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https://www.courtlistener.com/api/rest/v3/opinions/4622369/	Henry N. and Marilyn Hulter, et al., 1 Petitioners v. Commissioner of Internal Revenue, RespondentHulter v. CommissionerDocket Nos. 3969-81, 23116-81, 22544-82, 20873-83United States Tax Court83 T.C. 663; 1984 U.S. Tax Ct. LEXIS 18; 83 T.C. No. 36; October 31, 1984. October 31, 1984, Filed 18 Petitioners filed a motion for a determination as to admissibility of an expert witness' testimony and report. Respondent argues that the expert witness' material is inadmissible under rule 408, Fed. R. Evid., because the material was submitted to respondent by petitioners in settlement negotiations. Held: Rule 408 bars use of settlement material by a party as an admission against the other party who submitted the material in settlement negotiations. Rule 408 has no application where the party who submitted the material in the settlement negotiations is the party who seeks to admit the settlement material as evidence at trial. Shlomo A. Beilis19 and James J. Mahon, for the petitioners.Pamela V. Gibson, for the respondent. Swift, Judge. SWIFT663 OPINIONThis matter is before the Court on petitioners' motion in limine, filed on August 7, 1984, requesting a ruling on the admissibility of an expert witness' testimony and written report. The motion was filed because respondent informally indicated to petitioners that respondent would object to the admissibility of this material at trial. Respondent filed a notice of objection on August 28, 1984, and on September 12, 1984, petitioners submitted a reply memorandum in support of their motion. Trial of this case is scheduled to begin on November 26, 1984.Resolution of this motion involves an interpretation of rule 408, Federal Rules of Evidence.2 Respondent contends that the 664 aforementioned rule requires the exclusion of the expert witness' testimony and report as evidence at trial because such material was submitted to respondent in the context of, and to assist in, pending settlement negotiations. Rule 143(a), Tax Court Rules of Practice and Procedure, expressly provides that the "rules of evidence generally applicable in the Federal courts" are20 controlling in this Court. 321 The report in question was prepared at petitioners' request by Steven Hochberg, a real estate expert and appraiser, in December of 1982 and January of 1983, and was submitted shortly thereafter to both parties. Petitioners paid Mr. Hochberg's fee. The report pertained to the valuation and ownership of 13 parcels of real estate located in Durham, NC. Those parcels were associated with Tudor Associates, Ltd. II, one of a number of real estate limited partnerships organized and promoted by George Osserman and Paul Garfinkle. It was anticipated that the testimony and report of Mr. Hochberg would assist in negotiating a settlement of this matter. Settlement negotiations broke down, however, sometime after the report was completed, and petitioners now anticipate introducing the report, together with the testimony of Mr. Hochberg, into evidence at trial.Respondent relies primarily on the second sentence of rule 408. That sentence provides "Evidence of conduct or statements made in compromise negotiations is likewise not admissible." Since the report of Mr. Hochberg was prepared during, and submitted to respondent in the course of, settlement negotiations, respondent argues that it22 constitutes "statements made in compromise negotiations" and therefore is not admissible under rule 408. For the reasons explained below, 665 we conclude that respondent's argument misconstrues the purpose of rule 408 and the circumstances in which that rule will operate to preclude the admissibility of material submitted in settlement negotiations.Although our research has not located a case directly on point, the rationale underlying the common law rule that gave rise to rule 408 is clear. That rationale is stated in McCormick on Evidence, sec. 274 (E. Cleary 2d ed. 1972), as follows: "The exclusionary rule is designed to exclude the offer of compromise only when it is tendered as an admission of the weakness of the offering party's claim or defense, not when the purpose is otherwise." (Emphasis added.)The legislative history of rule 408 indicates that the purpose thereof is to encourage settlements. See S. Rept. 93-1277, to accompany H.R. 5463 (Pub. L. 93-595) (1974). The underlying fear is that, without the rule, settlement negotiations would be inhibited if the parties knew that statements made in the course of settlement might later be used against them as23 admissions of liability. Central Soya Co. v. Epstein Fisheries, Inc., 676 F.2d 939">676 F.2d 939, 944 (7th Cir. 1982). As stated in S. Salzberg & K. Redden, Federal Rules of Evidence Manual 191 (3d ed. 1982): "The philosophy of the Rule is to allow the parties to drop their guard and to talk freely and loosely without fear that a concession made to advance negotiations will be used [against them] at trial." Therefore, the evil which the rule seeks to avoid is that the one party will use material against the party who submitted the material for settlement purposes, and the rule should not be interpreted to prevent the same party who submitted the material in the course of settlement discussions from using the material later at trial.The third sentence of rule 408 is intended to insure that relevant evidence is not immunized from use at trial merely because the information was used in pretrial settlement negotiations. See S. Rept. 93-1277, supra at 10. That sentence provides "This rule does not require the exclusion of any evidence otherwise discoverable merely because it is presented in the course of compromise negotiations."The harmony between the24 second and third sentences of rule 408 is found in the explanation that material which exists only because of settlement negotiations will not be admissible against the party who submitted the material (under the 666 second sentence), but material which exists independently of the settlement negotiations will still be discoverable and admissible at trial, even though it was disclosed in the settlement negotiations (under the third sentence). In the latter case, the material will be admissible against the party who submitted it in the settlement negotiations.Respondent relies on Ramada Development Co. v. Rauch, 644 F.2d 1097 (5th Cir. 1981), in support of his position. In that case, the court held that a report which was prepared by an architect employed by plaintiff Ramada Development Co. (Ramada) was not admissible into evidence by the defendant (Rauch). The report had been prepared for the purpose of serving as a "basis of settlement negotiations regarding the alleged defects in the motel." Ramada Development Co. v. Rauch, supra at 1107. It would appear that the basis for the decision was that rule 408 precludes25 the admissibility of evidence offered by a party as an admission against the party who had obtained the evidence in the course of, and for the purpose of, settlement negotiations. The facts of Ramada Development Co. v. Rauch, supra, are distinguishable from the situation herein. As we have previously explained, petitioners herein are seeking to introduce a report of an expert witness whom they employed.We do not believe that a party should be barred from using his own expert witness' testimony and expert witness' report at trial merely because such evidence was used in the settlement negotiations. Such an interpretation would be contrary to the rationale of rule 408, which is to encourage the free exchange of information during settlement negotiations. If respondent's interpretation of the rule were correct, parties would be reluctant to utilize their own expert witnesses' reports during settlement negotiations for fear that the reports could not later be used by them at trial, thereby rendering their investment in such reports useless for anything other than the settlement negotiations. We do not believe that such a result was contemplated under26 rule 408.For the reasons explained above, petitioners' motion will be granted in that the testimony and report of Mr. Hochberg will not be ruled inadmissible by reason of rule 408. Our opinion herein pertains only to objections made under rule 408. Any other objections to the admissibility of Mr. Hochberg's testimony 667 and report will be determined on the merits, if and when objections are made.An appropriate order will be issued. Footnotes1. Cases of the following petitioners are consolidated herewith: Henry N. and Marilyn Hulter, docket No. 23116-81; Murray Israel, docket No. 22544-82; Julian Tenner and Hanna Tenner, docket No. 20873-83.↩2. Unless otherwise indicated, all rule references will refer to the Federal Rules of Evidence. Rule 408, Compromise and Offers to Compromise, provides as follows:"Evidence of (1) furnishing or offering or promising to furnish, or (2) accepting or offering or promising to accept, a valuable consideration in compromising or attempting to compromise a claim which was disputed as to either validity or amount, is not admissible to prove liability for or invalidity of the claim or its amount. Evidence of conduct or statements made in compromise negotiations is likewise not admissible. This rule does not require the exclusion of any evidence otherwise discoverable merely because it is presented in the course of compromise negotiations. This rule also does not require exclusion when the evidence is offered for another purpose, such as proving bias or prejudice of a witness, negativing a contention of undue delay, or proving an effort to obstruct a criminal investigation or prosecution."↩3. Rule 143, Evidence, Tax Court Rules of Practice and Procedure, provides in pertinent part as follows:"(a) General: Trials before the Court will be conducted in accordance with the rules of evidence applicable in trials without a jury in the United States District Court for the District of Columbia. See Code Section 7453. To the extent applicable to such trials, those rules include the rules of evidence in the Federal Rules of Civil Procedure and any rules of evidence generally applicable in the Federal courts (including the United States District Court for the District of Columbia). Evidence which is relevant only to the issue of a party's entitlement to reasonable litigation costs shall not be introduced during the trial of the case. As to claims for reasonable litigation costs, see Rules 231 and 232↩."	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622370/	CURVIN A. MILLER and PAULINE A. MILLER, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent.Miller v. CommissionerDocket No. 1674-73United States Tax CourtT.C. Memo 1975-8; 1975 Tax Ct. Memo LEXIS 365; 34 T.C.M. (CCH) 37; T.C.M. (RIA) 750008; January 14, 1975, Filed Curvin A. Miller, pro se. Russell K. Stewart, for the respondent. TANNENWALDMEMORANDUM FINDINGS OF FACT AND OPINION TANNENWALD, Judge: Respondent determined a deficiency of $1,293.52 in petitioners' income tax for 1970. The issues for decision relate to (1) the proper amount of a trade or business loss deductible pursuant to section 165 1 and (2) certain business expenses partially disallowed by respondent. Some of the facts have been stipulated and are found accordingly and incorporated herein by this reference. 366 Petitioners are husband and wife, who resided in New Oxford, Pennsylvania, at the time of filing their petition herein. (Hereinafter, "petitioner" will refer only to Curvin A. Miller). They filed a joint individual income tax return for the taxable year 1970 with the district director of internal revenue, Philadelphia, Pennsylvania. In 1965, petitioner purchased a standard-bred mare for $250. The mare died in 1970. As a result of the death, petitioners claimed a casualty loss of $10,000 on Schedule C of their 1970 tax return. Petitioner is an owner, trainer, and driver of horses and is licensed by the United States Trotting Association. The $9,750 petitioner added to the original cost of the mare to arrive at the $10,000 deduction represents petitioner's calculation of the value of his time spent training the horse during the years of his ownership. He arrived at the $9,750 figure my multiplying the number of hours he claimed that he spent training the horses by $7.00. During 1970, petitioner was employed as a heavy equipment operator and $7.00 per hour would have approximated petitioner's compensation had he spent the time operating heavy equipment instead of training the367 mare. Respondent disallowed $9,750 of the claimed loss due to the death of the mare and claimed business expenses of $928.12, consisting of a portion of the amounts petitioner deducted for taxes, repairs, feed, hay, and straw. Section 165(c) allows individuals to deduct losses incurred in a trade or business. There is no $100 limitation on such losses (compare section 165(c) (3)); the full amount of the lost property's adjusted basis (section 1.165-7(b) (1), Income Tax Regs.) may be deducted. The dispute herein is over the proper amount of such adjusted basis. Respondent has not questioned petitioner's assertion that his horse-raising activities amount to a "trade or business." Petitioner's sole argument is that the value of his time spent training the horse should be added to its cost in determining the adjusted basis. As the Court attempted to explain to petitioner at trial, however, our system of taxation does not generally provide for either deduction or capitalization of such "imputed expenses." See I Surrey, Warren, McDaniel and Ault, Federal Income Taxation, pp. 143-146 (1972). There is no evidence that petitioner at any time included the "imputed income" for his training368 activities in his gross income nor is there any basis for concluding that he should have included such income. 2 He, therefore, cannot now deduct or capitalize such "imputed expenses." Peter Vaira,52 T.C. 986">52 T.C. 986, 1002 (1969), reversed and remanded on another issue, 444 F. 2d 770 (C.A. 3, 1971); cf. Ernest L. Rink,51 T.C. 746">51 T.C. 746, 753 (1969); Frank Markarian,42 T.C. 640">42 T.C. 640 (1964), affd. 352 F. 2d 870 (C.A. 7, 1965); Palmer Hutcheson,17 T.C. 14">17 T.C. 14 (1951); Charles A. Collin,1 B.T.A. 305">1 B.T.A. 305 (1925). 3Petitioner has presented369 no evidence to justify the full amount of his claimed business expenses. Thus, we must hold that he has failed to carry his burden of proof on this issue. Rule 142, Tax Court Rules of Practice and Procedure.Decision will be entered for the respondent.Footnotes1. Unless otherwise specified, all section references shall refer to the Internal Revenue Code of 1954, as amended and in effect during the taxable year in issue.↩2. In the instant situation we do not have the problem that arises where an element of the taxpayer's cost represents an item of income which petitioner should have included, but did not include, in his income for a prior year. Compare Alsop v. Commissioner,290 F. 2d 726↩ (C.A. 2, 1961).3. See also Frank M. Butrick,T.C. Memo. 1972-59, n. 1; Noel Tancred Escofil,T.C. Memo. 1971-131, affirmed per curiam, 464 F. 2d 358 (C.A. 3, 1972); Ralph S. Clark,T.C. Memo. 1966-22↩.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622371/	A. C. Warnack and Shirley Warnack, Petitioners v. Commissioner of Internal Revenue, Respondent; Betty Warnack Boudreau, Petitioner v. Commissioner of Internal Revenue, RespondentWarnack v. CommissionerDocket No. 879-77, 1507-77United States Tax Court71 T.C. 541; 1979 U.S. Tax Ct. LEXIS 195; January 15, 1979, Filed 195 Decision will be entered for the petitioners in docket No. 879-77.Decision will be entered for the respondent in docket No. 1507-77. Held: Payments made by husband to wife under a written separation agreement are periodic payments includable in wife's gross income under sec. 71(a)(2), I.R.C. 1954, and deductible to husband under sec. 215. Apparent discrepancy between value of assets allocated to each in community property State did not require a determination that monthly payments in fact represented part of a division of property, particularly when, among other facts, wife's attorney drafted agreement that included provision that payments were deductible to husband and includable by wife. Robert J. Smith and Emilio T. Gurrola, for the petitioners in docket No. 879-77.Claude P. Kimball, for the petitioner in docket No. 1507-77.John W. Harris, for the respondent. Sterrett, Judge. STERRETT541 Respondent's motion to consolidate the above two cases was granted on January 11, 1978. Respondent determined deficiencies in income taxes paid by petitioners A. C. Warnack and Shirley Warnack, husband and wife (docket No. 879-77), for the following years and in the following amounts: 542 TYE Dec. 31 --Deficiency1971$ 13,913.03197216,322.0019731196 35,661.00197414,552.00Total80,448.03Respondent determined deficiencies in income taxes paid by petitioner Betty Warnack Boudreau (docket No. 1507-77) for the following years and in the following amounts:TYE Dec. 31 --Deficiency1969$ 3,983.6519716,154.0019723,334.0019746,151.75Total19,623.40The deficiency for Mrs. Boudreau's taxable year 1969 is due to a disallowance by respondent of a net operating loss carryback taken by her to her 1969 taxable year from her 1972 taxable year. After concessions made by the parties, the only issue before the Court is whether petitioner Betty Warnack Boudreau must include in her gross income, under section 71, I.R.C. 1954, and whether petitioners A. C. and Shirley Warnack may, therefore, deduct under section 215, certain payments made by A. C. and Shirley Warnack to Mrs. Boudreau during the years in issue. FINDINGS OF FACTSome of the facts have been stipulated and are so found. The stipulation of facts, together with the exhibits attached thereto, are incorporated herein by this reference.Shirley Warnack is a party 197 herein solely by virtue of having filed jointly with her husband A. C. Warnack. Petitioners in docket No. 879-77 will, therefore, be referred to collectively as Warnack or husband. Petitioner Betty Warnack Boudreau, docket No. 1507-77, will be referred to herein as Mrs. Boudreau or former wife. At the time she filed her petition herein, Mrs. 543 Boudreau maintained her legal residence in Tehachapi, Calif. At the time he filed his petition herein Warnack maintained his legal residence in Lancaster, Calif. The parties filed a joint return for their taxable year ended December 31, 1969, with the Internal Revenue Service Center, Ogden, Utah. Warnack filed his 1971 return at Ogden, Utah. There is no evidence as to where he filed his returns for his taxable years ended December 31, 1972, 1973, and 1974. Mrs. Boudreau filed her individual income tax return for her taxable years ended December 31, 1971, 1972, and 1974 with the Internal Revenue Service at Fresno, Calif. Both Warnack and Mrs. Boudreau are on the cash basis and use the calendar year as their tax accounting period.A. C. and Betty Warnack were married in Pascagoula, Miss., on September 3, 1949. Sometime thereafter the couple 198 moved to California. The record does not indicate how much, if any, property was acquired by the couple outside California and before they established their domicile in that State. The parties proceed on the assumption that all the property belonging to the couple at the time of their divorce was community property subject to division under the laws of California. We, therefore, find this as a fact. There were three children born of the union. The youngest was born February 20, 1958.After coming to California, Warnack worked and invested in the construction business -- at which work and investment he was apparently very successful. By 1968 he was a 50-percent owner of a combination of six interlocking construction companies. These companies were: (1) Excavation Construction Co., (2) Manhattan Electric Co., Inc., (3) Santa Fe Engineers, Inc., (4) Lancal Equipment Co., Inc., (5) Littlerock Aggregate Co., Inc. (sometimes referred to as the Antelope Valley Aggregate Co., Inc.), and (6) Construction Repair Co., Inc. At all times relevant in 1968, Santa Fe Engineers, Inc. (Santa Fe), was a 50-percent joint venturer in two projects: (1) The S & S Constructors' project at Vandenberg 199 Air Force Base (the VAFB project), and (2) the LTMCO Steel and Fabricating Co.On September 30, 1968, after some 19 years of marriage, Betty Warnack filed a complaint for divorce from her husband. 2 After an order to show cause hearing held in the Los Angeles County544 Superior Court on October 15, 1968, Warnack was ordered, by an order dated October 22, 1968, to pay to his then wife $ 1,450 per month for her support and to enable her to pay the trust deed payments on the couple's home. Warnack was, in addition, ordered to pay to his estranged wife a total of $ 400 per month for the support of two of the couple's children, and to pay attorney's fees in the amount of $ 10,000, and C.P.A. and appraisal fees not to exceed $ 10,000. On July 28, 1969, and pursuant to their divorce, the parties entered into a document entitled "Property Settlement Agreement" (agreement). This agreement was written by Mrs. Boudreau's attorney, Ned R. Nelsen (Nelsen), a member of the California bar who at the time he wrote the agreement had approximately 15-years experience as a divorce attorney. At the time of the divorce 200 herein, Nelsen had restricted his practice to marital dissolutions involving, for the most part, community estates in excess of $ 100,000. For his services in the Warnack divorce, Nelsen was paid $ 25,000.The agreement says, in relevant part:2. RECITALS:* * * (d) The parties hereto desire by this Agreement to finally adjust as between themselves their respective property rights and to terminate their respective obligations of support of the minor children of the parties.3. COMMUNITY PROPERTY OF THE PARTIES: * * There was a serious dispute as to the valuations ascribed to the assets set forth as the community property of the parties. After long, arduous and considerable negotiations, Husband and Wife, with the advice of her counsel, have reached the settlement as set forth herein.4. DIVISION OF COMMUNITY PROPERTY:The parties agree that the following property shall be the sole and separate property of Wife, and Husband does hereby forever waive any rights in or to the said property, and does hereby transfer, assign and convey unto Wife as her sole and separate property any and all interest which he may have as Husband, or otherwise, in and to said property or any part thereof: 201 * (f) $ 20,600.00 cash on the execution of this Agreement;(g) $ 20,000.00 cash one year from the date of this Agreement.5. PAYMENTS TO WIFE:(a) Husband agrees to pay to Wife $ 2,125.00 per month for one hundred twenty-one (121) months, commencing August 1, 1969, and on the first of each and every month thereafter until the full 121 payments have been made. Any payment not made within ten (10) days of due date is to draw interest at seven 545 percent (7%) from the date it was due until paid. To secure the payment of these sums Husband agrees that he shall pledge the stock in the above named corporations to Wife * * . This provision is entered into with the understanding and on the condition that Wife includes these payments in her income for income tax purposes and that Husband be permitted to deduct these payments for Federal and State income tax purposes. In the event the Internal Revenue Service holds that these payments are not deductible by Husband and not includable in the income of Wife, in that event Wife shall remit to Husband the amount she would have paid as taxes on these payments had they been included in her income.It is expressly understood and agreed that the provisions 202 for payment to Wife shall not be subject to modification, either as to amount or as to the duration of payment. Said payments are not to terminate upon the remarriage of Wife, and in the event of her death they are payable to her estate and are a charge against the estate of Husband.7. TAXES:For the year 1969, if either party requests the other to join in a joint return, the parties shall file jointly, provided said request is made thirty (30) days prior to the date the return shall be due. Each party shall pay his pro rata share of taxes based upon the income they received, and in this connection Wife's income shall be deemed to commence as of August 1, 1969. * * 10. RELEASE, WAIVER AND FINALITY CLAUSES:Except as otherwise provided in this Agreement --(a) Each party to this Agreement does hereby release the other from any and all liabilities, debts or obligations, of every kind or character, heretofore or hereafter incurred, and from any and all claims and demands, including all claims of either party upon the other for support and maintenance as Wife or as Husband, and it being understood this present Agreement is intended to settle the rights of the parties hereto in all respects, 203 and without limiting the generality of the foregoing, the Wife expressly waives alimony and support except as herein provided in paragraph 5.16. Wife has been represented and advised in the negotiations for and in the preparation of this Agreement by the counsel of her own choosing, and she has read this Agreement and has had it fully explained to her by such counsel, and is fully aware of the contents thereof and its legal effect. Husband has chosen not to have counsel represent him in the negotiations for and in the preparation of this Agreement, but has negotiated the terms of this Agreement with the assistance of his Certified Public Accountant, Mr. William Wheeler, for financial advice. * * The agreement, as part of its paragraph 3, listed all the community's property. Paragraph 4 of the agreement divided the community property among the members of the community. 3205 546 The various properties allocated, their recipient, and the value put thereon by either the agreement (A) or the parties' stipulations (S) before this Court, are as follows:RecipientItemNumber --PropertyHusband1Kerrick Street real property2Mortgage on the Kerrick Streetproperty$ 6,500.00 (S)3South Lake Tahoe real property,house, floating docks, boat,furnishings, snow mobiles4Wife's personal effects5China, silver, crystal61968 Lincoln7Lancaster Blvd., real property95,000.00 (S) subjecthouse, furnishings, surroundingto mortgage ofadditional lots$ 23,000.008Note secured by trust deed on11,000.00 (A)real property at 15th & P inPalmdale, Cal.91/3 interest in equity in 8022,000.00 (S) subject toacres in section 34mortgage of $ 10,667.00 (S)101/2 interest in equity in 307,500.00 (S)acres in section 2611Husband's personal effects5,000.00 (S)121/2 of all stock of the37,267.40 (A) (book valueConstruction Repair Co., Inc.as of 9/30/68)131/2 of all stock in the78,305.77 (A) (book valueLancal Equipment Co., Inc.as of 9/30/68)141/2 of all stock in the31,092.68 (A) (book valueManhattan Electric Co., Inc.as of 9/30/68)151/2 of all stock in the47,820.02 (A) (book valueExcavation Construction Co.as of 9/30/68)161/2 of all stock in the74,771.00 (A) (book valueAntelope Valley Aggregate Corp.as of 9/30/68)171/2 of all stock in Santa275,783.55 (A) (book valueFe Engineers, Inc.as of 9/30/68)18CashTotal net of mortgages649,373.42204 RecipientItemNumber --PropertyWife1Kerrick Street real property$ 24,650 (S)2Mortgage on the Kerrick Streetproperty3South Lake Tahoe real property,75,000 (S)house, floating docks, boat,subject to mortgagefurnishings, snow mobilesof $ 26,000 (S)4Wife's personal effects15,000 (S)5China, silver, crystal5,000 (S)61968 Lincoln5,000 (S)7Lancaster Blvd., real propertyhouse, furnishings, surroundingadditional lots8Note secured by trust deed onreal property at 15th & P inPalmdale, Cal.91/3 interest in equity in 80acres in section 34101/2 interest in equity in 30acres in section 2611Husband's personal effects121/2 of all stock of theConstruction Repair Co., Inc.131/2 of all stock in theLancal Equipment Co., Inc.141/2 of all stock in theManhattan Electric Co., Inc.151/2 of all stock in theExcavation Construction Co.161/2 of all stock in theAntelope Valley Aggregate Corp.171/2 of all stock in SantaFe Engineers, Inc.18Cash40,600 (A)Total net of mortgages139,250 Thus, Warnack received property with total stipulated fair market and book values net of all mortgages of $ 649,373.42. His former wife received property with net agreed to and book values of $ 139,250, plus payments of $ 2,125 per month for 121 months, or $ 257,125 for a total of $ 396,375. 4206 The 121-month 547 period was proposed by Warnack for the purpose of making the payments taxable to Mrs. Boudreau. The language of the agreement was incorporated in substantially identical wording in the Interlocutory Judgment of Dissolution of Marriage issued by the court on February 20, 1970, and entered February 24, 1970. The final Judgment (marriage) of Dissolution, which incorporated the provisions of the Interlocutory Judgment, was entered June 7, 1971. Since signing the agreement, Warnack has timely made all payments due thereunder.Warnack and his former wife filed a joint return for their taxable year ended December 31, 1969. For his taxable year ended December 31, 1971, Warnack deducted, by amended return, $ 25,500 as a Form 1040, line 25, miscellaneous deduction labeled "Alimony Betty Warnack." This deduction had not been included in his original return for that taxable year. For her taxable year ended December 31, 1971, Mrs. Boudreau included this same $ 25,500 in income and paid income taxes thereon -- but she also labeled the income as being for "community property division." In each of his taxable years ended December 207 31, 1972, 1973, and 1974, Warnack deducted as a miscellaneous deduction his payments to his former wife under the agreement. In her taxable year 1972, Mrs. Boudreau excluded her receipts from Warnack from income and filed a claim for refund (Form 843), for the taxes paid on the payments included in income for her taxable year ended December 31, 1971. She, apparently, has since then continuously followed the practice of excluding her receipts from Warnack from income.While Mrs. Boudreau, apparently, took some employment after her divorce, the vast majority of her income has come from Warnack's payments. At the time of her divorce and for sometime prior, she had no job and had never worked. California law, at the time of her separation and divorce from Warnack, provided that an aggrieved spouse was entitled to spousal support in an amount sufficient to support her in the style to which she was accustomed, provided the husband had the financial means. In the type of situation involved here, i.e., a 19-year marriage, three children, etc., a California court would normally have given her an award of spousal support.Since the tax law obviously does not permit a deduction by Warnack 208 of the payments to his wife and an exclusion by her of 548 the same payments, respondent sent statutory notices of deficiency to both, taking inconsistent positions by denying the deduction to one and including the payments in income of the other, reserving in effect the role to himself of stakeholder.OPINIONWarnack contends that the monthly payments in issue were paid as alimony and hence are deductible by him in accordance with the provisions of section 215, I.R.C. 1954. He cites paragraphs 5 and 10(a) of the Property Settlement Agreement in support of his view. Mrs. Boudreau, on the other hand, argues that the monthly payments in reality represent a part of the division of the couple's community property and, as such, their receipt is a nontaxable event to her. To buttress her contention she notes that only by concluding that such payments in aggregate are part of the property settlement does the otherwise apparently disparate amount allocated to each in the agreement make sense.Mrs. Boudreau's cross to bear is the effect of the paragraphs of the agreement cited above, including the specific language in paragraph 5(a) that: "This provision is entered into with the understanding 209 and on the condition that Wife includes these payments in her income for income tax purposes and that Husband be permitted to deduct the payments for Federal and State income tax purposes."Mrs. Boudreau seeks to accomplish her task by way of two basic contentions. First, citing section 71(a)(2) she argues that the payments herein were not made because of a family or marital relationship, but were made, as mentioned, in recognition of her property interest in the community. Secondly, citing section 71(a) and (c), she argues that the payments herein are not periodic because they are not in discharge of a "principal sum" and because they are not required to be made over a period in excess of 10 years from the date of the property settlement agreement, which is the only available document dated more than 10 years from the last payment date. We conclude that the facts herein do not support her arguments, and that the payments herein are in fact includable in Mrs. Boudreau's gross income under the terms of the above section 71, 5210 and are 549 consequently deductible to Warnack under the terms of section 215. 6Section 71(a)(2) says that if a wife is separated from her husband and there is a written separation 211 agreement executed after August 16, 1954, then her gross income includes periodic payments received by her after such agreement is executed and which are paid under such agreement and because of the marital or family relationship. Section 71(a)(2) does not apply to any year for which the husband and wife filed jointly.In our case, the parties are separated, and we clearly have a written separation agreement executed after August 16, 1954. By this agreement, the parties purported to settle finally all the points of conflict between them and to end, once and for all, their marital relationship and the material and spiritual involvements appurtenant. It is also clear that all the payments here in issue were made and received after such agreement was executed, and that these payments were made pursuant to such agreement. These are all conditions precedent to the applicability of section 71(a)(2).But the statute adds two more requirements which must both be satisfied before the payments here at issue may be considered to fall within its ambit and which are both the object of Mrs. Boudreau's attack: (1) The payments must be made "because of the marital or family relationship," and (2) 212 they must be "periodic." The section 71(c) test for "periodicity," which is the test at issue here, provides that the payments must be payable for a period in excess of 10 years from the date of the decree, instrument, or agreement, and they must constitute a principal 550 sum. Further, the regulations put a gloss on the statute's marital or family relationship requirement saying:Sec. 1.71-1(b)(4)Scope of section 71(a). Section 71(a) applies only to payments made because of the family or marital relationship in recognition of the general obligation to support which is made specific by the decree, instrument, or agreement. [Emphasis added.]Thus, Mrs. Boudreau's "family or marital relationship" argument also goes to the regulation's "support" requirement. We shall first discuss Mrs. Boudreau's arguments on the "family or marital relationship" issue, and then treat her objections to a finding that Warnack's payments to her are "periodic."The "support" language in the above-quoted regulation was meant as an elaboration, not an extension, of the marital or family relationship requirement. Bishop v. Commissioner, 55 T.C. 720">55 T.C. 720, 724 (1971). The "marital or family relationship" requirement 213 is the obverse of the requirement that, to be deductible, the payments must be in the "nature of alimony or an allowance for support." See, e.g., sec. 1.71-1(d)(3)(i)(b), Income Tax Regs. The regulation simply points out that the question of whether the payments are made because of the "marital or family relationship" can be answered by determining whether the payments involved are in discharge of the "support" obligation specified in section 1.71-1(b)(4), Income Tax Regs., or are, in the alternative, in discharge of some proprietary obligation of the husband to the wife. Many of the cases in the "marital or family relationship" area have dealt with that issue in terms of whether or not the payments in issue were for the wife's "support." See, e.g., Landa v. Commissioner, 206 F.2d 431">206 F.2d 431 (D.C. Cir. 1953), and 211 F.2d 46">211 F.2d 46 (D.C. Cir. 1954), revg. on other grounds a Memorandum Opinion of this Court; United States v. Soltermann, 272 F.2d 387 (9th Cir. 1959), revg. and remanding 163 F. Supp. 397">163 F. Supp. 397 (S.D. Cal. 1958).A review of the cases in the "support" area reveals that the courts have not focused merely on whether the payments are for "support" -- rather the approach has been to determine 214 whether the payments are for support in contradistinction to being in exchange for the wife's release of some property interest. The question of whether a payment is in recognition of the husband's obligation of support (and is, therefore, made because of the marital or family relationship) is meaningful only if it is considered in connection with the question of whether the 551 payments are in recognition of and for the extinguishment of some property interest of the wife. If the payments are of the former sort, they are probably periodic and hence section 71 income to the wife. If the payments are of the latter sort, then they are in the nature of capital expenditures by the husband and are neither deductible to him nor taxable to her, except to the extent the wife recognizes gain thereon. See Bishop v. Commissioner, supra at 725.This approach to the "support" requirement is reflective of the origins of section 71. Section 71 was mainly a relief provision to save husbands from the burden of excessive income taxes on income over which they never, except formally, had dominion and control, i.e., payments for which the husband functioned, in effect, as a mere conduit. The precursor 215 of section 71 was, therefore, framed with the payment of income from husband to former wife in mind. Congress did not intend this provision to tax mere property divisions. It is at this distinction that the regulation's "support" language is aimed.While the support/property distinction is clear in theory, it is often difficult to define in practice. Each case must be considered on its own facts. See United States v. Mills, 372 F.2d 693">372 F.2d 693, 696 (10th Cir. 1966). The courts are not bound in these cases to the labels attached to the payments by the parties. See, e.g., Mirsky v. Commissioner, 56 T.C. 664">56 T.C. 664 (1971). The courts are free to receive oral testimony with respect to the true nature of the transaction -- as opposed to its mere form. Bardwell v. Commissioner, 318 F.2d 786">318 F.2d 786, 789 (10th Cir. 1963).But the courts should not attempt to plumb the depths of the minds of the litigants in search of their "true" intention if some better basis of decision is available. 7217 Thus, if we should find that, from all the facts, there was a substantially equal division of the community's property without regard to the payments here at issue, we would certainly have to conclude that the payments in 216 issue were for Mrs. Boudreau's "support" because we would have precluded a finding that they were with respect to Mrs. Boudreau's "property." Recognizing this fact, Mrs. Boudreau 552 points to the one-sidedness of the property value figures shown above and says that despite any unfortunate appearances from the wording of the agreement to the contrary, her 121 monthly payments are in furtherance of the partys' division of their community property. 8 Warnack counters by seeking to show that the value shown in the agreement for Santa Fe was knowingly overstated by the parties by some $ 645,111.59 and that the true value of the community's interest in Santa Fe at the time of the divorce was really a loss of approximately $ 369,328.04. If this is true, then the division of property stated in the agreement is substantially equal before the 121 payments are taken into account. 9In pursuance of his theory, Warnack introduced evidence at trial that the true book value 218 at the relevant time of his one-half interest in Santa Fe was a loss of $ 369,328.04, not the $ 275,783.55 shown on the chart above. 10 This evidence was presented by way of William Robert Wheeler (Wheeler), a certified public accountant who had been, as of the time of trial, associated with the Warnack companies as an outside auditor since the latter part of 1960. Wheeler was also present during the last 3 weeks of the negotiations between Warnack and Nelsen leading up to the signing of the agreement, and was present when the agreement was signed. As one of the Warnack companies' outside auditors, Wheeler generally audited the various company books annually. The VAFB and LTMCO joint venture ledgers were, however, reviewed and a general ledger posted monthly. Wheeler testified that from his review of Santa Fe's records it was his opinion that 553 as of September 30, 1968, Santa Fe had an "anticipated" loss on the VAFB joint venture of $ 738,656.07, one-half or $ 369,328.04 of which was attributable to Warnack's 50-percent interest in Santa Fe. This would reduce the book value of Warnack's one-half of Santa Fe from a positive $ 275,783.55 to a negative $ 369,328.04. This loss was 219 only "anticipated," and had not yet actually been incurred because, as mentioned in footnote 4 above, VAFB was on the completed-contract-method of accounting. Thus Wheeler would put the total value of the companies received by Warnack under the terms of the agreement as substantially less than the amount stated in the agreement. From all the evidence, we find that Wheeler's testimony is credible and we hold that, as of September 30, 1968, Santa Fe had a loss of $ 738,656.07, of which $ 369,328.04 was attributable to the community's interest in the company. Thus Mrs. Boudreau received at least 50 percent of the community's property.Since the payments made to Mrs. Boudreau by Warnack under the agreement could not, therefore, be in exchange for any proprietary interest of hers in the community estate, we find that they were made for Mrs. Boudreau's support and because of the marital 220 or family relationship.This conclusion is supported by Mrs. Boudreau's situation at the time of the divorce. She had no job and no job skills. For all her taxable years in issue, Warnack's payments were Mrs. Boudreau's main source of support. It is reasonable to conclude that the parties foresaw this situation and dealt with it by providing for Mrs. Boudreau's support while she started a new life. Further, it is clear from the terms of the agreement that the parties intended these payments as "alimony" or support payments. For example, Nelsen, her own attorney, drafted paragraph 10(a) of the agreement which says, "Wife expressly waives alimony and support except as herein provided in paragraph 5." (Emphasis added.) Paragraph 5 is the paragraph setting out Warnack's obligation to make the 121 payments here at issue -- and it is also the paragraph where Mrs. Boudreau agrees to include these payments in her income and to allow Warnack to deduct them. Finally, we note that paragraph 4 of the agreement, entitled "Division of Community Property" provides for a payment to Mrs. Boudreau of $ 40,000 in cash, while it is paragraph 5, entitled "Payments to Wife," that calls for the payments 221 here at issue. This indicates that the parties did 554 not view these payments as part of the property division. When the provision for 121 monthly payments is considered with paragraph 10(a)'s "except" clause, we can only conclude that the parties intended these payments to be for Mrs. Boudreau's support and to be taxable to her and deductible by Warnack.If the support question is highly factual, the second set of issues, which deals with whether the payments herein are "periodic," is subject to a more certain and predictable disposition. Here, the statute itself provides the means of interpreting the parties' intention so that no later equivocation or memory lapse is possible.Section 71(a) taxes to the wife "periodic" payments made to her by her former spouse. The archetypal periodic payment is, of course, the standard "alimony" payment which the husband is typically required to make to his former wife until she dies or remarries. Frequently, the support/property issue is closely intertwined with the "periodic" requirement. Thus, if the payments extend for a period of less than 10 years and are not subject to any contingency, the support/property issue is moot because the payment 222 cannot be periodic. Sec. 1.71-1(d)(3)(i), Income Tax Regs.While the statute itself does not expressly define what payments will be considered "periodic," there are at least two tests for whether payments made under a decree, instrument, or separation agreement will be so considered: (1) The 10-year test of section 71(c)(2), and (2) the contingency test of section 1.71-1(d)(3) and (4), Income Tax Regs. Because we find that the payments herein qualify as periodic under the 10-year test, we need not reach the contingency test. 11223 The 10-year test first looks to whether the payments involved are stated in the instrument in terms of, or can be computed to be equivalent to a "principal sum." If they are so stated or can be so computed, then the next inquiry is whether they are payable for a period ending more than 10 years from the date of the agreement. If they are so payable, then the payments are includable in the wife's income and deductible by the husband, subject to the 10-percent 555 limitation of section 71(c)(2), regardless of whether they are subject to a contingency or not. Sec. 1.71-1(d)(4), Income Tax Regs.The principal sum and 10-year requirement are discussed next in order below:(a) Principal sum. -- Mrs. Boudreau argues that there is no principal sum stated in the agreement because the total amount of the payments to be made to her is not set out therein. An appeal in this case would probably be to the Ninth Circuit, absent a stipulation to the contrary by all the parties. Sec. 7482(b). Almost 25 years ago, that Circuit announced its view that no principal sum was present when the total amount of the payments was not expressly stated in the agreement. Myers v. Commissioner, 212 F.2d 448">212 F.2d 448, 450 (9th Cir. 1954). We had an opportunity to consider the Myers decision in the case 224 of Kent v. Commissioner, 61 T.C. 133">61 T.C. 133, 136-137 (1973).Kent concerned an Arizona divorce action in which the husband was obligated by the decree of divorce to pay his former wife $ 600 per month for 54 months. As petitioner in this Court, the husband argued, referring to Myers, that no principal sum was stated in the decree of divorce therein because the total amount of payments due was not set out. While our opinion in that case was appealable, absent a stipulation to the contrary, to the Ninth Circuit, we refused to apply our rule in Golsen v. Commissioner, 54 T.C. 742">54 T.C. 742 (1970). This was because Myers was decided 3 years before the adoption, in 1957, of section 1.71-1, Income Tax Regs. We felt that the intervening adoption of these regulations had changed the judicial climate sufficiently that Myers was not controlling in the facts then before us. We said:Notwithstanding that the Ninth Circuit appears to have espoused petitioner's argument, we do not feel constrained, under the facts before us, to find Myers controlling. What vitality a literal reading of Myers may have is suspect in view of the development of the law in the 19 years since promulgated. [Kent v. Commissioner, supra at 137; 225 fn. ref. omitted.]Our view of Myers has not changed since Kent. We again hold that Myers is not controlling on the facts before us. Present law does not require an express statement of the total amount due before that amount can constitute a "principal sum." Thus, it is clear that we have, in the facts before us, a principal sum stated in the agreement. We can, through the use of "mere mathematics," determine that $ 2,125 x 121 = $ 257,125.556 (b) Over 10 years. -- The next and most important question is whether this principal sum is payable over a period ending more than 10 years from the date of the agreement within the meaning of section 71(c)(2). The answer to this question depends on a combination of the parties' intent with respect to the source of Warnack's obligation to pay, and the governing State law. Prince v. Commissioner, 66 T.C. 1058">66 T.C. 1058, 1063 (1976). The Prince decision also involved a California marital dissolution. The payments there in issue were similar to those in our case. They were not subject to any of the contingencies listed in section 1.71-1(d)(3)(i), Income Tax Regs., and they were to be made in 121 monthly installments. The Prince's divorce action had 226 been called for trial on October 29, 1965. On that same day, the parties had entered into an oral agreement, on the record, with respect to the terms of their divorce. The interlocutory decree was entered on November 30, 1965. Mrs. Prince, the petitioner before the Tax Court, received her first payment on or about November 1, 1965. Prince v. Commissioner, supra at 1061. We there held that the source of the husband's obligation to pay alimony was the stipulation agreement made in open court on October 29, 1965, not the later interlocutory decree. Prince v. Commissioner, supra at 1063-1064. We found that California law clearly authorized the parties to enter into such a binding legal agreement with respect to their property rights, and that, from all the facts, the parties had intended that stipulation as the obligating event which fixed the husband's obligation to make the 121 payments.The California law relevant to the Prince decision is also the law applicable to the 1969 agreement before us. The relevant California Civil Code provisions are set out below.Section 139. * The provisions of any agreement for the support of either party shall be deemed to be separate and severable 227 from the provisions of the agreement relating to property. All orders for the support of either party based on such agreement shall be deemed law imposed and shall be deemed made under the power of the court to make such orders. The provisions of any agreement or order for the support of either party shall be subject to subsequent modification or revocation by court order except as to any amount that may have accrued prior to the order of modification or revocation, and except to the extent that any written agreement, or if there is no written agreement, any oral agreement entered into in open court between the parties, specifically provides to the contrary. All such orders of the court for the support of the other party, even if there has been an agreement of the parties, may be 557 enforced by the court by execution, contempt, or by such other order or orders as the court in its discretion may from time to time deem necessary. * Section 158. Contracts with each other and third personsHusband and Wife May Make Contracts. Either husband or wife may enter into any engagement or transaction with the other, or with any other person, respecting property, which either might if unmarried; 228 subject, in transactions between themselves, to the general rules which control the actions of persons occupying confidential relations with each other, as defined by the Title on Trusts.Section 159. Contracts; property; separationA husband and wife cannot, by any contract with each other, alter their legal relations, except as to property, and except that they may agree, in writing, to an immediate separation, and may make provision for the support of either of them and of their children during such separation.[Cal. Civ. Code tit. 1 was repealed by Stats. 1969, c. 1608, p. 3313, sec. 3, operative Jan. 1, 1970.]Thus it is clear that in 1969, California law contemplated the power of the parties to bind themselves to a property settlement agreement which also entailed a support settlement -- as is the case in the agreement. Cf. Egan v. Egan, 251 Cal. App. 2d 577">251 Cal. App. 2d 577, 59 Cal. Rptr. 705">59 Cal. Rptr. 705 (1967); Lane v. Lane, 117 Cal. App. 2d 247">117 Cal. App. 2d 247, 255 P.2d 110">255 P.2d 110 (1953); In Re Marriage of Nicolaides, 39 Cal. App. 3d 192">39 Cal. App. 3d 192, 114 Cal. Rptr. 56">114 Cal. Rptr. 56 (1974).Furthermore, it is clear that, in the case before us, the parties intended the agreement to be the source of Warnack's obligation to pay. The first payment thereunder 229 was due beginning on August 1, 1969, 3 days after the agreement was signed. Said payments were specifically made payable in all events regardless of the death or remarriage of either party. Effective the day the agreement was signed Mrs. Boudreau released Warnack --(a) * * from any and all liabilities, debts or obligations, of every kind or character, heretofore or hereafter incurred, and from any and all claims and demands, including all claims of either party upon the other for support and maintenance as Wife or as Husband, and it being understood this present Agreement is intended to settle the rights of the parties hereto in all respects, and without limiting the generality of the foregoing, the Wife expressly waives alimony and support except as herein provided in paragraph 5.Finally, we note that the language of the agreement was integrated, substantially word-for-word, into the interlocutory judgment issued herein. We believe that the intendment of the parties, and the effect of the agreement, was to exclude all contingencies, including change of economic condition of the 558 parties, from Warnack's obligation to make payments to Mrs. Boudreau -- and to fix that obligation 230 by means of, and as of the date of, the agreement.Since the date of the agreement, July 28, 1969, is more than 10 years before the due date of the last payment thereunder, August 1, 1979, this would conclude Mrs. Boudreau's case except for her final argument -- that if the agreement is found to be the document whose date starts the running of the section 71(c)(2) 10-year period, then the requirements of section 71(c)(2) cannot be met because the parties filed jointly in 1969. 12231 This argument is based on the last sentence 71(a)(2) which says: "This paragraph shall not apply if the husband and wife make a single return jointly."This sentence was appended to the end of section 71(a)(2) and (a)(3) because the enactment of these subsections in 1954 presented problems with respect to the relationship between these subsections and section 6013. To disallow married but separated persons access to both section 6013 and section 71(a)(2) or (a)(3), and avoid ensuing confusion which could result, an election was created: subsection 71(a)(2) and (a)(3) will not apply to any taxable year for which spouses have filed jointly under section 6013. Subsec. 71(a)(2), last sentence, and (a)(3), last sentence.Mrs. Boudreau cites no authority for support of her theory that section 71(a)(2) and (c)(2) are rendered inapplicable if the parties filed jointly for 1 year in the 10-year period. She misreads the section if she thinks that there is any basis to deny the applicability of section 71(a)(2) to payments made under a written separation agreement in one year because that section did not apply in another year. Nor is there any basis in the law upon which she could claim that section 71(a)(2) inapplicability in one year of the section 71(c)(2) 10-year period excludes that year from the 10-year 232 period. The last sentence of section 71(a)(2) was intended merely to exclude the possibility that a 559 couple could claim the benefits of both section 71 and section 6013 for any one year. That sentence is not directed at the treatment of two separate and different taxable years. Further, it is axiomatic that the tax law functions by way of 12-month-long accounting periods (except in those cases where a 52-53-week fiscal year is allowed, sec. 441(f)), and that each taxable year stands on its own. See Commissioner v. Sunnen, 333 U.S. 591">333 U.S. 591, 598-599 (1948); Burnet v. Sanford & Brooks Co., 282 U.S. 359">282 U.S. 359, 365 (1931). Thus, filing a joint return in one year of the section 71(c) 10-year period could not, of itself (even absent a provision such as is found in the last sentence of section 71(a)(2)), render section 71 inapplicable to all 9 of the other taxable years of the period. Such a result would frustrate the policy of certainty evident in section 71(c) because then its applicability in year one would be dependent on proof of the existence or nonexistence of some extraneous fact which may not occur until year 10.Thus, it is clear that the last payment under the agreement, due on August 233 1, 1979, 13 is due more than 10 years from the date of the agreement, July 28, 1969. Since this is a period in excess of 10 years, the payments herein are "periodic." Mrs. Boudreau's principal argument herein has been that the payments here involved are "property" payments, i.e., in pursuance of a division of the community property. In support of this argument, she has argued that we should ignore and set aside, as without meaning or effect, paragraphs 2(d), 5, 7, 10(a), and 16 of the agreement quoted above -- which were written by her own attorney -- but should enforce that part of the agreement relating to the valuation and division of the community's property. In effect, Mrs. Boudreau has argued that we should set aside -- not the whole agreement, but only those portions of it which prejudice her case in this Court -- what we might call a "selective set-aside." At the same time, Warnack argues that we should set aside those portions of the agreement which prejudice him, i.e., primarily those paragraphs which value his businesses. If we were to set aside the agreement, we can see no basis for doing 234 so selectively. We choose not to set any portion of the agreement aside.560 We hold that petitioner Warnack should prevail and that Mrs. Boudreau should not.Decision will be entered for the petitioners in docket No. 879-77.Decision will be entered for the respondent in docket No. 1507-77. Footnotes1. The deficiency shown for 1973 does not take into account a payment of $ 23,768 ($ 20,872 principal and $ 2,896 interest) made by petitioners in docket No. 879-77 on Oct. 29, 1975.2. The parties separated and agreed to live permanently apart on or about Sept. 21, 1968.↩3. In this connection, we note that each member of the community is under a fiduciary duty to the other member to reveal the full extent of the community property under his dominion or control. The parties remain tenants in common with respect to all community property not dealt with in the dissolution proceedings. In Re Marriage of Cobb, 68 Cal. App. 3d 855">68 Cal. App. 3d 855, 137 Cal. Rptr. 670">137 Cal. Rptr. 670, 673↩ n. 1 (1977).4. In their agreement, the parties used Sept. 30, 1968, a date a week after their separation, as the operative date for valuation purposes. At the hearing held herein, the parties directed themselves to the question of whether Santa Fe's book value as of Sept. 30, 1968, was correctly stated in the agreement. We too, therefore, direct ourselves to Santa Fe's book value as of that date. We intend no inference as to that date's importance under California law. The use of book values is perhaps one source of the conflict giving rise to this action. Book value is not necessarily fair market value. Also, when a corporation is involved in completed-contract-method joint ventures, as was Santa Fe herein, it is axiomatic that the corporation's book value will not reflect unfinished venture contracts.5. SEC. 71. ALIMONY AND SEPARATE MAINTENANCE PAYMENTS.(a) General Rule. --* * * * (2) Written separation agreement. -- If a wife is separated from her husband and there is a written separation agreement executed after the date of the enactment of this title [Aug. 16, 1954], the wife's gross income includes periodic payments (whether or not made at regular intervals) received after such agreement is executed which are made under such agreement and because of the marital or family relationship (or which are attributable to property transferred, in trust or otherwise, under such agreement and because of such relationship). This paragraph shall not apply if the husband and wife make a single return jointly.↩6. SEC. 215. ALIMONY, ETC., PAYMENTS.(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. No deduction shall be allowed under the preceding sentence with respect to any payment if, by reason of section 71(d) or 682↩, the amount thereof is not includible in the husband's gross income.7. This is especially true in litigation like this between former spouses. In such cases emotions are often high. Many times the intention of the parties' with respect to any one point is in conflict or nonexistent. Respondent's interest is usually only that of a stakeholder, i.e., to see to it that one of the parties' pays tax on the income involved. The dollar amounts are often small. In a case such as this, certitude↩ is the watchword. Only when the law is clear enough that planning is feasible can the parties and courts put such cases behind.8. The total cash payments to be made to wife over the 121 months equal $ 257,125. If this amount is subtracted from the value of the property apportioned to husband, and added to the value of wife's property, the division appears more equal:Mrs. BoudreauWarnackProperty FMV$ 139,250$ 636,373.36 Payments257,125(257,125.00)Total$ 396,375379,248.36 Mrs. Boudreau did not attempt to discount the value of her payments over the 121 month period.↩9. If Warnack's figures are adopted, then it would appear that he received property with a value of $ 8,738.32 to Mrs. Boudreau's $ 139,250. We note here that our calculations yield values and totals different from those derived by either party's experts. The business of valuing such properties as completed-contract-method joint ventures is, however, less than perfect and, we believe our figures sufficient for the purposes of this case.↩10. Warnack also indicated that he felt that Antelope Valley Aggregate Corp. was overvalued in the agreement. Since our findings with respect to Santa Fe settle the matter, and since little evidence was introduced on this second point, we make no finding on Antelope's "true" book value on Sept. 30, 1968.↩11. We do note, however, that normally, payments which are not contingent will not be periodic unless they are payable over a period ending more than 10 years from the date of the decree, instrument, or agreement. Sec. 1.71-1(d), Income Tax Regs.↩ On brief Mrs. Boudreau argued that the payments herein are not subject to any contingencies. We agree. But this conclusion is useless for Mrs. Boudreau's purpose unless we then also conclude that the payments are payable for a period of less than 10 years. As we see below, we find that the payments are for a period in excess of 10 years.12. Mrs. Boudreau said on brief:"(iii) Property Settlement Agreement: The Property Settlement Agreement would appear to qualify as a written agreement pursuant to IRC sec. 71(a)(2) but since a joint return was filed for 1969, IRC sec. 71(a)(2) could not apply for 1969. Therefore, the first payment under the Property Settlement Agreement which might qualify as a periodic payment pursuant to a written agreement would be the payment made January 1, 1970. Thus, the periodic payments pursuant to a property settlement agreement, since they will end August 1, 1969, will be less than ten (10) years."13. The last payment would not be in default and bear interest until Aug. 10, 1979.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622372/	Coca-Cola Bottling Company of Sacramento, Ltd., Petitioner, et al., 1 v. Commissioner of Internal Revenue, RespondentCoca-Cola Bottling Co. v. CommissionerDocket Nos. 19828, 25082, 25083United States Tax Court17 T.C. 101; 1951 U.S. Tax Ct. LEXIS 115; July 31, 1951, Promulgated 115 Decisions will be entered under Rule 50. 1. Income -- Separate Entities -- Corporation and Partnership -- Section 22 (a). -- Sacramento Corporation (Coca-Cola Bottling Company of Sacramento, Ltd.), which had a sole and exclusive license to bottle and vend Coca-Cola in the Sacramento, California, area, granted to a partnership formed by its two principal stockholders, N. M. Sellers and Gladys Sellers, a sublicense to bottle and vend Coca-Cola in all of its territory for a period of 5 years. The corporation also sold to the partnership at book value all of its operating equipment and all of its inventories of materials and supplies used in the Coca-Cola bottling business in exchange for two promissory notes executed by the partnership. Held, that a new partnership was a separate entity from the corporation and that the net income and capital gain of the new partnership for the years 1944, 1945, and 1946 are not includible in the income of the taxpayer corporation.2. Personal Holding Company -- Income from Royalties -- Excess Profits Tax. -- By the terms of the sublicense agreement with its parent bottler, Sacramento Corporation agreed to purchase from the parent bottler116 all the Coca-Cola syrup which it used at a basic rate of $ 1.30 per gallon. By the terms of a sub-bottling agreement with a partnership, the partnership agreed to purchase from the corporation the Coca-Cola syrup it used at a basic rate of $ 1.50 per gallon. The syrup was shipped directly to the partnership which transmitted $ 1.50 per gallon to Sacramento Corporation. The corporation retained 20 cents per gallon and transmitted the remainder to the parent bottler. Held, that the 20 cents per gallon retained by Sacramento Corporation constituted royalties which it received for the exclusive license which it had granted to the partnership, and held, further, that the petitioner, Sacramento Corporation, was a personal holding company and, therefore, was not entitled to any unused excess profits carry-back.3. Family Partnership -- Children of Petitioners not Recognized as Members of Partnership. -- Upon consideration of all of the facts and circumstances present in these proceedings, held, the petitioners, N. M. Sellers and Gladys Sellers, did not in good faith and acting with a business purpose intend to join together with their two children in the present conduct 117 of the partnership during 1944 and 1945. W. T. Fitzgerald, Esq., and C. E. Musto, Esq., for the petitioners.W. J. McFarland, Esq., for the respondent. Harron, Judge. Black, J., dissenting. HARRON 102 The Commissioner has determined deficiencies in taxes as follows:IncomePetitionerYear endedtaxCoca-Cola Bottling Co. of Sacramento, Ltd., Docket2/29/44$ 327.87No. 198282/28/4518,755.202/28/4619,662.5012/31/4417,497.67N. M. Sellers, Docket No. 2508212/31/4512,047.8912/31/4417,497.67Gladys Sellers, Docket No. 2508312/31/4512,047.89118 DeclaredPetitionervalueExcessexcess-profitsprofitsCoca-Cola Bottling Co. of Sacramento, Ltd., Docket0 $ 13,194.41No. 19828$ 7,467.8836,187.775,521.6812,204.94N. M. Sellers, Docket No. 25082Gladys Sellers, Docket No, 25083In Docket No. 19828, Coca-Cola Bottling Company of Sacramento, Ltd., petitioner, referred to hereinafter as the Sacramento Corporation, the respondent determined that an alleged partnership, created in 1944 to bottle and vend Coca-Cola, was "lacking in substance or business purpose" and that the entire income of the partnership for 1944, 1945, and 1946 and all of its capital gains for 1945 and 1946 were taxable to the Sacramento Corporation. The primary question in Docket No. 19828 is whether the petitioner corporation is taxable in 1944, 1945, and 1946 on the net income and capital gains of a partnership and that question turns on whether any partnership carried on a business separate and apart from the Sacramento Corporation.In Docket No. 19828, an alternative question arises if the respondent's determination that a partnership cannot be recognized for tax 103 purposes is rejected. The second question is raised119 by an allegation in the petition that for the taxable year ended February 29, 1944, the respondent erred in determining that the Sacramento Corporation was not entitled to an unused excess profits credit carry-back from the taxable year ended February 28, 1946, in the amount of $ 53,023.09, and in refusing the Sacramento Corporation's claim for refund of $ 17,359.52 excess profits taxes for the year ended February 29, 1944, based upon the unused excess profits credit. The respondent makes an alternative contention that the Sacramento Corporation was a personal holding company, not subject to the excess profits tax, and, therefore, not entitled to any excess profits credit.In Docket Nos. 25082 and 25083, N. M. Sellers and Gladys Sellers, petitioners, the primary question is whether their son and daughter were members of the partnership which is involved in the main issue in Docket No. 19828 during the years 1944 and 1945. If it is decided that the partnership conducted a business of its own separate and apart from any business of the Sacramento Corporation, the respondent, in the alternative, takes the position that only N. M. and Gladys Sellers were members of the partnership, 120 and that their son and daughter were not members of the partnership in 1944 and 1945. There is another question presented which is reached only if it is held in Docket No. 19828 that a partnership cannot be recognized for tax purposes to any extent whatsoever, regardless of any question relating to the composition of or membership in an alleged partnership, namely, whether the two chief stockholders of the Sacramento Corporation, N. M. and Gladys Sellers, received dividends of the corporation constructively during 1944 and 1945.The petitioners filed their returns for the taxable years in question with the collector for the first district of California.The record in these proceedings comprises oral testimony, a stipulation of facts, and various exhibits.FINDINGS OF FACT.The facts which have been stipulated are found as stipulated.Issue 1. N. M. Sellers and Gladys Sellers were married in 1919. They have two children, Jack born in 1920, and Virginia born in 1924. Shortly after their marriage, together they had about $ 5,000, part of which belonged to Gladys Sellers. They used $ 3,500 of their $ 5,000 for a down payment on the purchase of a one-sixth interest in a Coca-Cola121 bottling company in South Bend, Indiana. The total price to be paid for the one-sixth interest was $ 5,000; and a note, which was subsequently paid, was given for the remaining $ 1,500. N. M. Sellers was hired as the general manager of the bottling plant. In 1927 the Sellers sold their interest in the bottling plant for approximately $ 18,000.104 After they sold their interest in the South Bend plant, the Sellers went to California, where they purchased all the assets of a Coca-Cola bottling and vending business in Sacramento for $ 19,500. In order to have working capital to operate the bottling works, the Sellers borrowed $ 11,000 from Gladys' brother-in-law. They operated this business as equal partners until 1930, when the Coca-Cola Bottling Company of Sacramento, Ltd., hereinafter referred to as the Sacramento Corporation, was incorporated under the laws of California to take over the business. The original capital structure of the corporation consisted of 278 1/2 shares of common stock, each having a par value of $ 100. Ten of these shares were issued to the Pacific Coast Coca-Cola Bottling Company, hereinafter referred to as Pacific Coast, in payment of a $ 1,000122 debt; 110 shares were issued to Mrs. Sellers' brother-in-law in payment of the $ 11,000 which had been borrowed from him in 1927, and the remaining 158 1/2 shares were issued in the name of N. M. Sellers.On December 1, 1936, N. M. and Gladys Sellers jointly executed an agreement by which they converted the 158 1/2 shares of Sacramento Corporation's stock then standing in the name of N. M. Sellers into community property. On December 30, 1942, N. M. and Gladys Sellers entered into an agreement whereby each was given an undivided one-half interest in all their property as the sole and separate property of each. In accordance with this agreement, the 158 1/2 shares which had been issued in the name of N. M. Sellers were reissued in equal parts to N. M. and Gladys Sellers.The business of bottling and vending Coca-Cola is controlled throughout the United States by two companies, the Coca-Cola Company of Atlanta, Georgia, and Coca-Cola Bottling Company (Thomas), Inc., of Chattanooga, Tennessee, hereinafter referred to as Thomas. The right to bottle and vend Coca-Cola in the United States has been granted to six companies, including Thomas, which are known as "parent bottlers." Pacific123 Coast is the parent bottler for most of the west coast area. The parent bottlers do not, however, actually engage in the bottling business, but sublicense to others in their respective territories the right to engage in such business. With the permission of the Coca-Cola Company and of Thomas, the parent bottlers may grant the right to bottle and vend Coca-Cola in all or in a portion of their respective territories under a license unlimited as to its duration. A bottler who has been granted all or a portion of a parent bottler's territory is known as a "first-line bottler." A first-line bottler may with the permission of the Coca-Cola Company, Thomas, and its parent bottler in turn grant the right to bottle and vend Coca-Cola in all or a portion of its territory to another bottling company which is known as a "sub-bottler."105 On September 3, 1930, Sacramento Corporation entered into a first-line bottler's contract with Pacific Coast, its parent bottler. Under this contract Pacific Coast granted to Sacramento Corporation a "sole and exclusive" sublicense to bottle and vend Coca-Cola in the Sacramento area. Under this contract Sacramento Corporation agreed to pay $ 1.30124 per gallon to Pacific Coast for Coca-Cola syrup. This contract was amended in 1932 and again in 1936 to increase the territory in which Sacramento Corporation was licensed to bottle and vend Coca-Cola. As part of the enlargement of its territory in 1936, Sacramento Corporation entered into an agreement with another first-line bottler, Coca-Cola Bottling Company of California, whereby the latter bottler agreed to release the additional territory to Sacramento Corporation in exchange for an agreement by Sacramento Corporation to pay to it 20 cents per gallon for all Coca-Cola syrup consumed in the Woodland area which was released. The contract concerning the Woodland area was for a term of 2 years with provision for automatic renewals of 2-year terms, unless there was an election to cancel the contract.With the expansion of its territory, Sacramento Corporation opened branches in Auburn and Woodland and Marysville, California.In the spring of 1942, the construction of Camp Beale, a large Army camp at Marysville, California, commenced. At about this time, the building of a large warehouse was completed by N. M. and Gladys Sellers, as individuals in Marysville at a total cost of125 $ 21,685.99 on land which they had acquired in May 1941 at a cost of $ 2,180.77. Part of the cost was paid for by a loan of $ 13,400 made by the California Western States Life Insurance Company. This loan was secured by a mortgage on the property. In October 1942, the Sellers, as individuals, leased the building to Sacramento Corporation under a 10-year lease for a rental of $ 200 per month, plus taxes, for use as a warehouse and distribution point for Coca-Cola sales in the Marysville area.N. M. and Gladys Sellers made a gift of the Marysville property to their children, Jack and Virginia, on November 14, 1942, and assigned the lease to them. Thereafter, the rent was paid directly to Jack and Virginia until December 31, 1943. At this time there was an outstanding indebtedness of $ 12,435.87 on the property. The loan of California Western States called for monthly payments of $ 215.74, including interest, which began on June 1, 1942. The final payment was made on May 4, 1948. Jack and Virginia applied the leasehold rental payments to the monthly loan payments.In the spring of 1943, Sacramento Corporation succeeded in obtaining priorities for the manufacture of Coca-Cola 126 bottling machinery and equipment to be installed in the Marysville property for the purpose of supplying bottled Coca-Cola to the armed forces at Camp 106 Beale. The installation of the machinery was finished and bottling operations began in December 1943.On December 31, 1943, N. M. Sellers and Gladys Sellers each bought 55 shares of Sacramento Corporation stock from Gladys' brother-in-law, Dr. Thurlow. After that date, they each owned approximately 48.2 per cent of the corporation's outstanding stock, total 96.4 per cent. The other stockholders were Arthur P. Pratt and George T. Hunter, who owned five shares each. They had owned stock in Pacific Coast Coca-Cola Bottling Company.Sacramento Corporation entered into a contract dated December 31, 1943, with a newly-formed partnership having the name of Cola-Cola Bottling Company of Sacramento, which was composed of N. M. and Gladys Sellers and, also, of their two children. The partnership was created as of January 1, 1944. The facts relating to the partnership agreement are set forth hereinafter under Issue 3. Under the articles of partnership, the partnership is to exist for an indefinite length of time, and its duration127 is not limited to any fixed period of years. Under this contract Sacramento Corporation granted to the partnership a sublicense to bottle and vend Coca-Cola for a period of 5 years in the areas of Sacramento, Woodland, and all other territory in which Sacramento Corporation had been sublicensed by Pacific Coast to bottle and vend Coca-Cola. This sub-bottling contract was drawn up by the legal counsel of the Coca-Cola Bottling Company and was a typical sub-bottler's contract, of which more than 300 are in effect throughout the United States. The term of 5 years was the maximum term permitted by the parent bottlers for sub-bottling contracts, but the term could be extended. The contract provided that the partnership should pay to Sacramento Corporation $ 1.50 per gallon for Coca-Cola syrup. This amount was transmitted by Sacramento Corporation to the parent bottler, Pacific Coast, after the deduction of 20 cents per gallon. $ 1.50 per gallon was the highest price that the parent bottlers would permit a first-line bottler to charge to a sub-bottler at that time, and it was the standard price paid by sub-bottlers in the United States. The agreement also provided that if it were128 still in full force and effect at the end of the initial 5-year period, and if thereafter the partnership should continue to order syrup and Sacramento Corporation should continue to deliver syrup to the partnership, the entire agreement would remain in effect until terminated by either party. The sub-bottling contract with the partnership was approved by Pacific Coast Coca-Cola Bottling Company, the Coca-Cola Company, and the Coca-Cola Bottling Company of California.On January 1, 1944, Sacramento Corporation entered into an agreement with the partnership by which Sacramento Corporation agreed to sell to the partnership all of the corporation's operating 107 equipment and all of its inventories of supplies and materials used in the Coca-Cola bottling business. Sacramento Corporation also agreed to assign and transfer to the partnership existing policies of insurance covering the properties and operations transferred. In exchange, the partnership executed two promissory notes to Sacramento Corporation, each bearing interest at the rate of 2 per cent. The first of these notes in the face amount of $ 36,577.32 was payable in 1 year and was given for the purchase of the inventory129 of supplies and materials and for the existing policies of insurance which had been transferred. The second note in the face amount of $ 138,565.55 was payable in ten equal annual installments and was given for the purchase of the operating equipment of Sacramento Corporation.On January 1, 1944, Sacramento Corporation leased to the partnership three parcels of improved real property, located in Sacramento and Woodland, on which buildings were located, which were to be used by the lessee for the purpose of conducting its business of bottling and distributing Coca-Cola. The lease of these properties was for a term of 10 years until December 31, 1953, and provided for a rental of $ 800 a month to be paid by the partnership. In addition, Sacramento Corporation assigned to the partnership all of the corporation's rights as lessee of the building in Marysville, which had been used by Sacramento Corporation in the conduct of its business in that area. Thereafter, the partnership paid the leasehold rent of $ 200 per month to Jack and Virginia Sellers.The warehouse which N. M. and Gladys Sellers, as individuals, caused to be constructed at Marysville was completed on April 9, 1942, and130 was used thereafter by Sacramento Corporation as a warehouse until the end of 1943. In December of 1943, bottling machinery was installed in the Marysville building, and at the end of 1943 the premises were converted into a bottling plant and ready for operation. This plant went into operation under the partnership on January 1, 1944; it was never operated as a bottling plant by Sacramento Corporation. The production of the Marysville plant was approximately three-fourths of the production of the Sacramento bottling plant. It was not until the end of 1943, for the first time, that the Coca-Cola business in the Sacramento area expanded to the point that a second bottling plant -- the one at Marysville -- was needed. During 1944, the Marysville plant bottled approximately 325,000 cases of Coca-Cola, each case containing 24 bottles. During 1944, there were employed at the Marysville plant by the partnership about 40 people who were bottlers, route salesmen, supervisors, and office workers.The partnership adopted a fiscal year running from December 1 to November 30. On or before February 15, 1945, and on or before February 15 of each subsequent year the partnership has filed Federal131 income tax returns.108 After January 1, 1944, and during the three fiscal years following, the last of which ended on November 30, 1946, the partnership bottled, sold, and delivered to customers the following quantities of bottled Coca-Cola in cases containing 24 bottles each:Fiscal yearNumber of cases1/1/44 to 11/30/44887,46112/1/44 to 11/30/45777,40412/1/45 to 11/30/46643,149In connection with the bottling and vending of Coca-Cola, the partnership purchased Coca-Cola at a base price of $ 1.50 per gallon in the following amounts during its fiscal years as follows:Fiscal yearGallons of syrup1/1/44 to 11/30/44160,21312/1/44 to 11/30/45152,11812/1/45 to 11/30/46122,850The syrup thus purchased by the partnership was billed to the partnership by Sacramento Corporation and was paid for by checks of the partnership drawn to the order of Sacramento Corporation.During the above periods and until August of 1947, the amount of sugar which could be used in the manufacture of Coca-Cola syrup for civilian consumption was rationed, but sugar was not rationed in the preparation of Coca-Cola syrup for sale to the armed forces. As a result132 of the sugar rationing regulations, the bulk of the partnership's sales of Coca-Cola in 1944 and 1945 were to the armed forces.On January 10, 1944, the corporation's board of directors duly approved the sale to the partnership, as well as the lease of the real properties to the partnership.Of the 207 sub-bottlers within the territories of the 5 parent bottlers, approximately 110 have a common financial relationship with their respective first-line bottlers. In very few of these, all of the stockholders of the first-line bottler may be interested in the sub-bottler. In a great majority of these sub-bottlers, only a few of the stockholders are common to both the first-line and the sub-bottler, including ownership by a child or relative. There are 97 sub-bottlers in these same territories which do not have any common financial relationship whatsoever with their respective first-line bottlers.In addition to the sub-bottler's contract from Sacramento Corporation to the partnership, there are at least six other sub-bottlers contracts in which the territory of the sub-bottler is coextensive with the territory of the first-line bottler. In only one or possibly two of these six contracts, 133 the ownership of the first-line bottler and the sub-bottler is identical.Soon after January 1, 1944, the partnership opened a complete new set of books and records which were not only kept independently, but were kept physically separate and apart from the books of Sacramento Corporation.109 On January 3, 1944, the partnership opened a bank account with the Bank of America, Oak Park Branch, in Sacramento. The partnership also opened bank accounts in the Woodland Branch of the Bank of America, the Auburn Branch of the Bank of America, and the Marysville-Rideout Branch of the Bank of America. Checks bearing the partnership name printed thereon were put into use on January 4, 1944. Expenses of operating the partnership business, such as telephone, gas and electricity, etc., were paid by the partnership by checks drawn on its accounts in the Bank of America. Sacramento Corporation has, at all times material hereto, maintained a bank account separate and apart from that of the partnership, in the Oak Park Branch of the Bank of America at Sacramento. On December 31, 1943, Sacramento Corporation's bank accounts in the Woodland Branch of the Bank of America, in the Auburn Branch134 of the Bank of America, and in the Marysville-Rideout Branch of the Bank of America, were closed out. The balances in those bank accounts were not transferred to the accounts of the partnership opened in the same banks.On January 1, 1944, the partnership established its own payroll and since that date has paid all salaries of all its employees who number about 110. In addition, the partnership has paid amounts to each of the partners as salaries during the years in question. On and after January 1, 1944, the partnership has, as is required by law, acted as a withholding agent with respect to salaries paid to its employees for Federal income taxes, Federal social security taxes, and California unemployment taxes, and has paid its own Federal social security taxes, and California unemployment taxes. The partnership has withheld said Federal social security taxes under its own identification number. The partnership has withheld said California unemployment taxes under its own identification number, which is 51-9276. Sacramento Corporation has its own identification numbers for Federal social security taxes and California unemployment taxes.One of the methods employed by the partnership135 in selling Coca-Cola to the public was through the use of vending machines (coolers). During the periods in question the partnership owned approximately 750 vending machines which it had purchased from Sacramento Corporation, and approximately 60 per cent of these were located in Army camps. In addition to the vending machines owned by the partnership, it also supplied, serviced, and repaired approximately 2,500 vending machines owned by customers of the partnership. To accomplish this servicing and repairing, the partnership maintained a service department with its own mechanics.Sacramento Corporation and the partnership were separate and independent economic units during the taxable years in question.Issue 2. After January 1, 1944, Sacramento Corporation did not bottle and sell Coca-Cola. Its principal source of income after that 110 date was from the payments made by the partnership under the sub-bottling contract. During the fiscal years ended February 29, 1944, February 28, 1945, and February 28, 1946, the partnership purchased 9,729 gallons of Coca-Cola syrup, 175,108 gallons, and 145,368 gallons for use in its business. The fiscal year of Sacramento Corporation136 ran from March 1 to February 28 or 29. Delivery of the syrup was direct to the partnership. Sacramento Corporation performed no services in connection with the procurement of the syrup, except to receive the payments of $ 1.50 per gallon from the partnership, and to transmit the payments to Pacific Coast Coca-Cola Bottling Company after deducting 20 cents per gallon. It was the right to use the Coca-Cola name and formula which rendered the business valuable. The 20 cents per gallon retained by Sacramento Corporation was in exchange for the corporation's exclusive license to bottle and vend Coca-Cola in the Sacramento area, which it had sublicensed to the partnership for a period of 5 years.Sacramento Corporation had gross income of $ 40,662.79 during the fiscal year ended February 28, 1946. Of this amount, $ 29,073.60 was received under its sublicense agreement with the partnership; $ 9,600 was received from rents from the partnership; $ 1,828.47 was received from interest on notes of the partnership; and $ 60 was received from dividends -- total, $ 40,562.07.During the entire fiscal year ended February 28, 1946, N. M. Sellers and Gladys Sellers each owned 48.2 per cent of 137 the outstanding capital stock of Sacramento Corporation. After January 1, 1944, Sacramento Corporation had three employees, N. M. Sellers, Felix Schuler, and Gladys Sellers.Sacramento Corporation filed a Federal income and declared value excess-profits tax return and an excess profits tax return for the fiscal year ended February 29, 1944, on or before May 15, 1944. For its fiscal years ended February 28, 1945, and February 28, 1946, Sacramento Corporation filed, on or before May 15, 1945, and 1946, a Federal income and declared value excess-profits tax return, an excess profits tax return, and a personal holding company return.Issue 3. As of January 1, 1944, N. M. Sellers and Gladys Sellers entered into a partnership agreement with their two children, Jack, who was 23, and Virginia, who was 19. The partnership was to be effective January 1, 1944, and was to do business under the firm name of Coca-Cola Bottling Company of Sacramento. The partnership agreement provided that the partnership was to engage in the business of bottling and distributing Coca-Cola. The partnership was formed to take over the business of Sacramento Corporation under a sub-bottling contract. The138 articles of partnership provided that each party should have a 25 per cent interest each in the partnership and for an initial capital contribution of $ 6,000 from each of the four 111 parties, total $ 24,000, who agreed that the profits should be equally divided "between the partners," and losses should be borne and defrayed by them "equally." N. M. Sellers deposited $ 24,000 in a bank account of the partnership on January 3, 1944. Jack and Virginia each signed a demand note for $ 6,000 payable to their father and mother and bearing interest at 2 per cent. These notes were paid in 1947 out of the profits of the business, which were credited and disbursed to Jack and Virginia for the purpose of making payment of the notes.The partnership agreement provided that N. M. Sellers was to "devote full time to the affairs of the partnership," and that the other three partners were to devote only such time to the business as their "other interests" would "reasonably permit." It was provided that the business was to be under the management of N. M. and Gladys Sellers as general managers, and that "All questions of policy, including the particular services to be rendered by each of 139 the partners in the firm, and all matters otherwise involved in the conduct of the firm business shall be decided by them [N. M. and Gladys Sellers]." No partner could pledge the credit of the partnership without the previous consent in writing of N. M. Sellers. At no time were Jack and Virginia ever given authority to sign checks for the partnership. The partnership agreement provided, also, that each of the partners shall be entitled to withdraw from the firm without obligation to repay such amounts monthly as may be agreed upon by the parties, which withdrawals shall be considered and treated as items of firm expense in the computation of the firm profits; that a general account shall be made and an audit taken annually of the assets and liabilities of the firm, and the profits of the business, if any, apportioned "between" the partners, and at such time "the partners shall adjust, each with the other, their just share of the profits so made." Upon termination of the partnership, the net assets of the partnership shall be "divided among the partners in the proportion in which they are entitled to share in the profits." In the event of the death of a member of the partnership, 140 then the surviving partners, or such of them as elect to do so, shall be privileged, in equal shares, to acquire the interest in the firm of the person dying, which option shall be exercised by notice in writing served upon the decedent's personal representatives on or before 30 days after the appointment and qualification of a personal representative. The full compensation for the interest of a deceased partner shall be an amount equivalent to the book value of the deceased partner's interest and may be paid by a 1-year promissory note bearing 4 per cent interest. In the event of the death of a partner and the acquisition of his interest in conformity with the above terms, the surviving partners may elect to cause new articles 112 of partnership to be executed and to form a new partnership to continue the partnership dissolved by the death of a partner.The arrangements for providing the partnership with $ 24,000 were handled by N. M. Sellers. On December 31, 1943, he obtained checks for $ 20,000 from his own sources of his own funds. He borrowed $ 4,000 from a bank, giving his own note for the loan. The loan was for 90 days and was repaid on January 13, 1944, out of the141 proceeds of bonds owned by Mr. and Mrs. Sellers which they sold shortly after January 3, 1944. Sellers opened a bank account in the name of Coca-Cola Bottling Company of Sacramento for the partnership in which he deposited the total of the $ 24,000 of funds which he obtained, as set forth above.On January 4, 1944, Jack executed a general power of attorney in favor of his father. He executed the power of attorney in Cook County, Illinois. N. M. Sellers, acting under the power of attorney, signed the name of Jack Sellers to the sub-bottling agreement and other documents of agreement with Sacramento Corporation and a fictitious name certificate for the partnership.At the time the partnership agreement was entered into, 2 Jack was stationed at the Naval Air Station in Glenview, Illinois. Jack began working for Sacramento Corporation in 1934, when he was 14 years old. From 1934 to 1941 he worked during the summer for the corporation at various jobs for which he was adequately compensated. Late in 1941 he enlisted in the Navy and was called to active duty on January 15, 1942. He was not separated from active duty with the Navy until October 1945, at which time he returned to Sacramento. 142 Jack Sellers did not perform services for the partnership during 1944 and 1945 until after he was separated from the Navy. About two weeks after his return, he began working for the partnership as a route salesman. His job consisted primarily of placing Coca-Cola vending machines in factories, offices, and machine shops. He held this job for about six months, after which he worked for the partnership in various other capacities until December 1, 1948, when he became sales manager of the entire business. He was paid a salary of $ 300 per month for the services he performed after he returned in 1945, and during 1946. The salary was increased to $ 350 per month in June 1946.143 Four months after the partnership was formed, in May of 1944, Virginia became engaged to Willard Roper who was a flight instructor in the Army Air Corps. It was the desire of Mr. and Mrs. Sellers 113 that after Roper married Virginia and received his discharge from the Air Corps, he would go to work for the partnership and "look after his wife's interest." On September 9, 1944, Virginia and Willard Roper were married. Prior to her marriage she worked part time for the partnership during about four months in 1944. She was paid a salary for her limited services. After her marriage she traveled with her husband, during 1944 and 1945, to the various parts of the United States where he was stationed. In October 1945, she returned to Sacramento to await her husband's discharge from the armed service, which occurred on February 19, 1946. During this period she again worked part time for the partnership. She was paid a salary for her services.On April 1, 1946, Roper began working full time for the partnership as a route salesman. After about seven months, he was made manager of the Cooler Sales and Service Department.When Virginia signed the partnership agreement, she did 144 not intend to become active in the business. She expected to marry and to look after her home.Although Jack and Virginia Sellers held the title to the property where the Marysville plant was located, they did not in any written or oral agreement contribute that property to the partnership. Also, although they were entitled to receive the rent for this property, from the partnership, at the rate of $ 200 per month, they did not assign the rent receivable to the partnership as contributions to the capital thereof. They applied the rent so received to reduce an indebtedness of $ 12,435.87 on the property which was due to California Western States Life Insurance Company, payable at the rate of $ 215.74 per month. (See Issue 1 above.)Jack and Virginia Sellers did not attempt to borrow from a bank or any nonfamily source any funds which they could contribute to the business venture in question although they owned the property where the Marysville plant was located. When the partnership agreement was being discussed, N. M. Sellers told his children that he and Mrs. Sellers would "loan" them $ 6,000 each for their one-fourth interests.Although the partnership agreement recites that145 salary withdrawals by the individual partners could be arrived at by agreement of the parties, there is no evidence that the children arrived at any agreement relating thereto with their parents in 1944 or 1945. Amounts allocated to them during 1944 and 1945 were so allocated by N. M. Sellers in his own discretion and under his control both as to the amounts and the manner of allocation. N. M. Sellers allocated funds of the business in 1944 and 1945 by purchasing war savings bonds in their names, by paying life insurance premiums, and by paying income taxes on their returns.114 When Roper returned from the armed service, N. M. Sellers did not tell him that he was either an employee or a partner. He was not put on the payroll and did not receive compensation for his services. Checks were made payable to Virginia as her salary, for which she did not render services, and were deposited in a joint account in hers and Roper's names.The opening balance sheet of Coca-Cola Bottling Company of Sacramento, the partnership, as of January 1, 1944, after the purchase of assets by its notes from Sacramento Corporation was as follows:AssetsCurrent:Cash in bank$ 24,000.00Merchandise inventory96,997.31Deferred charges4,246.86$ 125,244.17Fixed:Machinery and equipment$ 48,376.96Trucks18,567.32Bicycles429.90Furniture and fixtures6,524.52$ 73,898.70Total assets$ 199,142.87Liabilities and CapitalNotes payable to Sacramento Corporation$ 175,142.87Capital24,000.00Total$ 199,142.87146 The partnership during the fiscal periods January 1, 1944, to November 30, 1944, and December 1, 1944, to November 30, 1945, realized gross and net income and had expenses and made expenditures as follows:Jan. 1, 1944 toDec. 1, 1944 toNov. 30, 1944Nov. 30, 1945Sales and rentals -- gross$ 742,698.88$ 651,779.62Cost of goods sold418,103.77347,765.65Gross profit$ 324,595.11$ 304,013.97Less expenses for selling and administration241,220.37253,326.58Net profit$ 83,374.74$ 50,687.39Add for partners' salaries, etc15,084.0021,458.01Net profit per tax returns$ 98,458.74$ 72,145.40The profits of the partnership were derived in large part from selling operations and from the sub-bottling agreement. Selling expenses amounted to $ 160,058.66 in the 1944 fiscal year and to $ 160,370.37 in the 1945 fiscal year. The mechanical equipment and 115 inventory of the partnership were acquired from Sacramento Corporation on credit by the issuance of notes of the partnership totaling $ 175,142.87. The inventory and machinery so acquired gave rise to some of the earnings of the partnership in 1944 and 1945. Neither Jack 147 nor Virginia Sellers contributed in 1944 or 1945 any money, directly or through borrowing, to the purchase of equipment and inventory costing $ 175,142.87. The sub-bottling agreement was obtained for the partnership by the personal efforts of N. M. Sellers. The earnings of the partnership in 1944 and 1945 were not due in any part to any services or capital of Jack or Virginia Sellers.During 1944 and 1945, N. M. and Gladys Sellers had complete control over the earnings and property of the partnership in question. On January 3, 1944, N. M. and Gladys Sellers contributed $ 24,000 to the partnership; neither Jack nor Virginia Sellers contributed $ 6,000, each, to the capital of the partnership in 1944.On or about January 1, 1944, N. M. Sellers and Gladys Sellers, on the one hand, and Jack Sellers and Virginia Sellers, on the other hand, did not in good faith and acting with a business purpose intend then to join with each other, the parents with the children or the children with the parents, in the present conduct of the business known as Coca-Cola Bottling Company of Sacramento, a partnership, and Jack and Virginia Sellers were not during 1944 and 1945 bona fide members of that partnership. 148 OPINION.Issue 1. The primary issue in these proceedings is whether the respondent erred in refusing to recognize the separate existence of the partnership and in including its income in the gross income of Sacramento Corporation. Sacramento Corporation, in Docket No. 19828, contends that the partnership was a separate economic entity and that its income cannot be imputed to the corporation. The respondent, however, alleges that the creation of the partnership served no business purpose and was merely a device whereby income was reallocated among the family group with resulting tax advantage. He argues, therefore, that the partnership was a sham which should be disregarded and that the income which purportedly was that of the partnership was in reality that of Sacramento Corporation. This issue relates to the tax liability of the corporation for its fiscal years ended February 29, 1944, February 28, 1945, and February 28, 1946.It is an established rule that a taxpayer has the right to adopt the type of organization for the conduct of a business which he deems to be suitable and preferable, and he is not required to adopt the type of business organization which will yield149 the maximum tax upon the income earned by the business. Moline Properties, Inc. v. Commissioner, 319 U.S. 436">319 U.S. 436; Chelsea Products Corp., 16 T. C. 840; Cedar 116 ., 16 T.C. 870">16 T. C. 870; Estate of Julius I. Byrne, 16 T. C. 1234; Buffalo Motor Co., 10 T. C. 83; Miles-Conley Co., 10 T. C. 754, affd. 173 F. 2d 958; Seminole Flavor Co., 4 T. C. 1215; Koppers Co., 2 T. C. 152; Essex Broadcasters, Inc., 2 T. C. 523; Twin Oaks Co. v. Commissioner, (C. A. 9, 1950), 183 F.2d 385">183 F. 2d 385, reversing a Memorandum Opinion of this Court; and Denning v. Commissioner, 180 F. 2d 280. However, if the form of a business enterprise which a taxpayer adopts is a sham and a device to evade the burden of taxation, the law allows looking through the form to reality and disregarding the selected form of the business. Higgins v. Smith, 308 U.S. 473">308 U.S. 473;150 Gregory v. Helvering, 293 U.S. 465">293 U.S. 465.The evidence shows that it was the intent of the parties that a partnership should take over and conduct the bottling and distributing business which the corporation previously had conducted, and that the operation of the bottling business actually was conducted by the partnership. A partnership consisting of N. M. and Gladys Sellers was created and operated as a distinct and separate economic entity. The partnership opened and maintained separate books of account; it opened and maintained separate bank accounts; it held title to all motor vehicles; it paid its own operating expenses; it had its own social security accounts and was the withholding agent for taxes on the payroll of its employees who numbered about 110 persons. The partnership operated under a sub-bottler's contract which was prepared and approved by the general counsel for the parent Coca-Cola bottling companies, which was in the almost identical form as the standard sub-bottler's contract, and was in conformity with the standard contract. It was approved by Sacramento Corporation's parent bottler, Pacific Coast Coca-Cola Bottling Company, and151 by the Coca-Cola Company. The entire arrangement of sublicensing the partnership would have been impossible without the approval of the above Coca-Cola companies. Under the original Articles of Partnership the term during which the partnership is to exist is of indefinite duration and is not limited to any period of years. The sub-bottling contract between Sacramento Corporation and the partnership can continue beyond the initial 5-year period, if the partnership continues to order Coca-Cola syrup for bottled Coca-Cola.The members of the partnership are subject to the unlimited personal liability which may develop out of the operation of the business by the partnership in place of the limited liability to which they had been subject previously as stockholders of Sacramento Corporation when it conducted the bottling and distributing business. The change in personal liability is evidence of the reality in the change of the form of the entity which thereafter operated the business. There was conversion of the operation of the bottling and distributing business from operation by a corporation to operation by a partnership.117 The chief stockholders of Sacramento Corporation152 are N. M. and Gladys Sellers, but there are also other stockholders, Pratt and Hunter, who, also, owned stock of Pacific Coast Coca-Cola Bottling Company. N. M. Sellers had attempted to purchase the stock of Sacramento Corporation which Hunter and Pratt owned, but they were unwilling to sell their stock. This explains to some extent the fact that Sacramento Corporation was not dissolved.The fact that Sacramento Corporation continued in existence, holding title to some parcels of real estate and providing the partnership with syrup under the sub-bottling agreement does not detract from the reality of the transfer of the bottling business from the corporation to the partnership. If the corporation had been dissolved, the franchise to bottle and sell Coca-Cola in the territory might have been lost.The price which the partnership paid to Sacramento Corporation for its physical assets represented the book value of the assets, and there is no evidence that the total price, $ 170,896.01 was not fair and reasonable. In this connection, it is noted that all of the vending machines were appraised and revalued so as to establish a fair price for them. The respondent argues that the purchase153 price was not adequate because no payment was made for good will. However, the ability of Sacramento Corporation to make a profit arose solely from its ownership of the Coca-Cola franchise in the Sacramento area, which it retained. The good will of the business lay in the Coca-Cola name and in the franchise, see Floyd D. Akers, 6 T. C. 693, and Sacramento Corporation was adequately compensated for the sublicense which it gave to the partnership to use the Coca-Cola name and formula, since under the terms of its sub-bottling contract with the partnership, Sacramento Corporation received the maximum return which the Coca-Cola Company allowed a first-line bottler to receive from a sub-bottler under a sub-license agreement. The contract between Sacramento Corporation and the partnership followed the pattern set up by the Coca-Cola Company for such agreements and was, in fact, drawn by the legal counsel of that company.Upon consideration of all of the evidence, it is held that the respondent erred in refusing to recognize the partnership as a new and separate business entity and in including the income of the partnership for the taxable years in that 154 of Sacramento Corporation and that the income of the partnership is not properly includible in the gross income of Sacramento Corporation.It should be noted that the respondent does not rely upon the provisions of section 45 of the Code in making his determination that all of the income of the partnership should be added to the income of the corporation. We do not, therefore, consider the applicability of section 45. See, however, Cedar Valley Distillery, Inc., supra; and Miles-Conley Co., 10 T. C. 754, supra.118 It follows from the holding made under this issue that in Docket Nos. 25082 and 25083, N. M. Sellers and Gladys Sellers, petitioners, the respondent erred in his determination that each of them received constructive dividends from Sacramento Corporation consisting of the net earnings of the partnership.Issue 2. The next question is whether Sacramento Corporation is entitled to an unused excess profits credit carry-back from the fiscal year 1946 to the fiscal year 1944. The respondent contends that Sacramento Corporation is not entitled to the carry-back because it was a personal holding company155 within the meaning of sections 501 (a) and 502 of the Internal Revenue Code3 during 1946, and therefore was not subject to the excess profits tax. Sacramento Corporation argues, however, that it was not a personal holding company during 1946. It bases this argument on the contention that the major portion of its income was not in the nature of royalties from the sublicense of the use of the Coca-Cola name and formula, but represented profits from the purchase of Coca-Cola syrup at $ 1.30 per gallon and its resale at $ 1.50 per gallon.156 Sacramento Corporation performed no actual services in connection with the procurement of the syrup, except to receive the payments from the partnership and pass them along to Pacific Coast after deducting 20 cents per gallon. Delivery of the syrup was direct to the partnership. The 20 cents per gallon retained by Sacramento Corporation was in exchange for the corporation's exclusive right to receive Coca-Cola syrup from Pacific Coast and exclusively to bottle and vend the Coca-Cola product in the Sacramento area. The 20 cents per gallon 119 was an interest reserved by Sacramento Corporation in return for the sublicense which it granted to the partnership to use the exclusive license owned by Sacramento Corporation. The amounts involved were paid by the partnership in proportion to the use made of the principal right granted by the sub-bottling contract, that is, on the basis of the quantity of Coca-Cola syrup used by the partnership in bottling and vending Coca-Cola.In addition, as Sacramento Corporation argued under the first issue, it was the right to use the Coca-Cola name which rendered the business profitable and without which the syrup would have had little value157 over the basic cost of its ingredients. When Sacramento Corporation's territory was enlarged in 1936, the corporation entered into an agreement with another first-line bottler whereby the latter bottler agreed to release the additional territory, which originally had been licensed to it, in exchange for an agreement by Sacramento Corporation to pay it a royalty of 20 cents per gallon for all Coca-Cola syrup used in supplying the territory so released. There is no real difference between the payments of 20 cents per gallon made by Sacramento Corporation under that agreement and the 20 cents per gallon retained by it as the result of the sub-bottling agreement with the partnership. The exclusive right to use the Coca-Cola name and bottle and vend the bottled product in the Sacramento territory was licensed to the partnership by Sacramento Corporation for a period of 5 years. It is concluded that the 20 cents per gallon received by Sacramento Corporation above the amount which it had to remit to Pacific Coast constituted payment for the exclusive license granted to the partnership. As such, those amounts constituted royalties within the purview of section 502. Puritan Mills, 43 B. T. A. 191;158 cf. Hugh Smith, Inc., 8 T. C. 660, affd. 173 F.2d 224">173 F. 2d 224, certiorari denied 337 U.S. 918">337 U.S. 918.Since Sacramento Corporation received more than 80 per cent of its gross income during 1946 from dividends, interest, rents, and royalties, and since more than 50 per cent in value of its outstanding stock was owned by not more than five individuals, the corporation was a personal holding company under section 501. As a personal holding company, Sacramento Corporation was specifically exempt from the excess profits tax under section 727. It follows and it is held that it is not entitled to any excess profits credit carry-back from the year 1946. Cf. Wier Long Leaf Lumber Co., 9 T. C. 990, revd. 173 F. 2d 549; Mesaba-Cliffs Mining Co., 10 T. C. 1010, revd. 174 F.2d 857">174 F. 2d 857.Issue 3. The third issue pertains only to petitioners N. M. Sellers and Gladys Sellers, Docket Nos. 25082 and 25083, and relates to their income tax liability for 1944 and 1945. The question under this issue is whether the159 two children of N. M. and Gladys Sellers should be recognized for tax purposes as bona fide partners in the partnership during the years 1944 and 1945. Although the respondent does not 120 dispute the existence of the partnership under this issue, it being his position that if under Issue 1 the partnership is recognized as a separate business entity apart from Sacramento Corporation, then in the alternative he recognizes Mr. and Mrs. Sellers as the only members of the partnership, he has refused to recognize Jack and Virginia as partners, and he has determined that their shares in the partnership income should be included in the gross income of their parents for their calendar years 1944 and 1945. The correctness of this determination depends upon whether or not N. M. and Gladys Sellers, in good faith and acting with a business purpose, really intended on January 1, 1944, to join together with Jack and Virginia in the then present conduct of a business. Commissioner v. Culbertson, 337 U.S. 733">337 U.S. 733; and Commissioner v. Tower, 327 U.S. 280">327 U.S. 280. Upon consideration of all the facts and circumstances present in these160 proceedings, we have found as a fact that the parties did not intend on or about January 1, 1944, to join with their children, Jack and Virginia, in the then present conduct of a business in good faith and with a business purpose, and that the children did not have that intention on or about January 1, 1944; that during the period from January 1, 1944, until November 30, 1945, at least, Jack and Virginia Sellers were not bona fide members of the partnership, and that they were not bona fide members of the partnership during the calendar years 1944 and 1945.The conduct of the Coca-Cola bottling business remained unchanged upon the formation of the alleged partnership with Jack and Virginia. The parents continued personally to operate and control the partnership business as they had done with respect to the business of Sacramento Corporation in prior years. The partnership agreement is careful to reserve away from Jack and Virginia all right of participation in the control and management of the business. Such participation has been viewed by the Supreme Court as a factor of prime importance in determining the bona fides of a family partnership. Commissioner v. Culbertson, supra.161 The actual conduct of the business is an important factor militating against the contention of the petitioners that Jack and Virginia were bona fide partners during 1944 and 1945. During 1944 and 1945 Jack was serving with the Navy, and for most of that time was stationed at the Naval Air Station in Glenview, Illinois. The only services he performed for the partnership during this period were as a route salesman during the last two months of 1945 after his separation from the Navy. Virginia, also, performed only desultory services for the partnership during several of the months involved. Both were adequately compensated for whatever services they did perform. However, neither Jack nor Virginia rendered vital services, and neither one participated in the management of the business during 1944 or 1945. Any intent which Jack or Virginia might have had to perform 121 services for the partnership in the future or to in fact become members of the partnership in the future, is not sufficient to give them a partnership status for tax purposes during 1944 and 1945. Commissioner v. Culbertson, supra.Moreover, the parties never intended that162 Virginia should exercise an interest as a partner in the business. It was their intention that her husband, who was released from the Army in 1946, should work for the business and look after any interest that his wife might have upon his release from the Army.The petitioners rest their contention that their children became members of the partnership known as Coca-Cola Bottling Company of Sacramento primarily upon the allegation that each contributed $ 6,000 to the capital of the business in January 1944. Although no ready "test" can determine whether or not members of a family have joined with other members of the family in the present conduct of a business, Commissioner v. Culbertson, supra, the lack of a contribution of capital is an important factor which weighs heavily against the taxpayer who contends that another member of his family is a bona fide partner for tax purposes. Commissioner v. Tower, supra;Lusthaus v. Commissioner, 327 U.S. 293">327 U.S. 293. Keeping in mind the admonition that no single "test" is determinative of the question, and that all of the facts and circumstances163 must be considered, we have considered carefully all of the evidence under this issue, bearing in mind, also, that income produced by services is taxed to the person who performs the services, and income produced by property is taxed to the owner of the property.There was an established business, the conduct of which was changed in 1944 from operation by a corporation to operation by a partnership. The earnings were derived from sales of bottled Coca-Cola, and apparently the sales were made on a cash basis with a rapid turnover. Earnings were largely attributable to the sub-bottling contract from the corporation, to the selling efforts of hired salesmen, to the receptive market, particularly Camp Beale, and to management. N. M. Sellers applied his personal efforts toward the obtaining of the sub-bottling contract, and his entire time was devoted to managerial services, which included the hiring and supervising of salesmen. Admittedly neither Jack nor Virginia Sellers gave one iota of time or service in the obtaining of the sub-bottling contract or the selling activities. The property used in the business was acquired from the Sacramento Corporation, and notes of the partnership164 were given therefor. None of the property used in the partnership business was acquired with any of the alleged capital contributions of Jack and Virginia. Jack and Virginia Sellers owned the improved realty where the Marysville plant was located, but they did not contribute that property to the partnership. The question is, therefore, whether the alleged cash contributions of Jack and Virginia were used in the business.122 With respect to cash, there is no evidence about the cash position of the Sacramento Corporation at the time the partnership was created to take over the business, but a reasonable assumption is that it was good in view of the first year's earnings of the partnership. The gross and net receipts of the partnership in the 1944 fiscal year amounted to $ 742,698.88 and $ 83,374.44. Not only is there no evidence to show that any part of the earnings was due to the alleged contributions of $ 6,000 of Jack and Virginia, but there is evidence that in the first two fiscal years more than $ 12,000 was disbursed under the petitioners' directions to purchase for Jack and Virginia war bonds and property, and for their use. We cannot find from all of the evidence, 165 therefore, that their alleged contribution of $ 12,000 in 1944 was either needed in the business, used in the conduct of the business, or productive of any of the earnings of the business. The reality of the arrangement was that N. M. and Gladys Sellers deposited their own $ 24,000 in the firm's bank account over which they exercised control. Jack and Virginia were not authorized to draw checks on the firm's bank account. The earnings of the business were under petitioners' control. Also, we cannot find that the giving of notes for the alleged loan of $ 12,000 satisfies the requirements of a contribution of capital. They were not repayable in any event but only out of earnings, and since $ 12,000 was advanced to Jack and Virginia, the notes involved could be viewed rather as evidence of personal loans. Upon the evidence it has been found as a fact that N. M. and Gladys Sellers contributed $ 24,000 on January 3, 1943, and that Jack and Virginia did not contribute $ 6,000 each, to the venture.Furthermore, a critical analysis of the entire arrangement of depositing $ 24,000 to the account of the partnership at the time the partnership agreement became effective shows that it lacked166 a true business purpose. It is not shown that the partnership was in need of working capital. A going business was taken over from the corporation in which monthly sales gave a quick turnover of cash. The transfer of $ 24,000 by N. M. and Gladys Sellers to a bank account of the partnership from their other accounts was in itself a re-allocating of their own funds, and at least $ 12,000 thereof is not shown to have been either needed or to have been a loan in the usual business sense.Upon all of the evidence, we cannot find as a fact that there was a present intent on the part of N. M. and Gladys Sellers (or on the part of the children) to presently operate the business as a genuine partnership with their children during 1944 and 1945, and it is held that Jack and Virginia were not bona fide partners during 1944 and 1945. The respondent's determination on this issue is sustained. See: Simmons v. Commissioner, 164 F. 2d 220; Joseph J. Morrison, 11 T. C. 696, affd. 177 F. 2d 351; T. Edward Ritter, 11 T. C. 234, affd. 174 F. 2d 377;167 W. F. Harmon, 13 T. C. 373; W. Stanley Barrett, 13 T. C. 539, 123 affd. 185 F. 2d 150; Herman Feldman, 17">14 T. C. 17, affd. 186 F.2d 87">186 F. 2d 87.Decisions will be entered under Rule 50. BLACK Black, J., dissenting: I am in entire agreement with the majority opinion wherein it holds that the Coca-Cola Bottling Company of Sacramento, Ltd., and a partnership organized January 1, 1944, known as Coca-Cola Bottling Company of Sacramento were separate legal entities and the income of the partnership cannot be taxed to the corporation. It seems to me that the facts fully support the majority opinion in its holding on that issue. I think its reasoning is sound and the authorities which are cited well support the conclusion which is reached.While I find myself in entire agreement with the majority opinion on that issue, I am not in agreement with the holding of the majority that N. M. Sellers and Gladys Sellers were the only members of the partnership. It seems to me that such a holding is in conflict with the facts which are present in 168 this proceeding. The question of whether a partnership is to be recognized for income tax purposes depends upon whether the parties, in good faith and acting with a business purpose, intended to join together as partners in the present conduct of the enterprise. Commissioner v. Culbertson, 337 U.S. 733">337 U.S. 733. The Commissioner has determined that N. M. Sellers and Gladys Sellers were members of the partnership which was organized January 1, 1944, but that their two children, Jack Sellers and Virginia Sellers, who also signed and obligated themselves under the very same partnership agreement, were not members of the partnership. The majority opinion sustains the Commissioner on this point and has an ultimate finding of fact as follows:On or about January 1, 1944, N. M. Sellers and Gladys Sellers, on the one hand, and Jack Sellers and Virginia Sellers, on the other hand, did not in good faith and acting with a business purpose intend then to join with each other, the parents with the children or the children with the parents, in the present conduct of the business known as Coca-Cola Bottling Company of Sacramento, a partnership, and Jack and Virginia Sellers169 were not during 1944 and 1945 bona fide members of that partnership.I think the foregoing ultimate finding of fact is not justified by the record. At the time this partnership was formed Jack Sellers was 23 years old and Virginia was 19 years of age. They had grown up in the business, so to speak, and it seems only natural that the parents would want to take them into the business as partners and I think that they did so in the written partnership agreement which was executed by the respective partners. This is not a case of parents endeavoring to take young minor children into a partnership with a 124 view of reducing their own income taxes. Jack and Virginia had grown up to the adult stage at the time the partnership was formed. It seems to me that it is safe to say that the partnership thus formed would be recognized under the laws of California for all purposes and I see no reason why it should not be recognized for Federal income tax purposes. It seems to me that to refuse to recognize it for what it really was is wholly illogical.I shall not in this dissenting opinion undertake to review all the facts which I think sustain the validity of the partnership under 170 the rule of the Culbertson case, supra. It would unnecessarily prolong this dissenting opinion to do so. I will simply say that applying the test which the Supreme Court laid down in Commissioner v. Culbertson, I think the partnership which was formed January 1, 1944, was composed of N. M. Sellers, Gladys Sellers, Jack Sellers, and Virginia Sellers and that the majority opinion errs in holding that only N. M. Sellers and Gladys Sellers were members of the partnership and that all the income of the partnership is taxable to them.To this holding of the majority, I respectfully dissent. Footnotes1. Proceedings of the following petitioners are consolidated herewith: N. M. Sellers and Gladys Sellers.↩2. The record is not clear as to the precise time that the partnership agreement was executed. The agreement recites that the parties subscribed their signatures as of January 1, 1944. Jack Sellers testified that he could not recall whether he signed the agreement in November 1943 when he was home on a visit, or whether it was mailed to him at Glenview, Illinois, where he was stationed.↩3. SEC. 501. DEFINITION OF PERSONAL HOLDING COMPANY.(a) General Rule. -- For the purposes of this subchapter and chapter 1, the term "personal holding company" means any corporation if -- (1) Gross income requirement. -- At least 80 per centum of its gross income for the taxable year is personal holding company income as defined in section 502; but if the corporation is a personal holding company with respect to any taxable year beginning after December 31, 1936, then, for each subsequent taxable year, the minimum percentage shall be 70 per centum in lieu of 80 per centum, until a taxable year during the whole of the last half of which the stock ownership required by paragraph (2) does not exist, or until the expiration of three consecutive taxable years in each of which less than 70 per centum of the gross income is personal holding company income; and(2) Stock ownership requirement. -- At any time during the last half of the taxable year more than 50 per centum in value of its outstanding stock is owned, directly or indirectly, by or for not more than five individuals.SEC. 502. PERSONAL HOLDING COMPANY INCOME.For the purposes of this subchapter the term "personal holding company income" means the portion of the gross income which consists of:(a) Dividends, interest (other than interest constituting rent as defined in subsection (g)), royalties (other than mineral, oil, or gas royalties), annuities. * * (g) Rents. -- Rents, unless constituting 50 per centum or more of the gross income. For the purposes of this subsection the term "rents" means compensation, however designated, for the use of, or right to use, property, and the interest on debts owed to the corporation, to the extent such debts represent the price for which real property held primarily for sale to customers in the ordinary course of its trade or business was sold or exchanged by the corporation; * *↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622373/	LENCARD CORPORATION, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Lencard Corp. v. CommissionerDocket No. 106493.United States Board of Tax Appeals47 B.T.A. 58; 1942 BTA LEXIS 742; June 9, 1942, Promulgated 742 Petitioner realized no gain on liquidation and retirement of all of its outstanding preferred stock. Richard H. Appert, Esq., for the petitioner. Conway Kitchen, Esq., for the respondent. ARUNDELL58 This proceeding is to test the correctness of the Commissioner's determination of deficiencies for the taxable year ended June 30, 1936, in income and excess profits taxes and in personal holding company surtaxes in the respective amounts of $10,646.59, $1,371.49, and $18,480.14. These deficiencies arise from the inclusion in gross income of $79,402.75 representing the excess of the fair market value over petitioner's bases of certain property turned over by petitioner to its sole preferred stockholder as consideration for the surrender of the outstanding shares of preferred stock held by her. 59 The facts have been stipulated and will be set forth only in so far as necessary to present the question in dispute. FINDINGS OF FACT. Petitioner was incorporated under the laws of Delaware and had its principal office in Jersey City, New Jerser. It was voluntarily dissolved upon consent of all stockholders on December 30, 1938. The743 returns for the taxable year involved were filed with the collector of internal revenue for the fifth district of New Jersey. On and prior to June 16, 1936, petitioner had outstanding 500 shares of common stock out of 2,000 such shares authorized and 3,500 shares of preferred stock out of 5,000 shares authorized. Both classes of stock had a par value of $100 per share. The 500 shares of common stock were owned by three trusts. The beneficiaries of the trusts were the children of Max D. Steuer, deceased. The sole owner, on or prior to June 16, 1936, of all of petitioner's outstanding preferred stock was Bertha Steuer, widow of Max D. Steuer. The preferred stock was entitled to a noncumulative dividend of 8 percent per annum and on lequidation or dissolution the holders of the preferred were entitled to receive the par value of their shares and the remainder of the assets were to be distributed to the holders of the common stock. Petitioner's preferred shares were redeemable in whole or in part at the option of the board of directors upon 10 day's notice to holders of record by payment of $100 per share. On June 12, 1936, Mrs. Steuer advised petitioner that she understood744 the corporation desired to redeem the preferred shares and stated that she waived notice of the redemption and, in lieu of cash, would accept 450 shares of stock of National Exhibition Co., 5,521 shares of Bankers Trust Co., and $11.50 in cash. On the same day the board of directors of petitioner discussed the matter of redeeming the shares of preferred stock and passed the following resolution: "RESOLVED, That all the outstanding preferred stock of this Company be redeemed and cancelled." Further resolutions were passed to carry out the transaction in the manner suggested in Mrs. Steuer's letter and, on June 16, 1936, the petitioner delivered and transferred to Mrs. Steuer 450 shares of National Exhibition Co. stock, 5,521 shares of Bankers Trust Co. stock, and $11.50 in cash. Mrs. Steuer thereupon surrendered and turned in to petitioner the 3,500 shares of its preferred stock theretofore held by her. These preferred shares were immediately retired and canceled by petitioner, so that thereafter petitioner had no preferred stock issued, either outstanding or as treasury stock. On June 30, 1936, the stockholders ratified the action of the directors in redeeming and retiring745 all the outstanding preferred stock 60 and voted to reduce the capital of petitioner to $50,000, the amount of common stock outstanding, and to amend the certificate of incorporation so as to eliminate all the outstanding preferred stock from its capitalization. On August 18, 1936, formal action was taken by petitioner by the filing of a "Certificate of Retirement of Preferred Stock Redeemed Out of Capital" with the Secretary of the State of Delaware, covering the matter of the redemption and retirement of the preferred stock, as heretofore related. The basis to petitioner on June 16, 1936, of the 450 shares of stock of the National Exhibition Co. was $18,000 and their fair market value on that date was $27,000. The basis on June 16, 1936, of the 5,521 shares of Bankers Trust Co+ stock was $252,585.75 and their fair market value on the same day was $322,988.50. OPINION. ARUNDELL: If the real nature of the foregoing transaction was the sale of assets of petitioner in consideration of the receipt of its own shares of preferred stock, a gain was realized and respondent must prevail. Art. 22(a)-16, Regulations 86; 746 ; , affirming . If, on the other hand, the transaction was essentially the liquidation of petitioner's outstanding preferred stock, petitioner realized no gain. Art. 22(a)-21, Regulations 86; ; affirmed per curiam, ; . We have no difficulty in concluding from the stipulated facts that the true transaction between petitioner and its stockholders was a liquidation of the preferred shares and not a sale of securities. The preferred shares were immdiately retired and canceled and corporate steps were taken to reduce the capitalization to reflect the retirement of those shares and, to that end, proper papers were filed with the Secretary of State of Delaware to so amend the certificate of incorporation. Article 22(a)-21 of Regulations 86, cited above, provides that: * * * No gain or loss is realized by a corporation from the mere distribution of its assets in kind in partial747 or complete liquidation, however they may have appreciated or depreciated in value since their acquisition. * * This regulation has appeared in all regulations since Regulations 74 (1928 Act). It has been carried forth in regulation applicable to the Revenue Acts of 1928, 1932, 1934, 1936, and 1938. As stated by the Supreme Court in , "Congress must be taken to have approved the administrative construction and thereby to have given it the force of law." 61 It is suggested by counsel for respondent that the quoted regulation (article 22(a)-21 of Regulations 86) applies only to dissolved corporations or those in process of dissolution, and that a gain or loss may be realized in the case of a partial liquidation when the liquidation is not in connection with the winding up of the affairs of the corporation. The difficulty with that argument is that it runs counter to another regulation of the Commissioner which defines distributions in liquidation, article 115-5 of Regulations 86, 1 and also to various decisions of the courts and the Board, which specifically hold that article 115-5, supra, when748 it refers to amounts distributed "in partial liquidation", nowhere limits such distributions to payments made in the course of winding up the corporation. ; , affirming . 749 The transaction before us clearly comes within the definition of a "partial liquidation" as set forth in article 115-5. One other point has been suggested. The retired shares were of a preferred issue which, by its terms, was redeemable at $100 per share. This fact, however, does not create an indebtedness owing by the corporation to the preferred shareholders, , nor does the retirement of these shares constitute the discharge of an indebtedness with assets the cost of which was less than the amount of the indebtedness discharged. It is clear from the record that at no time did petitioner have any obligation, in connection with the retirement of its preferred stock, to deliver to the preferred shareholders anything except the property which it did deliver. The transaction was not an undertaking to redeem the preferred stock pursuant to the retirement provisions of the certificate of incorporation and the subsequent discharge of such an undertaking by transferring the petitioner's assets. As stated by the Supreme Court in 750 , "This was no sale; assets were not used to discharge indebtedness." , and , relied on by counsel for the respondent, are not in point. In those cases the court held *62 that the transactions involved essentially the sale of assets of the corporation rather than a partial liquidation of outstanding shares. It may be observed in each of those cases that the shares of stock truned in for preferred were not canceled and retired but were held as treasury stock, nor did the transactions have any of the characteristics of a true liquidation, either partial or complete. The conclusion already reached makes unnecessary a consideration of an alternative issue covering the taxability of petitioner as a personal holding company. Decision will be entered under Rule 50.Footnotes1. ART. 115-5. Distributions in liquidation. - Amounts distributed in complete liquidation of a corporation are to be treated as in full payment in exchange for the stock, and amounts distributed in partial liquidation are to be treated as in part of full payment in exchange for the stock so canceled or redeemed. The phrase "amounts distributed in partial liquidation" means a distribution by a corporation in complete cancellation or redemption of a part of its stock, or one of a series of distributions in complete cancellation or redemption of all or a portion of its stock. A complete cancellation or redemption of a part of the corporate stock may be accomplished, for example, by the complete retirement of all the shares of a particular preference or series,↩ or by taking up all the old shares of a particular preference or series and issuing new shares to replace a portion thereof, or by the complete retirement of any part of the stock, whether or not pro rata among the shareholders. [Italics added.]	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622375/	Camiel Thorrez, Petitioner, v. Commissioner of Internal Revenue, Respondent. Joseph Michner, Petitioner, v. Commissioner of Internal Revenue, Respondent. Walter Michner, Petitioner, v. Commissioner of Internal Revenue, Respondent. Edward A. Forner, Petitioner, v. Commissioner of Internal Revenue, RespondentThorrez v. CommissionerDocket Nos. 3250, 3251, 3252, 3253United States Tax Court5 T.C. 60; 1945 U.S. Tax Ct. LEXIS 163; May 21, 1945, Promulgated 163 Decisions will be entered for the respondent. For several years prior to 1941 the petitioners operated a metal plating business in Jackson, Michigan, as equal partners. Early in 1941 they decided to bring their wives and six of their children, three of whom were minors, into the partnership with them. They agreed among themselves that each should split up his one-fourth interest in the business among the members of his family; that the existing partnership should be dissolved; and that a new partnership should be formed by all parties contributing their interests in the business to the new partnership. In accordance with such agreement new articles of copartnership were executed by the 14 members on January 3, 1941. Thereafter the partnership business was conducted in the same manner as before, under the management of the petitioners, except that the profits were distributable to the 14 partners on the basis of their respective interests. Held, as the respondent has determined, that each petitioner is taxable upon one-fourth of the partnership profits for 1941. J. Adrian Rosenburg, Esq., and Everett M. Hawley, Jr., Esq., for the petitioners.Melvin S. Huffaker, Esq., for the respondent. Smith, Judge. Arundell and Leech, JJ., dissent. Mellott, J., concurring. Opper, J., concurring. Van Fossan, J., Black, J., dissenting. Tyson, J., agrees with this dissent. Disney, J., dissenting. Tyson, J., agrees with this dissent. SMITH 60 These proceedings, consolidated for hearing, involve income tax deficiencies for 1941 as follows:PetitionerDocket No.DeficiencyCamiel Thorrez3250$ 18,661.57Joseph Michner325116,235.62Walter Michner32529,935.92Edward A. Forner325315,782.68In determining the above deficiencies165 the respondent has included in petitioners' income equal shares of the net earnings of a metal plating business which they operated as a partnership. Portions of such income had been reported in returns filed by petitioners' wives and children.FINDINGS OF FACT.Petitioners are residents of Jackson, Michigan. They filed their income tax returns for 1941 with the collector of internal revenue for 61 the district of Michigan. In such returns each reported a portion of the income of a partnership conducting a metal plating business at Jackson under the name of Michner Plating Co.History and Organization of Michner Plating Co.The Michner Plating Co. was first organized as a partnership in September 1936. Its organizers were Camiel Thorrez and Joseph Michner, petitioners herein, and a third individual, John Piniewski. Each of the three partners made an initial capital contribution of $ 2,000 to the business.On December 3, 1938, the partnership was dissolved and a new partnership formed to continue the business under the same name. At that time a fourth partner, petitioner Edward A. Forner, was admitted. Forner also contributed $ 2,000 in cash and his one-half interest166 in the assets of another metal plating business known as the Chromium Plating Corporation. The other one-half interest in the assets of that corporation was owned by Michner Plating Co., and was contributed to the new partnership by the three other parties.On August 31, 1940, the partnership was again dissolved and a new partnership formed to admit a fifth member, Walter Michner, son of Joseph Michner. Walter had worked for the company since its organization in 1936 and the other partners considered that he was entitled to admission as an equal partner. He likewise was required to make a capital contribution of $ 2,000 to the business to equal that made by the other partners, although a one-fifth interest in the business at that time was worth considerably more than that amount.On November 23, 1940, Michner Plating Co. acquired, by merger, all of the assets of another metal plating company, Jackson Chromium Plating Co. That company was also a partnership which at the time of the merger was owned by the partners in Michner Plating Co. In the latter part of December 1940 the other four partners in Michner Plating Co. bought out the interest of the fifth partner, John Piniewski, 167 for $ 10,000.On January 2, 1941, the four partners in Michner Plating Co., all petitioners herein, executed an agreement which purported to authorize each of them to transfer portions of their partnership interests to their wives and children. The agreement provided that the four partners should retain complete management and control over the partnership and that no wife or child could dispose of his or her interest without offering it first to the partner from whom it was acquired, if he should be a partner in the business, and then to the other partners at its appraised "fair value." If none of such partners should desire to purchase the interest it might then be offered at the 62 appraised value "to anyone acceptable to the remaining partners." Paragraph 5 of the agreement reads as follows:It is further mutually understood and agreed that the parties hereto, having at the present time the control and management of said partnership, shall retain such control and management of said partnership regardless whether such aforedescribed transfers are made or not. It is further agreed that if any of the parties hereto should make such transfers of portions of their partnership168 interests as has been heretofore agreed upon, such transfers shall be made with the understanding and subject to the condition that the active control, operation and management of the said partnership shall remain in the parties hereto and although such transfers shall constitute outright transfers and unconditional transfers of interests in the assets, income and liabilities of said co-partnership, such transfers shall only constitute transfers of interest in the assets, income and liabilities in said co-partnership, but shall not constitute transfers of shares in the control, operation or management of the partnership, and no purchases, sales, orders, notes, letters, bills, receipts, payments, contracts, securities, dealings and transactions which shall be made, given or taken for any matter or things concerning the partnership business shall be so made, given, taken or entered into by or through any transferee aforedescribed, but only by and through the parties hereto.On the following day, January 3, 1941, another agreement, styled "Articles of Co-partnership," was executed by petitioners as "parties of the first part" and the members of their respective families, referred to 169 in the agreement of January 2, 1941, as "parties of the second part." The agreement recites that:Whereas, the parties of the first part have been associated as co-partners in operating the Michner Plating Company, a going concern engaged in the general plating business in the City of Jackson aforesaid, andWhereas, the parties of the first part on the 2nd day of January, A. D. 1941, entered into an agreement whereby it was agreed that said parties of the first part could transfer portions of their undivided interests in said co-partnership to certain members of their families,and whereas each of the parties of the first part had accordingly made such transfers of designated portions of their interests to the members of their families (the several interests purportedly transferred by each of the petitioners are shown below), and whereas the parties of the second part were desirous of becoming members of the partnership and the parties of the first part were desirous of having them do so:Now, Therefore, all the aforesaid parties hereby enter into a co-partnership agreement for the purpose of carrying on a general metal plating business in the City of Jackson aforesaid under the 170 style and firm name of Michner Plating Company, being a successor to the co-partnership heretofore carried on under that style and firm name by the parties of the first part herein named and the names of the members of this co-partnership and their undivided percentage interests are as follows:63 The undivided percentage interests of each of the petitioners and members of their families as shown in the agreement were as follows:PercentCamiel Thorrez (petitioner)5 Flavia Thorrez (wife)5 Albert Thorrez (son)5 Henry Thorrez (son)5 Morris Thorrez (son)5 Walter Michner (petitioner)12 1/2Marie Michner (wife)12 1/2Joseph Michner (petitioner)8 1/3Lottie Michner (wife)8 1/3Elsie Michner (daughter)8 1/3Edward A. Forner (petitioner)6 1/4Veda Forner (wife)6 1/4Lorraine Forner (daughter)6 1/4Louise Forner (daughter)6 1/4The partnership agreement further provided that:-5-As a contribution to the capital of said partnership, the parties hereto shall contribute their respective undivided percentage interests as hereinbefore set forth in the assets of the Michner Plating Company except as may hereinafter be specifically171 provided, including all of the machinery, tools, equipment and appliances of said business;that the control and management of the partnership should be exercised by the parties of the first part; that Joseph and Walter Michner should devote their full time to the business, with the former acting as general manager, and should receive salaries of $ 250 and $ 200 a month respectively, plus bonuses based on a percentage of certain of the profits; that Camiel Thorrez and Edward A. Forner should devote only so much of their time to the business as they saw fit; that all major policies affecting the business should be determined by all of the partners, but that:* * * No purchases, sales, orders, notes, letters, bills, receipts, payments, contracts, securities, dealings and transactions which shall be made, given or taken for any matter or things concerning the partnership business shall be so made, given, taken or entered into by any of the parties of the second part, but shall only be made, given, taken or entered into by parties of the first part pursuant to their authority hereinabove and hereinafter described.It was further provided that each partner should share in all of the 172 profits and losses of the business in proportion to his respective interest.The partnership agreement also carried a provision, similar to that in the agreement of January 2, that none of the parties of the second part could dispose of his or her interest without such party, "or his 64 executor if disposition is made by will," first offering it to the "transferor" from whom it was received, then to the other transferees of such transferor as a group, and then to the other parties of the first part, at its then appraised value; and that none of the parties of the first part, nor the executors thereof, could dispose of his interest without offering it at its then appraised value first to his "transferees" as a group, if they were still partners, and then to the other parties of the first part both as a group and individually, if they were still partners. Upon the death or retirement of any of the parties of the first part the management of the business was to continue in those remaining. No partner, or his executor, could offer his or her interest to any outsider not acceptable to the other partners.It was further provided that proper books and records of the partnership should173 be kept and all partnership funds should be deposited in a bank to be agreed upon by the partners, subject to withdrawal only by checks signed by two of the parties of the first part.The net profits of the business were to be ascertained and distributed to the partners semiannually unless by mutual agreement they were left in the business.The partnership was to continue for a period of 20 years unless earlier dissolved by mutual agreement and upon its termination the assets were to be distributed to the partners in proportion to their respective interests.A certificate of dissolution of the old partnership and a certificate for the new partnership dated January 3, 1941, respectively, were filed at the office of the county clerk of Jackson County, Michigan, on May 29, 1941.On January 1, 1941, Joseph Michner, Camiel Thorrez, and Edward A. Forner were the owners of and equal partners in another metal plating business known as Mayo Hard Chrome Plating Co. and were also the owners, with Walter Michner, of all of the capital stock of a corporation known as Anodizing Co. of Jackson, Inc. Prior to April 15, 1941, the stockholders of the last named company transferred portions of their174 holdings in the capital stock of the company to members of their respective families in the same proportion as their undivided interests in Michner Plating Co. under the partnership agreement of January 3, 1941. On April 15, 1941, all of the assets of the corporation were transferred to Michner Plating Co. and the corporation was dissolved. All of the assets of Mayo Hard Chrome Plating Co. were transferred to Michner Plating Co. on May 1, 1941.In their gift tax returns for 1941 petitioners reported gifts to their wives and children of the above stated undivided interests in the Michner Plating Co. on the basis of a total value for the business of approximately $ 109,464, which was said to represent the reconstructed 65 book value of copartnership net assets at January 1, 1941, using the appreciated value of the fixed assets at December 10, 1940. Gifts of like fractional interests in the Anodizing Co. of Jackson, Inc., were also reported in the gift tax returns on the basis of a total value of approximately $ 10,935. None of the gift tax returns showed any tax due.After the new partnership agreement of January 3, 1941, was executed investment accounts and drawing accounts175 were set up in the books of the company for each of the 14 alleged partners. Thereafter entries were made on June 1 and December 1 in the drawing accounts of proportional interests in the earnings of the business. Checks for those amounts were issued to each of the 14 alleged partners.Michner Plating Co. does various types of metal plating, such as cadmium, zinc, copper, brass, etc. It occupies about 15,000 square feet of floor space. Its assets consist of tanks, hoists, steam boilers, generators, and other necessary equipment. This equipment was reported in a partnership return filed by the company for 1941 as having a cost basis of $ 29,556.69 for depreciation purposes. Approximately $ 15,000 worth of solutions are used annually. Salaries and wages for 1941 amounted to $ 33,869.27. The company's 1941 return showed a gross income of $ 265,817.20 and a net income of $ 178,095.16. It showed the "Partners' Shares of Income and Credits" as follows:SCHEDULE J -- PARTNERS' SHARES OF INCOME AND CREDITSOrdinary netEarnedIncomeIncome1. Name and address of each partner:(a) Joseph Michner,Jackson,Mich$ 28,554.37$ 5,710.87(b) Lottie Michner""15,154.693,030.94(c) Elsie Michner""13,698.472,739.69(d) Walter Michner""23,819.104,763.82(e) Marie Michner""19,471.543,894.31(f) Camiel Thorrez""7,739.701,547.94(g) Flavia Thorrez""7,739.70(h) Albert Thorrez""7,739.70(i) Henry Thorrez""7,739.70(j) Morris Thorrez""7,739.70(k) E. A. Forner""9,674.621,934.92(l) Veda Forner""9,674.63(m) Lorraine Forner""9,674.62(n) Louise Forner""9,674.62Totals$ 178,095.16$ 23,622.49176 All of the 14 alleged partners filed separate returns for 1941 in which they each reported his or her distributable share of the partnership earnings, computed in accordance with the partnership agreement. The respondent has determined in his deficiency notices herein that petitioners are taxable under section 22 (a) on all of the partnership's earnings, reduced by wages paid to Lottie Michner and some others for services performed.66 The Michner Family.Petitioner Joseph Michner has spent most of his working life in the metal plating business. He started working for Chromium Plating Corporation in 1930. His wife Lottie was already working for that company. They worked together there doing about the same tasks until 1936, when Joseph Michner, Camiel Thorrez, and John Piniewski organized the Michner Plating Co. Lottie furnished one-half of the $ 2,000 which Joseph Michner contributed to the business at that time. Lottie began working for Michner Plating Co. when it was first organized and has continued to do so up to the present time. She has always received pay for her services at a regular rate of compensation. She was instrumental in having her son, Walter Michner, 177 admitted to the partnership in 1940. She also urged from time to time that she herself be made a partner, but the other partners would not consent to a further dilution of their interests in the business. They insisted that if Lottie was to be admitted to the partnership they should be permitted to "bring in" their wives and children, as was finally done.Of the funds which Lottie received from the partnership, some were used to pay income taxes, some were put into a house which she and Joseph Michner purchased, some were invested in war bonds, some in another metal plating business, known as Hillsdale Plating Co., and some were deposited in savings accounts.Elsie Michner, the daughter of Joseph, was a minor on January 3, 1941. She was born on February 1, 1920.Walter Michner began working for the Michner Plating Co. when it was organized in 1936 and has continued to do so up to the present time. He was married to Marie Thorrez, a daughter of Camiel Thorrez, in May 1940. Marie worked at the plant occasionally before her children were born and was paid for her services. She has two children who were of the ages of about 2 1/2 years and 15 months when these proceedings were heard178 in September 1944. She and her husband, Walter Michner, have two joint bank accounts. With the money which she received from the partnership she purchased war bonds in her and her husband's joint names, helped him buy a home, paid income taxes, made an investment in Hillsdale Plating Co., and made deposits in savings accounts.The Thorrez Family.Petitioner Camiel Thorrez was an inactive partner in Michner Plating Co. He was president of Thorrez & Maes Manufacturing Co., which furnished Michner Plating Co. with a considerable part of its business. Neither his wife, Flavia, nor any of his sons, Albert, Henry, and Morris, ever performed any services for Michner Plating Co. 67 Two of the sons are now in the military service and one is regularly employed at Thorrez & Maes Manufacturing Co. With the money received from Michner Plating Co. they and their mother paid income taxes, bought war bonds, made deposits in savings accounts, and invested in a business known as Ace Screw Products. That company was a customer of Thorrez & Maes Manufacturing Co.The Forner Family.Petitioner Edward A. Forner became a partner in Michner Plating Co. in 1938 when the partnership took179 over the assets of Chromium Plating Corporation, in which he owned a half interest. He, like Camiel Thorrez, was an inactive partner. Neither his wife nor his daughters ever performed any services of note on behalf of the partnership. The daughters are twins and were 16 years of age in 1941. Some of the funds which the wife and daughters received from the partnership were loaned to petitioner Forner (these loans were later repaid with interest), some were invested in war bonds, building and loan associations, and real estate, and some were used to purchase cashier's checks. The Forners had no bank account and kept large amounts of cash and securities in their home.OPINION.Petitioners' contentions are that after the effective date of the execution of the partnership agreement of January 3, 1941, the business of Michner Plating Co. was conducted as a partnership consisting of the 14 members, including themselves, their wives, and minor children. They contend that their wives and children are entitled to full membership in the partnership because of their contributions of undivided interests in the assets of the business which petitioners allegedly transferred to them as bona180 fide gifts in anticipation of the organization of the partnership. The respondent has determined that petitioners themselves were the only partners in the business and that they are taxable individually on their proportionate share of the profits.We think that the respondent's determination must be sustained, evidence shows plainly that the purpose of petitioners was not to make completed gifts of severable interests in the assets of the business to the wives and children for their own use. The gifts, if such they could be called, were so restricted in their use and enjoyment that in effect all that the wives and children could ever receive was shares of the distributable profits of the business. They could not dispose of their alleged interests in the assets without first offering them to the other partners at their appraised value and they could not dispose of them to any outsider except upon approval of the partners 68 Thus the partners were in a position to prevent any disposition of such interests by refusing to purchase them themselves and refusing to approve a sale to any outsider. It is not clear just what was to become of the interest of any deceased partner, since181 their executors were to be under the same restraint in disposing of the interests as were the partners themselves.Although the assets of the business consisted of real estate of considerable value, there was no conveyance by title of any interest in the real estate to any of the wives and children.Under the terms of the so-called partnership agreement of January 3, 1941, petitioners were to continue in complete control of the business. The wives and children were to have no voice in its management or policies and could not bind the partnership by any of their acts. Their sole function was to receive whatever profits of the business might be determined by petitioners to be distributable to them.In order to have a valid business partnership there must be a contribution by all the members of either services or capital. ; . Except for one of the wives, Lottie Michner, none of the wives or children performed any services of note. She had worked at the business regularly from its beginning in 1936. She also furnished one-half of the $ 2,000182 capital originally contributed by her husband, Joseph Michner. It is not clear whether she gave this money to her husband, or loaned it to him, or paid it in to the company on her own behalf. On being asked if she loaned him the money, Joseph Michner testified: "She didn't loan me the thousand dollars; she just gave it to me. * * * she had idea that some day she was going to be partner."The evidence is that Lottie Michner was paid regular compensation for all of her services on behalf of the partnership, and no claim is made that her pay was not commensurate with the value of such services. She had no part in the management of the business.The evidence shows further that the admission of Lottie's son, Walter Michner, as a partner, for a consideration much less than the value of his one-fourth interest, was at her insistence and, for all that is shown, may have exhausted whatever claim she had to a proprietary interest in the business. It is significant that later the other partners refused to consent to her coming in as an equal partner with them. Joseph Michner testified "they let me take my wife in if I let them take their wives in, and family."If the business of Michner183 Plating Co. had been operated by Joseph Michner as a sole proprietorship and he had undertaken to make his wife an equal partner, claim for recognition of the partnership might be made on the reasoning of cases like , but that is not the situation. Lottie Michner's claim to membership has 69 the same basis as that of the other wives and children; that is, the alleged gift to her of an undivided interest in the partnership assets and the partnership agreement itself. There was never any recognition by the partners, and in fact there was a denial by them, that she had any other proprietary rights or interest in the business.We do not think it can be said that the wives and children contributed any capital of their own. The alleged gifts to them by petitioners of undivided interests in the assets fail for lack of intention on the part of petitioners to make completed gifts to them of such interests. The real intention of the petitioners was to create a partnership through which the profits of the business might be divided among themselves and their wives and children so as to reduce taxes. We think that they failed184 both in creating a bona fide business partnership and in making the completed gifts upon which the partnership was dependent. See ; ; ; certiorari denied, ; ; certiorari denied, ; ; certiorari denied, ; ; affd. (C. C. A., 3d Cir.), ; ; affd. (C. C. A., 6th Cir.), ; ; affd. (C. C. A., 8th Cir.), .We think that the respondent has correctly determined that petitioners are the real partners in Michner Plating Co. 185 and that they are taxable on all of its earnings for the year involved.Decisions will be entered for the respondent. MELLOTT; OPPERMellott, J., concurring: Notwithstanding the many cases which have been decided involving claimed family partnerships, the line of demarcation between those in which such status has been recognized for tax purposes and those in which it has not been recognized is not clear. In the absence of pronouncement by the Supreme Court upon the subject, the judges of the various Circuit Courts of Appeal and of this Court have striven to find the correct rule. The result has not been entirely satisfactory, as is indicated by the divided opinion in this case. At the risk of increasing, rather than dispelling the fog of uncertainty, I respectfully state some of my views.Under the Revenue Act of 1917 tax was imposed directly upon the partnership. (40 Stat. 300, 303.) However, since 1918 the revenue 70 acts 1 have recognized the basic principle of partnership law: That a partnership is not, in any true sense, a separate entity, but, paraphrasing the language of Chancellor Kent, is the result of a contract of two or more competent persons to place186 their money, effects, labor, and skill, or some or all of them, in lawful commerce or business and to divide the profits and bear the losses in certain proportions. Cf. . Thus since 1918 each of the revenue acts has required what is usually spoken of as an "information" return and since 1921 each act has stated that "individuals carrying on business in partnership shall be liable for income tax only in their individual capacity."Under the Uniform Partnership Law, adopted in many of the states, business is a very comprehensive term, including "every trade, occupation or profession." (See, e. g., New York Partnership Law, Consolidated Laws, ch. 39.) Without pausing to cite authorities, it may be stated that this is the view which has generally been taken of a partnership under the revenue laws.In most states a187 partnership may now exist among members of a family, including husband and wife, although at common law a husband and wife could not enter into such a relationship with each other. An infant's contract of partnership is voidable; and if he affirms after attaining majority he will be bound. Whether one of tender years, purporting to have signed such a contract personally rather than through a guardian, as seems to have been the situation in the cases now before us, should not for that reason be considered to be a partner, may be passed. It is a circumstance, however, entitled to some consideration in determining the basic question, viz: Were all of the alleged partners "individuals carrying on business in partnership?"One of the early, yet comparatively recent, cases decided by the Supreme Court is , which has been cited many times. In that case a written agreement confirmatory of a preexisting oral contract was entered into between the taxpayer and his wife, wherein it was acknowledged that she had been and was a full equal partner with him in his one-half interest in the Eagle Laundry Co., entitled to share 188 equally with him in the profits and obligated to bear equally any losses. The wife took no part in the management of the business and made no contribution to its capital.In response to a contention by the taxpayer that the assignment to his wife was of one-half of the "corpus" of his interest and that this "corpus" produced the income in question, 2 the Court said:71 The characterization does not aid the contention. That which produced the income was not Mr. Leininger's individual interest in the firm, but the firm enterprise itself, that is, the capital of the firm and the labor and skill of its members employed in combination through the partnership relation in the conduct of the partnership business. There was no transfer of the corpus of the partnership property to a new firm with a consequent readjustment of rights in that property and management. If it be assumed that Mrs. Leininger became the beneficial owner of one-half of the income which her husband received from the firm enterprise, it is still true that he, and not she, was the member of the firm and that she had only a derivative interest. [Emphasis supplied.]189 In some of the cases decided since the Leininger case the emphasis has been placed solely upon the portion quoted above following the portion which I have taken the liberty of emphasizing. Thus the case has sometimes been construed to apply only to the situation adequately dealt with by the Court previously in , and discussed by it in the next subdivision of its opinion. Without expressing disagreement with this view, it seems to be entirely proper to consider in each case not only whether an assignment of an interest in the business had been made, but also whether the assignee had actually engaged in a firm enterprise -- i. e., combined with others in the employment of the capital of the firm and the labor and skill of its members in the conduct of the partnership business. Under the present facts it is clear that the wives and children (with the exception of the one or two who worked in the business) furnished neither labor nor skill and that a substantial part of the income resulted solely from the labor and skill of their husbands and fathers. This brings us, then, to one of the tests which has sometimes been190 applied and which for want of a better term may be referred to as "personal service."Numerous cases have been decided in which the existence of a partnership for income tax purposes has been denied because the income was derived, largely, if not exclusively, from the personal earnings of the husband. In this category are attorney fees ( ); engineers' fees ( ); income from general insurance and real estate business ( ); commissions for writing insurance ( ); and commissions for selling shoes to dealers ( ; affd., (C. C. A., 8th Cir.). The difficulty is not so much in recognizing and applying this rule in appropriate cases. (But see .) The fallacy lies in adopting it as a postulate or major premise from which to start. 191 In other words, the fact that the particular income under consideration may not be from practicing a profession 72 or of the type mentioned in the cited cases, should not be accepted as a segment of a mold in which all partnership cases may be cast.To illustrate the thought which I have endeavored to bring out: Assume, e. g., a young graduate dentist, unable, for lack of finances, to establish himself in business. Recently married to one who has $ 10,000, the amount is put into fixtures and equipment under an arrangement to divide the profits. Shall it be said that no partnership existed because the income was derived solely from extracting and treating teeth? The answer may be suggested by the reasoning of the court in ; but cf. (estate tax). Whether it is correct is not now before us and is important only in examining one of the facets of the problem. Another, although not precisely like it, is the more familiar case where capital is essential (as in the plating business, which we have before us) but the skill of the guiding192 spirit is obviously the source of much of the income. The facts need not be repeated; but it is clear that capital played a less important part in the production of income than the skill of the taxpayers.Whether a more nearly correct answer to the problem posed could be reached by applying the rationale of , et seq., has not been suggested by either party. In that case it was obvious the wife had made a substantial contribution to the capital of the business. The record did not contain facts from which the profits of the business allocable to the wife could be determined with exactness. Nevertheless we felt it incumbent upon us "to determine the extent thereof as best we may on such facts as we do have." We concluded that an allocation of 75 percent to the husband and 25 percent to the wife was reasonable and proper. Perhaps some such allocation could be made in the instant cases although it would of necessity be a mere approximation. Inferentially the Circuit Court of Appeals for the Eighth Circuit suggested such an allocation in the Doll case, supra, pointing out that the criterion for determining income193 tax liability is the "possession of attributes of ownership by the taxpayer." However, the petitioners should have assumed their burden of showing how much of the income was derived from capital and how much from the labor and skill of the active partners; but they have made no effort to do so.Another segment of the mold, which some of the decided cases may tend to overemphasize, is whether a gift has actually been made by the one who established or breathed life into the business -- usually, as in the cases at bar, the husband and father. Thus in the nine cases reported in the last bound volume of our reports, 3 T. C., which will be referred to seriatim, as well as in cases subsequently decided, including the present one, the circumstances surrounding the making of the 73 alleged gifts have been referred to at length. In the Tower case 3 it was held that there had been no unconditional gift by the husband to the wife of shares of stock in a corporation largely owned by him. The transfer had been conditioned upon the wife placing the corporate assets, which the shares represented, in a new partnership to be established by the husband, his wife and an individual who 194 had owned 10 percent of the stock. The Circuit Court of Appeals for the Sixth Circuit, one judge dissenting, held that the gift was "both valid and complete" and that there was "no evidence upon which to base a conclusion that either the gift of corporate shares to the wife, or the organization of the partnership, was unreal and a mere artifice." Accordingly it reversed our holding that the income of the business was taxable in toto to the husband. ( .The next case was the Lusthaus case, 4 in which the husband undertook to vest one-half of his interest in two furniture stores in his wife, approximately half through a gift and half by purchase, the purchase being evidenced by a promissory note. Citing the Doll, Tower, and Schroder cases, supra, it was held that, even though the arrangement constituted a valid partnership under the laws of the state of domicile, 195 it should not be given recognition for Federal income tax purposes. The Circuit Court of Appeals for the Third Circuit affirmed, although Judge Fake filed a vigorous dissent ( , basing its affirmance partially upon . In answer to the taxpayer's assertion that error had been committed by the Tax Court, the court pointed out that the cases 5 "hold that the status must be genuine, with a change in economic interest." It held that the circumstances surrounding the alleged gift of $ 50,000 could be construed as indicating that the taxpayer "had not divested himself irrevocably of the subject matter of the gift." Whether the Tower and the Lusthaus decisions are in conflict with each other is not within our province and no opinion on that subject need be expressed.196 In the Lowry case 6 the taxpayers (Lowry and Sligh) transferred to their wives a portion of the stock of a furniture manufacturing company, most of the stock of which was owned by them. The corporation was then dissolved and an agreement was executed by the four, the husbands being designated general partners and their wives limited partners, the property of the corporation being transferred to the partnership. It was held that the wives had not received from 74 their respective husbands "a complete economic interest in the portions of the property which purportedly went to them out of the corporation, and from the wives into the partnership." One of the circumstances relied upon was that the gifts had been made with full understanding that a plan devised by the husbands would be carried out which restricted the wives' interests and required them to be limited partners rather than general partners, thereby preventing them from becoming absolute owners.197 In the Lorenz case 7 the taxpayer undertook to make a gift to his wife of a 50 percent interest in the tangible assets of an equipment company. It was pointed out that the "petitioner had not divested himself * * of the chief attribute of ownership of interests in property, namely, control over income." Many of the outstanding cases were analyzed and it was held that the facts failed to show that the wife exercised any control over the subject matter of the alleged gift to her. The Circuit Court of Appeals for the Sixth Circuit affirmed per curiam, partially on the authority of .In the Scherer case 8 the owner of a profitable manufacturing business transferred to his wife, individually and as trustee for several named children, five-sixths of his interest. Although much of the success of the business was attributable to his ability, it was held, following ,198 , and other cases, including , simultaneously promulgated, that the husband and father was engaged in a mercantile or manufacturing business and that he had made valid and completed gifts to his wife, individually and as trustee.Without criticising or attempting to justify the soundness of the conclusion reached, this circumstance may be alluded to. The Commissioner had determined very substantial deficiencies in gift tax in connection with the gifts which had been made and one of the issues submitted for determination was the value of the property transferred. In the income tax case, submitted contemporaneously, he was contending not that valid gifts had not been made, but that the income was taxable to the petitioner under the rationale of the Clifford case, supra (footnote 5). The inconsistency of the respondent's 199 contentions in the gift tax case and in the income tax case furnished at least a modicum of justification for adopting the postulate that valid completed gifts had been made, especially in view of the fact that he was not contending otherwise.In the Johnston case 9 the wife gave her husband an unsecured noninterest-bearing demand note, ostensibly in payment for one-half of 75 his one-half interest in a partnership. A new partnership was then formed, which took over all the assets of the old and assumed its liabilities. The price paid by the wife was probably inadequate; but that was thought to be neutral, since the excess constituted a gift to her by her husband. It was held that the Commissioner erred in including all of the income from the 50 percent interest in the partnership in the taxpayer's income.In the Zukaitis case 10 petitioner and his wife, both before and after marriage, had jointly conducted a merchandising business. 200 The business was carried on in the name of the husband. The parties executed a partnership agreement, the purpose of which was to make the wife an equal partner with the husband. It was held that, notwithstanding the fact husband and wife partnerships were not fully recognized under the laws of the state of domicile, nevertheless the wife, after the execution of the agreement, was entitled to one-half of the earnings of the business and that the husband was taxable only on the other half.In the Smith case 11 petitioner executed a deed of gift to an undivided one-half interest in his lumber business. By accepting the gift the wife assumed equal and joint liability with her husband for the payment of all his debts and obligations. They then entered into a partnership agreement for the purpose of engaging in the lumber business. The deed of gift was held to be adequate to pass title to an undivided one-half of the assets of the business and the201 husband was held to be taxable upon only one-half of the income derived from its operation.In the Argo case 12 the husband, an electrical engineer, undertook, by an oral agreement with his wife and through instructions to his bookkeeper, to divide the assets of a corporation, which had been distributed to him as its sole stockholder, among the members of the family. Decision that petitioner was taxable upon all of the income, notwithstanding the fact that he may have made bona fide gifts to his wife and children, was predicated largely upon the fact that the earnings of the business "were due mainly, though not entirely, to the personal activities and abilities of the petitioner as an electrical engineer under the principle applied in Earp v. Jones, * " cited supra, and other cases.202 The conclusion reached here may be contrary to that reached in the Scherer case; but it does not seem to be contrary to any of the other cases. The Argo case definitely supports the present decision. Whether the Scherer case and the other cases mentioned by Judge Black in his dissenting opinion "set a pattern" for all future cases, is 76 debatable. Stare decisis, as the Supreme Court pointed out in , "is a principle of policy and not a mechanical formula for adherence to the latest decision, however recent and questionable, when such adherence involves collision with a prior doctrine more embracing in its scope, intrinsically sounder, and verified by experience." If, therefore, the Scherer case can be construed as laying down a principle of law to be applied in resolving the difficult problem of fact arising in family partnership cases -- which is doubtful -- then perhaps it should be overruled. I view it, however, purely as a decision upon its facts. In that view, the possibility that it may have been contrary to the basic principle of Lucas v. Earl need not now disturb203 us.Some of my associates, for whose opinions I have the highest regard, seem to regard the cases as establishing the principle that if gifts of capital are made, followed by the execution of a document labeled a partnership agreement, the income is thereafter divisible unless the business is wholly "personal service." That, it seems to me, is an unsound approach. The question always is: "Were the individuals actually engaged in carrying on business in partnership?" It can not be answered in every instance simply by looking at the capital investment. Take for example the minor daughter of the Michner's, Elsie, in the case at bar. She was given an undivided one-third of the 25 percent interest of her father in the assets of the firm, the total value of which, as set out in the dissenting opinion of Judge Disney, was $ 109,464. Thus her interest in the assets was $ 9,122. During the taxable year she received $ 13,698.47. It taxes the credulity of the triers of facts to believe that Elsie's capital, donated to her by her father, earned 150 percent per annum. It is far more reasonable to assume, as I think the facts clearly indicate, that a substantial portion of the amount204 resulted from the labor and skill of her father. In that view, , requires that the major portion of the income be taxed to him.My dissenting brethren are correct in their view that a citizen has a clear right to make a gift of property to his wife and children and to engage with them in "carrying on business in partnership." His motive, even, is unimportant. But, while a taxpayer may assign capital to members of his family and permit them to have its fruits, he may not, through that guise, assign to them, tax-free, the income resulting from his own labor, skill, and industry. That, I am convinced by the record, is what occurred in the instant case. The suggestion that the taxpayers here, under the rationale of , may cast upon respondent the burden of proving how much of the income resulted from the capital investments and how much resulted from the labor and skill of the taxpayers is not sound. Respondent 77 determined that the income was earned by the taxpayers. They have not proved otherwise. I therefore concur in the result reached by the 205 majority.Opper, J., concurring: If we are not to be misled by mere terminology, it seems to me the petitioners here did no more than was done by the taxpayer with equal lack of success in . There the business conducted was the operation of a laundry, and I think we may safely assume that the partnership assets included a physical plant. The assignment relied upon was of a part of the taxpayer's "interest in the partnership," from which it was contended "that the assignment to his wife was of one-half of the 'corpus' of his interest and that this 'corpus' produced the income in question." As to this the Supreme Court commented: * * The characterization does not aid the contention. That which produced the income was not Mr. Leininger's individual interest in the firm, but the firm enterprise itself, that is, the capital of the firm and the labor and skill of its members employed in combination through the partnership relation in the conduct of the partnership business. * * In this case the agreement of the parties provides: * * It is further agreed that if any of the parties hereto [petitioners] should make206 such transfers of portions of their partnership interests as has been heretofore agreed upon, such transfers shall be made with the understanding and subject to the condition that the active control, operation and management of the said partnership shall remain in the parties hereto and although such transfers shall constitute outright transfers and unconditional transfers of interests in the assets, income and liabilities of said co-partnership, such transfers shall only constitute transfers of interest in the assets, income and liabilities in said co-partnership, but shall not constitute transfers of shares in the control, operation or management of the partnership * .That envisages more of an agreement to exclude the wives and children from the partnership rather than one treating them as "individuals carrying on business in partnership." Sec. 181, I. R. C.It is difficult for me to see that each of these petitioners has done any more by the formal agreement with his copartners than Leininger could and did do without it. Very probably the wife acquired rights under the agreement in the Leininger case which were enforceable against her husband as to both "corpus" and 207 income, 1 as I have no doubt that the wives and children have secured here. But they are derivative rights, and do not solve the familiar problem exemplified by , of the true source of the income, and hence 78 of whose income it was for purposes of imposing the tax burden. .VAN FOSSAN; BLACK; DISNEYVan Fossan, J., dissenting: Convinced as I am that the evidence in the instant cases demonstrates that valid, legal gifts of property were made; that under the law a minor may enter into a partnership relationship; 208 that a bona fide partnership was contracted among the parties, each contributing capital; that this is not a case of mere assignment of income; and believing that, despite the need for revenue in the form of taxes, certain basic principles of partnership law still stand, I respectfully dissent.Black, J., dissenting: In considering an issue of the kind which we have to decide in the instant case, it seems to me that there are certain fundamentals which we might well take into account. Among these fundamentals, as I view them, are: We live in a free country where a man can do with his property as he pleases so long as it is done in pursuance of a lawful purpose -- he can either give it away or he can keep it. If he decides to give away part of his property, he may lawfully give it to his wife and children, the most natural objects of his bounty.The majority opinion in the instant case is written around the premise that petitioners did not make completed gifts of part of their interests in Michner Plating Co. to their respective wives and children. It seems to me that, in the light of the undisputed facts which are in the record, this holding of the majority is altogether untenable. 209 Whether a completed gift is made in a given case of course depends upon the facts which are present, just the same as most other tax cases depend upon their facts. But I wish to emphasize in this dissent that whether or not a gift has been made is not a pure question of fact, such as what is the value of a given piece of property, or whether a debt became worthless in a certain year, or whether salaries paid officers and employees by a corporation are reasonable. These latter are, as I view them, pure questions of fact. But whether a gift has been made involves questions of substantive law as well as of fact.A well known and leading case which discusses the elements necessary to a completed gift is . In holding that there were no completed gifts in the instant case, I fear the majority opinion has given scant attention to the principles of law laid down by the court in Edson v. Lucas.What are the facts in the instant case which show that petitioners did make valid and completed gifts to their respective wives and children? First of all, on January 2, 1941, the four petitioners herein executed 79 210 a formal written agreement in which they proposed to give their respective wives and children certain proportions of their interests in the Michner Plating Co., which was then being operated as a partnership by the four individuals who are petitioners here. This agreement is in the record and, while it is entirely too lengthy to incorporate in full in this dissenting opinion, I think it is correct to say that it is a well drawn and well considered legal document and, in connection with the written partnership agreement which was executed on the following day, fully accomplished the purposes for which it was intended. See . The partnership agreement which was entered into by petitioners and their wives and children on January 3, 1941, is in the record. It is a well integrated and well drawn partnership agreement, in my judgment. The first paragraph of the agreement states the nature of the partnership and gives the names of its members and provides in part as follows:Now, Therefore, all the aforesaid parties hereby enter into a co-partnership agreement for the purpose of carrying on a general metal plating211 business in the City of Jackson aforesaid under the style and firm name of Michner Plating Company, being a successor to the co-partnership heretofore carried on under that style and firm name by the parties of the first part herein named and the names of the members of this co-partnership and their undivided percentage interests are as follows: [Here are set out the names of the respective partners and their proportionate interests.]Paragraph 2 of the agreement provides for the term of the partnership and states:The partnership as herein formed shall commence on the 4th day of January, A. D. 1941, and shall continue for a period of twenty (20) years or for such lesser or greater period as the parties hereto may specifically agree upon at some later date.Paragraph 5 of the agreement states the capital arrangement of the partnership as follows:As a contribution to the capital of said partnership, the parties hereto shall contribute their respective undivided percentage interests as hereinbefore set forth in the assets of the Michner Plating Company except as may hereinafter be specifically provided, including all of the machinery, tools, equipment and appliances of said business. 212 Paragraph 9 of the agreement provides for the sharing of profits and losses, as follows:Each partner shall share proportionately to their respective interests in all of the profits and losses that may arise out of or be incurred in the transaction of said partnership operations, except that the salaries drawn and the bonuses received by the said Joseph Michner and the said Walter Michner in accordance with the agreement herein contained, shall not be charged up against their respective shares of said profits, but shall be considered as additional compensation for services rendered.80 Paragraph 16 of the agreement provides for the distribution of assets on the dissolution of the partnership, as follows:In case of a termination of this partnership from whatever cause except as hereinbefore stated, the parties hereto agree that they will make a true and just final accounting of all matters relating to said business and in all cases duly adjust the same. After all of the affairs of the partnership are adjusted and its debts paid off and discharged, then all the stock as well as the gain or increase thereof which shall appear to be remaining either in money, goods, fixtures, 213 debts or otherwise, shall be divided between the parties hereto in accordance with their proportionate interests.Paragraph 17 of the agreement refers to the distribution of profits and reads as follows:Semi-annually upon the first day of June and upon the first day of December during the continuance of this partnership, in the event that the books of said partnership disclose a balance of funds over and above the total of all outstanding claims and the amount of the original capital, then in such an event the amount of profits of said business as shown by the books shall be divided between the parties hereto in accordance with their proportionate interests and withdrawn from said business unless the parties mutually agree to leave such funds in such business for the good of the business.There are other provisions in the partnership agreement not quoted above for the reason that to do so would make this dissenting opinion too long. The provisions quoted will, I think, make it perfectly plain that the partnership agreement was a well integrated and well drawn document.After the formation of the new partnership as evidenced by the foregoing partnership agreement dated January 3, 214 1941, drawing accounts and investment accounts for each of the fourteen partners were set up on the books of the company. Division of profits was made by checks of the company payable to each of the fourteen partners in accordance with his proportionate interest. Public recognition was given to the partnership. Dun & Bradstreet was notified of the new partnership and its membership. The bank where the company did business was told about it as well as several factories with which the company did business. In July of 1941 a suit was started in the Circuit Court for the County of Ottawa wherein the fourteen members were named as party plaintiffs. Yet in the face of all these undisputed facts the majority opinion says there were no completed gifts from petitioners to their respective wives and children. Therefore, says the majority opinion, the latter had nothing with which they could make a capital contribution to the business.Suppose we had here a gift tax case instead of an income tax case, does any one suppose that the Commissioner would be contending that the gift which petitioners made their wives and children was incomplete? Certainly not. He would be taxing the gift in215 the year it was 81 made, 1941, as would be his duty. See .I do not think the gifts were rendered in the least invalid by that clause in the agreement executed January 2, 1941, by the four petitioners here, who were then the four partners composing the firm of Michner Plating Co., which provided for their continued management of the new partnership which was about to be organized. That clause reads in part as follows:It is further mutually understood and agreed that the parties hereto, having at the present time the control and management of said partnership, shall retain such control and management of said partnership regardless whether such aforedescribed transfers are made or not. * * The partnership agreement of January 3, 1941, signed by all the fourteen partners, fully recognized this continued management and control of the four former partners provided for in the above quoted paragraph. This provision for management and control in no wise invalidated the new partnership. On this point see , and .216 In arriving at its conclusion that what was done in the instant case by petitioners amounted to a mere assignment by them of a part of their partnership profits to their wives and children, the majority opinion cites only one Supreme Court case, . It seems to me that Burnet v. Leininger is altogether inapplicable to the facts in the instant case. In that case the Supreme Court affirmed a decision of the Board of Tax Appeals reported at . The partnership there involved was the Eagle Laundry Co. in which Charles P. Leininger owned a one-half interest and another partner owned the other one-half interest. Leininger undertook to make his wife a subpartner in his one-half interest without making her a full partner in the Eagle Laundry Co. This fact is shown in the following quotation taken from our opinion in that case:It is observed from the testimony in the case that the books and records of the Eagle Laundry Co., the partnership, contained no entry reflecting part ownership by the wife or any payments to her or for her account. Partnership returns for the taxable217 years 1921, 1922, and 1923 were sworn to by petitioner and state that the names of the partners are C. P. Leininger and M. T. Monaghan, each owning one-half. We note further that Mrs. Leininger contributed neither capital nor services to the partnership and that all checks covering profits were made to the husband and by him deposited in a joint account. * On these facts we held that Mrs. Leininger was at most a subpartner in her husband's one-half interest in the Eagle Laundry and that this amounted only to an assignment of income and that such an assignment was ineffective to relieve the assignor, Leininger, from payment of tax on the income thus assigned. This view was upheld by 82 the Supreme Court, Chief Justice Hughes saying, among other things, in his opinion, as follows:* * * There was no transfer of the corpus of the partnership property to a new firm with a consequent readjustment of rights in that property and management. If it be assumed that Mrs. Leininger became the beneficial owner of one-half of the income which her husband received from the firm enterprise, it is still true that he, and not she, was the member of the firm and that she had only218 a derivative interest. [Italics supplied.]In the instant case we have no such situation as the Supreme Court pointed out was present in the Leininger case. Here we have the creation of a new partnership with recognition of the wives and children as full partners, entitled to share in the profits and liable for the losses. There was a transfer by the old partnership of its assets to the new partnership, a thing which Chief Justice Hughes pointed out was not present in the Leininger case.The assignment of income doctrine of , and , upon which the Leininger case was decided, would be present in the instant case if, for example, Joseph Michner and Walter Michner, who were paid $ 250 and $ 200 a month, respectively, plus bonuses, as managing partners, had assigned part of their earnings to their wives. Such an assignment would have been ineffective under Burnet v. Leininger and Lucas v. Earl to relieve them from paying income tax on the part of their compensation thus assigned. But no such assignments were made by them. They 219 returned as their individual income the salaries and bonuses which were paid them by the partnership for their services. The balance of the partnership profits, after the deduction of salaries and bonuses paid to Joseph and Walter Michner and other expenses of the firm, was divided among the respective partners, and each returned his share of the profits for taxation.Sections 181 and 182 of the Internal Revenue Code require each individual who is a member of a partnership to return for taxation his share of the net income of the partnership, whether it is distributed to him or not. These statutes have been complied with in the instant case, and I do not see where the law requires more. If it be said that to tax partnership income in this manner where there is a valid family partnership, as I earnestly believe there is here, loses revenue to the Federal Government, then the remedy lies with Congress and not the Tax Court. Congress could, of course, tax partnership income as a unit, as it does corporation income, but it has not done so. Therefore, I see no legal authority to tax all the income of a valid partnership such as we have here to only four of the partners as the majority220 opinion undertakes to do.Again I must emphasize that this is no mere assignment of income case. This is a case where the property which produced the income 83 has been transferred. It is certainly the well recognized rule that the ownership of property determines the taxability of income. . In considering such a question as we have here, I think we would do well to consider what the Supreme Court said concerning this principle of ownership of property determining the taxability of income in . In that case, among other things, the Court, speaking through Chief Justice Hughes, said:Our decisions in Lucas v. Earl * * * and Burnet v. Leininger * * * are cited. * * * These cases are not in point. The tax here is not upon earnings which are taxed to the one who earns them. * * In the instant case, the tax is upon income as to which, in the general application of the revenue acts, the tax liability attaches to ownership. See ; .221 [Italics supplied.]The Supreme Court, in its later decisions in , and , both of which were assignment of income cases, seems to make it plain that its decision in the Blair case is not overruled.Just about one year ago the Tax Court, after very considerable discussion and consideration, adopted ;; ; and . The Commissioner has published his acquiescence in all four of these decisions. All four of them were referred to by the Sixth Circuit in a footnote to its recent opinion in It was my thought that the adoption of these cases would set a pattern which would enable the Tax Court to reach a fair degree of uniformity in the decision of these family partnership cases where capital is a substantial income-producing factor, and where the partnership earnings222 were not due primarily to personal services as they were in one of the line of cases cited in None of the four cases mentioned above, except that of Felix Zukaitis are even referred to in the majority opinion. The distinction which the majority opinion undertakes to make as to that case is, in my opinion, a very unsubstantial one. It is stated as follows:If the business of Michner Plating Co. had been operated by Joseph Michner as a sole proprietorship and he had undertaken to make his wife an equal partner, claim for recognition of the partnership might be made on the reasoning of cases like , but that is not the situation. * It indeed seems to me a strange principle of law which would recognize the validity of a partnership between husband and wife where the husband was operating a business as a sole proprietorship, as was Zukaitis, and gave his wife a one-half interest and thereupon entered into a partnership agreement with her, and at the same time would refuse to recognize as valid a similar partnership where four partners did the same thing. In other223 words, one can do it and it is legal, but 84 four can not. I must confess that I am unable to grasp the reasoning back of such a distinction. As I have already stated, the majority opinion makes no attempt to distinguish Robert P. Scherer, J. D. Johnston, Jr., and M. W. Smith, Jr., all supra. It is my opinion that the effect of the majority opinion is to overrule all three of those cases without even mentioning them. This, I think, can only make for much confusion and is a most unfortunate situation. I, therefore, respectfully record my dissent.Disney, J., dissenting: Although the majority opinion discusses and is, in effect, based upon a denial of actuality of a partnership, the real question is, of course, whether the petitioners retained, after conveyance to their families, such complete ownership in the assets and business that they should be taxed upon the entire income thereof, instead of only in part. In other words, the gist of this problem is: Is this a case of mere assignment of income, so that under , and other cases to the same effect, the petitioners must224 be viewed as still taxable thereon? The answer depends upon whether or not gifts, completed and to be recognized, were made by them to their families, for that all parties did, with the assets involved, enter into a partnership can hardly be denied, and I understand that the respondent did not so deny. If by the transfers made the petitioners did not merely assign income, error appears in the taxation of the entire amount thereof to the petitioners.The facts here presented are, in substance, that the petitioners owned a large amount of property. The returns filed ascribed to it a value of $ 109,464, including equipment at $ 29,556.69 and assets formerly belonging to a corporation, the Anodizing Co. of Jackson, Inc., of a value of $ 10,935. (The stock of this corporation had belonged to the four petitioners, but had been transferred to their families, the corporation dissolved, and the assets transferred to the partnership.) All of this property was the subject of gifts to the petitioners' families. Though the majority opinion takes the view "that in effect all that the wives and children could ever receive was shares of the distributable profits of the business," the facts show225 that at the termination of the partnership the entire assets thereof must be distributed to the partners in proportion to their respective interests. This is altogether consistent with the transfers made. The agreement of partnership recites that such transfers had been made, and the interest of each of the transferees was set forth in writing. It is further recited that each contributes his share of the assets as a contribution to the capital of the partnership. It is certain. I 85 think, that the transferors could never deny the gift. Particularly as between members of a family, exactitude in form of gift is not required. Though real estate was involved, it is hornbook law that acknowledgement of an instrument is not necessary as between the parties. Likewise, between the parties general description suffices. ; .Had any of the wives, for instance, in case of divorce, or any of the children, been denied ownership of the interest conveyed to them, I have no doubt at all that any court would sustain their claims thereto. 