the years in issue, except for a few hours a week in 1983 that she worked cleaning the kitchen. John and Catherine lived in a three-bedroom row house, which they had purchased in 1961 for $ 11,990. They financed the purchase of the house, except for a downpayment of $ 500. During the years in issue, Catherine drove a 1980 Buick, which was purchased in 1980 for $ 11,000. John and Catherine traded a previous car in on the Buick and financed part of the purchase over 2 years. Title to the car is in both John and Catherine Purificato's names. Catherine Purificato also drove a 1980 Ford Granada in 1983. That car was titled in her mother's name. Like Marie, Catherine Purificato was responsible for the family finances. She wrote checks for the bills to which she signed her husband's name, since the bills were in his name. She also made deposits to their bank accounts. In response to respondent's interrogatories, John and Catherine supplied the following information regarding their bank accounts and investments. In 1981, they had two bank accounts and owned two CD's and two insurance company accounts of undisclosed amounts. In624 1982, they acquired five CD's of undisclosed amounts. In 1983, John and Catherine purchased 500 shares of preferred stock of Public Service Gas & Electric Co. on the following dates, in the following amounts: 4/27/83100 shares for $ 6,648.544/27/83100 shares for $ 6,672.544/28/8350 shares for $ 3,357.254/29/83100 shares for $ 6,673.545/10/83100 shares for $ 6,773.545/11/8350 shares for $ 3,407.74John and Catherine Purificato filed joint returns for taxable years 1981, 1982, and 1983 reporting adjusted gross income of $ 23,880, $ 25,064, and $ 27,396, respectively. These returns reflect interest income for the years 1981, 1982, and 1983 in the respective amounts of $ 1,548, $ 5,175, and $ 3,698. These returns also reflect dividend income of $ 2,925 for 1983 and no dividend income for 1981 and 1982. 4 John and Catherine claimed exemptions for two dependent children on their 1981 return and for one dependent child on their 1982 and 1983 returns. The returns were prepared by Mr. Schrader and mailed to John, who would place the forms in front of Catherine for her to sign. Catherine Purificato did not review the returns when she signed them. She did not625 discuss the returns with Mr. Schrader or her husband, nor did she supply information for their preparation. Catherine experienced substantial family problems during the years in issue. Her son, John, Jr., was involved in drug use and was arrested several times during the years in issue for possessing a controlled substance and driving under the influence of a controlled substance. Catherine's father was suffering from cancer during the years in issue. After her father's death in 1982, the health of Catherine's mother deteriorated. OPINION The sole issue to be decided is whether Marie and Catherine Purificato are entitled to innocent spouse treatment under section 6013(e). Under section 6013(d)(3), a husband and wife who file a joint return are jointly and severally liable 626 for the tax due. However, an "innocent" spouse is relieved of liability if he or she proves that: (1) A joint return has been made for a taxable year; (2) there is a substantial understatement of tax on the return attributable to grossly erroneous items of the other spouse; (3) in signing the return, he or she did not know, and had no reason to know, of the substantial understatement; and (4) after consideration of all the facts and circumstances, it would be inequitable to hold him or her liable for the deficiency in income tax attributable to such substantial understatement. Sec. 6013(e)(1); 5Purcell v. Commissioner, 86 T.C. 228">86 T.C. 228, 235 (1986), affd. 826 F.2d 470">826 F.2d 470 (6th Cir. 1987). In order to qualify for relief, petitioners must prove that each of the four requirements of section 6013(e) has been satisfied. Rule 142(a); Purcell v. Commissioner, 826 F.2d at 473">826 F.2d at 473; Flynn v. Commissioner, 93 T.C. 355">93 T.C. 355, 359 (1989); Sonnenborn v. Commissioner, 57 T.C. 373">57 T.C. 373, 381-383 (1971). 627 Respondent does not dispute that the first two elements are satisfied. Respondent contends, however, that both Marie and Catherine Purificato knew or had reason to know of the understatements. Respondent also contends that both Marie and Catherine significantly benefited from the omissions on the returns and that it would not be inequitable to hold them liable for the resulting deficiencies and additions to tax. We will address the last element first. Whether it is inequitable to hold a spouse liable is to be determined on the basis of all the facts and circumstances. Sec. 6013(e)(1)(D); sec. 1.6013-5(b), Income Tax Regs. Although section 6013(e), as amended, no longer specifically requires us to determine whether a spouse significantly benefited from the erroneous items, this factor is still to be taken into account in determining whether it is inequitable to hold a spouse liable. Estate of Krock v. Commissioner, 93 T.C. 672">93 T.C. 672, 678 (1989); see Day v. Commissioner, T.C. Memo. 1991-140. Marie and Catherine bear the burden of proving that they did not significantly benefit from the erroneous items. Estate of Krock v. Commissioner, supra.628 Petitioners contend that there is no evidence that Marie or Catherine Purificato received any benefit from their husbands' omitted income. They argue that William and John Purificato never provided money or property to them other than the minimal amount necessary for ordinary support. Normal support is not a "significant benefit" for purposes of determining whether denial of innocent spouse relief would be inequitable under section 6013(e)(1)(D). Flynn v. Commissioner, supra at 367; Purcell v. Commissioner, 86 T.C. at 242; Terzian v. Commissioner, 72 T.C. 1164">72 T.C. 1164, 1172 (1979); sec. 1.6013-5(b), Income Tax Regs. Normal support is to be measured by the circumstances of the parties. Sanders v. United States, 509 F.2d 162">509 F.2d 162, 168 (5th Cir. 1975); Flynn v. Commissioner, supra at 367. "Unusual support or transfers of property to the spouse would, however, constitute 'benefit' and should be taken into consideration". Estate of Krock v. Commissioner, supra at 679 (quoting S. Rept. 91-1537 (1970), 629 1 C.B. 606">1971-1 C.B. 606, 607-608). Petitioners attempted to establish that both Marie and Catherine, if not their husbands, led very austere lifestyles. Both wives testified that during the entire time they were married, they never took a vacation, attended a movie, or went out to dinner with their husbands. They also both testified that during the years in issue, and at the time of trial, they owned no furs and little jewelry. 6William and Marie's checking account records are not inconsistent with a simple lifestyle. 7 On the other hand, there is evidence indicating that they were accumulating substantial assets during the years in issue, most of which were held jointly by William and Marie Purificato. 630 In 1981, William and Marie acquired CD's in the amount of $ 50,000. In 1982, they deposited at least $ 40,000 in a savings account. While some of the CD's from the previous year were closed out in 1982, petitioners have not attempted to demonstrate that the $ 40,000 account opened in 1982 was opened with the proceeds of the closed CD's. In 1983, an account was opened with $ 73,452. Again, petitioners made no attempt to demonstrate that the 1983 deposits represented the proceeds of previously acquired CD's or savings accounts. All these accounts were held jointly in the names of William and Marie Purificato. 8 Therefore, over the 3 years in issue, Marie became joint owner of substantial accounts. Marie has not proven that she was unaware of these investments. 9 The amounts placed in these accounts greatly exceed the income reported by William and Marie Purificato during the years in issue, and the evidence in the record indicates that William and Marie's living expenses would have consumed all their reported income. 631 William did not testify at trial in support of Marie's position. n10 However, William did provide answers to respondent's interrogatories that were part of the parties' stipulation of facts. In answer to respondent's question about bank accounts in which he had an interest during the years in issue, William provided the previously described information concerning accounts and CD's. When Marie was asked the same question, she simply referred to William's response. In answer to respondent's question whether William made any other investments in stocks, bonds, or assets (other than the previously described accounts) during the years 1980 through 1985, William answered: Answer: Petitioner Marie Purificato has purchased one $ 100 (face value) savings bond (Double E) which [has] been placed in trust for her grandchildren, for each month from 1982 through 1985. By way of further answer, after reasonable effort and inquiry, Petitioners are unable to locate the records necessary to completely answer Interrogatory Number 15. When Marie was asked the same question, she simply referred to her husband's answer. Given the magnitude of the amounts of income and tax at issue, we find632 William's and Marie's answers incompatible with Marie's argument that she has met her burden of proving that it would be inequitable to hold her liable for the agreed-upon tax. Based on the entire record, including the fact that substantial deposits were made to jointly held bank accounts and CD's, we find that Marie Purificato has failed to prove that she did not receive a significant benefit from the items omitted from income or the substantial understatement of income tax for the years in issue, and therefore, hold that she has not met her burden of proving that it would be inequitable to hold her liable for the deficiencies and additions to tax. Petitioner Catherine Purificato has presented even less evidence in this vein. Catherine did not introduce any documentary evidence of her and John's living expenses during the years in issue. 11 Like Marie, Catherine testified that she led an austere lifestyle consistent with the amounts of income reported for the years in issue. She also testified that in the 33 years she was married to John Purificato, she and her husband had never taken a vacation, never gone to the movies or the theater, and had never gone out to dinner. She633 testified that she spent $ 75 to $ 100 a week on food and $ 50 a year on clothing. The record indicates that John and Catherine Purificato made a number of investments during the years in issue. In response to respondent's interrogatory to John Purificato asking him to identify his bank accounts during the years in issue, he indicated that he had two CD's and two Prudential Insurance Co. accounts in 1981; 12 five other CD's in 1982; and 500 shares of preferred stock in Public Service Electric & Gas Co. in 1983 plus a State Farm Life account. With the exception of the preferred stock, which John indicated was held in both his and Catherine's names, he failed to disclose the amounts of these investments or in whose name title was held. 13 John's response does not indicate that this is a 634 complete list of accounts. After disclosing the above information, his answer states: "By way of further answer, Petitioner, after reasonable effort and inquiry, is unable to find records to more fully answer interrogatory number 11." 14635 Catherine's response to respondent's interrogatory about her bank accounts simply refers to her husband's answer. She provided no additional evidence concerning bank accounts during the trial. In response to respondent's interrogatory asking for information regarding other investments made during the years in issue, John Purificato simply referred to his previously described answer. Beyond that, his answer stated: "By way of further answer, petitioners, after reasonable effort, are unable to locate the records necessary to further answer Interrogatory #15." In response to the same question, Catherine Purificato answered: "Petitioner, Catherine Purificato personally made no investments. By way of further answer, see Petitioner John Purificato's response to Interrogatory number 15." Catherine Purificato offered no further evidence regarding her and her husband's investments. At trial she testified that she could not recall the amounts of the CD's owned by her or John or whether she was a joint owner of the CD's. Catherine Purificato has failed to present sufficient evidence for us to find that she did not significantly benefit from the items omitted from income or from her husband's*636 substantial understatement of income tax. Therefore, she has failed to carry her burden of proving that it would be inequitable to hold her jointly liable for the tax deficiencies and additions thereto for the years in issue. Petitioners introduced a great deal of evidence at trial that both Marie and Catherine Purificato experienced extensive family problems during the years in issue. This evidence was intended to demonstrate that Marie and Catherine Purificato did not know, or have reason to know, of the understatements of income tax. Because we hold that petitioners have not proven that it would be inequitable to hold Marie and Catherine Purificato jointly and severally liable with their husbands for the taxes and additions to tax in issue, we will not address whether they knew, or had reason to know, of the understatements. Decisions will be entered for respondent. Footnotes1. This Court granted petitioners' motion to consolidate the case at docket No. 40369-86 with the case at docket No. 40447-86 for purposes of trial, briefing, and opinion.↩2. Unless otherwise indicated, all section references are to the Internal Revenue Code, as amended and in effect for the years in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.↩3. On their 1978, 1979, and 1980 tax returns, William and Marie reported interest income of $ 504, $ 1,048, and $ 2,970, respectively. Their reported adjusted gross income for those years was $ 3,504, $ 10,548, and $ 15,470, respectively.↩4. On their 1978, 1979, and 1980 tax returns, John and Catherine reported interest income of $ 368, $ 675, and $ 1,979, respectively. Their reported adjusted gross income for those years was $ 18,131, $ 21,545, and $ 25,071, respectively.↩5. The Deficit Reduction Act of 1984, Pub. L. 98-369, sec. 424(a), 98 Stat. 801-802, amended sec. 6013(e) retroactively to all years to which the Internal Revenue Code of 1954 applies.↩6. Catherine testified that she spent only $ 50 per year on clothing for herself.↩7. We note, however, that their personal living expenses during the 3-year period at issue exceeded their reported adjusted gross income for the same period.↩8. Two additional CD's were in William's name. ↩9. During her direct testimony, she recalled going to the bank with her husband: "Well, my husband took me over the bank and we both had to sign a card, and it was CD's he got."↩11. Catherine failed to produce any records of expenditures made by check and failed to produce records of expenditures made by credit card, despite acknowledging the existence of at least four credit cards in their joint names.↩12. John Purificato's response indicates that the Prudential accounts were owned during each of the years in issue. ↩13. John Purificato's response indicates that the Public Service Electric & Gas Co. stock cost $ 33,533.15 in 1983. Catherine Purificato testified that the Public Service Electric & Gas Co. stock was purchased for the benefit of her mother with her mother's savings. However, she provided no corroboration, nor did she introduce any documentation indicating the source of these funds. Catherine testified that her parents' savings totaled approximately $ 54,000. She offered no explanation for the difference between the total amount of savings and the total amount of stock purchased. ↩14. John Purificato did not testify at trial. His answers to respondent's interrogatories were part of the stipulation of facts. There is no indication that John and Catherine were divorced or separated at the time of trial.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4335449/	MARGRET LOUISE KELLEY, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentKELLEY v. COMMISSIONERNo. 6639-04SUnited States Tax CourtT.C. Summary Opinion 2005-68; 2005 Tax Ct. Summary LEXIS 95; June 2, 2005, Filed 95 PURSUANT TO INTERNAL REVENUE CODE SECTION 7463(b), THIS OPINION MAY NOT BE TREATED AS PRECEDENT FOR ANY OTHER CASE. Margret Louise Kelley, Pro se.Beth A. Nunnink, for respondent. Armen, Robert N.ROBERT N. ARMENARMEN, Special Trial Judge: This case was heard pursuant to the provisions of section 7463 of the Internal Revenue Code in effect at the time that the petition was filed. 1 The decision to be entered is not reviewable by any other court, and this opinion should not be cited as authority.Respondent determined a deficiency in petitioner's Federal income tax for the taxable year 2001 in the amount of $ 633. However, prior to trial, respondent filed a motion for leave to file answer out of time in order to assert an increased deficiency. 96 See sec. 6214(a). Petitioner did not object to respondent's motion, and the Court granted it. Accordingly, the deficiency at issue in this case is $ 1,900.After a concession by petitioner, 2 the only issue for decision is whether a $ 16,909 distribution made to petitioner as an alternate payee under a qualified domestic relations order is taxable to her as the distributee of such distribution. We hold that it is.BackgroundSome of the facts have been stipulated, and they are so found.At the time that the petition was filed, petitioner resided in Asheville, North Carolina.Petitioner and William A. Kelley (Mr. Kelley) were married in August 1954. The couple separated on June 11, 1986. Thereafter, in December 1986, the Superior Court of Orange County, California (the Superior Court), entered a judgment of dissolution of marriage.In June 1962, Mr. Kelley began employment97 with Aerospace Corp. of El Segundo, California. In July 1963, Mr. Kelley became a participant in the Aerospace Employees' Retirement Plan (Retirement Plan). 3 Mr. Kelley retired from Aerospace Corp. in November 1985.Incident to the matrimonial action between petitioner and Mr. Kelley, the Superior Court issued an Order On Division Of Aerospace Employees' Retirement Plan Benefits in July 1986. In its order, the Superior Court found that Mr. Kelley had earned benefits under the Retirement Plan, which the court decided were community property in their entirety. The Superior Court also decided that petitioner had a 50-percent interest in those benefits, and it directed the Retirement Plan to pay petitioner her community interest in those benefits. The Superior Court expressly retained jurisdiction "to make such further orders as are deemed appropriate to enforce or clarify the provisions of this order."In December 1992, the Superior98 Court entered a Stipulated Qualified Domestic Relations Order (QDRO), which was approved as to form and content by petitioner and Mr. Kelley, as well as their attorneys, and the plan administrator of the Retirement Plan. The QDRO stated, in relevant part, that petitioner, Mr. Kelley, and the Superior Court intended that the QDRO be a qualified domestic relations order within the meaning of the Internal Revenue Code of 1986, as amended. 4 The QDRO also identified Mr. Kelley as the "plan participant" and petitioner as the "alternate payee". As to petitioner, the QDRO included the following provisions:4. This Order hereby creates and recognizes as to the [Aerospace Employees' Retirement] Plan described above the existence of the Alternate Payee's right as of June 11, 1986 to 50% in said Plan, plus any cost of living adjustments.5. The Alternate Payee elects the SINGLE LIFE ANNUITY under the Plan to receive her benefits in the Plan created and recognized in Paragraph 4 of this Order.99 After entry of the QDRO, petitioner began to receive, directly from the administrator of the Retirement Plan, her 50-percent interest in Mr. Kelley's retirement benefits. Petitioner received these benefits through direct deposit to her bank account on the first of each month. Shortly after the end of each calendar year, petitioner also received a Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., or similar statement, from the Retirement Plan reporting the amount of the distribution.During 2001, petitioner received $ 16,909 pursuant to the QDRO. On her return for that year, petitioner disclosed this amount in its entirety on line 16a, "Total pensions and annuities", but reported "0" on line 16b as the taxable amount. In explanation, petitioner wrote "see addendum (commun. prop.)" and attached to her return a copy of the Superior Court's July 1986 order. Petitioner had consistently followed this approach for every year that she had received a distribution.Respondent contends that the amount actually paid to petitioner in 2001, i.e., $ 16,909, is includable, in its entirety, in petitioner's income for that year. 100 Petitioner contends that she received no property settlement per se in her divorce from Mr. Kelley and that her community property interest in his retirement benefits is essentially a "return of capital" and therefore not taxable. Petitioner also points out that on three separate occasions over the years, respondent's Service Centers have issued "no change" letters after inquiring into the status of her interest in Mr. Kelley's retirement benefits.Discussion 5Generally, under section 402(a), a distribution from a qualified retirement plan is taxable to the distributee.6 Neither the Code nor the regulations define the term "distributee". The Court, however, has construed the term to mean the participant or beneficiary who, under the plan, is entitled to receive the distribution. 101 Darby v. Commissioner, 97 T.C. 51">97 T.C. 51, 58 (1991); Estate of Machat v. Commissioner, T.C. Memo. 1998-154. In the present case, Mr. Kelley would be the distributee because, under the Retirement Plan, he is the participant or beneficiary who is entitled to receive the distribution.However, section 402(e)(1)(A) provides an exception to the general rule of section 402(a). Thus, section 402(e)(1)(A) provides that for purposes of section 402(a);an alternate payee who is the spouse or former spouse of the participant shall be treated as the distributee of any distribution or payment made to the alternate payee under a qualified domestic relations order (as defined in section 414(p)).In other words, a distribution102 made to an alternate payee under a qualified domestic relations order will be taxable to the alternate payee, and not to the plan participant or beneficiary, because section 402(e)(1)(A) treats the alternate payee as the distributee of the distribution. Seidel v. Commissioner, T.C. Memo 2005-67">T.C. Memo. 2005-67.As relevant herein,section 414(p)(1)(A) defines a "qualified domestic relations order" as a domestic relations order "which creates or recognizes the existence of an alternate payee's right to, or assigns to an alternate payee the right to, receive all or a portion of the benefits payable with respect to a participant under a plan". The term "domestic relations order" means any judgment, decree, or order that relates to the provision of alimony payments or marital property rights to a spouse or former spouse of a plan participant and that is made pursuant to a State domestic relations law, specifically including a community property law. Sec. 414(p)(1)(B); see Dunkin v. Commissioner, 124 T.C. (2005)( (slip op. at 6-7) discussing relevant principles of California community property law).In the present case, neither party has raised any issue regarding the status of the103 Superior Court's December 1992 order as a qualified domestic relations order, and there is nothing in the record that would lead us to question its status as such. Indeed, the Superior Court's order expressly states that the parties and the court intend that it constitute a qualified domestic relations order within the meaning of the Internal Revenue Code; moreover, all of the requirements of section 414(p)(1) through (3) appear to be satisfied. See generally Brotman v. Commissioner, 105 T.C. 141">105 T.C. 141, 147, 149-150 (1995); Burton v. Commissioner, T.C. Memo 1997-20">T.C. Memo. 1997-20.In sum, the $ 16,909 distribution that was received by petitioner in 2001 from the Retirement Plan was received by her as an alternate payee under a qualified domestic relations order. Accordingly, pursuant to section 402(e)(1)(A), petitioner is treated as the distributee of the distribution and, pursuant to section 402(a), the distribution is includable in her income.We recognize that from a property perspective, petitioner might not have taken anything from her 32-year marriage other than a 50-percent interest in Mr. Kelley's retirement plan. Unfortunately for petitioner, this fact does not serve104 to overcome the clear mandate of section 402 defining the taxability of distributions from an employees' trust.Finally, we recognize that on several occasions in the past, respondent's Service Centers apparently issued "no change" letters to petitioner after inquiring into the status of her interest in Mr. Kelley's retirement benefits. 7 Suffice it to say that the "mere acceptance or acquiescence in returns filed by a taxpayer in previous years creates no estoppel against the Commissioner nor does the overlooking of an error in a return upon audit create any such estoppel." Mora v. Commissioner, T.C. Memo. 1972-123; see Dixon v. United States, 381 U.S. 68">381 U.S. 68, 72-73 (1965); Automobile Club of Mich. v. Commissioner, 353 U.S. 180">353 U.S. 180, 183-184 (1957); McGuire v. Commissioner, 77 T.C. 765">77 T.C. 765, 779-780 (1981). In other words, even though the Commissioner may have overlooked or accepted the tax treatment of a certain item on a taxpayer's returns for many previous years, the Commissioner is not precluded from correcting that error on the taxpayer's return for a subsequent year. Garrison v. Commissioner, T.C. Memo. 1994-200 (and cases*105 cited therein), affd. without published opinion 67 F.3d 299">67 F.3d 299 (6th Cir. 1995).In conclusion, we hold for respondent on the disputed issue.Reviewed and adopted as the report of the Small Tax Case Division.To reflect our disposition of the disputed issue, as well as petitioner's concession, 8Decision will be entered for respondent in the amount of the increased deficiency of $ 1,900. Footnotes1. Unless otherwise indicated, all subsequent section references are to the Internal Revenue Code in effect for 2001, the taxable year in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.↩2. Petitioner concedes that a capital gain distribution of $ 138 that she received from Wachovia Securities Inc. is includable in her income.↩3. Mr. Kelley's interest in the Retirement Plan was funded by Aerospace Corp.↩4. The order also stated that it was "intended to be a QDRO pursuant to the [California Family Law] Act, and its provisions shall be administered and interpreted in conformity with the Act."↩5. We decide the issue in this case without regard to the burden of proof. See generally sec. 7491(a); Rule 142(a); INDOPCO Inc. v. Commissioner, 503 U.S. 79">503 U.S. 79, 84 (1992); Welch v. Helvering, 290 U.S. 111">290 U.S. 111, 115↩ (1933).6. Neither party has raised any issue regarding the qualified status of the Retirement Plan. Suffice it to say that there is nothing in the record that would lead us to think that the employees' trust is not described in sec. 401(a) and not exempt from tax under sec. 501(a).↩7. The record does not disclose what prompted respondent's Service Centers to issue the "no change" letters. Perhaps the Service Centers acted solely on the basis of the Superior Court's July 1986 order and without knowledge of the December 1992 QDRO. However, we need not speculate on this matter because, as discussed infra in the text, respondent is not estopped from correcting an error.↩8. See supra note 2.↩	01-04-2023	11-14-2018
https://www.courtlistener.com/api/rest/v3/opinions/4537661/	Nebraska Supreme Court Online Library www.nebraska.gov/apps-courts-epub/ 05/29/2020 09:08 AM CDT - 176 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports SABINO v. OZUNA Cite as 305 Neb. 176 Ariana Bernal Sabino, appellant, v. Juan Carlos Genchi Ozuna, appellee. ___ N.W.2d ___ Filed March 6, 2020. No. S-18-110. 1. Statutes. Statutory interpretation presents a question of law. 2. Judgments: Appeal and Error. An appellate court independently reviews questions of law decided by a lower court. 3. Divorce: Appeal and Error. In a marital dissolution action, an appellate court reviews the case de novo on the record to determine whether there has been an abuse of discretion by the trial judge. 4. Evidence: Appeal and Error. In a review de novo on the record, an appellate court is required to make independent factual determinations based upon the record, and the court reaches its own independent con- clusions with respect to the matters at issue. 5. Judges: Words and Phrases. A judicial abuse of discretion exists if the reasons or rulings of a trial judge are clearly untenable, unfairly depriv- ing a litigant of a substantial right and denying just results in matters submitted for disposition. 6. Statutes: Time. Amendments to Neb. Rev. Stat. § 43-1238(b) (Cum. Supp. 2018) were procedural and applicable to pending cases. 7. Courts: Minors. The role of state courts in the special immigrant juve- nile status determination is to make the findings of fact necessary to the U.S. Citizenship and Immigration Service’s legal determination of the immigrant child’s entitlement to special immigrant juvenile status. 8. Courts: Federal Acts: Minors. Federal law affirms the institutional competence of state courts as the appropriate forum for child welfare determinations regarding abuse, neglect, and abandonment, as well as a child’s best interests. But it is not the role of the state court to make a determination as to whether a child will ultimately be eli- gible for special immigrant juvenile status; that is a determination reserved for the U.S. Citizenship and Immigration Service and the federal government. - 177 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports SABINO v. OZUNA Cite as 305 Neb. 176 9. Courts: Minors. That a court is requested to make special immigrant juvenile status findings does not mean that it must make findings favor- able to the party seeking them. 10. Courts: Minors: Evidence. Courts asked to make special immigrant juvenile status findings may conclude that there was insufficient evi- dence or that the evidence was not credible. Appeal from the District Court for Douglas County: Peter C. Bataillon, Judge. Reversed and remanded for further proceedings. Roxana Cortes Reyes, of Immigrant Legal Center, an affili- ate of the Justice For Our Neighbors Network, for appellant. No appearance for appellee. Heavican, C.J., Miller-Lerman, Cassel, Stacy, Funke, Papik, and Freudenberg, JJ. Heavican, C.J. INTRODUCTION The Douglas County District Court dissolved the marriage of Ariana Bernal Sabino and Juan Carlo Genchi Ozuna and awarded full custody of the parties’ child to Sabino. Sabino sought specific findings of fact for purposes of special immi- grant juvenile (SIJ) status under federal law. The district court declined to make such findings, and Sabino appealed. We reverse, and remand for further proceedings. FACTUAL BACKGROUND According to an affidavit offered into evidence by Sabino at trial, she and Ozuna met in Cuatro Bancos, Guerrero, Mexico, in approximately 2000. Sabino was born in Cuatro Bancos, and she was 13 years old when she met Ozuna. A year later, she and Ozuna moved in together, and 5 months after that, Ozuna began to physically assault Sabino. Sabino became pregnant in May 2003, and she and Ozuna were married in November. Throughout this time, Ozuna continued to physically assault Sabino. In December, Sabino left Ozuna and returned to her - 178 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports SABINO v. OZUNA Cite as 305 Neb. 176 parents’ home. According to Sabino’s affidavit, just 1 week later, Ozuna moved in with another woman. Sabino averred that Ozuna was aware of her pregnancy and of the due date of the baby. Sabino also averred that Ozuna was aware of where she was staying. Sabino stated that Ozuna never attempted to see her or the baby and provided no finan- cial assistance. According to her affidavit, Sabino was unable to provide for the couple’s son on her own and came to the United States when her son was 20 months old. Sabino left her son in Mexico with her mother and sent money to cover his expenses. She also spoke with him on the telephone frequently. In August 2016, Sabino’s son and mother, who was also a victim of domestic violence at the hands of Sabino’s father, left Mexico for the United States. In June 2017, Sabino filed a complaint in the Douglas County District Court for the dissolution of marriage. Ozuna entered a voluntary appearance in October, but did not person- ally appear. Trial was held on November 8. Sabino testified through a Spanish language interpreter that she was married to Ozuna and was seeking a divorce because Ozuna had hit her, that she had been separated from him for over 13 years, and that she did not believe the marriage could be saved. Sabino sought an award of all of the property in her possession and custody of the parties’ son. Because Sabino had borne children from other relationships while Sabino and Ozuna were married, the trial court contin- ued the trial in order for Sabino to gather evidence rebutting the statutory presumption that Ozuna was the father of those children. The trial resumed on January 11, 2018, at which time evidence rebutting that presumption was offered. In addition to the proof of paternity for her other children, Sabino offered exhibit 4, which was a photocopy of materials from the U.S. Citizenship and Immigration Services explaining “Special Immigrant Juvenile Status.” According to this exhibit, SIJ status is available to children who present in the United - 179 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports SABINO v. OZUNA Cite as 305 Neb. 176 States without legal immigration status because they have been “abused, abandoned, or neglected by a parent.” As relevant to this appeal, exhibit 4 notes: “Juvenile courts issue orders that help determine a child’s eligibility for SIJ status. . . . The role of the court is to make factual findings based on state law about the abuse, neglect, or abandonment; family reunification; and best interests of the children.” Following admission of this evidence, the court made cer- tain inquiries of Sabino while she was on the witness stand. Specifically, the court asked Sabino whether she or her mother had “any legal authority to live in the United States.” Sabino’s counsel objected on relevancy grounds, noting that it went to neither “the best interest of the child [n]or the divorce proceedings.” The court then made an oral pronouncement (with an accom- panying written decree) granting the divorce and awarding custody to Sabino, subject to Ozuna’s reasonable visitation at Sabino’s reasonable discretion. Ozuna was also ordered to pay $50 per month in child support. As relevant to this appeal, the court also stated: The Court makes no decision as to the other issues that [Sabino] has requested with regard to abandonment in Mexico, abuse in Mexico, and things of that nature, as the Court does not have adequate information as to why the child could not live safely in some part of Mexico. In addition, the Court does find that it’s relevant as to whether [Sabino] is legally in the United States, if her mother is legally in the United States, things of that nature. And if she refuses to answer those, then I’m not going to go any further with asking other questions in this matter. The Court’s also concerned as to whether it’s even within my purview to makes [sic] these determinations. If I do make these — if this is in my purview to make these determinations, then I need a lot more evidence to make that determination. For sure I need evidence as to how - 180 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports SABINO v. OZUNA Cite as 305 Neb. 176 paragraph 7 [of Sabino’s affidavit, detailing her mother’s flight to the United States due to domestic violence,] was arrived at. . . . Sabino . . . doesn’t know how the informa- tion in paragraph 7 was obtained. If she doesn’t know, then that is somewhat of a crux of the information in this matter. The district court signed a decree prepared by Sabino’s coun- sel that included the findings sought regarding abuse, neglect, or abandonment; family reunification; and best interests of the child. However, the court struck through those findings and therefore did not make the findings requested by Sabino. Sabino appealed. In a prior opinion, we concluded that the district court erred in not allowing Sabino to proceed in forma pauperis.1 We are now presented with the merits of Sabino’s appeal. ASSIGNMENT OF ERROR Sabino assigns three assignments of error that can be con- solidated as one: The district court erred in not making the findings of fact requested by Sabino. STANDARD OF REVIEW [1,2] Statutory interpretation presents a question of law.2 We independently review questions of law decided by a lower court.3 [3-5] In a marital dissolution action, an appellate court reviews the case de novo on the record to determine whether there has been an abuse of discretion by the trial judge.4 In a review de novo on the record, an appellate court is required to make independent factual determinations based upon the record, and the court reaches its own independent conclusions 1 See Sabino v. Ozuna, 303 Neb. 318, 928 N.W.2d 778 (2019). 2 In Re Guardianship of Carlos D., 300 Neb. 646, 915 N.W.2d 581 (2018). 3 Id. 4 Burgardt v. Burgardt, 304 Neb. 356, 934 N.W.2d 488 (2019). - 181 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports SABINO v. OZUNA Cite as 305 Neb. 176 with respect to the matters at issue.5 A judicial abuse of discre- tion exists if the reasons or rulings of a trial judge are clearly untenable, unfairly depriving a litigant of a substantial right and denying just results in matters submitted for disposition.6 ANALYSIS This appeal generally presents the question of whether the district court had the authority to make the findings of fact requested by Sabino and, if so, whether there was sufficient evidence for the court to make those findings. Each issue will be addressed in turn. District Court’s Authority. [6] The district court in this case had the authority to make the findings sought by Sabino. Neb. Rev. Stat. § 43-1238(b) (Cum. Supp. 2018) provides: In addition to having jurisdiction to make judicial deter- minations about the custody and care of the child, a court of this state with exclusive jurisdiction under subsection (a) of this section [setting forth when a court has juris- diction to make an initial child custody determination] has jurisdiction and authority to make factual findings regarding (1) the abuse, abandonment, or neglect of the child, (2) the nonviability of reunification with at least one of the child’s parents due to such abuse, abandon- ment, neglect, or a similar basis under state law, and (3) whether it would be in the best interests of such child to be removed from the United States to a foreign country, including the child’s country of origin or last habitual residence. If there is sufficient evidence to support such factual findings, the court shall issue an order containing such findings when requested by one of the parties or upon the court’s own motion. 5 Id. 6 Id. - 182 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports SABINO v. OZUNA Cite as 305 Neb. 176 Although the amendments to § 43-1238 were not effective until July 19, 2018, which was several months after the order was issued in this case, we recently held in In re Guardianship of Carlos D.7 that the change made to § 43-1238(b) was proce- dural and thus applied to pending cases. The language of § 43-1238 provides that if a court has jurisdiction to make an initial child custody determination, it also has the jurisdiction and authority to make the factual findings relevant to SIJ status. In this case, the record shows that the child’s home state for purposes of § 43-1238(a) was Nebraska, and, as such, the court had the jurisdiction to make an initial child custody determination and to make the requested findings. Sufficient Evidence. Section 43-1238 provides that “[i]f there is sufficient evi- dence to support such factual findings, the court shall issue an order containing such findings when requested by one of the parties or upon the court’s own motion.” [7,8] Having concluded that the court has the authority to make these findings, we turn to an examination of what these factfinding courts should consider when doing so. The role of state courts in the SIJ status determination is to make the find- ings of fact necessary to the U.S. Citizenship and Immigration Service’s legal determination of the immigrant child’s entitle- ment to SIJ status.8 Federal law affirms the institutional com- petence of state courts as the appropriate forum for child welfare determinations regarding abuse, neglect, and aban- donment, as well as a child’s best interests.9 But it is not the role of the state court to make a determination as to whether 7 In re Guardianship of Carlos D., supra note 2. 8 8 U.S.C. § 1101(a)(27)(J)(iii) (Reissue 2018). 9 See, Guardianship of Penate, 477 Mass. 268, 76 N.E.3d 960 (2017); H.S.P. v. J.K., 223 N.J. 196, 121 A.3d 849 (2015); Kitoko v. Salomao, 215 A.3d 698 (Vt. 2019); In re Y.M., 207 Cal. App. 4th 892, 144 Cal. Rptr. 3d 54 (2012); Simbaina v. Bunay, 221 Md. App. 440, 109 A.3d 191 (2015). - 183 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports SABINO v. OZUNA Cite as 305 Neb. 176 a child will ultimately be eligible for SIJ status; that is a determination reserved for the U.S. Customs and Immigration Service and the federal government.10 [9,10] That a court is requested to make findings for pur- poses of SIJ status does not mean that it must make findings favorable to the party seeking them.11 Courts asked to make these findings may conclude that there was insufficient evi- dence or that the evidence was not credible.12 Federal law provides: Applications for asylum and other forms of relief from removal in which an unaccompanied alien child is the principal applicant shall be governed by regulations which take into account the specialized needs of unaccompanied alien children and which address both procedural and substantive aspects of handling unaccompanied alien chil- dren’s cases.13 Courts in other jurisdictions have interpreted this language as a caution to courts to not place insurmountable evidentiary burdens on SIJ petitioners, because those seeking that status will have limited abilities to corroborate testimony with addi- tional evidence.14 In this case, the district court questioned both the record before it and its authority, before concluding that it was not “even within [its] purview” to make the findings sought by Sabino. We conclude that although the court can and should entertain a request for findings, the court’s powers as a fact 10 See, J.U. v. J.C.P.C., 176 A.3d 136 (D.C. 2018); Romero v. Perez, 463 Md. 182, 205 A.3d 903 (2019); Guardianship of Penate, supra note 9; Kitoko v. Salomao, supra note 9. 11 See, J.U. v. J.C.P.C., supra note 10; Romero v. Perez, supra note 10; Kitoko v. Salomao, supra note 9; In re J.J.X.C., 318 Ga. App. 420, 734 S.E.2d 120 (2012). 12 See id. 13 8 U.S.C. § 1232(d)(8) (2018). 14 See, J.U. v. J.C.P.C., supra note 10; Romero v. Perez, supra note 10; Kitoko v. Salomao, supra note 9. - 184 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports SABINO v. OZUNA Cite as 305 Neb. 176 finder to assess the credibility of a witness or judge the suffi- ciency of evidence remain in effect. But nothing in this opinion should be read to suggest what findings the court should make on remand. Because in this case the district court concluded that it lacked the authority to make the requested findings, we accord- ingly reverse the decision of the district court and remand the cause for further proceedings. CONCLUSION The decision of the district court is reversed and the cause is remanded for further proceedings. Reversed and remanded for further proceedings.	01-04-2023	05-29-2020
https://www.courtlistener.com/api/rest/v3/opinions/4537660/	Nebraska Supreme Court Online Library www.nebraska.gov/apps-courts-epub/ 05/29/2020 09:08 AM CDT - 185 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports SELDIN v. ESTATE OF SILVERMAN Cite as 305 Neb. 185 Millard R. Seldin, individually and as Trustee of the Millard R. Seldin Revocable Trust, dated October 9, 1993, et al., appellants and cross-appellees, and Scott A. Seldin, individually and as Trustee of the Seldin 2002 Irrevocable Trust, dated December 31, 2002, appellant, cross-appellant, and cross-appellee, v. Estate of Stanley C. Silverman et al., appellees, cross-appellants, and cross-appellees. Theodore M. Seldin, individually and as Trustee of the Amended and Restated Theodore M. Seldin Revocable Trust, dated May 28, 2008, et al., appellees, cross-appellants, and cross-appellees, v. Millard R. Seldin, individually and as Trustee of the Millard R. Seldin Revocable Trust, dated October 9, 1993, et al., appellants and cross-appellees, and Scott A. Seldin, individually and as Trustee of the Seldin 2002 Irrevocable Trust, dated December 31, 2002, appellant, cross-appellant, and cross-appellee. ___ N.W.2d ___ Filed March 6, 2020. Nos. S-19-310, S-19-311. 1. Jurisdiction: Appeal and Error. A jurisdictional question which does not involve a factual dispute is determined by an appellate court as a matter of law. 2. Judgments: Arbitration and Award: Federal Acts: Appeal and Error. In reviewing a decision to vacate, modify, or confirm an arbi- tration award under the Federal Arbitration Act, an appellate court is - 186 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports SELDIN v. ESTATE OF SILVERMAN Cite as 305 Neb. 185 obligated to reach a conclusion independent of the trial court’s ruling as to questions of law. However, the trial court’s factual findings will not be set aside on appeal unless clearly erroneous. 3. Attorney Fees: Appeal and Error. On appeal, a trial court’s decision awarding or denying attorney fees will be upheld absent an abuse of discretion. 4. ____: ____. When an attorney fee is authorized, the amount of the fee is addressed to the discretion of the trial court, whose ruling will not be disturbed on appeal in the absence of an abuse of discretion. 5. Pleadings: Judgments: Appeal and Error. A motion to alter or amend a judgment is addressed to the discretion of the trial court, whose deci- sion will be upheld in the absence of an abuse of that discretion. 6. Judges: Words and Phrases. A judicial abuse of discretion exists when the reasons or rulings of a trial judge are clearly untenable, unfairly depriving a litigant of a substantial right and denying just results in mat- ters submitted for disposition. 7. Arbitration and Award: Federal Acts: Contracts. Arbitration in Nebraska is governed by the Federal Arbitration Act if it arises from a contract involving interstate commerce; otherwise, it is governed by Nebraska’s Uniform Arbitration Act. 8. Jurisdiction: Appeal and Error. Before reaching the legal issues presented for review, it is the power and duty of an appellate court to determine whether it has jurisdiction over the matter before it. 9. Arbitration and Award: Federal Acts: Jurisdiction: Notice. The Federal Arbitration Act’s notice requirements are jurisdictional, and fail- ure to strictly comply deprives the district court of authority under the Federal Arbitration Act to vacate the arbitration award. 10. Arbitration and Award: Federal Acts: Notice. The Federal Arbitration Act’s notice requirements are satisfied if the notice provided complies with Nebraska’s statutory notice requirements. 11. Arbitration and Award: Federal Acts: Legislature. The Federal Arbitration Act favors arbitration agreements and applies in both state and federal courts. It also preempts conflicting state laws and fore- closes state legislative attempts to undercut the enforceability of arbitra- tion agreements. 12. Arbitration and Award: Motions to Vacate. When arbitration has already occurred and a party seeks to vacate, modify, or confirm an award, an extraordinary level of deference is given to the underlying award itself. 13. Arbitration and Award: Federal Acts: Motions to Vacate. The Federal Arbitration Act sets forth four grounds under which a court may vacate an arbitration award, and in the absence of one of these grounds, the award must be confirmed. - 187 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports SELDIN v. ESTATE OF SILVERMAN Cite as 305 Neb. 185 14. Arbitration and Award: Federal Acts: Motions to Vacate: Proof. A party seeking to vacate an award for misconduct under 9 U.S.C. § 10(a)(3) (2018) of the Federal Arbitration Act must show that he or she was deprived of a fair hearing. 15. Arbitration and Award: Federal Acts. Under 9 U.S.C. § 10(a)(2) (2018) of the Federal Arbitration Act, evident partiality exists where the nondisclosure at issue objectively demonstrates such a degree of partiality that a reasonable person could assume that the arbitrator had improper motives. 16. Arbitration and Award: Federal Acts: Motions to Vacate. Under the Federal Arbitration Act, courts lack authority to vacate or modify arbitration awards on any grounds other than those specified in 9 U.S.C. §§ 10 and 11 (2018) of the Federal Arbitration Act. 17. Arbitration and Award: Federal Acts: Motions to Vacate: Public Policy. Under the Federal Arbitration Act, a court is not authorized to vacate an arbitration award based on public policy grounds because public policy is not one of the exclusive statutory grounds set forth in 9 U.S.C. § 10 (2018) of the Federal Arbitration Act. 18. Arbitration and Award: Federal Acts: Contracts: Proof. Pursuant to 9 U.S.C. § 10(a)(4) (2018) of the Federal Arbitration Act, a court is authorized to set aside an arbitration award where the arbitrator exceeded his or her powers. However, it is not enough to show that the arbitrator committed an error—or even a serious error. The analysis is whether the arbitrator (even arguably) interpreted the parties’ contract, not whether he or she got its meaning right or wrong. 19. Attorney Fees. Attorney fees shall be awarded against a party who alleged a claim or defense that the court determined was frivolous, inter- posed any part of the action solely for delay or harassment, or unneces- sarily expanded the proceeding by other improper conduct. 20. Actions: Attorney Fees: Words and Phrases. A frivolous action is one in which a litigant asserts a legal position wholly without merit; that is, the position is without rational argument based on law and evidence to support the litigant’s position. The term frivolous connotes an improper motive or legal position so wholly without merit as to be ridiculous. 21. Actions. Any doubt about whether a legal position is frivolous or taken in bad faith should be resolved in favor of the one whose legal position is in question. 22. Appeal and Error. An appeal or error proceeding, properly perfected, deprives the trial court of any power to amend or modify the record as to matters of substance. 23. Arbitration and Award: Federal Acts: Contracts. Under the Federal Arbitration Act, arbitration is a matter of contract, and courts must enforce arbitration contracts according to their terms. - 188 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports SELDIN v. ESTATE OF SILVERMAN Cite as 305 Neb. 185 24. Arbitration and Award. An evident material mistake is an error that is apparent on the face of the record and would have been corrected had the arbitrator known at the time. 25. Attorney Fees: Appeal and Error. Ordinarily, an improper calcula- tion of attorney fees would require a remand in order to reconfigure the award. However, when the record is sufficiently developed that a reviewing court can apply the law to the facts and calculate a fair and reasonable fee without resorting to remand, that route is available to the appellate court. 26. Appeal and Error. An appellate court is not obligated to engage in an analysis that is not necessary to adjudicate the case and controversy before it. 27. Judgments: Appeal and Error. Generally, under the acceptance of ben- efits rule, an appellant may not voluntarily accept the benefits of part of a judgment in the appellant’s favor and afterward prosecute an appeal or error proceeding from the part that is against the appellant. 