226 Yet, the majority opinion treats the gift as unreal. Such view must be upon the theory that the gift was in some way conditional; yet, reading the law of gifts, we discover that a gift is none the less complete and real because of conditions attached thereto, if ownership is vested in the donee, even though powers, such as agency and even some reservation of proprietary rights are retained by the grantor over the subject matter of the gift.The law on the point is reviewed in 38 C. J. S. on Gifts, pp. 815-817, and need not be set forth here. Gifts have been sustained, though reserving stock dividends for life, ; ; though reserving possession, ; affd., ; ; though reserving the right to pledge the gift, ; ; though donor retained227 legal title in stocks transferred on books of account, . I can see nothing in the facts here presented which indicates that the donees failed to receive title to absolute gifts, or that there were conditions or qualifications inconsistent with the vesting of title. It is true that the grantors were to exercise broad powers in the management of the partnership business, but all such powers are clearly within the category of agency and management, altogether consistent with title in the donees. Provisions as to inability of a partner to dispose of his interest, emphasized by the majority opinion, are of no weight, since it is primary law of partnership that it is a voluntary arrangement and a partner may not by sale of his interest impose a stranger upon his partners; and a gift may provide for inalienability by the donee. 38 C. J. S. 816. Thus, it appears that each of the various members of the petitioners' families had a contractual and enforceable right to a pro rata share of the entire assets conveyed, and not merely to profits of the operation of a partnership.The majority opinion, however, in effect, 228 denies the bona fides of the transfers. If the transfers are valid under the law, enforceable, permanent, how can it logically be maintained that they are not bona fide? 86 No secret arrangements or reservations contradictory of the gifts appear or are relied on. The only possible attack upon the transfers must rest upon the conditions specifically and openly set forth in writing. Those conditions are consistent with vested gifts, and do not invalidate them. The idea of mala fides, therefore, is seen to amount to one that intent to reduce taxes is bad faith. But are we to contradict , and all those cases in which we agree with it, and which in substance inform the taxpayer that he may, by lawful means, minimize his taxes? Are we to say that intent to reduce taxes, by an absolute gift of property, e. g., by deed of a one-half interest in real estate, destroys such deed for tax purposes? This would be, in my view, unconstitutional interference with one's right to dispose of his property. A gift of an interest in a business, including its assets, which interest the donor might sell to another, 229 perhaps for a large sum, is logically in no different category than the mere parcel of real estate above suggested. The majority opinion refuses to recognize such gift, obviously merely because of skepticism as to the good faith, of a permanent and irrevocable conveyance. Yet, here we see that in addition to transferring interests in other assets in business, the petitioners had, so far as the Anodizing Co. of Jackson, Inc., is concerned, owned corporate stock, had transferred it to their families, and the assets thereof had, after dissolution, been transferred to the partnership. Such gift of corporate stock is condemned. So far does the majority opinion go in preventing the disposition of property by gift. The gifts were not subject to revocation. This was no temporary reallocation of family income, but a permanent disposition of property. (Is not the element of "temporary" in the language of , negation of the idea that a permanent division of property may be disregarded. If we had here a revocable transfer, directly or indirectly, or one giving in fact no legal or economic benefit to the donees, clearly230 no completed gift would appear, and therefore no capital contributed to the partnership. But the exact opposite is the fact.)So far as the majority opinion expressly or impliedly relies upon the idea that state laws as to partnership and compliance therewith in this transaction do not bind, we need only remember that the definition of partnership in section 3797 (a) (2) of the Internal Revenue Code is very broad indeed, and that the arrangement between the petitioners and their families falls well within its ambit. In short, under its language there was here a real and recognizable partnership.To say this record shows a mere right in the petitioners' families "to receive whatever profits of the business might be determined by petitioners to be distributable to them," neglects not only the liability 87 of the members of the families for partnership losses, as provided in the articles of partnership, but their receipt as absolute owners of the entire partnership assets upon termination of partnership. I find it impossible to conceive that such a conveyance of extensive assets is a mere conveyance of the right to income, and therefore prohibited.The law of gifts, and partnership, 231 the growth of centuries of jurisprudence, is no mere attenuated subtlety or nicety of the conveyancer's art, but a long traveled road which we might well follow instead of turning aside on a bypath of doubt, uncertainty and deviation from justice. For, if we disregard rules furnishing assistance in determining rights in property and of contract, we appear left with no guide, except our agreement or disagreement that the transaction should be given tax effect. By what other measure shall we then judge? An irrevocable and absolute gift is a very real matter in its financial and economic effect on grantor and grantee, for it transfers property from one to the other. Had it not been for statutory exemptions, a very real gift tax would have been payable by petitioners. Given very real effect in all other branches of law (including gift tax law), why and how then may a gift be considered nil in the law of income taxation?It is no answer to say that, "taken altogether" or "taken as a whole," the transaction of gift and partnership was unreal; for the parts of the whole are real -- long recognized and effective concepts and rules binding the parties. The "taken altogether" idea is 232 a tacit confession that bad faith, in the sense of tax avoidance, is the basis of decision.Also, even if it be considered that through the arrangement made the petitioners' families receive the benefit of income from the petitioners' services to some extent, it is clear that, in so far as he taxes the petitioners upon the entire income produced both by the property transferred and by petitioners' services (two of them were inactive), the Commissioner erred, if the petitioners' families were the owners of property contributing to the production of such income. Believing that they clearly became the owners of such property, I suggest that error has been shown in the determination of deficiency under the principles announced in , in that it is without rational foundation and excessive, unless it is true that there were no gifts made. The petitioners, even though their families get some benefit from their services, may not, with good reason, be taxed upon the entire partnership income, and an error has been committed equally as egregious as might be involved if petitioners escaped some taxation in the process here involved. 233 Where, as here, some services, not from all petitioners, are involved along with large amounts of capital belonging to them and others, it seems to me, there having been not mere conveyance of right to income, but of property contributing 88 at least in large degree thereto, that taxation may with safety follow the long established concepts involved in the law of gifts and of partnership, and impose taxation in accordance with the gifts and partnership agreement with more assured results than by taking counsel of suspicion to the disregard of salutary principles of law. The result here, it appears to me, makes tax evasion out of what at most is tax avoidance through proper exercise of the individual's right to make gifts of his property and to enter into contracts therewith. The income from the property here appears inseparable from any to be ascribed to personal services, and in my opinion it is illogic to say that there is prohibited assignment of income. The question, depending as it does upon the validity of gifts, is not one of fact, but of law, if there is no evidence reasonably sustaining the denial of completed gift, as I think plainly appears. I would hold the 234 Commissioner to be in error, and I therefore respectfully dissent. Footnotes1. Sec. 218 (a), Revenue Acts of 1921, 1924, 1926; sec. 118, Revenue Acts of 1928, 1932, 1934, 1936, and 1938 and the Internal Revenue Code.↩2. See in this connection , and , subsequently decided.↩3. .↩4. .↩5. ; ; ; and .↩6. (on appeal. C. C. A., 6th Cir.).↩7. .↩8. .↩9. .↩10. .↩11. .↩12. (on appeal, C. C. A., 5th Cir.).↩1. "* * * the agreement * * * cannot * * * have amounted to more than an equitable assignment of one-half of what her husband should receive from the partnership * * ." "Equitable Assignment. An assignment which * * will be recognized and enforced in equity." Black's Law Dictionary, 3d Ed.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622376/	GLENN H. CURTISS, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. LENA P. CURTISS, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Curtiss v. CommissionerDocket Nos. 27407, 27408.United States Board of Tax Appeals21 B.T.A. 629; 1930 BTA LEXIS 1820; December 11, 1930, Promulgated 1820 As a result of the reorganization of the Curtiss Aeroplane & Motor Corporation the petitioners received in exchange for each share of preferred stock in the original company one-half share of preferred stock in the Curtiss Aeroplane & Motor Co., and one-half of a certificate of beneficial interest in the Curtiss Assets Co. In 1924 the petitioners sold their certificates of beneficial interest in the Curtiss Assets Co. Held, the latter transaction was one in which gain or loss should be determined under section 204(a)(6), Revenue Act of 1924. P. R. G. Sjorstrom, Esq., and William S. Hammers, Esq., for the petitioners. Arthur H. Murray, Esq., and S. B. Pierson, Esq., for the respondent. BLACK 629 In these proceedings, which have been consolidated for hearing and decision, the petitioners seek a redetermination of their income tax liability for the calendar year 1924, for which year the respondent has determined a deficiency as to Glenn H. Curtiss in the amount of $21,645.65, of which only $4,629.30 is in controversy, and as to Lena P. Curtiss, a deficiency in the amount of $1,811.55. 630 The above mentioned deficiencies1821 are the result of the respondent's refusal to allow as a loss the amount of $37,034.43 alleged by Glenn H. Curtiss to have been sustained in 1924 on the sale by him of 813 certificates of beneficial interest in the Curtiss Assets Co., and the refusal of the respondent to allow to Lena P. Curtiss a loss in the amount of $20,680, alleged to have been sustained by her in 1924 on the sale of 377 certificates of beneficial interest of the Curtiss Assets Co. FINDINGS OF FACT. Glenn H. Curtiss and Lena P. Curtiss were stockholders in the curtiss aeroplane & Motor Corporation, having acquired their stock during the year 1915. On June 30, 1923, the Curtiss Aeroplane & Motor Corporation was reorganized. The plan of this reorganization and the reasons for it, were set out in a circular mailed to all stockholders and dated March 12, 1923, the pertinent portions of which are as follows: Your Corporation now has the following capital stock outstanding: Preferred Stock $5,463,100 (par value) - Common Stock 218,016 no par value shares. It likewise has liabilities secured by mortgages on the Company's property: U.S. Government First Mortgage (secured by the Buffalo Plant and by the Corporation's patents)$552,000.00U.S. Government Second Mortgage (secured by the Buffalo Plant and by the Corporation's patents)300,000.00Purchase Money Mortgage on Curtiss Field, Mineola, N.Y500,000.00Mortgage and accrued interest on Garden City Plant, which is owned by Curtiss Engineering Corporation, the stocks of which this Corporation has agreed to purchase by contract dated Sept. 1, 1919, as supplemented424,701.161,776,701.161822 The Corporation has never declared a dividend on the common stock, and no dividends on the preferred stocks have been paid sonce January 1920. The Corporation has earned no surplus net profits during 1920, 1921 and 1922 and, therefore, it has not been able to set aside sums either for the payment of preferred dividends, or for the preferred stock sinking fund, because dividends and sinking fund payments may be paid only to the extent that there are surplus net profits available for that purpose, as provided by the certificate of incorporation and the laws of New York. The Corporation has among its assets certain aeroplanes and motors acquired after the Armistice from the War Department, together with the parts therefor. It also has a commercial inventory represented by planes, motors and parts manufactured by the Corporation for the purpose of sale for commercial use. In accordance with Schedule A hereto annexed these items as of Dec. 31, 1922, at cost price to the Corporation, less depreciation, total $1,659,941.54. The Corporation likewise owns certain domestic aeroplane patents which in 1917 were subjected, upon the insistence of the Government, to the provisions of1823 a cross license agreement which is administered by the Manufacturers' 631 Aircraft Association. Under this agreement the Corporation was to receive a maximum of $2,000,000. It has already received $434,580. Commencing with May 1, 1923, and thereafter until 1933, the Corporation will receive from the Manufacturers' Aircraft Association royalties at the rate of $175 for every aeroplane manufactured in the United States until the balance of said $2,000,000 maximum payment has been received. At the present time sales are being made of the government and commercial inventories from time to time and moneys are received from the Manufacturers' Aircraft Association. The directors feel that these moneys, although they are properly now being used in connection with the Corporation's manufacturing enterprises, are nevertheless in the nature of a realization or liquidation of capital assets, and in view of the fact that preferred dividends have not been earned or paid for the last three years, they should be set aside for the benefit of the preferred stockholders in such a way that whatever is realized from these assets should be turned over to the preferred stockholders. * 1824 The business of the Corporation is almost wholly manufacturing for the Army and the Navy. This business does not and will not justify the present capitalization of the Corporation. To protect the investment of the preferred stockholders, to enable the Corporation to refund its obligations when due, and assure it of needed working capital, and to afford to the Corporation an opportunity to become a strong manufacturing enterprise by segregating the activities which have nothing to do with its manufacturing functions, the following plan of reorganization has been informally approved by the owners or representatives of owners of a majority in interest of both the preferred and common stock at whose instance the plan is presented to the stockholders. I. CURTISS ASSETS COMPANY. It is proposed to form a new company bearing the name "Curtiss Assets Company" or some similar name (hereinafter called the Assets Company) under the laws of the State of New York or some other state, having a nominal capitalization of no par value stock. The Assets Company will issue its Certificates of Beneficial Interest of an aggregate par value of $2,731,500, being approximately one-half the par1825 value of the outstanding preferred stock of the present Corporation. The stock and Certificates are to be delivered to the present Corporation in consideration of the sale to the Assets Company of the present inventory of aeroplanes, motors and spare parts acquired from the Government, as well as certain of the inventory constructed for the purpose of sale for commercial use substantially as set forth in Schedule A hereto annexed, the aggregate cost of which, less depreciation charged off, as set forth in said schedule, is $1,659,941.54. The present Corporation will also sell to the Assets Company all of said Corporation's rights in all the domestic aeroplane patents owned by it and covered by the above-mentioned cross license agreement with the Manufacturers' Aircraft Association dated July 24, 1917, from which a maximum balance of $1,565,420 may be realized. Thus the present depreciated book value of the inventory and the maximum recovery value of the patents, to be turned over to the Assets Company aggregate $3,225,361.54, for which the Corporation will receive $2,731,500 Certificates of Beneficial Interest and all of the capital stock of the Assets Company. By contract, 1826 the present Corporation will agree to pay all expenses in connection with the inventory so transferred, such as insurance, upkeep, selling, taxes and overhead charges so that the Assets Company will receive net the 632 full cost price to it (substantially as provided in Schedule A hereto annexed) of each unit if the price received therefor be in excess of cost, in which event the present Corporation will retain the excess over cost of the price received to reimburse itself to such extent for its expenses. If the price received be below cost, then the Assets Company will retain the gross amount received. This contract will run for not less than ten years and will be terminable by the Assets Company upon ninety days' notice at any time. Inasmuch as the present Corporation's domestic aeroplane patents are included (together with real and other property of said Corporation) in property mortgaged to the United States Government, the transfer of such patents must be subject to that mortgage. Nevertheless the present Corporation will agree to pay off such mortgages to the Government, when due, and thus permit the Assets Company to retain and distribute, entire, after the mortgages1827 have been paid, the sums received from Manufacturers' Aircraft Association. From time to time as the directors of the Assets Company may determine, sums of money received from the sales of inventory, and (after 1926) from payments from the Manufacturers' Aircraft Association, will be distributed to the holders of said certificates of beneficial interest. Said Certificates in substance will evidence the right of the holders thereof to receive distributions, as aforesaid, from the net amounts realized by the Assets Company from the liquidation of such inventory and from the patents, up to but not exceeding the par value of such Certificates. Although the patents are subject, as aforesaid, to the Government mortgages, the payment of these mortgages will be assumed by the new Aeroplane Company (provided for in the following paragraph), and that Company will undertake to reimburse the Assets Company for payments or other obligations which the Assets Company may incur on account of said mortgages. Said Certificates will be registered and transferable, so far as possible, in the same manner as stock certificates. Distributions will be made to the holders thereof upon surrender of coupons1828 annexed thereto or pursuant to some other method of crediting such payments. Upon the final liquidation of the inventory and receipt of all sums payable in respect of the patent rights as aforesaid, a final distribution will be made to the holders of such certificates (or prior to such final liquidation and payments, in case the full par value of such certificates may theretofore be paid) upon surrender thereof. Although there is the prospect of paying the full par value of such certificates out of the moneys realized from the inventory and patents, in case the net amounts so realized are less than such par value, the Assets Company will not be obligated to make up such deficiency. The Assets Company will not engage in any business other than such as may be necessary or incidental to liquidating the said inventory and collecting payments due from the patents. 2. CURTISS AEROPLANE & MOTOR COMPANY. It is proposed to incorporate a company with the name "Curtiss Aeroplane & Motor Company" or some similar name (hereinafter called the New Aeroplane Company) under the laws of the State of New York or some other state, with a capitalization of $2,731,500 par value (being substantially1829 one-half the par value of the outstanding preferred stock of the present Corporation) Seven Per Cent Preferred Stock, cumulative as to 5% but non-cumulative as to the remaining 2%, said 2%, however, to be payable out of the net profits in any given year before any dividends are paid on the common stock. The preferred stock shall likewise participate equally, share for share, in dividends paid on the common stock until a total of $42.00 per share over and 633 above preferred dividends have been thus distributed, after which time the holders of preferred stock will no longer be entitled to such participation. This provision is intended to afford the holders of the preferred stock of the present Corporation, on which an aggregate of $21.00 per share of cumulative dividends remains unpaid for the reasons above mentioned, an additional participation equal to such accumulated unpaid dividends. The New Aeroplane Company shall also have the right to purchase on the open market or by private sale and retire its said preferred stock at not exceeding the current redemption price out of surplus or net profits. It may call said stock for redemption, in whole or in part, on 60 days' 1830 notice, at any time, $100at per share, plus accrued dividend, plus any part of the above mentioned additional participation of $42 per share which has not previously been paid. The New Aeroplane Company shall likewise issue 218,060 shares (being the number of outstanding shares of common stock of the present Corporation) of no par value common stock. The present Corporation will sell to the New Aeroplane Company all of its assets of whatsoever nature other than those sold to the Assets Company as enumerated above, and will receive therefor all of the $2,731,500 par value, preferred stock and all of the 218,060 shares of common stock of no par value of the New Aeroplane Company. The New Aeroplane Company will assume all of the liabilities of the present Corporation, including the payment of the mortgages to the United States Government which are in part secured by the patents proposed to be transferred to the Assets Company as above described and including obligations of the present Corporation under its contract with the Assets Company above mentioned. 3. EXCHANGE OF STOCK. The preferred stockholders and the holders of voting trust certificates for preferred stock of1831 the present Corporation shall receive, for each $100 share, $50.00 par value of Certificates of Beneficial Interest of the Assets Company, and $50.00 par value of the Preferred Stock of the New Aeroplane Company upon surrender of their certificates of preferred stock or voting trust certificates for preferred stock of the present Corporation, together with a waiver of their rights to accrued dividends, sinking fund payments and any other rights which they may have in connection with said stock. The holders of the common stock and the holders of voting trust certificates for common stock of the present Corporation shall, upon surrender thereof, receive no par value common stock of the New Aeroplane Company, share for share. The above described plan was carried out in the reorganization, substantially as outlined in the circular. The opening balance sheet of the Curtiss Aeroplane & Motor Co. (the new company) as of July 1, 1923, shows: Assets of$5,086,079.85Liabilities of1,476,016.89Net3,610,062.96Common stock1,086,912.96Preferred stock2,523,150.00Total common and preferred stock3,610,062.96634 The opening balance sheet of the1832 new Curtiss Assets Co. as of July 1, 1923, shows: Assets of$2,524,150.00Less set aside for common stock1,000.00Net asset value of certificates of beneficial interest of new corporation2,523,150.00At the date of the reorganization Glenn H. Curtiss owned 1,626 shares of the preferred stock of the Curtiss Aeroplane & Motor Corporation (old company), which cost him $106,548.85, and Lena P. Curtiss owned 1,752 shares of the preferred stock of said corporation, which cost her $131,366. Glenn H. Curtiss, at the date of reorganization, received for his 1,626 shares of preferred stock in the Curtiss Aeroplane & Motor Corporation 813 shares of preferred stock of the Curtiss Aeroplane & Motor Co. of a par value of $100 per share, and 813 certificates of beneficial interest of the Curtiss Assets Co. of a par value of $100 each. Lena P. Curtiss, at the date of reorganization, for the 1,752 shares of preferred stock of the Curtiss Aeroplane & Motor Corporation, received 876 shares of preferred stock of the Curtiss Aeroplane & Motor Co. of a par value of $100 each, and 876 certificates of beneficial interest of the Curtiss Assets Co. of a par value of $100 each. 1833 The cost of each of the two new blocks of stock received by the petitioners was set up on the petitioners' books at exactly one-half of the cost of the original stock, so that the cost of Glenn H. Curtiss' 813 shares of preferred stock in the Curtiss Aeroplane & Motor Co. was set up at $53,274.43, and the cost of his 813 certificates of beneficial interest in the Curtiss Assets Co. was set up at $53,274.43. The cost of Lena P. Curtiss' 876 shares of preferred stock in the Curtiss Aeroplane & Motor Co. was set up at $65,683, and the cost of her 876 certificates of beneficial interest in the Curtiss Assets Co. was set at $65,683. During the year 1924 Glenn H. Curtiss sold 813 certificates of beneficial interest of the Curtiss Assets Co. for $16,240 and Lena P. Curtiss sold 377 certificates of beneficial interest of the Curtiss Assets Co. for $7,540. The certificates of beneficial interest of the Curtiss Assets Co. were first quoted on the New York Curb Exchange during the week of April 25, 1924, at $20 per certificate, and the preferred stock of the Curtiss Aeroplane & Motor Co. was first quoted on the New York Stock Exchange during the week ending February 15, 1924, at $70 per1834 share. No part of the shares of the preferred stock of the Curtiss Aeroplane & Motor Co. received upon the reorganization was disposed of by petitioners during the year 1924. 635 OPINION. BLACK: It is conceded by all parties to this proceeding that the exchange of securities in 1923, which has been fully explained in our findings of fact, falls within the terms of section 202(c)(2) of the Revenue Act of 1921 and was a transaction in which no gain or loss is recognized. It is equally clear that the sale in 1924 by petitioners of certificates of beneficial interest in the Curtiss Assets Co. was one in which gain or loss should be recognized and is governed by section 204(a)(6) of the Revenue Act of 1924, the applicable part of which reads: SEC. 204. (a) The basis for determining the gain or loss from the sale or other disposition of property acquired after February 28, 1913, shall be the cost of such property; except that - * * * (6) If the property was acquired upon an exchange described in subdivision (b), (d), (e), or (f) of section 203, the basis shall be the same as in the case of the property exchanged, decreased in the amount of any money received by the1835 taxpayer and increased in the amount of gain or decreased in the amount of loss to the taxpayer that was recognized upon such exchange under the law applicable to the year in which the exchange was made. * * It is the contention of petitioners that, because the language of the foregoing section says that where there has been an exchange of securities in a reorganization the new securities received shall take the same basis of cost as the old securities surrendered, therefore each share of preferred stock in the new Curtiss Aeroplane & Motor Co. took the same basis as the cost of one share of preferred stock in the old Curtiss Aeroplane & Motor Corporation and each beneficial interest certificate in the new Curtiss Assets Co. took the same basis as the cost of one share of preferred stock in the old Curtiss Aeroplane & Motor Corporation. In passing upon the merits of that contention, it should be remembered that in the reorganization each holder of a share of preferred stock in the old corporation received for it one-half share in the new Curtiss Aeroplane & Motor Co. and one-half share in the Curtiss Assets Co. The aggregate of these two one-half shares took the same basis of1836 cost as each share of preferred stock in the old corporation, but in our opinion it could only be held that they each took an equal portion of the cost of the original share of preferred stock in the old company upon a showing being made that the fair market value, at the time of the exchange, of the preferred stock in the new Curtiss Aeroplane & Motor Co. and the certificates of beneficial interest in the Curtiss Assets Co. was the same. In other words, we hold that this transaction is one which requires an apportionment of the basis of cost of each share of preferred stock in the old company surrendered between the one-half share in the 636 Curtiss Aeroplane & Motor Co. and the one-half certificate of beneficial interest in the Curtiss Assets Co. received in exchange therefor. X plus Y may equal 1 but that does not necessarily mean that X equals one-half and Y equals one-half. X may equal three-fourths and Y may equal one-fourth. It can only be held that X equals one-half and Y equals one-half when the evidence shows that fact to be true. Respondent refused to treat the sale of the certificates of beneficial interest as one in which loss could be recognized, citing1837 as justification for his action a part of article 1567 of Regulations 62, which he quoted in the deficiency letter as follows: If property is exchanged for two kinds of property and no gain or loss is recognized under Articles 1564 and 1566, the cost of the original property shall be apportioned, if possible, between the two kinds of property received in exchange for the purpose of determining gain or loss upon subsequent sale, or if no fair apportionment is practicable, no profit on any subsequent sale of any part of the property received in exchange is realized until, out of the proceeds of sale shall have been recovered the entire cost of the original property. In refusing to treat the sale of the certificates of beneficial interest as one in which gain or loss might be recognized, we think respondent was in error. It was properly held, we think, in I.T. 2335, C.B. VI-1, p. 28, that while Regulations 65 (Revenue Act of 1924) and Regulations 69 (Revenue Act of 1926) do not contain any provisions corresponding to article 1567 of Regulations 62 (Revenue Act of 1921), nevertheless, the provisions of article 1567 of Regulations 62 lay down a principle which is equally applicable1838 to reorganizations under subsequent acts. We think the applicable part of article 1567 of Regulations 62 to the instant case is as follows: * * * When securities of a single class are exchanged for new securities of different classes so that no gain or loss is realized under the provisions of paragraph (b) of article 1566 [relating to reorganizations], for the purpose of determining gain or loss on the subsequent sale of any of the new securities 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. For example, if 100 shares of common stock, par value $100, are exchanged for 50 shares of preferred and 50 shares of common each of $100 par value, and the cost of the old stock was $250 per share, or $25,000, but the market value of the preferred on the date of the exchange was $110 per share, or $5,500 for the 50 shares, and the market value of the common was $440 per share or $22,000 for the 50 shares of common, one-fifth of the original cost, or $5,000, would be regarded as the cost1839 of the preferred, and four-fifths, or $20,000 as the cost of common. * * In applying the above quoted regulation to the facts of the instant case we are confronted with the necessity of finding the respective values of the preferred stock of the new Curtiss Aeroplane & Motor 637 Co., and the certificates of beneficial interest in the Curtiss Assets Co. at the time they were received in the exchange. The two new securities were set up on the books of the respective corporations at par, and if such action could be taken as proof of the value of said securities on that date, then the apportionment of costs should be made on an equal basis, as it was made on petitioner's books, but it can not be so received. Petitioners did not establish that the assets taken over by the respective corporations in the reorganization were worth the amount at which they were set up on the books of the new corporations. If any appraisement was made of the assets at the time of the reorganization by any reputable appraisers, it was not put in evidence. It was stipulated that the certificates of beneficial interest of the Curtiss Assets Co. were first quoted on the New York Curb Exchange during1840 the week of April 25, 1924, at $20 per certificate and the preferred stock of the Curtiss Aeroplane & Motor Co. was first quoted on the New York Stock Exchange during the week ending February 15, 1924, at $70 per share. If any sales of either security were made prior to the ones above mentioned, no evidence of that fact was offered at the hearing. After a careful review of all the evidence we think the above prices for which they were first sold represents the respective values of the securities at the time the exchange took place. Figured on this basis, the securities which Glenn H. Curtiss received in the reorganization were valued as follows: 813 shares preferred stock in Curtiss Aeroplane & Motor Co., at $70 per share$56,910.813 certificates of beneficial interest in Curtiss Assets Co. at $20 per certificate16,240.Total value of all securities received73,150., the cost of the 1,626 shares of preferred stock in Curtiss Aeroplane & Motor Corporation (old company) was $106,548.85. The basis of cost of the 813 certificates of beneficial interest in the Curtiss Assets Co. is 16,240/73,150 of $106,548.85, which equals $23,677.52. The loss which petitioner1841 Glenn H. Curtiss is entitled to deduct from his 1924 income on account of the sale of 813 certificates of beneficial interest in the Curtiss Assets Co. is $7,437.52, instead of the $37,034.43, as claimed by him. The securities which petitioner Lena P. Curtiss received in the reorganization were valued as follows: 876 shares preferred stock in Curtiss Aeroplane & Motor Co. at $70 per share$61,320.876 certificates of beneficial interest in Curtiss Assets Co. at $20 per certificate17,520. Total78,840.638 The cost to her of the 1,726 shares of preferred stock of the Curtiss Aeroplane & Motor Corporation (old company) was $131,366. The basis of cost of the 876 certificates of beneficial interest in the Curtiss Assets Co., which she received was 17,520/78,840 of $131,366, which equals $29,192.44, or $33.32 per single certificate of beneficial interest. In the taxable year she sold 377 of these certificates for $7,540. The basis of cost of these 377 shares was $12,561.64 ($33.32 multiplied by 377). The loss which petitioner Lena P. Curtiss is entitled to deduct from her 1924 income on account of the sale of 377 certificates of beneficial interest*1842 in the Curtiss Assets Co. is $5,021.64, instead of the $20,680 claimed by her. Reviewed by the Board. Judgment will be entered under Rule 50.VAN FOSSAN did not participate in the consideration of or decision in this report.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622378/	George C. Bettinger and Mary E. Bettinger v. Commissioner.Bettinger v. CommissionerDocket No. 5345-67.United States Tax CourtT.C. Memo 1970-18; 1970 Tax Ct. Memo LEXIS 338; 29 T.C.M. (CCH) 52; T.C.M. (RIA) 70018; January 28, 1970, Filed. Richard C. Schiller, for the petitioners. FAYMemorandum Findings of Fact and Opinion FAY, Judge: Respondent determined the following deficiencies and additions to tax with respect to petitioners' income taxes for the years 1964 and 1965: YearDeficiencyAddition to Tax§6653(a) I.R.C. 19541964$6,722.12$336.1119653,273.79163.63The sole issue for decision is whether petitioners are entitled to a deduction for partially worthless bad debts in the taxable years 1964 and 1965 in connection with advances to Boll Industries, Inc., in preceding years. Findings of Fact Some of the facts were stipulated. The stipulation of facts, together with the exhibits attached thereto, is incorporated herein by this reference. Petitioners George C. and Mary E. Bettinger are husband and wife. They were residents of San Gabriel, California, at the time of the filing of their petition in this case. Petitioners filed Federal340 income tax returns on the basis of the calendar year for the years 1964 through 1967 with the district director of internal revenue, Los Angeles, California. Hereinafter George C. Bettinger will be referred to as petitioner. Petitioner was connected with a number of corporations as promoter, shareholder, creditor, or officer during the ten-year period preceding the taxable years in question. Flight Line Corporation (hereinafter referred to as Flight Line) was incorporated on August 25, 1955, for the purpose of engaging in the manufacture and distribution of aircraft seats and precision sheet metal assemblies. Petitioner was elected president and Warren E. Leary was elected vice president of the corporation. Of the 1,910 shares of stock outstanding on June 13, 1967, petitioner and his wife collectively owned 998 shares. Robert H. Feldman, for the respondent. Boll Industries, Inc., was incorporated in the State of California on May 13, 1960, by petitioner and four individuals: Robert F. Laabs, John H. Bell, Warren E. Leary, and Ernest E. Overgard. Its business consisted of the manufacture and sale of air diffusers and related equipment in the air conditioning industry. The organizers341 of Boll planned to merge Boll eventually with Flight Line. The articles of incorporation of Boll authorized the issuance of 10,000 shares of common stock with a par value of $10 per share, but no stock was ever formally issued. Petitioner was elected president of Boll at the organizational meeting of its board of directors held on May 14, 1960. Petitioner received a salary of $200 per week during 1961 for management services rendered to Boll during that year. Thereafter, petitioner continued to serve the corporation, but Boll was unable to continue its salary payments to petitioner because of the lack of funds available for this purpose. In addition to the supervision of all aspects of production, petitioner rendered valuable accounting services to the corporation. Petitioner devoted all of his working time during the day to the affairs of Flight Line and Boll. Guardian Aire Corporation was organized in 1956 for the purpose of manufacturing electrostatic dust precipitators for the home building industry. Petitioner did not own any stock interest in Guardian Aire but served as director and rendered some management services to that corporation. Terri Air Conditioning Products, 342 Inc., was organized in 1956 for the purpose of manufacturing fire dampers for commercial air conditioning. Petitioner was elected to the board of directors of that corporation in 1964. He received a salary of $125 per month for management consultation. 53 The above-named corporations were financed primarily through capital contributions and cash advances from shareholders. Bank loans were usually difficult, if not impossible, to obtain. In some cases, where a corporation was in need of cash to continue its operations, it also resorted to invoice financing and the factoring of its accounts receivable. Boll received initially $25,000 from petitioner, plus $24,800 and $6,600, respectively, from two other individuals, John Bell and Warren Leary. These amounts were regarded by the individuals as contributions of capital to Boll, although there never occured any formal issuance of stock by such corporation. Petitioner advanced the following amounts to Boll between 1960 and 1967: YearAdvancesRepaymentsBalance1960$ 4,412.000$4,412.00196131,588.00-0-36,000.00196226,650.00-0-62,650.00196317,902.83$9,852.8370,700.00196427,100.001,700.00296,100.00196512,100.00-0-108,200.0019663,516.55-0-111,716.5519674,805.48-0-116,522.03343 Petitioner regarded the initial $25,000 of these payments as his contribution to the capital of that corporation. The balances of such advances were represented by written demand notes bearing interest at the rate of 10 percent per annum and were regarded as loans to the corporation. Additional advances in 1961, 1962, and 1963 amounting to approximately $6,000, $33,000 and $32,000, respectively, took the form of loans secured by accounts receivable, referred to as invoice financing, or the factoring of accounts receivable. Petitioner maintained extensive records of his transactions with Boll and other corporations. Bookkeeping activities of petitioner with respect to these transactions were carried on at night and on weekends at petitioner's home. Petitioner testified that the loans were made both to augment his income and aid the corporations in the continuation of their business operations. The "Receivables" account of petitioner's ledger reflects the following advances to Flight Line and repayments from 1957 through 1967: YearAdvancesRepaymentsBalance1957$7,900.00$355.19$7,544.81195844,200.0010,044.8141,700.00195918,000.0042,800.0016,900.00 196016,900.00196116,900.00196226,500.0021,000.005,500.00196330,762.527,000.0029,262.52196477,250.0021,100.0085,412.52196522,500.0020,000.0087,912.52196632,897.54120,810.06196719,389.94140,200.00344 As in the case of Boll, these advances were represented by written demand notes bearing interest at the rate of 10 percent per annum. In addition to these advances, petitioner paid a total of $99,877 into the capital stock account of Flight Line as consideration for the issuance to him of the stock of such corporation. 1 Petitioner's factoring activities and invoice financing relative to Flight Line were substantial, amounting to approximately $99,000 in 1961 and $30,000 in 1962. As in the case of Boll, such advances were not represented by notes. Petitioner's advances to Guardian Aire and repayments between 1964 and 1967 were as follows: YearAdvancesRepaymentsBalance1964$5,100.00$5,100.001965130.005,230.001966257.655,487.651967125.005,612.65These advances were represented to the extent of $5,000 by interest-bearing notes. Petitioner's practice of providing funds to small corporations began in 1949. The following amounts were advanced to corporations, 345 other than those set forth above, from 1949 through 1959: NationalNorwegianTotalEquipmentSmokingImportersLineFoodElectronicFishFlightNorweAerogian FishFactorsImportersYearMBH, Inc. Total1949$13,000.00$13,000.0019512,300.002,300.00195415,727.85$3,000.00$100.00$20,445.0039,272.8519555,314.90900.003,300.009,514.901959$14,000.0014,000.00Petitioner reported interest income from eight corporations in the 16-year period beginning with his taxable year 1951, as follows: 54 FlightTerriGuardianYearBollLineProductsAireTotal1951$223.57$ 223.571952515.08515.081953120.18120.181954162.69$212.60$ 60.00435.29195527.22309.452,135.252,471.921956261.7099.70903.501,264.901957177.77457.70$69.73705.20YearBollFlight LineTerriGuardianTotalProductsAire1958$ 1,205.27$ 1,205.2719596,161.776,161.77196011,343.63$810.2112,153.841961$1,962.381,962.3819621,173.66697.211,870.8719631,150.003,029.68600.004,779.6819646,180.05189.486,369.5319651,688.9311,886.04375.0013,949.971966130.005,620.005,750.00346 Of the corporations enumerated above, petitioner had an equity interest in M.B.H., Inc., Norwegian Fish Importers, Flight Line, Boll, and Terri Products. In the case of Terri Products, petitioner acquired his interest after the loans were made. Petitioner also reported on his Federal income tax returns fees and salaries for services rendered to various corporations as follows: YearCorporationAmount1960Flight Line$2,350.001961Flight Line125.001962Terri Products1,000.001963Terri Products1,800.001964Terri Products400.001965Terri Products1,000.00Petitioner made several loans to individuals, usually business associates or employees of one of the aforementioned corporations, as follows: DebtorAmountInterestYr. of LoanLeary$1,900.004%1958Johnson848.006%1962Dominquez175.006%1962Eason450.006%1965Boll's business activities were unsuccessful. As a result, Boll reported net losses for each year of its existence. The Federal income tax returns of Boll for the taxable years ending April 30, 1961, through April 30, 1967, disclose the following information with respect to347 losses sustained in those years and excess of liabilities over assets at the end of each taxable year: TaxableExcess ofYear EndingLossLiabilitiesApr. 30ReportedOver Assets1961$14,261.30$ 14,261.30196241,313.2155,577.51TaxableYearExcess ofEndingLossLiabilitiesApr. 30ReportedOver Assets1963$43,030.80$ 98,608.31196428,959.07127,567.38196536,987.30164,564.681966unknown198,043.00196731,558.00231,853.00Funds received by Boll and Flight Line from petitioner were required to help meet their operating expenses. Boll's financial position deteriorated rapidly after 1964. Even prior thereto, the possibility that petitioner would not recover his advances from Boll was substantial. Because Boll's liabilities greatly exceeded its assets, petitioner's expectation of repayment depended to a significant degree upon the success of Boll's business operations. Banks refused to extend any loans to either Boll or Flight Line after 1964 because these corporations were unable to provide security. After 1964 it became clear that Boll would never be profitable. Nevertheless, petitioner continued348 to advance money to that corporation in order to keep its business alive so that Boll could be sold as a going concern. He believed that Boll was more valuable as a going concern. Petitioner did not receive security on his advances to Boll or Flight Line except in the case of his invoice financing. Where bank loans were available, petitioner subordinated his loans to those of the bank. Petitioner's efforts to sell Boll from 1963 to 1967 were fruitless. In 1967 the assets of Boll were sold at public auction to satisfy Federal tax liens, as a result of foreclosure proceedings instituted by the United States Government. 55 Flight Line began to show profits in 1958 after having sustained losses totalling $109,581 in the first three years of its existence. Its business operations continued to be profitable until 1963. Profits during this period reduced accumulated losses to zero by 1962. Flight Line's financial statement showed an excess of assets over liabilities during 1962 and 1963 of $16,860 and $25,361, respectively. However, after 1963 Flight Line suffered a severe decline in business resulting in deficit balances in its capital account for the years 1964 through 1967 as349 follows: YearAmount1964($ 47,416.00)1965( 55,849.00)1966( 271,151.00)1967( 366,909.00)Petitioner did not charge off as worthless any of the advances to Boll or Flight Line on his books until 1967. Petitioner's advances to Boll became wholly worthless in that year. Petitioner has not established that any other losses have become wholly worthless during the taxable years in question. In their original Federal income tax returns for the years 1964 and 1965, petitioners claimed deductions of $40,100 and $35,900, respectively, for partially worthless nonbusiness bad debts attributable to loans to Boll in preceding years. Respondent disallowed such deductions in his notice of deficiency. Thereafter, petitioners amended their returns for the years 1964 and 1965, characterizing the losses in question as business bad debts and claiming deductions for the partial worthlessness of such debts in 1964 and 1965 of $40,100 and $35,900, respectively. 2Respondent has conceded350 that petitioners are not liable for additions to tax under section 6653(a). Opinion Section 166(a) of the Internal Revenue Code of 19543 allows an ordinary deduction for the worthlessness of business bad debts. 4 Nonbusiness bad debts, however, are treated as short-term capital losses. See section 166(d). Thus, nonbusiness bad debts are neither deductible against ordinary income nor available as a net operating loss carryback to prior years. See sections 1212(b) and 172(d)(2). Moreover, while a deduction is allowed for partially worthless business bad debts, nonbusiness bad debts must become wholly worthless before they can be written off. See sections 165 and 166. 351 Petitioners seek to characterize the bad debts attributable to the advances to Boll as business bad debts. Accordingly, petitioners claim a deduction for the partial worthlessness of such debts in 1964 or 1965. Petitioners further claim that they are entitled to a net operating loss carryback from the years 1966 and 1967 to the extent that the advances in question became worthless in those years. The central issue in this controversy is the proper characterization of such advances as business or nonbusiness bad debts. Petitioners argue that the lending activities during the period in question, and prior thereto, constituted a trade or business and that advances to various corporations made in connection with that trade or business are therefore business bad debts. Respondent, on the other hand, classifies such advances as nonbusiness bad debts, based upon the assumption that the advances were not connected with a trade or business. Alternatively, respondent contends that the advances were, in fact, contributions to the capital structure of the corporations rather than debts and consequently must be treated as capital losses. Section 166(d)(2) defines the term "nonbusiness bad352 debt" as a debt other than a debt created in connection with a trade or business of the taxpayer. To support his contention that the advances in question 56 constituted business bad debts, petitioner must establish that his advances were in fact debts, that he was engaged in a trade or business, and that the debts were proximately connected with such trade or business. Whipple v. Commissioner, 373 U.S. 193">373 U.S. 193 (1963); United States v. Henderson, 375 F. 2d 36 (C.A. 5, 1967). These are questions of fact in which no single factor is determinative. Section 1.166-5(b), Income Tax Regs., United States v. Henderson, supra. It is well settled that the trade or business of a corporation is not the business of its shareholder, no matter how great an interest in the corporation he possesses or how much time and energy he devotes to the affairs of such corporation. Whipple v. Commissioner, supra; Putnam v. Commissioner, 352 U.S. 82">352 U.S. 82 (1956); Langdon L. Skarda, 27 T.C. 137">27 T.C. 137, 148 (1956), affd. 250 F. 2d 429 (1957); Estate of Dominick F. Pachella, 37 T.C. 347">37 T.C. 347 (1961), affd. per curiam 310 F. 2d 815353 (C.A. 3, 1962). Petitioner takes the position, however, that his activities in connection with the advances to various corporations between 1949 and 1967 amounted to a trade or business of lending money. We disagree. In our findings we have set forth the frequency and amounts of petitioner's advances to various corporations during this period. While we recognize that the advances in question were extensive and continuous, our conclusion rests upon the nature of the advances and the relationship between petitioner and the debtor corporations rather than upon the degree of financial activity involved. The advances which petitioner relies upon to support his position were made after 1960 principally to two corporations - Boll and Flight Line. As to each of these corporations petitioner took an active part in its organization and management and held substantial equity interests. Furthermore, petitioner relied heavily upon the success of these corporate ventures for the repayment of his advances. In addition, although Flight Line's capitalization was substantial, Boll appears to have been undercapitalized from the outset. While these circumstances are often considered to support the354 characterization of advances as equity, they are also crucial to the determination of whether petitioner's advances can be regarded as a trade or business in the context of section 166. In order for the activities to qualify as a trade or business, they must result in "compensation other than the normal investor's return, income received directly for his own services rather than indirectly through corporate enterprise." Whipple v. Commissioner, supra, at 373 U.S. 203">373 U.S. 203. Accordingly, where a taxpayer seeks to elevate his lending activity in connection with the financing of corporate ventures to the status of a trade or business, he must demonstrate that his activity was separate and distinct from the corporate enterprises so that the primary financial return is more than a mere return on his investments. The burden of proof on this issue is especially difficult to sustain where the taxpayer is closely related to the corporate enterprises as shareholder and managing officer, and where the corporations are in unsound financial shape, as in the case before us. The fact that petitioner may have been motivated by a desire to augment his income in making the advances, 355 a fact which petitioner emphasizes, does not alone establish the existence of a trade or business. To be sure, the expectation of profit is a key element in determining whether a taxpayer's activities constitute a trade or business. Hirsch v. Commissioner, 315 F. 2d 731 (C.A. 9, 1963), affirming a Memorandum Opinion of this Court; Lamont v. Commissioner, 339 F. 2d 377 (C.A. 2, 1964), affirming a Memorandum Opinion of this Court. However, the anticipated source of such profit must be the independent business activity of the taxpayer rather than the corporate venture whose fruit the taxpayer hopes to harvest in the form of dividends or interest. In Higgins v. Commissioner, 312 U.S. 212">312 U.S. 212 (1941), the taxpayer argued that his devotion of substantial time and energy to the management of his securities constituted a trade or business. The court concluded: The petitioner merely kept records and collected interest and dividends from his securities, through managerial attention for his investments. No matter how large the estate or how continuous or extended the work required may be, such facts are not sufficient as a matter of law to permit the courts356 to reverse the decision of the Board. See also Whipple v. Commissioner, supra at 199. 57 Under the circumstances of the instant case, we think petitioner's anticipated return was plainly that of an investor, rather than the receipt of income from a separate and distinct trade or business. Petitioner, in making the advances in question, was motivated primarily by a desire to see the corporations succeed. At the time of these advances, Boll had been recently formed and was in a precarious financial position. The expectation of repayment was slight from the very outset. As time progressed, petitioner despaired of any possibility of repayment but continued to advance funds so that the corporation might be sold as a going concern. At best, all that can be said in the cases of Boll and Flight Line is that petitioner's expectation of repayment was dependent upon the future earnings of the corporation. The fact that such repayment was so closely tied up with the success of the corporation and that petitioner was intimately concerned with the corporate enterprise, brands petitioner's activities in respect of such corporations as an investment rather than a loan business. 357 In Holtz v. Commissioner 256 F. 2d 865 (C.A. 9, 1958), affirming a Memorandum Opinion of this Court the Ninth Circuit observed: Petitioner here claims that his continued use of the corporate form coupled with the two hundred and fifty loan transactions in which he participated show conclusively that he was a promoter within these cases. What petitioner fails to recognize is the distinction between carrying on one's business through a corporate form, which, of course, requires some organizing and financing, and the business of dealing in corporations which may likewise require some financing arrangements. Where the former is the situation, it is hornbook law, and not contested by petitioner, that the corporate entity is the primary debtor and shareholder loans to protect his investment or increase its value do not create a separate business for the shareholders. The foregoing views of the Ninth Circuit are equally applicable to the instant case, although petitioner herein has urged that his promotional and financing activity constitutes a lending business rather than the business of promoting corporations. We note several additional circumstances which tend to negate358 the existence of a trade or business of money lending. Petitioner devoted substantially all his working time during the day to the affairs of Boll and Flight Line. While it is possible for 18 T.C. 133">18 T.C. 133 (1952); H. W. Findley, or business, the portion of a taxpayer's time occupied by a particular activity is a factor frequently considered in determining whether such activity constitutes a trade or business. United States v. Henderson, supra.Also, petitioner neglected to enforce many of his loans and although interest-bearing notes were executed which were payable on demand, such notes were never called. Moreover, the interest received, in most cases, amounted to only a small fraction of the interest provided for in those notes. In the case of Electronic Smoking, Inc., and Guardian Aire, petitioner received no interest. A comparison of the outstanding balances in the various accounts with the interest reported in that year reveals, in many cases, receipts of interest far below the percentage provided in the notes. For example, although the outstanding balance in the Boll account was at least $36,000 in 1962, petitioner reported no interest income in that year. 359 Similarly, in 1963 petitioner's receipt of $1,150 from Boll represented less than a 3 percent return on his investment of $62,650. For the year 1964 no interest income from Boll was reported although more than $70,000 remained outstanding. Also, in the case of Guardian Aire, no interest was ever received despite substantial advances to that corporation. While the corporations continued to accrue unpaid interest to petitioner, the eventual receipt of such amounts was highly doubtful and depended largely on future earnings. Another factor to be considered is the petitioner's continued advancement of funds in sizable amounts to many of the corporations after the weak financial condition of such corporations had become obvious. Petitioner testified in this regard that his continued advances to Boll were made for the purposes of sustaining its business operations so that Boll might be sold as a going concern. Such conduct is inconsistent with the existence of a trade or business of lending money. Finally, the refusal on the part of outside parties to extend loans to the debtor corporations during the period of petitioner's advances, while not decisive, suggests the absence of the businessman-like360 manner essential to a determination that petitioner's money lending activities constituted a trade or business. Gross v. Commissioner, 401 F. 2d 600 (C.A. 9, 1968), affirming a Memorandum Opinion 58 of this Court; Henderson v. Commissioner, supra; H. Beale Rollins, 32 T.C. 604">32 T.C. 604, 613 (1959), affd., 276 F. 2d 368 (C.A. 4, 1960). In view of our holding that the advances in question were nonbusiness in character, it is unnecessary for us to decide whether any part of the advances constituted equity or debt. We note, however, that notwithstanding the execution of interest-bearing notes, it is questionable whether a substantial portion of the advances were loans. While the contemporaneous written treatment by parties is an indication of their real intent as to the nature of such transactions, Gross v. Commissioner, supra, it is not decisive. Loans made to Boll and those made to Flight Line after 1964 bear many of the earmarks of equity, under the facts of this case. See Henderson v. Commissioner, supra; H. Beale Rollins, supra, and cases cited therein. Circumstances and considerations discussed earlier relating to the361 existence of a trade or business are applicable here and do not bear repetition. In light of the foregoing, we conclude that losses which petitioner sustained in 1967 upon advances made in prior years are to be regarded as nonbusiness bad debts. Consequently, such losses must be treated as short-term capital losses in the year they became totally worthless. 5Decision will be entered under Rule 50. Footnotes1. Payment of $16,900 for the stock of Flight Line took the form of a transfer of that amount from the notes payable account of Boll to its capital stock account in 1961.↩2. Petitioners admit that their original characterization of the debts as nonbusiness bad debts would preclude a deduction for the partial worthlessness of such debts in 1964 and 1965.↩3. All statutory references are to the Internal Revenue Code of 1954. Sec. 166. BAD DEBTS. (a) General Rule. - (1) Wholly worthless debts. - There shall be allowed as a deduction any debt which becomes worthless within the taxable year. (2) Partially worthless debts. - When satisfied that a debt is recoverable only in part, the Secretary or his delegate may allow such debt, in an amount not in excess of the part charged off within the taxable year, as a deduction. ↩4. The term "business bad debts" is intended to refer to those debts which are excluded from the definition of nonbusiness bad debts contained in sec. 166(d)(2), which section provides: (d) Nonbusiness Debts. - * * * (2) Nonbusiness debt defined. - For purposes of paragraph (1), the term "nonbusiness debt" means a debt other than - (A) a debt created or acquired (as the case may be) in connection with a trade or business of the taxpayer; or (B) a debt the loss from the worthlessness of which is incurred in the taxpayer's trade or business.↩5. No deduction is permitted for partially worthless nonbusiness bad debts. Moreover, a charge-off in the year of deduction, or prior thereto, is indispensable to a deduction for partially worthless debts even in the case of business bad debts. See footnote 3, supra; sec. 1.166-3(a)(2)(i), (iii), Income Tax Regs.; International Proprietaries, Inc., 18 T.C. 133">18 T.C. 133 (1952); H. W. Findley 25 T.C. 311">25 T.C. 311 (1955), affd. per curiam 236 F. 2d 959↩ (C.A. 3, 1956). Petitioner has failed to charge off the claimed bad debts in any amount prior to 1967.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622379/	Rose Wasserman, Petitioner, v. Commissioner of Internal Revenue, RespondentWasserman v. CommissionerDocket No. 49998United States Tax Court24 T.C. 1141; 1955 U.S. Tax Ct. LEXIS 90; September 29, 1955, Filed 90 Decision will be entered under Rule 50. Petitioner and her husband were equal partners in a retail women's dress store in Newark, New Jersey. The partnership agreement contained a provision that "In the event of death of either partner, the remaining partner shall have the right of survivorship to the interest of the deceased partner's share of the partnership as at the time of death." Upon the sale of her deceased husband's one-half interest after his death, petitioner claimed a basis under section 113 (a) (5), Internal Revenue Code of 1939. Respondent has determined that petitioner received her husband's one-half interest in the partnership under the terms of the partnership agreement and not by inheritance under the New Jersey Statute of Descent and Distribution. Held, petitioner received her deceased husband's one-half interest in the partnership under the terms of the partnership agreement and not by inheritance and section 113 (a) (5) is not applicable in the determination of the basis. Respondent's determination of the basis is sustained. Jack Solomon, Esq., for the petitioner.William Schwerdtfeger, Esq., for the respondent. Black, Judge. BLACK 1141 OPINION.The Commissioner has determined a deficiency in petitioner's income tax for the year 1949 of $ 1,982.22. To the determination of the Commissioner petitioner assigns error as follows:The Commissioner disallowed the application of Section 113 (a) (5) of the Internal Revenue Code by the petitioner to the assets acquired by her on May 1, 1948, the date of death of her husband.1142 The facts have all been stipulated and are summarized as follows:The petitioner, Rose Wasserman, resides in Newark, New92 Jersey. Her return for the year 1949 was filed with the collector of internal revenue for the fifth district of New Jersey.Petitioner operated a retail women's dress store as a sole proprietor in Newark, New Jersey, from 1937 through December 31, 1943.Petitioner and Maurice Wasserman, sometimes hereinafter referred to as Maurice, were husband and wife and at all times pertinent were domiciled in the State of New Jersey.On January 2, 1944, petitioner and Maurice entered into a partnership agreement. That partnership agreement reads as follows:On this second day of January 1944 Rose Wasserman, hereinafter referred to as the Party of the First Part and Maurice Wasserman, hereinafter referred to as the Party of the Second Part have mutually agreed and entered into this partnership agreement for the conducting of a retail store selling women's and children's apparel at 90 Broadway, Newark, New Jersey, known and designated as REGENT COTTON FROCKS subject to the following terms and conditions:1. The party of the First Part and the Party of the Second Part agree that the net worth account as reflected by audit of the Regent Cotton Frocks for the year ended December 31, 1943 shall be93 the net worth account as at January 2, 1944 for the said partnership after conveying all assets and liabilities.2. The Party of the First Part and the Party of the Second Part agree that each party shall have a fifty percent interest of the net worth account, and that all money differences necessary to equalize the ownership of the capital account have been made prior to the formation of this partnership agreement.3. Each of the partners hereto agrees to devote his full time and effort to and for the interest of the business known and designated as Regent Cotton Frocks.4. It is understood and agreed by both parties that all profits and losses shall be shared equally.5. The parties hereto shall determine from time to time the amount to be withdrawn from the business dependent upon the condition and requirement of the business at the time of such withdrawal.6. This partnership shall exist at the will of each of the parties hereto. In the event any one of the parties desires its dissolution, he shall give sixty (60) days notice of his intention to dissolve the partnership to the other partner in writing at which time the dissolution shall be considered effective and liquidation94 shall occur in accordance with the provisions of the Uniform Partnership Act.7. In the event of death of either partner, the remaining partner shall have the right of survivorship to the interest of the deceased partner's share of the partnership as at the time of death.Maurice died intestate in the State of New Jersey on May 1, 1948, leaving petitioner as his sole heir under the New Jersey Statute of Descent and Distribution.During the period from May 1, 1948, after her husband's death, to September 2, 1949, petitioner operated the business as a sole proprietorship. On September 2, 1949, petitioner sold to Benjamin Brown, sometimes hereinafter referred to as Brown, a 50 per cent interest in the business, including goodwill, fixtures, and inventory, 1143 for $ 14,367.66. The parties have agreed as to the basis of petitioner for the 50 per cent interest in the business which she sold to Brown, as follows:7. If the petitioner took the one-half interest in the aforesaid business, which was owned by her deceased husband immediately prior to his death, by intestate succession under the law of the State of New Jersey, the basis of the property sold to Mr. Brown on September 95 2, 1949, is $ 14,309.22.8. If petitioner took the one-half interest in the aforesaid business, which was owned by her deceased husband immediately prior to his death, by operation of paragraph 7 of the partnership agreement (Exhibit 1), the basis of the property sold to Mr. Brown on September 2, 1949, is $ 5,559.22.There is no dispute as to the facts in the instant case. The issue is one of law. That issue is whether upon the death of her husband who died intestate on May 1, 1948, petitioner took his one-half interest in the business by inheritance under the New Jersey Statute of Descent and Distribution, as petitioner contends, or whether, as contended by respondent, she took the one-half interest in the business under paragraph 7 of the partnership agreement.We think the issue must be decided in favor of respondent. Section 113, Internal Revenue Code of 1939, Adjusted Basis for Determining Gain or Loss, is printed in the margin. 196 Petitioner contends that she received her husband's one-half partnership interest by inheritance and that under section 113 (a) (5) her basis would be the fair market value of such property at the time of such acquisition. If petitioner acquired the property by inheritance it has been stipulated that the basis is $ 14,309.22. It has also been stipulated that petitioner was the sole heir of her husband, Maurice, under the New Jersey Statute of Descent and Distribution. But it seems clear that under New Jersey law petitioner did not acquire the property by inheritance. She acquired it under the terms of the partnership agreement which was contractual rather than testamentary in character.In Michaels v. Donato, 67 A. 2d 911 (N. J., 1949), the decedent and the defendant had agreed in their articles of partnership that, upon the death of either, the surviving partner should pay $ 1,000 to the other's estate and thereupon would become the sole owner of the business. The decedent's portion being worth much more than that sum, his representative claimed the agreement to be invalid. The representative claimed that the partnership clause in question97 was testamentary in nature and void because not drawn in conformity 1144 with the Statute of Wills. The New Jersey tribunal in holding the partnership agreement to be binding, among other things, said:"The confusion results from the attempt to attach to the transaction characteristics of both a will and a contract. These characteristics are, however, entirely distinct. A contract operates immediately to create a property interest in the premises while a will is revocable, or, more properly speaking, inoperative or ambulatory until the death of the testator, at which time it operates to create a property interest in the beneficiary." Yale Law Journal, Vol. 27, Part 1, Page 542. 57 Am. Jur., Wills, Sec. 15, Page 48. The undertaking of a party under a contract is made in consideration of something to be paid or done by or on behalf of the other party, so that the obligation to and the right to require performance are reciprocal. A contract creates a present, enforceable and binding right over which the promisor has no control without the consent of the promisee, while a testamentary disposition operates prospectively. 57 Am. Jur., Wills, Sec. 40, Page 67. An instrument98 which does not pass any interest until after the death of the maker is essentially a will. But not every instrument which provides for performance at or after death is testamentary in character. If the instrument creates a right in the promisee before the death of the testator, it is a contract. * * It was held accordingly by the New Jersey court that the defendant, upon payment of the $ 1,000 was entitled to all the partnership assets under the terms of the agreement. The New Jersey court in upholding the validity of the partnership agreement further said:The great weight of authority is to the effect that "an otherwise sufficient contractual instrument, based on consideration, by which the promisor agrees, in substance, that ownership of or a designated right in property owned by him shall pass to the promisee at the promisor's death, is not rendered testamentary in character merely because of a provision naming the death of the promisor as the time for the transfer of the legal title to the promisee. If the instrument does invest him, in praesenti, with an irrevocable contractual interest in the property, it is not testamentary." Note, 1 A. L. R. 2d, Page 1207. Specifically, 99 "a provision in a partnership agreement that on the death of one of the partners his interest in the partnership shall become the property of the other partners is not invalid as testamentary in nature, and therefore inoperative because of failure to conform to the requirements of the Statute of Wills." 73 A. L. R. 980. 1 A. L. R. 2d 1265. [Citing a long list of authorities.]There appears to be one Federal tax case which at least has some bearing upon the question which we have here to decide. In Autenreith v. Commissioner, (C. A. 3, 1940) 115 F.2d 856">115 F. 2d 856, affirming Paul Autenreith, 41 B. T. A. 319, the decedent provided in a partnership agreement with his sons that at his death they should receive his interest upon tendering to his widow certain notes which were not to be paid except upon default of interest during her life, and upon her death were to become void. The Third Circuit held that "Such an agreement for the benefit of a third party, the widow and mother, is valid and enforceable in Pennsylvania [citing cases], and is to be treated as contractual and 100 not testamentary in nature even though not effective until death."1145 The question involved in the Autenreith case, supra, is not the same as we have here and, therefore, it cannot be said that it is precisely in point but we think it does lend support to respondent's contention that petitioner acquired the one-half interest of her deceased husband in the retail dress shop business under the contractual terms of the partnership agreement and not by inheritance under the laws of the State of New Jersey. Petitioner and Maurice as partners being bound by the terms of their partnership contract, their mutual obligations superseded all rights of property disposition by will or intestate succession. Suppose Maurice, instead of dying intestate, had died testate bequeathing all his interest in the Regent Cotton Frocks, the business in question, to someone else than petitioner, would such testamentary disposition have been effective and would it have prevented petitioner from receiving Maurice's one-half interest in the partnership business under the terms of the contract? We think not. It seems clear from the authorities we have cited that under such circumstances petitioner101 would have received title to her husband's one-half interest in the partnership property notwithstanding any contrary provisions in her husband's will. Paragraph 7 of the partnership agreement which provided that "In the event of death of either partner, the remaining partner shall have the right of survivorship to the interest of the deceased partner's share of the partnership as at the time of death" was, we think, a covenant mutually binding and removed the property from the operation of a testamentary or intestate disposition.It is true that paragraph 6 of the partnership agreement provides that either party might bring about the dissolution of the partnership by giving the other partner 60 days' notice of his intention to dissolve the partnership. It goes without saying, of course, that if the partnership had been dissolved prior to Maurice's death, then paragraph 7 of the partnership agreement would no longer have been in effect and petitioner would have taken nothing under it. But it had not been dissolved and paragraph 7 was in full force and effect at the time of Maurice's death. That fact being true, we think petitioner took Maurice's one-half interest in the partnership102 under the terms of the contract and not by inheritance.Petitioner strongly contends that such cases as Michaels v. Donato, supra, relied upon by respondent, are not controlling because in those cases there was a buy-sell agreement which was a sufficient consideration to support the agreement and, therefore, gave rise to binding, contractual, irrevocable rights in praesenti. "None of this, however," says petitioner, "is present in the case sub judice." It is true that paragraph 7 of the partnership contract did not provide that any monetary consideration should be paid by the survivor for the interest of the other partner in the event of the other partner's death. 1146 However, we do not think that the failure to provide a monetary consideration has the effect of invalidating the agreement. The mutual undertaking of each was sufficient consideration to make the contract a binding one. As said by the court in Michaels v. Donato, supra:The undertaking of a party under a contract is made in consideration of something to be paid or done by or on behalf of the other party, so that the obligation to and103 the right to require performance are reciprocal. A contract creates a present, enforceable and binding right over which the promisor has no control without the consent of the promisee, while a testamentary disposition operates prospectively. * * Under the facts which have been stipulated and the authorities which we have cited, we sustain respondent's determination that section 113 (a) (5) is not applicable.Decision will be entered under Rule 50. Footnotes1. SEC. 113. ADJUSTED BASIS FOR DETERMINING GAIN OR LOSS.(a) Basis (Unadjusted) of Property. -- The basis of property shall be the cost of such property; except that -- * * (5) Property transmitted at death. -- If the property was acquired by bequest, devise, or inheritance, or by the decedent's estate from the decedent, the basis shall be the fair market value of such property at the time of such acquisition. * *↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622381/	HARRY and MARTHA B. LOKAN, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentLokan v. CommissionerDocket No. 7102-78.United States Tax CourtT.C. Memo 1979-380; 1979 Tax Ct. Memo LEXIS 148; 39 T.C.M. (CCH) 168; T.C.M. (RIA) 79380; September 17, 1979, Filed Harry Lokan, pro se Avery Cousins, III, for the respondent. SCOTT MEMORANDUM FINDINGS OF FACT AND OPINION SCOTT, Judge: Respondent determined deficiencies in petitioners' income tax for the calendar years 1973 and 1974 in the amounts of $2,387.54 and $71.90, respectively, and an addition to tax under section 6653(a), I.R.C. 1954, 1 for the year 1973 in the amount of $119.38. Some of the issues raised by the pleadings have been disposed of by agreement of the parties, leaving149 for our decision the following: (1) Was a new home, constructed by petitioners during the years 1973 through 1976, used by them as their principal residence within a period of 18 months from the date of sale of their old residence so as to entitle them to the benefit of the nonrecognition of gain provisions of section 1034 with respect to the gain realized on the sale of their old residence. (2) If the house constructed by petitioners was not used by them as their principal residence within the 18-month period so as to entitle them to the nonrecognition provisions of section 1034 with respect to the cost of that house, should the cost to petitioners of a trailer purchased by them within one year after the sale of their old residence, which respondent concedes was a new principal residence of petitioners', include the entire seven and one-half acres of land purchased by petitioners or only the one and one-half acres that were not used by them in a farming operation. 2150 FINDINGS OF FACT Most of the facts have been stipulated and are found accordingly. Petitioners, husband and wife, who resided in New Port Richey, Florida, at the time of the filing of their petition in this case, filed a joint Federal income tax return for the calendar year 1973 with the Internal Revenue Service, Southeast Region, Chamblee, Georgia. In April 1973 petitioners were living in a residence they owned in Clearwater, Florida. They took out a first mortgage on this residence and with the proceeds purchased seven and one-half acres of land in the New Port Richey, Florida, area for $20,500 (approximately $2,733 per acre). In May 1973 petitioners began construction of a new home on this land in the New Port Richey area. In November 1973 petitioners sold their then personal residence in Clearwater, Florida, for $48,500.Petitioners incurred $4,034 of expenses in connection with the sale of their Clearwater residence. Their adjusted basis in this residence was $24,778, so that petitioners realized a net gain on the sale of the old residence of $19,688. Petitioners were required to vacate their Clearwater home in December 1973. At that time they purchased a house151 trailer for $2,109 which they situated on the land they had purchased in New Port Richey very close to the new house which was under construction. In December petitioners moved from their home in Clearwater to New Port Richey and moved into the house trailer. Petitioners incurred other expenses of $2,636 with respect to the house trailer situated on the New Port Richey property so that their total cost with respect to the trailer, aside from land, cost when they moved into it was $4,745. At the time petitioners moved into the house trailer on the New Port Richey property, they had four children.Although petitioners had been working on the new home, it was far from completed. They promptly completed one of the upstairs bedrooms in the new home and a downstairs bath so that three of their children could sleep in the new residence while the remainder of the family slept in the trailer. Three of petitioners' children moved into the unfinished residence in New Port Richey at the time the family moved to New Port Richey and petitioners and the other child moved into the house trailer. The kitchen and dining room facilities of the trailer were used by the entire family for family meals. 152 After approximately one month, one of petitioners' children who was living in the house moved back to the Clearwater area. About six months later, another one of the children moved out of the unfinished house and moved back to the Clearwater area. Petitioners' youngest son, Mark Lokan, lived in the new house which was under construction from December 1973 until the house was substantially completed in September 1976. Petitioners and their daughter occupied the house trailer right next to the new residence until the downstairs of the new residence was completed in September 1976 and the balance was sufficiently completed for petitioners to move into it and live there. Petitioners and the daughter who had also occupied the house trailer as sleeping quarters moved into the new house in September 1976. By early 1974 petitioners had partially installed electricity, heat, lights and water in their new residence in New Port Richey. Appliances were also installed in early 1974 and the kitchen was completed by September 1976. Petitioners did all electric and plumbing work on their new residence in New Port Richey themselves. In 1974 and 1975 petitioners used six acres of their153 land in the New Port Richey area in the business of farming.Their farming business consisted primarily of raising cattle. Petitioners on their 1974 and 1975 joint Federal income tax returns showed the use of these six scres of property for the business of farming. Petitioners on their 1973 joint Federal income tax return reported no reaized gain from the sale of their Clearwater residence in November 1973. Respondent in his notice of deficiency determined that petitioners had a long-term capital gain on the sale of their Clearwater residence in 1973 in the amount of $19,688 of which $9,844 was taxable, and increased petitioners' reported income for the year 1973 by the amont of this $9,844. In explaining the adjustment, respondent stated that petitioners did not meet the requirements of section 1034 for nonrecognition of gain on the sale of their personal residence. OPINION Section 1034, as applicable to the year 1973, provides that if property used by a taxpayer as his principal residence (old residence) is sold by him and within a period beginning one year before the date of such sale and ending one year after such date property is purchased and used by the taxpayer as his154 principal residence (new residence), gain from the sale of the old residence shall be recognized only to the extent that the taxpayer's adjusted sales price of the old residence exceeds the taxpayer's cost of purchasing the new residence. The section further provides (section 1034(c)(5)) that where construction of a new residence is commenced by the taxpayer before the expiration of one year after the date of the sale of the old residence, the section will apply if the new residence is occupied within a period of 18 months after the date of the sale of the old residence. 3155 Petitioners here have shown a sale of their old residence and the commencement of construction of a new residence within a period of one year after the sale of the old residence. However, in order to meet the requirements of section 1034 they must also show that they occupied the new residence as their principal residence within a period of 18 months following the sale of their old residence. Petitioners' old residence was sold in November 1973; therefore, this 18-month period would expire in May 1974. The record here is clear that petitioners themselves had not in any way occupied the new house which was under construction during this period and, in fact, did not occupy it until September 1976. Petitioners argue that because they were building the house themselves they could not occupy it until September 1976 since the house was not sufficiently completed, but that they did the next best thing by getting a trailer which they placed adjacent to the house, occupying the trailer with one of their children and moving three of their children into the house while it was under construction. Petitioners argue that for this reason the trailer should not be considered as a separate home156 but a part of the new home they were building, and therefore they should be considered as occupying their new residence as a principal residence within the required period. It is clear from the record, however, that neither petitioner lived in the building which was to be the new residence within the required time and that the trailer, though near to the new home, was a separate abode from the new home and that it was the trailer which was petitioners' principal residence until September 1976. As was pointed out in Bayley v. Commissioner,35 T.C. 288">35 T.C. 288, 295 (1960), the use in the statute of the phrase "used by the [taxpayers] as * * * [their] principal residence," with respect to a new residence means the physical occupancy of that residence by the owners. In other words, it means that the owners, who here are petitioners, must live in that new residence. In the Bayley case we discussed at some length the legislative history of section 1034 and the reason for our conclusion that "used as a principal residence" meant physical occupancy. Our holding in the Bayley case has been consistently followed by this Court and other courts. In Elam v. Commissioner,58 T.C. 238">58 T.C. 238 (1972),157 affd. per curiam 477 F.2d 1333">477 F.2d 1333 (6th Cir. 1973), we held that where taxpayers purchased property on which they erected a guest house into which they moved within the period required by section1034 for occupying a new residence and commenced construction of a main house, which they did not occupy within that period, they had not used the main house as a principal residence within the required period, and therefore only the guest house might be considered as the taxpayers' new residence in determining the amount of gain which should be reported on the sale of the old residence. Respondent here has conceded that the trailer was a new residence for petitioners which was occupied by them as their principal residence within the required period. In United States v. Sheahan,323 F.2d 383">323 F.2d 383 (5th Cir. 1963), the Court held that even though the taxpayers' daughter had spent some time in the new house within the required period, even having her lunches there occasionally, the taxpayers had not occupied the new residence as their principal residence within the required period. A strict construction of the requirements of section 1034, regardless of the good faith158 or intent of the taxpayers, as set forth in the Bayley,Elam and Sheahan cases has been consistently followed by this Court. We, therefore, conclude that petitioners did not occupy the new house they were constructing at New Port Richey as a principal residence within the period of 18 months following the sale of their old residence. Therefore, the provisions of section 1034 are not applicable with respect to this residence. Respondent recognizes that the trailer was a new principal residence of petitioners' and the only issue with respect to the proper adjustment under section 1034 with respect to the trailer is whether the cost of the entire seven and one-half acres of land purchased by petitioners should be considered as a part of the cost of the new trailer principal residence or only the one and one-half acres of that property not used by petitioners in their business of farming during 1974 and 1975. Section 1.1034-1(c)(3)(ii), Income Tax Regs., provides in part as follows: If the new residence is used only partially for residential purposes only so much of its cost as is allocable to the residential portion may be counted as the cost of purchasing the new159 residence. Here, the record shows that petitioners used six acres of the land acquired in New Port Richey in their business of farming. Where property is used both as a taxpayer's residence and as a farm, the cost of the portion of the land properly allocable as a part of the residence is considered to be part of the cost of the residence and the cost of the balance of the land is considered to be a part of the property nt used as a residence. See Spivey v. Commissioner,40 T.C. 1051">40 T.C. 1051, 1053 (1963). We, therefore, conclude on the basis of this record that only one and one-half acres of the property acquired by petitioners is properly to be considered as a part of their trailer residence in computing the portion of the gain on the sale of their old residence which is subject to nonrecognition under section 1034. Decision will be entered under Rule 155.Footnotes1. Unless otherwise indicated, all statutory references are to the Internal Revenue Code of 1954, as amended and in effect in the years in issue.↩2. At the trial, the question arose as to why petitioners were not entitled to use of the installment method provided by sec. 453 in reporting income with respect to the sale of their old residence if respondent is sustained in his position that petitioners did not use the home they constructed in New Port Richey as a principal residence within the period of 18 months from the sale of the old residence and for this reason were not entitled to use of the provisions of sec. 1034 with respect to the new house. The parties agreed to discuss this matter and petitioners were granted leave to file an amended petition claiming use of the installment method. The parties filed a supplemental stipulation of facts incorporating petitioners' pleading and the facts necessary to a computation under sec. 453. On brief, respondent conceded petitioners' right to use of the installment method and stated that the stipulated facts were sufficient for a computation on that basis and would be advantageous to petitioners. Because of respondent's concession in this respect, no issue is in this case in this regard, but the matter can be handled in a recomputation under Rule 155.↩3. SEC. 1034. SALE OR EXCHANGE OF RESIDENCE. (a) Nonrecognition of Gain.--If property (in this section called "old residence") used by the taxpayer as his principal residence is sold by him after December 31, 1953, and, within a period beginning 1 year before the date of such sale and ending 1 year after such date, property (in this section called "new residence") is purchased and used by the taxpayer as his principal residence, gain (if any) from such sale shall be recognized only to the extent that the taxpayer's adjusted sales price (as defined in subsection (b)) of the old residence exceeds the taxpayer's cost of purchasing the new residence. * (c) Rules for Application of Section.--For purposes of this section: * *(5) In the case of a new residence the construction of which was commenced by the taxpayer before the expiration of one year after the date of sale of the old residence, the period specified in subsection (a), and the 1 year referred to in paragraph (4) of this subsection, shall be treated as including a period of 18 months beginning with the date of the sale of the old residence.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622383/	FRANK BIZJAK, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentBizjak v. CommissionerDocket No. 5787-89United States Tax CourtT.C. Memo 1994-297; 1994 Tax Ct. Memo LEXIS 300; 67 T.C.M. (CCH) 3142; June 27, 1994, Filed 300 Decision will be entered under Rule 155. Frank Bizjak, pro se. For respondent: Patrick W. Turner. BUCKLEYBUCKLEYMEMORANDUM FINDINGS OF FACT AND OPINION BUCKLEY, Special Trial Judge: This case was assigned pursuant to the provisions of section 7443A(b)(3) and Rules 180, 181, and 182. 1Respondent determined a deficiency in petitioner's Federal income tax for the taxable year 1985, together with additions to tax and increased interest, in the following amounts: Additions to Tax and Increased Interest Sec.Sec.Sec. Sec. YearDeficiency6653(a)(1)6653(a)(2)6661(a) 6621(c) 1985$ 5,120$ 2561$ 1,2802301 After concessions, the issues remaining for decision are: 2 (1) Whether petitioner is entitled to a depreciation deduction on an energy management system; (2) if so, whether petitioner computed his depreciation deduction using the correct basis; (3) whether petitioner is liable for the addition to tax for negligence under section 6653(a)(1) and (2); and (4) whether petitioner is liable for increased interest under section 6621(c). FINDINGS OF FACT Some of the facts have been stipulated, and they are so found. The302 stipulation of facts and attached exhibits are incorporated herein by reference. At the time the petition herein was filed, petitioner resided in Redondo Beach, California. Frank Bizjak (hereinafter petitioner) has a degree in chemical engineering from Technical University in Graz, Austria, a B.S. in chemical engineering from Michigan Technical University, and a M.S. in chemical engineering from the University of Missouri. Petitioner worked for Intertec Design Inc. from 1983 through 1987, where he participated in the development of computer models which predict orbiter body and wing pressure environment during ascent and entry of flights. From 1974 to 1983, petitioner worked for the Energy Systems Group at Rockwell International, where he designed, developed, and tested various atmosphere control systems. Upon leaving his employment with Rockwell in 1983, petitioner received $ 60,000 and some Rockwell stock. 3 Petitioner recognized his need to invest his money and, when he was contacted in October or November of 1984 by Mr. Hoppe of Regency Financial Network, he began to explore potential investment opportunities. Mr. Hoppe suggested that petitioner invest in commodities, land, 303 or an energy management system. Petitioner viewed commodities as too risky and, although he was interested in the land investment, that opportunity never surfaced, and he began to explore seriously the opportunities available with the energy management system. Mr. Hoppe explained to petitioner that the energy management system was sold by a corporation called Sunbelt Energy Corp. (Sunbelt). Sunbelt was owned 30 percent by Murray Brooks and 70 percent by Phil Gardner. According to its sales brochure, Sunbelt was organized to manufacture and market an advanced solar-powered energy management system (system or equipment) which, by controlling air conditioning, heating, and refrigeration, would result in energy savings by commercial enterprises. Sunbelt claimed that the energy management system would reduce304 a business' annual utility bill by 20 to 30 percent. An investor derived income directly from the savings generated by the system to the business, usually at the rate of 50 percent. Sunbelt offered each system at a purchase price of $ 25,500; with $ 7,500 down and the remainder of the purchase price evidenced by an $ 18,000 nonrecourse, 15-year note bearing interest at the rate of 9 percent. In addition, each investor had to pay a one-time installation expense of $ 2,500. Sunbelt had paid only $ 2,500 for each system, but petitioner did not know Sunbelt's cost for the system. Each purchaser also entered into a Purchase and Security Agreement whereby "Buyer hereby conveys and transfers to Seller a security interest in the System, and in all proceeds derived from the sale or use thereof as security for the payment and performance of Buyer's obligation's hereunder." The sales brochure set forth the anticipated tax benefits for purchasing a system as follows: (1) 10-percent Federal investment tax credit; (2) 15-percent Federal business energy tax credit; (3) 25-percent California solar tax credit; and (4) 5-year depreciation allowances. The brochure stated that a purchaser would305 receive in the first year $ 12,750 in tax credits (half of the stated $ 25,500 purchase price) and depreciation allowances of $ 3,664, all for the initial cash expenditure of $ 10,000. On December 1, 1984, petitioner purchased one system from Sunbelt through Mr. Hoppe and Regency Financial Network. 4 Typically, when an individual purchased a system, Sunbelt provided a service company to locate a user for the system, to install the system, to monitor the energy consumption, and to collect and remit any gross receipts derived from energy savings. Petitioner entered into a service agreement with United States Energy Management Systems, Inc. (USEMS), which agreed to perform the duties listed above on petitioner's behalf. USEMS was entitled to 15 percent of petitioner's income from the user's energy savings. Petitioner then paid the one-time installation fee of $ 2,500 to USEMS. 306 Petitioner carefully reviewed the information about Sunbelt provided by Mr. Hoppe, including the sales brochure, purchase order, purchase and security agreement, and service agreement. In particular, petitioner gave substantial weight to the fact that Murray Brooks, president and 30-percent shareholder of Sunbelt, who had a B.S. in electronic engineering, had worked for 16 years in engineering and program management. Specifically, petitioner considered Murray Brooks' engineering experience on the Apollo Spacecraft Program at Rockwell International, a program with which petitioner was very familiar, representative of the quality of the investment and of those who put it together. Petitioner was aware that Mr. Hoppe was a financial adviser, with no previous experience as an engineer or with this type of energy management system. However, because of petitioner's engineering experience in general and with energy conservation techniques specifically, petitioner was confident that purchasing a system such as this one could produce a profit. To evaluate the system's profit potential, petitioner critiqued Sunbelt's cash flow projections and computed his own cash flow projections using307 a discounted cash flow analysis. After analyzing potential cash flows, petitioner concluded that a profit could probably be realized in the long run. Petitioner did not seek an independent appraisal of the system but testified he believed himself sufficiently familiar with similar systems and their cost during 1984 and felt that the purchase price was not unreasonable. Petitioner was wrong. He had never examined the equipment in question. Prior to entering into this transaction, petitioner who was familiar with the use and operation of computers, did not inspect the equipment. The record does not indicate that he made any particular attempt at such inspection. He was apparently satisfied with the statement of Mr. Hoppe that the equipment was in storage. Further, petitioner made no attempt at obtaining an independent appraisal of the property, nor did he enquire about the name of the manufacturer of the equipment. All that he knew was that it was assembled in California. He apparently knew nothing about who manufactured the components of the system. Thus, he relied entirely upon the word of Mr. Hoppe and the representations in the brochure. Petitioner's system was not installed308 prior to the end of 1984 as required by the agreement. Rather, he received a letter from USEMS confirming installation as of March 5, 1985, at a Mexican restaurant in Long Beach, California. Petitioner wanted to see his equipment functioning at its designated location, but was discouraged from doing so until August of 1985, when he waited at the restaurant for several hours before being given access to the system. He believed the equipment was operating properly. He did not have an opportunity, even then, to inspect the equipment thoroughly. All that he could testify to was that it was a 17" x 17" x 7 box with two cables. He did not inspect the solar panels and batteries on the roof. Petitioner subsequently attempted to verify that his system was operating properly. He called the restaurant in the spring of 1987 and was advised that the equipment was there but not functioning. Later, he went to the restaurant, but it was closed and out-of-business. Even later, the building disappeared. Petitioner later learned that USEMS had contracted with another company to install and maintain his equipment, and that problems existed between Sunbelt and USEMS. After filing a consumer309 complaint against USEMS, petitioner abandoned his equipment late in 1986 or 1987. Petitioner is an intelligent, well-educated and sophisticated person. We find it difficult to believe that he entered into the Sunbelt transaction for anything other than the projected tax benefits. He had the capability to examine the equipment personally and to consider its programming, but he failed to do so. Further, while petitioner knew and was aware of the cost of some computers utilized at his work, he did not know enough about the Sunbelt equipment to begin to be able to make any comparative analysis of its value. For purposes of his cashflow projections, petitioner simply accepted the words of Mr. Hoppe and the sales brochure. We are unable to conclude that petitioner entered into this transaction with an honest profit objective. OPINION Respondent disallowed petitioner's depreciation deduction for the taxable year 1985 by asserting that petitioner did not purchase the equipment with the requisite profit objective. Respondent also determined that petitioner was liable for an addition to tax for negligence and for increased interest under section 6621(c). Petitioner argues that he 310 is entitled to depreciation of his energy management system because he invested in it with a profit objective, and that the negligence penalty should not apply because he exercised reasonable care when making this investment. Petitioner bears the burden of proving that respondent's determinations are erroneous. Rule 142(a); Welch v. Helvering, 290 U.S. 111">290 U.S. 111 (1933). Depreciation.Section 167(a) allows a depreciation deduction for the exhaustion and wear and tear of property used in a trade or business or held for the production of income. 5312 To depreciate his energy management system, petitioner must demonstrate that he held it with the primary intention and motivation of making a profit. Jasionowski v. Commissioner, 66 T.C. 312">66 T.C. 312, 319 (1976); Leonard v. Commissioner, T.C. Memo. 1993-472; Langlois v. Commissioner, T.C. Memo. 1988-415, affd. without published opinion 886 F.2d 1316">886 F.2d 1316 (6th Cir. 1989). Although a reasonable expectation of profit is not required, the facts and circumstances must indicate that petitioner entered into the311 activity with an actual and honest profit objective. Beck v. Commissioner, 85 T.C. 557">85 T.C. 557, 569 (1985); Dreicer v. Commissioner, 78 T.C. 642">78 T.C. 642, 644-645 (1982), affd. without opinion 702 F.2d 1204">702 F.2d 1204 (D.C. Cir. 1983). When determining whether an actual and honest profit objective exists, the Court examines all the facts and circumstances, giving greater weight to objective facts than to petitioner's statement of intent. Engdahl v. Commissioner, 72 T.C. 659">72 T.C. 659, 666 (1979); sec. 1.183-2(a) and (b), Income Tax Regs. The regulations list nine nonexclusive factors relevant to the issue of profit objective.6 However, no one factor is controlling. Sec. 1.183-2(b), Income Tax Regs.Based upon the record, we hold that petitioner did not purchase the equipment with an actual and honest objective of making a profit. Unlike the typical investor, petitioner was intimately familiar with the technical manner in which an energy management system, set up to reduce the cost of air conditioning, heating, and refrigeration, could provide energy savings to a commercial business owner. Petitioner spent a large portion of his career designing, developing, 313 and testing atmosphere control systems and testified that he believed that by purchasing this system he could profit from the energy savings the system could provide. We note, however, that petitioner did not have any particular expertise about the cost of such systems, nor did he seek such expertise. Petitioner evaluated his investment by evaluating the cash flow projections provided by Sunbelt and by producing his own discounted cash flow analysis. Petitioner, based on his limited knowledge, felt the purchase price was reasonable, but he had nothing to support this belief. Petitioner may have hoped for substantial energy conservation over the long-term, but we believe he mainly hoped for substantial tax savings. Petitioner failed to explain to the Court why he continued with the project when Sunbelt failed to keep its promise that the equipment would be installed and operating during 1984. Petitioner later took an active role with respect to his equipment. He expended some time and energy attempting to physically view the system and to insure to his satisfaction that it was working properly. In fact, it was through petitioner's persistence that he learned that Sunbelt and314 USEMS were at loggerheads and that USEMS had subcontracted out the installation of his equipment. Soon after learning of these events, petitioner filed a formal complaint against USEMS. However, these are things that he did after entering into the transaction and after filing his 1985 return. Petitioner's earnings as an engineer do not fit the typical profile of someone that invests purely to shelter income without a profit objective. The $ 60,000 that petitioner received in 1983 from Rockwell exceeded his wages for the year in issue. We believe petitioner's subjective goal was to profit from his investment, but a substantial part of the way in which he expected to profit was through tax considerations. We do not believe that petitioner entered into the transaction with an honest and actual profit objective. Petitioner is not entitled to the deduction for depreciation. 7315 Negligence. Section 6653(a)(1) imposes an addition to tax if any portion of an underpayment is due to negligence or intentional disregard of the rules or regulations. Section 6653(a)(2) provides for an addition to tax in an amount equal to 50 percent of the interest due on the portion of the underpayment attributable to negligence. Negligence under section 6653(a) is 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). Petitioner maintains that he exercised reasonable care when he invested in and depreciated the energy management system because his experience with similar systems enabled him to objectively evaluate the financial merits of the investment. We do not agree. We find it incredible that petitioner, a chemical engineer with extensive experience in computer models for the Rockwell shuttle programs, would invest in a piece of equipment about which he knew so little. Petitioner is an intelligent and educated taxpayer who, after receiving a fairly large amount of money, decided to make an investment. He did so with little316 interest in the equipment. We cannot agree that he exercised due care in claiming this amount on his 1985 return, and hold that he was negligent in so doing. Section 6661(a). In view of respondent's concession regarding the Zond Energy issue, it is apparent that the provisions of section 6661(a) will not be applicable. Increased Interest. Section 6621(c), formerly section 6621(d), provides for an increased interest rate with respect to any "substantial underpayment" (greater than $ 1,000) in any taxable year attributable to a tax-motivated transaction. The increased rate applies to interest accrued after December 31, 1984, even though the transaction was entered into prior to the date section 6621(c) was enacted. Solowiejczyk v. Commissioner, 85 T.C. 552">85 T.C. 552, 556 (1985), affd. without published opinion 795 F.2d 1005">795 F.2d 1005 (2d Cir. 1986). The term tax-motivated transaction includes a transaction where any loss was disallowed by reason of section 465(a) or a transaction which is devoid of economic substance and without a profit objective. Sec. 6621(c)(3); Larsen v. Commissioner, 89 T.C. 1229">89 T.C. 1229 (1987),317 affd. in part and revd. in part sub nom. Casebeer v. Commissioner, 909 F.2d 1360">909 F.2d 1360 (9th Cir. 1990). This transaction was devoid of economic substance. We hold petitioner liable for increased interest under section 6621(c), if upon computation of his liability under the Sunbelt investment his underpayment is greater than $ 1,000. To reflect the foregoing, Decision will be entered under Rule 155. Footnotes1. Unless otherwise indicated, section references are to the Internal Revenue Code in effect for the year at issue; Rule references are to the Tax Court Rules of Practice and Procedure.↩1. 50 percent of the interest due on the deficiency.↩2. The annual rate of interest under sec. 6621(c) is 120 percent of the interest payable under sec. 6601 with respect to any substantial underpayment attributable to a tax-motivated transaction.↩2. The parties entered into a Stipulation of Settled Issues regarding determined deficiencies resulting from an investment in the Zond Wind System and, as a result of the stipulation, respondent completely conceded that issue so that petitioner is entitled to a $ 7,173 deduction from his investment in Zond Energy, and no additions to tax apply to that investment under secs. 6653(a)(1) and (2) and 6661. Further the parties agree that there is no increased interest under sec. 6621(c) in regard to Zond.↩3. It is possible that the $ 60,000 represented pension benefits, as petitioner stated at trial that he was entitled to 10-year averaging during those years. He referred to the amount received as his "savings".↩4. Petitioner made the $ 7,500 cash downpayment on the system and the one-time installation fee of $ 2,500. Petitioner never made any principal payments on the $ 18,000 note he executed for the purchase of the equipment. The record does not indicate that he ever received any income from the system.↩5. Respondent maintains that even if petitioner is entitled to depreciate the equipment, his depreciation deduction must be computed based only on petitioner's $ 7,500 downpayment, exclusive of the nonrecourse note. Petitioner included the $ 18,000 nonrecourse note as part of his basis for depreciation purposes.↩6. The nine 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) expectation that assets used in the activity may appreciate in value; (5) the success of the taxpayer in carrying on other similar or dissimilar activities; (6) the taxpayer's history of income or losses with respect to the activity; (7) the amount of occasional profits, if any, which are earned; (8) the financial status of the taxpayer; and (9) elements of personal pleasure or recreation. Sec. 1.183-2(b), Income Tax Regs.↩7. Even if petitioner were entitled to the deduction for depreciation, the amount of depreciation would be much less than claimed. Sec. 167(a) allows a deduction for depreciation for the exhaustion and wear and tear of property used in a trade or business or held for the production of income. Sec. 465 limits deductions so related to the amount for which petitioner is at risk. Sec. 465(a)(1), (c)(3). Amounts considered at risk include money and property contributed to an activity and amounts borrowed, if the taxpayer is personally liable for repayment or has pledged property (other than property used in the activity) for the amount borrowed. Sec. 465(b). However, borrowed amounts are not at risk to the extent that such amounts are protected against loss through "nonrecourse financing, guarantees, stop-loss agreements, or other similar arrangements." Sec. 465(b)(4). Although petitioner failed to have the note available for trial, he does agree that it was nonrecourse in nature. Accordingly, were petitioner allowed depreciation, his basis for purposes of depreciation is $ 10,000 consisting of his down-payment of $ 7,500 and the installation costs of $ 2,500.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622384/	GEORGE J. DELMEGE, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. T. F. GREFE, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. HOMER A. MILLER, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Delmege v. CommissionerDocket Nos. 30347, 34176, 34177.United States Board of Tax Appeals22 B.T.A. 1059; 1931 BTA LEXIS 2022; April 3, 1931, Promulgated 2022 Walter E. Barton, Esq., and Raymond C. Cushwa, Esq., for the petitioners. H. B. Hunt, Esq., for the respondent. VAN FOSSAN 1059 OPINION. VAN FOSSAN: These proceedings, duly consolidated for hearing and decision, were brought for the redetermination of deficiencies assessed against each of the petitioners, respectively, in the sum of $3,704, as transferees of the assets of the Central National Fire Insurance Company of Des Moines, Iowa, for income taxes in that amount for the year 1923, which were unpaid by the Central National Fire Insurance Company. In their several amended petitions petitioners make seventeen assignments of error. They have, however, waived all of such assignments of error except six - three in which the question of the constitutionality of section 280 of the Revenue Act of 1926 is raised, and three which are substantially as follows: (1) Whether or not a certain amount received by the Central National Fire Insurance Company during 1923 as repayment of a mortgage 1060 loan was improperly included in the gross income of that company for 1923 by respondent. (2) Whether the amount of $85.50 received by the Central2023 National Fire Insurance Company during 1923 as payment for certain school warrants was improperly included in the gross income of that company for 1923 by respondent. (3) Whether the sum of $46.71 interest received on account of certain school bonds and school warrants by the Central National Fire Insurance Company was improperly included in the gross income of that company for that year by respondent. At the hearing of these proceedings it was stipulated between the parties that the petitioners were transferees of the assets of the Central National Fire Insurance Company of Des Moines, Iowa, and that they were respectively liable for the payment of any income tax for the year 1923 determined to be due from that corporation. It was also stipulated that "the Central National Fire Insurance Company sustained in 1923 a loss of $6,765.98 in connection with the sale of certain real estate, which said loss was not allowed by the Commissioner in the 60-day letter." It was further stipulated that if this Board should find, in a proceeding pending before it at the date of the hearing herein, in which proceeding the Central National Fire Insurance Company was petitioner, that if any net2024 loss sustained in 1921 by that company was not exchausted in being credited against the net income for 1922, the balance of such net loss might be carried forward and "applied against the Company's net income for 1923." During the year 1923 the Central National Fire Insurance Company received the sum of $37,867.02 as repayment of a loan made on the security of a mortgage on real estate. This amount was entered in the company's cash book. The Central National Fire Insurance Company filed a corporation income tax return for the year 1923. During 1923 it was liquidating its affairs. In this return it reported the amount of total income received as $68,264.72. The return also stated expenditures in the sum of $139,296.81. Included in the amount of income disclosed by the return was the sum of $85.50, which was the amount received from the sale of school warrants. These warrants cost the insurance company the same sum, namely $85.50. The income reported also included $45 interest on school bonds and the sum of $1.71 interest on a school warrant. The respondent assessed a tax for the year 1923 against the Central National Fire Insurance Company in the sum of $3,074, having2025 determined the net income of the Central National Fire Insurance Company for the said year to be of $29,632. 1061 Three of petitioners' assignments of error raise the question of the constitutionality of section 280 of the Revenue Act of 1926. Decision in this issue is governed by our decision in , followed in many subsequent cases. See also ; . We are of the opinion that the sale of school warrants for which the Central National Fire Insurance Company received during 1923 the sum of $85.50, which was the amount the warrants cost, was a sale of capital assets resulting in no taxable gain and that the amount received on such sale should not be included in gross income. We are also of the opinion that the sums of $45 and $1.71, interest respectively on school bonds and school warrants, were nontaxable income, for the reason that these amounts were interest on the obligations of a political subdivision of a State. They should, therefore, be deducted from gross income. The proof shows that the2026 sum of $37,867.02 was received during 1923 by the Central National Fire Insurance Company as repayment of a mortgage loan and that it represented a return of capital. However, our attention has not been directed to any evidence, nor have we found any proof, which shows that this amount was included in gross income either in the return for 1923 made by the Central National Fire Insurance Company, or in respondent's computation of that company's gross income for 1923. Therefore, we can not hold that, upon redetermination, it should be deducted from gross income. In the proceeding referred to above in which the Central National Fire Insurance Company was petitioner and which was pending before this Board at the date of the hearing, we have decided that the Central National Fire Insurance Company sustained a net loss in 1921 amounting to $6,363.57, which should be deducted from that company's income for 1922. However, since the insurance company had a large net income for 1922, all of this 1921 loss was absorbed and no part remained to be carried over into 1923, under the stipulation with respect thereto made between the parties to these proceedings. Judgment will be entered*2027 under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622389/	JOHN H. WATSON, JR., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Watson v. CommissionerDocket No. 89671.United States Board of Tax Appeals38 B.T.A. 1026; 1938 BTA LEXIS 797; October 26, 1938, Promulgated 797 1. Certain stock in one company, and interests in another, both admittedly worthless, became so during the calendar year, 1934, and their cost to the taxpayer is deductible as a loss sustained in that year. 2. Where a taxpayer's mother, living with the taxpayer, a single man, possessed an estate of $100,000, and an annual income in excess of $3,000, though taxpayer paid out approximately $5,000 because of her residence with him during the taxable year, he was not the "head of a family" within Regulations 86, article 25-4, and is, therefore, not entitled to personal exemption in the amount of $2,500, under the Revenue Act of 1934, section 25(b)(1). Louise C. Ball,16 B.T.A. 785">16 B.T.A. 785, followed. Robert W. Wheeler, Esq., for the petitioner. W. H. Payne, Esq., for the respondent. LEECH1026 Respondent determined a deficiency of $8,579.77 in petitioner's income tax for the calendar year, 1934. The issues raised by the pleadings are: (1) Did petitioner sustain a loss in the amount of $46,250 in that year; (2) was he entitled to the personal exemption of $2,500, as the head of a family, for that year? 1027 FINDINGS OF798 FACT. On March 26, 1930, at a cost of $46,250, petitioner purchased 5 certificates evidencing, in the aggregate, ownership of 500 shares of the capital stock of the Union Trust Co., hereinafter called the Trust Co., of Cleveland, Ohio, and of interests in the Union Cleveland Corporation. He has held the same as his own since that date. The Trust Co. is and, during the period pertinent herein, was a banking corporation, organized under the laws of the State of Ohio, and had an authorized issued and outstanding capital stock of 914,000 shares of a par value of $25 per share. It was the largest bank in Cleveland. During the year 1932, there was a gradual reduction in the ratio of deposit credits to withdrawals from the bank, which caused a constant shrinkage of its net deposits. In the early part of 1933, withdrawals of deposits increased rapidly, due, in part, to the fact that many large depositors drew on their accounts in the Trust Co. to meet obligations in other communities, notably Detroit and Toledo, where banks had already suspended payment, and, in part, to the fact that other banks, of which the Trust Co. was a depositary, withdrew their funds from the Trust Co. to meet799 their own needs. In January or February 1933, the Trust Co. deposited with the Reconstruction Finance Corporation a "good bit" of its readily liquid collateral. The result of the deposit withdrawals and the pledging of this liquid collateral with the Reconstruction Finance Corporation was the depletion of the Trust Co.'s liquid assets and its increase in proportion of its assets consisting of real estate loans and the like, which could not be readily converted into cash, so that these latter assets were out of proper proportion to their other investments and, so long as such. disproportion existed, the Trust Co. was not in a safe condition to engage in the banking business under the provisions of the Ohio statute requiring that a bank's real estate loans be not greater than 20 percent of the amount of its reserves. On February 25, 1933, together with most of the other Cleveland Clearing House banks, the Trust Co. imposed restrictions upon withdrawal of 95 percent of its deposits. The Trust Co. was closed at the beginning of the "bank holiday" in March 1933 and was not thereafter licensed to reopen. Subsequent thereto, and throughout 1933, promising attempts were made to reorganize800 the Trust Co. with the consent of the state banking department. No reorganization was consummated during that year. On April 8, 1933, the Superintendent of Banks of Ohio appointed Oscar L. Cox, Deputy Superintendent of Banks, as conservator of the Trust Co. On June 15, 1933, the Superintendent of Banks of Ohio took possession of the Trust Co. pursuant to the laws of Ohio, appointing such Oscar L. Cox, liquidator, because the 1028 bank was then deemed to be in an unsound or unsafe condition to transact its business because of the heavy withdrawals and the frozen condition of its assets, and not because of insolvency. The book value of the Trust Co.'s assets, as of that date, showed a margin of about 25 percent of assets over liabilities. In July or August of 1933, at the direction of the superintendent of banks, the liquidator began an appraisal of the assets and liabilities of the Trust Co. On December 30, 1933, he released to the Cleveland papers a so-called "interim report", which report was published in the papers of that city on December 31, 1933, and January 1, 1934. It was directed "To Depositors, Stockholders and Friends of The Union Trust Company" and contained801 the following: It seems appropriate that an interim report be made to the depositors, stockholders, and friends of The Union Trust Company, not only as to the progress so far made in liquidation, which has been done from time to time, but also as to estimates of the values of the assets and the liabilities there against. This is particularly timely at this time of year when such information is necessarily required for statements and tax purposes. Following the heavy duties imposed upon our staff in preparation of borrowings from the Reconstruction Finance Corporation and The National City Bank in July, and the unprecedented volume of activity resulting in the payment of a dividend, specific attention has been given to the appraisal of the many thousand of asset items, using the schedules as of August first, the work being done in the three succeeding months, and resulting in the following tentative classifications in round figures. ASSETS:Good$18,599,000.00Slow105,456,000.00Doubtful17,093,000.00Loss41,508,000.00LIABILITIES:Bills Payable, Depositors' Certificates, and Reserves for non-book liabilities, without provision for excess of expenses over income$153,097,000.00802 These studies and valuations have necessarily been made and directed by our staff under the stress of our current duties and under business conditions rendering any forecast more than normally difficult. It is recognized that the limited collection experience, and exceedingly unsettled business conditions prevalent during the period of this valuation, emphasize the propriety of a re-check of our estimates against actual and further collection experience, after some opportunity to view the business outlook after the turn of the year. When the further survey is made, an appropriate certificate as to the results then found will be made to the Superintendent of Banks in connection with the levying or non-levying of stockholders' liability. In the classification of assets, those shown as "Good" or "Slow" were appraised at amounts believed to be realizable, or maintainable over a reasonable period. The assets classified as "Loss" were those concerning which our investigators found no basis for belief that collection can be reasonably expected. 1029 The "no man's land" between the first two classifications and the fourth was recognized as thoroughly "Doubtful" and so803 classified. It is appropriate to mention the value of the information and counsel supplied by the Depositors' Committee as to very many of the assets covered, and also to note the services of the Stockholders' Committee. While concurrence has been had in the main, all decisions arrived at are those of our own staff. For these decisions and the methods of the appraisal, the writer takes responsibility and with few exceptions concurs in the results shown. This appraisal was abandoned as any determination of the bank's insolvency when the liquidator reported to the superintendent of banks that he was of the opinion that it was inaccurate, that those responsible for the immediate preparation of the report did not have sufficient experience and were not sufficiently familiar to undertake such a large task. A subsequent appraisal of the assets and liabilities of the Trust Co. was made under the direction of the liquidator as of January 31, 1934, and completed in July 1934. This appraisal showed an excess of liabilities over the appraised value of the assets of approximately $26,000,000. This report was filed with the superintendent of banks of the state. Immediately thereafter, 804 on July 27, the liquidator wrote to the superintendent of banks of the State of Ohio, recommending that the stockholders' double liability be enforced. This letter provides, in part, as follows: Somewhat more than one year's experience has now been had in dealing with the assets of The Union Trust Company, and two appraisals have been made by our staff under the writer's direction, at six months' intervals. Our exhaustive consideration of these appraisals, the last as of January 31st, 1934, and recently available, in our judgment discloses: Book Value of Assets$167,534,482.13Estimated Liquidation Value of Assets111,500,000.00Liabilities137,346,957.22Approximate Excess Liabilities over Liquidation Value26,000,000.00Par Value of Shares Outstanding22,850,000.00On July 30, 1934, under the instructions of the superintendent of banks, the 100 percent assessment of their individual liability was made, as of August 1, 1934, against the stockholders of the Trust Co., pursuant to the laws of Ohio. The investment of the petitioner in the stock of the Trust Co. became worthless during 1934. The Union Cleveland Corporation, hereinafter called the Cleveland805 Corporation, was a security affiliate of the Trust Co. and did their securities and investment business. Petitioner's ownership of the interests in the Cleveland Corporation was evidenced by an endorsement on the reverse side of the Trust Co.'s stock certificates, and were transferable only upon transfer of stock in the Trust Co. The two corporations were separate and distinct entities. Following the appoiintment of a liquidator for the Trust Co., the Cleveland Corporation 1030 continued its business under its own management. Its assets consisted largely of securities, the major portion of which were placed with the Trust Co. as security for loans, with power of sale on default. Summarized, the facts regarding these collateral loans with the Trust Co. are as follows: Notes payable, the Union Trust Co. - secured$3,571,606.21Investments$4,329,106.08Less securities not pledged1,241,897.31Balance pledged3,087,208.77Undercollateralized484,397.44About July 1933, petitioner became attorney for the Cleveland Corporation. At that time it owned a large number of securities having various degrees of marketability. It also held stocks806 of the Trust Co., Chagrin Falls Banking Co., and Western Mortgage Co., which it alleged had been purchased for the Trust Co. The balance sheet of the Cleveland Corporation as of December 31, 1933, shows assets of $4,837,371.11 and liabilities of $4,769,202.35. The assets therein appear at book value except those pledged, which in practically all instances were carried at market. The liabilities set out therein were not admitted by the corporation to be correct because it was then contended that the several purchases of stock, mentioned above, had been made for the Trust Co. and it was then claiming that these assets be taken over by the receiver and credit be given for their cost against the indebtedness of the Cleveland Corporation to the Trust Co.Shortly after July 1933, Louis West, an experienced man in the securities business, was elected president of the Cleveland Corporation, to carry out an orderly plan of liquidation which contemplated securing from the liquidator of the Trust Co. acknowledgment of that company's responsibility for the purchases made for it by the Cleveland Corporation and the allowance of the consequent credits of the cost of the Cleveland Corporation807 for those assets, against the loans of that corporation from the Trust Co. At the end of November, West resigned to become Finance Director of the City of Cleveland, and in January 1934 petitioner was elected president of the Cleveland Corporation, to carry on the program adopted. During 1934, the liquidator of the Trust Co. acceded to the claims of the Cleveland Corporation that the Western Mortgage Co. stock held by the Cleveland Corporation had been purchased for the Trust Co. and took over that stock, crediting the Cleveland Corporation in the amount of its cost to it against its loans from the Trust Co. However, in May 1934 the liquidator, exercising the power of sale contained in the collateral notes of the Cleveland Corporation to the Trust Co., sold out the collateral, which consisted of substantially all of the assets of the Cleveland 1031 Corporation except the stock of the Trust Co. and the Chagrin Falls Banking Co. This forced sale left the Cleveland Corporation with insufficient assets to meet its remaining liabilities even had the liquidator of the Trust Co. then acceded to the claims of the Cleveland Corporation with respect to the remaining assets which808 the Cleveland Corporation claimed that it had purchased for the Trust Co.The interests in the Cleveland Corporation, owned by petitioner, became worthless during 1934. Petitioner's father and mother formerly lived at Montpelier, Vermont. Subsequent to the death of petitioner's father, petitioner, in 1931, brought his mother to Cleveland to make her home with him. She was then mentally and physically frail from age. The petitioner, who was a single man, had formerly occupied an apartment, but to meet the changed conditions occasioned by his mother's coming to live with him, he then rented and furnished a house. This house was later sold at foreclosure sale and petitioner there bought it. During the calendar year 1934, the portion of the total household expenses paid by petitioner, made necessary by his mother's residence with him, amounted to approximately $5,000. During the time petitioner's mother made her home with petitioner, she was possessed of an estate of approximately $100,000 in liquid assets. Petitioner handled all her business matters, was familiar with her property, and disbursed her income. During the taxable year 1934, the income of petitioner's mother from809 her property amounted to $3,231.65, plus a profit on the retirement of Liberty bonds in an undisclosed amount. Of this income, petitioner applied the sum of $588.90 in expenditures necessary in connection with her home in Vermont, $935 in payment of her personal nurse, and $433.60 for her support and maintenance. The balance was held intact as an addition to her estate. Petitioner's mother has since died, intestate. Her only heirs are petitioner and his brother, who each inherited one-half of her property. In his return for the calendar year 1934, petitioner took credit for a deduction of $2,500 as the head of a family. Respondent reduced this deduction to $1,000, as the amount deductible by a single person not the head of a family. During the taxable year, 1934, the petitioner was not the head of a family, within the meaning of Regulations 86, article 25-4. OPINION. LEECH: It is admitted that petitioner has sustained a loss of his investment in the stock of the Trust Co. and his interest in the Cleveland Corporation. The first issue here raises only the question of whether he is entitled to deduct this admitted loss in either of these companies, in the computation810 of his income tax for 1934. He 1032 has that right if, and only if, such loss was sustained in that year by reason of that investment then becoming worthless. Revenue Act of 1934, sec. 23(e). The time when a loss is sustained is generally fixed by some closed and completed transaction, but both the statute, supra - see United States v. White Dental Manufacturing Co.,274 U.S. 398">274 U.S. 398 - and Regulations 86, article 23(e)-1, permit the deduction of losses fixed by the occurrence of other identifiable events. Thus, if the worthlessness of petitioner's investment in the Trust Co. and the Cleveland Corporation was "fixed by identifiable events" 1 which happened in 1934, he is entitled to the disputed deduction. Whether it was so fixed is a question of fact, John B. Marsh,38 B.T.A. 878">38 B.T.A. 878, the answer to which requires the application of a practical, not a legal, test. Lucas v. American Code Co.,280 U.S. 445">280 U.S. 445. To be deductible in 1934, this loss must be fixed by events which would satisfy neither "an incorrigible optimist", 811 United States v. White Dental Manufacturing Co., supra, nor a confirmed pessimist. Although these events need not be ascertained by the taxpayer to support a deductible loss, Alfred Hafner,31 B.T.A. 338">31 B.T.A. 338, they must be such events as would clearly evidence to the person of average intelligence, under the circumstances, that no probability of realization of anything of value from this investment, by sale, liquidation, or otherwise, thereafter existed. Royal Packing Co. v. Commissioner, 22 Fed.(2d) 536; William E. Metzger,21 B.T.A. 1271">21 B.T.A. 1271; George H. Horning,35 B.T.A. 897">35 B.T.A. 897. Respondent argues that petitioner's investment in both the Trust Co. and the Cleveland Corporation became worthless in 1933, because of events occurring in that year. As to the Trust Co. stock, he points to the series of events then happening, including the successive appointments of a conservator, then a liquidator, and culminating in the report of that liquidator published December 30 and 31, 1933, and January 1, 1934, in the Cleveland newspapers. Petitioner answers812 that none of these occurrences clearly evidence the absence of probability of later realization on this stock. He contends the final report of the liquidator filed in July 1934, showing the status of the Trust Co. as of January 31, 1934, and the assessment of the stockholders' liability immediately made upon the basis of the recommendation accompanying that report, were the events which "fixed" the loss. Since the issue is entirely factual, its decision must, of course, rest upon the facts disclosed by the present record. Other cases may be helpful, but none, so far as we have found, are controlling here. 1033 Neither the appointment of a conservator nor that of a liquidator "fixed" the loss here. Jarvis v. Heiner, 39 Fed.(2d) 361; Burnet v. Imperial Elevator Co., 66 Fed.(2d) 643; W. W. Hanly,6 B.T.A. 613">6 B.T.A. 613; Oscar K. Eysenbach,10 B.T.A. 716">10 B.T.A. 716. The bank was the largest in Cleveland. So far as was then known, it was solvent. The book value of its assets then exceeded its liabilities by a margin of about 25 percent. Its only disclosed difficulty was the disproportionate deplepletion of its cash813 and liquid assets to other assets. Attempts at reorganization and reopening were continuing with the open encouragement of the state banking department. No assessment of the shareholders' liability was then made. Certainly, then, nothing happened in 1933 which eliminated the reasonable probability that petitioner would realize something from this stock, unless it was the "interim report" of the liquidator during the last day of that year. In viewing the picture as a whole, instead of intimating a finding of insolvency, we think this "interim report" shows rather that the liquidator, at the close of 1933, had real doubt on that question. It must be remembered that under Ohio law, 2 the Superintendent of Banks of Ohio was charged with the duty of enforcing stockholders' liability upon ascertainment of its insolvency. The immediate responsibility of ascertaining the condition of the bank and, if insolvlent, to recommend the assessment of the stockholders' liability, either partial or entire, restred primarily upon the liquidator. He made no recommendation after his "interim report." In fact, he never filed that report with the superintendent of banks of the state. It was abandoned814 for all purposes relating to any determination of the bank's then insolvency. Whatever the intent prompting it, the liquidator of the bank, the person in closest touch with its financial position and who issued the report, refused himself to accept it. He did not then recommend the assessment of any part of the shareholders' liability. It was not then assumed as it was in the case of other banks which were insolvent. Thus, unless we improperly ascribe to the liquidator a dereliction in his duty, he must have then believed the bank solvent. A necessary practical complement of that premise is that, at the close of 1933, the author of this "interim report" who, the taxpayer, as a man of average intelligence, had a right to assume, knew the actual financial condition of the bank, undoubtedly permitted the implication that he thought something of value would probably be realized by the stockholders from their stock. It follows, we think, that such report can not have operated as an event eliminating a reasonable hope of realization upon this stock. See 815 Henning Bruhn,11 B.T.A. 809">11 B.T.A. 809. Although of no controlling influence here, it may be interesting to note that the respondent has recognized as the general rule of administration, 1034 in such cases, that the assessment of the shareholders' liability "fixes" their stock loss. 3 In fact, that was the administrative position taken here by respondent as disclosed in a letter to shareholders of the Trust Co. early in 1934, advising that nothing had yet occurred fixing the loss on such stock. Indeed, at the direction of the collector of internal revenue at Cleveland, who was then familiar with the "interim report", two radio broadcasts were made early in 1934, pointedly advising shareholders of the Trust Co. to the same effect. It is now indicated that, for some unexplained reason, this administrative position was changed and published in 1935. Failure, as here, to show sales of this stock during 1933, undoubtedly tends to show absence of market value for this stock in that year. 816 Mark D. Eagleton,35 B.T.A. 551">35 B.T.A. 551; affd., 97 Fed.(2) 62. But we do not consider it decisive in the present circumstances, on the question of reasonableness of petitioner's hope of realizing from the liquidation of this stock at the end of that year. Considering only the record before us, we think the effect of that evidence, as well as the burden of proof, has been overcome by petitioner. Petitioner's loss in the stock of the Trust Co. was "fixed" by the report of the liquidator of July 1, 1934, as of January 31, 1934, his accompanying recommendation, and the assessment of the shareholders' liability immediately pursuant thereto. Cf. W. C. Coleman,31 B.T.A. 319">31 B.T.A. 319; affd., 81 Fed.(2d) 455. Respondent contends that petitioner's interest in the Cleveland Corporation also became worthless in 1933. He attempts to support this conclusion upon the premise that the Trust Co. stock then became worthless and the further fact that, at the end of 1933, the loans of the Cleveland Corporation from the Trust Co. were undercollateralized. But we have found that the Trust Co. stock did not become worthless until 1934. And, if the claim817 of the Cleveland Corporation that securities, then held by it, were purchased for and should be taken over by the Trust Co. and credited against its loans from that company at their cost to the Cleveland Corporation, were proved, the loans of the Cleveland Corporation from the Trust Co. were not undercollateralized. At the close of 1933, the balance sheet of the Cleveland Corporation showed assets of $68,168.76 over and above its liabilities, and in this balance sheet the pledged assets, representing the greater portion of its total holdings, were not included at cost but at their market value. In view of that fact and its then undecided claim against the Trust Co., this record reveals no event, either in the beginning of its liquidation, or otherwise, which "fixed" petitioner's 1035 loss of his investment in the Cleveland Corporation during 1933. William H. Redfield,34 B.T.A. 967">34 B.T.A. 967; Wiilliam E. Metzger, supra;W. W. Hanly, supra.However, in May 1934 the liquidator of the Trust Co., by virtue of the power of sale contained in the notes of the Cleveland Corporation, sold out the collateral for the loans evidenced by those818 notes. This collateral constituted almost all of the assets of the Cleveland Corporation except its claims with reference to the securities, above mentioned, consisting of Trust Co. stock and Chagrin Falls Banking Co. stock. This forced sale eliminated all reasonable probability of holders of interests in the Cleveland Corporation realizing anything on their investments therein, even though the contention of the Cleveland Corporation as to the Trust Co. stock and the Chagrin Falls Banking Co. stock held by it, was sustained. This is so, since the result of that sale of the pledged securities of the Cleveland Corporation was the definite insolvency of the Cleveland Corporation. That forced sale was the event, therefore, which "fixed" the petitioner's loss of his investment in Cleveland Corporation. Petitioner's loss of his cost of that investment was sustained in 1934 and we have so found. Our decision that petitioner's stock in the Trust Co. and interests in the Cleveland Corporation became worthless during 1934, eliminates the necessity of deciding whether the loss could be allocated. See 819 Stanley Hagerman,34 B.T.A. 1158">34 B.T.A. 1158. The remaining issue is whether respondent was correct in denying petitioner a credit of $2,500 against his net income, under section 25(b)(1) of the Revenue Act of 1934, as the "head of a family." Respondent has allowed a credit to the extent of $1,000, on the ground that petitioner was a single person, not the head of a family. The cited section grants the credit to the head of a family but does not define that term. The wording of this provision is the same as that appearing in prior revenue Acts. Respondent has construed it consistently in his regulations. Thus, article 25-4 of Regulations 86, issued in connection with the Revenue Act of 1934, which applies here, construed the term as follows: A head of a family is an individual who actually supports and maintains in one household one or more individuals who are closely connected with him by blood relationship, relationship by marriage, or by adoption, and whose right to exercise family control and provide for these dependent individuals is based upon some moral or legal obligation. * * This consistent interpretation of the language by regulation, with its continued820 use unchanged in succeeding revenue acts, gives the regulation the force and effect of law. Maryland Casualty Co. v. United States,251 U.S. 342">251 U.S. 342. Upon this ground we sustained the 1036 regulation as correctly construing the statute in Alfred E. Fuhlage,32 B.T.A. 222">32 B.T.A. 222. See also Louise C. Ball,16 B.T.A. 785">16 B.T.A. 785, and Joseph H. Rudiger,22 B.T.A. 204">22 B.T.A. 204; Olive Ross,37 B.T.A. 928">37 B.T.A. 928. It is true he expended approximately $5,000 in the taxable year, from his income because of his mother's residence with him. However, it is also apparent that his mother was possessed of an estate in excess of $100,000 and had a yearly income of more than $3,000. Obviously, petitioner's mother was not financially dependent upon him within the meaning of the regulation. We sustain the respondent on this issue. Louise C. Ball, supra.Decision will be entered under Rule 50.Footnotes1. Regulations 86, art. 23(e)-1, supra.↩2. Ohio General Code, sec. 710-95. ↩3. I.T. 2617XI-1 C.B. 129; I.T. 2843XIV-1 C.B. 77↩.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622390/	JFM, INC. AND SUBSIDIARIES, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentJFM, Inc. v. CommissionerDocket No. 2470-92United States Tax CourtT.C. Memo 1994-239; 1994 Tax Ct. Memo LEXIS 234; 67 T.C.M. (CCH) 3020; May 26, 1994, Filed; As Corrected June 6, 1994 234 For petitioner: Harris H. Barnes III. For respondent: J. Craig Young. GERBERGERBERMEMORANDUM FINDINGS OF FACT AND OPINION GERBER, Judge: Respondent determined deficiencies in petitioner's 1986 and 1987 consolidated Federal income tax in the amounts of $ 60,558 and $ 30,508, respectively. The issues presented for our consideration are: (1) Whether franchise fees are includable in the year of receipt or in the year the contractual performance is complete; and (2) whether gasoline pump canopies, fixtures, and signs should be classified in a 20-year depreciation class life, as determined by respondent, or in a shorter-year class life as advocated by petitioner. FINDINGS OF FACT 1General BackgroundPetitioner, JFM, Inc., and its three wholly owned subsidiaries (JFM) are all Delaware corporations with their principal place of business in 235 Jackson, Mississippi. Consolidated returns were filed for 1986 and 1987, and the accrual method of accounting was employed for tax and financial purposes. JFM was incorporated during 1920 under the name "Jitney Jungle, Inc." JFM sold supermarket franchises until the early 1960s, when it began franchising convenience stores under the name "Jitney Junior". Beginning in 1972, the franchise name was changed to "Junior Food Mart" (Mart). Franchise FeesDuring the 1980s JFM was under contract with about 60 franchisees, each operating from 1 to 70 Marts. At the time of trial, franchisees operated about 375 Marts in about 19 States, with about 90 percent being operated in Mississippi and surrounding States. JFM also operates several Marts without intermediary franchisees. The preliminary step to entering into a franchise agreement is for JFM and the potential franchisee to enter into a territorial agreement providing for an exclusive geographical area of operation, usually several counties. Then JFM locates and acquires an option to purchase realty to construct a Mart. Thereafter, JFM locates an investor to purchase the land and, in turn, build a Mart and enter into a sale/leaseback236 agreement with JFM. Usually the land and Mart building are owned by an investor and JFM leases the realty from the investor for a 15-year term. If the operation is successful, leases are renewed for successive 5-year terms. The territorial agreement remains in effect during the term of the lease agreement. Under the standard territorial agreement, JFM is obligated to perform significant services to franchisees, including: Selecting and procuring the Mart site; constructing the Mart building and leasing it to the franchisee; assistance in recruiting, hiring, and training of employees for up to the first three Marts of a franchisee; assistance in ordering and stocking of merchandise for up to the first three Marts of a franchisee; and consultation and merchandising assistance as reasonably requested by a franchisee. During the years in question, the franchisee would pay a $ 25,000 "territory fee" upon execution of the territorial agreement. The $ 25,000 fee was a figure devised to cover the cost of establishing a franchise. In some instances costs to JFM of establishing and servicing a franchise operation are $ 10,000 to $ 15,000 less than the fee and, in other instances, the237 cost may exceed the fee by $ 25,000 to $ 35,000. The majority of JFM's income is generated by its receipt of a percentage of sales (i.e., 1 percent of sales). Following execution of the territorial agreement, JFM begins incurring expenses in the performance of its obligations under the agreement. Those expenses are deducted in the same year as they are incurred. The $ 25,000 fee, however, is generally reported in the year after the year of receipt. JFM considers the $ 25,000 fee earned when the first basic Mart is operational. This approach is based upon JFM's obligation to meet the commitment to enable the franchisee to operate a Mart business. Generally, it takes about 18 months to complete JFM's franchise obligations. After receipt of the $ 25,000 fee, the funds are not segregated, but commingled with JFM's funds. The $ 25,000 fee is not refunded so long as JFM is capable of performing its obligations under the territorial agreement. JFM has refunded about 4 of about 800 fees. The refunds were due to JFM's inability to locate a suitable initial Mart site. During 1986 JFM received $ 50,000 in fees, which were not reported until 1987. During 1987 JFM received $ 57,500238 2 in fees, which were not reported until 1988. Depreciation Class Life CategorySunburst Energy, Inc. (Sunburst), is a JFM subsidiary incorporated in 1982 to enter into gasoline operating agreements with Mart franchisees. Sunburst leases some of the land adjacent to the Mart building. On the leased land, Sunburst installs and retains ownership in gas tanks, pumps, gas islands, canopies, wiring, and an electronic console inside the Mart which displays gas purchases. Sunburst and the franchisees enter into agreements under which the franchisee collects and deposits the receipts from gasoline sales, in return for which Sunburst pays a monthly commission, typically 50 percent of 239 the profits from the gasoline sales. JFM claimed $ 86,357 and $ 121,404 for depreciation of gasoline pumps, canopies, fixtures and signs for 1986 and 1987, respectively. Respondent, in the notice of deficiency, disallowed $ 59,275 and $ 78,994 of the claimed depreciation deductions for 1986 and 1987, respectively. The parties have stipulated the asset descriptions, cost bases, dates of capitalization, the amount of depreciation claimed in prior years, and the method of depreciation -- Accelerated Cost Recovery Systems or Modified Accelerated Cost Recovery Systems (ACRS or MACRS). The remaining controversy between the parties concerns the proper class life for the gasoline pump canopies, fixtures, and signs. A gasoline pump canopy (canopy) is designed to protect customers and gasoline equipment from the elements and to provide advertising of the product and/or business name. Beginning in the early 1980s, the average size of canopies has increased to accommodate multiple sets of dispenser pumps and more gasoline pumping areas. Average-sized canopies have increased from about 24 feet by 48 feet in 1984 to 24 feet by 70 to 90 feet in 1986 and 1987. As of the time of trial, the 240 largest canopies measure about 70 by 120 feet. The largest canopies now have as many as 96 light fixtures built into them. Canopies are constructed of steel superstructures with aluminum side panels ranging from 6 inches to 4 feet high. The side panels bear the brand names, colors, and logos of gasoline companies and/or the Mart. The canopy is supported by posts bolted onto four to six special concrete footings which are generally 3 feet deep and about 2 feet square. The posts are in turn bolted to I-shaped beams which connect to additional beams supporting the roof, side, and bottom panels. Several rows of lights are installed underneath the canopy and a rain removal gutter system is installed around the periphery. A canopy, during the years in issue, could be installed by a crew of four in 3 days and taken down by a crew of three in 2 days. A crane is necessary to install and dismantle a canopy. Some damage may occur to panels during the dismantling of a canopy. Canopies usually require renovation or repair after about 5 years; most frequently the side and under panels are repaired or replaced. Wind is a primary cause of canopy damage. Repairs or renovation can241 vary from $ 2,000 to the cost of an entirely new canopy. Side panels in serviceable condition may have to be replaced if the gasoline brand changes at a particular Mart. If additional gasoline pumps are added, canopies are either extended or totally replaced. When a switch is made from single to multiple dispensing pumps, it is usually more feasible to remove the old and install a new canopy, rather than modify the old one. Sunburst purchased and installed 14 canopies during 1984 and 1985. At the time of trial, of the 14 canopies, 1 had been damaged by a hurricane and required extensive repairs; at least 2 had been sold to third parties for reuse; at least 3 were taken down and either moved to another location or extensively rebuilt and reinstalled at the same location; at least 3 have had no work or modifications done; 2 have had the side panels changed; and there is insufficient information regarding the remainder to specifically categorize their historical pattern. Absent wind damage and obsolescence, a canopy could last 10 or more years. OPINION A. Franchise Fee -- Year of Includability -- JFM realizes fees in the year the agreements are entered into and does not 242 recognize them for income tax purposes until the time all possible obligations under the agreement are complete. Respondent disagreed with JFM's method of reporting the fees and determined that the fees were reportable in the earlier year under the accrual method of accounting. The issue here concerns the concept "clear reflection of income" under section 446. 3Section 446(b) permits the Commissioner broad discretion to determine whether a particular method of tax accounting clearly reflects income. RLC Industries Co. v. Commissioner, 98 T.C. 457">98 T.C. 457, 491 (1992). That determination is entitled to more than the usual presumption of correctness and "'should not be interfered with unless clearly unlawful.'" Thor Power Tool Co. v. Commissioner, 439 U.S. 522">439 U.S. 522, 532 (1979)243 (quoting Lucas v. American Code Co., 280 U.S. 445">280 U.S. 445, 449 (1930)). JFM bears the heavy burden of showing that respondent's determination is plainly arbitrary. Thor Power Tool Co. v. Commissioner, supra; Lucas v. Kansas City Structural Steel Co., 281 U.S. 264">281 U.S. 264, 271 (1930). For JFM to prevail, it must prove that respondent's inclusion of fees in the year received, i.e., prior to the year reported, is arbitrary and capricious and without sound basis in fact or law. Ford Motor Company v. Commissioner, 102 T.C. 87">102 T.C. 87, 90 (1994). JFM uses the accrual method of accounting for financial and tax reporting purposes. The accrual method does not focus on the time of payment or receipt, but upon the time there is an obligation to pay or a right to receive. See United States v. Hughes Properties, Inc., 476 U.S. 593">476 U.S. 593, 599, 604 (1986); Spring City Foundry Co. v. Commissioner, 292 U.S. 182">292 U.S. 182, 184 (1934). The all events test was judicially devised to measure whether and when an item should be accrued or reported. 244 The all events test was formulated in case law more than 50 years ago and has long been embodied in section 1.461-1(a)(2), Income Tax Regs., which contains the following two requirements: Under an accrual method of accounting, an expense is deductible for the taxable year in which [1] all the events have occurred which determine the fact of the liability and [2] the amount thereof can be determined with reasonable accuracy. * Here we consider a situation where JFM is paid the full established amount of a fee upon execution of a territorial agreement and is then obligated to perform various services for the franchisee in connection with the startup of a Mart franchise. These services are usually performed over an 18-month period, culminating when the Mart is fully operational. The services to be performed are substantial and occasionally may cost twice the fee amount. On the other hand, occasionally, the service may cost less than half the fee amount. The services include selecting and procuring the Mart site; constructing the Mart building and leasing it to the franchisee; assistance in recruiting, hiring, and training of employees for up to the first three Marts245 of a franchisee; assistance in ordering and stocking of merchandise for up to the first three Marts of a franchisee; and consultation and merchandising assistance as reasonably requested by a franchisee. Of about 800 franchise situations, JFM has returned about 4 franchise fees. The refunds occurred only in situations where JFM was unable to locate a suitable site for a Mart within the franchisee's territory. Chronologically, the location of a Mart site is one of the first obligations performed by JFM. Additionally, it is likely that the site will be located during the earliest portion of the 18-month process in establishing an operational Mart. Although it is possible that the fee may be received on the last day of JFM's taxable year and no work may be performed during the year of receipt, JFM has not shown any such pattern with respect to the transactions it has experienced. The pattern is one where the fee is received at the time of execution of the agreement during year one, and the Mart is completely operational about 18 months later during year two, the year in which JFM reports the fee. JFM relies heavily upon Artnell Co. v. Commissioner, 400 F.2d 981">400 F.2d 981 (7th Cir. 1968),246 revg. and remanding 48 T.C. 411">48 T.C. 411 (1967). In that case a baseball team had sold advance tickets for the season and its stock was acquired by the taxpayer early in the baseball season (prior to May 31, the tax yearend for the baseball team). As games were played, the taxpayer recognized the prepaid tickets in income, but the Commissioner determined that the prepaid tickets were includable by the taxpayer in the return for the prior tax year ended May 31, by which time all of the tickets had been prepaid. This Court, relying upon several Supreme Court opinions and its own opinions, 4 held that the Commissioner could apply section 446(b) and require prepaid income to be taxed when received, even if the taxpayer uses the accrual method of accounting for tax purposes. Artnell Co. v. Commissioner, 48 T.C. at 414-415. The Court of Appeals for the Seventh Circuit reversed and remanded for further proceedings in this Court holding that the principle that prepaid income must be reported in the year of receipt at the Commissioner's discretion is not an absolute one. The Court of Appeals' opinion contained the reasoning that it was247 possible that a particular taxpayer's method could so clearly reflect income that it would be an abuse of discretion for the Commissioner to require recognition in the year of receipt.On remand, this Court found that the taxpayer's method of accounting more clearly reflected income because it more effectively matched income and expenses in the same accounting period, one of the goals of the accrual method. Artnell Co. v. Commissioner, T.C. Memo. 1970-85.248 The criteria used by this Court on remand resided in the principle that the "purpose of the accrual method of accounting is to allow the matching in a single fiscal period of revenues and expenses attributable to economic activities carried on within such period. United States v. Anderson, 269 U.S. 422">269 U.S. 422 (1926)". Artnell Co. v. Commissioner, T.C. Memo. 1970-85. This case is unlike Artnell in that here the fee is paid at the commencement of the performance by JFM. Performance, including incurring expenses, is not to begin at some future time, as in Artnell. Here, JFM likely began incurring substantial costs in its efforts locating a site, constructing, and leasing the Mart during the year the fee was received. Equally as important here, JFM deducted its costs regarding its efforts under the agreements in the year those costs were incurred and not upon the completion of the entire process of making a franchisee's Mart operational. 5249 Finally, JFM has not provided sufficient evidence from which we could find that respondent abused her discretion in determining that JFM's method did not clearly reflect income. Accordingly, we find that JFM has not shown that its method of reporting the fees clearly reflected income and/or that respondent abused her discretion in requiring inclusion of fees in income in the year of receipt. B. Depreciation Class Life Category -- The parties differ regarding the category in which gasoline pump canopies and related assets should be classified. The use of ACRS and MACRS is mandatory for certain types of tangible depreciable assets which were placed in service after 1980. If property, mandatorily or by election, comes within this depreciation classification concept, the Secretary is authorized to prescribe allowable depreciation and the anticipated useful lives for various categories or classes of property for a particular industry or group of assets. See sec. 167. 6 Respondent has issued revenue procedures setting forth the prescribed categories. See Rev. Proc. 83-35, 1 C.B. 745">1983-1 C.B. 745, and Rev. Proc. 87-56, 2 C.B. 674">1987-2 C.B. 674.250 If depreciable property does not fit within the specific classes designated by respondent, then it comes within the catchall provisions of section 168(c)(2)(B) for 1986 and section 168(e)(3)(C) for 1987 and is depreciable for 5 and 7 years, respectively. Respondent determined and argues that the canopies come within classification 57.1, which under either revenue procedure would result in a 20-year class life. Respondent alternatively argues that the canopies constitute improvements to land or realty and would fall within class 00.3, which would also result in a 20-year class life. JFM argues that the canopies do not come within the revenue procedure categories prescribed by respondent and that the depreciable lives are governed by the section 168 catchall provisions resulting in a 5-year class life for assets placed in service prior to 1987 and a 7-year class life for assets placed in service after 1986. Alternatively, if it is decided251 that the catchall categories do not apply, JFM argues that the canopies fall within class 57.0 of the revenue procedures, which provides for a 9-year class life. The revenue procedures 7 contain the following definitions for guideline classes 57.0, 57.1, and 00.3: 57.0 Distributive Trades and Services: Includes assets used in wholesale and retail trade, and personal and professional services. Includes section 1245 assets used in marketing petroleum products. . . .57.1 Distributive Trades and Services-Billboard, Service Station Buildings and Petroleum Marketing Land Improvements: Includes section 1250 assets, including service station buildings and depreciable land improvements, whether section 1245 property or section 1250 property, used in the marketing of petroleum and petroleum products, but not including any of these facilities related to petroleum and natural gas trunk pipelines. Includes car wash buildings and related land improvements. Includes billboards, whether such assets are section 1245 property or section 1250 property. Excludes all other land improvements, buildings and structural components as defined in section 1.48-1(e) of the regulations. . 252 . .00.3 Land Improvements: Includes improvements directly to or added to land, whether such improvements are section 1245 property or section 1250 property, provided such improvements are depreciable. Examples of such assets might include sidewalks, roads, canals, waterways, drainage facilities, sewers * , wharves and docks, bridges, fences, landscaping, shrubbery, or radio and television transmitting towers. Does not include land improvements that are explicitly included in any other class, and buildings and structural components as defined in section 1.48-1(e) of the regulations. Excludes public utility initial clearing and grading land improvements as specified in Rev. Rul. 72-403, 2 C.B. 102">1972-2 C.B. 102. . . .253 First, we cannot agree with JFM's argument that gasoline canopies do not fit within any of the categories of the revenue procedures and therefore must default to the catchall provisions of section 168. The specific definitions and classifications of guidelines 57.0 and 57.1 encompass gasoline pump canopies. Both guidelines include section 1245 and/or 1250 property "used in marketing petroleum products." 8 The evidence in this case places the canopies squarely with this definition. More specifically, the brand name, logos, and familiar colors of the products and companies are displayed. Additionally, the canopies provide shelter for the gasoline pumps and the customers to purchase the gasoline products. We reject JFM's argument that there is no suitable category in the revenue procedures. 254 In order to carry its burden of showing that 57.0 is the correct classification (9-year class life), JFM must show that the canopies are section 1245 property; otherwise the canopies would more aptly come with class 57.1 (20-year class life). Section 1245 property could come within class 57.1 if it is considered a land improvement. In order to be section 1245 property, the canopies must be "tangible personal property", as defined in section 1.48-1, Income Tax Regs. Sec. 1245(a)(3)(A); sec. 1.1245-3(b)(1), Income Tax Regs. "Tangible personal property" is defined in section 1.48-1(c), Income Tax Regs., in pertinent part, as follows: Local law shall not be controlling for purposes of determining whether property is or is not "tangible" or "personal". Thus, the fact that under local law property is held to be personal property or tangible property shall not be controlling. Conversely, property may be personal property for purposes of the investment credit even though under local law the property is considered to be a fixture and therefore real property. For purposes of this section, the term "tangible personal property" means any tangible property except land and improvements255 thereto, such as buildings or other inherently permanent structures (including items which are structural components of such buildings or structures). * * * Tangible personal property includes all property (other than structural components) which is contained in or attached to a building. * * * Further, all property which is in the nature of machinery (other than structural components of a building or other inherently permanent structure) shall be considered tangible personal property even though located outside a building. Thus, for example, a gasoline pump * * * although annexed to the ground, shall be considered tangible personal property.Stated in the vernacular of the investment credit statutes and regulations, we must decide whether the canopies are "buildings or inherently permanent structures." 9 As a matter of perspective, we note that the investment credit provisions promoted the purchase of tangible personal property by extending dollar for dollar tax credits. The question of whether property fits within the investment credit definitions was answered by an all or nothing response. Here, we consider the proper class life for property which is admittedly depreciable256 and used in marketing petroleum products. This is a factual pursuit governed by the record in this case. Helpful criteria for resolving this question are contained in Whiteco Industries, Inc. v. Commissioner, 65 T.C. 664">65 T.C. 664, 672-673 (1975), as follows: (1) Is the property capable of being moved and has it in fact been moved? * * (2) Is the property designed or constructed to remain permanently in place? * * * (3) Are there circumstances which tend to show the expected or intended length of affixation, i.e. are there circumstances which show that the property may or will have to be moved? * * * (4) How substantial a job is removal of the property and how time-consuming is it? Is it "readily removable"? * * * (5) How much damage will the property sustain upon its removal? * * * (6) What is the manner of affixation of the property to the land? * * * [Citations omitted.]257 To assist in our consideration of the canopies' classification, we will use the Whiteco Industries, Inc., supra, guidelines to focus on the facts of this case. We recognize that no one factor is necessarily decisive, but that each, to some extent, is probative. (1) Is the property capable of being moved and has it in fact been moved? The record here reflects that, although the canopies are large and becoming larger, they are modular, homogeneous, and portable. We are cognizant that the canopies are being placed on the land by lessees with a 15- or shorter-year lease term. Further, at least 2 of 14 had been sold to third parties for reuse, and at least 3 were taken down and either moved to another location or extensively rebuilt and reinstalled at the same location. In addition, the canopies may be expanded, contracted, and readily modified. For example, when the brand of oil changes, the old side panels are replaced with new panels containing the new logo, brand name, and/or color scheme. (2) Is the property designed or constructed to remain permanently in place?, and (3) are there circumstances that tend to show the expected or intended length of affixation;258 i.e., are there circumstances which show that the property may or will have to be moved? We are cognizant that the canopies are being placed on the land by lessees with a 15- or shorter-year lease term. Once the initial 15-year lease ends, renewal leases are generally for 5-year terms. From the point of view of a lessee with a relatively short-term lease (in these instances from one-fourth to three-fourths as long as the 20-year class life of class 57.1), a truly permanent structure would not be cost effective. This is especially so where obsolescence has proven a factor. JFM's experience has been that the size of the gasoline facilities at the Marts has been increasing precipitously in the period preceding the tax years in question. In some instances, they have found it more economical to install new canopies, rather than to expand or modify existing ones. In addition, unpredictable weather conditions periodically require extensive replacement of panels and other components. (4) How substantial a job is removal of the property and how time-consuming is it? Is it "readily removable"?; (5) How much damage will the property sustain upon its removal?; and (6) What is the 259 manner of affixation of the property to the land? Although the canopy components are collectively formidable, the whole structure can be erected and/or dismantled and moved in a few days. Moreover, the canopies have been dismantled, modified, and reinstalled and/or sold to third parties. The side panels are occasionally damaged, but most of the components are reusable. The entire canopy structure is bolted together from component beams and parts and attached to posts bolted onto four to six special concrete footings which are generally 3 feet deep and about 2 feet square. When the canopy is unbolted from the footings, the footings are the residual structures remaining on the land. Using the Whiteco Industries, Inc., supra, guidelines, we find that the canopies in this case are not "inherently permanent structures." We find that the canopies were readily movable and constructed so as not to be permanent. See Fox Photo Inc. v. Commissioner, T.C. Memo. 1990-348. Respondent, however, makes the further argument that the use of the term "land improvement" in class 57.1 would include any improvement to land even though260 it may not be considered an "inherently permanent structure". Respondent draws upon class 00.3, which contains a broad definition of "land improvement". We reject respondent's approach for the same reasons we rejected JFM's attempt to classify the canopies in the catchall provisions of section 168. It is clear that classes 57.0 and 57.1 were intended to cover all possible types of real or personal property used in marketing petroleum products, whereas 00.3 is a catchall for otherwise unclassifiable improvements to realty. Although the actual life expectancy of an asset is not determinative of the asset class for depreciation, we acknowledge JFM's point that the actual life expectancy of the canopies is around 5 years because of wear and/or obsolescence. Even considering that canopies could last 10 or more years, it seems less appropriate that they would be classified as realty with a 20-year class life rather than as personalty with a 9-year class life. In this regard, JFM focused our attention on the conference committee report of the Tax Reform Act of 1986 which contains the following guidance to the executive branch in connection with the formulation of asset guidelines: 261 Any class life prescribed under the Secretary's authority must reflect the anticipated useful life, and the anticipated decline in value over time, of an asset to the industry or other group. Useful life means the economic life span of property over all users combined and not, as under prior law, the typical period over which a taxpayer holds the property. Evidence indicative of the useful life of property which the Secretary is expected to take into account in prescribing a class life includes the depreciation practices followed by taxpayers for book purposes with respect to the property. * H. Conf. Rept. 99-841 (1986), 1986-3 C.B. (Vol. 4) 42. Accordingly, we hold that petitioner's canopies for the tax years 1986 and 1987 should be classified under class 57.0 for purposes of their depreciable class life. To reflect the foregoing and concessions of the parties, Decision will be entered under Rule 155.Footnotes1. The parties have stipulated to facts and exhibits for purposes of trial, and the parties' stipulations are, to the extent relevant, incorporated by this reference.↩2. The $ 57,500 consists of two $ 25,000 territorial fees and three $ 2,500 initial store fees. It is not entirely clear whether the terms and conditions of the $ 2,500 initial store fees are the same as the $ 25,000 territorial fees, but the parties have treated them the same and we have found no reason to treat them differently.↩3. Section references are to the Internal Revenue Code in effect for the years in issue, and Rule references are to the Tax Court Rules of Practice and Procedure, unless otherwise indicated.↩4. Schlude v. Commissioner, 372 U.S. 128">372 U.S. 128 (1963); American Automobile Association v. United States, 367 U.S. 687">367 U.S. 687 (1961); Automobile Club of Michigan v. Commissioner, 353 U.S. 180">353 U.S. 180 (1957); Hagen Advertising Displays, Inc. v. Commissioner, 47 T.C. 139">47 T.C. 139 (1966); Decision, Inc. v. Commissioner, 47 T.C. 58">47 T.C. 58 (1966); Farrara v. Commissioner, 44 T.C. 189↩ (1965).5. It should be noted that the payments in Artnell Co. v. Commissioner, 400 F.2d 981">400 F.2d 981 (7th Cir. 1968), revg. and remanding 48 T.C. 411">48 T.C. 411 (1967), are more easily apportioned and matched to expenses because the payments there were for specific baseball games to be played pursuant to a fixed schedule. See also Chesapeake Financial Corp. v. Commissioner, 78 T.C. 869">78 T.C. 869, 881 n.3 (1982), where Artnell↩ was similarly distinguished.6. Former sec. 167(m)(1) was applicable for 1986 and sec. 167(m) for 1987.↩7. Fortunately, Rev. Proc. 83-35, 1 C.B. 747">1983-1 C.B. 747, 762, and Rev. Proc. 87-56, 2 C.B. 677">1987-2 C.B. 677↩, 686, contain the same definition for the asset guideline classes 57.0 and 57.1.8. Sec. 1245(a)(3) defines "section 1245 property" to include depreciable property which is either personal property or certain enumerated categories of real property. Sec. 1250(c) defines "section 1250 property" as any depreciable real property other than sec. 1245 property. It does not appear that gasoline pump canopies fall within any of the enumerated categories of real property afforded sec. 1245 property treatment.↩9. We note that Rev. Rul. 68-345, 2 C.B. 30">1968-2 C.B. 30↩, 32, specifically reaches the conclusion that "canopies installed over the pump islands of * * gasoline stations" are "inherently permanent structures" for investment credit purposes. Respondent did not rely upon or reference this ruling in the original or reply briefs, even though petitioner discussed the ruling in its opening simultaneous brief. Because we do not consider a revenue ruling to have the effect of law, but merely to represent the position of respondent, as a party, we must assume that respondent's position in this case is the one presented on brief, which does not include the subject ruling.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622392/	J. M. MOORE AND HATTIE MOORE, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Moore v. CommissionerDocket No. 28853.United States Board of Tax Appeals15 B.T.A. 1037; 1929 BTA LEXIS 2745; March 22, 1929, Promulgated 2745 HUSBAND AND WIFE. - Petitioners originally made a joint return for the calendar year 1925; thereafter, petitioners made separate individual returns for the year 1925, and tendered same to the respondent. Held, petitioners, having originally made a joint return for the calendar year 1925, may not thereafter, by filing amended separate returns, have the tax liability determined upon the basis of such separate returns. J. M. Moore for the petitioners. Brice Toole, Esq., for the respondent. MILLIKEN 1037 This proceeding results from the determination by respondent of a deficiency in tax for the calendar year 1925 in the amount of $379.03. Petitioners filed a joint income-tax return for the year 1925. Error is assigned in that the respondent refused to accept separate and amended income-tax returns for the year 1925. FINDINGS OF FACT. Petitioners are residents of Rising Star, Tex. Shortly prior to March 15, 1926, petitioners were advised that it would be necessary to file an income-tax return for the calendar year 1925. Neither of them prior thereto had filed an income-tax return and they were unfamiliar with the provisions of Federal2746 income-tax regulations, nor did they know that separate or joint returns covering their income for the year 1925 could be filed. When petitioners were advised 1038 that a return for the year 1925 was necessary, they took the matter up with I. J. Rice, an attorney at law of Brownwood, Tex., who was their legal advisor. He advised them that he was unfamiliar with income-tax matters, but did communicate with other individuals in Brownwood whom he felt would be qualified to make such a return, but was unable to secure the service of any of the parties he interviewed and, thereupon, owing to the fact that only two days remained in which to make and file the required return for the year 1925, their legal adviser attempted to make a proper return for the petitioners, notifying the Bureau of Internal Revenue of the circumstances and his inexperience in such matters. At the time said return was prepared and executed by petitioners an income-tax liability was shown and paid in the amount of $93.96. Afterwards, to wit, on July 3, 1926, by letter of that date, the petitioners were advised that an error in their return had been made and an additional assessment was proposed of $33.98, *2747 which was duly paid by them. Thereafter, on October 22, 1926, the petitioner was furnished with a statement from the Treasury Department at Dallas, Tex., showing an additional deficiency of $391.83. OPINION. MILLIKEN: Our findings of fact result from the admission by respondent of the allegations of fact set forth in the petition filed in this cause. Petitioners filed a joint Federal income-tax return for the calendar year 1925, and seek by this proceeding to have us hold that the respondent was in error in refusing to accept amended income-tax returns which were subsequently tendered to the respondent. We have decided the identical question adversely to the petitioners' contentions in , and . See also , and . Judgment will be entered for the respondent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622393/	WARE RIVER RAILROAD CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Ware R. R. Co. v. CommissionerDocket Nos. 8712, 19054.United States Board of Tax Appeals7 B.T.A. 133; 1927 BTA LEXIS 3250; May 27, 1927, Promulgated 3250 The amount of the Federal tax upon the income of the petitioner paid by its lessee constitutes income to the petitioner for the year in which such tax became due and was paid. Robert H. Davison, Esq., for the petitioner. A. H. Murray, Esq., for the respondent. LITTLETON133 Proceeding Docket No. 19054 relates to a deficiency of $649.02 for the calendar year 1919 and proceeding Docket No. 8712, relates to deficiencies of $643,29 and $463.27 for the calendar years 1920 and 1921, respectively. The issues in both cases are the same and the proceedings were consolidated for hearing and decision. The Commissioner held that the tax upon the petitioner's income paid by its lessee under the terms of the lease constituted additional income. Petitioner claims first that Federal income and profits tax payable by a lessee does not constitute additional income to the lessor; secondly, that Federal income and profits tax payable by a lessee does not constitute additional income to the lessor in the taxable year during which the income on which such tax was earned, was received. The facts are found as stipulated. Petitioner is a Massachusetts corporation3251 with principal office in Boston. During the years 1919, 1920, and 1921 it kept its books and rendered its income and profits-tax returns on the accrual basis. During the years in question the railroad property of the taxpayer was leased to the Boston & Albany Railroad Co. and by it to the New York Central Railroad Co. under an instrument of lease which contained among other things the following provision: "And said second party doth further covenant and agree to pay all taxes, which during said term may be assessed upon said first party, its railroad and the stock of its stockholders * ." Pursuant to the foregoing provision of the lease the New York Central Railroad Co. paid in the year 1919 taxes on the income of the taxpayer for the year 1918 in the sum of $6,438, of which sum, however, the Director General of Railroads bore or assumed one-sixth; the said New York Central paid in 1920 for Federal taxes on the income of the taxpayer for the year 1919 the sum of $6,490.14, of which sum the Director General of Railroads bore or assumed one-fifth; and paid in the year 1920 for Federal taxes on the income of the taxpayer for the year 1920 the sum of $6,482.84, of which sum the3252 Director General bore one-fifth of the portion of the taxes attributable to the months of January and February, or one-fifth of one-sixth of the aforementioned sum. *134 OPINION. LITTLETON: The decision of the issues presented in these proceedings is governed by the Board's decision in the , in which it was held that amounts representing Federal taxes assessed against the lessor and paid by the lessee under the terms of the lease constituted additional income to such lessor in the nature of compensation for the use of property in the year in which such tax became due and payable. The fact that the Director General of Railroads bore a portion of the tax assessed against the petitioner has no bearing upon the question whether the amount paid to petitioner by the New York Central Railroad Co., lessee, was income to it. Judgment will be entered on 15 days' notice, under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622396/	Fred C. and Evelyn P. Riley v. Commissioner.Riley v. CommissionerDocket No. 59794.United States Tax CourtT.C. Memo 1957-117; 1957 Tax Ct. Memo LEXIS 135; 16 T.C.M. (CCH) 485; T.C.M. (RIA) 57117; June 28, 1957135 Petitioners' home during the taxable year ended December 31, 1952, is held to be in Atlanta, Georgia, rather than in Nashville, Georgia. During the period April 14, 1952, to August 9, 1952, petitioner Fred C. Riley was employed by George S. May Company with his headquarters in Atlanta. During this period petitioner paid certain expenses in connection with this employment, a part of which was reimbursed by his employer. Petitioner has not shown that any of the unreimbursed expenses were incurred away from home. Held, petitioners are not entitled to deduct any part of the unreimbursed expenses, under section 22(n)(2) of the Internal Revenue Code of 1939. Clyde W. Chapman, Esq., Atlanta National Building, Atlanta, Ga., for the petitioners. Miller Bowen, Esq., for the respondent. ARUNDELLMemorandum Findings of Fact and Opinion ARUNDELL, Judge: Respondent determined a deficiency in income tax for the taxable year ended December 31, 1952, in the amount of $321.20. The sole issue is whether the respondent erred in disallowing "travel expense" in the amount of $1,607.57. Findings of Fact Petitioners are individuals, husband and wife, who reside in Atlanta, Georgia. They filed a joint income 136 tax return for the taxable year ended December 31, 1952, with the director of internal revenue for the district of Georgia. Petitioner Fred C. Riley 1 had been employed as a public accountant in Atlanta, Georgia, from 1940 until November 1949, at which time petitioners moved from Atlanta to Nashville, Georgia, where they rented a home on a yearly basis. The last lease on this home expired on October 31, 1952, and it was not renewed. Petitioner began practicing public accounting in Nashville, Georgia, and maintained an office there until November 1951. Evelyn acquired a tire-recapping and vulcanizing plant at Nashville, Georgia, in May 1950 and sold it October 29, 1951. In November 1951, petitioner returned to Atlanta, Georgia, and began an audit for Atlanta Band Mill located in a suburb of that city. On January 15, 1952, Eveyln began working for Georgia Rubber Company and G. T. Duke Company (partnerships owned by the same two individuals) in Atlanta, Georgia. She remained employed by them continuously until December 1954. On April 14, 1952, while 137 petitioner was still working on the audit of Atlanta Band Mill, he also began working for George S. May Company of Chicago, Illinois, as a special representative in the districts of Georgia, North Carolina, and South Carolina. Prior to entering upon this employment he received a form letter from the George S. May Company, which stated, in part, as follows: "This letter is directed to you to thoroughly familiarize you with the position for which you have made applicaton. * "This is a traveling sales position, and while such travel may be limited in some cases, it is still essential that a man have a good operating, late model car. Traveling expenses, including hotel, meals, tips, car operating expenses, toll fees and meter parking, are allowed and are paid by expense voucher every two weeks. * * "Every Special Representative operates from a headquarters city within his working area, one of his choosing, and in which no expenses will be allowed other than for the operation of his automobile." Petitioner chose to work for the George S. May Company in Atlanta, Georgia, and for the purpose of traveling expenses incurred on behalf of the George S. May Company, his "headquarters city" 138 was Atlanta. He was reimbursed for all expenses incurred away from the city of Atlanta, and for the operation of his automobile in Atlanta, to the extent that he made claim therefor to his employer. While in Atlanta, he was also paid 75 cents a day for lunch money, 5 days a week. Petitioner resided in hotels in Atlanta, Georgia, from November 1951 until April 18, 1952, when he and his wife rented a furnished apartment at 145 Elizabeth Street, N.E., Atlanta, Georgia. He and his wife have resided at this address continuously since that time. Petitioner's employment with George S. May Company was terminated on August 9, 1952, for failure to produce the minimum required sales. On their joint income tax return for the year 1952, the petitioners reported salary received by petitioner from the George S. May Company of $1,823.40 and deducted therefrom $1,607.57 as travel expenses not reimbursed by the George S. May Company, which latter amount petitioners itemized as follows: TotalReimbursedExpensesTravelByNotExpensesEmployerReimbursedLodging and Pullman$ 423.74$ 76.98$ 346.76Meals and tips645.02128.01517.01Railroad and bus fares174.26170.114.15Automobile and taxi769.54110.55658.99Telephone and telegraph56.7312.7044.03Postage45.008.3736.63Totals$2,114.29$506.72$1,607.57In 139 the notice of deficiency mailed to the petitioners on July 8, 1955, the respondent disallowed the $1,607.57 traveling expenses claimed by petitioners and gave the following as his explanation: "In the absence of proper evidence to substantiate automobile and traveling expenses in the amount of $1,607.57 claimed on your 1952 return as having been incurred by you as an employee of the George S. May Company, the deduction has been disallowed and your income has been increased accordingly." Included in the automobile and taxi expenses of $769.54 is depreciation on petitioner's automobile based upon a cost of approximately $2,600 and a depreciation rate of 25 per cent a year. During the taxable year ended December 31, 1952, petitioners' home was Atlanta, Georgia. Opinion Petitioners contend that during the taxable year in question and particularly during the period April 14 to August 9, 1952, their home for tax purposes was in Nashville, Georgia, and that, therefore, all unreimbursed expenses incurred by petitioner in Atlanta while working for the George S. May Company are deductible under section 22(n)(2) of the Internal Revenue Code of 19392141 as expenses incurred by petitioner while "away 140 from home." Respondent contends that the home of petitioners for tax purposes during 1952 was in Atlanta, and that the unreimbursed expenses in question were not incurred while away from home but were personal, living or family expenses not deductible under section 24(a)(1) of the 1939 Code. 3 We think the evidence shows that petitioners' home during 1952 was in Atlanta, Georgia, rather than Nashville, Georgia, and we have so found as an ultimate fact. Petitioner had lived and worked in Atlanta from 1940 until November 1949 when he and his wife moved to Nashville. At Nashville, petitioner became self-employed as a public accountant and his wife acquired a tire-recapping plant which she later sold on October 29, 1951. Shortly thereafter, in November 1951, petitioner returned to Atlanta to begin an audit for a company located in a suburb of that city. His wife joined him there in January 1952 and secured employment in Atlanta with two partnerships, where she worked continuously until December 1954. Before petitioner had finished his audit he also became employed as a special representative for the George S. May 142 Company. This company required its special representatives to choose a "headquarters city" from which to work. On or about April 18, 1952, petitioner and his wife rented a furnished apartment in Atlanta, where they are still residing. On the joint return for 1952, petitioner gave Atlanta as his home address and listed his occupation as bookkeeper and public accountant. The George S. May Company paid all of petitioner's travel expenses incurred outside of Atlanta and, in addition, paid automobile expenses incurred in the city to the extent requested by petitioner, plus 75 cents per working day for lunch money in Atlanta. Petitioner's employment with the George S. May Company was terminated on August 9, 1952. We think Atlanta was not only selected by petitioner as his business home, but Atlanta was recognized by the George S. May Company as petitioner's headquarters city under the working agreement of the parties. We think these evidentiary facts clearly show petitioners' home during 1952 was in Atlanta and we so hold. See Commissioner v. Flowers, 326 U.S. 465">326 U.S. 465; Harold R. Johnson, 17 T.C. 1261">17 T.C. 1261; Frank N. Smith, 21 T.C. 991">21 T.C. 991. The only expenses petitioner has claimed are those connected 143 with his employment by the George S. May Company that were not reimbursed by that company. Since petitioner has not shown that any of the unreimbursed expenses were incurred by him while away from his home in Atlanta, and since an employee is entitled to travel expenses only when away from home, it follows that petitioners are not entitled to deduct under section 22(n)(2) any portion of the expenses disallowed by the respondent. Horace E. Podems, 24 T.C. 21">24 T.C. 21. Decision will be entered under Rule 50. Footnotes1. Petitioner Fred C. Riley will hereafter be referred to as petitioner and petitioner Evelyn P. Riley will hereafter be referred to as Evelyn.↩2. SEC. 22. GROSS INCOME. * * (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 * * . 3. 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/4622397/	NAN R. WILLIAMS, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentWilliams v. CommissionerDocket No. 20420-90United States Tax CourtT.C. Memo 1991-521; 1991 Tax Ct. Memo LEXIS 570; 62 T.C.M. (CCH) 1042; T.C.M. (RIA) 91521; October 21, 1991, filed 570 P. Marshall Yoder and Lee A. Spinks, for the petitioner. James R. Rich, for the respondent. GALLOWAY, Special Trial Judge. GALLOWAYMEMORANDUM OPINION This case was assigned pursuant to section 7443A(b) and Rule 180 et seq. (All section references are to the Internal Revenue Code as amended and in effect for the years in issue. All Rule references are to the Tax Court Rules of Practice and Procedure). This case is before the Court on petitioner's Motion To Strike certain paragraphs or portions thereof from respondent's answer, which was scheduled for hearing at a trial session of this Court held at Winston-Salem, North Carolina, on February 11, 1991. Respondent filed a written objection and the parties argued their respective positions at the hearing. Petitioner requested and was granted permission to file a written response to respondent's objection, after which the Court took the matter under advisement. In a notice of deficiency dated June 13, 1990, respondent determined deficiencies in petitioner's 1982, 1983, and 1984, taxes in the respective amounts of $ 7,056, $ 9,004, and $ 8,509. Respondent also determined additions to tax against petitioner in the571 1982-1984 taxable years for fraud pursuant to section 6653(b)(1) in the amounts of $ 3,528, $ 4,502, and $ 4,253, respectively, and under section 6653(b)(2) in the amounts of 50 percent due on the respective underpayments. The adjustments determined by respondent resulted from petitioner's failure to report income allegedly embezzled by her in 1982, 1983, and 1984, in the respective amounts of $ 20,912, $ 26,457 and $ 28,055. Petitioner was a resident of Rocky Mount, North Carolina, when she filed her petition with this Court. Petitioner contested respondent's determinations in her petition, claiming that she did not receive taxable income due to embezzlement in the years in issue and that she was not liable for fraud. In support of the allegation in his answer that all or part of the alleged underpayment was due to petitioner's fraud, respondent alleged the following: 7. FURTHER ANSWERING the petition, and in support of the determination that all or part of the underpayments of tax required to be shown on the petitioner's income tax returns for the taxable years 1982, 1983 and 1984 are due to fraud, the respondent alleges: (a) During the years 1982, 1983 and 1984, petitioner572 was employed as a bookkeeper for the law firm of Pritchett, Cooke & Burch (hereinafter, "her employer"), Post Office Box 9, Windsor, North Carolina. Her duties consisted of making all bank deposits, compiling accounts receivable, crediting payments on customer accounts, handling office payroll, making federal tax deposits and calculating withholding taxes from employees' wages. (b) During the taxable year 1982, petitioner embezzled from her employer at least the sum of $ 20,912.00, which amount she failed to report on her 1982 income tax return. (c) During the taxable year 1983, petitioner embezzled from her employer at least the sum of $ 26,457.00, which amount she failed to report on her 1983 income tax return. (d) During the taxable year 1984, petitioner embezzled from her employer at least the sum of $ 28,055.00, which amount she failed to report on her 1984 income tax return. (e) The funds which petitioner embezzled from her employer in 1982 consisted of the proceeds of the following checks:Check No.Check Amount(1) 11107$ 3,333.00(2) 109521,034.00(3) 110794,431.00(4) 108011,271.00(5) 109641,583.33(6) 106977,022.93(7) 105031,525.00(8) 10550711.89Total Embezzled$ 20,912.15573 The checks listed in numbers (1) through (8) of subparagraph (e) of paragraph 7. above, were drawn on the Pritchett, Cooke & Burch trust account at First Union National Bank in Windsor, North Carolina. (f) The funds which petitioner embezzled from her employer in 1983 consisted of the proceeds of the following checks:Check No.Check Amount(1) 11135$ 3,833.34(2) 1233,597.38(3) 1196,647.80(4) 112593,300.71(5) 112711,010.00(6) 10802629.33(7) 10899997.50(8) 11534866.67(9) 112864,186.84(10) 108721,387.00Total Embezzled$ 26,456.57The checks listed in numbers (1) and (4) through (10) of subparagraph (f) of paragraph 7. were drawn on the Pritchett, Cooke & Burch trust account at First Union National Bank in Windsor, North Carolina. The checks listed in numbers (2) and (3) of subparagraph (f) of paragraph 7. were drawn on an account at North State Savings & Loan, Windsor, North Carolina, which account was entitled "Pritchett, Cooke & Burch No. 3." (g) The funds which petitioner embezzled from her employer in 1984 consisted of the proceeds of the following checks:Check No.Check Amount(1) 12347$ 6,332.43(2) 1393,464.16(3) 124243,463.90(4) 127434,081.00(5) 1576,000.00(6) 1472,770.00(7) 2622681,943.50Total Embezzled$ 28,054.99574 The checks listed in numbers (1), (3) and (4) of subparagraph (g) of paragraph 7. were drawn on the Pritchett, Cooke & Burch trust account at First Union National Bank in Windsor, North Carolina. The checks listed in numbers (2), (5) and (6) of subparagraph (g) of paragraph 7. were drawn on the "Pritchett, Cooke & Burch No. 3" account at North State Savings & Loan, Windsor, North Carolina. The check in number (7) of subparagraph (g) of paragraph 7. above, was drawn on the bank account of Union Camp Corporation and payable to petitioner's employer. (h) On or about October 21, 1985, the Grand Jury for Superior Court of Bertie County, North Carolina, indicted petitioner on 22 counts of embezzling money from her employer. (i) The funds for which the Grand Jury indicted petitioner for embezzlement consisted of the proceeds of the checks listed in numbers (1) through (6) of subparagraph (e) of paragraph 7. herein, numbers (2) through (10) of subparagraph (f) of paragraph 7. herein, and numbers (1) through (7) of subparagraph (g) of paragraph 7. herein. (j) On or about January 29, 1986, petitioner, in a plea bargain, pleaded guilty to three counts of embezzling from her employer, 575 and the remaining counts were dismissed. Copies of indictments to which petitioner pleaded guilty are attached as Exhibits A, B and C, respectively. (k) As a result of pleading guilty to the charges set forth in subparagraph (j) above, the Superior court sentenced petitioner to imprisonment for eight years, of which six were suspended. The Superior Court placed petitioner on supervised probation for five years, and as a condition of probation, ordered petitioner to make restitution to her employer in the amount of $ 75,489.71. (l) The amount ($ 75,489.71) 1 for which the petitioner was ordered to make restitution is the total sum set forth in subparagraphs (e), (f) and (g) above. (m) Petitioner failed to report on her 1982, 1983 and 1984 income tax returns, the respective sums of $ 20,912.00, $ 26,457.00 and $ 28,055.00 which she embezzled from her employer576 in said years. (n) Petitioner knew that the funds she embezzled were taxable income to her. (o) Petitioner's fraudulent omission of specific items of embezzled funds on her 1982, 1983 and 1984 income tax returns is a part of a three-year pattern of intent to evade taxes. (p) The petitioner understated her taxable income on her income tax returns for the taxable years 1982, 1983 and 1984, in the amounts of $ 20,832.00, $ 26,373.00 and $ 27,961.00, respectively. (q) The petitioner understated her income tax liabilities on her income tax returns for the taxable years 1982, 1983 and 1984 in the amounts of $ 7,056.00, $ 9,004.00 and $ 8,509.00, respectively. (r) The petitioner fraudulently, and with intent to evade tax, omitted from her income tax returns for the taxable years 1982, 1983 and 1984, embezzlement income in the amounts of $ 20,912.00, $ 26,457.00 and $ 28,055.00, respectively. (s) All were (sic) a part of each deficiency in income tax for the taxable years 1982, 1983 and 1984 is due to fraud with intent to evade tax.Rule 52 authorizes the Court to strike "any insufficient claim or defense or any redundant, immaterial, impertinent, frivolous, or scandalous matter." 577 Allen v. Commissioner, 71 T.C. 577">71 T.C. 577, 579 (1979). Rule 52 was derived from Rule 12(f), Federal Rules of Civil Procedure (FRCP) and the FRCP will be considered in applying Rule 52. See Estate of Jephson v. Commissioner, 81 T.C. 999">81 T.C. 999, 1000-1001 (1983). In Estate of Jephson v. Commissioner, supra at 1001, we stated the following with respect to motions to strike: Motions to strike under FRCP 12(f) have not been favored by the Federal courts. 'Matter will not be stricken from a pleading unless it is clear that it can have no possible bearing upon the subject matter of the litigation.' 'A motion to strike should be granted only when the allegations have no possible relation to the controversy. When the court is in doubt whether under any contingency the matter may raise an issue, the motion should be denied.' If the matter that is the subject of the motion involves disputed and substantial questions of law, the motion should be denied and the allegations should be determined on the merits. In addition, a motion to strike will usually not be granted unless there is a showing of prejudice to the moving party. [Citations578 omitted.]Petitioner has made a motion to strike from respondent's answer subparagraphs 7(h), 7(i), 7(k) and 7(l). Petitioner also moves to strike the portion of subparagraph 7(j) of respondent's answer which refers to dismissal of the 19 indictments as to which petitioner did not plead guilty because of the plea bargain disposition of the criminal case, i.e., the words "and the remaining counts were dismissed." Petitioner did not move to strike the portions of subparagraph 7(j) of respondent's answer which allege the three indictments (attached as exhibits), petitioner's plea bargain, and her guilty plea to three counts of embezzling from her employer. Petitioner seeks to have the above subparagraphs stricken on the ground that the subparagraphs are irrelevant and immaterial to the matters in controversy as well as being "highly prejudicial to petitioner as they refer to indictments in a criminal action which have been dismissed or refer to the sentence petitioner received after her plea of guilty to three counts of embezzlement." Respondent disagrees, arguing that all of the disputed paragraphs in his answer are material to the issue of whether petitioner embezzled her employer's579 funds in all three of the years 1982, 1983, and 1984, and whether petitioner was liable for fraud in those years. It is well established that embezzled funds constitute taxable income. James v. United States, 366 U.S. 213">366 U.S. 213, 6 L. Ed. 2d 246">6 L. Ed. 2d 246, 81 S. Ct. 1052">81 S. Ct. 1052 (1961). In appropriate cases, this Court has determined that the failure to report embezzled funds as income can result in fraud with intent to evade taxes. McGee v. Commissioner, 61 T.C. 249">61 T.C. 249, 260 (1973), affd. 519 F.2d 1121">519 F.2d 1121 (5th Cir. 1975); Foster v. Commissioner, T.C. Memo 1989-276">T.C. Memo 1989-276; Lodise v. Commissioner, T.C. Memo 1988-463">T.C. Memo 1988-463. The burden of proving fraud is on respondent. Sec. 7454(a); Rule 142(b). Whether petitioner fraudulently underreported embezzlement income in the years 1982, 1983, and 1984, is the ultimate question we must decide in this case. We note that the Supreme Court has held that fraud may be inferred from a course of conduct. Spies v. United States, 317 U.S. 492">317 U.S. 492, 499, 87 L. Ed. 418">87 L. Ed. 418, 63 S. Ct. 364">63 S. Ct. 364 (1943); see also Halpert v. Commissioner, T.C. Memo 1990-262">T.C. Memo 1990-262. Respondent has alleged in his answer that petitioner embezzled certain checks580 (which check numbers and amounts are specifically set forth) from her employer in 1982, 1983, and 1984. Respondent further alleges that as a result of petitioner's embezzlements, she was indicted on 22 counts of embezzling funds by a North Carolina court. Petitioner pled guilty to three of the embezzlement indictments. 2 The remaining nineteen indictments were dismissed by the North Carolina court as a result of a plea bargain, and petitioner was put on probation and required by the North Carolina court to repay the total funds embezzled from her employer. Respondent, in order to show a pattern of fraudulent intent by petitioner to evade additional income taxes in the 1982, 1983, and581 1984 taxable years, has alleged facts relating to all embezzlements by petitioner from her employer for the years 1982-1984. Petitioner has not objected to respondent's independent allegations relating to the embezzlements (including the check numbers and embezzlement amounts) in any of the years 1982, 1983, and 1984, or respondent's allegation that petitioner's fraudulent omission of embezzled income is part of a 3-year pattern of intent to evade income taxes. See subparagraphs 7(b), (c), (d), (e), (f), (g), (o), (p), (q), (r). These facts tend to show a pattern of embezzlement activity for all three years in issue as do the allegations in the subparagraphs petitioner seeks to strike. The entire controversy in this case involves whether petitioner fraudulently underreported embezzlement income for three years, as to which petitioner was indicted on 22 counts by the North Carolina court. We hold that petitioner has not shown that respondent's allegations concerning petitioner's indictments on 22 counts of embezzlement during the years 1982, 1983, and 1984, the specific checks which supported the indictments, the dismissal of 19 of the counts due to the plea bargain, petitioner's582 suspended sentence, and restitution required by petitioner, have "no possible relation" to the controversy in this case. Petitioner has cited no authority which would conclusively support her contention that the disputed factual allegations in the answer can in no way support respondent's allegations of fraud. Petitioner also contends that respondent's reference to the dismissed indictments are not only irrelevant and immaterial, but prejudicial to petitioner. Respondent disagrees and cites Register v. Commissions, T.C. Memo 1990-576">T.C. Memo 1990-576. 3 In Register v. Commissioner, supra, fraud was in issue for the years 1977 and 1978. The taxpayer objected to allegations in respondent's answer to his conviction of violating section 7201 for the year 1979, his sentence to five years' probation, and a $ 10,000 fine. We held that evidence of a conviction for criminal tax fraud for a later taxable year may be relevant to the consideration of civil tax fraud for earlier years. Here, as in Register v. Commissioner, supra, respondent is not seeking to preclude petitioner from denying that she is liable for fraud under section 6653(b). 583 Petitioner has not shown any prejudice to her in the event we deny her motion to strike the disputed paragraphs in respondent's answer. See Armstrong v. United States, 173 Ct. Cl. 944">173 Ct. Cl. 944, 354 F.2d 274">354 F.2d 274 (1965), where the court considered criminal tax convictions in prior taxable years as evidence of a fraudulent course of conduct in later years. Petitioner's motion to strike will be denied. An appropriate order will be issued. Footnotes1. The correct total of subparagraphs (e), (f), and (g) of paragraph 7 is $ 75,423.71 rather than $ 75,489.71. This discrepancy is not explained in the record.↩2. The three embezzlement indictments as to which petitioner pled guilty referred to as exhibits in subparagraph 7(j) are for the year 1982. These indictments were based on embezzlement of three 1982 checks in the respective amounts of $ 7,022.93, $ 1,271.00, and $ 1,583.33, referred to in subparagraph 7(e) of respondent's answer.↩3. Respondent also cited an unpublished memorandum sur order as authority. We will not consider such memorandum. See Brock v. Commissioner, 92 T.C. 1127">92 T.C. 1127, 1132↩ (1989).	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622398/	WIRT FRANKLIN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Franklin v. CommissionerDocket No. 9266.United States Board of Tax Appeals7 B.T.A. 636; 1927 BTA LEXIS 3132; July 13, 1927, Promulgated 3132 1. Where the Commissioner and the taxpayer, pursuant to the statute, have entered into a consent in writing to the determination, assessment and collection of a tax after the time otherwise prescribed by law for such determination, assessment and collection, such consent is an extension of the statutory period, bilateral in character. 2. Where such a consent is indefinite in duration, the true intent of the parties is to be ascertained. Rules laid down by the courts in the case of contracts which are similarly indefinite for determining such intent are applicable. Where the Commissioner gave notice that such consent would expire at a certain time, held that in the absence of other factors, such as an estoppel against the taxpayer, the Commissioner may not determine, assess, or collect the tax after the date fixed by him for the termination of the consent. 3. Such a consent was executed by petitioner on January 16, 1923, and by the Commissioner on February 19, 1923. On April 11, 1923, the Commissioner announced that all such consents would expire April 1, 1924. On September 28, 1923, the Commissioner assessed the tax in controversy. On October 14, 1923, petitioner3133 filed claim for abatement. On September 22, 1925, the Commissioner rejected such claim for abatement. Held, that collection of such tax is barred. Frank H. Bryan, Esq., for the petitioner. A. G. Bouchard, Esq., for the respondent. PHILLIPS 637 This case involves a deficiency in tax for the calendar year 1917, in the amount of $8,509.71. Such amount was assessed on September 28, 1923, and a claim for abatement of the same was filed. The claim for abatement was rejected by the Commissioner. The issues are (1) whether the Commissioner erred in disallowing as a deduction, depletion in the amount of $5,981.91, and (2) whether the collection of the alleged deficiency of $8,509.71 is barred by the statute of limitations. With respect to the first issue, it was stipulated by the respective counsel for the parties that the depletion allowance should be $6,608.97, instead of $6,204.44, as allowed, and that the net income as computed by the respondent should be reduced by the amount of $404.53. FINDINGS OF FACT. The taxpayer filed his tax return for the year 1917 on April 1, 1918, showing a tax liability of $80, and filed an amended return3134 for said year on April 29, 1918, showing a tax liability of $19,035.15. On September 28, 1923, the Commissioner assessed an additional tax for 1917 against the taxpayer of $8,509.71. On October 14, 1923, the taxpayer filed with the collector a claim for abatement of such tax in the amount of $8,509.71, covering the additional tax so assessed. On September 22, 1925, the Commissioner mailed to the petitioner a letter stating that the claim for abatement in said amount of $8,509.71 had been rejected, and that the rejection would officially appear on the next schedule to be approved by the Commissioner. The taxpayer filed a bond to stay the collection of the alleged deficiency with the collector of internal revenue at Oklahoma City during December, 1925. On December 17, 1926, the collector of internal revenue at Oklahoma City filed, in the office of the County Clerk of Oklahoma County, a lien against the property of the taxpayer in accordance with section 3186 of the Revised Statutes of the United States. No suit has ever been filed in the United States District Court for the Eastern District of the State of Oklahoma by the United States or by the collector of internal revenue3135 for the collection district of Oklahoma against the taxpayer for the collection of any income tax for the calendar year 1917. The taxpayer resides in the City 638 of Ardmore, Carter County, Okla., which is within the jurisdiction of said district court. In accordance with the provisions of section 250(d) of the Revenue Act of 1921, the taxpayer and the Commissioner signed the following consent: JAN. 16-1923 INCOME AND PROFITS-TAX WAIVER In pursuance of the provisions of subdivision (d) of section 250 of the Revenue Act of 1921 Wirt Franklin of Ardmore, Oklahoma, and the Commissioner of Internal Revenue, hereby consent to the determination, assessment, and collection of the amount of income, excess profits, or war profits taxes due under any return made by or on behalf of the said individual for the year 1917, under the Revenue Act of 1921 or under prior income, excess profits, or war profits tax acts or under section 38 of the Act entitled "An Act to provide Revenue, equalize duties, and encourage the industries of the United States, and for other purposes," approved August 5, 1909, irrespective of any period of limitations. WIRT FRANKLIN, Taxpayer.D. H. 3136 BLAIR, Commissioner.FEB. 19-1923. The Commissioner issued publicly on April 11, 1923, Mimeograph 3085, which reads as follows: TREASURY DEPARTMENT, OFFICE OF THE COMMISSIONER OF INTERNAL REVENUE, Washington, D.C., April 11, 1923.To Collectors of internal revenue, internal revenue agents in charge, and others concerned:The form of waiver now in use extends the time in which assessments of 1917 income and excess-profits taxes may be made to one year from the date of signing by the taxpayer. Inasmuch as there are many waivers on file signed by the taxpayers containing no limitation as to the time in which assessments for 1917 may be made, all such unlimited waivers will be held to expire April 1, 1924. D. H. BLAIR, Commissioner.OPINION. PHILLIPS: The sole question presented is whether collection of the deficiency is barred by the statute of limitations. The return of the petitioner was filed on April 1, 1918, and, except for the extension of time, the statute would have run on assessment and collection of the tax on April 1, 1923. Prior to that date the parties executed the document set forth in the findings, whereby the petitioner consented3137 to the determination, assessment, and collection of taxes due for 1917 irrespective of any period of limitation. The Revenue Act of 1921, under which the consent was executed, provided that the amount of any such taxes should "be determined and assessed within five years after the return was filed, unless both 639 the Commissioner and taxpayer consent in writing to a later determination, assessment, and collection of the tax." It was further provided that no suit or proceeding for the collection of any such taxes should be begun after the expiration of five years after the date when the return was filed. The consent here under consideration provided no definite period within which the determination, assessment and collection were to be made. On April 11, 1923, the Commissioner publicly issued a formal announcement to the effect that waivers for the 1917 taxes containing no limitation as to the time in which assessments might be made, would be held to expire April 1, 1924. The deficiency here in question was assessed within such period, on September 28, 1923, but the tax has not been collected, for immediately after the assessment a claim for abatement was filed and it3138 was not until two years thereafter, September 22, 1925, that the petitioner was notified of the rejection of such claim. In the meantime no effort was made to collect the tax. It is the petitioner's contention that the term of the consent expired on April 1, 1924, and that thereafter no collection of the tax might be made, while the respondent contends that the consent continued in full force and effect. The instrument under consideration is denominated an "income and profits-tax waiver." It is in fact a bilateral undertaking entered into by the parties pursuant to the statute. Technically, it is not a waiver of the statute, for it is made pursuant to the statute. It is not an acknowledgment of any existing obligation or a new promise to pay, from which a new cause of action arises, thus beginning anew the period of limitation. It is not an agreement not to plead the statute of limitations as a defense to any asserted tax liability. In short, it is not something to be considered as in avoidance of the statute. By the statute and by its terms, it operates to extend the time. The statute provides that in the case of such a consent as we have here, the tax is to be determined, 3139 assessed and collected at any time prior to the expiration of the period agreed upon. The consent of the parties is indefinite as to the period within which these acts may be done but it is not to be assumed that it was their intention that there never should be any limitation. In such cases, rather than hold agreements which contain similar provisions void for indefiniteness, courts attempt to arrive at the intent of the parties. Occasionally the courts have construed agreements containing such indefinite terms as terminable at the will of either party, but the more generally accepted construction is either (1) that the contract must be performed within a reasonable time, or (2) that it continues until terminated by either party upon reasonable notice. And where a reasonable time is allowed, the party who is first to perform the 640 conditions of the contract may, by act, deed or otherwise, fix a limitation beyond which he way not extend the time for performance and upon which the other party to the contract may rely. (See Williston on Contracts, sec. 68, et seq., and cases cited.) We see no reason why the rules laid down by the courts for the purpose of determining3140 the intent of the parties in such cases are not equally applicable to a "consent in writing" such as we have here. It was recognized by this Board in the , where, having under consideration an instrument which in terms was a waiver of all statutory limitations, the Board said: No notice was ever served upon the Commissioner by the taxpayer prior to the assessment of the amount here in controversy as to when it would regard the provisions of the waiver as having been fully complied will by both parties and become inoperative. Here the Commissioner, having given notice that all waivers then of file, containing no limitation as to the time in which assessments for 1917 might be made, would be held to expire on April 1, 1924, fixed the expiration date of this consent by his own act. Any taxpayer who considered the period so long as to be unreasonable might have attempted to shorten the period by notice to the Commissioner or otherwise, but was not required to do so and was entitled to rely upon the act of the Commissioner. Although it may have no significance, it is interesting to note that the Commissioner's notice3141 was issued shortly after Congress, on March 4, 1923, had amended section 252 of the Revenue Act of 1921 to provide that when a taxpayer filed a waiver of his right to have taxes for 1917 determined and assessed within five years, credit or refund should be allowed if claim therefor was filed within six years from the time when the return was due. In the case of a taxpayer filing no such waiver, only five years was allowed, indicating that it was the intention of Congress that such waivers should extend the statute in behalf of taxpayers for one year. The action of the Commissioner in limiting such waivers to approximately one year in behalf of the Government is in line with this action on the part of Congress. It should be noted that in the present case the tax was assessed on September 28, 1923, and a claim in abatement was filed on October 14, 1923. This left several months in which to collect the tax, either with or without passing upon the claim for abatement. No further consent in writing was entered into and no action was taken for two years. There is no claim that the petitioner further extended the time for collection, either in writing or otherwise, or that he has3142 acted in such a manner as to estop him from claiming the benefits of the statute. It there had been no public announcement 641 by the Commissioner fixing the time for which the agreement would remain in effect, we are nevertheless of the opinion that no action was taken within a reasonable time and collection of the tax would be barred. The provisions of the Revenue Acts of 1924 and 1926 with respect to collection have no application where the statutory period for collection expired prior to the date of their enactment into law. We therefore conclude that collection of the tax is barred. Reviewed by the Board. Decision will be entered for the petitioner.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622401/	Walter and Flora McBreen v. Commissioner.McBreen v. CommissionerDocket Nos. 40103, 40104.United States Tax CourtT.C. Memo 1954-42; 1954 Tax Ct. Memo LEXIS 204; 13 T.C.M. (CCH) 473; T.C.M. (RIA) 54148; May 17, 1954, Filed 204 Walter McBreen, Fairplay, Mo., pro se. Frank C. Conley, Esq., for the respondent. WITHEYMemorandum Findings of Fact and Opinion WITHEY, Judge: The respondent has determined deficiencies in the income tax of the petitioners as follows: Docket No.YearAmount401031949$199.14401041948225.44The only issue is the correctness of the respondent's action in determining that Walter McBreen was not entitled to a deduction for meals and lodging while away from home in pursuit of a trade or business. Findings of Fact The petitioners, husband and wife, filed their joint income tax returns for the years 1948 and 1949 with the collector of internal revenue for the sixth district of Missouri. On May 1, 1941, Walter McBreen, hereinafter referred to as the petitioner, purchased a five-room house and 35 acres of land at Fairplay, Missouri. Flora McBreen lived in the house during the taxable years. Petitioner has been a pipe fitter for 33 years. He works on different construction projects in various locations. Some of the jobs he worked on prior to 1948 were located at Oak Ridge, Tennessee; Memphis, Tennessee; Denver, Colorado; Colorado205 Springs, Colorado; and Salt Lake City, Utah. Prior to the purchase of the house at Fairplay, Missouri, the petitioner traveled from job to job and had lived in Denver and Chicago. In 1948 petitioner contacted the Pipe Fitters Association Local No. 533 in Kansas City, Missouri, and through the Union secured employment with the Dravo Corporation as a superintendent pipe fitter on the Sunshine Biscuit Company's new building being constructed at Fairfax, Kansas. While working on the Sunshine Biscuit project, petitioner resided in Kansas City, Missouri, in a hotel and later rented a room in a private home by the week. He ate his meals in a restaurant. He was not reimbursed by the employer for his living expenses. Petitioner worked on the Sunshine Biscuit building for 52 weeks in 1948 and for the first 42 weeks of 1949. In his income tax returns for 1948 and 1949, petitioner claimed as a deduction from wages received the following expenses: 1948Room - $7.00 per week for 52 weeks$ 364.00Meals - $4.00 per day - $20.00 perweek1,040.00Total$1,404.001949Room - $7.00 per week for 42 weeks$ 294.00Meals - $20.00 per week for 42 weeks840.00Total$1,134.00*206 The respondent disallowed the deduction. Petitioner's home, within the meaning of section 23(a)(1)(A) of the Internal Revenue Code, was in Kansas City, Missouri, the place of petitioner's employment. Opinion The petitioners have not submitted any briefs in this proceeding. We gather from petitioner's testimony that since he maintained a home in Fairplay, Missouri, he contends he is entitled to a deduction for travel expenses, meals and lodging while working away from home overnight. Based on our Findings of Fact, the issue is controlled by Commissioner v. Flowers, 326 U.S. 465">326 U.S. 465; Michael J. Carroll, 20 T.C. 382">20 T.C. 382; Beatrice H. Albert, 13 T.C. 129">13 T.C. 129; Virginia Ruiz Carranza (Zuri), 11 T.C. 224">11 T.C. 224; and S. M. R. O'Hara, 6 T.C. 841">6 T.C. 841. Decision will be entered for the respondent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622403/	ROY NICHOLS, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Nichols v. CommissionerDocket No. 24016.United States Board of Tax Appeals14 B.T.A. 1347; 1929 BTA LEXIS 2958; January 16, 1929, Promulgated 2958 1. A preliminary notice from a collector relative to proposed additional taxes is not a determination of a deficiency and an appeal therefrom does not lie to this Board. 2. Losses claimed are disallowed for lack of evidence of the facts. 3. The respondent erred in including in the income of petitioner an amount which was the income of another. J. M. McMillin, Esq., and W. W. Rankin, C.P.A., for petitioner. Bruce A. Low, Esq., for the respondent. LOVE 1347 This is an appeal from the determination of a deficiency alleged by the petitioner to be set forth by the respondent in his notice of 1348 deficiency dated December 14, 1926. Petitioner alleges that the taxes in controversy amount for the years 1921 and 1922 to $858.10 and $413.99, respectively. Petitioner alleges error in that (1) there has been a failure to allow the deductions of $4,664 in 1921, and of $858 in 1922, on account of worthless oil royalties; (2) the respondent has erred in increasing the income of the petitioner by an amount of $2,175 attributed to the sale of oil royalties in 1921; (3) there has been a failure to allow the deduction of $3,300 bad debts2959 in 1922. FINDINGS OF FACT. The petitioner is now a resident of Texas and he formerly was a resident of El Dorado, Ark.In the earlier months of 1921 the petitioner and C. R. Hoffer were members of a partnership, each owning a half interest therein, engaged in the buying and selling of oil leases and royalties in Arkansas. This partnership is hereinafter referred to as the partnership. In 1921 the partnership was dissolved by consent of the partners and a corporation, known as Nichols & Hoffer, Inc., hereinafter referred to as the corporation, was organized. Certain royalty rights, the subject of consideration herein, were turned in to the corporation for stock as hereinafter detailed. After an existence of about five or six months the corporation was dissolved and its assets were distributed to the stockholders. The assets of the corporation were distributed in 1921; its charter was surrendered in 1922. At the end of 1921 the petitioner was the owner of oil royalty interests in the J. C. Lewis farm located near the central part of Union County, Arkansas. A one sixty-fourth interest had cost the petitioner $350. Another one sixty-fourth interest was acquired by2960 distribution from the partnership. The cost to the partnership had been $614. During 1921 an offsetting well was drilled in adjoining property within a distance of 500 feet. In addition there were several other holes drilled in the immediate vicinity. No well was drilled on the particular land in which the petitioner held the interests. The test wells proved to be dry and thereafter there was no demand or market for the interests owned by the petitioner. They were unsalable. In 1921 the petitioner and Hoffer acquired a one sixty-fourth oil royalty interest in 40 acres of the W. C. Sorrell farm, located about three miles north of the Lewis farm in the central part of Union County, Arkansas, paying therefor a total of $2,500 of which the petitioner paid one-half, or $1,250. The lease was turned over to the partnership by the petitioner and Hoffer. Subsequently, in 1921, the partnership turned over the interest to the corporation for stock. 1349 In the latter part of 1921 the interest was turned over to the petitioner by the corporation as a distribution in liquidation. The petitioner took over the interest at an agreed valuation of $2,500, which was the original2961 cost to the individuals who purchased it. In the first part of the summer of 1921, the drilling of a well on the Sorrel farm was started. It had continued to a depth of 2,100 feet, where some gas was encountered at the time in August, 1921, when the interest was acquired by the petitioner. Later it was drilled to a depth of 3,000 feet and proved dry. Other dry wells were drilled beginning in the late summer of 1921, which were completed prior to the end of that year. Thereupon there was no market for the sale of the interest. Early in 1921 the partnership acquired at a cost of $1,200 a one thirty-second oil royalty interest in the Polk and Ezzell farm, located about seven or eight miles north and east of the Lewis farm. This interest was turned over to the corporation by the partnership for stock, and upon dissolution of the corporation was turned over to the petitioner at an agreed valuation equaling the original cost to the partnership. An offset well was drilled within 300 feet of the property line, on this tract, and proved to be dry. The territory was "wild-cat" territory and there was no market for the interest thereafter. In 1921 the petitioner sold a one sixty-fourth2962 oil royalty interest in the lands in section 6-18-35, to which he held title as trustee for his brother who was the sole beneficial owner. The entire proceeds, amounting to $4,000, were forwarded by the petitioner to his brother. The petitioner received no commission or profit of any kind in the transaction. A notice of deficiency was mailed to the petitioner by the respondent on December 14, 1926, notifying him of the determination of a deficiency for the year 1921, amounting to $858.10, and of interest due thereon amounting to $248.84. The notice made reference to a letter dated November 11, 1926, to the petitioner from the collector of taxes advising him of the report of a deputy collector wherein additional taxes for the years 1921 and 1922 were recommended, together with interest thereon. In this letter from the collector the petitioner was given opportunity to protest to the collector. OPINION. LOVE: The basis for this proceeding is alleged to be a notice of deficiency mailed December 14, 1926. The notice of deficiency in evidence before us was mailed on the specified date but it notifies the petitioner of a deficiency for the year 1921, only. It does not appear2963 that the additional taxes for 1922, recommended by a deputy collector 1350 have been the subject of a final determination. We have no jurisdiction in this proceeding over the year 1922, and so far as the appeal relates to that year, it is dismissed. See ; . The petitioner realized no taxable income on the sale by him as trustee for his brother, of the royalty interest in section 6-18-35. In the first issue for 1921, the petitioner contends for the allowance as deductions from income of losses in value of what are described orally by the petitioner on the stand as "oil royalty rights." It appears that all but one of the rights were purchased in the first part of the taxable year, either by the individual partners who turned them over to a partnership, or by the partnership directly. A short time later, with the one exception, they were turned over to a corporation for stock and after a few months existence, the corporation was dissolved and the rights were distributed to the stockholders. At the end of the same taxable year the rights were deemed valueless according2964 to the testimony of the petitioner. But he still owned those rights, and it does not appear whether such rights ran indefinitely with the land, or were limited in duration. If, in fact, they ran with the land, then no loss was realized, because they had not been disposed of. As title to royalty rights in oil leases, unless limited by contract, constitutes title to the reality itself, and is no subject to forfeiture, as oil and gas leases, we must hold in this case that they ran with the land and are yet undisposed of. The situation here is different from the situation in the case of , where the petitioner acquired a royalty interest in a specific oil lease. Under such a situation, the lease being subject to forfeiture, and the lease having been abandoned, the royalty rights terminated with the lease. In other words, the royalty rights were limited and did not run with the land, as they apparently do in the instant case. This case is also different from an ordinary oil lease, which is subject to forfeiture, or abandonment, as was determined in 2965 . Moreover, in all but one of such transactions, the acquisition of those rights by petitioner passed through several mutations, in all of which he participated. There may be situations wherein a consideration of the net result of the several transactions mentioned is all that is necessary, due to the fact that they all occurred within the same taxable year and the algebraic sum of the several gains or losses would reflect a final loss to the petitioner. This condition does not exist in this case for the reason that originally the petitioner owned one-half interests in all of the partnership assets while at the end we find him possessed of entire interests in some of the assets. Half interests of the partners have been the subject of indirect exchange. Complete details of the distribution by the corporation 1351 are lacking. Without a full disclosure of all of the facts it is impossible to ascertain what was the cost to the petitioner and, therefore, the losses, if any, can not be ascertained. With respect to all such royalty rights, the respondent contends, and we agree with him, that if the interest runs with the2966 land, no loss is realized until the interest is disposed of; it is not realized by an arbitrary conclusion that it is worthless. Cf. . It is not here shown and we can not assume that a right was forfeited, or ever was forfeitable. There is nothing to do but sustain the respondent. Judgment will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622406/	Edward A. and Elizabeth Ballerini v. Commissioner.Ballerini v. CommissionerDocket No. 926-70 SC.United States Tax CourtT.C. Memo 1970-334; 1970 Tax Ct. Memo LEXIS 27; 29 T.C.M. (CCH) 1595; T.C.M. (RIA) 70334; December 1, 1970, Filed 27 Held: Compensation received by petitioner Edward as a resident physician in obstetrics and gynecology at Gorgas Hospital, Panama Canal Zone, was compensation for services rendered for the benefit of the hospital and no part thereof was a scholarship or fellowship grant excludable from income under sec. 117(a), I.R.C. 1954. Edward A. Ballerini, pro se, P.O. Box 37, Kamuela, Hawaii. Harry Morton Asch, for the respondent. DRENNENMemorandum Findings of Fact and Opinion DRENNEN, Judge: Respondent determined a deficiency of $645.92 in petitioners' Federal income tax for the year 1967. 28 The only issue before us is whether a stipend in the amount of $9,076, received by petitioner Edward A. Ballerini (hereinafter referred to as petitioner) during 1967 while a resident at Gorgas Hospital, Panama Canal Zone, constitutes a scholarship or a fellowship grant, $3,600 of which is excludable under section 117(a) (1), Internal Revenue Code of 1954, 1 or is compensation for services rendered to the hospital, taxable under section 61. Findings of Fact Petitioners are husband and wife, residing at Honokaa, Hawaii, at the time they filed their petition herein. They filed their joint Federal income tax return for the calendar year 1967 with the director, internal revenue service center, Philadelphia, Pa. 1596 Petitioner is a doctor, having received a degree in medicine and surgery from the University of Padua, which is located in Europe. After receiving his medical degree, petitioner was employed for one year at Monmouth Medical Center in Long Branch, New Jersey, where he served as an intern. Upon completing the intern program, petitioner was awarded the Borden29 Award as the outstanding intern. From July 29, 1966, through June 1969, petitioner was a resident in obstetrics and gynecology at Gorgas Hospital (hereinafter referred to as Gorgas), Panama Canal Zone. The residency program participated in by petitioner consisted of 18 months in obstetrics and 18 months in gynecology. Petitioner received the following amounts from Gorgas during his 3-year residency program: July 1966 - June 1967$ 8,705.50July 1967 - June 196810,338.50July 1968 - June 196911,477.00Gorgas is a short-term, fully accredited 400-bed general hospital operated by the United States Government. It is not the only hospital in the Canal Zone but it is the general hospital and medical center for the entire Canal Zone. It is charged with the responsibility of providing a broad spectrum of medical services generally for persons connected in some way with the operation of the Panama Canal. Inasmuch as there are no private cases all of the parients of Gorgas are classified as service petients and are available for teaching purposes. Also, Gorgas is authorized to admit selected cases, which normally would not be eligible for admission, for their value30 as teaching material. As a resident in the obstetrics-gynecology service petitioner had extensive duties, including being directly responsible under supervision of the staff physicians for the admission, treatment, and discharge of patients, and being directly responsible for the supervision and training of interns assigned to him. Also, petitioner was required to make morning and evening ward rounds Monday through Friday, and to attend all scheduled clinics, his ward duties permitting. The mission of the obstetrics-gynecology service as also set forth in the "Policies and Standard Operating Procedures of the Obstetrics & Gynecology Service" is as follows: (1) to provide the best in individual obstetric and gynecologic care for our patients and (2) to provide a comprehensive intern training program and residency training program to fulfill the requirements as outlined by the American Medical Association and the American College of Obstetrics and Gynecology. Gorgas is staffed by approximately 54 staff physicians along with approximately 16 AMA-approved rotating interns and 29 resident physicians in various fields, including obstetrics-gynecology. If Gorgas did not utilize31 interns and residents to care for its patients, 30 to 40 additional staff physicians would be needed to properly care for the average number of patients treated at Gorgas. In 1967 the obstetrics-gynecology service of Gorgas was staffed by five staff physicians, two rotating interns, and three resident physicians. The interns and residents under staff supervision perform 90 percent of the workload of the obstetrics-gynecology service. The number of physicians exclusive of interns and residents needed to properly care for the average number of patients treated by the obstetrics-gynecology service is from eight to ten. The residents at Gorgas are not permanent employees, but do earn the same leave as other Federal employees of the Canal Zone Government and are eligible for the same sponsored life, health and accident insurance as the permanent employees, but at a higher rate. Residents do not participate in any sponsored retirement plan other than social security. The stipend received by the residents is fixed by the head of each agency of the Canal Zone Government but may not exceed the applicable maximum stipend prescribed by the Civil Service Commission. There is, however, a32 15 percent differential between the U.S. hospital stipends paid to residents and the stipend paid to residents in the Canal Zone since the Canal Zone is considered a hardship area. The amount of the stipend also depends upon the availability of funds. It is not based upon the financial needs of the resident. When petitioner completed his internship at Monmouth Medical Center, he decided to continue his training and to specialize in obstetrics and gynecology. He selected Gorgas since it was in a desirable location and offered an excellent training program. He worked exclusively in the obstetrics and gynecology department during his entire residency program at Gorgas, working a minimum of 90 1597 hours a week. Upon completing the residency program, petitioner was not obligated to perform future services for Gorgas. The residency program was important to petitioner first of all because it taught him a field of medicine he wanted to learn and practice and secondly because upon completing the program he could identify himself as an obstetrician and gynecologist to his patients and he could be sought out for that type of work. Without this specialized training, petitioner could not33 have held himself out as a specialist in obstetrics and gynecology. During the course of his residency program at Gorgas, petitioner became a junior Fellow in obstetrics and gynecology. After completing the residency program, petitioner was then eligible to take two examinations - one written 2 and one oral - to become a Fellow, or Board-certified, in obstetrics and gynecology, which would more or less identify him as an expert in that field of medicine. The successful completion of a residency program in obstetrics and gynecology is required to become a Fellow in obstetrics and gynecology. In the calendar year 1967 petitioner received a stipend of $9,076 from which Gorgas witheld income and social security taxes. On their 1967 joint Federal income tax return petitioners included the $9,076 as wages, but excluded $3,600 as constituting a scholarship or fellowship. In the statutory notice of deficiency respondent disallowed the exclusion on the basis that the stipend was not a scholarship or fellowship under section 117. Opinion The only34 issue for our decision is whether a stipend in the amount of $9,076, received by petitioner during 1967 while a resident physician at Gorgas, constitutes a scholarship or fellowship grant within the meaning of section 117. Section 117(a)3 excludes from gross income any amount received as a "scholarship" or a "fellowship grant." Section 1.117-3(a), Income Tax Regs., defines a "scholarship" as "an amount paid or allowed to, or for the benefit of, a student, whether an undergraduate or a graduate, to aid such individual in pursuing his studies." The term "fellowship grant" is defined in section 1.117-3(c), Income Tax Regs., as "an amount paid or allowed to, or for the benefit of, an individual to aid him in the pursuit of study or research." 35 If the payment represents "compensation for past, present, or future employment services" or enables the recipient "to pursue studies or research primarily for the benefit of the grantor," the payment is not an amount received as a scholarship or a fellowship grant. Sec. 1.117-4(c), Income Tax Regs.; Bingler v. Johnson, 394 U.S. 741">394 U.S. 741 (1969). Thus, we must determine "the raison d'etre of the payment - was it to further the education and training of the * * [petitioner] or was it, in reality, payment for services which directly benefited * * * [Gorgas]?" Elmer L. Reese, Jr., 45 T.C. 407">45 T.C. 407, 410 (1966), affirmed per curiam 373 F. 2d 742 (C.A. 4, 1967). As a general hospital, Gorgas is charged with the responsibility of providing a broad spectrum of medical services generally for persons connected in some way with the operation of the Panama Canal. While it is not the only hospital in the Canal Zone, it does serve as the general hospital and medical center for the entire Canal Zone. As such, there can be no question but htat its first objective is the care and treatment of its patients. In discharging its responsibility, Gorgas utilizes the36 services of inters and residents, including petitioner, who were participating in AMA-approved training programs offered by Gorgas, in addition to its full-time staff physicians. It is clear that had Gorgas not utilized interns and residents to care for and treat its patients, Gorgas would have 1598 had to hire approximately 40 additional staff physicians to discharge its responsibility to render medical services in the Canal Zone. In the obstetrics-gynecology department, where petitioner worked exclusively during his residency program, three to five additional staff physicians would have been required if interns and residents were not utilized. In fact, the needs of Gorgas as to patient care are a factor in determining the number of intern and resident positions available at Gorgas each year. As a resident in the obstetrics-gynecology service petitioner had extensive duties, including being directly responsible, under supervision of the staff physicians, for the admission, treatment, and discharge of obstetrical and gynecology patients. Also, petitioner was directly responsible for the supervision and training of interns assigned to him. Moreover, it is noteworthy that petitioner37 was required to attend all scheduled clinics, but only if his ward duties permitted. Thus, we think it clear that petitioner was primarily employed by Gorgas to care for and treat its patients and that the stipend received by petitioner was compensation for valuable services rendered for the benefit of Gorgas. In addition to the above-enumerated facts, we also find support for our conclusion in the financial aspects of petitioner's employment. The amount of petitioner's stipend was not based upon his financial need, as is usually customary with scholarship and fellowship grants, but rather was based upon similar hospital-paid stipends in the continental United States with a 15 percent differential for U.S. citizens who are heads of household. Moreover, Federal income and social security taxes were withheld from the payments made to petitioner. While withholding is alone not determinative, Chander P. Bhalla, 35 T.C. 13">35 T.C. 13, 17-18 (1960), it is not normally done in the case of a scholarship or fellowship grant. Petitioner also received fringe benefits that the permanent employees of the Canal Zone Government receive. These financial arrangements between petitioner and Gorgas38 are certainly indicative to us that the payments were in fact compensation for services which directly benefited Gorgas and were not payments primarily made to further the education and training of petitioner. See Irwin S. Anderson, 54 T.C. 1547">54 T.C. 1547 (1970). We are not unmindful, however, that by participating in the obstetrics-gynecology residency program at Gorgas petitioner did further his education and training in that he did receive specialized training in obstetrics and gynecology and that upon completion of the program he could hold himself out as an obstetrician and gynecologist. Nor are we unmindful of the fact that the successful completion of a residency program in obstetrics and gynecology is required for a physician to be certified by the American Board of Obstetrics and Gynecology, Inc., as a Fellow in obstetrics and gynecology. However, as we stated in Aloysius J. Proskey, 51 T.C. 918">51 T.C. 918 (1969): There can be no serious doubt that work as a resident physician provides highly valuable training, particularly in preparing for specialties in the various fields of medicine. Yet virtually all work as an apprentice, whether in medicine or law, carpentry39 or masonry, provides valuable training. Nothing in section 117 requires that an amount paid as compensation for services rendered be treated as a nontaxable fellowship grant, merely because the recipient is learning a trade, business, or profession. Whatever training petitioner received during the years of his residency - and we do not deny that it was substantial - was merely "incidental to and for the purpose of facilitating the raison d'etre of the Hospital, namely, the care of its patients." Ethel M. Bonn, 34 T.C. 64">34 T.C. 64, 73 (1960); * * * In arguing that the primary purpose of residency program in which he was engaged was to further his education and training, petitioner relies on the fact that the stated mission of the obstetrics-gynecology service is (1) to provide the best care for its patients and (2) to provide a comprehensive residency training program. Petitioner points out that the training received is so intertwined with the care of patients that the two cannot be separated. In Quast v. United States, 293 F. Supp. 56">293 F. Supp. 56 (D.C. Minn., 1968); affd., 428 F. 2d 750 (C.A. 8, 1970), the District Court noted in pertinent part: Undoubtedly in40 many institutions of higher learning, certain vocational or other work which a student may do as an employee in commercial industry constitutes actual experience and credit is given therefor by the educational institution. Such does not necessarily make any payment received for such work a scholarship or fellowship, however. Here, the fact that petitioner could not have received the training in obstetrics and 1599 gynecology without caring for and treating patients is not the crucial factor. To the contrary, it is the fact that Gorgas compensated petitioner for the services he rendered for the benefit of Gorgas. See Ethel M. Bonn, 34 T.C. 64">34 T.C. 64 (1960); Woddail v. Commissioner, 321 F. 2d 721 (C.A. 10, 1963), affirming a Memorandum Opinion of this Court; Aloysius J. Proskey, supra; Quast v. United States, supra; Wertzberger v. United States, 315 F. Supp. 34">315 F. Supp. 34 (D.C. Mo., 1970); Irwin S. Anderson, supra; and Kwass v. United States, - F. Supp. - (D.C.Mich. 1970).4 All of the above-cited cases are indistinguishable in principle from the instant case. 41 Accordingly, for the reason set forth above and on the authority of the abovecited cases, we hold that the stipend received by petitioner during 1967 is not a scholarship or fellowship grant within the meaning of section 117, but is compensation for services rendered, includable in gross income under section 61. Decision will be entered for the respondent. Footnotes1. All statutory references are to the Internal Revenue Code of 1954, as amended.↩2. Petitioner took and passed the written examination given by the American Board of Obstetrics and Gynecology, Inc., on June 23, 1969.↩3. SEC. 117. SCHOLARSHIPS AND FELLOWSHIP GRANTS. (a) General Rule. - In the case of an individual, gross income does not include - (1) any amount received - (A) as a scholarship at an educational institution (as defined in section 151(e)(4)), or (B) as a fellowship grant, including the value of contributed services and accommodations; (2) any amount received to cover expenses for - (A) travel, (B) research, (C) clerical help, or (D) equipment, which are incident to such a scholarship or to a fellowship grant, but only to the extent that the amount is so expended by the recipient.↩4. See also, Austin M. Katz, T.C. Memo. 1970-116; Marvin Flicker, T.C. Memo. 1970-252; and Janis Dimants, Jr., T.C. Memo. 1970-257↩.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622408/	H. W. Wahlert, Petitioner, v. Commissioner of Internal Revenue, RespondentWahlert v. CommissionerDocket No. 22262United States Tax Court17 T.C. 655; 1951 U.S. Tax Ct. LEXIS 62; October 10, 1951, Promulgated 62 Decision will be entered for the respondent. Petitioner was a 36 per cent member of a partnership, also more than a 50 per cent owner of stock in a corporation. The partnership sold certain property to the corporation. In the determination of deficiency in this matter the Commissioner denied petitioner's claim to deduction of his percentage of the alleged loss stating, in substance, that it was "unsubstantiated loss." The petitioner alleged a basis for the property sold of about $ 64,000, and a loss by the partnership of about $ 36,000. The answer denied this allegation, and in the opening statement respondent's counsel stated that he was contending that the basis of the property was not substantiated and therefore no deductible loss on the sale was recognizable, also that the loss was not deductible because of the provisions of section 24 (b) of the I. R. C., the petitioner owning more than 50 per cent of the stock of the purchasing corporation. Petitioner made no proof of basis in the property sold other than to show that a revenue agent examining the partnership return had recognized a basis of about $ 64,000, which appeared on the partnership books. The book recitation63 had its inception in large part to agreement, in the articles of partnership, on the value of property contributed as capital contribution. The identical property was sold by the partnership in the sale here involved. Held, that for failure of proof as to basis, petitioner has not shown error in the denial of deduction of the loss claimed. Fred L. Kuhlmann, Esq., for the petitioner.Gene W. Reardon, Esq., for the respondent. Disney, Judge. DISNEY656 This case involves income tax for the calendar year 1944. Deficiency was determined in the amount of $ 10,374.53, all of which is involved. The issue is whether the Commissioner erred in disallowing the deduction as a loss of petitioner's portion of a loss sustained by a partnership of which he was a member. 64 FINDINGS OF FACT.Petitioner is an individual who resides in Dubuque, Iowa.Petitioner keeps his books and files his tax returns on a cash basis. His taxable year is the calendar year, and his 1944 income tax return was filed with the collector of internal revenue for the district of Iowa.In July 1942 the Iowa Food Products Company, a limited partnership (hereinafter referred to as the "partnership" or "limited partnership") was organized pursuant to the provisions of chapter 428 of the Code of Iowa, 1939, with a total capital investment of $ 100,000. All the partners paid in cash their contribution to the capital investment of the partnership except C. F. Limbeck and M. D. Limbeck who together conveyed real and personal property having a combined value of $ 38,000, it was agreed in the articles of partnership, as their capital contribution to the partnership.Petitioner was a limited partner in the partnership and had a 36 per cent interest in the capital of the partnership. At the time the partnership was formed, the other partners in said partnership, and their respective interests in the capital of the partnership, were as follows: 657 CapitalinterestPartners(per cent)C. F. Limbeck20M. D. Limbeck18E. D. Krey9M. V. Kisting2M. E. Wissel3M. C. Haas3M. O. Bischof2L. M. Schmitt2M. M. Kuehn2E. I. Kemerer2V. G. Kisting165 Shortly after the formation of the partnership E. I. Kemerer withdrew from the partnership and his 2 per cent interest was transferred to M. D. Limbeck. With this exception the identify of the partners and their respective partnership interests remained unchanged throughout the existence of the partnership until it was terminated.Each limited partner, including petitioner, was entitled to share in the net profits of the partnership upon the basis of his or her respective capital contribution.The partnership was engaged in an egg drying and poultry business, and was located at Guttenberg, Iowa. It kept its books and filed its returns on an accrual basis and on the basis of a fiscal year ending October 31.The only general partner in the partnership was C. F. Limbeck. (C. F. Limbeck died prior to the trial of this case.) He had carried on the same kind of business for several years prior to the formation of the partnership under the name "Iowa Produce Company," and after the partnership was formed, he alone operated the partnership business. All the other partners were limited partners and none of the limited partners participated in the operation of the business. The interest66 of the limited partners in the partnership was limited to their capital contributions.In the latter part of September or the early part of October 1944 there were discussions between the limited partners and C. F. Limbeck with respect to the dissolution of the partnership prior to the close of its fiscal year ending October 31, 1944, and the general discussion was that C. F. Limbeck would acquire the property of the partnership and carry on the business. About the same time C. F. Limbeck employed an attorney, Matthew H. Czizek, who prepared for him articles of incorporation of Iowa Food Products Company. A certificate of incorporation was issued to that corporation on October 12, 1944, by the State of Iowa. Its principal place of business was Guttenberg, Iowa. The articles of incorporation provide, in part, that the general nature of the business to be transacted is to buy, grade, pack, process, freeze and cold storage warehouse shell, frozen and dried eggs and the sale of same, and the purchase and sale at wholesale and retail of poultry, and to buy and sell agricultural products of all kinds.658 C. F. Limbeck and the limited partners discussed the price at which he was67 to purchase the assets and agreed that the price was to be $ 28,000. On October 13, 1944, all of the partners signed an agreement to terminate the partnership and to liquidate its affairs. Paragraph (3) of said agreement provided as follows:The value of "Fixed Assets," consisting of land, buildings, equipment and trucks is agreed upon to be the sum of $ 28,000.00, and such Assets shall be offered for sale for such sum and, when sold, the proceeds therefrom shall be distributed among the Partners, General and Limited, in the ratio that their respective contributions bear to the capital investment of said Partnership.At the first meeting of the board of directors of Iowa Food Products Company, held on October 26, 1944, a motion was passed authorizing the president of the corporation "to negotiate with the owners of the real estate, egg drying equipment and machinery, general equipment and office equipment formerly owned by said partnership, for the lease or purchase thereof upon such terms as he deems advisable."At the time C. F. Limbeck agreed to pay $ 28,000 for the fixed assets, he indicated that he had no objection to the price but that he did not have sufficient funds and68 that it would be necessary for him to borrow the money. Efforts were made to borrow the money from the American Trust and Savings Bank of Dubuque, Iowa, and from the Interstate Finance Company. Both of these efforts were unsuccessful.The board of directors of Dubuque Packing Company held a meeting on November 1, 1944, to consider a proposal submitted by the partnership to sell certain real estate, including buildings and improvements, and all egg drying equipment and machinery, general equipment, and office equipment, for $ 28,000. A resolution was adopted reading in pertinent part as follows:Whereas, said partnership has been terminated as of October 31st 1944, and the sale of said property is a part of its liquidating process and it is advisable and for the best interests of said partnership that the Deed of Conveyance be dated on October 31st, 1944, or some day prior thereto rather than on some date subsequent thereto which arrangement is acceptable to this board:Now, therefore, be it resolved by the Board of Directors of Dubuque Packing Company that the proposal of Iowa Food Products Company, a limited partnership, to sell the property described in the Preamble hereof for69 the sum of $ 28,000.00 be, and the same is, hereby accepted.Be it further resolved that, upon the delivery of a good and sufficient Deed of Conveyance of said property to Dubuque Packing Company, said Company shall pay to said partnership the sum of $ 28,000.00.A deed of conveyance from Iowa Food Products Company, a limited partnership, to Dubuque Packing Company, a corporation, covering the property involved and above described, was executed by the partnership and signed by all partners. It recited that it was dated and signed the 28th day of October 1944. Some of the partners acknowledged 659 the execution on October 28, 1944, and others on October 30, 1944. The consideration recited in the deed was $ 28,000. The $ 28,000 was paid to the partnership by check of Dubuque Packing Company on November 9, 1944.The real estate described in the deed from the partnership to Dubuque Packing Company is the same as the real estate described in the articles of limited partnership of July 1942 where a part of the same real estate, later conveyed by the partnership to Dubuque Packing Company, is recited as contributed to the partnership by C. F. Limbeck; and where the remainder of70 the real estate later conveyed to Dubuque Packing Company by the partnership is recited to be conveyed a one-half interest each by C. F. Limbeck and M. D. Limbeck. In addition, the deed from the partnership to Dubuque Packing Company recites conveyance of improvements and equipment on the described real estate in Guttenberg, Iowa, and the articles of partnership recite contribution by C. F. Limbeck and M. D. Limbeck of a one-half interest each in machinery and equipment located upon a part of said real estate described in the deed from the partnership to Dubuque Packing Company. The real estate and personal property, machinery and equipment so described in the articles of partnership is recited to be (with C. F. Limbeck's interest in 12,863 cases of shell eggs in storage) the property the value of which aggregates the $ 20,000 recited as the value of his contribution to the partnership; and the real and personal property described, as above recited, in the articles of partnership is recited therein as comprising the $ 18,000 contribution of M. D. Limbeck to the partnership capital investment.Petitioner was president of Dubuque Packing Company and presided at the meeting of its 71 board of directors on November 1, 1944, at which the above resolution was passed. He and C. F. Limbeck had been friends for many years. Limbeck through his attorney attempted to obtain funds to purchase the property, conferences being had with a bank at Dubuque and a loaning corporation. Neither effort was successful. After these efforts had failed, the petitioner indicated that Dubuque Packing Company would aid C. F. Limbeck by acquiring the property from the partnership and reselling it to Limbeck later when he was able to purchase. It was left open so that Limbeck would have an opportunity of continuing his efforts to borrow sufficient money to take the property back from Dubuque Packing Company. On October 28, 1944, there was an oral agreement between Dubuque Packing Company and Iowa Food Products Company, the corporation, with regard to the property which was conveyed to Dubuque Packing Company on that date by the partnership, which was in substance the same as an agreement embodied in writing between the two corporations on November 9, 1944.660 On November 7, 1944, the directors of Dubuque Packing Company had a meeting, the petitioner presiding as president. He 72 stated that the purpose of the meeting was to consider an offer submitted by Iowa Food Products Company, a corporation, to purchase the property "heretofore acquired from Iowa Food Products Company, a limited partnership, for the sum of $ 28,600.00," explaining that the company represented that it was not able to pay such purchase price in full at this time and that it desired to enter into a contract agreeing to pay $ 16,600 on or before November 10, 1944, and the balance of $ 12,000 on or before June 1, 1945. After consideration it was resolved that the proposal be accepted and that a contract be executed by the president on behalf of the corporation.On November 9, 1944, a written Contract of Purchase was entered into between Dubuque Packing Company and Iowa Food Products Company, the corporation, whereby Dubuque Packing Company agreed to convey to Iowa Food Products Company, the corporation, the same fixed assets which had been conveyed to Dubuque Packing Company by the partnership on October 28, 1944, upon the payment of the sum of $ 28,600, payable $ 16,600 on or before November 10, 1944, and the balance of $ 12,000 on or before June 1, 1945. In the contract it is recited that73 Dubuque Packing Company is the owner of the property hereinabove described, and which is described in the contract in detail. The contract recites that the Dubuque Packing Company "agrees to sell and convey" and that the Iowa Food Products Company, a corporation, agrees to purchase, the described property.The Contract of Purchase provided that Iowa Food Products Company, the corporation, should pay all taxes levied and assessed or to be levied and assessed upon said property, real and personal, for the year 1944, and that Dubuque Packing Company should insure the property against loss by fire or the elements and pay the premiums thereon. The cost of the insurance was estimated to be $ 600, and this amount was added to the $ 28,000 which Dubuque Packing Company paid to the partnership in arriving at the $ 28,600 price agreed upon in the Contract of Purchase. The $ 28,600 was paid by Iowa Food Products Company, a corporation, as follows: $ 16,600 on November 10, 1944, and $ 12,000 on June 2, 1945.It is the custom of the attorney who handled the transaction for the parties, in a situation where a prospective purchaser does not have sufficient funds to pay in full for property, to74 handle the matter through a contract of purchase. In that way the title holder sells and agrees to convey to the purchaser upon payment of the purchase price and upon default in the payment when due any initial payment is retained by the owner and the contract stands forfeit. He follows that 661 procedure because it is simpler than a mortgage or deed of trust in case of default in which an action for judgment, a sale, and a 1-year period of redemption is involved.Pursuant to the terms of the Contract of Purchase, Dubuque Packing Company on May 31, 1945, executed a deed of conveyance to Iowa Food Products Company, the corporation, by the terms of which it sold and conveyed the fixed assets which it had acquired from the partnership to Iowa Food Products Company, the corporation, in consideration of $ 28,600.Dubuque Packing Company never operated or intended to operate the egg drying and poultry business which was conducted in the property conveyed to it by the partnership on October 28, 1944, and at no time did it have actual physical possession of the property. After the partnership ceased to operate the business, the newly formed Iowa corporation, Iowa Food Products Company, 75 was in physical possession of the property. There was no lease nor any rent paid between Iowa Food Products Company and Dubuque Packing Company during the time that Dubuque Packing Company held title to the property.At the date of sale by the partnership to Dubuque Packing Company the following partners in the partnership owned stock in Dubuque Packing Company: M. V. Kisting, L. M. Schmitt, M. M. Kuehn, V. G. Kisting, and petitioner. On said date petitioner and members of his "family," as that term is defined in section 24 (b) (2) (D) of the Internal Revenue Code, owned more than 50 per cent of the outstanding capital stock of Dubuque Packing Company. Petitioner was president of Dubuque Packing Company. None of the other partners owned stock in Dubuque Packing Company. On said date none of the partners was a member of petitioner's "family," as that term is defined in section 24 (b) (2) (D) of the Internal Revenue Code.As an accommodation to C. F. Limbeck, petitioner agreed to serve as one of the three incorporators of Iowa Food Products Company, the corporation, and one of the three directors needed to form the corporation under Iowa law. Upon incorporation, the stock book76 of the corporation showed 105 shares of $ 100 par value capital stock issued to C. F. Limbeck, 105 shares issued to M. D. Limbeck, his wife, and one qualifying share to petitioner. Petitioner resigned as director of the corporation on October 26, 1944, and the one share of stock which had been issued in his name was transferred on the books of the corporation to M. H. Czizek, who succeeded petitioner as a director and who paid the corporation the par value of $ 100 for said share.The adjusted basis of the fixed assets sold and conveyed to Dubuque Packing Company on October 28, 1944, as shown on the partnership's books, was $ 64,889.37. The partnership filed a return on Form 1065 for its fiscal year ended October 31, 1944, and reported a net loss of 662 $ 36,889.37, from said sale, and reported ordinary net income of $ 101,926.86. On May 7, 1947, an acting internal revenue agent in charge sent to Iowa Food Products Company, the partnership, copy of the report of his examination of its partnership income tax return for the year ending October 31, 1944. The report recites an increase in income of $ 13,280.17, that is, from $ 101,926.86, as reported, to $ 115,207.03, as corrected. 77 In pertinent part it recites that the principal cause for changes in income was the disallowance of a partner's proportion of a loss on the sale of assets to Dubuque Packing Company; that the partners other than H. W. Wahlert, under the provisions of section 24 (b) (1) and ( 2), Internal Revenue Code, are not precluded from taking a deduction for their proportionate share of the loss; that the unallowable deduction and additional income was $ 13,280.17, described as "36% of $ 36,889.37 (loss on sale of assets to Dubuque Packing Co.) disallowed to H. W. Wahlert, Pasture, Iowa Food Products Company," resulting in a net adjustment of $ 13,280.17. Schedule 1-A to the report recites:SCHEDULE 1-AExplanation of Items(a) Loss on sale of company assets$ 13,280.17This item represents Mr. H. W. Wahlert's proportionate shareof the loss from the sale of company assets to the DubuquePacking Company. Under the provision of Sec. 24 (b) (1) and(2) such losses are not allowable deductions, if one of thepartners owns directly or indirectly, more than 50% of theoutstanding stock of the corporation.Computation:Proceeds from the sale of depreciable assets to the DubuquePacking Company, Inc., as of Oct. 31, 1944$ 28,000.00Basis of the assets64,889.37Loss claimed on partnership reclaimed36,889.37H. W. Wahlert's share 36%13,280.1778 The Iowa Food Products Company in computing its net income per its partnership return for the year ended October 31, 1944, deducted a loss of $ 36,889.37 upon the sale of its said properties as of October 31, 1944, computed as follows:Cost of buildings, equipment and real estate$ 91,758.25Less depreciation:Prior years$ 15,024.76Current year ended 10/31/4411,844.1226,868.88Remaining adjusted cost basis as of 10/31/44$ 64,889.37Proceeds of sale 10/31/4428,000.00Net deductible loss$ 36,889.37663 In the partnership return ordinary net income of $ 101,926.86 was computed with petitioner's reported distributive share being $ 31,143.87 (36 per cent of $ 101,926.86).Petitioner reported in his individual Federal income tax return for the taxable year 1944 the said sum of $ 31,143.87 as being his distributive share of partnership income for the partnership year ended October 31, 1944.The Commissioner, in determining deficiency against petitioner for the calendar year 1944, determined that the above claimed partnership loss of $ 36,889.37 was an unallowable deduction and the Commissioner increased the petitioner's distributable share79 of partnership income for petitioner's taxable year 1944 by the sum of $ 13,280.17 (36 per cent of $ 36,889.37).The notice of deficiency against petitioner for the taxable year recited in pertinent part as follows:Net income as disclosed by return$ 50,126.52Unallowable deductions and additional income:(a) Partnership income increased13,280.17Net income as adjusted$ 63,406.69Explanation of Adjustments(a) The distributive share of income reported by you from Iowa Food Products Company, a limited partnership of Guttenberg, Iowa, for the fiscal year October 31, 1944, has been adjusted as follows:Ordinary net income reported on Form 1065 for fiscal yearOctober 31, 1944$ 101,926.86Less: Amounts distributed to other partners as salaries15,416.12Balance$ 86,510.74Add: Loss claimed by above partnership on sales of businessproperties36,889.37$ 123,400.11Your distributive share (36)44,424.04Amount reported by you31,143.87Increase$ 13,280.17It is held that no part of the unsubstantiated loss claimed in the above partnership return alleged to have arisen from the sale of its business properties to Dubuque Packing Company80 is deductible in computing your net income for the year 1944.Petitioner filed an amended petition in which, in substance, in reciting the facts relied upon as basis for this proceeding it is recited, in pertinent part, that Dubuque Packing Company was only the nominal purchaser of the assets from the partnership, that the real purchaser was C. F. Limbeck, and that the sale was bona fide and for a 664 valid business purpose. Under paragraph 5 (j) it is recited that the partnership basis in the assets was $ 64,889.37, that upon the sale the partnership sustained a net loss of $ 36,889.37 and reported said net loss of $ 36,889.37 as loss from sale of property other than capital assets, and reported net income of $ 101,926.86. Paragraph 5 (k) in pertinent part recites that respondent in his examination of the return of the partnership used $ 64,889.37 as the basis of the assets. Respondent filed answer to the amended petition and denied the allegation in paragraph 5 (j) that the partnership's basis for the fixed assets was $ 64,889.37 and that the partnership sustained a net loss of $ 36,889.37 upon said sale. He also denied the allegation in paragraph 5 (k) as to the partnership's81 basis in the assets being $ 64,889.37 and its loss $ 36,889.37. No reply was filed. At trial petitioner's counsel in his opening statement stated that the property sold by the partnership was carried on the partnership's books on the same basis as originally entered, that the basis of the property was never questioned by the respondent for depreciation purposes or in the audit of the partnership return for the year ending October 31, 1944, and that in determining the loss to the other partners that basis was recognized, and that it was his contention that respondent is in no position at this time to question the basis after allowing it as a proper basis to all the other partners; that it puts an impossible burden on petitioner to prove a basis which has to be traced back, if at all, to the origin of the building and the date of acquisition by C. F. Limbeck who is now dead. Later during the trial petitioner's counsel stated that he had no way of proving C. F. Limbeck's original basis for the property, and that he contended that respondent could not establish a basis to this partner (the petitioner) which differs from the basis that was established and accepted by him as to the other82 partners. Asked by the Court whether he was in effect pleading estoppel or raising estoppel, he stated: "It isn't an estoppel argument, I don't believe, Your Honor" and later stated as to the plea of estoppel "No; we haven't pleaded it and I am not urging that as the argument here * * ." Counsel for the respondent in his opening statement stated in pertinent part that the partnership had computed its loss on a basis of $ 91,758.26 cost, less depreciation $ 26,868.88, with remaining cost basis of $ 64,889.37, proceeds of sale $ 28,000, and net deductible loss of $ 36,889.37; that it was the contention of the respondent that the petitioner's claimed share of such purported partnership loss is not allowable for the reasons that (1) the basis of the partnership assets sold was not substantiated and therefore no deductible loss on sale is recognizable; and (2) petitioner owned more than 50 per cent of the capital stock of the purchasing corporation, Dubuque Packing Company, and consequently no part of any such purported 665 partnership loss on sale is deductible by petitioner under section 24 (b) of the Internal Revenue Code.OPINION.We are presented here with a question as to83 whether the Commissioner erred in denying to the petitioner deduction of his percentage of a loss by his partnership upon sale of assets. The deficiency notice so denying the deduction by way of explanation merely states, in substance, that the petitioner had reported $ 31,143.87 as his 36 per cent of partnership income of $ 86,510.74, but that due to the disallowance of loss of $ 36,889.37, claimed on the sale of the property by the partnership, the petitioner's distributive share was $ 44,424.04 and his income was therefore increased $ 13,280.17, with the statement "It is held that no part of the unsubstantiated loss claimed in the above partnership return alleged to have arisen from the sale * * is deductible in computing your net income for the year 1944." The respondent has two contentions, first, that the basis of the partnership assets sold was not substantiated and therefore no deductible loss is recognizable to the petitioner and, second, that the petitioner owned more than 50 per cent of the capital stock of Dubuque Packing Company, the purchaser from the partnership, so that no loss is allowable to the petitioner under the provisions of section 24 (b) of the Internal84 Revenue Code.Obviously, if the basis of the partnership assets was not substantiated, that is, not proven in this case, petitioner has not established a loss whether deductible or not, and we do not reach the second question. The petitioner's counsel frankly acknowledged at trial that he could not prove the basis of the assets sold, and stated that an impossible burden was put upon petitioner to prove the basis "when it has to be traced back, if it is to be traced at all, to the origin of the building and beyond that to the date of acquisition by C. F. Limbeck, who is now dead." He had earlier stated that: "The property which was sold by the partnership in this case * * was contributed to the partnership in 1942 by C. F. Limbeck * * * in exchange for the partnership interest which he acquired at that time." In respondent's opening statement reference is made to the conveyance by C. F. Limbeck and M. D. Limbeck of real estate and plant as contributed capital, and to the fact that the partnership "conveyed said assets to Dubuque Packing Company."The real and personal property conveyed by the partnership in 1944 to Dubuque Packing Company is particularly described, in the deed, 85 with the numbers of lots and blocks set forth, and such property is the identical property described in the articles of partnership formed in 1942 where such property is recited as contributed by 666 C. F. Limbeck and M. D. Limbeck as constituting their respective capital contributions of $ 20,000 and $ 18,000, respectively, those being the values agreed upon in the articles of partnership. Petitioner's opening statement recites: "The property was carried on the books of the partnership at all times on the same basis on which it was originally entered upon its books." It thus appears that although it is stipulated that the adjusted basis for the assets sold and conveyed by the partnership to Dubuque Packing Company was $ 64,889.37, "as shown on the partnership's books," that figure has its inception to a large extent in the real estate and personal property contributed by C. F. Limbeck and M. D. Limbeck and passing to Dubuque Packing Company, as to which no basic value appears, but only the value agreed upon by the partners for purposes of capital contribution. On trial petitioner's counsel stated: "We have no way of proving what C. F. Limbeck's original basis for this property86 was. At this late date, it is completely beyond us." (We note here that only C. F. Limbeck and not M. D. Limbeck was shown to be dead.)Under such circumstances it is apparent, we think, that any prima facie showing of value created by the stipulation as to the amount appearing on the partnership books, Frank C. Rand, 40 B. T. A. 233 (239), is overcome by the fact that such book value in considerable part rests only upon agreement for purposes of capital contribution. The petitioner does not suggest that the recitation of book value casts any burden upon the respondent but, on the contrary, as above seen, admits inability to prove the value. Petitioner seeks, however, to avoid this failure of proof by the contention that: "The basis of assets is a factor in the computation of the tax, and under partnership tax accounting, an adjustment of basis can only be made upon an audit of the partnership return"; under which he argues, in substance, that the partnership in its return used $ 64,889.37 as basis for the partnership property sold, that this figure was accepted in the revenue agent's report on the partnership for the taxable year, and that the "respondent87 cannot increase petitioner's distributive share of partnership income on the ground that the partnership's basis has not been substantiated unless, in his audit of the partnership return, he determined a new basis for the assets and readjusted each partner's distributive share accordingly." The petitioner cites no case which we find to have any relation to the point. It is obvious that unless the respondent as a matter of law or estoppel is precluded from questioning the partnership basis in the assets sold, petitioner can not prevail. Petitioner's counsel stated at trial when, on this point, he was asked by the Court whether he was in effect raising estoppel, that he did not think it was an estoppel argument and that he had not pleaded estoppel. The pleadings disclose no such plea. It can not be said that the petitioner 667 was taken unawares by the respondent's urging that no basis in the assets sold had been shown. The deficiency notice states that it is held that no part of the "unsubstantiated loss" claimed in the partnership return is deductible by the petitioner, so that by the determination of deficiency petitioner was duly put upon notice that the loss was considered88 unsubstantiated. Moreover, the amended petition alleges in paragraphs 5 (j) and 5 (k), in substance, that the partnership's basis for the assets was $ 64,889.37, which allegations were in the respondent's answer denied. Again, at trial, the respondent's counsel in his opening statement set forth, as his first contention, that the basis of the partnership assets sold had not been substantiated so that there was no deductible loss. Thus, it is clear that there is no element of surprise, in the urging by the respondent of the lack of basis. The petitioner was clearly apprised that he must prove basis, and just as clearly agreed that he could not do so. We note in this connection that two parties named Limbeck contributed property, instead of cash, to the capital of the partnership (which is the gist of the idea of no substantiation of basis of the assets) and that the death of only C. F. Limbeck is suggested. Estoppel was not pleaded and in any event there appears no basis of estoppel, in the facts before us. The only question, therefore, that remains is whether as a matter of law, as the petitioner urges, the respondent can not question the basis of the assets because it was 89 reported in the partnership return and referred to in the report of the internal revenue agent who examined the partnership return, and the figure as to basis used in the return was used by him in determining the amount of the loss, a percentage of which the petitioner claims is deductible. We note that in Hellman v. United States, 44 F.2d 83">44 F. 2d 83, there was contention by the defendant, collector of internal revenue, that the plaintiff, the taxpayer, was bound by the partnership return showing his distributive share. The court held that he was not so bound. In Lillie C. Pomeroy et al., Executors, 24 B. T. A. 488, affd. 68 F. 2d 411, an individual case, growing out of a partnership, the petitioner argued that statements made in a revenue agent's report relative to the termination of the partnership were controlling. It was held that such conclusions by the revenue agent were not binding upon the respondent. He had in his reports treated the business as a partnership and stated that it terminated upon the operation of a certain agreement. Though it is not closely applicable here, our statement90 in Estate of Herbert B. Hatch, 14 T.C. 251">14 T. C. 251, involving a sale by partners and capital gain, that the total of the basis of the partnership assets to the partnership does not necessarily equal the total of the bases to the partners of their interests, does indicate, in our opinion, error in the petitioner's view here that the respondent is necessarily bound by a view as to the basis of the 668 partnership assets. We can conceive of a case where revenue agents in examining a partnership return come to conclusions as to basis of assets, which conclusion it is later decided was erroneous, so that in determining a deficiency against one of the partners growing out of the partnership's sale of such assets the Commissioner in view of the error made by the revenue agents determines that there is no such basis, or, as in this case, that loss therefrom is "unsubstantiated"; and we see no reason why in the absence of estoppel the Commissioner is precluded from so determining and, as in this case, denying, in his answer, allegations as to the amount of partnership basis. In such a situation if, as here, the partnership basis is not proven there seems no 91 reason in law why the petitioner should prevail. The issue here has been squarely made and nothing but some reason, in law, why the respondent can not question the partnership basis can avail the petitioner. No such reason or case supporting it is suggested to us here. The determination of deficiency, the denial of basis in the answer, and the respondent's opening statement all put petitioner on his proof. He agrees that he can not prove his basis, and did not do so. It has been often held that inability to make proof avails nothing. In Burnet v. Houston, 283 U.S. 223">283 U.S. 223, a case, as here, of alleged loss, the Court said:* * * The impossibility of proving a material fact upon which the right to relief depends simply leaves the claimant upon whom the burden rests with an unenforceable claim, a misfortune to be borne by him, as it must be borne in other cases, as the result of a failure of proof. * * We, therefore, conclude that the petitioner has failed to show error on the part of the respondent, not having substantiated his loss by proving the basis of the partnership.In view of this conclusion it would be superfluous for us to examine the92 further question presented by the parties involving section 24 (b) (1) of the Internal Revenue Code.Decision will be entered for the respondent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622409/	LLOYD S. ROHLIG AND KATHLEEN M. ROHLIG, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentRohlig v. CommissionerDocket No. 1014-88United States Tax CourtT.C. Memo 1991-267; 1991 Tax Ct. Memo LEXIS 305; 61 T.C.M. (CCH) 2889; T.C.M. (RIA) 91267; June 11, 1991, Filed 305 Decision will be entered under Rule 155. Douglas R. Thompson and Lisa Gill Rowling, for the petitioners. Roslyn D. Grand, for the respondent. GERBER, Judge. GERBERMEMORANDUM OPINION 1Respondent, in a statutory notice of deficiency, determined deficiencies in and additions to petitioners' Federal income tax for the 1983 and 1984 taxable years as follows: Additions to TaxYearDeficiencySec. 6653(b)(1) 2Sec. 6653(b)(2)1983$ 1,306,353$ 653,177Applies to deficiency1984155,51277,756Applies to deficiencyThe issues presented for our consideration are: (1) Whether petitioners understated their income for 1983 and 1984 in accord with respondent's reconstruction determination306 by means of the bank deposits method; (2) whether various specific deposits to various financial accounts represent unreported income of petitioners for their 1983 and 1984 taxable years; (3) whether petitioners are entitled to various deductions and depreciation; and (4) whether petitioners are liable for the additions to tax for fraud under section 6653(b)(1) and (2) for their 1983 and 1984 taxable years. The parties entered into a stipulation of facts, along with attached exhibits, which are incorporated herein by this reference. Petitioners, who at all pertinent times were husband and wife, had their legal residence in Marietta, Georgia, at the time the petition was filed in this case. Petitioner Lloyd S. Rohlig (hereinafter the use of petitioner in the singular refers to Lloyd S. Rohlig) is a college graduate with a degree in accounting. His accounting studies included the study of the tax area. During the years 1983 and 1984307 petitioner was a self-employed accountant and he was also involved in real estate management. During those same years Kathleen Rohlig was a student at Life Chiropractic College and was also involved in real estate management. For each of the taxable years 1978, 1980, 1982, 1983, and 1984, petitioner prepared the joint Federal income tax returns filed by petitioners. For the taxable years 1977 and 1979 petitioners did not file Federal income tax returns. Prior to the 1983 taxable year, petitioner had been employed by the State of Michigan and had earnings ranging from about $ 12,000 to over $ 19,000. At various times no returns were filed, and on one occasion during 1977 petitioner made the claim to his employer that petitioner was entitled to 99 exemptions and that he was exempt from the withholding of Federal tax. Robin Gayle Rohlig (Robin) is petitioner's sister and petitioner prepared her 1982 through 1985 Federal income tax returns. With respect to Robin's 1982 return, petitioners' son (Shawn) was claimed as a dependent. Thereafter, petitioners filed a Form 1040X amended Federal tax return claiming Shawn as their dependent in order to claim an earned income credit of $ 308 303, which was not available without a "qualifying dependent." During October 1986, Cathy Mason (Mason), who had been an Internal Revenue Agent for 9 years, was conducting an examination of petitioners' 1983 and 1984 tax liabilities and she wrote to petitioners scheduling an appointment and requesting various documents. Petitioners did not appear for the appointment or otherwise submit any documents. Mason had also conducted the examination of petitioners' 1982 tax liabilities. Petitioners had also been examined by an agent of respondent for their 1977 through 1980 taxable years and did not provide any records in accord with respondent's agent's request. Mason discovered that petitioners were connected with the Life Science Church and had been identified as potential tax protestors due to that affiliation. Due to the lack of cooperation Mason, on February 18, 19, and 20, 1987, issued third-party record-keeper summonses to 10 financial institutions, along with notices of each summons to petitioners. After the summonses were issued, petitioner and Mason met, but no documents or information supporting the figures reported on petitioners' returns were turned over. On March 12, 309 1987, petitioners sought to quash the summonses and on May 14, 1987, the United States District Court for the Northern District of Georgia denied petitioners' attempt to quash the summonses. Pursuant to section 7609(e)(1), the period for assessment with respect to petitioners' 1983 taxable year was extended by 63 days. Because the period for assessment would have otherwise expired on August 16, 1987, it was extended to October 17, 1987. The notices of deficiency for petitioners' 1983 and 1984 taxable years were mailed to petitioners on October 14, 1987. Petitioners' failure to provide records in support of the amounts reported on their 1983 and 1984 Federal income tax returns caused Mason to reconstruct petitioners' taxable income for each year by means of a simplified bank deposits method. Mason totaled all deposits from petitioners' various financial accounts and reduced the total by transfers between accounts, redeposited items, and nontaxable items of deposit to arrive at "net taxable deposits." To the extent that net taxable deposits exceeded the total income reported on petitioners' return, the excess was treated as unreported income. If Mason had used the usual bank deposits310 method of reconstruction, she would have determined which of petitioners' expenses were business and which were personal. That might have resulted in additional income unreported by petitioners. Mason was not able to determine the character of the expenditures because petitioners did not provide records and Mason was not able to obtain all checks from the various financial institutions to which summonses were issued. Respondent's reconstruction resulted in the following computations which were set forth in the notices of deficiency to petitioners: 19831984Total bank deposits$ 7,201,252.40$ 760,575.67Less:Nontaxable sources4,544,870.27402,312.08Net taxable deposits$ 2,656,382.13358,263.59Less:Income reported21,734.1615,224.90Unreported income determinedby respondent$ 2,634,647.97$ 343,038.69Subsequent to the issuance of the notice of deficiency and prior to trial, petitioners submitted to respondent documentation concerning various matters, including information concerning additional bank accounts of which respondent was not aware. Based upon the additional information, respondent's reconstruction and recomputation of petitioners' 311 unreported income for 1983 and 1984 is as follows: 19831984Income reported per return:Interest$ 15,084.16$ 2,069.90Schedule C gross receipts1,475.004,675.00Schedule E gross receipts5,175.008,480.00Total income reported$ 21,734.16$ 15,224.90Revised taxable depositsper respondent89,882.33145,596.00Revised unreported incomeper respondent$ 68,148.17$ 130,371.10Petitioners do not agree that any part of the $ 89,882.33 or $ 145,596.10 of revised deposits computed by respondent is taxable for their respective 1983 or 1984 taxable years. During the 1983 and 1984 taxable years petitioners maintained, in their own names and those of nominees, about 20 different accounts in financial institutions including banks, savings and loans, and with stockbrokers. The remaining disputed deposits to various of these accounts are set forth below: Amount DisputedInstitutionDate of DepositAmt. of DepositBy PetitionersPeach State:April 8, 1983$ 992.50$ 992.50 First Fed.:April 14, 19835,000.00 5,000.00(1)April 18, 1983336.00336.00* May 20, 19836,603.806,603.80(2)United Fed.:Aug. 19, 198394,342.50342.50* FNB Cobb:April 21, 1983$ 200.00$ 200.00(1) May 24, 1983 122.00122.00(3) June 17, 198382.0082.00(3) July 18, 1983280.00280.00(1) Aug. 23, 1983122.00122.00(3) Sept. 19, 198382.0082.00(3) Oct. 19, 1983290.00290.00* Oct. 26, 198350.0050.00(1) Nov. 15, 19832,171.051,883.65(11)Nov. 16, 19832,280.002,280.00(5) Nov. 22, 1983280.00280.00(4) Nov. 30, 1983300.00300.00(4) Dec. 5, 198318,898.2018,435.00(6) Dec. 13, 1983342.00342.00* Dec. 19, 19834,873.74773.74(6) Georgia Fed.:Jan. 18, 19838,939.298,939.29(8) Feb. 2, 1983400.00400.00* Feb. 15, 198370.0070.00* Feb. 17, 1983333.03333.03* Feb. 22, 1983717.29717.29* Feb. 22, 19834,150.004,150.00(13)March 14, 198335.0035.00* March 21, 1983100.00100.00(1) April 8, 1983537.00537.00(7) April 11, 19831,000.001,000.00(1) April 14, 1983300.003.00* May 7, 1983244.50244.50(3) June 16, 198365.0065.00* July 27, 1983500.00500.00* Aug. 4, 1983300.00200.00(1) Aug. 5, 198363.7263.72(1) Aug. 8, 1983256.00256.00* Aug. 10, 198360.0060.00* Aug. 22, 1983130.00130.00* Sept. 23, 1983100.00100.00(1) Oct. 17, 198359.8159.81(1) Oct. 24, 198320.0020.00(1) Citibank:April 19, 19833,500.003,500.00(12)FNB Cobb:Jan. 19, 198420,005.00876.66(6) Feb. 1, 1984200.00200.00(1) Feb. 2, 19841,710.42500.00* Feb. 21, 198425,299.97621.31(6) March 22, 198440,323.43323.43(6) May 25, 1984112,012.50112,012.50(11)July 5, 19847,000.00 1,230.83(6) Aug. 8, 19848,232.226,169.39(1) Aug. 21, 1984112,936.67536.45(6) Georgia Fed.:Feb. 29, 1984$ 359.96$ 359.96* April 12, 1984813.78813.78(1) June 18, 1984882.21500.00(4) July 3, 19841,442.001,442.00(9) July 16, 19841,400.001,400.00(10)July 20, 19841,500.001,500.00(9) July 26, 198448.5348.53(1) Sept. 10, 1984684.39684.39(1)Sept. 28, 1984503.00500.00(4) Dec. 14, 198449.0049.00 312 An asterisk () has been placed next to each disputed deposit where petitioner did not recall the source and/or no evidence was presented to explain the nature or source of the deposit. In addition to these deposits were numerous other deposits which the parties agree do not represent taxable income and which made up the nearly $ 8,000,000 in deposits to petitioners' accounts or to accounts of their nominees. A large portion of the deposits no longer in dispute represent amounts deposited in connection with a kiting scheme between banks wherein interest was sought on the float. With respect to the above-listed disputed deposits, evidence was offered at trial concerning only certain of them. The remaining deposits have been marked or numbered to correspond with the following findings of fact and legal conclusions. (1) Petitioner claimed that these amounts consisted of deposits of cash items resulting from cash withdrawals by means of checks, automated teller machine withdrawals, and other sources. Petitioner's testimony was generalized concerning most of these items. Additionally, the time lapse between cash withdrawals and deposits was usually too distant to reasonably be 313 considered credible. Petitioner also claimed that some of these amounts were from rebates (presumably from companies offering them to purchasers of products) without providing any specific proof other than his testimony. Petitioners are not entitled to any reduction of the bank deposit analysis with respect to these items. (2) $ 6,603.80 - This amount was received by petitioner's sister, Robin, in the form of a $ 7,503.80 check from an insurance company. It was given to petitioner to invest (presumably in his kiting scheme) and he deposited the check and took a $ 900 cash withdrawal resulting in a $ 6,603.80 net deposit. Accordingly, the 1983 bank deposit analysis should be reduced by $ 6,603.80. (3) These items petitioner testified were "dividends" to his sister, Robin, but he did not explain the nature or source of the dividend. No documentation concerning the "dividends" was offered and no reduction of the bank deposit analysis is allowed. (4) These items concern petitioner's statements that they represent deposits from tenants who rented realty from petitioner. Petitioner did not show the return of the deposit or distinguish the "deposits" from rents and no adjustment 314 is to be made to respondent's computation. (5) These are items that petitioner claimed were given to him by his sister. No corroboration was provided to show that amounts were from his sister and no adjustment is allowed to petitioners. (6) These items were shown to be income or proceeds from the sale of notes of petitioner's sister, Robin, in connection with her ownership of Chrysler Corporation securities which were reported on her 1983 Federal income tax return. Accordingly, respondent's 1983 and 1984 bank deposit analysis should be appropriately reduced by these amounts. (7) Petitioner claimed that this amount represented birthday gifts because it was deposited on the date of his birth. This testimony is novel, but not credible or corroborated and no reduction is allowable. (8) This item petitioner claimed was the proceeds of the sale of stock with only $ 707.90 as a capital gain. Petitioners' 1983 Federal income tax return does not reflect the sale of any stock, the receipt of any dividends, or the reporting of any capital gain income and no reduction is allowable. (9) Petitioner received insurance reimbursement of this amount in connection with damage to real property, 315 and the 1984 analysis should be reduced by $ 1,442. (10) This amount represents a transfer between accounts which petitioner redeposited and, accordingly, the 1984 analysis should be reduced by $ 1,400. (11) The $ 1,883.65 and $ 112,012.50 checks involve San Jacinto Title Company and the bankruptcy of Murray B. Millican (Millican). Petitioners moved from Detroit, Michigan, to Corpus Christi, Texas (the area where Kathleen Rohlig's parents lived), during January 1980. On April 1, 1980, Kathleen's parents purchased a parcel of subdivided vacant land for the fully financed price of $ 21,500. The financing was through the seller, Weber Land Company. Petitioner, along with Kathleen's father, during 1980 built a quadraplex on the purchased land. On December 9, 1981, Kathleen's parents sold the quadraplex to Millican for $ 165,000, receiving a $ 10,050 cash downpayment and two notes for the balance. The notes were in the amounts of $ 40,000 and $ 110,000. Millican, by March 26, 1982, had defaulted on the notes and subsequently filed for protection under the Bankruptcy Act. A part of a November 15, 1983, $ 2,171.05 deposit to petitioners' bank account in the name of their Life Science316 Church was a $ 1,883.65 check from Tim Truman, chapter 13 trustee, reflecting an "in re" for Millican. On March 16, 1984, Millican sold the quadraplex for $ 172,000 to a person who in name appears to be a related party, and as part of the closing, San Jacinto Title Company was authorized to pay off the notes to Kathleen's parents in the amount of $ 134,050. On May 25, 1984, petitioners deposited a $ 112,012.50 check from San Jacinto Title Company in their FNB Cobb bank account. Petitioners claim that the $ 112,012.50 amount received in connection with the resale of the quadraplex represents the repayment of a loan made to Kathleen's parents. Petitioners provided no evidence that any amount of funds was advanced or loaned to Kathleen's parents or the source of same. Concerning the $ 1,883.65, petitioners claim that the amount is from a nontaxable source. No reduction to respondent's analysis is allowed for these items. (12) The source of this $ 3,500 deposit was a check signed by both Kathleen and Robin Rohlig. The check was deposited in petitioner's bank account but represents funds of Robin Rohlig which were managed and/or held by petitioner. Respondent's analysis should317 be reduced by $ 3,500 for 1983. Petitioner maintained and managed his sister Robin's funds. For reasons unexplained in the record, Robin's assets and funds were intermingled in petitioner's bank accounts. Additionally, during the years in question, petitioners, on two or more occasions, purchased realty. On one occasion Robin's name was on the deed and on another it was not. Subsequent to purchase, petitioner deeded his portion to Kathleen and Robin. Also for reasons which were not adequately explained in the record, stock and other securities were held in Kathleen's and Robin's names, although petitioner was the person who was looking after his sister's funds and assets. (13) Petitioner stated that this amount was from the sale of his automobile but produced no corroborating evidence and no reduction is allowable. In this case respondent reconstructed petitioners' 1983 and 1984 income because they refused or failed to provide records to respondent's agent who was examining petitioners' 1983 and 1984 income tax returns. Subsequent to the issuance of the notice of deficiency and prior to trial, petitioners did provide some documentation and information concerning various deposits. 318 Based upon the information provided, respondent reconstructed petitioners' income. Petitioners question the use of a reconstruction method and respondent's use of the so-called simplified bank deposits method. In the absence of adequate records, respondent may use a method of reconstruction of a taxpayer's income which clearly reflects income. Holland v. United States, 348 U.S. 121">348 U.S. 121, 99 L. Ed. 150">99 L. Ed. 150, 75 S. Ct. 127">75 S. Ct. 127 (1954); United States v. Johnson, 319 U.S. 503">319 U.S. 503, 87 L. Ed. 1546">87 L. Ed. 1546, 63 S. Ct. 1233">63 S. Ct. 1233 (1943). We have found that petitioners failed to provide records to respondent's agent, records which were available and which were presented only after a notice of deficiency was issued to petitioners. Petitioners' complaint about the need for respondent to use a method of reconstruction is without substance. The need for respondent's use of a reconstruction method was brought forth by petitioners' actions or intentional omissions, as the case may be. Petitioners also complain about respondent's use of a "simplified bank deposits method." Respondent explained the difference between the bank deposits method and the simplified version. The difference is that the simplified version does not include personal and319 cash expenditures of petitioners. Respondent correctly points out that use of the simplified method, of necessity, results in less potential for additional or unreported income. Accordingly, we do not find any fault, error, or abuse of discretion in respondent's use of the simplified bank deposits method. In Webb v. Commissioner, 394 F.2d 366">394 F.2d 366, 373 (5th Cir. 1968), affg. a Memorandum Opinion of this Court, it was held that: Arithmetic precision was originally and exclusively in * * [the taxpayer's] hands, and he had a statutory duty to provide it. He did not have to add or subtract; rather, he had simply to keep papers and data for others to mathematicize. Having defaulted in his duty, he cannot frustrate the Commissioner's reasonable attempts by compelling investigation and recomputation under every means of income determination. * * Here, because of the extraordinary size of petitioners' bank accounts, the relatively large number of accounts at financial institutions, and the general lack of other records or information, respondent's use of a form of the bank deposits method was proper. Respondent is not required to use a particular method. 320 Petitioners bear the burden of proving that respondent's determination is in error. Welch v. Helvering, 290 U.S. 111">290 U.S. 111, 78 L. Ed. 212">78 L. Ed. 212, 54 S. Ct. 8">54 S. Ct. 8 (1933); Rule 142(a). Bank deposits are prima facie evidence of income, and petitioners bear the burden of proving that respondent's determination based on this evidence is in error. Tokarski v. Commissioner, 87 T.C. 74">87 T.C. 74, 77 (1986); Estate of Mason v. Commissioner, 64 T.C. 651">64 T.C. 651, 656-657 (1975), affd. 566 F.2d 2">566 F.2d 2 (6th Cir. 1977). Initially, petitioners had refused to provide any records in support of the amounts reported on their income tax returns. Respondent reconstructed petitioners' income by means of the bank deposits method. Because petitioners had numerous bank accounts and substantial deposits, respondent's initial determination resulted in $ 7,201,252.40 and $ 760,575.67 of income for 1983 and 1984, respectively. After reducing those amounts by nontaxable sources, respondent arrived at net taxable deposits of $ 2,656,382.13 and $ 358,263.59 for 1983 and 1984, respectively. After accounting for the income reported by petitioners, respondent determined unreported income of $ 2,634,647.97321 and $ 343,038.69 for petitioners' 1983 and 1984 taxable years, respectively. After petitioners commenced this case, they provided certain records and information that permitted respondent to reduce his determination of unreported income to $ 68,148 and $ 130,371 for petitioners' 1983 and 1984 taxable years, respectively. A large portion of the deposits were eliminated due to petitioner's kiting scheme. By transferring large deposits between accounts petitioner was able to earn interest in two different financial institutions during the period of "float." This activity, along with petitioner's real estate and accounting activities, are the source of potential income to which respondent determined that the unexplained deposits were attributable. At this point we are down to a relatively smaller number and amount of deposits which respondent continues to assert are unexplained and which petitioners have attempted to show were, for some reason, not taxable. We have set forth a schedule of the various disputed deposits and conclusions about each category of deposit based upon the evidence offered by petitioners. Most of petitioners' evidence on these remaining disputed deposits consists322 of testimony and very little consists of documentation. Apparently, petitioners were able to convince respondent by means of documentation regarding the deposits which respondent has already eliminated. Regarding 20 of the deposits, petitioners either did not recall the source and/or no evidence was presented to explain the nature or source of all or part of the deposit. Concerning 16 of the disputed deposits, petitioners claimed that these amounts consisted of deposits of cash items resulting from cash withdrawals by means of checks, automated teller machine withdrawals, and other sources. Petitioner's testimony was general and either did not specifically tie any cash withdrawals that were relatively close from the time of cashing to the time of deposit or did not relate to any specific documentation or event. In this regard petitioner offered evidence of a few isolated instances of the receipt of cash at some time (on occasion a week or two prior to a disputed deposit) prior to a particular deposit. Petitioner did not show a consistent pattern or account for the time gaps where his avowed objective was to make interest on the float. We find petitioner's testimony on these323 items to be unsupported by the record and incredible. Moreover, the amounts withheld from larger deposits, received through cashed checks or from automated teller machines, were relatively small and were more likely for ongoing everyday expenditures. Petitioner also claimed that some of these amounts were from rebates. Petitioner's testimony on this point was vague, and it was difficult to understand which companies paid the alleged rebates and the reason why the rebates were paid. We note that respondent in certain instances permitted reduction of certain deposits as being attributable to rebates, but petitioners' showing on this record is not sufficient to warrant further reduction of disputed deposits. With respect to certain transactions concerning petitioner's sister, Robin, there was sufficient evidence to corroborate testimony that some of the income and/or funds received and deposited belonged to Robin. One particular $ 6,603.80 amount was received by petitioner's sister, Robin, in the form of a $ 7,503.80 check from an insurance company. It was given to petitioner to invest (presumably in his kiting scheme), and he deposited the check and took a $ 900 cash withdrawal, 324 resulting in a $ 6,603.80 net deposit. Additionally, petitioners met their burden of showing that Robin owned Chrysler Corporation securities, some of which were reported on her 1983 Federal income tax return. Certain other items petitioner testified were "dividends" to his sister, Robin, but he did not explain the nature or source of the dividend. No documentation concerning the "dividends" was offered. There are also some items that petitioner claimed were given to him by his sister, but no corroboration was provided to show that those amounts were from his sister. Petitioner maintained and managed his sister Robin's funds. For reasons unexplained in the record, Robin's assets and funds were intermingled in petitioner's bank accounts. Additionally, during the years in question petitioners, on two or more occasions, purchased realty. On one occasion Robin's name was on the deed and on another it was not. Subsequent to the purchase, petitioner deeded his portion to Kathleen and Robin. Also, for reasons which were not adequately explained in the record, stock and other securities were held in Kathleen's and Robin's names, although petitioner was the person who was looking 325 after his sister's funds and assets. One particular $ 3,500 deposit concerned a check signed by both Kathleen and Robin Rohlig. The check was deposited in petitioners' bank account but represents funds of Robin Rohlig's which were managed and/or held by petitioner. We note that petitioner has a college degree in accounting and practiced as an accountant, but he kept no records of numerous receipts of funds, income, investments, etc., concerning his maintenance and management of her assets. Regarding certain of the deposits, petitioners claimed that they represented deposits from tenants who rented their realty. Petitioners did not show the return of the deposit or distinguish the "deposits" from rents. Although these claims are in connection with the rental of real property, no documentation was provided to substantiate or corroborate petitioner's testimony. Concerning the $ 1,883.65 and $ 112,012.50 checks issued through San Jacinto Title Company and from the bankruptcy of Murray Millican, petitioners claim that the $ 112,012.50 amount received in connection with the resale of the quadraplex represents the repayment of a loan made to Kathleen's parents. Petitioners provided326 no admissible corroborating evidence that any amount of funds was advanced or loaned to Kathleen's parents or a clear source of same. Concerning the $ 1,883.65, petitioners claim that the amount constitutes a nontaxable source. No evidence was presented by petitioners to establish that such amount was not taxable. Several other disputed deposits are specifically addressed in our findings and need not be further detailed here. Suffice it to say that petitioners are entitled to a reduction in respondent's revised and reduced determination only to the extent so found in this opinion; otherwise the unexplained and unsubstantiated deposits are includable in income. Petitioners claimed to be entitled to certain depreciation and other deductions for the years in issue, but no evidence was offered or argument presented on brief concerning these items. Accordingly, we assume that petitioners have abandoned these claims, and if not, they have failed to carry their burden of showing that they are entitled to the claimed amounts. Finally, we consider whether petitioners are liable for an addition to tax for fraud under section 6653(b)(1) and (2). Respondent bears the burden of showing327 by clear and convincing evidence that a part of either petitioner's underpayment was attributable to fraud. Sec. 6653(b); Rule 142(b). Under section 6653(b), the existence of fraud is a question of fact to be resolved upon consideration of the entire record. Estate of Pittard v. Commissioner, 69 T.C. 391 (1977); Gajewski v. Commissioner, 67 T.C. 181">67 T.C. 181, 191 (1976), affd. without published opinion 578 F.2d 1383">578 F.2d 1383 (8th Cir. 1978). Fraud is not to be presumed but, rather, must be established by some independent evidence of fraudulent intent. Beaver v. Commissioner, 55 T.C. 85">55 T.C. 85, 92 (1970); Otsuki v. Commissioner, 53 T.C. 96">53 T.C. 96 (1969). However, fraud may be proved by circumstantial evidence and reasonable inferences drawn from the facts because direct proof of intent is rarely available. Spies v. United States, 317 U.S. 492">317 U.S. 492, 87 L. Ed. 418">87 L. Ed. 418, 63 S. Ct. 364">63 S. Ct. 364 (1943); Rowlee v. Commissioner, 80 T.C. 1111">80 T.C. 1111, 1123 (1983); Stephenson v. Commissioner, 79 T.C. 995">79 T.C. 995 (1982), affd. 748 F.2d 331">748 F.2d 331 (6th Cir. 1984). The entire course of conduct may establish the requisite328 fraudulent intent. Stone v. Commissioner, 56 T.C. 213">56 T.C. 213, 223-224 (1971); Otsuki v. Commissioner, supra at 105-106. The intent to conceal or mislead may be inferred from a pattern of conduct. See Spies v. United States, supra at 499. Respondent argues that fraud is evidenced in this case by facts showing that: (1) Petitioner was a college-educated accountant with exposure to tax accounting subjects in college. (2) Petitioner accumulated "substantial assets while reporting little or no income." (3) Petitioners were able to build a 2,960-square-foot home without obtaining construction loans. (4) The understatements of income could not have been due to inadvertence, carelessness, or ignorance. (5) Petitioners placed funds and assets in the name of the Life Science Church in order to hide assets and avoid paying tax. (6) Petitioners' child (Shawn) was claimed (by petitioner) on his sister's 1982 income tax return because the exemption would have the effect of reducing her tax, whereas it was not needed on petitioners' 1982 return. (7) Petitioners had been involved in "tax protest activities" for 1977 when they failed329 to file a return and claimed 99 exemptions for withholding purposes. (8) Petitioners had a consistent pattern of understating income. (9) Petitioners failed to cooperate with respondent's agents in the conduct of their examination of petitioners' 1983 and 1984 returns. Here petitioners failed to report income during 1983 and 1984 and they were not cooperative with respondent's agents during the conduct of the examination. Further, one or both petitioners were involved in protest and/or mail-order church activities in years prior to 1983 and 1984 and have continually thwarted respondent's efforts to determine their correct tax liability. Additionally, the facts in this case reflect 2 years of understatement and a consistent pattern of understatement, even considering the substantial reductions in respondent's original determination caused both by respondent's concessions and our findings. We find that petitioners' pattern of conduct in connection with their 1983 and 1984 taxable years is sufficient to support the inference that they intended to conceal or mislead. See Spies v. United States, supra at 499. The lack of cooperation, petitioner's education, 330 and the fact that he was a practicing accountant and could be expected to keep adequate records support a finding of fraud. Petitioners are far from being forthright and responsible taxpaying citizens, and respondent has shown by clear and convincing evidence that their activity in connection with the 1983 and 1984 taxable years amounted to fraudulent activity with the intent to evade or avoid the payment of tax. Accordingly, we find that petitioners are liable for the additions to tax under section 6653(b)(1) and (2) for their 1983 and 1984 taxable years. To reflect the foregoing, Decision will be entered under Rule 155.Footnotes1. For convenience the findings of fact and opinion portions have been combined.↩2. Unless otherwise indicated, all section references are to the Internal Revenue Code as amended and in effect for the years at issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622411/	IRENE L. GRINER, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentGriner v. CommissionerDocket No. 45342-86United States Tax CourtT.C. Memo 1990-301; 1990 Tax Ct. Memo LEXIS 319; 59 T.C.M. (CCH) 903; T.C.M. (RIA) 90301; June 18, 1990, Filed 319 Decision will be entered for the respondent. Robert320 H. Wyshak, for the petitioner. Marsha R. Yowell, for the respondent. WRIGHT, Judge. WRIGHTMEMORANDUM FINDINGS OF FACT AND OPINION Respondent determined the following deficiencies in, and additions to, petitioner's Federal income tax: Additions to TaxYearDeficiencySec. 6653(a) 1Sec. 6653(a)(1)Sec. 6653(a)(2)1980$ 30,835.00$ 1,542.00n/an/a198137,541.00n/a$ 1,877.0050% of the interestdue on $ 37,541.00The issues for consideration are: (1) whether petitioner underreported income on returns filed jointly with her former spouse for taxable years 1980 and 1981; (2) whether petitioner is liable for additions to tax pursuant to section 6653(a) for taxable year 1980, and sections 6653(a)(1) and 6653(a)(2) for321 taxable year 1981; and (3) whether petitioner is entitled to relief under section 6013(e) as an innocent spouse. 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 resided in Huntington Beach, California, when she filed her petition. Petitioner married Thomas Griner, a chiropractor, in 1974. They separated on April 22, 1983 and were divorced on July 19, 1984. In 1975 petitioner began managing Thomas' chiropractic office. Her duties included scheduling appointments, keeping the books, and depositing receipts. Thomas, with the aid of an accountant, would later prepare their Federal income tax returns based on the records maintained by petitioner. Petitioner and Thomas reported profits from the chiropractic office of $ 76,002 and $ 67,976 on their joint Federal income tax returns for 1980 and 1981, respectively. In April of 1980, petitioner's son, a chiropractor, joined Thomas' practice and took over some of petitioner's responsibilities as office manager. However, petitioner continued to keep the books and records for the office, to collect322 and deposit receipts, to schedule appointments, and to write checks for personal and business expenses. Pursuant to the divorce proceedings, petitioner was awarded alimony of $ 2,250 monthly and use of the family residence until its sale. Thereafter petitioner was to receive $ 3,000 monthly until April 9, 1987. In addition to alimony, petitioner received the following distribution of community assets, which were acquired during the marriage: (1) $ 260,000 in cash; (2) $ 10,000 for attorney's fees; (3) one half the value of Thomas' Keogh plan, or $ 57,000; (4) a Mercedes Benz automobile; (5) a house and furniture located in Huntington Beach, California; and (6) one half of miscellaneous money market funds. On May 9, 1983, Thomas informed respondent's criminal investigation division that he and petitioner had underreported the profits from the chiropractic office for the years at issue. He filed amended returns on which he reported profits from the chiropractic office of $ 129,909 for 1980, and $ 132,837 for 1981. Because petitioner had possession of the office's books and records, Thomas made estimates of the profits for the two years based on the number of patients he had treated. 323 Petitioner refused to sign the amended returns. During the examination of the returns at issue, petitioner refused to provide books and records to respondent and refused to meet with respondent to discuss the case. Respondent determined that the actual profits from the chiropractic office were $ 136,067 for 1980, and $ 146,446 for 1981. OPINION I. Unreported IncomeSection 61 defines gross income as "all income from whatever source derived." Taxpayers are required to maintain books and records sufficient to establish the amount of their gross income. Sec. 1.6001-1(a), Income Tax Regs. Where taxpayers do not maintain adequate records, respondent is entitled to use any reasonable means of reconstructing income. Llorente v. Commissioner, 74 T.C. 260">74 T.C. 260, 266 (1980), affd. in part and revd. in part 649 F.2d 152">649 F.2d 152 (2d Cir. 1981). The burden is on petitioner to prove that respondent's determination is incorrect. Rule 142(a); Welch v. Helvering, 290 U.S. 111 (1933). As a preliminary matter, we dismiss petitioner's claim that respondent's deficiency determination is arbitrary, and that therefore respondent bears the burden of going324 forward with the evidence. Jackson v. Commissioner, 73 T.C. 394">73 T.C. 394, 401 (1979). When petitioner asks this Court to find the statutory notice arbitrary, she is asking us to look behind the statutory notice to examine the evidence used or the propriety of respondent's administrative procedure in making the determination. As a general rule, we will not do so. Jackson v. Commissioner, supra; Greenberg's Express, Inc. v. Commissioner, 62 T.C. 324">62 T.C. 324, 327 (1974). This Court has recognized a strictly limited exception to the general rule in cases involving unreported illegal income where respondent introduced no direct evidence. Llorente v. Commissioner, supra at 264; Jackson v. Commissioner, supra at 401. However, the instant case does not involve illegal income, and we therefore will not look behind the statutory notice of deficiency. Furthermore, respondent has provided evidence connecting petitioner to the income producing activity. Petitioner's attempt to shift the burden of going forward with the evidence stems from her failure to introduce any evidence showing that respondent's determination325 of the profits from the chiropractic office is incorrect. We find that she has failed to satisfy her burden of proof, and therefore sustain respondent's determination. II. Additions to TaxSection 6653(a) and, beginning with taxable year 1981, section 6653(a)(1), provide for an addition to tax equal to 5 percent of any underpayment if any part of the underpayment is due to negligence or intentional disregard of rules and regulations. Section 6653(a)(2) provides for an addition to tax equal to 50 percent of the interest payable on the deficiency with respect to the portion of the underpayment which is attributable to negligence or intentional disregard of rules and regulations. Negligence under sections 6653(a) and 6653(a)(1) is the lack of due care or the failure to act as a reasonable person would act under the same circumstances where there is a legal duty to act. Nealy v. Commissioner, 85 T.C. 934">85 T.C. 934, 947 (1985). Petitioner bears the burden of proving that no part of the underpayments for 1980 and 1981 is due to negligence or intentional disregard of rules and regulations. Rule 142(a); Bixby v. Commissioner, 58 T.C. 757 (1972). We326 find that petitioner has failed to prove that any part of the underpayments for 1980 and 1981 was not due to negligence. Respondent's determination regarding the additions to tax under sections 6653(a), 6653(a)(1), and 6653(a)(2) is therefore sustained.III. Relief as an Innocent SpouseUnder section 6013(d)(3), if a husband and wife file a joint return for a year, then "the tax shall be computed on the aggregate income and the liability with respect to the tax shall be joint and several." Under section 6013(e), if certain requirements are met for a year, then a spouse may be relieved of a portion of this joint tax return liability for the year. Section 6013(e)(1) provides that: (a) where a joint return was filed, (b) on that return there is a substantial understatement of tax which is attributable to grossly erroneous items of one spouse, (c) the other spouse establishes that in signing the return he or she did not know and had no reason to know that there was such substantial understatement, and (d) taking into account all the facts and circumstances, it is inequitable to hold the spouse liable for the deficiency in tax for such taxable year attributable to such substantial327 understatements, then the spouse to whom the substantial underpayment was not attributable is relieved from liability for the tax on such substantial understatement. Petitioner bears the burden of proving that she has satisfied each statutory requirement of section 6013(e). Failure to prove any one of the statutory requirements will prevent petitioner from qualifying for relief. Stevens v. Commissioner, 872 F.2d 1499">872 F.2d 1499, 1504 (11th Cir. 1989), affg. a Memorandum Opinion of this Court; Purcell v. Commissioner, 826 F.2d 470">826 F.2d 470, 473 (6th Cir. 1987), affg. 86 T.C. 228">86 T.C. 228 (1986); Bokum v. Commissioner, 94 T.C. 126">94 T.C. 126 (1990); Sonnenborn v. Commissioner, 57 T.C. 373">57 T.C. 373, 381-383 (1971); Rule 142(a). We find that petitioner knew or had reason to know of the substantial understatements. The standard to be applied in determining whether a putative innocent spouse has "reason to know" under section 6013(e)(1)(C) is whether "a reasonably prudent taxpayer under the circumstances of the spouse at the time of signing the return could be expected to know that the tax liability stated was erroneous or that further investigation328 was warranted." Stevens v. Commissioner, 872 F.2d at 1505 (fn. ref. omitted); Shea v. Commissioner, 780 F.2d 561">780 F.2d 561, 566 (6th Cir. 1986), affg. on this issue and revg. on another issue a Memorandum Opinion of this Court. Petitioner served as the bookkeeper for the chiropractic office during 1980 and 1981. She scheduled appointments for patients and regularly deposited office receipts in the bank account she held jointly with Thomas. She was aware of the number of patients Thomas was treating and the profits the office was producing. We find that petitioner has failed to prove that she did not know, and had no reason to know, that the profits from the office as reported on her tax returns constituted a substantial understatement of the actual profits. We also find that petitioner has failed to prove that it is inequitable to hold her liable for the deficiencies in tax. A factor to be considered in determining whether it is inequitable to hold a person liable for a deficiency in tax is whether the person seeking relief significantly benefitted, directly or indirectly, from the items omitted from gross income. Sec. 1.6013-5, Income Tax Regs. Petitioner*329 received substantial assets in her divorce proceedings, and she has introduced no evidence showing that these assets were not, in part, attributable to the substantial understatement for the years at issue. Petitioner therefore fails to qualify for relief under section 6013(e). Decision will be entered for the respondent. Footnotes1. All section references are to the Internal Revenue Code of 1954, as amended and in effect for the years in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622413/	LYNDA MILITO, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentMilito v. CommissionerDocket No. 4686-88.United States Tax CourtT.C. Memo 1989-146; 1989 Tax Ct. Memo LEXIS 145; 57 T.C.M. (CCH) 14; T.C.M. (RIA) 89146; April 4, 1989Patrick E. Whelan, for the respondent. WHALENMEMORANDUM OPINION WHALEN, Judge: This case is before us on respondent's Motion for Default Judgment Pursuant to Tax Court Rule 123(a), filed December 6, 1988. At issue is respondent's determination of the following deficiencies in, and additions to, petitioner's Federal income tax: Addition to TaxYearDeficiencySection 6653(b) 11978$ 109,731.00$ 54,866.001979267,403.00134,172.00These deficiencies and additions result from respondent's underlying determination that petitioner failed to report income146 derived from the sale of automobiles in the amount of $ 167,997.00 for 1978 and $ 403,366.00 for 1979. Petitioner, who resided in Staten Island, New York, filed her petition on March 10, 1988. Respondent's Answer, filed May 9, 1988, denied the substantive allegations of the petition, and affirmatively alleged: 7. FURTHER ANSWERING the petition and in support of the determination that all or part of the underpayments of tax required to be shown on the petitioner's income tax returns for the taxable years 1978 and 1979 is due to fraud, the respondent alleges: A. During the years at issue, the petitioner was an automobile wholesaler licensed by the New York State Department of Motor Vehicles (DMV) to do business in Staten Island, New York. B. As such, the petitioner conducted and participated in a used car business with her husband, Liborio Milito, since, due to prior criminal convictions for automobile violations, he could not legally sell used cars in the state of New York. C. As such, the petitioner signed DMV Forms MV-50 as the owner of automobiles using the name Castleton Autorama, which entity she knew did not exist. D. The petitioner filed Federal income tax returns147 for the taxable years 1978 and 1979 using the status "Married, filing separately." E. Those tax returns failed to report a substantial amount of the gross income realized from the sale of automobiles during the taxable years 1978 and 1979. F. The petitioner should have reported as income the following amounts: 1. 1978Total sales to auctions$ 749,212.00Total other sales151,104.00Total sales$ 900,316.00Profit mark-up (20.92%).2092 Total income which shouldhave been reported$ 188,346.00Income per return-20,349.00Adjustment (unreported income)$ 167,997.002. 1979Total sales to auctions$ 1,567,010.00Total other sales395,065.00Total sales$ 1,962,075.00Profit mark-up (20.92%).2092 Total income which shouldhave been reported$ 410,466.00Income per return7,100.00Adjustment (unreported income)$ 403,366.00G. The petitioner's failure to report large amounts of taxable income over a two year period was fraudulent with intent to evade tax. H. The petitioner's failure to maintain complete and accurate records of her and her husband's used car sales148 and her failure to supply such records to the respondent in connection with the examination of the petitioner's income tax returns for the years at issue was fraudulent with intent to evade tax. I. Petitioner, fraudulently and with intent to evade tax, made false and misleading statements to respondent's agents during the examination. J. Petitioner, fraudulently and with intent to evade tax, failed to supply the preparer of her 1978 and 1979 income tax returns with accurate records of her and her husband's income from car sales, and lied to him by stating that no records were available for 1979. K. The petitioner's understatement of her tax liabilities in the amounts of $ 109,731.00 and $ 267,403.00 for the taxable years 1978 and 1979, respectively, was fraudulent with intent to evade tax. L. All or a part of the underpayments of tax required to be shown on the petitioner's income tax returns for the taxable years 1978 and 1979 is due to fraud on the part of the petitioner. Petitioner failed to file a Reply to respondent's Answer as required by Rule 37(a), to respond to or otherwise deny respondent's allegations, or to communicate with this Court in any fashion. On149 June 23, 1988, the Court served the parties with a trial notice setting this case for trial on November 28, 1988 in Newark, New Jersey. The trial notice specifically advised them as follows: The calendar for that Session will be called at 10:00 A.M. on that date and both parties are expected to be present at that time and be prepared to try the case. YOUR FAILURE TO APPEAR MAY RESULT IN DISMISSAL OF THE CASE AND ENTRY OF DECISION AGAINST YOU. Your attention is called to the Court's requirement that, if the case cannot be settled on a mutually satisfactory basis, the parties, before trial, must agree in writing to all facts and all documents about which there should be no disagreement. Therefore, the parties should contact each other promptly and cooperate fully so that the necessary steps can be taken to comply with this requirement. YOUR FAILURE TO COOPERATE MAY ALSO RESULT IN DISMISSAL OF THE CASE AND ENTRY OF DECISION AGAINST YOU. On June 23, 1988, the Court issued its Standing Pre-trial Order, directing the parties to prepare trial memoranda and a stipulation of facts, and informing them that the Court could impose appropriate sanctions, including dismissal150 of petitioner's case, for failure to comply with the order. Respondent's motion, supported by a sworn affidavit, alleges that, in accordance with the order, he took the following appropriate steps to prepare for trial: (1) on October 14, 1988, he sent a letter to petitioner at the address 641 Todt Hill Road, Staten Island, New York, 10304, scheduling a conference on October 21, 1988 to begin the preparation of a stipulation of facts, and instructing her to contact respondent if that date was inconvenient; (2) on October 21, 1988, he attempted to telephone petitioner after she failed to appear at the scheduled conference; (3) on October 28, 1988, he sent a second letter to petitioner at the same address, warning her that respondent would move for dismissal and entry of judgment against petitioner for both the deficiencies and additions to tax if she did not respond to respondent's requests regarding trial preparation; and (4) on November 10, 1988, he served petitioner with his trial memorandum, which again warned her that respondent would move the Court to dismiss her case and sustain the additions to tax for fraud if she did not participate in trial preparation. Petitioner failed151 to participate in trial preparation or respond in any fashion to respondent's attempts to communicate with her. Respondent's motion and supporting affidavit also allege that on November 22, 1988, Mr. Jack M. Portney telephoned respondent's attorney and explained that he was a Certified Public Accountant who had represented petitioner during the administrative proceedings in this case pursuant to petitioner's Power of Attorney. Mr. Portney advised respondent that petitioner had left the New York area and was believed to be in Florida seeking employment. He also authorized respondent to represent to the Court that petitioner would default her case. Petitioner failed to appear, either in person or by representative, at the scheduled trial of this case when it was called from the calendar on November 28, 1988, and recalled on November 30, 1988. Respondent subsequently moved the Court to hold petitioner in default under Rule 123(a) and enter judgment against her. The Court served petitioner with a copy of respondent's motion, to which she has not responded. There is no indication in the Court's records that petitioner did not receive our pre-trial order, the trial notice, or respondent's152 motion. Respondent contends that, based on the record, including the affirmative factual allegations contained in his Answer, we should hold petitioner in default and find her liable for both the tax deficiencies and the additions to tax for fraud under section 6653(b). We agree. Pursuant to Rule 123(a), this Court may hold any party in default when that "party has failed to plead or to otherwise proceed as provided by these rules or as required by the Court * ," and "[t]hereafter, the Court may enter a decision against the defaulting party * ." Application of Rule 123(a) is appropriate when a taxpayer has failed to appear at trial. Ritchie v. Commissioner,72 T.C. 126">72 T.C. 126, 128-129 (1979). Additionally, petitioner has failed "to plead or otherwise proceed," despite repeated warnings, by not participating in trial preparation, by not communicating with this Court, and by otherwise failing to prosecute her case. Smith v. Commissioner,91 T.C. 1049">91 T.C. 1049 (1988). The record reveals no reason to excuse either petitioner's failure to appear or her other inaction. Such conduct is sufficient for us to hold her in default. Respondent's determination153 of the underlying tax deficiencies is presumptively correct, and petitioner bears the burden of proving otherwise. Rule 142(a); Castillo v. Commissioner,84 T.C. 405">84 T.C. 405, 408 (1985). Respondent must prevail on the underlying deficiencies either on the ground that petitioner has defaulted by not appearing at trial or that she has failed to carry her burden of proof. Smith v. Commissioner, supra at 1052; Doncaster v. Commissioner,77 T.C. 334">77 T.C. 334, 336 (1981). Accordingly, we grant respondent's motion and enter a decision by default against petitioner under Rule 123(a) with respect to the underlying tax deficiencies set forth in respondent's statutory notice. Respondent, however, bears the burden of proving fraud under section 6653(b) by clear and convincing evidence. Section 7454(a); Rule 142(b); Castillo v. Commissioner, supra at 408. Respondent must show that the taxpayer intended to evade taxes known to be owing by conduct intended to conceal, mislead or otherwise prevent the collection of those taxes, that there is an underpayment of tax, and that some portion of the underpayment for each taxable year was due to the154 taxpayer's fraudulent intent. Stoltzfus v. United States,398 F.2d 1002">398 F.2d 1002, 1004 (3d Cir. 1968), cert. denied 393 U.S. 1020">393 U.S. 1020 (1969); Webb v. Commissioner,394 F.2d 366">394 F.2d 366, 377-378 (5th Cir. 1968), affg. T.C. Memo. 1966-81; Rowlee v. Commissioner,80 T.C. 1111">80 T.C. 1111, 1123 (1983). The existence of fraud is a question of fact to be resolved upon review of the entire record. Rowlee v. Commissioner, supra at 1123; 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). While fraud will never be presumed, Beaver v. Commissioner,55 T.C. 85">55 T.C. 85, 92 (1970), it may be proved by circumstantial evidence, e.g., Stephenson v. Commissioner,79 T.C. 995">79 T.C. 995, 1005-1006 (1982), affd. 748 F.2d 331">748 F.2d 331 (6th Cir. 1984). To carry his burden of proving fraud, respondent relies on the affirmative allegations of fact set forth in his Answer. This is an appropriate procedure under the Rules of this Court, and we may enter decision against a defaulting taxpayer under Rule 123(a) for an addition to tax155 for fraud if respondent has set forth specific affirmative allegations of fact which are sufficient to establish fraud. Smith v. Commissioner, supra at 1058. Petitioner's default, consisting of her failure to appear when her case was called and recalled for trial, has the effect of admitting all well-pleaded facts in respondent's Answer. Bosurgi v. Commissioner,87 T.C. 1403">87 T.C. 1403, 1409 (1986). If those facts are adequate to sustain a finding of fraud, then respondent is entitled to a default decision under Rule 123(a) for an addition to tax under section 6653(b). Smith v. Commissioner, supra at 1059. We believe that respondent's well-pleaded facts, taken to be true by reason of petitioner's default, are sufficient to satisfy his burden of proving fraud in this case. Petitioner filed returns for the years 1978 and 1979, which failed to report income in the amounts of $ 167,997.00 and $ 403,366.00, resulting in a consequent underpayment of tax in the amounts of $ 109,731.00 and $ 267,403.00, respectively. Mere failure to report income is not sufficient to establish fraud. Merritt v. Commissioner,301 F.2d 484">301 F.2d 484, 487 (5th Cir. 1962),156 affg. T.C. Memo 1959-172">T.C. Memo. 1959-172. A pattern of consistent underreporting of income, however, especially when accompanied by other circumstances showing an intent to conceal, justifies the inference of fraud. Holland v. United States,348 U.S. 121">348 U.S. 121, 139 (1954). Petitioner's fraudulent intent can be inferred from her entire course of conduct. Stone v. Commissioner,56 T.C. 213">56 T.C. 213, 223-224 (1971); Otsuki v. Commissioner,53 T.C. 96">53 T.C. 96, 105-106 (1969). First, petitioner's consistent underreporting of a substantial amount of income is persuasive evidence of fraud. Foster v. Commissioner,391 F.2d 727">391 F.2d 727, 733 (4th Cir. 1968), affg. on this issue T.C. Memo. 1965-246; Marcus v. Commissioner,70 T.C. 562">70 T.C. 562, 577, affd. without published opinion 621 F.2d 439">621 F.2d 439 (5th Cir. 1980). Second, petitioner's failure to keep adequate books and records is also a badge of fraud. Bradford v. Commissioner,796 F.2d 303">796 F.2d 303 (9th Cir. 1986), affg. T.C. Memo. 1984-601. Third, petitioner's refusal to cooperate with respondent's efforts to determine her correct tax liability, in the157 context of this record, is a further indication of fraud. Stringer v. Commissioner,84 T.C. 693">84 T.C. 693, 715 (1985), affd. without published opinion 789 F.2d 917">789 F.2d 917 (4th Cir. 1986); Rowlee v. Commissioner, supra at 1125; Grosshandler v. Commissioner,75 T.C. 1">75 T.C. 1, 20 (1980). Fourth, petitioner made false and misleading statements to respondent's agents during the course of their examination of her returns, which is another indicia of fraud. Grosshandler v. Commissioner, supra at 20; Powell v. Granquist,252 F.2d 56">252 F.2d 56, 60 (9th Cir. 1958); Beaver v. Commissioner, supra at 93. Fifth, petitioner's failure to supply the preparer of her 1978 and 1979 income tax returns with complete and accurate information about her income demonstrates fraudulent intent. Korecky v. Commissioner,781 F.2d 1566">781 F.2d 1566, 1569 (11th Cir. 1986), affg. per curiam T.C. Memo. 1985-63; Merritt v. Commissioner, supra.Sixth, petitioner's participation in a used automobile business with her husband, despite the fact that he was prohibited from legally selling used cars in New*158 York after certain criminal convictions, shows that petitioner engaged in illegal activities, which is a further indication of fraud. Bradford v. Commissioner,supra.Seventh, petitioner signed DMV Forms MV-50 using the fictitious name of Castleton Autorama. Generally, attempting to conceal illegal activities is a badge of fraud. Bradford v. Commissioner, supra.The use of aliases or fictitious names to conceal income is also evidence of fraud. See Cooperstein v. Commissioner,T.C. Memo. 1984-290; Yu v. Commissioner,T.C. Memo. 1973-188; Staff v. Commissioner,T.C. Memo. 1954-59. Our review of the record as a whole, including the well-pleaded facts contained in respondent's Answer, reveals clear and convincing evidence that the deficiency for each of the subject years is due, at least in part, to fraud. Accordingly, we grant respondent's motion and enter a decision by default against petitioner under Rule 123(a) with respect to the additions to tax for fraud set forth in respondent's statutory notice. To reflect the foregoing, Decision will be entered for the respondent.Footnotes1. Unless otherwise indicated, all section references are to the Internal Revenue Code of 1954, as amended and in effect at the relevant times, and all Rule references are to the Tax Court Rules of Practice and Procedure.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622414/	WILLIAM R. CAMPBELL and LINDA E. CAMPBELL, Petitioners v. COMMISSIONER OR INTERNAL REVENUE, RespondentCampbell v. CommissionerDockets Nos. 25364-85; 34128-85.1United States Tax CourtT.C. Memo 1988-105; 1988 Tax Ct. Memo LEXIS 133; 55 T.C.M. (CCH) 367; T.C.M. (RIA) 88105; March 9, 1988. Darrell Rippy, for the petitioners. Patrick E. McGinnis, for the respondent. FAYMEMORANDUM OPINION FAY, Judge: This matter is before the Court on respondent's motion to amend answer, petitioners' motion to dismiss for lack of jurisdiction, and petitioners' motion to shift the burden of going forward with the evidence to respondent, 2 all filed in docket No. 25364-85, and respondent's motion for leave to file motion to vacate in docket No. 34128-85. At the time of filing the petition herein, petitioners were residents of Barrington, Illinois. Petitioners filed a joint return for the 1981 taxable year. On April 15, 1985, the Laguna Niguel District Director of the Internal Revenue Service ("IRS") issued a notice of deficiency to petitioners for the 1981 taxable year determining a deficiency in the amount of $ 54,291 (the "first135 notice"). The first notice contained the following statement: In order to protect the Government's interest and since your original tax return is unavailable at this time, the income tax is being assessed at the maximum rate of 70%.The first notice disallowed a $ 55,651 loss from the Plantation Royal, LTD partnership. Petitioners' 1981 return reported $ 1,115 of income, no loss, from such partnership and claimed a $ 55,651 loss from the C-99, OTD partnership. On July 9, 1985, petitioners filed a petition with this Court instituting the case at docket No. 25364-85 (the "first case"). Attached to such petition, and referred to therein, was a copy of the first notice. On June 13, 1985, the Chicago District Director of the IRS issued a notice of deficiency to petitioners for the 1981 taxable year determining a deficiency in the amount of $ 18,754 (the "second notice"). On September 6, 1985, petitioners filed a petition with this Court instituting the case at docket No. 34128-85 (the "second case"). Attached to such petition, and referred to therein, was a copy of the second notice. Respondent filed a motion to dismiss the second case for lack of jurisdiction alleging that136 the second notice was invalid pursuant to section 6212(c)(1). 3 Petitioner did not object to the granting of such motion and on January 14, 1986, the Court dismissed the second case for lack of jurisdiction. In the first case, respondent filed on July 6, 1987, a motion to amend answer and lodged an amended answer. The amended answer properly named the partnership from which petitioners claimed a $ 55,651 deduction and disallowed claimed losses not disallowed in the first notice. Petitioners filed on august 25, 1987, a motion to dismiss for lack of jurisdiction alleging that the first notice was invalid pursuant to Scar v. Commissioner,814 F.2d 1363">814 F.2d 1363 (9th Cir. 1987), revg. 81 T.C. 855">81 T.C. 855 (1984). On August 25, 1987, petitioner also filed a motion to shift the burden of going forward. Respondent conceded at the hearing on these motions held on September 30, 1987, that the first notice was invalid pursuant to Scar v.137 Commissioner, supra. During the hearing on September 30, 1987, respondent filed a motion for leave to file a motion to vacate the order of dismissal entered in the second case and lodged such motion to vacate. In Scar v. Commissioner, supra, the taxpayers were sent a notice of deficiency which disallowed deductions from a partnership with which the taxpayers had no connection and computed a tax due using the then highest marginal rate. The notice of deficiency contained the following statement: In order to protect the Government's interest and since your original income tax return is unavailable at this time, the income tax is being assessed at the maximum rate of 70%.The Ninth Circuit, reversing this Court, held that the notice of deficiency was invalid because respondent failed to make a determination as required by section 6212(a). There are obvious similarities between the notice of dificiency at issue in Scar v. Commissioner, supra, and the first notice of issue herein. There are however, some dissimilarities between such notices. We need not decide whether the similarities so outweigh the dissimilarities as to require the application of Scar v.138 Commissioner, supra, as respondent has conceded that the first notice is invalid pursuant to Scar v. Commissioner, supra. In accordance with respondent's concession, the first case will be dismissed for lack of jurisdiction. Petitioners' motion to shift the burden of going forward and respondent's motion to amend answer will be denied as moot. The only remaining motion is respondent's motion for leave to file motion to vacate the second case. On January 14, 1986, the Court entered a final order dismissing the second case pursuant to respondent's motion to dismiss. The basis of dismissal and respondent's motion to dismiss was section 6212(c) which prohibits respondent from issuing additional notices of deficiency where respondent has mailed to the taxpayer a notice of deficiency and the taxpayer timely petitions this Court. 4 At the time respondent moved to dismiss and the Court dismissed the second case, the first notice was presumed by the parties to be valid 5 and a timely petition had been filed instituting the first case. Section 6212(c) appeared to be applicable. 139 On April 14, 1987, after docket No. 34128-85 had been dismissed, the Ninth Circuit rendered its opinion in Scar v. Commissioner, supra, reversing this Court. The Ninth Circuit's opinion questioned the validity of the first notice and ultimately led to respondent's concession that the first notice was invalid. Respondent argues that since the first notice is invalid, the second notice was not a prohibited additional notice pursuant to section 6212(c). Accordingly, respondent concludes that the second notice is not invalid, the second case should not have been dismissed, and the order dismissing the second case should be vacated. Pursuant to Rule 162, a motion to vacate a decision must be filed within 30 days after the decision has been entered. Respondent's motion to vacate is not timely, has not been filed, but has been lodged. Respondent has accordingly filed a motion for leave to file the motion to vacate. To determine whether to grant or deny a motion for leave to file a motion to vacate,140 the Court looks through such motion to the motion to vacate to determine whether a prima facie case in favor of granting the motion to vacate has been established. See Toscano v. Commissioner,52 T.C. 295">52 T.C. 295, 296 (1969), revd. on another issue 441 F.2d 930">441 F.2d 930 (9th Cir. 1971); 6Senate Realty Corp. v. Commissioner,522 F.2d 929">522 F.2d 929 (2nd Cir. 1975). 7 Where a prime face case has been established, the motion for leave to file the motion to vacate will be granted. Toscano v. Commissioner,441 F.2d 930">441 F.2d 930, 937 (9th Cir. 1971), revg. 52 T.C. 295">52 T.C. 295 (1969). We will accordingly look to the motion to vacate to determine whether a prime facie case in favor of granting such motion has been established. A decision of this Court becomes141 final, in the absence of a timely filed notice of appeal, 90 days after it is entered. Sec. 7481; sec. 7483. This Court may vacate a final decision where there has been fraud on the Court, Toscano v. Commissioner,441 F.2d at 932-933, where the Court lacked jurisdiction when it entered the decision, Brannon's of Shawnee, Inc. v. Commissioners,69 T.C. 999">69 T.C. 999, 1002 (1978), and where the decision was based on mutual mistake, Reo Motors v. Commissioner,219 F.2d 610">219 F.2d 610 (6th Cir. 1955). See Abatti v. Commissioner,86 T.C. 1319">86 T.C. 1319, 1323 (1986). Respondent does not argue that the decision entered in the second case was entered as a result of a fraud on the Court, at a time when the Court lacked jurisdiction, or pursuant to mutual mistake. Rather, respondent, relying on Wilson v. Commissioner,500 F.2d 645">500 F.2d 645 (2nd Cir. 1974), revg. a Memorandum Sur Order of this Court, argues that the Court may vacate a final decision "to consider the relevance of a new issue." Respondent's reliance on Wilson v. Commissioner, supra, is misplaced. The motion to vacate in Wilson v. Commissioner, supra,142 was filed when the decision was not final. See Wilson v. Commissioner, supra at 648, n.2; sec. 7481; sec. 7483. Further, the Tax Court granted the taxpayer's motion for special leave to file the motion to vacate. Having granted the motion for leave, the Second Circuit held that the Tax Court was required to consider the motion to vacate as if it had been timely filed. SWilson v. Commissioner, supra at 648. Accordingly, the standard of review announced in Wilson v. Commissioner, supra, was for timely filed motions to vacate non-final decisions. This standard is not applicable to untimely filed motions to vacate final decisions. Though respondent did not argue any other basis for vacating the final order of dismissal in the second case, we note that the record does not indicate that fraud on the Court existed, that the decision was entered when the Court lacked jurisdiction, or that mutual mistake occurred. See Toscano v. Commissioner,441 F.2d at 930; Brannon's of Shawnee, Inc. v. Commissioner, supra; and Reo Motors, Inc. v. Commissioner, supra.Accordingly, we will deny respondent's143 motion for leave to file motion to vacate. Respondent's final contention in this matter is that the Court should predicate jurisdiction in the first case based on the second notice. Respondent correctly points out that the first case was instituted after the second notice had been sent. 8 The only authority respondent cites in support of this contention is Cole v. Commissioner,30 T.C. 665">30 T.C. 665 (1958), affd. 272 F.2d 13">272 F.2d 13 (2nd Cir. 1959). In Cole v. Commissioner, supra, respondent, on April 28, 1952, sent to the taxpayer a notice of deficiency dated April 28, 1952. The envelope in which the notice was sent did not contain the taxpayer's correct name or last known address. The taxpayer never received the notice which was returned to respondent. On June 3, 1952, respondent sent the april 28, 1952, notice to the taxpayer in an envelope which contained the taxpayer's correct name and last known address. The taxpayer received the notice, and on august 8, 1952, filed a petition. The taxpayer moved to have the case dismissed arguing144 that the petition was not timely. The petition was filed more than 90 days after the notice was sent the first time but within 90 days after the notice was sent the second time. The Court denied the taxpayer's motion to dismiss holding that the first notice was invalid because incorrectly sent, the second notice was valid, and the 90-day period commenced upon the sending of a valid notice, regardless of the date of the notice. Cole v. Commissioner, supra, though in some ways similar to the case sub judice, is not here controlling. In Cole v. Commissioner, supra, the only case instituted was based on the only notice received. There is nothing in Cole v. Commissioner, supra, to suggest predication of jurisdiction in a case on the basis of a notice of deficiency other than a the notice of deficiency referred to and attached to the petition. Here the first case was based on the first notice and the second case was based on the second notice. We have discovered no authority or compelling reason to indicate that we can or should adopt respondent's argument to criss-cross the notices and petitions to find jurisdiction. Respondent145 has unwittingly shot off his foot and is asking us to glue it back. This we cannot do. To reflect the foregoing, An appropriate order will be entered.Footnotes1. The Court, of its own volition, has consolidated these two cases for disposition. ↩2. The motion filed by petitioners was entitled "Petitioners' Motion to Assign Burden of Proof." The motion will be treated as a motion to shift the burden of going forward with the evidence to respondent. See Kluger v. Commissioner,83 T.C. 309">83 T.C. 309, 310↩ n.1 (1984). 3. Unless otherwise indicated, all section references are to the Internal Revenue Code of 1954, as amended and in effect during the taxable year in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure. ↩4. Section 6212(c) provides in relevant part: (1) General Rule. -- If the Secretary has mailed to the taxpayer a notice of deficiency as provided in subsection (a), and the taxpayer files a petition with the Tax Court within the time prescribed in section 6213(a)↩, the Secretary shall have no right to determine any additional deficiency of income tax for the same taxable year * *. 5. The presumption of validity arose in part from the Tax Court's opinion in Scar v. Commissioner,81 T.C. 855">81 T.C. 855 (1983), revd. 814 F.2d 1363">814 F.2d 1363 (9th Cir. 1987), which opinion then had not yet been reversed. We express no opinion as to whether 6212(c)(1) was an appropriate basis for dismissal. See Commissioner v. Wilson,60 F.2d 501">60 F.2d 501 (10th Cir. 1932), and McCue v. Commissioner,1 T.C. 986">1 T.C. 986↩ (1943). 6. The Ninth Circuit reversed the Tax Court, not because the Tax Court evaluated the lodged motion to vacate, but because of the Tax Court's conclusion to deny the motion for leave to file the motion to vacate.↩7. See also Pulitzer v. Commissioner,T.C. Memo. 1987-408↩. 8. The first case was instituted on July 9, 1985. The second notice was sent on June 13, 1985. ↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622415/	REMINGTON RAND, INC., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Remington Rand, Inc. v. CommissionerDocket No. 34726.United States Board of Tax Appeals11 B.T.A. 773; 1928 BTA LEXIS 3722; April 23, 1928, Promulgated 3722 1. The sale by a corporation of all of the capital stock of an affiliated corporation results in neither a taxable gain nor a deductible loss. 2. The Baker-Vawter Co., making its return for the calendar year 1920, and being affiliated with the Commercial Stationery & Loose Leaf Co. from January 1 to February 28, 1920, included in its invested capital the surplus of the subsidiary company for the entire year. Since the Baker-Vawter Co. sold the entire capital stock of the subsidiary on February 28, 1920, the Commissioner reduced invested capital by a prorated portion of the surplus of the subsidiary from March 1 to December 31. The action of the Commissioner in making such reduction is sustained. Louis B. Montfort, Esq., for the petitioner. C. M. Charest, Esq., for the respondent. SMITH 774 This is a proceeding for the redetermination of a deficiency in income and profits tax for 1920 in the amount of $18,036.25. The petitioner admits that it is the transferee of the property and assets of the Baker-Vawter Co. within the meaning of section 280 of the Revenue Act of 1926, and that as such transferee it is liable for any and all additional3723 income and profits taxes that may be finally determined to have been payable by the Baker-Vawter Co. for the year 1920 (including interest, additional amounts, and additions to taxes), and consents that the amount of such liability may be used against the petitioner as such transferee and collected from it. Certain assignments of error contained in the petition have been waived by a stipulation filed by the parties. The assignments of error not waived are: (1) That the Commissioner erred in determining a profit upon the sale by the Baker-Vawter Co. (hereinafter called the parent company), of the capital stock of the Commercial Stationery & Loose Leaf Co. (hereinafter called the subsidiary company), in the amount of the difference between the purchase price originally paid for such stock and the price at which such stock was sold by the parent company. (2) That the Commissioner erred in disallowing to the parent company a loss upon the sale of the stock of the subsidiary company in the amount of $13,454.35, which loss it found by adding to the original cost of the stock the net aggregate profits of the subsidiary company during the period of ownership of the stock by the parent3724 company and deducting therefrom the price at which it sold the stock. (3) In taxing the income of the subsidiary company which is income of the "single business enterprise" of the parent company as income when earned and again as profit when the subsidiary company's stock was sold. (4) That the Commissioner erred in eliminating from the consolidated invested capital of the parent company and the subsidiary company for the year 1920 the surplus on January 1, 1920, of the subsidiary company for the period from February 28, 1920, to the end of the year. FINDINGS OF FACT. The petitioner is a Delaware corporation with its principal business office in New York City. On June 1, 1927, it acquired all the property and assets of the parent company in consideration of (a) the issue of 21,453 shares of the 7 per cent first preferred stock of the petitioner fully paid and nonassessable for which certificates were duly issued and delivered by the petitioner, and (b) the assumption by the petitioner of and its agreement to pay all the liabilities 775 of the parent company then existing, including any additional liabilities for income and profits tax for the year 1920. On March 1, 1916, the3725 parent company purchased and acquired all the issued and outstanding capital stock of the subsidiary company, an Illinois corporation, for the sum of $45,000, which the parent company paid in cash or its equivalent. The par value of the stock thus acquired by the parent company was $45,000. All of this stock of the subsidiary company was continuously held by the parent company until it was sold by it on February 28, 1920, as hereinafter stated. The subsidiary company never issued any additional stock. During the period from March 1, 1916, to February 28, 1920, both dates inclusive, the subsidiary company made net profits in the aggregate amount of $28,454.35, resulting from losses and profits as follows: Loss.Profit.10 months, Mar. 1 to Dec. 31, 1916$5,357.30Calendar year 19172,248.46Calendar year 1918$9,338.31Calendar year 191923,708.96Jan. 1 to Feb. 28, 19203,012.84Aggregate net profits for total period28,454.35During the period from January 1, 1918, to February 28, 1920, the subsidiary company was affiliated with the parent company under the provisions of section 240 of the Revenue Act of 1918. For the calendar years3726 1918, 1919 and 1920 consolidated income and profits-tax returns were filed by and on behalf of the parent company and the subsidiary company under and in accordance with the provisions of the Revenue Act of 1918, and the regulations prescribed by the Commissioner with the approval of the Secretary, and said returns included the net income of the subsidiary company and of the parent company for the calendar years 1918 and 1919, and the first two months of 1920, respectively. Income and profits taxes were duly assessed on the basis of the consolidated returns and were duly paid by the taxpayers. During the entire period from March 1, 1916, to February 28, 1920, all the dealings of the subsidiary company were with and all its net earnings resulted from trading with the outside public. All the aggregate net earnings of the subsidiary company during such period, or $28,454.35, were reinvested in the business of the subsidiary company and no dividends were ever declared by it. On February 28, 1920, the parent company sold to outside interests the entire capital stock of the subsidiary company for $60,000, which 776 was paid in cash or its equivalent. The affiliations between3727 these two companies ceased with the sale, because thereafter neither the parent company nor any of its stockholders owned or controlled any of the stock of the subsidiary company. At that date, after deducting all of its accrued unpaid charges and liabilities, the earned surplus of the subsidiary company was $28,454.35. The surplus on its books was $35,003.69 and the book value of its stock was $80,003.69. The respondent determined that the parent company realized on the sale of the stock of the subsidiary company a profit of $15,000, the difference between the amount originally paid for the stock and the amount received for it, and in determining the deficiency against the parent company added that amount to its taxable net income. The net assets of the subsidiary company, as shown by its books at the date of its acquisition of the capital stock by the parent company, were $51,549.34, and the balance sheet of the subsidiary company at that date showed a surplus of $6,549.34. On January 1, 1920, the surplus of the subsidiary company amounted to $31,990.85. This amount, less $6,549.34, the surplus of the subsidiary company at the time of the acquisition of its stock by the3728 parent company, or $25,441.51, was included by the parent company in its invested capital for 1920. The respondent eliminated this surplus of the subsidiary company from invested capital of the parent company from the date of the sale, February 28, 1920, resulting in a reduction in invested capital of the parent company for the year in the amount of $21,270.77, which is the $25,441.51 prorated for the last ten months of 1920. OPINION. SMITH: The identical issues involved in this proceeding were before the Board in . The present proceeding was submitted upon a stipulation of facts and no briefs were filed by either party in support of the contentions raised. In , the petitioner claimed, as the petitioner claims in this proceeding, that upon the sale of the capital stock of the Commercial Stationery & Loose Leaf Co. by the Baker-Vawter Co. on February 28, 1920, it sustained a loss of $16,454.35, which is the difference between the amount that the petitioner claimed was the basis for determination of loss or gain on the sale of the stock in the hands of the parent company, or $73,454.35, and3729 the amount received by the parent company for the stock, namely, $60,000. This basis is found by adding the cost to the parent company of the stock of the subsidiary company, $45,000, and the aggregate amount of the net profits of the subsidiary company from March 1, 1916, to February 28, 1920, inclusive, $28,454.35. The petitioner further claimed 777 that this loss was deductible by the parent company in determining its net taxable income for 1920. The respondent contended that the petitioner derived a taxable profit of $15,000 from the transaction, the difference between the amount which it paid for the capital stock of the subsidiary company and the amount which it received upon the sale thereof. We held that the Baker-Vawter Co. sustained no deductible loss from the sale of the stock and derived no taxable income therefrom. A like decision must be made in the proceeding at bar. In its petition the petitioner alleges as error that the respondent taxed the income of the Commercial Stationery & Loose Leaf Co. when it was received prior to March 1, 1920, and when the subsidiary company was affiliated with the parent company, and then is taxing it again as profit when*3730 the parent company sold the shares of stock of the subsidiary company. To the extent that the respondent added to the net taxable income reported by the Baker-Vawter Co. $15,000 arising from the sale of the stock of the subsidiary company on February 28, 1920, the action was in error; but to the extent that he disallowed the deduction of a loss of $13,454.35 the action was not in error. For reasons stated in , we are of the opinion that the Baker-Vawter Co. derived no income and sustained no loss from the sale of the capital stock of the subsidiary company on February 28, 1920. With respect to the reduction of the invested capital of the Baker-Vawter Co. by a prorated portion of the surplus of the subsidiary company which went out of the affiliated group as of February 28, 1920, we see no reason to modify the opinion or decision with reference thereto contained in Judgment will be entered on 15 days' notice, under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622416/	Louis J. Brecker v. Commissioner. Louis J. Brecker and Dorothy Brecker v. Commissioner.Brecker v. CommissionerDocket Nos. 109593, 109594.United States Tax Court1943 Tax Ct. Memo LEXIS 376; 1 T.C.M. (CCH) 846; T.C.M. (RIA) 43154; March 31, 1943376 Norman M. Behr, Esq., for the petitioner. Carl A. Phillips, Esq., and E. C. Algire, Esq., for the respondent. STERNHAGEN Memorandum Opinion STERNHAGEN, Judge: The Commissioner determined deficiencies in petitioner's income tax of $269.29 for 1938, and $1,627.95 for 1939. In the early part of 1938, petitioner owned 20 voting common shares, out of 60 outstanding, and 50 nonvoting preferred shares, out of 1,160 outstanding, of B.M.O. Corporation, the cost basis of which to him were $20,000 for the common and $7,500 for the preferred. B.M.O. owed him $20,200. B.M.O. went through a 77B reorganization in 1938, coming out as Intcas Corporation. Its new shares were 60 voting common, 437.25 nonvoting first perferred, 1,501.1165 nonvoting second preferred, and 1,160 nonvoting third preferred. Of these new shares, all the common were issued to old common shareholders in exchange for their old common; 225 first preferred were issued to old shareholders for cash, of which 75 were purchased by petitioner, and 212.25 were purchased by new shareholders; 404 second preferred were issued to B.M.O. creditors, of which 202 were issued to petitioner and 202 to other shareholder-creditors, and 1,097.1165377 second preferred were issued to other B.M.O. creditors; and 1,160 third preferred were issued in exchange for B.M.O. preferred, of which 50 shares were issued to petitioner. Thus, petitioner in the reorganization received 20 common in exchange for B.M.O. common, 75 first preferred by purchase, 202 second preferred as a creditor of B.M.O. and 50 third preferred for B.M.O. preferred. These shares, it is not disputed, became totally worthless in 1939 and petitioner sustained a loss measured by their proper basis. The Commissioner, treating the 1938 reorganization as not within the meaning of the Revenue Act of 1938, Section 112 (g), held that the loss admittedly sustained by the taxpayer when the shares became worthless in 1939 was a short-term capital loss, and therefore limited by Sections 23 (g) and 117, Revenue Act of 1938, to $32.76, the amount of net short-term capital gains on other transactions. The petitioner protests that the reorganization of 1938 was within the definition of the Revenue Act of 1938, Section 112 (g), and was, therefore, not the occasion for gain or loss upon the exchange at that time, but carried the basis from the original acquisition of the B.M.O. shares378 through the reorganization with a consequent recognition in 1939 of the entire loss of the original cost. The Commissioner's determination must be sustained because the reorganization was not within the terms of the definition. Since the new corporation, when it acquired the old corporation's property, issued not only voting common, which went to the old shareholders, but also nonvoting preferred, which went to shareholders, creditors and purchasers for cash, the requirement that the acquisition be solely for the new corporation's shares has not been fulfilled. "Solely leaves no leeway." . After the transfer the old shareholders did not hold eighty per cent of the new shares; for the issuance to old creditors, whether they also held old shares or not, may not, for purposes of this statutory provision, be treated as if it were an issuance to shareholders. ;. See also . The379 lack of statutory "control" also defeats the application of subdivision 112 (b) (5). When petitioner, for his B.M.O. shares and his claim for advances, received new shares of Intcas Corporation, he was entitled to a recognition of gain or loss upon a closed transaction and the new shares received at that time took their proper new basis. With this began a new period of holding the new shares as if he had purchased them at their value. Since this period from the middle of 1938 until the loss was sustained in January, 1939, was less than eighteen months, the loss was a short-term capital loss. The Commissioner's treatment of it as such was therefore correct and the 1939 deficiency upon that ground is sustained. Both parties agree without discussion that the correct determination of the tax for 1938, which also is nominally in issue, follows as a corollary of the determination for 1939. Accordingly, the determination for 1938 is reversed. Decision will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622417/	Frances Hummel, Petitioner, v. Commissioner of Internal Revenue, RespondentHummel v. CommissionerDocket No. 54686United States Tax Court28 T.C. 1131; 1957 U.S. Tax Ct. LEXIS 105; August 30, 1957, Filed 105 Decision will be entered under Rule 50. Alimony v. Child Maintenance -- Sec. 22 (k), I. R. C. 1939 -- Fixing Amount of Child Support -- Subsequent Amendment. -- Entire payment is taxable to divorced wife where it was for "alimony and maintenance of the child" under agreement incorporated in divorce decree, despite a later "awarding" of a lesser payment to the support of a minor child. Thomas W. Hardesty, Esq., for the petitioner.James C. Bright, Esq., for the respondent. Murdock, Judge. MURDOCK 1131 OPINION.The Commissioner determined deficiencies in income tax as follows:YearAmount1949$ 147.901950147.841951261.001952140.59The only issue for decision is whether the Commissioner erred in including an amount representing alimony in the petitioner's income for each year. The parties have filed a stipulation of facts which is adopted as the findings of fact.The petitioner filed her individual income tax returns for the taxable years with the collector of internal revenue for the district of Kentucky.The petitioner was divorced from Thomas Hummel on April 5, 1947, in the Campbell Circuit Court, Campbell County, Kentucky. She was awarded106 custody of the one child of the marriage, Christine Hummel, who was then 2 years of age. The petitioner and Thomas Hummel entered into an agreement which was incorporated in the decree of divorce. The agreement contained, inter alia, the following provision: "It is further agreed that the defendant, Thomas Hummel, shall pay to the plaintiff, Frances Hummel, the sum of $ 27.50 per week as alimony and maintenance of the child."The Commissioner, in determining the deficiencies, added to the petitioner's reported income $ 1,420 for 1949, $ 1,430 for 1950 and and 1951, and $ 550 and 1952, as alimony. He explained that those amounts, which she had received from her divorced husband under the divorce decree of April 5, 1947, were includible in her gross income under section 22 (k) of the Internal Revenue Code.Section 22 (k) provides that periodic payments received by a divorced wife from her husband subsequent to the decree of divorce in discharge of a legal obligation which, because of the marital or family relationship is imposed upon the husband under such decree, 1132 shall be includible in the gross income of the wife. It also provides that it shall not apply to that107 part of any such periodic payments "which the terms of the decree or written instrument fix, in terms of an amount of money or a portion of the payments, as a sum which is payable for the support of minor children of such husband."The Commissioner relies upon decisions of this Court holding that the entire amount of payments received by a wife from her divorced husband are taxable to the wife irrespective of how the money was used or expended, if no specific part or amount of the total payments was fixed or designated under the decree of the agreement as payable to the wife for the support of a child. Dora H. Moitoret, 7 T. C. 640; Henrietta S. Seltzer, 203">22 T. C. 203. Cf. Richard B. Prickett, 18 T.C. 872">18 T.C. 872.The petitioner contends that all, or at least some part, of the periodic payments should be recognized as paid for the support of the child, particularly since she spent more than the amount of the payments for the support and maintenance of the child. A similar situation existed in the Moitoret case, supra.The petitioner also points to the stipulated facts showing that the master108 commissioner of the Campbell Circuit Court made a recommendation on December 12, 1952, that Frances Hummel "be awarded maintenance for the support of the infant child herein in the sum of Twenty-Two and 50/100 ($ 22.50) Dollars per week until further order of the Court." That recommendation was confirmed by the judge of the court on March 9, 1953. The recommendation was made as a result of the request by Frances for an increase in the allowance for the maintenance of the child and a motion by Thomas to terminate all of the alimony requirements to be paid to Frances as of May 13, 1952, and to reduce the amount to be paid for the maintenance of the child to $ 15 a week. The recommendation and the confirmation which occurred later were in no way retroactive, corrected no error, and are of no significance in the decision of the present case. Cf. Robert L. Daine, 9 T.C. 47">9 T. C. 47, affd. 168 F. 2d 449; Peter Van Vlaanderen, 10 T. C. 706, affd. 175 F. 2d 389; Margaret Rice Sklar, 21 T.C. 349">21 T. C. 349. The payments here in question were not paid thereunder, *109 but were made under and in accordance with the original decree of the court in which no amount was fixed as payment for support of the child. The character of those payments was not changed by subsequent events. The fact that $ 22.50 was "awarded" later as "maintenance for the support of the infant child" was not intended and does not serve retroactively to fix a similar amount of the prior payments as maintenance. The Commissioner did not err in taxing the entire amounts to the petitioner as alimony payments under section 22 (k).The Commissioner conceded another issue.Decision will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622419/	Ernest W. Clemens, Petitioner, v. Commissioner of Internal Revenue, RespondentClemens v. CommissionerDocket No. 10026United States Tax Court8 T.C. 121; 1947 U.S. Tax Ct. LEXIS 307; January 23, 1947, Promulgated 307 Decision will be entered under Rule 50. 1. Community Property -- Commingling. -- Where the separate funds of the husband and the community funds are deposited in the same bank account, amounts paid for medical expenses may not be allowed as a deduction on the separate return of the husband unless it is shown by competent evidence that the expenditures were actually made from his separate funds.2. Burden of Proof. -- The taxpayer's burden of proof is not sustained by a mere showing that the amount of community expenditures for the taxable year involved exceeded the net community income.3. Contributions. -- Where the commingled funds are deposited to the account of the husband, a check for charitable contributions given by him may be assumed to be against his separate funds, since such contributions are not community expenses and the husband has no right to give his wife's interest to a stranger without her consent. Ernest W. Clemens pro se.Stanley B. Anderson, Esq., for the respondent. Harlan, Judge. HARLAN 122 The respondent determined a deficiency against petitioner in income and victory tax for the taxable year ended December 31, 1943, in the amount of308 $ 1,536. The petitioner contests this deficiency in so far as it involves certain deductions for charitable contributions and medical expenses claimed by him in his income tax return. Due to the application of section 6, Current Tax Payment Act of 1943, both the years 1942 and 1943 are here involved.The question presented is whether contributions made by petitioner in amounts of $ 363 and $ 805 for the years 1942 and 1943, respectively, and medical expenses in the amount of $ 1,874.31 for the year 1943 are separate deductions of petitioner or are community deductions, where paid from a bank account in which both the petitioner's separate income and the community income of petitioner and his wife were deposited. The case is submitted on oral testimony and documentary evidence introduced at the hearing.FINDINGS OF FACT.Petitioner is an individual, residing at 303 Contour Drive, San Antonio, Texas. For the taxable years 1942 and 1943 he and his wife filed separate income tax returns with the collector of internal revenue at Austin, Texas.In petitioner's income tax return for 1942 contributions aggregating $ 456.95 were claimed as a deduction. Of the above amount, the sum of 309 $ 93.95 is shown as a community deduction and the sum of $ 363 is shown as a separate deduction of petitioner. In petitioner's income tax return for 1943 contributions aggregating $ 921.27 were claimed as a deduction. Of the amount claimed for 1943, the sum of $ 116.27 is shown as a community deduction of which petitioner took one-half or $ 58.13, and the sum of $ 805 is shown as a separate deduction of Ernest W. Clemens. In computing the deficiency in question the respondent determined that all contributions were community and disallowed $ 402.50 of the amount claimed for the year 1943.123 During 1943 petitioner spent $ 3,295.75 for medical and dental services for the benefit of himself and his wife and minor son. Payment was made from time to time from February 2 to December 30, 1943, in varying amounts ranging from $ 3 to $ 500. In his return for 1943 petitioner claimed as a separate deduction medical expenses in the amount of $ 1,874.31, which represents the amount paid in excess of 5 per cent of the net income before the deduction for medical expenses.In the notice of deficiency the total contributions of $ 456.95 for 1942 and $ 921.27 for 1943 were held to be community310 payments, deductible one-half by each spouse. It was further held that the total medical expense of $ 3,295.75 was a community deduction, divided equally between the petitioner and his wife, subject to the limitation provided in section 23 (x) of the Internal Revenue Code. As thus computed, the respondent determined that petitioner was entitled to only $ 167.83 as a deduction for medical expenses, instead of $ 1,874.31 claimed in the return, and restored to income the difference, or $ 1,706.48.All income, including the separate income of petitioner and the community income of petitioner and his wife, was in the first instance deposited in one account in the National Bank of Commerce, San Antonio, Texas. This account was kept in petitioner's name and he alone could draw checks against it. Petitioner also kept an account in the South Texas National Bank of San Antonio, into which funds were transferred by him and used to pay community expenses such as groceries, clothing, laundry, and sundry living expenses. This account was also kept in petitioner's name and checks drawn against it were usually made out by his wife and signed by him.On December 31, 1942, there was a balance 311 of $ 2,540.23 in petitioner's account in the National Bank of Commerce. At the end of the year 1943 there was a balance of $ 5,731.04 in the same account.The net community income for the year 1943 was $ 8,388.33. After payment of income taxes in the amount of $ 2,103.68, there was left a net community income of $ 6,284.65. In 1943 the house rent for the family home, amounting to $ 1,455, was paid by checks drawn on the National Bank of Commerce, and petitioner transferred to the South Texas National Bank the amount of $ 5,650. This amount was used entirely for household and other necessary expenses. The total amount so paid out was $ 7,105, or $ 820.35 more than the net community income after payment of income taxes. None of the contributions or the medical expenses here in question were included in the $ 7,105.Petitioner's net taxable separate income for the year 1942 was $ 21,458.16. In addition to this amount petitioner had nontaxable separate income in the amount of $ 24,888.40. In 1943 petitioner's net 124 taxable income was $ 24,234.73 and his nontaxable separate income was $ 17,910.35.Petitioner's separate deduction for interest paid was $ 5,255.87 for the year312 1942 and $ 2,195.91 for the year 1943. The rate of interest paid by him varied from 4 per cent to 6 per cent. During 1943 petitioner paid off in excess of $ 30,000 on his separate indebtedness. These payments were made from the bank account in the National Bank of Commerce.OPINION.The amount of the contributions for charitable purposes and the amount of the medical expenses involved are not in dispute. Nor is there any question that the amount of $ 1,874.31, claimed by petitioner as an allowable deduction, is computed in accordance with the limitation applicable to medical expenses under section 23 (x) of the Internal Revenue Code.The only question presented is whether such expenditures are the separate deductions of petitioner, as claimed in his income tax returns, or whether they are community deductions of petitioner and his wife, who filed separate returns for the respective years 1942 and 1943.It is the contention of the respondent that they are community deductions. This contention is based upon the fact that the separate income of the petitioner and the community income of petitioner and his wife were deposited and commingled in one bank account.The petitioner admits313 that both his separate income and that of the community were deposited originally in the National Bank of Commerce, but contends that all the community income was expended for community purposes and that the contributions and medical expenses here in question were paid by him from his separate funds and are therefore deductible by him.It appears from the record that during the taxable year 1943 the net community income as reported in the income tax return of both petitioner and his wife was $ 8,388.33 and the separate net taxable income of petitioner was $ 24,234.73. These funds were all deposited in the first instance in the same bank in petitioner's account, and were all checked out by him. During the taxable year expenditures for the benefit of the community were paid by petitioner as follows:Family and living expenses$ 5,650.00Rent for family residence1,455.00Medical expenses3,295.75Total10,400.75It appears from the record that the community net income after the payment of income taxes was $ 6,284.65. It is obvious, therefore, that the expenditures made by petitioner for community purposes were 125 $ 4,116.16 in excess of the net community314 income. From these facts the petitioner argues that there was not such a "commingling" of separate and community funds as to make it impossible to determine the source of the payments and, since the amount paid for rent and for family and living expenses was in excess of the net community income, the amounts paid for medical expenses and the contributions in question were paid from his separate income.It is well settled that spouses domiciled in a community property state may divide their community income equally in separate returns, and that deductions properly chargeable against such returns should be equally divided between the spouses, but, where contributions are made by one of the spouses from his or her separate funds, such spouse is entitled to deduct them in full, Mellie Esperson Stewart, 35 B. T. A. 406; affd., 95 Fed. (2d) 821. The burden, however, is on the spouse claiming the deductions to show by competent evidence that he or she is entitled to the deductions claimed.The medical expenditures here in question were undoubtedly community expenses and payable from community income, if any.It is true, as petitioner315 argues, that as head of the family he was liable for its support, cf. Corbett v. Wade, 124 S. W. (2d) 889, and if the medical expenses were paid from his separate income he would be entitled to the deduction claimed, but the burden is on him to show that they were paid from his separate income. This he has failed to do. The record shows that the community expenditures were not all made at one time, but were made from time to time during the years. Some of these expenditures, such as rent and family living expenses, were not deductible from gross income, but a portion of the medical expenditures was deductible. Since the community net income was not sufficient to pay all the community expenses, petitioner has allocated all community income to the payment of nondeductible expenses and contends that the deductible portion was paid from his separate income. The evidence before us does not substantiate this contention. The medical expenses were community expenses, payable primarily from community income, cf. Clark v. First National Bank, 210 S. W. 677; In re Tompkins Estate, 11 Pac. (2d) 886;316 Huber v. Huber, 167 Pac. (2d) 708; George W. Van Vorst, 7 T. C. 826, and when paid from a bank account where community and separate funds are commingled it may be assumed that they are paid from community funds unless there is evidence that they were paid from separate funds. It may well be that when checks were drawn for medical expenses there were community funds in the bank to meet them and when checks were drawn for rent or living expenses no community funds were available. The petitioner has offered no evidence to show that they were actually paid from his separate funds or that they 126 were charged against his separate account. The Commissioner's determination as to the medical expenses is therefore affirmed.As to the contributions in question, the situation is reverse. Contributions are not community expenses and the husband, who, as the manager of the community, is the agent of his wife in the management, control, and disposition of community property, Atkins v. Dodds, 121 S. W. (2d) 1010, may not give her interest to a stranger. Watson v. Harris, 130 S. W. 237.317 It may be assumed, therefore, where, as here, there are commingled funds deposited to the account of the husband, that a check for contributions given by him is against his separate funds and not the funds of the community. Moreover, there is nothing in the record to indicate any consent by the wife to such contributions. We hold, therefore, that the contributions in question were made from the petitioner's separate funds and he is entitled to the deductions claimed for contributions.Decision will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622420/	UNION DENTAL PLAN, INC. TRANSFEREE AND UNION DENTAL PLAN, INC., Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentUnion Dental Plan, Inc. v. CommissionerDocket No. 12791-83.United States Tax CourtT.C. Memo 1989-255; 1989 Tax Ct. Memo LEXIS 255; 57 T.C.M. (CCH) 527; T.C.M. (RIA) 89255; May 25, 1989. Ross W. Paulson, for the respondent. PARRMEMORANDUM OPINION PARR, Judge: This case is before the Court on respondent's motion to dismiss for failure to prosecute properly. On August 11, 1988, the parties were notified that this case was set for trial on January 23, 1989. The notice setting case for trial said in bold type, "YOUR FAILURE TO APPEAR MAY RESULT IN DISMISSAL OF THE CASE AND ENTRY OF DECISION AGAINST YOU." Attached to the notice of trial was the Court's Standing Pre-Trial Order, which stated, in part: It is further ORDERED that all parties shall be prepared for trial at any time during the term of the trial session unless a specific date has been previously set by the Court. * * * When the case was called from the calendar on January 23, 1989, counsel for respondent appeared and was heard. There was no256 appearance on behalf of petitioner. Counsel for respondent moved orally that this case be dismissed against petitioner for petitioner's failure to prosecute properly. We requested respondent's counsel to prepare a written motion to dismiss, which was filed with the Court on January 31, 1989. The petition in this matter was filed with this Court on May 27, 1983, to contest respondent's determinations in four notices of deficiency, three of which involved determinations of transferee liability and one of which involves a determination of income tax liability as follows: Respondent determined a deficiency in income tax due from petitioner, Union Dental Plan, Inc., for the taxable year ended June 30, 1979, in the amount of $ 13,594. He determined liabilities in the amounts of $ 85,743.01 and $ 35,137.61 plus interest thereon as provided by law from September 15, 1978, to the date such liabilities are paid, due from petitioner as transferee of the assets of Davidowitz, Goldberg, Dean, A Professional Corporation, Transferor, for unpaid income tax and additions to tax of the transferor for the taxable year ended June 30, 1978. Respondent also determined a liability in the amount257 of $ 430,210, plus interest thereon as provided by law from September 17, 1979, to the date such liability is paid, due from petitioner as transferee of the assets of Rabbitt, Davis, Curren, A Professional Corporation, Transferor, for unpaid income tax of the transferor for the taxable year ended June 29, 1979. Respondent further determined a liability in the amount of $ 176,052, plus interest thereon as provided by law from September 17, 1979, to the date such liability is paid, due from petitioner as transferee of the assets of Davidowitz, Goldberg, Dean, A Professional Corporation, Transferor, for unpaid income tax as a transferor for the taxable year ended June 29, 1979. On February 14, 1985, petitioner filed a petition in bankruptcy with the United States Bankruptcy Court for the Northern District of California. The trustee in bankruptcy for petitioner was discharged by the United States Bankruptcy Court on October 1, 1987, and no longer represents petitioner in the above-mentioned bankruptcy action. Petitioner's bankruptcy estate was closed at the same time the trustee was discharged. On June 18, 1985, we granted the motion of petitioner's attorneys to withdraw as counsel258 of record. Since that date, petitioner has had no representative in this Court. Respondent orally represented to the Court that petitioner has no assets and no longer does any business whatsoever. Respondent further indicated that the attorney who previously represented petitioner in bankruptcy is unwilling to enter an appearance in this case or to execute any stipulated decision. It is clear to the Court that petitioner does not intend to prosecute its case. We therefore have no hesitancy in granting respondent's motion to dismiss as to the deficiency in income tax due from petitioner for the taxable year ended June 30, 1979, in the amount of $ 13,594. On the other hand, we must deny respondent's motion with regard to his determinations of transferee liability set forth above. Congress has imposed on respondent the burden of proof in establishing transferee liability. Section 6902(a); 1 see also Rule 142(d). Rule 123 of the Tax Court Rules of Practice and Procedure provides as follows: (a) Default: When any party has failed to plead or otherwise proceed as provided by these Rules or as required by the Court, he may be held in default by the Court either on motion of259 another party or on the initiative of the Court. Thereafter, the Court may enter a decision against the defaulting party, upon such terms and conditions as the Court may deem proper, or may impose such sanctions (see, e.g., Rule 104) as the Court may deem appropriate. The Court may, in its discretion, conduct hearings to ascertain whether a default has been committed, to determine the decision to be entered or the sanctions to be imposed, or to ascertain the truth of any matter. (b) Dismissal: For failure of a petitioner properly to prosecute or to comply with these Rules or any order of the Court or for other cause which the Court deems sufficient, the Court may dismiss a case at any time and enter a decision against the petitioner. The Court may, for similar reasons, decide against any party any issue as to which he has the burden of proof; and such decision shall be treated as a dismissal for purposes of paragraphs (c) and (d) of this Rule. While we can indeed dismiss this case under260 Rule 123(b) as to petitioner, who has the burden of proof as to the deficiency, we have no basis on which to hold petitioner in default regarding the transferee liability issues. In Bosurgi v. Commissioner,87 T.C. 1403">87 T.C. 1403 (1986) (Court-reviewed opinion), we held that entry of a default judgment is appropriate upon a determination in the sound judicial discretion of the Court that the pleadings of the moving party set forth facts sufficient to support the judgment. Entry of a default has the effect of admitting all well-pleaded facts in respondent's answer, and a default judgment must be supported by respondent's well pleaded facts. Bosurgi v. Commissioner,87 T.C. at 1408, 1409. In this case, however, respondent never pleaded any facts whatsoever with regard to the transferee liability. Respondent's answer simply contains a pro forma general denial of the allegations in the petition. Since there is no evidence or well-pleaded facts which would sustain respondent's burden of showing that petitioner is liable as the transferee, respondent's motion is denied to that extent. Moreover, since neither party offered any evidence when the case was called261 for trial, our decision is made in conformance with the relative burdens of proof. We therefore hold that there is a deficiency in income tax due from petitioner for the taxable year ended June 30, 1979, in the amount of $ 13,594. We find for petitioner on the transferee liability issue raised in the notices of deficiency on which this case is based. An appropriate order and decision will be entered.Footnotes1. Unless otherwise indicated all section references are to the Internal Revenue Code of 1954 as amended, and all Rule references are to the Tax Court Rules of Practice and Procedure.