28. ____: ____. The acceptance of the benefits rule does not apply when the appellant has conceded to be entitled to the thing he or she has accepted and where the appeal relates only to an additional claim on his or her part. 29. Judgments: Proof: Appeal and Error. In asserting that the accept ance of benefits rule precludes an appeal, the burden is on the party asserting the rule to demonstrate that the benefits of the judgment were accepted. Appeals from the District Court for Douglas County: J Russell Derr, Judge. Affirmed as modified. Jason M. Bruno and Robert S. Sherrets, of Sherrets, Bruno & Vogt, L.L.C., for appellants. Bartholomew L. McLeay, of Kutak Rock, L.L.P., for appel- lee Scott A. Seldin, individually. Robert L. Lepp and Mathew T. Watson, of McGill, Gotsdiner, Workman & Lepp, P.C., L.L.O., and Sean K. McElenney, of Bryan, Cave, Leighton & Paisner, L.L.P., for Omaha Seldin appellees. Heavican, C.J., Cassel, Stacy, Funke, Papik, and Freudenberg, JJ. - 189 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports SELDIN v. ESTATE OF SILVERMAN Cite as 305 Neb. 185 Heavican, C.J. I. INTRODUCTION This is an appeal from a judgment of the district court for Douglas County, confirming an arbitration award of $2,997,031 under the Federal Arbitration Act (FAA)1 and awarding attor- ney fees as a sanction under Neb. Rev. Stat. § 25-824 (Reissue 2016). II. BACKGROUND These two cases arose out of an arbitration between family members designated as the “Omaha Seldins” and the “Arizona Seldins.” The term “Omaha Seldins” refers to the following individuals, entities, and trusts: Theodore M. Seldin, indi- vidually and in his capacity as trustee of the Amended and Restated Theodore M. Seldin Revocable Trust, dated May 28, 2008; Howard Scott Silverman as trustee of the Amended and Restated Stanley C. Silverman Revocable Trust, dated August 26, 2006; Silverman Holdings, LLC, a Nebraska lim- ited liability company; SCS Family, LLC, a Nebraska limited liability company; TMS & SNS Family, LLC, a Nebraska limited liability company; Sarah N. Seldin and Irving B. Epstein, as trustees of the Theodore M. Seldin and Sarah N. Seldin Children’s Trust, dated January 1, 1995; Uri Ratner as trustee of the Stanley C. Silverman and Norma R. Silverman Irrevocable Trust Agreement (2008), dated April 10, 2008; John W. Hancock, Irving B. Epstein, and Randall R. Lenhoff as trustees of the Theodore M. Seldin and Sarah N. Seldin Irrevocable Trust Agreement (2008), dated May 12, 2008. The term “Arizona Seldins” refers to the following individ uals, entities, and trusts: Millard R. Seldin, individually and as trustee of the Millard R. Seldin Revocable Trust, dated October 9, 1993; Scott A. Seldin, individually and as trustee of the Seldin 2002 Irrevocable Trust, dated December 13, 2002; Seldin Real Estate, Inc., an Arizona corporation; Kent Circle Investments, LLC, an Arizona limited liability company; 1 9 U.S.C. §§ 1 through 16 (2018). - 190 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports SELDIN v. ESTATE OF SILVERMAN Cite as 305 Neb. 185 and Belmont Investments, LLC, an Arizona limited liabil- ity company. For a period of more than 50 years, the parties held joint ownership interests as the Seldin Company in numerous enti- ties located in the Omaha, Nebraska, area. The three princi- pals of the Seldin Company were Millard; Millard’s younger brother, Theodore; and Millard’s brother-in-law, Stanley C. Silverman. The Seldin Company’s principal place of busi- ness was Omaha. However, in 1987, Millard began relocating the business operations from Omaha to Scottsdale, Arizona. Theodore and Stanley co-owned the company, and they agreed to manage the jointly owned properties through management agreements. In 2007, the Arizona Seldins (specifically Millard and Millard’s son, Scott) began to question how Theodore and Stanley were managing the jointly owned properties. In 2010, the Arizona Seldins terminated the management agreements and the parties entered into an agreement to separate their joint interests in real estate assets through a bidding process. The “Separation Agreement” included a provision whereby the parties agreed to resolve all “Ancillary Claims” exclusively through binding arbitration before arbitrator Stefan Tucker with the Venable, LLP, law firm in Washington, D.C. In case of Tucker’s inability to serve as arbitrator, the agreement named a Venable partner as his successor. If both Tucker and the successor were unable to serve as arbitrator, the agreement provided that Venable’s managing partner was responsible for identifying a substitute successor. The agreement also included provisions defining the scope of arbitration, as well as a provi- sion that the “Commercial Division Rules” of the American Arbitration Association (AAA) would govern. After the bidding process was completed, the parties began arbitration before Tucker in October 2011. While the arbitra- tion was ongoing, the Arizona Seldins filed three lawsuits in the district court for Douglas County regarding their claims or, alternatively, seeking to remove Tucker as arbitrator. The dis- trict court dismissed the lawsuits and compelled the Arizona - 191 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports SELDIN v. ESTATE OF SILVERMAN Cite as 305 Neb. 185 Seldins back to arbitration after finding the FAA governed the arbitration provision in the agreement. The Arizona Seldins then filed a demand with the AAA, seeking to disqualify Tucker as the arbitrator. The AAA denied the request; how- ever, Tucker subsequently resigned and neither the succes- sor arbitrator nor Venable was willing to participate in the arbitration. The parties agreed to select an arbitrator through the AAA, and Eugene R. Commander (hereinafter arbitrator) was appointed. Arbitration resumed in October 2013. Due to the number of claims, each involving several independent causes of action and affirmative defenses, the arbitrator proposed bifurcating each claim to address liability and damage claims in separate hearings when necessary. The parties agreed to the proposal, and a schedule of hearings was adopted. After extensive discovery was conducted, 11 evidentiary hearings took place over a span of 14 months. Pursuant to the separation agreement, the hearings took place in Omaha. During the 53 days of hearings, 58 fact and expert witnesses testified and 1,985 exhibits were admitted into evidence. As permitted by the AAA’s rules,2 the arbitrator issued 12 separate interim awards at the end of hearings in which determinations of liability or damages had been made. The parties agreed that these interim awards were not considered final awards and that a final award would be issued after the arbitration had closed. The parties also agreed that the entities and individuals that made up each of the two parties were jointly and severally liable for any award issued by the arbitrator. At some point during the arbitration proceedings, the Arizona Seldins asserted that the Omaha Seldins’ lack of tender of one of its assets, Sky Financial Securities, LLC (Sky Financial), was a defense to damages under the Arizona Securities Act. Sky Financial is an Arizona limited liability company, cre- ated as part of a plan to acquire and operate a chain of pizza 2 American Arbitration Association, Commercial Arbitration Rules and Mediation Procedures R-37 at 24 (Oct. 1, 2013). - 192 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports SELDIN v. ESTATE OF SILVERMAN Cite as 305 Neb. 185 restaurants in numerous states. In response, the Omaha Seldins requested that the arbitrator take possession of Sky Financial as a form of interpleader so as to permit the award of the asset to the appropriate party after a determination was made. The Arizona Seldins did not object to the procedure, and when asked whether the assignment as a form of interpleader was acceptable to both sides, the Arizona Seldins stated, “Yes.” The Omaha Seldins then tendered Sky Financial to the arbitrator by assignment. In one of the interim awards, the arbitrator determined that the Arizona Seldins had breached their fiduciary duties and engaged in securities law violations relating to Sky Financial. After finding that none of the affirmative defenses raised by the Arizona Seldins were meritorious, the arbitrator awarded the Omaha Seldins $1,962,528 in damages for their lost corporate opportunities claims, as well as an additional $3,135,681 in recessionary damages for the securities violation claims. On April 12, 2017, the arbitration was officially closed. On April 27, the arbitrator issued a final net award in favor of the Omaha Seldins and against the Arizona Seldins in the amount of $2,997,031, plus postaward simple interest. The final award incorporated each of the prior interim awards issued and found the Arizona Seldins jointly and severally liable for the entire amount. On May 23, 2017, the Omaha Seldins filed a motion to con- firm the final award in district court. Opposing confirmation, the Arizona Seldins filed a motion seeking to modify, correct, and/or vacate the award. The Arizona Seldins argued, summa- rized, that the arbitrator (1) engaged in misbehavior regarding assignment of the Sky Financial asset, and thus the Omaha Seldins lacked standing after the assignment; (2) failed to provide a reasoned award on three of the Arizona Seldins’ key affirmative defenses; (3) exceeded his power in awarding legal fees and expenses to the Omaha Seldins, because the separa- tion agreement precluded the award of attorney fees; and (4) materially miscalculated the amount of prejudgment interest by applying the incorrect interest rate or, alternatively, exceeded - 193 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports SELDIN v. ESTATE OF SILVERMAN Cite as 305 Neb. 185 his power in awarding damages that included the calculated amount of prejudgment interest. Scott, one of the Arizona Seldins, sought further and sepa- rate relief. Scott argued that with regard to the Sky Financial claims, the arbitrator made an “evident material mistake in the description of ‘Respondents’” and made an award on mat- ters not submitted to him. Scott alternatively argued that the arbitrator exceeded his power or imperfectly executed it, by issuing an award of liability against Scott on those claims. In addition, Scott filed multiple applications seeking to vacate, confirm, and/or modify some of the interim awards in com- panion cases CI 16-7509, CI 16-8394, CI 17-506, CI 17-651, and CI 17-3637. The district court held that the interim awards were nonfinal arbitration orders and dismissed the applications. On May 3, 2018, the district court issued an order sustain- ing the Omaha Seldins’ motion to confirm the arbitration award and overruling the Arizona Seldins’ motion to vacate the award. The district court also awarded the Omaha Seldins an amount equal to the attorneys’ fees and costs [the Omaha Seldins] incurred in resisting [the Arizona Seldins’] application seeking vacation or modification of the Final Award and in seeking dismissal of the vari- ous applications (Case Nos. CI 16-7509; CI 16-8394; CI 17-506; CI 17-651; and CI 17-3637) . . . Scott . . . filed seeking to modify, vacate, or confirm the Arbitrator’s Interim Awards [under Neb. Rev. Stat. “§ 25-834”]. The district court had mistakenly referred to the statute autho- rizing the sanction as Neb. Rev. Stat. § 25-834 (Reissue 1995), instead of § 25-824. On July 30, 2018, the Omaha Seldins offered into evi- dence affidavits with attached fee statements from two law firms, demonstrating the amount of fees incurred on behalf of the Omaha Seldins in resisting the Arizona Seldins’ motion to vacate and in seeking dismissal of Scott’s interim award applications. The affidavits established that the law firm of McGill, Gotsdiner, Workman & Lepp, P.C., L.L.O. (McGill), - 194 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports SELDIN v. ESTATE OF SILVERMAN Cite as 305 Neb. 185 had incurred $131,184.45 in fees and that the law firm of Bryan Cave Leighton Paisner LLP (Bryan Cave) had incurred $211,676.50 in fees, both on behalf of the Omaha Seldins. The exhibit containing the McGill firm’s statement of fees had been redacted for privilege purposes. At a subsequent hearing, the Omaha Seldins offered an unredacted version of the McGill firm’s fee statement, which the court received into evidence under seal. On February 28, 2019, the district court issued its order denying the Arizona Seldins’ and Scott’s motions to alter or amend. In the same order, the district court awarded the Omaha Seldins attorney fees in the amount of $131,184.45. On June 3, 2019, the Omaha Seldins filed a motion for order nunc pro tunc, requesting that the district court modify the amount of attorney fees to include Bryan Cave’s fees of $211,676.50, for a total award of $342,860.95. After a hear- ing on the motion, in a written order dated August 26, 2019, the district court denied the Omaha Seldins’ motion for order nunc pro tunc. In its order, the district court stated that it had “clearly intended to award attorney fees to [the Omaha Seldins] in an amount, as stated in the Court’s Order of February 28, 2019, equal to the attorney fees and costs incurred,” but denied the motion after concluding that “[a]n Order Nunc Pro Tunc [could not] be used to enlarge the judgment or substantially amend[] the judgment even though said judgment was not the order intended.” On May 11, 2018, Scott filed a motion to alter or amend the district court’s May 3 order. Scott argued that the award of attorney fees and costs was beyond the amount permitted as damages and that the arbitrator’s award of attorney fees was improper. The motion further asserted that the order had refer- enced § 25-834 as authorizing the sanction against the Arizona Seldins, but that § 25-834 is unrelated to an award of attorney fees and had been repealed by the Legislature in 2002. The Arizona Seldins also filed a motion to alter or amend the order. The motion incorporated Scott’s arguments and additionally asserted that the district court failed to specifically - 195 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports SELDIN v. ESTATE OF SILVERMAN Cite as 305 Neb. 185 address some of the Arizona Seldins’ prior arguments, includ- ing whether the final award violated the automatic bankruptcy stay, whether the final award violated Nebraska’s public policy and resulted in a massive windfall to the Omaha Seldins, and whether the arbitrator engaged in evident partiality. On February 28, 2019, the district court issued a 13-page order detailing its findings and overruling both motions to alter or amend the May 3, 2018, order. The February 28, 2019, order included a nunc pro tunc modification, substituting § 25-824 for the references to § 25-834 in the previous order. When discussing the sanction ordered against the Arizona Seldins, the district court noted that its May 3, 2018, order had “repeatedly identified the absence of rational factual or legal basis to support [the Arizona Seldins’] theories of modifying or vacating the Final Award.” The district court articulated that “[w]hat should have been a fairly simple procedure, [the Arizona Seldins] literally turned into a re-litigation of the Arbitration itself.” The Arizona Seldins appeal the district court’s order con- firming the award and the district court’s order of sanctions under § 25-824. Scott, individually, filed a cross-appeal assert- ing that the final award against him should be modified, cor- rected, or vacated by law and that the district court abused its discretion in imposing sanctions and overruling his motion to alter or amend. The Omaha Seldins also filed a cross-appeal, challenging the amount of attorney fees and costs ordered by the district court and the district court’s denial of the Omaha Seldins’ motion for order nunc pro tunc. The Arizona Seldins subsequently filed a motion to dismiss the Omaha Seldins’ cross-appeal, claiming the Omaha Seldins’ registration of the district court’s judgment with an Arizona state court constituted an acceptance of the benefits of the judgment and, thus, pre- cluded them from appealing the judgment. We granted the parties’ petition to bypass the Nebraska Court of Appeals, and the two cases, S-19-0310 and S-19-0311, have been consolidated for purposes of oral argument and disposition. - 196 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports SELDIN v. ESTATE OF SILVERMAN Cite as 305 Neb. 185 III. ASSIGNMENTS OF ERROR The Arizona Seldins’ assignments, renumbered and restated, are that the district court erred in (1) failing to vacate the Sky Financial award because the award was secured through mis- behavior by the arbitrator; (2) failing to vacate the final award because the Sky Financial award violates Nebraska public pol- icy by creating a massive windfall for the Omaha Seldins; (3) confirming the arbitrator’s award of attorney fees because the award exceeded the scope of the separation agreement, which expressly prohibited an award of attorney fees; (4) awarding sanctions under § 25-824; and (5) excluding evidence of the Omaha Seldins’ acting contrary to the separation agreement and the award by currently seeking additional damages in other litigation for the same Sky Financial investment. Scott’s assignments of error on cross-appeal, summarized, are that the district court erred in (1) failing to modify or cor- rect an evident material mistake in the description of respond ents in the final award relating to him; (2) failing to vacate the final award on the ground of arbitrator misbehavior; (3) fail- ing to vacate the final award on the ground that the arbitrator exceeded his authority in regard to the claims bar date; and (4) imposing sanctions pursuant to § 25-824 and denying Scott’s motion to alter or amend the district court’s order regarding the sanctions. The Omaha Seldins assign on cross-appeal that the district court erred in (1) denying their motion for order nunc pro tunc and (2) failing to award the Omaha Seldins their reason- able attorney fees and costs incurred. While not specifically assigned as error, the Omaha Seldins also assert that the Arizona Seldins’ public policy argument is time barred. IV. STANDARD OF REVIEW [1] A jurisdictional question which does not involve a factual dispute is determined by an appellate court as a matter of law.3 3 J.S. v. Grand Island Public Schools, 297 Neb. 347, 899 N.W.2d 893 (2017). - 197 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports SELDIN v. ESTATE OF SILVERMAN Cite as 305 Neb. 185 [2] In reviewing a decision to vacate, modify, or confirm an arbitration award under the FAA, an appellate court is obligated to reach a conclusion independent of the trial court’s ruling as to questions of law.4 However, the trial court’s factual findings will not be set aside on appeal unless clearly erroneous.5 [3,4] On appeal, a trial court’s decision awarding or deny- ing attorney fees will be upheld absent an abuse of discretion.6 When an attorney fee is authorized, the amount of the fee is addressed to the discretion of the trial court, whose ruling will not be disturbed on appeal in the absence of an abuse of discretion.7 [5] A motion to alter or amend a judgment is addressed to the discretion of the trial court, whose decision will be upheld in the absence of an abuse of that discretion.8 [6] A judicial abuse of discretion exists when the reasons or rulings of a trial judge are clearly untenable, unfairly depriving a litigant of a substantial right and denying just results in mat- ters submitted for disposition.9 V. ANALYSIS 1. Appeal Is Governed by FAA [7] Prior to addressing the arbitration issues raised by the parties on appeal, we must determine which law governs—the Uniform Arbitration Act (UAA)10 or the FAA. Arbitration in Nebraska is governed by the FAA if it arises from a contract involving interstate commerce; otherwise, it is governed by the 4 Ronald J. Palagi, P.C. v. Prospect Funding Holdings, 302 Neb. 769, 925 N.W.2d 334 (2019). 5 Id. 6 White v. Kohout, 286 Neb. 700, 839 N.W.2d 252 (2013). 7 Rapp v. Rapp, 252 Neb. 341, 562 N.W.2d 359 (1997). 8 Breci v. St. Paul Mercury Ins. Co., 288 Neb. 626, 849 N.W.2d 523 (2014). 9 Id. 10 See Neb. Rev. Stat. §§ 25-2601 to 25-2622 (Reissue 2016 & Cum. Supp. 2018). - 198 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports SELDIN v. ESTATE OF SILVERMAN Cite as 305 Neb. 185 UAA.11 The district court determined that the issues presented in this case were governed by the FAA. We agree. Arbitration that arises from a contract involving interstate commerce is governed by the FAA.12 Because this case arose from a com- mercial dispute involving properties and companies located in multiple states, the arbitration agreement clearly involves inter- state commerce and thus is governed by the FAA. 2. Motion to Vacate Was Timely [8] Before reaching the legal issues presented for review, it is the power and duty of an appellate court to determine whether it has jurisdiction over the matter before it.13 The Omaha Seldins claim the Arizona Seldins are precluded from seeking modification or vacatur of the final award on public policy grounds because this argument was not raised within 3 months of the final order being issued as required by § 12 of the FAA. [9] Section 12 of the FAA sets forth the specific service requirements for motions to vacate, modify, or correct an award and requires notice of an application seeking judicial vacatur to “be served upon the adverse party or his attorney within three months after the award is filed or delivered.” This court has held that these notice requirements are jurisdictional and that failure to strictly comply deprives the district court of authority under the FAA to vacate the arbitration award.14 And, where the district court lacks jurisdiction, this court lacks jurisdiction.15 The relevant portion of § 12 provides: Notice of a motion to vacate, modify, or correct an award must be served upon the adverse party or his 11 Garlock v. 3DS Properties, 303 Neb. 521, 930 N.W.2d 503 (2019). 12 Aramark Uniform & Career Apparel v. Hunan, Inc., 276 Neb. 700, 757 N.W.2d 205 (2008). 13 State v. Uhing, 301 Neb. 768, 919 N.W.2d 909 (2018). 14 See Karo v. Nau Country Ins. Co., 297 Neb. 798, 901 N.W.2d 689 (2017). 15 State v. Dorcey, 256 Neb. 795, 592 N.W.2d 495 (1999). - 199 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports SELDIN v. ESTATE OF SILVERMAN Cite as 305 Neb. 185 attorney within three months after the award is filed or delivered. If the adverse party is a resident of the district within which the award was made, such service shall be made upon the adverse party or his attorney as prescribed by law for service of notice of motion in an action in the same court. If the adverse party shall be a nonresi- dent then the notice of the application shall be served by the marshal of any district within which the adverse party may be found in like manner as other process of the court. [10] Thus, the FAA’s notice requirements are satisfied if the notice provided complies with Nebraska’s statutory notice requirements. Neb. Rev. Stat. § 25-910 (Reissue 2016) requires that the notice be in writing and provides that it shall state (1) the names of the parties to the action or proceeding in which it is to be made, (2) the name of the court or judge before whom it is to be made, (3) the place where and the day on which it will be heard, (4) the nature and terms of the order or orders to be applied for, and (5) if affidavits are to be used on the hearing, the notice shall state that fact. It shall be served a reasonable time before the hearing. The record reflects that the final arbitration award was issued on April 27, 2017. The Arizona Seldins moved to mod- ify, correct, or vacate the award on July 25. On the same day, the Arizona Seldins provided the other parties with notice of the motion via U.S. mail and electronic mail. While the motion did not specifically assert the Arizona Seldins’ public policy argument, the notice included each of the five requirements set forth in § 25-910 and was provided within 3 months of the final order being issued. The Arizona Seldins’ notice complied with Nebraska’s statutory notice requirements; thus, the notice requirements under § 12 of the FAA were satisfied. The public policy argument was timely raised, and therefore, this court has jurisdiction over the claim. - 200 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports SELDIN v. ESTATE OF SILVERMAN Cite as 305 Neb. 185 3. Claims by Arizona Seldins and Scott (a) Arbitrator Misbehavior In their first assignment of error, the Arizona Seldins claim the district court erred in failing to vacate the Sky Financial award because the award was secured through misbehavior by the arbitrator. On cross-appeal, Scott also asserts that the arbi- trator’s acceptance of Sky Financial constituted misconduct. Scott further asserts that the Arizona Seldins could not have accepted or consented to the interpleader because the transfer abrogated the Omaha Seldins’ interest in Sky Financial and thus the interpleader never existed. Scott also claims that the interpleader procedure was not disclosed or explained and that he “should not be bound by a secret interpleader procedure of which he was never informed since he had no need for concern regarding any securities claim at the time the purported inter- pleader was first proposed for that purpose.”16 [11,12] Congress enacted the FAA to provide for “expe- dited judicial review to confirm, vacate, or modify arbitration awards.”17 The FAA favors arbitration agreements and applies in both state and federal courts.18 It also preempts conflict- ing state laws and “‘foreclose[s] state legislative attempts to undercut the enforceability of arbitration agreements.’”19 When arbitration has already occurred and a party seeks to vacate, modify, or confirm an award, “‘“an extraordinary level of deference” [is given] to the underlying award itself.’”20 The U.S. Supreme Court has instructed that under the FAA, a court 16 Brief for appellee Scott on cross-appeal at 24. 17 Hall Street Associates, L. L. C. v. Mattel, Inc., 552 U.S. 576, 578, 128 S. Ct. 1396, 170 L. Ed. 2d 254 (2008). 18 Preston v. Ferrer, 552 U.S. 346, 128 S. Ct. 978, 169 L. Ed. 2d 917 (2008). 19 Id., 552 U.S. at 353 (quoting Southland Corp. v. Keating, 465 U.S. 1, 104 S. Ct. 852, 79 L. Ed. 2d 1 (1984)). 20 SBC Advanced v. Communications Workers of America, 794 F.3d 1020, 1027 (8th Cir. 2015). - 201 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports SELDIN v. ESTATE OF SILVERMAN Cite as 305 Neb. 185 may vacate an arbitrator’s decision “‘only in very unusual circumstances.’”21 [13] The FAA sets forth four grounds under which a court may vacate an arbitration award, and in the absence of one of these grounds, the award must be confirmed.22 These grounds are as follows: (1) where the award was procured by corruption, fraud, or undue means; (2) where there was evident partiality or corruption in the arbitrators, or either of them; (3) where the arbitrators were guilty of misconduct in refusing to postpone the hearing, upon sufficient cause shown, or in refusing to hear evidence pertinent and mate- rial to the controversy; or of any other misbehavior by which the rights of any party have been prejudiced; or (4) where the arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final, and definite award upon the subject matter submitted was not made.23 Both the Arizona Seldins and Scott claim the arbitra- tor engaged in misbehavior by accepting ownership of Sky Financial. We reject this claim because the Arizona Seldins expressly agreed to the transfer of Sky Financial during the arbitration proceedings, and there is no evidence that the arbi- trator engaged in misconduct by accepting the transfer. The Omaha Seldins attempted to “tender” Sky Financial as a form of interpleader after the Arizona Seldins asserted that a lack of tender is a defense under the Arizona Securities Act in regard to damages. The Omaha Seldins transferred ownership of Sky Financial to the arbitrator “‘for purposes of effectuat- ing the relief to be awarded.’” The relief contemplated was the 21 Oxford Health Plans LLC v. Sutter, 569 U.S. 564, 568, 133 S. Ct. 2064, 186 L. Ed. 2d 113 (2013). 22 Hall Street Associates, L. L. C., supra note 17. 23 9 U.S.C. § 10(a). - 202 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports SELDIN v. ESTATE OF SILVERMAN Cite as 305 Neb. 185 award of the asset to the appropriate party after a determination had been made. At the time the assignment was made, the following collo- quy occurred: ARBITRATOR: Well, I’m in uncharted waters here. I guess my first question is why would the assignment come to me? [Counsel for the Omaha Seldins]: It’s largely in the sense of an interpleader. Is this to be — I mean, it empha- sizes the point which is the impossibility, to whom do we tender, do we tender to Millard, do we tender to Sky Financial, to whomever it is that it is deemed you think, to the extent it isn’t impossible and excused by impos- sibility, you’re welcome to determine to whomever it should be tendered. .... ARBITRATOR: Well, the only way I know how to deal with this right now is to consider this an act of interplead- ing these interests to me. I’m not an officer of the court, but I do have jurisdiction over this matter, so for the time being, at least, I’ll accept them. With that understanding in mind. Is that acceptable to both sides? [Counsel for the Arizona Seldins]: Yes. [14] “A party seeking to vacate an award for misconduct under § 10(a)(3) must show that he [or she] was ‘deprived of a fair hearing.’”24 When a party “‘who contests the merits of an arbitration award in court fails to first present the challenges on the merits to the arbitrators themselves, review is compressed still further, to nil.’”25 Here, the district court noted that the Arizona Seldins appeared to have consented to the arbitra- tor’s acceptance of the assignment as a form of interpleader. 24 Brown v. Brown-Thill, 762 F.3d 814, 820 (8th Cir. 2014) (quoting Grahams Service Inc. v. Teamsters Local 975, 700 F.2d 420 (8th Cir. 1982)). 25 Medicine Shoppe Intern. v. Turner Investments, 614 F.3d 485, 489 (8th Cir. 2010) (quoting Intern. Broth. v. Hope Elec. Corp., 380 F.3d 1084 (8th Cir. 2004)). - 203 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports SELDIN v. ESTATE OF SILVERMAN Cite as 305 Neb. 185 We agree. Not only did the Arizona Seldins not object to the assignment at the time it was made, but they agreed that the transfer as an act of interpleading was acceptable after the purpose of the procedure was explained. By consenting to the assignment, the Arizona Seldins waived the argument that the arbitrator’s acceptance of the transfer constituted miscon duct. And, the record clearly refutes Scott’s claim that the intended interpleader was not disclosed or explained. [15] Furthermore, while the Arizona Seldins’ attempt to invoke the grounds set forth in § 10(a)(3) of the FAA by using the term “misconduct,” their argument focuses only on the arbitrator’s possible partiality as the purported owner of Sky Financial. Under § 10(a)(2), a court may vacate an award for the arbitrator’s “evident partiality.” However, this is a “‘heavy burden’”26 because the standard “‘is not made out by the mere appearance of bias.’”27 “Evident partiality exists where the non-disclosure at issue ‘objectively demonstrate[s] such a degree of partiality that a reasonable person could assume that the arbitrator had improper motives.’”28 The Arizona Seldins assert that the arbitrator’s taking actual possession of Sky Financial without first securing mutual con- sent of the parties in writing and making it part of the record disqualified him as an interested party under Neb. Rev. Stat. § 24-739 (Reissue 2016). Section 24-739 provides, in relevant part, that a judge shall be disqualified in any case in which he or she is a party or interested except by mutual consent of the parties, which mutual consent is in writing and made part of the record. The Arizona Seldins contend that § 24-739 applies to arbitra- tors as well as judges per this court’s instruction that “‘judges 26 Will. v. National Football League, 582 F.3d 863, 885 (8th Cir. 2009) (quoting Choice Hotels Intern. v. SM Property Management, 519 F.3d 200 (4th Cir. 2008)). 27 Id. 28 Id. (quoting Dow Corning Corp. v. Safety National Cas. Corp., 335 F.3d 742 (8th Cir. 2003)). - 204 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports SELDIN v. ESTATE OF SILVERMAN Cite as 305 Neb. 185 and arbitrators are subject to the same ethical standards.’”29 However, this court has expressly rejected a “judicial ethics” standard when analyzing the FAA’s requirement of “evident partiality.” In Dowd v. First Omaha Sec. Corp.,30 we held that “‘“evident partiality” within the meaning of 9 U.S.C. § 10 will be found where a reasonable person would have to conclude that an arbitrator was partial to one party to the arbitration.’” Here, the record contains no evidence that the arbitrator engaged in misconduct or partiality by accepting the assignment of Sky Financial. Rule R-37(a) of the AAA rules, which was incorporated into the parties’ separation agreement, provides that “[t]he arbitrator may take whatever interim measures he or she deems necessary, including injunctive relief and measures for the protection or conservation of property and disposition of perishable goods.” Moreover, the Arizona Seldins’ argument that the arbitrator’s acceptance of Sky Financial constituted misconduct is confuted by their express acceptance of the pro- cedure. This argument is without merit. (b) Public Policy In their second assignment of error, the Arizona Seldins assert that the district court erred in failing to vacate the final award because the Sky Financial award violates Nebraska public policy by creating a massive windfall for the Omaha Seldins. The Arizona Seldins argue that the Omaha Seldins profited substantially from Sky Financial and that the award of damages results in a double recovery and windfall for the Omaha Seldins in violation of public policy. The Arizona Seldins further assert that a court may refuse to enforce an arbitration award on the ground that it is contrary to public 29 See brief for appellants at 24 (quoting Barnett v. City of Scottsbluff, 268 Neb. 555, 684 N.W.2d 553 (2004)). 30 Dowd v. First Omaha Sec. Corp., 242 Neb. 347, 358, 495 N.W.2d 36, 43 (1993) (quoting Morelite Const. v. N.Y.C. Dist. Council Carpenters, 748 F.2d 79 (2d Cir. 1984)). - 205 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports SELDIN v. ESTATE OF SILVERMAN Cite as 305 Neb. 185 policy. In making this assertion, the Arizona Seldins rely on this court’s prior holding in State v. Henderson.31 In Henderson, a Nebraska State Patrol officer had been ter- minated based on his membership in a Ku Klux Klan-affiliated organization. An arbitrator determined that the State Patrol had violated the officer’s constitutional rights because his affilia- tion with the organization was not “‘just cause’” for termina- tion.32 The arbitrator issued an award ordering the officer to be reinstated.33 The district court vacated the award after conclud- ing that the officer’s reinstatement violated Nebraska public policy, and this court affirmed the judgment.34 Unlike the present case, Henderson was governed by Nebraska’s UAA.35 However, this court found none of the UAA’s statutory bases for vacating an award applied.36 Noting that the applicable provisions in the UAA and the FAA were similar, the majority, in a 4-to-2 decision, relied on three U.S. Supreme Court cases applying the FAA when holding that an arbitration award could be vacated on public policy grounds.37 The majority in Henderson held that a court may refuse to enforce an arbitration award that is contrary to a public policy when the policy is explicit, well defined, and domi- nant. The majority concluded that Nebraska has “an explicit, well-defined, and dominant public policy” that “the laws of Nebraska should be enforced without racial or religious dis- crimination” and that the arbitrator’s decision reinstating the officer violated this public policy because the policy “incor- porates, and depends upon, the public’s reasonable perception 31 State v. Henderson, 277 Neb. 240, 762 N.W.2d 1 (2009). 32 Id. at 242, 762 N.W.2d at 3. 33 Id. 34 Id. 35 See §§ 25-2601 to 25-2622. 36 Henderson, supra note 31. 37 Id. - 206 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports SELDIN v. ESTATE OF SILVERMAN Cite as 305 Neb. 185 that the laws are being enforced without discrimination.”38 The dissent argued that the U.S. Supreme Court’s narrow public policy exception did not bar judicial enforcement of the award and that the majority was doing precisely what the Supreme Court had prohibited in Paperworkers v. Misco, Inc.39: engag- ing in factfinding, which is the arbitrator’s function, not the appellate court’s.40 [16] Prior to 2008, a circuit split existed on whether courts could apply nonstatutory standards when reviewing arbitra- tion awards under the FAA. Many courts had been relying on language in the 1953 case of Wilko v. Swan,41 which indicated courts could vacate an award made in “manifest disregard” of the law. In Hall Street Associates, L. L. C. v. Mattel, Inc.,42 the U.S. Supreme Court resolved the split and held that under the FAA, courts lack authority to vacate or modify arbitration awards on any grounds other than those specified in §§ 10 and 11 of the FAA.43 The Court was explicit that [o]n application for an order confirming the arbitration award, the court “must grant” the order “unless the award is vacated, modified, or corrected as prescribed in sec- tions 10 and 11 of this title.” There is nothing malleable about “must grant,” which unequivocally tells courts to 38 Id. at 263, 762 N.W.2d at 16-17. 39 See Paperworkers v. Misco, Inc., 484 U.S. 29, 108 S. Ct. 364, 98 L. Ed. 2d 286 (1987). 40 Henderson, supra note 31 (Stephan J., dissenting). See, also, Misco, Inc., supra note 39, 484 U.S. at 44, 45 (criticizing federal Court of Appeals’ conclusion that machine operator had ever been or would be under influence of marijuana while he was on job from fact that marijuana was located in his car as “an exercise in factfinding” that “exceeds the authority of a court asked to overturn an arbitration award”). 41 Wilko v. Swan, 346 U.S. 427, 436, 74 S. Ct. 182, 98 L. Ed 168 (1953). 42 Hall Street Associates, L. L. C., supra note 17. 43 See John M. Gradwohl, Arbitration: Interface of the Federal Arbitration Act and Nebraska State Law, 43 Creighton L. Rev. 97 (2009). - 207 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports SELDIN v. ESTATE OF SILVERMAN Cite as 305 Neb. 185 grant confirmation in all cases, except when one of the “prescribed” exceptions applies.44 Pointedly, the Eighth Circuit Court of Appeals has explained that prior to 2008, “a court could vacate arbitration awards on grounds other than those listed in the FAA.”45 However, “Hall Street, resolving a circuit split, held that ‘the text [of the FAA] compels a reading of the §§ 10 and 11 categories as exclusive.’”46 [17] Because the U.S. Supreme Court’s decision in Hall Street Associates, L. L. C. abrogated public policy as grounds for vacating an arbitration award under the FAA, we reject the Arizona Seldins’ argument. We hold that under the FAA, a court is not authorized to vacate an arbitration award based on public policy grounds because public policy is not one of the exclusive statutory grounds set forth in § 10 of the FAA. We also clarify that Henderson was governed by the UAA–-not the FAA–-and expressly disapprove of any language in Henderson that could be construed as authorizing courts to vacate awards on public policy grounds under the FAA.47 Because public policy is not a ground for vacating an arbi- tration award under the FAA, we need not address the merits of the Arizona Seldins’ argument that the purported windfall in favor of the Omaha Seldins is contrary to public policy. (c) Arbitrator’s Award of Fees and Costs In their third assignment of error, the Arizona Seldins argue that the district court erred in confirming the arbitrator’s award of attorney fees because the award exceeded the scope of the separation agreement. 44 Hall Street Associates, L. L. C., supra note 17, 552 U.S. at 587 (quoting 9 U.S.C. § 9). 45 Medicine Shoppe Intern., supra note 25, 614 F.3d at 489. 46 Id. 47 Henderson, supra note 31. - 208 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports SELDIN v. ESTATE OF SILVERMAN Cite as 305 Neb. 185 [18] Pursuant to § 10(a)(4) of the FAA, a court is authorized to set aside an arbitration award where the arbitrator exceeded his or her powers. However, “‘[i]t is not enough . . . to show that the [arbitrator] committed an error—or even a serious error.’”48 The analysis is “whether the arbitrator (even argu- ably) interpreted the parties’ contract, not whether he got its meaning right or wrong.”49 “Because the parties ‘bargained for the arbitrator’s construction of their agreement,’ an arbitral decision ‘even arguably construing or applying the contract’ must stand, regardless of a court’s view of its (de)merits.”50 In the final award, the arbitrator ordered the parties to pay their own attorney fees, expenses, and costs arising from the arbitration proceedings, “[e]xcept as specifically provided in Supplemental Interim Award Claim 16,” which awarded $1,001,051 in attorney fees and costs to the Omaha Seldins as a partial measure of the damages caused by securities viola- tions related to Sky Financial. The Arizona Seldins assert that the award of attorney fees exceeded the scope of the separa- tion agreement because the agreement expressly prohibited such an award. This assertion is based on a provision of the separation agreement, which states: In General: Except as otherwise provided in this Agreement, each Party shall bear its own costs and expenses (including legal fees and expenses) incurred in connection with this Agreement and the transactions con- templated hereby. No party shall be required to pay to the other Party any commissions, penalties, fees or expenses arising out of or associated with any of the transactions contemplated by this Agreement. 48 Oxford Health Plans LLC, supra note 21, 569 U.S. at 569 (quoting Stolt- Nielsen S. A. v. AnimalFeeds Int’l. Corp., 559 U.S. 662, 130 S. Ct. 1758, 176 L. Ed. 2d 605 (2010)). 49 Oxford Health Plans LLC, supra note 21, 569 U.S. at 569. 50 Id., 569 U.S. at 569 (quoting Eastern Associated Coal Corp. v. Mine Workers, 531 U.S. 57, 121 S. Ct. 462, 148 L. Ed. 2d 354 (2000)). - 209 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports SELDIN v. ESTATE OF SILVERMAN Cite as 305 Neb. 185 In “Supplemental Interim Award Claim 16,” the arbitrator interpreted the parties’ agreement regarding the award of fees and costs and found that the agreement did not preclude an award of fees and costs incurred in prosecuting the lost corpo- rate opportunity and securities violations claims related to Sky Financial. The arbitrator concluded that the agreement’s “trans- actions contemplated” language referred to the transactions and process contemplated by the parties in separating their joint ownership interests in the jointly owned properties and entities and not ancillary claims. The arbitrator’s conclusion was based, in part, on the loca- tion of the provision within the separation agreement, and on another provision which stated: “Cooperation. The Parties acknowledge and agree that the transactions contemplated by this Agreement are intended to permit the Omaha Seldins, on the one hand, and the Arizona Seldins, on the other hand, to separate their joint ownership of the Properties.” In addition, the arbitrator found that the rules of the AAA, which the par- ties had incorporated into the separation agreement, authorized the award of attorney fees and costs under circumstances such as those presented here. We hold that the arbitrator did not exceed his authority under the separation agreement by issuing the award of fees and costs. In the parties’ separation agreement, the parties each agreed to resolve their disputes relating to severing their jointly owned properties through final and binding arbitration. By entering into the agreement, the parties bargained for the arbi- trator’s construction of that agreement. The arbitrator construed the agreement as permitting the award of attorney fees for the parties’ ancillary claims. The Sky Financial claim was an ancil- lary claim, and thus, the arbitrator did not exceed his authority in awarding costs and fees related to that claim. The Arizona Seldins’ third assignment of error is without merit. (d) Sanctions Under § 25-824 In their fourth assignment of error, the Arizona Seldins argue that the district court erred in awarding sanctions against - 210 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports SELDIN v. ESTATE OF SILVERMAN Cite as 305 Neb. 185 them under § 25-824. Scott individually asserts on cross- appeal that the district court abused its discretion in impos- ing sanctions against Scott for filing the various applica- tions in CI 16-7509, CI 16-8394, CI 17-506, CI 17-651, and CI 17-3637 and in overruling his motion to alter or amend the district court’s order. Section 25-824(2) provides that in any civil action commenced or appealed in any court of record in this state, the court shall award as part of its judgment and in addition to any other costs otherwise assessed reasonable attorney’s fees and court costs against any attorney or party who has brought or defended a civil action that alleges a claim or defense which a court deter- mines is frivolous or made in bad faith. [19-21] We have stated that attorney fees shall be awarded against a party who alleged a claim or defense that the court determined was frivolous, interposed any part of the action solely for delay or harassment, or unnecessarily expanded the proceeding by other improper conduct.51 A frivolous action is one in which a litigant asserts a legal position wholly without merit; that is, the position is without rational argument based on law and evidence to support the litigant’s position.52 The term “frivolous” connotes an improper motive or legal posi- tion so wholly without merit as to be ridiculous.53 Any doubt about whether a legal position is frivolous or taken in bad faith should be resolved in favor of the one whose legal position is in question.54 In seeking to modify or vacate the final award, the Arizona Seldins asserted four arguments. As previously summarized, these arguments were that the arbitrator (1) engaged in mis- behavior relating to the assignment of the Sky Financial 51 Moore v. Moore, 302 Neb. 588, 924 N.W.2d 314 (2019). 52 TFF, Inc. v. SID No. 59, 280 Neb. 767, 790 N.W.2d 427 (2010). 53 Id. 54 Id. - 211 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports SELDIN v. ESTATE OF SILVERMAN Cite as 305 Neb. 185 property, (2) failed to provide a reasoned award on three affirmative defenses raised by the Arizona Seldins related to the Sky Financial claims, (3) exceeded his power in award- ing legal fees and expenses to the Omaha Seldins, and (4) materially miscalculated the prejudgment interest when award- ing damages. In its May 3, 2018, order, the district court entered judgment in favor of the Omaha Seldins and against the Arizona Seldins under § 25-824. When evaluating the Arizona Seldins’ claim that the arbitrator engaged in misbehavior, the district court noted that the Arizona Seldins appeared to have consented to the assignment of Sky Financial, they had presented no evi- dence demonstrating the arbitrator had improper motives when accepting the assignment of Sky Financial, and their argument “conflicts with the facts and the law.” With regard to the argument that the arbitrator had failed to provide a reasoned award in relation to the Arizona Seldins’ affirmative defense involving the claims bar date, the district court found this argument lacked merit and “mischaracterize[d]” the significance of the relation-back doctrine under Fed. R. Civ. P. 15. In doing so, the district court called attention to the arbitrator’s written findings and awards relating to the Sky Financial claim, which consisted of 60 pages and contained multiple paragraphs explaining the arbitrator’s reasoning when rejecting the defense. The district court also rejected the argument that the arbitra- tor exceeded his power when awarding legal fees and expenses. Recognizing that the cases cited by the Arizona Seldins when asserting this argument either did not support their argument or were not relevant, the district court found the arbitrator had correctly interpreted and applied the separation agreement when awarding the fees and costs. The district court characterized the Arizona Seldins’ argu- ment that the arbitrator had materially miscalculated the pre- judgment interest as “misleading” and “fundamentally mis- placed.” Noting that allegations of an arbitrator’s legal error - 212 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports SELDIN v. ESTATE OF SILVERMAN Cite as 305 Neb. 185 are not reviewable, the district court found that the Arizona Seldins had failed to identify any “‘mathematical error’” in the arbitrator’s calculations. The court recognized that in making this assertion, the Arizona Seldins were attempting to chal- lenge the merits of the final award by arguing that the arbitra- tor had committed legal error. Addressing Scott’s individual claims, the district court found there was no legal basis for Scott’s challenge of the interim awards as the parties had agreed that the arbitrator’s interim awards were nonfinal. Further, each of the 12 interim awards included the following statement: “The parties understand this Interim Award is not a final appealable arbitration award, but it will be part of the law of the case moving forward.” Still, Scott proceeded to file lawsuits seeking to modify, vacate, and/or confirm five of these awards. In addition to finding the interim applications frivolous, the district court found Scott’s argument that he should not be held jointly and severally liable to be “misleading.” Reviewing the record and arguments in this case, we agree with the district court in that “[w]hat should have been a fairly simple procedure, [the Arizona Seldins] literally turned into a re-litigation of the Arbitration itself.” The district court issued the § 25-824 sanction after repeatedly finding the absence of rational factual or legal bases to support the Arizona Seldins’ theories of modifying or vacating the final award. We hold that the district court did not abuse its discretion in awarding attor- ney fees and costs under § 25-824. We also reject Scott’s claim that the district court abused its discretion in overruling his motion to alter or amend the district court’s order and judgment. Scott argues that his argu- ments were not ridiculous and that the applications regarding the interim awards “were filed only in an ‘abundance of cau- tion’ and sought an ‘immediate stay’ to minimize any action by the parties or the district court.”55 55 Brief for appellee Scott on cross-appeal at 34. - 213 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports SELDIN v. ESTATE OF SILVERMAN Cite as 305 Neb. 185 In support of his argument, Scott first cites In re Chevron U.S.A., Inc.,56 in which the Texas Court of Appeals held that an arbitrator’s interim awards were sufficiently final for purposes of confirmation and vacation. The district court specifically rejected this argument in its February 28, 2019, order. The district court noted that In re Chevron U.S.A., Inc. lacked evi- dence demonstrating that the parties or arbitration panel had agreed or intended the interim decision to be nonfinal and non- appealable. The district court also recognized that the Arizona Seldins had “not cited to a case where an interim award that both the parties and the Arbitrator intended to be non-final was treated as a final, appealable arbitration award.” Scott also cites American Intl. Specialty Lines Ins. Co. v. Allied Capital Corp.57 However, that case is clearly distin- guishable from the facts presented here as the parties had specifically requested that the arbitration panel make a final determination on one of the issues. We hold that the district court did not abuse its discretion in finding Scott’s interim applications to be frivolous and order- ing sanctions accordingly. (e) Evidence of Omaha Seldins’ Claims in Arizona State Court In their fifth assignment of error, the Arizona Seldins argue that the district court erred in excluding evidence of the Omaha Seldins’ acting contrary to the separation agreement and the award by currently seeking additional damages in other litiga- tion for the same Sky Financial investment. [22] This court has held that “‘[a]n appeal or error proceed- ing, properly perfected, deprives the trial court of any power to amend or modify the record as to matters of substance[.]’”58 56 In re Chevron U.S.A., Inc., 419 S.W.3d 329 (Tex. App. 2010). 57 American Intl. Specialty Lines Ins. Co. v. Allied Capital Corp., 167 A.D.3d 142, 86 N.Y.S.3d 472 (2018). 58 Samardick of Grand Island-Hastings, Inc. v. B.D.C. Corp., 183 Neb. 229, 231, 159 N.W.2d 310, 313 (1968). - 214 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports SELDIN v. ESTATE OF SILVERMAN Cite as 305 Neb. 185 An appeal is taken by filing a notice of appeal and depositing the required docket fee with the clerk of the district court.59 The Arizona Seldins filed their notice of appeal in these cases on March 27, 2019. On July 5, the Arizona Seldins filed a motion in the district court seeking to supplement the bill of exceptions and/or to reopen the record. The Arizona Seldins claimed that after the arbitration award had been confirmed, the Omaha Seldins filed a complaint in an Arizona state court alleging the same or similar claims regarding Sky Financial that had been arbitrated in these cases. The Arizona Seldins sought to supplement the record with evidence of the newly filed Arizona cases for purposes of this appeal. The district court overruled the motion on the ground that perfection of an appeal deprives the trial court of any power to amend or modify the record as to matters of substance. We hold that the district court did not err when overruling the motion to supplement the record. Because the Arizona Seldins had perfected their appeal prior to the filing of the motion, the district court did not have jurisdiction to supple- ment the record with evidence of the Omaha Seldins’ purported filings. The Arizona Seldins’ fifth assignment of error is with- out merit. (f) Description of “Respondents” Scott individually asserts on cross-appeal that the district court erred in failing to modify or correct an evident material mistake in the description of “Respondents” in the final award relating to Scott. Scott argues that the parties agreed Scott had not personally violated any securities laws and, therefore, he cannot be jointly and severally liable on the Sky Financial award. In the Arizona Seldins’ motion to modify or vacate the arbitration award, Scott individually asserted that the arbitra- tor had made a material mistake in the final award relating to the description of “Respondents.” In its May 3, 2019, order 59 See Neb. Rev. Stat. § 25-1912 (Cum. Supp. 2018). - 215 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports SELDIN v. ESTATE OF SILVERMAN Cite as 305 Neb. 185 overruling the motion, the district court found the final award had properly provided that Scott was jointly and severally liable for all damages awarded. Classifying Scott’s argument as misleading, the district court recognized that although the parties agreed Scott had not violated any securities laws, he usurped corporate opportunities relating to Sky Financial. The district court also noted that Scott’s liability was not based on common-law principles of joint and several liability, but on his contractual liability as set forth in the parties’ separa- tion agreement. Scott attempts to invoke § 11(a) of the FAA, which permits a court to modify or correct an award “[w]here there was an evident material miscalculation of figures or an evident mate- rial mistake in the description of any person, thing, or property referred to in the award.” [23,24] Under the FAA, “arbitration is a matter of contract, and courts must enforce arbitration contracts according to their terms.”60 “An evident material mistake is an error that is appar- ent on the face of the record and would have been corrected had the arbitrator known at the time.”61 In the present case, the definition of which individuals and entities comprised each party was set forth in the separation agreement and in the first case management order. Throughout the arbitration proceedings, the individuals and entities com- prising the Omaha Seldins and the Arizona Seldins agreed to joint and several liability for any award entered against the Omaha Seldins or the Arizona Seldins, respectively. Scott entered into a binding agreement to arbitrate all claims relating to the separation of the parties’ jointly owned proper- ties, and he is included in the definition as one of the individ uals comprising the Arizona Seldins. Scott also agreed to joint and several liability for all awards issued against the 60 Henry Schein v. Archer and White Sales, ___ U.S. ___, 139 S. Ct. 524, 529, 202 L. Ed. 2d 480 (2019) (citing Rent-A-Center, West, Inc. v. Jackson, 561 U.S. 63, 130 S. Ct. 2772, 177 L. Ed. 2d 403 (2010)). 61 94 Am. Jur. Trials 211, § 96 at 359 (2004). - 216 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports SELDIN v. ESTATE OF SILVERMAN Cite as 305 Neb. 185 Arizona Seldins. According to the terms of the separation agreement, Scott is jointly and severally liable for all awards issued. We hold that the district court did not err in overruling Scott’s motion. (g) Claims Bar Date Scott individually asserts that the district court erred in failing to vacate the final award relating to the Sky Financial claim because the claim was untimely and the arbitrator exceeded his powers by permitting the Omaha Seldins to bring the claim. Again, §§ 10 and 11 of the FAA set forth the exclu- sive grounds for vacating or modifying an arbitration award.62 “‘[S]o long as the arbitrator is even arguably construing or applying the contract and acting within the scope of his author- ity,’ the award should be confirmed.”63 The separation agreement contains a provision stating that “reasonable amendments to Claims in pending actions shall be allowed in the Mediator’s discretion based on discovery, admissions, interim decision, and other developments in the prosecution of the Claim, consistent with the Federal Rules of Civil Procedure.” On December 3, 2013, the arbitrator granted the Omaha Seldins leave to amend their claims on or before December 6, “in the interests of justice and economy.” Scott complains that the parties’ agreed-upon claims bar date was July 2, 2012, and that the Omaha Seldins’ Sky Financial claim was untimely because it was filed on November 14, 2014. Scott argues that the arbitrator exceeded his powers by granting leave to amend because under Fed. R. Civ. P. 15, he was required to apply the relation-back doctrine when assess- ing the timeliness of the claim. Rejecting this argument, the district court found that the arbi- trator interpreted the separation agreement when concluding 62 See Hall Street Associates, L. L. C., supra note 17. 63 Beumer Corp. v. ProEnergy Services, LLC, 899 F.3d 564, 565 (8th Cir. 2018) (quoting Medicine Shoppe Intern., supra note 25). - 217 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports SELDIN v. ESTATE OF SILVERMAN Cite as 305 Neb. 185 leave to amend should be granted and that the arbitrator’s deci- sion was consistent with Fed. R. Civ. P. 15(a)(2). That section provides that “[t]he court should freely give leave [to amend] when justice so requires.”64 The district court also found that this argument mischaracterized the significance of “relation back” under Fed. R. Civ. P. 15 because the amended plead- ing did relate back to a claim that had originally been filed on October 9, 2011, prior to the parties’ claims bar date. We hold that the district court did not err in rejecting this claim. Scott does not argue that the arbitrator was not interpret- ing the separation agreement; rather, he argues that the arbitra- tor “was required to apply the ‘relation-back’ method of review under the [Federal Rules of Civil Procedure], before allowing the Sky Financial Claim to be brought after the Claims Bar Date.”65 The record clearly demonstrates the arbitrator was construing the separation agreement when he concluded that leave should be granted. The arbitrator’s decision to grant the leave is not grounds to vacate the award. This argument is without merit. 4. Omaha Seldins’ Cross-Appeal On cross-appeal, the Omaha Seldins argue they are enti- tled to reasonable attorney fees and costs in the amount of $342,860.95. Alternatively, the Omaha Seldins seek a determi- nation that the district court erred in denying their motion for order nunc pro tunc. In determining the amount of a cost or attorney fee award under § 25-824(2), Neb. Rev. Stat. § 25-824.01 (Reissue 2016) states that “the court shall exercise its sound discretion.” In its May 3, 2018, order, the district court entered judg- ment in favor of the Omaha Seldins for an amount equal to the attorney fees and costs incurred in resisting the Arizona Seldins’ application seeking vacation or modifica- tion of the final award and in seeking dismissal of the various 64 Fed. R. Civ. P. 15(a)(2). 65 Brief for appellee Scott on cross-appeal at 33. - 218 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports SELDIN v. ESTATE OF SILVERMAN Cite as 305 Neb. 185 applications filed by Scott. After the judgment was issued, the Omaha Seldins submitted evidence demonstrating that it had incurred $342,860.95 in fees and costs: $211,676.50 by the Bryan Cave law firm and $131,184.45 by the McGill law firm. However, when calculating the amount of fees to be awarded, the district court neglected to include the Bryan Cave law firm’s fees of $211,676.50. Although intending to include the fees from both law firms, the district court’s order included only the McGill law firm’s fees for a total amount of $131,184.45. The Omaha Seldins filed a motion for order nunc pro tunc, seeking an order substituting $342,860.95 for the total amount of fees incurred. In a written order, the district court stated that it had “clearly intended to award attorney fees to Petitioners in an amount, as stated in the Court’s Order of February 28, 2019, equal to the attorney fees and costs incurred.” But the court denied the motion after concluding that “[a]n Order Nunc Pro Tunc [could not] be used to enlarge the judgment or substan- tially amend[] the judgment even though said judgment was not the order intended.” Pursuant to the May 3, 2018, order, the Omaha Seldins are entitled to their judgment for “an amount equal to the attor- neys’ fees and costs [the Omaha Seldins] incurred in resisting [the Arizona Seldins’] application seeking vacation or modifi- cation of the Final Award and in seeking dismissal of the vari- ous applications [filed by Scott].” The district court’s error in calculating the amount of the award resulted in the Omaha Seldins’ being unfairly deprived of their right to $211,676.50 in fees incurred by the Bryan Cave law firm. Thus, the district court abused its discretion in determining the overall amount of the award. [25] Ordinarily, an improper calculation of attorney fees would require a remand in order to reconfigure the award.66 However, when the record is sufficiently developed that a 66 Cedars Corp. v. Sun Valley Dev. Co., 253 Neb. 999, 573 N.W.2d 467 (1998). - 219 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports SELDIN v. ESTATE OF SILVERMAN Cite as 305 Neb. 185 reviewing court can apply the law to the facts and calculate a fair and reasonable fee without resorting to remand, that route is available to the appellate court.67 Here, a remand is not required because the Omaha Seldins presented evidence demonstrating the amount of fees incurred, and we find these fees to be reasonable. Further, a remand would serve only to needlessly prolong this litigation and further undermine the finality of the arbitration award. We conclude that the Omaha Seldins are entitled to a total fee award of $342,860.95. Accordingly, we order the Arizona Seldins to pay the Omaha Seldins an additional $211,676.50 for fees incurred by the Byran Cave law firm on behalf of the Omaha Seldins. [26] Because we order the payment of $211,676.50, we do not reach or address the issue of whether the district court erred in denying the Omaha Seldins’ motion for order nunc pro tunc. An appellate court is not obligated to engage in an analysis that is not necessary to adjudicate the case and controversy before it.68 5. Arizona Seldins’ Motion to Dismiss Cross-Appeal The Arizona Seldins, along with Scott and Millard, filed a joint motion to dismiss the Omaha Seldins’ cross-appeal on the ground that the Omaha Seldins’ registration of the district court’s judgment with an Arizona state court consti- tuted a voluntary acceptance of the benefits of the judgment and, thus, prevents the Omaha Seldins from prosecuting their cross-appeal. The Omaha Seldins maintain that they have not attempted to collect upon the judgment entered on February 28, 2019, and that the registration of the judgment was merely a procedural act taken for purposes of collecting on the judgment when collection was permitted. 67 Id. 68 Selma Development v. Great Western Bank, 285 Neb. 37, 825 N.W.2d 215 (2013). - 220 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports SELDIN v. ESTATE OF SILVERMAN Cite as 305 Neb. 185 [27-29] Generally, under the acceptance of benefits rule, an appellant may not voluntarily accept the benefits of part of a judgment in the appellant’s favor and afterward prosecute an appeal or error proceeding from the part that is against the appellant.69 However, the rule does not apply when the appel- lant has conceded to be entitled to the thing he or she has accepted and where the appeal relates only to an additional claim on his or her part.70 In asserting that the acceptance of benefits rule precludes an appeal, the burden is on the party asserting the rule to demonstrate that the benefits of the judg- ment were accepted.71 Here, the Omaha Seldins agree with the judgment, except for seeking an additional recovery of attorney fees that were mistakenly omitted from the district court’s judgment. Further, the Arizona Seldins have presented no evidence demonstrat- ing the Omaha Seldins have accepted the benefits of the judgment. We hold that the Omaha Seldins’ mere registration of the judgment does not preclude their cross-appeal for the recovery of additional fees and costs. This argument is with- out merit. VI. CONCLUSION The FAA provides that a court must confirm an arbitra- tion award unless grounds exist for vacating or modifying the award under § 10 or § 11 of the FAA.72 Because neither the Arizona Seldins nor Scott have demonstrated any such grounds exist, the parties are bound by their agreement to arbitrate and the arbitrator’s construction of that agreement. We hold that the district court did not err in confirming the arbitration award and denying the motions to vacate and/ or modify the award, nor did it err in denying the Arizona 69 Liming v. Liming, 272 Neb. 534, 723 N.W.2d 89 (2006). 70 Id. 71 See 5 Am. Jur. 2d Appellate Review § 543 (2018). 72 Hall Street Associates, L. L. C., supra note 17. - 221 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports SELDIN v. ESTATE OF SILVERMAN Cite as 305 Neb. 185 Seldins’ motion to supplement the record. We further hold that the district court did not abuse its discretion when awarding attorney fees in favor of the Omaha Seldins or when deny- ing Scott’s motion to alter or amend the court’s May 3, 2018, order. We conclude that the Omaha Seldins’ registration of the district court’s judgment does not preclude the Omaha Seldins’ cross-appeal. Finally, we hold that the Omaha Seldins are entitled to reasonable attorney fees and costs incurred in confirming the arbitration award and resisting the various applications filed by the Arizona Seldins and Scott and that the district court abused its discretion when failing to include the Bryan Cave law firm’s fees in its calculation of the amount of fees to be awarded. Accordingly, we (1) affirm the district court’s confirmation of the arbitration award, (2) affirm the district court’s denial of the Arizona Seldins’ and Scott’s motions to vacate and/or modify the award, (3) affirm the district court’s denial of the Arizona Seldins’ motion to supplement the record, (4) affirm the district court’s award of sanctions under § 25-824, (5) over- rule the Arizona Seldins’ motion to dismiss the Omaha Seldins’ cross-appeal, and (6) sustain the Omaha Seldins’ cross-appeal and order the fee judgment in favor of the Omaha Seldins be increased to $342,860.95. Affirmed as modified. Miller-Lerman, J., not participating.	01-04-2023	05-29-2020