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622421/	KENNETH P. EASLON, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentEaslon v. CommissionerDocket No. 21349-80.United States Tax CourtT.C. Memo 1982-20; 1982 Tax Ct. Memo LEXIS 722; 43 T.C.M. (CCH) 302; T.C.M. (RIA) 82020; January 13, 1982. Kenneth P. Easlon, pro se. David G. Hendricks, for the respondent. DAWSONMEMORANDUM OPINION DAWSON, Judge: Respondent determined the following deficiencies in petitioner's Federal income taxes and additions to tax: Additions to TaxYearDeficiencySec. 6651(a)Sec. 6653(a)Sec. 6654 11978$ 2,499.00$ 541.56$ 124.95$ 66.6619792,613.00541.90130.6586.19723 The issues for decision are (1) whether the petitioner received as his one-half share of community income the amounts of $ 13,408.34 in 1978 and $ 14,442.61 in 1979; and (2) whether he is liable for the additions to tax determined by the respondent. All of the facts have been stipulated and are so found. The pertinent facts are summarized below. Petitioner was a resident of Odessa, Texas, during the years 1978 and 1979 and when he filed his petition in this case. He was married to Pauline G. Easlon in those years. During 1978 and 1979 the petitioner was employed by The General Tire & Rubber Company of Akron, Ohio, and he received wages in those years for work performed for that employer within the State of Texas. During 1978 and 1979 Pauline G. Easlon, the petitioner's wife, was employed by F.W. Woolworth Company of Milwaukee, Wisconsin, and she received wages in those years for work performed for that employer within the State of Texas. For the years in issue the petitioner received wage and tax statements from724 The General Tire & Rubber Company which showed: Wages andFederal IncomeYearOther CompensationTax Withheld1978$ 20,460.76$ 122.67197921,772.05177.56For the years in issue Pauline G. Easlon received wage and tax statements from F.W. Woolworth Company which showed: Wages andFederal IncomeYearOther CompensationTax Withheld1978$ 6,277.29$ 542.6719797,113.17713.29Petitioner filed a claim for refund of the overpayment of tax for 1978 on an incomplete Form 1040. On April 17, 1979, he received a registered notice from the Director, Internal Revenue Service Center, Southwest Region, stating that the U.S. Individual Income Tax Return form submitted by him was not acceptable as an income tax return. On the purported return petitioner reported $ 78.62 as interest income and opposite business income were typed the words "Object, Self Incrimination." Petitioner did not file a Federal income tax return for the year 1979. In his notice of deficiency dated September 26, 1980, respondent determined that the petitioner's one-half share of unreported community income was $ 13,408.34 in 1978 and $ 14,442.61 in725 1979. He also determined that the petitioner was liable for additions to tax under sections 6651(a), 6653(a) and 6654. Petitioner has the burden of proof with respect to the determined deficiencies and additions to tax. Welch v. Helvering, 290 U.S. 111">290 U.S. 111 (1933); Rule 142(a), Tax Court Rules of Practice and Procedure. He has completely failed to carry that burden. In his oral statements and trial memorandum the petitioner argued that the income tax on his wages is unconstitutional because wages and compensation do not constitute gross income. The argument is meritless. The Federal income tax laws are constitutional. See Brushaber v. Union Pac. R.R. Co., 240 U.S. 1">240 U.S. 1 (1916); Cupp v. Commissioner, 65 T.C. 68 (1975), affd. by unpublished opinion 559 F.2d 1207">559 F.2d 1207 (3d Cir. 1977); McCoyv. Commissioner, 76 T.C. 1027">76 T.C. 1027 (1981), on appeal (9th cir. Sept. 15, 1981). It is well established that compensation for services, in whatever form received, is includable in gross income. Commissioner v. Duberstein, 363 U.S. 278">363 U.S. 278 (1960). Section 61(a) defines gross income as "all income from whatever726 source derived." It includes the compensation for services and interest which the petitioner received in 1978 and 1979. Eisner v. Macomber, 252 U.S. 189">252 U.S. 189, 207 (1920); Reiffv. Commissioner, 77 T.C. No. 83 (November 30, 1981). The Form 1040 filed by the petitioner for 1978 was devoid of sufficient information which could be used to compute his tax lialbilities and, therefore, it does not constitute an income tax return. United States v. Porth, 426 F.2d 519">426 F.2d 519, 522-523 (10th Cir. 1970); Reiff v. Commissioner, supra; and White v. Commissioner, 72 T.C. 1126">72 T.C. 1126, 1129-1130 (1979). And, of course, there was no attempt by petitioner to file a return for 1979. Consequently, we sustain the additions to tax under section 6651(a) for failure to file timely returns. As to the additions to tax under section 6653(a), it is apparent that petitioner's refusal to file income tax returns as required by law and to supply information regarding his income was an intentional disregard of respondent's rules and regulations. Hence those additions are also sustained. Finally, the addition to tax under section 6654*727 is imposed regardless of a showing of reasonable cause absent exceptions provided in section 6654(d) which are not applicable here. Section 1.6654-1(a), Income Tax Regs.; Reaver v. Commissioner, 42 T.C. 72">42 T.C. 72, 83 (1964). Accordingly, Decision will be entered for the respondent. Footnotes1. All section references are to the Internal Revenue Code of 1954, as amended and in effect during the years in issue, unless otherwise indicated.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622422/	Theodore Papas v. Commissioner.Papas v. CommissionerDocket No. 30666.United States Tax Court1951 Tax Ct. Memo LEXIS 176; 10 T.C.M. (CCH) 605; T.C.M. (RIA) 51196; June 28, 1951176 Nathan Willner, Esq., 17 State St., New York, N. Y., for the petitioner. Maurice E. Stark, Esq., for the respondent. OPPERMemorandum Opinion OPPER, Judge: Respondent determined a deficiency in income tax for the year 1945 in the amount of $235.34, all of which is in controversy: The sole question is whether petitioner is entitled to two dependency deductions for the support of two sisters, who reside in Greece and are nationals of that country. All of the facts were stipulated. The stipulated facts are hereby found. They are as follows in their entirety: 1. That the petitioner resides in Peekskill, New York. 2. That the return for the year 1945 was filed in Albany 1, N. Y.3. That a Notice of Deficiency was mailed to the petitioner on or about the 29th day of June, 1950. 4. That the deficiency as determined by the Commissioner is in income taxes for the calendar year 1945 in the amount of $235.34. 5. That Ann Anagostopoulou, age 67, and Betty Xedes, age 64, are sisters of the petitioner. In his 1945 income tax return petitioner claimed both of the above-named individuals as dependents under the names of Ann Anastopolis and Exedes Anastopolis. The correct177 names of these sisters have been verified by an affidavit submitted by the petitioner. 6. During the year in question, Ann Anagostopoulou and Betty Xedes were citizens or subjects and residents of Greece. During this time they were forced to move from place to place within the country of Greece, in order to seek refuge from the Communists. 7. That during the year 1945, Ann Anagostopoulou and Betty Xedes had no income and petitioner transmitted to each of these sisters an amount in excess of $600.00 for their support. 8. To the best of his knowledge and belief the petitioner was the sole and only source of support of these sisters. Section 25 (b) (3), Internal Revenue Code, as added by Revenue Act of 1944, section 10 (b) (3), is dispositive of the case. It contains the following language: "* * * The term 'dependent' does not include any individual who is a citizen or subject of a foreign country unless such individual is a resident of the United States or of a country contiguous to the United States." The statute is completely unambiguous and it is not in fact contended otherwise. But even if resort is had to the legislative history, no different conclusion*178 can be reached. Isak S. Gitter, 13 T.C. 520">13 T.C. 520. Petitioner's situation falls squarely within the statutory language. Astley v. Rogan (D.C., S.D., Cal.), 32 A.F.T.R. (P-H) 1603">32 A.F.T.R. 1603, involved years prior to the effective date of the 1944 amendment; and cf Morrell v. Commissioner (C.A. 3), 107 Fed. (2d) 34. We are unable to find any error in respondent's determination. Decision will be entered for the respondent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622423/	ROBERT G. and NORITA C. WEST, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentWest v. CommissionerDocket No. 34762-86United States Tax CourtT.C. Memo 1991-18; 1991 Tax Ct. Memo LEXIS 18; 61 T.C.M. (CCH) 1694; T.C.M. (RIA) 91018; January 17, 1991, Filed 18 Decision will be entered for the respondent. Petitioners purchased a home financed in part by a loan from the Bank of America. The loan was evidenced by a note secured by a deed of trust. The note provided for a delinquency charge in the event any installment due thereunder was not timely paid. In 1983, petitioners paid $ 997 for such delinquency charges and deducted such payments as interest. Held, petitioners failed to prove that the delinquency charges are deductible as interest. Robert G. West, pro se. Rebecca T. Hill, for the respondent. JACOBS, Judge. JACOBSMEMORANDUM FINDINGS OF FACT AND OPINION Respondent determined a deficiency of $ 494 in petitioners' 1983 Federal income tax. After concessions by petitioners, the sole issue remaining for decision is whether petitioners are entitled to an interest deduction under section 163(a)1 for late payment charges on their home mortgage loan. 19 FINDINGS OF FACT Some of the facts have been stipulated and are so found. The stipulation of facts and accompanying exhibits are incorporated herein by this reference. Petitioners resided in Danville, California, at the time they filed their petition. In 1980, petitioners purchased a home in Redwood City, California, for $ 175,000. The purchase was financed, in part, with a $ 140,000, 30-year loan from the Bank of America (the bank). The loan was evidenced by a note and secured by a deed of trust. The note bore interest at the rate of 12.25 percent per year and provided for monthly installment payments of $ 1,467.47, each due on the first day of the month. The note further provided: Notwithstanding any other provision of this Note, if default be made in the payment when due of any part or installment of principal and interest, the undersigned agrees to pay a delinquency charge for each installment in default 15 days in an amount equal to 4% of each such installment.(Prior to 1975, the bank imposed a 2-percent late payment charge. In 1975, the bank raised the late payment charge to 4 percent. The bank's internal records reflect that this increase was made20 to recover more of the costs resulting from delinquent real estate loans.) Sometime in 1982 and continuing into 1983, petitioners ceased making the required monthly installment payments. They received a delinquency notification from the bank and were informed that a delinquency charge was being imposed. The bank accrued such charge on monthly billing statements sent to, and received by, petitioners. In 1983, petitioners paid $ 997 as delinquency charges, of which $ 469 related to 1982. Petitioners deducted the $ 997 as interest on their 1983 tax return; by way of a stipulation filed at trial they conceded that $ 469 of the $ 997 in late payment charges claimed on their 1983 return is not deductible because they are accrual basis taxpayers and such charges relate to 1982. Respondent disallowed the deduction on the grounds that the late payment charges were not interest. The amount of the late charge imposed by the bank is a percentage of the delinquent installment. It does not increase as the period of delinquency increases; it is not considered a "finance charge" for Federal Truth in Lending law purposes. In 1983, the bank's Standard Procedures Manual provided that late charges21 of the nature incurred by petitioners were to "compensate [the bank] for expenses and lost earnings." In the first month that a loan is delinquent, the bank's costs of collection are negligible. As time passes, additional costs are incurred and increase disproportionately. Foreclosure proceedings are not considered until a borrower has been in default for three months. After such time, a computer printout is generated listing those borrowers in default for 90 days; one of the bank's managers reviews the printout to determine whether foreclosure proceedings should be brought against a specific borrower. OPINION Section 163(a) allows a deduction for interest paid or accrued within the taxable year on indebtedness; the term "interest" is not statutorily defined. The Supreme Court has defined interest for Federal income tax purposes as the "amount which one has contracted to pay for the use of borrowed money," Old Colony Railroad Co. v. Commissioner, 284 U.S. 552">284 U.S. 552, 560, 76 L. Ed. 484">76 L. Ed. 484, 52 S. Ct. 211">52 S. Ct. 211 (1932), and as "compensation for the use or forbearance of money." Deputy v. duPont, 308 U.S. 488">308 U.S. 488, 498, 84 L. Ed. 416">84 L. Ed. 416, 60 S. Ct. 363">60 S. Ct. 363 (1940).In a particular instance, what constitutes compensation for the use or forbearance of money is22 a factual determination -- labels or terminology are not controlling. L-R Heat Treating Co. v. Commissioner, 28 T.C. 894">28 T.C. 894, 897 (1957). Petitioners posit that the loan documents permit them to make either timely or delinquent payments, and that the interest rate payable on their loan varies depending upon their performance. In other words, according to petitioners, if they tender timely payments, the interest rate on their mortgage loan is 12.25 percent per annum; but if they make delinquent payments, the interest rate on their mortgage loan is greater. We disagree. The mortgage note contemplates petitioners' remittance of timely payments, with a charge in the event petitioners breach their agreement to make timely payments, which they did. There is no indication that the bank intended to increase the effective yield on its loans through the late charge. Cf. Wilkerson v. Commissioner, 70 T.C. 240">70 T.C. 240, 254-256 (1978), revd. on other grounds 655 F.2d 980">655 F.2d 980 (9th Cir. 1981).The formula for calculating the late charge provision bears little resemblance to standard interest computations. The amount of the late charge has no correlation with the passage of time and is unrelated23 to the prevailing market rate for home mortgage interest. The amount of the payment was determined at the time the loan was made (as a percentage of the monthly payment), and it remained constant throughout the entire term of the loan. The late charge amount was the same whether the payment was one day late or two years late, or as here, seventeen months late. In our opinion, there are three purposes for the bank's delinquency charge: (1) to compensate the bank for estimated expenses it will sustain as a result of the borrower's breach of contract, (2) to penalize the borrower for making untimely payments, and (3) to compensate the bank for lost earnings or interest. Liquidated damages enable the bank to assess the borrower an agreed amount for estimated expenses the bank will incur if the borrower fails to make timely payments; the bank is not required to prove the actual amount of expenses sustained as a result of the delinquent payments. With respect to a charge for a late home mortgage payment, liquidated damages compensate the bank for: (1) its administrative expenses of collection, and (2) lost earnings or the cost of the money wrongfully withheld. Garrett v. Coast and24 Southern Federal Savings & Loan Association, 9 Cal. 3d 731">9 Cal. 3d 731, 108 Cal. Rptr. 845">108 Cal. Rptr. 845, 850-851, 511 P.2d 1197">511 P.2d 1197 (1973). Another purpose for the deliquency charge is to discourage borrowers from making untimely payments; to this extent, it is a penalty. Although the status of an item as interest for Federal income tax purposes does not depend upon its classification for other purposes, penalty provisions in a note which come into play only in the event of a maker's default are not regarded as interest on the loan itself under California law. First American Title Insurance & Trust Co. v. Cook, 12 Cal. App. 3d 592">12 Cal. App. 3d 592, 90 Cal. Rptr. 645">90 Cal. Rptr. 645 (1970). Finally, the delinquency charge enables the bank to partially recoup income it otherwise could have earned from reinvesting a timely installment payment. But petitioners have not satisfied their burden of proving that the late payment charges in question sufficiently relate to this element. Rule 142(a). In Rev. Rul. 74-187, 1 C.B. 48">1974-1 C.B. 48, the Internal Revenue Service held that a late payment charge assessed by a public utility is deductible as interest. The holding was premised on the absence of evidence that the charge was for a specific service performed25 in connection with the customer's account. In an attempt to distinguish Rev. Rul. 74-187 from the instant case, respondent posits that: In the revenue ruling, the Internal Revenue Service ("I.R.S.") assumed that the late payment charge was for the use or forbearance of money since there was no evidence that the charge was for a specific service performed in connection with a customer's account. This assumption was probably influenced by the fact that a public utility is in a regulated industry in which rates for services must be approved. * * * . . . the use of the term "specific services" in the revenue ruling is meant to be interpreted broadly and to include services for which separate charges are imposed on an individual borrower to compensate for costs incurred with respect to certain types of transactions but not services which are part of the general overhead of the lender. * * * . . . it is the I.R.S.'s position that payments made to compensate the lender for special handling are not interest. * * * In the case at bar, the record supports the fact that the late-payment charges were made to compensate the bank for costs resulting from delinquent real estate26 loans payments. * * The late payments charged by Bank of America ("B of A") more or less covered the costs incurred by B of A in connection with the processing of late payments. In fact, the payments made by the petitioners would have been less than the costs incurred by B of A in handling petitioners' late payments. Under the facts of the case at bar, the I.R.S.'s determination that the late payments at issue in the case at bar were not interest is consistent with the I.R.S.'s position in the revenue ruling.Although we cannot distinguish the situation involved herein from that involved in Rev. Rul. 74-187 as easily as respondent, we agree with respondent that the record herein reveals that the bank assessed the late charge, primarily, to recoup costs (telephone calls, letters, supervisory reviews, field visits, loan workouts, and note revisions) attendant to its attempt to collect the delinquent loan. Further, we are mindful that a revenue ruling merely represents the Commissioner's position with respect to a particular factual situation; we are not bound to follow its conclusion, for it does not constitute substantive authority in this Court. Stark v. Commissioner*27 , 86 T.C. 243">86 T.C. 243, 250-251 (1986). Deductions are a matter of legislative grace; taxpayers must prove their entitlement thereto. New Colonial Ice Co. v. Helvering, 292 U.S. 435">292 U.S. 435, 440, 78 L. Ed. 1348">78 L. Ed. 1348, 54 S. Ct. 788">54 S. Ct. 788 (1934);Rule 142(a). Here, petitioners failed to prove that they are entitled to an interest deduction under section 163(a) for the late payment charges on their home mortgage loan. Decision will be entered for the respondent. Footnotes1. All section references are to the Internal Revenue Code of 1954 as amended and in effect for the year in issue. All Rule references are to the Tax Court Rules of Practice and Procedure.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622424/	CHARLOTTE A. ASH, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentAsh v. CommissionerDocket No. 289-89United States Tax CourtT.C. Memo 1989-367; 1989 Tax Ct. Memo LEXIS 366; 57 T.C.M. (CCH) 1056; T.C.M. (RIA) 89367; July 25, 1989366 On Nov. 10, 1988, R mailed notices of deficiency to P for the years 1985 and 1986. On Dec. 6, 1988, P filed a voluntary petition with the Bankruptcy Court under the Bankruptcy Code Ch. 13, 11 U.S.C. On Feb. 8, 1989, while the bankruptcy proceeding was pending, P timely filed a petition with this Court within 90 days from the date of mailing of the notices of deficiency. Held, since bankruptcy proceeding was pending on date Tax Court petition was filed, 11 U.S.C. sec. 362(a)(8) (1982) precludes P from commencing a proceeding in the Tax Court. McClamma v. Commissioner, 76 T.C. 754">76 T.C. 754 (1981), followed. Held further, petition is dismissed for lack of jurisdiction. Held further, amount of time in which P may file a valid petition in the Tax Court computed. Sec. 6213(a) and (f), I.R.C. 1954; 11 U.S.C. sec. 362(c) and (d) (1982). Charlotte A. Ash, pro se. Terri A. Merriam, for the respondent. CANTRELMEMORANDUM OPINION CANTREL, Special Trial Judge: This case was assigned pursuant to the provisions of section 7443(b)(3) 1 and Rule 180 et seq., Tax Court Rules of Practice and Procedure. Respondent's Motions "to Dismiss for Failure to State a Claim Upon Which Relief Can be Granted" and "for Damages Under I.R.C. Section 6673368 ," were filed on April 18, 1989 and calendared for hearing at the Washington, D.C. Motions Session on June 21, 1989. In addition, petitioner, on June 9, 1989, filed a "Motion to Change Place of Hearing" (to Seattle, Washington). For the reasons set forth hereinafter, the case was stricken from the aforesaid calendar by Court Order dated June 20, 1989. On November 10, 1988, respondent mailed notices of deficiency to petitioner determining therein deficiencies in Federal income tax and additions to the tax for the taxable calendar years 1985 and 1986. Petitioner timely mailed her petition to the Court by certified mail on February 8, 1989. The petition was filed on February 13, 1989, on which date petitioner resided in Fircrest, Washington. See secs. 6213(a), 7502(a) and 7482(b)(1)(A). On June 19, 1989 petitioner filed a "Notice of Proceedings in Bankruptcy," a copy of which she served on respondent's trial counsel on June 15, 1989. Attached to her notice is a "Case Cover Sheet" indicating that she and her husband (who is not369 a party herein) had filed a voluntary petition in bankruptcy in the United States Bankruptcy Court for the Western District of Washington, Tacoma Division (hereinafter sometimes called Bankruptcy Court), in December 1988. A jurisdictional specter being raised for the first time, the Court contacted the Bankruptcy Court and was advised that Charlotte A. Ash and Dana C. Ash (Mr. Ash) had filed a voluntary petition in bankruptcy in that Court on December 6, 1988; that the case number thereof is 88-34642T; that the Bankruptcy Court issued an order on April 3, 1989 confirming a Chapter 13 plan; that the Internal Revenue Service had filed a proof of claim and an amended proof of claim in that proceeding on June 6, 1989; and that the case is still pending in the Bankruptcy Court as of June 19, 1989. With the foregoing Bankruptcy Court information in hand, the Court advised the parties that it was raising the jurisdictional issue on its own motion and had no alternative but to dismiss this case for lack of jurisdiction. "We have jurisdiction to determine if we have jurisdiction at any time, be it before or after final decision is entered." Brannon's of Shawnee, Inc. v. Commissioner, 71 T.C. 108">71 T.C. 108, 111-112 (1978).370 "[Q]uestions of jurisdiction which go to the root of all subsequent action * * * and should be disposed of at the threshold * * * must be dealt with by the Tax Court, like other tribunals, on its own motion even if not raised by either party." Midland Mortgage Co. v. Commissioner, 73 T.C. 902">73 T.C. 902, 905 (1980); National Committee to Secure Justice, Etc. v. Commissioner, 27 T.C. 837">27 T.C. 837, 839 (1957). It is clear that this proceeding is affected by the provisions of the Bankruptcy Code, which was codified and enacted as title 11 of the United States Code on November 6, 1978, by Pub. L. 95-598, 92 Stat. 2549, and the amendments made to the Internal Revenue Code by the Bankruptcy Tax Act of 1980, Pub. L. 96-589, 94 Stat. 3389 et seq., which was enacted on December 24, 1980. Both the Bankruptcy Code and the Bankruptcy Tax Act of 1980 are effective for bankruptcy cases commenced after October 1, 1979. Section 362(a)(8) of title 11 provides for an automatic stay of "the commencement or continuation of a proceeding before the United States Tax Court concerning the debtor." (Emphasis added.) This provision essentially prohibits a debtor-taxpayer from filing371 a petition in this Court during the imposition of the stay. For an individual taxpayer the automatic stay remains in effect until the bankruptcy proceedings are terminated or until the bankruptcy judge chooses to lift the stay. 11 U.S.C. sec. 362(c) and (d) (1982). Thus, the petition filed herein was filed in violation of the automatic stay provisions and is invalid. The joint statement by Senator DeConcini and Congressman Edwards makes this perfectly clear: "if the Internal Revenue Service had issued a deficiency notice to the debtor before the bankruptcy case began, but as of the filing of the bankruptcy petition the 90-day period for filing in the Tax Court was still running, the debtor would be automatically stayed from filing a petition in the Tax Court." 124 Cong. Rec. S17427 (1978); 124 Cong. Rec. H11111 (1978). The deficiency notices here were issued before the bankruptcy case was instituted at which time the 90-day period for filing a petition in the Tax Court was still running. Accordingly, petitioner was automatically stayed from commencing a proceeding in this Court on February 13, 1989 and this case must be dismissed. McClamma v. Commissioner, 76 T.C. 754">76 T.C. 754 (1981);372 Ever Clean Services, Inc. v. Commissioner, T.C. Memo. 1982-726. In order to invoke this Court's jurisdiction to contest her Federal income tax liability for 1985 and 1986 petitioner must file a new petition. Section 6213(f), as enacted by the Bankruptcy Tax Act of 1980, Pub. L. 96-589, supra, provides: (f) Coordination With Title 11. -- (1) Suspension of running of period for filing petition in title 11 cases. -- In any case under title 11 of the United States Code, the running of time prescribed by subsection (a) for filing a petition in the Tax Court with respect to any deficiency shall be suspended for the period during which the debtor is prohibited by reason of such case from filing a petition in the Tax Court with respect to such deficiency, and for 60 days thereafter. (2) Certain action not taken into account. -- For purposes of the second and third sentences of subsection (a), the filing of a proof of claim or request for payment (or the taking of any other action) in a case under title 11 of the United States Code shall not be treated as action prohibited by such second sentence. Hence, the unexpired portion of the 90-day period provided under*373 section 6213(a) is added to the 60 days provided by section 6213(f). Since the 90-day period was stayed by the filing of a bankruptcy petition after having run 26 days, 64 days plus the 60 days yields 124 days. McClamma v. Commissioner, supra at 757-758. See and compare Thompson v. Commissioner, 84 T.C. 645">84 T.C. 645, 648-649 (1985). However, here, the bankruptcy proceeding is still pending. Therefore, the 124-day period for filing a petition with this Court will not commence to run until the earliest of the time the case is closed by the Bankruptcy Court, the time the case is dismissed by the Bankruptcy Court or, if the case is under chapter 13 of Title 11, the time a discharge is granted or denied by the Bankruptcy Court, or until the bankruptcy judge chooses to lift the stay. 11 U.S.C. sec. 362(c) and (d) (1982). On the Court's own motion, this case will be dismissed for lack of jurisdiction. An appropriate order of dismissal for lack of jurisdiction will be entered. Footnotes1. Unless otherwise indicated, all section references are to the Internal Revenue Code of 1954, as amended and in effect for the years in issue.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622426/	Jack J. and Esther L. Barton v. Commissioner#&Barton v. CommissionerDocket No. 3255-67.United States Tax CourtT.C. Memo 1969-46; 1969 Tax Ct. Memo LEXIS 251; 28 T.C.M. (CCH) 261; T.C.M. (RIA) 69046; March 10, 1969, Filed 251 Aleksandrs V. Laurins, for the respondent. SCOTT Memorandum Opinion SCOTT, Judge: Respondent determined a deficiency in petitioners' income tax for the calendar year 1965 of $1,266.88 and an addition to tax under section 6653(a), I.R.C. 1954, in the amount of $63.34. The issues for decision are: (1) Whether petitioners are entitled to claimed deductions of $7,395.19 for business expenses. (2) Whether petitioners are liable for the 5 percent addition to tax under section 6653(a), I.R.C. 1954. Petitioners did not appear when this case was called for trial but by letter dated January 24, 1969, requested that the case be submitted on the pleadings and the stipulation of facts executed by the parties and filed with the Court on January 21, 1969. Respondent appeared by counsel when the case was called for trial and did not object to submission of the case on the basis of the pleadings and the stipulation of facts. The facts are found as stipulated. Petitioners Jack J. Barton and Esther L. Barton, husband and wife, resided in Fort Worth, Texas on the date of the filing of the petition in this case. Petitioners252 filed a joint Federal income tax return for the calendar year 1965 with the district director of internal revenue at Dallas, Texas. This return contained a schedule C, "Profit (or Loss) from Business or Profession" on which appeared the statement that the principal business of petitioner Jack J. Barton is Consulting Engineer. The schedule C showed gross receipts of $6,075.00 and total costs of $7,395.19 with a resulting loss of $1,320.19. Of the amount of deductions claimed by petitioner, the amount of $7,132.85 was listed as travel expenses on a form 2106, "Statement of Employee Business Expenses." 262 During the taxable year 1965 petitioner Jack J. Barton was employed as follows: PeriodEmployed atJanuary 1 to March 30H.K. Porter Co. Antioch, CaliforniaMarch 30 to June 15Brown Rubber Co. Lafayette, IndianaJune 15 to October 15Zimmer Paper Prod- ucts, Inc.1450 East 20th Street Indianapolls, IndianaOctober 15 to De- cember 31UnemployedDuring the taxable year 1965 petitioners maintained the following residences: PeriodResidenceJanuary 1 to March 30102 W. 20th Street Antioch, CaliforniaMarch 30 to Septem- ber 30R.R. No. 10 Road 26 West West Lafayette, IndianaSeptember 30 to De- cember 31Charleston Apartments Indianapolis, Indiana253 Zimmer Paper Products, Inc., provided petitioner Jack J. Barton with a desk and office space for his business activities in behalf of Zimmer Paper Products, Inc. During the period from July 1, 1965 to September 30, 1965, petitioner Jack J. Barton drove each workday in his automobile from his residence in Lafayette, Indiana to the premises of Zimmer Paper Products, Inc., Indianapolis, Indiana. The distance between Lafayette, Indiana and Indianapolis, Indiana is 51 miles. During the period July 1, 1965 until September 30, 1965 petitioner Jack J. Barton spent an average workday in the following activities: Transportation to Indianapolis1.5-1.75 hoursBreakfast (en route).5Work on premises8.0Lunch1.0Transportation to Lafayette1.5-1.75Dinner (en route) 1.5Total14.0-14.5 hoursDuring the period from July 1, 1965 until September 30, 1965, petitioner Jack J. Barton returned on workdays to his Lafayette, Indiana residence only to obtain necessary sleep. Respondent in his notice of deficiency disallowed petitioner's claimed deduction of expenses of $7,395.19 with the following explanation: It is determined that the items listed below [the254 various items of expenses claimed by petitioner totaling $7,395.19] which you claimed as employee expenses and/or business expenses sustained in your engineering consultant activities are disallowed for lack of substantiation that the deductions claimed were actually incurred and paid in 1965 and for lack of proof that the deductions claimed constituted ordinary and necessary employee or business expenses rather than personal living cost. Accordingly your taxable income is increased by $7,395.19. The only expenses which are shown by the evidence in this case to have been incurred by petitioner Jack J. Barton during the year 1965 are those in driving each workday for a period of 3 months a round trip of approximately 102 miles to his work at Zimmer Paper Products, Inc., and the cost in an unstated amount of the breakfasts and dinners he ate on his way to and from his work. There is nothing in the record to indicate that these expenses were business expenses and not personal living expenses. Commuting expenses are personal expenses and not business expenses. Clinton H. Mitchell, 42 T.C. 953">42 T.C. 953, 970 (1964) and cases there cited. Petitioners have totally failed to show that*255 any portion of the deductions claimed by Jack J. Barton as business expenses is properly deductible. Petitioners have also failed to show that some part of their underpayment of tax was not due to negligence or intentional disregard of rules and regulations. Decision will be entered for respondent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622428/	MARK ROBERT HADDON, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentHaddonDocket No. 15684-91United States Tax CourtT.C. Memo 1993-7; 1993 Tax Ct. Memo LEXIS 16; 65 T.C.M. (CCH) 1714; January 7, 1993, Filed 16 Decision will be entered for respondent. Mark Robert Haddon, pro se. For Respondent: Elaine Sierra. NAMEROFFNAMEROFFMEMORANDUM OPINION NAMEROFF, Special Trial Judge: This case was heard pursuant to the provisions of section 7443A(b)(3) and Rules 180-182. 1 Respondent determined a deficiency in petitioner's Federal income tax for 1985 in the amount of $ 1,938, plus additions to tax under section 6651(a)(1) in the amount of $ 476.50, section 6653(a)(1) 2 in the amount of $ 96.90, section 6653(a)(2) in the amount of 50 percent of the interest due on the entire deficiency, and section 6654(a) in the amount of $ 108. 17 Petitioner does not dispute the amount of his tax liability or that he failed to pay estimated taxes during 1985. The issues to be decided are: (1) Whether petitioner filed a tax return for the taxable year 1985 and paid his tax liability in full, and (2) whether petitioner is liable for the additions to tax. Some of the facts have been stipulated and are so found. The stipulation of facts and attached exhibits are incorporated herein by this reference. Petitioner resided in La Verne, California, at the time of the filing of the petition in this case. Petitioner bears the burden of showing that respondent's determinations are erroneous. Rule 142(a); . During 1985, petitioner was a 50 percent partner in a partnership called One Day Radiator Service (hereafter referred to as One Day), a car radiator repair business. In addition to being a partner in One Day, petitioner also worked at One Day. One Day filed a Form 1065 information return for 1985 on April 15, 1986, reporting petitioner's distributive share of ordinary income as $ 9,339.50. For 1985, petitioner also received wages in the amount of $ 330. 18 Petitioner testified that One Days's accountant, Mr. Thomas Talcott, prepared his individual return and simultaneously delivered both his individual return and the partnership return to One Day. As petitioner was working at One Day, he received the return upon delivery. Subsequently, petitioner allegedly signed the return, attached a check for $ 1,938 drawn on his Bank of Arizona3 account, and mailed the return to respondent on April 15, 1986 (the same day the partnership return was mailed). Petitioner did not place the return in a mailbox; rather, it was allegedly part of the mail the mailman picked up on his daily collection from One Day. Thus, petitioner contends that he timely filed his return and paid the taxes owed to the Federal government. Respondent's transcript of petitioner's 1985 account, dated June 21, 1992, indicated that no return or payments were received from petitioner for the 1985 tax year. Respondent's19 notice of deficiency has the presumption of correctness. Although petitioner firmly believes he filed a timely tax return for 1985, petitioner failed to present any documentary evidence, such as cancelled checks or bank statements, which would substantiate his claimed payment to respondent.4 Moreover, petitioner also failed to present copies of the return allegedly filed or convincing proof of such alleged filing. On this record, we must conclude that petitioner's uncorroborated testimony fails to satisfy his burden of proof. Accordingly, petitioner is liable for the deficiency in tax. 20 Section 6651(a)(1) provides for an addition to tax in case of failure to file an income tax return on the date prescribed therefor, unless it is shown that such failure is due to reasonable cause and not willful neglect. . Petitioner's 1985 Federal income tax return was due April 15, 1986. As we have found petitioner failed to timely file his 1985 tax return and no reasonable cause for the failure to timely file has been shown, the addition to tax under section 6651(a)(1) is sustained. Section 6653(a)(1) and (2) impose additions to tax for negligence or intentional disregard of rules or regulations. Negligence, under section 6653(a), is the lack of due care or the failure to do what a reasonable and ordinarily prudent person would do under the circumstances. . Petitioner also has the burden of proof on this issue. . We have held that the failure to file a return without reasonable cause is a prima facie case of negligence. ,21 affd. . Accordingly, in view of the fact that we have held that petitioner failed to timely file his 1985 return without reasonable cause, it follows that he is also liable for the additions to tax for negligence. Finally, section 6654(a) imposes an addition to tax for any underpayment of estimated tax by an individual. Petitioner did not file a return for 1985 and conceded that he did not make any prepayments of tax, either through withholding or estimated quarterly tax payments during 1985. Petitioner has failed to show that he falls within any of the exceptions provided for in section 6654(e). See . We therefore sustain the addition to tax under section 6654(a). To reflect the foregoing, Decision will be entered for respondent. Footnotes1. All section references are to the Internal Revenue Code in effect for the year at issue. All Rule references are to the Tax Court Rules of Practice and Procedure.↩2. In the notice of deficiency, respondent erroneously determined additions to tax under sec. 6653(a)(1)(A) and (B). This section was first applicable to returns the due date for which (determined without regard to extensions) was after December 31, 1986. The applicable negligence section for 1985 is sec. 6653(a)(1) and (2).↩3. According to petitioner, the Bank of Arizona was subsequently acquired by the Bank of America.↩4. Moreover, petitioner was granted a continuance to another trial calendar so as to give him an opportunity to subpoena his bank records to substantiate his claimed payment to respondent. On December 3, 1992, the parties informed the Court that petitioner was unable to obtain additional bank records and that no further trial was necessary. Accordingly, the record was closed on that date.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622429/	Andrew O. Stilwell and Charlotte C. Stilwell, Petitioners, v. Commissioner of Internal Revenue, RespondentStilwell v. CommissionerDocket No. 5080-64United States Tax Court46 T.C. 247; 1966 U.S. Tax Ct. LEXIS 101; May 17, 1966, Filed 101 Decision will be entered for the respondent. Petitioner husband and one Forsythe terminated their partnership. All of the partnership's assets were distributed to Forsythe, who assumed all of its liabilities. Held, Forsythe's assumption of his partner's share of the partnership liabilities constituted a distribution in liquidation within the meaning of sections 731 and 736, I.R.C. 1954, and loss realized on such liquidation was capital loss under section 741, I.R.C. 1954. Donald S. Day, for the petitioners.Ernest Honecker, for the respondent. Tannenwald, Judge. TANNENWALD247 Respondent determined a deficiency in the income tax of the petitioners for the calendar year 1962 in the amount of $ 3,549.06. Petitioners have conceded the inclusion of certain additional items of income. The sole remaining issue is whether petitioner husband suffered a capital loss or ordinary loss from his failure to recover his capital account upon the dissolution of a partnership during the taxable year.248 FINDINGS OF FACTThis is a fully stipulated case. The stipulation of facts, together with the exhibits attached thereto, is incorporated herein by this reference.Andrew O. Stilwell and Charlotte C. Stilwell are husband and wife and filed a joint Federal income tax return for the calendar year 1962 with the district director of internal revenue, Buffalo, N.Y. Charlotte C. Stilwell is a party to this proceeding only because she signed the joint return. 104 Any reference to the petitioner herein shall be deemed to refer to Andrew O. Stilwell.On September 1, 1954, petitioner entered into an agreement in writing with one Salem Forsythe (hereinafter referred to as Forsythe), whereby they formed a partnership under the name of Forsythe & Stilwell Co. The business of the partnership was to distribute fabricated building materials, represent various companies as selling agents, and act as wholesalers.Petitioner's $ 10,000 capital contribution represented the partnership's total initial capital. Forsythe contributed no cash or other assets. Forsythe was to be paid, from the annual profits of the business, the sum of $ 9,600 a year at the rate of $ 800 per month, "which shall be in the nature of a drawing account against Forsythe's share of the profits." In the event that the annual profits were insufficient, the "drawing account shall be paid out of the capital of the partnership." The agreement further provided that the balance of profits in excess of Forsythe's drawing account, after certain adjusting distributions, was to be paid two-thirds to Forsythe and one-third to petitioner.The partnership agreement was amended on January 1, 105 1958, and on January 1, 1959, to provide an increased drawing account to Forsythe and a drawing account to petitioner. The January 1, 1958, amendment modified the provisions governing dissolution so as to provide that, after the $ 10,000 had been repaid to Stilwell, any unpaid balance of the weekly drawing accounts for the year in which dissolution takes place was to be distributed to each partner. Any remaining profits were to be distributed in accordance with the basic ratio, which was changed by the amendment of January 1, 1959, to 75 percent to Forsythe and 25 percent to petitioner. The provision changing the ratio contained the following sentence: "As provided in the preceding paragraph, the drawing account paid a partner shall be charged against his share of the profits or his share in the partnership assets."Neither the agreement nor any of the amendments thereto contained any provision expressly dealing with excess withdrawals by either of the partners.249 In January 1962, Forsythe and petitioner in fact ceased doing business together as partners. By agreement dated October 1, 1962, they mutually agreed to terminate and dissolve the partnership. In accordance 106 with the agreement, all partnership assets were distributed to Forsythe. Forsythe assumed and agreed to pay all of the debts of the partnership and to indemnify, defend, and hold petitioner harmless from any payments or claims as a result of any indebtedness of the partnership.The balance sheet of the partnership immediately prior to dissolution on October 1, 1962, showed the following:AssetsLiabilitiesCash$ 24.59Accounts payable$ 32,703.74 Notes and accountsMortgages, notes19,087.00 receivable10,785.70Partners' capital accounts(37,566.35)Inventory900.00Fixed depreciable assets(furniture and fixtures)2,514.10Total14,224.39Total14,224.39 The item of $ 37,566.35 listed on the balance sheet as a deficit in the partners' capital accounts consisted of a debit balance against Forsythe of $ 61,483.49 and a credit balance in favor of petitioner of $ 23,917.14.At the time of the execution of the dissolution agreement, petitioner executed and delivered to Forsythe a general release in standard form.Petitioner held his interest in the partnership for more than 6 months. On October 1, 1962, immediately prior to dissolution, 107 the basis of petitioner's interest was $ 23,917.14 plus his share of the partnership liabilities.OPINIONRespondent has conceded that petitioner suffered a deductible loss from the termination of the partnership in 1962. 1109 Respondent takes the position, however, that the 1962 transaction between petitioner and Forsythe constituted a sale by petitioner of his partnership interest rather than a distribution in liquidation of the partnership and that, consequently, petitioner is limited to a capital loss under section 250 741. 2 We disagree with respondent on this score. The October 1, 1962, agreement stated that "the partners desire to terminate and dissolve said partnership" and that "The parties hereto hereby terminate and dissolve the partnership." It was further provided that "all partnership assets" be transferred to Forsythe and that he pay the indebtedness due the bank and "all other indebtedness of the partnership." There is not a single phrase which usually accompanies a sale, such as "does hereby transfer, set over, bargain, sell, assign and convey." Wilkinson v. United States, 177 F. Supp. 101 (S.D. Ala. 1959), heavily relied108 upon by respondent, is clearly distinguishable on this basis. Cf. David A. Foxman, 41 T.C. 535 (1964), affd. 352 F. 2d 466 (C.A. 3, 1965); Charles F. Phillips, 40 T.C. 157">40 T.C. 157 (1963); Virgil L. Beavers, 336">31 T.C. 336 (1958); B. Howard Spicker, 26 T.C. 91">26 T.C. 91 (1956).Nor does the fact that petitioner received "consideration" by being relieved of his share of the partnership liabilities require a different result. Such "consideration" may be equally present when a partnership is liquidated. Carried to its logical conclusion, respondent's argument would require us to hold that there was a sale in almost every situation involving the liquidation of a two-man partnership. Respondent's own regulations under section 741 do not go this far; they simply provide that the section is applicable "to the transferor partner in a 2-man partnership when he sells his interest110 to the other partner." (Emphasis added.) Sec. 1.741-1(b), Income Tax Regs. We hold that petitioner did not effect a "sale" of his partnership interest to Forsythe within the meaning of section 741.Such a conclusion does not, however, dispose of the matter. Section 736(b)(1) provides that "Payments made in liquidation of the interest of a retiring partner * * * shall * * * be considered as a distribution by the partnership," subject to certain exceptions not here material. Section 731(a) sets forth the consequences of a distribution by the partnership as follows:SEC. 731. EXTENT OF RECOGNITION OF GAIN OR LOSS ON DISTRIBUTION.(a) Partners. -- In the case of a distribution by a partnership to a partner -- (1) gain shall not be recognized to such partner, except to the extent that any money distributed exceeds the adjusted basis of such partner's interest in the partnership immediately before the distribution, and(2) loss shall not be recognized to such partner, except that upon a distribution in liquidation of a partner's interest in a partnership where no 251 property other than that described in subparagraph (A) or (B) is distributed to such partner, loss shall be111 recognized to the extent of the excess of the adjusted basis of such partner's interest in the partnership over the sum of -- (A) any money distributed, and(B) the basis to the distributee, as determined under section 732, of any unrealized receivables (as defined in section 751(c)) and inventory (as defined in section 751(d) (2)).Any gain or loss recognized under this subsection shall be considered as gain or loss from the sale or exchange of the partnership interest of the distributee partner.If the transaction herein is covered by the last paragraph of section 731(a), the loss will be a capital loss under section 741.Respondent argues that Forsythe's assumption of petitioner's share of the partnership liabilities constituted a "distribution" within the meaning of section 731 and that section 731(a) in conjunction with section 741 requires a finding of capital loss. Petitioner, on the other hand, seeks to avoid the effect of these sections by arguing that Forsythe's assumption of petitioner's share of the partnership liabilities did not constitute a "distribution." We hold for respondent.Section 752(a) provides that "Any increase in a partner's share of the liabilities112 of a partnership * * shall be considered as a contribution of money by such partner to the partnership." In other words, the basis of his partnership interest is increased. And section 752(b) provides that "Any decrease in a partner's share of the liabilities of a partnership * * * shall be considered as a distribution of money to the partner by the partnership." These two provisions are carried into the regulations dealing with the determination of gain or loss in connection with payments to a retiring partner. See sec. 1.736-1(a)(2), sec. 1.736-1(b), and sec. 1.752-1, Income Tax Regs. Since a partner's share of the partnership liabilities is added to the basis of his partnership interest, it necessarily follows that an assumption of that share by the partnership or other partner or partners must constitute a distribution. See A.L.I., Joint Committee on Continuing Legal Education, Federal Income Taxation of Partners and Partnerships 203 (1957). Otherwise, a partner would have a loss which would at least in part be fictitious in the event of the disposition of his partnership interest.Petitioner's reliance on Gaius G. Gannon, 16 T.C. 1134">16 T.C. 1134 (1951),113 and Palmer Hutcheson, 17 T.C. 14">17 T.C. 14 (1951), is misplaced. There is no indication in either case that there were any partnership liabilities from which the taxpayer was relieved when he withdrew from the law partnership. Consequently, this Court held in each case that the taxpayer received nothing for his partnership interest and that the resulting "forfeiture" gave rise to a deductible ordinary loss. Moreover, these cases were decided under the Internal Revenue Code of 1939, which contained extremely sparse provisions dealing with the 252 taxation of partnerships. By way of contrast, the partnership sections of the Internal Revenue Code of 1954 were expressly designed to deal with this inadequacy and to provide "the first comprehensive statutory treatment of partners and partnerships in the history of the income tax laws." See H. Rept. No. 1337, 83d Cong., 2d Sess., p. 65 (1954). We hold that petitioner did not suffer a "forfeiture" 3 and that Forsythe's assumption of petitioner's share of the partnership liabilities constituted a "distribution" to him under section 731 which, in turn, resulted in a long-term capital loss under section 741. *114 See A.L.I., supra at 98-99.Decision will be entered for the respondent. Footnotes1. It is not entirely clear from the record that petitioner in fact suffered such a loss. It would appear that the loss resulted from Forsythe's excess withdrawals. Absent any agreement to the contrary between the partners, Forsythe would be obligated to refund such excess. See 1 Rowley, Partnerships 465 (2d ed. 1960). Any such repayment would have provided sufficient funds to pay the debts of the partnership and to restore petitioner's capital account, with the possible exception of the unpaid drawing account of Forsythe for the month of January 1962. Furthermore, Forsythe's excess withdrawals occurred in prior taxable years. If he had no obligation of repayment, they would appear to be guaranteed payments properly chargeable as an expense of the partnership in those years, thereby decreasing petitioner's share of the profits or giving rise to a loss on the part of petitioner during those years. See sec. 1.707-1(c), Income Tax Regs.↩2. All references are to the Internal Revenue Code of 1954.SEC. 741. RECOGNITION AND CHARACTER OF GAIN OR LOSS ON SALE OR EXCHANGE.In the case of a sale or exchange of an interest in a partnership, gain or loss shall be recognized to the transferor partner. Such gain or loss shall be considered as gain or loss from the sale or exchange of a capital asset, except as otherwise provided in section 751↩ (relating to unrealized receivables and inventory items which have appreciated substantially in value).3. We expressly refrain from deciding whether an absolute forfeiture would give rise to a capital or ordinary loss under the 1954 Code. Cf. Larry E. Webb, 23 T.C. 1035">23 T.C. 1035 (1955), decided under the 1939 Code. Compare Little, Federal Income Taxation of Partnerships, 155 (1957 supp.), with Rev. Rul. 66-93, 1 C.B. 165">1966-1 C.B. 165↩.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622430/	ERNEST J. GRABOSKE AND BARBARA J. GRABOSKE, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentGraboske v. CommissionerDocket Nos. 13731-82, 17514-83.1United States Tax CourtT.C. Memo 1987-262; 1987 Tax Ct. Memo LEXIS 262; 53 T.C.M. (CCH) 896; T.C.M. (RIA) 87262; May 26, 1987. 262 Petitioners established a local chapter of the Universal Life Church, Inc. Bank accounts were opened in the local chapter's name, and amounts were withdrawn from accounts to pay for petitioners' personal expenses. Petitioners lived in a motor home which they moved from city to city due to petitioner-husband's employment as a contract engineer. Held, petitioners are not entitled to charitable deductions for amounts contributed to their local chapter of the Universal Life Church, Inc.Held further, petitioners are not entitled to deduct living expenses purportedly incurred while away from home. Held further, petitioner-husband is entitled to deduct contributions to an Individual Retirement Account for the years 1978 and 1979; held further, petitioners are liable for an addition to tax pursuant to sec. 6653(a); held further, petitioners are not liable for damages pursuant to sec. 6673. Peter Stromer, for the petitioners. Russell K. Stewart, for the respondent. WHITAKERMEMORANDUM FINDINGS OF FACT AND OPINION WHITAKER, Judge: Respondent determined deficiencies in, and additions to, petitioners' Federal income tax for the years and in the amounts indicated: Addition to TaxPetitionerYearDeficiencySection 6653(a) 2263 Ernest J. andBarbara J. Graboske1978$6,254$313Ernest J. Graboske197914,064703Ernest J. Graboske198022,1711,109Additionally, respondent made a motion at trial for damages pursuant to section 6673. The issues for decision are: (1) Whether petitioners are entitled to charitable deductions for amounts contributed to Universal Life Church, Travelers (ULC, Travelers); (2) whether petitioners incurred and properly deducted traveling expenses while away from home in the pursuit of a trade or business; (3) whether Ernest J. Graboske (Graboske) was entitled to deduct contributions to an Individual Retirement Account (IRA) for the years 1979 and 1980; (4) whether petitioners are liable for an addition to tax for negligence or intentional disregard of rules and regulations pursuant to section 6653(a); and (5) whether petitioners are liable for damages pursuant to section 6673. Some of the facts have been stipulated and are found accordingly. The stipulation of facts and attached exhibits are incorporated herein by this reference. Petitioners Graboske and Barbara J. Graboske (Mrs. Graboske), husband and wife, were married 264 throughout the years at issue. 3 Mrs. Graboske resided in, and Graboske stated his legal residence as being, Seattle, Washington, at the time their petition for the taxable year ending December 31, 1978, was filed. Graboske stated his legal residence as being Wilkes-Barre, Pennsylvania, at the time his petition for the taxable years ending December 31, 1979, and December 31, 1980, was filed. 4265 Petitioners filed a joint individual income tax return for 1978, and Graboske filed as married filing separately for 1979 and 1980. On September 15, 1977, petitioners executed a Charter Agreement with the International Headquarters of Universal Life Church, Inc., Modesto, California (ULC, Inc.). Pursuant to said Agreement, charter number 20646 was given by ULC, Inc. to Graboske, Mrs. Graboske, and Henry C. Graboske as Pastor, Secretary, and Treasurer, respectively, of ULC, Travelers, a local chapter of ULC, Inc. As members of ULC, Travelers' governing body, petitioners agreed to abide by all church rules and Federal, state, and local corporate laws. Upon issuance of the Charter, ULC, Inc. agreed to furnish ULC, Travelers with a nonprofit status 266 and a Federal tax-exempt number for filing with the Internal Revenue Service. On April 10, 1978, Graboske opened a checking account for ULC, Travelers with the San Diego Trust & Savings Bank. On the account application, ULC, Travelers was listed as an unincorporated association and reported as its tax identification number the tax-exempt number provided by ULC, Inc. Graboske signed the application "Rev. Ernest J. Graboske, Pres." and gave his residential address as ULC, Travelers' business address. On August 25, 1978, Graboske opened a savings account for ULC, Travelers with San Diego Trust & Savings Bank. Graboske again gave his residential address as ULC, Travelers' business address, and gave ULC, Inc.'s tax-exempt number as ULC, Travelers' tax identification number. Stating his title as either president or pastor, Graboske was the only person authorized to make withdrawals from either account. Pursuant to the Charter Agreement, Graboske prepared and submitted to ULC, Inc. quarterly reports indicating services held, attendance, donations, and disbursements. The reports indicated that services were held between 9 and 17 times a quarter, and that an average of 5 to 10 people 267 attended each service. The donations stated on the report included all donations to ULC, Travelers, but Graboske was often the only contributor to the accounts. Graboske would deposit cash or a paycheck to one of the ULC, Travelers' accounts and would receive a cash receipt from ULC, Travelers signed by Henry Graboske or signed by Graboske or Mrs. Graboske for Henry Graboske as Treasurer. Additionally, Graboske maintained a cash fund of approximately $500 that was used for miscellaneous expenses. All donations for which Graboske received a receipt from ULC, Travelers were either deposited in the accounts or placed in the cash fund. On December 29, 1980, petitioners donated by warranty deed to ULC, Travelers real property situated on Camano Island, Washington. 5 Graboske did not receive a receipt from ULC, Travelers for the donated realty. Pursuant to a written request made by Graboske on March 29, 1982, ULC, Inc. issued annual receipts for "donations" made by Graboske to ULC, Travelers for the 268 years 1978 and 1980 in the amounts of $12,477 and $27,260, respectively. Graboske had previously received a receipt for 1979 in the amount of $13,896. Total annual contributions to ULC, Travelers and Graboske's annual contributions to ULC, Travelers as reflected in ULC, Inc.'s annual receipts, ULC, Travelers' quarterly reports, and ULC, Travelers' cash receipts are set forth below. ULC, Inc.'sULC, Travelers'ULC, Travelers'YearAnnual ReceiptsQuarterly ReportsCash Receipts1978$12,477$14,600 $13,935 197913,89614,50013,89719806 27,26016,55013,810The ULC, Travelers' quarterly reports indicated disbursements for housing allowance, vehicle allowance, recreation, recruiting, and other administrative expenditures. The housing allowance for each quarter of the years before us was $1,500. Graboske used the housing allowance to maintain a house in Pennsylvania owned by Graboske, his mother, and brother and occupied by his mother. Additionally, the housing allowance was used to make payments on a truck and 269 trailer purchased by Graboske while living in San Diego and Seattle. The vehicle allowance for each quarter was $450, and was paid to Mrs. Graboske for the maintenance of petitioners' vehicles. The recruiting and recreation disbursements were for picnics, camping trips, food, drinks, frisbees, baseballs, and sleeping bags. Additional checks were drawn upon the ULC, Travelers' account by Graboske for the payment of his propane gas bill. Graboske did not have a personal checking account during the time he lived in San Diego. Consequently, he would write checks on the ULC, Travelers' account for his personal expenses and ostensibly reimburse ULC, Travelers by replacing money in the cash fund. The Charter Agreement listed ULC Travelers' address as Graboske's residential address in Chula Vista, California. ULC, Travelers was "scattered across the country" in 1978, with the church being physically located in San Diego, St. Louis, Los Angeles, Texas, and Tennessee. The church operated primarily in San Diego and Seattle in 1979, and mainly in Seattle in 1980. Services were held in the 26-foot motor home in which Graboske lived. The "dining area" where services were held was approximately 270 6 feet by 8 feet and could accommodate six adults. The driver's and co-pilot's chairs were adjacent to the dining area, and could accommodate several additional people. The 31-foot trailer was purchased as a "traveling church" and was used for part of the time in San Diego and Seattle. Graboske transferred the funds held in the San Diego Trust & Savings Bank accounts to the Seattle First National Bank at the time he moved from San Diego to Seattle for purposes of employment. Utilization of the ULC, Travelers' funds after their transfer to the Seattle accounts was similar to the use of the funds in San Diego. All checks drawn upon the San Diego Trust & Savings Bank account were signed by Graboske, and all withdrawals made from the savings account were executed by him. ULC, Inc. did not have an interest in, or control over, either the San Diego or Seattle accounts and did not make any withdrawals from either account during the years at issue. All decisions regarding the ULC, Travelers' funds were made by Graboske individually or in consultation with his wife and brother as members of ULC, Travelers' governing body. In January 1978, Graboske commenced employment with the Lancea Corporation 271 (Lancea) in Chula Vista, California. Graboske was employed as a senior design engineer, and did contract work for Rohr Industries Inc. designing airplane engine nacelles. Graboske was in Texas at the time he applied to Lancea for employment, and had last been employed by the McDonnell-Douglas Co., in St. Louis, Missouri. In addition to his base salary, Graboske was paid $10 per day, 7 days a week, as partial compensation for living expenses. During his period of employment with Lancea, Graboske lived in his motor home in which the ULC, Travelers' services were held. At the time Graboske was hired by Lancea, he did not know how long his employment with the company would last. Graboske was subsequently laid off by Lancea on June 8, 1979. Prior to his employment with Lancea, Graboske had worked for other aeronautical engineering firms in Missouri, California, Georgia, and numerous cities in Washington. On June 16, 1979, Graboske began employment with Kirk-Mayer Inc. (Kirk-Mayer), in Seattle, Washington. During the remainder of 1979 and through a portion of 1982, Graboske was employed as a structural engineer by Kirk-Mayer. Kirk-Mayer was working as a subcontractor of the Boeing 272 Corporation, and Graboske was designing doors and floors for the Boeing 757 airplane. Graboske continued to work for Kirk-Mayer through October or November 1982, although he was laid off four or five times during this period. Pursuant to Graboske's employment agreement with Kirk-Mayer, Graboske was to work for Boeing on an hourly basis. Kirk-Mayer made no representations as to the duration of employment and reserved the right to cancel the agreement at any time. Graboske was paid $16 per day, 7 days a week, in living expenses during the period that he was continuously employed with Boeing. To qualify for the per diem, Graboske was required to maintain a permanent residence at least 50 miles from the Boeing facilities, in addition to temporary living quarters near his place of employment. Graboske executed similar employment agreements with Kirk-Mayer on February 22, 1980, and June 20, 1980. The latter agreements each were amended to provide for a 6-month assignment. On December 22, 1976, Graboske opened an IRA account with the California Federal Savings and Loan Association. Graboske's initial deposit was for $1,500, and additional $1,500 deposits were made by Graboske during 273 1979 and 1980. Graboske's employment agreement with Lancea in 1979, and Kirk-Mayer in 1979 and 1980 did not provide pension plans of any kind. OPINION The first issue for decision is whether petitioners are entitled to charitable deductions for amounts contributed to ULC, Travelers. To secure a deduction for a charitable contribution under section 170(a), (b)(1), and (c), petitioners must establish that they have made an unconditional gift to a qualified entity. See De Jong v. Commissioner,309 F.2d 373">309 F.2d 373, 376-379 (9th Cir. 1962), affg. 36 T.C. 896">36 T.C. 896 (1961). Qualified entities under section 170 are essentially those organizations that qualify for an exemption from tax under section 501(c)(3). Although ULC, Inc. was at one time held to be a qualified entity, 7 that status has not been extended to local chapters such as the one operated by petitioners. Pursuant to section 170(c), charitable contribution is defined as follows: (c) Charitable Contribution Defined. -- For purposes of this 274 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 -- * * * (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; * * The burden of proving entitlement to a deduction is on petitioner. Welch v. Helvering,290 U.S. 111">290 U.S. 111 (1933); Rule 142(a). Thus, petitioners must show that all requirements of section 170 have been satisfied. After considering the record herein, we conclude that petitioners have failed to carry their burden of proof. Section 170(a) requires that a charitable contribution actually be made within the taxable year for which a deduction is sought. It is well established that where a taxpayer retains dominion and control over the purportedly contributed property, no charitable contribution or gift has been made. See, e.g., Davis v. Commissioner,81 T.C. 806">81 T.C. 806 (1983), affd. without published opinion 767 F.2d 931">767 F.2d 931 (9th Cir. 1985); Aufiero v. Commissioner,43 B.T.A. 753">43 B.T.A. 753 (1941). Graboske 275 was the only individual authorized to make withdrawals from ULC, Travelers' San Diego Trust & Saving's Bank accounts, and was the only individual to have in fact drawn upon either the San Diego or Seattle accounts. ULC, Inc. had no interest in, or control over, the funds at any time. By virtue of his signatory power over ULC, Travelers' accounts, Graboske retained control of funds deposited in the accounts, and consequently did not make a charitable contribution of them. Additionally, petitioners have failed to establish that ULC, Travelers was operated exclusively for exempt purposes as required by section 170(c)(2)(B). The services held in petitioners' motor home, and the picnicking and camping trips undertaken ostensibly for recruiting and recreational purposes, fail to convince us that ULC, Travelers was operated exclusively for exempt purposes. Finally, it is clear that some part of ULC, Travelers' assets inured to petitioners' benefit. The housing allowance was used to maintain Graboske's house in Pennsylvania while he lived in either San Diego or Seattle, the automobile allowance was used to maintain petitioners' automobiles, and various amounts were withdrawn from the accounts 276 to pay for propane gas and other personal items. Petitioners have not shown that their case is any different from the numerous other cases involving local chapters of ULC, Inc., in which taxpayers failed to prove that the deductions claimed by them were qualified charitable contributions. Graboske's control over the funds allegedly contributed and the inurement of the use of those funds to petitioners' personal benefit precludes deductibility. See, e.g., Davis v. Commissioner,supra at 815-819. Based on the foregoing, we conclude that petitioners have failed to meet their burden of proof with respect to charitable contributions purportedly made to ULC, Travelers, and thus deny any such deductions under section 170. The next issue for decision is whether petitioners incurred and properly deducted traveling expenses while away from home in the pursuit of a trade or business. The question turns upon whether Graboske was "away from home" when the expenses were incurred; specifically, we must determine whether Wilkes-Barre, Pennsylvania, was Graboske's tax home. Section 162(a)(2) allows a taxpayer to deduct ordinary and necessary traveling expenses, including amounts expended for lodging, 277 paid or incurred while away from home in the pursuit of a trade or business. The purpose of section 162(a)(2) is to mitigate the burden of the taxpayer who, because of the exigencies of his trade or business, must maintain two places of abode and thereby incur additional and duplicate living expenses. James v. United States,308 F.2d 204">308 F.2d 204 (9th Cir. 1962); Kroll v. Commissioner,49 T.C. 557">49 T.C. 557, 562 (1968); Verner v. Commissioner,39 T.C. 749">39 T.C. 749 (1963). An obvious precondition to a taxpayer's being away from home is that he must first have a home from which he can be away. Bochner v. Commissioner,67 T.C. 824">67 T.C. 824, 828 (1977); James v. United States,supra.If a taxpayer has no such permanent residence, then he is an itinerant for purposes of section 162(a)(2), and his tax home will be either his principal place of employment or the location where he physically resides. Whether petitioner had a permanent tax home so as to be entitled to deduct expenses under section 162(a)(2) is a factual question on which petitioner bears the burden of proof. Welch v. Helvering,290 U.S. 111">290 U.S. 111 (1933); Rambo v. Commissioner,69 T.C. 920">69 T.C. 920, 923-924 (1978); Rule 142(a). Graboske contends that Wilkes-Barre was his home 278 during the years in issue and that the claimed expenses were incurred while temporarily away from home due to business exigencies. Respondent's disallowance of the deductions is based upon the determination that petitioners were itinerants without a permanent place of residence, and that the expenses were incurred for personal, not business reasons. We decide this issue for respondent. 8 As a contract engineer, Graboske lived and worked in seven different cities on the eight jobs held prior to his move to Chula Vista. None of these prior jobs were in the State of Pennsylvania. Graboske's sole contact with Pennsylvania279 appears to be his joint interest in the house lived in by his mother. There is nothing in the record other than Graboske's naked assertion to suggest that his permanent residence was in Wilkes-Barre. To the contrary, it is clear that Graboske lived in either his motor home or the attached trailer throughout his employment in Chula Vista. While petitioners made payments to maintain the house in Pennsylvania, they did not otherwise incur substantial continuing living expenses anywhere other than at their home in Chula Vista or Seattle. Therefore, we conclude that, as petitioners moved so did their home. Consequently, we decide this issue for respondent. The next issue for decision is whether Graboske was entitled to an IRA deduction in the amount of $1,500 for the years 1979 and 1980. Respondent contends that Graboske was entitled to participate in a qualified employees' pension plan and therefore was precluded from participating in an IRA. Graboske maintains that he was not entitled to participate in a pension plan with either Lancea or Kirk-Mayer. We decide this issue for Graboske. Neither the offer of employment from Lancea or the employment agreement with Kirk-Mayer made 280 any mention of employee pension plans. The Lancea letter discusses wages, living expenses, insurance, holidays, and vacation allowances. The Kirk-Mayer employment agreement makes no mention of a pension plan, and expressly states "this document contains the entire agreement between the parties." Graboske testified that he was not eligible for a pension plan during this period and we find that testimony to be corroborated by the employment contracts. Given the nature of Graboske's employment as a contract engineer, the absence of a pension plan is in no way surprising. We therefore decide this issue for Graboske, and allow the IRA deductions for 1979 and 1980. The next issue for decision is whether petitioners' understatement of income tax for each of the years at issue was due to negligence or the intentional disregard of rules and regulations pursuant to section 6653(a). Petitioners bear the burden of proof on this issue. Enoch v. Commissioner,57 T.C. 781">57 T.C. 781, 802 (1972). Petitioners knowingly claimed a deduction as a charitable contribution for monies used to pay nondeductible household expenses. They are literate and intelligent adults, and as such they should have known better 281 than to deduct as a charitable contribution amounts channeled from themselves to a "church" which were then used to pay their personal living expenses. See Davis v. Commissioner,81 T.C. at 820-821. We conclude that petitioners deliberately chose to disregard the rules and regulations with respect to income taxes. Therefore, respondent's determination that petitioners are liable for additions to tax for each of the years at issue is sustained. The final issue for decision involves respondent's request for damages pursuant to section 6673. Section 6673 provides as follows: 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. Respondent orally moved for damages at the conclusion of the trial. After careful consideration of the record 282 before us, and in light of the stage of the proceedings at which respondent made his motion, we deny said motion and decide this issue for petitioners. Decisions will be entered under Rule 155.Footnotes1. On November 27, 1984, docket Nos. 13731-82 and 17514-83 were consolidated for trial, briefing, and opinion.↩2. 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.3. Pursuant to a decree of the Superior Court of Washington, petitioners' marriage was dissolved on October 22, 1981. Petitioners had executed a postnuptial agreement on June 23, 1978, setting forth the property rights and support obligations of each. Pursuant to said agreement, Graboske was obligated to provide Mrs. Graboske with the following items through the use and expenditure of his separate property: food, telephone, utilities, gasoline, medical insurance, and all expenses associated with temporary housing. Mrs. Graboske was obligated to provide the remainder of her necessities to the extent possible. ↩4. The petitions contained Graboske's and Mrs. Graboske's legal residence as of the date the petitions were filed pursuant to Rule 34(b)(1). In an affidavit subscribed and sworn to by Graboske and attached to a motion for a change of place of trial, Graboske stated that his place of residence at the time of filing the petition for 1978 was Seattle, Washington, and that he subsequently moved to Wilkes-Barre, Pennsylvania. Graboske's petition for 1979 and 1980 was executed 5 days after the motion for a change of place of trial. Consequently, Graboske's change in legal residence as stated in the petitions appears to be correct.5. On March 14, 1982, the donated realty was appraised at $22,000. There is nothing in the record to indicate the realty's value at the time it was donated by petitioners to ULC, Travelers.↩6. The ULC, Inc.'s annual receipt received by Graboske for 1980 reflects one-half of the appraised fair market value ($11,000) of the real property donated by petitioners to ULC, Travelers.↩7. The Internal Revenue Service has announced that it will no longer recognize the tax-exempt status of the Universal Life Church, Modesto, California. Announcement 84-90 (Sept. 4, 1984)36 I.R.B. 32">1984-36 I.R.B. 32↩.8. The Court has reached a similar conclusion in a growing list of cases involving contract engineers who have attempted to show attachments to their hometowns as bases for deducting their personal and living expenses under sec. 162(a)(2). See Spinks v. Commissioner,T.C. Memo. 1985-588; Lichtenberger v. Commissioner,T.C. Memo. 1985-370, affd. without a published opinion 789 F.2d 919">789 F.2d 919 (7th Cir. 1986); Deamer v. Commissioner,T.C. Memo. 1984-63, affd. per curiam 752 F.2d 337">752 F.2d 337 (8th Cir. 1985); Rohr v. Commissioner,T.C. Memo. 1982-117; Kaye v. Commissioner,T.C. Memo. 1974-111↩.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622431/	JOHN P. FODOR, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent; CARMEN M. FODOR, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentFodor v. CommissionerDocket Nos. 19153-87, 1 20320-87 United States Tax CourtT.C. Memo 1991-295; 1991 Tax Ct. Memo LEXIS 341; 62 T.C.M. (CCH) 47; T.C.M. (RIA) 91295; July 3, 1991, Filed 341 Decision will be entered under Rule 155 in docket No. 19153-87. Decision will be entered for the petitioner in docket No. 20320-87. Michael L. Eckstein and Susan J. Burkenstock, for the petitioners. Linda K. West, for the respondent. RUWE, Judge. RUWEMEMORANDUM FINDINGS OF FACT AND OPINION Respondent determined deficiencies and additions to tax in petitioners' Federal income taxes as follows:342 John P. FodorDocket No. 19153-87Additions to TaxYearDeficiencySec. 6653(b)(1) 2Sec. 6653(b)(2)Sec. 6654(a)Sec. 66611983$ 202,997$ 101,499$ 37,364$ 12,422$ 50,749 1984103,99551,99811,3806,53915,999Carmen M. FodorDocket No. 20320-87Additions to TaxYearDeficiencySec. 6653(a)(1)Sec. 6653(a)(2)Sec. 6654(a)Sec. 66611983$ 101,823$ 5,09150 percent of$ 6,197$ 25,456the interest dueon $ 101,823198450,5122,52650 percent of3,08812,628the interest dueon $ 50,512On brief, respondent conceded that petitioner Carmen M. Fodor did not receive unreported income from Nordac Manufacturing and that she is not liable for the additions to tax for underpayment of estimated taxes, substantial understatement of income tax liability, and negligence, for the years in issue. As a result, there are no deficiencies or additions to tax with respect to Carmen M. Fodor. 3343 The remaining issues for decision in each of the years in issue are: (1) Whether John P. Fodor (hereinafter petitioner) failed to report taxable income; (2) whether petitioner is liable for additions to tax under section 6653(b)(1) and (2) for underpayment of taxes due to fraud or, (3) as an alternative to fraud, whether petitioner is liable for additions to tax under section 6653(a)(1) and (2) for negligence or intentional disregard of rules and regulations; (4) whether petitioner is liable for additions to tax under section 6651(a)(1) for failure to timely file Federal income tax returns; (5) whether petitioner is liable for additions to tax under section 6654(a) for failure to pay estimated income taxes; and (6) whether petitioner is liable for additions to tax under section 6661 for substantial understatement of income tax liability. FINDINGS OF FACT Some of the facts have been stipulated and are so found. The stipulation of facts and attached exhibits are incorporated herein by this reference. During the years in issue and at the time of filing the petitions, petitioner resided in San Salvador, El Salvador, and his wife, Carmen M. Fodor, resided in LaPlace, Louisiana. Petitioner344 was a citizen of the United States, and Carmen M. Fodor was a citizen of El Salvador. Petitioner did not file Federal income tax returns for either taxable years 1983 or 1984. However, he did file income tax returns in El Salvador for these years. Carmen M. Fodor filed Federal income tax returns for taxable years 1983 and 1984, and reported income in the form of wages from River Parishes Medical Center in 1983 and 1984 and interest income in 1984. Petitioner was born in Hungary and immigrated to the United States in 1956. From 1956 to 1963, he resided in the United States, and thereafter, he resided in El Salvador. During the years in issue, petitioner was president and owned a minority interest in Almacen Signal, S.A. (Almacen), a legal entity under the laws of El Salvador. At the time of trial, Carmen M. Fodor also owned a minority interest in Almacen, but she was not involved in the operation of the business. Almacen was a licensed import company and was in the business of selling a wide variety of goods to consumers in El Salvador. Petitioner occasionally travelled to the United States to purchase goods for Almacen. In 1981 or 1982, while at a trade show in Las Vegas, 345 petitioner met John P. Straiton. Mr. Straiton was president of Nordac Manufacturing Corporation (Nordac), a Virginia corporation. Nordac manufactured and distributed military equipment, primarily "soft" military equipment. "Soft" military equipment refers to boots, field packs, ponchos, sleeping bags, etc. Prior to meeting petitioner, Nordac had not conducted any business in El Salvador. Almacen purchased soft military goods from Nordac for resale to its local El Salvador consumers. As the relationship between Mr. Straiton and petitioner developed, Mr. Straiton realized that petitioner could help Nordac establish contacts with the El Salvador government and ultimately help Nordac obtain contracts for the sale of military goods to the El Salvador government. Carmen M. Fodor's uncle is Salvadoran Army Colonel Jorge Rivera. Colonel Rivera was Chief of the Finance Department of the El Salvadoran Ministry of Defense. Petitioner helped Mr. Straiton and Nordac establish a business presence in El Salvador. Petitioner introduced Mr. Straiton to members of the local business community, advised Mr. Straiton on travel and accommodations in El Salvador, and made arrangements for Mr. 346 Straiton to join the local country club. Mr. Straiton and petitioner had an understanding that, in exchange for petitioner's assistance, petitioner would receive a portion of the profits on the government contracts that were awarded to Nordac by El Salvador. Thereafter, Nordac entered into contracts with the El Salvadoran government. Pursuant to the understanding between petitioner and Mr. Straiton, Nordac made the following payments during 1983 and 1984. Check No.DatePayeeAmount568021/7/83John Fodor$ 45,814.18575483/24/83John Fodor37,284.00575493/24/83John Fodor37,284.00575503/24/83John Fodor37,284.00575513/24/83John Fodor37,284.00575523/24/83John Fodor37,284.00575803/30/83John Fodor5,385.49579445/19/83John Fodor23,081.40589169/22/83Almacen Signal, S.A43,716.005993612/23/83Cash (given to petitioner)30,000.00Cash12/23/83-- (given to petitioner)9,900.00604342/16/84Carmen Fodor5,000.00601072/29/84Cash (given to petitioner)50,000.002354/3/84Almacen Signal, S.A26,000.00In 1983, petitioner purchased certificates of deposit with a total face value of $ 161,786.09 from the Riverlands National Bank347 of LaPlace, Louisiana. These certificates of deposit were purchased in the names of Cindy Fodor or John Fodor. Cindy Fodor is petitioners' daughter. She was 17 years old in 1983. In 1984, petitioner purchased certificates of deposit with a total face value of $ 188,711.84 from the Riverlands National Bank of LaPlace, Louisiana. These certificates of deposit were also purchased in the names of Cindy Fodor or John Fodor. 4 Petitioner did not pay any Federal income taxes on the interest income generated from these certificates of deposit. In 1983, petitioner and eight of his relatives, including Colonel348 Rivera and his family, traveled to Europe. Nordac paid for the airline tickets and provided petitioner with $ 39,000 in cash which he took with him on the trip to Europe. Petitioner failed to report, as required by law, to United States customs officials that he was taking in excess of $ 10,000 out of the United States. In May 1986, the grand jury for the Eastern District of Virginia returned a 60-page indictment against petitioner, Mr. Straiton, Mr. Straiton's ex-wife, and Nordac. 5 Count one of the indictment charged that petitioner violated Title 18 U.S.C. sec. 371 (1988). 6 Specifically, Count one of the indictment alleged that petitioner conspired to defraud the United States by impeding the Foreign Military Sales program, 7 undermining enforcement of the Arms Export Control Act, 8 and impeding the lawful functions of the Internal Revenue Service by impairing collection of petitioner's taxes. Count one of the indictment also alleged that petitioner conspired to commit various other acts against the United States. Count one of the indictment specifically alleged that: (1) Petitioner acted as Nordac's agent in El Salvador; (2) petitioner and others known and unknown to349 the grand jury received compensation for their services; (3) petitioner failed to report this compensation to the Internal Revenue Service; and (4) petitioner deliberately failed to report this compensation in order to avoid United States income taxes. Count one of the indictment also states that petitioner received approximately $ 416,315 and $ 81,000 in commissions from Nordac in the respective years 1983 and 1984. 350 On July 30, 1986, petitioner pled guilty to count one of the May 1986 indictment. At the hearing during which petitioner submitted his guilty plea, the United States Attorney stated that the evidence would demonstrate that petitioner received $ 635,363 9 in commissions from Mr. Straiton, his wife, and Nordac during the years 1983 and 1984. Petitioner's attorney did not contest this amount, but explained that only approximately $ 180,000 of that amount was paid pursuant to the contract which was the principal subject of the indictment and that petitioner received at least $ 300,000 in commissions on other contracts that had been entered into between Nordac and the El Salvadoran government. Petitioner's attorney also denied that petitioner had attempted to evade United States income taxes. Petitioner's attorney stated that by pleading guilty, petitioner was only admitting that he conspired to "cover up" the fact that commissions in excess of $ 50,000 were paid in order to conceal violations of the Foreign Military Sales program. The District Court accepted the plea. Petitioner's attorney essentially made the same representation in his sentencing memorandum dated September 18, 351 1986. Petitioner reported $ 11,400 of income on his 1983 El Salvador income tax return, and he reported $ 11,500 on his 1984 income tax return. OPINION The first issue for decision is whether petitioner received unreported sales commissions from Nordac during the years in issue. Respondent determined that petitioner failed to report sales commissions received from Nordac in the amounts of $ 416,315 and $ 219,048 for the taxable years 1983 and 1984, respectively. Petitioner's primary argument is that he received the commissions on behalf of Almacen and that he is not taxable for these amounts. If petitioner is correct, then Almacen, not petitioner, would be the recipient of the income. Goodwin v. Commissioner, 73 T.C. 215">73 T.C. 215, 230 (1979), overruled on other grounds Wright v. Commissioner, 84 T.C. 636">84 T.C. 636, 643 (1985); Diamond v. Commissioner, 56 T.C. 530">56 T.C. 530, 541 (1971),352 affd. 492 F.2d 286">492 F.2d 286 (7th Cir. 1974). Petitioner also claims that Almacen properly reported the money it received from Nordac on its El Salvador corporate income tax returns. Respondent's determination is presumed correct and petitioner bears the burden of proving otherwise. Welch v. Helvering, 290 U.S. 111">290 U.S. 111, 78 L. Ed. 212">78 L. Ed. 212, 54 S. Ct. 8">54 S. Ct. 8 (1933); Rule 142(a).10353 The primary evidence offered by petitioner to substantiate his claim that he received the sales commissions as an agent of Almacen was his own testimony. We are not bound to accept petitioner's own self-serving testimony. See Geiger v. Commissioner, 440 F.2d 688">440 F.2d 688 (9th Cir. 1971), affg. a Memorandum Opinion of this Court; Davis v. Commissioner, 88 T.C. 122">88 T.C. 122, 140-141 (1987), affd. 866 F.2d 852">866 F.2d 852 (6th Cir. 1989); Tokarski v. Commissioner, 87 T.C. 74">87 T.C. 74, 77 (1986); Nicholas v. Commissioner, 70 T.C. 1057">70 T.C. 1057, 1064 (1978). Petitioner did not produce the books and records of Almacen or the testimony of any of Almacen's officers or employees, to substantiate his claim that he received the commissions in his capacity as Almacen's agent. Petitioner testified that he was unable to present Almacen's business records because the United States Attorney who prosecuted him had the records and would not return them to petitioner. However, petitioner failed to offer any evidence to corroborate this explanation. Petitioner introduced into evidence a document which purports to be a summary of funds spent in connection354 with the construction of a warehouse by Almacen in El Salvador. Petitioner offered this document to prove that most of the payments from Nordac were used to pay for the construction of this warehouse. Petitioner's testimony regarding this document was vague and unpersuasive. Petitioner did not know when the document had been prepared, nor could he explain the figures reflected in the document. The document reflects that funds received from Nordac were "loans." However, Almacen never borrowed money from Nordac, and, it is clear that the commissions paid by Nordac were not loans. Petitioner testified that the amounts reflected in the document as loans were also reflected in Almacen's El Salvador corporate income tax returns as costs of goods sold. Accounting for the Nordac commissions as costs of goods sold makes no sense and petitioner was unable to provide any explanation. Mr. Straiton testified that Nordac compensated petitioner for his assistance in procuring contracts. Mr. Straiton also testified that petitioner directed him to issue checks payable to himself, to cash, to his wife, and to his corporation, and that Mr Straiton complied with this request because "it was his355 (petitioner's) money and it should be given to him in what ever manner that he wanted." The checks and other documents in evidence indicate that petitioner received large sums of money. This evidence indicates that petitioner received $ 410,417.07 from checks issued by Nordac. Petitioner also received a cash disbursement from Nordac in the amount of $ 9,900.00. Nordac also paid for airfare to Europe for petitioner and members of his family. Nordac, at petitioner's request, also issued a check to petitioner's wife in the amount of $ 5,000.00. Petitioner argues that the total amount of the specific payments by Nordac which respondent has proven are less than the total amount of commissions which respondent has included in petitioner's income. While it is true that the record in this case does not contain evidence of specific individual payments from Nordac which equal the income determined by respondent, 11 respondent's figures appear to be based in part on figures contained in petitioner's criminal indictment, and figures that were referred to during petitioner's guilty plea hearing and in the sentencing memorandum submitted to the District Court by petitioner's attorney. 356 During the aforementioned criminal proceedings, petitioner's attorney specifically admitted that petitioner received at least $ 300,000.00 in commissions from Nordac in addition to commissions of approximately $ 160,000.00 to $ 180,000.00 related to the contract that was the primary subject of the indictment. 12 At the trial in this case, petitioner did not offer any testimony that the total commissions paid by Nordac during the years in issue were less than the amount determined by respondent. During the years in issue, petitioner reported less than $ 23,000.00 of income on his El Salvador income tax returns while purchasing certificates of deposit with a total face value of $ 350,497.93. 13357 After reviewing the entire record, we find that petitioner has failed to satisfy his burden of proving that he did not receive income in the amounts determined by respondent. Accordingly, we hold for respondent on this issue. The second issue for decision is whether petitioner is liable for the additions to tax under section 6653(b)(1) and (2) for underpayment of taxes attributable to fraud. Respondent bears the burden of proving by clear and convincing evidence that: (1) An underpayment exists for each of the years in issue, and (2) that some portion of each underpayment is due to fraud. Sec. 7454(a); Petzoldt v. Commissioner, 92 T.C. 661">92 T.C. 661, 699 (1989); Hebrank v. Commissioner, 81 T.C. 640">81 T.C. 640, 642 (1983); Habersham-Bey v. Commissioner, 78 T.C. 304">78 T.C. 304, 311 (1982); Rule 142(b). To meet his burden, respondent must show that petitioner intended to evade taxes known to be owing by conduct intended to conceal, mislead, or otherwise prevent the collection of such taxes. Rowlee v. Commissioner, 80 T.C. 1111">80 T.C. 1111, 1123 (1983). The existence of fraud is a question of fact to be resolved upon consideration of the entire358 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 imputed or presumed. It must be established by independent evidence of a fraudulent intent. Beaver v. Commissioner, 55 T.C. 85">55 T.C. 85, 92 (1970). However, fraud may be proved by circumstantial evidence and reasonable inferences drawn from proven facts because direct proof of a taxpayer's intent is rarely available. Spies v. United States, 317 U.S. 492">317 U.S. 492, 87 L. Ed. 418">87 L. Ed. 418, 63 S. Ct. 364">63 S. Ct. 364 (1943); Rowlee v. Commissioner, supra.The taxpayer's entire course of conduct may be used to establish the requisite fraudulent intent. Stone v. Commissioner, 56 T.C. 213">56 T.C. 213, 223-224 (1971); Otsuki v. Commissioner, 53 T.C. 96">53 T.C. 96, 105-106 (1969). The fact that respondent has prevailed on the issue of the existence of a deficiency by virtue of a taxpayer's failure to carry his burden of proof, cannot be relied upon to sustain respondent's burden of proving fraud. Parks v. Commissioner, 94 T.C. 654">94 T.C. 654, 660-661 (1990). Respondent produced checks drawn359 on Nordac's account and made out to either petitioner, cash, Carmen M. Fodor, or Almacen. Petitioner received all of the proceeds from these checks, with the exception of the one check written to Carmen M. Fodor. Petitioner testified that he received these proceeds as an agent for Almacen. Respondent has not affirmatively established by clear and convincing evidence that petitioner did not receive these checks as an agent for Almacen. Petitioner testified that he ultimately transferred the Nordac commissions to or for the benefit of Almacen. The money proven to have been paid by Nordac cannot, on the basis of this record, be traced to an ultimate disposition that is clearly incompatible with petitioner's explanation. It is also unclear from the record exactly what services petitioner could have individually provided that would have warranted these substantial commissions. The circumstances surrounding the earning of the Nordac commissions suggest that others in El Salvador who were associated with Almacen and the government of El Salvador may have also provided services to Nordac. This, in fact, seems to be the principal theme adopted by the prosecutor in petitioner's criminal360 case. While petitioner was unable to prove his alleged relationship and arrangements with Almacen regarding the Nordac commissions, respondent has not clearly and convincingly disproven the agency relationship. Respondent argues on brief that petitioner's guilty plea is an admission by petitioner that he received sales commissions from Nordac on his own behalf. Count one of the indictment to which petitioner pled guilty alleges that petitioner received sales commissions from Nordac. When pleading guilty, petitioner's attorney admitted this but did not admit that petitioner received the commissions in his own individual capacity. In fact, petitioner's attorney specifically denied that he was trying to hide any of the commissions in order to evade individual taxes and claimed that "he was active on behalf of Almacen Signal throughout these transactions." Petitioner's plea of guilty to conspiracy to defraud the United States is not an admission of all the allegations in the indictment. Rather, it is only an admission of the necessary elements of the crime. Alsco-Harvard Fraud Litigation, 523 F. Supp. 790">523 F. Supp. 790, 801-804 (D.D.C. 1981) (Holding that a plea of guilty 361 to the crime of conspiracy to defraud the United States is, for purposes of subsequent civil litigation, only an admission of the necessary elements to establish the conspiracy and not an admission of all of the specific acts alleged in the indictment.); see United States v. American Packing Corp., 113 F. Supp. 223">113 F. Supp. 223, 225 (D.N.J. 1953). Respondent argues that petitioner's receipt of sales commissions in his capacity as an individual is a necessary element of the offense to which petitioner pled guilty. Respondent does not explain why this is so. After reading the indictment and the statutory provisions upon which the criminal charges were based, we do not agree that this is correct. The District Court accepted petitioner's guilty plea despite petitioner's denial that he conspired to hide income for tax purposes and despite his representation that he was acting on behalf of Almacen. This indicates that the capacity in which petitioner received money from Nordac was not a necessary element of the offense. After reviewing the entire record, we find that respondent has failed to prove by clear and convincing evidence that an underpayment exists. For essentially 362 the same reason, we cannot find that respondent has proven by clear and convincing evidence that petitioner intended to evade his taxes. The lack of evidence to prove that the Nordac commissions belonged to petitioner individually, leaves us without any evidence to show that petitioner knew that he was individually liable for taxes on the Nordac commissions. The third and fourth issues for decision are whether petitioner is liable for additions to tax under section 6653(a)(1) for negligence or intentional disregard of the rules and regulations and under section 6651(a)(1) for failure to timely file his Federal income tax returns. Respondent first asserted these additions to tax in his amended answer. Normally, petitioner bears the burden of proof on these issues, but because respondent first raised this issue in his amended answer, respondent bears the burden of proof in this case. Reiff v. Commissioner, 77 T.C. 1169">77 T.C. 1169, 1173 (1981). Respondent failed to address either of these issues on brief. In his reply brief, respondent states "petitioner's brief erroneously states that the respondent has imposed a negligence penalty" and restates respondent's position 363 that petitioner is liable for the additions to tax for fraud. In light of this statement, and respondent's failure to address these issues, we will consider respondent to have abandoned these issues. Sundstrand Corporation and Subsidiaries v. Commissioner, 96 T.C. 226">96 T.C. 226, 348 (1991); Ideal Basic Industries, Inc. v. Commissioner, 82 T.C. 352">82 T.C. 352, 366 (1984); Burbage v. Commissioner, 82 T.C. 546">82 T.C. 546, 547 (1984), affd. 774 F.2d 644">774 F.2d 644 (4th Cir. 1985); Rockwell International Corp. v. Commissioner, 77 T.C. 780">77 T.C. 780, 837 (1981), affd. 694 F.2d 60">694 F.2d 60 (3rd Cir. 1982). The fifth issue for decision is whether petitioner is liable for additions to tax for failure to pay estimated income taxes. Section 6654(a) provides for an addition to tax for failure by an individual to pay estimated income tax. The additions to tax under section 6654(a) are generally mandatory unless petitioner can place himself in one of the computational exceptions provided for in subsection (d) thereof. Grosshandler v. Commissioner, 75 T.C. 1">75 T.C. 1, 20 (1980). Petitioner bears the burden of proof on this issue, 364 and he has not established that any of the section 6654(d) exceptions apply. Accordingly, we hold for respondent on this issue. Petitioner argues that he is not liable for the section 6654 additions to tax because of the equity and good conscience exceptions in section 6654(e) that came into effect in 1984. Petitioner has not proven that he fits within the requirements of the statute, and if so, that the imposition of this addition to tax would be against equity and good conscience. The sixth issue for decision is whether petitioner is liable for additions to tax for substantial understatement of income tax liability. Section 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. 14Pallottini v. Commissioner, 90 T.C. 498 (1988). The amount of the understatement is equal to the excess of the amount of tax required to be shown on the return for the tax year less the amount of the tax shown on the return. Woods v. Commissioner, 91 T.C. 88">91 T.C. 88, 94 (1988). An understatement is "substantial" if it exceeds the greater of 10 percent of the365 tax required to be shown on the return for the taxable year, or $ 5,000. Sec. 6661(b)(1). Because petitioner failed to file income tax returns, the amount of tax shown on the returns is considered to be zero. Sec. 1.6661-2(d)(2), Income Tax Regs.Estate of McClanahan v. Commissioner, 95 T.C. 98">95 T.C. 98, 104 (1990). The deficiencies for 1983 and 1984 qualify as "substantial understatements" as defined in section 6661(b) and none of the provisions for reduction of the section 6661 addition to tax contained in section 6661(b)(2)(B) are applicable. Petitioner argues that he thought that he was not required to file Federal income tax returns because he qualified for the $ 80,000 exclusion from gross income under section 911. 366 Therefore, petitioner argues that he acted in good faith in failing to file his Federal income tax return, and that the resulting understatement was due to reasonable cause. However, the amounts of income attributable to petitioner are far in excess of the section 911 exclusion. Section 911 also requires a taxpayer to make an election before he can qualify for the section 911 exclusion. Sec. 911(a); Faltesek v. Commissioner, 92 T.C. 1204">92 T.C. 1204, 1207 (1989). Petitioner failed to present evidence that he made a proper election and presented no credible evidence to indicate that he attempted to ascertain whether he qualified for the section 911 exclusion during the years in issue. Moreover, the reasonable cause exception to section 6661, under which petitioner seeks relief, provides that the Secretary may waive the addition to tax under section 6661 upon a showing by the taxpayer that there was reasonable cause for the understatement and that the taxpayer acted in good faith. Sec. 6661(c) (emphasis supplied). We only review respondent's decision not to waive the section 6661 addition to tax upon a showing by petitioner that respondent abused his discretion in367 refusing to waive the addition to tax. Mailman v. Commissioner, 91 T.C. 1079">91 T.C. 1079, 1083, 1085 (1988). Petitioner has failed to make such a showing. Accordingly, we hold for respondent on this issue. Decision will be entered under Rule 155 in docket No. 19153-87. Decision will be entered for the petitioner in docket No. 20320-87. Footnotes1. On March 3, 1989, this Court granted respondent's motion to consolidate the case at docket No. 20320-87 with the case at docket No. 19153-87 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 brief, petitioners request that respondent return assets that he levied upon pursuant to a jeopardy assessment and which were previously held in the name of Carmen M. Fodor. Petitioners argue that respondent should return these assets in light of his concession that there are no issues with respect to Carmen M. Fodor. We assume petitioners are arguing that an overpayment exists. Sec. 6512(b). Petitioners bear the burden of proving that an overpayment exists. Petitioners' first raised this issue after the evidentiary record in this case was closed. Petitioners attached a copy of the settlement agreement of the District Court action brought by petitioner Carmen M. Fodor for wrongful seizure to their brief, but this document has not been admitted into evidence. In any event, the settlement agreement would not establish the fact that the levies in question were applied as payment for Carmen M. Fodor's taxes for the years in issue. There is no other evidence to establish that Carmen M. Fodor has overpaid her taxes for the years in issue.↩4. The individual certificates of deposits purchased in 1983 and 1984 were as follows: ↩Amount of Certificate of DepositDate of PurchaseTerm$ 40,000.0010/4/8332 days41,786.0910/4/83180 days40,000.0011/4/8330 days40,000.0012/4/8330 days32,975.072/2/84 30 days43,782.344/1/84 180 days32,975.074/2/84 30 days32,975.077/31/8430 days46,004.299/28/84180 days5. See United States v. John P. Fodor, et al.↩, Criminal No. 86-125-A, United States District Court, Eastern District of Virginia. 6. Under 18 U.S.C. sec. 371 (1988)↩, it is unlawful for two or more persons to conspire to either commit any offense against the United States, or to defraud the United States, or any agency thereof. 7. The Foreign Military Sales program loaned money to foreign governments so that the foreign governments could purchase military goods. The contracts between Nordac and El Salvador were financed with funds loaned to El Salvador from the Foreign Military Sales program. The loan agreement between the El Salvador government and the United States required that the El Salvador government only purchase military goods made in the United States and that the commission fees paid in connection with the sale of military goods not exceed $ 50,000. In fulfilling these contracts, Nordac paid sales commissions in excess of $ 50,000 to petitioner and sold munitions manufactured in Yugoslavia to the El Salvador government. ↩8. The Arms Export Control Act requires short-term importers and exporters of munitions located in the United States to obtain a transit license. Applications for the transit license must accurately identify the products being imported and exported. According to the indictment, the munitions that were sold to El Salvador by Nordac were shipped to the United States from Yugoslavia and then repackaged and identified on the transit license application as United States manufactured munitions. This was done to conceal the violation of the provision in the Foreign Military Sales program which requires that munitions purchased pursuant to the program be manufactured in the United States.↩9. This is the same as the total amount of commission income which respondent determined for 1983 and 1984 in the notice of deficiency.↩10. The presumption of correctness that attaches to respondent's determination has been qualified by some of the courts of appeals. In a recent opinion, the Fifth Circuit Court of Appeals stated: Several Courts, including this one, have noted that a court need not give effect to the presumption of correctness in a case involving unreported income if the Commissioner cannot present some predicate evidence supporting its determination. Although a number of these cases involved unreported illegal income, we agree with the Third Circuit that this principle should apply whether the unreported income was allegedly obtained legally or illegally. [Portillo v. Commissioner, 932 F.2d 1128">932 F.2d 1128 (5th Cir. 1991). Citations and footnotes references omitted.] The Court went on to state that before it would give the Commissioner the benefit of the presumption of correctness, "he must * * provide the court with some indicia that the taxpayer received unreported income." Portillo v. Commissioner, supra↩ at 1133. If we were to apply this standard in the instant case, we believe that the evidence introduced by respondent provides indicia that petitioner received unreported income.11. Respondent determined petitioner's commission income from Nordac to be $ 416,315 for 1983 and $ 219,048 for 1984, for a total commission income from Nordac in the amount of $ 635,363. ↩12. We do not construe these admissions as an admission that petitioner received commissions from Nordac in his individual capacity as opposed to being an agent for Almacen, but the statements made on behalf of petitioner are consistent with such a finding. ↩13. The evidence does not reveal the final disposition of the amounts placed in these certificates of deposit. Petitioner may have rolled over some of these certificates of deposit, but there is no evidence of this, and petitioner does not argue this on brief.↩14. The Omnibus Budget Reconciliation Act of 1986, Pub. L. 99-509, sec. 8002(a), 100 Stat. 1874, 1951, increased the section 6661(a)↩ addition to tax to 25 percent of the underpayment attributable to a substantial understatement for additions to tax assessed after October 21, 1986.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622433/	COMMISSIONER OF INTERNAL REVENUE, RESPONDENT., PETITIONER, v.Rockwood Sprinkler Co. v. CommissionerDocket No. 14937.United States Board of Tax Appeals13 B.T.A. 393; 1928 BTA LEXIS 3251; September 19, 1928, Promulgated 3251 Held, That a deficiency in income tax for the year 1920 was properly asserted against the petitioner under the provisions of section 240(b) of the Revenue Act of 1921. Merrill S. June, Esq., for the petitioner. Eugene Meacham, Esq., for the respondent. LANSDON 393 The respondent has asserted a deficiency in income tax for the year 1920 in the amount of $4,725.60. The parties have agreed that $3,290.85 is the amount in controversy. The single issue here is whether the deficiency in question has been properly asserted against the petitioner under the provisions of section 240(b) of the Revenue Act of 1921. FINDINGS OF FACT. The petitioner is an Illinois corporation. In the taxable year it was affiliated with the Rockwood Sprinkler Co. of Massachusetts, a corporation chartered and operating under the laws of that State. The Massachusetts corporation made a consolidated income and profits-tax return for the affiliated group for the year 1920. Such return showed a consolidated income in the amount of $549,145.42, and tax due on said income in the amount of $177,433.14. The petitioner's 394 income, if determined separately, 3252 was $331,034.69, and that of the Massachusetts corporation, $218,110.73, or, respectively, 60.282 per cent and 39.718 per cent of the consolidated income. The entire tax was paid in four installments by the Massachusetts corporation. Upon audit of the consolidated return the Commissioner determined that the correct tax liability of the consolidated group for the taxable year was $182,892.23, and a deficiency for such year in the amount of $5,459.09, and proposes to assert 60.282 per cent of such deficiency against the petitioner on the basis of the proportion of its income to the income of the affiliated group. For the taxable year the petitioner made an information return on Form 1122, which included paragraph 7, as follows: 7. The department prefers that the entire tax shown on a consolidated return be paid by the parent or principal reporting corporation, instead of being apportioned among the corporations composing the affiliated group. If apportionment is made, state the amount of income and profits taxes for the taxable period to be assessed against the subsidiary or affiliated corporation making this return $ OPINION. LANSDON: There is no controversy over the3253 facts here involved. The parties agree that, if the respondent has any authority to assert a deficiency against the petitioner for 1920, the correct amount thereof is $3,290.85. The petitioner contends that inasmuch as the original consolidated return was made by the Massachusetts corporation, and the tax shown thereon paid by it, and that as the information return made by the petitioner included no direction as to the apportionment of the tax, the Commissioner was fully advised that there was an agreement between the two members of the affiliated group that all taxes for the year in question were to be paid by the Massachusetts corporation. If this contention is sound it follows that any deficiencies determined as to the group should be asserted and assessed against such Massachusetts corporation under the plain provisions of section 240(b) of the Revenue Act of 1921, which is as follows: In any case in which a tax is assessed upon the basis of a consolidated return, the total tax shall be computed in the first instance as a unit and shall then be assessed upon the respective affiliated corporations in such proportions as may be agreed upon among them, or, in the absence of any3254 such agreement, then on the basis of the net income properly assignable to each. * * * In our opinion the evidence adduced, the law cited by the petitioner, and the reasoning of its counsel based thereon do not support the contention on which this proceeding is based. Even if it is the duty of the Commissioner to ascertain whether there is an agreement providing for the apportionment of the tax among the members 395 of an affiliated group, it is obvious that the failure of the petitioner to make the statement asked for in paragraph 7 of Form 1122 left the Commissioner without such information. Apparently the petitioner relies on an assumption that failure to indicate apportionment in percentages or amounts raises a conclusive presumption that all the tax was to be paid by the reporting member of the group. We do not agree with this conclusion. The Commissioner's assumption that in the absence of an agreement that all the tax was to be paid by the Massachusetts corporation, it follows that the tax liability shall be assessed on the basis of the proportional income of each of the reporting corporations, is at least equally as valid as the presumption relied on by the petitioner. 3255 The petitioner here is a taxpayer. The amount of the deficiency is not in controversy and the sole issue is whether it was within the authority of the Commissioner to assert it by the procedure adopted. Section 274(a) of the Revenue Act of 1926, under which this proceeding was initiated, provides that "If in the case of any taxpayer, the Commissioner determines that there is a deficiency in respect of the tax imposed by this title, the Commissioner is authorized to send notice of such deficiency by registered mail." All this has been done here, and we think that in the absence of any statement as to the proration of the tax as requested in paragraph 7 of Form 1122, the deficiency, now agreed as to amount, was properly asserted against this petitioner under the provisions of section 240(b) of the Revenue Act of 1921. Cincinnati Mining Co., 8 M.T.A. 79. Reviewed by the Board. Decision will be entered for the respondent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622435/	Richard Robinson and Marcia Robinson, a/k/a Marcia Korn v. Commissioner.Robinson v. CommissionerDocket Nos. 1785-69, 3734-69.United States Tax CourtT.C. Memo 1972-156; 1972 Tax Ct. Memo LEXIS 102; 31 T.C.M. (CCH) 774; T.C.M. (RIA) 72156; July 24, 1972Edward I. Haligman and Michael Korn, 15353 Weddington, Sherman Oaks, Calif.103 , for the petitioners. John D. Moats, for the respondent. FAYMemorandum Findings of Fact and Opinion FAY, Judge: Respondent determined deficiencies in petitioners' Federal income tax for 1965, 1966 and 1967 in the amounts of $1,356.60, $1,826.44 and $1,676.41, respectively. The issues for decision are: (1) Whether petitioners are entitled to a deduction under section 165(a) 1 in the taxable year 1965 for losses attributable to the expropriation of an interest in real property located in Poland; (2) assuming that the loss is properly deductible in the taxable year 1965, whether petitioners have satisfied the burden of proof by introducing sufficient evidence to establish the amount of the loss; and (3) assuming that the loss is properly deductible in the taxable year 1965 and that petitioners have satisfactorily proved the amount of the loss, whether petitioners are entitled to a loss carryover for the taxable years 1966 and 1967. Findings of Fact Some of the facts have been stipulated; they are so found and incorporated herein by this reference. Petitioners, 104 Richard L. Robinson and Marcia Robinson, were legal residents of Denver, Colorado, on April 17, 1969, the date they filed their first petition, and were legal residents of Omaha, Nebraska, on July 18, 1969, the date they filed their last petition. They filed joint Federal income tax returns for 1965, 1966 and 1967 with the district director of internal revenue, Denver, Colorado. Richard L. Robinson is a petitioner herein only because he filed joint returns with his wife, Marcia Robinson, who will hereinafter be referred to as petitioner. Petitioner was born in Poland in 1933 under the maiden name of Marcia Korn. Petitioner immigrated with her family to the United States in 1941 and became a naturalized American citizen on July 22, 1948. At all material times thereafter petitioner was an American citizen and resident. Petitioner's father, Leopold Korn (hereinafter referred to as Korn), purchased in Lodz, Poland, several apartment houses and the land upon which they were located (hereinafter collectively referred to as the Korn real property). Korn purchased the Korn real property sometime between 1930 and 1934 for $100,000. One-half of the Korn real property was purchased in Korn's105 name; the remaining one-half was purchased in the name of Korn's wife. 2On December 23, 1938, Korn divested himself of any remaining interest in the Korn real property by transferring a three-twelfths interest in such property to his wife and a one-twelfth interest to each of his three children (including petitioner). Korn received no financial consideration for transferring his remaining one-half interest in the Korn real property to his wife and children. During the years 1946 through 1951 petitioner and her family diligently petitioned the municipal and judicial authorities in Lodz in attempting to determine the status of the Korn real property. These attempts were futile as the Lodz authorities did not respond to the inquiries of petitioner and her family. A former caretaker106 of the Korn real property informed petitioner and her family that the City of Lodz was administering the Korn real property during the years 1946 through 1951. Since the Lodz authorities refused to answer inquiries of petitioner and her family, petitioner and her family assumed as of 1951 that the Korn real property had been appropriated by the Polish governmental authorities. Although the Korn real property has never been formally nationalized by the Polish government, petitioner was in effect deprived of her relevant incidents of 776 ownership of her one-twelfth interest in the Korn real property sometime between 1946 and 1951. Petitioner's one-twelfth interest in the Korn real property was, thus, expropriated by the Polish governmental authorities sometime between 1946 and 1951. Moreover, from the years 1951 through 1960, petitioner had no reasonable prospect of being reimbursed for the expropriation of her one-twelfth interest in the Korn real property. Poland and the United States executed, the Polish Claims Agreement of 1960 to authorize the Foreign Claims Settlement Commission (hereinafter referred to as the Commission) to receive and settle claims of United States nationals107 with respect to property that was nationalized or otherwise "taken" by the Polish government. Subsequent to the execution of the Polish Claims Agreement of 1960, petitioner and her family again initiated inquiries with the Lodz authorities concerning the status of the Korn real property. In August 1961 petitioner and her family received a certification from the District Court of Lodz, Department of Public Documents, dated August 22, 1961. This certification indicated that one Izaak Goclawski had acquired the Korn real property by inheritance proceedings in 1953, and that Izaak Goclawski had subsequently sold the Korn real property to a third party. On September 29, 1961, petitioner filed a claim with the Commission in which she asserted her claim for an alleged loss of her interest in the Korn real property. The claim was submitted under the Polish Claims Agreement of 1960 and the International Claims Settlement Act of 1949, as amended, 64 Stat. 13 (1950), 22 U.S.C. 1623(a) (1958). The Commission issued a Final Decision with respect to petitioner's claim on October 27, 1965. In its Final Decision the Commission determined that petitioner was fraudulently108 deprived of her interest in the Korn real property and that petitioner was entitled to $19,525, with interest thereon at 6 percent per annum from January 1, 1956, to July 1, 1960. 3 Pursuant to the Final Decision, petitioner received $1,794.74 in 1966, $950 in 1967, and approximately $350 per year in the years subsequent to 1967. In its Final Decision the Commission determined as findings of fact and law that the Korn real property constituted abandoned property within the meaning of Article 34 of the Polish Law of March 8, 1946 (Dz. U. 1946, No. 13, Item 87) and that petitioner's interest in the "abandoned" Korn real property was taken on January 1, 1956. In her returns for 1965, 1966 and 1967 petitioner claimed loss deductions under section 165(a) in the amounts of $7,876.85, $10,029.25, and $5,169.86, respectively. Respondent disallowed the entire amount of each of these claimed loss deductions. Ultimate Findings of Fact Petitioner was deprived of all relevant incidents of ownership with respect to her one-twelfth interest in the Korn real property sometime between 1946 and 1951. Petitioner's one-twelfth interest109 in the Korn real property was thus expropriated by the Polish governmental authorities sometime between 1946 and 1951. Opinion This case presents the question of whether petitioner is entitled to a loss deduction under section 165 with respect to her one-twelfth interest in the Korn real property which petitioner contends was expropriated in the taxable year 1965. Respondent contends that petitioner has failed to carry her burden of proving that she sustained an expropriation loss in fact in 1965. We agree with respondent. Section 165 provides, in pertinent part, as follows: (a) General Rule. - There shall be allowed as a deduction any loss sustained during the taxable year and not compensated for by insurance or otherwise. The regulations under section 165(a) provide that "a loss must be evidenced by closed and completed transactions, fixed by identifiable events, and * * actually sustained during the taxable year." Section 1.165-1(b), Income Tax Regs. In addition, section 1.165-1(d)(2)(i), Income Tax Regs., provides, in pertinent part, as follows: If a casualty or other event occurs which may result in a loss and, in the year of such casualty or event, there exists110 a claim for reimbursement with respect to which there is a reasonable prospect of recovery, no portion of the loss with respect to which reimbursement may be 777 received is sustained, for purposes of section 165, until it can be ascertained with reasonable certainty whether or not such reimbursement will be received. Whether a reasonable prospect of recovery exists with respect to a claim for reimbursement of a loss is a question of fact to be determined upon an examination of all facts and circumstances. * * See also United States v. White Dentalco., 274 U.S. 398">274 U.S. 398 (1927); Fuchs v. Commissioner, 413 F. 2d 503 (C.A. 2, 1969), affirming a Memorandum Opinion of this Court; and Harry J. Colish, 48 T.C. 711">48 T.C. 711 (1967). Petitioner argues, in effect, on brief as follows: (1) the earliest year in which her interest in the Korn real property could have been expropriated was 1961, since petitioner and her family were not informed by the District Court of Lodz until 1961 that legal title to the Korn real property had been "inherited" in 1953 by one Izaak Goclawski, and that said Izaak Goclawski had subsequently sold the Korn real property to a third111 party; (2) a claim for reimbursement of the loss did exist in the year in which the expropriation loss occurred, i.e., a claim for compensation was filed by petitioner with the Commission in 1961; (3) petitioner's prospects of recovering on her claim for reimbursement were reasonably good; and (4) petitioner was not capable of determining her loss with "reasonable certainty" until the Commission issued its Final Decision with respect to petitioner's claim in 1965. We are not convinced by petitioner's argument. Her argument assumes that an expropriation loss is not deemed to occur until the rightful owner has been deprived of legal title to the property. This assumption is not supported by law. It is clear that deprivation of legal title is not essential for establishing that an expropriation loss has in fact occurred. To the contrary, an expropriation loss is deemed to have occurred in the taxable year when the rightful owner is deprived of his relevant incidents of ownership of property. United States v. White Dental Co., supra at 402; Rozenfeld v. Commissioner, 181 F.2d 388">181 F. 2d 388, 389-390 (C.A. 2, 1950), affirming a Memorandum Opinion of this Court; and112 Wyman v. United States, 166 F. Supp. 766">166 F. Supp. 766 (Ct. Cls. 1958). The following considerations have persuaded us that petitioner's one-twelfth interest in the Korn real property was expropriated sometime between 1946 and 1951. In petitioner's claim to the Commission, petitioner asserted (1) that she (in conjunction with other members of the Korn family) submitted frequent inquiries from 1946 to 1951 to the judicial and municipal authorities in Lodz concerning the status of the Korn real property; (2) that, since no response was received, she and her family assumed "governmental administration and/or appropriation"; (3) that a former caretaker did inform petitioner and her family that the City of Lodz was administering the property during the years 1946 through 1951; (4) that the Korn family (including petitioner) made no inquiries with respect to the status of the Korn real property between 1951 and 1960; and (5) that the Korn family (including petitioner) instituted additional inquiries to the Lodz authorities in 1960 only after execution of the Polish Claims Agreement of 1960. Although the Korn real property was never formally nationalized by the Polish government, this113 factor is not controlling. A decree may be a mere formality. Harry J. Colish, supra at 716. Once the taxpayer's use and control of his property is so restricted that it technically constitutes an expropriation, it becames immaterial that the restriction was not legally authorized under the laws of the restricting nation. Rozenfeld v. Commissioner, supra at 389; and Wyman v. United States, supra at 770. In the instant case the Lodz authorities administered the Korn real property between 1946 and 1951 and refused to answer petitioner's inquiries concerning the status of the property. Petitioner and her family (1) maintained no physical control of the Korn real property (i.e., either personally or through appointed representatives); (2) received no proceeds from the property's usage, 5 and (3) could not dispose of their respective interests in the property absent a clarification of the status of their collective property interest. Accordingly, as we have stated in our findings of fact, we have determined that petitioner was deprived of her relevant rights of ownership in her one-twelfth 778 interest in the Korn real property sometime between114 1946 and 1951 and, thus, that petitioner's one-twelfth interest in the Korn real property was expropriated sometime between 1946 and 1951. 6 We do not find it necessary to determine the precise year of the loss, since the ultimate result is the same regardless of whether the loss was actually sustained in any of the years 1946 to 1951, inclusive. 115 Even though petitioner's property interest was technically expropriated between 1946 and 1951, petitioner would still be entitled to a section 165 loss deduction in 1965 if she could establish that she had a reasonable prospect of being reimbursed during each of the years from the year of the loss (i.e., sometime between 1946 and 1951) to 1965. See Harry J. Colish, supra at 716-718; and Fuchs v. Commissioner, supra at 507-508. We do not believe that petitioner has sustained her burden of proof with respect to this point. Petitioner and her family assumed in 1951 that the Korn real property had been "administered and/or appropriated" by the municipality of Lodz. Furthermore, petitioner and her family made no effort to contact the Polish authorities during the years 1951 through 1960 with respect to the Korn real property. Finally, petitioner and her family stated in effect in their claim to the Commission that they did not anticipate that the Polish government would reimburse them for their expropriated property interest. Thus, as we have stated in our findings of fact, petitioner had no reasonable basis during the period from 1951 through 1960 for believing116 that she would be reimbursed for the expropriation of her one-twelfth interest in the Korn real property. 7 The fact that petitioner did finally receive in the taxable year 1966 and in subsequent taxable years some compensation for her expropriated property interest does not establish that petitioner had a reasonable prospect of being reimbursed during the years 1951 through 1960. See Fuchs v. Commissioner, supra at 508. Therefore, since petitioner did not prove that she had a reasonable propect of being reimbursed during each of the years between 1951 and 1965, petitioner is not entitled to a section 165 loss deduction in 1965. Finally, since petitioner is not entitled to a section 165 loss deduction for the taxable year 1965, petitioner is accordingly not entitled to a loss carryover under section 172 for the taxable years 1966 and 1967. Decisions will be entered for the respondent. 779 Footnotes1. All section references are to the Internal Revenue Code of 1954, unless otherwise indicateed.↩2. We are unable to ascertain precisely what interest the Korn family owned in the Korn real property. The transcript indicates that the Korn family owned the entire interest in the Korn real property. However, the Foreign Claims Settlement Commission's Final Decision date October 27, 1965, indicates that the Korn family owned only a one-half interest in the Korn real property as of August 20, 1948.↩3. The interest computation amounted to $5,320.56.↩5. In petitioner's claim to the Commission petitioner claimed compensation for lost rental income from 1948 through 1960. We are not able to ascertain whether petitioner received any rental income for 1946 and/or 1947, as there is no evidence in the record pertaining to this specific point. ↩6. Section 165 and the regulations promulgated thereunder are not applicable to this determination, since chapter 1 of the 1954 Code applies only to years commencing after December 31, 1953. Secs. 7851(a)(1)(A) and 7807(a), I.R.C. 1954. The years 1946 through 1951 are governed by the 1939 Code. Sec. 29.23(e)-1 of Regs. 111, promulgated under the 1939 Code, provided, in pertinent part, as follows: In general losses for which an amount may be deducted from gross income must be evidenced by closed and completed transactions, fixed by identifiable events, bona fide and actually sustained during the taxable period for which allowed. Substance and not mere form will govern in determining deductible losses. * * * The evidence in the record supports the finding that the Korn real property was appropriated sometime between 1946 and 1951. If rental income was received by petitioner from the Korn real property in 1946 and 1947, sec. 29.23(e)-1, Regs. 111, would justify a finding that the expropriation loss occurred either in 1949 or 1951. That is, either 1949 or 1951 would be the appropriate loss year, since the termination of rental income in 1949 and the termination of reasonable anticipation of recovery in 1951 would constitute fixed, identifiable events. If, however, no rental income were received in 1946 and 1947, either 1946 or 1951 would constitute the appropriate loss year - i.e., the fixed, identifiable event with respect to 1951 is the same as indicated above, and with respect to 1946 is the termination of rental income. Moreover, in each of these years, the Lodz authorities administered the property and, correspondingly, petitioner was deprived of usage and possession of the property. We realize that sec. 4(h) of the International Claims Settlement Act provides that all actions of the Foreign Claims Settlement Commission shall be final and conclusive on all questions of law and fact and not subject to judicial or administrative review. However, the Commission's findings of fact that petitioner and her family abandoned the Korn real property within the meaning of Polish law, Article 34 of the Law of March 8, 1946, and that the Korn real property was "taken" by the Polish government on January 1, 1956, were made solely to enable the Commission to rule favorably on petitioner's (and her family's) claim. We believe that these findings should be conclusive only with respect to the context of whether petitioner was entitled to compensation for the expropriation of her property interest by the Polish authorities. Moreover, since we have no idea of what factors and evidence were considered by the Commission in making its findings, we feel that these findings should not be determinative upon this Court in the instant case. Nevertheless, this issue is moot, since the ultimate result will be the same regardless if the expropriation loss occurred between 1946 and 1951 or in 1956.↩7. Due to the execution of the Polish Claims Agreement of 1960 petitioner did have a reasonable basis from 1960 through 1965 for assuming that she would be at least partially reimbursed for her expropriated property interest.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622436/	Boris S. Nadiak v. Commissioner.Nadiak v. CommissionerDocket No. 2042-68.United States Tax CourtT.C. Memo 1969-280; 1969 Tax Ct. Memo LEXIS 14; 28 T.C.M. (CCH) 1445; T.C.M. (RIA) 69280; December 22, 1969, Filed Boris S. Nadiak, pro se, 183 Hoover Ave., Kenmore, N.Y. John D. Steele, Jr., for the respondent. WITHEYMemorandum Findings of Fact and Opinion WITHEY, Judge: A deficiency has been determined by the Commissioner in the income tax of petitioner for the taxable year 1964 in the amount of $145.56. The issues presented by the pleadings are: (1) whether respondent has erred in disallowing 1446 dependency exemption15 deductions for the two minor children of petitioner, and (2) whether petitioner is entitled to such deductions as the head of a household. Another issue raised in the pleadings is whether petitioner has a right to a hearing before the appellate division of the Internal Revenue Service. As to the latter issue, this Court has no jurisdiction and it is therefore not discussed herein. Findings of Fact The facts which have been stipulated are found. At the time of the filing of the petition herein, the petitioner's legal residence was Kenmore, New York. Petitioner timely filed his income tax return for the taxable year 1964 with the district director at Buffalo, New York. Two children were born to petitioner and his former wife, their names being Nadia and Samuel Nadiak, and their respective birth dates being December 15, 1951, and December 20, 1953. Petitioner and his wife were divorced on August 28, 1958, the wife being granted custody of the two children by the decree of divorce. During the entire year at issue, the children resided with their mother. By way of support moneys ordered in the decree, petitioner paid for the support of the children during 1964, $1,200.49. Ultimate16 Findings of Fact Petitioner did not provide more than half the support for his two children during 1964. Petitioner's two children did not reside in a home provided by him during 1964. Opinion Petitioner's pleading raises an issue with respect to his right to a hearing before the appellate division of respondent. We have no jurisdiction with respect thereto and therefore do not discuss it herein. Petitioner claims the right to deduct a $600 exemption with respect to each of his children as his dependents under section 151(e) of the Internal Revenue Code of 1954. He has utterly failed to establish by any evidence in the record what the total cost of their support amounted to in 1964, with the result that we have no basis upon which to determine whether he furnished more than one-half thereof as required by section 152(a). For failure of proof sufficient to overcome the presumption of correctness of respondent's determination on this issue, we uphold respondent's determination. Petitioner has also failed to establish that he was the head of a household during 1964, for it is stipulated that the children, whom petitioner claims as dependents under this*17 theory, did not reside with him during that year. See section 152(a) (9), I.R.C. 1954. Decision will be entered for the respondent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622439/	CORRAL CREEK CATTLE CO., ET AL., 1 Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent Corral Creek Cattle Co. v. CommissionerDocket Nos. 4277-74, 4278-74, 4279-74.United States Tax CourtT.C. Memo 1978-260; 1978 Tax Ct. Memo LEXIS 252; 37 T.C.M. (CCH) 1121; T.C.M. (RIA) 78260; July 17, 1978, Filed 252 During 1970, Foxley, a partnership, was defrauded of money. Held, on February 28, 1971, the end of Foxley's tax year, petitioners, as partners in Foxley, had no reasonable prospects of recovering more than $ 3,773 of the amount lost. Held further, petitioner Foxley & Co. may not deduct rental expenses covering the period Nov. 1, 1966 through Feb. 28, 1967, on its income tax return filed for the period ending Feb. 29, 1968. T. Geoffrey Lieben, for the petitioners. Wayne B. Henry, for the respondent. WILESMEMORANDUM FINDINGS OF FACT AND OPINION WILES, Judge: Respondent determined the following deficiencies in petitioners' Federal income taxes: Tax Year PetitionerEndedDeficiencyCorral Creek Cattle Co.Feb. 28, 1969$ 2,834.00Feb. 28, 197010,113.00Five Dot Livestock Co.Feb. 29, 196813,883.00Feb. 28, 196953,084.00Foxley & Co.Oct. 31, 19658,106.00Oct. 31, 19662,839.00Feb. 29, 1968135,773.63Feb. 28, 196924,679.31Feb. 28, 19701,435.20There are two issues for resolution. First, we must decide whether petitioners had reasonable prospects of recovering on claims for reimbursement of losses. If so, petitioners are not entitled to section 165 2 loss deductions. 3 Second, we must decide 253 whether a portion of rental expenses deducted by Foxley & Co. on its return for the tax year ended February 29, 1968, should have been deducted on the preceding year's tax return.FINDINGS OF FACT Some of the facts have been stipulated and are found accordingly. Petitioners Corral Creek Cattle Co., Five Dot Livestock Co., and Foxley & Co., are Nebraska corporations, with their principal offices in Omaha, Nebraska. For years prior to and including the tax year ended February 29, 1968, petitioners timely filed their Federal income tax returns with the District Director of Internal Revenue, Omaha, Nebraska. Thereafter, petitioners filed their Federal income tax returns with the Internal Revenue Service Center in Kansas City, Missouri. Petitioners compute their taxable income using an accrual method of accounting. On March 1, 1968, petitioners and a fourth corporation, Foxley & Sons Co., formed 254 a joint venture, Foxley Cattle Co. (hereinafter Foxley). Foxley filed partnership returns for the tax years ended February 28, 1969, February 28, 1970, and February 28, 1971, with the Internal Revenue Service Center, Kansas City, Missouri. Foxley was formed to carry on cattle feeding operations previously conducted by the joint venturers individually. In the course of its cattle feeding business Foxley contracted with Agri-Land & Beef, Inc. (hereinafter Agri-Land), a commercial feed lot and pasture operation. Agri-Land, a Nebraska corporation, was 100 percent owned by Howard Richter and his wife. Richter was also its president. By November 1, 1970, Agri-Land had feeding agreements covering approximately 3,000 head of Foxley's cattle. During November 1970, Foxley agreed to purchase 1,261 head of cattle from Agri-Land, all of which were allegedly located on leased property referred to as the Larsen farm. Foxley executed and delivered a check of $ 243,621.31 in payment for the Larsen cattle. In fact, there were only 739 head of cattle on the Larsen property, all of which were subject to security interests held by Production Credit Association of South Omaha (hereinafter PCA). 1,802 255 head of cattle from Agri-Land which were allegedly located on the Nygren farm, property leased by Agri-Land for feeding purposes. Foxley executed and delivered a check for $ 326,353.20 in payment for the cattle. Although Agri-Land claimed to have good title to the cattle located on the Nygren farm, these cattle were in fact owned by two unrelated individuals. Because of rumors concerning Agri-Land's business practices and solvency, Foxley, on December 3, 1970, retained a law firm for advice on how to protect Foxley's interests and recover the $ 569,974.51 recently paid to Agri-Land for cattle. In an attempt to secure its interest in Agri-Land's assets, Foxley on December 4, 1970, removed 4,111 head of cattle from the Nygren farm. Although these cattle remained in Foxley's possession for a time, they were owned by unrelated third parties to whom they were ultimately returned. On December 7, 1970, Foxley filed suit against Agri-Land, Richter, and the Bank of Mead on grounds of fraud, in an attempt to recover the $ 326,353.20 paid on December 1, 1970, for the cattle located on the Nygren farm. The Bank of Mead was joined as a defendant in this suit under a theory that the bank, through 256 its president Kenneth Schuette, had fraudulently misrepresented to Foxley that Agri-Land had good title to the Nygren cattle and was able to deliver the cattle free and clear of encumbrances. After Foxley filed suit against Agri-Land, Richter, and the Bank of Mead, its prospects of recovering any significant portion of the amount prayed for rapidly deteriorated. On December 7, 1970, PCA, one of Agri-Land's secured creditors, took possession of Agri-Land's feed lot. Included in this possession were all 739 head of cattle on the Larsen farm.On December 24, 1970, Agri-Land filed a petition under Chapter XI of the Bankruptcy Act in the United States District Court for the District of Nebraska alleging that its liabilities exceeded its assets by approximately $ 60,000. This $ 60,000 figure was, however, a conservative estimate. In fact, Agri-Land's assets were grossly overstated, assets were valued at fictional and inflated amounts, and at least one large "unliquidated claim" never existed. Further, Agri-Land's liabilities were understated. They failed to include approximately $ 570,000 owed to Foxley for cattle never delivered, $ 263,625 owed to a third party, and failed to include 257 a secured claim of $ 140,000. During the months of December 1970, and January and February 1971, Foxley's attorneys and accountants reviewed Richter's and Agri-Land's property holdings, all financing statements securing interests therein, and any available books and records. By December 10, it was determined that there was substantially "no equity in Richter or Agri-Land." Virtually all of their assets were subject to security agreements, and all finaning statements appeared to have been properly filed. The only property available for attachment appeared to be three cars with a total value of approximately $ 7,000, and Richter's home in which he had an equity of approximately $ 23,000. In a bankruptcy proceeding, however, any unsecured property would be used to satisfy expenses of administering the bankruptcy estate and pay both Federal and state taxes before an unsecured creditor such as Foxley would be able to satisfy its claims. With this pessimistic prospect of recovery, Foxley's legal counsel and accountants felt that as of February 28, 1971, the best Foxley could expect to collect from Richter and Agri-Land was $ 3,773 of its approximate $ 570,000 claim. Even so, counsel 258 advised its client to protect what interests it had by attempting to force PCA, the primary secured creditor, to trial on its claims, thereby hoping to force some form of settlement. Realizing that the possibility of recovering from either Richter or Agri-Land was slight, Foxley's counsel joined Bank of Mead as a party defendant in the fraud suit filed December 7, 1970. Foxley's suit against the bank was entirely based on a misrepresentation allegedly made to one of Foxley's employees during a one or two minute telephone conversation that occurred on December 1, 1970. Allegedly, prior to Foxley's December 1, 1970, purchase of cattle from Agri-Land, one of Foxley's accountants, a Mr. Holzapfel, spoke with Kenneth Schuette, the bank's president. During this conversation Holzapfel inquired whether Agri-Land had good title to the cattle, and allegedly Schuette responded that it had, that the proper title papers were held by a correspondent bank, and that he had personally seen the cattle that morning. Foxley alleged that relying on this false representation, it purchased cattle on December 1, 1970, from Agri-Land. In evaluating the potential success of this suit against Bank of Mead, 259 Foxley's counsel noted various discrepancies and weaknesses. First, there was evidence that Foxley purchased the cattle from Agri-Land before Holzapfel's conversation with Schuette. Second, one of PCA's employees informed Foxley after the purchase, but before Foxley's check to Agri-Land was cashed, that PCA had secured interests in the recently purchased cattle. Third, Foxley's suit against the bank relied entirely on an uncorroborated telephone call lasting less than two minutes. There was no certainty that any misrepresentation was made, or if made, was of such a nature that Foxley had any right to rely on it. Other problems also existed: Bank of Mead's total assets were $ 150,000, significantly less than the amount by which Foxley was defrauded; and the lawsuit against Bank of Mead would be before a jury in the county where Bank of Mead was located. Foxley's attorneys feared that local bias in favor of a local bank, and against a large company would significantly hurt Foxley's chance of winning a fraud suit against the bank. The total effect of all these problems was that Foxley's attorneys believed chances of recovery were very, very slim. After reviewing all the information 260 Foxley received from its independent investigation conducted by both its accountants and attorneys, Foxley deducted the entire amount of the purchase price paid for both the Larsen and Nygren cattle from its closing inventory. The effect of this was to increase its cost of goods sold, and thereby decrease its profits for the fiscal year ended February 28, 1971. On March 1, 1965, petitioner Foxley & Co. entered into a lease agreement with a testamentary trust established by William J. Foxley's will. The lease agreement required a base rental of $ 3,000 per month and an additional rental of 50 percent of Foxley & Co.'s annual net profits in excess of $ 10,000 per year. Foxley & Co.'s net profit from its feed lot operation was determined on the basis of the company's fiscal year ending October 31. Effective November 1, 1966, Foxley & Co. changed its fiscal year from October 31 to February 28. Rental, however, was still computed on the October 31 fiscal year. On December 26, 1967, Foxley & Co. agreed to change the fiscal year for computing rental payments to the fiscal year ending February 28. This change was made effective for the period following October 31, 1967. On its income 261 tax return filed for the period ending February 29, 1968, Foxley & Co. deducted rental payments made to the trust covering the period November 1, 1966 through February 29, 1968. ULTIMATE FINDINGS OF FACT As of February 28, 1971, there existed no reasonable prospect of recovering more than $ 3,773 of the amount Foxley paid for cattle during November and December of 1970. OPINION There are two issues we must resolve. First, we must decide whether Foxley, on February 28, 1971, had reasonable prospects of recovering amounts paid for cattle which were never delivered. If so, Foxley was not entitled to a deduction for losses incurred when it was defrauded on two cattle purchases. The second issue we must decide is whether Foxley & Co. should have deducted a portion of a rental expense in its tax year ended February 28, 1967, rather than in its tax year ended February 29, 1968. Generally, section 165 allows a deduction for losses sustained during a tax year. If, however, a loss occurs and at the end of the tax year "there exists a claim for reimbursement with respect to which there is a reasonable prospect of recovery, no portion of the loss with respect to which [there exists such 262 a reasonable prospect of recovery may be deducted]." Sec. 1.165-1(d)(2)(i), Income Tax Regs. Whether a reasonable prospect of recovery on a claim exists is strictly a factual question. Sec. 1.165-1(d)(2)(i), Income Tax Regs.The test to be applied in determining the year of deduction is a practical one. In Boehm v. Commissioner,326 U.S. 287">326 U.S. 287, 293 (1945), relying on Lucas v. American Code Co.,280 U.S. 445">280 U.S. 445, 449 (1930), the Supreme Court stated that, "no definite legal test is provided by the statute for the determination of the year in which the loss is to be deducted. The general requirement that losses be deducted in the year in which they are sustained calls for a practical, not a legal, test." In applying this practical test, we may look at the taxpayer's attitude and conduct, but these subjective factors are not conclusive. We must also look at all the facts before us and draw from them all reasonable inferences and conclusions. Boehm,supra at 293. In considering these facts we should apply a standard of "foresight, and hence * * not look at facts whose existence and production for use in later proceedings was not reasonably foreseeable as of the close of the particular 263 year." Ramsay Scarlett & Co. v. Commissioner,61 T.C. 795">61 T.C. 795, 811 (1974), affd. 521 F. 2d 786 (4th Cir. 1975). In sum, we must look at those facts available to Foxley on February 28, 1971, and determine if, at that time, Foxley, as a practical matter, had reasonable prospects of recovering the amounts it lost on the cattle purchases from Agri-Land. Initially, we note that the parties agree Foxley was defrauded of $ 569,974.51 when it paid Agri-Land for cattle in November 1970, and on December 1, 1970. The cattle Foxley paid for were either owned by other parties, subject to security interests, or nonexistent. Therefore, the only question we have is whether on February 28, 1971, Foxley had reasonable prospects of recovering on claims against Richter, Agri-Land, and Bank of Mead. After considering the pertinent facts, we conclude that as of the close of its tax year, February 28, 1971, Foxley did not have reasonable prospects of recovering more than $ 3,773 on its claims. A review of these facts convinces us that Foxley's attempts to protect itself were all but hopeless. Nevertheless, considering the magnitude of its losses, we believe any prudent businessman would have attempted 264 to protect himself by filing claims against the defrauding parties even though chances of recovery were significantly less than reasonable. On December 3, 1970, after hearing that Agri-Land's business practices were questionable and that Agri-Land was approaching insolvency, Foxley retained lawyers for advice on how to protect itself. Following consultation, Foxley took possession of 4,111 head of cattle, hoping to secure its rights to the cattle. Unfortunately all of these cattle were either owned by unrelated third parties or secured by PCA for credit given to Agri-Land. In an effort to protect itself Foxley had its lawyers locate Richter's and Agri-Land's property. After investigation in December, Foxley's attorneys concluded that both Richter and Agri-Land were virtually judgment-proof. Agri-Land, which filed under Chapter XI of the Bankruptcy Act, readily acknowledged its liabilities exceeded its assets. Foxley's attorneys, after looking at the balance sheet filed by Agri-Land, believed its financial condition was significantly worse than stated and anticipated Agri-Land being forced into straight bankruptcy. To make matters worse, Foxley, as a general creditor, would 265 not be entitled to levy on any property subject to properly perfected security agreements until the secured parties' interests were satisfied. It was the opinion of Foxley's counsel after locating most of Agri-Land and Richter's assets that virtually all assets were subject to properly perfected security agreements, most of which were held by PCA. Foxley's counsel attempted to assure its client some interest in Agri-Land's assets by developing a theory of "inverse order of alienation." Under this theory secured creditors would be required to satisfy their claims out of secured property before they could attach general assets. The only problem with this theory, however, was that after secured creditors' interests were satisfied, and after costs of administrative and Federal and State tax obligations were paid, there would probably be only de minimus assets left from which to satisfy Foxley's claims. Foxley's primary hope of finding a solvent defendant rested in its claim against Bank of Mead. The basis of Foxley's suit against Bank of Mead was that Mead's president, Kenneth Schuette, made fraudulent misrepresentations during a telephone conversation, lasting less than two minutes, 266 with one of Foxley's accountants. During this telephone call Schuette allegedly assured Holzapfel, Foxley's employee, that the Nygren cattle, the subject of Foxley's December 1, 1970, purchase, were free of any liens; that Schuette had seen the cattle that morning; and that the documents of title were held at a correspondent bank. Foxley's fraud theory against Bank of Mead was based on its alleged reliance on Schuette's misrepresentations. Facts concerning Foxley's reliance, however, were not entirely clear. There was evidence that Foxley paid for the cattle prior to the telephone conversation with Schuette. Further, before Foxley's check was cashed, one of PCA's employees informed Foxley that the cattle purchased on December 1, 1970, may have been subject to prior security agreements. Other problems were presented by a fraud suit against Bank of Mead: Foxley's case was built around a very short telephone conversation, and Foxley's primary witness was regarded as a weak witness; the lawsuit against Bank of Mead was to be tried before a jury in the county where the bank did business; and Bank of Mead's net assets were $ 150,000, less than enough to satisfy Foxley's claim. Indeed, 267 Foxley's attorney evaluated the chance of success as very, very slim. 4In sum, Foxley's chances of recovering any significant portion of its claims against Richter, Agri-Land, or Bank of Mead, appeared, on February 28, 1971, to be anything but reasonable. Consequently, Foxley was properly entitled to deduct under section 165, the unrecovered amount it lost as a result of the fraudulent cattle purchase. Although it is remotely possible that Foxley may some day recover some of its claim against the three defendants, this will not provide Foxley with a windfall, and indeed will not deprive the Commissioner of revenue, since under section 1.165-1(d)(2)(iii), Income Tax Regs., and subject to section 111, Foxley must 268 include the amount of any reimbursement in its gross income for the taxable year in which received. The second issue we must decide is whether any part of rental expenses deducted by petitioner Foxley & Co. in its tax year ended February 29, 1968, should have been deducted in its tax year ended February 28, 1967. On March 1, 1965, Foxley & Co. entered into a lease agreement with a testamentary trust established by the will of William J. Foxley. Under this lease agreement Foxley & Co. was to pay the trust rental of $ 3,000 per month plus 50 percent of Foxley & Co.'s annual net profits in excess of $ 10,000. Net profits were determined on Foxley & Co.'s fiscal year ending October 31. Effective November 1, 1966, Foxley & Co. changed the end of its fiscal year from October 31 to February 28. The lease agreement between Foxley & Co. and the trust was not modified to conform with the change in Foxley & Co.'s fiscal year until December 26, 1967. On that date the parties agreed that for the period commencing after October 31, 1967, net profits would be computed on a fiscal year ending on the last day of February. On its Federal income tax return for fiscal year ending February 29, 269 1968, Foxley & Co. deducted as a rental expense rents paid to the testamentary trust for the period November 1, 1966 to February 29, 1968. Respondent contends that $ 9,945.13 of the rent deducted on the return for the period ending February 29, 1968, should have been deducted on petitioner's preceding return since it was attributable to the period November 1, 1966 through February 28, 1967. Petitioner, in contrast contends that under its agreement with the trust its rental liability for the period November 1, 1966 through February 28, 1967, did not accrue until the tax year ended February 29, 1968. We disagree with petitioner. Generally, a taxpayer on an accrual method of accounting may deduct expenses in the taxable year for which all events have occurred so that the fact of liability and the amount thereof can be determined with reasonable accuracy. Sec. 1.461-1(a) (2), Income Tax Regs. The method used by a taxpayer in reporting income must be consistently used by the taxpayer so that it clearly reflects income. Sec. 1.446-1(c)(1)(ii), Income Tax Regs.In the case before us Foxley & Co. was required to pay rental income based in part on its net profits. Prior to Foxley & Co.'s 270 change in its annual accounting period, net profits for purposes of rental payment were determined at the end of its fiscal year. One year following Foxley & Co.'s change in its annual accounting period and for all subsequent years, the net profits, for purposes of rental payment, were determined at the end of Foxley & Co.'s fiscal year. Foxley & Co., however, deviated from this consistent pattern of determining net profits, for purposes of rental payment, during its period of transition from an October 31 fiscal year to a February 28 fiscal year. The effect of this deviation was that rental payments based on Foxley & Co.'s profits during the period November 1, 1966 through February 28, 1967, were not deducted on Foxley & Co.'s income tax return covering the same period. Rather, they were deducted on the return of the following year ending February 29, 1968. Foxley & Co.'s rental expense deduction on its return for the period ending February 29, 1968, therefore covered a period of 16 rather than 12 months. Since Foxley & Co. deviated from its consistent pattern of determining rental expenses based on its profits determined at the end of its fiscal year, and since this deviation *271 resulted in a deduction covering a period extending beyond Foxley & Co.'s annual accounting period, the deduction materially distorted Foxley & Co.'s income. Therefore, to the extent Foxley & Co. deducted rental expenses attributable to the period November 1, 1966 to February 28, 1967, on its income tax return filed for the period ended February 29, 1968, Foxley & Co.'s rental expense deduction must be denied. To reflect the foregoing, Decisions will be entered under Rule 155.Footnotes1. Cases of the following petitioners were consolidated: Five Dot Livestock Co., and Foxley & Co.↩2. All statutory references are to the Internal Revenue Code of 1954, as amended and in effect during the years in question. ↩3. This issue is before us as a result of net operating loss carrybacks from a loss sustained by the Foxley Cattle Co. joint venture in its fiscal year ended February 28, 1971.↩4. As part of his argument respondent alleges that Bank of Mead was covered by a $ 1,000,000 bond to protect the bank from fraudulent acts of its employees. While the bond was large enough to cover Foxley's claim against the bank, Foxley still had to win an unpromising lawsuit. Further, respondent has not satisfactorily persuaded us that the bond in question would cover the alleged misrepresentations made by Schuette, and hence, provide a source for satisfying Foxley's claim.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622440/	CHICAGO WAREHOUSE LUMBER CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Chicago Warehouse Lumber Co. v. CommissionerDocket No. 21427.United States Board of Tax Appeals16 B.T.A. 1416; 1929 BTA LEXIS 2386; July 24, 1929, Promulgated 2386 A cancellation of stockholders' and officers' indebtedness tentatively agreed to in 1922 but as to which formal action was not taken until 1923, held not to justify a deduction for compensation of officers in 1922. Eugene Bernstein, Esq., and Albert E. Gordon, Esq., for the petitioner. Edward C. Lake, Esq., for the respondent. SIEFKIN1416 This is a proceeding for the redetermination of a deficiency in income tax for the year 1922 asserted by the respondent in the sum of $656.25. One error alleged in the petition was withdrawn by the petitioner at the hearing and the only remaining question is with respect to the disallowance of a deduction of $4,800 for compensation of officers. 1417 FINDINGS OF FACT. The petitioner is an Illinois corporation with its principal office at Chicago. It was incorporated in January, 1922, to take over the business formerly conducted by S. R. Taxey as an individual. On incorporation Taxey held 171 shares of the capital stock, Julian Lentin held 25 shares, and James H. Kelly held 25 shares. Taxey paid for his stock with assets of his business and with a note for $1,000, and Kelly and Lentin2387 paid for theirs with cash and notes. At the end of 1922 the amount of such notes totaled $4,800, consisting of one of Lentin for $2,500, one of Kelly for $1,300, and one of Taxey for $1,000. These notes were all in part payment for stock, and were unpaid at the end of 1922. Kelly and Lentin had been employed by Taxey in his business before the petitioner was formed. Lentin's duties with the petitioner were those of general manager. He bought and sold lumber and lumber products and performed duties incidental to his buying and selling. He also kept the books. He devoted all of his time to the petitioner's business. Kelly was yard superintendent and devoted all his time to the petitioner's business. Taxey worked with both Lentin and Kelly and devoted all of his time to the petitioner's business. At the time of the organization of the petitioner, Taxey, Kelly, and Lentin agreed to draw only nominal amounts in salaries until the success of the company was certain with the understanding that the compensation of all would be adjusted at the end of the fiscal year when it was known how much the company could afford to pay. They thought that it might be two or three years before2388 the company would make a profit but were surprised to find that the company made a little money the first year. In October or November, 1922, Taxey, Kelly and Lentin discussed the question of salaries and agreed to charge off the accounts as they then stood on the books and cancel the notes of each. The amounts drawn by each during the year were as follows: S. R. Taxey$2,775.80J. Lentin3,154.00J. H. Kelly2,702.38On January 5, 1923, a directors' meeting was held. The minutes of that meeting read: Special meeting called in session by the President of the Board of Directors of the Chicago Warehouse Lumber Company, at its general offices, convened January 5, 1923; and on motion duly made and seconded, it was unanimously voted that a stock bonus of 10 shares be voted to S. R. Taxey, amount $1,000; 25 shares to Julius Lentin, amount $2,500; 13 shares to James H. Kelly, amount 1418 $1,300; and it is agreed and understood that the above stock bonuses represents the original issue of stock subscribed for by the above parties, which the corporation holds notes in part payment thereof, and these notes are hereby paid by virtue of this bonus. There being2389 no further business, the meeting, upon motion duly made, seconded and carried, adjourned. No new stock was issued as the result of such action, but instead the notes of each officer were canceled and returned to them. This was done in 1923. The directors' action above stated was taken at the suggestion of the company's lawyer, who advised them that such action was necessary to make the action legal. The action was decided on in October or November, 1922, but formal action was not taken until January 5, 1923. The item of $4,800 on account of notes canceled was charged to the surplus account on the books of the petitioner in 1923 after the books had been closed for 1922. In its income-tax return for 1922 the petitioner deducted $4,800 as a stock bonus to officers. The respondent disallowed the deduction and determined the deficiency in question in this proceeding. The petitioner's books were kept during the year 1922 upon an accrual basis. OPINION. SIEFKIN: The petitioner, in order to justify the deduction of $4,800 in 1922, relies upon an oral agreement or understanding in 1922 that such action would be taken. It is clear, however, that corporate action was2390 not taken until 1923 and, consequently, no liability to pay accrued to the petitioner until that year. See . It follows that the action of the respondent in disallowing the deduction in 1922 must be approved. Judgment will be entered for the respondent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622442/	HAWORTH H. PARKS, LAWRENCE V. LONG AND PEGGY J. LONG, AND ESTATE OF KENNETH R. MEGUIAR, DECEASED, MAXINE G. MEGUIAR, EXECUTRIX, AND MAXINE G. MEGUIAR, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentParks v. CommissionerDocket No. 1723-77.United States Tax CourtT.C. Memo 1980-382; 1980 Tax Ct. Memo LEXIS 208; 40 T.C.M. (CCH) 1228; T.C.M. (RIA) 80382; September 15, 1980, Filed 208 Petitioners, officers and shareholders of Parks, Inc., received interest-free loans from the corporation. Held: Loans of money, interest-free, do not create taxable income to the borrowers. Dean v. Commissioner, 35 T.C. 1083">35 T.C. 1083 (1961) and Greenspun v. Commissioner, 72 T.C. 931 (1979) followed. William H. Lassiter, Jr., for the petitioners. Wm. Robert Pope, Jr., for the respondent. STERRETTMEMORANDUM OPINION STERRETT, Judge: By statutory notices dated November 24, 1976 respondent determined deficiencies in income taxes paid and additions to tax under section 6651(a) by petitioners, Haworth H. Parks, Lawrence V. and Peggy J. Long, and Kenneth R. (now deceased) and Maxine G. 209 Meguiar as follows: Haworth H. ParksYearDeficiencyI.R.C. sec. 6651(a)(1)Total1972$1,910.02$283.19$2,193.2119732,317.942,317.9419741,943.731,943.73$6,171.69$283.19$6,454.88Lawrence V. Long, et ux1972$ 692.69$173.17$ 865.861973817.21817.211974281.23281.23$1,791.13$173.17$1,964.30Kenneth R. Meguiar, et ux1972$ 746.02$186.50$ 932.521973758.80758.801974159.64159.64$1,664.46$186.50$1,850.86TOTALS$9,627.28$642.86$10,270.14After concessions the only issue remaining for our decision is whether petitioners received income by virtue of having been the recipients of various interest-free loans from their corporation during the taxable years in issue. All of the facts were stipulated and are so found. The stipulation of facts and the exhibits attached thereto are incorporated herein by this reference. At the time their petition herein was filed, petitioners resided in Nashville, Tennessee. 1 Petitioners filed their Federal income tax returns on a cash-basis for the taxable years ended December 31, 1972, 1973 and 1974 with the Internal210 Revenue Service Center at Memphis, Tennessee. Petitioners Haworth H. Parks, Lawrence V. Long and Kenneth R. Meguiar were shareholders, directors and officers of the corporation known as Parks, Inc., during the years in issue. During the years 1972 through 1974 the amount of stock owned by each of the stockholders of Parks, Inc., was as follows: Name of StockholderNumber of SharesPercentage of TotalHaworth H. Parks45,90058.6Kenneth R. Meguiar10,80013.8Lawrence V. Long10,80013.8James W. Ralston3,6004.6Kenneth Bryant3,6004.6Kenneth S. Patterson3,6004.678,300On June 8, 1974, the corporation redeemed all of Mr. Patterson's stock. Under the authority of a corporate resolution passed October 2, 1966 Parks, 211 Inc., made open account loans to the petitioners who were officers of the corporation. No interest was charged by Parks, Inc., on any amount loaned to the petitioners/officers. Further petitioners did not pay any interest on the amounts loaned to them. Applying the average prime interest rate to the average monthly balance of the loans for each of the petitioners during the years involved, reducing the product by the $100 dividend exclusion for the years 1973 and 1974, respondent concluded that the following adjustments should be made to petitioners' taxable income as a result of the economic benefit received from the interest-free loan: YearsMr. ParksMr. LongMr. Meguiar1972$2,455.63$1,297.04$ 948.0319734,826.612,228.141,553.1019743,771.54896.91319.95During the years at issue each petitioner had an outstanding balance on the sums borrowed from Parks, Inc. No interest was charged or paid for the use of those funds. In these years, the petitioners were officers, members of the board of directors, and salaried employees of Parks, Inc. It is respondent's position that each of the petitioners realized an economic benefit, and212 thus taxable income, from their interest-free use of the corporation's funds. Respondent measures that economic benefit by the interest rate at which such sums could have been borrowed in an arms-length transaction. Respondent concedes that the decision of the present case in controlled by Dean v. Commissioner, 35 T.C. 1083 (1961) as explained by Greenspun v. Commissioner, 72 T.C. 931 (1979), on appeal (9th Cir. November 20, 1979). Thus respondent asked this Court, again, to reverse our decision in Dean. As we said in Creel v. Commissioner, 72 T.C. 1173">72 T.C. 1173, 1179 (1979), on appeal (5th Cir. February 15, 1980), "We again decline * * respondent's invitation to reverse our decision in Dean." For reasons well expressed in Dean, Greenspun, Creel, as well as other cases considering this issue, we refuse to hold that the mere loan of money interest-free creates income to the borrowers. 2 Accordingly, under the rationale expressed in the above cited cases, we find for petitioners on this issue. *213 To reflect concessions by the parties, Decision will be entered under Rule 155. Footnotes1. Respondent issued separate statutory notices to Haworth H. Parks, Lawrence and Peggy Long, husband and wife, and Kenneth and Maxine Meguiar, husband and wife. Mrs. Long and Mrs. Meguiar are parties to this action only by reason of their filing joint returns with their respective husbands. Pursuant to Rule 61, Tax Court Rules of Practice and Procedure↩, petitioners joined in the filing of their petitions.2. Some of the other cases in which respondent has argued, and lost, that interest-free loans have a direct Federal income tax effect are: Suttle v. Commissioner, F.2d (4th Cir. July 1, 1980), affg. a Memorandum Opinion of this Court; Zager v. Commissioner, 72 T.C. 1009">72 T.C. 1009 (1979), on appeal (5th Cir. Feb. 8, 1980); Saunders v. United States, 294 F. Supp. 1276">294 F.Supp. 1276, 1282 (D. Hawaii 1968), reversed on another issue 450 F.2d 1047">450 F.2d 1047 (9th Cir. 1971); amd Joseph Lupowitz Sons, Inc. v. Commissioner, 497 F.2d 862↩ (3rd Cir. 1974).	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4537673/	[Cite as Pendry v. Troy Police Dept., 2020-Ohio-3129.] IN THE COURT OF APPEALS OF OHIO SECOND APPELLATE DISTRICT MONTGOMERY COUNTY LAURA PENDRY, EXECUTOR : : Plaintiff-Appellant : Appellate Case No. 28531 : v. : Trial Court Case No. 2018-CV-1676 : CITY OF TROY POLICE : (Civil Appeal from DEPARTMENT, et al. : Common Pleas Court) : Defendants-Appellees : ........... OPINION Rendered on the 29th day of May, 2020. ........... GERALD S. LEESEBERG, Atty. Reg. No. 0000928, JOHN A. MARKUS, Atty. Reg. No. 0093736, and CRAIG TUTTLE, Atty. Reg. No. 0086521, 175 South Third Street, Penthouse One, Columbus, Ohio 43215 Attorneys for Plaintiff-Appellant DANIEL T. DOWNEY, Atty. Reg. No. 0063753 and PAUL M. BERNHART, Atty. Reg. No. 0079543, 7775 Walton Parkway, Suite 200, New Albany, Ohio 43054 Attorneys for Appellees, Miami County Sheriff’s Office, Chase Underwood and Todd Tennant NICHOLAS E. SUBASHI, Atty. Reg. No. 0033953 and TABITHA JUSTICE, Atty. Reg. No. 0075440, 50 Chestnut Street, Suite 230, Dayton, Ohio 45440 Attorneys for City of Troy Police Department, Joseph Gates, Joseph Long, Matthew Mosier, and Zachariah Bettelon ............. HALL, J. -2- {¶ 1} Laura Pendry, as administrator of the estate of Anthony Robert Hufford, appeals from the trial court’s entry of summary judgment in favor of the appellees on her personal injury and wrongful death complaint against several law-enforcement officers and two political subdivisions following a fatal high-speed police pursuit. {¶ 2} In her sole assignment of error, Pendry challenges the trial court’s summary judgment ruling. She contends genuine issues of material fact exist as to whether three police officers involved in the high-speed chase acted wantonly or recklessly, thereby negating statutory immunity. {¶ 3} The record reflects that Troy police officer Zachariah Bettelon was driving his patrol car around 3:30 p.m. on March 27, 2017 when he heard a dispatch about a stolen pick-up truck. The dispatch reported that the vehicle was traveling south on Interstate 75 from Piqua. Bettelon also learned that the suspect had been seen crying and walking in the middle of State Route 36 before stealing the vehicle. In addition, Bettelon heard that the suspect had been reported doing “donuts” in a field and driving erratically at a high speed, going on and off of the road. Shortly thereafter, Bettelon saw the stolen truck heading south on Interstate 75. The suspect was not driving dangerously or speeding at that time. Bettelon got behind the truck and attempted to stop it with his cruiser’s lights and siren activated. The suspect responded by fleeing at speeds up to approximately 100 miles per hour. {¶ 4} About one minute later, a second Troy police officer, Joseph Gates, joined the pursuit behind Bettelon. As the suspect continued to flee, Miami County sheriff’s deputy Chase Underwood unsuccessfully attempted to lay stop sticks ahead of the truck. Underwood then joined the pursuit on the interstate. Underwood initially was the fifth -3- cruiser in line because two Tipp City police cruisers already had joined the pursuit. 1 Underwood passed one of the Tipp City cruisers, becoming forth in line as the pursuit entered Montgomery County from Miami County at speeds up to 100 miles per hour. {¶ 5} The stolen truck exited Interstate 75 onto Northwoods Boulevard near the airport and headed west driving erratically and speeding. The suspect slowed at Northwoods and North Dixie Drive but did not stop at the traffic light and turned left, heading south on Dixie Drive into Vandalia. The pursuit continued on Dixie Drive with the suspect frequently driving between 70 and 90-plus miles per hour, running red lights, swerving around cars, and at times traveling on the wrong side of the road. Just south of the Route 40 intersection, Bettelon reported over his radio that the stolen truck had hit another vehicle (it had taken off another car’s side mirror). At that time, the Troy police officer in charge, Matthew Mosier, was monitoring the pursuit over the radio. He became concerned about the area getting more congested and consulted Troy police captain Joseph Long about calling it off. At that time, the pursuit was near the intersection of North Dixie Drive and Little York Road. When Mosier told Long the location, Long ordered the pursuit terminated. Mosier promptly ordered the Troy units (Bettelon and Gates) to stop the pursuit, and they immediately complied. Bettelon and Gates turned off their lights and sirens and exited Dixie Drive onto Sudachi Drive. {¶ 6} When the Troy officers terminated the pursuit, a Tipp City police cruiser was first in line behind the stolen truck. Officer Underwood from Miami County was second in line. (He presumably was followed by the second Tipp City unit, which he had passed earlier.) Miami County sheriff’s department lieutenant Todd Tennant also was following 1 No Tipp City officers are a party to the present lawsuit. -4- the pursuit from a distance and monitoring it on the radio, but he did not actively join the chase. Tennant ordered Underwood to terminate the pursuit shortly after the Troy units did so. His reason for terminating was his belief that units from the Ohio State Highway Patrol had taken over. Underwood failed to hear Tennant’s order to terminate due to radio static. Moments later, the stolen truck hit a vehicle driven by Anthony Hufford, who was pulling out of an apartment complex near the intersection of Dixie Drive and Stop Eight road. At the time of the collision, the stolen truck was travelling approximately 90 miles per hour. Hufford was pronounced dead at the scene. The fatal accident occurred approximately one mile and more than one minute after Troy police officers Bettelon and Gates terminated their pursuit. At the time of the collision, Underwood remained the second cruiser in line behind Tipp City. The record does not reflect precisely how far back Underwood was from the stolen truck at the time of the accident. He testified during his deposition that he was able to see the truck “at times” while on Dixie Drive. In a “Traffic Crash Witness Statement” made after the incident, Underwood described the end of the pursuit as follows: I heard Troy PD terminate their involvement in the pursuit. As they peeled off to the left side, Tipp City P.D. unit who was third in the pursuit became the lead cruiser and I followed 2nd. An O.S.P. cruiser turned southbound onto Dixie just in front of us. I thought it was going to take the lead but due to the speed of the pursuit, I stayed 2nd and Tipp City P.D. stayed lead. At Dixie Rd near Stop Eight Rd. I observed heavy dust and smoke. After crossing Stop Eight Rd, I observed the suspect vehicle stopped with heavy damage. * * * -5- {¶ 7} The record also contains a “Traffic Crash Witness Statement” from a motorist, Michael Phillips, who saw the wreck. In response to a question about whether he saw police cars chasing the stolen truck, Phillips responded: “No, sir. It seemed like a minute or so before they got here, but they all got here all at once.” {¶ 8} The trial court entered summary judgment in favor of all defendants, namely the City of Troy, Troy police officers Bettelon and Gates, Troy officer-in-charge Mosier, Troy police captain Long, the Miami County Board of Commissioners (hereinafter “Miami County”), Miami County sheriff’s lieutenant Tennant, and Miami County sheriff’s deputy Underwood. In its decision, the trial court found Mosier and Long entitled to summary judgment “[g]iven the limited nature and extent of their involvement in the pursuit[.]” (Order Granting Summary Judgment at 3.) The trial court also found Tennant, Mosier, and Long entitled to summary judgment given that they only had “participated in the events at a distance” and at reasonable speeds. (Id. at 6.) With regard to officers Bettelon, Gates, and Underwood, the trial court reasoned: * * * All were in constant communication with their superiors regarding the pursuit, all used active lights and sirens, all slowed at intersections, all stayed back of the apparently distraught, impaired and fleeing truck thief who, it must be noted, had begun driving erratically and at high rates of speed BEFORE law enforcement was ever dispatched to engage him and NOT AS THE RESULT OF THE PURSUIT ITSELF! Indeed, what of R.C. Section 2935.03 that imposed on the several Defendants the statutory duty to “arrest and detain, until a warrant can be obtained, a person found violating . . . a law of this state . . . .” [Footnote -6- omitted.] Had these several Defendants failed to discharge their duty to apprehend and detain a distraught, impaired and erratically driving truck thief, presumably they would have been sued for dereliction of duty. So it goes. (Id.) {¶ 9} The trial court then concluded as follows: Understandably, Plaintiff relies heavily on her expert’s opinion that the Troy PD and MCS officers and deputies violated their respective departments’ pursuit policies. But Argabrite [v. Neer, 149 Ohio St. 3d 349, 2016-Ohio-8374, 75 N.E.3d 161] makes it crystal clear that a violation of departmental policy does not equate to per se recklessness or wantonness. [Footnote omitted.] Instead, the Argabrite Court requires that, absent evidence that the officers and deputies (1) knew they were violating departmental policy and (2) that their violations would in all probability result in injury, summary judgment is mandated. And how, exactly, could it be said that Troy PD and MCS law enforcement personnel involved here “knew” they were in violation of departmental policy when they were in constant contact with their supervisors regarding the circumstances of the pursuit and that they “knew” their pursuit would in all probability cause injury when the already distraught, impaired and fleeing truck thief had imperiled the public well before law enforcement had been dispatched to make a welfare check and any effort -7- had been made to interdict the fleeing felon? For the foregoing reasons, the Court GRANTS summary judgment for both the City of Troy Defendants and the Miami County Defendants. (Id. at 6-7.) {¶ 10} “In a case decided on summary judgment, we must determine whether an issue of material fact remains to be litigated, whether the moving party is entitled to judgment as a matter of law, and whether when viewing the evidence most strongly in favor of the nonmoving party, reasonable minds can only reach a conclusion that is adverse to the nonmoving party.” Snyder v. Ohio Dept. of Natural Resources, 140 Ohio St.3d 322, 2014-Ohio-3942, 18 N.E.3d 416, ¶ 20, citing Civ.R. 56(C) and Temple v. Wean United, Inc., 50 Ohio St. 2d 317, 327, 364 N.E.2d 267 (1977). {¶ 11} The evidence here includes deposition testimony of the law-enforcement officials involved, deposition testimony from the plaintiff’s police-practices expert witness, incident reports, witness statements, a police cruiser-cam video, an accident reconstruction report, affidavits, police policy manuals, and other materials. Having examined that evidence, we see no genuine issue of material fact about what occurred on the afternoon of March 27, 2017 when police officers pursued a stolen pick-up truck. The real issue on appeal is whether reasonable minds construing that evidence in the Appellant’s favor could find that any of the officers involved acted in a way that overcomes statutory immunity. {¶ 12} As relevant here, “an employee of a political subdivision is immune from liability unless the employee’s acts or omissions were ‘with malicious purpose, in bad faith, or in a wanton or reckless manner.’ (Emphasis added.) R.C. 2744.03(A)(6)(b). This -8- standard applies to law-enforcement officers just as it applies to other employees of political subdivisions.” Argabrite at ¶ 7, citing Fabrey v. McDonald Village Police Dept., 70 Ohio St. 3d 351, 356, 639 N.E.2d 31 (1994). Revised Code Chapter 2744 also provides immunity for political subdivisions themselves. In particular, R.C. 2744.02(B)(1)(a) cloaks a political subdivision with immunity from liability where “[a] member of a municipal corporation police department or any other police agency was operating a motor vehicle while responding to an emergency call and the operation of the vehicle did not constitute willful or wanton misconduct.” (Emphasis added.) {¶ 13} The issue of statutory immunity for a political subdivision or its employees presents a question of law. Burgin v. Eaton, 2d Dist. Montgomery No. 24757, 2011-Ohio- 5951, ¶ 26, citing Conley v. Shearer, 64 Ohio St. 3d 284, 595 N.E.2d 862 (1992); see also Hoffman v. Gallia Cty. Sheriff’s Office, 2017-Ohio-9192, 103 N.E.3d 1, ¶ 38 (4th Dist.). “Whether a political subdivision employee acted with malicious purpose, in bad faith, or in a wanton or reckless manner generally are questions of fact, however. * * * Thus, a trial court may not grant summary judgment on the basis of R.C. 2744.02(B)(1)(a) or 2744.03(A)(6)(b) immunity unless reasonable minds can only conclude that the employee did not act willfully, wantonly, maliciously, reckless[ly], or in bad faith.” Hoffman at ¶ 38, citing Argabrite at ¶ 15. In resolving this issue, a reviewing court must “bear in mind that while many public employees face the potential for liability under R.C. 2744.03, no other public employee faces the potential danger, violence or unique statutory responsibilities a law-enforcement officer faces. Not only does Ohio law require an officer to arrest and detain a person who is violating the law, R.C. 2935.03(A)(1), it also subjects that officer to potential criminal liability for negligently failing to do so, R.C. 2921.44(A)(2).” Argabrite -9- at ¶ 15. As the Ohio Supreme Court explained in Argabrite: An officer’s role in our society creates a unique lens through which to view his or her actions and through which to determine whether those actions may have been malicious, in bad faith, wanton or reckless. We expect law-enforcement officers to protect the public, but that expectation need not mean that an officer must sit idly by while a suspect flees the scene of a crime, particularly when the suspect’s flight itself endangers the general public further. The danger of a high-speed chase alone is not enough to present a genuine issue of material fact concerning whether an officer has acted with a malicious purpose, in bad faith or in a wanton or reckless manner. Shalkhauser v. Medina, 148 Ohio App. 3d 41, 50-51, 772 N.E.2d 129 (9th Dist.2002). Id. at ¶ 16. {¶ 14} With the foregoing standards in mind, we see no error in the trial court’s entry of summary judgment in favor of the City of Troy, Miami County, Troy officer-in- charge Matthew Mosier, Troy police captain Joseph Long, and Miami County sheriff’s lieutenant Todd Tennant. As a threshold matter, it does not appear that the Appellant has challenged the trial court’s entry of summary judgment in favor of these defendants. The “Argument” section of the Appellant’s opening appellate brief does not mention any of these defendants. The Appellant argues that “[a]s municipal employees, the individual defendants are only entitled to immunity when they act in a manner which is neither reckless nor wanton.” (Appellant’s brief at 13.) She then asserts that “reasonable minds could easily conclude that the individual defendants’ actions were more than negligent -10- and were in fact reckless or wanton.” (Id.) In the remainder of her argument, the Appellant examines only the actions of Troy police officers Zachariah Bettelon and Joseph Gates and Miami County sheriff’s deputy Chase Underwood. She contends a jury reasonably might find that these officers’ actions were reckless or wanton. (Id. at 13-24.) {¶ 15} Given the Appellant’s complete failure to address the actions of Troy officer- in-charge Mosier, Troy police captain Long, and Miami County sheriff’s lieutenant Tennant, she has failed demonstrate error in the trial court’s summary judgment with respect to these defendants, who played supervisory roles and monitored the chase from some distance. As for the political-subdivision defendants, the Appellant’s argument fails to mention them either. We note too that a finding of recklessness by any of the defendant officers would not overcome statutory immunity for the City of Troy and Miami County. As set forth above, political-subdivision immunity exists unless one of the defendant officers involved in the pursuit engaged in “willful or wanton misconduct” in the operation of a police cruiser. The terms “willful” and “wanton” delineate “distinct degrees of care and are not interchangeable.” Anderson v. City of Massillon, 134 Ohio St. 3d 380, 2012-Ohio-5711, 983 N.E.2d 266, ¶ 31. Willful misconduct “implies an intentional deviation from a clear duty or from a definite rule of conduct,” a “deliberate purpose not to discharge some duty necessary to safety,” or a purpose to engage in “wrongful acts with knowledge or appreciation of the likelihood of resulting injury.” Id. at paragraph two of the syllabus. Wanton misconduct, on the other hand, “is the failure to exercise any care [for] those to whom a duty of care is owed in circumstances in which there is great -11- probability that harm will result.” Id. at paragraph three of the syllabus. Ibrahim v. City of Dayton, 2018-Ohio-1318, 110 N.E.3d 730, ¶ 16 (2d Dist.). {¶ 16} We see no evidence from which a trier of fact reasonably could find that any of the three defendant officers involved in the high-speed chase (namely Troy police officers Bettelon and Gates, and Miami County sheriff’s deputy Underwood) engaged in willful misconduct within the meaning of the immunity statute. Nor do we see a genuine issue of material fact as to whether any of them engaged in wanton misconduct. Uncontroverted summary judgment evidence demonstrates that all three officers exercised some care when they pursued the stolen pick-up truck. Among other things, they used lights and sirens, slowed at intersections, maintained radio contact with supervisors, attempted to deploy stop sticks to end the pursuit, backed off of the suspect at times to see if he would slow down, and two of them (the Troy officers) ultimately terminated the pursuit a mile or so before the crash. Therefore, the officers used some care, and the trial court properly granted summary judgment to the City of Troy and Miami County. {¶ 17} The remaining issue, which is the focus of the Appellant’s brief, is whether Troy police officers Bettelon and Gates and Miami County sheriff’s deputy Underwood acted “recklessly” for purposes of overcoming their own immunity. “Reckless conduct” is “ ‘characterized by the conscious disregard of or indifference to a known or obvious risk of harm to another that is unreasonable under the circumstances and is substantially greater than negligent conduct.’ ” Argabrite at ¶ 8, quoting Anderson, paragraph four of the syllabus. “[Recklessness] requires a finding that the probability of harm occurring is great and that the harm will be substantial. A possibility or even probability is not enough -12- as that requirement would place the act in the realm of negligence.” Preston v. Murty, 32 Ohio St. 3d 334, 336, 512 N.E.2d 1174 (1987). “Recklessness, therefore, necessarily requires something more than mere negligence. In fact, ‘the actor must be conscious that his conduct will in all probability result in injury.’ ” O’Toole v. Denihan, 118 Ohio St. 3d 374, 2008-Ohio-2574, 889 N.E.2d 505, ¶ 74, quoting Fabrey, 70 Ohio St. 3d at 356, 639 N.E.2d 31. {¶ 18} The Appellant contends the record reveals genuine issues of material fact as to whether Bettelon, Gates, and Underwood acted at least recklessly in the course of the pursuit. With regard to Bettelon, the Appellant first contends the trial court overlooked the fact that he subjectively determined the suspect was impaired and distraught based on a dispatcher’s report that: (1) the suspect had been seen walking in the middle of the road; (2) he looked like he had been crying; (3) he reportedly had stolen a truck and driven at a high rate of speed; and (4) he had been seen doing “donuts” in a field and repeatedly going off of the roadway. The Appellant questions whether this information was sufficient to support an objectively reasonable belief that the suspect was impaired or whether Bettelon truly had such a belief. (Appellant’s brief at 15-17.) {¶ 19} The Appellant next contends the trial court failed to consider how the suspect was driving on Interstate 75 before Bettelon initiated a stop. Given that the suspects driving performance was lawful at the time, although in a stolen vehicle, the Appellant contends a trier of fact reasonably might conclude that initiating a felony stop at all was wanton or reckless. (Id. at 17.) The Appellant contends the trial court also failed to consider whether deputy Underwood ever should have joined in the pursuit. The Appellant argues that Miami County’s pursuit policy prohibited him from joining because -13- he was not requested or permitted to do so by a supervisor and because at least two other units already were participating in the pursuit. (Id. at 18.) {¶ 20} The Appellant characterizes the pursuit as being initiated for a property crime, i.e., theft of a pick-up truck. She contends Troy’s policy prohibits a pursuit for a property crime unless the suspect presents a risk of physical harm or death and there exists an immediate need for apprehension. Again, the Appellant argues that these circumstances did not exist when Bettelon attempted to stop the suspect on Interstate 75. She contends Bettelon acted at least recklessly when he continued the pursuit on Interstate 75 despite the fact that the suspect sped away at up to 100 miles per hour, weaving in and out of traffic and at times driving on the shoulder. The Appellant argues that Gates and Underwood recklessly made the pursuit more dangerous by joining it on the interstate. (Id. at 18-19.) In addition to terminating the pursuit on the interstate, the Appellant suggests that all of the officers could and should have terminated at other times, including “when the officers exited their jurisdiction, once the suspect exited the highway and entered a more congested area, once the suspect started driving on the wrong side of the roadway, when the suspect passed a school bus in a school zone, and when the suspect sideswiped another vehicle on N. Dixie Drive.” (Id. at 19.) {¶ 21} The Appellant next cites the following list of factors courts have examined to determine whether a police officer engaged in willful, wanton, or reckless misconduct in operating a police cruiser: (1) the officer’s speed; (2) whether the officer was traveling in the correct lane of travel; (3) whether the officer had the right-of-way; (4) the time of day; (5) the weather; (6) the officer’s familiarity with the road; (7) the road -14- contour and terrain; (8) whether traffic was light or heavy; (9) whether the officer made invasive maneuvers (i.e., attempting to force the vehicle from the road) or evasive maneuvers (i.e., attempting to avoid a collision); (10) the nature and seriousness of the offense that prompted the emergency; (11) whether the officer possessed a safer alternative; (12) whether the officer admitted to disregarding the consequences of his actions; (13) whether the officer activated the vehicle’s lights and sirens; and (14) whether the officer violated any applicable departmental policy. Hoffman, 2017-Ohio-9192, 103 N.E.3d 1, at ¶ 49. {¶ 22} Applying the above factors in the present case, the Appellant reasons: * Five police units were traveling at speeds at or near 100 miles per hour; * Officers drove on the shoulder of Interstate 75 in order to keep up with the fleeing suspect and observed the suspect driving into oncoming traffic on multiple occasions; * Both the suspect and the Troy officers ran multiple red lights and stop signs and showed little, if any, regard for traffic on the roadway and failed to slow to reasonable speeds at intersections; * The officers were 10-15 miles outside of their jurisdiction and less familiar with the area; * Other vehicles, drivers, and pedestrians, including the occupants of a school bus travelling in a school zone, were all placed at extreme risk of injury because of the pursuit through both residential and commercial neighborhoods; -15- The pursuit happened during rush hour with moderate to heavy traffic; The officers had to make multiple invasive and evasive maneuvers during the approximately 15-mile pursuit, including weaving in and out of traffic and trying to force the truck to the right lane on Interstate 75; * The pursuit was initiated for a crime against property; * There were safer alternatives, as there was not an immediate need for apprehension; and * The officers violated multiple departmental policies and Ohio law. (Appellant’s brief at 20.) {¶ 23} In light of the foregoing factors, the Appellant argues: All of this conduct, under the circumstances, created a high likelihood of harm or death that would and should be apparent to any reasonable officer. Officer Bettelon knew this, the other officers that joined the pursuit knew this, yet every officer involved chose to continue pursuing the suspect in direct violation of departmental policy, until that risk of harm or death turned into a reality when the suspect struck and killed Anthony Hufford. When police officers engage in high-speed pursuits under these circumstances, it is absolutely foreseeable that the pursuit is likely to result in physical harm or death. That is precisely the reason high-speed pursuit policies have been enacted—to prohibit initiation of any pursuit where the need for immediate apprehension does not outweigh the inherent dangers of such pursuits, and mandate termination of such pursuits. (Appellant’s brief at 20-21.) -16- {¶ 24} The Appellant next asserts that the Argabrite case cited by the trial court is distinguishable. Although that case involved a high-speed police pursuit, the Appellant argues that the underlying offense was burglary and that the suspect driver had struck a police car and fled through residential yards prior to the pursuit. The Appellant also argues that the pursuit in Argabrite involved “moderate” speeds. (Appellant’s brief at 21-22.) Although the Ohio Supreme Court found no recklessness as a matter of law in Argabrite, the Appellant contends the present case involves different facts. {¶ 25} Finally, the Appellant reiterates her belief that Bettelon, Gates, and Underwood did not establish their entitlement to summary judgment. She argues that they failed to establish the absence of a genuine issue of material act as to whether they acted recklessly. She argues their denial of violating departmental police-pursuit policy is not dispositive. She reasons that the trial court’s decision “permits a police officer to act recklessly and plead ignorance after doing so without consequence.” (Id. at 23.) Finally, based on the evidence before us, the Appellant insists that the issue of recklessness must be submitted to a jury for resolution. Therefore, she urges reversal of the trial court’s decision as it relates to Bettelon, Gates, and Underwood. {¶ 26} Having reviewed the record, we see no error in the trial court’s entry of summary judgment in favor of Troy police officers Bettelon and Gates and Miami County deputy Underwood. Viewing the evidence and all reasonable inferences in a light most favorable to the Appellant, we do not believe a trier of fact could find that any of these officer acted recklessly. In reaching this conclusion, we bear in mind the Ohio Supreme Court’s observation of an officer’s “unique lens” on their actions and the potential danger, violence or unique statutory responsibilities faced by officers. Argabrite at ¶ 16. Notably, -17- the Argabrite court recognized that an officer is not obligated to “sit idly by while a suspect flees the scene of a crime, particularly when the suspect’s flight itself endangers the general public further.” Id. The majority also concluded that “the danger of a high-speed chase alone is not enough to present a genuine issue of material fact concerning whether an officer has acted * * * in a * * * reckless manner.” Id. {¶ 27} Contrary to the Appellant’s argument, reasonable minds could not conclude that Bettelon initiated a stop on the highway solely because the suspect stole a truck. The Appellant concedes that a dispatcher also had advised Bettelon about the suspect reportedly walking in the middle of the road and crying before the theft and then driving erratically and at a high rate of speed before the officer observed him. (See Bettelon depo. at 48.) These additional facts reasonably caused Bettelon to believe the suspect might be impaired and pose an immediate threat to the public. This remained true even though the suspect was not driving erratically at the moment when Bettelon initiated a stop. Moreover, we consider it the officers’ sworn duty to at least attempt a traffic stop of a stolen vehicle. {¶ 28} Nor are we persuaded by the Appellant’s argument that the trial court ignored Underwood’s violation of departmental policy by joining the pursuit. The Appellant argues that the policy precluded Underwood from joining a pursuit if two other units already were involved. The Appellant claims Underwood violated the policy because four other units were in pursuit when he joined the chase. Although Underwood disputes the Appellant’s reading of the policy, we see no genuine issue of material fact on the issue of recklessness even if he did violate departmental policy. In Argabrite, the Ohio Supreme Court concluded that a violation of departmental policy does not create a genuine issue -18- of material fact as to whether the violator acted recklessly absent evidence that the violator knew he was violating the policy and knew his violation” in all probability” would result in injury. Argabrite at ¶ 25. Here the record contains no evidence to support a finding that Underwood knew joining the pursuit violated departmental policy. This is particularly true given that he remained in contact with a supervisor who did not order him to terminate the pursuit based on the policy. The record also contains no evidence to support a finding that Underwood knew having five cruisers involved rather than four in all probability would result in injury. {¶ 29} The Appellant further argues that Bettelon violated departmental policy by initiating a pursuit for a property crime where the suspect did not present a risk of physical harm or death and there was no need for immediate apprehension. As set forth above, however, the undisputed facts supported a reasonable belief that the seemingly unstable and distressed suspect was impaired and posed a risk of physical harm to others. Once again, however, we see no genuine issue of material fact on the issue of recklessness even if Bettelon did violate the policy. On the record before us, no trier of fact could conclude that Bettelon knew initiating his pursuit of the suspect on Interstate 75 in all probability would result in injury. Nor do we see a genuine issue of material fact as to whether any of the three officers acted recklessly by continuing the pursuit on Interstate 75 and Northwoods Boulevard, which was in a largely commercial/ industrial area with light traffic. Having reviewed Bettelon’s cruiser-camera video, we note that roads were dry, and the weather was clear. Based on our examination of the video, we do not believe a trier of fact reasonably could find that Bettelon, Gates, or Underwood acted recklessly during this portion of the pursuit. We see no evidence to support a finding that they knew -19- their actions in all probability would result in injury when pursuing the suspect on Interstate 75 and Northwoods Boulevard. Therefore, they did not act recklessly as a matter of law. {¶ 30} In our view, the only real issue is whether any of the three officers acted recklessly by continuing the pursuit after exiting Northwoods Boulevard and turning southbound onto Dixie Drive where the pursuit continued for 4 or more miles. On this portion of the relatively wide and straight 4- and sometimes 5-lane road, the officers continued their use of lights and sirens in part to warn other motorists and pedestrians about the suspect’s flight. Bettelon, the driver of the lead cruiser for most of the pursuit, testified in his deposition that he was familiar with the entire route the suspect travelled. The officers slowed at intersections, periodically backed off from the suspect to see if he would slow down, and maintained radio contact with their supervisors. We note too that Troy officers Bettleon and Gates did terminate the pursuit when it was felt that the risks outweighed the law-enforcement benefit. Even if the timing of this decision might be questioned with the benefit of hindsight, the officers’ termination the pursuit when they did, in consultation with their supervisors, constituted at most negligence under the circumstances before us. In reaching this conclusion, we note that Bettelon and Gates discontinued their pursuit well before the crash. The Appellant’s own evidence demonstrates that Bettelon was so far behind the suspect that he lost sight of the suspect’s truck before terminating the pursuit. (Plaintiff’s Memo Contra Summary Judgment at Drago Exh. A 011.) As for Gates, he was behind Bettelon. The evidence also establishes that more than one minute elapsed from the time Bettelon and Gates stopped the pursuit until the crash. (Id. at Exh. A 012.) This timing is consistent with an incident report Bettelon completed after the crash. (Troy Defendants’ Motion for Summary -20- Judgment at Justice Affidavit Exh. 1 p. 10.) {¶ 31} As for Underwood, he continued the pursuit behind a Tipp City cruiser after Bettelon and Gates pulled off. Underwood also had been made aware of the suspect’s unusual behavior prior to stealing the truck and his erratic driving thereafter. Based on the information known to him and the circumstances of the pursuit, Underwood reasonably could have believed the suspect posed a danger to the public that outweighed the risks of the pursuit. He also testified in his deposition that his only role prior to the crash was backing up the Troy cruisers and, later, the Tipp City cruiser ahead of him. Even if Underwood’s assessment of the situation might be questioned in hindsight, no reasonable juror could conclude that he acted recklessly merely by following one or more other cruisers ahead of him at various times during the pursuit. As the Ohio Supreme Court observed in Argabrite, reckless conduct is “’characterized by the conscious disregard of or indifference to a known or obvious risk of harm to another that is unreasonable under the circumstances and is substantially greater than negligent conduct.’ ” (Citation omitted.) Argabrite at ¶ 8 “These are rigorous standards that will in most circumstances be difficult to establish, especially with respect to a law-enforcement officer carrying out the statutory duty to arrest and detain a person violating the law.” Id. Based on the evidence before us, we hold that Underwood did not act recklessly, as a matter of law, by engaging in the conduct that he did. {¶ 32} Finding no error in the trial court’s entry of summary judgment in favor of the Appellees, we overrule the Appellant’s assignment of error. The judgment of the Montgomery County Common Pleas Court is affirmed. ............. -21- TUCKER, P.J. concurs. FROELICH, J., concurs in judgment only. Copies sent to: Gerald S. Leeseberg John A. Markus Craig Tuttle Daniel T. Downey Paul M. Bernhart Nicholas E. Subashi Tabitha Justice Hon. Steven K. Dankof	01-04-2023	05-29-2020