https://www.courtlistener.com/api/rest/v3/opinions/4537663/	NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION This opinion shall not "constitute precedent or be binding upon any court." Although it is posted on the internet, this opinion is binding only on the parties in the case and its use in other cases is limited. R. 1:36-3. SUPERIOR COURT OF NEW JERSEY APPELLATE DIVISION DOCKET NO. A-5939-17T4 STATE OF NEW JERSEY, Plaintiff-Respondent, v. AMEER A. HOLT, Defendant-Appellant. _________________________ Submitted April 28, 2020 – Decided May 29, 2020 Before Judges Yannotti and Hoffman. On appeal from the Superior Court of New Jersey, Law Division, Ocean County, Indictment No. 16-10-2064. Joseph E. Krakora, Public Defender, attorney for appellant (Cody T. Mason, Assistant Deputy Public Defender, of counsel and on the briefs). Bradley D. Billhimer, Ocean County Prosecutor, attorney for respondent (Samuel J. Marzarella, Chief Appellate Attorney, of counsel; Shiraz Deen, Assistant Prosecutor, on the brief). PER CURIAM Defendant pled guilty to second-degree possession of a controlled dangerous substance (CDS) with intent to distribute, N.J.S.A. 2C:35-5(a)(1) and 35-5(b)(2), and other charges. Defendant appeals from the judgment of conviction dated August 10, 2018. He contends the trial court erred by denying his motion to suppress and resentencing is required. We affirm. I. In October 2016, an Ocean County Grand Jury returned Indictment No. 16-10-2064, charging defendant with third-degree possession of a CDS (Oxycodone), N.J.S.A. 2C:35-10(a)(1) (count one); third-degree possession of a CDS (cocaine), N.J.S.A. 2C:35-10(a)(1) (count two); second-degree possession of a CDS with intent to distribute, N.J.S.A. 2C:35-5(a)(1) and 35-5(b)(2) (count three); second-degree unlawful possession of a weapon, N.J.S.A. 2C:39-5(b)(1) (count four); second-degree possession of a firearm while engaging in drug activity, N.J.S.A. 2C:39-4.1(a) (count five); and second-degree certain persons not to have weapons, N.J.S.A. 2C:39-7(b) (count six). Thereafter, defendant filed a motion to suppress evidence and a judge conducted an evidentiary hearing on the motion. At the hearing, Officer Theodore Maloney, of the Toms River Police Department (TRPD), testified that on September 21, 2016, he was working at A-5939-17T4 2 police headquarters when a detective informed him that an anonymous person had reported that an individual named "Ameer Holt" was distributing narcotics out of a room at a certain motel in Toms River. The anonymous person also reported that defendant was driving a red Mazda that might be registered to a car dealership. Maloney and other TRPD officers obtained photographs of defendant’s driver’s license and established surveillance at the motel. Maloney said that on three separate occasions, he witnessed defendant walking down the motel's staircase towards a silver Buick LeSabre. He said defendant entered the vehicle and "fumble[d] around with some things," before he met another person in the parking lot. According to Maloney, defendant and the other individual engaged in a "brief conversation" and "appeared to exchange items[,]" before going their separate ways. Maloney testified that, based on his training and experience, he believed defendant’s activity was consistent with the distribution of narcotics. Maloney further testified that later, defendant entered the vehicle and drove to another location. Maloney said that, at that location, he observed defendant engage in what he "believed to be a drug deal" in his vehicle. Police officers then stopped defendant. He consented to a search of the vehicle and, A-5939-17T4 3 according to Maloney, he was "more than" cooperative. The police did not find drugs, firearms, or any other incriminating evidence in the car. The following day, Jeanine Reiser contacted Maloney. Reiser told Maloney she was defendant’s fiancée or girlfriend and that she saw the police stop defendant the previous day. She said she was upset that defendant was "involved in narcotic activity" and noted that she had reported the Buick stolen after defendant failed to return the car to her. Reiser told Maloney that defendant was staying at the motel. He was using the Buick as a "stash location" for drugs and had a handgun. Reiser informed Maloney defendant had picked up drugs from an associate in Newark, and he was driving to the motel in a red Mazda. The police officers again conducted surveillance of the motel. They observed a red Mazda enter the motel's parking lot. Defendant was in the passenger seat and an unknown person was driving the vehicle. The officers were not wearing their police uniforms, but they were wearing tactical vests with their badges displayed. The officers approached the Mazda with their guns drawn and removed defendant from the vehicle. Officer Andrew Chencharik of the TRPD patted defendant down for possible weapons. He testified that he felt "a soft object[ or] small plastic bag" A-5939-17T4 4 in defendant's pocket, which he "believed" was "consistent with the packaging" of "some type of contraband CDS." According to Chencharik, defendant said the "bulge" in his pocket "was marijuana and pills." Chencharik arrested defendant and placed him in the back of a patrol car. From defendant's person, the officers recovered ten Oxycodone pills, which were "[b]undled up along with a quantity of a marijuana . . . ." The driver of the red Mazda consented to a search of the vehicle. The officers searched the vehicle but found no additional evidence. They released the driver of the Mazda and he left the area. The officers then asked a K-9 team to report to the motel parking lot and have the dog check the Buick for narcotics. The team brought the dog to the motel. The dog examined the exterior of the car and gave two positive alerts indicating the presence of narcotics at the front side door on the passenger side and the rear door on the driver's side. The officers impounded the car and had the car brought to police headquarters. Maloney confirmed that Reiser reported that the Buick had been stolen. He called Reiser and told her that he would either seek a warrant to search the vehicle or she could come to police headquarters and complete a consent-to- search form. Reiser went to police headquarters. Maloney explained the A-5939-17T4 5 consent-to-search form to her. He told her she could be present for the search and she could stop the search at any time. Maloney gave her time to read the form. She did not ask any questions or indicate she did not understand the form. She signed the form. The officers searched the vehicle and found about seventeen grams of cocaine in the driver’s side door, two digital scales with CDS residue, a box of plastic sandwich bags, and drug paraphernalia. After the search, defendant waived his Miranda rights1 and gave the police a recorded statement. He admitted that the cocaine and the scales found in the car belonged to him. The police returned the vehicle to Reiser without further investigation. On September 23, 2016, Reiser called Maloney. She stated that after she spoke with defendant in jail, she became suspicious about the contents of her car. She checked certain panels on the vehicle’s doors. She observed a handgun behind a panel of the passenger-side door. Chencharik and three other officers responded to Reiser’s apartment. Chencharik advised Reiser of her rights and she consented to a second search of her car. The officers searched the vehicle and removed a gun from behind a panel on the passenger-side door. 1 Miranda v. Arizona, 384 U.S. 436 (1966). A-5939-17T4 6 At the suppression hearing, Reiser testified that defendant is her boyfriend and he is the father of her two-year-old child. Reiser said she and defendant were not living together in 2016, she did not know where he was living at that time, and she had no knowledge of his alleged crimes. She denied contacting the police on September 22 and 23, 2016. She said she never provided the police with information about drugs or a firearm. Reiser claimed she only signed the first consent-to-search form because the police had threatened to arrest her and have the Division of Child Protection and Permanency contact her. Reiser further testified that a detective called her and told her the police wanted to search the car a second time. According to Reiser, the police kept mentioning drugs and guns. Reiser explained that the police presented her with another consent-to- search form. She said she signed the form because she did not want any trouble. She claimed she did not read either form in detail. She said the officers did not read the form to her. She testified that she did not know she could refuse to sign the form or that she could stop the search. On January 2, 2018, the judge filed an opinion and order denying defendant's motion to suppress. Thereafter, defendant pled guilty to counts one, two, three, four, and six of the indictment. In exchange for defendant's plea, the A-5939-17T4 7 State agreed to recommend an aggregate sentence of twelve years of incarceration with five years of parole ineligibility. The State also agreed to dismiss count five and two disorderly persons offenses. On August 3, 2018, another judge sentenced defendant to an aggregate sentence of twelve years of imprisonment with five years of parole ineligibility. The judge also imposed various fines and penalties. This appeal followed. On appeal, defendant raises the following arguments: POINT I THE COURT ERRED IN DENYING THE MOTION TO SUPPRESS EVIDENCE BECAUSE IT WRONGLY FOUND DEFENDANT WAS DETAINED RATHER THAN ARRESTED WHEN HE WAS FRISKED, CONCLUDED THAT THE FRISK WAS JUSTIFIED BASED ON A TIP OF UNPROVEN RELIABILITY, AND FOUND THE BUICK WAS LAWFULLY IMPOUNDED BASED UPON A DOG SNIFF UNSUPPORTED BY PROOF OF RELIABILITY. A. Defendant Was Arrested When Three Officers Blocked In His Car, Approached With Guns Drawn, Removed Him From The Car, And Patted Him Down. B. The Officers' Conduct Was Unjustified Because It Was Based On A Tip Of Unknown Reliability. C. The State Failed To Show That The Dog Sniff Was Reliable Such That The Impoundment And Search Of The Buick Were Illegal. A-5939-17T4 8 POINT II THE MATTER MUST BE REMANDED FOR RESENTENCING BECAUSE THE COURT FAILED TO ADEQUATELY EXPLAIN ITS AGGRAVATING FACTOR FINDINGS AND DID NOT ACCOUNT FOR DEFENDANT'S REMORSE. II. We turn first to defendant's contention that the judge erred by denying his motion to suppress. The judge found that the officers had reasonable articulable suspicion that defendant was engaged in, or about to engage in criminal activity, and therefore lawfully detained and frisked defendant for investigation. The judge also found that Reiser knowingly and voluntarily consented to the searches of her vehicle. The judge therefore determined that the officers lawfully obtained the evidence during defendant's detention and the search of the car. When reviewing the denial by the trial court of a motion to suppress evidence, we will defer to the court's findings of fact "so long as those findings are supported by sufficient evidence in the record." State v. Hubbard, 222 N.J. 249, 262 (2015). We may disregard those findings of fact only if they are "clearly mistaken." Ibid. However, the trial court legal conclusions are not entitled to any special deference and we review those conclusions de novo. Id. at 263. A-5939-17T4 9 A. Investigative Stop or Arrest. Defendant argues that the motion judge erroneously found that the police lawfully detained him for investigation and frisked him during that encounter . Defendant contends that the officers transformed the encounter "from a minimally invasive detention to a de facto arrest." We disagree. "Warrantless seizures and searches are presumptively invalid as contrary to the United States and the New Jersey Constitutions." State v. Pineiro, 181 N.J. 13, 19 (2004) (citing State v. Patino, 83 N.J. 1, 7 (1980)). "[S]uch seizures or searches [must] be conducted pursuant to a warrant issued upon a showing of probable cause." Ibid. (citing U.S. Const. amend. IV; N.J. Const. art. I, ¶ 7). "When no warrant is sought, the State has the burden to demonstrate that ‘[the search] falls within one of the few well-delineated exceptions to the warrant requirements.’" Ibid. (alteration in original) (quoting State v. Maryland, 167 N.J. 471, 482 (2001)). Generally, there are three "constitutionally permissible forms of police encounters with citizens." Id. at 20-21. A "'field inquiry' is the least intrusive encounter[] and occurs when a police officer approaches an individual and asks 'if [the person] is willing to answer some questions.'" Id. at 20 (second alteration in original) (quoting State v. Nishina, 175 N.J. 502, 510 (2003)). A-5939-17T4 10 Next, "more intrusive than a field inquiry is . . . an investigative detention[,]" also known as a Terry stop. Nishina, 175 N.J. at 510 (citing Terry v. Ohio, 392 U.S. 1 (1968)). "An encounter escalates from an inquiry to a detention 'when an objectively reasonable person feels that his or her right to move has been restricted.'" Ibid. (quoting State v. Rodriguez, 172 N.J. 117, 126 (2002)). A Terry stop "is valid 'if it is based on specific and articulable facts which, taken together with rational inferences from those facts, give rise to a reasonable suspicion of criminal activity.'" Pineiro, 181 N.J. at 20 (quoting Nishina, 175 N.J. at 510-11). The police must "ha[ve] a 'particularized suspicion' based upon an objective observation that the person stopped has been [engaged] or is about to engage in criminal wrongdoing . . . based upon the . . . officer's assessment of the totality of circumstances with which he is faced." State v. Davis, 104 N.J. 490, 504 (1986). Furthermore, "[t]he standard of reasonable suspicion required to uphold an investigative detention is lower than the standard of probable cause necessary to justify an arrest." Nishina, 175 N.J. at 511 (citing State v. Stovall, 170 N.J. 346, 356 (2002)). Application of the reasonable suspicion standard is "highly fact sensitive and, therefore, not 'readily, or even usefully, reduced to a neat set A-5939-17T4 11 of legal rules.'" Ibid. (quoting United States v. Sokolow, 490 U.S. 1, 7 (1989)). "[A]n investigatory stop becomes a de facto arrest when 'the officers' conduct is more intrusive than necessary for an investigatory stop.'" State v. Dickey, 152 N.J. 468, 478 (1998) (quoting United States v. Jones, 759 F.2d 633, 636 (8th Cir. 1984)). There is no "bright line" for determining when an investigatory stop constitutes a de facto arrest. Id. at 479. In making that decision, the court should consider several factors including: the length of the detention; degree of fear and humiliation endured by the defendant; transportation or isolation of the defendant; and whether the defendant was handcuffed or confined to a police car. Ibid. Here, there is sufficient credible evidence in the record to support the judge's finding that defendant was subjected to an investigative stop for detention and the encounter was not a de facto arrest. The judge found that the police had reasonable articulable suspicion that defendant was engaged in, or about to engage in, criminal activity. Therefore, the officers lawfully stopped and frisked defendant. As the judge pointed out in his opinion, on September 21, 2016, the TRPD received an anonymous tip indicating that defendant was distributing drugs from a room at a certain motel in Toms River and he was seen driving a red Mazda. A-5939-17T4 12 The following day, Reiser told Maloney that defendant was distributing drugs out of her Buick. She said he had picked up drugs in Newark, was on his way back to the motel in a red Mazda, and had a gun. Reiser corroborated information provided in the anonymous tip. Moreover, officers from the TRPD conducted surveillance and observed defendant arrive in the motel parking lot in a red Mazda. Maloney and Chencharik approached defendant, drew their weapons, and ordered him to exit the car. Chencharik frisked defendant to determine if he was armed. Chencharik detected a bulge in defendant's pocket and defendant admitted he was in possession of marijuana and pills. The judge found that the officers had recovered the evidence during the detention and defendant had not been subjected to a de facto arrest. Defendant was not arrested until after he admitted he was in possession of a CDS. Defendant argues, however, that the officers "added to the intrusiveness of the detention by approaching the car with their badges displayed and guns drawn." He contends the "cumulative effect" of the officers’ actions made the encounter more intrusive than a Terry stop. We are convinced, however, that the record supports the judge's finding that defendant was detained for investigation and the detention did not constitute a de facto arrest. A-5939-17T4 13 As the record shows, the detention was no longer than necessary. The officer frisked defendant because the TRPD had been informed he had a gun. The officers did not humiliate defendant and there is no indication he faced extraordinary fear. During the detention, defendant was not handcuffed or placed in a police vehicle. We conclude the evidence was obtained during an investigative detention, not a de facto arrest. B. Reiser's Tip. Defendant argues that the judge erred by considering Reiser's tip to be the tip of a "concerned citizen." He contends the State failed to establish Reiser’s veracity and the basis of her knowledge for the information she provided to the TRPD. He therefore argues that the police lacked reasonable suspicion to stop and frisk him and that the trial court should have suppressed the evidence recovered from him during the stop. Again, we disagree. "[A] descriptive tip by an informant may contribute to a reasonable objective and particularized suspicion to serve as the basis for an investigatory stop." State v. Richards, 351 N.J. Super. 289, 300 (App. Div. 2002) (quoting State v. Caldwell, 158 N.J. 452, 467 (1999)). "[T]he reliability of an informant's tip must be analyzed in light of the totality of the circumstances . . . ." State v. A-5939-17T4 14 Williams, 364 N.J. Super. 23, 31-32 (2003) (citing Illinois v. Gates, 462 U.S. 213, 238 (1983); State v. Novembrino, 105 N.J. 95, 122 (1987)). "An informant's 'veracity' and 'basis of knowledge' are two highly relevant factors under the totality of the circumstances." State v. Zutic, 155 N.J. 103, 110 (1998) (citing State v. Smith, 155 N.J. 83, 92 (1998)). However, "[a] deficiency in one of those factors 'may be compensated for, in determining the overall reliability of a tip, by a strong showing as to the other, or by some other indicia of reliability.'" Id. at 111 (quoting Gates, 462 U.S. at 233). Furthermore, "‘[a] report by a concerned citizen’ or a known person is not ‘viewed with the same degree of suspicion that applies to a tip by a confidential informant’ or an anonymous informant." State v. Amelio, 197 N.J. 207, 212 (2008) (alteration in original) (quoting Wildoner v. Borough of Ramsey, 162 N.J. 375, 390 (2000)). "When an informant is an ordinary citizen, New Jersey courts assume that the informant has sufficient veracity and require no further demonstration of reliability." Stovall, 170 N.J. at 362. We are convinced the record supports the judge's finding that Reiser's tip consisted of information provided by an ordinary citizen. She identified herself to the police and they reasonably assumed she was providing reliable information. Moreover, Maloney testified that Reiser was upset because A-5939-17T4 15 defendant was using her car to engage in the distribution of narcotics, and her goal was to stop him from continuing to do so. Defendant argues that Reiser had "suspect motives" to provide the police with "highly damaging information" about him. He claims her goal was to retain possession of the vehicle and that her relationship with defendant "had been essentially nonexistent for months." He also claims she was motivated by a belief he was cheating on her. These arguments are entirely without merit. The police had no reason to suspect that Reiser was providing the information about defendant for some "suspect" reasons, nor were they required to question her to determine her motives for informing the police that defendant was engaged in criminal activity. She was an ordinary citizen who identified herself. Under the circumstances, the police reasonably assumed the information she provided was credible. C. Impoundment of Vehicle. Defendant argues that the State failed to show that the police lawfully impounded Reiser's car. He contends the State failed to provide sufficient detail about the dog’s alerts when he examined the car. He also contends that the State did not present sufficient information to show the dog had been properly trained A-5939-17T4 16 and his alerts had been reliable. He therefore contends the State failed to establish it had probable cause to impound the car. We disagree. Defendant argues that the State could only establish probable cause based on the dog's alerts if it produced proof from "controlled settings" that the dog had performed reliably in detecting the presence of narcotics. In support of that argument, he relies upon Florida v. Harris, 568 U.S. 237, 248 (2013). In this case, however, the State did not rely solely on the dog's alerts to establish probable cause to seize the Buick. The police had other information that established probable cause to impound the vehicle. As noted, Reiser told the police that defendant had been using the Buick for the distribution of CDS. The officers conducted surveillance and observed defendant engaging in actions that were consistent with the distribution of CDS. Moreover, the police stopped and frisked defendant, and found he was in possession of a CDS. Reiser also reported that the Buick had been stolen. Thus, wholly aside from the dog's alerts, the police had probable cause to seize the car. In addition, the police had independent justification to impound the car under N.J.S.A. 39:5-47, which provides that the New Jersey Motor Vehicle Commission: may authorize the seizure of a motor vehicle operated over the highways of this State when it has reason to A-5939-17T4 17 believe that the motor vehicle has been stolen or is otherwise being operated under suspicious circumstances and may retain it in the name of the commission until such time as the identity of ownership is established . . . . [Ibid.] The statute authorizes the police to impound a vehicle they reasonably believe was stolen. State v. Terry, 232 N.J. 218, 234 (2018). Furthermore, "[t]he Fourth Amendment . . . is not offended if an automobile is seized or its operator temporarily detained when a law enforcement officer has a reasonable and articulable suspicion that the vehicle is unregistered or stolen." Ibid. (citing Delaware v. Prouse, 440 U.S. 648, 663 (1979)). Defendant argues that the statute does not apply because there is no evidence the car was "operated over the highways" before the police impounded it. He asserts that before the officers seized the car, the officers did not determine that the vehicle was reported stolen. Defendant also asserts he was not afforded an opportunity to establish that he had lawful possession of the car. Defendant's arguments are unavailing. Before they impounded the vehicle, officers at the TRPD were aware the vehicle had been reported stolen. The police also had information which suggested that it was being operated under "suspicious circumstances." As A-5939-17T4 18 noted, Reiser told the police that defendant was using the car for the distribution of drugs. In addition, the vehicle was at the motel's parking lot. Therefore, the officers could reasonably assume it had been operated on the State's highways. Therefore, N.J.S.A. 39:5-47 authorized the police to impound the vehicle. III. Defendant argues that resentencing is required. He contends the sentencing judge failed to explain the bases for his findings of aggravating factors three and nine. He also contends the judge erred by failing to take into account his expression of remorse and acceptance of responsibility. We apply a "deferential" standard in reviewing a lower court's sentencing determination. State v. Fuentes, 217 N.J. 57, 70 (2014). This court: must affirm the sentence unless (1) the sentencing guidelines were violated; (2) the aggravating and mitigating factors found by the sentencing court were not based upon competent and credible evidence in the record; or (3) "the application of the guidelines to the facts of [the] case makes the sentence clearly unreasonable so as to shock the judicial conscience." [Ibid. (alteration in original) (quoting State v. Roth, 95 N.J. 334, 364-65 (1984)).] Here, the sentencing judge found aggravating factors three (the risk that defendant will commit another offense), six (the extent of defendant’s prior criminal record and the seriousness of the offenses for which he has been A-5939-17T4 19 convicted), and nine (the need for deterring defendant and others from violating the law). N.J.S.A. 2C:44-1(a)(3), (6), (9). The judge stated there was a risk defendant will commit another offense and he gave that factor "heavy weight" based on defendant's criminal record. The judge noted that this was defendant's third conviction of certain persons not to possess weapons, in violation of N.J.S.A. 2C:39-7(b). The judge pointed out that the legislative policy underlying that statute is clear. As provided in the statute, certain persons, like defendant, are not to possess weapons. The judge observed that in this matter, defendant was found guilty of possessing a handgun, and he had a prior conviction for possession of a machine gun. The judge emphasized that there was a need to deter defendant and others from violating the law. Therefore, the judge gave "heavy weight" to aggravating factor nine. The judge also found mitigating factor eleven (defendant’s imprisonment would entail excessive hardship to himself or his dependents). N.J.S.A. 44- 1(b)(11). The judge noted that defendant has a two-year-old child, and although he was not paying to support that child, the child would not have her father's A-5939-17T4 20 companionship and love while he is incarcerated. The judge gave mitigating factor eleven moderate weight. The judge found that the aggravating factors outweighed the mitigating factor. As stated previously, the judge sentenced defendant to an aggregate term of twelve years of incarceration, with five years of parole ineligibility. We reject defendant's contention that the judge failed to provide sufficient reasons for his findings of aggravating factors three and nine. The judge explained that defendant has a juvenile record, with three violations of probation. He also has eight municipal court convictions and six prior Superior Court convictions, which include two prior convictions for certain persons not to possess weapons. We are convinced that the sentencing judge provided a sufficient explanation for his findings. Defendant contends the judge erred by failing to consider his remorse and acceptance of responsibility. The judge noted, however, that defendant was "honest and open and forthright and accepted responsibility for [his actions], but he understands that he’s the architect of this situation and he stands here . . . as a result of his own conduct." Thus, the judge considered defendant's remorse and acceptance of responsibility. A-5939-17T4 21 Defendant also contends resentencing is required to ensure that the judge did not consider a prior drug offense, which made him eligible for an extended term under N.J.S.A. 2C:43-6(f), as a basis for his findings on aggravating factors three and nine. However, as we have explained, defendant has an extensive criminal record, which includes adjudications as a juvenile, municipal court convictions, and six prior Superior Court convictions. Wholly aside from his prior conviction for the drug offense, defendant's criminal record provides a sufficient factual basis for the judge's findings of aggravating factors three and nine. We therefore conclude that the judge complied with the sentencing guidelines and defendant's sentence represents a reasonable exercise of the court's sentencing discretion. We reject defendant's contention that resentencing is required. Affirmed. A-5939-17T4 22	01-04-2023	05-29-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622352/	UNITED MARKETS, INC., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.United Markets, Inc. v. CommissionerDocket No. 11489.United States Board of Tax Appeals10 B.T.A. 372; 1928 BTA LEXIS 4128; January 28, 1928, promulgated 4128 1. The evidence is insufficient to show that petitioner is entitled to a greater allowance for exhaustion, wear and tear than was allowed by the Commissioner. 2. The provisions of section 331 of the Revenue Acts of 1918 and 1921 are applicable to leases acquired by the petitioner in 1920 for stock from a predecessor partnership and the Commissioner correctly held that the petitioner might not include such leases in invested capital at an amount in excess of the cost thereof to the predecessor owner. Fred VanDolsen, Esq., for the petitioner. A. H. Murray, Esq., and Benton Baker, Esq., fot the respondent. LITTLETON372 The Commissioner determined a deficiency of $1,659.76 for the period March 6 to December 31, 1920, and a deficiency of $3,296.50 for the calendar year 1921. It is claimed that the Commissioner erred in refusing to allow a cash value of $5,466.50 for leases acquired in 1920 for stock for the purposes of invested capital and exhaustion, and in not allowing adequate deductions for exhaustion, wear and tear of furniture, fixtures, and equipment. FINDINGS OF FACT. Petitioner is a Florida corporation operating a chain4129 of stores for the sale of meat and groceries at retail at Tampa. It was organized March 6, 1920, succeeding a partnership engaged in the same business, and in exchange for the assets of the partnership, which included several leases for varying terms on buildings used in the business, petitioner issued to the partners its capital stock. Soon after its organization and during the taxable years petitioner made 373 many changes in the arrangement of its stores and made considerable additions and improvements. It removed and replaced certain shelving and other equipment, changed store fronts, rearranged entrances, rearranged and acquired new counters and show cases, and constructed new refrigerators. Considerable used furnishings and equipment were acquired by the petitioner from the partnership for stock. Petitioner frequently rearranged its stores and replaced certain equipment. For the period March 6 to December 31, 1920, the Commissioner reduced the deduction claimed by the petitioner for exhaustion, wear and tear of property in the amount of $2,762.90 and disallowed a deduction of $2,615.25, representing the cost of furniture and fixtures and $1,658.27 representing4130 the cost of additions and betterments. The Commissioner included these amounts in the capital account and allowed depreciation thereon. For the year 1921 the Commissioner reduced the deduction claimed for depreciation of property in the amount of $5,279.73 and disallowed a loss of $2,590.43 on furniture and fixtures. The Commissioner declined to allow petitioner a value of $5,466.50 for leases, acquired from the predecessor partnership for stock, for invested capital purposes, for the reason that under section 331 of the Revenue Acts of 1918 and 1921 a corporation was limited to the investment in these leases by the partners. The corporation claimed a deduction in its return for exhaustion of leases and there is insufficient evidence in the record to show that the Commissioner did not make an adequate allowance in this regard. OPINION. LITTLETON: The evidence submitted in this proceeding is not sufficient to warrant the Board in disturbing the Commissioner's determination in regard to the allowance for exhaustion, wear and tear of furniture, fixtures and equipment or as to the disallowance of the loss on furniture and fixtures. Considerable testimony was introduced by depositions4131 but this testimony was so general that it is impossible to determine therefrom the value of the property acquired for stock from the partnership, the cost of equipment subsequently acquired or its useful life. It appears that much of the furniture, fixtures and equipment was torn our, replaced or discarded prior to the end of the useful life thereof and the evidence is not sufficient to enable the Board to determine the loss, if any, to which the petitioner is entitled on this account. The leases in question were acquired by the partnership without cost and some time prior to the organization of the petitioner. It is claimed that when these leases were paid in to the petitioner by the 374 partners for stock they had an actual cash value of $5,466.50. The Commissioner correctly excluded this amount from invested capital for the taxable years under the provisions of section 331 of the Revenue Acts of 1918 and 1921. The evidence does not show what value, if any, the Commissioner determined for the leases for depreciation purposes or what portion, if any, he disallowed of the deduction claimed for exhaustion of these leases. Judgment will be entered for the respondent.4132	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622353/	BARTON THEATRE COMPANY, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentBarton Theatre Co. v. CommissionerDocket No. 4965-75.United States Tax CourtT.C. Memo 1980-128; 1980 Tax Ct. Memo LEXIS 456; 40 T.C.M. (CCH) 198; T.C.M. (RIA) 80128; April 21, 1980, Filed 456 Held, petitioner's debentures constituted bona fide debt, entitling it to interest deductions under section 163; held further, petitioner realized gain in 1966 from the redemption of its stock in Atlas Organization, Inc., in 1966 upon the determination of the fair market value of assets it received; held further, petitioner subject to the section 6653(a) addition to the tax for negligent disregard of the rules and regulations. Tom G. Parrott and Donald B. Nevard, for the petitioner. James D. Thomas, for the respondent. WILESMEMORANDUM FINDINGS OF FACT AND OPINION 457 WILES, Judge: Respondent determined the following deficiencies in petitioner's Federal income taxes: Sec. 6653(a) YearDeficiencyAddition to Tax1965$ 44,633.82$2,231.691966165,209.498,260.47After concessions the issues remaining for decision are: 1. Whether petitioner's five percent debentures 1 constitute a bona fide debt entitling it to interest deductions under section 163; 22. Whether petitioner's stock in Atlas Organization, Inc., was redeemed in 1966, and, if so, whether petitioner realized gain from such redemption; and 3. Whether petitioner's underpayments of tax in 1965 and 1966 were due to458 negligence or intentional disregard of rules and regulations under section 6653(a). FINDINGS OF FACT Some of the facts were stipulated and are found accordingly. Barton Theatre Company (hereinafter petitioner) maintained its principal place of business in Oklahoma City, Oklahoma, when it filed its 1965 and 1966 income tax returns with the District Director of Internal Revenue at Oklahoma City, Oklahoma, and when it filed its petition in this case. Petitioner filed its returns using the cash receipts and disbursements method of accounting. Petitioner was incorporated in Oklahoma on July 27, 1964. During 1965 and 1966 all of petitioner's stock was owned by R. Lewis Barton, Dollye Barton, Robert L. Barton, Betty Lou Barton, Harold L. Combs, Joanna Combs, Gerald G. Barton and Jo C. Barton (hereinafter referred to as the Barton Family). R. Lewis Barton, deceased, and Dollye Barton are the parents of Robert L. Barton, Joanna Combs, and Gerald G. Barton. Betty Lou Barton, Harold L. Combs, and Jo C. Barton are the respective spouses of Robert L. Barton, Joanna Combs, and Gerald G. Barton. Prior to the incorporation of petitioner, the Barton Family was in the business of owning459 and operating movie theatres and other income-producing property in the Oklahoma City area. Pursuant to a letter agreement dated September 17, 1964, the Barton Family offered to exchange certain properties (including movie theatres, real property, stocks and bonds) for all the original issued capital stock and debentures to be issued by petitioner. The agreement provided for an appraisal to be made of the properties to be conveyed. That appraisal was made by James P. Foley of Chicago, Illinois, who assigned a total net value of $8,033,459 to the properties as of January 1, 1965. By letter agreement dated May 17, 1965, petitioner and the Barton Family accepted the appraisals of the properties by James P. Foley and agreed to exchange those properties for petitioner's stock and debentures, effective January 1, 1965. Pursuant to this letter agreement, petitioner issued stock and debentures to the Barton Family as follows: PreferredCommon NamesDebenturesStockStockR. Lewis & Dollye Barton$279,059$1,700,000$ 389,219Robert L. & Betty Lou Barton716,3001,189,581Joanna Combs & Harold L. Combs666,6001,228,483Gerald G. Barton & Jo C. Barton671,5001,192,717$2,333,459$1,700,000$4,000,000460 Petitioner issued shares of common and preferred stock to the Barton Family as follows: ShareholderCommon StockPreferred StockR. Lewis Barton1,9468,500Dollye Barton1,9468,500Robert L. Barton11,896Gerald G. Barton11,927Joanna Combs11,291Harold L. Combs99440,00017,000Petitioner issued debentures in the total face amount of $2,333,459 to the Barton Family as follows: Certificate No.Registered OwnerAmount1R. Lewis Barton$139,559.002Dollye Barton139,500.003Robert L. Barton654,900.004Betty Lou Barton61,400.005Gerald G. Barton604,500.006Jo C. Barton67,000.007Joanna Combs666,600.00The debentures were evidenced by the issuance of debenture certificates signed by petitioner's president, Gerald G. Barton, and attested to by its assistant secretary, John C. Andrews. These certificates contained an expressed unconditional promise to pay a sum certain in money on the specified maturity date of January 1, 1985, in return for an adequate consideration in money or money's worth. They also contained a promise to pay interest at the rate of five percent per annum, payable461 monthly on the first day of each month. During 1965 and 1966, petitioner made interest payments to the holders of its debentures as follows: R. Lewis &Robert L. &Harold J. &Gerald G. & YearDollye BartonBetty Lou BartonJoanna CombsJo C. Barton1965$13,371.51$34,322.67$31,941.25$32,175.96196611,627.4030,345.8027,775.0027,979.10The debenture certificates further provided that the principal sum of the debentures and the interest due thereon were "subject to and subordinate to existing indebtedness due banks, i/nsurance companies, and other institutional lenders and to future indebtedness due to such lenders." Moreover, in the event petitioner was dissolved or liquidated, no payment was to be made upon the debentures until all other creditors of petitioner were paid in full. Petitioner owned 37.5 shares of stock in the Atlas Organization, Inc. (hereinafter Atlas). During 1966, petitioner and Atlas orally agreed to the terms embodied in an agreement entitled Stock Redemption Agreement (hereinafter Agreement). The written Agreement was drafted during December of 1966 but, due to the death of a partner in the462 law firm which drafted the Agreement, it was not executed by the parties until January or February of 1967. The Agreement, however, was post-dated to take effect "as of January 1, 1966," and provided such date as effective for all conveyances, assignments, endorsements and deliveries pursuant thereto. Pursuant to the Agreement, petitioner agreed to convey to Atlas its 37.5 shares of Atlas stock, to assign to Atlas an undivided one-half interest in a real estate lease dated April 13, 1965, and to assume from Atlas a real estate mortgage in the principal amount of $116,666. In consideration for the foregoing, Atlas agreed to convey to petitioner 100 shares of common stock in Plaza Realty Corp. (hereinafter Plaza Realty) and 5,450 shares of common stock in United Founders Corp. (hereinafter UFC). Prior to the exchange of assets between petitioner and Atlas, the stock of Atlas was owned as follows: Number of SharesOwner37.5Petitioner12.5Calvin GarrettAt the time of the exchange, petitioner had a basis of $375 in the 37.5 shares of Atlas stock. Atlas entered the 37.5 shares of stock received from petitioner on its books and certified financial statement463 as treasury stock for calendar year 1966. By an instrument effective "as of January 1, 1966," petitioner assigned an undivided one-half interest in a 99-year real estate lease covering 13.63 acres of land in Denver, Colorado (hereinafter Denver lease), to Atlas as provided for by the Agreement. The assignment was noted on Atlas' financial statement for 1966. The fair market value of the entire Denver lease was $559,800, making the 50 percent interest assigned to Atlas worth $279,900. Petitioner had no basis in the lease. Pursuant to the Agreement, petitioner executed an Agreement of Assumption of Indebtedness reflecting its assumption of the balance of principal and interest due as of January 1, 1966, on a note in the principal amount of $116,666 given by Atlas to United Founder's Life Insurance Company (hereinafter the Atlas note). Although the balance owed on the Atlas note on January 1, 1966, was $116,159.70, Atlas paid $2,876.76 (plus interest of $6,317.59) on October 25, 1966, leaving a principal balance of $113,282.94 actually assumed by petitioner. The Atlas note was removed from Atlas' books and certified financial statements for calendar year 1966. Under the Agreement, 464 Atlas transferred 100 shares of Plaza Realty stock to petitioner. Plaza Realty was incorporated under the laws of the State of Oklahoma on April 9, 1965. Prior to petitioner's acquisition of the 100 shares of Plaza Realty stock pursuant to the Agreement, Plaza Realty stock was owned as follows: ShareholderNumber of SharesPetitioner100Atlas100Oklahoma IndustrialDevelopment Corp.100Total300On April 9, 1965, Plaza Realty acquired a fee simple interest in Blocks 1 and 1-A of United Founders Life Plaza Addition located at the southwest corner of the intersection of Northwest 59th Street and North May Avenue and comprised of approximately 14.4 acres. Approximately 11.2 acres of the property was improved with a 93,282 square foot retail discount center building (hereinafter referred to as the Shoppers World Building), a 307,000 square foot asphalt parking lot and 87,300 square feet of concrete drives, walks, curbs, etc. The Shoppers World Building is a one-story, modern, fully air conditioned masonry building with 7,392 square feet of mezzanine area used for office space and anciliary purposes. Plaza Realty paid $1,000,000 for the Shoppers World465 Building. It received Blocks 1 and 1-A of United Founders Life Plaza Addition upon incorporation from its shareholders (petitioner, Atlas and the Oklahoma Industrial Development Corporation).The shareholders of Plaza Realty had acquired the property from United Founders Life Insurance Company on March 31, 1965, for $450,000 and the assumption of a $800,000 mortgage. 3 Petitioner, Atlas, and the Oklahoma Industrial Development Corporation gave mortgage notes to the United Founders Life Insurance Company in the principal amounts of $116,666, $116,666, $116,668, respectively. Plaza Realty paid United Founders Life Insurance Company the remaining $100,000 of the purchase price in cash. 466 On May 17, 1965, Plaza Realty mortgaged Blocks 1 and 1-A of United Founders Life Plaza (except for the West 200 feet of Block 1) and improvements thereon as security for a loan of $1,100,000 from Mercantile National Bank, Dallas, Texas. Pursuant to the mortgage, a Guaranty Agreement was executed by the Barton Family, whose individuals had an aggregate net worth in excess of $5,000,000. The Guaranty Agreement provided, in pertinent part, "The Guarantors understand that the lender is unwilling to make the Loan to Plaza, unless the obligations of Plaza under the note evidencing the Loan and the mortgage and collateral assignments securing payment thereof shall be unconditionally and jointly and severally guaranteed by the Guarantors." The property remained encumbered by the mortgage through December 31, 1966. During 1965 and 1966, the sole business of Plaza Realty was the leasing of the Shoppers World Building. From the completion of its construction for approximately $1,000,000 in September 1962 through 1964, the Shoppers World Building was operated under the name of Shoppers World. In 1965 the trade name of the Shoppers World Building was changed to Founders Fair. During 1965467 and 1966, the discount business in the Shoppers World Building was conducted by another corporation designated the Plaza Corporation. During 1963, 1964, and the first four months of 1965, prior to Plaza Realty's acquisition of the Shoppers World Building, the owner/lessor of that building received gross rental income of $95,000, $90,000 and $35,389.12, respectively. The gross rental income received by Plaza Realty as owner/lessor of the Shoppers World Building during the last eight months of 1965 and all of 1966 was $50,000 and $103,639, respectively. During those years Plaza Realty sustained net operating losses in the respective amounts of $7,313.26 and $7,316.62, and prior to January 1, 1966, the Shoppers World Building did not generate enough rental income to meet the mortgage payments on the property. The $5,450 shares of UFC stock petitioner received from Atlas pursuant to the Agreement were not issued by the transfer agent to petitioner until Mrach 1, 1967. Atlas had acquired these shares from UFC in exchange for UFC debentures at the rate of one share of stock for each $11 face amount of debentures. On December 15, 1965, Atlas sold $75,000 face amount of the debentures468 for $75,000 cash. On January 1, 1966, the effective date for the exchange of assets between petitioner and Atlas, as stated in the Agreement, registered UFC stock was being traded in the over-the-counter market at $11 per share. During 1965 and 1966, Edwinna Bridges, an employee of petitioner, maintained its books and records and prepared its tax returns. She had kept the books and records for the Barton Family business from 1949 through 1966. Petitioner's financial statements during those years were prepared by the CPA firm of Arthur Anderson & Co. Whenever Edwinna Bridges had any questions with respect to an accounting or tax matter regarding petitioner's books and records, she consulted with Arthur Anderson & Co. or Mosteller, Andrews, & Mosburg, petitioner's law firm, for tax advice. Although employees of Arthur Anderson & Co. thought that Edwinna Bridges did a good job, they did not like her system of bookkeeping. Respondent's examining agent informed petitioner's representatives on numerous occasions that its records were inadequate. On its 1965 and 1966 returns, petitioner reported only 50 percent of its capital gains. In 1966, petitioner did not report on its469 return the exchange of assets with Atlas. In his notice of deficiency respondent disallowed interest deductions taken by petitioner in 1965 and 1966 with respect to its debentures claiming the interest expense did not constitute an ordinary and necessary business expense. Respondent further determined that petitioner failed to report gain realized in the amount of $310,081.96 in 1966 on exchange of Atlas stock for certain properties computed as follows: 4Consideration Received: 100 shares of Plaza stock$366,666.665,450 shares of UFC stock59,950.00Total$426,616.66Less: Basis in Atlas stock$ 375.00Liability of Atlas assumed116,159.70116,534.70Gain on Exchange$310,081.96Finally, respondent determined that part of the underpayment of tax for 1965 and 1966 was due to negligence or intentional disregard of rules and regulations and, therefore, asserted the five percent470 addition to the tax. OPINION The issues for decision are: 1. Whether petitioner's five percent debentures constitute a bona fide debt entitling it to interest deductions under section 163; 2. Whether petitioner's stock in Atlas Organization, Inc., was redeemed in 1966, and, if so, whether petitioner realized gain from such redemption; and 3. Whether petitioner's underpayments of tax in 1965 and 1966 were due to negligence or intentional disregard of rules and regulations under section 6653(a). 1. DebenturesDuring 1965 and 1966, petitioner claimed deductions for interest expense in the respective amounts of $111,811.39 and $97,727.30 paid on five percent debentures held by its shareholders. Respondent maintains that since the debentures do not represent bona fide debt, the payments made with respect to the debentures do not constitute interest deductible under section 163(a) but rather are dividends paid with respect to the equity of petitioner. Respondent's position is based on the following arguments: (1) Interest on the debentures was not paid in full; (2) The debentures were issued for essential assets of the business; and (3) The debentures were471 subordinated to institutional lenders. The debt-equity issue has generated numerous cases which have set no clearly defined standards but usually depend upon the facts and circumstances therein. John Kelley Co. v. Commissioner, 326 U.S. 521 (1946). The cases generally compare the purported debt at issue with a list of factors which are commonly regarded as identifying the characteristic differences between debt and equity for income tax purposes. Fin Hay Realty Co. v. United States, 398 F. 2d 694 (3d Cir. 1968); J.S. Biritz Construction Co. v. Commissioner, 387 F. 2d 451 (8th Cir. 1967); O.H. Kruse Grain & Milling v. Commissioner, 279 F. 2d 123 (9th Cir. 1960); Foresun, Inc. v. Commissioner, 41 T.C. 706 (1964), affd. 348 F. 2d 1006 (6th Cir. 1965). This Court has noted that the determinative question to which an evaluation of the various independent factors point are: "Was there a genuine intention to create a debt, with a reasonable expectation of repayment, and did that intention comport with the economic reality of creating a debtorcreditor relationship?" Litton Business Systems, Inc. v. Commissioner, 61 T.C. 367">61 T.C. 367, 377 (1973).472 On the basis of this record, we believe that question must be answered in the affirmative and hold for petitioner. Respondent contends that, since petitioner made payments constituting only 96 percent and 84 percent of the total amount of interest due to the debenture holders during 1965 and 1966, respectively, this demonstrates that the debentures did not represent bona fide debt. 5 Although petitioner had sufficient assets to meet its obligation during the years at issue, a cash shortage prevented it from making all the payments on its obligations when due. The testimony of petitioner's president revealed that petitioner was delinquent in paying all of its creditors, not just its debenture holders, and paid only those creditors which were most insistent upon receiving the payments procedures to which they were entitled. Furthermore, a holder of petitioner's debentures testified that after making several telephone calls and threatening to sue petitioner for her interest payments, she was promptly paid. 473 We do not believe the payments due on the debentures were so contingent on earnings and profits that they should be treated as dividends. Petitioner had cash flow problems and therefore a valid business reason for falling behind in making the interest payments on the debentures. As soon as a holder of its debentures threatened to enforce her right to payment, petitioner promptly met its obligation. There is no evidence in this record that there existed an understanding between petitioner and the debenture holders with respect to the payment of interest. See Tomlinson v. 1661 Corp., 377 F. 2d 291, 299 (5th Cir. 1967). Respondent next maintains that the properties conveyed to petitioner in exchange for the debentures at issue were of an operating nature and necessary to continue the scope of the family business as it had been conducted prior to petitioner's incorporation. Hence, he argues, there was no business need for debt financing and the use of funds for purchase of the origifnal assets of a business indicates a contribution to capital rather than debt. Although this argument has been considered in determining the debt-equity issue, see Covey Investment Co. v. United States, 377 F. 2d 403 (10th Cir. 1967);474 Schnitzer v. Commissioner, 13 T.C. 43">13 T.C. 43 (1949), affd. per curiam 183 F. 2d 70 (9th Cir. 1950), this Court has recognized that, regardless of business need for debt financing, a corporation may have a business purpose independent from tax considerations for such financing. Morgan v. Commissioner, 30 T.C. 881">30 T.C. 881, 891 (1958), revd. on other issues 272 F. 2d 936 (9th Cir. 1959). We believe there was a valid business purpose for petitioner issuing its debentures as part of its capitalization. Petitioner was formed as a result of a family decision to transfer all its assets to one entity and conduct its affairs in the form of a corporation. The senior members of the Barton Family, R. Lewis and Dollye Barton, were issued only 10 percent of petitioner's voting stock and did not otherwise participate in the management of petitioner. They apparently decided to play a passive role in petitioner and the issuance of nonvoting preferred stock and the debentures at issue facilitated that decision. Moreover, a holder of petitioner's debentures testified that she insisted upon the issuance of the debentures in exchange for the income-producing475 property she transferred to petitioner. Since she and her family moved from Oklahoma to California without employment or business opportunities, they depended on the quaranteed mothly income from the debentures and relied on it to qualify for a loan to purchase a home. We are convinced from this testimony that petitioner's debentures were issued to facilitate the Barton Family's decision to transfer its assets to petitioner in order to operate in a corporate form and view this as a sound business purpose for creating such debt. Respondent's final argument is that, since petitioner's debentures were subordinated to other indebtedness, they were placed at the risk of the business and therefore should be treated as equity. Petitioner's debentures, however, were not completely subordinated to other indebtedness but, for so long as petitioner remained in business, were subordinated only to indebtedness "due banks, insurance companies, and other institutional lenders." The debentures were subordinated to the claims of general creditors only in the event of petitioner's liquidation or dissolution.Even in that event, the holders of petitioner's debentures still would have priority over476 the claims of the holders of all classes of petitioner's stock. Petitioner's financial statements also show that approximately 90 percent of its institutional indebtedness is secured by mortgages. Therefore, unless petitioner is dissolved or liquidated, the debentures are only subject to mortgage indebtedness and the debenture holders possess rights substantially similar to those of the general creditors of petitioner. Although this does give an apparent theoratical preference to the mortgage debt, in reality this preference is built in by the lien and enforcement provisions of the mortgage indebtedness. Tomlinson v. 1961 Corp., supra at 298.The subordination of petitioner's debentures is not in itself fatal to classifying such obligations as bona fide debt; the importance of subordination depends on the presence of other factors. See Trans-Atlantic Co. v. Commissioner, 469 F. 2d 1189, 1194 (3d Cir. 1972); Scriptomatic, Inc. v. United States, 397 F. Supp. 753">397 F. Supp. 753, 760 (E.D. Pa. 1975). Petitioner's president testified that the subordination provision477 was suggested by its primary bankers to eliminate the necessity of having to obtain subordination agreements from all of the debenture holders whenever petitioner needed to obtain a loan from an institutional lender. In view of the other characteristics of petitioner's debentures, the subordination provision at issue does not preclude classifying such debentures as bona fide debt.Moreover, we believe the factors respondent chose to ignore are highly supportive of petitioner's position. The debentures contained an unconditional promise to pay a sum certain in money payable within a reasonable period of time and on a fixed maturity date. Payment of principal and the fixed interest was not dependent on the earnings or discretion of petitioner. Furthermore, the debentures held by members of the Barton Family, were not in any way proportionate to their equity ownership in petitioner. The debentures gave the holders no voting or management powers in petitioner which, as expressly provided in the debentures, did not reserve the option to redeem the outstanding debentures. They were not callable and were not convertible into petitioner's stock. The debentures were evidenced by the478 issuance of written instruments which contained all of the formal indicia of an indebtedness. Respondent has conceded that petitioner was not thinly capitalized. As noted in Nassau Lens Co. v. Commissioner, 308 F. 2d 39, 46 (2d Cir. 1962) "There is no rule which permits the Commissioner to dictate what portion of a corporation's operations shall be provided for by equity financing rather than debt, so long as the latter can be said to be debt in terms of substantial economic reality." [Cite omitted.] Based on all the surrounding facts and circumstances, we find the parties at the time the debentures were issued and through the taxable years at issue intended to create and did in fact maintain a debtor-creditor relationship. 2. RedemptionDuring 1966 petitioner and Atlas negotiated an Agreement for the exchange of assets which included the redemption of Atlas stock held by petitioner. Although dated as of January 1, 1966, the Agreement was not formally executed by the parties until January or February 1967. Pursuant to the Agreement, petitioner not only conveyed 37.5 shares of Atlas stock, but also assigned an undivided one-half interest in a real479 estate lease and agreed to assume an Atlas real estate mortgage in the principal amount of $116,666. In consideration for the foregoing, Atlas conveyed to petitioner 100 shares of common stock in Plaza Realty and 5,450 shares of common stock in UFC. At issue is (1) whether the exchange occurred in 1966 or 1967, and (2) if it occurred in 1966, the fair market value of the 100 shares of Plaza Realty stock and the 5,450 shares of UFC stock for determining whether petitioner realized any gain from the exchange.Petitioner maintains that since the Agreement was formally executed in 1967 and the assets exchanged pursuant to the Agreement were not transferred until after such time, the redemption occurred in 1967, a taxable year not presently before us and barred by the statute of limitations. In the alternative, petitioner maintains that, regardless of when the redemption occurred, it realized no gain but instead sustained a loss as a result of the redemption. Respondent contends that petitioner entered the Agreement as of January 1, 1966, and, in his brief, claims petitioner realized gain of $312,958.72 during 1966 from the exchange of assets with Atlas. 6 On the basis of this record, 480 for reasons set out below, we agree with respondent as to the timing of the exchange.Therefore, in deciding whether petitioner realized any gain from the exchange, we must determine the value of the Plaza Realty and UFC stock petitioner received from Atlas. Petitioner relies on section 317(b)7 in support of its contention that the redemption occurred during 1967. In petitioner's view, the governing rule with respect to the timing of the redemption is that the transaction occurred at the time the redeemed stock was transferred to the redeeming corporation. The difficulty with petitioner's argument is that the only credible evidence in the record clearly indicates that the redeemed Atlas stock was actually transferred to Atlas in 1966. The 37.5 shares481 of Atlas stock redeemed by Atlas pursuant to the Agreement were reflected as Treasury stock on the balance sheet of Atlas for the calendar year 1966. This indicates not only that petitioner transferred the stock to Atlas in 1966, but also that Atlas regarded the stock as one of its assets in that year. 8482 Furthermore, since the Agreement was dated as of January 1, 1966, it is clear the parties intended the exchange to be effective on that date. Regardless of when the Agreement was formally executed, parties may agree that a "written contract shall take effect as of a date earlier than that on which it was executed, and when this is done, the parties will be bound by such agreement." Brewer v. National Surety Corp., 169 F. 2d 926, 928 (10th Cir. 1948); United States Mineral Products Co. v. Commissioner, 52 T.C. 177">52 T.C. 177, 193 (1969). In addition, credible testimony of the attorney who handled the redemption confirmed that the parties had struck their deal by the time they approached him early in January 1966. Indeed, all available records fully indicate that the parties made book entries reflecting the exchange of assets on their books during 1966. The 37.5 shares of Atlas stock was reflected as Treasury stock on Atlas's balance sheet for 1966 and the Atlas note assumed by petitioner does not appear as a liability on the same balance sheet. Similarly, the United Founders Life Insurance Company proxy statement with respect to the November 4, 1969, meeting483 of shareholders refers to the assumption of the Atlas note by petitioner on January 1, 1966. Although no book entry for the transfer of the 100 shares of Plaza Realty stock to petitioner was made by Atlas because that stock was never entered as an asset on Atlas's books, the 5,450 shares of UFC stock Atlas transferred to petitioner under the Agreement was removed from Atlas's books as an asset during 1966. While petitioner's journal entries and ledgers reflecting asset accounts were not available, every record in evidence in this case is consistent with the fact that the parties did, in fact, treat the assets as having been exchanged during 1966. The validity of an agreement for the sale of assets has been upheld in the absence of a formal contract, even where the parties later reduce the agreement to written form. United States Mineral Products Co. v. Commissioner, supra. The execution of the written Agreement in the instant case was only a formality memorializing the oral agreement which had already been consummated by the parties during 1966. Since the parties conducted themselves in accordance with their oral agreement, we find the redemption occurred484 in 1966 as they intended by post-dating the Agreement to January 1 of that year. Next we must value the UFC and Plaza Realty stock to determine whether petitioner realized any gain from the exchange The question of "valuation of stock for tax purposes is a matter of 'pure fact.'" Hamm v. Commissioner, 325 F. 2d 934, 938 (8th Cir. 1963), affg. a Memorandum Opinion of this Court. In general, this question requires a determination of "the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts." Sec. 20.2031-1(b), Estate Tax Regs., United States v. Cartwright, 411 U.S. 546">411 U.S. 546, 551 (1973); see also Estate of McNary v. Commissioner, 467">47 T.C. 467 (1967). As to the 5,450 shares of UFC stock, petitioner initially agreed with respondent that the fair market value of such stock was $11 per share or $59,950 and stipulated that UFC registered stock was being traded in the over-the-counter market at approximately485 $11 per share at the time of the exchange. By amending its pleadings, petitioner later contended that the UFC stock was restricted (legend) stock and, therefore, subject to a discount.Respondent claims petitioner presented no credible evidence showing the stock was in fact restricted stock. We agree.Petitioner simply has not carried its burden of showing that the UFC stock was in fact restricted stock. The only evidence produced was the self-serving testimony of petitioner's president, Gerald G. Barton, which is insufficient to establish that the stock in question was restricted. Petitioner's reliance on LeVant v. Commissioner, 376 F. 2d 434 (7th Cir. 1967), misses the point. At issue in LeVant was the discount that should be applied to the market price of the stock in determining the fair market value of the stock. Unlike petitioner, the taxpayer in that case had established that the stock to be valued was restricted stock. We find the fair market value of the UFC stock on January 1, 1966, was $11 per share and, therefore, the value of the 5,450 shares petitioner received from Atlas under the Agreement was $59,950 on that date. The testimony of the president486 of Atlas at the time of the exchange revealed that the parties in relying on the over-the- counter price, attached this value to the UFC stock transferred to petitioner. Moreover, in acquiring the UFC stock shortly before the exchange at issue, Atlas converted UFC debentures at the rate of one share of the UFC stock for each debenture with a face amount of $11. Finally those debentures had a fair market value of the full face amount during that time in that on December 15, 1965, fifteen days prior to the exchange, Atlas sold $75,000 face amount of those debentures for $75,000 cash. Next we must determine the fair market value as of January 1, 1966, of the 100 shares of Plaza Realty stock petitioner received pursuant to the exchange. In the notice of deficiency, respondent valued the Plaza Realty stock at $366,666.66 by using an appraisal of the fair market value of the company's assets reduced by the outstanding liabilities and dividing that figure by 3. (The 100 shares of Plaza Realty stock constituted a one-third interest in the corporation.) Petitioner argues that the stock was without value. Both parties, however, utilized the services of valuation experts for this trial. 487 In determining the value of the Plaza Realty stock, we have made use of the entire record, including the stipulation of facts, all the documentary evidence, the complete and detailed testimony of all witnesses, especially the expert witnesses and their reports. In particular, we have relied on the testimony and reports of petitioner's expert, East, and respondent's expert, Schmook, both of whom made their valuations as of January 1, 1966, for this case. Plaza Realty was organized for the purpose of holding title to and leasing its only asset, Blocks 1 and 1-A of United Founders Life Plaza Addition and the Shoppers World Building located thereupon. Therefore, in determining the value of the Plaza Realty stock, emphasis must be placed upon the fair market value of the underlying asset. The parties substantially agree on the value of the Shoppers World Building and other improvements on the land. By utilizing the cost approach method of valuation, Schmook arrived at the value of $827,925 and East arrived at the value of $877,895. For reasons set out below, we agree with Schmook's valuation and find the value of the Shoppers World Building and improvements to be $827,925 as488 of January 1, 1966. In determining the value of the Shoppers World Building, Schmook allowed for three years of depreciation on the basis of a forty-year life expectancy because it was three years of age at the time of the valuation. He also made an allowance for deferred maintenance of improvements such as asphalt parking, heating, and air conditioning. Since the improvements did not produce enough rental income to support the value of the land, Schmook viewed the Shoppers World Building as an underimprovement to the land and provided for a greater allowance for functional obsolescence than East did. We agree and find his greater allowance for functional obsolescence reasonable and justified. As to the value of the 627,284 square feet of land (approximately 14.4 acres), however, the parties substantially disagree. Unilizing the cost approach method of valuation, both experts relied on sales of surrounding parcels of land in the United Founders Life Plaza Addition for comparison purposes. East valued the land at $1 per square foot, whereas Schmook valued it at $2 per square foot. For reasons set out below, we agree with Schmook and find the value of the land to be $2 per489 square foot for a total of $1,254,568 as of January 1, 1966. In view of the sales in the United Founders Life Plaza Addition at $1.94 per square foot on May 2; 1963, and at $2.83 per square foot on June 30, 1967, East's valuation at $1 per square foot is entirely unrealistic. He emphasized the March 31, 1965, sale of the subject property for $450,000 but failed to take into account the assumption of the $800,000 mortgage by the purchasers. East rationalized his low valuation, as compared to sales of parcels surrounding the subject property, by stating that smaller parcels tend to sell at higher per square foot rates than larger parcels. Although that rationale may be true, it still does not justify his substantial discounting of the going market rate of parcels within the United Founders Life Plaza Addition. Schmook's valuation was at the lower end of the range of $2 per square foot at which surrounding parcels were selling for on or about January 1, 1966. His valuation is further supported by the opinion of the president of one of the world's largest mortgage companies that the subject property was worth $2 per square foot as of March 27, 1965. That opinion is particularly490 persuasive in that it was prepared in connection with his decision to make a loan of $1,100,000 on the property, a very large amount of money. Since the underlying asset of Plaza Realty had a fair market value of $2,089,493 on January 1, 1966 ($827,925 plus $1,254,568) and was subject to a $1,100,000 mortage on that date, we find that the net asset value of Plaza Realty was $982,493. In determining the fair market value of Plaza Realty stock, respondent argues that the net asset value is the sole factor for consideration in making the valuation. Petitioner contends that the net asset value should be discounted when considering other factors relevant to valuing closely held stock. See Hamm v. Commissioner, supra at 941; Estate of Schroeder v. Commissioner, 13 T.C. 259">13 T.C. 259, 263 (1949). Finding respondent's approach too simplistic, we agree with petitioner. At the time of this valuation, Plaza Realty was experiencing difficulties. During 1965 and 1966, it sustained net operating losses in the respective amounts of $7,313.26 and $7,316.62.Prior to January 1, 1966, the Shoppers World Building did not generate enough rental income to meet the491 mortgage payments on the property. Moreover, petitioner's president testified that the discount business in the Shoppers World Building had a reputation throughout the Oklahoma City business community as a "white elephant." He further testified that during 1964 and 1965 he made extensive efforts to either lease or sell the Shoppers World Building and was unsuccessful with such stores as K-Mart, TG & Y, and Woolco. Nonetheless, as noted in Schmook's valuation report, the land involved was underutilized as a site for the Shoppers World Building in that the site had more than adequate parking space and there was still an inordinate amount of raw land surrounding the Shoppers World Building. Moreover, the land was very valuable because of its location on one of the busiest throughfares in the Oklahoma City area. Taking into account the aforementioned and all other relevant factors, we have concluded that the net asset value of Plaza Realty must be discounted by 30 percent. Thus, we find that the fair market value of the Plaza Realty stock petitioner received from Atlas was $229,248 ($982,493 discounted by 30 percent and divided by 3 because the Plaza Realty stock valued constituted492 a one-third interest in this corporation). 3. Addition to TaxRespondent determined that part of petitioner's underpayment of tax for 1965 and 1966 was due to negligence or intentional disregard or rules and regulations, and, therefore asserted the five percent addition to the tax pursuant to section 6653(a). Since respondent's determination is presumed correct, petitioner has the burden of showing the addition was improperly asserted. Enoch v. Commissioner, 57 T.C. 781">57 T.C. 781, 802-03 (1972); Rule 142(a), Tax Court Rules of Practice and Procedure.Respondent maintains that petitioner's failure to report the exchange of assets with Atlas, combined with its understatement of capital gains in 1965 and 1966 and its failure to keep adequate books and records for those years, justifies the assertion of the addition. Petitioner argues that the addition should not be imposed because Edwinna Bridges, a long-time trusted and competent bookkeeper, kept adequate books and records and prepared its tax returns, regularly seeking the advice of certified public accountants and lawyers493 with respect to accounting and tax problems. Petitioner's reliance upon its bookkeeper is misplaced.A taxpayer cannot simply avoid the duty of filing accurate returns by shifting the responsibility to an agent. American Properties, Inc. v. Commissioner, 28 T.C. 1100">28 T.C. 1100, 1117 (1957); Bailey v. Commissioner, 21 T.C. 678">21 T.C. 678, 687 (1954).Moreover, petitioner made no showing of having acted in good faith in reliance on Edwinna Bridges' bookkeeping practices. American Properties, Inc. v. Commissioner, supra.Not only had respondent's examining agent informed petitioner's representatives on numerous occasions that its records were inadequate, but employees of petitioner's accounting firm had a low regard for Edwinna Bridges' system of bookkeeping. Since petitioner has failed to convince us that its underpayments of tax in 1965 and 1966 were not due to negligence, we must sustain respondent's determination. To reflect the foregoing, Decision will be entered under Rule 155.Footnotes1. The term "debenture" shall be used for convenience, though, as respondent notes in his brief, the name attached to the instrument is not thereby controlling. ↩2. Statutory references are to the Internal Revenue Code of 1954, as amended.↩3. Based upon this purchase price, the rate per square foot for the property was approximately $1.98. The rate per square foot for sales of property within United Founders Life Plaza Addition are summaized as follows: ↩ Date of SaleNo. of Sq. Ft.Price Per Sq. Ft.May 29, 196339,853$1.94196320,0002.00196362,0002.00196333,0002.00196340,0002.06January 3, 196420,0002.00March 31, 196433,0002.02March 29, 196523,0002.00August 13, 196524,4672.50February 12, 196715,0002.70June 22, 196715,0002.70June 30, 1967582,0002.25June 30, 1967140,0002.50June 30, 19671,400,0002.834. This was respondent's alternative position in the notice of deficiency.Since the parties focused on that position at trial and in their briefs, they apparently have agreed to disregard respondent's other position set out in the same notice of deficiency.↩5. Respondent further contends that the debentures were not true debt because petitioner made less than 100 percent of the payments due on the debentures in years subsequent to 1965 and 1966. Our characterization of petitioner's debentures, however, is limited to the taxable years before us, 1965 and 1966, so we refuse to consider facts which may be relevant in characterizing the debentures for other taxable years. See Cuyana Realty Co. v. United States, 180 Ct. Cl. 879">180 Ct. Cl. 879, 382 F. 2d 298, 301 (1967); Tampa & Gulf Coast Railroad Co. v. Commissioner, 56 T.C. 1393">56 T.C. 1393, 1402 (1971), affd. 496 F. 2d 263↩ (5th Cir. 1972).6. Respondent claims that the evidence at trial indicates that petitioner actually assumed a liability on the Atlas note to UFC in the amount of $113,282.94, rather than $116,159.70 as determined in the notice of deficiency. Since the record shows that Atlas did satisfy $2,876.76 of the principal on the note prior to transferring it to petitioner, we agree with respondent's determination on brief and have found accordingly.↩7. SEC. 317. OTHER DEFINITIONS. (b) Redemption of Stock.--For purposes of this part, stock shall be treated as redeemed by a corporation if the corporation acquires its stock from a shareholder in exchange for property, whether or not the stock so acquired is cancelled, retired, or held as Treasury stock. ↩8. Having disposed of petitioner's section 317(b) argument, we must also reject its reliance on Estate of Moore v. Commissioner, T.C. Memo. 1961-257↩. There the Court found that the redeeming corporation had not acquired its stock from the taxpayers in the year during which respondent claimed the redemption therein had occurred. That case is further distinguishable in that, as discussed below, petitioner went beyond preparatory actions in 1966 with respect to the redemption at issue herein.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622355/	New York City Omnibus Corporation v. Commissioner.New York City Omnibus Corp. v. CommissionerDocket No. 2757.United States Tax Court1946 Tax Ct. Memo LEXIS 187; 5 T.C.M. (CCH) 396; T.C.M. (RIA) 46121; May 23, 1946Charles C. Parlin, Esq., and Paul R. Russell, Esq., for the petitioner. Thomas H. Lewis, Jr., Esq., for the respondent. MURDOCKMemorandum Opinion MURDOCK, Judge: The Commissioner determined deficiencies in the petitioner's income tax for the years 1936 to 1939, inclusive. The Commissioner moved the Court to sever the issues and to hear and determine first the issue of what, as a matter of law, is the proper basis (unadjusted) to be used in computing a reasonable allowance for depreciation of188 the petitioner's franchise to operate omnibuses in the city of New York. That motion was granted. The parties were heard upon the issue thus severed. They filed a stipulation of facts and introduced other evidence. The Commissioner, in determining the deficiency, allowed a deduction for depreciation computed by using a basis of $7,087,784.85 for the bus franchise. He filed and amended answer claiming an increased deficiency on the ground that the proper basis for the franchise is not in excess of $1,300,941. The petitioner first claims a basis in excess of $24,000,000 upon the theory that the basis of its predecessor, Railways Corporation, for its street railway franchises carried over and became a part of the petitioner's basis for the bus franchise. It contends, in the alternative, for a basis of about $13,000,000 upon the theory that the cost of the bus franchise to it was a proportionate part of the total of the value of its own stock issued to Railways Corporation, plus the indebtedness of Railways Corporation assumed by it. It is essential to both of these contentions that Railways Corporation first owned the bus franchise and transferred it to the petitioner in 1936. The189 respondent contends that the petitioner acquired the bus franchise directly from the city of New York and that its basis is cost. We do not understand from the record just how the respondent would compute that cost. It is unnecessary at this time to review completely the long history of the transportation system now being operated by the petitioner. The city had granted a number of street railway franchises. Many of those were in perpetuity and some were for the lives of the corporations to which they were granted. The separate transportation routes were eventually consolidated into a comprehensive system of longitudinal and cross-town street railway lines in the Borough of Manhattan. The operation of that business was not always successful. A number of changes, foreclosures, receiverships, and reorganizations took place. Railways Corporation became the operating company for the entire system in 1925. The use of motor buses in place of electric street cars had been under consideration even before 1925. The petitioner was organized in 1925 for the purpose of making applications for bus franchises. Railways Corporation owned all of its 10 shares of stock. Potential competitors were190 also applying for bus franchises in the Borough of Manhattan. The city desired to recapture the perpetual and other indeterminateterm street railway franchises, to have the tracks and other unsightly equipment removed from the streets, and to have buses substituted for the dangerous and inade quate street car system. It did not intend to grant any perpetual bus franchises but desired to have a comprehensive bus operation for the entire Borough under a single franchise. It intended to obtain the best bargain that it could. The city finally decided that its best interests would be served by dealing with the petitioner and Railways Corporation. Both Railways Corporation and the city desired to have the petitioner own and operate the bus franchises in preference to the Railways Corporation because of the unfavorable financial condition of the latter. The petitioner made application for bus franchises covering practically all of the streets and routes upon which Railways Corporation was operating street cars and the petitioner also applied for franchises covering other streets and routes not included in Railways Corporation's transportation system. The franchise here in question was eventually191 granted to the petitioner under a contract with the city dated December 26, 1933, which provided that the petitioner should be granted the privilege of operating omnibuses over nine routes, substantially the same as the routes then in use by Railways Corporation in the operation of its electric street railway system, and granting to the petitioner, in addition, the privilege of operating omnibuses over four new cross-town routes. This single franchise was for a term of twenty-five years. The petitioner was required under the contract to pay to the city 3 per cent of the gross revenues from the operation of the nine old routes and 10 per cent of the gross revenues from the four new routes. Another contract was entered into at the same time between the city and the petitioner, Railways Corporation, and various affiliated corporations. It was provided under these contracts that Railways Corporation would abandon all of the franchises covering its entire street railway system and would obtain the approval of the New York State Transit Commission for the abandonment of those lines. It was further provided that all this should be done and that the omnibuses should be in full operation within192 18 months. Other provisions of the agreements important hereto were that Railways Corporation would remove certain of its equipment from the streets, would assign to the city its property rights in certain other equipment such as the tracks, and would pay to the city $160,000 in cash in lieu of removing the latter equipment from the streets. The use of the franchise was dependent upon the fulfilment of all of the above agreements. Railways Corporation, in the early part of 1934, filed with the Transit Commission a plan for the readjustment and motorization of the street railway lines in the Borough of Manhattan. A competitor started litigation to prevent the petitioner from obtaining its bus franchise under the arrangements outlined above. This litigation delayed the parties in carrying out the above-described arrangements, and the petitioner, in January 1935, entered into a supplemental contract with the city for an extension of the time within which to place the bus transportation system in operation. The city, as a condition of granting this extension, required the petitioner to give the city an option to elect after ten years to terminate the bus franchises and acquire the properties193 of the bus system at various prices fixed in the agreement. The litigation was finally terminated favorably to the petitioner in January 1935, and on March 19, 1935, a revised plan of readjustment and motorization of Railways Corporation through a 77-B reorganization was announced to its security holders. Railways Corporation, in accordance with that revised plan, filed a petition in July 1935 for its reorganization under section 77-B of the Federal Bankruptcy Act. The Court held that Railways Corporation was insolvent. Its capital and indebtedness had to be drastically reduced. The petitioner was to assume certain indebtedness of Railways Corporation, was to cancel its 10 outstanding shares of stock held by Railways Corporation, and was to issue about 500,000 shares of stock by exchanging 458,450 of those shares for certain properties of Railways Corporation which would be useful in the operation of the bus system, and by selling the remainder to certain security holders at $17.50 per share. The petitioner, in January 1936, had obtained the necessary authority from the Transit Commission to operate buses over the routes covered by its franchise from the city, and it began in194 the early part of 1936 to substitute its bus service for parts of the street car transportation system being operated by Railways Corporation. Railways Corporation advanced funds to the petitioner for the purchase of equipment and for other purposes. The petitioner was made a party to the 77-B proceedings in March 1936. The Court required the petitioner to operate the substituted bus routes for the account of Railways Corporation and to hold the proceeds for such disposition as the Court might direct until the various steps involved in the 77-B proceeding could be completed. It required the petitioner and Railways Corporation to enter into contracts to this effect as buses were substituted for street cars on various routes. The last of these substitutions was made in the late spring of 1936. The plan of reorganization of Railways Corporation was finally approved by the Court in June 1936, and the debtor was directed to abandon the street railway franchises. The bus franchise and other properties of the petitioner were subjected at that time to certain indebtedness of Railways Corporation, and the Court directed "that until further order of this Court the franchise routes of the Bus195 Company which correspond to the street railway routes of the Debtor shall be held by the Bus Company for the benefit and protection of the Trustee and the bondholders" and the entire capital stock of the bus company (petitioner) was to be held for the benefit and protection of creditors and stockholders of Railways Corporation as the Court might direct. Railways Corporation filed a declaration of abandonment of its street railway franchises with the Secretary of the State of New York on June 10, 1936. The approval of the Transit Commission of the abandonment of the street car franchises was conditioned upon the actual substitution of the bus system for the street car system. The operation of buses on the four new crosstown routes commenced during the month of June 1936. The conversion of the transportation system to a bus system was completed about that time. The city, on November 13, 1936, consented to having the bus franchise pledged to secure the indebtedness of Railways Corporation. Railways Corporation transferred its operating properties to the petitioner on December 24, 1936 in exchange for stock of the petitioner. The instruments effecting this transfer contain statements196 that Railways Corporation and its security holders and creditors transferred to the petitioner all of its interests, rights, and claims in the bus routes. The original 10 shares of the petitioner's stock were surrendered and cancelled at that time. Earnings of the petitioner for the period from February 12 to October 31, 1936, amounting to $594,776.28, were paid over to Railways Corporation in December, and earnings for the period from November 1 to December 24, amounting to $148,952.81, were paid over to a nominee of Railways Corporation in December 1936. The above were the entire net earnings of the petitioner for those periods. The 77-B proceeding was terminated on July 23, 1937. The parties refer for statutory authority to the Revenue Act of 1936. The general rule of section 113 (a) of that Act is that the basis of property shall be its cost. The respondent's position is that the petitioner acquired the bus franchise directly from the city of New York and the basis of that franchise in the hands of the petitioner is its cost. The petitioner argues, however, that Railways Corporation was the owner, or at least the beneficial owner, of the bus franchise prior to December197 1936 and the petitioner held legal title only, as nominee of Railways Corporation, until the final transfer in December, at which time Railways Corporation transferred the bus franchise to the petitioner, either in exchange for stock or as a contribution to capital or surplus. It suggests also that if Railways Corporation was not the beneficial owner of the bus franchise then its creditors were, and the result is the same. The petitioner argues that the basis of the street car franchise in the hands of Railways Corporation carries over under such circumstances and becomes a principal part of the basis of the bus franchise in the hands of the petitioner under exceptions (7) and (8) of section 113 (a). The first of those exceptions provides that, if property was acquired by a corporation in connection with a reorganization, then the basis shall be the same as it would be in the hands of the transferor, adjusted for gain or loss. The part of exception (8) upon which the petitioner relies is that, if property was acquired by a corporation as paid-in surplus or a contribution to capital, then the basis shall be the same as it would be in the hands of the transferor, adjusted for gain or198 loss. The petitioner also mentions section 112 (b) (1) which provides that no gain or loss shall result where property held for productive use is exchanged solely for property of a like kind held for productive use. It argues in this connection that the street railway franchises were exchanged for the bus franchise, the two were like property and both were held for productive use so that the basis remains the same under 113 (a) (6). It argues in the alternative that the bus franchise was exchanged for stock of the petitioner and the assumption by the petitioner of the indebtedness of Railways Corporation, so that the cost of the bus franchise was a portion of the sum of the indebtedness assumed plus the value of the petitioner's stock issued for all of the assets of Railways Corporation. The respondent contends that all of these arguments of the petitioner are unsound since the bus franchise was never owned by and never had any basis in the hands of Railways Corporation or its creditors; it certainly did not have as its basis in their hands the basis of the old street railway franchises; neither Railways Corporation nor its creditors transferred the bus franchise to the petitioner; 199 and consequently, the basis of the old street car franchise is not carried over to the petitioner under any of the provisions mentioned by the petitioner and, furthermore, there is no factual basis for the petitioner's theory for computing the cost of the bus franchise to the petitioner. It is apparent that all of the contentions of the petitioner are based upon the alleged fact that Railways Corporation (or its creditors) was the owner of the bus franchise and transferred it to the petitioner. Those contentions must all fail if, in fact, the petitioner acquired both legal title and a substantial part, or all, of the equitable ownership in the bus franchise directly from the city of New York. The city did not grant the bus franchise to Railways Corporation, but, for reasons important both to the city and to those interested in Railways Corporation, granted the franchise directly to the petitioner with the intention on the part of all that the bus franchise would be owned and operated by the petitioner. A part of the consideration which the city demanded for the bus franchise was the agreement by the petitioner that it would pay certain percentages of the gross revenues from the operation200 of the bus lines to the city. This part of the consideration was furnished by the petitioner and not by Railways Corporation. The city also demanded and obtained from the petitioner an option to recapture the bus franchise and to acquire the bus system after the elapse of at least ten years. Railways Corporation, the principal if not the sole stockholder of the petitioner, also furnished a part of the consideration for the bus franchise. The most important part of the consideration furnished by Railways Corporation was the surrender by it to the city of the street railway franchises. This was perhaps the most important consideration for the bus franchise. The petitioner, under the general plan, was to acquire all of the assets of Railways Corporation which would be useful to it in the operation of the bus lines and was to issue some of its new stock for those properties. It was to assume indebtedness of Railways Corporation. The latter was to supply capital to the petitioner. The acquisition of the bus line and the motorization of the transportation system, including the reorganization of Railways Corporation under section 77-B of the Bankruptcy Act, involved many complications. 201 It was not possible to take all of the steps involved in the plan at one time. It was not practical to operate the street car transportation system up to a certain day and then substitute a complete bus transportation system on the following day. Approval had to be obtained for the various steps from the Court, from the state authorities, and from the city. Bus equipment had to be obtained and personnel trained. Changes from street cars to buses were made on individual routes at various dates during the first six months of 1936. The bus transportation system was in complete operation at the end of that period. The street car franchises were still being held and at least one car was in operation on each street car line in order to hold those franchises until the bus system was complete. The franchises were then surrendered. The remaining properties of Railways Corporation were transferred to the petitioner in exchange for its stock in December 1936, and the whole plan was virtually completed. The Court required the petitioner, during this transition period, to account to Railways Corporation for the proceeds of operating the bus lines as they were substituted for old street car lines. 202 It might fairly be said that, to that extent, Railways Corporation had a beneficial interest in a part of the bus franchise owned by the petitioner. The necessities of the situation required those temporary arrangements in order to protect the beneficial owners of Railways Corporation until the reorganization could be completed, at which time those beneficial owners of Railways Corporation would be secured by the stock and assets of the petitioner. Since the petitioner had been required to account to Railways Corporation for the operation of some or all of the bus lines, it was no doubt fitting and proper to recite in the instruments under which the assets of Railways Corporation were eventually transferred to the petitioner, that the beneficial interest in the bus franchise of Railways Corporation and its creditors was transferred to the petitioner so that thereafter there could be no question of the complete title of the petitioner in the bus franchise. The evidence shows, however, that Railways Corporation never was and never was intended to be either the legal or beneficial owner of the entire bus franchise. Even though it was given the benefit of the operation of the bus lines203 for the transition period, nevertheless, it never acquired full beneficial interest in the bus franchise, never had a basis for the full beneficial interest in the bus franchise, and never transferred the full beneficial interest in the bus franchise to the petitioner. Of course, it never had legal title to the bus franchise. The transactions in this case do not fit into sections 113 (a) (7), (8) or 112 (b) (1) so as to carry the basis for the old street car franchises over to the bus franchise in the hands of the petitioner. Those sections, as the petitioner recognizes, are intended to cover situations where the owner of property exchanges it or transfers it directly to another taxpayer which then continues to hold that same property. Here there was no such transfer or exchange. If Railways Corporation had some partial beneficial interest in the bus franchise which it transferred to the petitioner in December 1936, the interest transferred did not carry with it to the petitioner the bases for the old street car franchises. The old street car franchises were not surrendered to the city solely for the purpose of obtaining for Railways Corporation the transitory beneficial interest204 in the bus franchises mentioned above. The chief, if not the entire purpose of surrendering those street car franchises was in consideration of the grant by the city of a long-term franchise to the petitioner which the latter was to hold for its term and use as its own. The statutory provisions relied upon by the petitioner for carrying over the old basis do not apply for the reasons already discussed and, consequently, it is unnecessary to consider whether or not there are other reasons why the transactions do not come within those provisions. Since none of the exceptions of section 113 (a) applies, the basis of the bus franchise in the hands of the petitioner is its cost, as provided in the general rule of (a). The petitioner's theory that it acquired the bus franchise from Railways Corporation by assuming indebtedness of Railways Corporation and issuing its stock to Railways Corporation is unsound for reasons which are already apparent, that is, because the bus franchise was not acquired by the petitioner in that way. While some beneficial interest in the bus franchise may have been transferred by Railways Corporation to the petitioner in exchange for its stock, nevertheless, 205 as indicated above, that was far from complete equitable ownership in the bus franchise. Other assets of Railways Corporation having a very substantial value were obviously the chief consideration given in exchange for the petitioner's stock and the assumption by the petitioner of certain indebtedness of Railways Corporation. The acquisition of the bus franchise was only one of the steps involved in the general plan for reorganizing Railways Corporation and motorizing the transportation system. All of the transactions involving Railways Corporation and the petitioner were closely related and were for the purpose of bringing about the final result. We have had all of those circumstances in mind and yet we conclude from the entire record that the bus franchise was acquired by the petitioner directly from the city, with the petitioner furnishing a part of the consideration and Railways Corporation contributing the balance. This contribution by Railways Corporation for the benefit of the petitioner in its efforts to acquire the bus franchise may not be regarded as having been made in exchange for the stock of the petitioner but must be regarded as merely a capital contribution by a stockholder206 to the petitioner corporation. Furthermore, the petitioner's basis is the full cost of the bus franchise, whatever that was, regardless of the fact that Railways Corporation may have had some beneficial interest in the franchise for a short time in 1936. It was always intended that the petitioner should have full beneficial interest in the bus franchise, and it acquired the above-mentioned fragment of beneficial interest before the whole transaction was completed. Thus, whatever basis, if any, Railways Corporation may have had for that partial beneficial interest, was transferred to the petitioner. Section 113 (a) (7) or (8). It is only necessary to add the various considerations paid in order to determine the cost and the basis of the bus franchise to the petitioner. The record indicates that the parties are not necessarily in disagreement as to the determination of cost under this method. It seems clear that they are in agreement as to some, if not all, of the items going into this cost. It is not our desire to interfere in so far as the parties may be in agreement as to any of these items. The agreement on the part of the petitioner to pay a percentage of gross income annually207 was a part of the cost of the franchise. Other parts of the cost of the bus franchise were the value of the street car franchises surrendered by Railways Corporation, the value of the street car tracks and other equipment which it turned over to the city of New York, and the $160,000 which it paid to the city of New York. It appears that the petitioner expended additional amounts to acquire or protect the bus franchise. The cost may include other items. The parties are directed to file computations under Rule 50 or otherwise move in respect of the case on or before July 31, 1946.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622356/	Frank Hendrick v. Commissioner.Hendrick v. CommissionerDocket No. 82687.United States Tax Court1948 Tax Ct. Memo LEXIS 163; 7 T.C.M. (CCH) 364; T.C.M. (RIA) 48100; June 14, 1948163 Thomas R. Wickersham, Esq., for the respondent. OPPERMemorandum Opinion OPPER, Judge: This proceeding involves deficiencies in income tax, 25 percent delinquency penalties for failure to file income tax returns, and 50 percent fraud penalties for the years 1925 to 1930, inclusive, in the following amounts: 25%50%YearDeficiencyPenaltyPenalty1925$ 843.75$ 210.94$ 421.88192632,944.758,236.1916,472.38192710,804.752,701.195,402.3819284,483.751,120.942,241.88192922,490.005,622.5011,245.0019301,563.75390.94781.88Totals$73,130.75$18,282.70$36,565.40Petitioner failed to appear at the hearing held on April 15, 1948, at New York, New York. Counsel for respondent moved for judgment for the amount of the deficiencies and the delinquency penalties as determined in the deficiency notice for the failure of petitioner to prosecute the case, and the motion was granted. Respondent assumed his burden of proof on the question of fraud penalties for the years 1925 to 1930, inclusive, and introduced evidence at the hearing on this issue. [The Facts] In the years 1925 to 1930, inclusive, 164 petitioner was an attorney at law, with offices at 120 Broadway, New York City. He filed no Federal income tax returns for these years. During the years 1925 to 1930, inclusive, petitioner received professional fees for personal services rendered to Charles B. Squier, a client, in the following amounts: YearAmount1925$ 21,500.001926167,244.00192777,700.00192849,000.001929131,500.00193030,000.00Respondent's representative charged with the investigation of petitioner examined his bank accounts at the New York Trust Company. He obtained a transcript of all of petitioner's bank accounts for the years in question and made an analysis of the deposits, the expenses and withdrawals. He prepared a schedule, showing the amount of petitioner's bank deposits for the years 1925 to 1930, inclusive, which after first eliminating those which clearly would not have been income items, disclosed deposits aggregating as follows: YearAmount1925$ 49,434.701926162,762.831927150,528.131928130,347.051929230,792.831930276,049.00On March 13, 1936, petitioner was indicted for fraudulent evasion of income taxes for the*165 years 1929 and 1930. He forfeited his bond, departed from the United States, and since that time has been a fugitive from justice. The professional fees received by petitioner from Squier in the years 1925 to 1930, inclusive, were a part of petitioner's gross income for those years. All or part of the deficiency in income tax for the years 1925 to 1930, inclusive, was due to fraud with intent to evade tax. [Opinion] Our ultimate findings of fact are dispositive of this phase of the case and are based upon a consideration of the record made by respondent at the hearing. He established receipt by petitioner of large amounts of professional fees and deposits of unexplained items of income, together with petitioner's failure to report any income. The receipts were of a size and nature sufficient to eliminate the possibility of innocent oversight. The fraud penalties must be sustained. ; ; ; , affirmed (C.C.A., 3rd Cir.), . Decision will be entered for the respondent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622357/	Theodore F. Wilson and Coramabel S. Wilson, Petitioners, v. Commissioner of Internal Revenue, RespondentWilson v. CommissionerDocket No. 16298United States Tax Court13 T.C. 409; 1949 U.S. Tax Ct. LEXIS 81; September 28, 1949, Promulgated 81 Decision will be entered under Rule 50. Petitioner Theodore Wilson was a partner of the Hanlon & Wilson Co., a partnership composed of petitioner, his brother, Richard, and his father, A. G. Wilson, from August 1, 1942, to July 5, 1945. The Commissioner, in his determination of the deficiencies, determined that A. G. Wilson was not a partner during the period from January 30, 1943, to July 5, 1945, and, therefore, determined that one-half of the partnership profits during this period was taxable to petitioners. Held, the Commissioner erred in determining that A. G. Wilson was not a bona fide partner of Hanlon & Wilson Co. during the period in controversy. Thomas J. McManus, Esq., and A. G. Wallerstedt, C. P. A., for the petitioners.Albert J. O'Connor, Esq., for the respondent. Black, Judge. BLACK 409 This proceeding involves deficiencies in income tax for the taxable years 1943 and 1944 in the amounts of $ 10,199.45 and $ 5,091.25, respectively. The amount of $ 10,199.45 for the year 1943 is made up 410 of a deficiency of $ 9,866.93 as set out in the deficiency notice, plus an increased deficiency of $ 332.52 claimed by respondent in his answer82 to the petition.The deficiencies as set out in the deficiency notice are due to an adjustment in petitioners' net incomes resulting from respondent's determination that for tax purposes Asbury G. Wilson was not a partner of the Hanlon & Wilson Co. after December 17, 1942, and that therefore one-half of the partnership profits is allocable to petitioners instead of one-third, as claimed in petitioners' returns. By appropriate assignment of error petitioners contest this adjustment. During the proceeding respondent conceded that Asbury G. Wilson was a partner until January 30, 1943, rather than December 17, 1942. Petitioners do not contest respondent's determination that the victory tax credit for 1943 is limited to the statutory maximum of $ 1,100, which results in a further deficiency of $ 332.52 for 1943 because of an erroneous allowance of $ 1,432.52, as shown in the deficiency notice.FINDINGS OF FACT.The case was submitted upon a stipulation of facts, depositions, oral testimony and exhibits. The facts so stipulated are found. Other facts are found from the evidence.Petitioners are individuals residing in San Gabriel, California. Joint income tax returns for the taxable83 years here involved were filed with the collector of internal revenue for the twenty-third collection district of Pennsylvania at Pittsburgh, Pennsylvania.During the period August 1, 1942, to July 5, 1945, petitioner Theodore F. Wilson (hereinafter called Theodore) was a member of the partnership of Hanlon & Wilson Co., of Wilkinsburg, Pennsylvania. The partnership articles named three individuals as members of the partnership. Those individuals were Theodore; Asbury G. Wilson (hereinafter called A. G. Wilson), Theodore's father; and John Richard Wilson (hereinafter called Richard), Theodore's brother.In 1905 A. G. Wilson and M. D. Hanlon founded Hanlon & Wilson Co., a partnership. Hanlon died about June 1932 and about six months later Hanlon & Wilson was organized as a corporation, A. G. Wilson and Mrs. Hanlon each owning one-half of the outstanding stock. In 1933 Richard became associated with the corporation, working at various jobs, beginning as a shop laborer and after a few years transferring to the office. A. G. Wilson gradually turned more responsibility over to Richard and in 1936 Richard was given full charge. A. G. Wilson continued as president of the corporation84 and participated in the management of the corporation in an advisory capacity.Early in 1941 when Richard's entrance in the Army was imminent, A. G. Wilson and Richard agreed that Theodore should be brought 411 into Hanlon & Wilson as a replacement for Richard during Richard's term of armed service. It was contemplated that after Richard returned all three of the Wilsons would remain in the firm. At the time plans were being made for Theodore's association with Hanlon & Wilson, Theodore was living in California and was employed as a salesman by the Diversey Corporation of Chicago. From the time Theodore graduated from the School of Business Administration of the University of Pittsburgh until coming with Hanlon & Wilson his experience had been limited to clerical and sales work. Theodore did not have the experience or skill at that time to run Hanlon & Wilson which was engaged in the manufacture of both airplane heaters, a wartime development, and rail bonds, which in peacetime are Hanlon & Wilson's principal product. Theodore joined Hanlon & Wilson in May 1941 and was given the title of superintendent, a position for which he was not qualified by experience and training. 