https://www.courtlistener.com/api/rest/v3/opinions/4475601/	OPINION. Van Fossan, Judge: Petitioner or its transferor placed various mortgages on the property in the years 1922 to 1931. Petitioner acquired the property in a tax free exchange. In 1943 the mortgage liability was $381,000. The mortgagee then foreclosed the mortgage and bought the property at the foreclosure sale for a nominal sum. The original cost of the property to petitioner’s transferor in 1922 was $296,400. From 1922 to 1943 deductions for depreciation attributable to the building on the property were taken and allowed at the rate of $3,000 per year, or a total of $63,000. Capital expenses were incurred over the years in the amount of $1,541.90. The respondent contends that petitioner realized a capital gain in the amount of $146,058.10, upon the foreclosure sale computed as follows: Mortgage in 1943 as reduced by principal payments — the amount respondent contends was “realized”-$381,000. 00 Less adjusted basis: Original cost in 1922_$296, 400. 00 Improvements- 1,541.90 <• Depreciation_ (63,000.00) - 234,941.90 Gain_ 146, 058.10 Section 111 (a) of the Code provides that “the gain from the sale or other disposition of the property shall be the excess of the amount realized * * * over the adjusted basis * * The adjusted basis as provided in section 113 (b) is the unadjusted basis (here the original cost of $296,400) less depreciation allowed (but not less than the amount allowable), plus capital expenses. In the Grane1 case it was held that on the sale of property, a mortgage debt was includible in the “amount realized” as “property” received. The Crane case was followed by our decisions in R. O'Dell & Sons Co., 8 T. C. 1165. affd. (CCA-3), 169 Fed. (2d) 247; and Mendham Corporation, 9 T. C. 320.2 Petitioner contends first that the taxable event was when the property was mortgaged in excess of cost by petitioner’s transferor and that the result should thus be an increased basis for the property in petitioner’s hands. This view was repudiated in our earlier case, Lutz & Schramm Co., 1 T. C. 682. There the taxpayer transferred the property in 1937 to the mortgagee in satisfaction of the debt. It was argued that the taxable transaction did not take place in 1937; that the fair market value of the property at that time was only $97,000 as against the debt in the amount of $300,000; and that in 1934 the creditor had agreed to look only to the property covered by the mortgage for security. We said, however, that: The fair market value of the property transferred is immaterial under the provisions of the revenue act in the computation of gain or loss from the disposition of the property. * . * * There is no question of the fact that the petitioner had received and used for its own benefit the $300,000 and the only repayment it made on this part of the debt was the transfer of the property. The debt was finally satisfied by that transfer. The petitioner’s release from personal liability in 1934 was not a taxable transaction * * . The fact remains that the taxable transaction took place in 1937, and the net result of it was that the petitioner, over a period of years, had enjoyed the full benefit from the receipt of $300,000 by transferring a property which had a basis in its hands for gain or loss of only $257,435.42. * * Here, as in Lutz & Schramm Co., there can be no question “that the petitioner [or its predecessors] had received and used for its own benefit” at least the amount of gain now being taxed. Petitioner has introduced evidence and requested a finding of fact to the effect that the fair market value of the property at the time of foreclosure of the mortgage in 1943 was not more than $320,000. as against a debt of $381,000. Under the view of Lutz & Schramm Co., supra, this value is immaterial and we have, therefore, disregarded the requested finding of fact. Petitioner’s attempts to distinguish Lutz & Schramm Co. are without merit as are its other arguments on this point to the effect that mortgaging without personal liability is a sale of but a lien, security for which is recourse only to the property, with the result that no debt is created. Petitioner finds itself traveling in two ways at once on this argument, for later in its brief it states that: * * * A debt payable only out of certain property is just as surely a debt as one payable in legal currency. * * * This statement was made in connection with the argument that: * * * Since his debt is limited to the value of the property, the property owner cannot be deemed to receive, by way of consideration for his property, debt discharge in a greater amount than the value of the property.* * * In any event, petitioner’s argument that a mortgage without personal liability is but a lien was refuted by the Circuit Court in Commissioner v. Crane, 153 Fed. (2d) 504: * * * The mortgagee is a creditor, and in effect nothing more than a preferred creditor, even though the mortgagor is not liable for the debt. He is not the less a creditor because he has recourse only to the land, * * * Petitioner next contends in the alternative that the amount (if any) “realized” on the foreclosure cannot exceed the fair market value of the property and relies principally on the following footnote 37 to the Supreme Court’s opinion in the Crane case: Obviously, if tbe value of the property is less than the amount of the mortgage, a mortgagor who is not personally liable cannot realize a benefit equal to the mortgage. Consequently, a different problem might be encountered where a mortgagor abandoned the property or transferred it subject to the mortgage without receiving boot. That is not this case. It is apparent from the quoted footnote and the context of the opinion that the Court intended to reserve its views on the situation where, as here, there was no boot in the transfer and the mortgage was foreclosed. We have already dealt with this aspect of the petitioner’s argument in our discussion of Lutz & Schramm Co., supra. We are not persuaded that the language from the Grane case quoted above is authority for changing our views. If the footnote from the Grane case rises above the status of dictum, we are unable to conclude that it is of any application, at least in circumstances such as those here presented where the entire rationale must be dependent upon the concept of basis and “realized” gain on foreclosure. Petitioner cannot elude the impact of the fact that it realized an economic gain of $146,058.10 when the mortgage was foreclosed. None of this amount was taxable prior to the foreclosure of the mortgage in 1943. That event was the first “disposition” of the property within the meaning of section 111 (a). The situation presented in Hirsch v. Commissioner, 115 Fed. (2d) 656, is not presented here. In that case there was a compromise of the amount of the mortgage as between the parties thereto when it became apparent that the value of the property had declined. It was said that there was “nothing of exchangeable value” received. In the present case, however, petitioner borrowed “new money” on the property greatly in excess of the amount respondent seeks now to tax as gain. It cannot be seriously argued that the various mortgagees were making gifts to the petitioner or its predecessor. The indebtedness was at all times a loan and the fluctuation of market value of the property so mortgaged does not change the nature of the security. Nor does a change in the market value affect the amount of the indebtedness outstanding and eliminated at the time of foreclosure. The amount thus became, at that time, a “realized” gain. Petitioner’s premise that the amount of the debt secured by the foreclosed mortgage is limited to the market value of the property, is untenable. Petitioner’s third point is that it should not be charged on foreclosure with a gain that accrued to its predecessor. Petitioner states: * * * The rule in [the Mendham case, supra], were it to stand, would be dispositive of the present ease on the question of whether a predecessor’s economic benefit may be attributed to the successor; * » * Petitioner invites us to “reconsider” the Mendham case, but its arguments are not persuasive, and we adhere to that decision. We hold that the respondent did not err in his manner of computation of gain resulting to the petitioner on the foreclosure of the property. Reviewed by the Court. Decision will be entered wider Rule 50. Crane v. Commissioner, 331 U. S. 1. The taxpayer inherited mortgaged business property valued for Federal estate tax purposes at an amount equal to a mortgage on which the taxpayer was not personally liable. The taxpayer operated the property for a number of years and claimed and was allowed annual depreciation deductions on the building. When the interest on the mortgage became substantially in arrears the taxpayer, under threat of foreclosure, sold the property subject to the mortgage for a proportionately small sum and reported gain in the amount of a net cash proceeds received from the sale. It was held that the unadjusted basis under section 113 was the proper basis for depreciation and bad to be reduced by allowable depreciation to arrive at the adjusted basis and that the taxpayer’s gain should be determined by subtracting the adjusted basis from the amount received on the sale vlus the amount of the mortgage. In the O'Dell case foreclosure and sale of petitioner's mortgaged property cancelled its mortgage indebtedness which was in excess of its adjusted cost basis. It was held that petitioner realized capital gain taxable to it in the year when the mortgagee’s action for a deficiency judgment was barred by local law under which the foreclosure, sale and action for deficiency were to be regarded as one complete transaction. In the Mendham case a foreclosure which eliminated a mortgage indebtedness greater than petitioner’s basis (the same as the basis of petitioner’s transferor since the property was acquired in a tax free exchange), was held to result in a taxable gain notwithstanding that the indebtedness had its inception in a borrowing by petitioner's transferor and that petitioner was not itself liable on the mortgage. The transaction was completed when the mortgage was discharged in exchange for a conveyance of the property the final disposition of which established as taxable gain the difference betVeen the basis for the property and the amount acquired by the earlier borrowing.	01-04-2023	01-16-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622455/	PACIFIC GAS & FUEL COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Pacific Gas & Fuel Co. v. CommissionerDocket No. 104527.United States Board of Tax Appeals47 B.T.A. 15; 1942 BTA LEXIS 747; June 3, 1942, Promulgated 747 During 1936 and 1937 all of petitioner's income came from an agreement by which it received a percentage of all oil and gas produced from certain property on which petitioner held the underlying lease. Under the terms of the agreement petitioner had an option to participate actively in the operation of the property. Petitioner did not exercise that option. More than 50 percent of petitioner's stock was owned by one individual. Held, the amounts received were royalties and petitioner was taxable as a personal holding company under the Revenue Acts of 1936 and 1937; held, further, imposition of the 25 percent penalty for failure to file a personal holding company return is mandatory. George S. Atkinson, Esq., for the petitioner. Donald P. Moyers, Esq., for the respondent. HARRON 16 Respondent determined deficiencies in petitioner's income and excess profits taxes and personal holding company surtax as follows: YearIncome taxExcessprofits taxPersonal holding company surtax25% penalty1936$10.78$47.79$11.95193737.35$25.49317.1079.28Petitioner contests the deficiencies only in so748 far as they relate to the personal holding company surtax and the 25 percent penalties for failure to file personal holding company returns. The primary issue is whether or not certain income from overriding oil royalties constituted personal holding company income within the meaning of section 351 of the Revenue Act of 1936 and section 353 of the Revenue Act of 1936, as amended by section 1 of the Revenue Act of 1937. The facts have been stipulated. FINDINGS OF FACT. Petitioner is a Texas corporation, having its principal place of business at Dallas, Texas. Petitioner filed its income and excess profits tax returns for the years 1936 and 1937 with the collector for the second district of Texas. No personal holding company return has been filed for any year, petitioner contending that it was not a personal holding company. Petitioner's certificate of incorporation contains the following statement of purposes: The purposes for which it is formed is to establish and maintain an oil business with authority to contract for the lease and purchase of the right to prospect for, develop and use coal and other minerals, petroleum and gas; also the right to erect, build and own749 all necessary oil tanks, cars and pipes necessary for the operation of the business of the same, with the incidental right to engage in the royalty business; and to make and perform contracts pertaining thereto, and to do anything and everything necessary, suitable and convenient or proper for the accomplishment of the purposes set forth, or incidental to the powers herein specified, if not inconsistent with the laws of the State of Texas. On October 15, 1934, petitioner obtained an original lease on certain property situated in Karnes County, Texas. On December 24, 1934, petitioner executed an assignment of that lease to the American Liberty Oil Co. in consideration of a payment of $1 cash and payment of $10,000 cash on or before January 20, 1935, and the payment of an additional $10,000 upon completion of a producing oil well. In addition, the assignment provided as follows: Assignee agrees to deliver to the Assignor's credit in the pipe line or tanks to which the wells on the above described premises may be connected one-fourth (1/4) of seven-eighths (7/8) of all oil and/or gas produced and saved from said premises, which shall be in the nature of an overriding royalty and750 shall be 17 delivered to Assignor's credit as hereinabove specified free and clear of any cost, expense or royalty whatsoever. Under the terms of the assignment, after the assignee had been reimbursed in full for the two $10,000 payments and the actual cost of drilling wells, petitioner was given option to elect to share in the actual operation of the lease, in which case petitioner's share of the oil produced would be increased to one-half of seven-eighths. Petitioner, however, did not elect in 1936 or 1937 to participate in the actual operation of the lease. During 1936 and 1937 petitioner's only income was from its one-fourth share of seven-eighths of the gas produced from the above mentioned lease. In the year 1935 petitioner and R. W. Norton drilled for oil on an oil and gas lease known as the Choate lease in Karnes County, Texas, which they owned together. The well was a dry hole, and after it was drilled, petitioner had no activities other than those incident to the handling of its affairs under the agreement with the American Liberty Oil Co.At all times material, more than 50 percent in value of petitioner's outstanding capital stock was owned by one individual751 and all of its gross income in each year was derived from the "overriding royalty" retained under the agreement with the American Liberty Oil Co. In 1936 and 1937 petitioner's income from the above agreement was, respectively, $1,508.71 and $1,104.13, which was its only income. OPINION. HARRON: The question is whether or not the amounts received by petitioner under the agreement with American Liberty Oil Co. constituted personal holding company income for the years 1936 and 1937. The definitions of personal holding company income, section 351(b) of the Revenue Act of 1936 and section 353(h) of the Revenue Act of 1936 as amended, are set forth in the margin. 1 Since the definition 18 is different in the 1936 and 1937 Acts, the two years must be considered separately. 752 Section 351 of the 1936 Act first appeared in substantially the same form in section 351 of the 1934 Act. Therefore, the legislative history of the 1934 Act is important in determining the intent of Congress. From a study of the committee reports on the 1934 Act, it is apparent that the primary object of the personal holding company provisions was to prevent tax avoidance by wealthy individuals through use of the "incorporated pocketbook." See Report of the Ways and Means Committee on the Revenue Bill of 1934, 73d Cong., 2d Sess., H. Rept. No. 704, p. 11; Senate Finance Committee Report on the Revenue Bill of 1934, 73d Cong., 2d sess., S. Rept. No. 558, p. 13, et seq.Petitioner argues that it was not the purpose of the statute to reach this corporation, having regard for the purposes set forth in its own charter as well as the Congressional intent. In making the argument, petitioner overlooks the fact that, in order to carry out its purpose of preventing tax avoidance and at the same time eliminate questions of subjective intent (cf. Ways and Means Report, supra, p. 11), Congress determined that a corporation whose stock was owned by a limited group and whose income753 came from certain sources should be deemed to be a personal holding company. The method which Congress chose to attain its purpose was by definition of a personal holding company in terms of stock ownership and sources of income. Both the House and Senate recognized that such a broad definition might include corporations which were not being used for purposes of avoiding surtaxes on shareholders. H. Rept. No. 704, supra, p. 12; S. Rept. No. 558, supra, p. 15. For that reason provisions were made so that the bill would not work hardship on any corporation except those used to avoid surtaxes on the shareholders. That is, section 351(b)(2)(C) and (d) of the 1936 Act and section 355 of the 1936 Act as amended allow credits in determining the undistributed adjusted net income upon which the surtax is levied, for dividends paid to shareholders. The fact that such provisions were made in the statutes shows that it was not the intent of Congress to exempt from the provisions of the act corporations other than "incorporated pocketbooks." In any event, the terms of the statute, as written, must be followed. A parallel situation in which the courts have recognized that the act754 covers all corporations which come within the scope of statutory definitions, whether or not used to avoid surtaxes on shareholders, is found in the treatment accorded small loan companies. See ; certiorari denied, ; . The real question is whether petitioner's income came from the sources enumerated in the statute. Royalties are included among 19 the enumerated sources. There can be no doubt that the amounts received by petitioner as lessor out of the oil produced from the leased property constituted royalties within the ordinary sense of the word. 2 Petitioner argues, however, that the term as used in the statute does not refer primarily to oil and gas royalties. The Revenue Bill755 of 1934 which passed the House included royalties in personal holding company income. While the bill was pending before the Senate Finance Committee some attempt was made to have corporations dealing in oil and gas royalties excluded from the personal holding company provisions. Revenue Act of 1934, Hearings Before the Committee on Finance on H. R. 7835, U. S.Senate, 73d Cong., 2d sess., pp. 145-153. Despite that attempt to gain special treatment for corporations dealing in oil and gas royalties, the act as passed contained no special mention of oil and gas royalties. The conference report on the bill did, however, contain the following explanation: * * The House bill defined a personal holding company as a corporation, 80 percent of whose gross income was derived from rents, royalties, dividends, interest, annuities and gains from the sale of stock or securities, and 50 percent in value of whose outstanding stock was owned by not more than five individuals. As used in the section, the term "royalty" is not intended to include overriding royalties received by an operating company [emphasis supplied]. [Conference Report on the Revenue Bill of 1934, 73d Cong., 2d sess. 756 , H. Rept., No. 1385, p. 20.] In light of that explanation of Congressional intent, the problem arises whether petitioner was an operating company. It is stipulated that petitioner's only activities during 1936 were incidental to handling its affairs under the agreement with American Liberty Oil Co. Its activities were not the activities of an operating company. The mere fact that petitioner's charter gave it power to engage in active operations and the fact that petitioner had at one time, in a prior year, drilled a dry well, do not make petitioner an operating company. Likewise, we deem it unimportant that under the agreement with the American Liberty Oil Co. petitioner had the option to participate actively in the operation of the property. The fact is that petitioner did not exercise that option. Thus we conclude that royalties received by petitioner were not of the type which Congress intended to exclude from section 351 of the 1936 Act. Since it is conceded that more than 50 percent of petitioner's stock was owned by one individual, and that all of its income during 1936 came from the agreement with American Liberty Oil Co., we hold that petitioner was taxable as a757 personal holding company for the year 1936. 20 The Revenue Act of 1937 made certain changes in the treatment of royalties for purposes of determining personal holding company income. The changes were made by the Senate Finance Committee, with the following explanation: The committee recommends the insertion in section 353 of new title IA, which relates to the gross income of personal holding companies, of a new subsection (sec. 353(h)) dealing with income from mineral, oil, or gas royalties. The effect of the subsection is to exclude such royalties from personal-holding-company income if they constitute 50 percent or more of the gross income of the corporation. This provision is subject to the limitation that, in order for such income to be excluded, the amount allowable for the taxable year for expenses under section 23(a) must constitute 15 percent or more of the gross income. Compensation to shareholders for personal services is not to be counted as part of the 15 percent. This amendment will not exclude royalty income if it constitutes less than 50 percent of the gross income, and it is believed that the 15-percent expenses requirement will furnish a satisfactory758 separation between companies which may be classified as operating companies and the pure holding-company type. The amendment to section 353(a) is a technical amendment made necessary by reason of the insertion of the new section 353(h). [Senate Finance Committee Report on the Revenue Bill of 1937, 75th Cong., 1st sess., S. Rept. No. 1242, p. 1.] The sums received by petitioner were clearly mineral, oil, or gas royalties constituting more than 50 percent of petitioner's gross income. However, the deductions allowable under section 23(a) did not amount to 15 percent of petitioner's gross income. 3 Therefore, under the terms of the statute, the royalties received by petitioner in 1937 constituted personal holding company income. No question need be raised as to whether or not petitioner was an operating company, inasmuch as the existence of deductions under section 23(a) amounting to more than 15 percent of the gross income was deemed by Congress to be a conclusive test of whether or not a company was an operating company. Accordingly, it is held that petitioner was taxable as a personal holding company for the year 1937. 759 Petitioner has not shown that its failure to file personal holding company returns was due to reasonable cause. The erroneous impression that petitioner was not a personal holding company is not the reasonable cause required by section 291 of the Revenue Act of 1936. (on appeal C.C.A., 2d Cir.); ; cf. . Respondent's imposition of the 25 percent penalty must, therefore, be approved. Decision will be entered for the respondent.Footnotes1. SEC. 351. SURTAX ON PERSONAL HOLDING COMPANIES [Revenue Act of 1936]. * * (b) DEFINITIONS. - As used in this title - (1) The term "personal holding company" means any corporation (other than a corporation exempt from taxation under section 101, and other than a bank, as defined in section 104, and other than a life-insurance company or surety company) if - (A) at least 80 per centum of its gross income for the taxable year is derived from royalties, dividends, interest, annuities, and (except in the case of regular dealers in stock or securities) gains from the sale of stock or securities, and (b) at any time during the last half of the taxable year more than 50 per centum in value of its outstanding stock is owned, directly or indirectly, by or for not more than five individuals. * * * * * * SEC. 353. PERSONAL HOLDING COMPANY INCOME [Revenue Act of 1936, as amended]. For the purposes of this title the term "personal holding company income" means the portion of the gross income which consists of: * * * (h) MINERAL, OIL, OR GAS ROYALTIES. - Mineral, oil, or gas royalties, unless (1) constituting 50 per centum or more of the gross income, and (2) the deductions allowable under section 23(a) (relating to expenses) other than compensation for personal services rendered by shareholders, constitute 15 per centum or more of the gross income. ↩2. For cases discussing the meaning of the term "royalties" see ; (on appeal C.C.A., 9th Cir.); and , reversing . ↩3. The gross income shown on petitioner's return for 1937 is $2,043.13, and the only deduction claimed under sec. 23(a) is for legal and professional fees in the amount of $130. In the notice of deficiency respondent reduced the gross income by $939. No adjustments were made to the deductions claimed under section 23(a). ↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622456/	BURROWS MCNEIR, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.McNeir v. CommissionerDocket No. 68480.United States Board of Tax Appeals30 B.T.A. 418; 1934 BTA LEXIS 1335; April 17, 1934, Promulgated 1335 Petitioner acquired corporate stock partly for cash and partly in exchange for other property. He was not a dealer insecurities. He traded property extensively, but it is not shown that he engaged in such trading with intent to make a profit so as to make it a trade or business. Held that a loss sustained by reason of the worthlessness of the stock is not a statutory net loss. Frank J. Albus, Esq., for the petitioner. Richard W. Wilson, Esq., and Dale H. Flagg, Esq., for the respondent. ARUNDELL418 OPINION. ARUNDELL: This proceeding involves deficiencies in income tax determined by the respondent for the years 1929 and 1930 in the respective amounts of $2,736.10 and $186.27. Tax assessed for 1929 in the amount of $36.02 is also disputed, making a total of $2,772.12 in controversy for that year. The controversy for the year 1930 was settled at the hearing by the concession of counsel for respondent of a deductible loss sustained by petitioner in the operation of a farm and the petitioner's abandonment of a claimed bad debt deduction. Decision of no deficiency will be entered for the year 1930. The remaining question is1336 whether a loss sustained in 1928 was a statutory net loss so that petitioner may carry it forward and reduce 1929 income. The 1928 loss was occasioned by the worthlessness of stock of the Alliance Realty Co. Respondent concedes worthlessness in 1928, resulting in a deductible loss of $60,000 and a consequent net loss for the year in the amount of $30,340.69. Petitioner's first acquisition of Alliance Realty Co. stock was in 1925. He loaned money to an acquaintance to enable him "to complete a deal for a hotel" in Florida. He shortly learned that negotiations had not progressed as far as he had been led to believe 419 and endeavored to get his money back. He was unable to obtain repayment and was persuaded to advance additional funds. The advances so made amounted to about $40,000 and for them he received stock, $20,000 common and $20,000 preferred, some of which he sold. He later traded a boat which had cost him about $20,000 for $10,000 common and $10,000 preferred Alliance stock. Still later he exchanged real estate for additional stock in the amount of $40,000. The Alliance Realty Co. acquired and operated the Monterey Hotel. The operation was not successful1337 and the property was taken over by the bondholders in 1928. From the time of construction in 1925 until its surrender to the bondholders in 1928 petitioner had an office in the hotel and supervised its operation. For a number of years petitioner has traded various kinds of property. He has traded cattle, sheep, gasoline engines, automobiles, boats, typewriters, pumps, and electric motors; at one time he traded an airplane for stock of a laundry company; he did some trading in real estate. He made his trades at irregular intervals, at times several in one day and at others not more than one a week. He is a machinist by trade, and his garage in Florida was equipped with a lathe and drill press and other tools. He kept a supply of pumps in the garage. Petitioner received income from a trust fund and from securities other than the Alliance Realty stock. Petitioner's argument is that the Alliance Realty Co. stock was acquired in trades for other property; that his business was that of trading generally as distinguished from trading in securities; that his trades occurred with sufficient regularity and required sufficient time to constitute a business regularly carried on. He1338 does not claim to have dealt in securities sufficiently to make that a trade or business regularly carried on within the meaning of section 117 of the Rvenue Act of 1928. Neither does he claim that the loss was a net loss by reason of his being a heavy stockholder in the hotel company and his business was that of supervising the operation of the hotel property. Cf. , where a net loss deduction was denied to an individual managing a corporation and owning a majority of the stock, the loss growing out of a sale of the stock and payment of notes of the corporation endorsed by the taxpayer. Assuming for the moment that trading property for other property was petitioner's regular trade or business, it does not appear that the stock which became worthless was all acquired in a trade. When he first became involved in the hotel deal he put in cash to the extent of $40,000, for which he received stock. He testified that he sold some of the first acquired stock, but does not say how much. Apparently the sales were not in any substantial amount, as he 420 owned $75,000 or $80,000 worth in 1928. The acquisition of stock for cash1339 obviously was not an acquisition in a trade or an exchange. But passing this, we have the question of whether petitioner's activities as a trader amounted to the conduct of a trade or business regularly carried on. That he had a penchant for swapping things is undeniable on the record, his testimony being that he started trading in early boyhood and has continued it ever since. It does not appear, however, that his trading was conducted with a view to making a livelihood or profit. The intent of reaping a profit - if not a livelihood - is an essential element in bringing a transaction within the accepted definitions of trade or business. See , and cases cited. In , the taxpayer was not dependent on profit from trading for her livelihood, but, as said in the opinion, "it is not denied that petitioner carried on these activities in the hope of profit." Fondness for a particular kind of enterprise or pleasure derived from engaging in an activity does not prevent classification as a trade or business, see *1340 , where the business was that of breeding and raising horses, but in such cases "intention is important," . In the latter case the court concluded from the evidence that the taxpayer "embarked in these enterprises with the expectation of making profits; at least he did so with an earnest and honest intention." In the present case we are unable to find from the evidence that petitioner engaged in the trading of property with any intention of making a profit, and so we are unable to conclude that his trading amounted to a trade or business within the meaning of the taxing statute. Decision will be entered for the respondent for the year 1929, and decision of no deficiency will be entered for the year 1930.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622457/	William A. Boyd v. Commissioner. Mark W. Allen v. Commissioner.Boyd v. CommissionerDocket Nos. 4988, 4989.United States Tax Court1947 Tax Ct. Memo LEXIS 306; 5 T.C.M. (CCH) 1205; T.C.M. (RIA) 47030; February 17, 1947306 Morse D. Campbell, Esq., 821 Ford Bldg., Detroit 26, Mich., and Edmund Darling, C.P.A., 851 Ford Bldg., Detroit 26, Mich., for the petitioners. Melvin S. Huffaker, Esq., for the respondent. HARRON Supplemental Findings of Fact and Opinion HARRON, Judge: The following findings of fact are made and they are supplemental to the Findings of Fact set forth in the Memorandum report in this proceeding which was entered on September 13, 1946 [1Supplemental Findings of Fact In connection with the sale of certain assets of the corporation, Mark W. Allen and Company, to William A. Boyd, Alice L. Allen, and Mark W. Allen, pursuant to a bill of sale dated December 23, 1940, each of the above named purchasers executed notes dated December 31, 1940, as follows: William A. Boyd executed note in theamount of$51,884.38Alice L. Allen executed note in theamount of33,441.50Mark W. Allen executed note in theamount of1,332.25Total$86,658.13The corporation sold all of its assets to Boyd and307 the Allens except land and buildings. The corporation had certain obligations outstanding at the time of the sale of its assets which could be met only from the proceeds which the corporation would receive from the payments to be made on the above notes. William Boyd and Alice and Mark Allen gave their personal guarantee, individually, that they would make monthly payments on their respective notes which would aggregate about $800, or more, per month, about $9,600 per year, so that the notes would be paid not later than ten years from the dates of the notes, if not before the end of ten years. In accordance with this agreement, payments have been made monthly on each note since January 1941. The following schedule shows the total payments made in the years 1941, 1942, 1943, 1944, 1945, 1946, and the balance due on each note on January 1, 1947: 1. Note of William A. Boyd dated Dec. 31, 1940$51,884.38Total payments made during 1941$ 3,264.00Total payments made during 19424,665.74Total payments made during 19438,160.00Total payments made during 19446,859.50Total payments made during 19454,998.00Total payments made during 19464,896.00Total$32,843.24$32,843.24Balance due Jan. 1, 1947$19,041.142. Note of Alice L. Allen dated Dec. 31, 1940$33,441.50Total payments made during 1941$ 3,072.00Total payments made during 19424,391.29Total payments made during 19437,680.00Total payments made during 19446,456.00Total payments made during 19454,704.00Total payments made during 19464,608.00Total$30,911.29$30,911.29Balance due Jan. 1, 1947$ 2,530.213. Note of Mark W. Allen dated Dec. 31, 1940$ 1,332.25Total payments made during 1941$ 64.00Total payments made during 194291.49Total payments made during 1943160.00Total payments made during 1944134.50Total payments made during 194598.00Total payments made during 194696.00Total$ 643.99$ 643.99Balance due Jan. 1, 1947$ 688.26308 During the six years, 1941 to 1946 both inclusive, the total sum of $64,398.52 has been paid on the three notes, leaving a total balance due on January 1, 1947, of $22,259.61. Since 1943, payments on the notes have aggregated $9,600, and more, per year. Payment of $9,600 per year on the three notes during the 2 1/2 years following December 31, 1946, will complete payment in full of the three notes. The makers of the notes intended to pay and agreed to pay the notes in full within, and not later than, ten years after December 31, 1940, and they have fulfilled that intention and agreement during the six years after the above date. For purposes of computing the value on December 31, 1940, of the three notes, the notes were ten year notes. Opinion The parties filed their respective recomputations of the deficiencies under Rule 50 but were not in agreement and the matter came up for hearing on January 29, 1947. At the hearing petitioners contended that the notes in question were 8 1/2 year notes according to the agreements of the makers thereof and their intention at the time of making the notes. The evidence shows that the notes were ten year notes and it has been found as309 a fact that the notes were ten year notes. The parties did not at all times make monthly payments aggregating $800 per month. The total monthly payments ranged above and below $800. A reasonable conclusion from the evidence is that the notes were ten year notes. At the hearing, petitioners contended that the method used by the respondent in valuing the notes as of December 31, 1940, was incorrect, and they offered valuation of the notes under a method they had adopted which assumed that the notes should be valued on the basis of amortization at $849.59 per month at 3 percent interest compounded monthly. The notes did not bear any interest at all. They were not to be paid at the rate of $849.59 per month, total payments on the three notes. The parties agreed to make monthly payments on the notes aggregating $800 per month. The monthly payments have varied in amounts above and below $800 per month during the past six years. Petitioners' method of valuing the notes is improper and is disapproved. Respondent's method of valuation is an acceptable method of arriving at the discounted value on December 31, 1940, of the non-interest bearing notes, employing the use of Table B in Article*310 81.10(i)(11) of Regulations 105. As between the methods employed by petitioners and respondent in arriving at the discounted value in 1940 of the three notes, respondent's method has the support of approval in many instances similar to the situation here. Respondent's method of valuation is, therefore, approved. The recomputations which were filed under Rule 50 on December 5, 1946 and December 11, 1946, are both incorrect in view of the facts found in the Supplemental Findings of Fact. Under the Supplemental Findings of Fact made herein, and the conclusions made above, it becomes necessary for the parties to again recompute the deficiencies under Rule 50, and revised recomputations may be filed. Decisions will be entered under Rule 50. Footnotes1. The decision has not been entered but has been awaiting recomputation of the deficiencies in income tax under Rule 50.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622458/	FERDINAND E. MARCOS, DECEASED, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentMarcos v. CommissionerDocket Nos. 1091-94, 11514-94United States Tax CourtT.C. Memo 1994-528; 1994 Tax Ct. Memo LEXIS 536; 68 T.C.M. (CCH) 1002; October 20, 1994, Filed 536 For petitioner: John D. Singleton and James P. Linn. For respondent: William E. Bonano, Alan Summers, and Henry E. O'Neill. GERBERGERBERMEMORANDUM OPINION GERBER, Judge: Respondent filed motions to dismiss for lack of jurisdiction on the ground that the petitions were not filed by a proper party in both of the above-enumerated cases. We must decide whether the decedent's surviving spouse, Imelda R. Marcos, has the capacity to petition this Court on behalf of decedent. BackgroundFerdinand E. Marcos, former president of the Republic of the Philippines, died in Honolulu, Hawaii, on September 28, 1989. On October 15, 1993, and April 6, 1994, respondent issued notices of deficiency addressed to Ferdinand E. Marcos (decedent) in care of his surviving spouse and to an attorney. The notices determined income tax deficiencies for the taxable years 1986, 1987, 1988, and 1989 in the amounts of $ 1,023,647, $ 1,258,171, $ 684,260, and $ 1,179,608, respectively. Petitions were filed on behalf of decedent by his surviving spouse, Imelda R. Marcos (hereinafter sometimes referred to as surviving spouse). Mrs. Marcos has not caused a probate proceeding to commence; however, the 537 Republic of the Philippines, on October 16, 1992, filed a petition in the Philippine courts captioned "IN THE MATTER OF THE PROBATE OF THE WILL OF FERDINAND E. MARCOS/PETITION FOR ISSUANCE OF LETTERS OF ADMINISTRATION". The petition contained allegations that decedent left personal and real property in the Philippines and in other countries with a "probable value" of 24 million Philippine pesos. In addition, it was alleged that decedent had acquired "ill-gotten wealth" and that the Republic was seeking an amount approximately 125 billion Philippine pesos. It was further alleged that decedent had left, in Hawaii, a last will and testament, dated and executed June 23, 1988, and that his surviving spouse and a son were named as executors. The Republic also alleged that Mrs. Marcos and other heirs of decedent are incompetent to serve as executors or administrators "by reason, among others, of their want of integrity." 1 The Republic sought to have its nominee issued letters of administration for decedent's estate. A copy of the alleged will was annexed to the Republic's petition, and it was alleged that Mrs. Marcos and other heirs, for more than 3 years after decedent's death, neglected538 to initiate probate proceedings, irrespective of whether the alleged will was spurious or genuine. Mrs. Marcos lodged a document in opposition to the Republic's petition alleging, among other things, that the Republic was incompetent to file a petition for probate and that the surviving spouse does not possess decedent's alleged original will. Mrs. Marcos also stated in her document that if the estate is probated, she and her son, and not a Republic nominee, should be named fiduciaries of the estate. Mrs. Marcos 539 also argued that, without the original will, the copy cannot be the subject of a probate proceeding. After respondent moved to dismiss the petitions filed herein, surviving spouse filed a response that, in pertinent part, explains that surviving spouse has been substituted as the legal representative of decedent in two legal actions in both Federal and State courts of Hawaii for the purposes of acting as a fiduciary. 2 It is then requested that this Court, in a like manner, permit surviving spouse to act as a fiduciary in order to protect and safeguard decedent's rights or, in the alternative, that this Court permit additional time for a court's appointment of a fiduciary to proceed with these income tax cases. At a May 23, 1994, hearing involving respondent's motion to dismiss for lack of jurisdiction, petitioner's counsel pointed540 out that surviving spouse had not been appointed as the decedent's estate's fiduciary or representative and that no proceeding had matured to the point where a court-appointed representative could exist. He also pointed out that it was surviving spouse's intent to institute probate proceedings in Ilocos Norte, Province of Luzon, Republic of the Philippines, at "the appropriate time." In that regard, it was explained that surviving spouse was engaged in about 70 civil and criminal litigation matters in the Philippines, including the petition for probate by the Republic. Finally, Philippine law was discussed at the hearing and the question arose as to whether surviving spouse was entitled to administer the community property estate and represent decedent for purposes of initiating legal proceedings. Respondent submitted a declaration of foreign law by Juan G. Collas, Jr., a member of the Philippine bar who has been accepted by this Court as an expert on Philippine law. Attorney Collas concluded that a surviving spouse does not have the capacity under Philippine law to bring an action on behalf of a decedent without first being appointed as a representative by a court. Attorney 541 Collas also concluded that the Philippine community property provisions would not permit a surviving spouse to administer the community property estate without first being court appointed. Mrs. Marcos has not presented any declaration of foreign law and has not specifically expressed disagreement with the conclusions of attorney Collas, which we accept under Rule 146 3 as a correct interpretation of Philippine law. There is no disagreement between the parties here concerning the fact that the Republic of the Philippines was decedent's domicile at the time of death. DiscussionWe cannot acquire jurisdiction of a case unless the petition is filed by the taxpayer or an individual or entity authorized to act on the taxpayer's behalf. Fehrs v. Commissioner, 65 T.C. 346">65 T.C. 346, 348 (1975). Under Rule 60(a)(1), "A case shall be brought by and in the name of the person against whom the Commissioner determined the 542 deficiency * , or by and with the full descriptive name of the fiduciary entitled to institute a case on behalf of such person." In that regard, Rule 23(a)(1), concerning the caption to be placed on the pleadings, requires a format where "The name of an estate * * shall precede the fiduciary's name and title". In this regard, Mrs. Marcos did not designate herself as the fiduciary of decedent's estate on the pleadings filed with this Court. Rule 60(c), in pertinent part, provides that "The capacity of a fiduciary or other representative to litigate in the Court shall be determined in accordance with the law of the jurisdiction from which such person's authority is derived." The burden of establishing that surviving spouse was a fiduciary or person authorized to act on decedent's behalf is on petitioner. Fehrs v. Commissioner, supra at 349. The burden has not been carried in these cases. Mrs. Marcos admits that there has been no court appointment or formal authorization for any individual or entity to act on behalf of decedent. Mrs. Marcos points out that State and Federal courts in Hawaii have allowed her to act as a fiduciary in a few court543 proceedings. However, Mrs. Marcos has not specified the circumstances under which those courts permitted her to represent the interests of decedent or the authority under which the courts granted permission. Mrs. Marcos has advanced a possible theory under which a surviving spouse, pursuant to Philippine community property law, may be empowered to represent a deceased or incapacitated spouse with respect to the community property. Respondent's proffered foreign law expert's conclusion, however, convinces us that, under Philippine law, a surviving spouse is without capacity to institute a legal proceeding without first being appointed as a representative by a court. We also find it unusual that, 5 years after decedent's death, no probate proceeding has been instituted, even though decedent appears to have died possessed of an estate and may have had a will. This phenomenon is also illustrated by surviving spouse's resistance to the Republic of the Philippines' attempt to institute a probate proceeding. We recognize that it may be in the interests of surviving spouse to delay the probate of decedent's estate. We also recognize that this delay will result in a situation where, 544 prior to payment, a subsequently authorized representative will be denied a forum to controvert respondent's income tax deficiency determinations for 1986 through 1989. Only a refund proceeding may be available. However, we are without authority to accept or create jurisdiction in a situation where the person seeking jurisdiction lacks capacity to do so. Finally, Mrs. Marcos has asked us to delay ruling on our jurisdiction in order to provide time to pursue multifarious litigation which could result in the appointment of a representative who would have court-approved capacity to pursue or validate this proceeding. 4 We note that Mrs. Marcos has been less than certain about when a person with court-approved capacity could exist. Petitioner's counsel has indicated that Mrs. Marcos intends to begin a probate proceeding in the Republic of the Philippines at "the appropriate time." Assuming that we could permit such delay, we would decline to do so under such precarious circumstances. Accordingly, we must grant respondent's motions to dismiss these cases for lack of jurisdiction due to Imelda R. Marcos' lack of capacity to represent decedent. 545 To reflect the foregoing, Appropriate orders will be entered.Footnotes1. In this regard it was specifically alleged that: The Marcos Heirs have had direct participation as co-conspirators of the Decedent, in grave abuse of his position as President of the Republic of the Philippines, in defrauding the * * [Republic of the Philippines] of billions of pesos. The Marcos Heirs have also individually abused and taken advantage of their positions as public officers and/or immediate relatives of the former dictator in defrauding * * * [the Republic of the Philippines].↩2. It appears that Mrs. Marcos was permitted to represent decedent's interests by defending against legal action, whereas in this instance Mrs. Marcos is attempting to initiate litigation.↩3. All Rule references are to the Tax Court Rules of Practice and Procedure.↩4. Rule 60(a)(1)↩ allows petitioner a "reasonable time" in which to have the petitions ratified.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622460/	NEW ENGLAND FURNITURE & CARPET CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.New England Furniture & Carpet Co. v. CommissionerDocket No. 11128.United States Board of Tax Appeals9 B.T.A. 334; 1927 BTA LEXIS 2619; November 25, 1927, Promulgated 2619 At the beginning of the petitioner's fiscal years ended January 31, 1920, and January 31, 1921, there stood on the books of account of petitioner installment accounts receivable representing sales effected prior to the beginning of the fiscal year when petitioner was following the straight accrual method of accounting. Held, that petitioner may not include in invested capital of the fiscal years in question as earned surplus the profits included in installment accounts receivable at the beginning of each fiscal year which had not been collected at the beginning of such fiscal year. A. S. French, C.P.A., for the petitioner. J. B. Harlacher, Esq., for the respondent. SMITH 335 In this proceeding the petitioner asks for a redetermination of tax liabilities as follows: Fiscal yearDeficiencyOverassessmentJanuary 31, 1920$36,470.53January 31, 1921143.40January 31, 1922$1,613.93January 31, 192310,381.96Total36,613.9311,995.89The only question presented to the Board for decision is in connection with the fiscal years ended January 31, 1920, and January 31, 1921, and is whether the petitioner2620 may include in invested capital accounts receivable as of the beginning of each fiscal year which had not been collected at the beginning of the fiscal year. The findings of fact are stipulated as follows: FINDINGS OF FACT. 1. The petitioner filed its appeal to the Board of Tax Appeals on the 20th day of January, 1926. 2. The net income of the petitioner for the fiscal year ending January 31, 1920, is $192,941.21, computed on the installment basis as set forth in the attached Schedule A, in accordance with the provisions of sections 212(d) and 1208 of the Revenue Act of 1926. 3. The net income of the petitioner for the fiscal year ending January 31, 1921, is $284,288.91, computed on the installment basis as set forth in the attached Schedule A in accordance with the provisions of sections 212(d) and 1208 of the Revenue Act of 1926. 4. The only question involved in this appeal which has not been agreed upon by the parties hereto is whether or not this petitioner is entitled to include in invested capital for the fiscal year ending January 31, 1920, the sum of $364,737.46 and to include in invested capital for the fiscal year ending January 31, 1921, the sum of $80,544.82. 2621 5. The said sum of $364,737.46 represents the unrealized and deferred profits as at January 31, 1919, on the balance of $810,527.69 of the installment accounts receivable as at January 31, 1919. 6. The said sum of $80,544.82 represents the unrealized and deferred profits as at January 31, 1920, on the balance of $178,988.48 of the installment accounts receivable as at January 31, 1920, for sales made prior to February 1, 1919, the date upon which petitioner changed its method of reporting income to the installment basis. 336 7. The invested capital for the fiscal year ending January 31, 1920, after eliminating the said item of $364,737.46 as described in paragraph 5 above, is the sum of $898,080.55. 8. The invested capital for the fiscal year ending January 31, 1921, after eliminating the said item of $80,544.82 as described in paragraph 6 above, is the sum of $977,263.09. 9. In the event that petitioner's contentions with reference to the computation of petitioner's invested capital for the fiscal years ending January 31, 1920, and January 31, 1921, are not sustained by the Board the petitioner and the respondent stipulate and agree that the computation2622 of the tax for the fiscal years ending January 31, 1920, and January 31, 1921, shall be as set out in Schedule A attached hereto and made a part of this stipulation. 10. In the event that petitioner's contentions with reference to the computation of petitioner's invested capital for the fiscal years ending January 31, 1920, and January 31, 1921, are sustained by the Board the petitioner and the respondent stipulate and agree to the petitioner's tax for the fiscal years ending January 31, 1920, and January 31, 1921, on the following basis: by including in the invested capital for the fiscal year ending January 31, 1920, as heretofore set forth the sum of $364,737.46 and by including in the petitioner's invested capital for the fiscal year ending January 31, 1921, as heretofore set forth the sum of $80,544.82. OPINION. SMITH: The Board has no jurisdiction to determine the tax liabilities for the fiscal years ended January 31, 1922, and January 31, 1923, the Commissioner not having determined any deficiencies for those years. Section 274(g), Revenue Act of 1926. The petitioner's excess-profits-tax liability for the fiscal years ended January 31, 1920, and January 31, 1921, is2623 to be determined upon the installment sales basis as set forth in section 212(d) and section 1208 of the Revenue Act of 1926. The petitioner claims the right to include in invested capital the profits included in the installment accounts receivable outstanding at the beginning of each taxable year. The identical question was before the Board in Appeal of Blum's, Inc.,7 B.T.A. 737">7 B.T.A. 737, in which the Board stated: In computing invested capital in the deficiency notice, the Commissioner included, as a part of the earned surplus, the entire profits of installment sales effected in 1917. In the amended answer, the Commission eliminated from invested capital of 1918, 1919, and 1920, the profits included in the outstanding 1917 installment accounts receivable, at the beginning of each of those years, as unrealized and not properly includable in earned surplus. The petitioner opposes this action of the Commissioner on the ground that the entire profits on installment sales of 1917 were returned and taxed as income of that year. We think that the action of the Commissioner, as set forth in the amended 337 answer, is correct. For the years in question, the installment2624 sales method has been used in computing income. By the use of that method all of the profits actually reduced to possession in those years, are to be returned as income of those years. The fact that some of these profits have been returned in prior years is to be ignored, and they are, for the purposes of the tax, to be treated as a part of the earnings of the years in which they are reduced to possession. Obviously, the petitioner may not include in invested capital of any taxable year, as earned surplus, the earnings of that year and subsequent years. The above-mentioned opinion of the Board was promulgated after the hearing in the instant case. In his brief counsel for the petitioner refers to the opinion of the Board in Blum's, Inc., supra, and contends that it was in error in that it was the intention of Congress in the enactment of the Revenue Act of 1926 to give taxpayers making returns upon the installment basis the benefit of including in invested capital profits upon sales made prior to the beginning of the taxable year even though the profits had not been collected and reflected in taxable net income. He calls attention particularly to article 422625 of Regulations 45, and rulings of the Commissioner contained in O.D. 623, 3 C.B. 105, and O.D. 793, 4 C.B. 87, as approved, supporting his contentions. In his brief he states: It is the petitioner's contention that section 212(d) of the 1926 Act was passed and made retroactive for the purpose of giving installment houses benefits that would accrue to them by reporting profits from installment sales as being realized as of the date of the collection of the outstanding accounts and to confirm the acts of the Commissioner, who pursuant to authorized regulations had permitted installment houses to so report their profits and in so reporting their profits had permitted the inclusion in invested capital of tax-paid profits on installment accounts receivable for prior years for the year in which the taxpayers changed their method of reporting profits from installment sales. We should call attention to the fact that the rulings of the Commissioner, published in a cumulative bulletin, other than Treasury Decisions, are not regulations of the Commissioner published pursuant to law with the approval of the Secretary of the Treasury. The regulations of the Commissioner*2626 contained in article 42 are noncommittal upon the point in issue. The underlying theory of returns made upon the installment basis has been set forth by the Board in Appeal of B. B. Todd, Inc.,1 B.T.A. 762">1 B.T.A. 762, and that of Blum's, Inc., supra. No argument is advanced by the petitioner which, in our opinion, warrants any modification of the portion of the opinion in Blum's, Inc., quoted above. Judgment will be entered on 15 days' notice, under Rule 50.Considered by LITTLETON, TRUSSELL, and LOVE. TRUSSELL dissents.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622461/	Oxygen Therapy Research Foundation v. Commissioner. Alexander J. Berndt and Elizabeth Berndt v. Commissioner. Alexander J. Berndt v. Commissioner.Oxygen Therapy Research Foundation v. CommissionerDocket Nos. 64323, 64346, 64347.United States Tax CourtT.C. Memo 1958-192; 1958 Tax Ct. Memo LEXIS 32; 17 T.C.M. (CCH) 956; T.C.M. (RIA) 58192; November 17, 195832 Alexander J. Berndt (an officer), 39 Colonial Parkway, Dumont, N.J., for the petitioner in Docket No. 64323, and pro se. William F. Fallon, Esq., for the respondent. MULRONEY Memorandum Findings of Fact and Opinion MULRONEY, Judge: Respondent determined deficiencies in income tax in these consolidated cases as follows: Oxygen Therapy Research FoundationDocket No. 64323Additions to TaxYearDeficiencySec. 293(b)Sec. 291(a)1946$11,988.41$ 5,994.21$ 2,997.10194730,466.0315,233.027,616.51194840,062.3620,031.1810,015.59194930,048.6715,024.347,512.1719503,959.371,979.69989.84Alexander J. Berndt and Elizabeth BerndtDocket No. 64346Additions to TaxSec.Sec.YearDeficiencySec. 293(b)294(d)(2)294(d)(1)(A)1949$36,527.34$18,263.67$2,252.68$3,754.48Alexander J. BerndtDocket No. 64347Additions to TaxSec.Sec.YearDeficiencySec. 293(b)Sec. 291(a)294(d)(2)294(d)(1)(A)1946$15,756.59$ 7,878.30$ 3,939.15$ 945.40$1,575.67194751,116.4725,558.243,124.695,207.84194869,751.2034,875.6017,212.804,131.076,885.1219504,508.422,254.211,127.11270.51450.8433 At the outset of the trial counsel for respondent announced to the court "we are withdrawing our assertion of the fraud penalties in these cases so that the only issue * * * will be with respect to the tax deficiencies and the delinquency penalties determined against the taxpayers." Findings of Fact Some of the facts were stipulated and are found accordingly. The Oxygen Therapy Research Foundation, hereinafter referred to as the Foundation, was, during the years involved, a corporation organized under the laws of the State of New Jersey. Petitioners Alexander J. Berndt and Elizabeth Berndt are husband and wife residing in Dumont, New Jersey. Their joint Federal income tax return for the taxable year 1949 was filed with the then collector of internal revenue at Newark, New Jersey. Alexander J. Berndt filed his individual Federal income tax return for the taxable year 1947 with the then collector of internal revenue at Newark, New Jersey. On May 19, 1945 the Foundation applied for a ruling that it was exempt from Federal income tax under section 101(6) of the Internal Revenue Code of 1939. A tentative ruling was given to the Foundation in a letter dated May 19, 1947, granting34 the exemption on the basis stated in the application that it was to engage in oxygen research and it was to provide oxygen breathing devices free of charge to any person, regardless of race, color or creed, if needed for therapeutic reasons. A formal ruling of exempt status was issued to the Foundation on May 22, 1947. Subsequently, the Federal Bureau of Investigation made an investigation of the Foundation and on September 20, 1949 petitioner Alexander J. Berndt and the Foundation were each indicted on seven counts of making false and fraudulent statements during the year 1947 to the War Assets Administration for the purpose of obtaining surplus war materials. Said petitioners each pleaded guilty in the District Court of the United States for the District of New Jersey to four counts in the indictment and were sentenced. In these counts, to which they pleaded guilty, it was charged they falsely represented the Foundation as a nonprofit educational or public health institution for the purpose of securing property from the War Assets Administration, not for their own needs but for resale. The ruling granting the Foundation tax exempt status was retroactively revoked in a notice35 dated March 17, 1950. During the course of the Internal Revenue Service's investigation the revenue agent endeavored to obtain the books and records of the Foundation. The books and records of the Foundation were never made available, Berndt maintaining that they had been turned over to the F.B.I. and never returned to him. The books and records had, prior to this time, been turned over to Berndt's attorney by the F.B.I. Respondent's determination of deficiencies of income tax in all of the dockets was computed by resort to third party records with some other adjustments set forth in detail in the statutory notices. Berndt was the president of the Foundation and the only person authorized to sign checks on its funds during all of the years in question. Opinion With the issue of fraud removed by respondent, the petitioners had the burden of proof Petitioner Alexander J. Berndt appeared pro se and he filed the petition and appeared for the Foundation, of which he was the president. The evidence consists of his testimony, in which he stated that since the books and records of the Foundation were not available to him, he could not know "the accuracy of the amounts claimed by the government. *36 " Since the petitioners failed to carry their burden of proof, respondent's determinations of deficiencies and additions thereto, except with respect to the additions to tax for fraud, are sustained. It is worth stating that respondent placed in evidence the receipt of the attorney who had represented Berndt and the Foundation in the criminal action showing that he, as attorney, had received the books back from the F.B.I. The attorney also testified he received the books from the F.B.I. in October 1950 and whereas he had no independent recollection of delivering them to Berndt, he said this "would be natural" and he knew he had not had them in his possession since October of 1950. Decisions will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622462/	DAVID HERMAN, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentHerman v. CommissionerDocket No. 7998-76.United States Tax CourtT.C. Memo 1979-30; 1979 Tax Ct. Memo LEXIS 497; 38 T.C.M. (CCH) 119; T.C.M. (RIA) 79030; January 22, 1979, Filed Robert B. Kroner and Harvey R. Poe, for the petitioner. Steven I. Klein, for the respondent. GOFFEMEMORANDUM FINDINGS OF FACT AND OPINION GOFFE, Judge: The Commissioner determined a deficiency in petitioner's Federal income tax in the amount of $ 31,236.36 for the taxable year 1972. Due to concessions the only issues for our decision are: (1) Whether the Federal income tax return filed by petitioner for the taxable year 1972 constitutes a joint return under section 6013, Internal Revenue Code of 1954; 1 and (2) Whether respondent is estopped from challenging498 the joint status of petitioner's return filed for the taxable year 1972. FINDINGS OF FACT Some of the facts have been stipulated. The stipulation of facts and the exhibits attached thereto are incorporated by this reference. Mr. David Herman, herein referred to as petitioner, resided at Livingston, New Jersey, at the time of the filing of his petition in the instant case. He filed his Federal income tax return for the taxable year 1972 with the Internal Revenue Service at Newark, New Jersey. Petitioner and Celia Herman were married on January 14, 1945. Petitioner filed joint Federal income tax returns with his wife for the taxable years 1945 through 1952. He prepared the returns and Mrs. Herman signed the returns at the request of petitioner. In 1951 and 1952 Mrs. Herman experienced serious mental disorders and on December 23, 1953, she entered the Essex County Hospital Center (herein hospital) for treatment. The hospital is an institution for the treatment of mental disease. On January 20, 1954, the Essex County Juvenile and Domestic Relations Court ordered the commitment of Mrs. 499 Herman to the hospital until a final hearing could be conducted to determine her mental condition. Following this order of the court Mrs. Herman was adjudicated insane on February 1, 1954, and by the language of the adjudication she was ordered to remain at the hospital until her reason was restored. The hospital characterized her mental condition as paranoid schizophrenia. Mrs. Herman remained at the hospital as a patient for approximately 23 years and was released by the hospital on July 1, 1976. In the years 1969, 1970, 1971 and 1972 the direct costs for hospitalization of Mrs. Herman were $ 5,475, $ 5,986, $ 7,621.20 and $ 8,784, respectively. Of these amounts petitioner paid $ 720 per year with the balance paid by the State of New Jersey and the County of Essex, New Jersey. In addition, petitioner paid for incidental expenses for dental work and clothes. He visited his wife on numerous occasions during the period of her hospitalization but never discussed financial affairs or matters relating to the filing of Federal income tax returns. This was due to his wife's mental condition which on occasion resulted in acts of violence. In addition, during the course of her hospitalization500 Mrs. Herman received extensive amounts of medication as well as electro-shock therapy which among other things affected her memory. Mrs. Herman was unaware of petitioner's filing income tax returns. She did not sign any of the returns filed for the taxable years 1953 through 1972 and at no time did Mrs. Herman file a separate return. Mrs. Herman did not file a separate return for the taxable year 1972 presumably because her gross income was less than $ 750. After Mrs. Herman was committed to the hospital, petitioner, in 1953, employed Mr. Philip Weinberg, a certified public accountant, who prepared petitioner's Federal income tax return for the year 1953. He informed Mr. Weinberg that his wife had been adjudicated insane and, therefore, unable to sign the return for 1953 which had been prepared as a joint return. Following this discussion with petitioner, Mr. Weinberg contacted someone at the Internal Revenue Service in an effort to determine if and what measures could be taken so that petitioner could file a joint return. Mr. Weinberg was informed that if he would state the exact facts surrounding petitioner's circumstances and attach the statement to the return it would probably501 be sufficient to satisfy the requirements for filing a joint return. Accordingly, Mr. Weinberg attached the following statement to the return filed by petitioner for the taxable year 1953: Note: Because my wife is at present in an institution, I am unable to obtain her signature. However, this return is to be considered a joint return. I have signed her name. Petitioner continued to file his Federal income tax returns for subsequent years in the same manner. His wife's mental condition remained basically the same with varying degrees of improvement and relapses. Mrs. Herman was a beneficiary of her father's estate but the Superior Court of New Jersey, Chancery Division of Essex County, appointed a custodian of her share of the estate and ordered that her share be deposited with the clerk of the Superior Court due to her mental incompetence. The action with regard to this matter took place on October 27, 1961. Petitioner was never appointed guardian of Mrs. Herman. Petitioner instituted divorce proceedings on December 28, 1972. On March 5, 1973, the court in which the proceeding was pending ordered the appointment of a guardian ad litem for Mrs. Herman. Petitioner never502 visited his wife after he filed his petition for divorce. On June 26, 1973, petitioner filed a Federal income tax return for the taxable year 1972 in the same manner he had followed in the past. Attached to this return was the following statement: Statement re: Missing signature of Celia Herman. This tax return is to be considered a joint return. My wife is ill and in an institution.I am unable to obtain her signature * * Petitioner reported on this return taxable income in the amount of $ 265,082.66 of which $ 74.52 represented interest income derived from a savings account of Mrs. Herman. 2 On September 14, 1973, a judgment of divorce between petitioner and Mrs. Herman was granted. Mrs. Herman continued to be hospitalized and on February 3, 1975, was designated by the hospital as a voluntary patient. The hospital then released her from its custody on July 1, 1976. 503 Respondent conducted an audit of petitioner's Federal income tax returns for the taxable years 1969, 1970 and 1971. The focus of the audit did not involve a review of the joint status of the returns and respondent made no objection as to petitioner's election to file a joint return. Each return audited by respondent contained the statement regarding the condition of Mrs. Herman. The Commissioner, in his statutory notice of deficiency, determined that petitioner was not entitled to file a joint Federal income tax return for the taxable year 1972. OPINION Petitioner married Celia Herman in 1948 and for the taxable years 1948 through 1952 they filed joint Federal income tax returns. Petitioner was responsible for the preparation of these returns and at the appropriate time he requested Mrs. Herman to sign them. In 1953 Mrs. Herman was admitted to the Essex County Hospital Center (herein hospital) where she was diagnosed as paranoid schizophrenic. In January 1954 Mrs. Herman was adjudicated insane and ordered to remain at the hospital until her reason was restored. She remained at the hospital until her release on July 1, 1976. Following Mrs. Herman's admission to the504 hospital, petitioner employed a certified public accountant and informed him about Mrs. Herman's mental condition. The accountant contacted someone at the Internal Revenue Service and inquired as to what procedure should be followed in filing a joint return for 1953 due to Mrs. Herman's condition. The accountant testified that he could not remember with whom he discussed this matter but stated that someone instructed him to attach a statement to the return describing the reason Mrs. Herman's signature was not on the return. The accountant prepared the return as a joint return and attached to the return was the following statement: Note: Because my wife is at present in an institution, I am unable to obtain her signature. However, this return is to be considered a joint return. I have signed her name. Petitioner continued to file "joint returns" for each taxable year up to and including the taxable year in issue in the same manner. During this period of time respondent conducted audits of petitioner's returns for the taxable years 1969, 1970 and 1971 regarding matters which did not include the propriety of the election to file joint returns. Petitioner visited Mrs. Herman on505 numerous occasions during her hospitalization but never discussed matters relating to financial matters or filing income tax returns. The reason petitioner never discussed these topics with Mrs. Herman was due to her mental condition. In 1961 it was necessary to appoint a custodian to take responsibility for Mrs. Herman's interest received from her father's estate. On December 28, 1972, petitioner instituted a divorce proceeding against Mrs. Herman and sought the appointment of a guardian ad litem to protect her interests pending the final outcome of the proceedings. On March 5, 1973, the court appointed a guardian ad litem for Mrs. Herman. Petitioner ceased his visits with Mrs. Herman on December 28, 1972, but filed a Federal income tax return for the taxable year 1972, as he had done for the previous 19 years, on June 26, 1973. On September 14, 1973, petitioner's divorce was granted. Petitioner was never appointed guardian of Mrs. Herman. The first issue for our decision is whether respondent is estopped from determining that petitioner is not entitled to file a joint Federal income tax return for the taxable year 1972. Petitioner takes the position that because respondent506 examined the income tax returns filed by petitioner in 1969, 1970 and 1971 without contesting their indicated joint status, respondent is estopped from determining that petitioner is not entitled to file a joint return for the taxable year 1972. Petitioner argues that the facts surrounding the filing of his return for 1972 are identical to those facts existing at the time of his filing the previous returns. In addition, petitioner contends that by filing returns for the taxable years 1953 through 1972 in a manner consistent with the directions of some employee of the Internal Revenue Service he justifiably relied upon respondent and, therefore, respondent is not in a position to question the return filed for the taxable year 1972. Respondent argues that his acquiesence in petitioner's filing income tax returns as joint returns in prior years does not prevent him from attacking the character of the return for the taxable year in issue. We agree with respondent.It is well settled that respondent cannot be estopped from asserting a position as in the instant case even though he raised no objection to similar circumstances in prior years. Easter v. Commissioner,338 F.2d 968">338 F.2d 968 (4th Cir. 1964),507 affg. a Memorandum Opinion of this Court, cert. denied 381 U.S. 912">381 U.S. 912 (1965); Caldwell v. Commissioner,202 F.2d 112">202 F.2d 112 (2d Cir. 1953), affg. a Memorandum Opinion of this Court; South Chester Tube Co. v. Commissioner,14 T.C. 1229">14 T.C. 1229 (1950). Likewise the fact that petitioner filed returns from 1953 through 1972 without respondent's objection as to their joint status is of no moment. Union Equity Cooperative Exchange v. Commissioner,58 T.C. 397">58 T.C. 397, 408 (1972), affd. 481 F.2d 812">481 F.2d 812 (10th Cir. 1973), cert. denied 414 U.S. 1028">414 U.S. 1028 (1973). In addition, respondent disagrees with petitioner's assertion that he justifiably relied upon the instruction of the Internal Revenue Service in preparing his returns for the taxable years 1953 through 1972 and argues that the facts in the instant case will not support petitioner's position. We agree.In an attempt to prove that he relied upon instructions from the Internal Revenue Service petitioner offered the testimony of his certified public accountant. However, his accountant's testimony was limited to the following: Q. When it came to signing the tax return, what transpired508 between you and Mr. Herman? A. Well, as I understood it, Mr. Herman -- we'd prepared a joint tax return. Mr. Herman told me that his wife was ill. That she was in an institution.That he could not get her signature. And to the best of my recollection, under the circumstances, I didn't know the procedure at the exact moment, and I believe by telephone information from the department, it was suggested, or I was directed to -- I wouldn't say which specifically -- that the exact facts be stated in a statement attached to the return, and have Mr. Herman sign it, and that it would probably be okay to file as a joint return. * * Q. Can you recall who you spoke to at the Internal Revenue Service? A. I have no notation of who I spoke to, no. This testimony falls short of the mark in establishing justifiable reliance. Not only did petitioner's accountant fail to identify the official with whom he spoke but by his own testimony demonstrated that he had no basis upon which to assure the filing of an acceptable joint return. To the contrary, the most petitioner could expect was a probability of approval. Accordingly, we hold that respondent is not estopped from challenging509 the filing status of petitioner's income tax return for the taxable year 1972. The next issue for our decision is whether the Federal income tax return filed by petitioner for the taxable year 1972 constitutes a joint return within the meaning of section 6013, Internal Revenue Code of 1954, as amended. Respondent's determination that the return filed by petitioner for the taxable year in issue was not a joint return is presumptively correct and petitioner has the burden of proving that such determination is erroneous. Welch v. Helvering,290 U.S. 111">290 U.S. 111 (1933); Rule 142(a), Tax Court Rules of Practice and Procedure. It is clear and without dispute that in order for petitioner to carry his burden of proof he must demonstrate by a preponderance of the evidence that he and Mrs. Herman intended to file a joint return for the taxable year 1972. Federbush v. Commissioner,34 T.C. 740">34 T.C. 740 (1960), affd. 325 F.2d 1">325 F.2d 1 (2d Cir. 1963); Bour v. Commissioner,23 T.C. 237">23 T.C. 237 (1954). Likewise, our decision in this regard must be based upon all the facts and circumstances surrounding petitioner's return. Helfrich v. Commissioner,25 T.C. 404">25 T.C. 404 (1955).510 Petitioner takes the position that Mrs. Herman's intent to file jointly with him for the taxable year 1972 is evident from the fact that she customarily signed the tax returns filed by petitioner from 1948 through 1952, a time prior to her commitment to the hospital for mental care. Petitioner argues that the absence of Mrs. Herman's signature on the return filed for 1972 does not in and of itself negate her intent to file a joint return. In so arguing he relies upon Abrams v. Commissioner,53 T.C. 230">53 T.C. 230 (1969); Federbush v. Commissioner,34 T.C. 740">34 T.C. 740 (1960), affd. 325 F.2d 1">325 F.2d 1 (2d Cir. 1963); Kann v. Commissioner,18 T.C. 1032">18 T.C. 1032 (1952), affd. 210 F.2d 247">210 F.2d 247 (3d Cir. 1953); and Howell v. Commissioner,10 T.C. 859">10 T.C. 859 (1948), affd. 175 F.2d 240">175 F.2d 240 (6th Cir. 1949). We agree that Mrs. Herman's signature or lack thereof on the tax return in issue is not crucial in our decision. However, we are not convinced from the record before us that Mrs. Herman's intention to file a joint return for 1972 carried over from the years prior to her institutionalization, as petitioner argues. The fact that511 petitioner filed returns for 1953 through 1972 with a statement attached to the returns declaring his wife was unable to sign the returns due to her mental condition does not prove Mrs. Herman's intentions with respect to the taxable year in issue. We have thoroughly examined the hospital records which contain the medical history of Mrs. Herman's treatment during the 23-year period she was under the care of the hospital. From this examination we are convinced that she was an incompetent and unable to manifest an intention to file a joint return with petitioner for the taxable year in issue.Moreover, the fact that a guardian ad litem was appointed to represent Mrs. Herman's interests pending the final outcome of divorce proceedings instituted by petitioner further demonstrates her inability to join with petitioner in filing the return for 1972. Petitioner further asserts that he acted as Mrs. Herman's agent when he prepared and filed the return in issue. We cannot agree with petitioner because Mrs. Herman, due to her mental condition, was at all times relevant unable to either authorize petitioner to so act, or manifest any intention that petitioner act as her agent when filing*512 the return in issue. 3 See Restatement (Second) of Agency, sec. 22 (1957). Accordingly, we hold that petitioner has failed in his burden of proving that Mrs. Herman intended to file a joint Federal income tax return for the taxable year 1972.Due to concessions of the parties, Decision will be entered under Rule 155. Footnotes1. All section references are to the Internal Revenue Code of 1954, as amended.↩2. During the time she was hospitalized Mrs. Herman had no other income with the exception of the following: (1) accumulated interest from 1961 to 1976 in the amount of $ 1,934.70 generated by the proceeds from her father's bequest; and (2) dividends from insurance policies for the taxable years 1969 and 1970 in the respective amounts of $ 20.17 and $ 23.02.↩3. The facts in the instant case are distinguishable from those set forth in Rev. Rul. 56-22, 1 C.B. 558">1956-1 C.B. 558↩, wherein the Commissioner held that a wife who was managing her husband's business during his mental incompetency before he was adjudged legally incompetent could file a valid return for the husband.In the instant case petitioner did not manage any of his wife's property; it was held by the Clerk of the Superior Court. Mrs. Herman had been adjudged insane 18 years before the return for 1972 was filed. Petitioner sued Mrs. Herman for divorce prior to the close of the taxable year before us and a guardian ad litem was appointed for Mrs. Herman before petitioner filed the return involved.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622463/	GIFFORD M. MAST, JR. AND JUDITH A. MAST, ET AL., 1 Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent Mast v. CommissionerDocket Nos. 43312-85, 43313-85, 43314-85, 43315-85, 43316-85United States Tax CourtT.C. Memo 1989-438; 1989 Tax Ct. Memo LEXIS 437; 57 T.C.M. (CCH) 1355; T.C.M. (RIA) 89438; August 17, 1989David J. Duez, for the petitioners. Albert B. Kerkhove, for the respondent. DRENNENMEMORANDUM OPINION DRENNEN, Judge: These cases involved primarily the value of certain interests in a large collection of antique stereoscopic negative glass plates and related material, known as the Keystone-Mast Collection, which were donated by the petitioners to the University of California at Riverside (UCR) in 1977 and 1981. On their income tax returns for those years petitioners claimed a value of $ 1,427,253 for the entire collection and deducted varying portions of that value as charitable438 contributions on the returns of the various petitioners. Respondent simultaneously issued notices of deficiency to each of the petitioners on September 6, 1985, which completely denied petitioners' charitable deductions, based on a revenue agent engineer's valuation of zero for the Collection. Petitioners all filed petitions with this Court on December 5, 1985. After a trial at which petitioners offered the testimony of three experts and respondent offered the testimony of one expert on the value of the Collection, we concluded that the value of the entire Collection was $ 1,250,000 and that petitioners were entitled to deductions for their respective shares of the Collection donated by them to UCR. We now have before us Petitioners' Motion for Litigation Costs, under section 7430, Internal Revenue Code. While petitioners submitted an affidavit listing costs incurred of more than $ 25,000, they limit their claim to $ 25,000 as provided by section 7430, prior to its amendment by the Tax Reform Act of 1986 and the Technical and Miscellaneous Revenue Act of 1988. Respondent filed a written response to petitioners' motion requesting the Court to deny the motion. 439 Respondent does not dispute the reasonableness of the costs set forth in petitioners' affidavit. A hearing on the motion is not deemed necessary. As required by section 7430(a) this was a civil proceeding brought against the United States in connection with the determination of a tax and was brought in a court of the United States, the United States Tax Court. Petitioners are the prevailing parties and may be awarded a judgment for reasonable litigation costs incurred in such proceeding if they meet the requirements of section 7430. Those requirements are (1) that petitioners must have exhausted their administrative remedies; (2) that they must establish that the position of the United States was unreasonable; and (3) that they substantially prevailed with respect to the amount in controversy or with respect to the most significant issues presented. 2We find that petitioners have met all the requirements of section 7430440 of the Code and Rule 231 of the Rules of Practice and Procedure of the United States Tax Court and are entitled to reasonable litigation costs. Since respondent does not dispute the reasonableness of the costs claimed by petitioners and they appear to be reasonable to us we grant petitioners' motion and award them $ 25,000 as litigation costs. Petitioners exhausted their administrative remedies. Shortly after they received Notices of Proposed Deficiency, they timely filed protests with the Appeals Division of the Internal Revenue Service, attended a meeting with an IRS appeals officer and engaged in other correspondence with the appeals officer. When this effort failed to bring about an administrative resolution, notices of deficiency were issued by respondent and petitioners timely filed petitions with this Court. Petitioners substantially prevailed with respect to the amount in controversy and the most significant issue, being the value of the Keystone-Mast Collection donated to UCR. Petitioners claimed its value to be $ 1,427,253; respondent determined it to be zero. The Court re-determined its value to be $ 1,250,000. The Court also held that petitioners were entitled to441 deduct disproportionate portions of their undivided interests in the Collection. However, respondent urges that petitioners failed to meet the third requirement of the law because they failed to prove that the position of the United States in this proceeding was unreasonable. Whether we look at the position taken by respondent prior to the filing of the petitions or only subsequent thereto we find that the position taken by the United States was unreasonable. See Sher v. Commissioner, 89 T.C. 79">89 T.C. 79, 84 (1987), affd. 861 F.2d 131">861 F.2d 131 (5th Cir. 1988), in which this Court held that the substantial justification standard adopted by the Tax Reform Act of 1986 was not a change from the prior reasonableness standard. In his notices of proposed deficiencies sent to petitioners in 1985 respondent determined that the value of the Collection was zero, based upon a report by an IRS engineer. Petitioners filed protests and at conferences with the IRS appellate officer assigned to the cases, presented the valuation report of Mead B. Kibbey, an appraiser who had spent 30 to 40 hours examining the Collection, who found the value to be $ 1,427,253 by applying a per unit442 value to the various items in the Collection. When the parties could not agree on a value, respondent issued notices of deficiency in which he determined the value of the Collection to be zero. Petitioners filed petitions for redetermination with this Court on December 5, 1985, and employed another appraiser, Marjorie Neikrug (Neikrug), an experienced appraiser of photographic archives, to value the Collection. After spending 35 hours examining the Collection, Neikrug estimated its value to be $ 1,592,611, based on per unit values. This appraisal was filed with respondent and petitioners discussed it with respondent's appeals officer. Respondent rejected the appraisals and advised petitioners that he was retaining an expert to make an appraisal. Respondent retained John S. Waldsmith (Waldsmith), a dealer in stereophotographic prints to value the Collection. Waldsmith subsequently spent 102 hours extensively examining the Collection at UCR and arrived at a valuation of $ 1,207,500 by breaking the Collection into segments and assigning per unit value for items in each segment. His appraisal report was received by respondent in October of 1986 but a copy was not given to petitioners. 443 However, respondent did not abandon the position he took in the notices of deficiency, i.e., that the value of the Collection was zero. Respondent refused to give petitioners a copy of Waldsmith's report, but advised them that he was engaging another expert to make an appraisal. Respondent finally contacted Penelope A. Dixon (Dixon) concerning an appraisal in July of 1987, after the cases were placed on a trial calendar to be held in September of 1987. Dixon was not retained by respondent to make an appraisal until August 12, 1987. As a result Dixon was forced to prepare her appraisal report without physically examining the Collection. In this report, a copy of which petitioners received on September 11, 1987, just four days prior to call of the cases on the trial calendar, Dixon appraised the Collection at $ 500,000. Her appraisal was based on sales prices of allegedly comparable collections. Because this was a radically different method than used by petitioners' appraisers it was not possible to reconcile her approach with the petitioners' appraisals. Dixon did arrange to review the Collection several days before the trial, after which she lowered her appraisal value to $ 450,000. 444 At the trial petitioners offered as their evidence the appraisal report of Waldsmith and his testimony. Respondent did not offer any evidence to support his determination that the value of the Collection was zero. Nevertheless respondent did not amend his answer to change his position taken in the notice of deficiency that the value of the Collection was zero. Despite the fact that respondent failed to comply with the Court's Rule 143(f) requiring that expert witness reports shall be submitted to the Court and the opposing party not later than 15 days prior to the call of the trial calendar on which the cases shall appear, the Court permitted Dixon's report to be filed as a part of the record in these cases in order to assist the Court in learning more about the property being valued. In cases such as this we think it was unreasonable for respondent to determine, without the advice of an expert, that a collection such as the Keystone-Mast Collection had a zero value and then stick with that determination throughout the trial despite the fact that he had no evidence to support his position and petitioners provided the testimony of three qualified appraisers who valued the Collection445 near the same amount as claimed by petitioners. Compare Frisch v. Commissioner, 87 T.C. 838">87 T.C. 838 (1986) and Minahan v. Commissioner, 88 T.C. 492">88 T.C. 492 (1987). In fact respondent's own expert, Dixon, did not support respondent's position. See Rutana v. Commissioner, 88 T.C. 1329">88 T.C. 1329, 1334 (1987). The first expert engaged by respondent, Waldsmith, arrived at a value that was close to the value claimed by petitioners, but respondent chose to ignore this witness and engage someone else who might support respondent's position. Even this was done so late that no interested party had time to analyze the witness' testimony before she took the stand. When the property being valued is as unique as was the Collection it is very important that the other party be given a copy of the appraisal report long enough before the trial to analyze it for possible flaws. That is the purpose of the Court's Rule 143(f). Respondent had ample time, about two years between the time his determination was made and the trial, to review his determination and get expert advice. Furthermore, we do not believe respondent was reasonable, after hearing the opinions of the experts, *446 not to try to reach an agreement with petitioners that would protect the rights of both parties, without attaching to it a condition that petitioners concede the other issue in the cases. Respondent has failed to provide us with any authorities or evidence to support his second position that petitioners were not entitled to deduct as charitable contributions their disproportionate transfers of interests in the Collection. We find nothing in the record to support such a position. For these and other reasons we have concluded that petitioners are entitled to receive reasonable litigation costs from respondent which we have determined to be $ 25,000. An appropriate order will be entered. Footnotes1. Cases of the following petitioners are consolidated herewith: Terrill A. Mast and Melinda L. Mast, docket No. 43313-85; Eric W. Mast and Martha E. Mast, docket No. 43314-85; Sara B. Mast, docket No. 43315-85; and Roderic B. Mast, docket No. 43316-85.↩2. Sec. 7430↩ was amended by sec. 1551(a) of the Tax Reform Act of 1986, which was effective for actions commenced after December 31, 1985. Since the petitions in these cases were filed December 5, 1985, those amendments do not apply to these cases.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622465/	APPEAL OF HARRY W. BOCKHOFF.Bockhoff v. CommissionerDocket No. 3206.United States Board of Tax Appeals3 B.T.A. 560; 1926 BTA LEXIS 2627; February 3, 1926, Decided Submitted November 6, 1925. 2627 Determination of the rate of exhaustion of a patent. Lawrence Baker and R.L.P. Wallace, Esqs., for the taxpayer. Ward Loveless, Esq., for the Commissioner. TRAMMELL 560 Before TRAMMELL and LOVE. This is an appeal from the determination of a deficiency for the year 1919 in the sum of $887.17. The deficiency arises from the refusal of the Commissioner to allow a deduction for the exhaustion of a certain fractional interest in a patent. FINDINGS OF FACT. 1. The taxpayer on June 30, 1917, acquired by gift a one-fifth interest in a certain patent No. 1,012,024, and, for the year 1919, received $27,163.20 as royalties, the same being his share of a 10 per cent royalty on net sales of the product manufactured under the patent. The Commissioner has refused to allow any deductions for exhaustion of the patent. 561 2. The circumstances of the acquisition of the interest in the patent were as follows: The patent in question was originally issued December 19, 1911, to one J. R. Stephenson, an employee of the National Automatic Tool Co., an Ohio corporation. He assigned this patent to the corporation. In 1913 another corporation2628 of the same name was formed under the laws of Indiana, which took over the assets of the Ohio corporation. All the assets of the Ohio corporation, with the exception of the patents, were transferred to the new corporation. This left the ownership of the patent in question in the Ohio corporation. William F. Bockhoff was the sole stockholder of the old corporation and, upon its dissolution, became the sole owner of this patent. William F. Bockhoff then made a contract or royalty agreement with the new corporation, by the terms of which the corporation was granted the exclusive right to manufacture under said patent, for which it was to pay 10 per cent on the sales of the machinery manufactured under this patent. Subsequently, as of June 30, 1917, the said patent was transferred as a gift by William F. Bockhoff to his wife and four children - one fifth to each. The taxpayer, Harry W. Bockhoff, was one of the children and, in 1919, received $27,123.20 as his share of the royalties. 3. The patent was on a certain machinery device known as a "Variable Speed Multiple Drill." The ordinary unpatented drills had but one speed, while, under the patent, drills were enabled to be operated2629 at two or three rates of speed. It gave the choice of two or more independent changes of speed to each drill at the will of the operator, permitting the simultaneous drilling of different sized holes at different speeds in the same operation. This feature excited great interest in the tool industries and at once caused an increasing demand for this type of machine. There were several types of this machine, with prices ranging from approximately $1,000 to $4,000, and weighing from 3,000 to 10,000 pounds, depending upon the number of sizes of drills in each machine. The additional cost of a variable-speed machine over a single-speed machine ranges from $35 to $50, while the difference in selling price was approximately $160. The principal market of the device consisted of the manufacturers of automobiles, automobile parts, electrical equipment, heavy cast-iron parts, textile-making machinery, and auto-repair shops. By 1917 the advantages of the variable drills were well known in the tool industry and among the manufacturers requiring drilling machinery. The product had long passed the experimental stage and had become the standard equipment of leading manufacturers and was rapidly2630 replacing the one-speed 562 drill. Its market and usage had become established in the machinery trade. The said National Automatic Tool Co. manufactured both the single-speed and the variable-speed drills, but the greater portion of the demand was for the variable-speed machine. The relative sales of the single-speed and the variable-speed models, for the period 1913 to 1917, were as follows: Year ending.Year.Total sales.Single speed.Change of speed.Change of speed percentages.Dec. 311913$74,950.47$19,112.37$55,838.1074.5Dec. 31191495,385.3138,821.8256,563.4959.3Dec. 311915397,288.44125.543.15271,745.2968.4First 6 months1916325,538.9151,109.61274.429.3084.3June 301917760,239.53101,872.10658,367.4386.6It will be noted that the total sales of the variable-speed model for the fiscal year ended June 30, 1917, was $658,357.43 and constituted 86.6 per cent of all types of drills sold. 4. As of June 30, 1917, the National Automatic Tool Co. could reasonably anticipate and expect, for the remaining life of the patent (11 years, 5 months, and 19 days) sales of the patented device2631 of the average annual sum of at least $600,000, and an annual income of $60,000 to the owners of the patent. 5. The taxpayer claims a value of $525,628.20 for the patent at the date of his acquisition, that his one-fifth interest was worth $105,155.64, and that the annual deduction for exhaustion of his interest should be $9,556.87. The Commissioner refused to allow any deduction, for exhaustion of the patent, from the gross income of the taxpayer. 6. The total value of the patent as of June 30, 1917, the date of acquisition by the taxpayer, together with the contract, was $337,000, and the value of the taxpayer's one-fifth interest was $67,400. The annual deduction for exhaustion of the taxpayer's interest in the patent over its remaining life of 11 years, 5 months, and 19 days, is $5,879.79. DECISION. The deficiency should be computed in accordance with the following opinion. Final determination will be settled on 10 days' notice, in accordance with Rule 50. OPINION. TRAMMELL: The sole question involved in this appeal is whether the taxpayer shall be allowed a deduction from his gross income for the year 1919, for exhaustion on his one-fifth interest in a patent2632 563 acquired by gift as of June 30, 1917. Section 214(a)(8) of the Revenue Act of 1918 provides: Sec. 214. (a) That in computing net income there shall be allowed as deductions: * * * (8) A reasonable allowance for the exhaustion, wear and tear of property used in the trade or business, including a reasonable allowance for obsolescence. This Board has already held that deductions for exhaustion of patents are allowable under this statute. Appeal of Union Metal Manufacturing Co.,1 B.T.A. 395">1 B.T.A. 395. The fact that it was a gift to the taxpayer and that he owned but a fractional part of the patent does not deprive him of the right to a deduction on account of the exhaustion thereof. The real question in this appeal is the determination of the value of the patent at the time of acquisition by the taxpayer and the proper rate of exhaustion. It is very apparent that the patent had a substantial value at the time of acquisition. By means of the patent, the corporation manufacturing thereunder was able to create increasing sales in a practically unlimited market. In 1919 it paid the taxpayer $27,123.20 royalty, which represented but one-fifth of 10 per cent2633 of the sales for that year. The question now is whether there is sufficient evidence to find a value for the patent from which the proper amount of exhaustion can be deducted. We must find a value as of June 30, 1917, the date of acquisition by the taxpayer, using the factors available at that time. The evidence is convincing that sales in the sum of at least $600,000 per year could have been reasonably anticipated under the circumstances. Witnesses familiar with the machinery market, and particularly this patented machine, who took into consideration the fluctuation of the market, possible business depressions, etc., testified that the minimum average of sales per year for 11 years should be well over $600,000. Although figures of sales in subsequent years have not been given us, it is evident that, since in 1919 the taxpayer received $27,123.20, representing one-fifth of 10 per cent royalty, the 1919 sales were greater than the estimate we are asked to accept. Having established that $600,000 a year in sales could reasonably have been anticipated for the remaining life of the patent, the owners of the patent would then be assured of an income of at least $60,000 per year. 2634 The total return for 11 years would be $660,000. In consideration of all the facts and circumstances of this appeal, we find that the value of the patent at the time acquired was $337,000. The taxpayer's interest therein would be one-fifth of this sum, or $67,400. The annual deduction for exhaustion of the taxpayer's *564 interest in the patent over its remaining life of 11 years, 5 months, and 19 days, is $5,879.79. We are of the opinion that the taxpayer is entitled to a deduction of $5,879.79, as exhaustion, from his gross income for the year 1919.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622466/	KASKASKIA LIFE INSURANCE CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. MISSISSIPPI VALLEY LIFE INSURANCE COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Kaskaskia Life Ins. Co. v. CommissionerDocket Nos. 27576, 41506, 42157.United States Board of Tax Appeals22 B.T.A. 210; 1931 BTA LEXIS 2152; February 18, 1931, Promulgated 2152 The guarantee capital of an Illinois life insurance company required to be deposited with the State auditor held not a reserve within the meaning of section 242 of the Revenue Act of 1926. John V. Sees, Esq., for the petitioners. John D. Foley, Esq., for the respondent. MATTHEWS 210 OPINION. MATTHEWS: These proceedings, which were duly consolidated for hearing and decision, involve deficiencies in income taxes for the years 1925, 1926, and 1927 in the amounts, respectively, of $1,208.13, $937.23, and $897.15. The Kaskaskia Life Insurance Company was incorporated on July 29, 1924, and duly licensed to engage in the business of life insurance under the laws of Illinois. Its principal place of business was Shelbyville, Ill. The Mississippi Valley Life Insurance Company is the same corporation, the change in name having taken place in 1927 by corporate action, with the authority and consent of the Department of Trade and Commerce of the State of 211 Illinois, which department has charge of insurance companies. Its home office is Madison, Ill., and its principal place of business is St. Louis, Mo. The insurance company will2153 be referred to hereinafter as the petitioner, without regard to the name under which it did business in the several years under consideration. The only issue arises on the refusal of the respondent to allow the petitioner to compute its income as an ordinary corporation and make its return on Form 1120, and his insistence that the income be computed as a life insurance company, and that Form 1120-L, provided for the use of life insurance companies, be employed. Each year petitioner filed its annual statement as a life insurance company with the Department of Trade and Commerce of Illinois, showing the financial status of the company, and in accordance with the law of that State maintained a guarantee capital of $100,000 and the reserves required for the fulfillment of its policy contracts. The amounts of the reserves for the fulfillment of policy contracts were for 1925, 1926, and 1927, respectively, $2,152.10, $12,117, and $57,928. The substance of the petitioner's contention is that its guarantee capital of $100,000 is a reserve and that it was not a life insurance company for the purposes of taxation in the years in controversy, since the reserves held for the fulfillment2154 of its policy contracts did not comprise more than 50 per cent of its total reserves. Petitioner admits that it is a life insurance company in fact, but not for taxation purposes. Petitioner's contention is founded upon the premise that section 242 of the Revenue Act of 1926 defines a life insurance company for tax purposes and that a corporation, although admittedly doing a life insurance business, which does not fall within the scope of this definition, is to be taxed in the ordinary way as any other corporation. Upon this foundation the petitioner builds up the argument that Congress did not mean to tax life insurance companies as such in the first few years of their existence and until their reserve fund held for the fulfillment of life insurance contracts should exceed any other reserves which the company might hold, treating the guarantee capital as a reserve, or, in the words of the statute, until the reserves held for the fulfillment of its life insurance contracts should comprise more than 50 per cent of its total reserve funds. The respondent takes the position that the guarantee capital is not a reserve fund within the meaning of section 242 and that petitioner is2155 a life insurance company for the purposes of taxation by reason of the fact that its reserve funds held for the fulfillment of its life and annuity contracts comprise more than 50 per cent of its total reserve funds. 212 The real point in controversy is whether the guarantee capital of $100,000 deposited by the petitioner with the Department of Trade and Commerce of Illinois, where the petitioner was incorporated, and in accordance with the law of that State, constitutes a part of the petitioner's "total reserve funds," as that phrase is used in section 242 of the Act. If the guarantee fund does not come within total reserves, the reserves held by the petitioner for the fulfillment of its life and annuity contracts obviously comprise more than 50 per cent of its total reserves, comprising in fact its total reserves. If we look at the Illinois Statute (5 Callaghan's Ill. Stat. Ann. (1924)), chapter 73, Insurance, we find the following pertinent provisions: P315. Guarantee Capital - Investment of.] Section 1. That before any life insurance company goes into operation, under the laws of this State, a guarantee capital of at least one hundred thousand dollars shall2156 be paid in money and invested in the stocks of the United States or of this State, or of any city or town in this State, estimated at their market value, or in such other stocks and securities as may be approved by the Insurance Superintendent, or in mortgages being first liens on real estate in this State, the said real estate being worth at least twice the amount of money loaned thereon, with abstract showing a good and sufficient title, and the certificate of two reputable landholders, under oath, certifying to the value of said property. * * * P319. Increase or decrease of capital stock - Amendment of charter - Procedure.] § Id. No company organized under this Act shall increase or decrease its capital stock or otherwise amend its charter except in accordance with the provisions of this section and subject to the supervision of the Director of Trade and Commerce as hereinafter provided. * * * P320. Examination by Auditor - Fee.] § 2. No policy shall be issued until a certificate from the Auditor has been obtained authorizing such company to issue policies. The said auditor shall examine the capital, and the majority of the directors shall make oath that the money2157 has been paid in by the stockholders towards payment of their respective shares and not for any other purpose, and that it is intended that the same shall remain as the capital of the company, to be invested as required by the laws of this State. * * P321. Certificate from Auditor - Deposit - Permission.] § 2a. Whenever the corporators shall have fully organized such company, and the said company shall have deposited with the Auditor the required amount of capital, it shall become his duty to furnish the corporators with a certificate of deposit, which, with the certified copy of said declaration previously received from the Auditor, when filed for record in the office of the recorder of deeds in the county where such company is to be located, shall be the authority to commence business and issue policies, and the same, or a certified copy thereof, shall be evidence in all suits. The statutes further provide that the insurance company must make an annual statement according to a prescribed form (par. 325, 326); and that a life insurance company is prohibited, on pain of discontinuance of its business and even of involuntary insolvency, 213 from permitting a condition2158 to arise and continue when "the admitted assets * * * in excess of the minimum amount of capital stock required under this Act * * * are less than its liabilities, including the net value of its policies * * ." (Par. 331.) It is also of interest that section 341 prohibits an Illinois life insurance company from issuing fire, marine, and livestock insurance policies, or health and accident insurance except where the last two are combined with life insurance; but this provision should be read in connection with sections 436-440, which permit a life insurance company to engage in separate health and accident business, or a health and accident company in separate life business, provided it deposits with the Department of Trade and Commerce fully paid-in capital stock of an amount not less than $200,000 for investment in certain stated classes of securities, and appropriately amends its charter in a prescribed manner. The provision of the taxing statute in question, section 242, Revenue Act of 1926, is as follows: When used in this title the term "life insurance company" means an insurance company engaged in the business of issuing life insurance and annuity contracts (including contracts2159 of combined life, health, and accident insurance), the reserve funds of which held for the fulfillment of such contracts comprise more than 50 per centum of its total reserve funds. This provision first appears in the revenue acts as section 242 of the Act of 1921, which in sections 242 to 247, inclusive, shows the result of the attempt made by Congress to find a more satisfactory and equitable basis for the taxation of insurance companies, both life and otherwise, than that hitherto employed. Independent Life Insurance Co.,17 B.T.A. 757">17 B.T.A. 757, 761. Attention should here be drawn again to the provisions of the Illinois statutes noted above which prohibit a life insurance company licensed under its laws from doing a mixed business except where the life or endowment insurance is combined with the health and accident insurance in the same contract, so long as the deposited capital stock of the company is only $100,000; and allow a mixed life business and a separate health and accident business to be carried on only where the company's charter powers so permit and the paid-in and deposited capital is not less than $200,000. Since the petitioner's paid-in capital2160 stock was only $100,000, it follows, therefore, that it is to be regarded solely as a life insurance company under Illinois law. The respondent's counsel argues that the guarantee capital is not a "reserve fund" within the meaning of section 242, since it is not a "reserve fund required by law" within the meaning of section 245(a)(2) of the statute. In pursuance of this argument he suggests that the Treasury Department in Regulations 62, article 214 661 (covering the 1921 Revenue Act), and in the regulations promulgated under the later acts, has always adhered to the view that the two phrases were identical in meaning; Regulations 62, articles 661, 681; Regulations 65, articles 661, 681; Regulations 69, articles 661, 681. Article 661, Regulations 62, reads in part as follows: * * * In determining whether an insurance company is a "life insurance company" as defined in section 242, no reserve shall be regarded as held for the fulfillment of life insurance and annuity contracts unless the company is entitled to a deduction from gross income on account thereof under the provisions of section 245(a)(2) and article 681. * * * 2161 But we are not concerned here with the meaning of a "reserve fund * * held for the fulfillment of life insurance and annuity contracts," as used in section 242, but with the meaning of the other phrase used in that section, "total reserve funds." As to what constitutes a "reserve required by law" within the meaning of section 245(a)(2), Revenue Acts of 1921, 1924, and 1926, regarding deductions from gross income, we have no doubt. That phrase has been amply expounded by the United States Supreme Court and this Board. McCoach v. Insurance Co. of North America,244 U.S. 585">244 U.S. 585; United States v. Boston Insurance Co.,269 U.S. 197">269 U.S. 197; New York Life Insurance Co. v. Edwards, Collector,271 U.S. 109">271 U.S. 109; Standard Life Insurance Co. of America,13 B.T.A. 13">13 B.T.A. 13; Old Line Insurance Co.,13 B.T.A. 758">13 B.T.A. 758. And in Midland National Life Insurance Co.,14 B.T.A. 200">14 B.T.A. 200, the Board, construing section 245(a)(2), Revenue Act of 1924, held that a fund of $100,000 deposited by the petitioner with the Commissioner of Insurance of South Dakota, pursuant to the law of that State, as a condition precedent2162 to the right to do business within the State, was not a "reserve required by law." The Board said: The fund herein involved is a deposit of capital to guarantee the performance by insurance companies of contracts entered into. It has no relation to the net value of outstanding policies and is not a fund reserved from premiums to meet policy obligations at maturity. We are of the opinion that it is not a reserve required by law within the meaning of the Revenue Act. OldLine Insurance Co.,13 B.T.A. 758">13 B.T.A. 758. There would seem to be no question, therefore, that the fund here in controversy, the guarantee capital, was not a "reserve required by law" within the meaning of section 245(a)(2) of the Acts of 1921, 1924, and 1926. The Midland National Life Insurance Co. case is conclusive upon this point. The respondent's attempt to equate the phrase, "reserve fund required by law," as used in section 245(a)(2) which admittedly has 215 a restricted and technical meaning, with "reserve fund * * * held for the fulfillment of life insurance and annuity contracts," used in section 242, accomplishes no purpose. Obviously the latter phrase can not mean the same2163 thing as "total reserve funds" used in the same section, for neither of two equals can exceed the other; nor, as we have said, do the Treasury Regulations, article 661, maintain such a view. We come back, then, to the question whether in the plain words of the statute, without any gloss supplied as to the intent of Congress, the guarantee capital comes within the meaning of "total reserve funds," as used in section 242. We do not think it does. The State statute requires, in substance, nothing more than that the capital of the life insurance company be of a fixed amount, be paid in, be invested in a certain way and be not impaired. It is significant here that the guarantee capital is not reckoned in with the life insurance company's assets in striking a balance to determine whether such a deficit exists as to warrant the State Commissioner declaring the company insolvent if the deficit is not made good, for paragraph 331, section 10, of the Illinois Statute provides in part: If the Department of Trade and Commerce shall find, in the case of any company doing business under this Act, that the admitted assets of a stock life insurance company in excess of the minimum amount2164 of capital stock required under this Act, * * * are less than its liabilities, including the net value of its policies computed by the standard of valuation established by this section, such Department shall give notice to the company of the amount of such deficit as determined by it, and shall require that the deficit be made good within such period as it may designate in its notification, which shall be not less than fifteen days nor more than ninety days, from the issuance of such notification; provided that, in the case of a stock life insurance company where the deficit shall exceed twenty per centum of such minimum capital stock, * * * the Department shall further notify the company to discontinue the issuance of new policies until the deficit shall have been made good. (Italics supplied.) We are unable to see how such a requirement as to paid-in capital can be construed as constituting a "reserve" even under the most nontechnical definition. We do not think it too broad a statement to say that the ordinary meaning conveyed by the word "reserve," when applied to an insurance company, is that portion of the premiums retained and placed in a fund to meet policy obligations2165 at maturity. Bouvier (Rawle's Third Revision, p. 2919, sub verb. "Reserve") defines "reserve": In Insurance Law. That part of the premiums on a policy, with the interest thereon, which is required to be reserved or set aside as a fund for the payment of the policy when it becomes due. Richards, Ins. L. 20. 216 An insurance company is deemed to be solvent when its reserved funds, invested at a specified rate of interest, will suffice to meet the payments on its policies as they shall mature. As a factor of safety, the rate of interest is usually fixed very low. * * * It is urged upon us by the petitioner that the Supreme Court has held in Duffy v. Mutual Benefit Co.,272 U.S. 613">272 U.S. 613, that a legal reserve of a mutual life insurance company may be regarded as in the nature of "invested capital," under section 207(a) of the Revenue Act of 1917. This is true, and the doctrine has recently received a further extension in Atlantic Life Insurance Co. v. Moncure, 35 Fed.(2d) 360, affd., 2166 44 Fed.(2d) 167, in which the Court held that the amount held as a legal reserve by a stock life insurance company might be included as invested capital. It by no means follows from these cases, however, that the converse of this principle is true, that the guarantee capital of a stock life insurance company may be regarded as a reserve for tax purposes. If it be contended that the meaning of section 242 is ambiguous and can not be learned from the plain words of the section (and the use of the word "means" in the definition lends color to this argument), we must seek the intent of Congress. Takao Ozawa v. United States,260 U.S. 178">260 U.S. 178. The Senate hearings on the bill which became the Revenue Act of 1921 (the first to contain the new provisions for taxing insurance companies on what was conceived to be a more scientific basis than that theretofore employed) shed much light on the matter. T. S. Adams, the Treasury Department's tax adviser, testified at that time that the draftsman of the bill had in mind life insurance companies which were also doing a separate accident and health insurance business. 1 Those life companies which issued combined2167 life, health and accident policies were expressly included in the bill as life companies. But to differentiate between the life companies doing a mixed business, the 50 per cent line was drawn, the amount of the reserve held for the fulfillment of life and annuity (and combined life, health and accident) contracts being taken as the measure of such business. If more than 50 per cent of the reserves were for separate health and accident insurance business (on the reserve test adopted), then obviously the life reserve would fall below 50 per cent of the "total reserve funds," and the company would not be taxable as a life insurance company but as a nonlife insurance company. Further facts stated at the hearing were that health and accident insurance had, at that time at least, no sound actuarial basis and that State laws therefore did not require 217 a fixed reserve to be held; nevertheless, for such policies insurance companies did maintain reserves, and it was such reserves upon which the additional 4 per cent deduction was allowed under section 245(a)(2) as "reserve funds (not required by law)." 2168 It thus appears clearly that the reserves other than those held for life contracts contemplated by the statute included those for separate accident and health policies, and the two classes of reserves combined would constitute the "total reserve funds" of section 242 now under consideration. Upon such a construction of section 242 it is clear, for the reasons already suggested, that the guarantee capital is not a reserve within the meaning of section 242 and that petitioner is taxable as a life insurance company, since its total reserves were held for the fulfillment of its life and annuity contracts. The respondent's calculation of petitioner's income for the years in question was made on the basis of petitioner's annual statement to the Insurance Department of the State of Illinois and in accordance with sections 242 to 245 of the Revenue Act of 1926. The petitioner asserts that it had no taxable income for the years in question within the meaning of the Sixteenth Amendment as interpreted by the Supreme Court, but a loss. Its claim of loss for those years was calculated on a basis not recognized by the applicable statute. In an allegation couched in the most general*2169 terms petitioner seeks to raise the issue of the constitutionality of the whole existing scheme of insurance income taxation, but at the same time raises no question as to the improper inclusion as income by the respondent of any amount calculated pursuant to that insurance taxation scheme. This is not an attack then of the constitutionality of any part of the insurance taxation scheme, such as was presented in Independent Life Insurance Co., supra.Reviewed by the Board. Judgment will be entered for the respondent.Footnotes1. Senate Finance Committee hearings on H.R. 8245, 67th Cong., September 6, 1921, pp. 83-95. ↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622468/	Seneca, Ltd., H. Quintin Foster, Jr., and Dorothy L. Foster, Partners Other Than the Tax Matters Partner, Petitioners v. Commissioner of Internal Revenue, RespondentSeneca, Ltd. v. CommissionerDocket No. 37276-87United States Tax Court92 T.C. 363; 1989 U.S. Tax Ct. LEXIS 27; 92 T.C. No. 22; February 16, 1989. February 16, 1989, Filed 27 An order dismissing this case for lack of jurisdiction will be entered. R issued an FPAA to a partnership that had no tax matters partner. R did not appoint a tax matters partner. Ps timely received the FPAA which gave adequate notice of how Ps could protect their interests. Ps filed their petition untimely. Held, R is not required to appoint a tax matters partner where the partners receive adequate notice and opportunity to protect their interests. Held, further, the FPAA is valid. Held, further, this Court lacks jurisdiction over petitioners' case. Paul S. Schleifman, for the petitioners.R. Alan Lockyear, for the respondent. Williams, Judge. WILLIAMS363 OPINIONThis case is before us on respondent's motion to dismiss for lack of jurisdiction on the ground that petitioners failed to file their petition for readjustment of partnership items within the time prescribed by section 6226(b)(1)1 of the partnership audit and litigation procedures. 364 Petitioners object on the ground that the final notice of partnership administrative adjustment was invalid and, consequently, that the statutory period for filing a petition never commenced. 28 The material facts are not in dispute. At the time the petition was filed in this case, the partnership in which petitioners were partners, Seneca, Ltd. (Seneca), had its principal place of business in Covina, California.On or about May 1, 1984, Richard E. Donovan organized Seneca as a limited partnership. Seneca has 32 limited partners including petitioners, but Donovan served as the sole general partner and as Seneca's tax matters partner. On December 5, 1986, an involuntary bankruptcy petition under chapter 7 of the United States Bankruptcy Code was brought against Donovan in the U. S. Bankruptcy Court for the Central District of California. Consequently, his designation as the tax matters partner for Seneca terminated on that date. Secs. 301.6231(c)-7T, and 301.6231(a)(7)-1T(L)(4), Temporary Proced. & Admin. Regs., 52 Fed. Reg. 6792-6793 (March 5, 1987); 29 Computer Programs Lambda, Ltd. v. Commissioner, 89 T.C. 198">89 T.C. 198 (1987). During 1986, respondent commenced an examination of Seneca in which respondent disallowed Seneca's claimed deductions, credits, and losses for the 1984 tax year. On June 18, 1987, an FPAA was sent, via certified mail, to "Seneca, Ltd., Tax Matters Partner" at the partnership's address. On July 6, 1987, respondent mailed a copy of this FPAA to petitioners who were notice partners of Seneca as defined in section 6231(a)(8).The 90-day period following the mailing of the FPAA to the tax matters partner during which only the tax matters partner could file a petition for redetermination of partnership adjustments pursuant to section 6226(a) expired on September 16, 1987. The subsequent 60-day period within which a notice partner could file a petition for redetermination pursuant to section 6226(b)(1) expired on November 16, 1987. Petitioners, as notice partners, mailed a petition for readjustment on November 17, 1987, which was received on November 20, 1987, by this Court. Respondent filed a motion to dismiss for lack of jurisdiction because the petition was untimely filed.365 30 The FPAA addressed to petitioners was a standard form notice of final partnership administrative adjustment and stated that respondent had determined adjustments to Seneca's partnership return for its 1984 taxable year. The date the FPAA was mailed to the tax matters partner was stated on the form, as were the name and phone number of a person to contact with questions. The notice further provided the following instructions for partners who wished to challenge respondent's proposed adjustments:If you are the tax matters partner (the partnership representative who deals with IRS) and want to contest these adjustments in court, you have 90 days from the date this letter was mailed to file a petition for a readjustment of the partnership items with the United States Tax Court, the United States Claims Court, or the District Court of the United States for the district in which the partnership's principal place of business is located. During the 90-day period, no other partner may file a petition for judicial review, and the filing of a petition by the tax matters partner precludes all other actions.If the tax matters partner has not filed a petition by the 90th day from the date 31 the FPAA was mailed, any other partner entitled to receive this notice under section 6223 of the Internal Revenue Code (or any group of partners who together have an interest of 5 percent or more in the profits of the partnership (5-percent group)) may petition one of these courts after the 90th day, but on or before the 150th day, from the date the FPAA was mailed to the tax matters partner. * * A prerequisite to our jurisdiction over a partnership action is a timely petition filed by either a tax matters partner or a notice partner of a partnership after an FPAA is mailed to the tax matters partner of the partnership. Sec. 6223(a)(2) and sec. 6226(a) and (b). Section 6226(b) provides that notice partners may only file a petition for readjustment of partnership items if the tax matters partner has failed to file a petition within the statutory period. A notice partner must file a petition within the 60-day period following the close of the 90-day period allotted for filing by the tax matters partner. Transpac Drilling Venture 1982-22 v. Commissioner, 87 T.C. 874">87 T.C. 874 (1986). Because the petition in this case was filed subsequent to the close of the32 60-day period for filing petitions of notice partners, we must grant respondent's motion to dismiss for lack of jurisdiction unless the FPAA mailed to Seneca's tax matters partner is invalid.366 Petitioners contend that the FPAA mailed to Seneca's place of business and addressed generically to the partnership's tax matters partner is invalid. Seneca was without a tax matters partner at the time the FPAA was issued, due to Donovan's involvement in a bankruptcy action. Petitioners argue that the FPAA required to be sent to the tax matters partner is null and void because respondent failed to appoint a tax matters partner for the partnership pursuant to section 6231(a)(7). Under this view, the statutory time period provided for the filing of a petition by a notice partner never began to run.Initially, we note petitioners' argument presumes that respondent has a mandatory duty to appoint a substitute tax matters partner for a partnership in the absence of any general partner to serve as such. We find this presumption mistaken. Although, as we have stated in previous opinions, the continual presence of a tax matters partner is essential to the operation of the statutory procedures33 of section 6221 et seq., during both administrative proceedings and litigation, we have not suggested that interruptions in the service of a tax matters partner could never be tolerated. Respondent was given power to appoint a tax matters partner because the partnership procedures assume that adequate notice and hearing for all partners on their potential tax liability flowing from the partnership requires a tax matters partner capable of acting on the partnership's behalf. Computer Programs Lambda, Ltd. v. Commissioner, supra at 205. Similarly, a tax matters partner is important to the conduct of subsequent litigation, and we have exercised our inherent powers as a Court to appoint a substitute tax matters partner during partnership litigation to assure the fair, efficient, and consistent progress and disposition of partnership litigation. Computer Programs Lambda, Ltd. v. Commissioner, 90 T.C. 1125">90 T.C. 1125 (1988).Congress granted respondent in section 6231(a)(7) the power to appoint a substitute tax matters partner in order to continue the fair, efficient, and consistent administration of partnership actions in the event34 a designated tax matters partner is nonexistent or is terminated as tax matters partner, and no other general partners in the partnership are eligible to serve as tax matters partner for the 367 partnership. 2 See sec. 301.6231(a)(7)-1T(m), Temporary Proced. & Admin. Regs., 52 Fed. Reg. 6792 (Mar. 5, 1987). Respondent, therefore, has a public duty to assure the fairness of the partnership's administrative proceedings. The power to appoint a tax matters partner for a partnership is given to respondent in order to assist him in carrying out his administrative responsibilities in partnership proceedings. Nevertheless, the language of section 6231(a)(7) does not compel respondent to exercise this power if no prejudice results from the lack of a tax matters partner to the rights of remaining partners.35 In this case, the absence of a tax matters partner for Seneca had no adverse effect on petitioners' rights to notice and hearing. Respondent mailed an FPAA to petitioners on July 6, 1987, which was received in due course by petitioners. The FPAA detailed instructions on the time period within which notice partners could seek judicial review of partnership adjustments, and provided a phone number to call with any questions. The FPAA included the date on which the 150-day period for filing a petition began to run pursuant to section 6226, i.e., the date the notice was mailed to the tax matters partner of Seneca. See Byrd Investments v. Commissioner, 89 T.C. 1">89 T.C. 1 (1987), affd. without published opinion 853 F.2d 928">853 F.2d 928 (11th Cir. 1988). All the information that petitioners needed to protect their interests was presented to them in the FPAA. Chomp Associates v. Commissioner, 91 T.C. 1069">91 T.C. 1069 (1988). Neither the absence of a tax matters partner nor respondent's failure to appoint a tax matters partner in this case interfered with petitioners' timely receipt of the FPAA.We have noted the similar functions36 of the FPAA and the statutory notice of deficiency. Clovis I v. Commissioner, 88 T.C. 980">88 T.C. 980, 982368 (1987). As the function of the statutory notice is to give adequate notice to a taxpayer of respondent's determination of a deficiency, the function of the FPAA is to give adequate notice to affected taxpayers that respondent has made a final partnership administrative adjustment for the tax years involved. The existence of a tax matters partner at the time the FPAA was issued was not critical in this case to petitioners' receipt of adequate notice to challenge respondent's determination.Petitioners received adequate notice of respondent's final partnership administrative adjustment in time to protect their interests. Under these circumstances, we hold that the existence of Seneca's tax matters partner was not a necessary condition for a valid FPAA, because the FPAA sent to petitioners provided adequate notice of when and how to commence a partnership proceeding in this Court. Any injury that petitioners suffer as a result of filing their petition out of time was caused by their own inaction and was not caused by respondent's conduct. We will37 grant respondent's motion to dismiss for lack of jurisdiction.An order dismissing this case for lack of jurisdiction will be entered. Footnotes1. All section references are to the Internal Revenue Code of 1954 as in effect for the years in issue, unless otherwise indicated.↩2. Section 6231(a)(7) provides:(7) Tax matters partner. The tax matters partner of any partnership is -- (A) the general partner designated as the tax matters partner as provided in regulations, or(B) if there is no general partner who has been so designated, the general partner having the largest profits interest in the partnership at the close of the taxable year involved (or, where there is more than 1 such partner, the 1 of such partners whose name would appear first in an alphabetical listing.)↩If there is no general partner designated under subparagraph (A) and the Secretary determines that it is impracticable to apply subparagraph (B), the partner selected by the Secretary shall be treated as the tax matters partner.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622472/	James F. Holden, et al. * v. Commissioner. Holden v. CommissionerDocket Nos. 237-67, 266-67, 1775-67, 1947-67.United States Tax CourtT.C. Memo 1968-237; 1968 Tax Ct. Memo LEXIS 63; 27 T.C.M. (CCH) 1166; T.C.M. (RIA) 68237; October 14, 1968Edmund Durkin, Jr., 1857 Union Commerce Bldg., Cleveland, Ohio, for the petitioners in Docket Nos. 236-67 and 1775-67. Martha C. Holden, pro se, 2420 Hempstead Rd., Toledo, Ohio, in Docket Nos. 266-67 and 1947-67. Frank E. Wrenick, for the respondent. SCOTT Memorandum Opinion SCOTT, Judge: Respondent determined64 a deficiency in the income tax of petitioner James F. Holden for the calendar year 1963 in the amount of $6,120.65 and a deficiency in the income tax of petitioners James F. Holden and Helen J. Holden for the calendar year 1964 in the amount of $4,825.66. He determined deficiencies in the income taxes of Martha C. Holden for the calendar years 1963 and 1964 in the amounts of $4,765.11 and $3,993.58, respectively. The issues for our decision are the following: (1) Whether petitioner James F. Holden is entitled to deduct in each of the years 1963 and 1964 payments he made in each of those years to Martha C. Holden, the payment in the year 1963 being made pursuant to a written agreement of separation and the payment in 1964 being made in part pursuant to such written agreement of separation and in part pursuant to a divorce decree. (2) Whether the payments made by James F. Holden to petitioner Martha C. Holden in each of the years 1963 and 1964 are includable in income by petitioner Martha C. Holden. All of the facts in this case have been stipulated and are found accordingly. The legal residence of James F. Holden at the time his petition in this case was filed and the legal65 residence of James F. and Helen J. Holden, husband and wife, at the time their petition in this case was filed was in Toledo, Ohio. The legal residence of Martha C. Holden at the time her petitions in this case were filed was in Toledo, Ohio. James F. Holden filed an individual Federal income tax return for the calendar year 1963 with the district director of internal revenue at Cleveland, Ohio, and James F. Holden and Helen J. Holden filed a joint Federal income tax return for the calendar year 1964 with the district director of internal revenue at Cleveland, Ohio. Martha C. Holden filed an individual Federal income tax return for each of the calendar years 1963 and 1964 with the district director of internal revenue at Cleveland, Ohio. James F. Holden (hereinafter referred to as James) and Martha C. Holden (hereinafter referred to as Martha) were married on February 15, 1941. They entered into a separation and settlement agreement dated April 27, 1962, which recited that there were four children who were issue of the marriage, aged 19, 18, 14, and 11 years, respectively. This separation and settlement agreement provided in part as follows: 3. The wife shall have custody66 of the children, and control and supervision of their upbringing, subject to the following: * * 4. The wife shall support and maintain herself, and shall in all respects care for, educate, and maintain, and support the children properly and in such manner as to afford the children the best care, education, maintenance and support, consistent with the payments made by the husband in accordance with the terms of this agreement. In consideration thereof, the husband shall pay to the wife the sum of $833.33 on or about the first day of every month commencing May 1, 1962, provided that in the event that any of the four children reach majority at age twenty-one, dies before age twenty-one or if the daughter marries before age twenty-one, then the payment herein specified shall be reduced by a sum equal to one-fourth of the sum set forth above, and subject to the following conditions: a.) The husband shall be relieved from and shall have no obligation to make the payments provided herein, and shall be entitled to custody of the children, during any period when the wife shall be physically, mentally or emotionally incapable of maintaining custody of the children and such incapacity shall67 be stated in writing by two (2) qualified physicians. * * b.) The sum provided herein shall be reduced by one-fourth (I/4) of the amount then payable with respect to each increment of reduction of five thousand ($5,000.00) dollars per year of the husband's earnings 1168 below the annual salary rate of the husband in effect on the date hereof as evidences [sic] by Exhibit A attached hereto and made a part hereof. The wife agrees that she will properly maintain, care for and educate the children in her custody, but subject only to this agreement, she may expend the said payments in accordance with her uncontrolled discretion. James and Martha were divorced under a decree entered by the Court of Common Pleas of Lucas County, Ohio, on February 3, 1964. This decree recited that the Court found that the parties had heretofore entered into a separation and settlement agreement, and that a copy of that agreement was attached to the decree and made a part of the entry as though fully rewritten therein, except that the agreement was modified in the following respect: "The wife shall support and maintain herself and shall, in all respects, care for, educate and maintain, and support68 the children properly and in such manner as to afford the children the best care, education, maintenance and support consistent with the payments to her made by the husband in accordance with the terms of this agreement. In consideration thereof, the husband shall pay to the wife the sum of Eight Hundred Thirty-three and 33/100 Dollars ($833.33), commencing forthwith; provided, that in the event any of the three remaining minor children reach age 21, die before age 21, or if the daughter marries before age 21, then the payment herein provided shall be reduced by one-fourth (I/4) of the sum set out above; provided, further, that the amount paid by the husband shall not be reduced to less than Two Hundred Eight and 33/100 Dollars ($208.33) per month and provided that payments to the wife shall terminate upon her death or remarriage, and subject to the same conditions outlined in the separation and settlement agreement." Provided, however, that the amount to the wife shall not be reduced below $208.33 per month, notwithstanding any change in the salary of the husband. Pursuant to the terms of the separation and settlement agreement, James paid to Martha during69 the calendar year 1963 a total amount of $9,583.33 in monthly installments, and pursuant to the terms of the separation and settlement agreement and the divorce decree, James paid to Martha during the calendar year 1964 a total of $10,000 in monthly installments. James in his Federal income tax return for each of the years 1963 and 1964 claimed a deduction as an alimony payment for the amount he paid to Martha. Martha did not include the payments she received from James in her income as reported on her Federal income tax returns for the years 1963 and 1964. Respondent in his notices of deficiency to James disallowed the deductions claimed by James for alimony payments for each of the years 1963 and 1964. In his notices of deficiency to Martha respondent increased her reported income in each of the years 1963 and 1964 by the amount of the payments she received from James in each of those years. Section 71(a), I.R.C. 1954, 2 provides for the inclusion in the income of a wife who is divorced or separated from her husband of periodic alimony and separate maintenance payments received by the wife from the husband, and section 71(b)3 provides that the amount70 includable in the wife's income shall not apply to that part of any payment which "the terms of the decree, instrument, or agreement fix, in terms of an amount of money or a part of the payment, as a sum which is payable for the support of minor children of the husband." Section 215 provides for the deduction by a husband of amounts includable under section 71 in the gross income of his wife. It is James' contention in these cases that no portion of the payments made by him to Martha during either of the years 1963 or 1964 was payment for71 support of his minor children within the meaning of section 71(b). James contends therefore that the total amounts which he paid to Martha in each of the years 1963 and 1964 are includable in her income under section 71 and therefore are deductible by him. It is Martha's contention that all of the payments made to her by James in the year 1963 were payments for support of the minor children of herself and James 1169 and that all of such payments made to her during the year 1964 except to the extent of $208,33 per month were payments made by James for the support of their minor children within the meaning of section 71(b). The Supreme Court in Commissioner v. Lester, 366 U.S. 299">366 U.S. 299 (1961), hold that the language contained in section 22(k), I.R.C. 1939, which is substantially the same as the language contained in section 71(b), requires that the agreement expressly specify or fix a "sum certain or percentage of the payment for child support before any of the payment is excluded from the wife's income." The Supreme Court called attention to the fact that the statutory requirement is strictly and carefully worded and stated (366 U.S. at 303): It does not72 say that "a sufficiently clear purpose" on the part of the parties is sufficient to shift the tax. It says that the "written instrument" must "fix" that "portion of the payment" which is to go to the support of the children. Otherwise, the wife must pay the tax on the whole payment. We are obliged to enforce this mandate of the Congress. The instrument under consideration by the Supreme Court in Commissioner v. Lester, supra, provided for a reduction in the amount of the payments to be made by the husband when any one of the three children of the parties married, became emancipated, or died. In our opinion there is no substantive distinction in the provisions of the agreement which was considered by the Supreme Court in Commissioner v. Lester, supra, and the provisions of the agreement and divorce decree involved in the instant case. Both respondent and James contend that the instant case is not distinguishable from Commissioner v. Lester, supra. Martha contends that this case is distinguishable from Commissioner v. Lester, in that the agreement in the instant case, unlike that in the Lester case, contained no provision for the reduction73 of payments if the wife remarried, that the agreement in the instant case specifically states that the wife is to support herself and emphasizes that the payments made by James are only for the children. Martha argues that the custody of the children and the payment for the children go hand-in-hand under the agreement and decree involved in the instant case. Her primary argument is that under the agreement the wife is to support herself out of funds other than the payments received from James because after the words, "the wife shall support and maintain herself," in the agreement there appears a comma before the words, "and shall in all respects care for, educate, and maintain, and support the children properly * ." Martha argues that the comma after the words referring to the wife's supporting hereself shows that it was intended under the agreement that she support herself from funds other than those supplied by James. Martha then argues that the provision in the divorce decree read in the light of the provision in the agreement shows that only $208.33 per month of the amount paid to her by James under that decree was for her support. We do not agree with the technical argument74 made by Martha. We do not share her view that the comma following the word "herself" in the agreement indicates that all of the payments made by James to Martha were to be used for support of the children. However, the fact that Martha's technical argument with respect to the interpretation of the language as punctuated in the separation and settlement agreement is not a proper one is shown by other parts of the agreement. The separation and settlement agreement specifically provided that the "wife agrees that she will properly maintain, care for, and educate the children in her custody, but subject only to this agreement, she may expend the said payments in accordance with her uncontrolled discretion." The fact that the wife was free to spend the money paid to her under the agreement as she saw fit enabled her to use the money for her own support or any other purpose so long as she supported the children. The unfettered command of the wife over the payments from the husband was given as one reason for including the payments in the wife's income in Commissioner v. Lester, supra, In this regard the Court stated (366 U.S. at 303-304): One of the basic precepts75 of the income tax law is that "[the] income that is subject to a man's unfettered command and that he is free to enjoy at his own option may be taxed to him as his income, whether he sees fit to enjoy it or not." Corliss v. Bowers, 281 U.S. 376">281 U.S. 376, 378 (1930). Under the type of agreement here, the wife is free to spend the monies paid under the agreement as she sees fit. "The power to dispose of income is the equivalent of ownership of it." Helvering v. Horst,, 311 U.S. 112">311 U.S. 112, 118 (1940). Including the entire payments in the wife's gross income under such circumstances, therefore, comports with the underlying philosophy 1170 of the Code. And, as we have frequently stated, the Code must be given "as great an internal symmetry and consistency as its words permit." United States v. Olympic Radio & Television, 349 U.S. 232">349 U.S. 232, 236 (1955). In Van Oss v. Commissioner, 377 F. 2d 812 (C.A. 2, 1967), affirming a Memorandum Opinion of this Court, it was held that payments were includable in the income of the wife where the agreement contained no specific requirement that the wife use any minimum portion of the payments received for the support76 of the children, even though the agreement disclosed an intention that certain amounts were made available to the wife for the care of the children while they were in her custody. In Jean Talberth, 47 T.C. 326">47 T.C. 326 (1966), we held that even though the agreement mentioned an allocation of an amount for the support of the children "for tax purposes" and the divorce decree mentioned an allocation of such an amount "for tax purposes only" the total amount of the payments to the wife was includable in her income since she was free to spend the money as she saw fit. We hold that the total amount paid by James to Martha in each of the years 1963 and 1964 is includable in Martha's income for each of such years and is deductible by James for each of such years. Because of other adjustments made by respondent which were not contested by petitioners and one issue disposed of by agreement of the parties, Decision will be entered under Rule 50. Footnotes. Cases of the following petitioners are consolidated herewith: Martha C. Holden, Docket No. 266-67; James F. Holden and Helen J. Holden, Docket No. 1775-67; and Martha Comstock Holden, Docket No. 1947-67.↩. Per month MCH.↩2. All references are to the Internal Revenue Code of 1954 unless otherwise indicated. ↩3. Sec. 71(b)↩ Payments to Support Minor Children. - Subsection (a) shall not apply to that part of any payment which the terms of the decree, instrument, or agreement fix, in terms of an amount of money or a part of the payment, as a sum which is payable for the support of minor children of the husband. For purposes of the preceding sentence, if any payment is less than the amount specified in the decree, instrument, or agreement, then so much of such payment as does not exceed the sum payable for support shall be considered a payment for such support.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622473/	CLAYTON H. SMITH and DORIS J. SMITH, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentSmith v. CommissionerDocket No. 1031-72.United States Tax CourtT.C. Memo 1973-78; 1973 Tax Ct. Memo LEXIS 208; 32 T.C.M. (CCH) 352; T.C.M. (RIA) 73078; April 9, 1973, Filed 208 Dougal C. Pope, for the petitioners. James N. Mullen and Robert Jones, for the respondent. DRENNENMEMORANDUM OPINION DRENNEN, Judge: Respondent determined deficiencies in petitioners' income taxes in the amounts of $1,018.75, $200.10, and $267.73 for the years 1965, 1966, and 1968, respectively. Additionally, respondent determined that petitioners owed additons to tax in the amounts of $50.94, $10, and $13.39 for the same respective years, due to their negligence or intentional disregard of his rules and regulations with respect to income taxes. Sec. 6653(a). 1 2 Since no concessions have been made by either party, all of the deficiencies and additions to tax are at issue. We are asked to decide whether petitioners are entitled to the following deductions claimed by them on their income tax returns: Disallowed deduction196519661968 1. Depreciation$1,616.22$1,780.26$249.092. Auto Maintenance282.12350.24366.023. Insurance premiums622.70584.62146.254. Utilities & telephone84.20146.07---5. Interest4,149.531,041.401,160.306. Bad debts489.84710.16490.367. Dental supplies848.46382.21---8. Capital gains4,018.8037.9332.259. if Finance charge---28.55---209 We also must decide if any part of the underpayment of tax was due to petitioners' negligence or intentional disregard of the Commissioner's rules and regulations. Clayton H. Smith and Doris J. Smith, husband and wife, filed joint income tax returns for the years 1965, 1966 and 1968, with the district director of internal revenue, Austin, Tex. Petitioners were residents of Shreveport, La., at the time they filed the petition herein. Petitioners received a notice of deficiency from respondent, dated November 24, 1971, in which he disallowed the deductions at issue herein. Subsequently, on February 11, 1972, petitioners filed a petition with this Court which contested the entire amounts of the deficiencies and additions to tax determined against them. The facts upon which petitioners based their petition were summary. 3 On March 14, 1972, respondent filed an abbreviated answer to the petition, which in effect was a general denial of the disputed facts surrounding the deficiencies. Petitioners' counsel, Dougal C. Pope, then made a request for admissions as to petitioners' correct taxable losses sustained in the years 1965, 1966, and 1968. The request was treated as210 a motion and was denied by this Court on April 6, 1972. Thereafter, on August 24, 1972, petitioners' counsel submitted a second, much longer request for admissions. Respondent did not reply to this request for admissions but filed an objection with this Court. This request was treated as a motion, which was denied on October 11, 1972. The case proceeded to trial, which was held on December 4, 1972. At trial the only facts stipulated were petitioners' names, their address, and that they had filed joint returns for each of the years at issue. Additionally, petitioners' joint returns for 1965, 1966, and 1968 were received into evidence. Neither party, however, offered an oral arguments on the merits or introduced additional evidence. Both parties moved for judgment on the pleadings, and no briefs were filed in support thereof. This case turns on the identical procedural issue raised in two companion cases submitted to this Court 4 on the same day by petitoners' attorney. See Bobby R. Casey, 60 T.C., AND Julian T. Keith, T.C.Memo. 1973-77. The question is whether petitioners' request for admissions, if unanswered by respondent, may be deemed admitted facts211 for purposes of deciding the substantive issues of the case. As we pointed out in the Casey opinion, that question is clearly and unquestionably answered in the negative by Gilbert C. McKenzie, 59 T.C. 139">59 T.C. 139 (1972), on appeal (C.A. 5, Dec. 26, 1972). Thus, we are left to decide petitioners' case on a record barren of any evidence or stipulations relative to the substantive issues in this case. The rule is well established that respondent's determinations in the notice of deficiency bear a presumption of correctness, and the burden of proof is upon the petitioner to show his entitlement to deductions disallowed by respondent. Avery v. Commissioner, 22 F.2d 6">22 F.2d 6 (C.A. 5, 1927); Wallis v. Commissioner, 357 F.2d 313">357 F.2d 313 (C.A. 10, 1966). See also Rule 32, United States Tax Court Rules of Practice. Petitioners, having failed to provide any competent evidence to prove error in any of respondent's determinations, have failed to carry their burden of proof, and we must sustain respondent's determinations disallowing the deductions in issue. 5 Likewise, petitioners failed to refute respondent's position with regard to the section 6653(a) additions*212 to tax and we sustain respondent's determination. Decision will be entered for the respondent. Footnotes1. All section references are to the 1954 Internal Revenue Code↩, as amended, unless designated otherwise.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622474/	Fenwal, Incorporated v. Commissioner.Fenwal, Inc. v. CommissionerDocket No. 21231.United States Tax Court1949 Tax Ct. Memo LEXIS 218; 8 T.C.M. (CCH) 345; T.C.M. (RIA) 49084; April 15, 1949Samuel S. Dennis, III, Esq., for the petitioner. Leo C. Duersten, Esq., for the respondent. MURDOCKOrder MURDOCK, Judge: For reasons set forth in a Memorandum accompanying this order, it is ORDERED, that the respondent's motion is granted and the proceeding is dismissed for lack of jurisdiction in so far as it relates to excess profits tax penalty for 1943. Memorandum to Accompany Order Granting Motion to Dismiss in Part MURDOCK, Judge: The Commissioner mailed a notice of deficiency to the petitioner dated September 20, 1948, in which he determined219 deficiencies in income tax for 1942 and 1943, a deficiency in income tax penalty for 1943 and overassessments in excess profits tax and excess profits tax penalty for 1943. He explained that the penalty represented a 15 per cent addition to the tax under section 291(a) of the Internal Revenue Code because the petitioner had failed to file its returns for 1943 within the time prescribed by law. The figures in the following table are taken from the statement attached to the notice above described: 1943LiabilityAssessedOverassessmentExcess Profits Tax$100,475.77$102,707.45$ 2,231.68Addition to tax15,071.3731,490.0716,418.70The petitioner did not assign any error relating to excess profits taxes for 1943 except with respect to the addition to the tax for failure to file the return on time. The respondent moved to dismiss the proceeding for lack of jurisdiction in so far as it relates to the penalty or addition to the excess profits tax for failure to file a timely return. The basis of the motion is that the notice upon which the petitioner relies for the jurisdiction of this Court did not determine a deficiency in220 excess profits tax penalty for 1943 but, on the contrary, determined an overassessment, and a prerequisite to the jurisdiction of this Court is the mailing of a notice of deficiency. The parties were fully heard on that motion. There would be a deficiency within the definition contained in section 271(a)(1) where the tax imposed exceeds the sum of the amount shown as the tax by the taxpayer on his return, plus amounts previously assessed as a deficiency. The petitioner recognizes that the notice upon which it relies shows an overassessment in the excess profits tax penalty, but it contends that the notice in fact determines a deficiency therein. Cf. New England Power Co., 25 B.T.A. 195">25 B.T.A. 195. It is incumbent upon the petitioner to allege and prove facts to show that this Court has jurisdiction of the proceeding. Louisiana Naval Stores, Inc., 18 B.T.A. 533">18 B.T.A. 533. Thus, the petitioner would have to allege and prove facts showing that the notice was in fact the determination of a deficiency. The petitioner claims that no part of the addition to the tax here in question was ever validly assessed and, therefore, the determination of an overassessment in penalty based*221 upon late filing of the return was a deficiency under the definition given above. Cf. Angier Corporation, 17 B.T.A. 1376">17 B.T.A. 1376, modified on other points 50 Fed. (2d) 887. It would not follow as a matter of course that the petitioner's remedy for an invalid assessment would be to proceed in this Court. But that question need not be decided because, for all that appears, the taxpayer may have waived the restrictions against assessment, and if that were so, the petitioner's whole argument would fall. See also section 274. The petitioner has failed to show that the Court has jurisdiction and the respondent's motion to dismiss is therefore granted. Cf. Rosemary Manufacturing Co., 9 T.C. 851">9 T.C. 851.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622476/	APPEAL OF ILLINOIS RURAL CREDIT ASSOCIATION.Illinois Rural Credit Ass'n v. CommissionerDocket No. 5058.United States Board of Tax Appeals3 B.T.A. 1178; 1926 BTA LEXIS 2466; April 3, 1926, Decided Submitted December 11, 1925. 2466 Subscribers to capital stock, after making partial payment on their subscriptions, defaulted in meeting the remaining payments due. The stock so subscribed for, together with payments then made, was declared forfeited to the corporation, but with the privilege to the subscribers to re-subscribe and thereby receive credit for the payments declared forfeited. Held, the payments declared forfeited are not income to the corporation. R. C. De Mange, Esq., for the taxpayer. M. N. Fisher, Esq., for the Commissioner. GRAUPNER 1178 Before GRAUPNER, TRAMMELL, and PHILLIPS. This is an appeal from the determination of a deficiency in income and profits taxes for the calendar year 1918 in the amount of $9,507.29. The question involved is whether payments made by subscribers to capital stock, which were forfeited to the corporation upon default in payment of installments due, constitute taxable income. FINDINGS OF FACT. The taxpayer is a Delaware corporation with its principal office at Bloomington, Ill. It was organized in March, 1916, with an authorized capital of $1,000,000, divided into 20,000 shares of a par value of $50 each. 2467 By written contract dated March 25, 1916, the taxpayer employed two agents to obtain subscriptions to its capital stock at $100 per share. Under this contract the agents were authorized to sell and accept subscriptions to the stock on the basis of cash payment in full, 1179 less a discount, or 25 per cent cash payment and three notes of the subscribers each representing 25 per cent of the amount of the subscription, payable in three, six, and nine months from date. The agents were to receive, as commission and full compensation for their services, 25 per cent of the gross amount realized from the sale of stock, which commission the taxpayer agreed to pay from each sale upon receipt of each subscription contract with the cash payment and the notes for deferred payments. Out of the commissions received the agents agreed to pay all expenses, including office rent, telephone, stationery, etc., incurred in starting the business of the taxpayer and in the selling of its stock. They also agreed to reimburse the taxpayer for the salaries paid by it to its president and secretary to and including June, 1916. The agents had no connection with the taxpayer except their employment2468 under contract. In accordance with the terms of their contract of employment, the agents during 1916, 1917, and the early part of 1918, secured a number of subscriptions to the capital stock of the taxpayer. Some of the subscribers failed to meet their notes when due and were advised by the taxpayer, by letter, that, unless payment was made by a specified date, the stock subscribed for would be offered for sale, and if no outside bidder could be had the stock might either be purchased by the taxpayer or forfeited to it together with any payments that had been made. On December 1, 1917, a meeting of the board of directors was held at which 1,319 1/2 shares of stock, for which payments on subscriptions were in default, were offered for sale, but no bids being made therefor, on motion duly carried, a resolution was adopted that the stock should be forfeited to the taxpayer. A similar meeting was held on January 7, 1918, at which 121 shares of stock were declared forfeited to the taxpayer. In addition to the stock forfeited at the latter meeting, subscriptions to 213 shares had been released by agreement between the taxpayer and the subscribers making a total of 334 shares forfeited2469 or released in 1918. Prior to the meeting of December 1, 1917, subscribers to the stock which was declared forfeited on that date had paid on account of their subscriptions $34,150, of which the selling agents had received as their commissions $32,987.50 and the taxpayer had received $1,162.50. With respect to the stock forfeited at the meeting of January 7, 1918, and the stock released in 1918, subscribers had paid $8,800, of which the selling agents had received $8,350 and the taxpayer had received $450. The total amount paid by subscribers on the stock so declared forfeited was $42,950. 1180 After the stock subscribed for and the payments on the subscriptions of delinquent subscribers had been declared forfeited, the taxpayer notified such subscribers by letter that they might re-subscribe for the forfeited shares, in which event they would be given credit for the payments they had theretofore made and which had been declared forfeited and would be reinstated as members and entitled to all the privileges and benefits of the association. Subsequently, two of the subscribers whose stock had been declared forfeited for delinquency in meeting payments on their subscriptions2470 took advantage of this offer of the taxpayer and became stockholders. In its income-tax return for 1918 the taxpayer did not include the sum of $42,950 as income, but did add that amount to its average invested capital for the year. The return filed showed a loss for the year and consequently no tax due. The Commissioner added the amount of $42,950 to income for the year, which resulted in a net taxable income of $34,225.21 and gave rise to the deficiency from which the taxpayer appeals. OPINION. GRAUPNER: The issue in this appeal is whether the sum of $42,950, or any part of it, which was paid by subscribers on account of their subscriptions to capital stock of the taxpayer, was income to the taxpayer. The payments on account of the stock subscriptions, at the time they were made, were undoubtedly capital payments, being made to provide capital for the corporation, and were in its hands capital receipts as distinguished from income. The fact that payments were made in installments and stock was never issued for such payments, because they were not made to the full amount of the subscriptions, does not alter their character. There is no deficiency and it will be*2471 so ordered.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622479/	Appeal of MARY P. ENO STEFFANSON.Steffanson v. CommissionerDocket No. 7.United States Board of Tax Appeals1 B.T.A. 979; 1925 BTA LEXIS 2727; April 8, 1925, decided Submitted November 21, 1924. 2727 An individual who places her property in trust under an agreement by which she may have paid over to her a portion of the principal upon written request therefor and is to receive the income of the fund for life in excess of an annuity payable to her mother is not entitled to deduct from gross income in her individual income-tax return a loss of a portion of the principal realized by the trustee upon the sale of a part of the assets of the fund. John A. Kratz, Esq., for the taxpayer. A. Calder Mackay, Esq., for the Commissioner. SMITH979 Before GRAUPNER, LANSDON, LITTLETON, and SMITH. This is an appeal from the determination by the Commissioner of a deficiency in income tax for the year 1919 in the amount of $2,967.27. From the evidence of record the Board makes the following 980 FINDINGS OF FACT. 1. On or about April 9, 1904, the taxpayer executed a certain deed of trust to the United States Trust Company of New York by the terms of which she transferred certain property and interests in property from the estate of her grandfather of a value in excess of $500,000. She made herself the sole beneficiary under this instrument2728 with the exception of an annuity of $3,000 payable to her mother. The property consisted entirely of personalty. The deed of trust provided in part: II. To hold, manage, invest and reinvest said fund and keep the same invested in the manner provided in Article THIRD hereof and to recover and receive the income and revenue thereof, and to pay over the net income thereof, during the natural life of said party of the first part, after deduction of all proper expenses and charges, including the commissions of said party of the second part as follows: Three thousand dollars ($3,000) thereof annually to Harriet C. Eno, mother of the party of the first part, and the remainder thereof unto the said party of the first part, in quarterly installments as near as may be, for and during the period of the natural life of said party of the first part, upon her sole and separate receipt. If said Harriet C. Eno shall die during the life of said party of the first part, then from and after her death the entire net income of said fund shall be paid to said party of the first part during her natural life, and upon her sole and separate receipt. III. To pay over to said party of the first part2729 such portions of the said principal of said fund, as and when she may from time to time in writing request, after the expiration of five years from the date hereof, or after the marriage of said party of the first part, if she should marry within said period of five years, provided that such payments of principal shall not in any event or at any time exceed in the aggregate the sum of Three hundred thousand dollars ($300,000). And said party of the second part shall at any time, upon the request in writing of said party of the first part, purchase and maintain out of the principal of said fund any residence selected by the party of the first part for her use and occupation, or shall purchase any real estate selected by the party of the first part for the erection of a residence for her, and shall out of the principal of said trust fund pay and defray all expenses of the erection, decoration and furnishing of a residence thereon for said party of the first part as she may desire and direct, and shall permit said party of the first part to occupy and use the same without the payment of any rent or other charge therefor, all charges and costs of maintaining the same, including taxes, 2730 assessments, water rents, repairs and improvements to be paid out of the income of the balance of said trust fund, and shall, upon like written request, sell or otherwise dispose of such property and purchase other property in place thereof as the party of the first part may select, to the end that said party of the first part may always have provided and maintained a suitable and satisfactory residence out of said fund. The payments so made for the purchase or erection, decoration and furnishing of such residence shall not form a part of the sum which the said party of the first part is entitled to withdraw from the principal of said trust fund, as hereinbefore provided. IV. Upon the death of the said party of the first part to pay over and distribute the principal of said trust fund, or the balance thereof then in the hands of said party of the second part, as the case may be, to the persons and in the manner, shares and proportions, which the party of the first part shall by her last will and testament direct and appoint. * * * SECOND: - The party of the first part hereby reserves for herself and for every other beneficiary of any trust hereunder, being, at the time of2731 full age, the right to substitute by instrument under her or his hand and seal any other corporation capable by law of executing any trust hereby created for the benefit of the person making such substitution, in place of said party of the second part, and upon the execution by said party of the first part, or by any such beneficiary, of any such new appointment and notice thereof to the party of the second part, said party of the second part shall immediately account for 981 and pay over and transfer to such new trustee all property of said trust then in its possession or under its control. THIRD: - All funds received by the said trustee hereunder shall be invested by it in bonds secured by first mortgage or mortgages on improved real estate situated in the State of New York, or in bonds of the State of New York, or of any of the cities or counties thereof, or bonds of the Government of the United States of America, or in first mortgage bonds on railroads within the United States upon which the interest has been regularly and duly paid for a period of five years next preceding such investment. The party of the first part, however, shall have the power, in case any investment2732 made by the party of the second part is not satisfactory to her, to direct the party of the second part in writing to change such investment; and such investment shall, as soon as practicable, be sold or otherwise converted into money, and the proceeds invested by the party of the second part in other securities of the character hereinbefore specified, which shall be subject to the same power in the party of the first part. * * 2. In the year 1906 the taxpayer requested the trustee to purchase for her the premises numbered 17 West 37th Street, in the Borough of Manhattan, New York, N.Y., and during the same year the said premises were so purchased as a residence for the taxpayer, title being taken in the name of the trustee. The consideration therefor was $88,000. The taxpayer instructed her trustee to make such alterations and repairs as were necessary to place the premises in suitable condition for her residence. But before the alterations were completed, the taxpayer abandoned her intention of occupying the premises as a residence and the same were rented and continued to be rented until the sale thereof. 3. After the taxpayer had determined not to occupy said premises, 2733 and in the year following the date of the purchase, she requested her trustee to purchase for her for a residence premises numbered 56 East 57th Street, in the Borough of Manhattan, New York, N.Y. These premises were immediately purchased and they have been occupied by the taxpayer continuously since that date. 4. The fair market value of the premises numbered 17 West 37th Street at March 1, 1913, was $95,000. 5. In 1919 the trustee, at the instance of the taxpayer, sold the premises on 37th Street for $53,593.90, realizing a loss upon the sale of $41,406.10. 6. In her income-tax return for 1919, the taxpayer reported in Schedule "C": Profit on bonds$1,086.25Loss on sale #17 West 37th St41,406.10Net loss this Schedule40,319.86Included in the gross income are - Rent of premises numbered 17 West 37th Street$1,900.00Interest on corporation bonds containing tax-free covenant clause5,153.33Interest on bonds not containing tax-free covenant clause1,263.70Interest on bank deposits20,865.51Amount paid by debtor corporation on tax-free bonds103.07Dividends received through fiduciary2,330.00From the total gross2734 income was deducted the net loss of $40,319.85 above mentioned and other deductions to which the taxpayer was legally entitled. The net loss shown by the return was $16,107.50. 982 After an examination of the taxpayer's records, the deduction of $40,319.85, above mentioned, was disallowed. DECISION. The determination of the Commissioner is approved. OPINION. SMITH: The taxpayer derives practically all of her income from a trust. During the year 1919 the trustee sold certain assets at a profit of $1,086.25 and sold certain other assets, consisting of premises numbered 17 West 3th Street, New York, N.Y., at a loss of $41,406.10. The net loss from the sale of capital assets was $40,319.85. The entire income or revenue of the trust fund for 1919, exclusive of $3,000 payable to the taxpayer's mother, was paid to the taxpayer during the year 1919. The taxpayer claims a deduction from the gross income received by her of the above-mentioned net loss of $40,319.85 sustained by the corpus of the trust fund. Is this a legal deduction from the gross income of the taxpayer? On behalf of the taxpayer it is argued that by the terms of the deed of trust the taxpayer2735 reserved the right to direct the Trust Company to change the investment of the funds. This, however, was a very limited right since the taxpayer only had the right to require the trustee to sell certain obligations and purchase certain other obligations of a given class. It is also argued that the taxpayer retained the right to substitute a new trustee; that she retained the right to withdraw $300,000 of the principal of the fund after 1909; that she retained the right to have the trustee purchase any residence selected by her for her use and occupation, the company to pay all expense of maintenance out of any income in its possession; that if the taxpayer cannot get the benefit of a deduction in the case of a capital loss, neither can the trustee, for the trustee has no undistributable income nor capital gains against which such capital loss could be offset. What was the nature of the estate or interest which the taxpayer had in the trust fund voluntarily created by her in 1906? Manifestly, she had only a life interest in a part of the trust fund. It is true that she had the right to withdraw a portion of the corpus of the fund but she retained no right whatever to withdraw*2736 the entire fund and so far as the year 1919 is concerned, which is the only year before us, no such withdrawal was made. For the entire year the taxpayer merely had a life interest in the trust fund. The question whether a beneficiary with a life interest may deduct from gross income any part of a capital loss sustained by a trustee, under the provisions of the Revenue Act of 1918, was before the court in the case of . The decision of the lower court was affirmed by the United States Court of Appeals for the First Circuit on January 14, 1925, . It was there held that under section 219 of the Revenue Act of 1918 capital losses of a trust estate are deductible only by the trust, and the beneficiaries with life interests must report for taxation the income received by them from the proceeds without deduction of losses suffered by the corpus of the trust estate.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622481/	Edwin Singer v. Commissioner.Singer v. CommissionerDocket No. 111720.United States Tax Court1944 Tax Ct. Memo LEXIS 390; 3 T.C.M. (CCH) 66; T.C.M. (RIA) 44020; January 25, 1944390 Joseph J. Klein, Esq., 60 E. 42nd St., New York, N.Y., for the petitioner. F. S. Gettle, Esq., for the respondent. HARRON Memorandum Findings of Fact and Opinion HARRON, Judge: Respondent determined a deficiency in gift tax liability for the year 1940 in the amount of $10,450.96. The only question for determination is the value of certain shares of Pepsi-Cola stock on October 2, 1940, the date of gift. Petitioner resides at 607 Del Mar Boulevard, Corpus Christi, Texas, and filed his gift tax return with the collector for the first district of Texas. Findings of Fact The Pepsi-Cola Company was organized on August 10, 1931, under the laws of the State of Delaware, with an authorized and issued capital of 300,000 shares of $5 par value each, of which 259,277 shares were outstanding on October 2, 1940. In 1939, after extensive litigation, Loft Incorporated, (hereinafter called Loft) recovered from Charles G. Guth, its former president, and from certain family corporations which Guth controlled, 237,500 shares of stock of the Pepsi-Cola Company. The attorneys representing Loft were paid in 1939, as compensation for their services in this litigation, 13 1/2 percent of the number of391 Pepsi-Cola shares recovered by Loft in that action. The stock so received by the attorneys amounted to 32,063 shares and was delivered to the attorneys under conditions set forth in an agreement of settlement and compromise dated June 6, 1939, as modified by an order of the Chancery Court of the State of Delaware in and for New Castle County, dated July 7, 1939. The attorneys received 32,063 shares of stock on July 7, 1939. Of the 32,063 shares of Pepsi-Cola stock received by the attorneys as compensation for their services, 15,000 shares could not be sold by them prior to February 1, 1940; 7,000 shares could not be sold until the final disposition of certain litigation known as the Megargel litigation, and the Bartus Trew litigation, and in no event prior to July 1, 1941. The purpose of the Megargel litigation and the Bartus Trew litigation was to recover from Loft some of the stock which Loft had received as a result of its suit against Guth. Of the 32,063 shares of Pepsi-Cola stock received by the attorneys, 10,063 shares were subject to certain purchase options in favor of Loft, as follows: "First Option: One third exercisable during the 60 day period beginning two years after392 the date of receipt of said stock; "Second Option: One-third exercisable during the 60 day period beginning three years after the date of receipt of said stock; "Third Option: One-third exercisable during the 60 day period beginning four years after the date of receipt of said stock." In the event that the Megargel litigation and the Bartus Trew litigation were not disposed of at the date when the first option became exercisable, "then the first option shall become exercisable during the 60 day period immediately following the date of the final disposition of the said litigations and claims; the second option shall become exercisable during the 60 day period commencing one year after the date of said final disposition; and the third option shall become exercisable during the 60 day period commencing two years after the date of said final disposition." The agreement of June 6, 1939, between Loft and its attorneys contained the following provisions which were not modified by the order of the Chancery Court of July 7, 1939, except with respect to the percentage which was reduced to 13 1/2 percent by said order: "(b) In the event of a final determination in the Megargel litigation393 reuiring Loft Incorporated to turn over shares of Pepsi-Cola stock to Megargel, you shall be obligated to return 15% [13 1/2%] of the number of shares that Loft Incorporated is so required to turn over, provided, however, that you shall be under no obligation to turn back any of the stock in the event that it is established that you have rights superior to Megargel's rights with reference to the 15% [13 1/2%] of 95,000 shares received hereunder by you. You shall have no obligation to contribute to any settlement of the Megargel litigation which you in your absolute discretion do not consent to. Providing that any settlement involves delivery to Megargel of shares of stock of the Pepsi-Cola Company, and in the event you consent in writing to any such settlement, then you shall be obligated to contribute to the settlement to the extent of 15% [13 1/2%] of the number of shares of Pepsi-Cola stock required to be delivered to Megargel pursuant to the terms of said settlement, which shares shall come out of the 15% [13 1/2%] of the 95,000 share block involved in the Megargel litigation. You shall have no obligation to bear any expense in connection with the defense in said litigation. 