85 Later, he was relieved of his duties as superintendent and assumed the position of secretary-treasurer of the corporation, which he retained until its dissolution on July 31, 1942. On July 5, 1941, Richard entered the Army and the active management of the business was assumed by A. G. Wilson and Theodore.In July 1942 the corporation purchased Mrs. Hanlon's remaining stock for $ 25,000, Richard having previously purchased $ 1,000 of her stock. A. G. Wilson and Richard then owned all of the outstanding stock of the corporation. On July 16, 1942, Theodore received gifts of 127 1/3 shares and 19 1/3 shares of the corporation's stock from A. G. Wilson and Richard, respectively. These gifts were preliminary to the organization of a partnership composed of A. G. Wilson, Richard, and Theodore, in which each was to have a one-third capital interest and share profits and losses equally. On July 31, 1942, the corporation was dissolved and all assets thereof were on August 1, 1942, transferred to Hanlon & Wilson Co. (the partnership).On December 17, 1942, the partnership agreement was amended to provide that upon the death of A. G. Wilson, leaving his wife to survive him, his estate would86 receive three-fifths of the agreed or arbitrated value of his interest in the business, and that his estate would receive two-fifths of such value if his wife predeceased him. This amendment was due to the fact that the life of A. G. Wilson was not then insurable on any sound economic basis, whereas the partnership had applied for and received life insurance policies on the lives of Theodore and Richard in the face amount of $ 50,000 each, of which the partnership was the beneficiary.On January 30, 1943, Theodore, Richard and A. G. Wilson entered into a supplemental agreement, under the terms of which A. G. Wilson was to withdraw his capital equity of $ 30,000 and continue as a 412 partner in the business without any capital investment therein. This agreement was made because A. G. Wilson wished to settle his estate and to insure that, upon his death, the business would pass to Theodore and Richard without being financially embarrassed by other members of the family. The agreement provided, inter alia, that (1) A. G. Wilson should have a drawing account equal to that of Theodore and Richard; (2) Theodore, Richard and A. G. Wilson should share profits and losses one-third87 each; upon A. G. Wilson's death the partnership should not terminate, but his right or the right of his estate to demand or receive any moneys whatsoever from the partnership business should be at an end and thereafter Theodore and Richard should share profits and losses 50 per cent each; (3) Theodore and Richard should each have a 50 per cent capital investment in the partnership business; and (4) upon the death of either Theodore or Richard, or both of them, provision would be made to pay A. G. Wilson an income so long as he should live. On February 20, 1943, A. G. Wilson withdrew the $ 30,000 from the partnership and made distribution of it among members of his family, as follows:Mrs. A. G. Wilson, wife$ 6,000Louise Wilson, daughter6,000William Wilson, son6,000J. Richard Wilson, son6,000Theodore F. Wilson, son6,000A. G. Wilson continued to serve the partnership in the same capacity as he had prior to the agreement permitting the withdrawal of his capital. It was the intent of Theodore, Richard, and A. G. Wilson that Hanlon & Wilson Co. should be a bona fide partnership consisting of the three partners as provided by the partnership agreement and its amendments, 88 and there was no intention that A. G. Wilson should cease to be a member of the partnership because of his withdrawal of his capital interest.A. G. Wilson was in his 80's during the period here involved. However, he was present at the plant almost daily, presided at managerial meetings, and helped formulate the business policy. He signed notes, mortgages, and checks as a partner on behalf of the partnership. He helped design small machinery and tested the quality of the Hanlon & Wilson's product. Occasionally he made a business trip with Theodore. A. G. Wilson did not manage the business actively, but he received the weekly report of the business and was frequently consulted by the management and key personnel, giving advice on matters with which he was particularly familiar on account of his long service and experience in the business.A. G. Wilson's one-third share of the net profits of the partnership for the year ended July 31, 1943, as shown by the partnership books, 413 was $ 73,220.45. He withdrew the sum of $ 30,484.97 from the partnership and the balance of his share of the profits, or $ 42,735.48, was credited to his capital and undrawn earnings account.A. 89 G. Wilson's one-third share of the net profits of the partnership for the year ended July 31, 1944, as shown by the partnership books, was $ 45,734.57, which sum was credited to his capital and undrawn earnings account. He withdrew the sum of $ 76,719.85 from the partnership and that sum was charged to his capital and undrawn earnings account.A. G. Wilson's one-third share of the net losses of the partnership for the year ended July 31, 1945, as shown by the partnership books, was $ 8,712.42, which sum was charged to his capital and undrawn earnings account. He withdrew the sum of $ 8,521.24 from the partnership, which sum was charged to his capital and undrawn earnings account.On July 31, 1945, A. G. Wilson had withdrawn from the partnership $ 10,898.51 in excess of the profits to which he was entitled, computed as follows:CREDITS7/31/43 credit balance$ 42,735.4810/14/43 adjustment of 1942-1943 entries3,772.027/31/44 profit Aug. 1943 to July 31, 194445,734.5710/31/44 prior year adjustments1,212.93Total credits93,055.00DEBITS1/6/44 renegotiation year 8/1/42 to 7/31/4310,000.0010/31/44 transfer of drawing account for year ended July 31, 194476,719.857/31/45 net loss -- year ended July 31, 19458,712.427/31/45 drawing account -- year ended July 31, 19458,521.24Total debits103,953.51Net debit balance10,898.5190 The partnership filed income tax returns showing income and losses for the fiscal years ended July 31, as follows:1943 (original return)$ 167,105.52 1943 (amended return)199,397.10 1944 (original return)152,080.95 1944 (amended return)110,495.44 1945 (original return)(56,884.20)1945 (amended return)(57,238.34)1945 (amended return) long term capital gain3,350.48 A. G. Wilson, Richard, and Theodore each reported one-third of the net income of the partnership for the fiscal years ended July 31, 1943, 414 and July 31, 1944. The net loss and long term capital gain for the fiscal year ended July 31, 1945, were reported as follows:Long termNet losscapital netgainAsbury G. Wilson$ 19,079.45John Richard Wilson21,077.16$ 1,675.24Theodore F. Wilson17,081.731,675.24Total57,238.343,350.48When Richard returned from the Army in July of 1944 there was considerable friction between him and Theodore, and neither of the brothers was willing to allow the other to have a position of authority. In the spring of 1945 A. G. Wilson used his power to put Richard in the position where he again had command, and on July 5, 91 1945, with the consent of A. G. Wilson, Richard purchased Theodore's interest in the partnership and Theodore retired.During the period here involved Hanlon & Wilson Co. was a bona fide business partnership consisting of Theodore, Richard, and A. G. Wilson, and each partner was entitled to receive and did receive his one-third of the profits and shared one-third of the losses.OPINION.There is only one question for us to decide, which is the composition of the partnership Hanlon & Wilson Co. during the period from January 30, 1943, to July 5, 1945. Although deficiencies have been determined for the taxable years 1943 and 1944 only, the taxable year 1945 is also in controversy because the partnership suffered a net operating loss in 1945, which reduced the partnership's distributable income for 1943 under the carry-back provision of the Internal Revenue Code.Respondent contends that for tax purposes A. G. Wilson was not a partner of Hanlon & Wilson Co. during the period in controversy and therefore one-half of the profits and losses for this period is taxable to petitioners. Respondent argues that after the agreement of January 30, 1943, under which A. G. Wilson was to withdraw92 his capital investment, he was no longer a partner because he did not contribute to the control or management of the business, or otherwise perform vital services for Hanlon & Wilson; that any allocation of profits to A. G. Wilson during the period from January 30, 1943, to July 5, 1945, was only a paper reallocation of the income attributable to Theodore and Richard, who were the only bona fide partners of Hanlon & Wilson Co.415 We can not agree with respondent, for we have found from a consideration of all the evidence that during the period in controversy Hanlon & Wilson Co. was a bona fide partnership, consisting of Theodore, Richard, and A. G. Wilson.Hanlon & Wilson was organized as a partnership on July 1, 1942, and consisted of Theodore, Richard, and A. G. Wilson. A. G. Wilson shared in the management and control of the business, rendered other vital services, and shared in the profits and losses. A. G. Wilson did not cease to be a partner after January 30, 1943, when the agreement permitting the withdrawal of his capital interest was signed, nor was it intended by the parties that he should cease to be a member.In our findings of fact set out above we found that93 during the period in controversy A. G. Wilson was a part of the management of Hanlon & Wilson and rendered vital services to the business during the period. A. G. Wilson was treated as a partner and actually participated in the affairs of the partnership. A. G. Wilson, though a man of approximately 80 years, was a vital figure in the management of Hanlon & Wilson. He had founded the business in 1905 and the knowledge he had acquired in 38 years was of great value to the partnership. It can hardly be expected that a man of 80 years would perform the routine tasks of management which were delegated to Richard in 1936 and which Theodore performed after Richard's departure for the service. However, A. G. Wilson helped formulate the policies of the business and acted as an advisor to Theodore during this period as he had done to Richard as late as 1941.In , the Court said:* * * A partnership is, in other words, an organization for the production of income to which each partner contributes one or both of the ingredients of income -- capital or services. .94 * To be a partner, then, it is not a prerequisite that one contribute capital to the business. We find that A. G. Wilson was a partner of Hanlon & Wilson from January 30, 1943, to July 5, 1945, on the basis of the services as detailed in our findings of fact which he rendered the business during this period, notwithstanding his capital contribution had been withdrawn.In the Supreme Court's recent decision in , the Court, among other things, said: * * The question is not whether the services or capital contributed by a partner are of sufficient importance to meet some objective standard supposedly established by the Tower case, but whether, considering all the facts -- the agreement, the conduct of the parties in execution of its provisions, their statements, the testimony of disinterested persons, the relationship of the parties, their respective abilities and capital contributions, the actual control of income and the purposes for which it is used, and any other facts throwing light on their true 416 intent -- the parties in good faith and acting with a business purpose intended to join together95 in the present conduct of the enterprise. * * *In reaching our decision that A. G. Wilson during the period here in question was a bona fide partner in the partnership of Hanlon & Wilson, we have given consideration to the several factors named by the Supreme Court in the above language. Having reached the conclusion that A. G. Wilson was a bona fide partner in the business, we reverse the Commissioner's determination that petitioner Theodore F. Wilson is taxable on part of the profits which were received by A. G. Wilson. In a recomputation under Rule 50, Theodore should be taxed on only the share of the profits to which he was entitled under the partnership agreement. We do not understand that the amount of the partnership profits during the periods involved is in issue.Decision will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622358/	AERO WAREHOUSE CORPORATION, ET AL., 1 Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent Aero Warehouse Corp. v. CommissionerDocket Nos. 29226-85; 31506-85; 38814-85.United States Tax CourtT.C. Memo 1989-180; 1989 Tax Ct. Memo LEXIS 183; 57 T.C.M. (CCH) 200; T.C.M. (RIA) 89180; April 19, 1989; As corrected April 24, 1989 Michael H. Singer, for the petitioners. Frank Agostino and Michael R. Rizzuto, for the respondent. WELLSMEMORANDUM189 FINDINGS OF FACT AND OPINION WELLS, Judge: Respondent determined the following deficiencies and additions to tax in these consolidated cases: Petitioner(s)YearDeficiencyAero Warehouse Corporation1981$ 118,832Gary D. Pesnell and Judy A. Pesnell198128,792 Charles S. Nagy and Lynne I. Nagy198112,126 2 Additions To Tax, Sections Petitioner(s)6653(a)(1)6659Aero Warehouse CorporationGary D. Pesnell and Judy A. Pesnell $ 1,439.60$ 4,743Charles S. Nagy and Lynne I. NagyRespondent also determined that all petitioners were liable for increased interest under section 6621(c) (formerly designated section 6621(d)). The instant case presents the following issues: (1) whether petitioners are entitled to investment tax credits and190 deductions for a loss generated by a limited partnership, (2) whether petitioners are liable for additions to tax under section 6659, (3) whether petitioners are liable for additions to tax under section 6653(a), (4) whether petitioners are liable for increased interest under section 6621(c), and (5) whether the applicable statute of limitations bars assessment against petitioners Charles S. and Lynne I. Nagy. FINDINGS OF FACT Some of the facts have been stipulated and are found accordingly. The stipulation of facts and attached exhibits are incorporated herein by this reference. Petitioner Aero Warehouse Corporation had its principal place of business in New Jersey when it filed its petition. Petitioners Gary D. Pesnell, Judy A. Pesnell, Charles S. Nagy, and Lynne I. Nagy resided in New Jersey when they filed their petitions. Production and Transfer of Master Video TapesAll petitioners are limited partners in TMJ Associates ("TMJ"). On December 31, 1981, TMJ purchased all rights in 12 master video tapes ("masters") from Life Science Productions, Inc. ("LSP"), a corporation owned in equal shares by Dr. Lawrence DeMann, Sr., and petitioner Charles S. Nagy. The masters191 were educational and concerned the diagnosis and treatment of temporo-mandibular joint syndrome, an ailment relevant to the practice of chiropractic, dentistry, and possibly other health fields. Dr. DeMann, Sr., himself a chiropractor, had conceived the idea of marketing educational tapes for chiropractors. Possibly as early as 1980, Dr. DeMann, Sr., spoke with Dr. Ernest Napolitano of the New York Chiropractic College ("the college") about the advantages of taped instruction as a means of providing continuing education to chiropractors. Dr. Napolitano and Dr. DeMann, Sr., verbally agreed that the college would "sponsor" continuing education tapes, so long as it retained the right to approve the quality of the tapes as well as the means used to commercially exploit them. Although it was agreed that the college would "sponsor" the tapes, it is apparent that the college agreed to endorse the tapes, rather than provide financial backing. For that financial backing, Dr. DeMann, Sr., turned to Mr. Nagy, whom he knew as someone capable of "putting people together on investment proposals." Discussions between Dr. DeMann, Sr., and Mr. Nagy resulted in a "Production Agreement" dated192 July 15, 1981, between Chiropractic Video Studies, Inc. ("CVS"), and LSP. CVS was owned in equal shares by Dr. DeMann, Sr. (who, as noted, also owned one-half of LSP), and his son Dr. Lawrence DeMann, Jr. In the Production Agreement, LSP agreed to pay CVS $ 80,000 per master for masters to be produced by CVS. Of the foregoing amount, LSP agreed to pay $ 5,000 per master in cash upon closing, while the remainder of the purchase price was to be represented by a promissory note for $ 75,000 per master due on December 31 of the 15th year following closing. The note was to bear 9-percent interest and be recourse as to principal only. The Production Agreement requires LSP to prepay its note to CVS with any proceeds received from "the sale, rental or other exploitation" of the masters. Specifically, the Production Agreement requires LSP to pay CVS 40 percent of any proceeds received, within 30 days of receipt. Such prepayments are to be applied first to principal and, subsequently, to interest. Prior to the date of the Production Agreement, both Mr. Nagy and Dr. DeMann, Sr., called studios in New York for estimates of the price of one-hour video masters of the type contemplated193 by Dr. DeMann, Sr. Mr. Nagy obtained estimates ranging from $ 75,000 to $ 150,000, while Dr. DeMann, Sr., was given estimates ranging from $ 100,000 to $ 175,000. Those estimates persuaded Dr. DeMann, Sr., to produce the masters himself, through CVS. The estimates also convinced Mr. Nagy that $ 80,000 was a good price for LSP to pay for a master. Prior to the date of the Production Agreement, Mr. Nagy had also consulted with Martin Fiderer Associates, a marketing firm, for information about the potential market for tapes reproduced from the masters. After entering into the Production Agreement requiring LSP to finance CVS' cost in producing the masters, Mr. Nagy began work on a private placement memorandum that would attract investors. He consulted Appleton-Century-Crofts ("ACC"), a division of Prentice-Hall, Inc. In fact, both Mr. Nagy and Dr. DeMann, Sr., met with a number of people from ACC, including Doreen Berne, in the summer of 1981. After paying $ 5,000, Mr. Nagy obtained a preliminary market study from ACC. Subsequently, ACC supplied Mr. Nagy with an appraisal which valued the masters to be sold to TMJ at $ 500,000 each. The appraisal appeared as an exhibit to the194 private placement memorandum. ACC had some knowledge of the chiropractor market because it had successfully published a text for chiropractors. Ms. Berne of ACC, however, issued the firm's appraisal without having viewed all of TMJ's masters, because not all of the masters had been completed as of the date of the appraisal, October 30, 1981. The appraisal indicated that ACC would "view the tapes prior to issuing a final statement." No such statement, however, was ever issued by ACC, and no one requested it. Further, the appraisal assumed that the finished masters would be of professional quality and that certain professionals, including Dr. DeMann, Sr., and Dr. Harold Gelb, a dentist of national reputation, would appear on the masters, as represented to ACC. The appraisal also incorporated sales projections prepared by accountants selected by TMJ, Hecht & Katz, who did not express any opinion on the feasibility of any projected amounts because the projections were based upon information and assumptions provided to the accountants. Mr. Nagy formed limited partnerships as a means of raising capital. He ultimately formed five limited partnerships, each to purchase a given group195 of master video tapes from LSP. Mr. Nagy selected Paul Sanford Flaxman, who had once served as Mr. Nagy's attorney, to serve as general partner of TMJ. Before agreeing to serve as general partner of TMJ, Mr. Flaxman viewed some of the taping of the masters, reviewed the market study prepared by Martin Fiderer Associates, and talked to Ms. Berne regarding ACC's appraisal. Prior to the master sale from LSP to TMJ, the limited partners of TMJ signed subscription agreements obligating them to pay $ 37,000 for each unit of TMJ. Although the TMJ private placement memorandum solicited 35 units, investors purchased only 20 units. The limited partners tendered $ 10,000 per unit with an executed subscription agreement, while the balance of the subscription price was represented by short-term notes in the face amounts of $ 7,500, $ 7,500, and $ 12,000, becoming due on February 15, 1982, May 15, 1982, and February 15, 1983, respectively. Those notes were recourse and bore 9-percent interest. Additionally, each limited partner agreed to assume liability for his pro rata share of the $ 1,600,000 recourse portion of a "Partial Recourse Promissory Note" that TMJ gave LSP for the masters. Thus, 196 for each unit of TMJ purchased, a limited partner assumed up to $ 80,000 of liability. A "Purchase Agreement" between TMJ and LSP obligated TMJ to pay LSP $ 6,000,000 for 12 masters (or $ 500,000 per master). TMJ paid $ 135,000 in cash at closing and gave LSP four promissory notes for the balance of the purchase price. Three of the notes had face amounts of $ 100,000, $ 100,000, and $ 65,000 and became due on March 15, 1982, June 15, 1982, and March 15, 1983, respectively. Those notes were recourse and bore 9-percent interest. The fourth note was the Partial Recourse Promissory Note discussed above. It had a face amount of $ 5,600,000 and becomes due December 31, 1996, bearing 9-percent interest. As noted, only $ 1,600,000 of the principal is recourse. The remainder of the principal and all interest are nonrecourse. The Purchase Agreement requires TMJ to prepay the Partial Recourse Note with any proceeds it receives from the commercial exploitation of the masters. Specifically, TMJ must pay LSP 35 percent of the "Net Sales from exploitation of the Masters" in prepayment of the note. "Net Sales" is defined by the Purchase Agreement as "gross sales (less returns, discounts,197 allowances and uncollected receivables) generated by * * * [TMJ] directly or indirectly from any commercial exploitation of the Masters." Any prepayments by TMJ first reduce principal for which TMJ is liable, i.e., the recourse portion of the note. Any prepayments in excess of that amount reduce nonrecourse principal and, subsequently, interest. In a "Security Agreement," TMJ granted LSP a lien upon "the * * * [masters] and the products derived from the use and exploitation thereof, including without limitation a lien on the copyrights, model and property rights with respect thereto." Production of the masters began in July 1981, after Dr. DeMann, Sr., and Mr. Nagy entered into the Production Agreement. Production continued into the following December and was not completed until roughly two weeks before the closing of the sale of the masters to TMJ. To produce the masters, CVS hired professional producers, directors, and editors. CVS hired doctors to give the taped lectures and demonstrations. CVS ultimately produced 120 separate master video tapes. It retained 20 and transferred the remaining 100 to LSP, pursuant to the Production Agreement. As noted, LSP sold 12 masters198 to TMJ. LSP sold the other master video tapes to the other four limited partnerships formed by Mr. Nagy (the "other limited partnerships"). The total cost to CVS of producing all of the masters, without considering the value of the time devoted by Dr. DeMann, Sr., and Dr. DeMann, Jr., did not exceed $ 1,000,000 (or about $ 8,333 per master). Although initially Dr. DeMann, Sr.'s profit from the business venture was to be derived from CVS, which, as noted, he and his son owned in equal shares, Dr. DeMann, Sr., subsequently persuaded Mr. Nagy to give him a 50-percent interest in LSP, which was to have been owned wholly by Mr. Nagy. As of the time of trial, Dr. DeMann, Sr., had made a net profit of some $ 300,000 as the result of his interests in LSP and CVS. Mr. Nagy's profit from the business venture was to be derived from his 50-percent interest in LSP and from Lexson Diversified Investors ("Lexson"), a brokerage firm which received syndication fees of at least $ 30,000 from TMJ. Mr. Nagy was at least part owner of Lexson and a salesman for the firm. Distribution EffortsIn February 1982, TMJ and CVS each received letters from attorneys for Dr. Gelb, who appeared on199 one of the masters purchased by TMJ. The letters threatened legal action for, inter alia, the unauthorized use of Dr. Gelb's name in the TMJ private placement memorandum. On or about May 18, 1982, Dr. Gelb commenced a civil action against CVS and TMJ. As a result of the ensuing litigation, TMJ delayed any marketing efforts until August 2, 1982. 3On August 2, 1982, TMJ entered into a "Distributorship Agreement" with Tele-Course Management, Inc. ("Tele-Course"), a corporation owned wholly by Dr. DeMann, Jr. The Distributorship Agreement required Tele-Course to "use its best efforts to market and sell reproductions of the Masters." In return, Tele-Course could retain proceeds from tape sales, after paying TMJ a "basic fee" of $ 105 per tape. Also, Tele-Course could retain any proceeds from other commercial exploitations of the masters, 200 e.g., tape rentals, after paying 40 percent of those proceeds to TMJ. TMJ paid Tele-Course a $ 20,000 "non-refundable management fee" upon entering into the Distributorship Agreement. Also, TMJ agreed to bear all costs of reproducing the masters, i.e., producing tapes, while Tele-Course agreed to pay all "advertising and promotion expenses." After operating under the foregoing terms for roughly eight months, TMJ and Tele-Course amended the Distributorship Agreement. They agreed that Tele-Course could retain all proceeds from any sort of commercial exploitation of the masters, e.g., tape sales and rentals, after paying TMJ 20 percent of the "net proceeds" from such exploitation. The written amendment to the Distributorship Agreement defined "net proceeds" as "the net amount received after all discounts, returns, allowances, shipping charges, sales and/or use taxes or other deductions from * * [Tele-Course's] charges to users or purchasers of the tapes." The written amendment specified that it was to be effective April 1, 1983. Tele-Course did attempt to exploit the masters commercially. Dr. DeMann, Jr., sought advice from advertising and marketing professionals in New201 York City. Tele-Course sent representatives to booths at state conventions, where the representatives would play tapes and distribute sales material. Tele-Course placed advertising and articles in the major chiropractic journals, prepared a catalogue, and solicited business by mail and telephone. Tele-Course also transcribed the masters and prepared examination questions in order to have the masters approved for continuing education credit. Some state approvals were obtained. On or about December 1, 1984, Tele-Course requested additional funds from TMJ and the other limited partnerships. Tele-Course terminated the Distributorship Agreement after TMJ and the other limited partnerships refused to pay the requested amounts. After cancellation of the Distributorship Agreement, Mr. Flaxman and the general partners of the other limited partnerships met to discuss further marketing efforts. One of the general partners, Neil Deutsch, offered to assume marketing responsibilities, and the other general partners agreed. The general partners also agreed that profits and losses would be shared equally by TMJ and the other limited partnerships. Mr. Deutsch's marketing efforts included202 mailing flyers, hiring a company to reproduce the masters, filling orders, collecting payments, and distributing proceeds after paying expenses. Later, around June 27, 1985, Mr. Deutsch reached agreement with Medical Audio Visual Transcripts ("MAVT"). Mr. Ron Pobuda, president of MAVT, had cautioned Mr. Deutsch not to expect more than $ 100,000 in gross sales as a result of MAVT's marketing efforts. On behalf of TMJ and the other limited partnerships, Mr. Deutsch paid MAVT a $ 21,000 management fee. MAVT agreed to pay TMJ and the other limited partnerships 60 percent of sales less a tape reproduction fee equal to $ 10 per tape. MAVT then conducted two mailings to some 23,000 chiropractors and conditioned further marketing efforts upon the success of such mailings. According to accountings by MAVT dated March 24, 1986, and August 4, 1986, MAVT's mailings produced $ 10,126.56 for TMJ and the other limited partnerships. After the mailings, MAVT made no additional efforts to market tapes. On or about December 4, 1986, TMJ entered into a "Licensing Agreement" with Intravision, Inc. ("Intravision"), a New York corporation. The operative part of the Licensing Agreement stated, "* 203 * [TMJ] hereby grants to * * * [Intravision] the exclusive right to commercially exploit the Videos in any manner that * * * [Intravision] deems fit and appropriate for the term of this Agreement." For the license, Intravision agreed to make 15 annual payments of $ 167,000 each to TMJ, with the first payment due on December 3, 1987. The Licensing Agreement named each payment a "guaranteed minimum annual royalty fee." As part of a corporate reorganization, discussion of which follows, TMJ gave Intravision a promissory note in the face amount of $ 1,600,000 and bearing 9-percent interest. The note was payable in 15 annual installments of $ 162,000, commencing on December 4, 1987. The note was intended as a substitute for the recourse portion of the long-term note given to LSP by TMJ. The nonrecourse portion of the long-term note was forgiven. Intravision's annual, guaranteed payments to TMJ pursuant to the Licensing Agreement were to exceed TMJ's note payments to Intravision by $ 5,000 each year. The note given to Intravision expressly provided that TMJ would offset its required installments with any "guaranteed annual minimum payment" required by the Licensing Agreement. 204 In the Licensing Agreement, Intravision also agreed to pay TMJ 40 percent of annual "net receipts" in excess of $ 75,000. The Licensing Agreement defined "net receipts" as "gross receipts received by * * [Intravision] from either the sale, lease, licensing, or other exploitation of the Videos (or reproductions thereof) less the direct selling costs therefor." "Direct selling costs" were defined as follows: all certifiable costs for reproduction, sales or lease commissions, direct marketing expenses such as artist costs, printing costs, postage, collection expenses, and any other expenses incurred by * * * [Intravision] (exclusive of general overhead and administrative expenses not directly related to the commercial exploitation of the Videos and other video tapes involving chiropractics) directly attributable to the selling, leasing, or other commercial exploitation of the Videos (or the reproductions thereof). The Licensing Agreement obligated Intravision to commit at least $ 250,000 to "direct selling costs" and to raise $ 1,000,000 of "equity capital" within six months of the agreement. TMJ agreed to transfer certain assets worth in excess of $ 100,000 to Intravision. 205 Intravision agreed to give TMJ warrants entitling TMJ to purchase as many as 125,000 shares of Intravision's common stock. In a ""Master Agreement" also dated December 4, 1986, TMJ and Intravision agreed that the Licensing Agreement, warrants, and promissory note would be conditioned upon the effectiveness of certain other agreements. Specifically, the Master Agreement required that the Licensing Agreement, warrants, and promissory note be delivered to Daniel M. Wasser, Esq. The Master Agreement also required as follows: Mr. Wasser shall release the executed Documents to the appropriate parties only if certain licensing agreements between Intravision and four (4) limited partnerships and two (2) reorganization agreements between Intravision and (a) Life Science Productions and its shareholders and (b) CVS and its shareholders become effective. The Documents shall not be effective unless and until released by Mr. Wasser. The effect of the Master Agreement was to condition TMJ's agreements with Intravision, i.e., the Licensing Agreement, warrants, and promissory note, upon Intravision's ability to obtain licenses from the other limited partnerships and upon reorganization206 agreements with LSP and CVS. Intravision acquired LSP and CVS pursuant to those reorganization agreements in section 368(a)(1)(B) reorganizations. Intravision issued its voting common stock for all of the outstanding shares of LSP (held by Mr. Nagy and Dr. DeMann, Sr.) and CVS (held by Dr. DeMann, Sr. and Dr. DeMann, Jr.). As of trial, Intravision was still marketing tapes, less than 50,000 individual tapes made from TMJ masters had been sold, and the limited partners of TMJ had received small or no cash distributions. OPINION 1. Profit ObjectivePetitioners' ability to deduct their distributive shares of depreciation and other business expenses incurred by TMJ depends upon the existence of profit objective. Simon v. Commissioner,830 F.2d 499">830 F.2d 499, 500-501 (3d Cir. 1987), affg. T.C. Memo 1986-156">T.C. Memo. 1986-156; Deegan v. Commissioner,787 F.2d 825">787 F.2d 825, 826-827 (2d Cir. 1986), affg. T.C. Memo 1985-219">T.C. Memo. 1985-219; Taube v. Commissioner,88 T.C. 464">88 T.C. 464, 478 (1987); Porreca v. Commissioner,86 T.C. 821">86 T.C. 821, 843 (1986). Further, if the masters may not be depreciated, their purchase and use will not entitle petitioners207 to investment tax credit ("ITC"). Sec. 48(a)(1); Taube v. Commissioner, supra at 478. In determining whether the requisite profit objective existed, our inquiry is made at the partnership level. Brannen v. Commissioner,78 T.C. 471">78 T.C. 471, 505 (1982), affd. 722 F.2d 695">722 F.2d 695 (11th Cir. 1984). This means that we focus our inquiry upon the "intent of the general partner and the promoters," because they control the partnership. Deegan v. Commissioner, supra at 826; Fuchs v. Commissioner,83 T.C. 79">83 T.C. 79, 98 (1984). The requisite profit objective exists if there is an "actual and honest objective of making a profit." Levy v. Commissioner,91 T.C. 838">91 T.C. 838, 871 (1988); 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). A "reasonable" expectation of profit, however, is not required. Sec. 1.183-2(a), Income Tax Regs.; Dreicer v. Commissioner, supra at 644-645. If the requisite profit208 objective is absent, section 183 governs the deductibility of the partnership items. Sec. 183(c). Section 183(b)(1) would allow those deductions allowable regardless of profit objective, e.g., interest and State and local taxes; while section 183(b)(2) would permit deduction of "business" expenses, e.g., depreciation, but only to the extent that gross income generated by the partnership's activity exceeded the deductions allowed by section 183(b)(1). Petitioners bear the burden of proving the existence of the requisite profit objective. Rule 142(a); Welch v. Helvering,290 U.S. 111">290 U.S. 111, 115 (1933). The issue is one of fact and is resolved on the basis of all surrounding facts and circumstances. Sec. 1.183-2(b), Income Tax Regs; Dreicer v. Commissioner, supra at 645. In resolving the issue, we give greater weight to objective indicia of profit objective than to taxpayers' statements of intent. Sec. 1.183-2(a), Income Tax Regs.; Dreicer v. Commissioner, supra at 645. 4209 In the instant case, we find that TMJ lacked the requisite profit objective when it purchased the masters and, therefore, that deductions attributable to TMJ's commercial exploitation of the masters are allowable only to the extent permitted by section 183 and that TMJ's limited partners are not entitled to ITC. Our finding is based upon the entire record, but certain facts deserve emphasis. Most notably, TMJ did not purchase the masters in an arm's-length transaction, and it paid LSP a grossly-inflated purchase price. CVS produced the masters at a cost of approximately $ 8,333 each ($ 1 million divided by 120). LSP agreed to pay CVS $ 80,000 for each master, with payment of the majority of that price deferred. Then, TMJ agreed to purchase the masters from LSP for $ 500,000 each, with payment of the great majority of that price deferred with nonrecourse, long-term financing. Neither can we ignore nor has petitioner explained the foregoing appreciation in the "value" of the masters. The private placement memorandum itself concedes: "The terms of the transaction between LSP and the Partnership were not an 'arms length' transaction." (Emphasis supplied.) Mr. Flaxman, general210 partner of TMJ, testified that his attorney, a Mr. Marcus, unsuccessfully attempted to negotiate a lower price for the masters. We do not believe, however, that any negotiation transpired between LSP and TMJ. Rather, the record reflects that Mr. Flaxman agreed, without protest, to the terms of sale established by Mr. Nagy on behalf of LSP. We reject petitioner's assertion that TMJ paid a fair price for the masters. Both Mr. Nagy and Dr. DeMann, Sr., called studios for estimates of the price of one-hour tapes comparable to the masters. Their research produced estimates ranging from $ 75,000 to $ 175,000 per tape. Mr. Nagy concluded, on the basis of his research, that $ 80,000 was a fair price to pay CVS for each master. While $ 80,000 per master may have been a fair price, given the estimates, $ 500,000 per master was clearly excessive. For a number of reasons, we reject the ACC appraisal, which valued the masters at $ 500,000 each. The appraisal was premised upon certain assumptions, including (1) that faculty would be "nationally known, from the chiropractic, dental and other related health professions," (2) that "production quality and script writing" would be of the "highest211 professional criteria," and (3) the accuracy of sales projections prepared by Hecht & Katz, TMJ's accountants. The first assumption proved unwarranted because Dr. Gelb, touted as a "principal program participant," commenced litigation that resulted in the withdrawal of his tape from the TMJ series. Although ACC assumed that Dr. Gelb would be a "principal program participant," he did not appear in the masters marketed by TMJ. It appears that Mr. Nagy misrepresented Dr. Gelb's role to ACC, resulting in civil litigation and, more importantly for our purposes, a flawed appraisal. Petitioners cite Dr. Gelb's litigation as evidence of the masters' value. They argue that Dr. Gelb sued CVS and TMJ because he felt undercompensated for his work, given the masters' value. Petitioners have mischaracterized the litigation. Our review of the record discloses that Dr. Gelb brought suit because TMJ, in its private placement memorandum, heralded Dr. Gelb as a "principal program participant," despite the fact that Dr. Gelb never authorized such a use of his name. The second assumption, regarding the master's technical quality, was equally dubious. ACC issued its appraisal without viewing212 all of the masters. Thus, it could not have evaluated the entire series for technical quality. Although ACC promised to view eventually the entire series and issue a supplement to its appraisal, ACC failed to do this. Some evidence of the masters' technical quality is the oral stipulation in the record that 1000 reproductions can be made from each master. Assuming that TMJ could sell reproduced tapes for $ 250 each (a figure used in the ACC appraisal), it follows that the entire TMJ series of 12 masters could yield no more than $ 3 million in gross sales (1000 X 250 X 12). Thus, even without considering reproduction and distribution costs, which have proved to be substantial, petitioners have stipulated that the masters could only generate revenue equal to one-half of their $ 6 million purchase price. Finally, the appraisal expressly relied upon sales projections prepared by TMJ's accountants, who in turn had prepared the sales projections based upon information and assumptions provided to them by TMJ. Consequently, the appraisal can be hardly characterized as an "independent" evaluation of the masters. 5213 In addition to the lack of arm's-length bargaining and the payment of an inflated purchase price, Mr. Flaxman's failure to arrange for the production and distribution of tapes is the sort of unbusinesslike conduct which evinces lack of profit objective. Sec. 1.183-2(b)(1), Income Tax Regs. Before TMJ purchased the masters on December 31, 1981, Mr. Flaxman had not contacted anyone concerning the production and distribution of tapes, much less the cost of those functions. TMJ's profitability, however, depended in part upon the cost of production and distribution. Mr. Flaxman's failure to investigate that cost belies a lack of concern for profit. The agreements regarding production and distribution further evidence Mr. Flaxman's indifference to profit. Tele-Course was owned wholly by Dr. DeMann, Jr., and the terms of the Distributorship Agreement enabled Dr. DeMann, Jr., to receive his slice of a pie which already had been nearly devoured by Dr. DeMann, Sr., and Mr. Nagy. The original Distributorship Agreement allowed Tele-Course to retain 58 percent (($ 250-105) divided by 250) of sales proceeds, while the amended Distributorship Agreement gave Tele-Course214 a generous 80 percent of these proceeds. We are left with the inescapable conclusion that Mr. Flaxman served as a rather pliable accomplice of Mr. Nagy. He permitted any economic benefits to be skimmed by the promoters of the venture, leaving the limited partners with only promised tax benefits. We view the post-1984 distributor changes and the third-party complaint that TMJ filed against LSP as meaningless window dressing, intended to give the appearance that Mr. Flaxman was in diligent pursuit of profit. The ACC appraisal stated that one of its most important assumptions was that tapes would be brought to market in 1982. Marketing efforts occurring more than three years after production of the masters must be viewed as less important than those occurring shortly after the masters were produced. In conclusion, we find that TMJ lacked the requisite profit objective and hold that section 183 governs the deductibility of items attributable to TMJ's activity. 6215 With respect to the return preparation fee, such a fee normally would be deductible regardless of profit objective. Secs. 183(b)(1), 212(3); sec. 1.212-1(1), Income Tax Regs. Petitioners, however, have failed to substantiate that the "professional fees" were ever "paid or incurred." In light of petitioners' burden of proof (Rule 142(a)), such failure is fatal to the claimed deduction. 2. Section 6659 AdditionRespondent seeks additions under section 6659.7Section 6659 imposes an addition to tax if an underpayment is "attributable to a valuation overstatement." See generally Soriano v. Commissioner,90 T.C. 44">90 T.C. 44, 60-62 (1988); Todd v. Commissioner,89 T.C. 912">89 T.C. 912, 915-916 (1987), affd. 862 F.2d 540">862 F.2d 540 (5th Cir. 1988); Zirker v. Commissioner,87 T.C. 970">87 T.C. 970, 978-981 (1986). We have upheld the section 6659 addition in cases disallowing losses under section 183. E.g., Soriano v. Commissioner, supra.216 The amount of the addition varies from 10 to 30 percent of the portion of the underpayment attributable to the valuation overstatement, with the exact percentage depending upon the extent of the overstatement. Sec. 6659(b). A valuation overstatement exists "if the value of any property, or the adjusted basis of any property, claimed on any return is 150 percent or more of the amount determined to be the correct amount of such valuation or adjusted basis * * ." Sec. 6659(c). The underpayment attributable to the foregoing valuation overstatement must be at least $ 1,000 for section 6659 to apply. Sec. 6659(d). 217 At the outset, we summarily reject petitioners' argument that section 6659 is inapplicable when section 465 limits deductibility of losses. There is no indication in either section or their histories that the overvaluation addition cannot apply along with section 465. Further, we hold that petitioners are liable for additions to tax under section 6659 because the sum of the correct bases of the masters was $ 1.5 million, while the sum of the masters' claimed bases was $ 6 million, an amount equal to or in excess of 150 percent of the correct amount. Sec. 6659(c). Because $ 6 million is more than 250 percent of $ 1.5 million, the additions should be computed by applying 30 percent to the portions of the underpayments attributable to the overstatement of bases. Sec. 6659(b); Zirker v. Commissioner, supra at 979. We fix the sum of the masters' correct bases at $ 1.5 million, the masters' fair market value on the date of the Purchase Agreement. While generally the basis of property for tax purposes is its cost (sections 167(g), 1011, and 1012), we noted the following218 exception in Bixby v. Commissioner,58 T.C. 757">58 T.C. 757, 776 (1972): This rule, however, does not apply where a transaction is not conducted at arm's-length by two economically self-interested parties or where a transaction is based upon "peculiar circumstances" which influence the purchaser to agree to a price in excess of the property's fair market value. * Accord Lemmen v. Commissioner,77 T.C. 1326">77 T.C. 1326, 1347-1348 (1981); Jordon v. Commissioner,60 T.C. 872">60 T.C. 872, 879-881 (1973), affd. per curiam 514 F.2d 1209">514 F.2d 1209 (8th Cir. 1975); Investors Diversified Services, Inc. v. Commissioner,39 T.C. 294">39 T.C. 294, 305-306 (1962), affd. 325 F.2d 341">325 F.2d 341 (8th Cir. 1963); Mountain Wholesale Co. v. Commissioner,17 T.C. 870">17 T.C. 870, 875 (1951). In the absence of an arm's-length purchase, basis in property may be limited to its fair market value, despite a purchase price in excess of that value. Lemmen v. Commissioner, supra at 1348. TMJ did not purchase the masters in an arm's-length transaction. The private placement memorandum admits as much, and the inflated purchase price paid by219 TMJ confirms the lack of any real negotiation. Thus, the basis limitation rule set forth in Bixby v. Commissioner, supra, is applicable in the instant case. Based upon the record in the instant case, we find that the fair market value of the masters on the date of the Purchase Agreement was $ 1.5 million, a value we compute by averaging the highest and lowest estimates obtained by Mr. Nagy and Dr. DeMann, Sr., for the prices charged by independent studios for video tapes comparable to the masters (($ 2.1 million plus $ .9 million) divided by 2). The record lacks other reliable evidence of the masters' value. We have already discussed and found unreliable the ACC appraisal presented by petitioners. The appraisal of respondent's expert was discredited by the expert's admission that a 1.5 percent penetration of the chiropractor market reasonably could be expected from a mail solicitation. The appraisal of respondent's expert, however, was premised upon the sale of 150 tapes or a market penetration of only .65217 percent (150 divided by 23,000 chiropractors). This Court need not accept the opinion of any expert witness. Chiu v. Commissioner,84 T.C. 722">84 T.C. 722, 734 (1985).220 Moreover, we cannot adopt with any degree of confidence as an indicator of fair market value the $ 80,000 paid by LSP to CVS for each master. Dr. DeMann, Sr., held a 50-percent interest in both entities, suggesting an absence of arm's-length dealing. We hold that the masters' fair market value, $ 1.5 million, constituted the sum of the masters' bases and that any amount paid or agreed to be paid in excess of that amount must be attributed to other items, possibly Mr. Nagy's promotional services, Dr. DeMann, Sr.'s production work, or promised tax benefits. In any event, the masters' bases for purposes of depreciation and ITC were limited to a total amount of $ 1.5 million, and to the extent depreciation and ITC were based upon additional claimed bases in the total amount of $ 4.5 million, the underpayments are attributable to a valuation overstatement. Zirker v. Commissioner, supra at 979. Respondent next argues that, for the purpose of applying the section 6659 addition, the sum of the masters' bases should be further reduced by "discounting" the bases pursuant to section 483(a). We reject respondent's argument because section 483(d), as in effect for the year221 in issue, prohibits the application of section 483(a) to payments with indefinite due dates, until the payments are made. 8222 Essentially, section 483 imputes interest to certain contracts for the sale or exchange of property. Sec. 483(a). Imputed interest is not a part of a purchaser's basis in property. Sec. 1.483-2(a)(1)(i), Income Tax Regs. Nevertheless, section 483 applies only if a contract has "total unstated interest" and certain other conditions are present. Sec. 483(c). Section 483(b) requires that certain deferred payments be discounted to present value in order to ascertain whether there is total unstated interest and, therefore, whether section 483 applies. For contracts entered into on December 31, 1981, the date TMJ bought the masters, the regulations prescribe that a nine-percent "test rate" be used to discount payments. Sec. 1.483-1(d)(1)(ii)(C), Income Tax Regs.If section 483 applies, a portion of the total unstated interest is imputed to each deferred payment. Sec. 483(a). The regulations, however, prescribe that a ten-percent discount rate be used to determine the amount of total unstated interest imputed to a contract, after it223 has been determined that section 483 applies. Sec. 1.483-1(c)(2)(ii)(C), Income Tax Regs. This is so because section 483(c), as in effect for the transaction in issue, requires that a lower discount rate ("test rate") be used to determine whether section 483 applies. When, as in the instant case, the due dates of payments are uncertain because of a mandatory prepayment provision, it is impossible to discount deferred payments to present value. Therefore, it is also impossible to determine whether there is total unstated interest and whether section 483(a) applies. For the transaction in issue, section 483(d) addresses this problem by requiring that such payments be separately discounted when made.Section 1.483-1(e)(1), Income Tax Regs., makes this clear: In the case of a contract be for the sale or exchange of property under which there are any indefinite payments, section 483 shall be separately applied to each such indefinite payment as if it * * * was the only payment due under the contract, and the effect of the application224 of section 483 shall be determined at the time such payment is made. [Emphasis supplied.] Thus, when a mandatory prepayment is made, it is to be discounted at that time in order to determine what portion, if any, represents total unstated interest. By its express terms, section 483(d) does not provide a method for imputing interest to contracts involving indefinite payments "at the time of the sale or exchange." Thus, section 483(a) cannot be used to fix the initial basis of property. Moreover, no other provision in section 483, as in effect for the year in issue, permits the discounting sought by respondent in the instant case. 9225 In Caruth v. United States,566 F.2d 901">566 F.2d 901 (5th Cir. 1978), the court recognized that section 483 (including section 483(d) as it existed prior to amendment by the DRA) provided no method for discounting an obligation requiring payments with indefinite due dates, before the payments were made. In that case, a number of trusts sold real property to a partnership and also became limited partners in the partnership. The purchase price consisted of cash and promissory notes which did not bear interest. Further, the notes required prepayment from the partnership's distributions of "net cash flow" to the trusts. The trusts argued that the notes they received should be discounted pursuant to section 483 in computing the amount realized from the sale of the real property. The court, however, disagreed and held that section 1001 required that the notes be included in the amount realized at fair market value. The court reasoned that section 483(d) was applicable because of the mandatory prepayment provision and that it precluded a discounting of the notes pursuant to section 483(a)-(c). The court explained, 226 The provisions of section 483 applicable to definite, non-interest bearing notes are so simple to apply that regulations provide a tabular computation which simply discounts the face amount of the note to its present value by attributing a part of the principal to interest at a specified rate. Such a computation is impossible if the date of payment cannot be determined from the face of the instrument. [Emphasis supplied.] Caruth v. United States, supra at 905. While Caruth v. United States, supra, decided the amount realized by a seller of property, we see no reason why a purchaser's cost basis should be determined under a different rule. Sec. 1.483-2(a)(1)(i), Income Tax Regs. In either case, if a contract for the sale of property requires payments with indefinite due dates, section 483(a) cannot be used to discount the contract. Insofar as Revenue Ruling 82-224, 2 C.B. 5">1982-2 C.B. 5, may be read to require a different result, we disagree with the ruling. We further note that revenue rulings merely represent respondent's position on specific factual situations rather than substantive authority. 227 Stark v. Commissioner,86 T.C. 243">86 T.C. 243, 250-251 (1986). We also decline to reduce the bases by eliminating the recourse portion of the long-term note and find that LSP did intend to enforce TMJ's liability. Crane v. Commissioner,331 U.S. 1">331 U.S. 1 (1947); sec. 1.1012-1, Income Tax Regs. Our finding is based upon the fact that both Mr. Nagy and Dr. DeMann, Sr., looked to LSP (which they owned in equal shares) for part of their profit from the project. Enforcement of the long-term note's recourse portion would augment that profit. Moreover, $ 2 million ($ 400,000 cash plus $ 1.6 million of recourse financing) approximated a fair price for the 12 masters, considering the estimates obtained by Mr. Nagy and Dr. DeMann, Sr. (i.e., $ 75,000 to $ 175,000 each, or a total of $ 900,000 to $ 2,100,000). Petitioners contend that respondent should have waived the section 6659 additions, as permitted by section 6659(e). That subsection grants the Commissioner the authority to waive all or a portion of the section 6659 addition "on a showing228 by the taxpayer that there was a reasonable basis for the valuation or adjusted basis claimed on the return and that such claim was made in good faith." Assuming we have the authority to review respondent's refusal to grant relief ( Mailman v. Commissioner,91 T.C. 1079">91 T.C. 1079 (1988)), we decline to afford such relief in the instant case. The only evidence of "reasonable basis" or "good faith" presented by petitioners is the ACC appraisal. That appraisal was flawed on its face, as it acknowledged that the masters had not been viewed and that it relied upon sales projections which were prepared by TMJ's accountants and based upon TMJ-supplied information and assumptions. The ACC appraisal also promised a supplement after the masters had been completed and viewed, but no supplement was prepared, and no TMJ partner, general or limited, asked for the supplement. Under the circumstances, relief under section 6659(e) is unwarranted. 3. Section 6653(a) AdditionRespondent seeks additions for negligence. Under section 6653(a)(1), "If any part of any underpayment * * is229 due to negligence or intentional disregard of rules or regulations," an addition of five percent of the entire underpayment is imposed. Further, section 6653(a)(2) increases the addition by 50 percent of the interest due on the portion of the underpayment "which is attributable to the negligence." We have defined negligence as the lack of due care or failure to do what a reasonable and ordinarily prudent person would do under the circumstances. Neely v. Commissioner,85 T.C. 934">85 T.C. 934, 947 (1985). Petitioners argue that section 6653(a) additions should not be imposed against them because they relied upon the advice of their accountants and the contents of the private placement memorandum when preparing their returns. We reject petitioners' defense and sustain imposition of the negligence addition because petitioners failed to procure independent advice prior to purchasing their limited partnership interests and reporting ITC and pass-through losses on their returns. We find apropos the following excerpt from Ryback v. Commissioner,91 T.C. 524">91 T.C. 524, 565 (1988), In these circumstances petitioners did not rely on competent, independent parties; they230 did no more than inquire of the promoter if the investment was sound. Such reliance is not the type of activity which will overcome the addition to tax for negligence or intentional disregard of the rules and regulations. * * * In the instant case, the accountants to whom petitioners refer are Hecht & Katz, who served as TMJ's accountants. We find that those accountants were not a source of independent counsel. Similarly, the private placement memorandum was not such a source. Thus, petitioners' reliance upon those sources does not militate against imposition of the section 6653(a) addition. 4. Section 6621(c) Increased InterestSection 6621(c)(1) provides for an increased interest rate on "any substantial underpayment attributable to tax-motivated transactions." Section 6621(c)(3)(A) itemizes certain transactions that are deemed "tax-motivated" within the meaning of the subsection. In section 6621(c)(3)(B), Congress delegated to the Secretary the authority to "specify other types of transactions which will be treated as tax-motivated for purposes of this subsection * * . 231 " Section 301.6621 -2T, Q-4, Temp. Proced. and Admin. Regs., 49 Fed. Reg. 50394 (December 28, 1984), brings within section 6621(c) substantial underpayments resulting from disallowances under section 183. Consequently, we hold that petitioners are liable for increased interest under section 6621(c). 5. Statute of LimitationsPetitioners Mr. and Mrs. Nagy (the "Nagys") argue that assessment against them for taxable year 1981 is barred by the three-year statute of limitations set forth in section 6501(a). Section 6501(a) requires the assessment of tax liability "within 3 years after the return was filed * * ." Sections 6503(a)(1) and 6213(a) combine to toll the foregoing limitations period upon the issuance of a statutory notice of deficiency. Thus, in the instant case, we must decide whether respondent issued his statutory notice within three years of the date the Nagys "filed" their return for taxable year 1981. The Nagys obtained an extension allowing them until August 15, 1982, to file their return for taxable year 1981. They mailed their return on July 21, 1982, and232 respondent received the return on July 23, 1982. On July 23, 1985, respondent issued a statutory notice of deficiency for the 1981 taxable year. Petitioners contend that their return was filed on its mailing date and cite section 7502(a) and Hotel Equities Corp. v. Commissioner,546 F.2d 725">546 F.2d 725 (7th Cir. 1976), for this proposition. If the return was indeed filed on its mailing date, then assessment against the Nagys is barred by section 6501(a). Respondent contends that the Nagys' return was filed on the date of its receipt by respondent. Respondent reasons that section 7502(a) is not applicable in the instant case, because the Nagys' return was received by respondent within an extended period allowed for filing. Respondent cites, among other authorities, Pace Oil Co. v. Commissioner,73 T.C. 249">73 T.C. 249 (1979). Respondent concludes that assessment is not barred by section 6501(a) because he issued his statutory notice within three years of the date he received the Nagys' return. We agree with respondent and hold that section 6501(a) does not prevent assessment against the Nagys. In Pace Oil Co. v. Commissioner, supra at 253, we233 confronted the same issue presented here and concluded as follows: On its face, section 7502(a) evidences the express purpose that the date of mailing of a return be deemed to be the date of its delivery only where it would otherwise be considered as untimely filed. There is no indication that this rule is to apply to returns that are timely without regard to section 7502(a), i.e., returns that are delivered prior to the expiration of an extended period for filing. [Emphasis supplied.] Moreover, we do not agree with petitioners' assertion that Hotel Equities Corp. v. Commissioner, supra, mandates a contrary result. As pointed out in First Charter Financial Corp. v. United States,669 F.2d 1342">669 F.2d 1342, 1346-1347 (9th Cir. 1982), Hotel Equities Corp. v. Commissioner, supra, involved a return that was not timely received. In such instances, section 7502(a) does characterize the mailing date as the "filing" date. The facts in the instant case are distinguishable, and we perceive no conflict between our opinion in Pace Oil Co. v. Commissioner, supra,234 and Hotel Equities Corp. v. Commissioner, supra.To reflect the foregoing, Decisions will be entered under Rule 155.Footnotes1. Cases of the following petitioners have been consolidated herein: Gary D. Pesnell and Judy A. Pesnell, docket No. 31506-85; and Charles S. Nagy and Lynne I. Nagy, docket No. 38814-85. Except as otherwise noted, for convenience we will refer to the foregoing consolidated cases collectively as the "instant case."↩2. Unless otherwise indicated, all section and Code 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. ↩*. Plus 50 percent of the interest due on the portion of the underpayment attributable to negligence per section 6653(a)(2)↩.3. TMJ subsequently filed a third party complaint for indemnity against LSP. Although the outcome of the litigation is unclear, it appears that TMJ ultimately returned Dr. Gelb's master to LSP in exchange for four other masters. Dr. Gelb's master was never exploited by TMJ. There is some evidence that Dr. Gelb himself is marketing tapes.↩4. Section 1.183-2(b), Income Tax Regs., contains a nonexclusive list of nine factors, derived from case law, to be considered in determining whether an activity is engaged in for profit. Allen v. Commissioner,72 T.C. 28">72 T.C. 28, 33 (1979); Benz v. Commissioner,63 T.C. 375">63 T.C. 375, 382-383 (1974). The factors are: (1) the manner in which the taxpayer carries on the activity; (2) the expertise of the taxpayer or his advisors; (3) the time and effort expended by the taxpayer in carrying on the activity; (4) the expectation that assets used in the activity may appreciate in value; (5) the success of the taxpayer in carrying on other similar or dissimilar activities; (6) the taxpayer's history of income or loss with respect to the activity; (7) the amount of occasional profits, if any, which are earned; (8) the financial status of the taxpayer; and (9) whether elements of personal pleasure or recreation are involved. No single factor is determinative, and, as noted, all surrounding facts and circumstances, including factors not listed, are to be considered. Sec. 1.183-2(b), Income Tax Regs.; Abramson v. Commissioner,86 T.C. 360">86 T.C. 360, 371↩ (1986).5. In view of our finding that the ACC appraisal was inflated, we need not rule upon respondent's request that the testimony of Ms. Berne, of ACC, be excluded.↩6. Our finding that TMJ lacked the requisite profit objective renders it unnecessary to decide whether the masters were "placed in service" in 1981 for purposes of depreciation and ITC. Because TMJ reported no gross income in that year, TMJ is entitled to no depreciation in any event. Further, TMJ's partners are entitled to no ITC regardless of the date the property was "placed in service," because TMJ is not entitled to depreciate the masters. Sec. 48(a)(1). Also obviated by our holding are counsels' arguments regarding whether the masters qualify for ITC and the proper basis for computing ITC. Although we sustain disallowance of ITC and deductions for the partnership loss upon the ground that TMJ's activity was subject to section 183, we would have arrived at the same result by analyzing TMJ under the framework set forth in Rose v. Commissioner,88 T.C. 386">88 T.C. 386 (1987), affd. 865 F.2d 851">865 F.2d 851 (6th Cir. 1989), as suggested in respondent's briefs. We decline to consider respondent's argument that TMJ entered into a joint venture for the exploitation of the masters, because our holding that section 183 governs TMJ's activity renders it unnecessary to decide this issue. Finally, our holding that section 183 governs TMJ's activity also obviates any need to consider the extent to which petitioners' ability to deduct a flow-through loss and take ITC was circumscribed by the at-risk rules of section 465. In the instant case, the absence of "otherwise allowable" deductions under section 183(b)(1)↩ means that petitioners are entitled to deduct none of TMJ's reported loss.7. Although respondent determined additions under sections 6653(a) and 6659 against petitioners Mr. and Mrs. Pesnell, respondent failed to determine some of these additions to tax against the other petitioners. At the conclusion of trial, however, respondent moved under Rule 41(b) for an order amending the pleadings to conform to the proof at trial. Petitioners did not object to the motion, and respondent contends that all additions to tax are therefore in issue for all petitioners. Because petitioners concede in their briefs that additions to tax may be brought into issue through a Rule 41(b) motion, we hold that additions under sections 6653(a) and 6659 are in issue for all petitioners. Of course, the burden of proof on the issue of whether a particular addition to tax is applicable to a given petitioner depends upon whether the addition to tax was determined in the notice of deficiency issued to that petitioner. Rule 142(a)↩.8. For the year in issue, section 483(a)-(d) provides as follows: (a) Amounts Constituting Interest. -- For purposes of this title, in the case of any contract for the sale or exchange of property there shall be treated as interest that part of a payment to which this section applies which bears the same ratio to the amount of such payment as the total unstated interest under such contract bears to the total of the payments to which this section applies which are due under such contract. (b) Total Unstated Interest. -- For purposes of this section, the term "total unstated interest" means, with respect to a contract for the sale or exchange of property, an amount equal to the excess of -- (1) the sum of the payments to which this section applies which are due under the contract, over (2) the sum of the present values of such payments and the present values of any interest payments due under the contract. For purposes of paragraph (2), the present value of the payment shall be determined, as of the date of the sale or exchange, by discounting such payment at the rate, and in the manner, provided in regulations prescribed by the Secretary. Such regulations shall provide for discounting on the basis of 6-month brackets and shall provide that the present value of any interest payment due not more than 6 months after the date of the sale or exchange is an amount equal to 100 percent of such payment. (c) Payments to Which Section Applies. -- (1) In general. -- Except as provided in subsection (f), this section shall apply to any payment on account of the sale or exchange of property which constitutes part or all of the sales price and which is due more than 6 months after the date of such sale or exchange under a contract -- (A) under which some or all of the payments are due more than one year after the date of such sale or exchange, and (B) under which, using a rate provided by regulations prescribed by the Secretary for purposes of this subparagraph, there is total unstated interest. Any rate prescribed for determining whether there is total unstated interest for purposes of subparagraph (B) shall be at least one percentage point lower than the rate prescribed for purposes of subsection (b)(2). (2) Treatment of evidence of indebtedness. -- For purposes of this section, an evidence of indebtedness of the purchaser given in consideration for the sale or exchange of property shall not be considered a payment, and any payment due under such evidence of indebtedness shall be treated as due under the contract for the sale or exchange. (d) Payments that are indefinite as to time, liability, or amount. -- In the case of a contract for the sale or exchange of property under which the liability for, or the amount or due date of, any portion of a payment cannot be determined at the time of the sale or exchange, this section shall be separately applied to such portion as if it (and any amount of interest attributable to such portion) were the only payments due under the contract; and such determinations of liability, amount, and due date shall be made at the time payment of such portion is made.↩9. Section 483 has undergone significant amendment since the date of the transaction in issue, and we express no opinion respecting the treatment of transactions subject to the amendments. Most notable are certain changes made by the Deficit Reduction Act of 1984, Pub. L. 98-369, 98 Stat. 494, 553-555 (the "DRA"). Section 483(d) (concerning indefinite payments) was deleted. Section 483(f)(1) (formerly (g)(1)) was added, and it directs respondent to prescribe regulations providing for the application of section 483 to contracts involving indefinite payments. Further, the DRA added new section (d)(1) which exempts from section 483, transactions governed by the original issue discount rules of section 1271 et seq. The DRA further coordinated section 483 with the original issue discount rules by amending section 483(b) and (c) to require that total unstated interest be computed by discounting deferred payments under the method required by section 1274(b)(2) and by using discount rates tied to the applicable Federal rate. Consequently, the discount rates and corresponding tables of discount factors set forth in the current section 483 regulations ( sec. 1.483-1(g)(2), Income Tax Regs.) generally do not govern transactions entered into after December 31, 1984. It also should be noted that current law prescribes use of the same discount rate for both ascertaining whether section 483 applies and determining the interest to be imputed. Sec. 483(b)↩ (flush language).	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622359/	Estate of Clarence A. Williams, Deceased, William E. Nodine, Administrator, d.b.n. c.t.a., Petitioner v. Commissioner of Internal Revenue, RespondentEstate of Williams v. CommissionerDocket No. 6194-72United States Tax Court62 T.C. 400; 1974 U.S. Tax Ct. LEXIS 87; 62 T.C. No. 46; June 25, 1974, Filed 87 Decision will be entered for the petitioner. In his will decedent's uncle, Joseph L. Friedman, who died in 1913, established a trust for the benefit of his mother and his three sisters and their heirs. The trust was to continue in existence until 21 years after the death of the last of Friedman's sisters to die, which will be in 1975. The will provided that, at the expiration of the 21-year period, "then the estate in the hands of the trustee shall be divided, one-third to the heirs of each of my said sisters." Decedent received one-half of his mother's one-third share of the income from the trust until his death in 1968. He was survived by one child of his first marriage and by a second wife. Held, decedent's interest in both the corpus and income of the Friedman trust was contingent at the time of his death and the value thereof is not taxable in his estate. Edward S. Wunsch, for the petitioner.James C. Lynch, for the respondent. Drennen, Judge. DRENNEN401 Respondent determined a deficiency in Federal estate tax for the Estate of Clarence A. Williams in the amount of $ 115,821.54. The issues before the Court are whether, at the time of his death, Clarence A. Williams had a vested interest in either (1) a portion of the corpus of a testamentary trust established by his uncle or (2) the income from a portion of the corpus of the trust, which is includable in his gross estate under section 2033, I.R.C. 1954.FINDINGS OF FACTThe facts have been fully stipulated by the parties and are found accordingly.Petitioner is the Estate of Clarence A. Williams, deceased, William E. Nodine, administrator d.b.n. with the will attached, who at the time the petition was filed had his legal address in Clearwater, Fla. Clarence A. Williams died April 29, 1968, a resident of Clearwater, Fla. The estate tax return for the Estate89 of Clarence A. Williams was received by the director of internal revenue, Jacksonville, Fla., on February 25, 1969.Up to the time of his death, Clarence A. Williams received a portion of the income from a trust established under the will of Joseph L. Friedman, the decedent's uncle.Joseph L. Friedman died a resident of Paducah, Ky., in 1913. His last will and testament, dated June 25, 1908, was duly admitted to probate on July 9, 1913, 1 by the County Court for McCracken County, Ky. The will of Friedman created a testamentary trust. The portion of Friedman's will that established the trust provided:Now after the foregoing devises and bequests are provided for and executed, it is my will that the balance of my estate be converted into good, interest-bearing securities which shall be turned over by my executors to the Louisville 402 Trust Company of Louisville, Kentucky, as trustee, if in the opinion of my executors that Company is in a position to handle the balance of my estate; but be it understood that it is my will that my executors shall exercise their discretion as to the selection of a trustee, preferring, however, the Louisville Trust Company if it shall continue90 to be a solvent and reputable concern in their judgment. Such securities shall be held by such trustee and in trust for the benefit of my mother, Mrs. Louisa Friedman, and my sisters, Mrs. Ida Williams, Mrs. Blanche C. Keiler and Mrs. Sunshine F. Nahm and their children and [sic] hereinafter provided. The trustee will keep the trust fund invested in the best and safest securities to be found at the best interest rates to be secured, having at all times due regard to the safety of the investments, and will pay to my mother and my three sisters, or to the heirs of such of my sisters as may die, equally the income from said trust fund. When my mother dies her interest in said income is to go to her daughters or their children, if any of them be dead. And the interest of each of my sisters in the income from said estate in the hands of such trustee upon her death shall go to her children. It being my purpose to create an estate in the hands of the trustee to be selected as hereinabove set forth, the income from which shall go to my mother and my three sisters as long as my mother lives and at her death to my three sisters as long as they live and in the event of the death of either91 one of them her interest shall go to her children.It is my will that the funds in the hands of the trustee provided for herein shall be held by such trustee and the income therefrom paid as hereinbefore directed until the death of the last to survive of my three sisters hereinbefore named; and for twenty-one years thereafter; and at the expiration of the period of twenty-one years after the death of the last to survive of my said three sisters then the estate in the hands of said trustee shall be divided, one-third to the heirs of each of my said sisters.Friedman was survived by his mother, Louisa Friedman, and his three sisters who were named in the will, Ida Williams, Blanche C. Keiler, and Sunshine F. Nahm. Ida Williams was born in 1862, 92 Blanche Keiler in 1866, and Sunshine Nahm in 1869. At the time Friedman's will was executed on June 25, 1908, and at the time of his death in 1913, his sisters had living children as follows:(a) Ida was the mother of:(1) Clarence A. Williams, born in 1879, and(2) Jerome J. Williams, born in 1886;(b) Blanche was the mother of:(1) Leo F. Keiler, born in 1888, and(2) Anita Keiler (May), born in 1893, and(c) Sunshine was the mother of:(1) Emanie Nahm (Phillips), born in 1895.Louisa Friedman died on February 2, 1922. Ida Williams died on December 15, 1914. Ida was survived by her two children, Jerome J. Williams and Clarence A. Williams. Jerome was still living on the date this case was submitted. Clarence, the decedent in the present case, died on April 29, 1968, leaving surviving him his wife, Claribel, 403 and his daughter, Anita Cote. Claribel Williams was the second wife of the decedent and never bore any children by him. Claribel died December 2, 1971.Sunshine Nahm died in 1937, leaving her daughter Emanie Nahm Phillips surviving, who was also living at the date this case was submitted. The third sister of Friedman, Blanche C. Keiler, died on March 9, 1954, 93 being the last sister to die. Blanche was survived by two children, Anita Keiler May and Leo F. Keiler. Leo F. Keiler died in 1958, leaving two children surviving him, Blanche Keiler Prinzmetal and John W. Keiler II. Anita K. May was alive when this case was submitted.The following genealogical chart (p. 404) shows the relationship of the above-mentioned people to Joseph L. Friedman, their date of birth, and their date of death, if applicable.On June 6, 1958, John W. Keiler II was appointed as trustee of the last will and testament of Joseph L. Friedman. On July 28, 1965, he resigned as trustee of the one-third of the assets that were then being held for the benefit of Sunshine Nahm, her children, and heirs. Citizens Fidelity Bank & Trust Co. of Louisville, Ky., was appointed successor trustee of that one-third portion of the original trust estate. That one-third portion that benefited Sunshine Nahm, her children, and heirs was thereafter and is presently known as the Joseph L. Friedman Trust A. The remaining two-thirds portion of the original trust estate, which was held for the benefit of Ida Williams and Blanche Keiler and their heirs, was subsequently designated the Joseph94 L. Friedman Trust B. Trust B is the trust with which we are presently concerned. The above division of the trust estate was made pursuant to an order entered by the McCracken County Court in the State of Kentucky. The order provided, in pertinent part:C. Joseph L. Friedman Trust A shall constitute the portion of the original trust estate in which all persons claiming and taking through the deceased sister of the said Joseph L. Friedman, Sunshine F. Nahm, are interested, that is to say, the "heirs" of the said Sunshine F. Nahm, and said persons shall not have any claim to or interest in Joseph L. Friedman Trust B whatsoever, unless they should happen to qualify as "heirs" of the other two deceased sisters by reason of the death of the direct descendants of said sisters.D. Joseph L. Friedman Trust B shall constitute the portion of the original trust estate in which all persons claiming and taking through the deceased sisters of the said Joseph L. Friedman, Ida F. Williams and Blanche F. Keiler, are interested, that is to say, the "heirs" of the said, Ida F. Williams and Blanche F. Keiler, and said persons shall not have any claim to or interest in Joseph L. Friedman Trust A whatsoever, 95 unless they should happen to qualify as "heirs" of the other deceased sister by reason of the death of the direct descendants of said sister. * * *404 [SEE ILLUSTRATION IN ORIGINAL]405 L. An attested copy of this order shall be sent by the Clerk of this Court to all adult contingent beneficiaries who are not now represented by counsel herein, and to the persons having custody of all infant contingent beneficiaries, and said Clerk may rely upon information furnished to him in that respect concerning names, addresses et cetera.Following the death of Joseph L. Friedman in 1913, the persons acting as fiduciaries under the will of Joseph L. Friedman paid the net income from the trust estate to the following individuals: One-fourth to his mother, Louisa Friedman; one-fourth to his sister, Ida Williams; one-fourth to his sister, Blanche Keiler; and one-fourth to his sister, Sunshine Nahm. After the death of Ida Williams on December 15, 1914, her portion of the net income from the trust estate was divided equally and her two children, Clarence A. Williams and Jerome J. Williams, each began receiving one-eighth of the trust income. The other sisters of Friedman and his mother96 continued to receive their one-fourth shares.When Louisa Friedman died in 1922, the fractional shares of the net trust income were recomputed and paid to the following recipients: One-third to Blanche C. Keiler; one-third to Sunshine Nahm; one-sixth to Jerome J. Williams; and one-sixth to Clarence A. Williams.Sunshine F. Nahm died in 1937 and was survived by one child, Emanie A. Nahm (Phillips). Sunshine's one-third of the trust income was thereafter paid to Emanie. The other income beneficiaries continued receiving their proportionate share of the income.When the last surviving sister of Joseph L. Friedman, Blanche C. Keiler, died on March 9, 1954, the net income from the trust was paid in the following manner: One-third to Emanie Nahm (Phillips); one-sixth to Anita Keiler (May) (daughter of Blanche); one-sixth to Leo F. Keiler (son of Blanche); one-sixth to Jerome J. Williams; and one-sixth to Clarence A. Williams.On June 28, 1958, Leo F. Keiler died. He was survived by two children, Blanche Keiler Prinzmetal and John W. Keiler II. These children of Leo each began receiving one-twelfth (one-half of Leo's one-sixth) of the net trust income. The other recipients of trust 97 income continued to receive their previous fractional shares.Since the division of the trust estate in 1965, the Joseph L. Friedman Trust B was held by John W. Keiler II, as trustee. The net income from Trust B was paid to the following people in the following proportions: One-fourth to Clarence A. Williams; one-fourth to Jerome J. Williams; one-fourth to Anita Keiler May; one-eighth to Blanche Keiler Prinzmetal; and one-eighth to John W. Keiler II. Clarence A. Williams, the decedent in the present case, died on April 29, 1968, and since the time of his death, his one-fourth share of the net income from 406 Trust B has been paid to his daughter, Anita Cote. The other recipients have continued receiving their fractional share of the income from Trust B.In his will, executed April 29, 1960, and admitted to probate on or about May 9, 1968, after making specific bequests of $ 1,000 to each of his granddaughter and grandson, Clarence A. Williams left all the rest and remainder of his estate to his wife, Claribel. Paragraph IV of the will stated:I am making no provision in this Will for my daughter, MRS. ANITA CLIETT, not because of any lack of affection for her, but because98 of the fact that she is otherwise well provided for by virtue of trusts which have been previously established and which will pass to her outside of this Will at the time of my death.Mrs. Anita Cliett is the same person as Anita Cote, and she had no interest in any trust other than the trust established under the will of Joseph L. Friedman. The total gross estate reported on the estate tax return for the Estate of Clarence A. Williams was valued at $ 149,910.25. Petitioner maintains that Clarence A. Williams had no interest in the Joseph L. Friedman Trust that was taxable in his estate and no value therefor was reported in his gross estate.Respondent, in his notice of deficiency, determined that decedent did have a one-fourth interest in the Joseph L. Friedman Trust B, which was taxable in decedent's estate, which he valued at $ 789,677.95. The marital deduction was increased accordingly.The total fair market value of all of the assets of the Joseph L. Friedman Trust B as of April 29, 1968, was $ 3,158,711.83.OPINIONClarence A. Williams, the decedent herein, died testate April 29, 1968. During his lifetime decedent received a part of the income from a trust established 99 under the will of his uncle, Joseph L. Friedman, who died a resident of Kentucky in 1913. Under the terms thereof, the trust was to terminate 21 years after the death of the last survivor of Friedman's three sisters, one of whom was decedent's mother, which will be in 1975. In his will decedent made reference to the trust but made no disposition of any interest that he might have therein. In the estate tax return filed for his estate disclosure was made of decedent's income interest in the trust, but no value therefor was included in his gross estate. The issues before us are whether decedent had such an interest in either the corpus or the income of the trust that it would be taxable in his estate.The relevant provision in the Internal Revenue Code is section 2033, which provides: "The value of the gross estate shall include the value of all property to the extent of the interest therein of the 407 decedent at the time of his death." Section 20.2033-1, Estate Tax Regs., adds little to the statement of law quoted above, although earlier regulations contained the statement quoted in the footnote. 2100 The Federal taxing statute enacted by Congress determines whether property in which a decedent had an interest at the time of his death is subject to the Federal estate tax; but when the question becomes whether the decedent had such an interest that is declared taxable under Federal law, we must look to State law to answer that question. Blair v. Commissioner, 300 U.S. 5">300 U.S. 5 (1937). As was said in Morgan v. Commissioner, 309 U.S. 78">309 U.S. 78 (1940), quoted with approval in Aquilino v. United States, 363 U.S. 509">363 U.S. 509, 513 (1960), "in the application of a federal revenue act, state law controls in determining the nature of the legal interest which the taxpayer had in the property * * sought to be reached by the statute. [Fn. omitted.]"The Federal statute here involved is inclusive but not definitive, including in the gross estate "all property to the extent of the interest therein of the decedent." It has been held, particularly with regard to interests in trusts, that the potential inclusion of such an interest in a decedent's taxable estate is often dependent on whether decedent's interest101 was vested or contingent. If the former, it is taxable; if the latter, it is not taxable. Earle v. Commissioner, 157 F. 2d 501 (C.A. 6, 1946); Estate of Sergeant Price Martin, 23 T.C. 725 (1955); Estate of John G. Frazer, 6 T.C. 1255">6 T.C. 1255 (1946), affd. 162 F. 2d 167 (C.A. 3, 1947); Joseph P. McMullen, Executor, 3 B.T.A. 589 (1926). However, where a decedent's right to receive benefits under a trust is so conditioned as to terminate at his death, such interest is not taxable, see Rev. Rul. 67-370, 2 C.B. 324">1967-2 C.B. 324, whether such life estate is considered vested or not. The parties are in agreement that the resolution of the issues in this case hinges on whether decedent had a vested or contingent interest in the Friedman trust.The parties have stipulated that the interpretation of the will of Joseph L. Friedman is controlled by the law of Kentucky, the State of which Friedman was a resident at the time of his death and wherein his estate was administered. In Commissioner v. Estate of Bosch, 387 U.S. 456">387 U.S. 456 (1967),102 the Supreme Court said that a State's highest court is the best authority on its own law. Where Federal estate tax liability turns upon the character of a property interest held and transferred by a decedent under State law, the Federal authorities are not bound by the determination made of such property interest by a State trial 408 court; if there is no decision by the State's highest court, Federal authorities must apply what they find to be the State law after giving "proper regard" to relevant rulings of other courts of the State.The Kentucky law with regard to the interpretation of wills and determination of property rights created thereby is rather succinctly set forth in Lincoln Bank & Trust Co. v. Bailey, 351 S. W. 2d 163, 165 (Ky. Ct. App. 1961), as follows:All the parties are agreed on the principle that the will must be construed according to the testator's intent, gathered from what he did say in the instrument as distinguished from what the court thinks he would have said if he had considered the problem now before it. And though they are not further utilized in this opinion, we give full recognition as well to the familiar103 rules of construction favoring testacy over intestacy, absolute over qualified estates, and early vesting as against contingent rights. All of these, however, apply only where there is real doubt as to what the testator intended by what he said. They cannot be hoist by their own petard to achieve a result repugnant to the testator's legitimate objectives as the court is able to recognize those objectives from a reading of the instrument itself.And, in Harrison v. Shippen, 419 S.W. 2d 557 (Ky. Ct. App. 1967), the highest court of Kentucky made it clear that it is committed to the rule that the intention of the testator, as manifested by the will as a whole, must control, and that it will not be bound by technical rules of construction when the intent of the testator would be frustrated thereby.We think we can determine with reasonable certainty the intent of Joseph L. Friedman with respect to the disposition of his estate from the terms of his will and that it is not necessary to turn to the rules of construction relied on by respondent. As a result of that determination, we conclude that Clarence A. Williams, decedent herein, did not have 104 such an interest in either the corpus or the income of the Friedman trust at the time of his death that would require inclusion of the value thereof in his estate for Federal estate tax purposes.We turn first to the provisions of the Friedman will relative to the corpus of the trust. After making various specific bequests, the will provided:Now after the foregoing devises and bequests are provided for and executed, it is my will that the balance of my estate be converted into good * * securities which shall be turned over by my executors to the Louisville Trust Company * * * as trustee * * . Such securities shall be held by such trustee and in trust for the benefit of my mother * * and my sisters * * * and their children and [sic] hereinafter provided. * * After providing for distribution of the income, the will continued:It is my will that the funds in the hands of the trustee * * shall be held by such trustee * * * until the death of the last to survive of my three sisters * * * and for twenty-one years thereafter; and at the expiration of the period of twenty-one years after the death of the last to survive of my said three sisters 409 then the estate in the105 hands of said trustee shall be divided, one-third to the heirs of each of my said sisters.It is quite clear from the above language that the testator was not only conscious of the rule against perpetuities but also that he intended that the corpus of the estate be continued in trust for as long as it could reasonably be kept in trust without violating the rule. "Then the estate * * * shall be divided, one-third to the heirs of each of my said sisters." (Emphasis added.) The language itself not only postpones the termination of the trust and division of the trust estate until the end of the 21-year period, but also postpones the determination of the "heirs" of the sisters, who were to be the ultimate beneficiaries, until the 21 years expired. Furthermore, it would be rather foolish to have the heirs -- remainder beneficiaries -- determined as of the date of death of each sister, as contended by respondent, and then postpone distribution to them for a minimum of 21 years thereafter. At the end of the 21-years-or-longer period all or many of the heirs as so determined might be deceased -- and yet no provision was made for disposition of their interests in that event. Also, had106 testator intended that the heirs of his sisters be determined as of the date of their respective deaths, he would probably have either said so or used the words "children" instead of "heirs."The rule against perpetuities has long been in force in Kentucky both in the courts, see Johnson's Trustee v. Johnson, 25 Ky. L. Rptr. 2119">25 Ky. L. Rptr. 2119, 79 S. W. 293 (1904); Fidelity Trust Co. v. Lloyd, 25 Ky. L. Rptr. 1827">25 Ky. L. Rptr. 1827, 78 S. W. 896 (1904); and by statute, see Ky. Stat. 1903, sec. 2360, and Ky. Rev. Stat. Ann. sec. 381.215 (Baldwin 1973). The latter statute provides:No interest in real or personal property shall be good unless it must vest, if at all, not later than twenty-one years after some life in being at the creation of the interest. It is the purpose of this section to enact the common law rule against perpetuities * .The rule against perpetuities primarily prevents the postponement of vesting of interests in property beyond the prescribed period. The fact that Friedman chose the exact period prescribed by the rule against perpetuities for continuation of the trust is a strong indication107 that he intended that no interest in the corpus of the trust, at least, vest until the trust terminated.It is usually a waste of time to attempt to analogize one will interpretation case with another because the words used and the circumstances existing are rarely the same and the goal sought in the instant case is the intent of the instant testator, not another, but it may be helpful to point out that in several cases the highest court of Kentucky has given consideration to some of the factors we have considered in reaching conclusions similar to our conclusion here. One such case is Lincoln 410 v. Bailey, supra, which we have quoted from above. In that case the will under consideration provided that the estate be put in trust and held together as a whole "until twenty one years after the death of my said grand children, who may be alive at my death and the last survivor of them, when it shall be divided among the descendants of said grand children." The court held that all of the ultimate remainder interests were contingent. Harrison v. Shippen, supra, involved a will containing 108 a design for devolution of the estate somewhat similar to the testator's design in this case and the court concluded that the ultimate remaindermen were to be determined as of the date of termination of the trust. Its reasoning included the following: "It is unlikely the testatrix intended to control her estate up to this point and then turn it over to her daughters to pass on to strangers should they die without issue." We think Friedman's intent to keep his estate within his sisters' bloodlines is also apparent from his overall plan for disposition of his estate as enunciated in his will. But if our decedent had a vested interest in the trust estate at the time of his death which was a part of his estate, Ida Williams' one-third share of the trust would pass to decedent's wife, Claribel, and eventually to her heirs, all of whom would be complete strangers to Ida's bloodlines, and to the exclusion of Ida's granddaughter, Anita.We have no reasonable doubt based on our analysis of Friedman's will that he intended the determination of the ultimate beneficiaries of the trust estate to be made as of the date of termination of the trust. Consequently, decedent Williams had only a contingent109 interest in the trust corpus at the time of his death and that interest is not taxable in his estate.While we have given little or no consideration to the following factors in reaching our conclusion, they do tend to support our conclusion. In the proceedings in the McCracken County Court in Kentucky to divide the trust estate in 1965, which does not have the earmarks of a completely friendly proceeding, that court decreed that the Joseph L. Friedman Trust B "shall constitute the portion of the original trust estate in which all persons claiming and taking through the deceased sisters of the said Joseph L. Friedman, Ida F. Williams and Blanche F. Keiler, are interested, that is to say, the 'heirs' of the said Ida F. Williams * * and said persons shall not have any claim to or interest in Joseph L. Friedman Trust A whatsoever, unless they should happen to qualify as 'heirs' of the other deceased sister by reason of the death of the direct descendants of said sister." This certainly implies an interpretation of the Friedman will that would postpone determination of the "heirs" of a deceased sister until termination of the trust. We have given "proper regard" to it.411 It110 is also obvious that decedent herein, Clarence A. Williams, thought he had no disposable interest in the trust. In his will he stated that he was making no provision for his daughter, Anita, not because of lack of affection for her, "but because of the fact that she is otherwise well provided for by virtue of trusts which have been previously established and which will pass to her outside of this Will at the time of my death." The only trust in which Anita had any interest was the Friedman Trust B. Furthermore, we note that since the death of Clarence his share of the income from the trust has been distributed to Anita.This leaves only the question whether decedent had such an interest in the income from the trust at the time of his death that the value thereof is taxable in his estate. Respondent claims that under the terms of the Friedman will decedent was the ultimate beneficiary of his share of the income from the trust, that his estate was entitled to receive that income until the trust terminated, and that this was a vested interest, the value of which is taxable in his estate.The provisions of Friedman's will pertaining to the income of the trust were as follows:Such111 securities shall be held by such trustee and in trust for the benefit of my mother * * and my sisters, Mrs. Ida Williams, Mrs. Blanche C. Keiler and Mrs. Sunshine F. Nahm and their children and [sic] hereinafter provided. The trustee * * * will pay to my mother and my three sisters, or to the heirs of such of my sisters as may die, equally the income from said trust fund. When my mother dies her interest in said income is to go to her daughters or their children, if any of them be dead. And the interest of each of my sisters in the income from said estate in the hands of such trustee upon her death shall go to her children. It being my purpose to create an estate in the hands of the trustee * * * the income from which shall go to my mother and my three sisters as long as my mother lives and at her death to my three sisters as long as they live and in the event of the death of either one of them her interest shall go to her children.The intent of the testator with regard to distribution of the income of the trust in the event the children of any of the three sisters should die before the trust terminated is not as easily determined from the words quoted above as was his intent112 with respect to disposition of the corpus. This is because in one instance the word "heirs" of the sisters is used while in several other instances the word "children" of the sisters is used. Where such doubt exists we must try to determine the testator's intent with regard to the income from all of the terms of the will. Harrison v. Shippen, supra.In Gresham v. Durham, 270 S. W. 2d 952 (Ky. Ct. App. 1954), the court said:the apparent objects operating to influence testator's mind should be considered and the words used in the will given that reasonable construction best calculated to carry out the wishes of the testator as reflected by his will. [Emphasis added.]412 We have concluded above that the ultimate beneficiaries of the corpus of the trust, "the heirs of each of my said sisters," are not to be determined until the termination of the trust. We think it would be inconsistent with the overall plan of the testator for disposition of his estate, as manifested by the language of the will as a whole, and an unreasonable construction of the above-quoted provisions, to construe the income provisions113 in a manner that would cause the income from decedent's share of the trust to be paid to decedent's estate, rather than to the granddaughter of Ida, from the time of decedent's death until the termination of the trust, at which time the corpus will presumably be distributed to the granddaughter, Anita, in fee. But such would be the result if we accept respondent's argument that the word "children" used in the quoted provision is controlling and was a word of limitation that vested the income interest in this decedent and made the value thereof taxable in his estate.Analyzing the income provisions themselves, in the light of the will as a whole, leads us to the conclusion that Friedman intended the income of the trust to be distributed to the heirs, as currently determined, of his sisters, and did not intend that a sister's share of the income be distributed to the estate of a child of hers who died before termination of the trust. Friedman was obviously concerned with tying up the estate for the benefit of the lineal descendants of his sisters as long as reasonably permissible under the law, and it is reasonably certain that he did not intend to permit a child of a deceased sister114 to divert the income of the trust to someone that was not a lineal descendant of that sister. See Lincoln Bank & Trust Co. v. Bailey, supra at 166.The principal dispositive sentence in the income provision above quoted reads: "and will pay to my mother and my three sisters, or to the heirs of such of my sisters as may die, equally the income from said trust fund." This clearly evidences an intent to have the income paid to the heirs or lineal descendants of a deceased sister while the trust was in existence. We think it is a reasonable construction of the use of the word "children" in the following sentences of the income provision that testator wanted to make it clear that the "heirs" of the sisters meant lineal descendants, i.e., "children." To construe the word "children" as a word of limitation would, in our opinion, be inconsistent with the prior use of the word "heirs" and with the remainder of the will. But to categorize the word "children" as a word of description would permit a determination of the testator's intent consistent with other parts of the will. We so construe the income provisions of the will and conclude that decedent had115 only a life estate in the income from the trust which terminated at his death and was not taxable in his estate.413 We note that this conclusion appears to accord with our decedent's understanding of the provisions of the Friedman trust because, when he deliberately made no provision for his daughter in his own will, he obviously thought she would receive his share of the income from the trust until it terminated and then Ida's share of the corpus. We also note that our conclusion is in accord with the actual distribution of the trust income, not only with respect to decedent's share of the income since his death, but also with respect to the share of Blanche C. Keiler, one-half of which has been distributed to her granddaughter and grandson since the death of their father, Leo F. Keiler, who was a child of Blanche.Decision will be entered for the petitioner. Footnotes1. The parties stipulated that Joseph L. Friedman died on July 15, 1913. They also stipulated that his will was duly admitted to probate on July 9, 1913, and this date of probate is also shown on a true copy of the will. There is no explanation for this apparent inconsistency.↩2. Art. 13, Regs. 80 (1937), contained the following statement:"The value of a vested remainder should be included in gross estate. Nothing should be included, however, on account of a contingent remainder in the case the contingency does not happen in the lifetime of the decedent, and the interest consequently lapses at his death. Nor should anything be included on account of an interest or an estate limited for the life of the decedent. * * *"↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622360/	RONALE ROBERSON AND PAMELA ROBERSON, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentRoberson v. CommissionerDocket No. 39223-87United States Tax CourtT.C. Memo 1990-643; 1990 Tax Ct. Memo LEXIS 718; 60 T.C.M. (CCH) 1486; T.C.M. (RIA) 90643; December 20, 1990, Filed 718 Decision will be entered under Rule 155. Curtis Darling, for the petitioners. 719 Peter D. Bakutes and Alison W. Lehr, for the respondent. SWIFT, Judge. SWIFT2128 MEMORANDUM FINDINGS OF FACT AND OPINION Respondent determined deficiencies and additions to tax in petitioners' joint Federal income tax, as follows: Additions to Tax, Secs. 1YearDeficiency66516653(a)(1)6653(a)(2)6661 1983$ 95,153$ 33,099$ 8,170$ 15,146198487,90627,0086,75219,582198585,0070 4,25016,723After settlement of some issues, the issues for decision are: (1) Whether petitioners should be taxed on a 1984 sale of real property; (2) whether petitioners may deduct certain travel expenses under section 162(a)(2); and (3) whether petitioners are liable for additions to tax under sections 6653(a)(1) and (2) and 6661. 720 FINDINGS OF FACT Some of the facts have been stipulated and are so found. Pamela and Ronale Roberson were married and filed joint Federal income tax returns for the years at issue. At the time they filed their petition, petitioners resided in Bakersfield, California. Sale of Real PropertyPetitioners have been engaged in a construction business for many years, specializing in the construction of residential homes. In years prior to 1980, the business was operated generally in partnership with Wayne and Evelyn Vaughn 2129 (the Vaughns), who are petitioner Pamela Roberson's parents. From 1983 through 1985, the business was operated generally by petitioners as a sole proprietorship under the name of Ron Roberson Builders. Sometime prior to September of 1982, petitioners purchased a parcel of unimproved real property located at 1100 Calle Extrano, Bakersfield, California. Petitioners obtained a $ 220,000 construction loan and built a house on this property (hereinafter, the house and property will be referred to as Calle Extrano). After completing the house on September 1, 1982, petitioners offered to sell Calle Extrano for $ 295,000. The parties have stipulated721 that Calle Extrano was held by petitioners as inventory property and that it was offered for sale in the normal course of their construction business. In January or February of 1983, petitioners allegedly entered into a joint venture with the Vaughns to develop 30 lots on a parcel of real property referred to as tract #3907 which had a value of $ 126,850. Petitioners and the Vaughns each were to contribute property to the joint venture with a value of $ 63,425. The Vaughns were to contribute to the joint venture tract #3907, which contribution (after the adjustments and credits mentioned below between petitioners and the Vaughns) apparently would represent a net contribution by the Vaughns to the joint venture of $ 63,425. Petitioners' contribution to the joint venture was to occur through a related transaction between petitioners and the Vaughns involving Calle Extrano. The Vaughns were to purchase Calle Extrano from petitioners for $ 282,080. The Vaughns were to pay the $ 282,080 purchase price by assuming the $ 220,000 construction loan relating to Calle Extrano and by giving petitioners a $ 62,080 credit toward petitioners' obligation to the joint venture (i.e., by treating722 petitioners as if petitioners had then paid the $ 62,080 to the joint venture, and by treating the joint venture as if it had then paid that amount to the Vaughns). Neither the existence nor terms of the alleged joint venture with respect to the proposed development of tract #3907, nor with respect to the alleged 1983 sale of Calle Extrano by petitioners to the Vaughns are reflected by any written agreements or documents in evidence in this case. In early 1983 the Vaughns moved into the Calle Extrano home. They stayed in the home for only a few weeks, during which they apparently made a payment on the construction loan and Wayne Vaughn made improvements to the property at a cost to him of $ 27,744. In March or April of 1983, Wayne Vaughn indicated to petitioners that he had decided not to purchase Calle Extrano, and petitioners indicated to the Vaughns that they would be interested in purchasing from the Vaughns all of tract #3907. Apparently for the latter purpose, petitioners borrowed $ 91,407 from Evelyn Vaugh. Petitioners then, on April 18, 1983, paid a total of $ 156,014 to Wayne Vaughn representing the $ 126,850 value of tract #3907 and reimbursement of the $ 27,744723 cost of improvements and of other miscellaneous expenses Wayne Vaughn had incurred in connection with Calle Extrano. It apparently was understood that petitioners would repay the $ 91,407 loan they obtained from Evelyn Vaughn out of proceeds of a subsequent sale of Calle Extrano. During all of 1983, petitioners held title to Calle Extrano. No written documents were executed purporting to transfer title or ownership of Calle Extrano to the Vaughns. No escrow was entered into for the sale of Calle Extrano to the Vaughns. The bank was not notified of any intention on the part of the Vaughns to assume the construction loan on the Calle Extrano property, and the property tax records reflect no change in the ownership of Calle Extrano. Sometime after the Vaughns moved out of Calle Extrano, petitioners again listed Calle Extrano for sale. After approximately one year, on March 22, 1984, Leonard and Janet Parsons (the Parsons) made a written offer to purchase the property from petitioners that, after negotiations, was accepted by petitioners. Title to Calle Extrano passed from petitioners to the Parsons on April 18, 1984. The sale price less expenses was $ 314,404. Petitioners724 received net cash proceeds of $ 73,391 and a second mortgage of $ 15,000. Petitioners' cost basis in Calle Extrano at that point was $ 253,913. In a related transaction, petitioners purchased the Parsons' former residence known as "Saddleback," at apparently fair market value. On April 24, 1984, petitioners repaid Evelyn Vaughn $ 67,460 of the $ 91,407 they had borrowed from her in 1983. On October 15, 1984, petitioners sold the Saddleback property. Both the sale of Calle Extrano and the sale of Saddleback were reflected on petitioners' records relating to their real estate development and construction business for 1984. Evelyn Vaughn died on March 21, 1985. Sometime after her death, the $ 15,000 second mortgage held by petitioners relating to the sale of Calle Extrano was paid off by the Parsons. The proceeds therefrom were paid by petitioners to Evelyn Vaughn's estate in further repayment 2130 of the loan petitioners had received from Evelyn Vaughn. Travel ExpensesIn September of 1983, petitioners took a family vacation and visited relatives in Oklahoma. While in Oklahoma, they purchased a hay farm. In June of 1985, petitioners sold their family residence725 in California and moved to the hay farm in Oklahoma, even though they intended to continue operating their construction business in California while at the same time living in Oklahoma. Respondent concedes that the Oklahoma hay farm was a bona fide business with economic substance. However, during 1985 the construction business in California produced substantially all of petitioners' income. In December of 1985, due to the unprofitability of the hay farm and the high cost of operating a business in California while living in Oklahoma, petitioners moved back to California and terminated the hay farm operation as a business. During the six months petitioners lived in Oklahoma, they made several trips to California relating to the construction business, and they incurred in connection therewith expenses for transportation, meals, and lodging totaling $ 4,124. As of the date of trial, petitioners continue to own the Oklahoma hay farm property. Petitioners' Federal income tax returns for the years in issue were prepared by their accountant. Petitioners acknowledge that they hastily filed their Federal income tax returns for the years in issue without reading or reviewing the returns. 726 Petitioners did not report any sale of Calle Extrano on their 1983 or their 1984 Federal income tax returns, and petitioners claimed on their 1985 Federal income tax return $ 4,417 as deductible business travel expenses relating to their trips to California from Oklahoma. Evelyn Vaughn's Federal income tax return for 1984 reported the sale of Calle Extrano as a long-term capital gain. By statutory notice, respondent determined that petitioners should have reported the gains from the sale of Calle Extrano on their 1984 Federal income tax return. Respondent also disallowed the entire $ 4,417 claimed by petitioners for travel expenses on their 1985 Federal income tax return, and respondent imposed additions to tax under sections 6651, 6653, and 6661. OPINION Sale of Calle ExtranoFor purposes of Federal income taxation, gain or loss from the sale of property is attributable to the owner of the property at the time of the sale. See ; . This ownership question is generally controlled by who the owner of the property was just prior to the sale727 in question (i.e., who, prior to the sale, had the benefits and burdens associated with ownership of the property). , revd. on another issue ; . Petitioners contend that they sold Calle Extrano to the Vaughns in January or February of 1983 in exchange for a one-half interest in the joint venture relating to tract #3907. Petitioners also contend that on April 18, 1983, when they gave Wayne Vaughn the $ 91,407 check, they were acting as undisclosed agents for Evelyn Vaughn and that she at that time purchased Wayne Vaughn's share of Calle Extrano, making Evelyn the sole owner. Petitioners thus contend that Evelyn Vaughn was the owner of Calle Extrano when it was sold to the Parsons in 1984, and therefore that the gain associated with the 1984 sale should not be charged to them. Respondent contends that no sale of Calle Extrano took place in 1983 and that petitioners were the sole owners of Calle Extrano in 1984 when it was sold and title was transferred to the Parsons. Respondent contends728 that petitioners were in control of the transaction and now must accept the consequences of the form and structure they chose, regardless of their wish to change the tax consequences. Taxpayers bear a heavy burden when they seek to set aside the form of a transaction they themselves structured. ; . Too many facts indicate that petitioners still owned Calle Extrano at the time of the 1984 sale to the Parsons to accept petitioners' explanation of these transactions. Title to Calle Extrano remained in petitioners' names during 1983 and 1984 right up until the 1984 sale. The purported 1983 sale to the Vaughns was not documented in any way, nor was it disclosed to the mortgage holder. No sale was reported, nor was any gain relating thereto reported on petitioners' Federal income tax return for 1983. Also, petitioners' own real estate records do not reflect a 1983 sale of Calle Extrano but do reflect that petitioners sold Calle Extrano to the Parsons in 1984. Petitioners, throughout most of 1983 and 1984 until the date of the sale to the Parsons, bore essentially729 all of the burdens of ownership of Calle Extrano, while the Vaughns had none of the benefits of ownership of Calle Extrano, other 2131 than living in Calle Extrano a few weeks in 1983. We hold that petitioners were the owners of Calle Extrano on April 18, 1984, when it was sold to the Parsons and accordingly that petitioners are to be taxed on the gain associated with that sale. Travel Expense DeductionSection 162(a)(2), in general, allows deductions for ordinary and necessary travel expenses incurred in a trade or business. As we have stated: a taxpayer may have more than one occupation or business, and * * where it is shown that the taxpayer has two occupations which require him to spend a substantial amount of time in each of two cities, he is entitled to the deduction of traveling and other ordinary and necessary business expenses incurred in connection with attendance upon the one removed from his residence. [.]Petitioners contend that their trips in the summer and fall of 1985 between Oklahoma (the location of their residence and their hay farm business) and California730 (the location of their construction business) were necessary for the operation of the construction business and therefore that the related expenses are deductible. Respondent contends that such trips were made for nonbusiness purposes such as visiting family or vacationing and therefore are nondeductible personal expenses. We have found that petitioners were engaged in two businesses and that the travel expenses at issue were incurred for business-related trips between the two businesses. The $ 4,124 in travel expenses that has been substantiated is allowed as a deduction under section 162(a)(2). Additions to TaxRespondent determined that petitioners were liable under section 6653(a)(1) and (2) for additions to tax due to negligence on the entire underpayment for all three years at issue. Negligence, for purposes of section 6653(a), has been defined as a lack of due care or failure to do what a reasonable and ordinarily prudent person would do under the circumstances. ; ; .731 The burden of proof is upon petitioners to show that respondent's determination of additions to tax for negligence is incorrect. ; . Petitioners testified that they did not review or even read their tax returns. The audit adjustments made on petitioners' income tax returns for 1983, 1984, and 1985 were numerous, ranging from the omitted gain on the sale of Calle Extrano to the disallowance of claimed gambling losses and charitable contributions. In 1983, six separate adjustments were made resulting in a $ 40,301 increase in taxable income. In 1984, eight adjustments were made resulting in a $ 133,318 increase in taxable income, and in 1985 seven adjustments were made resulting in a $ 99,214 increase in taxable income. Due to the nature, number, and amount of the adjustments, combined with petitioners' failure to make any effort to review their tax returns, and the absence of any other sufficiently mitigating circumstances, we find no basis for relieving petitioners from liability for the additions to tax under section 6653(a)(1) and (2). Substantial732 UnderstatementSection 6661 imposes an addition to tax if there is a substantial understatement of income tax equal to 25 percent of the amount of the underpayment attributable to the understatement. The addition to tax may be reduced to the extent the taxpayer adequately disclosed or had substantial authority for the position taken on the return. An understatement is substantial if it exceeds the greater of 10 percent of the amount required to be shown on the taxpayer's return or $ 5,000. Because petitioners failed to adequately disclose or to show that they had substantial authority for their tax return positions, they are liable for the additions to tax under section 6661 for those years in which the understatement exceeded the specified amount. Petitioners' other arguments were considered and found to be without merit. Decision will be entered under Rule 155. Footnotes1. Unless otherwise indicated, all section references are to the Internal Revenue Code of 1954 as in effect for the years in issue.