394 "(c) In the event of the final determination against Loft Incorporated in connection with Bartus Trew's petition requiring Loft to give up any shares of stock to Pepsi-Cola Company, you shall return your proportionate share out of the 15% [13 1/2%] of 97,500 share block provided, however, that you shall be under no obligation to turn back any of the stock in the event that it is established that you have rights superior to the claims made by Bartus Trew. You shall have no obligation to contribute to any settlement of the Bartus Trew petition which you in your absolute discretion do not consent to. Providing that any settlement of the Bartus Trew petition involves delivery into the Treasury of the Pepsi-Cola Company of Pepsi-Cola stock, and in the event you consent in writing to any such settlement, you shall be obligated to contribute to the settlement to the extent of 15% [13 1/2%] of the number of shares of Pepsi-Cola Company stock required to be delivered pursuant to the terms of such settlement, which shares shall come out of the 15% [13 1/2%] of the said blocks of Pepsi-Cola Company stock aggregating 137,500 shares involved in the Bartus Trew petition. You shall have no obligation395 to bear any expense in connection with the defense of the Bartus Trew petition." Both the Megargel litigation and the Bartus Trew litigation were settled prior to October 2, 1940, which was the date of the gift in this proceeding. The agreement between Loft and its attorneys further provided that the optioned stock could be sold by the attorneys in the following contingency: "In the event that the market price of Pepsi.Cola stock as evidenced by a sale of said stock on any market shall decline 20% or more within any two-week period, then you shall have the right at any time within six months thereafter to offer in writing all or any part of the stock remaining under option for sale to Loft Incorporated at a price fixed by you, and in the event that Loft Incorporated does not accept in writing said offer within twenty-four hours, you shall be free to sell such stock to any other purchaser, provided, however, that said sale shall not be made at a price less than the price offered to Loft Incorporated until Loft Incorporated is given a further twenty-four hour period within which to accept in writing any lower price submitted in writing by you to Loft Incorporated. In the event that396 you do not sell all of the stock remaining under option pursuant to the aforesaid right, within the six months' period aforementioned, then the option or options shall remain in force with respect to those shares remaining unsold, such shares to be divided equally between or among the remaining options." The price to be paid by Loft under each option was to be 85 percent of the average market price at which the stock would sell for a period preceding the date of the exercise of each option if the stock were listed on either the New York Stock Exchange or the New York Curb Exchange. If the stock were not listed on either of such Exchanges, the option price was to be 85 percent of 12 times the consolidated net earnings per share of Pepsi-Cola Company, its subsidiaries and affiliates, and any merged or consolidated company. On October 2, 1940, petitioner made a gift of 804 shares of Pepsi-Cola stock; 402 shares to a trust for one sister, and 402 shares to a trust for another sister. These 804 shares were part of the Pepsi-Cola stock which the attorneys representing Loft had received in 1939, as set forth above. These shares were part of a block of 2,355 shares of Pepsi-Cola stock previously397 received by petitioner as a gift from his brother, Herbert M. Singer, one of the attorneys for Loft in its action againstguth. Petitioner's gifts to his two sisters are set forth in two indentures of trust. Each indenture expressly states that the shares of Pepsi-Cola stock constituting the corpus of the gift are "subject to certain restrictions and options as more particularly set forth in an order dated July 7, 1939, in the action entitled 'Loft Incorporated v. Charles G. Guth, et al.' in the Chancery Court, State of Delaware, New Castle County, consisting of the following: 134 shares subject to the first option, 134 shares subject to the second option, and 134 shares subject to the third option." The gift tax liability disclosed by petitioner's amended gift tax return for the year 1940 amounted to $1,683, which amount was duly paid to the collector of internal revenue on December 12, 1941. One-third of the 804 gift shares, i.e., 268 shares were under the first option to Loft until September 7, 1941; 268 shares were under the second option to Loft until September 7, 1942, and 268 shares were under the third option to Loft until September 7, 1943. Each of the certificates 398 of Pepsi-Cola stock which constituted the gift shares was stamped with a legend that the shares could not be sold until the expiration date of the option. For some years prior to October 2, 1940, the Pepsi-Cola Company was engaged in a great deal of litigation. In March 1936, Coca-Cola Company of Canada, Ltd., brought a suit against Pepsi-Cola Company of Canada, Ltd. (a wholly owned subsidiary of Pepsi-Cola Company) in the Exchequer Court of Canada, seeking to enjoin Pepsi-Cola Company of Canada, Ltd. from using its trade mark "Pepsi-Cola" upon the ground that the trade mark infringed the trade mark "Coca-Cola", and seeking an accounting or damages. After trial, a judgment was rendered on July 15, 1938, holding that the trade mark "Pepsi-Cola" infringed on the trade mark "Coca-Cola"; enjoining the use of the trade mark "Pepsi-Cola" in the sale of that product, and enjoining the use of the trade mark in the corporate name of the Pepsi-Cola Company of Canada, Ltd.; and awarding Coca-Cola Company of Canada, Ltd. either an accounting for profits or damages, whichever it might elect. The Pepsi-Cola Company of Canada, Ltd. took an appeal to the Supreme Court of Canada, and on December 9, 399 1939, the Supreme Court of Canada rendered a decision in favor of the Pepsi-Cola Company of Canada, Ltd., reversing the decision of the lower court. The Coca-Cola Company of Canada, Ltd. then petitioned for leave to appeal to the Privy Council in London, England, and over opposition of the Pepsi-Cola Company of Canada, Ltd., the Privy Council granted leave to appeal. This petition was granted after October 2, 1940, and final decision was rendered in March 1942 in favor of the Pepsi-Cola Company of Canada, Ltd.In August 1938, shortly after the decision of the Exchequer Court of Canada, Pepsi-Cola Company instituted a suit in the Supreme Court of the State of New York County of Queens, against the Coca-Cola Company, seeking damages and injunctive relief to restrain the Coca-Cola Company from engaging in certain alleged monopolistic and unfair business practices. The answer of the Coca-Cola Company consisted of a general denial and an affirmative defense and counterclaim in which the Coca-Cola Company charged that the trade mark "Pepsi-Cola" infringed its mark "Coca-Cola"; that the Pepsi-Cola Company was guilty of certain acts of unfair competition; and sought an injunction enjoining400 the Pepsi-Cola Company from using the trade mark "Pepsi-Cola", together with an accounting requiring the Pepsi-Cola Company to account to the Coca-Cola Company for triple the amount of its profits and triple the amount of all damages allegedly sustained by the Coca-Cola Company. As of October 2, 1940, this action was untried, although motions preliminary to trial had been made by both parties to the litigation. The suit was disposed of in May 1942 by settlement, the basis of which does not appear in the record of this proceeding. Prior to October 2, 1940, the Coca-Cola Company brought an action against the Dixie-Cola Company in the United States District Court of Baltimore. In this action, the Coca-Cola Company sought to restrain use of the name "Dixie-Cola" on the ground that it was an infringement on the trade mark of "Coca-Cola". By October 2, 1940, the date of the gift in this proceeding, a decision had been rendered by the United States District Court to the effect that "Dixie-Cola" was an infringement on "Coca-Cola"; the appeal in that case was not decided by the Circuit Court of Appeals for the Fourth Circuit until January 11, 1941, when the lower court was reversed; certiorari401 was denied on October 13, 1941. This case was of importance to the Pepsi-Cola Company since it was similar to the litigation between the Coca-Cola Company and the Pepsi-Cola Company in which the Pepsi-Cola trade mark was in jeopardy, as well as the profits theretofore earned by the Pepsi-Cola Company. In the appeal before the Circuit Court of Appeals for the Fourth Circuit, the Pepsi-Cola Company was granted leave by the Court to appear as amicus curiae. On October 2, 1940, litigation was pending entitled Joseph H. Loveman and Lewis Loveman, etc. v. Happiness Candy Stores, Inc., Loft Incorporated et al. This was a stockholders' derivative action brought by a stockholder of Happiness Candy Stores, Inc. against Loft and its directors, which sought, inter alia, to impress a trust for the benefit of Happiness upon a portion of the shares of capital stock of Pepsi-Cola Company held by Loft and requiring Loft to account to Happiness for all profits received by it with respect to those shares. The complaint charged that Loft controlled Happiness through acquisition of over 71 per cent of the capital stock of Happiness in August 1930; that Loft, in the litigation of Loft402 Incorporated v. Guth et al., in the Court of Chancery of the State of Delaware, recovered 91 percent of the outstanding shares of the capital stock of Pepsi-Cola Company, the Court holding that Loft was entitled to recover these shares of stock of the Pepsi-Cola Company because the opportunity presented by the Pepsi-Cola venture was one that belonged to Loft, and that the defendant Guth had violated his fiduciary duty to Loft in acquiring it for himself and because the facilities, assets, personnel and resources of Loft were used by Guth in establishing and furthering the Pepsi-Cola venture; that the opportunity that the Pepsi-Cola venture presented was one which was closely allied to the corporate business of Happiness and Mirror (a subsidiary of Happiness) as well as to Loft, in that the Happiness and Mirror Stores were used by Loft as outlets for the sale of Pepsi-Cola; that factories operated by Mirror in New York and in Baltimore were capable of being used in the manufacture of Pepsi-Cola syrup; that Guth utilized the assets, personnel and resources of Happiness and Mirror in the enterprise; that Loft was indebted to Happiness and was financed by Happiness during the years403 1931-1935, and by reason of these facts Loft was under a fiduciary duty to press the claim of Happiness for recovery from Guth. The complaint alleged by reason of these facts Happiness was entitled to have a portion of the Pepsi-Cola stock recovered by Loft in the Loft v. Guth litigation impressed with a trust in favor of Happiness, and an accounting for the profits. The Bartus Trew litigation involved a claim for two blocks of Pepsi-Cola stock aggregating 136,500 shares. The litigation was settled in September 1940, and the final order was entered in December 1940. As a result of the settlement of the Bartus Trew litigation, the holders of the gift stock were called upon to contribute their proportionate share of the cash settlement. The Chancellor of the Court in which the Bartus Trew case was tried was advised by an intervenor that a stockholder, one Katherine B. Jones, objected to the settlement and intended to oppose it. This stockholder could either move to intervene and, if intervention was granted, take an appeal within the sixmonth period permitted by the Delaware law, or, in the alternative, start a new litigation. Katherine B. Jones elected to start a new litigation, 404 which was pending at the date of the gift. This action was entitled Katherine B. Jones v. Loft Incorporated and Pepsi-Cola Company and was a representative stockholder's action brought on behalf of all other stockholders of the Pepsi-Cola Company. The complaint sought to compel Loft to account to the Pepsi-Cola Company for two blocks of stock of the Pepsi-Cola Company, (a) 97,500 shares and (b) 40,000 shares of that stock, and to procure a decree directing the surrender of those shares to the Pepsi-Cola Company and also to declare invalid the merger agreement between Loft and Pepsi-Cola Company. At the end of 1930, the Pepsi-Cola Company was in a condition of insolvency; in 1934 the company introduced a 12-ounce nickel bottle of Pepsi-Cola, and the company's growth and progress began at that time; the sale of the drink rapidly increased and the profits of the Pepsi-Cola Company grew. The net earnings per share and the dividends paid per share for the years 1936 to 1940, inclusive, are as follows: DividendsNet earningspaidYearNet earningsper shareper share1936$1,516,00$ 5.80$ 2.0019372,128,0008.14none19383,176,00012.15none19394,870,00018.7415.0019405,826,00022.4518.00405 In 1939, a new management took charge of Pepsi-Cola Company, and Guth, the former president of Pepsi-Cola Company, and his key associates, were eliminated from the management of the company. Thereupon, Guth and his associates entered into a competing soft-drink business. In 1940, rising war prices of sugar and cola, both of which were imported, had an unfavorable effect on Pepsi-Cola Company in its competition with the Coca-Cola Company since Pepsi-Cola sold a double size drink for a nickel. On October 2, 1940, the stock of the Pepsi-Cola Company was not listed on any Exchange, and there was no material change in stockholders during that month. On November 1, 1940, out of 259,277 issued and outstanding shares of Pepsi-Cola stock, 33 stockholders owned over 200 shares each and an aggregate of 254,955 shares; of these shares Loft owned 205,437 shares; 20 stockholders owned between 100 and 200 shares, aggregating 2,395 shares; 24 stockholders owned from 50 to 100 shares, aggregating 1,391 shares; 293 stockholders owned less than 50 shares each, aggregating a total of 2,745 shares. None of the Pepsi-Cola stock subject to the options in favor of Loft has ever been traded in or sold. 406 The free stock of Pepsi-Cola Company during 1940 was traded over-the-counter and was highly speculative and erratic; the market for the stock was very thin and could not absorb any volume of sales. Approximately 95 percent of all trading in such stock was made by or through Ernst & Company, members of the New York Stock Exchange, and the usual sales were in lots of 5 or 10 shares each. The daily trading in Pepsi-Cola stock in the over-the-counter market by and through Ernst & Company from January 1, 1940 through December 31, 1940, amounted to 806 shares bought, and 841 shares sold, with the high and low prices for each month shown as follows: SharesSharesYear 1940boughtsoldHighLowJanuary72113263215February250291290March4639378301April68100360323May8754340230June00July00August00September12270216195October60152215190November00December326313188165806841The following tabulation shows the purchases and sales by Ernst & Company of Pepsi-Cola stock for the period from May 2, 1940, to May 16, 1940, inclusive: BOUGHTSOLDPricePriceNo. ofperNo. ofperDatesharesshareDatesharesshare5/ 2103405/ 71335313391335713301453004330152285103351682701413152255155270227016326032558260524522602260407 The daily range of bids and offers for Pepsi-Cola stock for the period from September 25, 1940, to October 8, 1940, inclusive, are as follows: DateBidOfferSept. 25, 1940200210-215Sept. 26, 1940200-205208-220Sept. 27, 1940190-205208-215Sept. 28, 1940200-202208-212Sept. 30, 1940200-202208-212Oct. 1, 1940200-203210-212Oct. 2, 1940200-203210-212Oct. 3, 1940198-202207-210Oct. 4, 1940200-205206-212Oct. 5, 1940208-210215-218Oct. 7, 1940200-212215-218Oct. 8, 1940200-212213-218The stock which petitioner gave to his sisters in trust was entitled to receive dividends, did receive such dividends, and had voting rights which the trustees were entitled to exercise. It would have been extremely difficult to sell these shares because of the purchase options, the express restrictions against sale, and the litigation hazards. However the right, title, and interest of the owner thereof could have been disposed of by assignment. The value of 804 shares of unrestricted Pepsi-Cola stock on October 2, 1940, was $144,720, or $180 pershare. The value of 804 shares of restricted Pepsi-Cola stock on October 2, 1940, was $80,400, 408 or $100 per share. Opinion The only question for determination is the value, for the purpose of computing petitioner's gift tax liability for the year 1940, of the gift of 804 shares of restricted Pepsi-Cola stock on October 2, 1940, the date of the gift. In his amended gift tax return, petitioner determined the value of this stock at $100 per share. In respondent's notice of deficiency, he determined a value of $211.50 per share, "based upon the consideration of all relevant factors affecting fair market value, primary weight being accorded bid and offered quotations and the earnings and dividend-paying capacity of the company". This value was several dollars more per share than the sales price or the mean of bid and offered quotations of unrestricted Pepsi-Cola stock on the over-the-counter market on October 2, 1940. Petitioner contends that a block of 804 shares of unrestricted Pepsi-Cola stock had a value on October 2, 1940, of between $150 and $180 per share. He argues that the fair market value of this stock was not determinable on the basis of selling prices or of bid and offered prices since there were only scattered sales of stock in small lots at wide fluctuations in 409 price. He contends that the small sales were not proper indicia of fair market value but were merely speculations on the outcome of litigation pending against the Pepsi-Cola Company. Based upon his value of unrestricted Pepsi-Cola stock, petitioner claims that because of the purchase options and restrictions on the sale of the gift stock, that stock was unmarketable and had no fair market value. For purposes of determining his gift tax liability, however, he now contends that the 804 shares of restricted stock were not worth more than $50 per share on October 2, 1940, and claims a refund on the gift tax paid by him. The statute provides that "If the gift is made in property, the value thereof at the date of the gift shall be considered the amount of the gift". Sec. 1005, Internal Revenue Code. The parties agree that the term "value" as used in the statute means "fair market value", and although petitioner could not have sold his stock until the expiration of the purchase options in favor of Loft, that stock had value none the less. The courts have repeatedly approved the ascertainment of fair market value of stock when there was no ready market for it, or where there was a restriction410 against sale. Kline v. Commissioner, 130 Fed. (2d) 742, 744; Heiner v. Gwinner, 114 Fed. (2d) 723; Newman v. Commisoner, 40 Fed. (2d) 225; certiorari denied, 282 U.S. 858">282 U.S. 858; R. E. Baker 37 B.T.A. 1135">37 B.T.A. 1135; affd., 115 Fed. (2d) 987. Upon due consideration of all of the evidence, including the opinion evidence of the expert witnesses called by petitioner it has been found as a fact that the value of 804 shares of unrestricted Pepsi-Cola stock on October 2, 1940, was $180 per share, and the value of the same number of restricted shares on the same date was $100 per share. The evidence relating to the value of both the restricted and unrestricted stock consists of annual financial reports of the company for the years 1938, 1939, and 1940; dividends and earnings per share of the capital stock of the company for the period 1936 to 1940, inclusive; lists of transactions in the stock on the over-the-counter market throughout the year 1940; a table classifying stockholders by number of shares held; bids and offers 411 on the unrestricted stock for the period from September 21, 1940, to October 23, 1940; the testimony of a director of the Pepsi-Cola Company as to the litigation which was pending against the company, and the testimony of two expert witnesses called by petitioner as to the value of the stock on the date of gift. Respondent called no witnesses and did not offer any evidence. Consideration has been given to all of the evidence. The question relating to the value of the stock constituting the gifts is a question of fact. Heiner v. Crosby, 24 Fed. (2d) 191. Complete rationalization of the value determined by us of $100 per share for the restricted stock cannot be made. "In matters so practical as the administration of tax laws and in the decision of problems connected with them, a high degree of precision is often impossible to achieve." Sometimes, "an approximation derived from the evaluation of elements not easily measured" must be made. Safe Deposit & Trust Co. of Baltimore v. Helvering, 316 U.S. 56">316 U.S. 56. Edith G. Goldwasser, 47 B.T.A. 445">47 B.T.A. 445. During the taxable year 1940, the Pepsi-Cola Company412 was engaged in very serious litigation with the Coca-Cola Company in connection with the alleged violation of the "Coca-Cola" trade mark. A Canadian subsidiary of the Coca-Cola Company had commenced an action in 1936 in the Exchequer Court of Canada against a wholly-owned Canadian subsidiary of the Pepsi-Cola Company to enjoin the Pepsi-Cola Company from using its trade mark "Pepsi-Cola", on the ground that the trade mark infringed the "Coca-Cola" trade mark. As part of this litigation, the Coca-Cola Company also demanded an accounting of profits derived by the Pepsi-Cola Company for its alleged unlawful act, or in the alternative, for damages. During the taxable year the litigation was still in progress. In 1938 the Coca-Cola Company made the same allegations in an action in the Supreme Court of New York, County of Queens, and sought an injunction to restrain the Pepsi-Cola Company from using the trade mark "Pepsi-Cola" together with an accounting, requiring the Pepsi-Cola Company to account to the Coca-Cola Company for triple the amount of its profits and triple the amount of all damages allegedly sustained by the Coca-Cola Company. During the taxable year this litigation was still413 in progress. As a result of these actions, the future status of the Pepsi-Cola Company was in doubt, and the fluctuations in the prices of the stock on the over-the-counter market indicated speculation. There was also a limited amount of Pepsi-Cola stock available for trading in the market. On November 1, 1940, out of 259,277 issued and outstanding shares of Pepsi-Cola stock, Loft owned 205,437 shares. Thirty-three stockholders, including Loft, owned over 200 shares each, and an aggregate of 254,955 shares. Approximately 95 per cent of all trading in the Pepsi-Cola stock was made by or through the firm of Ernst & Company. During the entire month of January 1940, 72 shares were bought and 113 shares were sold; during the entire month of February 1940, 25 shares were bought and no shares were sold; during the entire month of March 1940, 46 shares were bought and 39 shares were sold; during the entire month of April 1940, 68 shares were bought and 100 shares were sold; during the entire month of May 1940, 87 shares were bought and 54 shares were sold; during the months of June, July, and August 1940, there was no trading in the stock at all; during the entire month of September 1940, 414 there were 122 shares bought and 78 shares sold; during the month of October 1940, 60 shares were bought and 152 shares were sold; there was no trading during the month of November 1940; in December 1940, there were 326 shares bought and 313 shares sold. Many of these purchases and sales were matching transactions. The total number of shares bought during 1940 was 804 shares, and the total number of shares sold was 841 shares. The stock reached a high of $378 per share in March 1940, and a low of $165 per share in December 1940. The stock was usually traded in small lots of between 5 and 10 shares each. On October 2, 1940, the date of the gift, 7 shares were sold at $207 per share. During the month of May 1940, on transactions involving 141 shares, the price fluctuated between a high of $340 on May 2, to a low of $230 on May 21. In view of these circumstances, there can be little doubt that a sale of a block of 804 shares of stock on October 2, 1940, or within a reasonable time thereafter, could not have been made without seriously disrupting the market. One of petitioner's expert witnesses testified that an offer to sell 50 shares of stock would have broken the market 30 to 40 415 points. We think the evidence fully warrants the conclusion that the sales of the small lots in October 1940 did not signify the fair market value of the Pepsi-Cola stock on that date. The amount of stock sold during this period did not constitute representative sales. As pointed out in Jenkins et al., Executors, v. Smith, 21 Fed. Supp. 251, "in order to be representative the amount of stock sold must bear some reasonable relation in volume to the amount of stock being valued." See, also, Safe Deposit & Trust Co. of Baltimore, Executors, 35 B.T.A. 259">35 B.T.A. 259; affd., 95 Fed. (2d) 806; Commissioner v. Shattuck, 97 Fed. (2d) 790; Helvering v. Maytag, Executor, 125 Fed. (2d) 55; Helvering v. Kimberly, 97 Fed. (2d) 433. In our opinion, the over-the-counter quotations did not furnish a fair index of the value of the block of stock involved in this proceeding. Both of petitioner's expert witnesses testified that the unrestricted shares of Pepsi-Cola stock had a fair market value on the date of the gift of between416 $150 and $180 per share, and we have found as a fact that the value of such stock on October 2, 1940, was $180 per share. Factors entering into this determination of value include the quoted market price on October 2, 1940; the volume of sales during the year; the size of the lots sold and the wide fluctuation in price; the prospects, earnings and expenses of the company; and the number of shares involved in this proceeding which could not have been marketed except over a substantial period of time and at a price much less than the quoted price of October 2, 1940. The value of $180 per share seems to be substantiated by the fact that the capital stock of Loft was widely traded on the New York Stock Exchange and on the date of the gift that company owned about 80 per cent of the stock of Pepsi-Cola Company. After giving due effect to adjustments involving other assets of Loft, the price at which Loft stock was selling on the date of the gift was equivalent to a value of $180 per share for a block of unrestricted Pepsi-Cola stock. The stock of Pepsi-Cola, which was the subject matter of the gift, was not unrestricted stock. It was encumbered and restricted by purchase options in favor417 of Loft; the stock could not be sold to anyone other than Loft for substantial periods of time. The last option in favor of Loft did not expire until September 7, 1943. The trust indentures expressly stated that the shares were subject to the restrictions and options and the certificates of the gift shares were stamped with legends to the same effect. While the litigation between Pepsi-Cola Company and Cola-Cola Company was pending, there was always the possibility that a decision unfavorable to Pepsi-Cola Company would completely destroy the assets of that company and render the stock completely valueless. In this connection, respondent points out that since the stock had decreased in value more than 20 per cent during the two week period of May 1940, petitioner had the right to dispose of the stock to a purchaser other thanloft. On brief, petitioner denies that he had this right. However, the salient fact remains that at the date of the gift, the right had not been exercised and the gift stock was still subject to the purchase options and the restriction against sale. It is apparent that the restriction against the sale of the stock to anyone other than Loft requires a determination418 that the value of such restricted stock is materially less than the value of unrestricted stock. These restrictions necessarily had a depressing effect upon the value of the stock. A commodity freely saleable is worth more on the market than a precisely similar commodity which cannot be freely sold. Worcester County Trust Co., Executor, v. Commissioner, 134 Fed. (2d) 578. However, the amount by which the restriction depressed the value of the gift stock can only be approximated for it is an "element not easily measured." Petitioner's expert witness, Smith, testified that the value of the stock was not more than $50 per share on the date of the gift. Petitioner's witness, Graham, testified that in his opinion the 804 gift shares were worth between $50 and $72 per share. We cannot fully agree with their opinion because the record indicates that part of such opinion was predicated upon the erroneous belief on their part that the holders of the gift stock would be required to return their proportionate share of the stock in the event of an adverse decision in the Loveman litigation and the Jones litigation. There was some testimony on petitioner's behalf419 that the attorneys as part of their agreement of compensation with Loft might be required to return their proportionate share of whatever stock Loft might be required to return in connection with these actions. However, the agreement between Loft and the attorneys was incorporated in a letter dated June 6, 1939, which was approved by the Chancery Court of Delaware, as modified by an order dated July 7, 1939. In that written agreement, the attorneys were under no obligation to contribute to any settlement of litigation in the event that they did not consent to such settlement. The only litigation mentioned in the agreement which might require the attorneys to return some of their stock was the Megargel litigation and the Bartus Trew litigation. Those litigations, however, had been settled prior to the date of the gift. There was nothing in the agreement which required the attorneys to contribute to the settlement of the Loveman litigation or the Jones litigation. Under all the circumstances and upon due consideration of all the evidence, it is held that the value of the 804 shares of restricted stock which was the subject matter of the gift in this proceeding was $100 per share on420 October 2, 1940. Decision of no deficiency will be entered.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622483/	Kingston Steamship Corporation, Petitioner, v. Renegotiation Board, Respondent; Rockland Steamship Corporation, Petitioner, v. Renegotiation Board, RespondentKingston S.S. Corp. v. Renegotiation BoardDocket Nos. 1009-R, 1010-R.United States Tax Court46 T.C. 288; 1966 U.S. Tax Ct. LEXIS 96; May 24, 1966, Filed 96 Held, the Renegotiation Act of 1951, as amended, specifically applies to petitioners' contracts with the Department of the Navy. Robert A. Kagan, for the petitioners.Irwin Goldbloom, for the respondent. Arundell, Judge. ARUNDELL288 OPINIONUnder date of June 15, 1960, the Renegotiation Board issued its Order After Review determining that the Kingston Steamship Corp. had received excessive97 profits under the Renegotiation Act of 1951, as amended, in the amount of $ 150,000 with respect to the fiscal year of the contractor ended March 31, 1957, upon contracts and subcontracts. On the same date the respondent issued a similar order determining that the Rockland Steamship Corp. had received excessive profits under the aforesaid Renegotiation Act of 1951 in the amount of $ 125,000 with respect to certain contracts and subcontracts for the fiscal year ended March 31, 1957.The sole question presented for decision is whether contracts for the transportation of supplies for the Navy in vessels of the United States, which contracts are made pursuant to section 2631 of title 10 of the United States Code, 1 are subject to the provisions of the Renegotiation Act of 1951, as amended, in the absence of a finding by the President of the United States that the freight charged by such vessels is excessive or otherwise unreasonable.98 This same question was presented in March 1961 to the U.S. District Court, Southern District of New York, in United States v. Rockland Steamship Corporation, 218 F. Supp. 509">218 F. Supp. 509 (1963), wherein the court said:The key question on these facts is whether this Court has the power to decide now if the contracts are covered by the Renegotiation Act. I conclude that the Court does not have such power and that defendants must pursue their already pending suit in the Tax Court for a decision as to that issue. * * *289 The parties have stipulated that if the petitioners are subject to the Renegotiation Act of 1951, the Kingston Steamship Corp. and the Rockland Steamship Corp. received excessive profits in the amounts determined respectively by the Renegotiation Board for the fiscal year ended March 31, 1957.The facts are stipulated and are incorporated herein by reference.Petitioner Kingston Steamship Corp. is a New York corporation incorporated under the laws of New York on April 18, 1956. At all times material herein petitioner's principal office and place of business was at New York, N.Y.Petitioner Rockland Steamship Corp. is a New York corporation99 incorporated under the laws of New York on April 10, 1956. At all times material herein petitioner's principal office and place of business was New York, N.Y.During the fiscal year ended March 31, 1957, petitioner Kingston Steamship Corp. and petitioner Rockland Steamship Corp. had receipts and accruals and profits from the performance of various contracts which they had with the Department of the Navy for the transportation by sea in vessels of the United States of diesel fuel, aviation gas, and jet fuel as supplies for the Navy.The Renegotiation Board determined that $ 125,000 of the profits realized by the Rockland Steamship Corp. was excessive within the meaning of the Renegotiation Act of 1951, as amended.The Renegotiation Board determined that $ 150,000 of the profits realized by the Kingston Steamship Corp. was excessive within the meaning of the Renegotiation Act of 1951, as amended.During the period covered by petitioners' fiscal years ended March 31, 1957, the President of the United States did not make a finding pursuant to 10 U.S.C. sec. 2631, supra.Petitioners contend that since 1904 the transportation of military supplies100 by sea has been subject to special provisions of law and that under section 2631, 10 U.S.C., as amended by Public Law 1028, 84th Cong., 2d Sess., 70A Stat. 146 (see fn. 1), a preference is given to the American shipowners. This section specifically provides that, in the absence of certain findings, only American vessels can be used for the transportation of military supplies. It is further provided that if the rates of American ships should become excessive or otherwise unreasonable and the President of the United States so finds, contracts for transportation may be made as otherwise provided by law. From this statement of the law petitioners argue that, in the absence of a finding by the President that the rates were unreasonable or excessive, there is no basis for finding that the earnings under the Renegotiation law were excessive.We cannot agree with this contention. On the contrary, we agree with the respondent that the provisions of section 2631, 10 U.S.C., are 290 irrelevant to the renegotiability of Navy contracts under the provisions of the Renegotiation Act of 1951, as amended.Section 2631, which originally appeared in 1904 as chapter 1766, 33 Stat. 518, was 101 before the Attorney General for his consideration some years ago and, in 26 Op. Atty. Gen. 415, it was said that the purpose of section 2631 was to accord a preference or privilege for American shipowners in the transportation of military supplies. The fact that the President made no finding pursuant to section 2631 during 1957 would seem to have no bearing on the specific coverage of Navy contracts by the Renegotiation Act.The intent of Congress in the Renegotiation Act "was to limit profits derived from war production by prime contractors and subcontractors." Grob Brothers v. Secretary of War, 9 T.C. 495">9 T.C. 495, 500.Section 102(a) of the Renegotiation Act of 1951, as amended, 50 U.S.C. App. 1212(a), provides that the Act "shall be applicable (1) to all contracts with the Departments specifically named in section 103(a)" and section 103(a) of the Act defines the term "Department" as meaning, inter alia, the "Department of the Navy."We hold that the Renegotiation Act of 1951, as amended, specifically applies to petitioners' contracts with the Department of the Navy.An order will be102 issued in accordance herewith. Footnotes1. Sec. 2631. Supplies: preference to United States vessels.Only vessels of the United States or belonging to the United States may be used in the transportation by sea of supplies bought for the Army, Navy, Air Force, or Marine Corps. However, if the President finds that the freight charged by those vessels is excessive or otherwise unreasonable, contracts for transportation may be made as otherwise provided by law. Charges made for the transportation of those supplies by those vessels may not be higher than the charges made for transporting like goods for private persons. [Aug. 10, 1956, ch. 1041, 70A Stat. 146.]↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622484/	Alex McCutchin, Petitioner, v. Commissioner of Internal Revenue, Respondent. Alma McCutchin, Petitioner, v. Commissioner of Internal Revenue, RespondentMcCutchin v. CommissionerDocket Nos. 1497, 1498United States Tax Court4 T.C. 1242; 1945 U.S. Tax Ct. LEXIS 175; April 30, 1945, Promulgated 175 Decisions will be entered under Rule 50. 1. Income from long term irrevocable trusts of which the trustee is the alter ego of the grantor, and over which the trustee had broad powers of management and a limited discretion as to distribution or accumulation of the income until the beneficiaries reached the age of 25 years, held, not taxable to grantor under section 22 (a) and the principles of Helvering v. Clifford, 309 U.S. 331">309 U.S. 331; David Small, 3 T.C. 1142">3 T. C. 1142.2. Income from long term irrevocable trusts of which grantor was likewise, for practical purposes, trustee, and over which the trustee had broad powers of management and in his sole discretion could distribute the income or corpora during the lifetimes of the primary beneficiaries, held, taxable to grantor under section 22 (a) and the principles of the Clifford case. Louis Stockstrom, 3 T.C. 255">3 T. C. 255; affd., 148 Fed. (2d) 491.3. Trusts for the benefit of each of petitioners' children provided that the income might be used for the support, education, and maintenance of the minor beneficiary 176 if prior to the time he becomes of age those legally bound to support, educate, and maintain him are unable to do so. At all times petitioners were well able to provide for their children and none of the income of the trusts was used for that purpose. Held, Helvering v. Stuart, 317 U.S. 154">317 U.S. 154, is not applicable. Robert P. Scherer, 3 T.C. 776">3 T. C. 776.4. Intangible drilling and development costs incurred in the drilling of oil wells where such drilling is required as part of the consideration for the acquisition of the lease are to be capitalized and may not be deducted as an expense. R. B. Cannon, Esq., for the petitioners.William G. Ruymann, Esq., for the respondent. Arundell, Judge. ARUNDELL1243 The Commissioner has determined deficiencies in income taxes for the calendar year 1940 in the following amounts: Alex McCutchin, $ 13,046.24, and Alma McCutchin, $ 13,046.24.These proceedings have been duly consolidated for hearing and opinion. The deficiencies resulted mainly from the inclusion in the gross income of each petitioner of one-half of the income of certain trusts established by them in 1939. Certain other adjustments made by respondent are not now in issue. By amended answer respondent affirmatively alleges that in the notice of deficiency he improperly allowed the deduction of the amount of $ 27,970.42 as intangible drilling and development costs and that he further erred in failing to allow a deduction for depletion in the amount of $ 1,395.63.FINDINGS OF FACT.The petitioners, Alex McCutchin and Alma McCutchin, 178 are husband and wife and at all times material herein they resided in Dallas, Texas. For the calendar year 1940 they filed separate returns on the community property, cash receipts and disbursements basis with the collector of internal revenue for the second collection district of Texas.Issue No. 1.On December 26, 1939, the McCutchin Investment Co., a corporation, was chartered under the laws of the State of Texas, with authorized capital stock of $ 25,000, fully paid in in cash. Its incorporators were the petitioners, Alex and Alma McCutchin, and R. M. McCutchin, brother of Alex McCutchin. Alex was president of the corporation and owned all of its stock except qualifying shares. The corporation had no employees or office of its own and was organized to receive and manage the trusts hereinafter described.1244 On December 29, 1939, petitioners established by trust indenture four trusts, known, respectively, as the Jerry McCutchin trust, the Gene McCutchin trust, the Carrie McCutchin trust, and the J. A. McCutchin trust. Under the indentures certain community oil properties were transferred to the McCutchin Investment Co., as trustee, for the purposes stated therein. 179 Petitioners duly filed Federal gift tax returns for 1939, reporting these gifts in trust, and proper returns by or on behalf of each of four donees were duly filed.The primary beneficiary of the first trust above mentioned was Jerry McCutchin, a son of petitioners, born November 23, 1939. The pertinent provisions of the instrument are as follows:The Trustee shall immediately take possession, management and control of all of the property conveyed to it, as heretofore specified, and shall diligently and faithfully manage, conserve, care for, protect and control the trust property and every part thereof. The Trustee shall have, and is hereby given and granted, as full and complete power in the management, control and disposition of the trust property as it would have or might exercise if it were the sole and absolute owner thereof in fee simple, except to the extent that its powers are expressly limited herein. Without in anywise limiting the generality of this grant of power, the Trustee is hereby expressly authorized and empowered:(a) - To hold, manage and control the trust property and every part thereof.(b) - To sell, for cash or upon credit, or to exchange any property at180 any time belonging to the Trust.(c) - To lease, rent, improve or otherwise develop any property belonging to the Trust, including the right and power to make oil, gas and mining leases upon any property belonging to the Trust for any term by it deemed appropriate, even though longer than the probable existence of this Trust. Any lease so made shall be valid and binding, according to its terms, even though this Trust should terminate before the termination of such lease.(d) - To demand, receive and collect all revenues and proceeds arising from the operation or disposition of the trust properties, or any part thereof.(e) - To invest and reinvest all funds coming into its hands as such Trustee and to change the form of any investment as frequently as it deems necessary or appropriate. In making investments, the Trustee shall not be restricted by any law now in existence, or hereafter adopted, regarding the character of investments which Trustees or other Fiduciaries may make, but may at all times invest in such lawful enterprises as the Trustee may deem appropriate, including joint enterprises, stocks, and securities of corporations, either organized or organizing, and any other181 lawful enterprise.(f) - In its own name sue and defend in all courts or quasijudicial bodies in all matters relating to the trust property or its affairs, with or without disclosing its trusteeship, and without being required to make the beneficiary a party thereto.(g) - Hold in is own name, without disclosing its trusteeship, any property belonging to the Trust.(h) - Borrow money for the purposes of the Trust and execute mortgages, deeds of trust and pledges of any trust property to secure its indebtedness.(i) - Lend money with or without security.(j) - Acquire and pay the premiums upon policies of life insurance upon the life of the beneficiary, and annuities measured by his life, taking such steps and making such provisions with respect to such insurance and annuity contracts as may be appropriate, to the end that the benefits therefrom will be used for the 1245 purposes herein specified and ultimately go as is herein provided for the remainder of the trust property.Whenever above, or elsewhere in this instrument, reference is made to the trust property, the parties intend that that phrase shall apply, not only to the original corpus of the Trust, but to all changes182 therein, the revenues derived therefrom and all reinvestments and acquisitions of every kind at any time held by the trustee hereunder, and the powers granted herein shall apply to all such property.(4).Until the beneficiary reaches the age of twenty one (21) years, the income of this Trust shall be accumulated and reinvested. Thereafter, and until said beneficiary reaches the age of twenty five (25) years, the Trustee shall pay over to him monthly such portion of the income of the Trust as the Trustee may in its uncontrolled discretion determine advisable, reinvesting the remainder of said income, if any. Thereafter, for so long as this Trust shall remain in existence, the Trustee shall pay over to the beneficiary periodically, and as frequently as once each year, the entire net income of the Trust. In addition, the Trustee may (after the beneficiary reaches the age of twenty one or marries) in its discretion, acquire and hold in its own name a suitable residence for the beneficiary and furnish and maintain the same from trust funds, allowing the beneficiary to use the same without charge. Whenever and if, prior to the time the beneficiary reaches the age of twenty one years, 183 those legally responsible for the support, education, and maintenance of the beneficiary as a minor are unable to support, educate and maintain him, then the Trustee may expend such portion of the net income of the Trust as it may in its uncontrolled discretion determine to be appropriate for the purpose of supporting, educating and maintaining the beneficiary until he reaches the age of twenty one (21) years.(5).At any time, and from time to time, after the beneficiary reaches the age of twenty one (21) years, and before he becomes twenty five (25) years of age, the Trustee may deliver to him any portion of the trust property which, in the uncontrolled discretion of the Trustee, it would be appropriate for him to have, but not exceeding in the aggregate property of the value of Twenty Five Thousand ($ 25,000.00) Dollars. After the beneficiary reaches the age of twenty five (25) years, the Trustee may, in its uncontrolled discretion, from time to time, deliver to the beneficiary all of the remaining property of the Trust then held by it under the terms hereof. But the Trustee shall never be required to deliver to the beneficiary more than the amounts of income specified in paragraph184 four (4) hereof, and its judgment as to the advisability of so doing shall not be subject to review or control by any Court, or otherwise. It is the desire of the Settlors that said beneficiary shall, upon reaching the age above specified, receive from the Trustee portions and all of the estate created hereby for his benefit if and as rapidly as he has demonstrated his capacity to manage and care for the same; but that until and unless that capacity has been demonstrated to the satisfaction of the Trustee, the corpus of the Trust shall be held for the use and benefit of the beneficiary, even though this period extends throughout the entire life of the beneficiary. Any property delivered by the Trustee to the beneficiary from the trust estate under the discretionary powers herein granted shall thereafter be free from all control by the Trustee and shall belong to the beneficiary absolutely in fee simple. Any distributions made by the Trustee under the terms of this paragraph may be in kind and at valuations and appraisals made by it and not subject to review by any Court, or otherwise.1246 Paragraph 6 of the Jerry McCutchin trust indenture provides for the disposition of 185 the property in case the beneficiary should die prior to the termination of the trust and the delivery of the corpus to him. It provides that if the death of the beneficiary occurs before his twenty-first birthday and he is unmarried the corpus is to go in equal shares to the surviving children of the settlors (petitioners), or, if there should be at that time a trust in existence for such surviving children, to the trust for their benefit. It further provides that if the beneficiary is married or 21 years or over at the time of his death, the trust property goes to his surviving spouse or issue, or to his brothers or sisters, as he shall by will appoint. In case of failure to appoint, the trustee is directed to distribute the property in accordance with the laws of descent and distribution of the State of Texas.The instrument further provides as follows:(10).In determining distributable income, the Trustee shall act in accordance with sound accounting principles, making reasonable provisions for depreciation, depletion, reserves for losses and bad debts. Revenues from oil, gas and mining properties shall be treated as income to the extent the same are so treated by the current186 Federal Income Tax Laws. The trustee's classification of corpus and income shall not be subject to review.(11).The Settlors, and each of them, hereby acknowledge and declare that the gift, evidenced hereby and by the conveyances to the Trustee made this date and heretofore referred to, is, and is intended to be, irrevocable and that this decision has been reached after full deliberation and consideration, and that in no event shall this trust instrument be construed as authorizing or empowering them, or either of them, or the survivor of them, (either with or without action by the Trustee) to reinvest in themselves, or in either or the survivor of them, the beneficial title to all or any part of the trust property or its revenues, except and only under the circumstances specified in paragraph (6) (a) hereof. Nevertheless, said Settlors retain for themselves, or their survivor, the following rights and powers with respect to this Trust and the property at any time constituting a part thereof, to wit:(a) - To designate one or more substitute trustees in lieu and in place of the McCutchin Investment Company, or any subsequently appointed Trustee or Trustees, and to require the McCutchin187 Investment Company, or any subsequently appointed Trustee or Trustees, to surrender and deliver to such substitute or successor trustee or trustees all of the property then held hereunder. Such successor or substitute trustee or trustees may be either an individual or corporation, or one or more individuals and/or one or more corporations, and the Settlor, Alex McCutchin, may be and become one of the Trustees. Likewise, the Settlors, or their survivor, may appoint one or more individuals or corporations to act as co-trustees with the McCutchin Investment Company and to share with it its powers, duties, responsibilities and immunities as such Trustee.(b) - To require the McCutchin Investment Company, or any substitute, successor or co-trustee, to give bond or security for the faithful performance of its duties.(c) - To restrict the discretionary power herein granted to the Trustee to the extent the Settlors, or the survivor of them, may deem proper as to the character 1247 of investments which may be made of trust funds, the right to borrow money, and the right to hold in its own name, without disclosing the trusteeship, property belonging to this Trust.(d) - While both 188 of the Settlors are living, and if they act jointly and after the beneficiary has reached the age of twenty one (21) years, to require the Trustee to deliver to the beneficiary, for his free and unrestricted benefit and disposal, such portion or all of the corpus of the trust property as the Settlors by such joint action may direct.(e) - From time to time, to add to the corpus of the trust property by gift, bequest or devise.The Gene McCutchin trust is identical in terms with the Jerry McCutchin trust except for the primary beneficiary, who is Gene Paul McCutchin, a son of petitioners who was a minor at the time the trust was established.The third trust, the Carrie McCutchin trust, was for the benefit of Carrie McCutchin, the mother of petitioner Alex McCutchin. Paragraph 3 of the indenture, dealing with the powers of the trustee, is identical with paragraph 3 of the Jerry McCutchin trust. Paragraph 4 provides as follows:During the life of the primary beneficiary, the Trustee shall pay over to her from time to time such portions of the income of the Trust as, in its uncontrolled discretion, the Trustee deems appropriate for the needs and welfare of the said primary beneficiary. 189 If, in the uncontrolled discretion of the Trustee, the needs and welfare of the primary beneficiary so require, the Trustee may, from time to time, distribute to the primary beneficiary such portions of the corpus of this Trust as the Trustee deems appropriate. Any income not so distributed shall be held, invested and disposed of by the Trustee under the further terms hereof.Upon the death of the primary beneficiary, this Trust shall terminate and all property and funds remaining in the Trust shall pass to and vest in equal shares in the two sons of the Settlors, to wit, Jerry Alex McCutchin and Gene Paul McCutchin. But if, at that time, there is still in existence a Trust or Trusts created by the Settlors on this date of which the Trustee herein named in Trustee, and of which said sons are the respective beneficiaries (which Trusts are known as "The Jerry McCutchin Trust" and "The Gene McCutchin Trust", respectively) the share or shares of the residue of this Trust which would otherwise go directly to Settlors' said sons, or either of them, shall pass to and become a part of the property then so held in trust for Settlors' son or sons, respectively, and thereafter in all respects190 be governed, pass and be disposed of in accordance with the terms of said respective Trusts in exactly the same way as if the property so passing by this provision had constituted a part of the original corpus of said Trust.If either of the said sons of Settlors predecease the primary beneficiary and leave no descendants surviving, the share of the residue of this Trust which would otherwise go to such predeceased son, or to his Trust as above provided, shall pass to and vest in the surviving son, or in his Trust as above provided.If either or both of such sons, predeceasing the primary beneficiary, should leave surviving him a child or children, or their descendants, the share of the residue of this Trust which would otherwise go to, or for, such son shall pass to and vest in his surviving child, children or their descendants, per stirpes.1248 If both of the Settlors' said sons should predecease the primary beneficiary and leave no child, children, or their descendants, surviving them, the residue of this Trust shall pass to and vest in the Settlors, in equal shares, or in the survivor of them.The trust contains spendthrift provisions and provision for compensation of191 the trustee. Paragraph 8, dealing with the determination of distributable income is identical with paragraph 10 of the Jerry McCutchin trust and paragraph 9 is identical with paragraph 11 of the Jerry McCutchin trust, with the exception of subparagraph 11 (d) of the latter instrument, which does not appear in the Carrie McCutchin trust.The J. A. McCutchin trust is identical in terms with the Carrie McCutchin trust except for the primary beneficiary, who was J. A. McCutchin, father of petitioner Alex McCutchin.The property transferred to the McCutchin Investment Co. under these instruments consisted of two kinds of oil interests: (1) Oil payments, and (2) overriding royalties carved out of leasehold interests owned by petitioners. Each trust took an undivided one-fourth interest in all of the oil properties conveyed to the McCutchin Investment Co. as trustee. The conveyances were duly recorded in the deed records of the counties in which the properties were located.Books and records were opened for McCutchin Investment Co., trustee, and a bank account was opened by the investment company with the Tyler State Bank at Tyler and, subsequently, with the First National Bank in Dallas, 192 Texas. At no time did petitioners have any accounts in these two banks. As oil was produced from the properties held by the McCutchin Investment Co. the proceeds were remitted by the pipe line companies purchasing the oil directly to McCutchin Investment Co., trustee, under division orders.Within the calendar year 1940, the investment company's share of the proceeds before the deduction of the gross production tax levied by the State of Texas totaled $ 81,278.48. The production tax in the amount of $ 2,419.26 was paid by the pipe line companies directly to the State of Texas and there was remitted to the McCutchin Investment Co., trustee, the sum of $ 78,859.22. Ad valorem taxes in the amount of $ 808.69 and trustee fees totaling $ 3,902.51 were incurred and paid, resulting in net income for the four trusts in the total amount of $ 74,148.02, before the deduction of statutory percentage depletion.J. A. McCutchin died in July of 1940. Thereupon, in accordance with the provisions of the J. A. McCutchin trust, the corpus and accumulated income thereof vested one-half in the Jerry McCutchin trust and one-half in the Gene McCutchin trust. The distributive share of each of the respective193 trusts in the gross oil proceeds for the year 1940, and in the deductions attributable to such proceeds, exclusive of statutory percentage depletion, was as follows: 1249 GrossNet incomeGrossproduction taxesbeforeproceedsand expensesdepletionJerry McCutchin trust$ 25,297.02$ 2,214.97$ 23,082.05Gene McCutchin trust25,297.052,214.9323,082.12J. A. McCutchin trust10,259.74909.789,349.96Carrie McCutchin trust20,424.671,790.7818,633.89Total81,278.487,130.4674,148.02On December 31, 1940, after the transfer of the corpus and accumulated income of the J. A. McCutchin trust ratably to the Jerry McCutchin trust and the Gene McCutchin trust, the undivided profits accounts of the three remaining trusts stood as follows:TransferredReceivedfrom J. A.directMcCutchinTotaltrustJerry McCutchin trust$ 23,082.05$ 4,674.98$ 27,757.03Gene McCutchin trust23,082.124,674.9827,757.10Carrie McCutchin trust18,633.89None18,633.89Total64,798.069,349.9674,148.02No distributions of income were made by the McCutchin Investment Co., trustee, to the beneficiaries of the 194 various trusts prior to December 31, 1940. Beginning about July 1942, there was distributed to Carrie McCutchin out of the income of the Carrie McCutchin trust the sum of $ 50 per month.During the year 1940 Alex McCutchin and the McCutchin Investment Co. jointly purchased four separate oil properties, each advancing part of the purchase price. In the case of two of the joint purchases, Alex McCutchin received more value proportionately for his contribution than the investment company received. In the case of the remaining two joint purchases, the investment company received more value for its contribution, proportionately, than Alex McCutchin received. As to each of the four transactions, however, both Alex and the investment company in each and every instance received full value for their contributions to the purchase price.In April 1940 Alex McCutchin borrowed $ 23,500 from the investment company without security. Interest to December 31, 1940, was paid on March 4, 1941, in the amount of $ 333.67.For the calendar year 1940 the McCutchin Investment Co., trustee, duly filed Federal income tax returns and reported and paid a tax on the income of each of the four trusts above195 described.Respondent determined a deficiency in income tax against petitioners for the year 1940 based upon the inclusion in the income of each of one-half of the income of the four trusts.1250 Issue No. 2.On March 15, 1940, Jessie Reagan, joined by her husband, J. H. Reagan, executed an oil and gas lease on certain described property to Alex McCutchin, the pertinent provisions of which follow:Lessee, Alex McCutchin, agrees to immediately apply to the Railroad Commission of Texas for permits to drill four (4) wells upon said tract of land, and in the event one or more of such permits should be granted, to immediately, upon the completion of a well which McCutchin is now drilling, known as The Tucker-Bieler well, move said rig and drilling machinery and equipment to the tract of land hereinabove described and begin actual operations for the drilling of the first well on said tract, and continue said drilling operations with due diligence until said well is drilled to completion. And, successively, thereafter, lessee will drill the additional wells for which Railroad Commission permits have been secured at not to exceed ninety (90) days intervals from the completion of196 any one well until the commencement of drilling operations on a succeeding well; all of said wells to be drilled with due diligence and in a good and workmanlike manner.Failure of the lessee to so drill said wells as above described will, ipso facto, forfeit this lease as to such undrilled locations, and lessee agrees to immediately assign to lessors such undrilled locations.In the event a well, or wells are drilled upon any tract of land adjacent to the hereinabove described property, which in the opinion of lessors demand that a compensating offset well be drilled upon the hereinabove described tract, and if a permit or permits can be secured from the Railroad Commission of Texas for such well or wells to be drilled upon the above described tract, lessee agrees to drill such well or wells, or, in the alternative to assign to lessors such undrilled locations.During the year 1940, petitioners expended the sum of $ 27,970.42 as intangible drilling and development costs in connection with the drilling of three wells on this lease. In their returns for the year 1940 petitioners deducted this amount from their community gross income as an expense. The respondent in the notice of 197 deficiency took no action in regard to this deduction, but by amended answer he alleges that the deduction should be disallowed as a cost incurred in the acquisition of a capital asset. Respondent agrees that if it should be found that this amount should be capitalized rather than deducted as an expense, petitioners are entitled to an additional allowance for depletion in the amount of $ 1,395.63.OPINION.The first issue deals with the taxability of petitioners on the income of the four trusts here involved under section 22 (a) of the Internal Revenue Code and under the principle of Helvering v. Clifford, 309 U.S. 331">309 U.S. 331. The respondent contends that the McCutchin Investment Co. is but an alter ego of petitioner Alex McCutchin; that he must be regarded as the real trustee; and that as 1251 such he has retained controls over the several trusts sufficient to leave him in substance the owner of the properties.It is apparent, we think, that the McCutchin Investment Co. is not an independent entity insulating the grantors against taxability, if otherwise the various trusts should fall within the rule of the Clifford case. Petitioner Alex198 McCutchin owned all the shares of the corporation except qualifying shares and directly managed the corporation as its president. He further reserved the right to change the trustee and substitute himself. Under these circumstances he must be treated as the actual trustee for present purposes. Phipps v. Commissioner, 137 Fed. (2d) 141.The respondent's contention that petitioner Alex McCutchin retained such control over the properties of the trusts as to remain in substance the owner thereof is based upon the following alleged factors: (1) The intimate family relationship of the parties; (2) the broad powers vested in the trustee-settlor in connection with the management and control of the trusts; (3) the broad powers vested in the trustee-settlor in connection with the distribution of the income of the trust property; (4) the ability of the trustee-settlor to shift the beneficial interest; and (5) the ability of the settlor to gain through his dealings with the trusts. Initially, it must be observed that the four trusts are expressly irrevocable and are not subject to alteration or amendment By the terms of the instrument the grantors divested199 themselves of all interests in the trusts and only upon the remote contingency that they survive their children, who were minors at the time of the creation of the trusts, and the issue of such children, have they any reversionary interest. The short term factor of the Clifford case is thus not present in this case. See Lura H. Morgan, 2 T.C. 510">2 T. C. 510.That the trusts were established for the benefits of the children and the parents of the grantors can not of itself direct the conclusion. Lura Morgan, supra. The powers of management and control over the trusts were vested in petitioner Alex McCutchin (ignoring the investment company) as the trustee and the exercise of such powers for his own advantage as distinguished from that of the trusts would have been subject to strict judicial control. Slay v. Mary Couts Burnett Trust, 180 S. W. (2d) 480; MacDonald v. Follett, 180 S. W. (2d) 334. It is now clear that the possession of such fiduciary powers as here vested in the trustee does not in and of itself serve to subject the grantor to a tax on the income200 of the trusts. Armstrong v. Commissioner, 143 Fed. (2d) 700; Estate of Benjamin Lowenstein, 3 T. C. 1133; David Small, 3 T. C. 1142. There must be an economic gain or profit realized or realizable by the grantor before he may be taxed. Helvering v. Stuart, 317 U.S. 154">317 U.S. 154. But, the respondent argues that petitioner Alex McCutchin may derive and, in fact, has derived economic gains from his dealings with the trust res. The evidence 1252 shows that he purchased four oil properties during the taxable year, part of the consideration being furnished by him and part by the trusts. In return for their contribution the trusts received oil payments in each and in every instance. It was stipulated that in two instances the petitioner received more proportionately for his contribution than did the trusts and that in the remaining two the trusts received more proportionately for their contribution than did the petitioner. These circumstances satisfy us that the petitioner has not dealt unfairly with the trusts in his capacity and has not utilized the201 trust properties to his own advantage.The crux of respondent's argument seems to rest in the contention that the petitioner retained the right to make or withhold distributions at will and that this "is equal to the reserved power of the taxpayer settlor to shift the beneficial interest. Commissioner v. Buck, 120 Fed. (2d) 775." It is argued that in all four trusts petitioner could increase the estate of the secondary beneficiaries by withholding distributions of income and corpus during the lifetimes of the primary beneficiaries and that he could in the case of Carrie and J. A. McCutchin trusts eliminate the secondary beneficiaries entirely by distributing the whole corpus to the primary beneficiaries at any given time.We think this argument has no application whatsoever to the Jerry and Gene McCutchin trusts. The indentures establishing those trusts provide that the income is to be accumulated and reinvested until the beneficiary reaches the age of 21. Thereafter, and until the beneficiary reaches the age of 25, the trustee is to pay monthly to the beneficiary such proportion of the income as the trustee deems advisable, the balance to be 202 accumulated and reinvested. After that time the entire net income of the trust is to be distributed to the beneficiary as long as the trust continues. The only variation from the above provision is authorized only in the event those legally bound to support, educate, and maintain the beneficiary prior to his twenty-first birthday are unable to do so. That problem will be discussed hereinafter more fully. The devolution of the corpora of the trusts is fixed by the terms of the trust instruments, which permit of no variation.The instant case is different from Louis Stockstrom, 3 T. C. 255; affd., 148 Fed. (2d) 491. In that case the court pointed out that the trustee-settlor "was not required to distribute any part of the income to any of the beneficiaries during his lifetime." Nor do we think it is comparable to Commissioner v. Buck, supra, where the grantor had reserved for his life, the power, at any time, and from time to time, to "alter or amend in any respect whatsoever" the provisions relating to the distribution of the income and the principal of the trust estate. The facts and circumstances203 here are more like those in David Small, 1253 , and Frederick Ayer, 45 B. T. A. 146. In the Small case the powers of management lodged in the trustee-settlor appear to be as broad and comprehensive as those here present and in that case, in addition to his discretionary power over the distribution of the income to the minor children, the trust instrument also provided that in the event the income from the trust, at any time while the petitioner or his wife was trustee, should in his or her sole discretion be deemed insufficient for the comfort, care, maintenance, and/or support of the children or issue of deceased children, the trustee might in his or her sole discretion pay to such children or issue of such children, out of principal, such additional amount as he deemed necessary or advisable. It was further provided that the trustee in making such payments to one child or to the issue of one child to the exclusion of others, should charge the entire trust estate and not the ultimate share set apart for the child for whose benefit the payment was made. It is apparent that the control of the trustee over204 the distribution of the trust property in the instant case is less comprehensive than in the Small case, supra. In the circumstances, we conclude that the trusts for the benefit of the children should be given treatment similar to that which we accorded in the cases just mentioned.The two trusts for the benefit of the parents are different from those for the children. There the trustee was to pay to the beneficiary so much of the income or corpora as in his discretion was appropriate for the needs and welfare of the beneficiary. Any undistributed income was to be accumulated and the whole was to vest in equal shares in the two sons of the petitioner upon the death of the primary beneficiary. It is to be noted that the sweeping rights of alteration or amendment reserved to the settlor in his individual capacity in Commissioner v. Buck, supra, are not here present and in the circumstances, it would appear that the broad powers over the income and principal there reserved would have little, if anything, in common with the limited discretion here provided for. See Phipps v. Commissioner, supra.However, 205 the facts here blend rather closely with those in Louis Stockstrom, where it was held that the broad management powers on the part of the settlor-trustee, coupled with the discretion in the distribution or accumulation of the income, were sufficient to render the settlor-trustee taxable as the "owner" of the trust property.Accordingly, we conclude that the petitioner here is likewise liable to tax within the meaning of section 22 (a) of the Internal Revenue Code on the income of the trust established by him for the benefit of his parents.The trusts for the benefit of Jerry and Gene McCutchin provide that the income thereof may be used for the support, education, and maintenance of the minor beneficiary if prior to the time he becomes of age 1254 those legally bound to support, educate, and maintain him are unable to do so. At all times pertinent petitioners were well able to provide for their children and none of the income of the trusts was used to that end. Helvering v. Stuart, supra, therefore, is not applicable. Robert P. Scherer, 3 T. C. 776. Moreover, it may not be amiss to point out that even were206 the rule of the Stuart case applicable in the instant case, petitioner would be entitled to the benefits of section 134 of the Revenue Act of 1943, adding section 167 (c) of the Internal Revenue Code, upon compliance with the conditions therein set forth.The remaining issue concerns the deductibility of the amount of $ 27,970.42 as intangible drilling and development costs incurred in the drilling of three oil wells on the Reagan leasehold. Under the provisions of Regulations 103, section 19.23 (m)-16, 1 the taxpayer is accorded an option to charge to expense or to capitalize certain expenditures in connection with the drilling and development of oil wells. It is now settled that the option does not extend to costs incurred in the drilling of wells where such drilling is required as part of the consideration for the acquisition of the lease. F. F. Hardesty, 43 B. T. A. 245; affd., 127 Fed. (2d) 843; Hunt v. Commissioner, 135 Fed. (2d) 697; F. H. E. Oil Co., 3 T. C. 13. Indeed, the opinion of the Circuit Court of Appeals for the Fifth Circuit, rendered207 March 6, 1945, affirming the F. H. E. Oil Co. case, holds that the cost of drilling oil wells is a capital investment in every instance, recoverable only by depletion, and that the provisions of section 23 (m)-16 of Regulations 101 and 103, in so far as the granting of the option is concerned, are inconsistent with the statute. Aside from the broad impact of that decision, under the terms of the instant lease petitioner was obligated to drill in order to avoid termination of the lease in whole or in part. Such a condition falls within the rationale of all the above cited cases and on their authority we hold that the deduction of the drilling costs should properly be disallowed.208 It is conceded by the Commissioner that the disallowance of this item necessitates the allowance of additional depletion in the amount of $ 1,395.63 by reason of the capitalization of the intangible drilling and development costs. This concession will be given effect in the recomputation under Rule 50.Decisions will be entered under Rule 50. Footnotes1. Sec. 19.23 (m) 16. Charges to capital and to expense in the case of oil and gas wells. -- (a) Items chargeable to capital or to expense at taxpayer's option:(1) Option with respect to intangible drilling and development costs in general: All expenditures for wages, fuel, repairs, hauling, supplies, etc., incident to and necessary for the drilling of wells and the preparation of wells for the production of oil or gas, may, at the option of the taxpayer, be deducted from gross income as an expense or charged to capital account. Such expenditures have for convenience been termed intangible drilling and development costs. * *↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622487/	STEVEN McCABE, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentMcCabe v. CommissionerDocket No. 17929-85.United States Tax CourtT.C. Memo 1986-533; 1986 Tax Ct. Memo LEXIS 73; 52 T.C.M. (CCH) 962; T.C.M. (RIA) 86533; November 4, 1986. Steven McCabe, pro se. Susan N. Wasko, 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 by the Tax Reform Act of 1986, Pub.L. 99-514, section 1556, 100 Stat. ) of the Code 1 and Rules 180, 181, and 182. Respondent issued two notices of deficiency in which the following deficiencies in Federal income taxes and additions to tax were determined against petitioner for the years indicated: Additions to TaxSectionSectionSectionYearDeficiency6651(a)(1)6653(a)(1)6653(a)(2)1981$1,282.00$320.50$64.101982$1,380.00$345.00$69.00 The issues are whether petitioner had unreported income from salaries or wages and76 whether petitioner is liable for the additions to tax for the years in question. Respondent also moved for damages under section 6673. 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. At the time the petition was filed, petitioner's legal residence was Las Vegas, Nevada. During the two years at issue, petitioner was employed by the Whittlesea Blue Cab Company of Las Vegas, Nevada, as a taxicab operator. During 1981, petitioner admittedly earned $10,595.52 and during 1982, he admittedly earned $11,770.92 for his services as a taxicab operator. Petitioner filed no income tax returns for 1981 and 1982. Respondent issued the notices of deficiency in which it was determined that petitioner failed to report his earnings and, accordingly, the above deficiencies in income taxes and additions to tax were determined. Petitioner raises a number of what this Court has referred to as "protester type" arguments. For example, petitioner asserts (1) there is no definition of "income" in the Internal Revenue Code; (2) the filing of an income tax return is voluntary77 and imposition of additions to tax, in effect, makes the filing of a return "mandatory;" (3) respondent has violated the Privacy Act of 1974; (4) respondent has not shown or established the liability of petitioner in accordance with law; (5) the determined deficiencies have never been assessed; and (6) wages do not constitute taxable income because petitioner had a basis in his labor equal to the amount he received for his services. OPINION Section 1(c) provides in clear, concise, and pointed language that "[t]here is hereby imposed on the taxable income of every individual * * a tax determined in accordance with * * * tables" provided in the Internal Revenue Code. All taxpayers with taxable income are generally required by law to file Federal income tax returns. Section 6012. Under sections 6651 and 7203, taxpayers who fail to file may be subject to civil additions to the tax and prosecution for criminal offenses. The matter of filing tax returns and paying taxes is not voluntary. Respondent is authorized under section 6213 to issue notices of deficiency for determined deficiencies and/or additions to tax. It is well settled that the determinations made by respondent78 in a notice of deficiency are presumed correct; the burden of proof is on petitioner, not respondent, to show that the determinations are wrong, and the imposition of the burden of proof is constitutional. Welch v. Helvering,290 U.S. 111">290 U.S. 111 (1933); Rockwell v. Commissioner,512 F.2d 882">512 F.2d 882, 887 (9th Cir. 1975), cert. denied 423 U.S. 1015">423 U.S. 1015 (1973); Rule 142(a). Moreover, this Court generally will not look behind a deficiency notice to examine evidence used or the propriety of the Commissioner's motives or of the administrative policy or procedures involved in making his determinations. Proesel v. Commissioner,73 T.C. 600">73 T.C. 600, 605 (1979); Greenberg's Express, Inc. v. Commissioner,62 T.C. 324">62 T.C. 324, 327 (1974). The term "taxable income" is defined in section 63(b) generally as adjusted gross income reduced by, among other things, excess itemized deductions. The term "adjusted gross income" is defined in section 62 as gross income less trade and business expenses, long-term capital gains, and various other items of deduction. The term "gross income" is defined in section 61 as all income from whatever source derived79 including, but not limited to, wages. See Tomburello v. Commissioner,86 T.C. 540">86 T.C. 540, 543 (1986). Petitioner's argument that wages are not taxable income because the basis in his labor equals the amount received for his services was rejected in Reading v. Commissioner,70 T.C. 730">70 T.C. 730 (1978), affd. 614 F.2d 159">614 F.2d 159 (8th Cir. 1980). The sale of one's labor is not the same as the sale of property. A person's gain from the sale of his labor is the entire amount received for the services performed without any reduction for costs. Wage income, or compensation for services rendered, is taxable in its entirety. Any realized accession to wealth constitutes taxable income. Commissioner v. Glenshaw Glass Co.,348 U.S. 426">348 U.S. 426 (1955). The argument that respondent violated the Privacy Act, 5 U.S.C. section 552(a), is without merit. Section 7852(e) expressly provides that the Privacy Act does not apply to cases involving the determination of liability for any tax, addition to tax, or interest. Under section 6213(a), when a notice of deficiency is issued, respondent is prohibited from making an assessment against the80 taxpayer until the time has expired for filing a petition with this Court. If a petition is filed, the prohibition against assessment continues until a decision by this Court becomes final. We dismiss, therefore, petitioner's argument that he was not assessed prior to issuance of the notices of deficiency. Respondent's determinations of the deficiencies in tax are sustained. Section 6651(a)(1) provides for the imposition of an addition to tax for failure to timely file a return unless such failure is due to reasonable cause and not due to willful neglect. Sections 6653(a)(1) and (2) provide for the imposition of additions to tax for the underpayment of tax due to negligence or intentional disregard of rules and regulations. Petitioner bears the burden of proof on these issues. Welch v. Helvering,supra;Knoll v. Commissioner,735 F.2d 1370">735 F.2d 1370 (9th Cir. 1984), affg. Catalano v. Commissioner,81 T.C. 8">81 T.C. 8 (1983); Rule 142. Petitioner clearly failed to carry his burden as to each of the additions to tax.Petitioner did not file returns for 1981 and 1982. The only reasons advanced for his failure to file was that he was not required81 to file, and the compensation he received for his services did not constitute taxable income. We dismiss these as valid reasons against imposition of the additions to tax and accordingly sustain respondent. Respondent requested damages under section 6673. Under that section, this Court is permitted to award damages to the United States in an amount up to $5,000 where the proceedings have been instituted or maintained by the taxpayer primarily for delay or where the taxpayer's position in such proceeding is frivolous or groundless. Beard v. Commissioner,82 T.C. 766">82 T.C. 766 (1984), affd. per curiam 793 F.2d 139">793 F.2d 139 (6th Cir. 1986); Grimes v. Commissioner,82 T.C. 235">82 T.C. 235, 238 (1984); see also Sydnes v. Commissioner,74 T.C. 864">74 T.C. 864, 870-873 (1980), affd. 647 F.2d 813">647 F.2d 813 (8th Cir. 1981). Respondent represented to the Court that petitioner was advised on several occasions, prior to trial, that his arguments were frivolous and groundless, and he was subject to possible damages under section 6673. Prior to trial, petitioner and counsel for respondent met in a pre-trial conference and petitioner was given similar admonitions by82 the Court. Petitioner's situation fits squarely with the observations of the Seventh Circuit in Coleman v. Commissioner,791 F.2d 68">791 F.2d 68, 69 (1986): Some people believe with great fervor preposterous things that just happen to coincide with their self-interest. "Tax protesters" have convinced themselves that wages are not income, that only gold is money, that the Sixteenth Amendment is unconstitutional, and so on. These beliefs all lead -- so tax protesters think -- to the elimination of their obligation to pay taxes. The government may not prohibit the holding of these beliefs, but it may penalize people who act on them. Accordingly, respondent's motion for damages under section 6673 is granted and damages are awarded the United States in the amount of $1,800. Decision will be entered for the respondent.Footnotes1. All section references are to the Internal Revenue Code of 1954, as amended, unless otherwise indicated; and all rule references are to the Tax Court Rules of Practice and Procedure.↩. 50% of the interest due on $1,282.00. ** 50% of the interest due on $1,380.00.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622488/	Allied Industrial Cartage Company, Petitioner v. Commissioner of Internal Revenue, RespondentAllied Industrial Cartage Co. v. CommissionerDocket No. 7918-77United States Tax Court72 T.C. 515; 1979 U.S. Tax Ct. LEXIS 99; June 20, 1979, Filed 99 Decision will be entered for the petitioner. Individual A owned 100 percent of the stock of corporate petitioner X and corporation Y. X's principal business was the leasing of real estate and trucks to Y. Held, individual A, through his ownership of Y's stock, will not be treated as an individual entitled to the use of X's property under sec. 543(a)(6), I.R.C. 1954. Robert I. Alpern, for the petitioner.Thomas E. Ritter, for the respondent. Sterrett, Judge. STERRETT515 Respondent, on April 29, 1977, issued a statutory notice in which he determined a deficiency in petitioner's Federal corporate income tax return for its taxable year ended February 28, 1974, in the amount of $ 8,047.90. The narrow issue presented to the Court is whether the sole shareholder of a lessee corporation will be treated as "an individual entitled to the use of property" under section 543(a)(6), I.R.C. 1954.FINDINGS OF FACTThis102 case was submitted under Rule 122, Tax Court Rules of Practice and Procedure, hence, all of the facts have been stipulated and are so found.Petitioner Allied Industrial Cartage Co. is a corporation whose principal place of business is located in Detroit, Mich. It filed its Federal corporate income tax return (Form 1120) for its fiscal year ended February 28, 1974, with the Internal Revenue Service Center, Covington, Ky. Petitioner's principal business was the leasing of real estate and trucks to Allied Delivery Systems, Inc. (hereinafter Delivery). At all times relevant herein, Alvin Wasserman (hereinafter Mr. Wasserman) owned 100 percent of both petitioner and Delivery's outstanding stock.Delivery and petitioner, as brother-sister corporations, along with other component members of the group of corporations 516 controlled by Mr. Wasserman and his family, filed a consent to election of multiple surtax exemptions under sections 1562 and 1564 with respect to December 31, 1973, as part of petitioner's income tax return for the taxable year in issue.The entire amount of gross rental income reported on petitioner's return for the taxable year in issue, $ 42,689, was received103 from Delivery pursuant to a written lease between petitioner as landlord and Delivery as tenant. For the taxable year in issue, petitioner also had interest income of $ 6,246 and dividend income of $ 1,342 which amounts were personal holding company income as that term is defined by section 543(a)(1). In that year, petitioner's ordinary gross income was $ 50,277, adjusted ordinary gross income was $ 32,228, and adjusted gross income from rents was $ 24,290. Thus, petitioner's adjusted gross income from rents constituted 50 percent or more of its adjusted ordinary gross income for such year within the meaning of section 543(a)(2)(A). Petitioner paid section 543(a)(2)(B)(i) dividends of $ 4,000 during the taxable year in issue. As of yearend, petitioner had assets totaling $ 498,772 including cash of $ 93,117, stock of $ 135,773, and bonds of $ 50,184. Petitioner also had unappropriated retained earnings of $ 497,772.Mr. Wasserman did not use the real estate and trucks leased by petitioner to Delivery, except as such use may be deemed to exist under section 543(a)(6) solely from his stockholdings in Delivery.OPINIONSection 541 provides that:SEC. 541. IMPOSITION OF PERSONAL104 HOLDING COMPANY TAX.In addition to other taxes imposed by this chapter, there is hereby imposed for each taxable year on the undistributed personal holding company income * * * of every personal holding company * * * a personal holding company tax equal to 70 percent of the undistributed personal holding company income.In pertinent part, section 542(a) defines a personal holding company as:(a) General Rule. -- For purposes of this subtitle, the term "personal holding company" means any corporation * * * if -- (1) * * * At least 60 percent of its adjusted ordinary gross income * * * for the taxable year is personal holding company income (as defined in section 543(a)), and(2) * * * At any time during the last half of the taxable year more than 517 50 percent in value of its outstanding stock is owned, directly or indirectly, by or for not more than 5 individuals. * The parties herein have stipulated that, if the rental income received by petitioner from the lease of real estate and trucks to Delivery does not fall within the intendment of section 543(a)(6), the petitioner was not a personal holding company for the taxable year in issue. No issue has been made105 with respect to the reasonableness of the rent.Section 543(a) sets forth various categories of income which are to be deemed "personal holding company income" and paragraph (6), which is pertinent here, provides that:(6) Use of corporation property by shareholder. -- Amounts received as compensation (however designated and from whomsoever received) for the use of, or right to use, property of the corporation in any case where, at any time during the taxable year, 25 percent or more in value of the outstanding stock of the corporation is owned, directly or indirectly, by or for an individual entitled to the use of the property; whether such right is obtained directly from the corporation or by means of a sublease or other arrangement. * * Respondent contends that use of the corporate structure constitutes an "other arrangement" that gives their identical shareholder a right to use the leased property. In Minnesota Mortuaries, Inc. v. Commissioner, 4 T.C. 280">4 T.C. 280, 284 (1944), this Court held that the statute 1 referred to an "actual use rather than a use imputed to an individual from the activities or rights of a corporation in which he owns stock." 106 Our opinion made reference to H. Rept. 1546, 75th Cong., 1st Sess. (1937), 1939-1 C.B. (Part 2) 704, 707-708, which explained the purpose of the section as follows:Subsection (f) includes in personal holding company income amounts received as compensation for the use of, or the right to use, the property of the corporation. However, this rule only applies where during the taxable year of the corporation, 25 percent or more in value of its outstanding stock is owned, directly or indirectly, by an individual leasing or otherwise entitled to the use of the property. It makes no difference whether the right to use the property is obtained by the individual directly from the corporation or by means of a sublease or other arrangement. Since under existing law, this type of compensation is not now included for the purposes of determining whether the corporation meets the 80 per cent test, the taxpayer may fix such compensation in an amount sufficient to bring its other investment income below the 80 per cent test. It has been shown to the committee that this device has been 518 employed by taxpayers who had incorporated their yachts, city residences, 107 or country houses and had paid sufficient rent to give the corporations enough income from their service to take them out of present section 351. By including this type of income in the definition of personal holding company income, your committee removes this method of tax avoidance.We also noted that the doctrine of corporate entity is well established in tax law. Thereunder, the acts of a corporation are not imputed to the shareholders so long as there exists a business nexus. New Colonial Ice Co. v. Helvering, 292 U.S. 435">292 U.S. 435, 442 (1934).We reiterated our interpretation of the statute 2 in 320 E. 47th Street Corp. v. Commissioner, 26 T.C. 545">26 T.C. 545, 549 (1956). That opinion was reversed and remanded by the Second Circuit (243 F.2d 894">243 F.2d 894, 899 (2d Cir. 1957)). 320 E. 47th Street Corp. 108 was a corporate taxpayer which, due to fortuitous circumstances, had received "unusual income" for the taxable year in issue in the form of interest on a condemnation award in the amount of $ 20,728.81. Such amount comprised 77.14 percent of the corporation's gross income. The remainder of the corporation's gross income consisted of $ 6,000 rent received from a corporation having identical shareholders and $ 143.04 miscellaneous income. For the year here in issue, section 501(a)(1), I.R.C. 1939, defined the term personal holding company, with respect to the 320 E. 47th Street Corp., as any corporation whose gross income included personal holding company income of 80 percent or more. The section defining personal holding company income relevant to the case was section 502, specifically subsections (a), (f), and (g), I.R.C. 1939, thereof. These subsections provided, in pertinent part, that:SEC. 502. PERSONAL HOLDING COMPANY INCOME.For the purposes of this subchapter the term "personal holding company income" means the portion of the gross income which consists of:(a) * * interest * * ** * * (f) Use of Corporation Property by Shareholder. -- Amounts received as compensation109 (however designated and from whomsoever received) for the use of, or right to use, property of the corporation in any case, where, at any time during the taxable year, 25 per centum or more in value of the outstanding stock of the corporation is owned, directly or indirectly, by or for an individual 519 entitled to the use of the property; whether such right is obtained directly from the corporation or by means of a sublease or other arrangement.(g) Rents. -- Rents, unless constituting 50 per centum or more of the gross income. For the purposes of this subsection the term "rents" means compensation, however designated, for the use of, or right to use, property * * but does not include amounts constituting personal holding company income under subsection (f).Section 223, Revenue Act of 1950, implies an amendment to section 502(f) as follows:Section 223. Personal Holding Company Income. -- Section 502(f) of the Internal Revenue Code * * * shall not apply with respect to rents received during taxable years ending after December 31, 1945, and before January 1, 1950, if such rents were received for the use by the lessee, in the operation of a bona fide commercial, industrial, 110 or mining enterprise, of property of the taxpayer.Its application was extended to cover the year in issue. H. Rept. 1353, 84th Cong., 1st Sess. (1955), 2 C.B. 844">1955-2 C.B. 844, and S. Rept. 1242, 84th Cong., 1st Sess. (1955), 2 C.B. 845">1955-2 C.B. 845. Our application of the statute to the facts of that case interpreted the interest on the condemnation award to fall within the definition of personal holding company income under section 502(a) and the rent to fall within that definition under section 502(g). The result of our interpretation was that the corporation, a bona fide lessor of property used by the lessee in a commercial enterprise, was subject to tax as a personal holding company.The Second Circuit pierced the corporate veil and imputed use of the lessor's property to the lessee's shareholders. Because the two sets of shareholders were identical, that court found that the lessor's shareholders, by use of an "other arrangement," had111 the use of the property under 502(f). The court then applied the amendment of section 223, Revenue Act of 1950, and found 320 E. 47th Street Corp. to have received rents for the use of its property by a lessee in the operation of a bona fide commercial enterprise. It concluded, at page 899, that the amendment literally excluded the rent from inclusion in the definition of personal holding company income under subsection (f) and that:It was the plain intention of the Congress for the period in question to exempt from personal holding company income rents from shareholders in the situation of these two individuals, who leased taxpayer's property through a wholly owned corporation through which they used it to carry on a bona fide commercial or industrial enterprise.Therefore, the court also excluded the rent from subsection (g) 520 income. The net result was that the court found the taxpayer was not subject to the personal holding company tax. Subsequently, the Second Circuit Court's opinion in 320 E. 47th Street Corp. was interpreted in Rev. Rul. 65-259, 2 C.B. 174">1965-2 C.B. 174, as finding that shareholders of the lessee corporation112 will be imputed as having use of the lessor corporation's property through an "other arrangement."Respondent now asks the Court to consider Minnesota Mortuaries, Inc., in light of the Second Circuit's opinion in 320 E. 47th Street Corp. and to impute to the shareholder of the lessee corporation the use of the lessor corporation's property. It can be argued that the language on which respondent relies constitutes dicta in the Second Circuit's opinion. However, no matter what its characterization, we respectfully decline to follow it. We have carefully reconsidered our position and have concluded that we should reaffirm our holding in Minnesota Mortuaries, Inc., which recognized the lessee's corporate identity.Respondent is obviously offended by the fact that a majority of petitioner's assets consisted of cash or investments in stocks and bonds and the further fact that it had some half a million dollars in unappropriated retained earnings. Respondent goes on to argue that:This evidence coupled with the fact that petitioner's sole-shareholder owned and/or controlled numerous other entities performing limited services or functions is indicative of a tax avoidance purpose. 113 The petitioner has offered no evidence indicative of a legitimate corporate function aside from tax avoidance.Thus, petitioner fits in with the spirit of the personal holding company provisions of section 541 et.seq. The issue before this Court is whether petitioner fits into the letter of the personal holding company provisions.While we agree with respondent that spirituality alone does not tax, our reaction to the facts of this case is that petitioner does not fall even within the spirit of the personal holding company provisions. It is manifest from the legislative history quoted above, and duplicated in section 1.543-1(b)(9), Income Tax Regs., that subsection 543(a)(6) was enacted with personal, nonbusiness type use of corporate property by a shareholder in mind. We are not dealing here with rental of yachts or hunting lodges to shareholders but rather with rental of trucks and real estate used by the lessee in its corporate business. The common shareholder, Mr. Wasserman, did not use the real estate and 521 trucks leased by petitioner to Delivery except as such use could be imputed through the corporate structure under respondent's interpretation of section 543(a)(6). *114 Accordingly, our reaction to the facts herein does not motivate us to seek a broadened meaning to section 543(a)(6). We will not impute Delivery's use of business property leased from petitioner to Mr. Wasserman without specifically drawn congressional guidelines.Decision will be entered for the petitioner. Footnotes1. Sec. 353(f), Revenue Act of 1936 as amended by sec. 1, Revenue Act of 1937 was substantially similar to the statute as written in the year in issue.↩2. Then sec. 502(f), I.R.C. 1939↩.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622489/	JOHN C. LEE, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. MRS. JEANNE LEE, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Lee v. CommissionerDocket Nos. 5984, 5985.United States Board of Tax Appeals6 B.T.A. 1005; 1927 BTA LEXIS 3351; April 25, 1927, Promulgated 3351 Where income is earned from sources without the United States by a nonresident alien, such income does not become taxable although such alien, prior to the close of the taxable year, changes his status to that of a resident alien. George S. Atkinson, Esq., for the petitioners. S. S. Faulkner, Esq., for the respondent. PHILLIPS 1005 The deficiencies in controversy herein are income taxes for 1922 in the amount of $114.87 for John C. Lee and $87.82 for Mrs. Jeanne Lee. The two appeals arise from the same state of facts and were consolidated for hearing and decision. They raise the question whether an alien is to be taxed upon income earned from sources without the United States while a nonresident. FINDINGS OF FACT. The petitioners are and were, during the taxable period involved, husband and wife. During the taxable year involved the petitioners were citizens of Great Britain and prior to July 31 of that year 1006 were residing in England. From January 1, 1922, to May 31, 1922, the petitioner, John C. Lee, was employed by an American firm as its European representative and received in that year for services performed wholly3352 without the United States $2,076.25 of salary and $1,135.50 in commissions. On July 31, 1922, the petitioners came to the United States and established their residence in Dallas, Tex. During the taxable year and while a resident of Dallas Tex., petitioner, John C. Lee, was paid a salary of $2,600 for seryices rendered in the United States and realized gains of $881.33 from trading in cotton. During 1922 the petitioner, John C. Lee, paid an income tax to Great Britain of $266.02, which was claimed as a credit against the amount of tax shown on the returns. On December 31, 1922, the petitioners had two children under the age of eighteen years. In March, 1923, the petitioners filed separate individual income-tax returns with the Collector of Internal Revenue at Dallas, Tex., dividing their income between them. No income taxes for 1922 have been assessed against or paid by either of the petitioners. OPINION. PHILLIPS: It is the contention of the petitioners that the salary and commissions earned by the petitioner, John C. Lee, for services performed wholly without the United States while he was a nonresident alien are not subject to tax. The Commissioner, on the other3353 hand, contends that since the petitioners were resident aliens on the last day of the taxable year they must include such amount in their income. The Commissioner has filed no brief advising us why he believes his contention to be well founded and the examination we have made of the law discloses nothing to justify the position taken by him. The Revenue Act of 1921 in section 212(a) provides that in the case of an individual the term "net income" means the gross income as defined in section 213, less the deductions allowed by section 214. Section 213(c) provides as follows: In the case of a nonresident alien individual, gross income means only the gross income from sources within the United States, determined under the provisions of section 217. There is no question that at the time the amounts in question became income, the petitioners were nonresident alien individuals and as such were exempt from any tax upon this amount. There is nothing in the law providing that if they became resident aliens, such income shall become subject to tax. It is a familiar rule of statutory construction that taxing statutes should not be extended beyond their clear import. 1007 3354 It might be pointed out that if the position of the Commissioner is correct and the tax liability is to be determined by reason of the status at the close of the year, one who has been a resident alien, and as such subject to tax on income from all sources, could escape liability on income from sources outside the United States by becoming a nonresident prior to the close of the taxable year. This constraction, however, would be in contravention of section 250(g) of the Revenue Act of 1921, providing for the termination of the taxable year by the Commissioner in the event that a taxpayer intends to depart from the United States. Counsel for the petitioners points out in his brief that section 216(f) of the Revenue Act of 1921 provides as follows: The credits allowed by subdivisions (c), (d), and (e) of this section shall be determined by the status of the taxpayer on the last day of the period for which the return of income is made * . This appears to be the only provision of the statute providing that the status of the taxpayer on the last day of the taxable period is to govern in computing tax. The subdivisions enumerated do not cover the case of a nonresident alien who3355 becomes a resident alien. Expressio unius est exclusio alterius.Reading the statute as a whole we are of the opinion that income received by a nonresident alien from sources without the United States is not taxable even though such person may become a resident alien subsequent to its receipt and prior to the close of the taxable year. The deficiencies are redetermined to be $3.63 as to each of the petitioners. Decision will be entered accordingly.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622490/	The Travelers Insurance Company, a Corporation, Petitioner, v. Commissioner of Internal Revenue, RespondentTravelers Ins. Co. v. CommissionerDocket No. 8082United States Tax Court6 T.C. 753; 1946 U.S. Tax Ct. LEXIS 229; April 17, 1946, Promulgated 229 Decision will be entered for the respondent. The plea here of estoppel by judgment or res adjudicata is not supported by proof of judgments or decrees rendered in prior proceedings in which the issue here was neither litigated nor decided. Lillian L. Malley, Esq., for the petitioner.B. J. Long, Esq., for the respondent. Leech, Judge. LEECH753 OPINION.Respondent has determined that petitioner is liable as transferee of the Northwestern Telegraph Co. for $ 6,000 unpaid income taxes of that company for each of the years 1940 and 1941. The sole issue is whether the Federal Government is estopped from enforcing such liabilities under the doctrine of res adjudicata by reason of judgments rendered in certain prior litigation.The facts have been stipulated and are so found. Only such of them as are necessary230 to an understanding of the issue are hereinafter set out. The petitioner is a Connecticut corporation, with principal place of business at Hartford, Connecticut. The Northwestern Telegraph Co. (hereinafter referred to as Northwestern) is, and was at all times mentioned herein, a Wisconsin corporation, with its principal office during the years 1940 and 1941 and thereafter in Hartford, Connecticut. Prior to July 1, 1881, Northwestern operated a telegraph business in several states in the United States and in the Dominion of Canada. At all times mentioned hereinafter, its outstanding capital stock was divided into 50,000 shares of a par value of $ 50 each.Between 1892 and 1896, the petitioner from time to time acquired shares of the capital stock of Northwestern in an aggregate of 2,000 754 shares, and since that time it has held continuously, and now owns, that 2,000 shares.On May 7, 1881, Northwestern leased to the Western Union Telegraph Co. (hereinafter referred to as Western Union), for a term of 99 years, all of its assets and property and, following the execution of this contract, possession of the property was taken by Western Union, and the lease agreement has been231 continuously in effect since the date thereof.By the terms of the lease agreement, Western Union obligated itself to pay the specified rentals direct to the stockholders and bondholders of Northwestern, and after taking possession of the leased property it caused to be placed upon each certificate of capital stock of Northwestern, as required by the terms of the lease, an endorsement evidencing its obligation to make payment of dividends to the owner of such stock in the amounts provided by the lease. This endorsement was placed upon the certificates of stock owned by the petitioner.Since taking possession of the leased properties, Western Union has used and operated them and Northwestern has been without property in its possession out of which any liability for Federal income taxes for each of the years 1940 and 1941 might be satisfied. In each of those years Western Union duly paid to the stockholders of Northwestern the sums provided by the lease contract. In each of the years 1940 and 1941, payments of $ 6,000 were so made to the petitioner as holder of 2,000 shares of stock of Northwestern, such payments representing dividends at 6 percent upon the par value of such stock. 232 For each of the years 1940 and 1941, Northwestern filed corporation income tax returns in the office of the collector of internal revenue for the district of Connecticut, reporting an income tax amounting to $ 36,012.24 for the taxable year 1940 and $ 46,265.81 for the taxable year 1941. These taxes, in each year, were computed upon a gross income consisting of the payments made as agreed by Western Union to Northwestern stockholders for those years under the lease agreement. No part of the taxes reported on these returns was paid.On or about the 16th day of February 1944, after suit brought, a judgment for delinquent Federal income taxes and interest due from Northwestern for the years 1934 to 1941, inclusive, was entered against Northwestern in favor of the United States in the United States District Court, Civil No. 1028, in the total sum of $ 286,445.49, plus $ 22.20 costs, which judgment includes the sum of $ 36,012.24 and $ 46,265.81 owing by Northwestern for the taxable years 1940 and 1941. This judgment was not appealed and has become final. Execution thereon was duly issued and returned unsatisfied and no part of the judgment has been paid.755 Petitioner pleads233 res adjudicata, basing such plea on a decree entered in the District Court of the United States for the Southern District of New York on January 10, 1927, dismissing the amended bill of complaint in a suit, No. E 28-402, entitled "United States of Americav.The Western Union Telegraph Company, et al."; the mandate of the United States Circuit Court of Appeals for the Second Circuit affirming that decree, entered October 14, 1931; a judgment entered in the United States District Court for the Southern District of New York on October 8, 1943, granting summary judgment and dismissing the complaint on the merits in an action, Civil No. 21-539, entitled "United States of America, Plaintiff, v.The Western Union Telegraph Company and Northwestern Telegraph Company, Defendants"; and the order of the Circuit Court of Appeals, dismissing the appeal upon the stipulation of the parties, entered August 28, 1944.There is presented here the sole legal question of whether respondent is estopped by the judgments set forth in our findings of fact from asserting a transferee liability against petitioner, a stockholder of Northwestern, for the unpaid Federal income taxes for the234 years 1940 and 1941 of the latter corporation. The difficulty here appears to arise from the application of the well established principles governing that phase of the doctrine of res adjudicata known as estoppel by judgment. This rule applies if, and only if, the controlling fact or matter in issue here is the same as that actually litigated and decided in an earlier action between the same parties or their privies. Cromwell v. County of Sac, 94 U.S. 351">94 U.S. 351; Southern Pacific R. R. Co. v. United States, 168 U.S. 1">168 U.S. 1; United States v. Moser, 266 U.S. 236">266 U.S. 236; Tait v. Western Md. Ry. Co., 289 U.S. 620">289 U.S. 620. Does there exist here the essential identity to parties and matters actually litigated and adjudged in the prior proceedings? An examination of the decrees upon which petitioner relies discloses that the judgment or decree entered October 8, 1943, was one of dismissal of the complaint upon the merits (52 Fed. Supp. 553). This judgment sustained a plea of res adjudicata raised by the defendant, Western Union, by preliminary235 motion for summary judgment made prior to the joinder of the issues set forth in the complaint. No issue of fact was litigated or adjudged. Hence it is necessary to revert to the prior judgment entered January 10, 1927 (19 Fed. (2d) 157), affirmed October 14, 1931 (50 Fed. (2d) 102), to ascertain the scope of the issues litigated and decided and the identity of the parties. Since this judgment or decree entered was merely one of dismissal of the complaint on the merits, we are required to search the pleadings and the opinion of the court to determine the issues raised and the matters adjudged. Bates v. Brodie, 245 U.S. 520">245 U.S. 520; Vicksburg v. Henson, 231 U.S. 259">231 U.S. 259; United Shoe Mach. Co. v. United States, 258 U.S. 451">258 U.S. 451. An examination 756 of the issues raised and submitted and which the court intended to decide is made clear by the opinion of the Circuit Court of Appeals for the Second Circuit, affirming the judgment (50 Fed. (2) 102). That court said:Two questions are presented: (a) Whether such236 payments by the Western Union Telegraph Company to the shareholders constitute income of the Northwestern Telegraph Company and are subject to a tax; and (b) whether the appellant could enforce a lien upon the annual payments, for the taxes duly assessed, against the Western Union Telegraph Company.We think the pleadings and the District Court's opinion establish that the issues as above stated were the only ones presented upon which the court intended to adjudicate. In passing, it should be noted that petitioner was only a nominal party in its capacity as a stockholder. No relief was sought against the stockholders, either individually or as stockholders, nor was any affirmative relief prayed for against Northwestern.We think it is too clear for controversy that neither of the issues tendered in the prior proceeding, which were litigated and adjudged, is in controversy in the instant proceeding. Petitioner here concedes Northwestern is liable for Federal taxes upon the amounts due and to become due under the lease between it and Western Union, so that issue is not now being relitigated. The second issue, whether respondent had or now has any equitable lien upon the funds in237 the hands of Western Union for taxes assessed against Northwestern, is not now in controversy. Western Union is not a party here, nor is any direct or derivative right of Western Union here in question. The issue submitted here is whether the respondent is entitled to enforce a transferee liability against this petitioner as a stockholder of Northwestern. This proceeding is an independent statutory remedy against the petitioner as an individual. 1 This question has never been presented or litigated in any prior proceeding.It may be that respondent could have asserted a claim against the stockholders of Northwestern, as transferees in the prior proceedings, but he did not do so. A judgment is not conclusive of those matters as to which party had the option to litigate but did not in fact litigate. Larsen v. Northland Trans. Co., 292 U.S. 20">292 U.S. 20; Mercoid Corporation v. Mid-Continent Co., 320 U.S. 661">320 U.S. 661, 667. We do not think this238 record supports the petitioner's plea of res adjudicata. The respondent is sustained.Decision will be entered for the respondent. Footnotes1. Sec. 311, I. R. C.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622492/	Foster Frosty Foods, Inc., Petitioner, v. Commissioner of Internal Revenue, RespondentFoster Frosty Foods, Inc. v. CommissionerDocket No. 89719United States Tax Court39 T.C. 772; 1963 U.S. Tax Ct. LEXIS 197; February 12, 1963, Filed 197 Decision will be entered under Rule 50. Addition to Reserve for Bad Debt -- Sec. 166(c), I.R.C. 1954. -- The petitioner has no right under sec. 166(c) to deduct an addition to bad debt reserve for notes discounted and not then owned by it. James E. Carpenter, Esq., for the petitioner.Jack Morton, Esq., for the respondent. Murdock, Judge. Bruce, J., concurs in the result. Raum, J., concurring. Tietjens and Withey, JJ., agree with this concurring opinion. Pierce, J., dissenting. Fisher and Mulroney, JJ., agree with this dissent. MURDOCK 772 The Commissioner determined deficiencies in income tax of the petitioner for its fiscal years ending with February in 1956, 1957, and 1958 of $ 8,525.40, $ 5,674.40, and $ 6,028.58. The only adjustment challenged198 herein is a part of the amount disallowed in each year representing the deduction of an addition to the reserve for bad debts. 773 The additions claimed and the portions allowed were as follows:Fiscal yearClaimedAllowed1956$ 16,394.99None195716,139.70$ 7,332.74195843,308.4031,714.99FINDINGS OF FACT.The petitioner was incorporated early in 1948 and since then has been engaged in business in Denver, selling food freezers, food, and food memberships. It filed its income tax returns with the district director of internal revenue, Denver, Colo. Petitioner used an accrual method of accounting.Its customers, desiring to buy on credit, were required to execute a promissory note for the balance due on purchases of food, to enter into a food service membership agreement in purchases of food memberships, and to execute a contract note and chattel mortgage in purchases of freezers.There is no showing of the amount, if any, 1 of its creditor obligations disposed of by the petitioner prior to its fiscal year ended February 29, 1956, but in that year and thereafter it discounted portions of such notes or contracts at three local banks, with recourse. 199 The amounts of notes and accounts discounted and not discounted for certain years were as follows:Fiscal yearNot discountedDiscounted1952$ 31,795.24(1) 195355,846.05(1) 195456,676.74(1) 195582,043.52(1) 1956191,725.62$ 396,010.53195762,100.07644,007.64195856,495.77876,494.73The petitioner received credit to its account for the paper discounted with recourse in the face amount of the note or contract less the agreed upon discount and less the amount which was required to be placed in a loss reserve under the governing contracts.The taxpayer included in income all amounts credited to a bank's loss reserve at the time said credits were made.If a purchaser fell behind on payment of a discounted obligation, the bank would notify the petitioner's credit department which would then try to have the account made current. If it failed or if the bank was not satisfied200 with any delinquent account it would require the petitioner to buy it back.774 The actual losses of the petitioner on reacquired obligations are not shown in this record.The Commissioner in computing a reasonable reserve at the end of each tax year recognized that the petitioner held outstanding installment contracts amounting to $ 9,018.25 for 1956, $ 1,939.67 for 1957, and $ 8,983.48 for 1958. He included 50 percent of those amounts in computing the allowable additions to the reserve. The petitioner reacquired much larger amounts of these obligations during the tax years but the record does not show what became of them.The petitioner established a bad debt reserve computed with reference to its total sales, cash and credit, including sales involving notes discounted with recourse, by taking $ 25 per freezer sold (average sale price $ 630), 5 percent of the price of food sold, and 25 percent of the sale price of food memberships, and adding an amount to the reserve each year on that basis.The following taken from the returns shows the results of that method while in use through February 28, 1958 (omitting cents):Fiscal yearAdditionsChargesBalance1952$ 9181953$ 11,226$ 6112,083195411,5479,50514,126195517,66411,56320,227195616,3947,96328,658195716,13916,32030,915195843,30828,85945,364201 The Commissioner, in determining the deficiencies, held that the total reasonable reserve for bad debts at the end of each year should be the total of 4 percent of outstanding receivables held by the petitioner (excluding those discounted and held by banks) plus 50 percent of all previously discounted items reacquired by the petitioner and held by it at the end of the year and not charged against the reserve, as shown below:Reserve, Feb. 28, 1955BalanceFeb. 29, 1956:$ 20,227.14Additions allowedNone Charge-offs per return$ 7,963.76Balance in reserve12,263.38Feb. 28, 1957:Additions allowed7,332.74Charge-offs per return16,320.01Balance in reserve3,276.11Feb. 28, 1958:Additions allowed31,714.99Charge-offs per return28,859.14Balance in reserve6,131.96775 Paragraph 11 of the stipulation filed is as follows:Petitioner concedes that for the purposes of this case only, its reserve for bad debts shall be computed in the manner of the schedule representing respondent's computation thereof for statutory notice purposes, hereinabove, paragraph 8, except for the exclusion by respondent of petitioner's202 notes receivable discounted; accordingly, only the aforesaid exception by respondent as to each adjustment (b) "Reserve for bad debts," for each of the taxable years per statutory notice of deficiency, is at issue, that is, whether the statutory notice of deficiency computation of a reasonable bad debt reserve should take into consideration petitioner's total notes and accounts receivable, including those discounted with banks, or just total notes and accounts receivable, excluding notes receivable discounted.The Commissioner made no concession regarding any narrowing of the issue for decision.All stipulated facts are incorporated herein by this reference.OPINION.Deductions for bad debts are allowed by section 166(a) in the year in which worthlessness occurs, whereas (c), by allowing "a deduction for a reasonable addition to a reserve for bad debts," enables the taxpayer to take the deduction in anticipation of the actual worthlessness and to charge the current losses against the reserve thus created. The word "reasonable" brings a relative, as opposed to a definite, amount into the law. No set formula for computing "a reasonable addition" has ever been fixed by law, the regulations, 203 or the courts. The computation depends upon the circumstances of each case and this is wise though sometimes difficult. The provisions of the Code obviously refer to debts owed to the taxpayer. Cf. sec. 1.166-1(a), Income Tax Regs. There are perhaps contingent liabilities of taxpayers for which good accounting might set up a reserve but for which the Internal Revenue Code does not allow deductions of additions to such reserve. Lucas v. American Code Co., 280 U.S. 445">280 U.S. 445, 452. Good accounting, relied upon by the petitioner, is not determinative in this case.The reserve accounting used by the petitioner up to March 1, 1955, had created a reserve balance which the Commissioner apparently considered excessive and sufficient, without any addition, to take care of fiscal year 1956. The figures in the record do not show error on his part in reaching that conclusion. He devised a new method of determining a reserve for the petitioner to which the latter objects only in part. The record does not contain facts upon which this Court could determine a proper reserve or reasonable additions thereto and the parties, apparently, expect the Court to decide204 only whether the 776 receivables held by banks must be treated the same as those owned by the petitioner.The petitioner argues that the discounted notes should be treated just like the ones not discounted, despite the fact that it disposed of those notes, ceased to be the creditor, was a guarantor only, and when it reacquired some of them the Commissioner included 50 percent of the outstanding reacquired debt in the addition to the reserve. The petitioner is supported in this contention by a recent decision of the Court of Appeals for the Ninth Circuit, Wilkins Pontiac v. Commissioner, 298 F.2d 893">298 F. 2d 893, reversing the Tax Court decision in that case, 34 T.C. 1065">34 T.C. 1065. We cannot in good conscience follow the reversal because we think our opinion in that case was in line with prior decisions, correctly interpreted the law, and reached the correct result. The discounted notes, not being debts due the petitioner, could not be considered in determining a reasonable addition to a reserve for its debts until as guarantor it reacquired them and again became creditor of the debtor ( Putnam v. Commissioner, 352 U.S. 82">352 U.S. 82),205 only then could the notes be the basis for a deductible addition to its reserve for its bad debts. 2 The Commissioner has followed this interpretation of the law precisely.Decision will be entered under Rule 50. RAUMRaum, J., concurring: The issue which the Court decides is, in my judgment, not necessary to the disposition of this case. True, the parties may have attempted to stipulate the Court into deciding whether petitioner is entitled to an addition to the reserve in respect of the discounted notes still206 in the hands of the bank. However, the parties cannot by stipulation force the Court to pass upon a question that need not be reached.The only dispositive question is whether the additions to the reserve approved by the Commissioner are "reasonable." The Commissioner's method was to allow an addition measured in part by 50 percent of the previously discounted items reacquired by petitioner that were still outstanding at the end of the year. In my opinion, such a disproportionately 777 large allowance in respect of the reacquired items is sufficient to cover all of the discounted receivables, whether still in the hands of the bank or reacquired by petitioner. The findings of the Court setting forth petitioner's actual loss experience and the balances in the reserve account show that the allowances approved by the Commissioner are "reasonable." That is all that the statute requires, and it is not necessary to deal with the troublesome issue which the parties seek to have this Court decide. Certainly, the method approved by the Commissioner is reasonable. There is nothing in the statute requiring the addition to the reserve to be measured by an across-the-board percentage207 of all debts. The question simply is whether the addition to the reserve, considered in the light of the balance already in that reserve, is reasonably calculated to absorb the anticipated bad debts. The answer to that question should not involve any conceptual inquiry into the theoretical status of the notes still in the hands of the banks. If the addition approved by the Commissioner in the light of the balances in the reserve and petitioner's actual loss experience is "reasonable," that should be an end to the matter. 3 In these circumstances there is no need to deal with the question whether Wilkins Pontiac should be followed. It has long been established that the Commissioner's determination will be sustained if it is correct regardless of whether he gave the correct reason for it or indeed even if he gave a wrong reason for it. Blansett v. United States, 283 F. 2d 474, 478-479 (C.A. 8); Bernstein v. Commissioner, 267 F. 2d 879, 881-882 (C.A. 5); Acer Realty Co. v. Commissioner, 132 F. 2d 512, 514-515 (C.A. 8); Alexander Sprunt & Son v. Commissioner, 64 F. 2d 424, 427208 (C.A. 4); Crowell v. Commissioner, 62 F. 2d 51, 53 (C.A. 6); J. & O. Altschul Tobacco Co. v. Commissioner, 42 F. 2d 609, 610 (C.A. 5); Hughes v. Commissioner, 38 F.2d 755">38 F. 2d 755, 757 (C.A. 10); cf. Helvering v. Rankin, 295 U.S. 123">295 U.S. 123, 132-133.PIERCEPierce, J., dissenting: I think the Court should have followed and applied the recent decision of the Ninth Circuit in Wilkins Pontiac v. Commissioner, 298 F.2d 893">298 F. 2d 893, which I believe reached*209 the correct result. Footnotes1. No showing.↩1. The returns indicate that there were none prior to March 1, 1955.↩2. Not only did the parties not argue the point relied upon in the concurring opinion but a fair reading of the stipulation, the opening statements, and the briefs shows that the parties are agreed upon what would be reasonable additions to the reserve, if the Commissioner is wrong in ignoring the debts owned by the banks during each of the taxable years, and that amount (including 4 percent of the discounted notes) would be larger than the amount allowed (including 50 percent of the reacquired notes).↩3. Indeed, even if the addition were thought not to be "reasonable," the method↩ employed by the Commissioner is sound, and a correct result would simply require an upward revision of the 50 percent formula as applied to the outstanding reacquired notes. As indicated, the statute contains no requirement whatever that the addition, in order to be "reasonable," must be measured by a fixed percentage of all the notes.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622494/	PAUL R. SCHOUTEN AND MARY KAY SCHOUTEN, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentSchouten v. CommissionerDocket No. 48491-86United States Tax CourtT.C. Memo 1991-155; 1991 Tax Ct. Memo LEXIS 174; 61 T.C.M. (CCH) 2357; T.C.M. (RIA) 91155; April 8, 1991, Filed 174 Decision will be entered under Rule 155. George P. Latchford and James B. Rice, for the petitioners. Marjory A. Gerdes and James C. Lanning, for the respondent. WHALEN, Judge. WHALENMEMORANDUM FINDINGS OF FACT AND OPINION Respondent determined the following deficiencies in, and addition to, petitioners' Federal income tax: Addition to TaxYearDeficiencySection 6653(a)1979$ 46,173$ 2,309198032,556 0 (All section references are to the Internal Revenue Code, as amended.) After concessions, the issues for decision are: (1) Whether petitioners are entitled to a deduction under section 616(a) for mine development expenditures of $ 16,000 allegedly paid to a partnership called Westates Development Company; (2) whether respondent properly used the cash receipts and disbursements method of accounting under section 446 in determining petitioners' distributive share of income from a partnership called Mine-Rite Mining Company; and (3) whether petitioners are entitled to deduct $ 601 in 1979 and $ 34,410 in 1980 as their distributive share of losses realized by a partnership called American Mining Trust. Throughout this opinion, we 175 use the words "investor," "investment," "promissory note," "security agreement," "security interest," "agency agreement," "mineral claim lease," "mining contract," "mine," "ore," "contractor," "development work," "gold," "silver," "copper," and other such terms merely for convenience and simplicity. They are not intended by their use to imply any conclusion as to the character of the transactions at issue for Federal tax purposes, or as to the mineral content of the earth or rock described herein. FINDINGS OF FACT The parties have stipulated some of the facts, which are so found. The Stipulation of Facts, First Supplemental Stipulation of Facts, Stipulation of Settled Issues, and attached exhibits are incorporated herein by this reference. Petitioners filed joint Federal income tax returns for the years 1979 and 1980. At the time they filed their petition in this case, they resided in Palos Heights, Illinois. In 1979, Mr. Paul R. Schouten, referred to herein as petitioner, was an attorney engaged in the practice of law on a full-time basis in the State of Illinois. During that year, he was approached by Mr. Philip Schouten and Mr. Lawrence Van Someren because, according to 176 petitioner, they "wanted to create their own mining shelter." Mr. Philip Schouten was an accountant and also petitioner's uncle. Mr. Philip Schouten and Mr. Van Someren had previously invested in so-called "mining programs" which offered investors Federal income tax deductions for mining development expenditures under section 616. One of those investments was a tax shelter called "Gold for Tax Dollars," sponsored by an entity called International Monetary Exchange. That tax shelter is the subject of a number of opinions of this and other courts. See, e.g., Gray v. Commissioner, 88 T.C. 1306">88 T.C. 1306 (1987), affd. sub nom. Becker v. Commissioner, 868 F.2d 298">868 F.2d 298 (8th Cir. 1989), affd. without published opinion sub nom. Armstrong v. Commissioner, 869 F.2d 1496">869 F.2d 1496 (9th Cir. 1989), affd. sub nom. Adkins v. Commissioner, 875 F.2d 137">875 F.2d 137 (7th Cir. 1989), affd. sub nom. Kennedy v. Commissioner, 876 F.2d 1251">876 F.2d 1251 (6th Cir. 1989); Saviano v. Commissioner, 80 T.C. 955">80 T.C. 955 (1983), affd. 765 F.2d 643">765 F.2d 643 (7th Cir. 1985); Yuter v. Commissioner, T.C. Memo 1990-108 (on177 appeal); Hines v. Commissioner, T.C. Memo 1989-17">T.C. Memo 1989-17, affd. without published opinion 893 F.2d 1330">893 F.2d 1330 (3d Cir. 1989); Smith v. Commissioner, T.C. Memo 1986-101">T.C. Memo 1986-101; see also Securities and Exchange Commission v. Rogers, 790 F.2d 1450">790 F.2d 1450 (9th Cir. 1986); Horn v. Commissioner, 90 T.C. 908 (1988); Howard v. Comimissioner, T.C. Memo 1988-531">T.C. Memo 1988-531; United States v. Rogers, 636 F. Supp. 237">636 F. Supp. 237 (D. Col. 1986); Securities and Exchange Commission v. International Mining Exchange, Inc., 515 F. Supp. 1062">515 F. Supp. 1062 (D. Col. 1981). The other investment was a mining program sponsored by an entity called Argus Resources which followed the same format as the Gold for Tax Dollars program. An official of Argus Resources, Mr. Robert Hughes, consulted with Mr. Philip Schouten and Mr. Van Someren about the organization of the tax shelter which was ultimately formed in this case. He introduced them to another individual, Mr. Robert Morris, who was the chief executive officer of a corporation called Bullion Monarch Company. Mr. Morris also consulted with petitioner, Mr. Philip178 Schouten, and Mr. Van Someren about the organization of a mining tax shelter and introduced them to a retired mining engineer, Mr. R. O. Camozzi. At that time Mr. Camozzi was approximately 70 years old and was no longer physically able to visit mine sites. He was the principal officer of a Mexican corporation, Camco Industrias, S.A. C.V., and a Nevada corporation, Jarbridge Gold and Silver Mining Company. In November or December of 1982, he became ill and died after undergoing open heart surgery. During 1979, petitioner organized the three partnerships which are central to the issues in this case, Westates Development Company (Westates), Mine-Rite Mining Company (Mine-Rite), and American Mining Trust. Westates had three partners, petitioner and two associates from his law office, Mr. James Wolfenson and Mr. Patrick Cleary. During 1979 and 1980, each of them had a one-third interest in Westates' capital, profits, and losses. Mine-Rite was organized in December of 1979. During 1979 and 1980, its partners and their respective interests in the partnership's capital, profits, and losses were as follows: PartnershipPartnerInterest Paul R. and Mary Kay Schouten25 percentPhilip J. and Dorothy L. Schouten25 percentLawrence and Alma Van Someren50 percent179 The last of the three partnerships, American Mining Trust, had three partners, petitioner, Mr. Van Someren, and Mr. Philip Schouten, and during 1979 and 1980, each of them had a one-third interest in its capital, profits, and losses. Petitioner had no training or experience in mining. In structuring the "mining shelter" at issue in this case, he took the operative legal documents which formed the basis of certain of the programs sponsored by International Monetary Exchange and Argus Resources and revised them to reflect differences in the names of the entities, the type and location of minerals to be mined, and the like. As structured by petitioner, the mining shelter in this case is similar to the 1978 version of the Gold For Tax Dollars shelter described in Gray v. Commissioner, supra, and Saviano v. Commissioner, supra.The mining program in this case offered investors a tax deduction under section 616(a) for mine development expenses in an amount equal to four times their cash outlay. Under the program, a typical investor paid Westates one-fourth of the amount of the deduction he desired for 1979 and executed a promissory note180 to Westates for the other three-fourths. Westates, purportedly acting as agent for the investor, arranged "to fund" the investor's promissory note by borrowing an amount equal to the face value of the note from American National Bank of Chicago, a bank at which Mr. Van Someren conducted business. By prearrangement, the proceeds of that loan, together with the cash paid by the investor, were transferred to an account at the same bank maintained by Mine-Rite. Ostensibly, the purpose of this transfer of funds to Mine-Rite's account was to pay Mine-Rite for mine development work. Nevertheless, the monies transferred were used to purchase certificates of deposit which were immediately pledged as collateral for Westates' loan and, when they matured, the proceeds were used to pay Westates' loan from the bank. As a result, Mine-Rite ended up with the cash paid to Westates by the investor. The record in this case does not satisfactorily explain why Mine-Rite paid Westates' loan. There is also no evidence that any investor became liable to American National Bank by reason of Westates' "funding" of his promissory note at the bank. Finally, there is no evidence that any investor ever 181 paid his promissory note to Westates nor is there evidence that Westates, Mine-Rite, the bank, or any other entity ever sought to enforce a promissory note signed by any of the investors. All of the notes were forgiven at the end of 1982 or at the beginning of 1983. The promotion in this case involves four mines, two in Mexico and two in Nevada. The two Mexican mines were located in the State of Durango, Mexico. Petitioner testified that one of them, San Andreas, was principally a silver mine. He said that the other, San Jeronimo, was principally a gold mine. Both mines had been abandoned for approximately 30 to 40 years. One of the two mines in Nevada, called Adelaide, was located in Golonda, Nevada, and was said to contain copper/silver ore. The other Nevada mine was called Jarbridge. The record does not describe its location or its purported mineral content. Mine-Rite did not itself engage in any development work. Rather, it entered into "joint venture" agreements with corporations owned or controlled by Mr. Camozzi and Mr. Morris, purportedly for the purpose of having them do the development work. Three such joint venture agreements were entered into covering the four182 mine sites. One joint venture, variously referred to as Camco Industrias or Camco Industries, covered the two Mexican mines and was composed of Camco Industrias, S.A. C.V., Bullion Monarch Company, and Mine-Rite. A second joint venture, variously referred to as Jarbridge Mining Co. or Jarbridge Gold & Silver Corp., covered the Jarbridge mine and was composed of Jarbridge Gold and Silver Mining Company, Bullion Monarch Company, and Mine-Rite. The third joint venture, referred to as M.B. Mining Company, covered the Adelaide mine, and was composed of Bullion Monarch Company and Mine-Rite. Each of the three joint ventures described above was an entity separate from the other two and from Mine-Rite. Transfers of money from Mine-Rite to each of the three joint ventures were labeled "advances" in Mine-Rite's general ledger and were labeled "capital" on trial balances prepared for the joint ventures. For example, Mine-Rite's general ledger for 1979 shows "Advances to Camco" in the aggregate amount of $ 30,000 and the 1979 trial balance for the Camco Industries joint venture shows "Capital - Mine-Rite" in the amount of $ 30,000. Similarly, Mine-Rite's general ledger shows "Payments 183 to Camco" for 1980, in the aggregate amount of $ 443,904.45 and Camco's trial balance for 1980 shows "Capital" in the amount of $ 443,904.45. Similarly, trial balances prepared for Mine-Rite for both 1979 and 1980 refer to "Investment in Camco." Ultimately, there were approximately 35 investors in the mining program, including petitioner. Petitioner promoted the investment to his parents and to three brothers who owned Indeck Power Equipment Company, one of petitioner's clients. Mr. Philip Schouten promoted the investment among the clients of his accounting practice and Mr. Van Someren promoted the investment among his business associates and controlled businesses. On December 4, 1979, petitioner effected his investment in the Westates program through the following prearranged and integrated steps. First, he paid $ 4,000 to Westates, and executed a $ 12,000 promissory note, in which he agreed to pay Westates three equal installments of $ 4,000 each, due on January 1, 1981, June 1, 1981, and January 1, 1982, including interest of 15 percent per annum. As set forth in a document entitled "Security Agreement," the promissory note was secured by petitioner's mineral claim lease, 184 which is described below. Second, petitioner executed an agency agreement which, among other things, authorized Westates to (1) "assist in arranging to fund" the promissory note, (2) pay a contractor to develop his mineral claim lease at a fee of $ 400 per ton of ore, (3) after the development work was completed, retain "an extraction contractor willing to deduct cost of extraction solely from production at a cost of 200 per ton of ore," and (4) receive a "commission of ten percent of the market value of the gold at the time of production." Third, petitioner and Camco Industrias, S.A. C.V., executed a document entitled "Canelas Mining District San Jeronimo Gold & Silver Mine Concessions Mineral Claim Lease" (mineral claim lease). The mineral claim lease purportedly assigns to petitioner "the mineral rights to the proven gold/silver reserves owned by Camco Industrias, S.A. C.V., on the real estate located in Durango State, Mexico, on forty tons of mineral bearing ore hereinafter referred to as Claim Number 79-134, the Premises." The mineral claim lease also sells to petitioner for $ 1 "all merchantable, commercially available and economically recoverable gold and silver that can185 be recovered by removing and processing all material bearing ore discovered on the Premises." Petitioner's consideration for the mineral claim lease was his agreement "to expend $ 400.00 for development to ready the claim for extraction for each ton of ore contained in said Premises as expeditiously as possible, but no later than December 31, 1979." The mineral claim lease provides that Camco "shall not be entitled to proceed against the Miner [i.e., petitioner] or any of his assigns or heirs for any interest, sales or legal expenses or lease balance owing." Significantly, the mineral claim lease contains no representation that the claim contains gold, silver, or ore containing gold or silver. Fourth, petitioner claims to have entered into a document entitled "Mining Contract" with Mine-Rite. The "Mining Contract," which forms a part of the record in this case, is executed by "Authorized Agent for Lessee Paul R. Schouten," a partner of Westates. It sets forth the identity of the investor and the location of the property to be mined in its opening paragraph as follows: an owner of a divided interest in certain silver deposits and the mining rights and privileges appurtenant186 thereto which are more particularly hereinafter described as hereinafter referred to as "Lessee" (see Exhibit attached). [Emphasis supplied.]No "Exhibit" is attached to the "Mining Contract" contained in the record in this case. Moreover, petitioner testified that his mineral claim lease was for ore contained in the San Jeronimo mine which he described as "principally a gold mine." The "Mining Contract" further provides that Mine-Rite, as "Miner," "shall perform the development outlined in Exhibit 1, attached hereto, for $ 400.00 per ton, and to perform or cause to be performed all extraction work on said ore to produce gold/silver bullion for Cost of $ 200.00 per ton." Significantly, the "Mining Contract" contained in the record of this case contains no "Exhibit 1" and the nature of the work to be performed is not otherwise described therein. Finally, the "Mining Contract" provides as follows: In no event shall Lessee [i.e., investor] be personally liable for the payments or the performance of the Miner [i.e., Mine-Rite] other than from proceeds derived from the production and sale of gold/silver and in the event of any default, no deficiency or other personal judgment187 will be requested or entered against Lessee with respect to the obligations contained herein.Petitioners' joint Federal income tax return for 1979 includes Schedule C, Profit or (Loss) from Business or Profession, for a "mining" business. It reports no gross income or sales from the "mining" business but claims a deduction in the amount of $ 16,000 for "development work." Petitioners' joint returns for taxable years 1979 and 1980 fail to report losses or profits from Mine-Rite or American Mining Trust. During 1979 and 1980, Mine-Rite received the transfers of monies from Westates, described above, and also realized interest income. Nevertheless, Mine-Rite failed to file timely partnership returns. It did not apply for or obtain permission to extend the time to file such returns. Similarly, American Mining Trust failed to file timely partnership returns for 1979 and 1980, and it did not apply for or obtain permission to extend the time to file such returns. In 1983, respondent audited Mine-Rite's 1979 and 1980 taxable years. After examining the partnership's books and records, respondent's agent, Mr. Tom Ridgeway, prepared IRS Form 4605, Examination Changes -- Partnerships, 188 Fiduciaries, Small Business Corporations and Domestic International Sales Corporations (examination report), dated March 8, 1983. The examination report computes Mine-Rite's income based on the cash receipts and disbursements method of accounting. That computation is summarized as follows: 19791980OperationalIncome$ 310,000 $ 333,750 AllowableDeductions(4,865)(84,414)OrdinaryIncome (Loss)305,135 249,336 The examination report also proposes assessment of penalties against Mine-Rite under section 6698 for failure to file returns for 1979 and 1980. On April 1, 1983, Mr. Philip Schouten agreed to the proposed adjustments and penalties, and signed the examination report as "Philip J. Schouten-Partner." As mentioned above, Mr. Philip Schouten is an accountant who was the Mine-Rite partner responsible for keeping the partnership's books. On September 26, 1983, approximately 6 months later, Mine-Rite filed Forms 1065, U.S. Partnership Return of Income, for its taxable years ending December 31, 1979, and December 31, 1980. They state that the partnership's accounting method is the "completed contract" method and they compute net losses for Mine-Rite189 of $ 4,864 and $ 22,367, respectively. Schedules K-1, Partner's Share of Income, Credits, Deductions, etc., attached to the returns, state that petitioners' distributive share of such losses is $ 1,216 in 1979 and $ 5,592 in 1980. Mine-Rite's returns for 1979 and 1980 were prepared under the direction of a member of Mr. Philip Schouten's accounting firm, Mr. Richard E. Lloyd, Jr. Mr. Lloyd is a certified public accountant who had invested $ 1,000 in the mining program at issue in this case. Before preparing Mine-Rite's returns, Mr. Lloyd prepared trial balances from the books and records maintained on behalf of the partnership. He then made adjustments to the accounts reflected on the trial balance. For the year 1979, he made two adjustments. First, he increased an account labeled "Investment in Camco" by $ 15,000 to account for money contributed directly to the project by Mr. Van Someren or his controlled entity, Air Right, and he increased "Loan Payable - Van or Air Right" in the same amount. Second, he booked a reserve for depreciation and depreciation expense for a Ford Bronco in the amount $ 2,530. After these adjustments, Mine-Rite's trial balance for 1979 reflected190 a credit balance of $ 305,000 in an account designated "From Westates-Investor Money." For the year 1980, Mr. Lloyd made adjustments to Mine-Rite's trial balance which fall into six categories. First, he booked "Disbursements from Reno account 3-6-80 - 12-31-80" by increasing various accounts shown on the trial balance in the aggregate amount of $ 42,418.89. Second, he reduced "Investments in Camco," an asset account, and increased consultant fees to Mr. Camozzi, an expense account, in the amount of $ 16,000. Third, he increased the reserve for depreciation and depreciation expense for the Ford Bronco, in the amount of $ 2,530, and for certain office equipment, in the amount of $ 171. Fourth, he increased the note payable for the purchase of the Bronco truck by the interest to be paid over the life of the loan, $ 3,873.28, and increased prepaid interest in the same amount. Fifth, he decreased prepaid interest and increased interest expense by $ 1,549, the portion of interest paid during the year. Finally, he decreased an account labeled "From Investors" by debiting $ 120,000 to the account and made an offsetting credit to an account entitled "Westates Exchange." After these191 adjustments were made, Mine-Rite's 1980 trial balance reflected a credit balance of $ 310,000 in the account labeled "From Investors" and a credit balance of $ 23,526.12 in the account labeled "Interest Earned." At no time prior to August or September of 1983 when Mr. Lloyd prepared the trial balances for Mine-Rite, as described above, did Mine-Rite or any person acting on its behalf prepare books or records for Mine-Rite under the completed contracts method of accounting. Prior to the time Mr. Lloyd prepared the trial balances described above, all of the entries made in Mine-Rite's books and records were based upon the amount of cash received or disbursed by the partnership. At no time did Mine-Rite or any person acting on its behalf request or receive respondent's permission to use the completed contract method of accounting. On September 29, 1986, respondent issued a statutory notice of deficiency in which he computed Mine-Rite's net income to be $ 305,135 in 1979 and $ 249,336 in 1980, using the cash method of accounting, as he had in the examination report. Based upon petitioners' 25-percent partnership interest, respondent determined that petitioners' distributive share192 of the income from Mine-Rite amounted to $ 76,250 in 1979 and $ 62,334 in 1980. The record does not state why respondent computed petitioners' distributive share of Mine-Rite's income in 1979 to be $ 76,250, $ 34 less than 25 percent of $ 305,135. Set forth below are two schedules, the first of which compares the income and deductions claimed on Mine-Rite's 1979 return with the income and deductions determined by respondent in his notice of deficiency issued to petitioners, and the second of which is the same comparison for 1980: 1979IRS1980 IRSReturnNotice Return Notice Income:Gross Receipts 0.00 $ 105,000.00 Cost of Goods Sold (51,000.00)Gross Profit 0.00 54,000.00 Other Income Interest 23,526.00Total Income 0.00 310,000.0077,526.00 333,750.00Deductions:Salaries 790.00 1,322.00Guaranteed Payments 26,000.00 0.00Rent 2,500.00 2,500.00Interest 26,600.00 26,463.00Depreciation 2,530.00 2,530.002,701.00 4,537.00Other Deductions 2,334.23 2,335.0041,301.88 49,592.00Total Deductions 4,864.23 4,865.0099,892.88 84,414.00Ordinary Income (Loss) (4,864.23)305,135.00(22,366.88)249,336.00Petitioners' Share (25%) ($ 1,216.06)$ 76,250.00($ 5,591.72)$ 62,334.00193 The record does not explain what relationship, if any, the third partnership formed by petitioner, American Mining Trust, bore to Mine-Rite, Westates, or the subject tax shelter. In any event, on September 26, 1983, at the same time that Mine-Rite filed partnership returns for 1979 and 1980, American Mining Trust also filed Forms 1065, U.S. Partnership Return of Income, for its taxable years ending December 31, 1979, and December 31, 1980. American Mining Trust's tax returns, which are further described below, state that the partnership was engaged in the principal business activity of "milling," from which its principal product or service was "concentrate." Those returns also state that the partnership employed the cash method and reported its income on a calendar year basis. OPINION I. Mine Development Expense DeductionPetitioners claim to be entitled to deduct $ 16,000 in 1979 as a mine development expense under section 616(a). Respondent determined that such amount is not deductible, in whole or in part, on the grounds that: (1) Petitioners have not satisfied the statutory requirements of section 616(a); (2) petitioners' investment lacked a profit objective; (3) petitioners194 were not at risk with respect to the $ 12,000 promissory note; (4) the note did not constitute genuine indebtedness; and (5) the note was nonrecourse. We agree with respondent that petitioners have not satisfied the requirements of section 616(a) and find it unnecessary to reach the other grounds raised by respondent. Section 616(a), as in effect during 1979, provided for the current deduction of: all expenditures paid or incurred during the taxable year for the development of a mine or other natural deposit (other than an oil or gas well) if paid or incurred after the existence of ores or minerals in commercially marketable quantities has been disclosed. This section shall not apply to expenditures for the acquisition or improvement of property of a character which is subject to the allowance for depreciation provided in section 167, but allowances for depreciation shall be considered, for purposes of this section, as expenditures.Generally, a mine development expense "is commonly understood by authorities in the mining field to mean the activity necessary to make a deposit accessible for mining" and is "designed to prepare the deposit for extraction or exploitation." 195 Santa Fe Pacific Railroad Co. v. United States, 378 F.2d 72">378 F.2d 72, 76 (7th Cir. 1967); see Geoghegan & Mathis, Inc. v. Commissioner, 55 T.C. 672">55 T.C. 672, 676 (1971), affd. 453 F.2d 1324">453 F.2d 1324 (6th Cir. 1972), cert. denied 409 U.S. 842">409 U.S. 842, 34 L. Ed. 2d 81">34 L. Ed. 2d 81, 93 S. Ct. 41">93 S. Ct. 41 (1972). Such expenses differ from exploration expenses, which are incurred for the purpose of ascertaining the existence, location, extent, and quality of a mineral deposit, and production expenses, which are incurred to sustain extraction of the mineral. See H.G. Fenton Material Co. v. Commissioner, 74 T.C. 584">74 T.C. 584, 588 (1980). To qualify for deduction, a development expense must be incurred after the disclosure of commercially marketable quantities of ore. Santa Fe Pacific Railroad Co. v. United States, supra at 75; Anderson v. Commissioner, 83 T.C. 898">83 T.C. 898, 908 (1984), affd. without opinion 846 F.2d 76">846 F.2d 76 (10th Cir. 1988); Saviano v. Commissioner, 80 T.C. at 960; H.G. Fenton Material Co. v. Commissioner, supra at 591; Estate of DeBie v. Commissioner, 56 T.C. 876">56 T.C. 876, 893 (1971).196 Petitioners bear the burden of proof with respect to this requirement. See Santa Fe Pacific Railroad Co. v. United States, supra at 75; Conforte v. Commissioner, 74 T.C. 1160">74 T.C. 1160, 1197 (1980), revd. on other ground 692 F.2d 587">692 F.2d 587 (9th Cir. 1982); Rule 142(a), Tax Court Rules of Practice and Procedure.Whether "deposits of ore * * exist in sufficient quantity and quality to reasonably justify commercial exploitation by the taxpayer" depends upon "consideration of all the facts and circumstances (including actions of the taxpayer)." Sec. 1.616-1(a), Income Tax Regs.; Hughes v. Commissioner, T.C. Memo 1989-528">T.C. Memo 1989-528; Smith v. Commissioner, supra. Among the relevant "facts and circumstances" to be considered are the quantity, quality, accessibility, location, marketability, and current market price of a mine's ore. See, e.g., Zimmerman v. Commissioner, T.C. Memo 1987-534">T.C. Memo 1987-534. The record before us contains no credible evidence, such as assay reports, geological studies, engineering reports, or market analyses, to support the commercial feasibility of the San Jeronimo mine. 197 Compare Hughes v. Commissioner, supra. In his testimony, petitioner estimated that the mine contained 5,000 tons of ore and vaguely referred to assay and engineering reports prepared by the project engineer, Mr. Camozzi. Petitioners, however, failed to produce these reports. They also failed to produce any expert testimony or other substantive information relevant to the mine's commercial value. We infer that such evidence or testimony would cast doubt on the mine's commercial feasibility. See Horn v. Commissioner, 90 T.C. 908">90 T.C. 908, 936 (1988); 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 on the facts and circumstances reflected in the record, we conclude that petitioners have failed to prove that there were any minerals whatsoever located at the San Jeronimo mine, much less in commercially marketable quantities. Therefore, we sustain respondent's determination that the $ 16,000 invested by petitioners in the San Jeronimo mine through the Westates program is not deductible under section 616(a). II. Use of the Cash Method to Compute198 Mine-Rite's Taxable IncomeRespondent determined that petitioners' share of Mine-Rite's taxable income amounted to $ 76,284 in 1979 and $ 62,334 in 1980, and that their taxable income for each year should be increased accordingly. For this purpose, he computed Mine-Rite's taxable income using the cash receipts and disbursements method of accounting. Petitioners contend that the completed contract method of accounting, rather than the cash method, should be used in computing Mine-Rite's taxable income. Under the completed contract method of accounting, they contend, the partnership realized losses in each of the years at issue and they are entitled to deduct their distributive share of those losses in the amount of $ 1,216 and $ 5,592, respectively. Petitioners do not dispute that Mine-Rite received monies in the amounts determined by respondent nor do they dispute that each of the adjustments determined by respondent and the amount thereof is necessary and appropriate in computing Mine-Rite's income under the cash method of accounting. Their contention is that respondent is required to use the completed contract method of accounting because: (1) Mine-Rite maintained its financial199 books "contemporaneously on a basis consistent with an election to use the completed contract basis of accounting"; (2) Mine-Rite adopted the completed contract method for 1979 and 1980 when it filed its first returns in 1983; and (3) the cash method does not clearly reflect the partnership's income but the completed contract method does. We disagree. Section 446(a) sets forth the general rule that a taxpayer is required to compute taxable income for Federal income tax purposes, "under the method of accounting on the basis of which the taxpayer regularly computes his income in keeping his books." (Emphasis supplied). In this case, it is clear that Mine-Rite did not "regularly" use the completed contract method of accounting in computing its income in keeping its books. Mine-Rite recorded its cash receipts and disbursements in a cash journal and periodically posted such amounts to its general ledger. At the time it was audited for 1979, 1980, and 1981, the partnership had no books or records of any kind in which income was computed under the completed contract method of accounting. The partnership's accountant, Mr. Lloyd, acknowledged that to be the case during his testimony200 at trial. Respondent's agent used the cash method in computing Mine-Rite's taxable income and one of Mine-Rite's partners, Mr. Philip Schouten, an accountant, signed IRS Form 4605 as a partner of Mine-Rite and represented that he "has reviewed and hereby accepts the examiner's recommended adjustments listed above resulting from an examination of returns of the entity identified above." Thereafter, respondent issued his statutory notice and determined Mine-Rite's taxable income in accordance with the examiner's report. Petitioners do not argue that Mine-Rite "regularly" used the completed contract method to compute its income for book purposes. Indeed, as discussed above, it is clear that this was not the case. Rather, petitioners argue that Mine-Rite's books and records were maintained in a manner "consistent" with the completed contract method of accounting. We are not sure what the significance of that argument may be, but it is incorrect in any event. The completed contract method of accounting is one of two accounting methods under which income from long-term contracts is included in gross income. See sec. 1.451-3(a)(1), Income Tax Regs. The other is the percentage of 201 completion method described in section 1.451-3(c), Income Tax Regs. Under the completed contract method, gross income derived from long-term contracts is reported as income for the year in which the contract is finally completed or accepted. Sec. 1.451-3(d), Income Tax Regs. Under this method, the gross contract price of each long-term contract is included in gross income for the taxable year in which the contract is completed, and all costs properly allocable to the contract must be deducted from gross income in the same year. Sec. 1.451-3(d)(1), Income Tax Regs.; see generally Sierracin Corp. v. Commissioner, 90 T.C. 341">90 T.C. 341 (1988); Rotolo v. Commissioner, 88 T.C. 1500">88 T.C. 1500 (1987); Guy F. Atkinson Co. v. Commissioner, 82 T.C. 275">82 T.C. 275 (1984), affd. 814 F.2d 1388">814 F.2d 1388 (9th Cir. 1987). Petitioners claim that Mine-Rite's general ledger accounts for "Advances to Camco Industrias" and "Advances to M.B. Mining Co." are the costs allocable to long-term contracts, so-called product costs. They claim that other expense accounts in Mine-Rite's general ledger, "professional services," "interest expense," "road and travel," etc., 202 are costs not allocable to long-term contracts, so-called period costs. Petitioners point to the existence of these accounts as evidence that Mine-Rite's books and records "were maintained on a basis wholly consistent with the completed contract basis of accounting." However, the general ledger accounts for "Advances to Camco Industrias" and "Advances to M.B. Mining Co." contain Mine-Rite's payments to two of the three joint ventures which are described above. Petitioners did not introduce the joint venture agreements into evidence, but the payments are described as "capital" in the trial balances for each of the joint ventures. Thus, it appears that these accounts record Mine-Rite's payments of capital to specific joint ventures and do not record long-term contract costs. Moreover, the long-term contracts for which petitioners claim Mine-Rite was accounting are the individual "mining contracts" which Mine-Rite entered into with investors. There is no evidence in the record that Mine-Rite allocated costs between or among those "mining contracts." There is also no indication in the Mine-Rite books and records that those contracts were aggregated according to the mine at which203 the development work was to be done. Even if such aggregation were permissible, which is not clear, see sec. 1.451-3(e)(1), Income Tax Regs., petitioners do not cite any authority to aggregate costs according to the three joint ventures, rather than according to the four mines. We also find unpersuasive petitioners' argument that, as a matter of law, Mine-Rite can properly use the completed contract method because the partnership "adopted" that method on its "first returns," filed September 26, 1983, for the taxable years ending December 31, 1979, and December 31, 1980. Although section 1.446-1(e)(1), Income Tax Regs., provides that "A taxpayer filing his first return may adopt any permissible method of accounting in computing taxable income for the taxable year covered by such return," the method so adopted must still conform to taxpayer's book method of accounting. To conclude otherwise would obviate the requirement under section 446(a) that a taxpayer's tax accounting method conform to its "regularly" used book accounting method. Moreover, a taxpayer's notation of its accounting method on a return is not determinative of its actual accounting method. Aluminum Castings Co. v. Routzahn, 282 U.S. 92">282 U.S. 92, 99, 75 L. Ed. 234">75 L. Ed. 234, 51 S. Ct. 11">51 S. Ct. 11 (1930);204 Lincoln Storage Warehouses v. Commissioner, 13 T.C. 33">13 T.C. 33, 41 (1949), affd. 189 F.2d 337">189 F.2d 337 (3d Cir. 1950). Respondent argues that Mine-Rite used the cash method to "regularly" compute its income in keeping its books and is, accordingly, required under section 446(a) to use the cash method in determining its taxable income for 1979 and 1980. Respondent's argument has merit. See, e.g., Mifflin v. Commissioner, 24 T.C. 973">24 T.C. 973, 979 (1955); Tunningley v. Commissioner, 22 T.C. 1108">22 T.C. 1108, 1117-1118 (1954). However, based upon the facts in this case, we cannot find that Mine-Rite "regularly" computed its income using the cash method of accounting. While Mine-Rite booked its cash receipts and disbursements and periodically entered those amounts into its general ledger, there is no evidence in the record that it computed its income for book purposes prior to 1983. Since there is no evidence in this case that Mine-Rite "regularly" computed its income using the completed contract method of accounting or any other method of accounting, our decision must be governed by the exception to the general rule contained in section 446(b)205 which provides: If no method of accounting has been regularly used by the taxpayer, or if the method used does not clearly reflect income, the computation of taxable income shall be made under such method as, in the opinion of the Secretary, does clearly reflect income.Section 446(b) vests respondent with "wide discretion" in selecting an accounting method which clearly reflects a taxpayer's income. Thor Power Tool Co. v. Commissioner, 439 U.S. 522">439 U.S. 522, 533, 58 L. Ed. 2d 785">58 L. Ed. 2d 785, 99 S. Ct. 773">99 S. Ct. 773 (1979); see United States v. Catto, 384 U.S. 102">384 U.S. 102, 114, 16 L. Ed. 2d 398">16 L. Ed. 2d 398, 86 S. Ct. 1311">86 S. Ct. 1311 (1966); Commissioner v. Hansen, 360 U.S. 446">360 U.S. 446, 467, 3 L. Ed. 2d 1360">3 L. Ed. 2d 1360, 79 S. Ct. 1270">79 S. Ct. 1270 (1959); Lucas v. American Code Co., 280 U.S. 445">280 U.S. 445, 449, 74 L. Ed. 538">74 L. Ed. 538, 50 S. Ct. 202">50 S. Ct. 202 (1930); Molsen v. Commissioner, 85 T.C. 485">85 T.C. 485, 498 (1985). Respondent's determination under section 446(b) will be upheld absent an abuse of discretion, and petitioners bear a "heavy burden" of proof to show that such determination is "clearly unlawful" or "plainly arbitrary." Thor Power Tool Co. v. Commissioner, supra at 532-533. In this case, petitioners must prove that respondent abused his discretion in determining that the cash method clearly206 reflects Mine-Rite's income. See, e.g., Capitol Federal Savings & Loan Association v. Commissioner, 96 T.C. 204">96 T.C. 204 (slip op. at 8-9) (1991); Prabel v. Commissioner, 91 T.C. 1101">91 T.C. 1101, 1112 (1988), affd. 882 F.2d 820">882 F.2d 820 (3d Cir. 1989). As we noted earlier, petitioners argue that Mine-Rite was eligible to adopt the completed contract method of accounting and that such method of accounting clearly reflects Mine-Rite's income. We do not reach these issues, because petitioners have failed to prove that respondent abused his discretion under section 446(b) in using the cash method to compute Mine-Rite's income. At the outset, we note that petitioners misperceive the burden of proof in this case. They apparently believe that respondent has the burden of proving that the cash method clearly reflects income. They argue as follows: The Respondent has not introduced any evidence, adduced any testimony or otherwise even in so many words asserted that the cash basis of accounting clearly reflects the income of Mine-Rite for the years before the Court.They further argue: Respondent's argument is limited to the proposition that merely saying it is207 so, makes it so. Whatever presumption existed in Respondent's favor vanished entirely in the face of the contrary evidence in the record. Respondent offered nothing in opposition to the evidence in the record.As discussed above, however, petitioners not only bear the burden of proof, they bear a heavy burden of proof. Thor Power Tool Co. v. Commissioner, 439 U.S. at 532-533; Capitol Federal Savings & Loan Ass'n v. Commissioner, supra; Prabel v. Commissioner, supra.In support of their contention that the cash method does not clearly reflect income, petitioners first allege that respondent used the cash method to compute Mine-Rite's income as a "punitive device." Petitioners argue that respondent's agents misperceived the nature of the promotion in this case and equated it with "the infamous program called 'Gold for Tax Dollars'" and that respondent's agents also misperceived the nature of petitioner's activities on behalf of the subject program. In effect, petitioners contend that respondent's agents computed Mine-Rite's income in an effort to punish petitioners. To the contrary, we find no evidence that the adjustments208 proposed against petitioners were intended to be punitive. In fact, they are well supported. Petitioners' second argument suggests that the cash method mismatches income and expenses. They state as follows: The cash method is totally inappropriate in this situation. By isolating receipt of money from the expenditure thereof a gross distortion of income results.They further state as follows: An examination of [Mine-Rite's 1970 and 1980 Federal income tax returns] discloses that Mine-Rite expended during 1979 and 1980 in excess of $ 700,000.00 of "product costs" and almost $ 100,000.00 of "period costs." This $ 800,000.00 is substantially in excess of the $ 644,000.00 of gross income Respondent asserts it received. Clearly, Mine-Rite received no net income in the economic sense in those years. A finding that Petitioner realized taxable income from Mine-Rite in excess of $ 138,000.00 during those years would indeed be a draconian result. It was just to avoid that draconian result that the completed contract basis of accounting was inserted in the regulations.The "$ 700,000.00 of 'product costs'" referred to above are actually the "advances" which Mine-Rite made209 to the joint ventures discussed above. Petitioners chose not to introduce the joint venture agreements into evidence. Those agreements govern Mine-Rite's payment of such advances and its share of any profits realized by the joint ventures. Significantly, as discussed above, the trial balances prepared for the joint ventures label such amounts "Capital." Under these circumstances, we are unwilling to accept petitioners' argument premised on the theory that such amounts are "product costs." Petitioners failed to prove any distortion of income or mismatching of income and expenses. Moreover, it appears that respondent's computation of Mine-Rite's income is fully consistent with the trial balances prepared by Mr. Lloyd for Mine-Rite. The 1979 trial balance shows a credit balance of $ 305,000 in an account designated "From Westates Dev -- Investor money." The total income determined by respondent for 1979 is $ 305,135. Similarly, the 1980 trial balance shows a credit balance of $ 310,000 in an account labeled "From Investors." There is also a credit balance of $ 23,526.12 in an account labeled "Interest Earned." The total of those two accounts, $ 333,526, is similar to the total 210 income determined by respondent in the amount of $ 333,750. On the other hand, Mine Rite's 1980 return reports gross receipts of $ 105,000. We find nothing in Mine-Rite's trial balance for 1980 which explains how this amount was computed. Additionally, petitioners have offered no evidence to substantiate any deductions other than those allowed by respondent. Indeed, petitioners have not even attempted to reconcile the deductions claimed with those allowed by respondent. In our view, respondent's determination is in full accord with proper tax accounting principles, and petitioners have shown no authority in law or in fact to support their position. We cannot characterize respondent's actions as "plainly arbitrary," or conclude that there is no adequate basis in law for his determination. Accordingly, we hold that petitioners must report their income from Mine-Rite in conformity with the cash method. III. American Mining Trust LossesPetitioners contend that they are entitled to losses of $ 601 in 1979 and $ 34,410 in 1980, as their distributive share of the partnership's profits and losses for those years. Respondent contends that petitioners have not substantiated these211 losses. We agree with respondent. Petitioners bear the burden of proof with respect to this issue. Rule 142(a), Tax Court Rules of Practice and Procedure. Petitioners introduced the following evidence to substantiate their claim: (1) Forms 1065, U.S. Partnership Return of Income, filed September 26, 1983, alleging that American Mining Trust incurred losses of $ 1,804.00 and $ 103,231.00 for the partnership's respective taxable years ending December 31, 1979, and December 31, 1980; and (2) Schedules K-1, Partner's Share of Income Deductions, Credits, etc., stating that distributive shares of the partnership's losses for those years were $ 804 and $ 34,410, respectively. Petitioners argue that "a review of the tax returns [filed on behalf of American Mining Trust] shows that as a general partner, without limitation, Petitioner was jointly and severely liable on the debts of American Mining Trust." Petitioners further argue that "Respondent solicited no testimony or evidence to show that the debts were limited in any fashion and as such, Petitioners should be entitled to an 'at risk' basis sufficient to allow them their distributive share of the 1980 loss of American Mining Trust." 212 A tax return, however, is merely a statement of a taxpayer's claim, and does not establish the correctness of the figures and facts stated therein. Wilkinson v. Commissioner, 71 T.C. 633">71 T.C. 633, 639 (1979); Roberts v. Commissioner, 62 T.C. 834">62 T.C. 834, 837 (1974); Seaboard Commercial Corp. v. Commissioner, 28 T.C. 1034">28 T.C. 1034, 1051 (1957). Indeed, to hold that representations on a return constitute proof of a taxpayer's entitlement to those items would negate the presumption of correctness attached to respondent's statutory notice of deficiency. Halle v. Commissioner, 7 T.C. 245">7 T.C. 245, 247-248 (1946), affd. 175 F.2d 500">175 F.2d 500 (2d Cir. 1949). Because the record is devoid of any other evidence to substantiate the amounts asserted on the partnership's returns, petitioners have failed to carry their burden of proof on this issue. Accordingly, we hold that they are not entitled to deduct any losses from American Mining Trust in 1979 or 1980. To reflect the foregoing, Decision will be entered under Rule 155.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622497/	BUFFALO UNION FURNACE COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Buffalo Union Furnace Co. v. CommissionerDocket Nos. 16075, 16076.United States Board of Tax Appeals23 B.T.A. 439; 1931 BTA LEXIS 1871; May 28, 1931, Promulgated 1871 1. An allowance determined for exhaustion, wear and tear of property used in the iron furnace business, including a reasonable allowance for obsolescence. 2. Expenditures incident to the restoration of petitioner's dock classified as between capital and expense items. 3. Petitioner performed certain switching service from 1905 to 1914, without receiving payment therefor, when its competitors were either receiving payment for rendering such service or the service was being rendered for them without charge. In 1911 the Interstate Commerce Commission found that the discriminatory practice existed and in 1917 ordered the railroads to pay the petitioner the cost of rendering such service from 1905 to 1914. The railroads, however, refused to pay and suits were instituted by petitioner to enforce collection. The suits were compromised in 1920 through payment to petitioner of approximately one-half of the cost found by the Interstate Commerce Commission. Held, that the entire amount received constituted income to the petitioner when received in 1920. 4. Commissioner's adjustment of invested capital under articles 845 and 845(a) of Regulations 45, sustained. 1872 Ralph Ulsh, Esq., for the petitioner. John D. Foley, Esq., and James C. Maddox, Esq., for the respondent. SEAWELL440 These proceedings, which were consolidated for hearing and decision, involve deficiencies in income and profits tax as determined by the Commissioner for the fiscal years ended April 30, 1919, April 30, 1920, and April 30, 1921, in the respective amounts of $223,336.65, $148,274.68 and $75,047.09. Errors were assigned with respect to (1) the allowance on account of depreciation and obsolescence on plant and equipment, (2) the failure of the Commissioner to allow credits to a reserve for furnace linings as deductions in computing net income, (3) whether certain expenditures on petitioner's dock constitute capital or expense items, (4) the treatment of an amount received in June, 1920, in settlement of a certain railroad controversy, as income for the year in which received, and (5) the reduction of invested capital on account of income and profits taxes which had accrued for the various prior respective years. In addition, errors were assigned on account of the effect on invested capital of certain tentative tax computations in1873 determining the earnings available for the payment of dividends and the purchase of preferred stock for retirement, but the Commissioner confessed error as to these items. FINDINGS OF FACT. The petitioner is a New York corporation and during the years involved was engaged in the business of manufacturing pig iron in Buffalo. 1. The petitioner's plant was located on a plot of ground of about 55 acres on the Buffalo River, which river is navigable for lake boats at that point. The plant itself consisted of three blast furnaces - known 441 as A, B and C - of a daily capacity of from 300 to 325 tons each. The furnaces were served by a common ore dock on the Buffalo River, two of the furnaces being adjacent to the ore dock and the third on the other side of the property to which the ore was transferred by railroad cars. Each furnace was a complete unit, its tonnage capacity being determined by the size of the furnace hearth, and therefore, if it became necessary to construct one of the more modern furnaces (hereinafter referred to), the entire unit would have to be dismantled. With very few exceptions, the buildings were mere shells to enable the men to work with1874 a reasonable degree of protection and in many cases were supported by the furnaces themselves. The auxiliary equipment, such as cranes, ladles and pig-casting machines, was likewise an integral part of a given furnace unit and was not adapted for use in the much larger unit. No central power plant existed for the three furnaces, but each had its own power plant as an integral part of the furnace itself. Further equipment consisted of some cars and one or two locomotives which were used for switching purposes, and certain dock equipment and facilities which are referred to in more detail under another issue. The basic unit in each blast furnace is a vertical cylindrical steel shell which is lined with fire bricks. Iron ore, coke and limestone in varying amounts are dumped into the top of this fire-brick-lined shell. Hot air is blown into the furnace by blowing engines at the bottom, where the combustion takes place, and as fast as the combustion takes place at the bottom, which reduces the iron ore to molten iron, the mixture of ore, coke and limestone recedes from the top of the furnace. At intervals of from four to six hours sufficient iron has been melted in the bottom of1875 the furnace so that it is tapped and the molten iron removed and cast into pigs suitable for shipment to the trade. In order to heat the air for the hot blast blown into it, each furnace has four cylinders lined with fire-brick flues. These are known as stoves. The waste gas from the furnace is piped into the stoves and used for the purpose of heating the fire-brick lining. The waste gases which come from the top of the furnace, in addition to heating the stoves, which in turn heat the blast, are also burned under boilers to supply steam to operate the blowing engines and other auxiliary equipment, consisting of a large number of pumps. The operation of a blast furnace is continuous, the only reason for shutting down being for repairs or lack of market. The petitioner's furnaces were merchant furnaces, that is, the petitioner manufactured pig iron to sell to consumers, and consumed none of its own product. The market for its product was found largely in New York, eastern Pennsylvania, eastern Ohio, and the 442 New England States, and its product was in competition with blast furnaces located in this area and beyond it within the range of competitive transportation1876 costs. Until about 1917 or 1918 petitioner's furnaces were of the same general type and capacity as the greater number of other furnaces with which petitioner was in competition. The three furnaces of petitioner were originally built and owned by separate corporations in 1893, 1898 and 1900, but they had been enlarged, improved and reequipped in many respects by 1918. Owing to the great demand for iron during the war period and due to the fact that it had been demonstrated that merchant iron of a more uniform character and better quality could be manufactured in the larger type of furnace than in the existing small type of furnace, a large number of the larger and more modern type of furnace were built during the period 1918 to 1920 by petitioner's competitors or concerns which then became competitors. The newer furnaces were from 600 to 1,000 tons capacity as compared with 300 to 400 tons for the old furnaces and included many mechanical and operating improvements which resulted in more efficient operation, the utilization of gas, and other economies which greatly reduced the cost of pig iron manufactured in the new furnaces. In addition to the construction of the newer type1877 of furnace by concerns which were engaged solely in the manufacture of pig iron for sale, some of the steel companies also installed furnaces of this type, with the result that instead of having to purchase some of the pig iron which they used they now had pig iron for sale and thus became competitors of petitioner. After 1918 the newer and heavier type of furnace became the standard of construction. A change in blast furnace construction and design comparable to that which took place from 1918 to 1920 had not taken place prior to that time. While some smaller furnaces were remodeled in line with the newer type of furnace, in such instances it was generally necessary to dismantle them completely and build up entirely new units, since the furnace hearth does not permit of enlargement and it is the furnace hearth which determines the tonnage capacity. Petitioner's furnaces could not have been remodeled without dismantling the existing furnaces, constructing new units and reequipping them. The physical life of a blast furnace is dependent in large measure upon industrial conditions and the extent to which repairs are made. Repairs and replacements can be made to such an extent1878 that a given unit will last indefinitely. In the case of petitioner's furnaces much of the original furnaces had been entirely exhausted and replaced by the time involved in these proceedings, and the furnaces were comparable with the type of merchant furnaces then in general use, 443 though not with the newer type then being constructed. During the years here in question petitioner's repair work was very heavy. During the fiscal year ended April 30, 1919, petitioner's officers were aware of the changes which were taking place in blast furnace construction and considered their effect upon the continued use of petitioner's existing plant in competition with the more modern type of furnace. The petitioner, however, had a very valuable good will that extended over a great many years and there was some prejudice in the minds of buyers of pig iron against iron made by steel companies. The petitioner's officers were accordingly of the opinion that the business could be continued for some time with the existing furnaces, though they were of the opinion that the furnaces could not be operated throughout their physical life in competition with the more modern type of furnace. 1879 The rate of 10 per cent then fixed to take care of depreciation and obsolescence was approximately that which was required to effect a recovery of cost over the period when the furnaces were continued in operation. In 1920, the petitioner leased its plant to the Hanna Furnace Company, a subsidiary of the M. A. Hanna Company, for a period of 40 years from July 1, 1920, with the option of the lessee to purchase at any time after 20 years. It was not a lease of the plant in the ordinary sense, but was a turning over to the lessee of the assets of the petitioner, including plant, cash, working capital and all of its interests of every kind connected with the furnace business. The petitioner then had between one and one-half and two million dollars in net quick assets and a very small indebtedness. The petitioner was then also operating under a long-term contract with the M. A. Hanna Company for the supply of iron ore, which was entered into in 1914 or 1915 and was very advantageous to the petitioner. So advantageous was the contract to the petitioner that during the war period it voluntarily made some additional payments to the M. A. Hanna Company on account of changed conditions. 1880 This contract was considered one of the principal assets of the petitioner. In addition, the petitioner had entered into a contract with the United States Government for the building of a large by-product coke plant, which was to supply it with coke. That contract proved very favorable upon the termination of the war. The foregoing contracts were important considerations in the negotiation of the contract on the part of the lessee. One paragraph of the lease read as follows: We will maintain your plant in first class condition, so that on its return to you it shall constitute a modern pig iron producing plant in first class condition capable of producing not less than 1,000 gross tons per day of pig iron by the then accepted best method and practice of the trade. 444 During the period from 1920 to 1927 the aforementioned lessee expended approximately $750,000 to $800,000 in modernizing and making more efficient the petitioner's blast furnaces here in question and during that period the lessee's losses aggregated more than $4,000,000. Prior to October 1, 1927, the M. A. Hanna Company acquired control of the petitioner and as of October 1, 1927, the aforementioned1881 lease with the Hanna Furnace Company was canceled. The operation of the "C" furnace was discontinued in April, 1925, and that of the "A" furnace in January, 1928. Both furnaces were partially demolished in 1928. The "B" furnace, which manufactures a special kind of iron, was still in operation on January 15, 1930, but will not continue in operation after a stock pile of ore is consumed or the present furnace linings are consumed, whichever is sooner. The entire salvage value of the three furnaces upon abandonment, including auxiliary and dock equipment, will not exceed $50,000 or $60,000. The petitioner's books showed the following status of the plant and reserve accounts: Cost of plantDepreciation reserveMay 1, 1918$2,769,827.78$664,342.63May 1, 19192,767,293.78852,185.60May 1, 19202,856,207.411,123,566.49May 1, 19212,840,888.811,394,106.15Before providing for depreciation for the year ending on the dates indicated, the amount of cost of plant to be recovered was as follows: April 30, 1919$2,102,951.15April 30, 19202,004,021.81April 30, 19211,717,322.32The amount of plant investment to be recovered1882 on May 1, 1921, after taking into consideration depreciation set up prior thereto, was $1,446,782.66. Depreciation (including obsolescence) was set up by petitioner on its books and claimed as deductions in its returns as follows: April 30, 1919$269,825.44April 30, 1920277,981.05April 30, 1921283,922.16Prior to the fiscal year ended April 30, 1919, petitioner took depreciation on its entire plant and equipment at a composite rate of 5 per cent, but in that year and for the other years here in question it increased the rate to 10 per cent in order to take care of 445 both depreciation and obsolescence. In the determination of the deficiencies with which we are concerned, the Commissioner reduced the foregoing rate of 10 per cent to 5 per cent. In its fiscal years ended April 30, 1920, and April 30, 1921, the petitioner charged to the cost of making pig iron and deducted from income 50 cents for each ton of iron produced to take care of the expense of relining the blast furnaces and stoves. The amount charged was credited to a reserve account and when a given furnace was relined this account was charged with the cost of such relining. The1883 aggregate amount of these deductions for 1920 was $212,734.64 and for 1921, $25,091.51. With varying rates, this has always been petitioner's uniform practice and is similarly followed generally in the industry. The average life of a furnace lining, according to petitioner's experience, is approximately from 2 to 2 1/2 years, though so many factors enter into the life of a given lining that it is difficult, if not impossible, to predict or foresee its exact life. In petitioner's experience it has had linings that were entirely consumed in three months and in other instances they have been known to last as long as five or six years. Labor and material costs necessary to replace the linings were taken into consideration in fixing the amount to be set up in the reserve. The following information was furnished with respect to this reserve account from January 1, 1910, to April 30, 1920: Dr.Cr.Balance Jan. 1, 1910$36,243.87Product "A"106,422 tonsProduct "B" 98,607 tonsProduct "C" 55,112 tons260,141 tons at 20??$52,028.20Relining "C" furnace25,995.55Balance forward Dec. 31, 191010,211.2262,239.4262,239.42Balance Jan. 1, 191110,211.22Product "A"108,578 tonsProduct "B"104,616 tonsProduct "C" 31,593 tons244,787 tons at 20??48,957.40Stove repairs, "A" furnace9,074.93Balance forward Dec. 31, 191129,671.2548,957.4048,957.40Balance Jan. 1, 191229,671.25Product "A"105,849 tonsProduct "B"100,497 tonsProduct "C" 60,279 tons266,625 tons at 20??53,325.00Stove repairs, "A" furnace2,580.75Balance forward Dec. 31, 191280,415.5082,996.2582,996.25Balance Jan. 1, 1913$80,415.50Product "A"102,762 tonsProduct "B" 48,137 tonsProduct "C" 94,997 tons245,896 tons at 20??49,179.20Stove repairs, "B" furnace$19,950.52Dec. 31 - Credit to profit and loss34,644.18Balance forward Dec. 31, 191375,000.00129,594.70129,594.70Balance Jan. 1, 191475,000.00Product "A" 78,236 tonsProduct "B" 51,723 tonsProduct "C" 83,969 tons213,928 tons at 20??42,785.60Relining "A" furnace87,093.14Relining "B" furnace (part)50,216.48Relining "C" furnace21,873.09Balance forward Dec. 31, 191441,397.11159,182.71159,182.71Balance Jan. 1, 191541,397.11Product "A"110,002 tonsProduct "B" 84,272 tonsProduct "C" 96,581 tons290,855 tons, at 20??58,171.00Relining "B" furnace (balance)26,325.53Balance forward Dec. 31, 19159,551.6467,722.6467,722.64Balance Jan. 1, 19169,551.64Jan. 1, 1916, to Apr. 40, 1916:Product "A" 37,511 tons.Product "B" 35,840 tons.Product "C" 33,698 tons.107,049 tons, at 20??21,409.80Balance forward Apr. 30, 191611,858.1621,409.8021,409.80NOTE. - Fiscal year changed Jan. 1, 1916, from a calendar year basis to Apr. 30 - 16 months reported at this time.Balance May 1, 191611,858.16Product "A" 37,536 tons.Product "B" 40,067 tons.Product "C" 41,616 tons.119,219 tons, at 20??23,843.80Product "A" 50,556 tons.Product "B" 39,408 tons.Product "C" 14,732 tons.104,696 tons, at 30?? (From Nov. 1, 1916)31,408.80Total product223,915 tons.Relining "A" furnace (mantle up)34,787.05Relining "B" furnace55,199.18Relining "C" furnace39,007.17Balance forward Apr. 30, 191761,882.64128,993.40128,993.40Balance May 1, 191761,882.64Product "A" 72,568 tonsProduct "B"100,522 tonsProduct "C" 81,308 tons254,398 tons, at 50??127,199.00Relining "C" furnace (balance)15,257.27Balance forward Apr. 30, 191850,059.09127,199.00127,199.00Balance May 1, 1918$50,059.09Product "A"45,837 tonsProduct "B"107,610 tonsProduct "C"101,250 tons254,697 tons, at 50??127,348.50Relining "A" furnace$177,377.45Balance forward Apr. 30, 191960,030.14177,407.59177,407.59Balance Apr. 30, 191960,030.14Product "A"74,840 tonsProduct "B"124,281 tonsProduct "C"106,288 tons305,409 tons, at 50??152,704.50Balance forward Apr. 30, 1920212,734.64212,734.64212,734.64Balance Apr. 30, 1920212,734.64Product "A"15,473 tonsProduct "B"16,992 tonsProduct "C"14,311 tons46,776 tons, at 50??23,388.00Adjustment account overrun on iron yard 4,247 tons, at 50??2,123.50Adjustment relining reserve account - fire brick on hand419.99Balance forward June 30, 1920237,826.15238,246.14238,246.141884 447 When petitioner's plant account was first opened there was included therein an amount of $184,458.98 as representing the cost of the original furnace linings, and this amount is still included in the plant account on which a composite rate of 5 per cent has been allowed by the Commissioner as depreciation, but on which a rate of 10 per cent is claimed by the petitioner. No additions have been made to this amount on account of new linings, nor has any charge been made against the plant depreciation reserve for new linings. The general practice in the industry is to include the original cost of furnace linings in the plant account and compute depreciation thereon in the manner followed by the petitioner. In the prior years the Commissioner allowed additions to the reserve as a deduction from gross income as well as a deduction for depreciation based upon a composite rate of 5 per cent on the entire plant account. 2. Along that part of the plant fronting on the Buffalo River, petitioner had an ore and limestone dock with an adjacent storage yard upon which it unloaded and stored quantities of iron ore and limestone for use in its operations. The total length of the1885 dock was about 2,300 feet and that part of the dock used for the unloading and storage of ore and limestone was 1,450 feet. The dock itself consisted of timber crib work about 26 feet wide and 27 feet deep, filled with stone, resting on bed rock, and surmounted by concrete walls to carry on rails the front legs of the ore unloading bridges. The cribs were anchored to the rock by car axles set in the rock. 448 Extending back from this dock structure was a yard area of natural, original hard clay about 150 feet in width and running the entire length of the dock. The ore unloaders spanned this entire back area, which constituted the storage yard for iron ore and limestone. In the fall of 1918, a portion of the dock, about 400 feet long, collapsed and slid into the river. That portion of the dock was wrecked and the iron ore, several thousand tons, subsided to bed-rock, thus displacing the earth on which it rested and forcing this section of the dock and rear area into the river. Before the restoration of the dock was accomplished it was necessary to remove the wrecked portion of the dock and the earth which had slid into the channel, and also to recover with a dredge1886 as much ore as possible from the back area and dredge the whole area to bed rock. The dock was then restored with the same general type of construction as had been there previously. Wooden cribs of the same dimensions and materials were constructed and sunk to bed-rock and filled with stone. On these the concrete wall or super-structure and the tracks for carrying the ore bridge were restored. But after the restoration of the dock it was also necessary to restore the back area. Where there had previously been a yard of natural hard blue clay there was now a hole filled with water, about 400 feet long, 150 feet wide and about 27 feet deep. In order to restore this area to its former use and to provide storage space for the next season's operations as soon as possible, it was found most practicable to restore this back area by driving wooden piles into a loose earth or cinder fill and then placing a layer of reinforced concrete 24 inches thick over the top, thus tying together the upper ends of the piles. The piles were required in order to get a bearing surface on the bed-rock, but if piles alone had been used the weight of the iron ore on them would have pushed them aside laterally1887 and permitted subsequent lateral movements such as had occurred. The purpose of the concrete mat was to distribute the load evenly over the piles. No work was done beyond that necessary to restore the dock and back area to its former condition of usefulness. After the restoration was finished the dock was put to the same use as before and no greater quantities of materials or heavier loads were stored thereon. No failure or giving away of the dock or back area had occurred prior to the one referred to above and none has occurred since that time. The entire cost of the work done and materials used, exclusive of $121,537.03 expended for removing wrecked dock, dredging backfilling, recovering the ore which had subsided, etc., was as follows: 5,400 wood piles at $9$48,600Concrete mat on piles, 5,480 yds. at $843,840Reinforcement of concrete crib under back fill, 302 tons at $8024,160Steel pipe for sewer2,200Total cost of restoring back area$118,000Repairing and restoring dock:New timber cribs, complete51,000Stone filling for cribs14,400Replacing car axles in dock with billets4,690Concrete superstructure19,250Rails, ties, etc., and placing same7,885Total cost of repairing and restoring dock97,225Less: Depreciation on old dock13,33583,890202,6901888 449 Of the foregoing amount of $202,690, the petitioner capitalized $25,000 and charged the balance, $177,690, to expense. In the determination of the deficiency for the fiscal year ended April 30, 1919, the Commissioner disallowed the entire amount of $177,690 as a deduction on the ground that it was a capital expenditure, though at the hearing counsel for the Commissioner conceded that the petitioner should be allowed a loss of $40,005 on account of the cost of the portion of the dock destroyed which had not yet been recovered through depreciation allowances, thus leaving the amount in controversy $137,685. The Commissioner also allowed as a deduction in the year when the dock subsided the amount of $121,537.03 expended for removing wrecked dock, dredging, backfilling, etc. 3. In June, 1920, the petitioner received from a group of railroads $70,863.88 in settlement of a claim of the petitioner against the said railroads on account of switching services performed by the petitioner from August 1, 1905, to March 31, 1914. Blast-furnace coke, coal and other materials used by the petitioner were received over the railroads serving Buffalo. The cars were delivered by1889 the trunk-line railroads on a delivery or interchange track adjacent to petitioner's plant, and at that point the petitioner's own locomotives picked them up and distributed them to the unloading points within the plant. And when they were unloaded the empty cars were returned by the petitioner to the interchange track, where they were picked up by the trunk-line railroads. In the same way, the trunk-line railroads delivered empty cars to the petitioner for loading pig iron to be shipped out to the petitioner's customers. These cars were taken by the petitioner's locomotives from the interchange track to the various points of loading in the petitioner's yard, weighed, loaded, and returned to this track for transportation by the trunk-line railroads. This switching process is known as "car spotting." 450 During the years for which the sum received by the petitioner in 1920 was paid by the railroads, the railroads performed this switching service without charge at other blast furnaces competing with the petitioner, or paid those industries for performing the service if it was done by the industry. In some cases the railroads sent their own locomotives into the furnace1890 yard and distributed the cars. In other cases, where it was difficult for the railroad locomotives to operate in the furnace yard, the industry performed the work and was reimbursed by the railroads for it at varying rates per car, depending upon what the service was. It was treated by the railroads as an item of expense which was a part of the transportation service to be performed by the railroads in delivering cars of commodities for transportation to and from the industry. The railroads, however, had failed to accord similar treatment to the petitioner, and prior to November 6, 1911, the petitioner filed a complaint before the Interstate Commerce Commission on account of this discrimination. After a trial upon petitioner's complaint an order was made on November 6, 1911, by the Interstate Commerce Commission to the effect that: The testimony shows that the furnaces of the complainant, the Buffalo Union Furnace Company, are in keen competition with those of the Cleveland Furnace Company at Cleveland, and we are of opinion, and find, that the defendants have made or given undue and unreasonable preference or advantage to the plant at Cleveland hereinbefore described, and1891 have subjected complainant to undue and unreasonable prejudice and disadvantage, in violation of section 3 of the act, and by appropriate order will be required to cease and desist from such violation. The secretary and treasurer of the Buffalo Union Terminal Railroad Company filed as an exhibit to his testimony a compilation which purports to be a full and complete statement of the number of cars handled by that company for the defendant railroads from August, 1905, to May, 1907, both inclusive. It will, however, be necessary to have a further hearing in the case in order to determine accurately the amount of reparation to be awarded. An order will be entered in accordance with the foregoing conclusions commanding the defendants to cease and desist from subjecting complainant to undue prejudice and disadvantage, and the case will be held open for further hearing, on request of counsel for complainant Buffalo Union Furance Company as to the amount of reparation which should be awarded. Prior to 1917 further hearings were held at which time petitioner was permitted to present its proof of the amount of reparation to be awarded and reports were handed down 1892 (29 I.C.C. 212">29 I.C.C. 212 and 32 I.C.C. 129">32 I.C.C. 129), but a final order was not issued until 1917. On April 9, 1917, the Interstate Commerce Commission entered its further and final order (44 I.C.C. 267">44 I.C.C. 267), in which reparation was fixed by taking into consideration the number of cars switched, and determining 451 that the petitioner had been damaged to the extent that the cost of service exceeded the charges that would have accrued at the rates for the line hauls. The railroads were ordered to pay the petitioner $139,736.98 on account of discrimination from August 1, 1905, to March 31, 1914. Certain pertinent parts of the order follow: In the instant case no rebate is involved; the pleadings sufficiently allege damages arising out of the unlawful discrimination which we have found to exist; and there is sufficient dvidence to prove that the wrong of the carrier has in fact operated to complainant's injury. The furnace company was in competition with the Lackawanna Steel Company, the Cleveland Furnace Company, and many other iron manufacturers located in western Pennsylvania and eastern Ohio. There was competition between these manufacturers in the1893 purchase of coal, coke, limestone, iron ore, and various other materials. Other furnaces in the Buffalo-Black Rock switching district received their raw materials at the same line-haul rate, and the cars consigned to certain of these furnaces were spotted by the trunk lines or allowances for spotting were made to the industrial roads. The transportation charges paid by the furnace company were higher than those paid by its competitors for a service substantially similar in all respects. Complainant furnace company and these competing furnaces were engaged in manufacturing the same kinds of iron, which were sold in the same competitive markets. 