↩. 50 percent of the interest attributable to the portion of the underpayment that is due to negligence or intentional disregard of the rules and regulations.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622361/	Percy E. Godbold, Jr., and Grace F. Godbold, Petitioners v. Commissioner of Internal Revenue, RespondentGodbold v. CommissionerDocket No. 18123-80United States Tax Court82 T.C. 73; 1984 U.S. Tax Ct. LEXIS 124; 82 T.C. No. 7; January 9, 1984, Filed 124 Decision will be entered under Rule 155. In 1966, petitioners executed a contract covering a period of 62 years for the sale of timber to a timber cutting company. The agreement provided for quarterly fixed payments to petitioners for the sale of 640 cords of wood per year, with payments to be made whether or not any timber was cut. Petitioners retained title to the timber, paid taxes on it, and bore the risk of loss until it was cut. A cord credit account was maintained by the purchaser under which petitioners were credited with a minimum of 640 cords per year and debited as the timber was cut. Petitioners were compensated for any overcut in addition to the fixed annual payments. At the termination of the contract, petitioners were entitled to retain as liquidated damages all payments received whether or not any timber had been cut.From 1966 through 1979, petitioners reported all amounts received under the contract as capital gains. For 1978 and 1979, respondent determined that the payments were taxable as ordinary income.Held, the minimum payments do not qualify for capital gains treatment under sec. 631(b), I.R.C. 1954, because petitioners did not retain an economic125 interest in the timber. Held, further, payments in excess of the fair market value of the timber on the date the contract was executed are not capital gains under sec. 1221 but are ordinary income. Percy E. Godbold, pro se.Jillena A. Warner, for the respondent. 126 Shields, Judge. SHIELDS74 Respondent determined deficiencies in petitioners' income tax for 1978 and 1979 in the respective amounts of $ 16,086.83 and $ 1,488.37. After concessions by the parties, the issue remaining for decision is whether certain payments received by petitioners under a long-term contract for the sale of timber must be treated as ordinary income as contended by the respondent, or as income from capital gains under section 631(b)1 or section 1221, as contended by the petitioners.FINDINGS OF FACTSome of the facts have been stipulated and are so found. The stipulation of facts and exhibits attached thereto are incorporated herein by reference.Petitioners Percy E. Godbold, Jr., and Grace F. Godbold, husband and wife, resided in Anniston, Ala., when the petition was filed in this case. They filed joint income tax returns for 1978 and 1979 with the Internal Revenue Service Center127 in Chamblee, Ga.Mr. Godbold is a banker and certified public accountant. Mrs. Godbold is a housewife. On April 8, 1966, Mrs. Godbold had owned for several years a tract of land containing 652 acres of which 640 acres constituted timberland. Neither Mr. 75 Godbold nor Mrs. Godbold was in the business of selling or harvesting timber, and the timber standing on the property was not used by them in a trade or business or held for sale in the course of any business.On April 8, 1966, petitioners, as owners, executed a Timber Sale and Purchase Contract with Harmac Alabama, Inc., as purchaser. The name of the purchaser was later changed to MacMillan Bloedel Products, Inc., and will be referred to herein as MacMillan Bloedel, the purchaser or the corporation. The contract covered timber standing on, or to be grown on, the aforesaid 640 acres of timberland. The contract was effective through December 31, 2028, a period of 62 years.Under the contract, MacMillan Bloedel received the exclusive right to cut and remove all timber standing and growing at the time of the contract and all future timber standing and growing during the term of the contract, except for the equivalent of128 1,280 cords of pulpwood timber which the petitioners reserved the right to cut and remove on or before January 1, 1968. MacMillan Bloedel was obligated to pay the petitioners for pulpwood timber, and certain hardwood timber at a specified rate of $ 6 per cord as adjusted in each year in which there was a fluctuation of 5 percent or more in the annual average of the Wholesale Price Index for All Commodities over the annual average of such index for 1964. MacMillan Bloedel was also obligated to pay the petitioners for any removal of merchantable saw, pole, piling, crosstie, or veneer block timber according to the stumpage price prevailing from time to time in the vicinity.The contract required MacMillan Bloedel to maintain a "cord credit account" which was to be credited each year for 640 cords of merchantable pine pulpwood timber. The account was to be debited for each cord of merchantable pine pulpwood timber, or its equivalent, as it was cut and removed from the land. The corporation, however, was under no obligation to cut any quantity of timber in any year, but was required to pay the petitioners in equal quarterly installments an amount equal to the purchase price of 640 129 cords of merchantable pine pulpwood timber, whether or not any timber was cut during that year.If MacMillan Bloedel cut timber in any one year in excess of the total cord credit, resulting in a debit balance in the cord 76 credit account, the corporation was to pay the petitioners the purchase price for the overcut of timber in the following year. Any credit balance in the account was to be carried forward each year as a credit against any timber cut during subsequent years, but any such credit would not reduce the corporation's obligation to pay the petitioners the minimum amount each year equal to the purchase price of 640 cords.Upon termination of the contract, the petitioners were entitled to retain as liquidated damages all minimum payments they had received, whether or not MacMillan Bloedel ever cut the timber for which such payments were made.On May 23, 1966, the petitioners sold to MacMillan Bloedel the 1,280 cords of pulpwood timber that had been reserved in the original contract between the parties. The petitioners received $ 7,680 for this timber, payable in two equal amounts of $ 3,840 in 1966 and 1967. By agreement, these 1,280 cords of pine pulpwood timber130 were credited to the cord credit account, but the payments did not eliminate the corporation's obligation to make the minimum quarterly installments for 1966 and 1967 as prescribed in the agreement of April 8, 1966.The entries made in the cord credit account maintained by MacMillan Bloedel for the years 1966 through 1979 pursuant to the timber sale and purchase contract were as shown on page 77.MacMillan Bloedel cut no timber under the contract in 1966 through 1971, or in 1974, 1978, and 1979. Timber was cut in 1972 and 1973, and in 1975 through 1977. Until 1977, the cut timber did not exceed the credit balance in the cord account. In 1977, MacMillan Bloedel overcut the timber by 6,437 cords, and, pursuant to the contract, paid petitioners $ 71,197.53 in 1978 for the overcut.The fair market value on April 8, 1966, of the timber on the land covered by the contract was $ 68,817.34. From and after their receipt of the payment in 1978 for the overcut in 1977, the petitioners had completely recovered the value of the timber on the date of the contract.Title to the timber covered by the contract remained in petitioners until the timber was cut. Until such time, they were also responsible131 for all taxes levied against the property including the standing timber, and they bore the risk of any 77 PricePricePaymentsCordper cordCordper cordCordreceived byYearcreditfor credit(debit)for debitbalancepetitioners1966640.00$ 6.00640.00 $ 3,840.001967640.006.001,280.00 3,840.001968640.006.171,920.00 3,945.601969640.006.332,560.00 4,051.201970640.006.543,200.00 4,182.401971640.006.953,840.00 4,444.801972640.007.21(1,490.86)$ 7.212,989.14 4,614.401973640.007.21(1,688.35)7.211,940.79 4,614.401974640.008.522,580.79 5,452.801975640.0010.12(2,033.14)10.121,187.65 6,476.801976640.0011.06(285.45)11.061,542.20 7,078.401977640.0011.06(8,619.59)11.06(6,437.39)7,078.406,437.3911.06(additional payment0 71,197.53for debit balance)1978640.0012.28640.00 7,859.201979640.0013.241,280.00 8,473.60147,149.5378 damage to the timber caused by fire, weather, disease, or insects.On their returns for 1966 through 1979, 132 the petitioners reported all payments received under the timber contract as income from capital gains. The respondent did not question this treatment on any of the returns for 1966 through 1977, but in the deficiency notice for 1978 and 1979, he determined that $ 69,858.59 of the $ 79,056.73 received by the petitioners from MacMillan Bloedel in 1978 and all of the $ 8,473.60 they received from the corporation in 1979 were ordinary income and not income from capital gains.The respondent has subsequently conceded that all of the $ 71,197.53 received by the petitioners in 1978 for the overcut made in 1977 was properly reported by them as capital gain income. He continues to insist, however, that the minimum payments totaling $ 7,859.20 in 1978 and $ 8,473.60 in 1979 are ordinary income.On their part, the petitioners concede that 75 percent of the minimum payments for 1978 and 1979 do not qualify for capital gain treatment under section 631(b). They have made this concession because by December 31, 1977, 480 acres, or 75 percent, of the timberland covered by the contract had been substantially clear cut and replanted.They continue to insist, however, that the other 25 percent of 133 such payments qualifies for capital gain treatment under either section 631(b) or, in the alternative, under section 1221.OPINIONUnder section 631(b) as it existed in 1966, income received from a timber sale was treated as capital gains if the timber had been held for more than 6 months (12 months after 1976), was disposed of by the owner, and the disposition was in such a manner that the owner retained an economic interest in the timber. 2134 79 This provision was designed to give an owner of timber who sells it under a cutting contract the same favorable capital gains treatment as an owner who sells it outright. See S. Rept. 627, 78th Cong., 1st Sess. (1943), 1 C.B. 973">1944-1 C.B. 973, 993, which deals with sec. 117(k)(2) of the 1939 Code, the predecessor of sec. 631(b). See also Indian Creek Lumber Co. & Consolidated Subsidiaries v. Commissioner, T.C. Memo 1982-146">T.C. Memo. 1982-146.The applicable regulation describes an economic interest as one "in which the taxpayer has acquired by investment any interest in * * standing timber and secures, by any form of legal relationship, income derived from the * * * severance of the timber, to which he must look for a return of his capital." Sec. 1.611-1(b)(1), Income Tax Regs. This regulation was considered with approval by the Fifth Circuit in Dyal v. United States, 342 F.2d 248">342 F.2d 248, 252 (5th Cir. 1965), revg. and remanding an unreported case ( S.D.Ga. 1963, 64-1 USTC par. 9196), in which it stated at page 252:It is essential that the consideration for the transaction, whether135 payable in cash or in kind, be contingent upon the severance of the timber, and payable to the owner solely out of the proceeds from the natural resource itself.The Court concluded that capital gains treatment under section 631(b) was not available to the taxpayers in Dyal because "They were not required to look to the sale or severance of the timber for the annual payments, and the obligation of [the purchaser] to make the annual payments * * was in no way determined or affected by the amount of timber cut, or whether any timber was cut at all." Dyal v. United States, supra at 252.Again, in Crosby v. United States, 414 F.2d 822">414 F.2d 822 (5th Cir. 1969), affg. 292 F. Supp. 314">292 F. Supp. 314 (S.D. Miss. 1968), the Fifth Circuit applied the economic interest rationale of Dyal by holding that there could be no retained interest unless the minimum annual payment was contingent upon the severance of timber. In Crosby, the purchaser made minimum annual payments which entitled it to cut a prescribed number of cords every year. The timber which was purchased but was not severed went into a "timber backlog" 136 which the purchaser could cut 80 without making further payments. Nothing in the agreement required the purchaser to exercise his backlog privilege. Consequently, the taxpayers might have received their payments without a single tree's being cut and, consequently, the payments were not contingent upon the severance of the timber.Finally, in Plant v. United States, 682 F.2d 914">682 F.2d 914 (11th Cir. 1982), affg. an unreported case ( N.D. Ala. 1981, 48 AFTR 2d 81-5936, 81-2 USTC par. 9661), the taxpayer sold to a paper company all the timber standing and growing on certain acreage for a period of 20 years. The paper company was obligated to pay for at least 2,000 cords per year regardless of the annual harvest. If the company cut more than 2,000 cords in any one year, the taxpayers were compensated for the excess at the end of the year. If fewer than 2,000 cords were severed, a timber backlog clause authorized the company to harvest the timber at any time prior to the expiration of the contract. At the termination of the contract, the taxpayers were to retain as liquidated damages any advance payments not credited137 against the timber yield.The taxpayers in Plant, like the petitioners herein, were required to pay all the taxes on the land and the timber until cut. Also, the taxpayers retained title in the timber until it was severed, so that if the trees became unmerchantable before harvesting, the taxpayers bore the loss. Relying on Crosby and Dyal, the Eleventh Circuit in Plant denied capital gains treatment under section 631(b) for the minimum annual payments. The Court characterized the liquidated damages clause in the contract as words of art, which did not alter the fact that the landowners could retain all payments previously made without any obligation to refund amounts for uncut timber. "In reality, it is a guaranteed annual income for the [taxpayers] for the life of the contract, precisely the type of arrangement foreclosed by Crosby." 682 F.2d at 917.The contract at issue in the Plant case is indistinguishable from the contract under consideration here. Petitioners were guaranteed annual payments based on 640 cords of timber per year, whether or not any timber was ever severed. Petitioners' cord account was credited in years138 during which no timber was cut and then debited during the 5 years in which timber was severed. Petitioners bore the risk of loss from damage or 81 destruction of the standing timber and retained title in the wood until it was cut. They also paid all the taxes on the timber and the land. A liquidated damages clause provided that petitioners could retain any amount paid in advance for uncut timber at the expiration of the contract.Petitioners argue, however, that under section 1.631-2(d), Income Tax Regs., they are entitled to capital gains treatment on the annual payments. 3 This section provides that advance payments may receive capital gains treatment if the taxpayer retains an economic interest in the timber and the payments are to be applied to timber subsequently cut. This section is inapplicable where there is no assurance that any timber will ever be cut. Crosby v. United States, supra at 825.139 In view of the foregoing, we conclude that petitioners are not entitled to the benefits of section 631(b) because they did not retain an economic interest which was contingent upon the severance of the timber.Even though petitioners did not retain an economic interest in the timber which would entitle them to capital gains treatment under section 631(b), they are entitled to capital gain on the payments received for the timber which qualifies as a capital asset under section 1221. As stated in our findings, the respondent has conceded that the petitioners are entitled to capital gains treatment to the extent of the value of the timber in existence on the date of the sale. This concession is in line with Revenue Ruling 62-81, 1 C.B. 153">1962-1 C.B. 153, which involved a contract for the sale of timber standing and growing for a period of 60 years. The paper company was obligated to pay a fixed rate per cord for a designated number of cords of wood per year, or the estimated annual growth, whichever was greater. In the ruling, respondent concluded that the contract 82 accomplished an absolute sale of the timber standing at the time of the execution140 of the contract, and that payments equal to the fair market value of timber existing at that date constituted proceeds from the sale of timber which were treated as capital gains under section 1221 or section 1231. However, the respondent also concluded that because only timber in existence can be the subject of a present sale, the payments not attributable to timber existing at the execution of the contract were not proceeds from the sale of timber, but instead were consideration for the use of the land by the paper company and were taxable as ordinary income. See Estate of Lawton v. Commissioner, 33 T.C. 47">33 T.C. 47 (1959). 4141 The reasoning set forth in Revenue Ruling 62-81 was adopted by the Fifth Circuit in Dyal v. United States, supra, 5 as follows:the taxpayers are limited to the fair market value of the timber actually in existence at the execution of the [contract]. Clearly no timber growth after the date of the [contract] would be entitled to capital gain treatment. [342 F.2d at 254.]Therefore, all payments received under the contract by the petitioners for the timber which was in existence on April 8, 1966, qualify for capital gains treatment under section 1221 as being amounts received from the sale of a capital asset. Unfortunately, the petitioners will derive no further benefit from this conclusion because we have found that after receipt of the payment in 1978 for the overcut in 1977, the petitioners had fully recovered and had been allowed142 capital gains treatment on the value of the timber in existence at the execution of the contract. As a result, the minimum payments of $ 7,859.20 in 1978 and $ 8,473.60 in 1979 are taxable to them as ordinary income. 6Dyal v. United States, supra.143 Decision will be entered under Rule 155. Footnotes1. All section references are to the Internal Revenue Code of 1954 as amended, unless otherwise indicated.↩2. At the time of the execution of the contract, sec. 631(b) provided in relevant part:"In the case of the disposal of timber held for more than six months before such disposal, by the owner thereof under any form or type of contract by virtue of which such owner retains an economic interest in such timber, the difference between the amount realized from the disposal of such timber and the adjusted depletion basis thereof, shall be considered as though it were a gain or loss, as the case may be, on the sale of such timber."In 1976, this section was amended to require that the timber be held for more than 1 year. Pub. L. 94-455, 90 Stat. 1732.↩3. Sec. 1.631-2(d), Income Tax Regs., provides in relevant part:(1) Where the conditions of paragraph (a) of this section are met [the timber is held for more than 1 year and the taxpayer retains an economic interest], amounts received or accrued prior to cutting (such as advance royalty payments or minimum royalty payments) shall be treated under section 631(b) as realized from the sale of timber if the contract of disposal provides that such amounts are to be applied as payment for timber subsequently cut. * *(2) However, if the right to cut timber under the contract expires, terminates, or is abandoned before the timber which has been paid for is cut, the taxpayer shall treat payments attributable to the uncut timber as ordinary income and not as received from the sale of timber under section 631(b)↩. Accordingly, the taxpayer shall recompute his tax liability for the taxable year in which such payments were received or accrued. The recomputation shall be made in the form of an amended return where necessary.4. See also Bridges v. Commissioner, T.C. Memo. 1979-290↩ (payments in excess of market value of timber when contract executed treated as ordinary income).5. An appeal from the decision in this case would be to the newly created Eleventh Circuit. However, the case law of the former Fifth Circuit has been adopted by the Eleventh Circuit as binding precedent unless or until overruled by the Eleventh Circuit Court of Appeals sitting en banc. Bonner v. City of Prichard, 661 F.2d 1206 (11th Cir. 1981). See Simon v. Commissioner, T.C. Memo. 1982-2 (43 T.C.M. (CCH) 269">43 T.C.M. 269, 271, 51 P-H Memo T.C. par. 82,008); DiAndrea, Inc. v. Commissioner, T.C. Memo. 1983-768↩ (slip op. at 13 n. 15).6. Petitioners' reliance on Ah Pah Redwood Co. v. Commissioner, 251 F.2d 163">251 F.2d 163 (9th Cir. 1957), revg. on other grounds 26 T.C. 1197">26 T.C. 1197 (1956), is misplaced. There, the Ninth Circuit denied capital gains treatment to payments received under a contract for the sale of timber pursuant to sec. 631(b). Acknowledging that capital gains treatment might be available under the predecessor to sec. 1221↩, the Court of Appeals remanded the case to the Tax Court to determine the purpose for which the property was being held by the taxpayer, whether primarily for sale to customers in the ordinary course of trade or business or as an investment. Whether the payments made to the taxpayer exceeded the fair market value of the timber standing at the time the contract was executed was not an issue in that case.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622363/	Charles H. Allen v. Commissioner.Allen v. CommissionerDocket No. 4392-64.United States Tax CourtT.C. Memo 1967-105; 1967 Tax Ct. Memo LEXIS 155; 26 T.C.M. (CCH) 493; T.C.M. (RIA) 67105; May 11, 1967155 1. Held: Petitioner failed to prove that during the taxable year 1959 he incurred expenses in excess of the amount allowed by respondent in the operation of his landscaping proprietorship. The doctrine of Cohan v. Commissioner, 39 F. 2d 540 (C.A. 2, 1930), does not apply where respondent has already allowed a substantial portion of the claimed expenses and petitioner does not establish that he is entitled to deduct a greater amount. 2. Held: Respondent's determination that petitioner received income of $1,000 in merchandise from Mary Muncy during the taxable year 1959 sustained. Petitioner's burden of proof not met to overcome presumptive correctness of such determination. 3. Held: Petitioner did not establish that he incurred a capital loss during the taxable year 1959 from the sale of stock in National Landscaping Corporation. 4. Held: Petitioner failed to prove that during the taxable year 1960 he incurred expenses in connection with his work for National Landscaping Corporation in an amount greater than allowed by respondent. 5. Held: Petitioner failed to establish that during the taxable year 1960 he incurred expenses in the operation of Letcher County Memorial156 Gardens in an amount greater than allowed by respondent. 6. Held: Petitioner failed to establish that he incurred expenses during the taxable year 1960 on the landscaping of a cemetery for F. B. Hay in an amount greater than allowed by respondent. 7. Held: Petitioner failed to establish that during the taxable year 1960 he incurred a capital loss on a second investment in National Landscaping Corporation. 8. Held: Petitioner did not establish a capital loss during the taxable year 1960 on an investment in Letcher County Memorial Gardens. 9. Held: Petitioner successfully established that he did not realize a short-term capital gain during the taxable year 1960 from the sale of certain stock in Letcher County Memorial Gardens. William S. Tribell and Daniel J. Tribell, 109 S. Main, Middlesboro, Ky., for the petitioner. Dennis M. Feeley, for the respondent. HOYTMemorandum Opinion HOYT, Judge: The respondent determined deficiencies in petitioner's income taxes for the years 1959 and 1960 as follows: YearDeficiency1959$1,870.9219604,849.09 Only a portion of these deficiencies are in issue here. Some of the facts have been stipulated157 and are found accordingly and adopted as our findings. Petitioner is an individual residing at 110 North Richardson Street, Somerset, Kentucky, and for the taxable years 1959 and 1960 he filed income tax returns with the district director of internal revenue in Louisville, Kentucky. During these years petitioner was in the business of landscaping cemeteries, individual residences, businesses and highway projects. He acted both as an independent contractor and as an agent for several corporations, serving as an officer in two of these and owning stock in them. Little regard was had by petitioner for the distinctions between the various business entities through which he operated. Petitioner did not produce business records shedding any light on his various transactions in issue, such records, according to petitioner's testimony, being either mislaid, unavailable, lost or stolen. The great bulk of the evidence in this case consisted of petitioner's own extremely general testimony and that of his lawyer, one of the attorneys of record at trial, who also represented petitioner and his corporations during the years of business activity before us. Petitioner made virtually no attempt158 to secure documentation nor did he produce corroborating testimony for his opposition to the majority of respondent's determinations, infra. Most of petitioner's factual contentions would appear to be estimates based upon his memory of allegedly missing records which, in truth, have not been shown ever to have existed at any point in time. The evidence is, for the most part, unconvincing, vague, conflicting and confusing and the petitioner's briefs are of very little assistance to us. Petitioner's income tax returns for both 1959 and 1960 also were inexact, vague, general and confusing. The returns are somewhat specific as to taxes withheld and itemized deductions claimed but in roundedoff figures as to income and expense items; almost none of the matters which give rise to this litigation and frame the issues before us are even mentioned in the returns themselves and appear to be petitioner's afterthoughts. In his 1959 return, for example, petitioner reported wages of $2,000 from National Landscaping Corporation. In Schedule C, attached, he reported gross receipts from Pike Tree and Landscape Service of $8,000, labor cost as $200, material and supplies of $5,800, total cost of159 goods sold as $6,000 and gross profit of $2,000. No other taxable transactions were reported but itemized deductions of $2,010.60 were claimed. In his 1960 return petitioner reported even more sparingly. His only income shown was $4,500, wages from National Landscaping; deductions of $1,774.72 were claimed but no other taxable transactions were reported. The issues for the year 1959 arise from respondent's determination, after certain concessions, that petitioner received $1,000 in unreported income and did not incur claimed business expenses in excess of $3,833. These questions are discussed as Issues 1 and 2, infra. The issues for the year 1960 are more complicated and have evolved from respondent's determination, the subsequent pleadings and the stipulation of the parties. They are as follows: (a) Whether in connection with certain compensation from National Landscaping Corporation, the petitioner incurred expenses in excess of $6,461.44; this is discussed as Issue 4, infra. (b) Whether petitioner received income from Letcher County Memorial Gardens totaling $5,563.05 in 1960 and whether petitioner incurred expenses exceeding $1,978.30 in connection with his work on behalf160 of the Memorial Gardens; petitioner maintains that the sums received from the Memorial Gardens were not reportable and constituted the repayment of loans he had made to the Gardens; these questions are discussed as Issue 5, infra. (c) Whether petitioner incurred expenses in landscaping a cemetery for F. B. Hay in an amount greater than $2,194.85; this is discussed as Issue 6, infra. (d) Whether petitioner realized a short-term capital gain of $6,000 from the sale of stock in Letcher County Memorial Gardens; respondent determined that such gain occurred, and denies that petitioner sustained any capital loss during 1959 on the sale of his stock in National Landscaping Corporation; respondent also denies that the petitioner sustained a capital loss during 1960 on a second investment in the same corporation; respondent denies further that the petitioner sustained any loss during 1960 on his investment in Letcher County Memorial Gardens; the $6,000 gain is discussed, infra, as Issue 9; the losses petitioner claims are discussed, infra, as Issues 3, 7 and 8. Apparently, petitioner would offset these alleged capital losses (the 1959 one being carried forward) against the capital gain161 determined by respondent for 1960 and also against ordinary income for both years to the extent allowed by law. The deficiency notice also included disallowances of medical expenses for 1959 as well as an addition to the tax for that year which was due to petitioner's computative errors. The medical expenses were disallowed solely because respondent determined a higher adjusted gross income than petitioner had used in conjunction with the applicable formulas for computing the medical deduction. The parties can therefore determine the proper amount of medical deduction in their Rule 50 computation and can also correct petitioner's mathematical errors in computing the tax due. Petitioner has apparently conceded that respondent was correct in disallowing totally his itemized personal deductions for 1960. He presented no evidence to support these deductions and must be considered to have accepted the standard deduction allowed by respondent. After trial, then, there remained some nine factual issues for our decision. Because these issues appear susceptible of separate resolution and because the proper disposition of this case involves almost entirely factual determinations as to the162 nine questions before us, we deem it prudent and convenient simply to list our findings as to each issue in dispute. Issue 1 Whether Petitioner Incurred Expenses in the Operation of Pike Tree and Landscaping Service During the Taxable Year 1959 in Excess of $3,833 Petitioner had gross receipts from this landscaping business totaling $8,000 for 1959. Prior to trial, the parties agreed that petitioner had substantiated his related expenses in the amount of $3,833.60. Petitioner reported income from this particular landscaping business in the amount of $2,000, claiming a $6,000 business expense deduction for 1959. Respondent contends that petitioner incurred no business expenses in excess of the $3,833.60. Therefore, in issue is some $2,166.40, the difference between the amount claimed by petitioner ($6,000) and allowed by respondent as substantiated ($3,833.60). Unquestionably, the burden lay upon petitioner to rebut the presumption in favor of respondent's disallowance of the $2,166.40 difference. At trial petitioner produced no evidence whatever in the nature of business records to substantiate the amount in issue. As mentioned, petitioner alleges that the records of this163 business were stolen. The only evidence (not later withdrawn) presented as to this issue was petitioner's oral testimony regarding what the expenses had been. Petitioner admitted that the round numbers used on his 1959 return may have been due to the fact that the various items were mere estimates. Petitioner's recollection, which certainly must be considered in the nature of generalized self-serving statements, does not nearly sustain his burden. His recollections (admitted over respondent's vigorous objections that the spirit of the "best evidence" rule was thereby violated) are, in our opinion as the trier of fact, entitled to little, if any, weight. His testimony was unconvincing and inexact. Petitioner urges that his circumstances call for the application of the principles enunciated in (C.A. 2, 1930). In our judgment, this is not a proper case for such application, however. Where, as here, respondent did not disallow the expenses claimed in full and, in fact, allowed a substantial portion of them, petitioner should come forward with persuasive evidence to establish that he is entitled to a greater allowance. (See e.g., .)164 Petitioner relies upon , reversing a Memorandum Opinion of this Court. However, in Poletti, we found as a fact that the petitioner had incurred expenses beyond the amount the parties stipulated to be allowable, yet we declined to apply the principle of Furthermore, unlike the present case, the taxpayer in Poletti was at least able to provide some record of the additional expenses. Here, no records of any description were submitted to prove additional expenses. The whole rationale of Cohan's precept is that we should avoid the paradox which arises in acknowledging the existence of a legitimate expenditure and at the same time ignoring the right to any deduction therefor. . In the circumstances of the present case, the credible evidence presented by petitioner is so meager that we cannot possibly conclude that petitioner has established that any expenses were actually incurred beyond the amount allowed and stipulated. We simply are unable to determine from the evidence that there were any additional expenses to which Cohan might apply. Moreover, we165 are unwilling to apply the Cohan doctrine here in view of the fact that the respondent has already allowed a substantial portion of the claimed expenses. Issue 2 Whether Petitioner Received $1,000 in Income From Mary Muncy During the Taxable Year 1959 In his deficiency notice respondent determined that petitioner received increased business income of $7,667 and the parties have stipulated that the adjustment was computed in part as follows: Income from landscapingMary Muncy CemeteryCash$4,500Merchandise1,000$5,500Respondent has conceded that the sum of $4,500 cash received for services performed by petitioner on the Mary Muncy Cemetery as shown in the foregoing adjustment was income in 1958 not 1959. Therefore, the remaining controversy as to this part of respondent's determination concerns the $1,000 in merchandise which allegedly constituted income to petitioner from Mary Muncy in 1959. At trial petitioner produced no records of any description to counter respondent's determination. Again, he simply stated that he had not received $1,000 in merchandise and that he could not recall receiving anything from Mary Muncy that year. Income items166 are not different from expense items as regards petitioner's burden of proof. Petitioner cannot rebut the presumption in favor of respondent's determination simply by uttering flat denials which we find unconvincing and vague and inexact recollections favorable to himself. Petitioner's testimony was not persuasive and was less than candid; his conduct and demeanor on the witness stand were such that we can credit little weight to his self-serving assertions. Petitioner's argument on brief is to the effect that he simply has no idea what respondent could have in mind concerning the $1,000 item and that he knows of no other means by which he might have proved that he did not receive this income. In short, he asks, what he could do other than give oral testimony based upon his best recollection? At least one answer is that petitioner could have kept records of the total work done for Mary Muncy and of the payments made by her. These would have reflected, for example, the amount charged Mary Muncy for the work done, payments on account and the amount remaining unpaid thereon. Petitioner testified that he performed services for Mary in 1958 and that as late as 1960 she was still indebted167 to him for this work. The taxpayer, and especially the business taxpayer, has a duty to keep records of the total amounts of all varieties of income received by him so that he may show himself and the Commissioner the quantity of such income. . Petitioner produced no records whatever, if, indeed, he kept any. And where was Mary Muncy; why was she not produced to give testimony if it would have supported petitioner? Respondent's determination is upheld. Issue 3 Whether Petitioner Incurred a Capital Loss During the Taxable Year 1959 From the Sale of Stock in the National Landscaping Corporation Petitioner alleges in his petition that he acquired and sold stock in the National Landscaping Corporation in 1959 and that he thereby incurred a capital loss. He claimed no such loss in his 1959 income tax return. Respondent's primary contention here is that petitioner never had any proved investment in National Landscaping Corporation - we must agree that he never established any basis, cost or otherwise, for this investment. Beyond doubt, we must have some notion of the amount of the basis in order to compute the amount of the168 loss. At trial petitioner's only documentary evidence was a check from Associated Cemetery Sales Company for $727.32, which check purports to have been issued for "Purchase of stock and settlement with National Landscaping Corp." Petitioner testified that the fair market value of the assets he transferred to the corporation in exchange for stock in April of 1959 was $9,800, and that he received 98 shares of stock. However, he offered no evidence of property transferred for the stock. To the best of his memory, the property transferred was landscaping equipment consisting of two trucks, a mulcher, a seeder and various small tools; however, on cross examination petitioner was unsure of the model and years of the trucks, was unable to estimate their cost, and was uncertain as to the original value of the seeder and mulcher. Because the corporate records were allegedly stolen, petitioner was not able to prove in an affirmative manner that he ever owned any stock in this corporation. No stock certificates, corporate tax returns, or records of any description were offered. The check offered by petitioner to prove the event of his loss does not establish that it was in payment for petitioner's169 entire investment in National Landscaping or any specific number of shares and on its face shows that it was also in "settlement with National Landscaping Corp." We think it highly unlikely that petitioner would have agreed to transfer chattels worth $9,800 to a corporation without an offer, a formal contract or a receipt. We agree with respondent that in transactions of the type petitioner claims to have engaged in with National (whereby chattels of value are transferred to a corporation for stock and that stock is later sold), the very nature of the transaction indicates that contracts, receipts, bills of sale and similar documents would likely have been necessary to effectuate the transfer and sale. We are not persuaded by petitioner's bare, vague and general oral allegations. We note also that on Schedule C of his 1959 return petitioner claimed no depreciation for the landscaping equipment which he presumably was using in the operation of his landscaping proprietorship prior to the alleged transfer of the equipment to the corporation in April of 1959. Furthermore, it would seem that if the loss actually had been incurred, the petitioner would have claimed the loss in 1959, and170 under the circumstances of this case, a carry forward loss in 1960. Petitioner's returns for 1959 and 1960 show that petitioner was not claiming any such losses at that time. Respondent's contention as to this issue is upheld. Issue 4 Whether Petitioner Incurred Allowable Expenses During the Taxable Year 1960 in Connection With His Income From National Landscaping Corporation in Excess of $6,461.44 Respondent, in his statutory notice, increased petitioner's 1960 income in the amount of $750.17 for travel expenses held to be compensation. Petitioner received during 1960 compensation other than wages from National Landscaping amounting to $7,211.61. Respondent conceded that petitioner substantiated $6,461.44 in expenses related to this income. The addition to income of $750.17 represents the difference between the expenses respondent conceded to be substantiated and the total amount received from National. Petitioner offered no evidence of any description to substantiate expenses in excess of the $6,461.44 allowed by respondent. We conclude that he virtually abandoned this issue at trial and chose not to attack respondent's determination. Certainly there is insufficient evidence171 before us to permit holding for petitioner on this issue; accordingly, we uphold that determination. Issue 5 Whether Petitioner Incurred Expenses in the Operation of Letcher County Memorial Gardens Exceeding $1,978.30 During 1960 In 1959 or 1960, petitioner became a shareholder in another corporate venture, Letcher County Memorial Gardens. Respondent maintains that during the taxable year 1960 petitioner received gross income from this source totalling $5,563.05 and that he substantiated no expenses related to this income in an amount greater than $1,978.30. Petitioner made no real effort to prove expenses in an amount greater than respondent had allowed. His position as to this issue is that the amounts received by him from Letcher were not income at all and that these amounts constituted repayments for loans or advances made by him to the corporation. Petitioner argues that the corporation was started on a shoestring, that it had heavy development expenses, and that he paid the development expenses as they occurred, thus creating a debtor-creditor relationship. However, petitioner produced no evidence of any indebtedness or binding obligation of the corporation in favor172 of himself. Petitioner failed to offer any documentary or other evidence to corroborate his testimony, and was content to imply that the evidence was lost, stolen, or unavailable. Respondent contends, properly we think, that as in Issue 3, supra, the very nature of the transactions alleged to have occurred would require the use of documents or corporate records. Petitioner has failed to produce any records of the corporation or his own bank or other records which presumably would show to whose account certain checks received by petitioner (and alleged by him to have been expended for the corporate benefit) were deposited. Petitioner also failed to introduce as evidence any canceled checks or vouchers or receipts from merchants or service concerns documenting sums he claims were spent on behalf of the corporation. Even if these had been produced, we could not conclude without more that the sums allegedly expended in the corporate behalf constituted an enforceable claim against the corporation which was satisfied by petitioner's receipt from the corporation of other, later disbursements in issue. Again, petitioner has not nearly sustained his burden of proving error in this portion173 of respondent's determination. Issue 6 Whether Petitioner Established That He Incurred Expenses Exceeding $2,194.85 in Connection With the Landscaping of a Cemetery for F. B. Hay During the taxable year 1960 petitioner received gross income in the amount of $7,000 from F. B. Hay. Apparently, this amount represents compensation for the landscaping of a cemetery at Albany, Kentucky, payment being had from Hay in the form of a note in the approximate amount of $7,800, which petitioner discounted for $7,000. On his income tax return for 1960, petitioner reported no income whatever from this source. Petitioner's position with respect to this income is that he incurred related expenses amounting to at least $5,000; respondent allowed petitioner only $2,194.85 of expenses and increased petitioner's business income by $4,805.15. The question before us is whether petitioner has substantiated any expenses beyond the amount allowed by respondent. We find that he has not. Again, petitioner offered no evidence other than his own testimony as to the quantity of these expenses, again alleging that the pertinent records were lost, stolen or otherwise unavailable. He estimated that his expenses174 on such a project would have been in the neighborhood of $5,000, this estimate being based on his general experience in the landscaping business and a list said to reflect the actual expenses which was purportedly made up when the work was done. Petitioner testified at trial that the list was made up for the purpose of determining "the amount of profit that I had made, actually for tax purposes." We note again, however, that petitioner reported neither income nor expenses associated with this project on his return for 1960. This failure to report the difference between the estimated expenses of $5,000 and the gross income of $7,000 hardly corroborates petitioner's testimony that he was keeping an accurate list of expenses for tax purposes. We believe that petitioner's testimony concerning the origin of this list is of doubtful credibility and that his general recollections and estimates are entitled to little weight. His estimates do not sustain his burden of proof or establish affirmatively that any expenses were incurred beyond the amount allowed by respondent. Again, the taxpayer has some duty to keep and produce at least minimal records, and though a taxpayer's recollections under175 certain circumstances might persuade us that expenses had been incurred, this petitioner's own story strikes us, frankly, as being somewhat incredible. Petitioner urges additionally that the doctrine of , should also apply to this issue. He is mistaken. What we said regarding the applicability of Cohan to Issue 1, supra, is of equal validity here. Respondent's determination is upheld without change. Issue 7 Whether Petitioner Incurred a Capital Loss During the Taxable Year 1960 on a Second Investment in National Landscaping Corporation Petitioner maintains that after his initial stock in National Landscaping was sold at a claimed loss, (Issue 3, supra) he still was unable to recognize an unprofitable or unsavory situation and invested again in the same corporation. He claims that he contributed three trucks to the corporation and was supposed to receive in return 36 shares of stock as well as a salary of $500 per month, all expenses, and one-third of the net profits. Once again petitioner produced no records, receipts or documentary proof whatever to show that any property was transferred to the corporation. He did not introduce176 a copy of the subscription agreement or contract mentioned above under which he would receive the 36 shares, his general position being that the corporate records were not available to him because they were stolen and/or that the controlling interests in the corporation were hostile to him and would not make records available. Petitioner did not prove the fact of the transfer to our satisfaction. Surely this is the sort of transaction in which the taxpayer would maintain some record of a personal and noncorporate nature, which might be produced even if the minutes or other books of the corporation were not available to him. On brief, petitioner contends that the property contributed had a fair market value of $3,600, but no similar contention was made at trial nor was evidence of value produced. This is irrelevant, in any event, as we are not even convinced of the fact of this second investment in National Landscaping. Petitioner's rather fantastic version of this venture is that having made the investment, he never received his stock in the company, the company never honored its commitments to him, and that all the assets were transferred to yet another corporation and he has177 been left "holding the bag" of a hollow corporate shell. Though not articulated, we take petitioner's theory to be that he had a loss either for reasons of worthlessness or abandonment. No sale or exchange is alleged. Even if we could accept petitioner's unsubstantiated general oral testimony as to the facts of his rather fantastic allegation, which we do not, again he has failed to prove the basis of his investment. This is certainly necessary where worthless securities are involved. See . Perhaps even more important, petitioner has not pointed out the identifiable events which fix his loss in the year 1960. The right to a loss deduction depends upon certain identifiable events which the taxpayer must establish in fixing the loss in the year when he seeks to take the deduction. See , and cases cited therein. Petitioner did not even attempt to establish such events. We find that the loss was not proved, if indeed, this second investment in National Landscaping ever occurred. Issue 8 Whether Petitioner Incurred a Capital Loss During the Taxable Year 1960 on an178 Investment in Letcher County Memorial Gardens At some time prior to the end of the calendar year 1959, petitioner became involved in still another cemetery or landscaping venture, Letcher County Memorial Gardens, Inc. Petitioner was president of the corporation and a 50-percent stockholder. Initially, the only other shareholder was Abel M. Hughes, who owned the remaining 50 percent of the issued and outstanding stock. Petitioner maintains that he suffered a capital loss on his investment in Letcher during the taxable year 1960; he urges on brief and testified at trial that the stock was pledged to secure a loan and was subjected to foreclosure when the loan became overdue. Again, petitioner failed to introduce any documentary evidence tending to prove the event of the loss, and all corroborative testimony was vague, general, unconvincing and of little value. Furthermore, petitioner once again failed to prove the basis of his investment. He urged orally at trial that his investment in the corporation had a value of $5,000 and introduced Letcher's corporate tax return for 1959 which showed a capital stock liability in the amount of $10,000. However, the tax return is not necessarily179 probative of the amount of the investment or the transfer of any property to the corporation. It does not establish whether the amount specified or any amount was ever actually paid in, or whether any paid-in amounts were ever withdrawn. As with the other loss issues, we are not persuaded that petitioner has established that he made an initial investment in any definite amount. Also, as in Issue 7, supra, petitioner was unable to prove the identifiable events fixing his loss. He has failed to carry his burden of proof; his oral allegations as to the foreclosure do not suffice. The presumptive correctness of respondent's determination has not been overcome. Issue 9 Whether Petitioner Had a $6,000 Short-Term Capital Gain During the Taxable Year 1960 From the Sale of Stock in Letcher County Memorial Gardens Which Had Initially Been the Property of Abel M. Hughes As already found in Issue 8, supra, at some time prior to the end of the year 1959 petitioner became involved with Letcher County Memorial Gardens, Inc.; he became a 50-percent shareholder and president of the corporation. The only other shareholder was Abel M. Hughes who also owned 50 percent of the corporate stock. Respondent180 determined that during the taxable year 1960, petitioner realized a $6,000 short-term capital gain on the sale of Hughes' stock. At trial and on brief it became apparent that respondent's determination was based on the proposition that in January of 1960 petitioner had purchased Hughes' equity interest in Letcher and sold it for a greater amount to Gladys McGregor, who contined to be associated with Letcher at least through April of 1961. Letcher's primary asset was a certain tract of 9.3 acres of land suitable for cemetery use. This land was acquired by the corporation from Palmer Bentley at a total consideration of $10,000. In January of 1960 there remained unpaid approximately $4,100 of this amount, and the agreement between the grantor, Bentley, and the grantee, Letcher, apparently reserved to grantor Bentley the right to resume possession if the total amount due was not paid prior to a certain day in January of 1960. At trial petitioner maintained that the corporation had been developing the property on the strength of an option which by its terms had to be exercised prior to the given day in January of 1960. The existence of the option agreement was never proved, but we are181 convinced by the evidence that by some form of contract, the corporation (Letcher) was obligated to pay its grantor (prior to a specific date in January of 1960) approximately $4,100, this amount being the outstanding balance on the $10,000 purchase price. As this due date approached, the fortunes of the corporation became increasingly uncertain; neither petitioner nor Hughes, the other shareholder, had the money to pay the outstanding balance. Hughes was willing to sell his 50-percent ownership for $3,000, and it made no difference to him who purchased his investment. Petitioner, without sufficient personal or corporate funds to buy the stock, apparently seized upon the availability of Hughes' shares as a means of procuring the advancement of sufficient funds to bail the corporation out of its difficulties. Petitioner and the corporation's lawyer worked out an arrangement with the aforementioned Gladys McGregor whereby Gladys would advance to the corporation the balance due to Bentley on the purchase price of the cemetery tract and at the same time purchase the Letcher stock which belonged to Abel Hughes. Gladys advanced $10,000 to the corporation in the form of two separate checks. 182 One check was in the amount of $4,120 and was given to Palmer Bentley or his lawyer in payment of the balance due on the cemetery property. The remaining $5,880 was deposited in a Pikesville, Kentucky bank by the corporation's lawyer, who made the following disbursements of it for the following purposes: (1) $3,000 directly to Hughes' lawyer as payment for the surrender of Hughes' shares; (2) $1,000 to himself as a fee for handling the transaction and possibly in payment for other services; (3) $1,880 to petitioner either as repayment for loans made to the corporation or as compensation. Hughes' stock certificates were delivered personally by Letcher's attorney to Gladys McGregor's lawyer; apparently, new certificates were not issued, the old ones merely being endorsed over and delivered to Gladys. At trial neither petitioner nor the lawyer who acted for Letcher in the McGregor transaction was able to state definitely whether the sale of Hughes' stock was a redemption by the corporation followed by a stock issue to Gladys, or whether Hughes transferred his stock directly to Gladys. Respondent attaches great significance to petitioner's inability to provide legal conclusions as to183 whether or not a redemption had occurred. Petitioner and Letcher's attorney, who was petitioner's corroborative witness on this issue, indicated at times that there was an outright transfer from Hughes to Gladys McGregor; however, because the lawyer stated that he was representing only the corporation in this transaction and was not acting for any other parties, the facts developed at trial suggested that a redemption followed by a stock issue might have occurred. However, we feel that the legal effect of this transaction (i.e., whether or not a redemption was involved) is not material to the issue before us. Respondent has not urged that this is a case where the corporate entity should be disregarded or where any of the codified attribution rules should apply. Respondent contends simply that when Abel Hughes transferred his stock to Gladys McGregor petitioner somehow purchased the stock first and in effect it was he who sold the shares to Gladys McGregor. Petitioner has developed sufficient facts at trial to rebut the presumptive correctness of respondent's determination. We are satisfied from the evidence and conclude that Hughes' shares were not actually or constructively petitioner's, 184 they never came into petitioner's hands, and petitioner realized no gain on the sale or exchange of Hughes' stock. Respondent's position in dollars and cents is that petitioner purchased Hughes' stock for $3,000 and sold it to Gladys McGregor for $10,000, which netted him a $6,000 gain after the allowance of $1,000 in attorneys' fees on the transaction. 1Respondent's determination is contrary to the facts developed at trial. Respondent was content to rest upon his determination, while petitioner, in a different style entirely from his presentation on the other issues, offered some documentary proof and considerable corroborative and credible testimony by Letcher's lawyer. Respondent's determination as to this issue is not upheld, and we conclude and hold that petitioner realized no gain whatever from the sale of Hughes' *185 stock in Letcher County Memorial Gardens to Gladys in 1960. In summary, then, we have upheld respondent on all issues except this final one involving the transfer of Hughes' stock in Letcher County Memorial Gardens to Gladys McGregor. With the other issues, there was a virtual failure of proof on petitioner's part. He has not sustained his burden on these issues to overcome the presumptive correctness of the Commissioner's determinations and accordingly such determinations are upheld. To reflect all required adjustments. Decision will be entered under Rule 50. Footnotes1. Prior to trial respondent conceded that petitioner incurred a loss in the amount of $1,377 on the sale of stock in Cumberland Memorial Gardens, Inc. Accordingly, the net amount of short-term capital gain in issue for 1960 is actually $4,623, arrived at by deducting the allowed Cumberland loss from the gain respondent determined on the McGregor transaction.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622364/	CLARKSON COAL CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Clarkson Coal Co. v. CommissionerDocket No. 8449.United States Board of Tax Appeals7 B.T.A. 690; 1927 BTA LEXIS 3116; July 22, 1927, Promulgated 3116 Karl D. Loos, Esq., for the petitioner. C. H. Curl, Esq., for the respondent. PHILLIPS 690 PHILLIPS: The petitioner seeks a redetermination of a deficiency of $2,649.35 in income and profits tax for 1920 asserted by the Commissioner. 691 It alleges that the Commissioner committed error in reducing the amount allowable as a deduction for salaries of its officers from $14,400 to $7,200. FINDINGS OF FACT. The petitioner is an Illinois corporation with its principal office at Nashville. It was organized in 1919 as the Mid-West Coal Co. Shortly thereafter, its name was changed to the Clarkson Coal Co. It was engaged in the purchase and resale of coal. The organizers of the company and the stock held by each was as follows: Shares.C. H. Johnson, secretary20E. E. Clarkson40Samuel Day, vice president20J. L. Clarkson, president and treasurer120E. E. Clarkson was the wife of J. L. Clarkson and the 40 shares of stock nominally held by her belonged to J. L. Clarkson, making his total holdings 160 shares. A branch office was established in St. Louis, Mo., and C. H. Johnson was placed in charge. A contract3117 was entered into between Johnson and the petitioner in 1919 which recited in part: It is understood and agreed that the Mid West Coal Co., a corporation of Illinois agrees to furnish the sum of Five Thousand Dollars (5,000.00) cash as a working capital to buy and sell coal on a wholesale basis, That said C. H. Johnson is to act as General Sales Agent for the Mid West Coal Co. with the right to purchase and resell coal and coke, with offices in St. Louis, Mo., as agreed upon by the Mid West Coal Co. and C. H. Johnson, * * * It is understood and agreed between said Mid West Coal Co. and C. H. Johnson that for services rendered by said C. H. Johnson, C. H. Johnson will at the end of each calendar month have credited to his account one half, after all accrued expenses, such as office rent, help, telephone, stationery and all other office expense, of the remaining profit for the past months business. * * * (Signed) JOHN L. CLARKSON (Signed) CHAS. H. JOHNSON For Mid West Coal Company. No change was made in this contract in 1920. In the beginning the books were kept in St. Louis by Johnson, but he did not keep them in a manner satisfactory to Clarkson and in September, 3118 1919, Clarkson removed them to Nashville and a bookkeeper was employed to take care of them. Johnson developed a good business in St. Louis. 692 Amounts paid to officers in 1919 as salaries were as follows: Per monthC. H. Johnson, secretary $30Samuel Day, vice president $30J. L. Clarkson, president and treasurer $240Early in 1920, it became difficult to buy enough coal to supply the market. Clarkson had a wide acquaintance among mining men and it became necessary for him to devote a great deal of time in locating and buying coal. He also assumed general supervision of the business and accounts and of collections of the company. He took care of the correspondence, kept in touch with the St. Louis office, and in 1920 made frequent trips to mines to locate available coal, purchased it when he could, and in cases where Johnson had a better contact with the mining company, advised him of the availability of the coal. During that year about half of his time was used in the performance of his duties as general manager of the Nashville Mining Co. He worked about fourteen hours a day. Clarkson made frequent trips to St. Louis and in his absence3119 Samuel Day assumed his office duties at Nashville. Day spent about 5 per cent of his time on business of the petitioner. In May, 1920, after consultation among the officers, who were also the directors and stockholders of the company, the amounts paid monthly as salaries were increased in the same proportion in which they were then being paid. This was in proportion to the stock held by each. The monthly payments, as increased, were as follows: Per monthC. H. Johnson, secretary $120Samuel Day, vice president120J. L. Clarkson, president and treasurer960In 1921 conditions changed and it became easy to buy coal but difficult to sell it. The business dropped off and the amounts paid monthly as salaries were then reduced. Clarkson had no connection with selling coal, which duty was attended to by Johnson. The gross sales for the year 1919 to 1922, inclusive, were as follows: YearAmount1919$157,795.441920413,654.331921158,798.78192241,332.90The business was discontinued in 1923. The total commission paid Johnson in 1920 was $17,965.07. The total salaries paid to officers in 1920 were $14,400. These salaries3120 were not deducted from gross income in computing the net income, half of which was paid to Johnson under his contract. The balance *693 of 1920 earnings available for dividends after paying salaries and commissions was approximately $4,000. No dividends were declared, and this amount was credited to surplus. The paid-in capital was $5,000 in 1920. The Commissioner allowed petitioner to deduct $7,200 as a reasonable allowance for salaries in 1920. Decision will be entered for the respondent.Considered by MARQUETTE and MILLIKEN.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622365/	MORRIS L. AND RENEE J. CHUCAS, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentChucas v. CommissionerDocket No. 27916-90United States Tax CourtT.C. Memo 1993-147; 1993 Tax Ct. Memo LEXIS 142; 65 T.C.M. (CCH) 2324; April 6, 1993, Filed 142 Decision will be entered under Rule 155 with respect to petitioner Morris Chucas for all years in issue and with respect to petitioner Renee Chucas for 1979. Decision will be entered for petitioner Renee Chucas for 1977, 1978, and 1980. For petitioners: Robert H. Williams and Ronald M. Warren. For respondent: Michael D. Baker. COLVINCOLVINMEMORANDUM FINDINGS OF FACT AND OPINION COLVIN, Judge: Respondent determined deficiencies in and additions to tax and additional interest as follows: Additions to TaxYearDeficiencySec. 6653(a)(1)Sec. 6621(c)1977$ 250,700.60$ 12,5351197880,711.004,03611979676.22-- -- 19803,989.702001Respondent also determined additions to tax under section 6653(a)(2) for 1977, 1978, and 1980, which respondent now concedes. After concessions, the sole issue for decision is whether Renee Chucas qualifies as an innocent spouse under section 6013(e) for 1977, 143 1978, and 1980. We hold that she does. The parties agree that Renee Chucas does not qualify as an innocent spouse for 1979 because she does not meet the percentage income test for that year, but that she meets the percentage income test for 1977, 1978, and 1980. Sec. 6013(e)(4)(B). References to petitioner in the singular are to Renee Chucas. All section references are to the Internal Revenue Code in effect for the taxable years in issue. All Rule references are to the Tax Court Rules of Practice and Procedure. FINDINGS OF FACT Some of the facts have been stipulated and are so found. 1. PetitionersPetitioners were married in 1965, and remained married during the years in issue. They separated in September 1989 and divorced in April 1991. Petitioners have two children, born in 1966 and 1969. Petitioners resided in Cherry Hill, New Jersey, when the petition was filed. Petitioner has a degree in history. She has not studied tax or accounting. She worked for approximately 3 years before her marriage, first as a teacher, and then as an insurance agent for her father's company. She filed individual returns before her marriage in 1965. During the years in issue, 144 she worked as a part-time travel agent and earned approximately $ 1,000 to $ 1,500 per year. Mr. Chucas did not tell petitioner about his investments or his financial affairs. He opened joint savings accounts at Fellowship Bank, Coastal State Bank, and Washington Bank, and purchased certificates of deposit during the years in issue, without her knowledge. Petitioner never signed any account cards for those accounts and was never in those banks. Mr. Chucas signed petitioner's name to financial documents without her knowledge. Petitioners had a joint checking account at the Bank of New Jersey which petitioner knew about and from which she paid the household expenses. Mr. Chucas provided most of the funds for this account. Petitioner took care of their children and household. She did not read her husband's mail. She did open household bills and personal mail addressed to her and her husband. 2. Mr. Chucas' Law PracticeMr. Chucas practiced antitrust law and performed legal services relating to the formation of banks. He opened accounts with at least three of these banks. Through February 1977, he was a partner in the law firm Pelino, Wasserstrom, Chucas and Monteverde145 in Philadelphia, Pennsylvania. After March 1977, he was a partner in the law firm Wasserstrom and Chucas. He became of counsel to this firm in January 1981. Petitioner was not involved with her husband's law practice. She visited his office only a few times during their 25 years of marriage. She attended social events with her husband's business associates and their spouses, but did not discuss business or investments. 3. Mr. Chucas' Investmentsa. Abusive Tax SheltersDuring the years in issue, Mr. Chucas invested in several partnerships which respondent determined to be abusive tax shelters. Petitioners reported income and losses for these partnerships and for a purported Schedule C lithograph venture on their tax returns for the years in issue. Mr. Chucas bought the investments through his law partner and friend, David Wasserstrom (Wasserstrom), who also invested in them, except for the lithograph activity. Wasserstrom is a tax specialist and has an LL.M. degree in taxation from New York University. Mr. Chucas received most correspondence concerning his investments at his law office. Petitioner did not open Mr. Chucas' business mail that arrived at their146 home. Mr. Chucas opened and maintained joint accounts at the Fellowship Bank, Coastal State Bank, and GMAC without petitioner's knowledge. b. Jodamoto EnterprisesAround 1977, Mr. Chucas and the three other named partners at Pelino, Wasserstrom, Chucas and Monteverde formed the Jodamoto Enterprises partnership (Jodamoto) to make investments unrelated to the law firm. The law partners made their wives equal partners in Jodamoto, with each wife receiving a 25-percent interest. However, the law partners made all decisions relating to Jodamoto and petitioner did not know of its existence or that she was a partner. Wasserstrom instructed the partners to have their wives sign the partnership agreement, and his wife signed it. Wasserstrom gave the agreement to Mr. Chucas for petitioner to sign. However, petitioner never saw that document or any others relating to the partnership. Jodamoto issued Schedules K-1 for 1977 and 1978 which listed petitioner as a partner. Respondent determined that Jodamoto was an abusive tax shelter and disallowed the resulting loss petitioners claimed on their 1977 return. c. Purported Lithograph ActivityIn 1978, petitioners reported losses147 from a purported Schedule C activity based on a lithograph Mr. Chucas purchased. Mr. Chucas listed his home address as the location of the lithograph activity, but he did not conduct any lithograph-related business at his home. Petitioner was not aware of the purported lithograph activity. Mr. Chucas received most of the correspondence concerning the activity at his office. d. The Tannery and Mr. Chucas' LossesIn 1980, Mr. Chucas had $ 300,000 in cash and investments, which petitioner did not know about. He used the money and investments to secure a loan to buy a tannery in Maine. He and his cousin each bought 50 percent of the tannery. Each invested approximately half a million dollars. Mr. Chucas encumbered the $ 300,000 to provide a letter of credit and borrowed the rest. The tannery failed in 1983. Mr. Chucas could not make the payments and lost all his collateral. 4. Petitioners' Income Tax ReturnsPetitioners filed joint returns in 1977, 1978, 1979, and 1980. The returns were prepared at the accounting firm of Touche Ross by a C.P.A. named Howard Needleman (Needleman) and other Touche Ross personnel. Mr. and Mrs. Needleman and petitioners were friends. 148 Petitioners signed the returns for the years in issue on the following dates: YearDate Signed1977April 14, 19781978July 16, 19791979October 14, 19801980October 12, 1981Petitioner glanced at the returns when she signed them, but did not verify their accuracy because she relied on her husband and Needleman. Before signing the returns, petitioner asked her husband if the returns were correct. He said they were. Petitioners were audited for prior tax years and respondent made adjustments for similar investments. The record does not indicate when that audit began. The audit ended in 1985. Mr. Chucas took out a second mortgage to pay the deficiency. For the 1977 tax year, petitioners executed a Form 2848, Power of Attorney, on April 25, 1979, and a Form 872-A, Consent to Extend the Time to Assess Tax, on August 15, 1980. 5. Petitioners' LifestylePetitioners lived in the house they bought in 1967 for $ 39,000 until 1989 when they separated. They did not own a second home. Petitioners owned three Ford station wagons over 15 years, and Mr. Chucas used a car provided by his law firm. Petitioners had some membership privileges at the Woodcrest Country149 Club, such as use of a pool and tennis courts. As a travel agent, petitioner received discount rates of $ 225 to $ 300 for "familiarization" trips. During the years in issue, she took a 10-day trip to Scandinavia with her husband, the expenses of which were significantly reduced because she received discounts as a travel agent. Otherwise, petitioners took routine vacations during the years at issue, such as to Washington, D.C., and Williamsburg, Virginia. Mr. Chucas occasionally gave petitioner jewelry, but no pieces costing more than $ 1,000. Mr. Chucas' tax shelter deductions did not improve petitioners' standard of living because, unknown to petitioner, Mr. Chucas reinvested and lost all the proceeds from his investment activities in the tannery. OPINION A husband and wife who file a joint return are jointly and severally liable for the tax due on their income and related additions to tax. Secs. 6013(d)(3), 6662(a)(2). However, an innocent spouse may be relieved of joint and several liability in certain circumstances. Sec. 6013(e). The taxpayer has the burden of proving entitlement to relief under section 6013(e). Rule 142(a). To obtain relief under section 6013(e), 150 the taxpayer must prove for each year in issue that: (1) A joint return was filed; (2) there is a substantial understatement of tax attributable to grossly erroneous items of the other spouse on the return; (3) in signing the returns, the taxpayer did not know, and had no reason to know, of the substantial understatement; and (4) under all the facts and circumstances, it is inequitable to hold the taxpayer liable for the deficiency attributable to the substantial understatement. Sec. 6013(e)(1). Failure to meet any of these requirements precludes a taxpayer from qualifying as an innocent spouse. Shea v. Commissioner, 780 F.2d 561">780 F.2d 561, 565 (6th Cir. 1986), affg. in part and revg. in part T.C. Memo. 1984-310; Estate of Jackson v. Commissioner, 72 T.C. 356">72 T.C. 356, 362 (1979). In enacting section 6013(e) Congress "intended the exception to remedy a perceived injustice, and we should not hinder that praiseworthy intent by giving the exception an unduly narrow or restrictive reading." Sanders v. United States, 509 F.2d 162">509 F.2d 162, 166-167 (5th Cir. 1975) (fn. ref. omitted). 1. 151 Section 6013(e)(1)(A) -- Joint ReturnPetitioner must prove she filed joint returns for the years in issue. Sec. 6013(e)(1)(A). Respondent concedes that petitioner meets this element. 2. Section 6013(e)(1)(B) -- Substantial Understatement of Tax Attributable to the Grossly Erroneous Items of the Other SpousePetitioner must prove that the substantial understatements of tax for the years in issue were attributable to grossly erroneous items of her husband. Sec. 6013(e)(1)(B). Respondent concedes that petitioner meets this requirement because petitioners reported substantial underpayments attributable to deductions and credits in connection with Mr. Chucas' various tax shelters which had no basis in fact or law on their joint tax returns for 1977, 1978, and 1980. 3. Section 6013(e)(1)(C) -- Knowledge of the Substantial UnderstatementsPetitioner must demonstrate that in signing the returns for the years in issue she did not know, and had no reason to know, of the substantial understatements attributable to her husband's abusive tax shelter investments. Sec. 6013(e)(1)(C). The knowledge contemplated by section 6013(e)(1)(C) is knowledge of the underlying transaction, 152 not knowledge of the tax consequences of the transaction. Purcell v. Commissioner, 826 F.2d 470">826 F.2d 470, 473-474 (6th Cir. 1987), affg. 86 T.C. 228">86 T.C. 228 (1986); Quinn v. Commissioner, 524 F.2d 617">524 F.2d 617, 626 (7th Cir. 1975), affg. 62 T.C. 223">62 T.C. 223 (1974); Bokum v. Commissioner, 94 T.C. 126">94 T.C. 126, 145-146 (1990). The transactions at issue are petitioner's investments which respondent determined to be abusive tax shelters. a. Knowledge of the UnderstatementPetitioners testified that petitioner did not know about the investments at issue. Respondent argues that it is unlikely that Mr. Chucas did not tell petitioner about his investments, totaling approximately $ 300,000 by 1980. Respondent argues that petitioners' testimony is not sufficient to overcome respondent's presumption of correctness because it was uncorroborated. We disagree. Petitioners' testimony was reasonable, credible, and consistent. Respondent did not produce any witnesses or evidence that leads us to conclude otherwise. As stated by the United States Court of Appeals for the Third Circuit: 153 There is no question that taxpayer's uncontradicted testimony [is] sufficient to establish that the Commissioner's determination * * * was erroneous. However, the Tax Court [is] not bound to accept taxpayer's uncontradicted testimony if it * * * [finds] the testimony to be improbable, unreasonable or questionable. * * * [Citations and fn. refs. omitted.] Demkowicz v. Commissioner, 551 F.2d 929">551 F.2d 929, 931 (3d Cir. 1977), revg. T.C. Memo 1975-278">T.C. Memo. 1975-278. We found nothing improbable, unreasonable, or questionable about petitioners' testimony. Respondent argues that the existence of 1977 and 1978 Schedules K-1 bearing petitioners' home address and listing petitioner as owning a 25-percent interest in Jodamoto establishes that petitioner had knowledge of Jodamoto. Petitioners testified that petitioner did not see the Schedules K-1 during the years at issue and did not know of Jodamoto. Wasserstrom testified that he was not aware of petitioner's knowing of Jodamoto. Petitioners and Wasserstrom were credible witnesses. Based on this record, as stated in the findings of fact, we find that petitioner did not know of Jodamoto. Respondent154 argues that petitioner knew of the lithograph activity because Mr. Chucas used petitioners' home address for that activity. We disagree. Mr. Chucas received most correspondence concerning the lithograph activity at his office. Any mail that did arrive at home concerning the lithograph activity did not give petitioner knowledge because she did not open her husband's mail. Mr. Chucas did not in fact conduct any lithograph activity at home. Therefore, we conclude that the documents bearing petitioners' address did not give petitioner knowledge of the underlying transactions and that petitioner did not know of the lithograph activity. Therefore, we conclude that petitioner did not know of the substantial understatement of tax on petitioners' returns for the years at issue. b. Reason to Know of the UnderstatementWe next decide whether petitioner had reason to know of the substantial understatement of tax. The test to apply in deciding whether petitioner had reason to know of the substantial understatement is whether, at the time of signing the returns, a reasonable person in the taxpayer's circumstances could be expected to know of the substantial understatement. Stevens v. Commissioner, 872 F.2d 1499">872 F.2d 1499, 1505 (11th Cir. 1989),155 affg. T.C. Memo. 1988-63; Shea v. Commissioner, supra at 566; Sanders v. United States, supra at 166-168. Significant factors in this decision are petitioner's intelligence, her level of involvement in the financial transactions which gave rise to the deductions, her husband's openness concerning these transactions, and the presence of lavish or unusual expenditures compared to taxpayer's past standard of living. Price v. Commissioner, 887 F.2d 959">887 F.2d 959, 965 (9th Cir. 1989), revg. an Oral Opinion of this Court. Petitioner has no business or tax education. She worked for approximately 3 years before her marriage in 1965, but was not employed outside her home for more than 10 years before the first year at issue here. She had no knowledge of Mr. Chucas' investments. Petitioner's involvement in the couple's financial affairs was limited to paying household expenses for which her husband provided the funds. Petitioners maintained a standard of living commensurate with Mr. Chucas' income from his law practice. Petitioners did not live a lavish or extraordinary156 lifestyle. Respondent argues that if petitioner had reviewed the returns more closely, she would have known that the claimed partnership losses created a substantial understatement of tax. Respondent points out that the returns showed income and losses from 17 partnerships in 1977, 16 in 1978, and 12 in 1980. Respondent contends that this should have put petitioner on notice to inquire further into the accuracy of the returns. Respondent also argues that the losses claimed on petitioners' returns were staggering and would put even an unsophisticated taxpayer on notice to question the returns. The losses claimed represented 52 percent, 29 percent, and 38 percent of petitioners' total gross income for 1977, 1978, and 1980, respectively. Deductions which are so large as to be "staggering", coupled with other factors such as a lavish lifestyle, an unexplained failure of the tax preparer to sign the return, or the involvement of the taxpayer claiming innocent spouse status in the activity related to the understatement of tax, give a taxpayer reason to know of the understatement of tax. Stevens v. Commissioner, supra at 1506; Bokum v. Commissioner, 94 T.C. 126">94 T.C. 126, 148-150 (1990).157 In Stevens v. Commissioner, supra, the Court of Appeals for the Eleventh Circuit affirmed our decision denying the taxpayer innocent spouse relief. In that case the taxpayer knew of her husband's investments from her work in his business and from conversations with her husband and their accountants. In addition, the taxpayer's lifestyle was lavish, and the taxpayers claimed losses equal to or greater than their income for the years at issue. The court in Stevens stated that when: staggering deductions -- deductions which equal or exceed one's income -- are claimed, the appearance of those deductions on a tax return, combined with an affluent lifestyle that has been wholly unaffected by the losses allegedly incurred, makes the presence of unusual and lavish expenditures highly pertinent. * * * Id. at 1506. In Bokum v. Commissioner, supra at 146-148, the taxpayer knew about a sale of property by her husband's corporation, which distributed the proceeds ($ 2,605,272) to her husband, the sole shareholder. The taxpayers reported the distribution as dividend income and subtracted158 therefrom $ 2,089,057 as the basis deduction. Id. at 147. These amounts far exceeded any other amount shown on the taxpayers' return. The taxpayer signed the tax return, but the preparer did not. Id. at 132. We held that the taxpayer had notice that the returns might be inaccurate because of the taxpayer's knowledge of the transaction which caused the underpayment, the plain description of the transaction on the taxpayers' return, the magnitude of the numbers on the return, and the fact that the preparer had not signed the return. Id. at 147, 150. The facts in the instant case are markedly different than in Stevens v. Commissioner, supra, and Bokum v. Commissioner, supra. Here, petitioner was not involved in Mr. Chucas' investments and did not live a lavish lifestyle, and the preparer signed the return. In addition, the deductions at issue in Stevens and Bokum were larger relative to the other items on the return than in the instant case. Because of these differences, respondent's reliance on Stevens159 and Bokum is not warranted. Respondent raises two arguments for the first time in the posttrial memorandum. Respondent did not question petitioners about either point at trial. First, respondent argues that petitioner should have known of the understatement of tax on petitioners' 1977, 1978, and 1980 returns because of the audit of petitioners' prior years. Petitioners deny in their posttrial memorandum that petitioner knew about the earlier audit. The record is incomplete concerning the prior audit. The prior audit of petitioners' 1974, 1975, and 1976 tax returns ended in 1985, and Mr. Chucas testified that he took out a second mortgage in 1985 or 1986 to pay the deficiencies. However, the record does not show when the audit started, whether it occurred before, during, or after the years in issue, or what petitioner knew about it when it occurred. Second, respondent argues in the posttrial memorandum that petitioner had notice that there were problems with petitioners' 1977, 1978, and 1980 returns, when they executed Forms 2848, Power of Attorney, on April 25, 1979, and 872-A, Consent to Extend the Time to Assess Tax, on August 15, 1980. We disagree. Petitioner's signing160 of the Forms 872-A and 2898 did not give her notice of problems with the 1977 return because she signed it before she signed the forms. She signed the Form 2848 before signing the 1978 and 1980 returns and signed the Form 872-A before signing the 1980 returns. Consenting to extend the statute of limitations and authorizing a power of attorney may have alerted petitioner that the Internal Revenue Service had some interest in the taxable year referred to in the forms, but we do not think she knew or should have known from it that there was a substantial understatement in a later year, or that it triggered a duty for her to inquire about the later year. We accept petitioner's denial of knowledge in light of the entire record in this case. We find under the facts of this case that petitioner's signatures on these IRS forms did not give her notice to inquire. We conclude that petitioner did not know or have reason to know of the understatement of tax. Accordingly, petitioner meets the third requirement for innocent spouse relief. 4. Section 6013(e)(1)(D) -- InequityTo be entitled to relief as an innocent spouse, petitioner must show that, based on the facts and circumstances, 161 it would be inequitable to hold her liable for the deficiency in tax for the years in issue. Sec. 6013(e)(1)(D). We find that it would. In deciding whether it is inequitable to hold a spouse liable for a deficiency, we take into account whether the purported innocent spouse significantly benefited, either directly or indirectly, from the items omitted from gross income. Belk v. Commissioner, 93 T.C. 434">93 T.C. 434, 440 (1989); Purcell v. Commissioner, 86 T.C. 228">86 T.C. 228, 242 (1986), affd. 826 F.2d 470">826 F.2d 470 (6th Cir. 1987); H. Rept. 98-432 (Part 2), at 1501, 1502 (1984); sec. 1.6013-5(b), Income Tax Regs. Normal support is not a significant benefit for purposes of deciding whether it is inequitable to hold petitioner liable for the deficiency. Terzian v. Commissioner, 72 T.C. 1164">72 T.C. 1164, 1172 (1979); sec. 1.6013-5(b), Income Tax Regs. Normal support is to be determined by the circumstances of petitioners. Sanders v. United States, 509 F.2d 162">509 F.2d 162, 168 (5th Cir. 1975); Flynn v. Commissioner, 93 T.C. 355">93 T.C. 355, 367 (1989); Estate of Krock v. Commissioner, 93 T.C. 672">93 T.C. 672, 678 (1989).162 Respondent contends that petitioner derived significant benefit from the understatements. Respondent contends that lower tax rates which result in a tax savings are a significant benefit, and thus argues that petitioner benefited for each year in issue. We disagree. Petitioners received no refunds and their standard of living did not change due to any tax savings because Mr. Chucas reinvested the savings and ultimately lost them all. Petitioner did not benefit from the savings. See Bouskos v. Commissioner, T.C. Memo 1987-574">T.C. Memo. 1987-574. Respondent further argues that petitioner's vacations were a significant benefit. We disagree. Mr. Chucas' income from his law practice was more than adequate to pay for petitioner's trips, especially in light of the discounts she received as a travel agent. Respondent also argues that petitioner benefited from petitioners' family vacations. However, their family trips consisted of routine trips within the bounds of normal support. Based on the record of this case, we conclude that it would be inequitable to hold petitioner liable for the deficiency in tax. Accordingly, we find petitioner has met all the elements of163 section 6013(e) and thus is an innocent spouse for 1977, 1978, and 1980. To reflect concessions and the foregoing, Decision will be entered under Rule 155 with respect to petitioner Morris Chucas for all years in issue and with respect to petitioner Renee Chucas for 1979. Decision will be entered for petitioner Renee Chucas for 1977, 1978, and 1980. Footnotes1. Formerly sec. 6621(d); 120 percent of the interest due on the underpayment.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622367/	GARBIS S. BEZDJIAN AND MAIDA M. BEZDJIAN, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentBezdjian v. CommissionerDocket No. 13306-82.United States Tax CourtT.C. Memo 1987-140; 1987 Tax Ct. Memo LEXIS 132; 53 T.C.M. (CCH) 368; T.C.M. (RIA) 87140; March 16, 1987. Dennis R. DiRicco and Bernard P. Kenneally, for the petitioners. Barbara Leonard, for the respondent. CLAPPMEMORANDUM FINDINGS OF FACT AND OPINION CLAPP, Judge: Respondent determined deficiencies in petitioners' 1978 and 1979 Federal income taxes in the amounts of $37,594.00 and $2,417.00, respectively. The issue for decision is whether the transaction described below satisfies the "exchange" requirement of section 1031. 1FINDINGS OF FACT Some of the facts have been stipulated and are found accordingly. The stipulation of facts and the exhibits attached thereto are incorporated133 by this reference. During 1978, Shell Oil Company (Shell), conveyed to petitioners property located at 1199 Broadway/Laguna, Burlingame, California (Broadway property), and petitioners conveyed to Roberta and Barbara Levey (Leveys) property located at 1236 El Camino Real, Burlingame, California (El Camino property). Prior to March 21, 1978, Garbis Bezdjian (petitioner) and representatives of Shell negotiated for the sale of the Broadway property from Shell to petitioner. The representatives informed petitioner that the price of the property was $175,000. Petitioner asked the representatives if Shell was interested in exchanging the Broadway property for other real property. The representatives refused to participate in such an exchange and informed petitioner that Shell was only interested in selling the property for cash. On March 21, 1978, Shell informed petitioner that he had 30 days to purchase the property for $175,000 and that the sale had to close by September 15, 1978. On April 13, 1978, petitioner deposited $10,000 of earnest money with Shell. Two days later, petitioner offered, as consideration for the purchase of the Broadway property, to deposit $175,000 in escrow134 at the Title Insurance and Trust Company (Title Insurance escrow) by September 15, 1978. On May 18, 1978, Shell accepted petitioner's offer. Three days after petitioner and Shell executed a written contract, petitioner contacted Armen Sossikian (Sossikian), a real estate agent, to discuss with him the sale of the El Camino property. Petitioner told Sossikian that he wanted him to close the Broadway and El Camino properties simultaneously and that the proceeds from the sale of the El Camino property were to go to Shell via the Title Insurance escrow. Because petitioner and Sossikian could not find a buyer for the El Camino property prior to September 15, 1978, the date of the Broadway property closing, petitioner negotiated a $165,000 loan from the Chartered Bank of London (Chartered Bank). As security for said loan, he executed a promissory note and deeds of trust on the El Camino property and his personal residence. On August 22, 1978, Chartered Bank transferred the $165,000, which petitioner borrowed, to the Title Insurance escrow. On September 6, 1978, the Title Insurance escrow disbursed the funds in the escrow to Shell and recorded the deed which transferred the Broadway135 property from Shell to petitioner. On September 25, 1978, the Leveys, after refusing to participate in an exchange of the El Camino property for other real property, offered to purchase the El Camino property for $257,500. On that same day, petitioners accepted the Leveys' offer. Subsequent to petitioners' acceptance, the Leveys had trouble financing their purchase, and because of said trouble, petitioners and the Leveys modified their contract so that the purchase price would be $10,000 less, i.e., $247,500. On October 6, 1978, petitioner opened an escrow at the Founders Title Company (Founders escrow) for the sale of the El Camino property. To finance their purchase of the El Camino property, the Leveys obtained a $79,500 loan from Chartered Bank and assumed a $67,335.63 mortgage on the property. By December 4, 1978, Chartered Bank had deposited the $79,500, which the Leveys borrowed, and the Leveys had deposited the balance of the funds needed to purchase the El Camino property, in the Founders escrow. On December 4, 1978, Founders escrow recorded a deed, which conveyed the El Camino Property to the Leveys, and disbursed $170,683.27 to Chartered Bank as repayment for136 petitioners' $165,000 loan, plus accrued interest. The following diagram chronologically depicts the steps which the participants took to effect the transfers: [SEE ILLUSTRATION IN ORIGINAL] Petitioners realized a gain from the sale of the El Caminio Property, but did not recognize said gain because they claimed that the transaction was subject to the nonrecognition provisions of section 1031. In a notice of deficiency, respondent determined that section 1031 did not apply because, pursuant to said section, petitioners' purchase of the Broadway property and sale of the El Camino property were not an "exchange." OPINION Section 1031(a) provides that no gain or loss shall be recognized if property held for productive use in a trade or business or for investment is exchanged solely for property of a like kind. A sale of property followed by a separate and unrelated purchase of property is not an "exchange" pursuant to section 1031. If petitioner's transfer and receipt of property were interdependent parts of an overall plan, the result of which was an exchange of like-kind properties, 137 section 1031 applies. Biggs v. Commissioner,69 T.C. 905">69 T.C. 905, 914 (1978), affd. 632 F.2d 1171">632 F.2d 1171 (5th Cir. 1981). If the taxpayer sells property for cash and reinvests said cash in like-kind property, section 1031 does not apply, even if the taxpayer reinvests said cash just a few days after the sale. Starker v. United States,602 F.2d 1341">602 F.2d 1341, 1352 (9th Cir. 1979). Barker v. Commissioner,74 T.C. 555">74 T.C. 555, 560-561 (1980). Petitioners contend that section 1031(a) applies because: 1) pursuant to their intent, the transfers were part of an overall plan; 2) the substance rather than the form of the transfers controls the tax consequences, and, in the present case, the substance of the transaction was the receipt of the Broadway property followed by the transfer of like-kind property, i.e., the El Camino property; 3) the step transaction doctrine supports a finding that they effected a like-kind exchange; 4) the transfers had to be an "exchange," and not a sale, because they did not have an unfettered right to the El Camino proceeds; and 5) the legislative intent of section 1031 supports their position. Respondent contends that138 section 1031(a) does not apply because, pursuant to section 1031, petitioner did not "exchange" the El Camino property for the Broadway property. We agree with respondent. Petitioners' IntentPetitioners transferred $175,000 to Shell via the Title Insurance escrow, and the Title Insurance escrow recorded the deed which conveyed the Broadway property from Shell to petitioners. Petitioners subsequently conveyed the El Camino property to the Leveys via the Founders escrow, and the Leveys transferred cash, which the Chartered Bank claimed as repayment for petitioners' loan, to the Founders escrow. Petitioners did not "exchange" like-kind property; 2 they conveyed the El Camino property for cash. Although petitioners contend that they intended to effect an exchange of like-kind properties, such an exchange did not occur. In fact, petitioners attempted to work out an exchange and were rebuffed by both Shell and the Leveys. Petitioners cite, inter alia, Alderson v. Commissioner,317 F.2d 790">317 F.2d 790 (9th Cir. 1963), Starker v. United States,supra, and Biggs v. Commissioner,supra.139 In each of those cases, the taxpayer's intent was coupled with the taxpayer's transfer of real property to a person who, or entity which, in turn, transferred real property to the taxpayer. See Alderson v. Commissioner,supra (taxpayer transferred California land to a person who transferred California land to the taxpayer); Starker v. United States,supra at 1342-1343 (taxpayer transferred Washington and Oregon land to Crown Zellerbach Corporation which transferred both real property and a contract right to purchase real property to the taxpayer); and Biggs v. Commissioner,supra (taxpayer transferred a Maryland farm to a person who transferred a contract right to purchase a Virginia farm to the taxpayer). In the present case, although petitioners intended to effect an exchange of like-kind property, they did not transfer the El Camino property to a person who transferred real property to them; they transferred the El Camino property to the Leveys for cash. Substance-Over-Formthe substance of a transaction in which the taxpayer sells property and immediately reinvests the proceeds in like-kind property is140 not much different from the substance of a transaction in which two parcels are exchanged without cash. * * * Yet, if the exchange requirement is to have any significance at all, the perhaps formalistic difference between the two types of transactions must, at least on occasion, engender different results. [Barker v. Commissioner,supra at 561; citations omitted.] In the present case, the substance of the transaction was not such that "two parcels [were] exchanged without cash." Petitioners purchased the Broadway property and subsequently sold the El Camino property for cash. The substance of the transaction was a purchase followed by a sale. Step Transaction Doctrine"The step-transaction doctrine is a particular manifestation of the more general tax law principle that purely formal distinctions cannot obscure the substance of a transaction." Superior Coach of Florida, Inc. v. Commissioner,80 T.C. 895">80 T.C. 895, 905 (1983). The doctrine treats a series of separate steps as a single transaction if they are in substance integrated, interdependent141 and aimed at a particular result. Superior Coach of Florida v. Commissioner,supra.In the present case, petitioners did not convey their property to a person who, in turn, transferred real property to them. They conveyed the El Camino property to the Leveys who, in turn, transferred cash to them. Thus, the transfers fail the "exchange" requirement of section 1031 even if the transfers were integrated, interdependent and aimed at a particular result. Was It An "Exchange" Because Petitioners Did Not Have An Unfettered Right To The El Camino Proceeds?Petitioners sold the El Camino property to the Leveys. They did not receive the sale proceeds; the Chartered Bank claimed said proceeds as repayment for the loan which petitioners obtained to purchase the Broadway property. An "exchange" occurs pursuant to section 1031 if a taxpayer transfers property to a person who transfers like-kind property to the taxpayer. See Alderson v. Commissioner,supra.In the present case, regardless of whether petitioners received the proceeds from the142 sale to the Leveys, or whether the Chartered Bank claimed the proceeds for repayment of petitioners' loan, petitioners did not convey the El Camino property for like-kind property; they conveyed it for cash. Legislative IntentPetitioners contend that the legislative intent of section 1031 supports their position. Specifically, they state that an exchange of business or investment assets should not trigger recognition of gain or loss if a taxpayer is not "cashing in" his/her investment. Petitioners' argument does not persuade us. First, the statute (section 1031) requires an "exchange," and petitioners have not satisfied that requirement. Second, we have held that petitioners have sold/"cashed in" their investment in the El Camino property. Finally, in Starker v. United States,supra, a case upon which petitioners rely heavily, the Ninth Circuit stated: the "underlying purpose" of section 1031 is not entirely clear. The legislative history reveals that the provision was designed to avoid the imposition of a tax on those who do not "cash in" on their investments in trade or business property. Congress appeared to be concerned that taxpayers would*143 not have the cash to pay a tax on the capital gain if the exchange triggered recognition. This does not explain the precise limits of section 1031, however; if those taxpayers sell their property for cash and reinvest that cash in like-kind property, they cannot enjoy the section's benefits, even if the reinvestment takes place just a few days after the sale. Thus, some taxpayers with liquidity problems resulting from a replacement of their business property are not covered by the section. The liquidity rationale must therefore be limited. [Starker v. United States,supra at 1352.] Petitioners also contend that the Tax Reform Act of 1984 supports their position because the Tax Reform Act of 1984 permits non-simultaneous exchanges in certain circumstances. This argument does not affect our decision. We have held, supra, that petitioners did not satisfy the "exchange" requirement of section 1031; we have not held that section 1031 does not apply because the transfers were not simultaneous. Decision will be entered under Rule 155.Footnotes1. Unless otherwise indicated, all section references are to the Internal Revenue Code of 1954, as amended.↩2. See Lee v. Commissioner,T.C. Memo. 1986-294↩.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622368/	I. Jay Green and Beatrice F. Green, Petitioners, v. Commissioner of Internal Revenue, RespondentGreen v. CommissionerDocket No. 77980United States Tax Court35 T.C. 764; 1961 U.S. Tax Ct. LEXIS 224; February 16, 1961, Filed 224 Decision will be entered for the respondent. Deduction -- Travel Expense -- Home. -- The petitioners are not entitled to a deduction for travel expenses in Dayton, Ohio, from whence came all of the income-producing business. Charles W. Slicer, Esq., for the petitioners.Gerald W. Fuller, Esq., for the respondent. Murdock, Judge. Fisher, J., dissenting. Bruce, Withey, and Forrester, JJ., agree with this dissent. MURDOCK 764 225 The Commissioner determined deficiencies in income tax of the petitioners of $ 994.48 for 1954 and $ 424.84 for 1955. The only issue for decision is the location of Jay's home for income tax purposes.FINDINGS OF FACT.The petitioners, husband and wife, filed their joint income tax returns for the taxable years with the district director of internal revenue at Toledo, Ohio. They resided during those years at 107 Fairview Avenue, Greenville, Ohio, in a house owned by Beatrice's mother who also resided in that house and was claimed as a dependent on the petitioners' returns.Beatrice was employed during both taxable years by Sears, Roebuck and Company in Dayton, Ohio, as a division manager, and she commuted daily between Greenville and Dayton, the distance between the two being about 37 miles. Jay was self-employed during those years, and described his occupation as "industrial and management engineer and consultant." Jay had an office during the taxable years at his Greenville residence. It contained a desk, files, bookcases, technical and professional books, magazines, records, and clients' reports, and at that office he did some work at times not disclosed by the record.Attached226 to each return is a Schedule C to show "Profit (or Loss) from Business or Profession." There is a place on those schedules for "Business address" and there for 1954 is shown "18 West Monument Avenue, Dayton, Montgomery, Ohio," and for 1955 is shown "384 West 1st Street (office service), Dayton 2, Montgomery, Ohio," Montgomery being the county in which Dayton is located.The addresses, 18 West Monument Avenue and 384 West 1st Street, Dayton, Ohio, were places where telephone calls to Jay would be 765 answered and mail addressed to him would be received, and where he had a telephone, listed in the Dayton telephone book under his name. Jay had no office at either of these addresses, no equipment, and no facilities for work other than those mentioned. Jay used business stationery during the taxable years, some of which showed his address and telephone number as 18 West Monument Avenue, Dayton 2, Ohio, Hemlock 3203, some of which showed that address and a telephone number and, in addition, showed his address in Greenville and a telephone number. Jay used business envelopes during the taxable years, some of which showed 18 West Monument Avenue, Dayton 2, Ohio, as the return address227 and some of which showed his return address as 384 West 1st Street, Dayton 2, Ohio. Jay used business cards during the taxable years, some of which showed the 18 West Monument Avenue, Dayton 2, Ohio, address and telephone number, some of which showed the 384 West 1st Street, Dayton 2, Ohio, address and a telephone number, and some of which showed both the 18 West Monument Avenue address and his address in Greenville together with a telephone number for each.Jay reported for 1954 gross receipts of $ 12,141.30, gross profit of $ 11,390.86, and net profit of $ 3,505.53 from his business. Jay reported for 1955 gross receipts of $ 3,780, gross profit of $ 3,481.18, and $ 4,118.34 loss from business. Jay reported no other income on either return and his wife reported as salary from Sears, Roebuck and Company $ 3,735.03 for 1954 and $ 3,805 for 1955.A former client, not otherwise identified in the record, recommended Jay to Lau-Blower Company of Dayton, Ohio, and he began his first task for it in March 1954. The company wanted to know its costs as they occurred. Jay estimated that this work would take about 6 months but actually he completed it in 4 months. He then undertook another228 task for the same company relating to an incentive system and group bonus. This took about 2 months. He then undertook another task for the same company. It had to do with work simplification factors and the training of a time-study man. It took 1 or 2 months. He was then further engaged by the same company to realign machinery. This overlapped with the previous task. He then was engaged by Lau-Blower to review production control, and he called in an associate to help him with this task. Thereafter, he was engaged for about a month in developing an incentive system for a new, small department of Dayton Precision Manufacturing Company, also located in Dayton, Ohio. This task took about 1 month and was performed in 1955. The record does not show what part, if any, of the work done for Lau-Blower was done in 1955. Jay had no income from any client in Greenville in either tax year.Jay remained overnight at his residence in Greenville, Ohio, not more than 50 days in 1954 and not more than 52 days in 1955. Jay 766 remained overnight in Dayton 300 days in each of the taxable years, lodging at the Holden Hotel in Dayton. Jay met with officials of Lau-Blower and with representatives229 of a striking union at the hotel. He had many meetings at the plant, many of which took place early in the mornings and a great many took place late at night. Week after week he was in the plant as late as 10:30 at night.Jay expended for meals and lodging for himself while in Dayton $ 3,566.32 in 1954 and $ 3,737.04 during 1955. He had automobile expenses of $ 1,082.09 in 1954 and $ 876.11 in 1955 attributable to travel between Dayton and Greenville and between the Hotel Holden and the Lau-Blower and Precision plants in Dayton.OPINION.The petitioners in their brief state that the Commissioner relies upon the facts that Jay had a Dayton telephone, a Dayton telephone listing, a Dayton telephone-answering service, and a Dayton address for answering mail. They apparently fail to realize that the burden is upon them to prove that Jay's home for tax purposes was in Greenville rather than in Dayton. The Commissioner has denied the deductions claimed by the petitioners for travel expense upon the theory that Jay's home for tax purposes was in Dayton. That determination is presumed to be correct and the burden to prove that it was erroneous is upon the petitioners. The telephone 230 and mail receiving addresses are merely some evidence unfavorable to the petitioners, of which there is considerably more.Not only is the Commissioner's determination presumed to be correct, but the great preponderance of the evidence supports that determination. Most of the facts have been stipulated and Jay was the only witness. The parties have stipulated that Jay had no income from any client in Greenville during the taxable years, and there is no evidence to show that he ever was employed or had any income from business in Greenville. The evidence shows, furthermore, that all of his income for the taxable years was derived from services in Dayton. We cannot assume, in the absence of proof, that these years were not typical of his business activities. The only employment that he ever had as a consultant, so far as this record shows, was in Dayton, an industrial city much larger than Greenville.The fact that Jay had an office in his residence in Greenville is far from being determinative. He could as well have had it in Dayton. Jay testified that he "Made out reports for clients, the recommendations of work proposed, or to be done, or done for clients, procedures, designed231 the forms, generator plant layouts, and the general paperwork involved in professional engineering" in Greenville, but he did not relate that statement to any work done during the taxable years. However, with respect to realigning machinery for Lau-Blower in 767 1954, he testified, "Now, the plant layout and the majority of all the paper work was not done in Dayton. The leg work, the time studies, were done at the plant, as is normal; but the other work was all taken back to my office in Greenville." The parties have stipulated that Jay remained overnight in Greenville at undisclosed times for not more than 50 nights in 1954 and was in Dayton for 300 nights. This, taken in connection with other evidence, leads the Court to doubt that he could have done very much, if any, of his work during the taxable years at his place in Greenville. But even if he did do some work there, certainly by far the largest part of the work which he did to earn income during these taxable years was done in Dayton, and all of it could have been done there without travel expense had he resided there. He may have worked only 1 month in 1955 yet was in Dayton 300 days.Jay testified in explanation232 of the Dayton addresses which he used in his business, "Well, through analysis of our ethical way of contacting clients, I found that I got very few responses to Greenville, but that by having an answering service and a mail service where mail could reach me in a city like Dayton, I got a very much greater response, and contacts for my profession." At another place he said he did it "for a prestige standpoint."The evidence as a whole implies that Jay's only prospects of employment were in Dayton and that he, like his wife, chose to live in Greenville for personal reasons only, while earning income in Dayton. Their work in Dayton does not give rise to business expenses under the circumstances shown in this record, even though Jay depended upon short-period employment. If the record does not prove affirmatively that Dayton was Jay's home for tax purposes, nevertheless, the petitioners have failed to sustain their burden of proof that it was not.Decision will be entered for the respondent. FISHERFisher, J., dissenting: In this, as in many cases, the purpose of the law is a valuable aid to interpretation. The broad purpose of Congress in enacting section 162(a)(2) of the233 Code of 1954 was to implement, in a practical way, its recognition of the fact that when the exigencies of business call for travel away from home, such travel usually entails expenses such as hotel bills, extra cost of meals, and transportation expenses not required at home. Leaving aside, for the moment, the question of whether or not the taxpayer traveled "away from home," the stipulated facts show payments for hotel room and meals, together with at least some transportation expense. The relationship of these expenses to his business activities is apparent from the record. The taxpayer has thus brought himself within the practical application of 768 the law at least to the point of demonstrating actual payment of expenses.To my mind, the only real question in this case is whether taxpayer was "away from home." That the word "home" is a vague concept for tax purposes is recognized by the Supreme Court in Commissioner v. Flowers, 326 U.S. 465">326 U.S. 465, in which the Court said, in part (p. 471):The meaning of the word "home" in § 23 (a)(1)(A) with reference to a taxpayer residing in one city and working in another has engendered much difficulty234 and litigation. * * (For authorities and rulings relating thereto, see notes 4 and 5 and cases cited by the Court in Flowers, on pages 471-472.)It is stipulated that taxpayer resided in Greenville during the years in question. The testimony establishes that in the years in question he had an office in Greenville, and the majority, in its findings, describes the contents and uses thereof. That he went to Dayton in pursuit of his business in 1954 and 1955 is clear upon the record. The incurring of hotel expenses in a Dayton hotel when his residence was in Greenville lends some color to the view that he was not in an "at home" status at that time.These circumstances, to my mind, make out a prima facie case on the issues in controversy and meet any technical burden of proving that taxpayer traveled "away from home" in pursuit of his business.I agree that this Court is not bound to accept a prima facie case as conclusive. We may find other supervening circumstances which require a contrary conclusion even though (as here) there is no conflicting evidence.What, then, are these supervening circumstances, if any?Petitioner had arrangements with a telephone- and mail-answering235 service in Dayton. These are facts to be considered, but to my mind are of little significance, particularly when he had no office in Dayton and did not receive or confer with clients at the answering service office. I see no greater significance to the several addresses on his stationery and returns.Working at the plants could not, of itself, change his home to Dayton. If a taxpayer's home automatically follows a temporary jobsite, no working man could ever be away from home while he was working. In the instant case, it seems clear to me that he went to Dayton and remained there temporarily in pursuit of his own business to carry out short-term, impermanent assignments.Without going into details, I think it is clear that the use of the hotel was required by the exigencies of his business. It was obviously not his home. (Actually, if petitioner had raised the point, I think he would be entitled to deduct part of the hotel expense as rent under section 162(a)(3), whether in travel status or not, in view of its use for conferences as described in the findings of the majority.)769 That the sources of his business activities in the 2 years in issue were in the Dayton area236 is a factor to be considered, but is not, in my opinion, controlling on the issue of whether or not Dayton was his tax home. The sources in prior or subsequent years could have been Dayton or elsewhere, but the question of his tax home would still necessarily be determined by a consideration of all of the then relevant circumstances.Finally, there is the argument that petitioner could have moved to Dayton. This, of course, he could have done. I cannot agree, however, that Congress intended, or that the law as written requires, a taxpayer, in relation to temporary jobs of the nature here involved, to face the alternative of moving his home every time his job moved or paying travel expenses such as hotel bills without receiving the allowance of a deduction therefor.On the broader aspect of the case, therefore, I think the views of the majority are wrong in that they defeat the intent of Congress. From the narrower standpoint, in my opinion, the conclusion reached by the majority cannot be justified on the theory of a failure to meet the burden of proof.	01-04-2023	11-21-2020

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