21 I.C.C., 625. It was forced to meet and did meet the prices at which its competitors sold. Under such circumstances it was impossible to add the cost of performing the terminal switching to the selling price of such products. In consequence complainant was compelled to absorb that cost out of its profits. It inevitably follows that the complainant furnace company suffered a loss in profits measured by the cost of that interchange switching service, and we find that it was damaged to the extent of such cost. * * * Upon1894 all the facts of record we are of the opinion and find that complainant Buffalo Union Furnace Company made the shipments as described, and paid and bore the cost of the interchange switching service performed by its plant facility, the Buffalo Union Terminal Railroad Company, which cost of service, being in addition to the rates for the line-haul movements, is herein found to have been unduly prejudicial; that it has been damaged to the extent that the cost of service herein found reasonable exceeded the charges that would have accrued thereon at the rates for the line hauls; and that it is entitled to reparation in the sums set forth in the above table, with interest. An order will be entered requiring the defendants to pay to the complainant furnace company the amounts shown in the table above, with interest calculated upon the amount stated for each period at 6 per cent per annum from the day following the close of that period. The railroads refused to pay the amount awarded by the Interstate Commerce Commission and the petitioner brought suits against them. Before the suits came to trial, they were compromised during the fiscal year ended April 30, 1921, by the payment to1895 the petitioner of $70,863.88 in full settlement of the award of the Interstate Commerce Commission. 452 The petitioner expended in performing these switching services, for which the reparation was ordered, the amounts which were shown in the order of the Commission of April 9, 1917, and in addition some further amounts which were not considered by the Commission as elements of cost of this service. The cost of performing the service was taken as a deduction from gross income in the several years in question for which petitioner was required to file returns. It never received reimbursement for the difference between the amount so expended by it and the sum of $70,863.88 received from the railroads in 1920. A claim against the railroads for this switching service was accrued and carried upon the petitioner's books at an amount greater than the award of the Interstate Commerce Commission and greater than the settlement. Bills for the work were sent to the railroads in each of the years when the services were rendered. The railroads in the summer of 1916 published a formal tariff, recognizing and providing for the payment to the Buffalo Union Furnace Company of the sum1896 of 90 cents a car for all cars thus switched by the Furnace Company, and since that time have been paying that sum towards the switching expense. The sum of $70,863.88 which was received is apportioned and prorated to the several years involved in accordance with the expenditures actually made in those years as follows: 1905-6$10,729.9519077,166.8419084,650.54190911,220.9019108,939.221911$4,832.5219127,259.14191313,412.751914 (to March 31)2,652.02None of the amount received in settlement of the foregoing controversy was included in taxable income by the petitioner. The Commissioner, in his deficiency notice, included $48,316.55 in taxable income for the fiscal year ended April 30, 1921, on the theory that this amount was received by the petitioner on account of its expenses in switching and spotting cars from January 1, 1909, to March 31, 1914, which amount had been deducted in determining net income for those years. At the hearing, however, the Commissioner was permitted to amend his pleadings so as to allege that the taxable income as determined by him for the fiscal year ended April 30, 1921, should be increased in the amount1897 of $22,547.33, or by the remainder of the amount received in settlement which had not theretofore been considered taxable income by him. The petitioner kept its books and rendered its returns on the accrual basis. In the determination of the deficiencies here in question, invested capital was adjusted by the Commissioner in accordance with articles 453 845 and 845(a) of Regulations 45 on account of taxes due and payable for the respective prior years. OPINION. SEAWELL: 1. The first question at issue in this case is the contention of the petitioner that it is entitled to a deduction of 10 per cent on its plant assets on account of depreciation and obsolescence, whereas the Commissioner has allowed only 5 per cent. The principal point in dispute and that to which the greater part of the evidence was directed is as to obsolescence which occurred as a result of the new type of blast furnace construction which began to be installed about 1918. There appeared to be little, if any, dispute between the parties that, leaving out of consideration the factor of obsolescence and the exhaustion of furnace linings, the composite rate of 5 per cent taken as depreciation by1898 the petitioner for the years preceding those before us, which is the same as that allowed by the Commissioner in determining the deficiencies for the years on appeal, is fair and reasonable. That is, the Commissioner does not contend that the rate of 5 per cent is sufficient to take care of depreciation and also obsolescence, but rather that there were not substantial reasons for believing in the years before us that the assets in question would become obsolete prior to the end of their useful life. Further, it should be observed that, because of the integral character of the blast furnace units, the obsolescence with which we are concerned relates to the entire plant, with a few minor exceptions not deemed material by either party. The statute provides (section 234(a)(7) of the Revenue Act of 1918) for a "reasonable allowance for the exhaustion, wear and tear of property used in the trade or business, including a reasonable allowance for obsolescence." That is, a reasonable deduction is allowable on account of the exhaustion, wear and tear of property used in a trade or business, including obsolescence, if the property is becoming obsolete, so that by the time the property reaches1899 the end of its useful life the entire cost thereof will be restored. Like depreciation, whether property is becoming obsolete is a question of fact in each case, and when it is found that such a condition is taking place a deduction on that account can be determined by ascertaining when the property may no longer be expected, under the circumstances, to be commercially useful notwithstanding its physical condition. Columbia Malting Co.,1 B.T.A. 999">1 B.T.A. 999. See also the recent case of Burnet v. Niagara Falls Brewing Co.,282 U.S. 648">282 U.S. 648, wherein the court said: It would be unreasonable and violate that canon of construction to put upon the taxpayer the burden of proving to a reasonable certainty the existence and 454 amount of obsolescence. Such weight of evidence as would reasonably support a verdict for a plaintiff in an ordinary action for the recovery of money fairly may be deemed sufficient. Neither the cost of obsolescence nor of accruing exhaustion, wear and tear that is properly chargeable in any period of time can be measured accurately. A reasonable approximation of the amount that fairly may be included in the accounts of any year1900 is all that is required. In determining the proper deduction for obsolescence there is to be taken into consideration the amount probably recoverable, at the end of its service, by putting the property to another use or by selling it as scrap or otherwise. There is no hard and fast rule, as suggested by the Government, that a taxpayer must show that his property will be scrapped or cease to be used or useful for any purpose, before any allowance may be made for obsolescence. We are satisfied from the evidence here presented that it was known to the petitioner in the fiscal year ended April 30, 1919, that the changes which were taking place in blast furnace construction would render its blast furnaces obsolete prior to the end of their useful life. At that time the heavier and larger type of furnace was replacing the smaller type of furnace and thereafter became the standard type of construction. These newer furnaces embodied many radical improvements in equipment and operation which resulted in a substantial reduction in the cost of manufacturing pig iron. Another result of this development was to bring steel mills into competition with merchant blast furnaces such as operated1901 by the petitioner, because of the surplus product produced. The changes which were taking place were known to petitioner's officers and were discussed by them. At that time the petitioner fixed a rate of 10 per cent, and a witness who was then vice president of the petitioner testified that this was done because it was then known that the plant would become obsolete prior to the end of its useful life. The furnaces were abandoned approximately within the time provided for by the rate of 10 per cent. While to say that the latter fact establishes the rate allowable might be said to allow "hindsight" to take the place of "foresight," it is a fact which can not be overlooked in substantiation of evidence offered as to the situation known to exist during the years with which we are concerned. Since we are satisfied that the petitioner's furnaces were becoming obsolete in the years before us and that this fact was known to petitioner, our question is as to how long it was reasonably expected by petitioner that it could operate its plant profitably without installing the more modern type of furnace. Petitioner's vice president testified that the petitioner's officers were of the opinion1902 that they could not operate more than seven or eight years without replacing their furnaces and on this basis fixed a rate of 10 per cent. The testimony of Mr. Brassert, an expert in the construction of blast furnaces and familiar with petitioner's furnaces and plant, 455 was to the effect that a period of seven to ten years of operations was what could reasonably have been anticipated in 1919. One of petitioner's furnaces was abandoned in 1925, another in 1928, and the third was expected to be operated for only a short time after the hearing in this proceeding. On the other hand, we find that the repairs were very heavy for the years before us and that the petitioner's plant was kept in an excellent state of repair. And, too, much importance is attached by the Commissioner to the fact that on July 1, 1920, the petitioner leased its entire plant to the Hanna Furnace Company for a period of 40 years with option on the part of the lessee to purchase at the end of 20 years. The lease provided that the lessee would maintain the plant in such condition that upon its return to the petitioner at the expiration of its term it would constitute a modern pig-iron producing plant. 1903 There were, however, important considerations entering into the negotiations for the lease other than that of securing the plant for operating purposes - particularly, relief on the part of the lessee from an extremely burdensome ore contract, and the transaction in many respects was more like a sale than a lease. And even if looked at as a lease in the ordinary sense, we do not think a taxpayer can be denied obsolescence which is occurring merely because an advantageous contract is made after it has been ascertained that a given asset will become obsolete at a future date. Further, the large losses of some $4,000,000 sustained by the lessee during its period of operations, even with large expenditures for repairs, tend to confirm the fact that obsolescence was taking place as contended by the petitioner. Another factor to be considered is the petitioner's good will and valuable trade connections which were of such a nature that both the petitioner and the lessee considered them important elements in allaying to a certain extent obsolescence which would arise in connection with competition from the more modern furnace. But before finally disposing of the foregoing issue we will1904 discuss the claim of the petitioner that, in addition to the deduction on account of depreciation and obsolescence, it is also entitled to a further deduction on account of additions to a reserve for relining furnaces, whereas the Commissioner has disallowed all additions to this reserve. An examination of the evidence submitted with respect to this contention shows that this is not a reserve set up on the basis of the exhaustion of the furnace linings, but rather on the basis of what it would cost to replace them upon their exhaustion. In periods of constant prices or costs it would be immaterial which basis is said to be used as the same results would be reached in each instance, but where prices or costs are rising or falling the results are not the same. While the statute provides for deductions on account of the exhaustion, wear and tear of physical assets 456 to the end that the cost thereof may be restored upon the expiration of their useful life, we find no provision under which a taxpayer may set up a fund which would necessarily replace a given asset upon its ultimate exhaustion. For example, if a taxpayer has a building which cost $100,000, but at the end of1905 its useful life cost $150,000 to replace, additions to a reserve would be allowable on the basis of the $100,000 cost, but not on the basis that $150,000 would be required to replace the original $100,000 of cost. The argument of the petitioner is that it should be allowed the additions to the reserve as ordinary and necessary expenses of carrying on its business on the ground that they are generally recognized in the industry and that without the recognition of these items costs of producing its product are understated. What items are capital and what are ordinary and necessary expenses is governed by the statute and we are of the opinion that this can not be varied because of a practice in a given industry. The contention as to the understatement of costs for the purpose of determining net income for tax purposes would be sound only to the extent that provision is not made for adequate deductions on account of the exhaustion of physical assets to the end that their cost may be restored at the expiration of their useful life. It is, of course, not correct to say that no provision is made for the exhaustion of furnace linings in the deductions as allowed by the Commissioner, for1906 the reason that the original cost of furnace linings is included in the plant account on which a composite rate of 5 per cent has been allowed. Of itself, however, it would not be sufficient as shown by the evidence as to the average life of the linings of from 2 to 2 1/2 years, and from the further fact that the petitioner expended approximately $261,000 for furnace relinings over the period 1917 to 1920. During that period one furnace was relined once from the mantle up at a cost of $34,787.05 and completely relined two years later at a cost of $117,377.45. The total allowance by the Commissioner for all depreciation for the entire plant of approximately $140,000 per year over this period was but little more than double the furnace relining costs. It further appears that additions to the reserve were allowed by the Commissioner in prior years in addition to the composite rate of 5 per cent on the entire plant account. When we consider the whole record on the two issues as discussed above, both of which are questions of fact, we are satisfied that the rate of 5 per cent allowed by the Commissioner on the petitioner's entire plant account was insufficient to take care of both1907 depreciation and obsolescence and that while additions to the reserve for relining furnaces can not be allowed, consideration should be given to the life of these linings in fixing a depreciation rate for the entire plant. In 457 short, we are of the opinion that a fair and reasonable allowance for both depreciation and obsolescence (including depreciation on the furnace linings) is obtainable on the basis of 10 per cent of the plant account without the allowance of additions to the reserve for furnace linings, and we so find. 2. The next issue is the deduction to which petitioner is entitled on account of the collapse of a portion of its dock and the expenditures incident to its restoration. In substance, what occurred was that a section of petitioner's dock collapsed and slid into the river, taking with it a quantity of ore which was stored on the dock. Before the dock was restored to its former state of usefulness it was necessary to remove the wrecked portion of the dock and earth which had slid into the channel and also to recover the ore which had subsided into the river. The cost of this so-called preliminary work was $121,537.03 and this has been allowed as1908 an expense deduction by the Commissioner. In addition, the petitioner expended $202,690 in the restoration of the dock which included not only the dock proper, but also the storage area back of the dock. The petitioner capitalized $25,000 of this amount and claimed the remainder as a deductible expense on the ground that this remainder represented incidental repairs which neither materially added to the value of the property nor appreciably prolonged its life, but were necessary merely to restore the property to its former operating condition. On the other hand, the Commissioner considered the entire amount of $202,690 as a capital item and therefore not deductible, though at the hearing he conceded that the petitioner was entitled to a loss of $40,005 as the cost of the portion of the dock which was destroyed. The evidence is to the effect that of the $202,690 in question $83,890 was expended in restoring the dock and $118,800 the back area, and the two items will be disposed of separately. With respect to the dock restoration, we are unable to agree with petitioner that this amount represents what might ordinarily be termed a repair item. What is a repair item and therefore1909 deductible in the year when expended and what is a replacement item and therefore to be capitalized is often difficult of ascertainment and definitions or plausible reasoning may be presented to suit the particular position sought to be upheld and no general rule can be laid down which would be applicable to all cases. As we said in Joseph E. Hubinger,13 B.T.A. 960">13 B.T.A. 960: Counsel for petitioner cites many cases in which the word "repair" is defined and distinguished from such terms as replacements, betterments, improvements, and so on. The difficulties that lie in the way of adopting any general rule and attempting to fit all cases to it are obvious. An item, in relation to income, may in one case be so insignificant that it would be absurd to require its capitalization even though under a technical definition it might be an improvement, 458 while in another case the cost of a similar item might be sufficient to absorb all the income for the year. We can not believe that Congress intended to allow as charges against the revenues of a day or year the cost of restoring major parts of income-producing property where the restoration is of such character as to1910 be useful over a long period of years. And, further, we have this statement from Hubinger v. Commissioner, 36 Fed.(2d) 724 (affirming the foregoing Board decision), with respect to ordinary expenses in the case of a fire or casualty: In other words, where a loss sufficient to be regarded as within the purview of (a)(4) or (a)(6) occurs, it is the occasion rather than the precise kind of reconditioning done that determines whether the particular outlay involves "ordinary and necessary expenses" or "losses." Any other view requires a determination in case of each serious fire which comes short of total destruction of just the extent of damage from that casualty which involves a capital expenditure to restore it and which involves a mere ordinary repair. We think the statute contemplates no such difficult classification, but places damage due to casualty in the sense we have used that term in the category of "losses." Moreover, a replacement of damage from a devastating fire while perhaps a "necessary" expense cannot be regarded as an "ordinary" one. "Ordinary * * * expenses" in the most natural meaning of the words are those due to wear and tear and trifling1911 accidental causes. We are of the opinion that the expenditures here made in the restoration of the dock proper come squarely within the principles laid down above and constitute replacements rather than repairs. Even conceding, as the petitioner contends, that the restored dock had no more utility value to the petitioner than that which had been destroyed and even assuming that the reconstruction could have been done in the same manner in every respect as the original construction, we do not understand that this would make the reconstruction cost deductible. What occurred was that the petitioner lost a capital asset and now has another in its place. The cost of the asset lost is a proper deduction, which we understand is being allowed in the conceded amount of $40,005, and the cost of the new asset should be capitalized in the amount of $83,890. Cf. Ben Baer,12 B.T.A. 1060">12 B.T.A. 1060; Joseph E. Hubinger, supra; and Hubinger v. Commissioner, supra.The cases of Illinois Merchants Trust C., Executor,4 B.T.A. 103">4 B.T.A. 103, and 1912 J. W. Forgeus,6 B.T.A. 291">6 B.T.A. 291, on which much reliance is placed by the petitioner, are distinguishable from the case at bar, in so far as deductions there allowed are concerned, on the ground of the difference in character of expenditures and the circumstances under which made. And much that is said above applies with equal force to the item of $118,800, though a slightly different situation exists because of the character of that which was destroyed. The back area, which consisted of natural original clay earth, was in effect as much a part of the dock as the portion constructed of wood, steel, stone, etc., 459 though as to the former we have no construction costs, whereas this is not true as to the latter. It may be merely a fortunate circumstance that this land could be availed of for dock purposes without cost other than for the land itself, and it may be equally unfortunate that the petitioner lost through a casualty that which was necessary to be replaced through new capital construction, but we find no provision in the statute which would allow a deduction on account of damage to property other than on the basis of the cost or March 1, 1913, value1913 of the property damaged. Whatever cost or March 1, 1913, value was applicable to the back area was perhaps small as compared with the reconstruction cost, but in any event no showing was made in this respect. Further, we are unable to agree with petitioner that the restoration of this back area was merely an incidental repair. In effect what it did, in the restoration work, was to build a new back area in the same sense that it would have been required to do had this been low ground when the original dock was built. Piles were sunk, a concrete mat was placed over the entire area, and the concrete crib under the back fill was reinforced at a cost in the respective amounts of $48,600, $43,640, and $24,160. In our opinion, these expenditures can not be viewed other than of a capital nature. The amount of $2,200 expended for the new sewer is of course a replacement and therefore should be capitalized. 3. The next issue presented relates to the treatment to be given the receipt by the petitioner in the fiscal year ended April 30, 1921, of $70,863.88, on account of a settlement with certain railroads. In short, what occurred was that from about 1904 or 1905 petitioner was seeking1914 relief on account of certain alleged discriminatory practices on the part of the railroads, wherein the railroads were either performing or causing to be performed switching services for petitioner's competitors without charge or were making an allowance to them when they performed the service themselves, whereas similar treatment was not accorded petitioner. In 1911, on the basis of a complaint filed by the petitioner, the Interstate Commerce Commission found that the discriminatory practice existed, but left open the question of reparation to be awarded. Subsequent hearings were held before the Commission and finally in 1917 the Commission entered an order requiring the railroads to pay the petitioner the cost of rendering the service from 1905 to 1914, namely, $139,736.98. The railroads, however, refused to pay and the petitioner instituted suits to enforce collection, but before the suits came to trial they were compromised in 1920 through the payment by the railroads to the petitioner of $70,863.88. The contention of the Commissioner is that the entire amount is taxable income in the year when received as compensation for service performed in prior years, which compensation1915 was not finally fixed and determined as a definite liability 460 until the year when received, whereas the petitioner contends that the amount received was not taxable income, but rather a partial reimbursement for the cost of expenditures made by the petitioner for the account of the railroads. In the first place, we are unable to agree with petitioner that the expenditures for which it was reimbursed were other than its own expenses. It is, of course, true that the railroads were finally required to pay an amount as an award of damages for a discriminatory wrong which was measured by the expenditure made, but this does not necessarily make the expenditure that of the railroads. It was the petitioner who incurred and paid the expense of spotting its cars for the purpose of carying on its business, and the amount so expended was treated by it as an ordinary business expense. That because of the discrimination then being practiced by the railroads a cause of action arose in favor of the petitioner through which the amount here in question was recovered does not, in our opinion, mean that the petitioner was reimbursed for an expense which it had made on behalf of the railroads, 1916 but rather that the railroads committed a wrong through discriminatory practice and that the award of damage on account of such wrong was measured by the expenditure which the petitioner had made. And when we come to consider the taxability of the amount recovered and, if taxable, when it should be taxed, we find it difficult to distinguish the situation presented from that considered in Burnet, Commissioner v. Sanford & Brooks Co.,282 U.S. 359">282 U.S. 359; in fact, the petitioner relies on that case as decided by the Circuit Court of Appeals (Sanford & Brooks Co. v. Commissioner, 35 Fed.(2d) 312) as authority for the proposition that the amount recovered is not taxable income, though, at time briefs were filed, the decision of the Supreme Court which reversed the Circuit Court of Appeals had not been rendered. As shown in the aforementioned case, Sanford & Brooks Company was engaged from 1913 to 1915 in carrying out a Government contract for dredging the Delaware River. During those years it included in gross income for each year the payments made to it under the contract and deducted the expenses paid in performing the contract. 1917 In 1915 work under the contract was abandoned and in 1916 suit was brought to recover for a breach of warranty of the character of the material to be dredged. Recovery was finally had in 1920 upon the contract and was "compensatory of the cost of the work of which the Government got the benefit." The court, in deciding that the entire amount received in 1920 should be taxed as income for that year, said: That the recovery made by respondent in 1920 was gross income for that year within the meaning of these sections cannot, we think, be doubted. The money 461 received was derived from a contract entered into in the course of respondent's business operations for profit. While it equalled, and in a loose sense was a return of, expenditures made in performing the contract, still, as the Board of Tax Appeals found, the expenditures were made in defraying the expenses incurred in the prosecution of the work under the contract, for the purpose of earning profits. They were not capital investments, the cost of which, if converted, must first be restored from the proceeds before there is a capital gain taxable as income. See Doyle v. Mitchell Brothers Co., supra, p. 185. 1918 That such receipts from the conduct of a business enterprise are to be included in the taxpayer's return as a part of gross income, regardless of whether the particular transaction results in net profit, sufficiently appears from the quoted words of § 213(a) and from the character of the deductions allowed. Only by including these items of gross income in the 1920 return would it have been possible to ascertain respondent's net income for the period covered by the return, which is what the statute taxes. The excess of gross income over deductions did not any the less constitute net income for the taxable period because respondent, in an earlier period, suffered net losses in the conduct of its business which were in some measure attributable to expenditures made to produce the net income of the later period. That is, it was immaterial that no net profit was involved of an excess of the amount received under the judgment over the expenses paid, and this fully answers the contention of the petitioner that "no gain or profit could arise from such a transaction unless and until the amount received should exceed the amount paid out." While it is only "net income" as determined1919 on an annual basis that is subject to tax, "net income" as a specific item is not set out in the statute, but rather is a derivative item arrived at under the Revenue Act of 1918 as the difference between the items to be included in gross income and the deductions allowable therefrom. In view of the broad definition of gross income as set out in section 213(a) of the Revenue Act of 1918 to include "gains or profits and income derived from any source whatever" and the definition of income as laid down in Eisner v. Macomber,252 U.S. 189">252 U.S. 189, to include the "gain derived from capital, from labor, or from both combined," we do not think it can be doubted, as the court said in the Sanford & Brooks case, that the recovery by the petitioner from the railroads constituted an item to be included in gross income. The cause of action through which recovery was made was a discriminatory wrong, but there was a discriminatory wrong because of the use of labor and the expenditure of capital by the petitioner without compensation therefor when its competitors either received payment from the railroads for rendering the service or had the service rendered for them without charge. 1920 Certainly, in the case where a competitor was paid for rendering the service, the amount received would have been includable in gross income, that is, would have constituted income, in the year in which it was received or accrued, and the expenditures made in rendering such services were ordinary and necessary expenses in the year in 462 which paid or incurred. We do not think a different rule can be applied to the petitioner. Of course, it may be desirable that income be balanced by the expenditures which produce such income to the end that only net income from a given undertaking may be taxed, but as the Supreme Court has said on many occasions (Burnet v. Sanford & Brooks Co., supra;Fawcus Machine Co. v. United States,282 U.S. 375">282 U.S. 375; and Burnet v. Thompson Oil & Gas Co.,283 U.S. 301">283 U.S. 301, the scheme of taxation with which we are concerned is predicated upon annual periods and therefore it may well happen that expenses incident to the production of income will fall in one year and the income will not be received until another year. Under such circumstances, even though the net result, if combined in a single taxable1921 period, might be a loss, this would afford no reason for relieving the taxpayer from tax for the year in which income was received. The income here in question was received in 1920, but since the petitioner kept its books and rendered its returns on the accrual basis the question remains as to whether it can be said that the amount received had accrued prior to its receipt and therefore must be accounted for as income prior to 1920. The petitioner says that the right to the payment received in 1920 arose when the switching was done and was definitely determined in 1911 when the Interstate Commerce Commission entered its first order to the effect that the railroads were engaging is discriminatory practice to the detriment of the petitioner. With this we can not agree. The most that can be said of what occurred in 1911 is that the Interstate Commerce Commission then found that the discriminatory practice existed and issued an order commanding the railroads to desist from such practice, but left open the question as to reparation to be awarded on account of such damage as may have been suffered. It was not until 1917 that the Commission entered its final decree fixing the damage1922 suffered and ordering the railroads to pay to the petitioner the cost of the services rendered by it. This order was not self-executing; if the railroads refused to pay, which they did, the petitioner's remedy was an action at law wherein the Commissioner's findings were prima facie, but not conclusive, evidence, subject to be overthrown by countervailing evidence. Meeker & Co. v. Lehigh Valley Railroad Co.,236 U.S. 412">236 U.S. 412, and Atchison, Topeka & Santa Fe Railroad Co. v. Spiller,246 Fed. 1. Since the railroads refused to pay, the petitioner brought suits for collection, but before the suits came to trial a compromise was effected through which payment was made to the petitioner in 1920 of approximately one-half of the amount fixed by the Commission in full satisfaction of the damage suffered. Under such conditions, we are of the opinion that it was not known until 1920 what amount, if any, would be 463 recovered and therefore no basis for accrual existed prior to that time. United States v. Anderson,269 U.S. 422">269 U.S. 422, and 1923 Lucas v. American Code Co.,280 U.S. 445">280 U.S. 445. Whatever may be the rule laid down in Park v. Gilligan,293 Fed. 129, on which the petitioner relies, we think it is to be distinguished from the case at bar, on the ground that the amount there in controversy was found by the court to have been an accrued chose in action as an asset on March 1, 1913, and therefore the conversion of this asset into cash in 1916 could not be considered income in 1916 of the cash then received, whereas we are of the opinion that no amount had accrued in the case at bar on March 1, 1913. In view of the foregoing, we are of the opinion that the entire amount received by the petitioner from the railroads constituted income to it; that no basis for accrual of such amount existed prior to 1920, and therefore the action of the Commissioner in seeking to include the entire amount in gross income in 1920 should be sustained. 4. In the final issue the petitioner questions the correctness of the Commissioner's action in adjusting invested capital in each of the years before us in the manner provided in articles 845 and 845(a) of Regulations 45 on account of income and profits*1924 taxes due and payable for the respective prior years. The Board has heretofore held that the validity of the regulations in question was made effective by section 1207 of the Revenue Act of 1926 (Russel Wheel & Foundry Co.,3 B.T.A. 1168">3 B.T.A. 1168), and the same regulations were recently upheld by the Supreme Court in Fawcus Machine Co. v. United States, supra.Reviewed by the Board. Judgment will be entered under Rule 50.SMITH dissents.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622498/	Appeal of HEWITT RUBBER CO.Hewitt Rubber Co. v. CommissionerDocket No. 325.United States Board of Tax Appeals1 B.T.A. 424; 1925 BTA LEXIS 2929; January 29, 1925, decided Submitted December 3, 1924. 2929 An interest-bearing demand promissory note of a responsible and solvent maker actually and in good faith paid in for stock of a New York corporation, constitutes invested capital, to the extent of its actual cash value at the time paid in, within the meaning of section 326(a)(2) of the Revenue Act of 1918, notwithstanding the provision of section 29 of the New York Stock Corporation Law, that a note may not be received in payment of any installment, or any part thereof, due or to become due on any stock of such corporation, without personal liability of the officers or directors of the corporation receiving such note, for the amount thereof with interest. The note for $1,000,000 received by this taxpayer on April 1, 1918, for stock, had an actual cash value on that date of the full amount thereof. E. C. Gruen, C.P.A., for the taxpayer. J. D. Foley, Esq. (Nelson T. Hartson, Solicitor of Internal Revenue) for the Commissioner. LITTLETON425 Before GRAUPNER, LITTLETON, and SMITH. This appeal involves income and profits taxes for the year 1918 in an alleged amount of $45,821.66. The deficiency letter mailed to the taxpayer on August 7, 1924, covered2930 the years 1918 to 1921, inclusive. There appears an additional tax of $85.68 for 1919, an overassessment of $74.95 for 1920, and no deficiency in tax for the year 1921. Only the tax for 1918 is in dispute. There is little dispute as to the facts in the case. The answer of the Commissioner admits practically all of the material facts alleged. The issue presented is one of law. Taxpayer contends that a demand promissory note for $1,000,000 bearing 6 per cent interest given in good faith on April 1, 1918, by a responsible and solvent maker, who was also the president and a director of taxpayer, for stock, constituted invested capital to the extent of its face value from the date paid in, as tangible property bona fide paid in for stock, within the meaning of section 326(a)(2) of the Revenue Act of 1918. Taxpayer makes two alternative contentions: (1) If the note should be held not to constitute invested capital from the date paid in, as contended by the Commissioner, the interest paid thereon during the year in the amount of $27,670.50 does not constitute taxable income of the corporation as defined in sections 232 and 233 of the Revenue Act of 1918, and should be considered2931 as a sum paid to apply upon the purchase price of the stock and effect a purchase thereof at a price above par; (2) if the Commissioner's action in computing taxpayer's invested capital from the dates of actual payments made on the note given for the stock is approved, the sum of $1,000 paid on the granting of an option to purchase should be applied as the first payment on the stock issued. The Commissioner controverts the contentions made by the taxpayer and insists that under section 29 of the Stock Corporation Law of New York promissory notes are not acceptable in payment for capital stock of a corporation; therefore, there is properly includable in invested capital only the amounts actually paid on said note for stock from the dates of actual payment thereof, and that interest payments made upon said note constitute gross income to the corporation. From the admissions contained in the answer, oral testimony, and exhibits introduced by taxpayer the Board makes the following FINDINGS OF FACT. The taxpayer is a corporation organized and existing under the laws of the State of New York, with its principal office at Buffalo, New York. As of January 1, 1918, taxpayer had2932 outstanding 10,000 shares of common stock, par value $100 each, of which H. H. Hewitt, its president, owned 7,429 shares. The total authorized capital then was $1,500,000, all common. Early in 1918 the authorized capital was increased to $3,000,000, being $2,000,000 of common and $1,000,000 of 8 per cent cumulative preferred stock. At a meeting of the directors held on February 26, 1918, an option was given to H. H. Hewitt, president and a director, granting to him 426 for two years the exclusive right to purchase any part or all of the unissued capital stock for cash at par, as follows: Whereas, by appropriate action the capital stock of this corporation is being increased from $1,500,000 to $3,000,000 t consist of $2,000,000 Common Capital stock (being the present authorized capital stock, viz; $1,500,000 and $500,000 of the new stock) and $1,000,000 eight per cent (8%) cumulative preferred stock (being the balance of the new stock). Whereas, all the stockholders of this Corporation have duly waived in writing their rights to subscribe to any part of said $2,000,000 of stock not yet issued, and Whereas, H. H. Hewitt has asked this Board to grant him an option2933 to purchase all of said unissued stock for cash, at par, to continue for a period of two years from this date, and in the opinion of this Board, it is for the best interests of this Company to grant him such option. Now, therefore, be it Resolved that in consideration of the payment of $1,000 on account of such option (receipt of which is hereby acknowledged by this Corporation) an option is hereby given for a period of two years from the date hereof to H. H. Hewitt, his heirs and assigns, to purchase for cash, at par the entire amount of two million dollars ($2,000,000) of the unissued stock of this Corporation, or any part thereof, with the understanding that such payment of $1,000 already made by him shall be applied upon the purchase price of any stock purchased by him, his heirs or assigns under the terms of this option. The consideration for this option was $1,000 paid by H. H. Hewitt to be applied against any purchase of stock made by him. Under this option H. H. Hewitt purchased on April 1, 1918, all of the unissued 8 per cent cumulative preferred stock, consisting of 10,000 shares of a par value of $1,000,000, for which he gave the taxpayer his promissory note payable2934 on demand and bearing 6 per cent interest. This note was accepted by the corporation, and Certificate No. 1 for 10,000 shares of fully paid 8 per cent cumulative preferred stock was issued to H. H. Hewitt under date of April 1, 1918, and registered with the corporation's transfer agent on April 15, 1918. At the time of issuance of this stock to H. H. Hewitt and the receipt by the corporation of the note for $1,000,000 the following entry was made in the general journal of taxpayer: Debit.Credit.Bills receivable$1,000,000To capital stock$1,000,000Purchase of 10,000 shares preferred stock to Mr. H. H. Hewitt. During the year 1918, H. H. Hewitt disposed of certain shares of this stock, and on December 31, 1918, he held 7,132 of the original 10,000 shares. The ledger account, notes receivable, representing this note, shows credits as follows, being the monthly summary postings from the cash book: April 30$4,300May 3161,000June 3023,000July 3152,000August 314,500September 3010,000November 308,500December 31836,300427 The note of $1,000,000 was actually paid and retired during the2935 year 1918, by payments shown in the cash book, as follows: April 25$4,300May 72,000May 83,500May 13500May 1650,000May 27500May 314,500June 135,000June 186,000June 275,500June 284,000June 293,000July 11$2,000July 2950,000August 192,500August 222,000September 2510,000November 75,500November 163,000December 71,000December 111,000December 31834,200Total1,000,000H. H. Hewitt paid the taxpayer interest on this note as follows: July 1, 1918, $15,000; September 30, 1918, $12,670.50; total, $27,670.50. H. H. Hewitt was at the time of making this note and at all times thereafter, solvent and financially responsible and able to pay the note in full on demand at any time from its date. Regular quarterly dividends on this stock of $2 per share, or $20,000, were authorized by the directors, and paid July 1 and October 1, 1918, and January 1, 1919. No purchases of stock other than the 10,000 shares hereinbefore mentioned were made by Mr. Hewitt under the option, and the $1,000 paid for the option was refunded by taxpayer on December 31, 1920, after the expiration of the option. 2936 At the annual meeting of the stockholders held on January 20, 1919, the following resolution was passed: "Resolved, * * That each and every official act and procedure taken and had by the directors of this company and by its elective officers since the last meeting of the stockholders be, and the same are, hereby in all respects, approved and confirmed." The Commissioner, in computing the addition to invested capital from date of payments, determined the amount of $79,780.78 by using the dates shown in the ledger account, whereas the correct addition to invested capital predicated upon actual payments from the date received, as shown by cash book, is $84,016.44. The equated value of the $1,000 payment for the option is $753.42. DECISION. The deficiency determined by the Commissioner is disallowed. OPINION. LITTLETON: The first question to be decided in this appeal is whether the taxpayer is entitled, under section 326(a)(2) of the Revenue Act of 1918, in view of the provisions of the statutes of the State of New York, to have the face or full value of an interest-bearing demand promissory note given by a responsible and solvent maker in payment for an original issue2937 of capital stock included in its invested capital from the date of the note or to have included therein only the payments made on such note from the dates of actual payments. 428 The facts surrounding the subscription of H. H. Hewitt for the 10,000 shares of stock of the Hewitt Rubber Co. and the method and manner of payment therefor, are not in dispute. Section 326(a)(2) of the Revenue Act of 1918 provides - That as used in this title the term "invested capital" for any year means: (2) Actual cash value of tangible property, other than cash, bona fide paid in for stock or shares at the time of such payment * * . Section 325(a) of the same Act provides - That as used in this title the term "tangible property" means stocks, bonds, notes, and other evidences of indebtedness, bills and accounts receivable, leaseholds, and other property other than intangible property. The sections of the Revenue Act of 1918 quoted, defining what shall constitute invested capital, were intended solely for the purpose of computing the amount of war-profits and excess-profits tax to be paid by corporations, and to apply to all corporations alike where cash or such property is 2938 bona fide paid in for stock or shares. The only limitation which Congress has placed upon the inclusion in invested capital of cash or property (which includes notes) paid in for stock or shares, is that the cash or property must be bona fide paid in. So in this appeal we have only to determine what Congress meant by the use of the words bona fide paid in.The Commissioner admits the financial responsibility of H. H. Hewitt; admits that he was at the time of making the note for $1,000,000 and at all times thereafter able to pay the amount thereof on demand, and that the note was worth its face value. He does not deny that the purchase of this stock by Mr. Hewitt was a real transaction, or that the purchase by Mr. Hewitt and the sale by the corporation was in good faith and without fraud or collusion. It is contended by the Commissioner that bona fide as used in section 326(a) of the Revenue Act is equivalent to and means legally. So he contends that Congress in using the words "bona fide paid in" authorized the inclusion in invested capital of corporations only property (including notes) legally paid in; such property as is authorized or2939 sanctioned by the law of its domicile to be received by corporations in payment for stock or shares; that if the acceptance of the property (note) by the corporation in payment for stock is not strictly in accordance with the law of the State it is not "bona fide paid in" within the meaning of section 326(a) of the Revenue Act of 1918. For this interpretation the Commissioner relies upon section 29 of the Stock Corporation Law of the State of New York in support of his disallowance from invested capital of taxpayer of the actual value of the note for $1,000,000 from April 1, 1918, and the inclusion of only actual cash payments thereon from the dates paid. Before discussing the provisions of the New York Stock Corporation Law we will take up the interpretation of the words "bona fide paid in" used in section 326(a)(2) of the Revenue Act of 1918. This section of the law is in no wise ambiguous, and the language used therein is to be construed in its ordinary and usual sense. To say that the words "bona fide" as used in the Revenue Act mean "legally" would be giving them a restricted meaning which we do not think Congress intended. "Bona fide" is synonymous with 429 "really, 2940 truly, actually, sincerely, in good faith, upon honor." The word "legal" is synonymous with "lawful, legitimate, legalized, authorized or sanctioned by law, according to law." (Soule's Dictionary of English Synonyms). Congress must be presumed to have known when enacting section 326(a) that corporations are creatures of and regulated by statutes, and that in most, if not in all, States various restrictions as to the issuance of stock are imposed by statute. If it had been the intention of Congress that the invested capital of corporations for the purpose of the excess-profits tax should be determined strictly according to the laws of the various States, it would have used the words "legally paid in" instead of "bona fide paid in." In the case of Ware v. Hylton, 3 U.S. (Dallas) 199, the court had before it for consideration a provision of a treaty between the United States and Great Britain, and Mr. Justice Chase, at page 240, said: But the debts contemplated were to be bona fide debts, that is, bona fide contracted before the peace, and contracted with good faith, or honestly and without covin, and not kept on foot fraudulently. Bona fide is2941 a legal technical expression, and the law of Great Britain and this country has annexed a certain idea to it. It is a term used in statutes in England and in acts of assembly of all the States, and signifies a thing done really, with a good faith, without fraud or deceit or collusion or trust. We think this language of the Supreme Court is applicable to the meaning the words bona fide as used by Congress in section 326(a)(2) of the Revenue Act of 1918. Bouvier's Law Dictionary defined "bona fides" as "good faith, honestly, as distinguished from mala fides." This view is strengthened by the fact that Congress used the words "bona fide paid in" not only in respect to tangible and intangible property, but in respect to "cash paid in." The fact that Congress intended to allow as invested capital only actual cash "bona fide paid in" clearly indicates that Congress intended that cash and property in reality and in good faith paid in for stock should be included in invested capital. In the case of Harriman National Bank v. Palmer, (1916), 93 Misc. 431">93 Misc. 431, 158 N.Y.S. 111">158 N.Y.S. 111, the court said: The policy of the law is that subscriptions to corporate stock2942 shall be bona fide and that the interests of corporations and of those who, in good faith, contribute to their capital be conserved. It follows, therefore, that neither a promise to subscribe nor a conditional subscription is valid. The evidence introduced by taxpayer clearly shows that the sale of the 10,000 shares of 8 per cent cumulative preferred stock by the taxpayer and the purchase thereof at par by H. H. Hewitt and paid for by his demand note for $1,000,000 was a real transaction, entered into in good faith, without fraud, deceit, or collusion; that the stock was actually and in good faith issued by the corporation to Mr. Hewitt; that the $1,000,000 demand note was carried on the books of taxpayer as an asset; that the regular quarterly dividends were paid on the stock, and that the entire note with interest was paid within the year. There is not a scintilla of evidence in the record to indicate that the purchase and sale of the stock was mala fide; not a real transaction, or that it was not entered into in good faith, and for the best interests of the taxpayer. 430 We reach the conclusion that Congress intended by the language used in section 326(a) 2943 that for the purpose of computing the profits tax, notes in reality and without fraud or collusion paid in for stock should be included in invested capital unless such sale of stock is rendered absolutely void by positive statute. We do not believe that the New York State statutes relating to the issuance and sale of stock in any way conflict with the conclusion reached because: (1) Congress has laid down a rule in clear and unambiguous terms for determining invested capital of corporations and where all requirements of that rule are met, a State statute imposing certain restrictions upon corporations for the purpose of enforcing full payment for its stock, designed and intended to serve as entirely different purpose, can not operate to nullify the plain provisions of the Federal statute. (2) The statutes of the State of New York do not make void a bona fide sale of an original issue of stock by a corporation paid for by a promissory note of a responsible and solvent maker. They were intended merely to circumscribe the transaction with certain restrictions to prevent fictitious sales, to enforce full payment of subscriptions and to make the directors and officers2944 personally liable for the protection of stockholders and creditors of the corporation. Section 29 of the New York Stock Corporation Law provides: Liability of directors for loans to stockholders. - No loan of moneys shall be made by any stock corporation, except a moneyed corporation, or by any officer thereof out of its funds to any stockholder therein, nor shall any such corporation or officer discount any note or other evidence of debt, or receive the same in payment of any installment or any part thereof due or to become due on any stock in such corporation, or receive or discount any note, or other evidence of debt, to enable any stockholder to withdraw any part of the money paid in by him on his stock. In case of the violation of any provision of this section, the officers or directors making such loan, or assenting thereto, or receiving or discounting such notes or other evidences of debt, shall, jointly and severally, be personally liable to the extent of such loan and interest, for all the debts of the corporation contracted before the repayment of the sum loaned, and to the full amount of the notes or other evidences of debt so received or discounted. with interest from2945 the time such liability accrued. A reading o" this section discloses that its purpose is not to make void the issuance of stock for an interest-bearing demand promissory note of a responsible and solvent maker, or on a credit basis. Installment payments are specifically permitted by section 53. The purpose of section 29 is to enforce the obligation of stockholders to make good their subscriptions and to keep them good at all times and to make the officers and directors also personally liable for the protection of other stockholders and creditors of the corporation. This section can no more be held to forbid the use of such promissory notes as a part of invested capital of the corporation than it can be held to withdraw from the corporation a part of its invested capital in the event the stockholder borrows from the corporation in violation of such section. Since Congress has specifically provided that "Notes, and other evidences of indebtedness, bills and accounts receivable" (which include an obligation of a stockholder to pay) constitute invested capital, a section designed to protect and enforce that obligation by making certain transactions illegal can not be 431 2946 construed as taking away from the stock the quality of invested capital merely because additional safeguards are thrown around the ultimate payment of the obligation so entered into. If the officers of a New York corporation permitted a stockholder to borrow, contrary to section 29, the entire amount he had originally paid for his stock taking his note therefor (for which they would become personally liable), charging him with such loan on the books of the corporation, this fact would not deprive the corporation of any portion of its invested capital. How, then, can it be successfully argued that a transaction of exactly similar character, except that it relates to the original issue of the stock, can be held to deprive the corporation of a portion of its invested capital? In the instant appeal the capital stock certificate for 10,000 shares was actually issued on April 1, 1918. In the general journal of the taxpayer "Bills Receivable" was debited with $1,000,000 on that date, and capital stock credited with a like amount accompanied by the following notation, "Purchase of 10,000 shares preferred capital stock to Mr. H. H. Hewitt" - all done with the assent and upon instructions2947 of the purchaser who was president and a director of taxpayer, and with the assent and knowledge of the other officers and directors. Subsequently and before the end of the taxable year the entire amount was paid. It is obvious, therefore, that under section 29 Mr. H. H. Hewitt was not only liable as the purchaser of the stock for the $1,000,000, but, together with the other officers and directors, was liable as an officer and director for the full amount with interest and for all debts of the corporation contracted before payment. The fact of complete payment of the $1,000,000 within the year proves the good faith of the transaction at the time of giving the note. No cases are cited and we find none specifically holding that a sale of the character here involved is void, when entered into in good faith, both parties thereto having performed acts to effectuate and carry out the contract, and the purchaser having made payments on the note for stock actually issued. In Furlong v. Johnston,209 App.Div. 198, 204 N.Y.S. 710">204 N.Y.S. 710-716, it is stated: It does not necessarily follow that, when the law prohibits an act, a contract made in contravention of it2948 may be avoided. The Legislature may impose other penalties than declaring such contract void. Harris v. Runnels, 12 How.(U.S.) 79, 13 L. Ed. 901">13 L.Ed. 901; Pratt v. Short,79 N.Y. 437">79 N.Y. 437, 35 Am. Rep. 531">35 Am.Rep. 531. There are other penalties imposed here. An officer or director of a corporation, who issues stock contrary to law, may be punished criminally (Penal Law, sections 662, 664, subd. 3), and may become personally liable for receiving or discounting a note in payment for an installment due on stock (Stock Corporation Law, sec. 29), or in certain corporations, for debts incurred while the corporation is doing business before its capital stock shall have been fully paid (Id. sec. 20 [as added by Laws 1912, c. 351, sec. 1]). * * Such notes are held valid and collectible by receivers of insolvent corporations for the benefit of creditors (Farmers' & Mechanics' Bank v. Jenks, 48 Mass. [7 Metc.] 592; Finnell v. Sanford, 56 Ky. [17 B. Mon.] 748); by persons taking them for value without notice (Willmarth v. Crawford,10 Wend. 341">10 Wend. 341; Ogdensburgh, C. & R.R. Co. v. Wolley, 40 New York 118; 2949 Washer v. Smyer,109 Tex. 398">109 Tex. 398, 211 S.W. 985">211 S.W. 985, 4 A.L.R. 1320">4 A.L.R. 1320); and by holders with notice and by the corporation itself (Magee v. Badger,30 Barb. 246">30 Barb. 246, affd. 34 N.Y. 247">34 N.Y. 247, 90 Am.Dec. 691; Borough Bank of Brooklyn v. Lamphear,154 App.Div. 177, 138 N.Y.Supp. 864; Vermont Cent. R. Co. v. Clayes,21 Vt. 39; Stoddard 432 v. ShetucketFoundry Co.,34 Conn. 542">34 Conn. 542; Goodrich v. Reynolds,31 Ill. 490">31 Ill. 490, 83 Am.Dec. 240; First National Bank of Ottumwa v. Fulton, 156 Iowa, 734, 137 N.W. 1019">137 N.W. 1019); although sometimes resort is had to circuity of action (First National Bank of Baldwinsville v. Cornell,8 App.Div. 427, 40 N.Y.Supp. 850). See, also, Cook, Corporations (8th Ed.) section 20; Fletcher, Cyc. Corporations, section 3513. The note so taken is regarded as another form of subscription or new promise, and an extension of credit by the corporation to the subscriber. Cook, Corporations, supra; Fletcher, Cyc. Corporations, supra. At common law it was not illegal to give credit for stock issued. 2950 Wheeler v. Millar, supra; 14 C.J. 439. If prohibited now, it is not because it is malum in se. First National Bank v. Cornell, supra.At best the note would not be wholly void, but voidable only. Weeks v. Bridgman,159 U.S. 541">159 U.S. 541, 547, 16 Sup.Ct. 72, 40 L. Ed. 253">40 L.Ed. 253. Again, at page 712, it is stated: It is not fully settled in this State just what effect the violation of such statutory provisions has on the contract. The provisions in statutes and in constitutions relative to the issuance of stock differ somewhat in language in the several jurisdictions, but in general are the same in effect. Generally speaking, a note is personal property, particularly the note of a solvent person, and in many jurisdictions is held valid when given on a subscription for stock. Pacific Trust Co. v. Dorsey,72 Cal. 55">72 Cal. 55, 12 Pac. 49; Meholin v. Carlson, 17 Idaho, 742, 107 Pac. 755, 134 Am. St. Rep. 286">134 Am.St.Rep. 286; Schiller Piano Co. v. Hyde,39 S.D. 74, 162 N.W. 937">162 N.W. 937; 2951 German Mercantile Co. v. Wanner,25 N.D. 479, 142 N.W. 463">142 N.W. 463, 52 L.R.A.(N.S.) 453; 14 C.J. 439; Cook, Corporations (8th Ed.) section 20. * . The object of the statute and the result to be obtained are that the corporation shall become vested with assets, so that strangers dealing with it and stockholders may be protected. First National Bank v. Fulton, supra.Although the statute may use the word "cash," the form of the payment, either the 10 per centum on subscription or the whole amount, is unimportant. An equivalent is sufficient. Matter of Staten Island Rapid Transit R. Co., 37 Hun, 422, affd. 101 N.Y. 636">101 N.Y. 636; Id., 38 Hun 381">38 Hun 381; Rodgers v. H. S. Kerbaugh, Inc., (Sup.) 190 N.Y.Supp. 245; Lee v. Cutrer,96 Miss. 355">96 Miss. 355, 51 South. 808, 27 L.R.A.(N.S.) 315, Ann.Cas. 1912B, 478; People v. Stockton & V.R. Co.,45 Cal. 306">45 Cal. 306, 13 Am. Rep. 178">13 Am.Rep. 178. * * A mere promise or conditional agreement to subscribe for capital stock has been held void. 2952 General Electric Co. v. Wightman,3 App.Div. 118, 39 N.Y.Supp. 420. It may be that, as between the corporation and the subscriber for original shares, there being nothing but a bare subscription, without the equivalent of a cash payment, the subscription agreement is void (New York & Oswego M.R. Co. v. Van Horn,57 N.Y. 473">57 N.Y. 473; Van Schaick v. Mackin,129 App.Div. 335, 113 N.Y.Supp. 408), * . A note of no value, or of doubtful value, would not constitute assets; but in this case the maker was responsible. The Commissioner calls attention to section 53 of the New York Stock Corporation Law which provides that "every subscriber shall pay in cash 10 per cent upon the amount subscribed by him," and to section 55, which provides that "no corporation shall issue either shares of stock or bonds, except for money, labor done, or property actually received, for the use and lawful purpose of such corporation." Section 53, which requires the payment of 10 per cent of the amount subscribed is immaterial in this case. Ten per cent of the purchase price was paid within four months, and the full amount of the note given for the2953 stock was paid within the year. A subsequent payment satisfies this section. Black River & Utica R. Co. v. Clarke, 25 N.Y. 208; Ogdensburgh C.R. Co. v. Wolley,40 N.Y. 118">40 N.Y. 118; Excelsior Grain Binder Co. v. Stayner, 25 Hun, 91; Primos Chemical Co. v. Fulton Steel Co.,266 Fed. 937; Miles v. Friedman,181 N.Y.S. 285">181 N.Y.S. 285, at page 294. 433 In the case of Jeffery v. Selwyn,220 N.Y. 77">220 N.Y. 77, 82; 115 N.E. 275">115 N.E. 275, 276, (6. A.L.R., 111), it is said: Subscriptions not accompanied by immediate cash payments have not, however, been held void. A subsequent payment will suffice, even though it is made through the medium of services rendered the corporation. Beach v. Smith,30 N.Y. 116">30 N.Y. 116. The statute does not prohibit or forbid and other mode of subscription, and this court said in Buffalo & J.R.R. Co. v. Gifford,87 N.Y. 294">87 N.Y. 294, 300 that "We are inclined to the opinion that it was not intended by this section to prescribe a fixed statutory mode of making a subscription, and that any contract of subscription good and valid2954 at common law is still valid, notwithstanding this section." Likewise we are of the opinion that the provisions of section 55 of the New York Stock Corporation Law has no bearing on this case. Although a note was given the corporation actually received the money. The note had an actual cash value of $1,000,000 at the time paid in and satisfies section 326(a)(2) of the Revenue Act. We find nothing in the New York law which would make the stock issued in this case void. This was not a mere subscription but was a purchase of stock. The contract which this note represents violates no general principle of public policy and is in no sense what may be termed malum in se. First National Bank of Baldwinsville v. Cornell,8 App.Div. 427; 40 New York Supp. 850. The debt which the note of $1,000,000 represents, for which the stock was actually issued, was at all times fully collectible from Mr. Hewitt, the purchaser, and also as a director, as well as from the other officers and directors. Even though there might have existed as between the parties certain defenses in the event of refusal of the maker to pay and an attempt to recover on the note, 2955 the corporation nevertheless had as an asset a valid and enforceable account receivable for the stock issued from a responsible and solvent debtor, safeguarded by personal liability of the directors. Had taxpayer sold this note for $1,000,000, which it could have done, no question could now be raised as to the inclusion thereof in invested capital. In the event of insolvency the defense of illegality could not be availed of to defeat the rights of creditors. In order to exclude from invested capital a note given in good faith for stock issued, it is not enough to point to a defense which might be interposed as between the parties in the event of a suit on the note. It must be shown that the sale was void and not enforceable, or that the purchase of the stock and the giving of a note was in bad faith and for the purpose of evading the provision of the revenue law - neither of which is true in this case. We are therefore of the opinion under the facts in this appeal that the demand promissory note of H. H. Hewitt was tangible property bona fide paid in for stock issued to him; that it had an actual cash value of $1,000,000 at the time paid in, and constituted a part of2956 taxpayer's invested capital within the meaning of section 326(a)(2) of the Revenue Act of 1918. Since it is held that the note in question constituted invested capital from the date paid in for stock to the full amount thereof, the interest paid thereon constituted income to the taxpayer, and the $1,000 paid at the time of the option and refunded in 1920, is not a part of invested capital for 1918.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622499/	DUVIN COAL CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Duvin Coal Co. v. CommissionerDocket No. 22005.United States Board of Tax Appeals16 B.T.A. 194; 1929 BTA LEXIS 2621; April 25, 1929, Promulgated 2621 Deduction on account of exhaustion of capital amount invested in air shaft, main shaft, railroad, development, and right of way, determined. Attilla Cox, Esq., and E. J. Wells, Esq., for the petitioner. Bruce A. Lowe, Esq., for the respondent. GREEN 194 In this proceeding petitioner seeks a redetermination of its income taxes for the calendar year 1922, for which the Commissioner has determined the deficiency of $846.01. Petitioner alleges error on the part of the Commissioner in failing to allow adequate depreciation. 195 FINDINGS OF FACT. Petitioner is a corporation organized under the laws of the State of Kentucky, with its principal office at Providence, Ky. It owns and operates 1,710 acres of coal land located in Webster County, Ky. Operations were begun in May, 1922. With the machinery and equipment then installed, a production of 1,500 tons a day was possible. Subsequently, the machinery, equipment and development were increased so that by 1927, the mine was equipped to produce 5,000 tons a day, and was producing about 2,000 tons a day. On account of the existing conditions and the method of operation employed2622 by the petitioner, it was possible to recover only 4,500 tons of coal per acre. The recoverable reserve in the property amounted to 7,700,000 tons. During the year 1924, petitioner filed with the Bureau of Internal Revenue a Form E(3), in which it estimated an annual production of 300,000 tons, and a life of 25 years. There were produced from the mine in 1922, 56,000 tons; 1923, 150,000 tons; 1924, 292,000 tons; 1925, 380,000 tons; 1926, 400,000 tons. Prior to January 1, 1922, the following assets were purchased: Machinery and equipment$ 39,941.19Steel rails1,780.95Buildings4,855.76Lakes8,496.17Air Shaft12,694.48Main shaft17,665.35Railroad41,683.20Development4,143.84Right of way4,100.00During the year 1922, the following capital expenditures were made: Machinery and equipment$ 36,367.46Steel rails6,235.44Buildings11,374.95Railroad22,590.74These additions were entered on the ledger, by months, as follows: YearMachinery and BuildingsSteel railsRailroad Suppliesequipmentconstruction 1January$1,284.45$1,451.79$2,096.03$2,847.61February494.25924.19731.946,224.21March3,095.411,453.02514.82April290.282,373.808,863.71May5,322.291,000.00162.50June2,411.781,000.00$172.50July3,847.001,000.001,607.341,200.00August3,634.001,072.90367.52September4,232.001,099.252,988.08November5,160.00December6,596.001,100.002623 196 The Commissioner of Internal Revenue allowed depreciation at the rate of 10 per cent on machinery, 5 per cent on steel rails, 10 per cent of buildings, 5 per cent on lakes, 2 1/2 per cent on air shaft, main shaft, railroad, development, and right of way, and allowed depreciation on the additions made during 1922 at one-half of the above rates. Petitioner claimed for depreciation a rate of 10 per cent on machinery and equipment, 10 per cent on rails, 10 per cent on buildings, 5 per cent on lakes, air shaft, main shaft, railroad, development, and right of way. In the answer, the respondent admits that the average life of steel rails would not be more than 10 years. The life of the air shaft, main shaft, railroad, development, and right of way is the life of the mine. OPINION. GREEN: There appears to be no controversy as to the annual rates of depreciation on machinery and equipment, steel rails, buildings, and lakes, since the respondent has admitted, and we so find, that the annual rate of depreciation on steel rails is 10 per cent. A controversy does arise, however, in respect to2624 the computation of depreciation on additions made during the year. In support of its contention on this point, the petitioner submitted ledger sheets, which showed entries on various dates during the year of amounts included in the various accounts. In the case of machinery and equipment, buildings and steel rails, it is apparent from these accounts that the method employed by the Commissioner of allowing one-half the rate for a full year, which is equivalent to allowing the full rate for one-half year, works to the advantage of the petitioner and gives it a deduction in excess of that which would be allowed if depreciation were computed on each addition from the date entered. In the case of railroad construction, the advantage would be only slightly in favor of the petitioner, but this would not result in a material advantage, since the largest expenditure for the year was $8,045.08, made on April 30. In the case of railroad supplies, the expenditures were made in January and February, 1922. The ledger sheets merely show when the expenditures were made. They do not show when the machinery and equipment, buildings, rails or supplies were actually installed, erected or consumed. 2625 Under ordinary circumstances, depreciation does not start until the equipment has actually been installed and is ready for operation. It is admitted by the petitioner that operations did not start until May, 1922, and up to that time the petitioner was not engaged in actual business operations, having mined no coal. No information has 197 been submitted on this point, other than that operations started in May, 1922. We are, therefore, of the opinion that petitioner has failed to show that the Commissioner erred in computing depreciation on additions made during the year 1922. All that the statute requires is that the Commissioner make a reasonable allowance, and the record in this proceeding does not establish that he has not done this. There remains the question of the proper rate to be used in determining the exhaustion of capital expended for shafts, development, railroad, and right of way. Petitioner originally, and even as late as 1924, considered that the rate should be based upon a life of 25 years. The respondent, from the data submitted by the petitioner, determined that the rate should be based upon a life of 37 years. The petitioner now maintains that, 2626 in view of the information available in 1927, the life should be about 17 years. The witnesses for the petitioner have established that these assets, when in use and properly maintained, do not exhaust appreciably due to lapse of time, but exhaust only because of the fact that the mine exhausts. It is perfectly apparent that the exhaustion of the mine is not necessarily in equal annual amounts. Its exhaustion, during use, bears a direct relation to the mineral extracted each year. It is apparent to us that the exhaustion of the capital invested in these assets should be computed on a tonnage basis in the same manner that deduction for depletion is computed. The rate per ton should be based upon a reserve as of January 1, 1922, of 7,700.000 tons. Judgment will be entered under Rule 50.Footnotes1. Railroad construction account reduced by credit entry of $50.08. ↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622500/	WILLIAM F. HARRAH, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. MARIE E. HARRAH, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. L. G. MCDONALD, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. JULIUS C. KIRCHNER, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. C. K. ANDERSON, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. FREDERICK A. HASTINGS, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Harrah v. CommissionerDocket Nos. 21643, 25269, 25427, 25428, 33242, 38864.United States Board of Tax Appeals27 B.T.A. 1305; 1933 BTA LEXIS 1210; April 27, 1933, Promulgated 1210 1. The fair market value on March 1, 1913, of shares of American Wire Fabrics Companyheld upon the evidence to be $200 each. 2. The fair market value on July 1, 1919, of shares of American Wire Fabrics Companyheld upon the evidence to be $250 each. 3. The amount received in 1922 by petitioners, shareholders of American Wire Fabrics Company, in respect of each share, held in the circumstances to be part dividend and part sale price in amounts established by the evidence. Arnold R. Baar, Esq., Arthur R. Foss, Esq., and Florence L. Siverston, C.P.A., for the petitioners. Elden McFarland, Esq., for the respondent. STERNHAGEN 1305 The respondent determined deficiencies in the petitioners' income taxes for 1922, as follows: William F. Harrah, $3,929.64; Marie E. Harrah, $1,347.66; L. G. McDonald, $487.62; Julius C. Kirchner, $2,208.76; C. K. Anderson, $20,383.70; Frederick A. Hastings, $8,615.37. The controversy is as to the gain derived by each of the petitioners from a sale of his shares in the American Wire Fabrics Company, and this involves three issues of fact: (1) The fair market value on March 1, 1913, of such1211 of the petitioners' shares as were owned on that date; (2) the fair market value of the shares of Marie E. Harrah on July 1, 1919, when she received them as a gift, and (3) how much of the amount of $238.75 received by the petitioners in 1922 in respect of each share owned was the sale price of such share and how much, if any, thereof was dividend. An issue presented in the original petition of C. K. Anderson as to salary received was not pressed by him, and may therefore be regarded as abandoned. 1306 FINDINGS OF FACT. In September 1922, each of the petitioners sold shares of the American Wire Fabrics Company for a sale price of $218.75 per share and received a dividend upon each share of $20. Some of the shares thus sold were acquired as stock dividends and some were owned by petitioners on March 1, 1913. The fair market value of the shares owned on March 1, 1913, was $200 each, which was more than the prior cost of the shares to the petitioners. Some of the shares sold by petitioner Marie E. Harrah were acquired as stock dividends, and some were received by her as a gift on July 1, 1919. The fair market value of the shares received by gift was, on July 1, 1919, $2501212 each. OPINION. STERNHAGEN: The issues are entirely in the realm of fact, and evidence of widely varying kinds and qualities was taken for three days, ranging from accurate records and accounts, through narrative statements of events, causes, motives and expectations, to categorical personal opinions of value, given by witnesses called by both sides. This evidence has been considered not only with full regard for the impression received at the time of trial as to the witnesses and their testimony, but with regard to subsequent detailed study and analysis of its significance and effect. There has been neither "slavish adherence to a formula" nor an escape from the restraints which the record imposes. Without disregarding any of the evidence, we have given it such weight as its significance in the problem seemed to demand. Obviously such weight and significance can not be measured or described, consisting as they do of ponderable and imponderable factors, the appreciation of which is to some extent born of our experience in other cases involving valuation. The record contains evidence of the history of the corporation's business and of the corporation, showing the reasons, 1213 motives and expectations of its creators, and the terms upon which it was created; the development of the business, together with its production, sales, earnings and dividends, and the trend thereof generally toward improvement; the assets, both tangible and intangible (including its secret process), with their appraisal at one time and another by several methods; the sales at various times of small lots of the shares, the prices and the circumstances in which such sales occurred with regard to their reflection of value; the opinions of several persons, interested and disinterested, whose qualifications were widely diversified as to experience, knowledge of the significant facts, and 1307 ability to consider the factors of valuation. This has all been carefully considered. The petitioners, in their several returns for 1922 used, as the basis for determining the gain derived from the sale of their shares, a value on March 1, 1913, for each share held on that date of $421.70 (in one instance, $421.57). The respondent, in determining the deficiencies, held the values on that date to be $193.86 and $185.45. During this proceeding, the respondent claimed that such value was1214 no more than $100, and this he now urges is the value shown by the evidence and upon which a claimed increase in the deficiency should be based. The petitioner contends that the March 1, 1913, value established by the evidence is not less than $350 and is perhaps $500. We have found as a fact that such value was $200 This, it should be said, is not a figure thoughtlessly hit upon as a convenient intermediate figure. It has been arrived at as a fair representation of the evidence, and reflects our opinion of what a seller and a buyer, acting fairly, freely, and with substantial knowledge of the facts and reasonable prospects, would have agreed upon as a price. This figure should be used in a recomputation which will of course take into consideration the later stock dividends and purchases in determining the total gains of the several petitioners. Such other factors of the computation are not in dispute and require no consideration in this report. Marie E. Harrah acquired her shares originally by gift on July 1, 1919, increased later by a stock dividend. The basis of gain or loss upon their sale by her in 1922 is the value of the shares at the time of the gift. She used in1215 her return a figure representing $225 as such value, which the respondent reduced to $150. This figure the respondent insists is supported by the evidence, while the petitioner now urges that $400 should be used. We think the evidence establishes the fair market value on July 1, 1919, to have been $250 a share and have so found as a fact. The third question is fraught with the utmost confusion of treatment by all the parties. It grows out of the circumstance that the shareholders all agreed to sell their shares to one buyer, and appointed one of their number to complete the transaction and distribute to each his proper part of the selling price. The corporation at that time had a surplus on hand. Although each knew at the completion of the transaction that in one way or another he had received $238.75 in respect of each share he had held, a failure to make an analysis of the accounting source of this figure resulted in various allocations of it by them on their several returns. Such an analysis is now available from the evidence, and it indicates without much doubt that of the $238.75 received, $20 per share was a dividend out 1308 of the corporation's earnings and*1216 profits accumulated since March 1, 1913, and hence subject only to surtax, and $219.75 was sale price. In some instances the respondent has taxed the same amount twice by including it in both categories. This error should be corrected, and it only remains for the respondent in proceeding under Rule 50 to divide the $238.75 into a dividend of $20 and a sale price of $218.75. Judgment will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622502/	The LTV Corporation, 1 Petitioner v. Commissioner of Internal Revenue, RespondentLTV Corp. v. CommissionerDocket No. 4080-71United States Tax Court63 T.C. 39; 1974 U.S. Tax Ct. LEXIS 34; October 21, 1974, Filed 34 Decision will be entered under Rule 155. Petitioner contracted to lease an IBM computer from Boothe Leasing Corp. The computer was on petitioner's premises on or before Dec. 31, 1961. Pursuant to the purchase agreement between Boothe and IBM, the computer was to be installed by IBM on petitioner's premises. Installation of the computer was completed after Dec. 31, 1961. Held, petitioner is entitled to an investment credit under secs. 38 and 48(b)(2), I.R.C. 1954. Held, further, the contract between petitioner and Boothe was in substance as well as form a lease entitling petitioner to rental deductions under sec. 162(a)(3), I.R.C. 1954. Neil J. O'Brien and Jimmy L. Heisz, for the petitioner.John W. Dierker, for the respondent. Sterrett, Judge. STERRETT39 The respondent determined deficiencies in petitioner's Federal income tax for the calendar years 1962, 1963, and 1964 as follows:YearDeficiency1962$ 49,371.7919632,042,488.9619641,769,443.3840 Of the many issues raised by respondent during his audit of petitioner's tax returns all but three had been settled by the trial date. An additional issue has since been conceded by the respondent in its entirety, 36 leaving two issues to be decided by the Court.The first issue relates to the applicability of the investment credit provided for by section 38, I.R.C. 1954, 2 to one International Business Machines Corp. 7090 Data Processing System installed in petitioner's computer center facilities at Arlington, Tex. The second issue requires us to determine whether the transaction by which petitioner acquired the above data processing system is to be characterized for tax purposes as a lease entitling petitioner to a deduction under section 162(a)(3) for rent paid, or as a conditional sale requiring petitioner to capitalize the cost of the data processing system and deduct appropriate amounts for depreciation and interest under sections 167 and 163, respectively.FINDINGS OF FACTSome of the facts are stipulated and are so found. The stipulation of facts, together with the exhibits attached thereto, are incorporated by this reference.The LTV Corp. (hereinafter37 petitioner) was incorporated under the laws of the State of Delaware on November 20, 1958. Since incorporation petitioner's name has been changed several times, the last one occurring May 5, 1972. Petitioner's principal office is located in Dallas, Tex. For the years 1962, 1963, and 1964 petitioner filed consolidated Federal income tax returns with the District Director of Internal Revenue in Dallas, Tex.Prior to July 1960 petitioner was engaged principally in the business of developing and producing electronic products and electro-mechanical, acoustical, air conditioning, and refrigeration equipment. With the acquisitions of Temco Aircraft Corp. in July 1960 and Chance Vought Corp. in August 1961 petitioner directly or through one or more subsidiaries, became engaged in the design, development, and production of missiles, military aircraft, military aircraft assemblies, and electronic and other components thereof.41 This venture into the production of military equipment necessarily involved petitioner in many Government contracts. On certain types of contracts petitioner would be entitled to recover its costs. To recover these costs petitioner submitted invoices and38 public vouchers to Government auditors for review as provided in the contractual agreement. In addition to the direct charges, overhead costs were submitted and received and charged to overhead pools, which were allocated to specific contracts.On October 23, 1961, petitioner entered into an agreement entitled "Equipment Lease Agreement" (hereinafter Boothe lease) with Boothe Leasing Corp. (hereinafter Boothe) to lease one International Business Machines Corp. 7090 Data Processing System (hereinafter computer). 3 Relevant provisions of the Boothe lease include the following terms:1. The lease of and rent for the computer was to commence on the day specified in the equipment lease schedule.2. As additional rental, lessee was to pay all license fees, assessments, or taxes imposed by any governmental authority upon the computer, whether such license fees or taxes were billed to the lessor or lessee.3. Lessee at its sole expense was required to maintain at all times during the term of the agreement the computer in good operating order and repair.4. Lessor assigned to lessee for the term of the agreement any applicable factory warranty, express or implied, issued on or applicable39 to the leased property, and authorized the lessee to obtain the customary service furnished by the manufacturer at lessee's expense.5. Lessee was to maintain, at its own expense, insurance on the leased property for its actual value, but in no event for less than the stipulated loss value specified in the equipment lease schedule, naming the lessor and lessee as the insureds.6. Lessee assumed all risks of loss, theft, or destruction of, and damage to the leased property.42 7. Nothing contained in the lease was to give or convey to lessee any right, title, or interest in any of the leased property except as a lessee.The equipment lease schedule (hereinafter schedule) referred to in the Boothe lease established additional relevant provisions of the agreement. The term of the lease40 was to be 60 months commencing January 23, 1962, with a renewal option of indefinite duration, and no deposit was required. The rental payment schedule was included and called for semiannual payments as follows:1st year:two payments of$ 535,768.082d year:two payments of535,768.083d year:one payment of535,768.08one payment of133,942.024th year:two payments of133,942.025th year:two payments of133,942.02If petitioner took up the renewal option, annual payments of $ 116,471.32 would be due.The stipulated loss value schedule was also included and showed the minimum value for the computer to decrease from its original cost of $ 2,911,783 to its estimated market value at the end of the 5-year lease term of $ 291,178.30. The relationship of the stipulated loss value to the remaining rent due and the estimated market value of the computer after 5 years is as follows:EstimatedRemaining+market value =Stipulatedrent dueafter 5 yearsTotalloss valueYear 1$ 3,348,550$ 291,178$ 3,639,728$ 2,911,783 (original cost)Year 22,277,014291,1782,568,1922,277,014Year 31,205,478291,1781,496,6561,351,067Year 4535,768291,178826,946826,946Year 5267,884291,178559,062704,65141 Attached to the schedule is a description of the computer. It shows that the computer is to consist of 24 separate components.As an addition to the Boothe lease, Boothe granted to the petitioner the option to purchase the computer at the expiration of the lease term. The purchase price was set at 10 per cent of the original cost which amounts to $ 291,178.30. These terms were set out in a letter dated January 23, 1962, from Boothe to petitioner. The price was quoted to Boothe by the International 43 Business Machines Corp. (hereinafter IBM) as the amount for which they would sell the computer at that time.To fulfill its requirements to petitioner, Boothe entered into an agreement of sale with IBM to purchase the computer. Pursuant to this agreement, the computer was to be installed and placed in good working order on petitioner's premises by IBM. Relevant provisions of the agreement may be summarized as follows:1. Terms: Invoice rendered at time of shipment. Payment to be made in full upon the later of the date of installation or 30 days after the date of invoice.2. Title: Title to each machine was to remain vested in IBM until the full purchase price was paid. 42 IBM assumed the risk of loss or damage to the machine up to the time it was installed, except for loss or damage resulting from negligence of the purchaser.3. Installation: Machines purchased under the agreement were to be installed and placed in good working order by IBM without additional charge. The date on which IBM notified the purchaser in writing that a machine had been placed in good working order and was ready for use was to be considered the date of installation of such machine for all purposes of the agreement.4. Warranty: IBM was required to keep the machines in good working order for 90 days from date of installation.The computer was shipped on December 13, 1961, from Poughkeepsie, N.Y., for delivery to petitioner's computer center at Arlington, Tex. Upon delivery, a few days later, the installation work was commenced by IBM personnel. The work was performed by a crew of five to eight people. Of this group three to four were assigned specially for the installation work, the remainder were assigned to service and maintain the computer on a permanent basis. The specially assigned group did not leave petitioner's computer facilities until the middle of January 1962. 43 However, despite the notification of installation requirement in the agreement of sale, no such notice was sent by IBM to either petitioner or Boothe, nor was any notice of acceptance of the computer sent by petitioner to IBM.Boothe did not accept or pay for the computer until it was assured by IBM that it was completely installed and in good 44 working order. These requirements were satisfied between January 17, 1962, and January 23, 1962. Pursuant to Boothe's policy to place the computer on a rental basis immediately following installation, the lease term commenced January 23, 1962. Boothe paid for the computer by check on January 29, 1962.The use of the computer was essential to petitioner's operations, especially its Government contract work. It was also important that the petitioner have the latest equipment to successfully compete in the bidding for Government contracts. Petitioner anticipated complete use of the computer, since it could be used for scientific and financial operations, and petitioner's acquisition of the computer was based on this anticipation.After analyzing the expected use of the computer, petitioner decided that it would be cheaper to deal44 with Boothe rather than IBM. The Boothe lease required petitioner to pay a fixed rental whereas IBM's rental was based on usage. IBM's basic rental was for an 8-hour shift, with additional rent due for additional use. Since petitioner expected a utilization rate beyond the break-even point, Boothe's terms were pursued.On petitioner's consolidated income tax return for 1962, the cost of the leased computer was claimed as an investment in property eligible for the investment credit provided for in section 38. An appropriate election was filed with petitioner's 1962 consolidated income tax return to treat petitioner, the lessee, as the purchaser of the property pursuant to section 48(d) as it then existed. Respondent in his deficiency notice disallowed this claim as follows:It is determined that claimed 1962 investment credit of $ 208,825 applicable to the $ 2,911,783 cost of an IBM 7090 Computer System is disallowed because the property was acquired and placed in service before 1962.Respondent does not now contest the validity of the election treating petitioner as the purchaser of the property, nor that the computer is property eligible for the investment credit.On its financial45 statements, petitioner accounted for the acquisition of the computer as a lease deducting the payments to Boothe as rental. These payments were allowed by the Government auditors as proper expenses with respect to the Government contracts. For tax purposes, petitioner also treated the acquisition 45 as a lease deducting the payments as rental. Respondent in his deficiency notice disallowed this treatment as follows:It is determined that the contractual acquisition in 1961 of an IBM 7090 computer under an alleged lease arrangement was in substance and in fact a conditional purchase of depreciable property; that claimed deductions for rental expense are disallowed; * * Accordingly, respondent recast the transaction by disallowing the claimed rental expense and allowing appropriate amounts for depreciation and interest. Petitioner does not now contest the figures that respondent used if his legal position is sustained by this Court.OPINIONThis case involves two questions that have arisen from the petitioner's acquisition of the computer. The first issue is whether the petitioner is entitled to the investment credit provided for in section 38 resulting from the acquisition46 of the computer. The second issue is whether the transaction by which petitioner acquired the computer should be characterized for tax purposes as a lease, allowing petitioner to deduct the payments to Boothe as rental under section 162(a)(3), or as a conditional sale, requiring petitioner to capitalize the cost of the computer and deduct appropriate amounts for depreciation and interest under sections 167 and 163, respectively.Issue 1. Investment CreditDue to concessions by the respondent this issue is a narrow one and turns upon whether the computer constitutes "new section 38 property" within the meaning of the following provisions of section 48(b):(b) New Section 38 Property. -- For purposes of this subpart, the term "new section 38 property" means section 38 property -- (1) the construction, reconstruction, or erection of which is completed by the taxpayer after December 31, 1961, or(2) acquired after December 31, 1961, if the original use of such property commences with the taxpayer and commences after such date.In applying section 46(c)(1)(A) in the case of property described in paragraph (1), there shall be taken into account only that portion of the basis 47 which is properly attributable to construction, reconstruction, or erection after December 31, 1961.46 In October 1961 petitioner entered into a lease with Boothe, the relevant terms of which have been summarized in the findings of fact. To fulfill this agreement, Boothe made an agreement with IBM to purchase the computer. The relevant provisions of this agreement have also been set out in the findings of fact. Pursuant to this agreement, the computer was to be installed and placed in good working order on petitioner's premises by IBM. The computer was delivered and the installation work began in the middle of December 1961. The installation requirements were not satisfied until the third week of January 1962 when the lease commenced and Boothe paid for the computer.Respondent argues that the computer does not qualify as "new section 38 property" since it was acquired before December 31, 1961. He cites sec. 1.48-2(b)(6), Income Tax Regs., which provides that "Property shall be deemed to be acquired when reduced to physical possession, or control," and asks us to give these words their "everyday straight forward English meaning." In Madison Newspapers, Inc., 47 T.C. 630">47 T.C. 630, 635 (1967),48 we said the following with respect to this language in respondent's regulations:This regulation, however, is directed for the most part, as is respondent's argument herein, on the when of possession or control and fails to deal with the nature of the property subject to these powers. Undoubtedly petitioner herein did have "possession or control" of something on or before December 31, 1961, but the critical question requiring resolution is possession or control of what.We hold that the what in this case is an installed and operating computer; one that is available for use by the petitioner for the purpose for which it was purchased. We believe this to be the property with respect to which "physical possession or control" should be determined. Such an interpretation accords the words a commonsense meaning.Respondent disagrees with our holding in Madison Newspapers, Inc. but also seeks to distinguish it on the grounds that we placed great weight on the taxpayer's rights to installation service, and in this case IBM's installation obligation was to Boothe and not petitioner. However, pursuant to the agreement between Boothe and IBM, the computer was to be installed49 and placed in good working order on petitioner's premises by IBM. The Boothe lease made it clear that Boothe was not the manufacturer of the computer, and that Boothe47 authorized petitioner to obtain the customary service furnished by IBM. Neither Boothe nor the petitioner had the necessary expertise to install this highly complex piece of equipment, nor was it likely that anyone other than IBM could properly install the computer. Consequently we believe that it was the clear understanding of all the parties involved that IBM's installation obligation -- to install and place the computer in good working order without additional charge -- would accrue to petitioner's benefit. In so doing, we find J. E. Barron Plastics, Inc. v. Commissioner, 397 F. 2d 250 (C.A. 6, 1968), affirming 47 T.C. 638">47 T.C. 638 (1967), to be distinguishable.Having established the "what" of section 38 property, we now must analyze the facts as presented to determine when it was installed. There is no question that the computer arrived and the installation work began in the middle of December 1961. However, from that point on the record becomes unclear. 50 Respondent relies heavily on the testimony of George Nanson, an IBM field engineer, who was responsible for the installation of the system. Nanson indicated the work was well along by Christmas, but he could not recall when the job was completed. Nanson did indicate that the entire job took about 9 to 10 days which would mean a completion date before yearend.However, IBM's procedures indicate that the field engineer does not inform the customer of his progress. He makes progress reports to the IBM marketing representative who is responsible for determining for IBM when a machine is installed. This determination is based on negotiations with the customer. Gene E. Washington served as the marketing representative for IBM for this account. Washington testified that he was in daily contact with petitioner and that he considered the computer to be installed by the middle of January. Washington also accounted for the lack of the written notice of installation. Since he was in daily contact with the customer the formal written notice became superfluous.This testimony is in line with the January 23, 1962, commencement of the Boothe lease, and the January 29, 1962, payment by Boothe51 for the computer. Under the terms of the agreement of sale, if the computer had been installed by yearend the purchase price would have been due by January 13, 1962. If Boothe had paid for the computer at that time, the Boothe lease would have started the next day. Since we believe neither Boothe48 nor IBM to be charitable institutions, we find the timing of the above events to be strong evidence that the computer was not installed until January 1962. Furthermore, Washington's estimation also agrees with the final departure of the IBM installation crew in the middle of January 1962.This finding also tends to discredit respondent's reliance on an internal IBM document (hereinafter I.A.C.). The I.A.C. records for IBM the installation, alteration, or cancellation of service. The I.A.C. shows that the various components of the computer were installed on December 28, 1961. Glen M. Countryman, a current IBM employee, testified with respect to the document's authenticity; however he was not personally involved with the installation of the computer. His testimony merely related to his interpretation of the I.A.C.Paul W. Williams, Jr., also testified with respect to the I.A.C. 52 He was the IBM branch manager in 1961 and the individual responsible for the I.A.C. Williams testified that the date on the I.A.C. could have been completed by one of his staff. 4 He also indicated that the installation date on the I.A.C. would trigger the crediting of the salesman's commission and quota points, both important figures for a salesman to have before yearend. Consequently the salesman's view of installation could be decidedly different from that of the other people involved. Williams also doubted Nanson's testimony that the computer was installed in 9 to 10 days. For a machine of this size, he would have been happy if the installation had been completed in 3 weeks.53 IBM felt its installation obligation was not completed until there was a mutual agreement between IBM and the customer that the machine was operational and ready to perform the functions for which it was intended. We also believe that this is a proper standard to guide us in the resolution of this difficult question. After a careful consideration of this record, we find this final step did not occur until well into January 1962. Consequently, we hold that the computer qualifies as "new section 38 property" since it was acquired after December 31, 49 1961, within the meaning of section 48(b). 5 The record also includes additional testimony describing the condition and appearance of the installation area at yearend. Based upon the above finding, we believe that discussion of this testimony would be of little value.54 Issue 2. Sale or LeaseDue to concessions by the petitioner our task is solely to characterize the form of the transaction by which petitioner acquired the computer. Petitioner argues that under the factual pattern of this case and those of Lockhart Leasing Co., 54 T.C. 301">54 T.C. 301 (1970), affd. 446 F. 2d 269 (C.A. 10, 1971), and Northwest Acceptance Corp., 58 T.C. 836">58 T.C. 836 (1972), affd. 500 F. 2d 1222 (C.A. 9, 1974), this transaction too should be characterized as lease. As such petitioner claims it is entitled to deduct the payments to Boothe as rental under section 162(a)(3). 6 Respondent's position is that the factual pattern presented indicates that the substance of the transaction is a conditional sale. Accordingly, respondent disallowed the rental deduction and required petitioner to capitalize the purchase price and allowed appropriate deductions for depreciation and interest under sections 167 and 163, respectively. We agree with the petitioner.55 There have been numerous cases which have considered whether an agreement which was in form a lease was in substance a sale for tax purposes. In making this determination we have been concerned with the economic substance of the transaction and not the form in which it was cast. This procedure is continued in the case at bar.To support his position, respondent makes a fourfold argument. His first argument cites the terms of the Boothe lease which placed the burdens of ownership on the petitioner. The Boothe lease did require petitioner, at its own expense, to repair, insure, 50 and pay all taxes arising out of ownership. However, in this respect the leases as described in Lockhart Leasing Co., supra at 302-306, and Northwest Acceptance Corp., supra at 838-839, which gave rise to valid leasing arrangements, are strikingly similar.Respondent argues that Boothe protected itself from risk of loss by requiring petitioner to insure the computer for an amount at least equal to the outstanding rent plus the amount necessary to exercise the option. As detailed in the findings of fact it is not until the fourth year56 of the lease term that Boothe is so protected. In addition, the Boothe lease itself made a specific provision that no title passed to the petitioner, and there is no indication in the record that IBM would buy back the computer from Boothe if petitioner defaulted.Respondent's second argument is that the existence of an option to purchase the property at the end of the lease term indicates a conditional sale. Respondent has cited cases in which the option price was either nominal or when added to the other payments approximated the original selling price of the property. See D. M. Haggard, 24 T.C. 1124">24 T.C. 1124 (1955), affd. 241 F. 2d 288 (C.A. 9, 1956); Quartzite Stone Co., 30 T.C. 511">30 T.C. 511 (1958), affirmed on other grounds 273 F. 2d 738 (C.A. 10, 1959); Judson Mills, 11 T.C. 25">11 T.C. 25 (1948). In this case the option price, 10 percent of the original purchase price -- $ 291,178.30, was established after Boothe learned from IBM that this was the price for which IBM would sell the computer after 5 years. Furthermore, the option agreement does not allow any57 part of the payments by petitioner to Boothe to offset this price. On these facts we find the option price to be comparable with the computer's estimated fair market value at the end of the lease term. Consequently, the existence of the option does not indicate a conditional sale, and respondent's support for this argument is irrelevant.Respondent's third argument is that the sum of the rental payments and option price approximates the cost of the computer under a deferred payment plan. We find this to be unsubstantiated by the facts. In addition respondent asks us to compare the rentals paid in the first 2-1/2 years of the lease term ($ 2,678,840) with the original purchase price ($ 2,911,783). We find these figures to be incomparable without considering an interest factor.51 Respondent's final argument is that the rental payments materially exceeded the current fair rental value of the computer, especially the first half of the lease term. For support, respondent cites M & W Gear Co., 54 T.C. 385 (1970), affd. 446 F. 2d 841 (1971). In that case this Court found that the "rent" paid was more than twice the 58 fair rental value. M & W Gear Co., supra at 394. In this case petitioner investigated the rental terms of IBM and Boothe and found Boothe's to be lower. In addition these payments were not challenged by Government auditors when the contract costs were reviewed.In this area we also consider relevant the type of property involved. During the period in issue new developments in computer technology were rapid. Obsolescence could be virtually an overnight event. We believe this accounts for the higher front-end rental payments. On these facts we find the rental payments to be comparable with the fair rental value of the computer. Based on this we also find that the payments were for the use of the computer and that petitioner was not building up any equity.Petitioner relies heavily on the recent decisions of this Court in Lockhart Leasing Co., supra, and Northwest Acceptance Corp., supra. While these cases both dealt with the lessor and the interpretation of many leases, we agree that the factual circumstances are very similar. Since these cases characterized the lessor's transactions 59 as leases, we find them as added support for treating the lessee in the same manner.After careful consideration of the economic substance of this transaction we hold that petitioner entered into a lease agreement with Boothe to acquire the use of the computer, and therefore petitioner is entitled to deduct the payments to Boothe as rentals within the terms of section 162(a)(3).Decision will be entered under Rule 155. Footnotes1. By motion of the petitioner, to which the respondent had no objection, the pleadings were amended to reflect the name change of Ling-Temco-Vought, Inc. to The LTV Corporation.↩2. All Code references are to the Internal Revenue Code of 1954 as amended.↩3. The terms "lease," "lessee," "lessor," and "rent," as used in the findings of fact, are not intended to indicate the character of the transactions in question, but instead are used solely for purposes of clarity and convenience.↩4. Petitioner strenuously objects to the introduction of this document. Although Williams' signature is on the I.A.C., he did not sign it. The I.A.C. was prepared Oct. 30, 1961, and the signature is dated Dec. 8, 1961, both of which are before the shipment date. There is no indication, however, that the document had been deliberately falsified, and it is obviously part of IBM's business records and was so identified.↩5. There is no indication of, nor does respondent allege deliberate delay in the installation of the computer. See Madison Newspapers, Inc., 47 T.C. 630">47 T.C. 630, 637↩ (1967), which indicates that as of January 1962 such delay would have been unnecessary.6. SEC. 162. TRADE OR BUSINESS EXPENSES.(a) In General. -- There shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including -- * *(3) 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/4622503/	B. P. BAILEY AND MRS. B. P. BAILEY, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Bailey v. CommissionerDocket Nos. 33724, 33725.United States Board of Tax Appeals18 B.T.A. 105; 1929 BTA LEXIS 2134; November 9, 1929, Promulgated 2134 1. Certain parties entered into a contract of sale of an interest in a partnership in November, 1921, and part of the consideration was paid at that time and on December 31, 1921, and vendor retired from partnership activities in November, 1921, but final papers and notes for deferred payments were not signed until January 5, 1922. Held that the sale was made in 1921. 2. Vendor and purchaser agreed that vendor should make draft on purchaser for $24,000 on December 31, 1921, and vendor did so through third party, who credited the drawer therewith on December 31, 1921, and was ready, able, and willing to pay same, if demanded. Held that this constituted a payment and receipt on December 31, 1921, although it was not called for or paid until January 3, 1922. 3. Facts of this case constitute installment sale. H. B. Thomas, Esq., and Thomas B. Love, Esq., for the petitioners. Frank S. Easby-Smith, Esq., and R. B. Cannon, Esq., for the respondent. LITTLETON106 The Commissioner determined a deficiency in income tax of $10,871.65 against each of the petitioners for 1922. Petitioners are husband and wife and are residents2135 of Texas, where community property laws prevail. The husband was a partner in an insurance agency and upon a sale of his interest therein the respondent determined the deficiencies above mentioned. Petitioners claim that respondent erred (1) in finding that the sale was a cash transaction concluded in 1922, instead of an installment sale made in 1921; (2) in finding that the payments of $1,000 to petitioner B. P. Bailey in November, 1921, and of a $24,000 draft on December 31, 1921, were received in 1922 instead of in 1921, and (3) in finding that the unsecured note of $175,000 of E. B. Trimble, payable in 60 monthly equal installments with 6 per cent interest, had a fair market value of the face of the note on January 5, 1922. At the hearing the petitioners abandoned the last specification of error. It was agreed that the cases should be heard and considered together. FINDINGS OF FACT. The petitioner, B. P. Bailey, was for a number of years prior to 1922 an equal partner with Carr P. Collins in an insurance agency under the firm name of Bailey & Collins, with its principal office at Dallas, Tex. Bailey wished to dispose of his interest in the partnership. Collins undertook2136 to interest E. G. Trimble, of Kansas City, Mo., in the purchase of Bailey's share and agreed with Trimble that he would take one-half of the Bailey share, thus making a new partnership in which Collins would own three-fourths and Trimble one-fourth. A personal conference was held on or about November 8, 1921, between Bailey and Trimble at Kansas City, and on November 9, 1921, Trimble wrote a letter to Bailey in which he offered to purchase Bailey's interest in the firm of Bailey & Collins for $200,000 and the payment of whatever income tax that might be assessed against Bailey on account of the transaction. The consideration was 107 to be paid $25,000 cash and 60 notes of $1,000 each, payable monthly, and one note for $115,000, payable in five years. This offer culminated in the following written agreement of November 26, 1921: MEMORANDUM OF AGREEMENT WHEREAS, B. P. Bailey, member of the firm of Bailey & Collins of Dallas, Texas, desires to sell all of his interest, being one-half interest in the firm of Bailey & Collins, and WHEREAS E. G. Trimble of Kansas City, Missouri, desires to purchase said interest from B. P. Bailey, it is agreed as follows: In consideration2137 of $1,000 paid, receipt of which is hereby acknowledged, and the further agreement to pay $24,000 in cash on January 2, 1922, and the conveyance to said B. P. Bailey of 600 shares of the capital stock of the Ineeda Laundry & Cleaning Company, Houston, Texas, and note for $115,000 bearing interest at the rate of 6% per annum - note payable in sixty equal payments, the monthly payments being payable on or before the 2nd day of each month, together with interest on all unpaid instalments. It is agreed that E. G. Trimble will pay any income tax which may become payable by B. P. Bailey to the United States Government on account of this sale and purchase. It is further agreed that on or before January 2, 1922, B. P. Bailey will convey in formal manner all of the right, title and interest of every character which he may have in he firm of Bailey & Collins, and it is agreed by him that his interest is a one-half interest. It is further agreed on the part of E. G. Trimble that he will enter into an agreement through which he guarantees B. P. Bailey against loss during six years next succeeding January 2, 1922, to the extent of $100 per share on the 600 shares of Ineeda Laundry and2138 Cleaning Company Stock to be conveyed under definite agreement; and further agrees that on six months' notice at the end of the six years, that he will re-purchase the stock, if necessary, to prevent B. P. Bailey from having a loss thereon. The agreement shall provide that B. P. Bailey shall not sell any of this stock at a loss without giving said Trimble at least sixty days notice of his intention to sell it at a price lower than $100, and shall not be permitted to sell more than 100 shares of said stock at a loss within any one calendar year during the six years that this guaranty shall continue. In connection with this guaranty, it is agreed that if obtainable, said Trimble shall procure $25,000 of life insurance payable to B. P. Bailey, and in the event of the death of said E. G. Trimble during the period of this guaranty, the assignment of $25,000 of insurance shall be in full liquidation of any damages that might accrue to said Bailey on this stock. It is further understood and agreed that in the event of the inability of said Trimble to complete this transaction as of January 2, 1922, said Bailey shall have the right to retain the $1,000 as liquidated damages because2139 of the failure of said Trimble to complete the contract. Signed in duplicate at Kansas City, Missouri, this 26th day of November, 1921. (Signed) B. P. BAILEY E. G. TRIMBLE This writing was endorsed by Collins, the other partner, on December 3, 1921, as being agreeable and satisfactory to him. When the agreement was signed it was agreed between Bailey, Collins, and 108 Trimble that Bailey was to take no further active part in the management of the business, that Collins was to continue in active management of the business and that any consultations thereafter necessary in the conduct or policy of the business should be held by Colins with Trimble instead of petitioner Bailey. This agreement was earried out by Bailey's retirement from active participation in the business. Collins took full control, advising Trimble by letter from time to time as to its condition and future plans, and seeking his aid for the purpose of raising money. Collins considered Trimble his partner after the signing of the agreement of November 26, 1921, and did not consult Bailey about any matters elative thereto. It was the practice of the firm to advance to insurance companies premiums2140 on insurance policies, which had not been collected, and it was frequently necessary to borrow money from banks to cover these remittances to the insurance companies. At the close of 1921 it was found necessary to borrow approximately $100,000 for this purpose. Collins arranged to borrow from a bank partly on Trimble's credit, and on December 29, 1921, Trimble wired a Dallas bank as follows: "Will sign $50,000 note with Carr P. Collins proceeds to be used by Bailey and Collins." Upon receipt of this telegram the bank furnished the money to Bailey & Collins. It was needed and was used prior to December 31, 1921. Trimble signed the note January 4, 1922. On December 13, 1921, entries were made on the books of Bailey & Collins, excluding from partnership assets certain real estate standing in the name of Carr P. Collins and B. P. Bailey, which were excepted from the sale. Between the signing of the agreement of November 26, 1921, and December 31, 1921, it was agreed between Bailey and Trimble that the stock of the Ineeda Laundry Co. should be eliminated from the consideration and a note for $175,000 payable in 60 monthly installments be given instead of the laundry stock and2141 note for $115,000. It was further agreed between Bailey, Collins, and Trimble that the $24,000 cash provided to be paid on January 2, 1922, should be paid as follows: Bailey was to draw on Trimble for $24,000 by draft dated December 31, 1921, Trimble agreed to pay the draft when presented, the draft was to be drawn through Bailey & Collins and Collins agreed to cash it upon presentation. Pursuant to this agreement, Bailey drew the draft and presented it to Bailey & Collins, who immediately credited his account with $24,000, December 31, 1921, and entered it as a cash receipt on their books. On the same day the draft was deposited in bank as a cash item, Bailey & Collins received credit therefor and it was subsequently paid by Trimble on presentation on January 4, 1922. At the time the draft was presented 109 to Bailey & Collins, Bailey was indebted to the firm in the amount of $781.97 for certain advances, and the difference between the amount of the draft and these advances, to wit, $23,218.03, was paid to Bailey on January 3, 1922, when he first called for it. At all times between the presentation of the draft to Bailey & Collins and the payment of the $23,218.03, 2142 Bailey & Collins were willing, able, and had the money on hand to make the payment whenever demanded. During the interim between November 26, 1921, and December 31, 1921, Trimble had his lawyer redraft the written agreement to conform to the change relative to the elimination of the laundry stock from the consideration and the substitution of a note for $175,000 instead of $115,000. In addition a supplementary agreement was prepared which gave Trimble the right within a specified time to deliver said laundry stock to Bailey and receive credit for a specified sum on the note of $175,000, and also bound Bailey not to engage in the business of certain branches of insurance for a specified time and granted the new firm the right to use the name of Bailey & Collins. These papers were sent by Trimble to Collins with the request that Bailey examine them at once, and if he had any suggestions or alterations to make them at once and return them to him, and if the papers were satisfactory for Collins to wire Trimble. On December 31, 1921, Bailey wrote Trimble: The contracts are, as Collins wired you, practically "O.K." The time during which I agree to remain out of competitive business2143 should be five years, not ten, but this can be changed. It might as well be for life, so far as my going back into business is concered, but it, as a matter of equity, should not run longer than the payments. * * * It is agreeable to me, as I wired you, to postpone until the 5th the signing up of contract, but the contract should date the 1st, as we don't want to carry the old firm over into this year. On January 5th, 1922, the parties met in Dallas, and the following agreements were entered into: AGREEMENT OF SALE WHEREAS, B. P. Bailey, a member of the firm of Bailey and Collins, of Dallas, Texas (said firm being composed of B. P. Bailey and Carr P. Collins), desires to sell all of his one-half interest in said firm and in all of the business and properties owned, operated and conducted by said firm, and - WHEREAS, E.G. Trimble, of Kansas City, Missouri, desires to purchase said interests and properties from B. P. Bailey, IT IS AGREED, as follows: 1. In consideration of the payment by said Trimble to said Bailey of the sum of Twenty-five Thousand Dollars ($25,000.00) in cash on or before January 5th, 1922, and the delivery to said Bailey by said Trimble of his promossory2144 note for One Hundred Seventy-five Thousand Dollars ($175,000.00), dated January 1st, 1922, bearing interest at the rate of six per cent (6%) per annum, payable in sixty (60) equal monthly payments of Two Thousnd Mine Hundred 110 Sixteen Dollars Sixty-six and two thirds Cents ($2,916.99 2/3) each, said monthly payments being payable on or before the second day of each month, together with interest on all unpaid installments, said Bailey agrees to transfer and deliver to said Trimble, by proper legal conveyances, all of the properties scheduled in "Exhibit A" hereto attached; also including all of his right, title and interest of every character which he may have in the firm of Bailey and Collins, and in all of the business and activities owned, operated and controlled by said Bailey and Collins, including good will. 2. Upon payment of the moneys and the delivery of the properties mentioned in Section One hereof by said Trimble to said Bailey, THIS AGREEMENT shall operate as a conveyance from said Bailey to said Trimble of all the properties provided to be conveyed from said Bailey to said Trimble under the terms of said Section. In addition thereto, said Bailey agrees to2145 execute such additional conveyances of said properties as may be required by said Trimble. 3. In connection with the purchase of the properties herein specified, said Trimble assumes one-half of the liabilities of the firm of Bailey and Collins specified in "Exhibit B" hereto attached. Signed in duplicate this 5th day of January 1922. (Signed) B. P. BAILEY E. G. TRIMBLE Witness H. B. HOUSTON GEO. A. CHATFIELD The undersigned Carr P. Collins, member of the firm of Bailey and Collins, referred to in the foregoing agreement, hereby consents to and approves the sale of the partnership interest of B. P. Bailey in said firm to E. G. Trimble in accordance with the provisions of said agreement. Signed this 5th day of January 1922. (Signed) CARR P. COLLINS Witness H. B. HOUSTON GEO. A. CHATFIELD. BAILEY & COLLINS DALLAS, TEXAS, January 5, 1922.Mr. E. G. TRIMBLE, Kansas City, Mo.DEAR SIR: Supplementing the Agreement of Sale entered into this day between yourself and the writer, I hereby agree to accept, if offered for delivery within sixty days, the six hundred shares of stock of the Ineeda Laundry and Cleaning Company specifically mentioned2146 in the supplementary agreement entered into between the writer and yourself this day, and to credit on the notes provided in the Agreement of Sale above mentioned $60,000, said credits to apply at the rate of $1,000 per month upon the installment payments which it is agreed shall be made on the major note, it being understood that I am to receive the dividends on this stock from January 1st, and to credit you with interest at the rate provided in the notes for the same period upon the $60,000 above mentioned as a consideration for this stock. Yours very truly, (Signed) B. P. BAILEY. 111 SUPPLEMENTARY AGREEMENT WHEREAS, on the 5th of January, 1922, B. P. Bailey, of Dallas, Texas, and E. G. Trimble, of Kansas City, Missouri, entered into a written contract providing for the sale of certain properties by said Bailey to said Trimble, a copy of said contract being hereto attached and marked "Exhibit A", - NOW, THEREFORE, in connection with and supplementary to said contract, IT IS AGREED, between said Bailey and said Trimble, as follows: 1. Said Bailey agres that for a period of five (5) years he will not engage directly or indirectly, or directly or indirectly become2147 interested, in any business or activity of the kind and character engaged in by the firm of Bailey and Collins prior to the date on which the contract above referred to was executed except that this provision shall not be construed to prohibit said Bailey from engaging in the business of life insurance or in the business of accident and health insurance in connection with life insurance. 2. Said Trimble agrees to pay any income tax which may become payable by said Bailey to the United States Government on account of the sale and purchase of the properties mentioned and in accordance with the contract above referred to. By "income tax" as used in this section, it meant any tax which may be assessed by the government on account of increase of capital as applied to said properties. 3. It is further agreed on the part of said Trimble that he shall guarantee said Bailey against loss during six years next succeeding January 1st, 1922, to the extent of One Hundred Dollars ($100.00) per share on the six hundred (600) shares of Ineeda Laundry and Cleaning Company stock if and when conveyed in accordance with said contract. And said Trimble further agrees that on six months' notice, 2148 at the end of six years, he will repurchase said stock, if necessary, to prevent said Bailey from having a loss thereon. In this connection said Bailey agrees that he will not sell any of said stock at a loss without giving said Trimble at least sixty (60) days' notice of his intention to sell same at a price lower than One Hundred Dollars ($100.00) per share, and said Bailey shall not be permitted to sell more than one hundred (100) shares of said stock at a price of less than One Hundred Dollars ($100.00) per share within any one calendar year during the six (6) years that this guaranty shall continue. 4. In connection with the guaranty referred to in Section 3, it is agreed that, if obtainable, said Trimble will procure and carry during the period covered by Section Three, Twenty-five Thousand Dollars ($25,000.00) of life insurance, payable to said B. P. Bailey, and in the event of the death of said Trimble during the period covered by this guaranty, he assignment of Twenty-five Thousand Dollars ($25,000.00) of insurance shall be in full liquidation of any and all damages that might accrue to said Bailey because of any and all losses on any or all of said stock in said company. 2149 5. It is agreed by said Bailey that for a period of ten (10) years following the date of this agreement, said Trimble, by himself or in connection with said Collins, or through his heirs, administrators, executors, successors or assigns, may, in so far as said Bailey is concerned, use the partnership name of Bailey and Collins in and for the transaction of the various business activities covered by the contract above referred to, or other business activities which may be added thereto; and said Bailey further agrees that said Trimble may have the right, at his option, to incorporate the name of Bailey and 112 Collins with such other names or designations attached thereto as may be required by law for the purpose of incorporation. Signed in duplicate this 5th day of January 1922. (Signed) B. P. BAILEY E. G. TRIMBLE Witness H. B. HOUSTON GEO. A. CHATFIELD The undersigned, Carr P. Collins, member of the firm of Bailey and Collins, referred to in the foregoing Supplementary Agreement, hereby consents to and approves the sale of the partnership interest of B. P. Bailey in said firm to E. G. Trimble in accordance with the provisions of said Supplementary Agreement. 2150 Signed this 5th day of January 1922. (Signed) CARR P. COLLINS Witness H. B. HOUSTONGEO. A. CHATFIELD The books of Bailey & Collins were closed as of December 31, 1921, and the partnership profits determined for the year 1921, which were divided equally between Bailey and Collins. After December 31, 1921, Bailey had no interest in the business whatever, either as a salaried officer or employee, or as a partner. The book value of the assets was $640,016.17; the liabilities were $557,524.98, leaving a net book worth of $82,491.19, of which Bailey's net one-half was $41,245.59. Against this amount Bailey had drawn $10,717.50, so that the net cost of the partnership interest sold was $30,528.09. Bailey did not dispose of the note for $175,000 during 1922, and payments of the regular monthly installments and interest were made regularly by Trimble on the due dates or a few days thereafter. OPINION. LITTLETON: The question presented here is whether or not the sale of Bailey's half interest in the partnership of Bailey and Collins was an installment sale under section 212(d) of the Revenue Act of 1926. In order to determine this question it is first necessary to determine2151 in what taxable period or year the sale was made, and, second, whether or not the payments during that year or taxable period exceed one-fourth of the purchase price. Three requisites are necessary to constitute or create a simple contract such as the one here involved, viz., (1) parties having legal capacity; (2) mutual assent to its terms, and (3) an agreed valid consideration. There is no doubt of the first and third requirements. and none as to the second except as to the time it occurred. 113 In ; , will be found an interesting and instructive opinion on (1) a sale of lands; (2) an agreement to sell lands; and (3) what is popularly called an "option." There, an option had been given supported by no consideration. The court held that it had no validity as an option, but was good as an offer to sell and a valid contract resulted if accepted before withdrawal. After discussing the various kinds of sales, offers, and options, the court said in part: Examine the two options granted in the case before us. L. sold I. an option for 10 days from September 24th for one dollar. He then gives an option2152 for another 10 days from October 3d, for what? For nothing. L. transfers this option, this incorporeal valuable something, for nothing. The transfer of the option was nudum pactum, and void. But, the point just discussed being conceded, appellant still contends that this second instrument or option was a continuing offer to sell, at a given price, and was accepted by the respondent before retracted, and that such acceptance, evidenced by, and accompanied with, the tender of the price, and demand for a deed, constitute an agreement to sell land, which may be enforced in equity. We leave behind now our views of options, and consideration therefor, and meet a wholly different proposition. Reading the two instruments together we find that on October 3d L. extended to I. an offer to sell his lands at the price of $1,000. There was no consideration for the offer, and it could have been nullified by L. at any time by withdrawal. But it was accepted by I., while outstanding, the price tendered, and deed demanded. It must be plain from the previous discussion that we do not hold the offer, when made, or at any moment before acceptance, was a sale of lands, an agreement to sell2153 lands, or an option. But upon acceptance and tender was not a contract completed? If one person offers to another to sell his property for a named price, and while the offer is unretracted the other accepts, tenders the money, and demands the property, that is a sale. The proposition is elementary. The property belongs to the vendee, and the money to the vendor. Such is precisely the situation of the parties herein. L. offered to sell for $1,000, I. accepted, tendered the price, and demanded the property. Every element of a contract was present, parties, subject-matter, consideration, meeting of the minds, and mutuality. And as to the matter of mutuality we are now beyond the defective option. We have simply an offer at a price, acceptance, payment or tender, and demand. That this was a valid contract we cannot for a moment doubt. In discussing a transaction of this nature, in , BECK, C.J., in one of his clear opinions, says: "Its legal effect is that of a continuing offer to sell, which is capable of being converted into a valid contract by a tendor of the purchase money, or performance of its conditions, whatever they2154 may be, within the time stated, and before the seller withdraws the offer to sell," LURTON, Jr., in , says: "Before acceptance, such an agreement can be regarded only as an offer in writing to sell upon specified terms the lands referred to. Such an offer, if based upon no consideration, could be withdrawn by the seller at any time before acceptance. It is the acceptance while outstanding which gives an option, not given upon a consideration, vitality." In , we find the following, by FLETCHER, J.: "In the present case, though the writing signed by the defendants was but an offer, and an offer that might be revoked, yet while it remained in force and unrevoked it was a continuing offer during the time limited for acceptance, and during the whole of that time it was an offer every instant; but as soon as it was accepted it ceased to be an offer merely, and then ripened into a contract." The case of 2155 , was an income and profits-tax case and involved the question of in what year a sale was made. The facts are stated in the opinion, where the court said: II. We come now to the sale of real estate by the corporation. Was this sale for the purpose of assessing income or profit taxes under the act of 1918 made in the year 1919 or the year 1920? A contract of sale by the corporation of certain real estate on which it had operated a lumber yard was made to solvent purchasers, able to pay at any time, on November 20, 1919. At that time $10,000 was paid in cash and a contract in writing was entered into between the corporation and the purchasers, conditioned alone on the title being found satisfactory to the purchasers. Some time in the month of December, 1919, the purchasers, having examined the title, removed this condition from the contract by advising the corporation the title to the property was satisfactory to them, and the contract of sale was thus made absolute. The contract provided for the payment of the remainder of the purchase price, $100,000, on June 1, 1920, and that conveyance should be delivered2156 by the corporation to the purchasers at this time. Also the corporation, not being able to remove its business from the property, agreed to pay one-half the taxes for the year 1920 as a consideration for being permitted to remain on the premises. However, the dominion, control, burdens, and benefits of the property were passed to the purchasers in the year 1919 at the time the contract of sale was made absolute. The Revenue Act provides, in regard to the assessment of property under such conditions, as follows: "Sec. 213(a) That for the purposes of this title * * the term 'gross income' includes gains, profits, and income derived from * * * sales, or dealings in property, whether real or personal, growing out of the ownership or use of or interest in such property." Comp. St. Ann. Supp. 1919, § 6336 1/8 ff. The question is, who owned this property in the latter days of the year 1919? As the right of the corporation to compel compliance with the terms of the contract was by the contract made dependent on the corporation delivering a good title to the purchaser, the contract remained conditional and dependent until the title had been examined and approved by the purchasers. 2157 As the corporation was notified this condition was met in the month of December, 1919, thereafter the conditional contract of sale became absolute in its terms, and any loss to the property or any benefits or advantage accruing thereto was the loss or benefit of the purchasers. To this end come not only the adjudicated cases on the question but the very reason of the thing itself. The Supreme Court of this state in , said: "The purchaser of land in possession under an agreement for a conveyance is considered the owner in equity, subject to the payment of the purchase money, and the vendor is treated as the trustee of the legal title. * * The fact that possession was not transferred in this instance may be accounted for by the relationship of the parties." * * * As 115 the contract for the sale of the property, fixing the terms of the sale made, the amount of the purchase price to be paid, and all other of its terms, including the present payment of $10,000, was performed in the year 1919, the amount of profits taxable must have been determined as of that year as readily2158 and absolutely as of the date the conveyance was delivered and the deferred payment made. I therefore find as a fact the sale of the real estate in this case, while not perfected by conveyance and full payment of the purchase price until June, 1920, was made in the year 1919, as contended by the plaintiff in this case, and that the profit made in the transaction should have been included in the income and excess profits taxes of the corporation for the year 1919. In , a sale of the taxpayer's interest in a partnership was agreed upon in 1919, but the price to be paid was not finally settled until 1921 and it was held that the sale was made in 1919. The Board said: The last issue to be considered concerns the Commissioner's action in holding that the sale of the partnership's assets and business constituted a completed transaction for the year 1919, and that any gain or loss realized therefrom should be reflected in the partnership net income for that year. The petitioners contend that since there was no determination within the year 1919 of the actual amount to be paid by the purchaser for the partnership assets and businesses, and2159 that final payment was not made by the purchaser until December, 1921, the sale was not completed until the year 1921, and any gain or loss resulting therefrom should be reflected in the partnership net income for the latter year. The books of the partnership were maintained upon the accrual basis. According to the terms of the sale contract, the purchaser, on May 1, 1919, took possession of the business and of all offices, and thereafter the partners conducted the business for the account of the purchaser. The transaction was completed so far as the partnership was concerned and, in the event of the purchaser's failure to make payment according to the terms of the contract, the partnership could not have repossessed the properties, but would have been limited to an action to enforce payment under the contract to pay. It appears that it was not until some time later than the year 1919 that the specific amount to be paid by the purchaser for the partnership assets and businesses was determined. But, all circumstances considered, we do not think this fact sufficient to justify the postponement until a later year of the accounting for the gain or loss realized from the sale. The2160 sale was consummated in the year 1919; the liability of the purchaser to pay the purchase price arose in that year; and, in our opinion, whatever gain or loss resulted from the sale accrued to the partnership in the same year. * * * A similar case is , where the Board said: The second question presented is whether the profits arising from the sale of certain art objects to one Morton F. Plant, as set forth in the findings of fact, were income to the taxpayer in the year 1918 or in the year 1919. The Commissioner contends that they were income for the year 1918. In its petition the taxpayer raised the point that the sale was one on the installment plan and that the profits arising therefrom should be allocated to the several payments. It abandoned that contention, however, at the hearing. It reported the profits in question as income for the year 1919 and now contends that 116 they were in fact income for that year. The amount of the profits involved is conceded to have been $61,268.75. We are of the opinion, upon consideration of the evidence presented, that the position of the Commissioner as to this point is correct2161 and should be approved. The transaction was clearly a sale of merchandise in the year 1918. The art objects were delivered to Plant and the terms of purchase were communicated to him in writing. On May 8, 1918, he wrote to the taxpayer that "I beg hereby to confirm the purchase," and contracted to pay certain amounts of money at certain specified dates in accordance with the proposition made to him by the taxpayer. The transaction was completed so far as the taxpayer was concerned, and, in the event of Plant's failure to make payment, as set forth in his letter of May 8, 1918, the taxpayer could not have repossessed the art objects, but would have been limited to an action to enforce payment under the contract to pay. The transaction was a completed sale in the year 1918, and, as the taxpayer kept its books of account on the accrual basis, the sale price was properly accruable in that year. We hold, therefore, that the profits arising from the sale in question were income to the taxpayer in the year 1918. In the instant case Bailey received $1,000 on account of the signing of the original contract November 26, 1921, and from that date had nothing more to do with the management2162 or conduct of the business. He stepped out and so far as was necessary Trimble, the purchaser, stepped in. Collins, the remaining partner, ran the business and frequently consulted Trimble prior to January 1, 1922, as to its policy and Trimble obligated himself to the extent of $50,000 on bank paper of the firm, which, had there been no sale, Bailey would have had to assume. It seems to us that no matter whether we consider the original contract and succeeding negotiations a sale, an agreement for a sale, an option, or an offer, that the sale was complete when Bailey wrote Trimble on December 31, 1921, that the redrafted contract was satisfactory and had Collins telegraph Trimble to the same effect and at the same time drew on Trimble for $24,000 as per their agreement. This draft was to all intents and purposes cashed by Collins and over $700 of the proceeds were used that day to extinguish Bailey's debt to his old firm. It was the purpose of all the parties to close the transaction as of December 31, 1921, and the action of Bailey constituted a mutual assent and a binding contract of sale prior to the signing of the final papers on January 5, 1922. Bailey had no interest of2163 any kind after December 31, 1921. The reference by Bailey in his acceptance to the time he was to remain out of competitive business was not a part of the original contract and was not in the final contract. It was a part of a supplemental agreement and formed no part of the contract of sale and was no real dissent in the light of Bailey's other acts. The only difference between the original contract of November 26, 1921, and the final one of January 5, 1922, was the elimination of the laundry stock from the consideration, and the purpose of the supplemental contract was to put it back again under certain conditions. 117 The signing of the papers and delivery of the note on January 5, 1922, was merely the formal execution and reduction to written evidence of the terms of the sale made in 1921, and which had been carried out to the extent of Bailey's retirement from the business November 26, 1921, and his collection of $24,000 on account of the purchase price, on the same day he wrote Trimble the contracts were "O.K." 2164 ; . It remains to consider the amount of the initial payment, which is the sum of all payments made during the taxable period in which the sale was made. The original agreement of November 26, 1921, provided for the payment of $1,000 on the purchase price and was paid upon the signing of the agreement. It was further provided in the agreement that, in the event that Trimble was unable to carry out his part of the agreement, Bailey should retain the $1,000 as liquidated damages. There was no provision of any kind for the return of the $1,000 to Trimble in any event or upon any condition. Upon its payment to Bailey it became his absolute property on one ground or the other and was a payment made in 1921. Cf. . By agreement of the parties, Bailey was to collect and be paid $24,000 by draft on December 31, 1921, and this was to be considered as cash. To all intents and purposes, it was cash and practically the same as if Trimble had sent Bailey his check and Bailey had deposited the check as a cash item in bank and had not checked2165 it out for several days after. We consider the payment of $24,000 to have been made and received December 31, 1921. The Board had a somewhat similar question before it in , where the stockholders of a large contracting firm agreed that, instead of having surety companies go on the company's contract bonds, they would go on the bonds in their individual capacities and divide the premiums they would have had to pay a bonding company. The premiums were divided according to their stockholdings and were credited on the books when the bonds were given, but in the case of John Griffiths were not collected in cash until a subsequent year. The question was whether they were taxable in the year when credited, or in that in which received in cash. The Board held they were taxable in the year when credited. The Board said: There is no testimony, however, to the effect that the petitioner did 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 withdrew2166 the cash before reporting them in his income. 118 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. So in this proceeding all Bailey had to do was to ask for it and the actual cash or a check would have been given him on December 31, 1921. . In , the Board held that interest credited to the personal account of petitioner on the books of the corporation of which he was a stockholder was constructively received where the financial condition of the debtor during the taxable years was such that the amounts credited could have been paid. In , a number of cases are reviewed and the deduction drawn that, if the funds are available, subject to demand of taxpayer, and debtor is able to pay, and taxpayer merely omits to take possession of what is his, this constitutes a receipt of taxable income. It results that the sale was made in 1921, that the initial payment during that year was $25,000 which is less than one-fourth of the purchase2167 price of $200,000, and that the sale was an installment sale and petitioners' income therefrom should be computed on the installment basis. Judgment will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622504/	Standard Asbestos Manufacturing and Insulating Company v. Commissioner. Alice D. Ryder v. Commissioner.Standard Asbestos Mfg. & Insulating Co. v. CommissionerDocket Nos. 60607, 60696.United States Tax CourtT.C. Memo 1958-42; 1958 Tax Ct. Memo LEXIS 188; 17 T.C.M. (CCH) 207; T.C.M. (RIA) 58042; March 18, 1958188 1. Petitioner, Standard Asbestos and Insulating Company, paid to each of its three officers for services rendered during the years 1949, 1950 and 1951, the sums of $52,232.14, $65,290.17 and $65,290.17, respectively. The officers and their families collectively held the majority of the stock in the corporation. They performed all the duties of the major officers of a corporation and estimated, bid, and supervised the work on all contracts of over $5,000. During the 1920's and 1930's their compensation was small. Evidence was presented, inter alia, of the compensation paid to officers in other companies in the industry. Other pertinent financial data, both with respect to petitioner company and with respect to other companies in the industry, was submitted. Held, on the facts, none of the compensation paid during the years in question was intended as compensation for services rendered in prior years. Held further, that the compensation paid to the officers in question for the years 1949, 1950 and 1951 was unreasonable to the extent herein determined. 2. Petitioner company paid $13,012.50 to petitioner Alice D. Ryder, widow of its deceased president, which amount represented the probable 189 amount of bonus which the president would have drawn for the first quarter of 1949, had he been alive at the end of the year, when bonuses were being determined. The president died on April 1, 1949, and before that date was the active head of the corporation. No employment contract existed between the company and the president, and there was no obligation for the company to pay the amount to his widow. Alice Ryder performed no services for the corporation and became a director of the corporation after the amount had been decided upon and accrued on the corporation's books. The amount was paid directly to her, and not to her husband's estate. The corporation deducted the amount on its return for 1949 as a payment to W. E. Ryder, and Alice Ryder included the amount in income in the year of receipt, 1950. Held, the amount represented a gift and was not includible in Alice Ryder's income for 1950. 3. The corporation had 500 shares of stock outstanding. During the years 1949-1951, inclusive, 446 1/2 of these shares were held by members of the Ryder family. Of the remaining shares, 26 3/4 were held by E. McElreath, the assistant secretary of the corporation, and 26 3/4 by Charles C. Knapp. 190 These parties (other than Knapp) entered into a contract under date of February 17, 1949, in which they agreed to certain restrictions on the transfer of their stock. The agreement provided in part that should any of the Ryder brothers or their father die and leave their stock to their widow, or should the widow inherit any of their stock, the stockholders would cause the company to pay the widow, quarterly, 50 per cent of the average of the salaries of the father and brothers during the preceding quarter, so long as the widow held the stock. Pursuant to this agreement, the stockholders caused the company to pay to Alice Ryder the amount called for in the agreement. Held, the amounts were not deductible by the company, and were properly includible in Alice Ryder's income. 4. The respondent determined additions to the income tax of Alice Ryder for the year 1950 under sections 294(d)(1)(A) and 294(d)(2). Alice Ryder failed to file declaration of estimated tax for 1950. Held, that Alice failed to meet the burden of proving reasonable cause for failure to file such declaration and that additions to tax under the sections referred to are applicable. Harry H. Ellis, Esq., Argyle Building, 191 Kansas City, Mo., for the petitioners. Claude R. Sanders, Esq., for the respondent. FISHERMemorandum Findings of Fact and Opinion FISHER, Judge: In these consolidated proceedings respondent determined deficiencies in income taxes and additions to the taxes of petitioners as follows: Docket No. 60607YearDeficiency1949$19,644.67195040,843.10195156,432.34Docket No. 60696Additions to Tax UnderSec.Sec.YearDeficiency294(d)(1)(A)294(d)(2)1950$11,128.84$1,444.66$963.1019525,168.43Many of the issues have been conceded by one or another of the parties, which will require entry of decision under Rule 50 in any event. The issues still contested are: (a) The reasonableness of compensation for services rendered by three of the officers of petitioner, Standard Asbestos and Insulating Company, in the years 1949, 1950, and 1951; (b) Whether amounts accrued by petitioner Standard Asbestos and Insulating Company, in 1949, 1950, and 1951, and paid to petitioner Alice D. Ryder in 1950 and 1952, are properly deductible by petitioner Standard Asbestos and Insulating Company, and properly excludible from the taxable income of petitioner Alice D. Ryder; (c) Whether or not the payment by petitioner Standard 192 Asbestos and Insulating Company to petitioner Alice D. Ryder of $13,012.50 was excludible from Alice D. Ryder's taxable income in 1950, the year of receipt; (d) Whether or not petitioner Alice D. Ryder is liable for additions to tax under section 294(d)(1)(A); (e) Whether or not petitioner Alice D. Ryder is liable for additions to tax under section 294(d)(2). Findings of Fact Some of the facts have been stipulated, either orally or in writing, and are incorporated herein by this reference. Salary Issue Petitioner, Standard Asbestos Manufacturing and Insulating Company (hereinafter sometimes referred to as Standard), is a corporation organized in 1918 under the laws of the State of Missouri. Its original capitalization, which has not changed through the years, was $50,000, consisting of 500 shares of stock at a par value of $100 each. Standard was incorporated to do a general asbestos and insulating business and has developed into a technical specialities contractor organization handling all or part of the specifying, fabricating, manufacture, cost estimating, erection and surface finishing in connection with highly technical construction work involving insulation, air conditioning, 193 and temperature control installations. In performing such work, petitioner employs engineers, draftsmen, salesmen, district supervisors, superintendents, and various classes of skilled and unskilled labor. Petitioner's average number of employees during the years 1949, 1950 and 1951 (the years in question), was between 450 and 500, but because much of this labor was temporary and transient, obtained at the work site, the total number of persons working for petitioner at one time or another during the years in issue was approximately 1,500 to 1,600 persons. At all times material hereto Standard was on an accrual basis of accounting. It filed its corporate income tax returns for the calendar years 1949, 1950 and 1951 with the collector of internal revenue for the eighth district of Missouri. Standard's officers during the years 1949, 1950 and 1951 were Willard D. Ryder, president (acting president in 1949); George M. Ryder, treasurer and vice president (1950-51); Richard E. Ryder, secretary; and E. McElreath, assistant secretary. These persons, along with petitioner Alice D. Ryder (1950-51), also constituted the board of directors. Williard E. Ryder was the father of Willard D., George 194 M., and Richard E. Ryder, and the husband of Alice Ryder. Before coming to Kansas City in 1901, he had had experience in the insulation field as factory superintendent for Chicago Fire Proof Covering Company. After arriving in Kansas City, he entered into partnership with three others, doing business as Midland Asbestos Manufacturing Company. This partnership operated until the end of 1912. In 1913, Willard E. Ryder entered into partnership with Ben C. Naylor, doing business as Standard Asbestos Manufacturing and Insulating Company. All the brothers worked for this partnership, both Willard D. and George working in the factory and in various manufacturing departments, and Richard, only 11 or 12 years of age, working at more menial tasks. The corporate petitioner, Standard, was formed with the proceeds of insurance received when the partnership burned out in 1918, and with capital received from Mrs. E. P. Conger. The original stockholdings were in the following amounts: Willard E. Ryder5 sharesE. P. Conger354 sharesW. D. Ryder61 sharesBen C. Naylor60 sharesGeo. M. Ryder20 sharesTotal500 sharesWillard E. Ryder was elected the first president of the corporation and remained its president 195 and chairman of the board of directors until his death on April 1, 1949. He was at all times before his sickness the actual head of the business. The corporation grew considerably in size over the years. Its sales volume for the year 1918 was $41,826.31. For the year 1951 it was $3,565,763.92. By the year 1925, the Ryder family acquired a majority of the stock of the company. The stockholders of the corporation during the years 1949-1951 were as follows: OwnerAmountWillard E. Ryder41 1/2Alice D. Ryder (wife)6Willard D. Ryder66 1/2Merle H. Ryder (wife)66 1/2George M. Ryder86Iris B. Ryder (wife)47Richard E. Ryder66 1/2Hazel M. Ryder (wife)66 1/2Elizabeth McElreath26 3/4Charles C. Knapp26 3/4 George, Willard and Richard Ryder have had long and outstanding careers with the company. They all worked for the company in various capacities immediately after its incorporation, and by the late 1920's were obtaining inquiries from substantial customers, securing large contracts, estimating jobs, bidding on them, closing contracts, supervising work in the field, collecting accounts, and, when necessary, designing new installations and equipment. After the death of Willard E. Ryder, his duties were 196 divided with substantial equality among the three brothers. They continued to perform his duties through 1951. From the date of his father's death, Willard D. Ryder held the office of president (acting president in 1949). His duties in this capacity included acting as sales manager, engineering director, Kansas City district manager, and Denver district manager. In addition, he accepted all contracts for the company, helped determine cost prices and selling prices, was responsible for billing and invoicing, determined estimating procedures, and performed the ordinary duties of president of a corporation. George M. Ryder, after his father's death, became general office manager, in which position he was responsible for the financial relations of the company, its supplier and distributor relations, its customer credit limits, all accounting (including cost accounting), purchasing, collections, and company disbursements. He was also vice president and treasurer of the corporation and helped determine costs and selling prices. Richard E. Ryder, after his father's death, was directly responsible for all requisitions, job supervision, and field supervision in the Gulf and south central area 197 of the United States. His duties included the supervision of work, and the responsibility for branch payrolls and expense accounts. He was secretary of the company, and assisted in estimating work, and in developing new products. During the years in question, Richard suffered from a heart condition, and underwent surgery in 1950. After a recuperative period of three months, he again resumed his duties. While the company employed branch managers, supervisors, draftsmen, engineers, salesmen and the like during the years in question, all employees were under the direct supervision of at least one of the brothers. No one other than the three Ryders was allowed to handle contracts amounting in sales price to over $5,000. The estimating, bidding, and supervision of contracts in excess of that amount were handled by either George, Willard, or Richard. The Ryders also obtained most of the inquiries on substantial contracts, although occasionally others in the organization helped in that regard. During the years in question no employee of Standard other than officers was paid more than $9,000 per year. Each of the brothers devoted greatly in excess of 40 hours per week to the business during 198 the periods here material. Defense work performed by the company during the Korean War amounted to between 25 per cent and 33 per cent of sales for each of the years 1950 and 1951. The company's performance was highly complimented by the Renegotiation Board, which approved the maximum profit allowable to contractors. The Board did not question the brothers' compensation. The brothers drew currently $70 per week during the years in question. The remainder of their compensation was paid to them in the form of a bonus. The compensation deducted by Standard in 1949, 1950, and 1951 was authorized by the board of directors as follows: "Minutes of October 3, 1949: "In consideration of the constantly increasing volume of business being handled by the Company and recognizing the resultant increase in responsibility levied upon the officers, multiplying the demands upon their time, their energies, etc., it is directed that compensation to officers and key personnel be authorized and approved up to, but not to exceed, the following annual amounts: W. D. Ryder, Acting Presi-dent$67,500.00R. E. Ryder, Secretary67,500.00G. M. Ryder, Treasurer67,500.00E. McElreath, Assistant Secre-tary15,000.00Branch Managers, drawing ac-counts8,500.00Superintendents, drawing ac-counts8,000.00199 Any salary adjustments shall be handled individually and at the studied discretion of the Acting President, but in any event, all such salaries must be held within the maximum limits herein established and must be, in the opinion of the Acting President, consistent with the earning of the Company." In the minutes of December 1, 1949, after a report on the "highly satisfactory financial condition of the company," and approval of a 10 per cent dividend, the following motion was adopted: "in view of the report just submitted by the Treasurer, that additional salary be paid to all officers for the year 1949, in keeping with the increased earnings of the Company and that such additional salary be in the amounts as determined and designated by Acting President of the Company, W. D. Ryder, and within the limits previously authorized by the Board of Directors." The compensation authorized by the president for the year 1949, payable to each brother pursuant to these minutes, was $52,234.14. The minutes of July 3, 1950, contain, inter alia, the following: "G. M. Ryder, Treasurer, reported that a tentative appraisal of Company's cash position at close of first half of 1950 fiscal year, indicated 200 the following: Cash on hand$361,000A/cs Receivable294,000A/cs Payable49,000Bank Loan60,000Houston Property Loan11,000"Thus reflecting a highly satisfactory liquid condition, and in addition, the existence of a very gratifying back-log volume, all of which conceivably should result in a profitable 1950 year. "R. E. Ryder moved, that in-as-much as the Company's finances indicated a sound liquid status that in view of the increasing time and effort expenditure being required of the officers, in the administration of Company affairs, and in line with increases already granted to the executive and supervisory employees at the various offices, that compensation of all officers for the 1950 year be increased up to 25% beyond the compensation paid the officers for the 1949 year. The exact percentage increase to be designated by the President, with the 25% figure to maintain as maximum." The minutes of December 4, 1950, report "as to the present highly satisfactory financial condition" of the company. The following motion was thereupon adopted: "in view of the report just submitted by the Treasurer, that additional salary be paid to all officers for the year 1950, in keeping with the increased 201 earnings of the Company and that such additional salary be in the amounts determined and designated by the President of the Company, Willard D. Ryder, and within the limits as previously authorized by the Board of Directors." The amount of compensation authorized by the president to be payable to each of the three brothers for the year 1950 was $65,290.17. The minutes of October 10, 1951, contain a report on the financial condition of the company, stressing the fact that large amounts of assets were tied up in accounts receivable for the rest of the year, and extending into 1952. The minutes continue: "Based upon the above report, R. E. Ryder then introduced the following Motion: 'In consideration of the fact that profits for 1951 operations evidence substantial proportion, but in-as-much as it is early to definitely calculate a probable total, that additional compensation be paid to all officers - in amounts as established and instructed by President W. D. Ryder, it being understood, however, that resulting total compensation will not exceed total for the year 1950; and that full consideration be given by W. D. Ryder to determined profits and cash requirements in keeping with the 202 needs of the business, in arriving at compensation amounts.'" By the authority stated in the above minutes, the president fixed compensation for 1951 at $65,290.17, the same amount as for 1950. The parties have stipulated that compensation paid to Richard, George, and Willard, respectively, during the long period the brothers served Standard was dependent upon the cash position and the financial condition of the company. The compensation was also dependent on the earnings and profits of the corporation. As early as December 31, 1921, the board of directors of petitioner corporation gave authority to the chairman of the board to set aside additional compensation as bonus to officers and heads of departments "as the profits resulting from the business may warrant, in the judgment of the managing directors," except that additional compensation be made available "only as the financial condition of the Company may be in condition to conveniently allow such withdrawals." In 1928, because the company was short of working capital, losing money, and raising the quality of the company's product, the board resolved that the president could curtail drawing accounts and that the authority to allow 203 additional compensation as bonus be withheld temporarily, "until, and providing business conditions improve to such extent that board can feel justified in allowing such withdrawals on compensation account without the hazard of continued losses." The authority to allow bonuses was withheld until 1937. During the period between 1928 and 1937, the compensation paid the brothers by Standard was very small, amounting to as little as $910 each per year in 1933 and 1934. By motion of December 20, 1937, the board voted to resume bonuses and pay back bonuses (theretofore suspended) for the years from 1928 on. Authority was given at the same time to make present payment of bonuses for the years 1928, 1929, and 1930. In 1938 and 1939, the salary of each of the brothers was supplemented by amounts considered to be due them as salary (bonus) withheld in back years. Willard D. Ryder left Standard in 1922 to work for Armstrong Cork Company. He returned to Standard in 1927. When he left Armstrong Cork he was being paid $360 per month. His salary upon his return to Standard was $205approximately per month. He returned because of the influence exerted by his father and brothers who persuaded him that 204 the four Ryders could go a lot further together than individually, and that if the compensation was then low, it would not always be so. In 1929, George M. Ryder was loaned to Barrett Company, who paid him $400 per month. At this time his salary from petitioner was $40 per week or $2,080 per year. While with Barrett, that company offered George an increase from $400 to $500 per month if he would stay in its employ. George refused the offer, due mainly to influence exerted by his family persuading him that his place was in Kansas City. Willard E. Ryder intended that when the company's sales volume reached $1,000,000 the salary paid to the brothers would be increased to some point which would be consistent with what was being paid in the industry. This goal was reached in 1941. The following schedule shows the sales volume of the company from 1942 to 1951, inclusive, the aggregate amount of compensation authorized by the board and paid to the brothers for services, (each received the same amount), the aggregate amount received by the brothers before the end of the years in which the work was performed, and the aggregate amount allowed and disallowed by respondent for the years in question: 205 Authorized andReceivedYearSales VolumeDeductedDuring YearAllowedDisallowed1942$2,055,312.68$ 45,000.00$32,460.0019432,690,437.2760,000.0060,000.0019441,149,537.9445,000.0045,035.0119451,600,037.1152,465.0044,964.9919461,653,529.3337,500.0017,730.0019471,751,199.3460,000.005,460.0019482,402,590.1790,000.0042,280.8019492,633,679.78156,696.4241,340.00$105,000$51,696.4219502,578,287.24195,870.5157,515.01120,00075,870.5119513,565,763.92195,870.5110,920.00120,00075,870.51 Each brother's 1940 compensation was $2,100. This amount was increased by the board to $11,000 each in 1941 because the board recognized that the officers had received inadequate salaries prior to that time as part of the plan to bring the company "to its present financial status," and to allow it to accumulate working capital. In 1942, as indicated by the minutes, the board increased the maximum compensation to each brother to $20,000 in recognition of the low salaries paid theretofore, and because the company was doing a larger volume with the same overhead so that earnings would be up. The sum of $15,000 each was the amount finally paid to the brothers for that year. In 1943, salaries were frozen, and the amount paid 206 the brothers was the maximum provided in 1942. The 1946 salary was reduced because of the company's then unfavorable cash position. The 1947 salary was increased because of the company's then favorable cash position. The amounts paid during each of the years 1949, 1950, and 1951, the years in question, were intended to compensate only for services performed during each of those years. No arrangement, agreement, or understanding existed between Standard and the Ryders that any part of the compensation paid them for the years 1949-1951, inclusive, was to be in payment for services performed in prior years, nor did any amount paid for each of said years represent such payment. The compensation for 1949 was determined in the following manner. First, the 1942 compensation was increased by a factor of 2.5, which represented the parties' estimate of the increase in labor cost over 1942. To the resulting amount was added the amount which Willard E. Ryder would have been paid for the last three quarters of 1949, based upon the same formula. (The amount Willard E. Ryder would have been paid for the first quarter of 1949 is discussed in connection with petitioner Alice Ryder.) The total derived 207 by the above computations was divided equally among Willard, George and Richard. The compensation for 1950 and 1951 was determined by increasing 1949 compensation by 25 per cent. Pertinent operating and financial data of petitioner for the years 1942-1951, inclusive, is [are] as follows: GrossYearNet SalesProfit Net Income 1942$2,055,312.68$538,233.16$266,200.9219432,690,437.27696,549.94334,677.6119441,149,537.94378,307.0299,308.7319451,600,037.11388,562.20121,565.5119461,653,529.33413,422.03107,476.1419471,751,199.34437,612.41139,208.2619482,402,590.17548,212.68232,105.8119492,633,679.78743,445.71397,126.9319502,578,287.24846,186.49451,098.6219513,565,763.92803,181.38351,045.82Officers'Net IncomeYear EndSalariesAfter Of-YearSurplusDeductedficers'Salaries1942$296,294.64$ 65,000.00$201,200.921943338,852.3285,000.00249,677.611944387,507.3965,000.0034,308.731945407,526.8374,953.3246,612.191946431,985.2760,000.0047,476.141947457,029.1090,000.0049,208.261948509,969.16135,000.0097,105.811949627,794.65182,008.92215,118.011950710,474.79209,933.01241,165.611951752,999.88209,933.01141,112.81The ratio which the brothers' compensation bears to net sales and to net 208 income before salaries, and the ratio which total officers' salaries bears to net sales and to net income before salaries is indicated in the following schedule: Brothers'Brothers'Officers'Compen-Com-Officers'Compen-YearsationpensationSalariessationNetNetNetNetSalesIncomeSalesIncome19422.2%17%3.1%24%19432.2%18%3.2%25%19443.9%45%5.7%65%19453.3%43%4.7%61%19462.3%35%3.6%55%19473.4%43%5.1%64%19483.7%39%5.6%58%19496 %39%6.9%46%19507.2%43%8.1%47%19515.5%56%5.9%60% Petitioner paid dividends in 1941 of $7,500. In 1942, it paid no dividends and in each of the years 1943 to 1951, inclusive, it paid dividends of $5,000. The Asbestos and Magnesium Materials Company of Chicago is a corporation engaged in the same general line of work as Standard. Pertinent financial data of the corporation for the years 1949-1951, inclusive, is set forth below: 1Officers' SalariesTotal SalariesYearGross SalesPresidentVice PresidentTreasurerGross Sales4/30/49$4,000,000$80,000$55,000$20,0003.9%4/30/505,500,00080,00030,00010,0002.2%4/30/514,450,00080,00030,00010,0002.7%4/30/524,270,00080,00032,00010,0002.9%The president of Asbestos and Magnesium Materials 209 Company during 1949-1951, inclusive, founded the company in 1920. He had 10 years experience at the time the company was organized and put in more than 48 hours a week in the business during the years in question. The vice president of the company in 1949 had had 25 years exeperience and worked in excess of 48 hours a week with the company. The vice president in 1950 and 1951 had 28 or 29 years experience and had been treasurer of the company in 1949. The treasurer of the company in 1950 and 1951 had had experience in the accounting and investment field and was with the company about 10 years. Two men with 15 to 20 years experience each, who did only sales work for Asbestos and Magnesium Materials Company, and who were paid on a commission basis, averaged $40,000 to $45,000 per year each during the years 1949-1951, inclusive. Asbestos and Magnesium Materials Company paid dividends of $50,000 in each of the years 1949 to 1951, inclusive. It had a capitalization of $500,000 consisting of 5,000 shares of common stock with a par value of $100 each. The president owned about 95 per cent of the stock. The Kelley Asbestos Products Company is a corporation engaged in the same general line 210 of work as Standard. Pertinent financial data of the corporation for the years 1949-1951, inclusive, is set forth below: NetPresi-President'sDivi-YearNet SalesGrossIncome dent'sSalarydends PaidProfitSalarySales1949$1,336,440.40$277,883.21$ 73,033.04$16,0001.1%$ 9,35419501,458,206.17263,600.5336,155.5426,0001.7%*19512,274,774.09520,790.94259,136.5326,0001.1%12,896Kelley Asbestos Products Company had approximately 1100-1300 shares of stock outstanding during the years in question, with a par value $100, of which David E. Kelley, the president, owned 1,000 shares. David Kelley has been in the business since 1912, and in 1932 formed the present organization which was operated as a partnership until 1947. The compensation paid by Standard to George, Richard and Willard for each of the years 1949, 1950 and 1951 was in excess of reasonable as to each for the services rendered. Reasonable compensation for services rendered by each of the brothers was $42,500 for the year 1949 and $47,500 for each of the years 1950 and 1951. Payment of $13,012.50 Willard E. Ryder died on April 1, 1949. Prior to that time he had been the active 211 head of the business. His compensation, like that of his sons, was not fixed by written contract with the company, but, since at least 1941, was fixed each year on the basis of the financial condition and the earnings of the company for the year. His compensation was ordinarily 20 to 25 per cent greater than that paid to each of his sons. Willard E. Ryder, by his usual drawings of $70 per week received $1,050 from the company as compensation for the first 15 weeks of 1949. At the close of that year, when compensation to officers was being determined, the company paid to Alice Ryder $13,012.50, which sum represented the bonus, or compensation, which Williard E. Ryder would have received for the first quarter of 1949 under the formula outlined supra, whereby the 1942 salaries were increased by a factor of 2.5. There is no evidence of any action by the board of directors authorizing this payment. There was no obligation on the part of the company to pay any amount to Alice Ryder, as widow of Willard E. Ryder. Willard E. Ryder was the first officer of the company to die, and this marked the first time on which there was occasion to consider death benefits to the wife of a deceased officer, 212 although retirement benefits had been paid to other employees as the occasion arose. (See infra.) The amount of $13,012.50 was accrued by the company and deducted on its return for 1949 as part of a payment to W. E. Ryder. The amount was actually paid on March 4, 1950, to Alice, who reported her income on the cash basis, and included the amount in her income tax return for 1950. At no time did Alice render services to the company except as director. She was elected a director in January 1950, after the payment to her had already been determined. She owned 47 1/2 shares of the company's stock out of a total of 500 shares outstanding prior to and at the time the amount in question was accrued and paid. The officers of the company intended the payment to be a gift. The amount of $13,012.50 paid by the company to Alice Ryder represented a gift from the company to Alice Ryder. Pension Issue On February 17, 1949, an agreement which, inter alia, gave an option to the named stockholders to purchase the stock of other named stockholders under certain contingencies, was entered into among the parties stated, and included the following provisions: "AGREEMENT "THIS AGREEMENT, made and entered 213 into this 17th day of February, 1949, by and between W. E. Ryder, Alice D. Ryder, Willard D. Ryder, Merle H. Ryder, George M. Ryder, Iris B. Ryder, Richard E. Ryder, Hazel M. Ryder and E. McElreath (hereinafter sometimes separately referred to as a 'Stockholder' and collectively referred to as the 'Stockholders'), "WITNESSETH: "WHEREAS, the Stockholders presently or prospectively own substantially all of the common capital stock (hereinafter referred to as the 'Shares') of Standard Asbestos Manufacturing and Insulating Co., a Missouri corporation (hereinafter referred to as the 'Company'), and "WHEREAS, the Stockholders have agreed among themselves with respect to certain restrictions upon the transfer of the Shares, and desire to reduce said agreement to writing; "NOW THEREFORE, in consideration of the premises, the mutual covenants herein contained, and the mutual benefits to be derived herefrom, the sufficiency of such consideration being hereby acknowledged, it is understood and agreed betwen the parties as follows: * * "ARTICLE III "If W. E. Ryder, Willard D. Ryder, George M. Ryder, or Richard E. Ryder shall leave all of his Shares to or for the benefit of his widow in his Last 214 Will and Testament, either outright or in trust for her life, or if all of such Shares shall descend to such widow by operation of law, the Stockholders will cause the Company to pay a pension to such widow so long as she retains all of such Shares (or such trust continues and the trustee retains all of such Shares) and she does not remarry. Such pension shall be paid quarterly, and shall be the equivalent of 50% of the average of the salaries paid by the Company during the preceding quarter to W. E. Ryder and his lineal descendants." * * Standard was not a party to this agreement. Pursuant to the terms of the agreement, the shareholder-signatories thereto, who owned 473 1/4 shares of the 500 shares outstanding, caused the corporation to authorize payment to Alice Ryder of the amount called for by Article III thereof by unanimously adopting a motion which was recited in the minutes of July 5, 1949, as follows: "The Chairman advised the Board of Directors that, pursuant to Article #3 of an Agreement executed by the stockholders of the Company on February 17, 1949, Alice D. Ryder, widow of our late President, W. E. Ryder, was entitled to a pension from the Company equivalent to 50% 215 of the average of the compensation paid by the Company to the lineal descendants of W. E. Ryder.A motion was made by G. M. Ryder that the terms of said contract be complied with and that the Treasurer be instructed to pay such pension to Alice D. Ryder, beginning as of April 1, 1949, and to pay the same semi-annually or quarterly, as the Treasurer may elect, such payments to continue until the further order of this Board." During the years in question the amounts Alice Ryder received pursuant to the agreement and motion, as set forth above, along with the amounts she reported in her income tax returns are shown below: ReportedReceived1950$ 6,876.44$27,367.40195228,225.0032,645.09Respondent increased Alice Ryder's income by the amount of $20,491.08 for the year 1950, and $5,300.08 for the year 1952, on account of the payments received by her by virtue of the aforesaid agreement and motion. Respondent now concedes that $1.88 for 1950 and $909.99 for 1952 were erroneously included in Alice Ryder's income. Standard accrued the amounts payable to Alice on its books each year. Small amounts were paid in each year of accrual, the balance being paid in the succeeding year. No deduction for 216 the amounts accrued was taken by the company on its income tax returns for the years in issue. The company made retirement payments to employees which, with social security, amounted to 50 per cent of their average yearly salary during the years they worked for the company. The amounts paid to Alice by Standard, pursuant to the agreement and motion of the board of directors, constituted a distribution of profits and not a pension. Issue re Additions to Tax Alice Ryder was 84 years old in 1950. Her income tax returns were prepared by Edwin J. Yentzer, a certified public accountant, who also did work for Standard. Alice Ryder did not file a declaration of estimated tax or pay an estimated tax for the year 1950. Opinion Salary Issue With respect to the reasonableness of the salaries deducted by Standard in 1949, 1950 and 1951, petitioner argues alternatively that the compensation included amounts intended to reimburse the brothers for services performed in prior years, or that the compensation was reasonable on the basis of services performed by the brothers in the years in question. We think it clear from the record that petitioner has failed to establish that the compensation deducted 217 in 1949, 1950 and 1951 had any ascertainable relationship to services performed in prior years. The years in which the brothers received a low income from the corporation were in the period of the 1920's and 1930's. During this time the brothers chose to work for Standard rather than other companies though they had ample opportunity to work for others. Whether or not their choices were prompted by understandings that when the company was in a position to pay larger salaries the brothers would be compensated for any year at a rate in excess of the value of their services to the company during that year, there is no evidence that part of the compensation authorized for 1949, 1950 and 1951 was so intended. Cf. Lucas v. Ox Fibre Brush Co., 281 U.S. 115">281 U.S. 115. Petitioner relies on the following testimony in the record: By George M. Ryder [with reference to Willard's return in 1927]: "My younger brother and my father cornered him and talked him into coming back into the business with the promise that although he would temporarily have to work for less money than he was drawing, that as the business was built up he would be reimbursed for the time at which he drew lesser money." By Willard D. 218 Ryder [with reference to his return in 1927]: "They pointed out that we could go a whole lot farther together than we could individually, and they promised that later on it would be made up to us." By Willard D. Ryder [with reference to his father's attitude towards compensation]: "His position was always, when your volume reached a million dollars we could talk about it then, we could talk about salaries to some point which was relative with what was being paid in the trade." We note that there is some difference between George's third party account of what was promised to influence Willard to return, and Willard's much less definite account of the same promises. We note, more significantly, that in describing his father's attitude, Willard clearly states that his father's position was always to bring salaries into line with going rates in the industry when the million dollar volume was reached. When all of the above testimony is examined, along with the minutes of the corporation in 1928, 1937, and 1939 (referred to in our Findings), first withholding extra compensation and then allowing reimbursement for the amounts withheld, and when consideration is also given to the testimony 219 that the amounts authorized by the minutes for reimbursement were paid, we think that the evidence negatives petitioner's argument to the effect that part of the compensation received in each of the years 1949, 1950 and 1951 was intended as reimbursement for services performed in prior years. Especially is this so when it is considered that compensation for the years 1941-1948, inclusive, is substantial; that the minutes for 1941 and 1942 indicate that some part of the compensation paid for that period was intended as reimbursement for prior years' services; and that the minutes authorizing compensation for 1949, 1950 and 1951, make no mention of an intention to reimburse for prior years' services, but on the contrary, indicate that compensation was determined on the basis of then existing conditions. It should be recalled, also, in this connection that the Ryders controlled the company. For these reasons we hold that the compensation in question was intended to be paid for services rendered in the year for which the compensation was authorized, i.e., each of the years 1949, 1950 and 1951. In any event, it is clear that petitioner has failed to carry its burden of proving the contrary. 220 See E.B. & A. C. Whiting Co., 10 T.C. 102">10 T.C. 102, 117, 118 (1948). We recognize that it is not an unreasonable business practice "for an employer to recognize and reward sacrifices made by employees in the hard formative days by granting a more generous compensation in the days that are lush." Commercial Iron Works v. Commissioner, 166 Fed. (2d) 221, 224, (C.A. 5, 1948). There is, however, no indication that petitioner here so intended for the years in question and, as we have said, we think the evidence points the other way. Cf. Christman Co., 8 T.C. 679">8 T.C. 679 (1947), affd. on other grounds 166 Fed. (2d) 1016, (C.A. 6, 1948). We consider, therefore, whether or not the compensation in question was reasonable in the light of the services rendered by the brothers during the years in question. In determining the reasonableness of salaries, all the elements of the particular case must be considered as disclosed by an analysis of the record. Heil Beauty Supplies v. Commissioner, 199 Fed. (2d) 193 (C.A. 8, 1951), affirming a Memorandum Opinion of this Court dated December 13, 1950 [9 TCM 1125,; The Barto Co., 21 B.T.A. 1197">21 B.T.A. 1197 (1931)]. The minutes of the company indicate that the board of directors 221 considered the compensation reasonable. While the decision of the board is a factor to be considered, it is not, of course, controlling upon us, but it is to be weighed in the light of all of the circumstances of the case. L. Schepp Co., 25 B.T.A. 419">25 B.T.A. 419, 429 (1932). The action of the board must be examined closely, particularly in a case involving the reasonableness of salaries paid to officers in a closely held corporation in which the officers are also the majority shareholders and directors, with a view to determining whether or not any part of the amount designated as salaries may in fact represent a distribution of profits under the guise of compensation. Miles-Conley Co. v. Commissioner, 173 Fed. (2d) 958, 960 (C.A. 4, 1949), affirming 10 T.C. 754">10 T.C. 754; Crescent Bed Co., Inc. v. Commissioner, 133 Fed. (2d) 424 (C.A. 5, 1943), affirming 46 B.T.A. 1280">46 B.T.A. 1280; Marble & Shattuck Chair Co., 39 Fed. (2d) 393, (C.A. 6, 1930) affirming 13 B.T.A. 657">13 B.T.A. 657. We first consider the year 1949. Respondent allows a salary of $35,000 to each brother for that year, recognizing, in effect, an increase of $5,000 to each over their salaries for 1948. His determination is prima facie correct, and the burden 222 lies with the corporate petitioner to show error. The company fixed the amount of salary to each brother at $52,232.14, an increase to each of $22,232.14 over 1948. We think it clear that the corporate petitioner has failed to prove that the amounts so fixed are reasonable. At the same time, we think the record justifies salaries to each brother in excess of the amounts determined by respondent. In reaching this conclusion, and in determining, infra, the amounts which we hold to be allowable, we have given careful consideration to all of the evidence in the record, including that relating to the services performed by the brothers; their industry, capacities and versatility; the financial data presented; the method (formula) by which their salaries were calculated by the company; the information in the record as to compensation to officers by other organizations whose business activities bore some relationship to those of petitioner; the opinion evidence offered in connection therewith, and all other relevant factors set forth in our Findings and in the stipulation of the parties. It would serve no useful purpose to repeat or summarize all of these considerations in our Opinion. We 223 think it appropriate, however, to mention several factors. We think the record demonstrates that the progress of the company in 1949 is attributable in some measure to the services of the three brothers. The father, who had been the leader, died on April 1, 1949. The brothers took over his duties, allocating them substantially equally to each brother. The net income of the company increased from $232,105.81 (before officers' salaries) in 1948, when the brothers' compensation was $30,000 each, to $397,126.93 in 1949. This last factor is not to be overemphasized, because net sales did not increase in anything like the same proportion, and it is obvious that profits may fluctuate from year to year for reasons not attributable to officers' services (net profits before salaries increased in 1950, although net sales decreased slightly, while net profits before salaries decreased somewhat in 1951 although net sales materially increased). Nevertheless, we think that a substantial increase in earnings tends to support the view that the brothers, together, ably and successfully took over the entire management of the business. As mentioned above, we have given some consideration to the "formula" 224 upon which the salaries were based. We think it is an indication of an effort at consistent treatment of the problem. We do not, however, attribute to it the weight with which petitioner would have us regard it. We do not think a relationship of officers' salaries to labor cost is controlling, or essentially sound, particularly in the light of changing conditions from 1942 (and prior thereto) through 1949. We, of course, have noted that petitioner introduced testimony of the vice president of a somewhat similar organization who testified that the compensation determined by the company was reasonable, but his appraisal was based mainly on his rule of thumb opinion that any amount for total officers' salaries representing 5 to 6 per cent of sales was reasonable. In this connection, however, we also note that for each of the years 1949 and 1950, the combined officers' salaries came to more than 6 per cent of sales. We have considered the testimony of the witness and have utilized it to a limited degree in reaching our conclusion, but we do not consider ourselves bound by his ultimate opinion. An indication that an opinion based upon a ratio of officers' compensation to sales is not to 225 be accepted without reservation appears from facts already referred to showing that net sales for 1950 decreased below the 1949 figure, although, at the same time, net income before officers' salaries increased, while, in 1951, on the other hand, net sales increased materially, but net income before officers' salaries was less for that year than either 1949 or 1950. In all events, we conclude, upon consideration of all relevant factors, with some emphasis upon the taking over of the father's duties after April 1, 1949, and the continued success which attended the changeover, that part of the father's probable compensation, if he had lived, should be allocated equally to the brothers for 1949 and that the success of the company in 1949 should be reflected in the amount of compensation determined. It is our judgment, in the light of the foregoing, that, for the year 1949, an increase in the compensation of each brother of $12,500 over 1948 compensation is justified by the record, resulting in the allowance of total compensation to each in the amount of $42,500 for the full year 1949. Respondent allowed $40,000 as compensation to each brother for each of the years 1950 and 1951 (an increase 226 of $10,000 to each over 1948). His determination is prima facie correct. Our analysis of the problem of compensation for the brothers in 1949, and our further consideration of the record relating to 1950 and 1951, leave us with no doubt that the corporate petitioner has failed to meet the burden of proving that compensation, fixed by the company at $65,290.17 for each brother for each of the years 1950 and 1951 was reasonable. The increase adds 25 per cent to the compensation of each as fixed by the company for the year 1949. The record does not, in our judgment, furnish a basis for such increases. We think it unnecessary to repeat our own discussion of 1949 compensation as background for discussing 1950 and 1951. We think that in essential respects the business was neither more nor less successful and that the services of the brothers were not, to any substantial extent, more valuable or extensive in 1950 and 1951 than in 1949, except for the fact that in 1950 and 1951, the brothers, together, were in complete charge of the entire management of the business and were in full stride as such for the entire year, instead of taking over and managing the business for nine months, as in 227 1949. It is true that net income before officers' salaries increased in 1950, but net sales dropped off slightly. On the other hand, in 1951, net sales materially increased, but net profits before officers' salaries dropped below 1949. We have no doubt that Korean War conditions were in part responsible for the variations in 1950 and 1951, but the over-all picture from the standpoint of compensation does not, in our judgment, vary materially from 1949. We note the fact that the Renegotiation Board did not question officers' compensation, and we have given consideration thereto, but we do not know what record was before the Board, and absence of action on the part of the Board is clearly not binding upon us or upon respondent. Kerrigan Iron Works, Inc., 17 T.C. 566">17 T.C. 566, 573 (1951). Consistent with the foregoing, we conclude that compensation of $47,500 is properly allowable to each brother for each of the years 1950 and 1951, representing an annual increase of $5,000 to each over compensation for 1949. Payment of $13,012.50 With respect to the payment of $13,012.50 to Alice Ryder, respondent challenges only the allegations of Alice Ryder that the amount represented a gift rather than 228 taxable income. The resolution of this question depends upon the intentions of the parties, particularly that of the employer, which intention must be gleaned from the circumstances surrounding the transaction. Estate of Frank J. Foote, 28 T.C. 547">28 T.C. 547, 549 (1957). We think the payment represented a gift. Alice Ryder performed no services for the company at the time of the accrual of the payment in question. She owned only 47 1/2 shares of the 500 shares of stock outstanding, although control of the stock was in her family. The amount was paid directly to her and not to her husband's estate. There was no obligation on the part of the company to make such payment to her. These facts were present in Estate of Arthur W. Hellstrom, 24 T.C. 916">24 T.C. 916 (1955), and were deemed sufficient there to support the view that the payment was a gift. We think the facts stated above outweigh any indications to the contrary, and support a holding that the payment was not taxable income. Estate of Frank Foote, supra; Florence E. Carr, 28 T.C. 779">28 T.C. 779, 781 (1957), on appeal (C.A. 2); Florence S. Luntz, 29 T.C. - (Filed January 13, 1958). Respondent argues that the company deducted the accrued amount on its tax 229 return and that Alice included it in her 1950 return as taxable income. These circumstances, while factors to be taken into consideration, are not controlling and, of themselves, do not require a conclusion contrary to the one we have drawn. Estate of Arthur W. Hellstrom, supra; Estate of Frank J. Foote, supra.Respondent argues that there was no authorization for the payment and, therefore, that there can have been no gift. We agree that the record does not show any formal authorization. There is no dispute, however, that Alice received the amount of $13,012.50 in 1950, and there is convincing oral testimony that it was intended as a gift to her. Respondent argues further that since the amount paid was computed on the basis of the amount which W. E. Ryder had earned during the first quarter of 1949, the amount represents compensation. We need not decide whether the equivalent of the amount paid to Alice was earned by and should be deemed to be income to W. E. Ryder or his estate, since his taxes and those of his estate are not before us. Assuming that it should have been so treated, or that the payment to Alice was measured by compensation which would have been paid to W. E. Ryder, 230 we note, as we noted in Estate of Arthur W. Hellstrom, supra, that gifts to widows are frequently determined by the amount which an officer or employee would have earned had he lived. Assuming, arguendo, that the amount was earned prior to the death of W. E. Ryder, that fact would not alter our conclusion that the amount was not taxable income to Alice Ryder. In Florence E. Carr, supra, where the corporation was bound by contract to pay over to the employer's widow, in installments, amounts earned by the employee before the contract was entered into, we held that the amounts did not constitute taxable income to the widow. And in Estate of John A. Maycann, 29 T.C. 81">29 T.C. 81, where respondent argued that a bonus which had been paid to the widow in an amount equal to that which had been paid consistently to the deceased in prior years, should, because the practice was consistent, be deemed to have been earned by the deceased before his death, we held that the testimony of officers to the effect that the payment was intended as a gift must prevail over respondent's argument. In the light of the foregoing discussion, we hold that the payment of $13,012.50 received by Alice Ryder in 1950 was 231 not taxable income to her and should not have been reported as such in her return for that year. Pension Issue We have found as a fact that the payments to Alice by Standard pursuant to the agreement of February 17, 1949, and motion adopted by the board under date of July 5, 1949, both of which are set forth in our Findings of Fact, were distributions of profits. Accordingly, payments are taxable to, and includible in, Alice's income, and are not deductible by Standard. Petitioner argues that the amount is deductible by Standard and not includible in Alice Ryder's income, relying mainly on Rev. Rul. 54-625, C.B. 1954-2, 85, and upon the cases therein cited on the deduction issue. While the facts stated in that ruling bear some resemblance to those before us, there are facts here present which we think controlling, and which lead to a contrary view. The facts which emerge in this case as the distinguishing features are that under the agreement it was necessary that the stock of her husband pass to Alice outright or in trust, either by her husband's will or by operation of law, and also that she retain the stock in order for her to receive the "pension." We think the requirements that 232 Alice must receive and retain her husband's stock are here controlling. Moreover, neither the agreement nor the resolution of the board recite that the payments were in recognition of her husband's past services. The only recital of purpose relates to "restrictions upon the transfer of the shares." Thus, the complexion of the payments is one of distribution of earnings to stockholders in order to deter alienation of stock, rather than to compensate for past services, even though measured thereby. In this respect, the importance to the family of control of the company is a factor of significance. The intention of the parties, as stated in the agreement, was to provide "certain restrictions on the transfer of the Shares." The parties promised that if the described beneficiaries of the deceased officer would not transfer their shares, they would profit from the corporation's business beyond the regular dividends receivable from the ownership of the shares. Standard was not a party to the agreement, and its authorization of payment of the amounts called for in the agreement was procured by the controlling stockholders "pursuant to Article #3 of our Agreement executed by the stockholders 233 of the Company," under which Alice Ryder was "entitled to a pension from the Company." No such motive as compensation for her husband's past services is brought out in the record. Respondent argues that the case of Astorian-Budget Publishing Co., 44 B.T.A. 969">44 B.T.A. 969 (1941) is controlling, and we agree. In that case an heir of a deceased stockholder, who inherited stock in the corporation, was paid certain amounts pursuant to an agreement among the stockholders to pay to his heir the salary of any stockholder who died so long as the stock was held by the heir. The agreement was among stockholders only and the corporation was not a party. We there held that no deduction for the payment was allowable to the corporation, which paid amounts to the heir of a deceased stockholder-signatory. As to the requirement that the heir hold the stock, we said (p. 973): "Such a provision bears more earmarks of a special provision for the distribution of profits to an officerstockholder than it does to a pension payment." Petitioners attempt to distinguish the Astorian-Budget case on the grounds that the case dealt with an agreement which provided for payment to be made to the deceased stockholder's estate 234 or next-of-kin, relying on Est. of Edward Bausch, et al, 14 T.C. 1433">14 T.C. 1433, affd. 186 Fed. (2d) 313 (C.A. 2, 1951). However, the Findings of Fact in Astorian-Budget recite that payment was to be made to the widow or next-of-kin, and payment was made directly to the next-of-kin of the deceased stockholder except during the period of administration of his estate. We see no significant difference between the provisions of the contract in Astorian-Budget and the one involved herein which would in any way support petitioners' contention. Furthermore, as pointed out in Estate of Edward Bausch, supra, the fact that payment was made to the estate is significant only as it tends to prove that the payment was not intended as a gift. Cf., e.g., Estate of Frank J. Foote, supra.In our case (as in some respects in Astorian-Budget, supra), other facts above adverted to - that the agreement required the intended recipient to receive and retain the stock; the absence of evidence that the payments were in compensation for past services; the fact that the corporation was not a party to the agreement and that the carrying out the provisions of the agreement was procured by the stockholders who wanted 235 the stock to remain in the family - negative any intention to make a gift, or pay a pension, and, to the contrary, tend to establish that the significant reason for the payments was to discourage the recipient from transferring her stock. Since we hold that the payments represented a distribution of profits by the company, they, of course, consituted income to Alice Ryder and are to be included as such in the year of receipt. Correspondingly, they are not deductible by Standard. Issue re Additions to Tax With respect to the additions to tax determined for failure to file a declaration of estimated tax for the year 1950, petitioner had failed to carry her burden of proving error in respondent's determination. On brief, it is argued that petitioner was aged and "placed these affairs in the hands of Edwin J. Yentzer, a certified public accountant and a capable person to handle tax affairs." There is no evidence in the record (and petitioner's brief furnishes no reference to the transcript) to the effect that petitioner was infirm in 1950, and did not pay attention to her affairs, or that she relied wholly or even substantially on Yentzer. Inconsistent with the inference which petitioner 236 would have us draw from age alone, petitioner was elected to the board of directors of Standard in January of 1950, and from the minutes it appears that she took an active part in the affairs of the corporation. It is also argued on behalf of Alice that there was disagreement with respect to the taxability of the payments, and that she would not have had to file a declaration of estimated tax if it were not for the inclusion of the payments in income. It is urged on this premise that her failure to file an estimated declaration was due to reasonable cause, and not to negligence. Petitioner, however, has not shown that her gross income from sources other than the payments in question could not reasonably be expected to be in excess of $600, and that her gross income from sources other than wages would not reasonably be expected to exceed $100 for the year in question. Section 58(a)(2) of the Internal Revenue Code of 1939. Her return for 1950 discloses income in excess of the minimum statutory requirements for filing a declaration of estimated tax. Moreover, there is no evidence that her failure to file a declaration of estimated tax was due to the fact that she thougth the amounts here 237 in question were not taxable. Indeed, for the year in question, a substantial portion of such payments were reported by her as income. We think it clear, therefore, that petitioner has failed to sustain her burden of proof on this issue. Since her failure to file a declaration of estimated tax is deemed to be equivalent to an estimate of zero, the addition to tax under section 294(d)(2) is applicable. The amounts of the additions must, of course, await the final computations under Rule 50. Decisions will be entered under Rule 50. Footnotes. Before salaries subtracted.↩1. See infra as to substantial compensation of the two salesmen.↩. After salaries, but before taxes. ↩**. No information available.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622505/	INTERSTATE RESERVE LIFE INSURANCE COMPANY, AN ILLINOIS CORPORATION, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Interstate Reserve Life Ins. Co. v. CommissionerDocket No. 78638.United States Board of Tax Appeals37 B.T.A. 54; 1938 BTA LEXIS 1091; January 12, 1938, Promulgated 1091 "Advance Premium Fund", maintained by petitioner, was not within the meaning of "reserve funds required by law" as defined by the Revenue Act of 1932, section 202(b). Raymond F. McNally, Jr., Esq., for the petitioner. E. L. Corbin, Esq., for the respondent. LEECH54 OPINION. LEECH: The respondent determined a deficiency in income tax against the petitioner in the amount of $411.68 for the calendar year 1932. This proceeding involves the correctness of that determination. The only issue now left as the subject of inquiry here is whether, in computing the net income of the petitioner for the calendar year 1932, the petitioner is entitled to the deduction of 4 percent of the mean of the reserve of "advance premium payments" under the provisions of section 202(b) of the Revenue Act of 1932. No testimony was taken. The case was submitted on the pleadings and certain stipulations of fact. We find the facts as thus evidenced. 55 The petitioner is an incorporated life insurance company. It was organized as the Merchants Reserve Life Insurance Co. under an act of the Legislature of the State of Illinois entitled "An Act to incorporate1092 companies to do the business of life or accident insurance on the assessment plan, * * ", approved June 22, 1893, effective July 1, 1893. The articles of incorporation of the petitioner have been amended several times. The amendments pertinent to our inquiry were those of September 1, 1921, July 18, 1923, and March 17, 1930. That of September 1, 1921, contained the following provision, inter alia:ARTICLE X. Section 1. Policies of Insurance shall be written by this company with assessment rates based upon the American Experience Table of Mortality with four percent interest, and such policies shall be known as "Legal Reserve Policies"; the time when the company shall begin issuing such policies to be determined by vote of the Board of Directors; the issuance of such polices shall not affect the rates to be paid by policy holders under the policies heretofore authorized. The amendment of July 18, 1923, provided for the establishment of an advance payment fund. Section 6 of those amended articles provides: All deposits received from policy holders of Legal Reserve Policies in addition to the premiums required to continue the insurance in force shall be kept separate1093 and apart from all premium payments and shall be placed in a Fund to be kept by the Company, known as the Advance Payment Fund. All such deposits shall be improved by interest at the rate of four percent per annum and the interest credited at the end of each policy year. Such interest payments shall be made from the Surplus Fund of the Company. All or any part of the amount thus credited may be withdrawn in cash by the Insured after thirty days written notice by the Insured of his desire to withdraw all or such part of the amount thus credited, or may be applied by the Company towards the payment of premium if the policy should become in default in premium payment and the amount to the credit of the Insured is sufficient to pay at least one quarterly premium. The amendment of March 17, 1930, provided for the change in the name of the company from the Merchants Reserve Life Insurance Co. to the Interstate Reserve Life Insurance Co. The policy under which these advance premiums were paid contained, among others, the following provisions: NOTICE OF PAYMENT, REINSTATEMENT Notice of each and every payment due or to become due hereon is given and accepted by the delivery1094 and acceptance of this policy. All premiums are due and payable at the Company's home office or its designated depositories. If any premium shall not be paid when due or within 30 days thereafter, this policy shall thereupon cease and determine unless maintained in force as provided under the heading "Privilege of Advance Premium Payments" on the Third page hereof. In case this policy is lapsed for non-payment of premium, it may 56 be reinstated within two years thereafter upon evidence of insurability satisfactory to the officers of the Company, and upon payment of all the premiums then due and unpaid with interest at 6% per annum. No annual premium shall exceed in amount, in any one year, the annual premium stated, unless the mortality experience of the Company should exceed that of the American Experience Table of Mortality for such a period as to exhaust the mortuary and surplus funds and then only for an amount sufficient to pay the pro-rata share of the excess mortality. [Emphasis supplied.] The private property of the policyholders of this Company shall be exempt from corporate debts. PREMIUM PAYMENTS The annual renewal premium on this policy will be Dollars1095 payable in advance, but upon written application of the Insured, the Company will accept payment in semi-annual or quarterly payments in advance as follows: Dollars on the day of and or: Dollars on the day of and ; provided that upon death of the Insured, any semiannual or quarterly payment necessary to complete premium payment for the then current policy year will be deducted from the amount otherwise payable under the policy. DIVIDENDS This policy shall participate annually beginning at the end of the first policy year in the surplus earnings of the Company as ascertained and apportioned by the Board of Directors provided all premiums required hereon have been duly paid. Such dividends shall be paid or applied according to one of the following options which the Insured may elect: Option 1. Applied to reduce the premiums on the policy. Option 2. Paid in Cash. Option 3. Placed in the Advance Payment Fund to the credit of the Insured to be used in the manner prescribed for payments into said Fund as stated on the third page hereof. Election of an option may be made when the policy takes effect or at any time thereafter and shall remain in effect until a new1096 option is selected. If no option is selected, the dividends will be applied as in Option 1, and in the event of failure to pay the balance of the premium due, or in the event of payment of the full premium, will be paid into the Advance Payment Fund to be used in the manner prescribed for payments into said Fund as stated on the third page hereof. PRIVILEGE OF ADVANCE PREMIUM PAYMENTS The Insured hereunder shall have the right, beginning with the second policy year, to deposit ANNUALLY IN ADVANCE with the Company the sum of dollars, (hereinafter called deposit) each such annual deposit to be in addition to the annual renewal premium required for this insurance as stated on the second page hereof, making total payments of dollars annually in advance. In the event that the Insured does not exercise this privilege at the beginning of the second policy year, he or she shall have the privilege of beginning to make such deposits at the beginning of any subsequent policy year, by the payment of all omitted payments with interest compounded at the rate of 57 4 per cent per annum; provided, however, that no deposits will be received in any such case unless all the premiums1097 required on the policy have been duly paid. All such deposits shall be kept separate and apart from all payments made to the Company for other purposes and shall be held to the credit of this policy in a fund to be known as the Advance Payment Fund kept be the Company, and paid on account of this policy under the following conditions: (1) Interest compunded at the rate of four per cent per annum shall be allowed on all such deposits, such interest to be paid into the Advance Payment Fund and credited to this policy at the close of each policy year. (2) Upon thirty days written notice, the entire amount credited to this policy in the Advance Payment Fund may be withdrawn by the Insured in cash and this policy may thereafter be continued in force at the option of the Insured by the payment of the premium as stated on the second page of the policy. (3) Should the Insured fail to pay any renewal premium when due, then any amount to the credit of this policy in the Advance Payment Fund, unless the Insured directs the Company otherwise in writing before the date of default in premium payment, shall be applied automatically to the payment of such premium or premiums as long as1098 the amount in the Advance Payment Fund to the credit of this policy will be sufficient to pay at least one full quarterly premium. All amounts thus applied will be charged against the Insured's account in the Advance Payment Fund when applied. While the policy is thus maintained in force, the Insured may resume the payment of premiums without medical examination. If the amount in the Advance Payment Fund should become insufficient to pay at least one full quarterly premium, the Company will mail notice of this fact on or before the date of default in premium payment to the Insured at the last known address of the Insured, and thirty days after the mailing of such notice, provided the premium is still unpaid, will forward to the Insured in cash an amount equal to the amount to his credit in the Advance Payment Fund. Upon tender of such cash payment the insurance hereunder shall cease. (4) Upon the death of the Insured, any amount to the credit of the Insured in the Advance Payment Fund shall be added to the face of this policy and paid to the beneficiary as herein provided. (5) When the amount credited to this policy in the Advance Payment Fund at the beginning of the1099 year of the policy is equal to the amount stated in the Table of Accumulated Savings below at the beginning of the said year, the Insured will be so notified, and thereafter, unless directed in writing by the Insured before the date of default in premium payment, the Company will apply the interest earnings at four per cent per annum on such amount to the payment of the annual renewal premium necessary to continue this insurance in force, any balance remaining after such payment has been made being paid in cash to the Insured; provided, however, that if subsequent to such date the Insured should withdraw in cash such an amount that the remaining balance will not earn sufficient interest at 4 per cent per annum to pay the renewal premiums when due, then premium payments will be continued thereafter only as stated in subdivision (3) hereof. (6) An amount equal to the amount in the Advance Payment Fund shall be kept invested by the Company in securities among the kinds in which Life Insurance Companies in Illinois are required to invest their funds. 58 If the Insured should make all the additional annual deposits in advance as provided above and not withdraw any amount to1100 his credit in the Advance Payment Fund, the accumulated amount to the credit of this policy after each annual deposit is made in advance will be as set forth in the following table: Table of Accumulated Savings in the Advance Payment Fund After the Deposit for the Year Designated Has Been Made.[Table follows.] The advance premium payment fund for the year 1932 amounted to the following: Beginning of that tax year$22,544.82End of such year20,865.62The mean of that fund for such year is $21,705.22. In its income tax return for 1932, the petitioner deducted $868.20, 4 percent of that amount, to which deduction it claims it was entitled under the Revenue Act of 1932, section 202(b). 11101 The propriety of the respondent's disallowance of this deduction presents the only issue. The term "reserve funds required by law", as used in the revenue acts applying to insurance, has a very definite meaning. Thus the Supreme Court said in : * * As the Act does not permit corporations other than insurance companies to make deductions of the kind here under consideration, "reserve funds" may not reasonably be deemed to include values that do not directly pertain to insurance. In life insurance the reserve means the amount, accumulated by the company out of premium payments, which is attributable to and represents the value of the life insurance elements of the policy contracts. The Court of Claims, in , similarly defines and limits the expression: * * * Properly interpreted we think these last-mentioned cases establish the principle that the term "reserve" has a special meaning in the law of insurance and means a sum of money variously computed or estimated which, with accretions from interest, is set aside, 1102 "reserved", as a fund with which to mature or liquidate, either by payment or reinsurance with other companies, future unaccrued and contingent claims. Also, that reserved for matured accrued claims which are payable in cash or subject to certain options cannot be included in the "reserve required by law" within the meaning of the taxing act. In the case of life-insurance companies, the computation of the reserve, in connection with which the deduction is allowable, is to be made upon the basis of an experience table of mortality and an assumed rate of 59 interest, the calculation of which is an actuarial function, and the reserve intended by the taxing act as a deduction is the amount set aside from premiums and built up by interest accretions to meet existing unmatured insurance, whether fire, marine, or life insurance. This principle excludes, as reserves within the meaning of the Federal taxing act, amounts held on account of matured obligations * * . So, it was held in both the cited cases that reserve funds maintained by a life insurance company to meet its liability to holders of matured unpaid coupons attached to its policies were not "reserve funds required1103 by law" within the meaning of the revenue acts. The advance premium fund here had not been applied under the policyholders' option, to the payment of premiums. It was held, therefore, only to guarantee the repayment of those advance premiums, with interest, to the stockholders, or the application of them, at the option of the stockholders, to the payment of premiums due. This obligation was matured and existing. It did not pertain to insurance. It was a mere solvency reserve similar to the reserves discussed in the cited cases. As such, therefore, this advance premium fund did not constitute "reserve funds required by law." But the petitioner argues that the insurance contracts from which the advance premium fund arose were "assessment insurance" and that the "advance premium fund" made up from those payments was "maintained * * * exclusively for the payment of claims * * " and that it was therefore entitled to the deduction of 4 percent of the mean of those funds for the taxable year. Sec. 202(b), supra.That section has appeared without change in every revenue act since and including that of 1921. 2 See also Revenue Act of 1916, sec. 12(c). No authority has been1104 called to our attention, construing that legislative provision. The reason may be that the answer is so obvious. It would be difficult, if not impossible, to conclude from section 202(b), supra, alone, that Congress intended "reserve funds required by law" in assessment insurance to include something not only definitely excluded by the term in other insurance, but wholly repugnant to the purpose of the phrase in the revenue acts. The Court of Claims, in the Continental Assurance Co. case, supra, stated this purpose clearly and its application here thus: * * * But in the income-tax statutes Congress was not legislating with reference to solvency matters or accrued and unpaid claims or refunds of insurance companies; instead it was dealing with the determination of taxable income and the deductions from income in determining the amount subject to the income tax. For this reason matured or accrued claims, so long as they remain payable upon demand, have no place in the reserve contemplated in the taxing acts. 1105 60 We conclude that the expression "claims arising under certificates of membership * * " used in section 202(b), supra, means life insurance claims, only, and does not include the claims of policyholders in connection with the advance premium fund here. This interpretation is supported by the construction of the substantially similar expression "policy obligations" in We think section 202(b), supra, does not change or broaden the scope of "reserve funds required by law" when used in connection with assessment insurance. In view of the fact that premium payments are the basic source of insurance reserves, excepting in assessment insurance (see Revenue Act of 1916, sec. 12, supra; , and cases cited therein), it would seem that section 202(b), supra, was meant merely to provide equality of treatment of assessment insurance by including within the meaning of "reserve funds required by law" funds raised by assessment as well as from premium payments. Decision will be entered for the respondent.Footnotes1. SEC. 202. GROSS INCOME OF LIFE INSURANCE COMPANIES. * * (b) The term "reserve funds required by law" includes, in the case of assessment insurance, sums actually deposited by any company or association with State or Territorial officers pursuant to law as guaranty or reserve funds, and any funds maintained under the charter or articles of incorporation of the company or association exclusively for the payment of claims arising under certificates of membership or policies issued upon the assessment plan and not subject to any other use. ↩2. Acts of 1921, 1924, and 1926, sec. 244(b); Acts of 1928, 1932, and 1934, sec. 202(b). ↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622506/	JERRY McGARVEY, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentMcGarvey v. CommissionerDocket No. 37331-85.United States Tax CourtT.C. Memo 1987-521; 1987 Tax Ct. Memo LEXIS 513; 54 T.C.M. (CCH) 876; T.C.M. (RIA) 87521; October 6, 1987. 514 Jerry McGarvey, pro se. Clinton Fried, for the respondent. COHENMEMORANDUM FINDINGS OF FACT AND OPINION COHEN, Judge: In separate notices of deficiency, respondent determined deficiencies in and additions to petitioner's Federal income taxes for 1982 and 1983 as follows: Additions to TaxYearDeficiencySec. 6651(a) 1Sec. 6653(a)(1)Sec. 6653(a)(2)Sec. 66541982$ 13,912$ 2,482.95$ 695.60 $ 869.86* 50% of the interest due on the deficiency of $ 9,931.80.1983742185.5037.10 -- 50% of the interest due on the deficiency of $ 742.The issues to be determined are whether petitioner is entitled to business deductions, dependency exemptions, and joint return rates and whether he is liable for additions to tax for failure to file timely returns, for negligence or intentional disregard of rules or regulations, and for failure to pay estimated tax. FINDINGS OF FACT Some of the facts have been stipulated, and515 the stipulation is incorporated in our findings by this reference. Petitioner resided in Grayville, Illinois, at the time he filed the petition. During 1982 and 1983, petitioner was employed in the construction industry. He earned wages of $ 41,179 in 1982 and $ 8,248 in 1983. Petitioner also had taxable unemployment compensation of $ 113 in 1982 and $ 347 in 1983 and interest income of $ 12 in 1982 and $ 95 in 1983. In 1980, petitioner married Betty June Carr and became the father of a son. He lived with his wife and son and provided their support in Kentucky until about April 1982. Thereafter petitioner, his wife, and son moved to Grayville, Illinois, where he resided through the time of trial. During 1982 and 1983, petitioner drove his automobile from his residence in Kentucky or in Illinois to various construction sites, where he performed services as a pipefitter or as a welder. Petitioner was sent to the various job sites by his union. Petitioner did not live away from home during 1982 or 1983 but commuted from his home to his job site on a daily basis. Petitioner's wife commenced employment in 1983 at a nursing home. She filed a separate tax return for 1983 and516 claimed their son as a dependent on that return. For 1982 and 1983, petitioner filed Forms 1040 that did not contain any information concerning his income or deductions for the years in issue but set forth frivolous objections and arguments. His petition in this case asserted similar and additional frivolous arguments and failed to allege facts concerning petitioner's income or deductions. Respondent moved for summary judgment and for damages under section 6673. After being given an opportunity to do so by the Court, petitioner filed an amended petition in which he alleged that he was entitled to business deductions for transportation expense in his work, dependency exemptions for his wife and son, and joint return filing status. Petitioner alleged facts in support of his claims, and, on that basis, respondent's motion for summary judgment and damages was denied. The case was then set for trial on the issues raised in the amended petition. OPINION In Kasun v. United States,671 F.2d 1059">671 F.2d 1059 (7th Cir. 1982), the Court of Appeals for the Seventh Circuit, to which our decision in this case is appealable, summarized the rules applicable to petitioner's claim for517 expenses relating to his driving from his residence to the job sites on which he was employed in the construction industry. Pertinent portions of the opinion are as follows: Section 162(a) of the Internal Revenue Code, 26 U.S.C. sec. 162(a), allows a taxpayer to deduct ordinary and necessary business expenses. Personal, living, or family expenses, however, are not deductible. 26 U.S.C. sec. 262. In Commissioner v. Flowers,326 U.S. 465">326 U.S. 465, 66 S. Ct. 250">66 S.Ct. 250, 90 L. Ed. 203">90 L.Ed. 203 (1946), the Supreme Court held that travel expenses are deductible under sec. 162(a) only if (1) the expense is reasonable and necessary, (2) the expense is incurred while away from home, and (3) the expense is incurred in the pursuit of business. Id. at 470, 66 S.Ct. at 252. It is well-settled that the cost of daily commuting is a nondeductible, personal expense under sec. 262. See, e.g., Commissioner v. Flowers,326 U.S. 465">326 U.S. 465, 473, 66 S. Ct. 250">66 S.Ct. 250, 253, 90 L. Ed. 203">90 L.Ed. 203 (1946); * * An exception to the general rule against the deductibility of commuting expenses allows the taxpayer to deduct the cost of518 traveling to a job that is temporary, as opposed to indefinite, in duration. See, e.g., Peurifoy v. Commissioner,358 U.S. 59">358 U.S. 59, 60, 79 S. Ct. 104">79 S.Ct. 104, 105, 3 L. Ed. 2d 30">3 L.Ed.2d 30 (1958); * * Determination of whether a job is temporary or indefinite is a factual question. Peurifoy v. Commissioner,358 U.S. 59">358 U.S. 59, 61, 79 S. Ct. 104">79 S.Ct. 104, 105, 3 L. Ed. 2d 30">3 L.Ed.2d 30 (1958). The court must examine all of the circumstances of the case before reaching its conclusion. Frederick v. United States,603 F.2d 1292">603 F.2d 1292, 1296 (8th Cir. 1979). When reviewing the facts, the court must bear in mind that employment which was temporary may become indefinite if it extends beyond the short term. Also, employment which merely lacks permanence is indefinite unless termination is foreseeable within a short period of time. See Boone v. United States,482 F.2d 417">482 F.2d 417, 419 n.4 (5th Cir. 1973). * * * As other courts have noted, work in the construction industry is, by its very nature, impermanent. See, e.g., Commissioner v. Peurifoy,254 F.2d 483">254 F.2d 483, 486 (4th Cir. 1957), aff'd,358 U.S. 59">358 U.S. 59, 79 S. Ct. 104">79 S.Ct. 104, 3 L. Ed. 2d 30">3 L.Ed.2d 30 (1958). Workers move from519 job to job and often must seek employment at some distance from their homes. Courts have not, however, found that these characteristics distinguish construction work from other forms of employment. Rather than recognize a construction-work exception to sec. 262, courts must judge each case on its facts according to the "temporary-indefinite" test. * * In any tax case, it is the responsibility of the taxpayer to place himself clearly within the bounds of the appropriate Code section relating to the deduction he is claiming. United States v. Tauferner,407 F.2d 243">407 F.2d 243, 245 (10th Cir.), cert. denied,396 U.S. 824">396 U.S. 824, 90 S. Ct. 66">90 S.Ct. 66, 24 L. Ed. 2d 74">24 L.Ed.2d 74 (1969). * * * [671 F.2d at 1061-1063. Fn. ref. omitted.] Petitioner testified that his claim for business expenses was based upon the mileage that he traveled from his home to the job site on a daily basis, multiplied by the number of days that he estimated that he worked at a particular job site. The parties have tried the issue as a dispute over whether petitioner's jobs were temporary or indefinite. Applying this test, petitioner has failed to satisfy his burden of proving that the jobs were520 temporary rather than merely lacking in permanence. He testified that he had "estimations" of the amount of time required when he was sent to a job. He failed to provide any specific information, however, as to the anticipated duration of any of the jobs that he had during the years in issue. 2 He is not, therefore, entitled to any deduction for transportation expenses. Petitioner contends521 that he is entitled to dependency exemptions for his wife and son in 1982. He testified that he was married in 1980, that his won was born in 1980, and that he supported his wife and son during 1982. He testified that his wife did not begin working until 1983. He presented a certificate of marriage, signed by the person performing the ceremony, and a birth certificate for his son. Respondent argues that petitioner's testimony is not credible and is insufficient to satisfy his burden of proof. Although the reliability of some of the petitioner's claims may be eroded by his tendency to make frivolous arguments, his testimony with respect to the dependency exemptions is not inherently incredible, and we have no reason not to believe him with respect to those items. He is, therefore, entitled to dependency exemptions for his wife and son for 1982. Petitioner's failure to file a valid return, however, prevents his now enjoying the benefits of joint return status for 1982. Thomson v. Commissioner,78 T.C. 558">78 T.C. 558 (1982). Petitioner and his wife never filed a return for 1982, electing joint return status. Thus, his situation is distinguished from that of the taxpayers522 in Phillips v. Commissioner,86 T.C. 433">86 T.C. 433 (1986), on appeal (D.C. Cir., Aug. 7, 1987), in which we overruled our prior opinion in Durovic v. Commissioner,54 T.C. 1364">54 T.C. 1364 (1970), affd. on this issue 487 F.2d 36">487 F.2d 36 (7th Cir. 1973). In any event, because of its affirmance by the Court of Appeals for the Seventh Circuit, Durovic still represents the law applicable to petitioner's case. See Golsen v. Commissioner,54 T.C. 742">54 T.C. 742 (1970), affd. 445 F.2d 985">445 F.2d 985 (10th Cir. 1971). The Forms 1040 submitted by petitioner did not constitute returns because they did not constitute an honest and reasonable attempt to supply information required by the Internal Revenue Code. See United States v. Moore,627 F.2d 830">627 F.2d 830, 835 (7th Cir. 1980); United States v. Porth,426 F.2d 519">426 F.2d 519 (10th Cir. 1970); Cupp v. Commissioner,65 T.C. 68">65 T.C. 68, 78-79 (1975), affd. in an unpublished opinion 559 F.2d 1207">559 F.2d 1207 (3d Cir. 1977). The frivolous nature of those forms compels the conclusion that respondent's determination of additions to tax for failure to file, under section 6651(a), and for negligence523 or intentional failure to comply with rules and regulations, under section 6653(a), must be sustained. See Thompson v. Commissioner, supra.Moreover, petitioner is reminded that he narrowly escaped the imposition of damages under section 6673, because his initial position in this proceeding was frivolous or groundless, and that any further filings by him of a similar nature may be expected to result in an award of damages against him in an amount not in excess of $ 5,000. The addition to tax under section 6654 is mandatory absent exceptions not shown to apply in this case. Grosshandler v. Commissioner,75 T.C. 1">75 T.C. 1, 20-21 (1980). Decision will be entered under Rule 155.Footnotes1. All section references are to the Internal Revenue Code of 1954 as amended and in effect during the years in issue, except as otherwise noted. ↩2. When respondent's counsel sought to elicit information, petitioner testified as follows: Q. What did you know about the job with Industrial Contractors when you were employed there? A. I don't understand what you are getting at. Q. Do you know the size of the job you were undertaking to perform? A. No, you don't when you go out, you never now what you are going to. Q. So you could have a day's worth of work, you could have had 3 years worth of work, you just didn't know at that time, is that right? A. That is correct. You may have an estimation but you have no way of knowing for sure. Q. Unless you said you were laid off, you thought you had work, didn't you? A. Generally you can see when it is coming to an end.The balance of his testimony was comparable. ↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622443/	WILLIAM J. LEVITT AND SIMONE H. LEVITT, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentLevitt v. CommissionerDocket No. 1916-89United States Tax Court97 T.C. 437; 1991 U.S. Tax Ct. LEXIS 90; 97 T.C. No. 30; October 21, 1991, Filed 90 H filed the petition in this case, signing his and W's names on it. W did not authorize H to sign the petition on her behalf. W claims that the returns that H filed were not valid joint Federal income tax returns and that the notice of deficiency was invalid as to W. Held: Because W is not a party to this case, we do not decide whether the statutory notice of deficiency was valid as to her. Michael I. Sanders, Alan S. Weitz, and Craig A. Etter, for the petitioner William J. Levitt. Bryan C. Skarlatos and Robert S. Fink, for the petitioner Simone H. Levitt. Thomas D. Moffitt and Karen E. Chandler, for the respondent. COHEN, Judge. COHEN437 OPINION Through the circumstances described below, it is now apparent that the Court lacks jurisdiction over Simone H. Levitt in this case. The parties disagree, however, as to the ground to be stated in our order dismissing the petition as to her. Unless otherwise indicated, all section references are to the Internal Revenue Code as amended and in effect at the time the petition was filed, and all Rule references are to the Tax Court Rules of Practice and Procedure. Some of the facts have been stipulated, 91 and the stipulated facts are incorporated herein by this reference. BackgroundFor 1977 through 1981, Federal income tax returns were filed in the names of William J. Levitt (Mr. Levitt) and Simone H. Levitt (Mrs. Levitt). Mr. Levitt signed his own name and Mrs. Levitt's name on those returns. The filing status indicated on those returns was "Married filing joint return." Mrs. Levitt did not file Federal income tax returns separately during the years in issue. 438 Mr. Levitt signed powers of attorney (Form 2848) granting certain attorneys the authority to represent Mrs. Levitt and himself before respondent in personal income tax matters relating to joint returns for the years in issue. Mrs. Levitt did not sign any of the Forms 2848. Mr. Levitt also signed Consents to Extend the Time to Assess Tax (Form 872) for petitioners for the years in issue. Mrs. Levitt did not sign any of the Forms 872. The statutory notice of deficiency was sent November 4, 1988, and was addressed to Mr. and Mrs. Levitt. The petition in this case was filed on January 27, 1989, and bore the purported signatures of both petitioners. Mrs. Levitt did not sign the petition and did not authorize Mr. 92 Levitt to sign the petition on her behalf. By notice dated September 19, 1989, this case was calendared for trial to commence February 20, 1990. On January 9, 1990, petitioners filed a Motion to Continue in which they represented to the Court that they had reached a basis of settlement on a number of issues and were working to settle the issues remaining in this case. On January 24, 1990, the Court ordered this case stricken for trial from the February 20, 1990, trial session. To accommodate the trial of this case, a special session was set to commence on October 1, 1990. A Stipulation of Agreed Adjustments was filed on September 5, 1990. Mr. Levitt signed his name and Mrs. Levitt's name to that stipulation. On September 20, 1990, the parties advised the Court that they had reached a basis of settlement. On that ground, the Court canceled the October 1, 1990, trial session and directed the parties to file their computations for decision and proposed decision. On December 13, 1990, new counsel filed an Entry of Appearance on behalf of Mrs. Levitt. On March 6, 1991, Mrs. Levitt filed a Motion to Ratify Petition and Vacate Stipulation of Settlement and Determine That There is93 No Deficiency (the motion to ratify and vacate). A proposed Amendment to Petition was lodged on that date. In the motion to ratify and vacate, Mrs. Levitt stated that the petition in this case was filed by Mr. Levitt on behalf of both Mr. Levitt and herself and requested that she be permitted to ratify the petition filed by Mr. Levitt and to 439 file the amendment to petition. Mrs. Levitt also stated that she did not sign, or authorize Mr. Levitt to sign, the stipulation of agreed adjustments and moved that the stipulation be vacated. Mrs. Levitt alleged in the proposed Amendment to Petition, among other things, that she did not file, and was not required to file, Federal income tax returns for 1977 through 1981. On April 8, 1991, Mrs. Levitt's Motion to Amend Amended Petition with Second Amended Petition Attached (the motion to amend) was filed, and a proposed Second Amended Petition was lodged. In the motion to amend, Mrs. Levitt stated that the extensions of the period of limitations that Mr. Levitt signed were ineffective with respect to her. In the proposed Second Amended Petition, Mrs. Levitt alleged that the period of limitations within which respondent was required to assess94 tax had expired prior to the date the notice of deficiency in this case was sent. The Parties' PositionsThe parties have now stipulated that Mrs. Levitt did not sign the petition. At the hearing on her above-described motions, however, Mrs. Levitt's counsel requested that the Court dismiss this case for lack of jurisdiction with respect to Mrs. Levitt on the ground that the notice of deficiency in this case was invalid as to her. Mrs. Levitt's position is that section 6212(b)(2) authorizes respondent to issue a single joint notice of deficiency to a husband and wife only where they have filed a joint Federal income tax return and that, if she did not intend to file such a return with Mr. Levitt, the notice of deficiency in this case is not valid as to her. Mrs. Levitt argues that her testimony and Mr. Levitt's testimony at the hearing supports, and she requests this Court to make, findings: (1) That she did not impliedly or expressly grant Mr. Levitt authority to sign her name to the purported joint Federal income tax returns for the years in issue, (2) that she did not intend to file joint Federal income tax returns for those years, and (3) that she did not file separate95 Federal income tax returns for those years because she did not have any taxable income. Mrs. Levitt contends that we should make such findings even though 440 she did not authorize Mr. Levitt to file the petition in this case on her behalf. Respondent's position is that this Court does not have jurisdiction over Mrs. Levitt because she did not file a petition or ratify the petition that Mr. Levitt filed. Respondent contends that we therefore lack jurisdiction to determine whether the statutory notice of deficiency is valid as to Mrs. Levitt. Respondent argues that a dismissal for lack of jurisdiction based on an invalid statutory notice of deficiency would "usurp the jurisdiction which the district court has been granted under section 6213(a) (to determine the issue of the validity of assessments)" and would therefore be improper. Respondent contends, in the alternative, that Mrs. Levitt filed joint Federal income tax returns with Mr. Levitt for the years in issue and that the statutory notice of deficiency is valid. Respondent argues that the testimony of Mr. and Mrs. Levitt establishes: (1) That Mrs. Levitt delegated the authority to Mr. Levitt to file, and that Mrs. Levitt intended96 Mr. Levitt to file, joint Federal income tax returns for the years in issue, and (2) that Mrs. Levitt had knowledge of and acquiesced in the filing of such returns. Respondent also argues that the testimony of Mr. and Mrs. Levitt establishes that Mrs. Levitt had income from assets that she owned and was therefore required to file Federal income tax returns for the years in issue. In particular, respondent asserts that Mrs. Levitt owned real estate and numerous shares of stock in publicly held corporations and that the dividend checks from those stocks were in her name. Respondent also contends that Mr. Levitt did not retain the right to exercise dominion and control over any of those assets. Finally, if Mrs. Levitt prevails in her arguments, respondent asserts that Mr. Levitt's tax liabilities should be recomputed on the basis of a married person filing separately. Mr. Levitt does not take a formal position on Mrs. Levitt's motions or her request that the Court dismiss for lack of jurisdiction. Mr. Levitt testified that "I took it for granted that my job was to do the financing and her job was to take care of my home." 441 DiscussionOur jurisdiction depends on a valid statutory97 notice of deficiency and a timely filed petition. , affd. without published opinion ; . In Pietanza v. Commissioner, we explained that, if we dismissed for lack of jurisdiction on the ground that a timely petition was not filed, the taxpayers: would not be entitled to challenge the merits of the deficiency in this Court, but would be required to pay the full assessment and file a claim for refund prior to challenging the merits of the assessment in court through a suit for refund. Sec. 7422; . However, if jurisdiction is lacking because of respondent's failure to issue a valid notice of deficiency, we will dismiss the case on that ground, rather than for lack of a timely filed petition. Keeton v. Commissioner, * * . [.]Where a joint notice of deficiency is issued and only one spouse signs the petition, in order for us98 to have jurisdiction over the nonsigning spouse, the nonsigning spouse must ratify the petition and must intend to become a party to that case. ; . See also Rule 60(a)(1). Ratification requires a showing of proper authorization by the signing party to act on behalf of the nonsigning party. . We must ascertain whether the nonsigning spouse intended that the signing spouse act on behalf of and with the approval of the nonsigning spouse when the signing spouse filed the petition with this Court. . If the nonsigning spouse did not ratify the petition and did not intend to become a party to the case, we must dismiss for lack of jurisdiction over the nonsigning spouse who, "never having petitioned the Court in this case, is not a party to this case." . In the motion to ratify and vacate, Mrs. Levitt asserted that the petition was filed by Mr. Levitt on behalf of both petitioners99 and requested that the petition be deemed ratified. At the hearing, however, Mrs. Levitt testified that 442 she did not authorize Mr. Levitt to file the petition in this case. Further, Mrs. Levitt's counsel acknowledged that a finding that Mr. Levitt had the authority to sign the petition on behalf of Mrs. Levitt "is not supported by the facts." Mrs. Levitt's counsel therefore requested that the Court dismiss this case for lack of jurisdiction with respect to Mrs. Levitt on the ground that the notice of deficiency in this case was invalid as to her, rather than find that Mr. Levitt had the authority to sign the petition and the stipulation of agreed adjustments on behalf of Mrs. Levitt. Thus there is no dispute that Mrs. Levitt did not sign the petition or that she did not authorize Mr. Levitt to act on her behalf in signing the petition. We therefore conclude that Mrs. Levitt did not ratify the petition and did not intend to become a party to this case. Any decision on the merits as to her would be a legal nullity. This case should be dismissed as to Mrs. Levitt on the ground that she is not a party to this case and we therefore lack jurisdiction over her. .100 Mrs. Levitt argues that the instant case is analogous to cases that we dismissed for lack of jurisdiction on the ground that a notice of deficiency was not sent to the taxpayer's last known address (or sent at all), rather than on the ground that a timely petition was not filed. See, e.g., ; ; . In each of the cited cases, however, a petition raising this issue had been filed with the Court, and we had jurisdiction to find facts that were necessary to conclude that the notice of deficiency was not sent to the taxpayer's last known address or was not sent. The validity or invalidity of the notice of deficiency does not affect or determine our jurisdiction in this case; rather, our jurisdiction is affected only by Mrs. Levitt's failure to petition this Court. Mrs. Levitt, of course, seeks now to file a petition (amended petition) raising the issue of the validity of the statutory notice. In view of the history of this case, allowing her to amend the petition would be prejudicial to respondent and would101 be an undue burden on the Court. In any event, Rule 41(a) states, in part: 443 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. * * To dismiss this case on the ground that the joint notice of deficiency is invalid would require this Court to find, as Mrs. Levitt contends, that she did not file and did not intend to file joint Federal income tax returns with Mr. Levitt. In this regard, Mrs. Levitt argues that this case is "like the many cases in which courts have found that a wife who did not sign the return and had no idea that her name was being forged did not file a joint return." Mrs. Levitt cites, among other cases, ; ; ; . In each of the cases cited by Mrs. Levitt, a separate petition was filed by the taxpayer-wife. 102 We therefore had both the jurisdiction and the obligation to determine whether a valid joint Federal income tax return had been filed. In each of those cases, we found that the taxpayer-wife did not intend to file joint Federal income tax returns. We therefore concluded that the taxpayer-wife was not jointly and severally liable for the deficiencies as determined in the notice of deficiency; we did not dismiss for lack of jurisdiction based on an invalid notice of deficiency, as Mrs. Levitt requests here. Here, however, our obligation is to find facts that are necessary to determine whether Mrs. Levitt is a party to this case. Inasmuch as we have concluded that Mrs. Levitt is not a party to this case, any additional or unnecessary findings would have no binding effect in this or any subsequent proceeding. If we were to resolve the disputed inference concerning Mr. Levitt's authority against Mrs. Levitt, she would be free to contend that we were without jurisdiction to make such findings. Finally, Mrs. Levitt relies on , on rehearing , wherein the Court of Appeals for 103 the Second Circuit stated: 444 a single joint notice of deficiency is effective in imposing liability only "in the case of a joint income tax return filed by the husband and wife * * ." (Emphasis added.) We think that this language means that the return contains the genuine signatures of both, unless signed by a duly authorized agent, and that neither was made under duress and that both intended that it be filed as the law requires. * * [.]In that case, a single joint notice of deficiency and a single joint notice of assessment and demand for payment were sent to the last known address of the taxpayer and her husband. The Government also filed a lien and placed a notice of seizure on the taxpayer's home. The taxpayer alleged that she had no notice or knowledge of these proceedings, that she never filed a joint return with her husband, and that any signature purporting to be hers was placed on such return through forgery or duress. The Federal district court denied her motion to enjoin the Government from seizing and selling her property, to have the assessment voided, and to secure the release 104 of the lien. The Court of Appeals for the Second Circuit reversed and directed the district court to determine on remand whether the signature of the taxpayer was forged or placed on the return under duress. If the district court also found that the taxpayer did not have actual knowledge of the forging of her name upon the return and of the filing of such a purported return, and if, among other things, that lack of knowledge: continued for a period beyond the expiration of the 90 days allowed in section 6213(a) for the taxpayer to petition the Tax Court, the trial court may find that she had and has no adequate remedy at law and * * grant equitable relief. [.]That a taxpayer may be entitled to equitable relief in Federal district court under the circumstances present in Bauer does not confer jurisdiction on this Court with respect to Mrs. Levitt in this proceeding. This Court's jurisdiction to enjoin assessments can only be invoked where the tax is the subject of a timely filed petition pending before this Court. ; sec. 6213(a). 105 Thus Mrs. Levitt's reliance 445 on , is misplaced. She may well have a remedy under that case, but it is not in this Court. To reflect the foregoing, An appropriate order will be issued.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622444/	Estate of Rudolph G. Leeds, The Second National Bank of Richmond, Executor, Petitioner v. Commissioner of Internal Revenue, Respondent; Estate of Florence Smith Leeds, The Second National Bank of Richmond, Executor, Petitioner v. Commissioner of Internal Revenue, RespondentEstate of Leeds v. CommissionerDocket Nos. 396-69, 397-69United States Tax Court54 T.C. 781; 1970 U.S. Tax Ct. LEXIS 162; April 16, 1970, Filed 162 Decisions will be entered under Rule 50. 1. The order of abatement of bequests under decedent-husband's will determined for the purpose of computing the marital deduction under sec. 2056, I.R.C. 1954.2. Bequests to the trustees of the Palladium Fund to be used primarily as a pension, unemployment, and insurance fund for the employees of the Palladium-Item, a newspaper, and the wives and minor children of such employees are not deductible under sec. 2055, I.R.C. 1954, as "charitable" bequests. Estate of Leonard O. Carlson, 291">21 T.C. 291 (1953), overruled. Lester M. Ponder, Anton Dimitroff, and Edward W. Harris III, for the petitioners.Bernard J. Boyle and Wayne I. Chertow, for the respondent. Tietjens, Judge. TIETJENS781 The Commissioner determined deficiencies of $ 112,858.70 and $ 351,156.89 in the estate taxes of Estate of Rudolph G. Leeds and Estate of Florence Smith Leeds, respectively. We must decide whether, for the purpose of determining the amount of the marital deduction which may be allowed the Estate of Rudolph G. Leeds under section 2056, I.R.C. 1954, 1 a bequest to his surviving wife abates for the payment of debts, administration and funeral expenses, the Indiana inheritance and Federal estate taxes. Also, for the purpose of determining whether decedents' estates may be allowed charitable deductions under section 2055 for bequests to the trustees of the Palladium Fund, we must164 decide whether such bequests are to be used by such trustees exclusively for charitable purposes.FINDINGS OF FACTSome of the facts have been stipulated and are so found. The stipulation and exhibits attached thereto are incorporated herein by this reference.782 Rudolph G. Leeds died a resident of Richmond, Ind., on November 21, 1964. The Federal estate tax return for the Estate of Rudolph G. Leeds was filed with the director of internal revenue for the district of Indiana, Indianapolis, Ind.Florence Smith Leeds, the wife of Rudolph G. Leeds, died a resident of Richmond, Ind., on June 4, 1966. The Federal estate tax return for the Estate of Florence Smith Leeds was filed with the director of internal revenue for the district of Indiana, Indianapolis, Ind.The Second National Bank of Richmond, Ind. (hereinafter petitioner) is the duly appointed, qualified, and acting successor executor of the Estate of Rudolph G. 165 Leeds and of the Estate of Florence Smith Leeds. Edward H. Harris, Jr., was the original executor of each such estate until his death on May 3, 1969.The will of Rudolph G. Leeds, executed on June 30, 1949, and admitted to probate by the Wayne County, Ind., Circuit Court, consisted of 11 items, and disposed of his estate as follows:ITEM I: I direct my Executor, hereinafter named, to pay all of my just and lawful debts, including costs of my last sickness, proper burial, and all pledges made by me to any charitable, educational, religious, or community organizations. My said Executor shall also pay from my estate all federal estate tax from whomsoever due and however assessed, and all estate, succession, legacy, and inheritance tax, but in so doing said taxes shall be paid from other property than that given and devised to my wife or from life insurance received by her, so that any property received by her as the result of my death will not be reduced by the payment of said taxes, and for the further reason that my estate may get the full benefit of the marital deduction as defined in the Federal Tax Reduction Act of 1948.ITEM II: I give and bequeath to my beloved wife, Florence166 S. Leeds, absolutely, the following described personal property: any automobile owned by me at my death, all my household goods and furnishings, whether the same be in our home at Number 131 South Eighteenth Street, or at the late residence of my mother, Number 115 North Tenth Street, both in the City of Richmond, Indiana, all watches, pins, jewelry, and silverware as not specifically hereinafter bequeathed, my books, pictures, and any other tangible personal property owned by me at said residences, or at my office.ITEM III: I make specific bequests, as follows:(a) To William Bateman Leeds, my brother, of New York City, my emerald and sapphire tie pin which his mother gave me, and my pearl tie pin which belonged to our father;(b) To Nancy Leeds Wynkoop, my niece, of New York City, the sum of One Thousand Dollars ($ 1,000.00);(c) To Edward J. Wynkoop, husband of my niece, Nancy, the sum of One Thousand Dollars ($ 1,000.00);(d) To Stanton B. Leeds, my first cousin of 89 Taconic Avenue, Great Barrington, Massachusetts, the sum of One Thousand Dollars ($ 1,000.00);(e) To Linda Leeds Bassett, my first cousin, of New York City, One Thousand Dollars ($ 1000.00);(f) To Luther M. Feeger, 167 my friend and business associate, the sum of One Thousand Dollars ($ 1000.00);783 (g) To Dolores Dickman, my secretary, the sum of One Thousand Dollars ($ 1000.00);(h) To Joseph H. Hill, my friend, my Masonic diamond and platinum ring, two pearl studs and pearl cuff links, my platinum and pearl watch chain and gold cigarette case and match set, and my pearl tie clips;(i) To Lucile G. Hill my diamond wheel pin that belonged to my mother;(j) To Joanna Hill Mikesell my small diamond encrusted watch and chain that belonged to my mother;(k) To Leslie L. Williams, 117 North 20th Street, Richmond, Indiana, my gold chime watch and platinum chain;(l) To Violet Hawkins Williams, of 117 North 20th Street, Richmond, Indiana, the sum of Five Hundred Dollars ($ 500.00);(m) To Charles M. Hawkins, my houseman, the sum of Five Hundred Dollars ($ 500.00);(n) To John C. Bland, my cousin, the sum of One Thousand Dollars ($ 1000.00), and my Gaar crest gold ring;(o) To Mrs. Agnes Helems, Comstock Building, Richmond, Indiana, my mother's companion, the sum of Five Hundred Dollars ($ 500.00);(p) To Roy Woods, my farm manager, the sum of Two Hundred Dollars ($ 200.00);(q) To Mrs. Milton B. 168 Craighead, my mother's pink enameled watch;(r) The sum of Three Thousand Dollars ($ 3000.00) to Earlham Cemetery. Richmond, Indiana, the same to be held, invested and reinvested by the Trustees thereof as a perpetual upkeep fund for the John M. Gaar burial ground and all graves, grass, and monuments thereon, and the income therefrom is to be used for the care and preservation thereof. Said burial ground is described as Lots Numbered One Hundred Ten (110) to One Hundred Thirteen (113) inclusive, Section Five (5), in said cemetery.ITEM IV: I give, devise and bequeath to my wife, Florence S. Leeds, such an amount of my property, real or personal, which when added to my life insurance paid to my wife, and the bequests made to her in Item II above, shall total an amount in value equal to fifty percent (50%) of my adjusted gross estate, as such term is used in the Federal Tax Reduction Act of 1948.I expressly authorize my wife to select the property that shall make up such amount, on the basis of values finally determined for Federal Estate Tax, such selection to be made from property not specifically bequeathed by any item of my will.Such property so selected shall belong to my wife169 absolutely and in fee simple.ITEM V: I give and bequeath to my wife, Florence S. Leeds, three hundred and fifty (350) shares of common stock of Palladium Publishing Corporation, and three hundred and fifty (350) shares of common stock of Palladium Realty Inc., both of the same being Indiana corporations, with offices at Richmond, Indiana, for her lifetime, and at her death to Edward H. Harris, Jr., my friend and business associate, absolutely and in fee simple, and if he be dead, then to his estate, to be disposed of by his will, and if he have no will, then to his heirs as fixed by law in the State of Indiana. Any stock dividends declared on said shares of stock, or shares received in any split up thereof, or profits from the sale thereof, shall be treated as principal and not income, and shall pass under this bequest.ITEM VI: I give and bequeath to Edward H. Harris, Jr. and Luther M. Feeger, as Trustees, one hundred (100) shares of preferred stock and three hundred (300) shares of common stock of Joseph H. Hill Company, an Indiana 784 corporation, with its office at the City of Richmond, Indiana, the same to be held in trust for my cousin. Elizabeth Kolp Popp, during her170 lifetime, and the net income therefrom shall be payable to her as often as dividends are declared and paid on said stock. At her death the income therefrom shall be payable to my wife, Florence S. Leeds, during her lifetime, and at her death the property then remaining in said trust I give, devise, and bequeath to the charitable trust created in Item VII of my will, and all of such property then remaining shall be transferred to the Trustees for said charitable trust to be held, administered, and disposed of according to the terms thereof.ITEM VII: I give, devise and bequeath three hundred (300) shares of common stock of said Palladium Publishing Corporation and three hundred (300) shares of common stock of said Palladium Realty Inc., together with all the rest, residue, and remainder of my property, real or personal, and wheresoever situate, to Edward H. Harris, Jr., and Luther M. Feeger, as Trustees, and in trust, for the uses and purposes hereinafter stated:1. Until the death of my wife, the annual net income therefrom shall be distributed as follows:(a) Fifty per cent (50%) thereof to my wife, Florence S. Leeds;(b) Thirty per cent (30%) thereof to Edward H. Harris, Jr., not171 exceeding, however, Three Thousand Dollars ($ 3000.00) to him per annum;(c) Twenty per cent (20%) thereof to Luther M. Feeger, not exceeding however, Two Thousand Dollars ($ 2000.00) to him per annum.(d) At the death of either of the last two of said beneficiaries, his share shall thereafter be payable to my wife.(e) To the extent that the annual net income exceeds Ten Thousand Dollars ($ 10,000.00), it shall be paid to my wife.2. (a) At the death of my wife, Florence S. Leeds, all property then in this trust, together with all undistributed income, plus any property that may be left thereto by my wife or others, plus the remainder of the Elizabeth Kolp Popp Trust created in Item VI, subject to the right of said Elizabeth Kolp Popp to the income therefrom for her life, shall be combined and all of the same shall be and constitute a charitable fund to be known as the PALLADIUM FUND, and all of said property and said trust fund I give, devise, and bequeath to Edward H. Harris, Jr. and Luther M. Feeger, as Trustees, or to their successor Trustees, in trust, and all of said property constituting said Palladium Fund, and all accrued income thereon, shall be held, invested, and reinvested, 172 administered, and disposed of by said Trustees, and their successors, primarily as a pension, unemployment, and insurance fund for the employees of the Palladium Publishing Corporation engaged in the publication of the Richmond, Indiana, Palladium-Item, and the wives and minor children of said employees.(b) Said fund and the proceeds therefrom shall be used for the benefit of said beneficiaries, exclusively for charitable purposes, as herein described, and no person shall be lawfully entitled to receive any pecuniary benefit from the operation or administration of said fund, except reasonable compensation for his services, either as a Trustee or an employee, in the administration of said fund, and said Trustees shall not carry on any propaganda, or otherwise attempt to influence legislation, nor shall any of said fund or its income be used for such purposes.(c) The purpose of said PALLADIUM FUND is to secure regular employees of the Palladium-Item and their dependents against the hazards of unemployment, over which they have no control, due principally to sickness, accident, disability, death and old age.785 (d) The amount of benefits and pensions, to whom, when, and under173 what conditions they shall be paid, are to be determined from time to time by said Trustees, but in so doing these general principles shall control:(1) All regular employees of said Palladium Publishing Corporation engaged in the publication of said Palladium-Item shall be eligible for benefits irrespective of their type of employment.(2) A reasonable [sic] period of employment may be required before eligibility begins.(3) Although reasonably uniform standards shall be established for the payment of benefits, said Trustees may vary the same, due to the conditions of the particular case and the adequacy of available funds.(4) Benefits may be paid when unemployment is due to sickness, accident, disability, or any other good cause, including lack of work which the employee is capable of performing.(5) Employees, sixty years of age, who have been regularly employed by said newspaper for at least twenty years, shall be eligible to retirement pensions.(6) No annual retirement pension shall exceed more than one-half of the annual average wage or salary paid to said employee during his last ten years of service.(7) Net income only shall be used in the payment of benefits and pensions, 174 except upon the termination of said trust as hereinafter provided for.(8) Said Trustees may use the income for the purchase of life insurance for said employees, individually or as a group, or for such other insurance or annuities as they deem proper for the carrying out of the purposes of said trust, or for making contributions to such purchases.(9) Information concerning said trust and the rules and regulations adopted by the Trustees for the carrying out of the same, shall be printed and furnished to the employees. Said rules and regulations may be amended from time to time as said Trustees deem necessary, and when amended they shall be republished.3. Termination of Trust. This trust shall cease and terminate upon the happening of the first of the following contingencies:(a) Upon the majority ownership of the stock in said Palladium Publishing Corporation passing to a person or persons who are not bona fide legal residents of, and actually living in Wayne County, Indiana;(b) Upon the majority ownership of the stock in said Palladium Publishing Corporation passing to a person or persons irrespective of their residence, or to a corporation owning another newspaper or newspapers175 so that said Palladium-Item becomes part of what is commonly designated as a chain owned newspaper.(c) Upon said Palladium-Item ceasing to be published at Richmond, Indiana, as a daily newspaper.4. In the event of the happening of any of the aforesaid contingencies whereby said trust is terminated, then and in such event I give, devise and bequeath all property remaining in said trust absolutely and in fee simple to Reid Memorial Hospital of Richmond, Indiana. Said property shall be held by the Trustees of such hospital as an endowment fund, or used for capital improvements, and none of the principal of the same shall be used for the operating expenses of said hospital.5. If at the time of the termination of the said PALLADIUM FUND and the trust for the administration thereof, any employee of the Palladium Publishing Corporation, who was in the employ of said corporation and engaged in the publication of said Palladium-Item, at the time of my death, shall be drawing a retirement pension, or be eligible therefor, then said trust shall be continued for such length of time as necessary to pay said pensions in full.786 Said Trustees in order to expedite the distribution of 176 said trust estate to said hospital, may make settlement with any of the aforesaid pensioners entitled to share in said trust estate, or may purchase such annuity insurance for said employees as will provide an adequate substitute for said pensions. For such purpose the principal of said trust may be used, if insufficient income be available.ITEM VIII: If at any time there be a vacancy among my Trustees due to death, resignation or incapacity, then and in such event the other Trustees shall fill such vacancy or vacancies, and such self-perpetuation of trustees shall continue throughout the life of said trust. Each successor Trustee shall have all of the powers given to said Trustee named herein. Any set of Trustees while serving said trust shall keep full minutes, records and accounts of their doing.ITEM IX: Said Trustees shall have full power to do any and all things necessary to the full carrying out of the provisions of each of said trusts by whichever item created, and without limiting the powers thereof, said Trustees and their successors shall specifically have powers, as follows:(a) Said Trustees may hold and keep in said trust estate any property owned by me at the time177 of my death, even though the same do not conform to the statutes and the rules of court governing trust investments. But the proceeds of any property disposed of by said Trustees shall be invested and reinvested in property and securities which conform to the limitations concerning trust investments.(b) Said Trustees shall have full power to hold, manage, direct, conserve, invest and reinvest said trust property, borrow money when required, transpose investments, sell, assign, transfer, pledge, mortgage, and convey any and all property in said trust estate of whatsoever kind, make contracts, vote stock, and exercise all of their powers without the consent or confirmation of the court, and all to the end that the purposes of said trusts may be carried out and the net income and principal thereof be used for the purposes as herein defined.(c) In making sale or disposition of any property, real or personal, in said trust estates said Trustees shall not be required to secure a court order, nor court confirmation, and any and all sales of property, either real or personal, may be made, without appraisement, at private sale without notice, or at public sale upon such notice as said Trustees178 may determine, and all sales shall be made upon such terms and conditions as said Trustees may fix.(d) My Trustees shall furnish bond with a sound surety company thereon, in such an amount as is reasonably necessary to protect said trust, and the cost of such bond shall be paid for by said trust.(e) Said Trustees shall not be required to file any inventory with, nor to make any reports to, the court concerning their doings, but instead thereof they shall keep written complete minutes, records and accounts of all of their doings, which shall be available to my wife, and following the death of my wife they shall make a written or printed annual report to the employees of said Palladium-Item Newspaper.(f) Stock dividends and profits from the sale of any stock, securities, or other property, shall not be treated as income by my Trustees, but the same must be held or reinvested as part of the principal of said trust estate, and the income therefrom to be used for the purposes of said trust, and in the manner as hereinabove directed.(g) Said Trustees shall have the right to receive property from my wife, or any other person, firm or corporation by gift or devise, and the same when so179 received shall be held, administered, and disposed of according to the terms and provisions of said PALLADIUM FUND.787 (h) If my wife predecease me, and if her will shall provide for a trust for the benefit of the Palladium-Item employees similar to the trust created by me, then I direct that the two trusts be combined, and that they be administered as one trust and by the same Trustees.(i) Nothing herein shall prevent my Trustees from selling all or any part of the stock in the Palladium Publishing Corporation, and the Palladium Realty Inc., if and when they deem the same advisable, but if sale is to be made of any such stock, then I direct my Trustees to first acquaint all other stockholders of said corporations with the terms and conditions of the proposed sale, so that the other stockholders may have opportunity to sell their stock on the same basis, if they desire so to do.(j) That Edward H. Harris, Jr. is a Trustee shall not prevent him from purchasing stock in either the Palladium Publishing Corporation or the Palladium Realty Inc., provided he pays as much for the same as can be secured by said Trustees elsewhere.ITEM X: I hereby nominate and appoint Edward H. Harris, 180 Jr. as Executor of my Will, and if he be dead, or is unable to act, then The Second National Bank of Richmond, Indiana, shall serve as Executor.My Executor shall have full power to sell any real or personal property as may be necessary to pay bequests, debts, taxes, or expenses, and in so doing shall not be required to get the approval or confirmation of the Court. Sales may be made at private sale without notice, or at public sale upon such notice as said Executor may fix, and all at such prices, without appraisement, and on such conditions as he shall deem best.ITEM XI: If my wife predeceases me, then I give, devise and bequeath all of my property, both real and personal, owned by me at my death, and not otherwise disposed of herein, to said PALLADIUM FUND and the Trustees thereof, as described in Item VII of my will, the same to be held, administered, used and disposed of in the same manner as if my wife had survived me and said PALLADIUM FUND and trust had become effective at her death.The will of Florence Smith Leeds, executed on April 13, 1949, and admitted to probate by the Wayne County, Ind., Circuit Court, disposed of her estate as follows:ITEM X: If my husband, Rudolph181 G. Leeds, shall predecease me, then and in such event I give, devise and bequeath all of my property, both real and personal, and not otherwise disposed of by me herein, as follows:* * * (d) All the rest, residue and remainder of my property I give, devise and bequeath as follows:(1) One-half thereof to * (2) One-half thereof to the Palladium Fund of Richmond, Indiana, a charitable trust created by my husband, Rudolph G. Leeds, in his Will for the benefit of employees of the Palladium Publishing Corporation, engaged in the publication of the Palladium-Item newspaper, said share and all property therein to be held, administered, used and disposed of by the Trustees of said Fund for the same purposes and in the same manner as provided for by my husband's Will, with the exception, however, that upon the termination of said Palladium Fund as provided for in my husband's Will, or if said Palladium Fund is not in existence at my death, then and in either of such events I give, devise and bequeath all of the balance and remainder of said property to said Reid Memorial Hospital for the uses and purposes described in Item IX of my Will.788 Reid Memorial Hospital of Richmond, 182 Ind., is a charitable organization within the meaning of that term as it is used in the Internal Revenue Code of 1954, as amended.At the time of his death, Rudolph G. Leeds was the copublisher, with Edward H. Harris, Jr., of the Palladium-Item, a newspaper of Richmond, Ind., which was owned by Palladium Publishing Corp. The issued and outstanding shares of common stock (the only stock authorized) of Palladium Publishing Corp., at the date of Rudolph G. Leeds' death, were held as follows:StockholderNumber of sharesRudolph G. Leeds602Edward H. Harris, Jr.48Trust under the will of Edward H. Harris (died 1937)350Total1,000In December of each of the years 1952 through 1963, Rudolph G. Leeds transferred to Edward H. Harris, Jr., by gift, 4 shares of Palladium Publishing Corp. stock, aggregating the 48 shares above listed. Such stock is now held by the Estate of Edward H. Harris, Jr. Of the 602 shares held by Rudolph G. Leeds at the date of his death, 350 shares thereof were distributed to Edward H. Harris, Jr., under the will of Rudolph G. Leeds, and such shares are now held by the Estate of Edward H. Harris, Jr.; 100 shares thereof were purchased from183 the Estate of Rudolph G. Leeds by the Palladium Fund on or about August 10, 1967; and the remaining 152 shares are now held by the Estate of Rudolph G. Leeds. The 350 shares held by the trust under the will of Edward H. Harris (died 1937) continue to be so held.Rudolph G. Leeds first became active in the Palladium Publishing Corp. in 1937 after the death of Edward H. Harris, Sr. who had been the publisher. Edward H. Harris, Jr., the son of Edward H. Harris, Sr., first started working for the Palladium Publishing Corp. after the death of his father. The relationship between Edward H. Harris, Jr., and Rudolph G. Leeds was very close and similar to a father-son relationship. From the date of Edward H. Harris, Sr.'s death it has Rudolph G. Leeds' desire to have Edward H. Harris, Jr., follow in the footsteps of his father. The bequests under Items II, III, V, and VI of the will of Rudolph G. Leeds have been distributed as directed in Rudolph G. Leeds' will without abatement.The Commissioner disallowed the Estate of Rudolph G. Leeds the maximum allowable marital deduction of 50 percent of the adjusted gross estate, which was claimed under section 2056 on the estate tax return, for184 the stated reason that less than 50 percent of the adjusted gross estate passes from the decedent to his surviving spouse. The Commissioner's determination of deficiencies in the Estate of Rudolph 789 G. Leeds and in the Estate of Florence Smith Leeds reflects his disallowance of charitable deductions claimed under section 2055 for the bequests to the Palladium Fund.OPINIONIssue 1. The Marital DeductionSection 2056 provides generally that, for purposes of the tax imposed by section 2001, the value of the taxable estate shall be determined by deducting from the value of the gross estate an amount equal to the value of any interest in property which passes from the decedent to the decedent's surviving spouse. Section 2056(c)(1) limits the deduction to an amount not exceeding 50 percent of the value of the "adjusted gross estate."We must decide whether 50 percent of the value of Rudolph's "adjusted gross estate" passes to Florence, his surviving wife, as provided by Item IV of his will.Rudolph directed his executor to pay all estate taxes from his estate, i.e., out of the property passing under his will. Because that property is not sufficient to pay all Federal estate185 taxes and also to distribute the bequests provided under Items II, III, IV, V, and VI, some portion of the Federal estate taxes must be paid out of one or more of those bequests. If any amount must be paid out of the bequest under Item IV, then the amount of property passing to Florence -- and the allowable marital deduction -- will be reduced by such amount.Our question, then, is simply, what bequests are to be invaded first for the payment of the Federal estate tax. The answer is found, in this case, in the law of Indiana. Riggs v. Del Drago, 317 U.S. 95">317 U.S. 95 (1942).The applicable statutory provision, sec. 7-1103, Ind. Ann. Stat. (1953), provides:7-1103. Order in which assets appropriated -- Abatement -- General rules -- Contrary provisions, plan or purpose. -- (a) Except as provided in subsection (b) hereof, shares of the distributees shall abate, for the payment of claims, legacies, the widow's or family allowance, the shares of pretermitted heirs or the share of the surviving spouse who elects to take against the will, without any preference or priority as between real and personal property, in the following order:(1) Property not disposed186 of by the will;(2) Property devised to the residuary devisee;(3) Property disposed of by the will but not specifically devised and not devised to the residuary devisee;(4) Property specifically devised.A general devise charged on any specific property or fund shall, for purposes of abatement be deemed property specifically devised to the extent of the value of the thing on which it is charged. Upon the failure or insufficiency of the thing on which it is charged, it shall be deemed property not specifically devised to the extent of such failure or insufficiency.790 (b) If the provisions of the will or the testamentary plan or the express or implied purpose of the devise would be defeated by the order of abatement stated in subsection (a) hereof, the shares of distributees shall abate in such other manner as may be found necessary to give effect to the intention of the testator.A careful reading of the entire will of Rudolph G. Leeds persuades us that in order to give effect to the intention of the testator, the marital share must abate last. By Item I the decedent directed that his estate taxes be paid from other property than that given and devised to his wife or from187 life insurance received by her so that any property received by her would not be reduced by the payment of such taxes, and for the further reason that his estate might get the full benefit of the marital deduction. By Item IV the decedent gave and devised to his wife such an amount of his property, real or personal, which when added to his life insurance paid to his wife and the bequests made to her in Item II above, shall total an amount in equal value to 50 percent of his adjusted gross estate, as such term is used in the Federal Tax Reduction Act of 1948.We think the decedent's intention to give 50 percent of his adjusted gross estate to his wife was predominant over his intention to make the bequests under Items V and VI. Accordingly, we hold the bequests under Items V and VI abate first for the payment of Federal estate taxes and the amounts given to his wife, last.Issue 2. The Charitable DeductionSection 2055 provides that for the purposes of the tax imposed by section 2001, the value of the taxable estate shall be determined by deducting from the value of the gross estate the amount of all bequests to trustees, but only if such contributions are to be used by such188 trustees exclusively for charitable (among other) purposes. The determination, for what purposes are the bequests to be used, is to be made from an examination of the terms of the bequests as properly construed under the applicable State law, in this case, the law of Indiana. Whether those purposes, so determined, are exclusively "charitable" within the meaning of section 2055 is a question of Federal law. Watson v. United States, 355 F. 2d 269 (C.A. 3, 1965.)The bequests are to be used by the trustees of the Palladium Fund "primarily as a pension, unemployment, and insurance fund for the employees of the * * Palladium-Item, and the wives and minor children of said employees." Item VII, clause 2(a), of the will of Rudolph G. Leeds. The purpose of the Palladium Fund is "to secure regular employees of the Palladium-Item and their dependents against the hazards of unemployment, over which they have no control, due principally to sickness, accident, disability, death and old 791 age." Item VII, clause 2(c). In our view the purpose in other words, is an insurance purpose, to benefit all regular employees by securing them against189 the enumerated hazards. This purpose is to be effectuated in either of two ways: (1) The use of income "for the purchase of life insurance for said employees, individually or as a group, or for such other insurance or annuities as * * * [the trustees] deem proper for the carrying out of the purposes of said trust, or for making contributions to such purchases" (Item VII, clause 2(d)(8)); (2) the payment of benefits to employees "when unemployment is due to sickness, accident, disability, or any other good cause, including lack of work which the employee is capable of performing" (Item VII, clause 2(d)(4)). In purpose and in effect, the decedents' bequests will operate to relieve qualifying employees of the Palladium-Item of the expense of securing themselves, by savings, insurance, health plan contributions or otherwise, against these same hazards. To us this clearly is not exclusively a "charitable" use of the bequests.A second use of decedents' bequests is the payment of retirement pensions. "Employees, sixty years of age, who have been regularly employed by * * * [the Palladium-Item] for at least twenty years, shall be eligible to retirement pensions" (Item VII, clause190 2(d)(5)). All such employees qualify for retirement pensions without qualification. We do not think this constitutes a use of decedents' bequests for charitable purposes.As we see it, decedents' bequests are to be used by the trustees merely as an additional form of compensation to the employees of the Palladium-Item; "a logical, legitimate and impelling incentive to a person both in seeking employment with the company and after being hired. The quid pro quo to the company was at least as important, in helping to attract desirable personnel and obtaining satisfactory results from them." Watson v. United States, supra at 271. In these circumstances, we cannot allow the deduction.Petitioner relies upon Estate of Leonard O. Carlson, 21 T.C. 291">21 T.C. 291 (1953), and the cases cited therein, as establishing that the purposes of a welfare or retirement fund for the benefit of employees of a corporation are charitable. Upon reconsideration of Carlson, in the light of Watson v. United States, supra, we conclude that the position we took in Carlson is no longer tenable. We note that 191 Carlson relied on Gimbel v. Commissioner, 54 F. 2d 780, which has been subsequently discredited in Watson by the Third Circuit Court of Appeals, the same circuit court that had decided Gimbel in the first instance.Decisions will be entered under Rule 50. Footnotes1. All statutory references are to the Internal Revenue Code of 1954 unless otherwise stated.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622445/	GUARANTEE LIQUID MEASURE CO., PETITIONER v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Guarantee Liquid Measure Co. v. CommissionerDocket No. 36029.United States Board of Tax Appeals20 B.T.A. 758; 1930 BTA LEXIS 2036; September 11, 1930, Promulgated 2036 Additional compensation paid to petitioner's president, held to be a reasonable allowance for personal services actually rendered. Frank J. Albus, Esq., for the petitioner. J. D. Kiley, Esq., for the respondent. MORRIS758 This proceeding is for the redetermination of deficiencies in income taxes for the calendar years 1924 and 1925 in the amounts of $761.96 and $4,739.97, respectively. The error alleged is that respondent erred in adding back to income an item of $25,000 representing compensation paid to the president of the petitioner for the year 1925. At the hearing respondent moved to dismiss the proceeding in so far as it related to the year 1924. This motion was granted without objection from the petitioner. FINDINGS OF FACT. The petitioner is a corporation with its principal place of business at Rochester, Pa. It is engaged in the business of manufacturing and selling the ordinary visible gasoline pump used in dispensing gasoline at filling stations. The president of the petitioner during the year 1925 was W. S. Townsend. Townsend first became associated with the petitioner corporation in 1918 under the following2037 circumstances: Prior to the signing of the Armistice, Townsend was in Washington engaged in was work, and with the signing of the Armistic he had intended returning to his home in Georgia. However, his employer asked him if he would go to Pittsburgh to inspect a device in which some friend of his was interested, to determine whether it was worth while. Townsend found upon investigation that the man was making a visible pump and after having examined it reported to his employer that it looked like a pretty good idea but that it was too small. Townsend's employer then proposed that, if the right to manufacture the device in the East could be obtained, Townsend should stay and run the business. Townsend agreed that he would stay and operate the business, but it subsequently developed that his employer could not obtain the contract to manufacture the pumps. However, he did acquire the right to sell the pumps in the East, and thereafter Townsend ran the sales company which was engaged in selling the visible pumps manufactured by the petitioner. 759 The visible pumps were shipped by the petitioner to the sales company in Washington, where the sales company rebuilt them before2038 shipment to customers. In rebuilding the pumps Townsend found that they were very poor in construction and faulty in design. An engineer was employed in Washington, and a good many ways were found whereby the pumps could be improved. The suggested improvements were relayed back to the petitioner's plant at Rochester, with the result that finally Townsend was asked if he would come to Rochester and take charge of the petitioner. Townsend consented upon certain conditions, namely, that $50,000 of additional capital should be put in the business; that he should have complete charge of the petitioner; and that his employer in Washington should agree to his change of employment. In Washington agreed to and Townsend took charge of the company as its general manager in 1920. At the time Townsend became general manager, petitioner had nothing but a small shop, very little equipment, and a lot of debts. It was unknown to the trade, and its production was small, amounting to 15 pumps a month. The credit of the company was poor, and most of the goods which it purchased were shipped to it C.O.D. Townsend early discovered that his principal problem was that of production. After quite2039 a struggle a production system was installed, the design of the pump was improved, some additions were made to the factory and some secondhand machinery of one sort or another was acquired. After a couple of years the company had a little business running along in very good shape. In 1920 when Townsend went with petitioner as general manager he was given complete charge of the business. The president of the company at that time was H. C. Fry, Sr., a man of eighty years, who took no active part in the business, with the result that from 1921 until his election as president in 1924, Townsend was performing the duties of the president. Beginning in 1923 the petitioner began to make progress and by July, 1925, it had become the leader in its industry from the standpoint of volume of sales. It had established a reputation with the oil trade as a concern upon which the trade could depend. It had a little different method of doing business from competing concerns, and as a result some of its larger customers were constantly bringing to petitioner the thought that it should undertake the manufacture and sale of other filling-station equipment in addition to it visible pumps. These2040 suggestions were made because in purchasing other filling-station equipment the oil companies' dealings had not been so satisfactory as their dealings with the petitioner. One large oil company suggested to Townsend that the petitioner buy the Marvel 760 Equipment Co., from which the oil company was purchasing lubricating oil equipment, grease cans, oil tanks, and equipment of that sort. Several advantages from the consolidation of the two companies were suggested to Townsend by the oil company, and particularly the administration of the Marvel Co.'s business by the petitioner. Such a consolidation was likewise suggested to the Marvel Equipment Co., and a conference was held between a representative of the Marvel Co. and Townsend to discuss the probabilities of a consolidation of the two companies. Townsend arranged a number of meetings and he, together with Fry and Wolf, members of petitioner's board of directors, made several trips to Cleveland to look over the Marvel plant and personnel, and get a general idea of the whole situation. Townsend finally came to the conclusion that there was no basis on which a consolidation could be made, and that if petitioner acquired2041 the management and control of the Marvel Co., it would have to be by purchase and not by consolidation. Townsend discussed the various developments with the board of directors of the petitioner and secured their opinion concerning whether or not the petitioner should even think about the purchase. It was agreed that the acquisition of the Marvel Co. would be a good thing for the petitioner, and that Townsend should keep the board informed from time to time as to the progress of his negotiations. Assisting Townsend in his negotiations with the Marvel Co. was George D. Wolf, a director of the petitioner, who was a certified public accountant and the senior member of Wolf & Co., an accounting firm located in Chicago. This firm on behalf of the petitioner made an analysis of the Marvel Co.'s operating statements, and checked the inventories, its accounts, and its financial position to determine definitely whether the profits submitted were correct. In addition Townsend went to New York to interview purchasing agents of various companies, with whom he was closely identified, to make sure that the acquisition of the Marvel Co. and its line of equipment would be favorably received. 2042 As a result of these investigations the directors of the petitioner agreed that, if the Marvel Co. could be purchased for $1,000,000, it would be a good buy and that the price paid would be reasonable. Shortly thereafter actual negotiations were entered into looking to the purchase of all the stock of the Marvel Co. since the petitioner did not care to purchase less than 100 per cent of that company's stock. The Marvel Co. was interested in becoming a part of the petitioner's organization, so Townsend was able to secure for the petitioner thirty-day options to purchase all the stock at a total price of $832,000. 761 In order to purchase this stock it was necessary to secure a large amount of cash. Townsend, together with Wolf, procured this money by means of loans from the Union Trust Co. of Chicago in the amount of $250,000, the Mellon National Bank of Pittsburgh in the amount of $250,000, the Baltimore Trust Co. of Baltimore in the amount of $250,000, and the First National Bank of Pittsburgh in the amount of $50,000. In securing the first loan of $250,000, which was procured from the Union Trust Company of Chicago, it was necessary for Townsend and Wolf to personally2043 endorse the petitioner's note. The result of the negotiations and the plan to finance the purchase were formally reported to the petitioner's board of directors at a meeting held on May 13, 1925, as shown by the following minutes: Mr. Townsend gave a brief history of the negotiations with the Marvel Equipment Company concerning the procuring of the options and investigation of the Company's relations with the trade, also the report of Wolf and Company's auditors on the accounts of the Marvel Equipment Co. Marvel's profits this year after taxes were $126,000.00 and it was estimated they would do $65,000.00 in April. Mr. Townsend explained how the purchase could be financed as he had procured the following loans, Union Trust Co., Chicago, $250,000.00; Baltimore Trust Company, Baltimore, $250,000.00; Mellon National Bank, Pittsburgh, $250,000.00 and First National Bank, Pittsburgh, $50,000.00. These loans with a portion of our certificates of deposit will amply take care of the proposed purchase. Mr. Townsend was highly complimented by the directors for procuring the options on the purchase of the stock of the Marvel Equipment Company at such a reasonable figure. The directors2044 unanimously approved the acceptance of the options. On motion of Mr. Harry C. Fry, Jr., duly seconded by Mr. Fischer and carried the president was authorized to make the purchase of the outstanding stock of the Marvel Equipment Company. At the same meeting the board of directors adopted the following resolution: On motion of Mr. Wolf duly seconded by Mr. Harry C. Fry, Jr., and carried, Mr. Townsend was granted a special compensation of $25,000.00 for services in connection with the purchase of the Marvel Equipment Company, to be paid at the convenience of the Treasurer but the entire amount is to be paid within three months from date. In conducting negotiations leading up to the acquisition of the Marvel Co., Townsend had acted as the president and managing head of the petitioner. He had no agreement or arrangement with the petitioner respecting any additional compensation for his services, and the first time he knew that he was to receive extra compensation for such services was when the above resolution was passed. Nobody else connected with the petitioner received any additional compensation in connection with this matter. A reasonable amount of compensation for Townsend's2045 services was agreed upon by George D. Wolf and H. C. Fry, Jr., two of the directors of the petitioner, a 762 few hours prior to the directors' meeting of May 13, 1925, and their recommendation was accepted by the board of directors. Townsend's regular salary for his services to the petitioner for the calendar year 1925 was fixed by a resolution of the executive committee adopted May 13, 1925, as follows: The following members of the executive committee were present at a meeting held this date: Mr. W. S. Townsend, Mr. H. C. Fry, Jr., and Mr. G. D. Wolf. On motion of Mr. Wolf duly seconded and carried the compensation of Mr. W. S. Townsend for 1925 was fixed at a salary of $25,000.00 per year and a bonus of 5% of net profits before taxes determined by the current Profit and Loss Statement. The total compensation received by Townsend from the petitioner under the foregoing resolutions during 1925 amounted to $89,174.66. Townsend returned this amount as salary received by him upon his individual income-tax return for 1925. Townsend received salaries from the petitioner for the calendar years 1921 to 1926 as follows: 1921$9,666.72192210,833.34192322,955.54192448,379.18192589,174.66192669,051.662046 At no time prior to or during 1925 did Townsend hold more than 25 per cent of the petitioner's capital stock. The original investment in the Guarantee Liquid Measure Co. was approximately $143,000, the increase in the size of its business being due to profits earned by the company rather than to any additional capital invested therein. The total sales and net income as shown by petitioner's books for the calendar years 1921 to 1926, inclusive, were as follows: YearSalesNet income1921$498,247.541 $15,962.231922691,495.483,811.9119231,797,276.16274,773.531924$4,034,212.67$665,377.1419254,476,864.41940,840.6519264,590,198.54866,071.00The entire management of the petitioner's business during these years was handled by Townsend and the decisions incident thereto were made by him. The sales of the petitioner's products were closely supervised by him, and he was personally responsible for more than 50 per cent of its sales contracts. Upon its return for 1925 the petitioner deducted $87,074.66 as compensation of officers, which included $64,174.66 paid to Townsend. Respondent allowed this deduction in2047 its entirety. In schedule 2 763 attached to its return petitioner claimed under administrative expenses an item entitled "Bonus - Office - $64,587.50," which sum included the $25,000 paid to Townsend as special compensation for services in connection with the purchase of the Marvel Equipment Co. It is respondent's refusal to allow this $25,000 deduction which results in the deficiency for 1925. OPINION. MORRIS: The sole issue presented is whether under the facts herein the petitioner is entitled to deduct the extra $25,000 payment made to Townsend in 1925 as "a reasonable allowance for salaries or other compensation for personal services actually rendered," within the meaning of section 234(a)(1) of the Revenue Act of 1924. The entire question, as we view it, is one of reasonableness, that is, whether the personal services rendered by Townsend to the petitioner were actually worth $89,174.66. The respondent concedes that petitioner is entitled to deduct $64,174.66 of Townsend's compensation, but disputes the reasonableness of the remaining $25,000. The petitioner has carefully developed the facts from the date of Townsend's first connection with it down through2048 the taxable year, and calls our attention to the growth of its business from obscurity to an outstanding position in its industry under Townsend's skillful leadership and management. Beginning with a loss of almost $16,000 in 1921 Townsend so capably managed the petitioner's business that by 1925 the net income was over $940,000. During the intervening years the petitioner's net income rose steadily, jumping from $3,800 in 1922 to over $274,000 in 1923. It is interesting to note that as the petitioner's business grew Townsend's salary was increased, and if the $25,000 item be excluded from his 1925 salary, it appears that each year Townsend's salary was increased with the increase in petitioner's sales. The particular facts which influenced the board of directors in voting this additional compensation to Townsend were the circumstances surrounding petitioner's acquisition of the Marvel Equipment Co. This company manufactured and sold a line of gasoline filling-station equipment, which, together with petitioner's visible pumps, would enable the petitioner to completely equip filling stations. The detailed investigations conducted by Townsend revealed that petitioner could well2049 afford to pay a million dollars for the Marvel Equipment Co., and the board of directors signified its willingness to purchase at that price. Townsend's negotiations resulted in the purchase of the Marvel Co. for $832,000, which represented a saving to the petitioner of $168,000. Having acquired the stock, 764 Townsend then proceeded to raise the necessary cash to make the purchase. This he accomplished, at least partially, by personally endorsing petitioner's note for $250,000. The minutes of the directors' meeting of May 13, 1925, clearly reveal the feelings of the board of directors with respect to Townsend's achievement in buying the Marvel stock for $832,000. They not only "highly complimented" him, but expressed their appreciation of his efforts in a more concrete form. Prior to the meeting Wolf and Fry agreed that Townsend's services should be rewarded and they further agreed that $25,000 would be a reasonable compensation to Townsend for his efforts. Their recommendation was accepted by the Board, and the resolution adopted states that the $25,000 was "a special compensation * * for services in connection with the purchase of the Marvel Equipment Co. * * 2050 ." At the hearing George D. Wolf, one of the directors of the petitioner, testified in considerable detail with respect to the services rendered by Townsend in acquiring the Marvel Co.'s stock, and likewise he gave in some detail the nature of the investigations which were conducted by Townsend and himself prior to the actual purchase. Wolf testified that Townsend was responsible for arranging and handling the negotiations, and then related how he and Fry had agreed upon the $25,000 payment to Townsend authorized by the resolution of the board of directors on May 13, 1925. Wolf further stated that he considered the $25,000 voted to Townsend was a reasonable compensation for services rendered, and that he realized at the time the amount was voted that such a disbursement would reduce the amount of profits available for dividends. Respondent calls attention to our decisions in the ; ; and , which cases he considers are authorities for his position that this claimed deduction should be disallowed. We have examined the*2051 above cited cases, but we can not agree that they are controlling under the facts herein. We are convinced by the record that the amount paid Townsend for the year 1925 constituted a reasonable compensation for personal services actually rendered, and that the petitioner is entitled to deduct this $25,000 payment under section 234(a)(1) of the Revenue Act of 1924. This proceeding, in so far as it relates to the year 1924, is dismissed and decision will be entered for the respondent. Decision will be entered under Rule 50.Footnotes1. Loss. ↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622446/	VICTOR & JUDITH A. GRIGORACI, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentGrigoraci v. Comm'rNo. 8784-01 United States Tax Court122 T.C. 272; 2004 U.S. Tax Ct. LEXIS 14; 122 T.C. No. 14; March 25, 2004, Filed 14 Petitioners failed to establish that they incurred litigation and administrative costs in this proceeding apart from $ 60 filing fee. Court lacked jurisdiction to award punitive damages against respondent. Case dismissed for lack of jurisdiction. Ps sought redetermination under sec. 6213, I.R.C., of a deficiency for tax on self-employment income from a partnership in which H was an indirect partner. Following Grigoraci v. Commissioner, T.C. Memo. 2002-202 (Grigoraci I), which involved a similar issue for Ps' earlier tax year, this Court dismissed the instant case for lack of jurisdiction. Ps seek reasonable litigation and administrative costs allegedly incurred in Grigoraci I as well as in the instant proceeding. Ps also seek punitive damages against R. Held: Pursuant to sec. 7430, I.R.C., we cannot in this proceeding award Ps litigation and administrative costs incurred in connection with the proceedings in Grigoraci I. Held, further, Ps have failed to establish that they incurred litigation and administrative costs in this proceeding apart from a $ 60 filing fee. Held, further, this Court lacks jurisdiction to award punitive damages against R. Victor15 & Judith A. Grigoraci, pro sese.Mary Ann Waters , for respondent. Thornton, Michael B.THORNTON273 OPINIONTHORNTON, Judge: This case is before us on petitioners' motion for reasonable litigation and administrative costs pursuant to section 7430 and Rule 231. 1 BackgroundMr. Grigoraci is a certified public accountant and the chief executive officer (C.E.O.) of an accounting partnership, Grigoraci, Trainer, Wright & Paterno (GTWP). On December 1, 1995, Mr. Grigoraci formed Victor Grigoraci CPA Accounting Corp. as an S corporation (the S corporation) for the purpose of acting as a partner (with two other corporations) in GTWP. On their 1997 and 1998 joint Federal income tax returns, petitioners16 reported certain distributions from the S corporation, essentially representing passthroughs to Mr. Grigoraci of the S corporation's distributive shares of GTWP's income.By notice of deficiency dated April 13, 2001, respondent determined that the amounts petitioners had reported as the S corporation's distributions actually represented Mr. Grigoraci's personal service income and were subject to self-employment tax. Petitioners duly petitioned this Court to redetermine the determined deficiencies in their 1997 and 1998 income taxes.Before the scheduled trial in the instant case, this Court issued its decision in Grigoraci v. Commissioner, T.C. Memo. 2002-202 (Grigoraci I), involving similar issues relating to petitioners' 1996 taxable year. 2 In Grigoraci I, this Court concluded, among other things, that the self-employment tax determined by respondent, insofar as it was attributable to self- employment tax on the S corporation's distributive share 274 of GTWP's income, was an "affected item" requiring a "partner-level determination" pursuant to section 6230(a)(2). Because the notice of deficiency in Grigoraci I was issued before the close of the partnership proceedings, 17 this Court dismissed for lack of jurisdiction so much of petitioners' case as related to that affected item.3 Id.On January 16, 2003, petitioners filed a motion for entry of decision in this case on the basis of this18 Court's holding in Grigoraci I. In their motion, petitioners asserted that in this case, as in Grigoraci I, the related partnership-level proceeding had not been completed. In his response, filed February 7, 2003, respondent stated that he had no objection to petitioners' motion for entry of decision. On March 26, 2003, this Court entered an order of dismissal for lack of jurisdiction, denying petitioners' motion for entry of decision and dismissing this case for lack of jurisdiction, consistent with this Court's jurisdictional holding in Grigoraci I. 4On May 9, 2003, petitioners filed a motion for reasonable litigation and administrative costs, with supporting affidavits. On August 1, 2003, respondent filed his response. Pursuant to this Court's Order dated September 22, 2003, on November 6, 2003, petitioners19 filed additional supporting affidavits and a reply to respondent's response. On December 15, 2003, respondent filed a response to petitioners' last-mentioned filing.The parties agree that an evidentiary hearing is not required. We base our decision on the pleadings, petitioners' motion for litigation and administrative costs, petitioners' supporting affidavits, and the various responses and counter-responses filed by the parties. 275 DiscussionA. BackgroundSection 7430(a) allows, in specified circumstances, for an award of reasonable litigation and administrative costs "incurred" in an administrative or court proceeding brought against the United States in connection with the determination of any tax, interest, or penalty pursuant to the Internal Revenue Code. This award for costs is generally available only if the taxpayer is the "prevailing party", did not unreasonably protract the administrative or judicial proceedings, and exhausted available administrative remedies. 5Sec. 7430(a); see sec. 7430(b)(1) and (3).20 Respondent concedes that petitioners are the "prevailing party" in this matter, that they did not unreasonably protract the proceedings, and that they exhausted all administrative remedies. Respondent also concedes that petitioners are entitled to recover the $ 60 fee for filing their petition in this case. The only dispute is what additional amount of reasonable costs, if any, petitioners may recover pursuant to section 7430.In general, petitioners bear the burden of proving that they meet the requirements of section 7430. Rule 232(e); Grant v. Commissioner, 103 F.3d 948">103 F.3d 948, 952 (11th Cir. 1996), affg. per curiam T.C. Memo. 1995-374; Gantner v. Commissioner, 92 T.C. 192">92 T.C. 192, 197 (1989), affd. 905 F.2d 241">905 F.2d 241 (8th Cir. 1990).B. Petitioners' Claimed Litigation and Administrative CostsPetitioners request an award for the following claimed costs and fees:1. Administrative personnel expenses of $ 5,395. 6 These claimed expenses consist of charges for professional services rendered by Pamela S. Lyons, who is a secretary for GTWP, Gina West (a.k.a. Gina Grigoraci), who is the office manager for GTWP, and three other GTWP secretaries. The21 supporting affidavits indicate that all these GTWP employees were acting under the "direct supervision" of petitioner Victor Grigoraci. The supporting affidavits also indicate that the charges were based on 276 the time billed by these employees, using the lowest "customary" GTWP billing rates for the relevant time periods.72. Miscellaneous expenses of $ 536.50. These expenses are itemized in Ms. Lyons's affidavit, which describes "estimates of various other expenses incurred" as follows:Copying (600 pages @ $ .50 per page) $ 300.00Postage & Federal Express Charges 125.00Transcript from U.S. Tax Court 36.50Long distance telephone calls 75.00 Total 22 536.503. "Filing fees" of $ 180. Petitioners have not further described these fees.C. Costs Relating to Grigoraci I ProceedingsAs a threshold matter, we note that some of the litigation and administrative costs that petitioners have claimed relate to the proceedings in Grigoraci I. In particular, the affidavits that petitioners have submitted in support of their motion for litigation and administrative costs specify that $ 3,800 of the claimed $ 5,395 of administrative personnel expenses was incurred with respect to the proceedings in Grigoraci I. Moreover, all but $ 60 of the claimed filing fees appear to relate to the Grigoraci I proceedings. 8 In addition, it appears that an indeterminate part of the claimed miscellaneous expenses relates to the proceedings in Grigoraci I. 923 Petitioners contend that costs incurred in connection with the proceedings in Grigoraci I are recoverable in the instant proceeding because they "were vital to the defense against" respondent's determination in the instant proceeding. We disagree.277 Section 7430(a) provides in relevant part that "In any administrative or court proceeding" the prevailing party may be awarded a judgment for reasonable administrative costs incurred "in connection with such administrative proceeding" and for reasonable litigation costs incurred "in connection with such court proceeding". (Emphasis added.) Under the plain language of the statute, then, we may award only such administrative or litigation costs as were incurred in connection with the instant proceeding. We cannot in this proceeding award litigation and administrative costs incurred in connection with the proceedings in Grigoraci I, whether or not those costs ultimately might have helped petitioners prevail in this proceeding. 1024 Accordingly, we cannot award petitioners the $ 3,800 of claimed administrative personnel expenses that they acknowledge relate to the proceedings in Grigoraci I or filing fees beyond the $ 60 fee for filing the petition in this case. In addition, petitioners have not shown what part, if any, of the estimated miscellaneous expenses relate to the instant proceeding. If this were the only problem with petitioners' claim for miscellaneous expenses, we might attempt to make a reasonable allocation of these expenses to the instant proceeding. Cf. Malamed v. Commissioner, T.C. Memo. 1993-1. Such an allocation would serve no purpose, however, for as discussed more fully below, petitioners have not established that they "incurred" these miscellaneous expenses (or any of the administrative personnel expenses) within the meaning of section 7430.D. Meaning of "Incurred"Awards of costs and fees under section 7430(a) are limited to administrative costs "incurred" and reasonable litigation costs "incurred". In this context, the word "incur" carries its ordinary meaning: "to become liable or subject to: bring down upon oneself." Frisch v. Commissioner, 87 T.C. 838">87 T.C. 838, 846 (1986)25 (holding that an attorney acting pro se was ineligible 278 to receive attorney's fees because he "did not become liable to another person for attorney fees nor did he bring down upon himself any debt"); see also Corrigan v. United States, 27 F.3d 436">27 F.3d 436, 438-439 (9th Cir. 1994); United States v. McPherson, 840 F.2d 244">840 F.2d 244 (4th Cir. 1988); Andary-Stern v. Commissioner, T.C. Memo. 2002-212; Austin v. Commissioner, T.C. Memo. 1997-157. "Fees and expenses are incurred when there is a legal obligation to pay them." Republic Plaza Props. Pship. v. Commissioner, T.C. Memo. 1997-239 (holding that the petitioning tax matters partner had failed to establish a legal obligation to pay any of the litigation costs at issue); see also Kruse v. Commissioner, T.C. Memo. 1999-157 (holding that the taxpayers had not incurred liabilities for fees and costs for which they were contingently liable).All the costs for which petitioners seek an award (except for the filing fees) represent charges for professional services provided by GTWP administrative personnel and for estimated miscellaneous expenses associated with those services. Supporting26 affidavits submitted by petitioners indicate that the administrative services rendered date as far back as August 2000. The affidavits also show, however, that GTWP did not bill petitioners for any of these services or for any of the miscellaneous expenses before October 31, 2003, some 6 months after petitioners filed their motion for reasonable litigation and administrative costs and shortly after this Court ordered petitioners to provide additional support for their claimed costs. 11 Ms. West's affidavit states: "These invoices have been incurred but not yet been paid by Victor and Judith A. Grigoraci."Petitioners have not persuaded us that they were legally obligated, or were even expected, to pay the invoiced27 amounts. Indeed, petitioners represent that "any fees and expenses paid by the Internal Revenue Service to the Petitioners will promptly be paid to Grigoraci, Trainer, Wright & Paterno." From this statement, and absent any suggestion to the contrary, we infer that petitioners will not pay any expenses to GTWP unless and until this Court 279 awards costs under section 7430. 12In these circumstances, we cannot award costs. See Swanson v. Commissioner, 106 T.C. 76">106 T.C. 76, 101 (1996).28 Petitioners contend that they "have incurred these reasonable fees to Grigoraci, Trainer, Wright & Paterno and both Pamela S. Lyons and Gina West should qualify as a representative and, if not, surely these are reasonable expenses for the Petitioners to incur as pro se." Respondent concedes that Ms. Lyons and Ms. West have Centralized Authorization File numbers, which might allow those individuals to represent taxpayers before the IRS. Nonetheless, nothing in petitioners' supporting materials or affidavits suggests that either Ms. Lyons or Ms. West performed services for petitioners in a representative capacity. On the contrary, their services appear to have been clerical in nature. More fundamentally, even if we were to assume, for sake of argument, that Ms. Lyons and Ms. West acted as petitioners' representatives, this circumstance would be insufficient to meet the section 7430 requirement that the cost of their services be "incurred". See Kruse v. Commissioner, supra; Thompson v. Commissioner, T.C. Memo 1996-468">T.C. Memo. 1996-468.In conclusion, petitioners have failed to show that they "incurred" the claimed administrative personnel expenses or the associated miscellaneous29 expenses. Moreover, they have acknowledged that most of the claimed administrative personnel expenses relate to the Grigoraci I proceedings and have failed to establish how much of the claimed miscellaneous expenses relates to this proceeding. We have found that only $ 60 of the claimed filing fees relates to the instant proceedings. Giving effect to respondent's concession, we hold 280 that petitioners are entitled to an award of $ 60 for these filing fees.E. Punitive DamagesPetitioners also request that we award punitive damages against respondent. There is no statutory authority for this Court to consider petitioners' claim for punitive damages against the Internal Revenue Service; consequently, we have no jurisdiction to do so. See Petito v. Commissioner, T.C. Memo 2002-271">T.C. Memo. 2002-271.An order and order of dismissal for lack of jurisdiction will be entered. Footnotes1. Unless otherwise indicated, all section references are to the Internal Revenue Code as amended, and all Rule references are to the Tax Court Rules of Practice and Procedure. All references to sec. 7430↩ are to that section as in effect when the petition was filed.2. The trial in Grigoraci I took place in April 2001 before petitioners filed their petition in the instant case, which apparently explains why the instant case was not consolidated with the three dockets that were consolidated in Grigoraci I.↩3. In Grigoraci I, unlike the instant case, the deficiency determined by respondent was also partly attributable to self-employment tax on wages that the S corporation had reported paying to Mr. Grigoraci. In Grigoraci I, this Court held that this discrete portion of the deficiency was not attributable to an "affected item" and that consequently this Court had jurisdiction to review it pursuant to sec. 6213↩. This Court held in Grigoraci I that the Grigoracis properly reported this income as wages from the S corporation and owed no self-employment tax on it.4. By Order dated May 9, 2003, we vacated our order of dismissal for lack of jurisdiction entered Mar. 26, 2003, pending resolution of petitioners' motion for reasonable litigation and administrative costs.↩5. We may award costs pursuant to sec. 7430 even though we decide that the underlying case should be dismissed for lack of jurisdiction. Weiss v. Commissioner, 88 T.C. 1036">88 T.C. 1036↩ (1987).6. This amount includes $ 240 of secretarial expenses that petitioners allege they have incurred defending their request for litigation and administrative costs.↩7. The affidavits indicate that the rates increased over time from $ 38 per hour to $ 40 per hour.↩8. Petitioners have not itemized the $ 180 of "filing fees" that they have claimed. We take judicial notice that when petitioners filed their petition in this case on July 11, 2001, the fee for filing a petition in this Court was $ 60. Petitioners have failed to establish that they incurred more than $ 60 of filing fees in this proceeding. We find as a fact that only $ 60 of the claimed filing fees relates to the instant proceeding.↩9. Ms. Lyons's affidavit, which itemizes the estimated miscellaneous expenses, specifically allocates her hours of secretarial services between the proceedings in Grigoraci I and the instant case, but does not similarly allocate the estimated miscellaneous expenses, from which we infer that the estimated miscellaneous expenses relate to both the instant case and the proceedings in Grigoraci I. This inference is supported by the fact that the estimated miscellaneous expenses include a $ 36.50 item for "Transcript from U.S. Tax Court". The instant proceeding, unlike the proceedings in Grigoraci I, has involved no hearing for which a transcript has been produced.↩10. Moreover, petitioners do not explain why they failed to file a timely motion for reasonable litigation and administrative costs as part of the proceedings in Grigoraci I. Under Rule 231(a)(2), a taxpayer claiming litigation and administrative costs must file a motion with the Tax Court within 30 days after the service of a written opinion determining the issues in the case. If we were to award petitioners costs incurred in connection with the proceedings in Grigoraci I, we would effectively permit petitioners to avoid the 30-day requirement of Rule 231(a)(2)↩.11. Ms. West's affidavit states that on Oct. 31, 2003, she prepared invoices from GTWP to petitioners for the administrative personnel expenses and miscellaneous costs at issue and that on Nov. 3, 2003, she prepared an invoice of $ 240 for the costs of preparing petitioners' reply to respondent's response.↩12. In fact, the record does not suggest that the administrative services performed on petitioners' behalf by GTWP employees resulted in any incremental cost to either GTWP or petitioners. Given that the employees who rendered these services worked under Mr. Grigoraci's direct supervision and that he was C.E.O. of GTWP, it might reasonably be inferred that these services were rendered as an accommodation to him in that capacity. In these circumstances, we are unpersuaded that petitioners are entitled to shift to respondent a portion of what appears to be GTWP's fixed overhead. Moreover, we note that Ms. West's affidavit states that the invoiced amounts were based on the lowest "customary" GTWP billing rates used for the named employees during the relevant time periods. Presumably, the customary GTWP billing rates include a profit margin that would accrue partly to the benefit of Mr. Grigoraci, as an indirect partner in GTWP. At least to that extent, the invoiced amounts represent a lost opportunity cost, which petitioners are not entitled to recover under sec. 7430. See Corrigan v. United States, 27 F.3d 436">27 F.3d 436, 439 (9th Cir. 1994); United States v. McPherson, 840 F.2d 244">840 F.2d 244, 245 (4th Cir. 1988); Frisch v. Commissioner, 87 T.C. 838, 845-846↩ (1986).	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622447/	J. W. LAM, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Lam v. CommissionerDocket No. 1323.United States Board of Tax Appeals8 B.T.A. 785; 1927 BTA LEXIS 2798; October 14, 1927, Promulgated 2798 Petitioner realized no taxable gain from the receipt of certain notes by him as consideration for debts due him by a liquidating corporation in which he was the principal stockholder. Chester A. Bennett, Esq., for the petitioner. J. W. Fisher, Esq., for the respondent. LANSDON 785 The Commissioner has asserted a deficiency in income tax for the year 1919 in the amount of $28,266.12. The only question at issue is whether the petitioner realized a taxable gain upon receipt of certain property assigned to him as a liquidating dividend. FINDINGS OF FACT. The petitioner is an individual residing at Greenville, Ky., where he has long been engaged in the business of owning and operating coal lands and coal mines. Prior to 1911 he had acquired all the coal rights in about 450 acres of coal-bearing lands, together with title to several acres of surface lands for use in mining such coal lands. In the development and operation of this property he opened up two fully equipped mines, erected 74 dwelling houses for occupancy by miners, and constructed one mile of surface railway for the purpose of facilitating the shipment of coal recovered in2799 his mining operations. The value of such coal rights, lands, equipment, trackage, 786 and other mining facilities at June 10, 1911, was not less than $125,000. On June 10, 1911, the petitioner sold the mining properties above described to the Hillside Coal Co. and received therefor all the common stock of such company of the par value of $25,000 and its 20-year 6 per cent bonds of the par value of $100,000. The bonds so received were secured by a first mortgage on all the property transferred The fair market value or price of the securities received by the petitioner in exchange for the property transferred to the Hillside side Coal Co., was not less than $125,000 at June 10, 1911, and at March 1, 1913. On April 17, 1918, the Hillside Coal Co. deeded to the Liberty Coal Co., a small tract of land and a stone house located thereon, and received as consideration therefor, the amount of $3,500. On December 30, 1918, it sold one of its mining plants to the Saulsburg Coal Co., of Central City, Ky., and received therefor, the amount of $5,000 in cash, and a series of 6 promissory notes for $8,333.33 1/3 each, which by their terms were a lien on the property. On December 30, 1919, it2800 sold the Oakland Coal Co. its remaining mining property, and received therefor, in 2 payments, the amount of $30,000 in cash and a series of 8 purchase-money notes in the amount of $7,500, each, and payable one at the end of each succeeding 12 months until all were discharged, with interest on deferred payments at the rate of 6 per cent per annum. Upon the completion of the sales above described, the Hillside Co. proceeded to liquidate. It applied all the cash proceeds received to its open accounts payable and assigned all the purchase money notes of the Oakland Coal Co. and the Saulsburg Coal Co. to the petitioner as consideration for his surrender and cancellation of its bonds and stock, which he had received at date of incorporation, and which he held and owned at date of liquidation. At date of the surrender and cancellation of the bonds no payments had ever been made on the principal amount thereof, and only the amount of $2,500 had been paid on the interest accrued from June 10, 1911, to December 1, 1918, a period of approximately 7 years and 6 months. At such date, the accrued unpaid interest thereon was approximately $39,000. The cash received by the Hillside Coal2801 Co. from the Liberty Coal Co., the Saulsburg Coal Co. and the Oakland Coal Co., was not sufficient to pay its outstanding current obligations. Upon liquidation the petitioner received the assets of the Hillside Coal Co. subject to liabilities to creditors in amounts not disclosed by the record. At the date of liquidation such company had no surplus. 787 OPINION. LANSDON: The only question to be decided here is whether the petitioner realized a taxable profit when he surrendered the stock and bonds of the Hillside Coal Co. at the par value of $125,000 and received therefor all the assets of such company at the date of its liquidation in the taxable year. We are convinced that the property paid in by the petitioner for the bonds and stock in question was worth not less than $125,000 and that such bonds and stock had a fair market price or value at date of acquisition and at March 1, 1913, of not less than such amount. The date of final liquidation is not in the record but the parties agree that it was some time in the taxable year. At January 1, 1919, the Hillside Coal Co. had no assets other than the deferred purchase money notes in the amount of $110,000, which2802 it had received in part payment for its property. Upon liquidation such notes were assigned and transferred to the petitioner in consideration of his surrender and cancellation of its stocks and bonds. As the sole stockholder of the Hillside Coal Co. and therefore the sole distributee of its assets in liquidation, the petitioner became liable for all the outstanding obligations of the company which included interest due and unpaid on the bonds in an amount not less than $39,000 and certain other unpaid accounts of such company in amounts not disclosed by the record. The property received at date of liquidation, subject to liabilities in excess of $39,000 was worth less than $125,000. No taxable profit resulted from the petitioner's receipt of such property received in liquidation of the Hillside Coal Co. in the taxable year. Judgment will be entered for the petitioner.Considered by STERNHAGEN, GREEN, and ARUNDELL.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622449/	Estate of Edward P. Bender, Martha A. Bender, Executrix, Petitioner v. Commissioner of Internal Revenue, RespondentEstate of Bender v. CommissionerDocket No. 9338-82United States Tax Court86 T.C. 770; 1986 U.S. Tax Ct. LEXIS 117; 86 T.C. No. 49; April 22, 1986, Filed 117 Decision will be entered under Rule 155. P carried back NOLs from the short year in which decedent died to 6 previous years. P declared tax reductions attributable to these amounts as undisclaimed estate assets includable in the widow's spousal share. P deducted gross income tax liabilities for carryback years (without offsetting tax reductions due to carrybacks) as estate debts payable by all legatees. R offset each year's original tax liability against reductions from carrybacks for the same year, then netted all the years to arrive at one net income tax liability, treated as a single estate debt. This reduced the spousal share deduction and increased estate tax. Held, this Court has jurisdiction to determine decedent's correct estate tax liability when the determination involves examination of respondent's offset of decedent's income tax liabilities against his income tax overpayments. Held, further, within any given year, P may not, for estate tax purposes, treat income tax liabilities independent of NOL-generated reductions or overpayments for the same year. Held, further, P did not have to assume, for estate tax purposes, that R would offset years against118 each other, and may treat each liability year as an estate debt and each overpayment year as an estate asset. John Taylor, for the petitioner.Edward Peduzzi, for the respondent. Parr, Judge. PARR771 Respondent determined a deficiency in petitioner's estate tax liability of $ 202,673.28. 1 The issues for decision are: (1) Whether this Court has jurisdiction to determine decedent's correct estate tax liability when the determination involves examination of respondent's offset of a decedent's income tax liabilities against his income tax overpayments, and, if we have jurisdiction, (2) whether, in determining the decedent's estate120 tax liability, respondent was correct in removing as an estate asset the decedent's gross annual income tax overpayments, setting off each year's overpayment against that year's liability, and then netting the resulting annual overpayments and liabilities against each other.FINDINGS OF FACTThis case was submitted fully stipulated pursuant to Rule 122 2 and all the facts so submitted are found accordingly. The stipulation of facts and exhibits attached thereto are incorporated herein by this reference.121 Martha A. Bender (petitioner) is the executrix of the Estate of Edward P. Bender, her deceased husband (decedent). Petitioner resided at Carrolltown, Pennsylvania, at the time of the filing of the petition.On May 13, 1978, decedent died testate as a domiciliary of Carrolltown. On May 17, 1978, decedent's Last Will and Testament, dated April 13, 1978, was admitted to probate by the Register of Wills for Cambria County, Pennsylvania, and recorded in Will Book Volume 56 at page 842. Letters testamentary were issued by the Register of Wills to Martha A. Bender as Executrix.The operative paragraphs of decedent's will appear below.1. I direct that my just debts and funeral expenses be paid promptly after my decease.2. All the rest, residue and remainder of my property, real, personal 772 and mixed, I give, devise and bequeath to my beloved wife, Martha, if she survives me. If she should predecease me, or die with me in a common accident, or within thirty (30) days after my death, then it is my will that all my estate, real, personal and mixed, shall go to my two sons, John and Edward, equally, share and share alike, with the stipulation that they pay to my daughter, Grace, 122 the sum of Two Hundred Thousand ($ 200,000.00) Dollars within a period of two (2) years following my death. If they should fail, or should elect not to make the $ 200,000.00 payment, then, in that event, all my property, real, personal and mixed, shall go to my three children, John, Edward, and Grace, equally, share and share alike.3. I hereby nominate, constitute and appoint my wife, Martha, the Executrix of this, my Last Will and Testament, if she survives me, and in the event she predeceases me, then I nominate, constitute and appoint my two sons, John and Edward, the Executors of this, my Last Will and Testament.On January 31, 1979, Mrs. Bender filed with the Orphans' Court Division of the Court of Common Pleas of Cambria County, Pennsylvania, a disclaimer which disclaimed the following property: a 75-percent interest in all the assets of E. P. Bender Coal Co. (the company) "subject, however, to seventy-five (75%) percent of all debts and liabilities of said E. P. Bender Coal Company"; 100 percent of a $ 125,000 note due to the estate by John E. Bender, one of decedent's sons; and 100 percent of a $ 125,000 note due to the estate by Edward P. Bender, Jr., decedent's other son. 123 The above-described disclaimer was a qualified disclaimer as that term is comprehended in sections 2046 and 2518. Decedent's sons elected not to make the $ 200,000 payment referred to in decedent's will.During the period 1972 through his death, decedent operated the company as a sole proprietorship engaged in the business of coal stripping. During each of the years 1972 through 1977, decedent filed a joint income tax return with Mrs. Bender. Mrs. Bender did not earn any taxable income in her own right during those years. For the short taxable year ending May 13, 1978, the date of decedent's death, a separate return was filed on behalf of the decedent. This short-year return showed a net operating loss of $ 814,472.As a result of the 1978 net operating loss, Forms 1045, Applications for Tentative Refund, and Forms 1040X, 773 Amended U.S. Individual Income Tax Returns, were filed and various adjustments were made to the annual income tax accounts of Edward P. Bender and Martha A. Bender for the years 1972 through 1978. These adjustments were of sufficient magnitude to be considered pursuant to section 6405 and were approved by the Joint Committee on Taxation. The amounts124 involved in these redeterminations are reflected in the following chart: 3Net overpaymentYearTax liabilityTax overpayment 4(liability)1972$ 1.50$ 15,578.01$ 15,576.51 19730 40,314.5640,314.56 1974317,597.5073,344.86(244,252.64)1975360,901.30511,208.70150,307.40 197655,025.600 (55,025.60)1977779,205.15139,891.99(639,313.16)197812,137.710 (12,137.71)Total1,524,868.76780,338.12(744,530.64)On February 9, 1979, petitioner filed the Federal estate tax return for the estate125 of decedent. The company was valued at $ 2,765,203. The gross estate was valued at $ 4,472,347. The total of decedent's debts and the estate's expenses was set at $ 1,398,648. Petitioner included the total of the gross annual income tax overpayments in the gross estate as an asset passing to Martha, and treated the total of the gross annual income tax liabilities separately as a debt of the estate.In his statutory notice of deficiency, respondent made various adjustments. Among these was an adjustment which reduced the net amount deductible for bequests to a surviving spouse by $ 456,338.04. This reduction resulted from, among other things, an adjustment to that portion of the marital deduction which represents assets other than jointly held property, insurance, mortgages, notes, and cash, including the nondisclaimed portion of the company (Item 4 of Schedule M of the Estate Tax Return). Respondent's 774 adjustment of this item was based on the following method of computation. 5Gross estate (as corrected)$ 4,790,344.01Less: nonadministrative assets,Schedule D$ 71,352.00 E293,055.00 G10,300.00 (374,707.00)4,415,637.01 Income tax overpayments(891,711.01)Gross administrative estate3,523,926.00 Less: items renounced by widow 75% of the Company (as corrected)2,186,762.25 100% of Note #1125,000.00 100% of Note #2125,000.00 (2,436,762.25)Gross amount passing to wife1,087,163.25 Less: expenses allocable thereto: Debts and expenses, Schedules J and K1,870,949.20 Less: income tax overpayments(891,711.01)979,238.19 Expenses claimed for income taxAttorney's fees50,000.00 Accounting charges26,000.00 1,055,238.19 Multiplied by $ 1,087,163.2530.85%(325,540.95)$ 3,523,926.00Amount of administrative estate passing to wife 6761,622.30 (Sch. M, item 4)126 What respondent did here was to remove as an estate asset decedent's total gross annual income tax overpayments. Respondent set off each such overpayment against the liability, if any, for that same year to obtain the net annual income tax overpayment or liability. In a final step, respondent then netted all the net annual overpayments and liabilities against each other to obtain a single net overall income tax liability.No refund regarding any overpayments of income tax in any of the years 1972 through 1978 was ever issued to Edward P. Bender, Martha A. Bender, or the Estate127 of Edward P. Bender. The Estate of Edward P. Bender 775 remains open for administration by the executrix, Martha A. Bender. No distribution of the principal assets of said estate has been made by the executrix or the Orphans' Court of Cambria County, Pennsylvania.OPINIONPetitioner contends that the above-described computation improperly reduced the marital share, and hence reduced the marital deduction and inflated the taxable estate. Petitioner argues as follows: All income tax overpayments owed to decedent as of the date of his death are assets which passed to Martha in the marital share, as undisclaimed residuary property. Decedent's gross income tax liabilities should be treated as a separate debt of the estate. In other words, the liabilities should be spread ratably among all the residuary heirs.Respondent contends first that this Court has no jurisdiction to hear the matter. Alternatively, respondent argues that, if in fact we have jurisdiction, the offset of income tax overpayments against liabilities was proper, the income tax overpayments as of decedent's date of death cannot constitute "an interest in property which passes or has passed from the decedent 128 to the surviving spouse" as required by section 2056(a), the income tax overpayments by the decedent as of his date of death cannot constitute an asset of the decedent's gross estate because it is a "mythical asset" causing an impermissible double deduction, and the marital deduction is entirely free from the estate tax.We turn first to the question of jurisdiction. The Tax Court is purely a creature of statute and has only the power given to it by Congress. Estate of Smith v. Commissioner, 638 F.2d 665">638 F.2d 665, 669 (3d Cir. 1981); Naftel v. Commissioner, 85 T.C. 527">85 T.C. 527 (1985). However, speaking of a Tax Court proceeding to determine estate tax, the Fifth Circuit has said "the Tax Court acquires jurisdiction over the entire cause of action, necessarily including all possible issues controlling the determination of the amount of tax liability * ." Finley v. United States, 612 F.2d 166">612 F.2d 166, 170 (5th Cir. 1980). Further, "the tax liability of an estate constitutes a single cause of action." Finley v. United States, supra at 170.776 In the context of income and gift129 tax deficiencies, section 6214(b) provides:(b) Jurisdiction over other years and quarters. The Tax Court in redetermining a deficiency of income tax for any taxable year or of gift tax for any calendar year or calendar quarter shall consider such facts with relation to the taxes for other years or calendar quarters 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 year or calendar quarter has been overpaid or underpaid.Under the authority of section 6214(b) and its predecessor, section 272(g) of the Internal Revenue Code of 1939, the courts have looked to the effect of a net operating loss on the tax liability in dispute, even if the loss year itself was not properly before the Court. Marcello v. Commissioner, 380 F.2d 499">380 F.2d 499 (5th Cir. 1967); Phoenix Coal Co. v. Commissioner, 231 F.2d 420">231 F.2d 420 (2d Cir. 1956); see also Schmidt v. Commissioner, 272 F.2d 423">272 F.2d 423 (9th Cir. 1959); cf. Commissioner v. van Bergh, 209 F.2d 23 (2d Cir. 1954) (recomputation of130 tax liability for a time-barred year allowed so as to negate net operating loss carryback by setoff).In this case, decedent's 1978 net operating loss and his income tax liabilities for the years prior to his death are not before us, nor are they in dispute. The statutory notice was directed to petitioner, not decedent. We are asked to redetermine petitioner's estate tax liability, not decedent's income tax liability. Over the former, we have jurisdiction; over the latter, we have none. We are not ousted from jurisdiction over the former merely because a proper determination of the estate tax requires us to take into account, without altering, income tax liabilities and overpayments for taxpayers or taxable periods not properly before us. See sec. 6214(b).The authorities respondent cites are not on point. U.S. ex rel. Girard Trust Co. v. Helvering, 301 U.S. 540 (1937), merely decided that mandamus is not an appropriate remedy to compel the Commissioner to refund to the taxpayer taxes erroneously collected. The following cases simply denied the jurisdiction of the Tax Court or the Board of Tax Appeals to order the Commissioner to refund overpayments: 131 Continental Equities, Inc. v. Commissioner, 551 F.2d 74">551 F.2d 74 (5th Cir. 1977); Morse v. United States, 494 F.2d 876">494 F.2d 876777 (9th Cir. 1974); Transport Manufacturing & Equipment Co. v. Commissioner, 480 F.2d 448 (8th Cir. 1973); Robbins Tire & Rubber Co. v. Commissioner, 53 T.C. 275 (1969); and Jones v. Commissioner, 34 B.T.A. 280">34 B.T.A. 280 (1936). That question is not before us.Commissioner v. Gooch Milling & Elevator Co., 320 U.S. 418">320 U.S. 418 (1943), is also distinguishable. There the Supreme Court held that an overpayment in a time-barred year cannot be offset by the Board of Tax Appeals against a deficiency in an open year under the doctrine of equitable recoupment. Resolution of the taxpayer's claim "necessarily involved a determination of whether there was an overpayment during the [year not before the Board]." 320 U.S. at 421. Further, "the redetermination of the tax liability for the [year before the Board] was in no way dependent on any prior tax assessment or overpayment." 320 U.S. at 420-421.132 Similarly inapposite is First Security Bank of Idaho v. Commissioner, 592 F.2d 1046">592 F.2d 1046 (9th Cir. 1979). There, the Tax Court was held incorrect in determining the fact of an overpayment in a year not before it, and then setting off that overpayment against liabilities for years before it.Petitioner does not ask us to order a refund, nor does she seek a redetermination of decedent's income tax liabilities or overpayments. Rather, petitioner contends that, although respondent's treatment of decedent's income tax liabilities and overpayments may be correct for some purposes, it is incorrect for purposes of determining petitioner's estate tax liability. In deciding this issue, we need only consider the fact of the decedent's income tax liabilities and overpayments, not their correctness. We have jurisdiction to do so.We now turn to the merits of petitioner's claim. We do not agree with petitioner that respondent's use of his offset power improperly deprived the surviving spouse of an asset with a value equal to the total of the decedent's gross annual income tax overpayments. We think, however, that petitioner was entitled to compute the decedent's estate133 tax liability without presuming respondent would set off one year's net income tax overpayment against another year's net income tax liability.Section 2031 provides that the value of a decedent's gross estate shall be determined with reference to the value of 778 property at the time of his death. Section 6402(a)7 provides that the Secretary may credit the amount of any tax overpayment against any tax liability of the person who made the overpayment.Petitioner was not entitled to treat each gross annual income tax overpayment independently of each gross income tax liability for the same 134 year. In the context of a judicial, rather than an administrative setoff, it has been held that:the taxpayer cannot recover unless he has overpaid his tax. It is not enough that he can prevail on the particular items on which he sues, for he may have underpaid with respect to other components entering into that tax. Only if the overall balance moves his way can he recover * * * [Dysart v. United States, 169 Ct. Cl. 276">169 Ct. Cl. 276, 340 F.2d 624">340 F.2d 624, 628 (1965).]See Kingston Products Co. v. United States, 177 Ct. Cl. 471">177 Ct. Cl. 471, 368 F.2d 281">368 F.2d 281 (1966). We think that the logic of the cited cases is equally applicable in the administrative context. This is akin to the principle that one cannot deduct losses incurred in a transaction without also declaring the profits. See Grant v. United States, 399 F. Supp. 79">399 F. Supp. 79, 81 (E.D. Ark. 1975).We note that the Dysart opinion distinguished a within-year setoff (the case before it) from a setoff of one year's tax liability against another's. In at least one circumstance, the Commissioner may absolutely refuse to set off one year's liability135 against another year's overpayment. See Rothensies v. Electric Storage Battery Co., 329 U.S. 296">329 U.S. 296 (1946) (setoff improper where overpayment year closed by statute of limitations). In general, the Commissioner has broad discretion in such matters, and is not required to set off overpayments for one year against liabilities for another. Sec. 6402(a); Acker v. United States, 519 F. Supp. 178">519 F. Supp. 178, 182 (N.D. Ohio 1981).In Kalb v. United States, 505 F.2d 506">505 F.2d 506 (2d Cir. 1974), cert. denied 421 U.S. 979">421 U.S. 979 (1975), the court considered whether the Commissioner had wrongfully refused to honor 779 a request by a corporate officer to apply an overpayment arising from the company's net operating loss in 1960 to reduce its withholding tax liability for various periods in 1959, 1960, and 1961. If the loss were so applied it would have eliminated the company's liability, as well as that of the officer as a responsible person. The court held that the Commissioner did not abuse his discretion in refusing to make the offset.The Seventh Circuit has expressed doubt that the discretion136 embodied in section 6402 could ever be challenged. See Vishnevsky v. United States, 581 F.2d 1249">581 F.2d 1249, 1253 (7th Cir. 1978). That court further noted that even mandamus would in no way interfere with the Commissioner's discretion to apply an overpayment as he saw fit. 581 F.2d at 1255 n. 7. See also United States v. Teti, an unreported case ( D. Conn. 1975, 36 AFTR2d 75-5762, 75-2 USTC par. 9709). Respondent's argument that he is under a mandatory obligation to offset year against year is contrary not only to his own arguments in prior cases but to the weight of authority as well.We think that petitioner was entitled to prepare the decedent's estate tax return on the basis of the facts as they existed at the date of decedent's death. As of that date, decedent's net annual income tax overpayments and liabilities were ascertainable. What was not ascertainable was whether the respondent would exercise his discretion and set off overpayments against liabilities for different years. It was not incumbent upon petitioner to assume a setoff.Since respondent clearly has discretion, for 137 purposes of collection, to treat each year separately, it ill behooves him to argue that petitioner may not so treat each year. Each year is assessed separately and each is subject to its own statute of limitations and deficiency procedures. Each year is independent of the other. 8 See Commissioner v. Sunnen, 333 U.S. 591">333 U.S. 591, 598 (1948).Respondent argues that income tax overpayments never 780 "passed" to Martha so as to allow them to be deductible as part of the spousal bequest. The argument is predicated on the requirement that to be deductible, assets must pass to the widow as a beneficial owner. Since 138 no refund check was ever issued to Martha Bender, the argument continues, and since all income tax overpayments resulted from decedent's business activities independent of his widow, she is not the beneficial owner of the overpayments.Respondent completely fails to see that Martha Bender need not be the individual payee on a receivable for it to be includable in the spousal bequest. In fact, to the extent she was the payee, an asset would not be in the estate. Her beneficial interest is as an heir. If decedent had an interest, his wife could become its beneficial owner.Respondent next argues that the overpayments are a "mythical" estate asset creating an impermissible double deduction. The argument is premised on the principle that an asset cannot be an element of the marital deduction if not a part of the gross estate. The argument begs the question.To contend that an asset cannot be a part of the marital deduction because it is not part of the gross estate is to state the obvious. We are here to decide, however, what part, if any, of the decedent's income tax overpayments are includable in the gross estate.Respondent's final argument is that the marital bequest 139 bears no portion of the estate tax. True though this may be, it does not suffice to change the result herein.In sum, although petitioner was not entitled to view decedent's tax liabilities as distinct from his overpayments within the same year, petitioner was entitled to include as assets of the estate decedent's net annual income tax overpayments, and treat as debts of the estate decedent's net annual income tax liabilities.To reflect the foregoing,Decision will be entered under Rule 155. Footnotes. By order of the Chief Judge, this case was reassigned from Judge Charles E. Clapp II to Judge Carolyn Miller Parr.↩1. Respondent has asserted an increased deficiency in his answer, the amount of which he ultimately contends is $ 781.11. Petitioner does not dispute the mathematical corrections yielding this increased deficiency.↩2. Unless otherwise indicated, all Rule references are to the Tax Court Rules of Practice and Procedure and all section references are to the Internal Revenue Code of 1954 as amended and in effect on the date of decedent's death.↩3. Due to concessions and the myriad changes of figures both sides have submitted since the petition in this case was filed, the chart figures differ from the figures respondent sent petitioner with the statutory notice of deficiency. The parties agree to the figures in the chart.↩4. For convenience, we adopt the parties' terminology in calling these figures overpayments. The positive figures in the last column, above, are the only true overpayments in this case.↩5. The figures given are the ones respondent used in his notice of deficiency. Although most differ from the figures now used by the parties, the method of computation, which has not changed, is that upon which we focus.↩6. Although respondent denominated this final figure as he did, the figure represents only a portion of the administrative estate passing, and does not include, for example, Schedule C assets (mortgages, notes, and cash).↩7. Sec. 6402(a) provides:In the case of any overpayment, the Secretary, within the applicable period of limitations, may↩ credit the amount of such overpayment, including any interest allowed thereon, against any liability in respect of an internal revenue tax on the part of the person who made the overpayment and shall, subject to subsections (c) and (d), refund any balance to such person. [Emphasis supplied.]8. We note that petitioner could have paid off the deficiency years leaving only the refund years. In such case, the refunds would clearly be includable in the spousal share as nondisclaimed assets of the estate. We question whether that option should be foreclosed by the fortuity that respondent has determined the estate tax before petitioner has paid the deficiency years.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622451/	Willet Watkins v. Commissioner. Nancy Watkins v. Commissioner. Betty Watkins v. Commissioner. Mississippi Valley Trust Company and Ruth H. Watkins, Trustees and Transferees, v. Commissioner.Watkins v. CommissionerDocket Nos. 109947, 109948, 109950, and 109949.United States Tax Court1943 Tax Ct. Memo LEXIS 256; 2 T.C.M. (CCH) 254; T.C.M. (RIA) 43282; June 10, 1943256 On the facts, held: that certain gifts in trust were gifts of future interests; and that the beneficiaries in the trust are liable, as transferees, for the gift tax due and unpaid by the donors, as are likewise the trustees in the trust. Stanley S. Waite, Esq., 408 Pine St., St. Louis, Mo., for the petitioners. Carroll Walker, Esq., for the respondent. TYSON Memorandum Findings of Fact and Opinion Respondent determined deficiencies in gift tax for the year 1937 as follows: DocketPetitionerNo.LiabilityWillet Watkins, as benefici-ary and transferee109947$1,425.00Nancy Watkins, as beneficiaryand transferee1099481,425.00Betty Watkins, as beneficiaryand transferee1099501,425.00Mississippi Valley Trust Com-pany and Ruth H. Watkins,as trustees and transferees1099491,425.00Petitioner in each proceeding alleges that respondent erred: (1) in refusing to allow that the statute of limitations bars collection of the gift taxes involved; (2) in (a) denying exclusion of $15,000 based on the assertion that gifts made in 1937 by Horton Watkins were of future interests, and (b) in denying exclusion of $5,000 based on the assertion that the payment257 of certain insurance premiums by Ruth H. Watkins in 1937 was a gift of future interest; and (3) in determining that petitioner is liable for gift tax as transferee. In their pleadings the parties are in agreement that the assessment and collection of any deficiency in gift tax against either Horton or Ruth H. Watkins for 1937 is barred by the statute of limitations. The proceedings have been consolidated and submitted upon the pleadings and a stipulation of facts. The stipulated facts not set forth are included herein by reference. Findings of Fact All of the petitioners, except Mississippi Valley Trust Company, reside in the County of St. Louis, Missouri. The Mississippi Valley Trust Company is a Missouri corporation with its principal place of business in the City of St. Louis, Missouri. The gift tax returns referred to hereafter were filed with the collector of internal revenue for the First District of Missouri. Horton Watkins and Ruth H. Watkins are husband and wife and the parents of Nancy, Betty, and Willet Watkins during the taxable year, Nancy, Betty, and Willet Watkins were sixteen, thirteen, and eleven years of age, respectively. On January 5, 1937, Horton Watkins 258 made an irrevocable transfer to Mississippi Valley Trust Company and Ruth H. Watkins, as trustees, of all his right, title, interest, and estate in and to certain insurance policies on his life aggregating $316,000 and having a total gross value on the date of transfer of $107,205.90. The trust estate was to be divided after the death of Horton Watkins into equal shares, one for each of his three above-mentioned children. The trust instrument under which this transfer was made was executed by Horton Watkins and the two trustees. The trust instrument provided, inter alia, that "Prior to the death of Horton Watkins the income of the trust estate shall be accumulated and added to the principal thereof"; and thereafter the trustees were to apply "so much of the net income of the respective shares of the children of Grantor as they may deem necessary for their proper education, care, comfort and support until they attain the age of twenty-one (21) years respectively, after which time the net income from their respective shares shall be paid to them direct during the further continuance of their respective trusts". The trust instrument further provided that after the death of Horton259 Watkins the shares of the three children were to be distributed as follows: When the three children respectively reached the age of twenty-five years they should each receive a one-third part of their respective shares of the trust estate; that when they respectively reached the age of thirty years they should each receive one-half of the property then constituting their respective shares of the trust estate; and that when they respectively reached the age of thirty-five, they should each receive the residue of their respective shares of the trust estate. The preamble to the trust instrument signed by Ruth H. Watkins as a party thereto recited that she desired the insurance policies to be transferred by Horton Watkins in trust for the benefit of the three children and expressed her willingness, if this was done, to pay all future premiums on the policies. During the year 1937 Horton Watkins made charitable gifts in the amount of $18,350. On March 14, 1938, Horton Watkins filed a gift tax return for the year 1937 reporting the gift of insurance policies referred to in the preceding paragraph and claimed three exclusions of $5,000 each therefor. The amount of taxes as shown on that260 return to be due was paid by Horton Watkins. Respondent in his notices of transferee liability, each dated December 31, 1941, disallowed the exclusions with respect to each gift on the ground that the gifts in trust were of future interests and determined a liability of $1,350 against the petitioners as transferees for the gift tax liability of Horton Watkins. During the year 1937 Ruth H. Watkins made gross gifts of $26,047.18 by: (1) paying premiums of $13,236.80 on the policies of life insurance transferred by Horton Watkins to the trust; (2) paying premiums of $6,714.61 on life insurance policies payable to Nancy Watkins; and (3) paying premiums of $6,095.77 on policies of life insurance payable to Betty Watkins. During 1937 she made a charitable gift of $6,000. On March 14, 1938, Ruth H. Watkins filed a gift tax return for the year 1937 reporting these gifts and claimed three exclusions of $5,000 each. Respondent in his notices of transferee liability, each dated December 31, 1941, disallowed one $5,000 exclusion on the ground that payment of premiums on the insurance policies held in trust was a gift of future interest. Respondent determined a liability of $75 against the petitioners261 as transferees for the gift tax liability of Ruth H. Watkins. Both Horton Watkins and Ruth H. Watkins were solvent before and after the abovementioned gift and were able to pay the deficiencies determined against the petitioners. No part of the deficiencies for 1937 has been paid, and the statute of limitations bars it assessment and collection as against the donors. The value of the interest in the gift in trust received by each petitioner was at the time it was received in excess of the amount of the deficiency determined against that petitioner. Opinion TYSON, Judge: The first issue raised by the petition presents the question of whether the statute of limitations bars collection of the gift taxes here involved from the petitioners as transferees. On March 14, 1938, Horton Watkins, as donor of the insurance policies, and Ruth H. Watkins, as donor of the gift represented by her payment of premiums on these policies, each filed a gift tax return for 1937. The three year period (section 517 (a), Revenue Act of 1932, applicable here) within which a deficiency could be determined against these donors expired March 13, 1941. On December 31, 1941, respondent determined a deficiency262 against each of the petitioners, as transferees, for the gift tax duc from the respective donors. Section 526 (b) (1) of the Revenue Act of 1932, also applicable here, provides that assessment of liability against a transferee may be made "within one year after the expiration of the period of limitation for assessment against the donor". It is therefore clear that the statute of limitations does not bar the assessment and collection of the gift tax here involved from petitioners, or either of them, as transferees if they are otherwise liable therefor, and we so hold. The second issue raised by the petition presents the question of whether the gifts involved were gifts of future or present interests within the meaning of section 504 (b) of the Revenue Act of 1932. 1 If the gifts were of future interests the donor was not entitled, under that section, to the exclusions claimed by petitioners. 263 Under the terms of the trust instrument the income was to be accumulated and added to the corpus prior to the death of the insured and, thereafter, until the beneficiaries were 21 years old. The trustees had the discretion of determining the extent to which the income was to be used for the benefit of the beneficiaries. In no event could any beneficiary acquire any part of the corpus until he or she had attained the age of 21 years. The record discloses that during the taxable year the oldest beneficiary was 16 years of age. Accordingly we hold the gift of the insurance policies to be one of a future interest. ; ; and . See also ; ; ; ; ;264 and . Likewise we hold that the payments of the premiums by Ruth H. Watkins on the insurance policies held in trust were gifts of future interests. ; The third issue raised by the petition presents the question of whether petitioners, or any of them, are liable for the gift tax liability of the donors of the gifts. The petitioners contend that section 510 of the Revenue Act of 1932, 2 applicable to the taxable year 1937, here involved, does not impose a liability at law on either of them and that consequently there could be no liability of either, since the donors are shown to be solvent, and, moreover, the statute of limitations bars assessment and collection of the tax as against the donors. The contentions of petitioners as to their liability at law and as to the solvency of the donors are conclusively answered against the petitioners by the discussions and decisions in , and ; and265 their contention as to the effect of the statute of limitations barring assessment and collection of the tax from the donors likewise is answered in In this connection it is to be noted that Willet Watkins, Nancy Watkins, and Betty Watkins, petitioners in Docket Nos. 109947, 109948, and 109950, being the beneficiaries in the trust, were donors, , and thus occupy the same status, in that particular, as that occupied by the donee in the Moore case. On the authority of the Evelyn N. Moore and Fletcher Trust Co., Trustee, cases, above cited, we hold that the Mississippi Valley Trust Company and Ruth H. Watkins are liable as trustees and transferees for the deficiencies determined against them as such by the respondent; and that Willet Watkins, Nancy Watkins, and Betty Watkins, respectively, are each liable for the gift tax deficiency determined by the respondent against each of them respectively as donee and transferee.266 Respondent in his answer to each petition alleged that each petitioner received "money, property and effects in excess of the amount of the deficiency determined against the said Horton Watkins". Each petitioner in reply to this allegation "denies that as such beneficiary he [or she] received money, property or effects in any amount whatsoever". Neither of the petitioners on brief or otherwise argues or contends that the value of the property received by each was not in excess of the amount of the deficiency determined against each by the respondent. It would seem that failure of the replies of petitioners to specifically deny the amount of the property to be as affirmatively alleged in the answer constitutes an admission that it was of such amount and that the failure of petitioners to make any argument or contention that the value of the property received by each was not in excess of the amount of the deficiency determined against each constitutes a waiver on this question. But however this may be, we have found as a fact that the value of the property received by each petitioner, exceeded the amount of the deficiencies involved and, from the facts of record, we so hold. The 267 determination of the respondent in each docket number is approved. Decisions will be entered for the respondent. Footnotes1. SEC. 504. NET GIFTS. (b) Gifts Less Than $5,000. - In the case of gifts (other than of future interests in property) made to any person by the donor during the calendar year, the first $5,000 of such gifts to such person shall not, for the purposes of subsection (a), be included in the total amount of gifts made during such year.↩2. SEC. 510. LIEN FOR TAX. The tax imposed by this title shall be a lien upon all gifts made during the calendar year, for ten years from the time the gifts are made. If the tax is not paid when due, the donee of any gift shall be personally liable for such tax to the extent of the value of such gifts. * * *↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622452/	WILLIAM M. SWART, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentSwart v. CommissionerDocket No. 2580-74.United States Tax CourtT.C. Memo 1978-38; 1978 Tax Ct. Memo LEXIS 472; 37 T.C.M. (CCH) 205; T.C.M. (RIA) 780038; January 30, 1978, Filed Scott R. Santerre, for the petitioner. Harry Beckhoff, for the respondent. SCOTT MEMORANDUM FINDINGS OF FACT AND OPINION SCOTT, Judge: Respondent determined a deficiency in petitioner's income tax for the calendar year 1971 in the amount of $114.70. The only issue for decision is whether the amount paid by the Rocky Mountain Osteopathic Hospital, Denver, Colorado, to petitioner as a resident in pathology was a fellowship grant under the provisions of section 117, Internal Revenue Code of 1954. 1FINDINGS OF FACT Some of the facts have been stipulated and are found accordingly. Petitioner, who was a resident of El Paso, Texas, at the time his petition in this case was filed, filed an individual Federal income tax return for the calendar year 1971 with the Ogden Service Center of the Internal Revenue Service. Petitioner is a Doctor of Osteopathy. He474 graduated from the Kansas City College of Osteopathy and Surgery in 1958 and completed his internship at Phoenix General Hospital, Phoenix, Arizona, in 1959. Petitioner was licensed to practice as an osteopathic physician and surgeon in Arizona. Thereafter, petitioner engaged in general practice of osteopathy in Phoenix, Arizona, until approximately the end of February 1971. On March 1, 1971, petitioner entered into a contract with Rocky Mountain Osteopathic Hospital, Denver, Colorado, (hereinafter hospital) whereby he accepted an appointment as a resident in pathology for a one-year period beginning March 1, 1971, and ending February 29, 1972. The contract provided a stipend of $900 per month plus a $25 monthly increase semi-annually and a comparable increase which could be designated by the executive committee in the future. The contract further provided that the hospital would specify the conditions under which living quarters, meals and laundry service, or the equivalent of these, would be provided to petitioner. It also provided that the hospital would stipulate whether professional liability insurance and hospital and health insurance for the resident and his family would475 be provided. By letters dated March 22, 1971, and July 1, 1971, the hospital agreed with respect to these items as follows: (1) To furnish meals, uniforms and personal laundry for petitioner; (2) effective July 1, 1971, to give petitioner a housing allowance of $100 monthly in addition to his monthly stipend with petitioner selecting his own living quarters off the hospital premises. The hospital was to act as lessee paying the lessor the entire rental amount as it became due. Any excess rental over the $100 allowance was to be deducted from petitioner's stipend by the hospital on a mutually agreeable schedule. In addition to the $100 housing allowance, the hospital agreed to pay utility and local telephone charges; (3) to provide professional liability insurance for petitioner as an employee of the hospital since, under the laws of the State of Colorado, residents are not licensed but are considered employees of the hospital; (4) to provide Blue Cross Hospitalization Insurance for petitioner and his family; (5) to allow petitioner two weeks vacation with pay during the year; and (6) to allow petitioner every other weekend off except if needed on an emergency basis476 to cover for illness or emergency procedures. Under the contract, petitioner agreed to the following: B. THE RESIDENT AGREES: 1. To serve as a Resident in the field of Pathology during the entire period as specified above in this contract. 2. To perform all the duties assigned to him to the best of his ability, to maintain standards of professional competence as determined by the Hospital, and to conduct himself in a professional manner at all times. 3. To observe all rules and regulations of the Hospital and those of the American Osteopathic Association pertaining to Residents. 4. To engage during the entire period of this contract only in such activities of a professional nature as are approved by the Hospital and the Association. 5. To refrain during the entire period of this contract from engaging or participating in any nonprofessional activities that would interfere with his effective performance of this contract. In the contract the parties agreed with respect to termination of the contract by mutual consent of the parties, termination by the hospital upon failure of the resident to perform satisfactorily, basis of settlement of disputes between the477 resident and the hospital, and that termination of the contract by the hospital without just cause shall be a basis for revocation of approval of the hospital for training of residents. The contract also incorporated by reference the "Requirements and Interpretative Guide for Hospitals Approved for Intern and/or Residency Training" of the American Osteopathic Association. Petitioner, as a resident, was classified by the hospital as house staff and provided with the benefits which were available to other house staff members which included, in addition to the items covered by the letters written pursuant to the contract, free parking, participation in the employees' credit union, vacation leave, free medical care for himself and his family, and annual postgraduate educational allowances for courses taken outside the hospital. Petitioner was furnished a "Wage and Tax Statement," Form W-2, by the hospital. Federal, state and city income taxes were withheld from petitioner's stipend and FICA contributions were also withheld from that stipend. The hospital is a nonprofit, nonsectarian, medical facility organized under the laws of the State of Colorado for the principal purpose of478 providing patient care, research and teaching. It is an organization described in section 501(c)(3) which is exempt from Federal income taxes. It is not an educational organization described in section 170(b)(1)(A)(ii). The hospital is a short-term acute care general hospital providing medical, surgical, obstetrical and pediatric care for the Denver, Colorado, and surrounding areas.The hospital is principally funded from patient revenues plus minor grants from private foundations for equipment. Patients are admitted to the hospital solely on the basis of medical needs. During 1971, the hospital had a 174 bed capacity which included the nursery capacity of bassinets. During 1971, the hospital handled 6,376 admissions, 10,349 out-patient procedures, and 4,025 patients on an emergency basis. During that year the hospital was staffed by approximately 100 physicians, 2 residents, and 6 interns. One of the residents was a surgical resident and the other was petitioner, a resident in pathology. The Pathology Department of the hospital in which petitioner served his entire residency was staffed by one Pathologist (D.O.), one resident, and approximately 12 medical technologists. During479 1971, the Pathology Department of the hospital performed 50 autopsies; handled 3,179 surgical pathology cases; and 2,345 cytologies. Stipends to residents of the hospital are fixed unilaterally by the hospital administration without regard to the resident's financial needs. Contracts between residents and the hospital are executed annually. The stipends are fixed at annual periods and are increased for length of service in accordance with the provisions of the contract entered into by the hospital and the resident. Reappointment of a resident is subject to the recommendation of the head of the department in which the resident serves. On March 1, 1972, petitioner entered into another one-year contract with the hospital as a second-year resident in pathology at an increased stipend.Petitioner and the hospital mutually terminated the second-year residency contract on July 1, 1972, because the chairman of the Pathology Department left the hospital and the program was discontinued. Thereafter, petitioner continued in his pathology training at a hospital in El Paso, Texas. Prior to March 1, 1971, the hospital had been authorized a training residency in pathology, but the program480 had not been implemented and petitioner was the first and, at the date of the trial of this case, only trainee involved in that program at the hospital. The activities performed by petitioner at the hospital were subject to the constant direction, supervision, and control of the chairman of the Department of Pathology. His duties were specifically designated and increased progressively. Petitioner was assigned all cases which were presented to the Department of Pathology. Surgical pathology handled by petitioner involved tissues and materials taken from patients of the hospital. Autopsies performed in the hospital involved patients who died in the hospital. The duties of petitioner as the pathology resident of the hospital included conducting weekly seminars of a half hour to an hour's duration for medical students, interns, student nurses, and assistant residents. This activity required petitioner to spend 3 to 4 hours a week preparing for the lectures. During 1971 petitioner was primarily engaged in Anatomic Pathology and his duties generally consisted of observation of gross examinations, description, cutting, fixation, embedding, sectioning, and staining tissues for microscopic481 examinations. Petitioner performed microscopic examinations of such tissues, and reported the results of such examinations. All of petitioner's microscopic examinations were reviewed by the chairman of the department. Petitioner and the chairman would discuss the diagnoses made by petitioner and the report would be dictated by the chairman and signed by both petitioner and the chairman. All reports prepared by petitioner were countersigned by the chairman of the Department of Pathology. During 1971, petitioner examined hundreds of cases involving surgical tissues and autopsies, and completed reporting all such examinations. During this year petitioner was involved in approximately 25 autopsies. All of the actual autopsies were performed by the chairman of the department and all autopsy reports dictated by him. However, petitioner performed microscopic examinations on tissues taken from the body during autopsy and the results of these examinations, after review by the department chairman, would generally be made part of the autopsy report. Petitioner would discuss and participate in the evaluation of the findings from the autopsy report. The autopsy reports were used as the basis482 of preparing death certificates. In surgical pathological cases, the report of the gross examination and the microscopic examinations, which are required in approximately 90 percent of the surgical cases, after being completed, were given to the operating surgeon and the attending physician of the patient. Petitioner, in his work as a resident in pathology, had no direct patient contact. When the chairman of the Pathology Department of the hospital was on vacation during 1971, all tissues that were to be examined and diagnosed were sent to another hospital for such examination. The duties of petitioner as a pathology resident were not essentially different from those of the staff pathologist, except that any report prepared by petitioner required the countersignature of the department chairman to be official. As a general rule, a hospital would have one pathologist per 100-bed capacity. However, the Rocky Mountain Osteopathic Hospital had never in its history had but one pathologist on its staff and had had no resident except during the time petitioner was there. Petitioner as a resident was required to spend a minimum of 2,000 hours a year at the hospital or approximately483 40 hours a week for 50 weeks. Petitioner's hours of duty generally began at 7:00 a.m. and ended at approximately 5:00 p.m. Residents were required to attend both hospital staff and departmental meetings and were assigned to observe and assist various hospital staff committees. In order to complete residency requirements in pathology, a minimum of 1,500 examinations of surgical tissue and the completion of reporting of 500 cases was required. It was also required that the resident assist in 100 autopsies and complete reporting of 30 such cases and examine 500 cytologies, completing reporting of 100 cases. During the year 1971, petitioner was not involved with any cytologies. Petitioner, as a pathology resident, was periodically evaluated as to his diagnostic proficiency by the staff pathologist. He was not regarded by the hospital as a "degree" candidate in an academic or university sense. During the taxable year 1971, petitioner received a stipend as a resident of the hospital in the amount of $9,724.89. He excluded $3,000 of this amount from income on his income tax return for the year 1971 as a fellowship grant. Respondent disallowed this claimed exclusion. OPINION484 Section 117, insofar as here pertinent, allows a $300 per month exclusion from the gross income to an individual not engaged in a degree program at a university from amounts received as a "fellowship grant" from an organization described in section 501(c)(3) which is exempt from Federal income tax. 2 The facts here show that petitioner was not engaged in a degree program and that the hospital that paid his stipend was an organization described in section 501(c)(3) which is exempt from Federal income tax. Petitioner has only claimed an exclusion of $300 per month. Therefore, the only issue between the parties is whether the amount paid to petitioner was received by him as a "fellowship grant" within the meaning of section 117. The statute itself does not define the term "fellowship grant." However, section 1.117-3(c), Income Tax Regs., defines this term as "an amount paid or allowed to, or for the benefit of, an individual to aid him in the pursuit of study or research. 485 Section 1.117-4(c)(2), Income Tax Regs., specifically provides that allowances shall not be considered as received as a scholarship or fellowship grant if the amounts are paid as compensation for services or primarily for the benefit of the grantor. This section of the regulations further states that amounts paid or allowed to an individual to enable him to pursue studies or research are considered to be received as a scholarship or fellowship grant-- If the primary purpose of the studies or research is to further the education and training of the recipient in his individual capacity and the amount provided by the grantor for such purpose does not represent compensation or payment for the services * * . Additionally, this regulation states that-- Neither the fact that the recipient is required to furnish reports of his progress to the grantor, nor the fact that the results of his studies or research may be of some incidental benefit to the grantor shall, of itself, be considered to destroy the essential character of such amount as a scholarship or fellowship486 grant. The validity of these regulations was upheld in Bingler v. Johnson,394 U.S. 741">394 U.S. 741, 757-8 (1969). In so holding, the Supreme Court pointed out that-- The thrust of the provision dealing with compensation is that bargained-for payments, given only as a "quo" in return for the quid of services rendered--whether past, present, or future--should not be excludable from income as "scholarship" funds. [Fn. ref. omitted.] * * * The question in this case, therefore, is whether the facts here present show the primary purpose of the payments by the hospital to petitioner to be to enable petitioner to pursue studies or research to further his education and training in his individual capacity or whether these payments were primarily for the services rendered by petitioner. Clearly here, as in numerous other cases involving medical or surgical interns and residents of hospitals (see Weinberg v. Commissioner,64 T.C. 771">64 T.C. 771, 776-777 (1975) and cases there cited), the agreement which petitioner had with the hospital has all the indicia of an employer-employee relationship. Petitioner agreed to perform the duties assigned to him, to observe487 the rules and regulations of the hospital, to engage only in activities of a professional nature approved by the hospital, and to regrain from engaging in any nonprofessional activities which would interfere with his performance for the hospital. The record shows that in all respects petitioner was treated as a member of the staff and an employee of the hospital as far as his contractual relations with the hospital were concerned.Petitioner was provided with the same "fringe benefits" as other employees of the hospital, including a 2-week vacation, hospitalization, and medical care. The hospital withheld state and Federal income taxes and FICA taxes from the payments made to petitioner. The amount paid to petitioner had no relation to petitioner's financial needs. All these aspects of employment have in various cases been held to indicate that the relationship between the recipient of a payment and the grantor was that of employer and employee. See Proskey v. Commissioner,51 T.C. 918">51 T.C. 918 (1969); Anderson v. Commissioner,54 T.C. 1547">54 T.C. 1547 (1970); Fisher v. Commissioner,56 T.C. 1201">56 T.C. 1201 (1971). Petitioner argues that his case is distinguishable488 from other cases involving residents and interns in that aside from his work of teaching, holding seminars and giving lectures in pathology to nurses and interns, which he concedes otherwise would have necessitated a staff person of the hospital being used for the function, his services were duplicated by the chairman of the department and, therefore, did not amount to services rendered for the benefit of the hospital. 3 The record shows that during the year here involved the work petitioner did was reviewed by the chairman of the hospital. Also, as petitioner points out, there had only been one staff pathologist at the hospital from the time it commenced operation up to the time of the commencement of petitioner's residency. Petitioner concludes from these facts that he did not contribute services to the hospital which otherwise would have been done by someone else. Petitioner also stresses the fact that he did not have contact with patients and contribute to the hospital in this manner as did many residents489 and interns. All that petitioner's argument amounts to is that the hospital could have functioned without his work. In fact, the indication from the record is that the hospital could have functioned without the staff pathologist by sending its work out to other hospitals.However, the fact that the hospital could, and in years prior to the time petitioner came, did operate only with the staff pathologist, does not of itself warrant the conclusion that the amount paid to petitioner was noncompensatory. See Fisher v. Commissioner,supra. Certainly the fact that a staff pathologist could operate without the assistance of a resident does not mean that the work of the resident was not helpful to the staff pathologist, and in fact, the indication from this record is that petitioner's work was of assistance to the staff pathologist and to the hospital. Also, petitioner by his contract was bound to perform whatever duties were assigned to him. The very nature of pathology as a specialty is such that patient contact is not to be expected. However, the patients are assisted by the work of the pathologist by the reports furnished to the surgeon and the doctor who do490 have the patient contact. 4Considering all the facts here present, we conclude that the services rendered by petitioner to the hospital are comparable to the services generally rendered by interns and residents. 491 With few exceptions, stipends paid to interns and residents have been held to represent compensation for services rather than fellowship grants. See Rosenthal v. Commissioner,63 T.C. 454">63 T.C. 454, 461 (1975), and cases there cited. On the basis of this record, we conclude that the payments made to petitioner were for services rendered and that he is not entitled to the $3,000 exclusion which he claimed on his tax return as a fellowship grant. Decision will be entered for the respondent. Footnotes1. All statutory references are to the Internal Revenue Code of 1954, as amended, unless otherwise stated.↩2. SEC. 117. SCHOLARSHIPS AND FELLOWSHIP GRANTS. (a) General Rule.--In the case of an individual, gross income does not include-- (1) any amount received-- * (B) as a fellowship grant, including the value of contributed services and accommodations; and * (b) Limitations.-- * *(2) Individuals Who Are Not Candidates For Degrees.-- In the case of an individual who is not a candidate for a degree at an educational institution (as defined in section 151(e)(4)), subsection (a) shall apply only if the condition in subparagraph (A) is satisfied and then only within the limitations provided in subparagraph (B). (A) Conditions For Exclusion.--The grantor of the scholarship or fellowship grant is-- (i) an organization described in section 501(c)(3) which is exempt from tax under section 501(a), (ii) a foreign government, (iii) an international organization, or a binational or multinational educational and cultural foundation or commission created or continued pursuant to the Mutual Educational and Cultural Exchange Act of 1961, or (iv) the United States, or an instrumentality or agency thereof, or a State, a territory, or a possession of the United States, or any political subdivision thereof, or the District of Columbia. (B) Extent of Exclusion.--The amount of the scholarship or fellowship grant excluded under subsection (a)(1) in any taxable year shall be limited to an amount equal to $300 times the number of months for which the recipient received amounts under the scholarship or fellowship grant during such taxable year, except that no exclusion shall be allowed under subsection (a) after the recipient has been entitled to exclude under this section for a period of 36 months (whether or not consective) amounts received as a scholarship or fellowship grant while not a candidate for a degree at an educational institution (as defined in section 151(e)(4)↩).3. In our view petitioner's work of up to 5 hours a week in conducting lectures and seminars was valuable to the hospital and not as "incidental" as petitioner argues.↩4. Two cases involving pathologists have been decided by this Court. Nugent v. Commissioner,T.C. Memo 1974-161">T.C. Memo. 1974-161, and Handelman v. Commissioner,T.C. Memo. 1975-331. Though understandably there are some factual differences in the work assigned to the residents in pathology in those cases and to petitioner, basically petitioner's work as a resident in pathology was the same as the residents involved in those cases. Petitioner attempts to distinguish the Nugent↩ case by the fact that the taxpayer involved in that case performed autopsies and conducted tests in surgical pathology. However, the facts in that case show that the resident's duties were performed under the supervision of a staff pathologist who reviewed and approved all reports and diagnoses made by the resident. Except as to quantity of review by the staff pathologist, there is little distinction in the cases.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4562802/	UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLUMBIA KARLA REID-WITT, on behalf of C.W., Plaintiff, v. Civil Action No. 1:19-cv-02473 (CJN) DISTRICT OF COLUMBIA, Defendant. MEMORANDUM OPINION C.W. was a student at Washington’s Benjamin Banneker High School before her disabilities interfered with her studies. See generally Am. Compl., ECF No. 7. She was granted various accommodations but her multiple requests for special-education services were denied. See generally id. Unable to maintain consistent attendance, C.W. fell below the requirements for continued enrollment and the school asked her to withdraw. See generally id. After exhausting administrative remedies, C.W’s mother, Karla Reid-Witt, filed this suit alleging a violation of the Individuals with Disabilities Education Act (IDEA), 20 U.S.C. § 1400 et seq., and disability discrimination under the Rehabilitation Act, 29 U.S.C. § 794, the Americans with Disabilities Act (ADA), 42 U.S.C. § 12101 et seq., and the District of Columbia Human Rights Act (DCHRA), D.C. Code § 2-1401.01 et seq. See generally Am. Compl. The District moves to dismiss the discrimination counts for failure to state a claim. See generally Def.’s Partial Mot. to Dismiss Pl.’s Am. Compl. (“Mot.”), ECF No. 8. For the reasons explained below, the Court grants the Motion in part and denies it in part. 1 I. Background Banneker is a selective public high school; among other requirements, students must maintain a minimum grade-point average and a record of community service to remain enrolled. 1 Am. Compl. ¶ 74. C.W. entered Banneker in the ninth grade during the 2016–17 school year. Id. ¶ 13. She suffers from anxiety and depression, which cause difficulties with “[self-] organization, time management, completing assignments, memory, and focus,” as well as at least two instances of suicidal ideation. Id. ¶¶ 14–15, 47–49. After a breakdown caused C.W.’s temporary hospitalization in the middle of ninth grade, Reid-Witt requested that the District of Columbia Public Schools (DCPS) arrange an IDEA Individual Education Program for C.W. to complete either at home or in the hospital. Id. ¶ 18. Reid-Witt supplied supporting documentation from C.W.’s therapist. Id. ¶ 20. C.W. remained hospitalized for a portion of the spring semester and “attended Banneker on a part-time basis,” but DCPS did not respond to Reid-Witt’s request for home study. Id. ¶¶ 19, 25. After C.W. returned to school full-time in May 2017, DCPS informally notified Reid-Witt that C.W. was ineligible for home instruction. Id. ¶¶ 26–28. DCPS instead issued an accommodation plan under section 504 of the Rehabilitation Act that permitted C.W. to drop two courses and gave her various testing and learning accommodations. Id. ¶ 30; see also Section 504 Plan of Jun. 9, 2017, ECF No. 8-1. C.W. missed 71 days of the ninth grade. Am. Compl. ¶ 31. Before C.W.’s tenth-grade year commenced, DCPS formally denied Reid-Witt’s request for special-education services. Id. ¶¶ 32–34. It also rejected a request to use an assistive electronic device in class. Id. ¶¶ 37–40; see also Section 504 Plan of Aug. 31, 2017, ECF No. 1 On a motion to dismiss under Federal Rule of Civil Procedure 12(b)(6), the Court must, of course, accept well pleaded facts in the Complaint as true. Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007). 2 8-2; Section 504 Plan of Sep. 5, 2017, ECF No. 8-3. C.W. missed 67 days of school during the tenth grade, including one incident during which she ran away from school for the day and another instance of suicidal ideation that required hospitalization. Am. Compl. ¶¶ 42–49. DCPS kept the accommodations in place but maintained its position that C.W. was ineligible for special-education services. Id. ¶¶ 50–53. The Parties reached an impasse during the eleventh-grade year. C.W. attended school only one day that year, and DCPS repeatedly rejected Reid-Witt’s requests for special-education services. Id. ¶¶ 54–72; see also Section 504 Plan of Aug. 27, 2018, ECF No. 8-4. The school informed Reid-Witt that C.W.’s grade-point average and record of community-service hours had fallen below the acceptable minimums and asked her to transfer to one of the District’s non- selective high schools. Am. Compl. ¶¶ 73–78; Def.’s Ltr. of Feb. 25, 2019, ECF No. 8-5. Reid- Witt decided instead to homeschool C.W. for the 2019–20 school year but has been largely unsuccessful because of C.W.’s disabilities. Id. ¶¶ 85–89. Reid-Witt filed an administrative complaint alleging both the denial of a Free Appropriate Public Education and disability discrimination. Id. ¶ 1; see also 34 C.F.R. § 104.33(a) (“A recipient [of federal funding] that operates a public . . . secondary education program . . . shall provide a free appropriate public education to each qualified handicapped person who is in the recipient’s jurisdiction, regardless of the nature or severity of the person’s handicap.”). On June 10, 2019, a Hearing Officer denied the complaint after finding that C.W. did not qualify for special education under the IDEA and that he lacked jurisdiction over the discrimination claim. Am. Compl. ¶¶ 90–100; Hearing Officer’s Decision, ECF No. 1-1. Reid- Witt then filed this lawsuit. The Amended Complaint contains three counts: (I) a challenge to the denial of the IDEA complaint, id.; (II) disability discrimination under the Rehabilitation Act, 3 id. ¶¶ 101–75; and (III) disability discrimination under the ADA and the DCHRA, id. ¶¶ 176– 256. The District moves to dismiss in part, arguing that Counts II and III fail to state a claim. See generally Mot. The District does not yet challenge Count I. See id. at 1. II. Legal Standard Ordinarily, “[a] pleading that states a claim for relief must contain . . . a short and plain statement of the claim showing that the pleader is entitled to relief.” Fed. R. Civ. P. 8(a)(2). When evaluating a motion to dismiss under Federal Rule of Civil Procedure 12(b)(6), the Court must “treat the complaint's factual allegations as true . . . and must grant plaintiff the benefit of all inferences that can be derived from the facts alleged.” Holy Land Found. for Relief & Dev. v. Ashcroft, 333 F.3d 156, 165 (D.C. Cir. 2003) (internal quotation omitted). Although the Court accepts all well pleaded facts in the Complaint as true, “[f]actual allegations must be enough to raise a right to relief above the speculative level.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007). “While a complaint . . . does not need detailed factual allegations, a plaintiff’s obligation to provide the grounds of [her] entitlement to relief requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do.” Id. at 554–55 (internal quotations and citations omitted). The claim to relief must be “plausible on its face,” enough to “nudge[ the] claims across the line from conceivable to plausible.” Id. at 570. The Court may also consider “any documents either attached to or incorporated in the complaint and matters of which [the Court] may take judicial notice.” EEOC v. St. Francis Xavier Parochial Sch., 117 F.3d 621, 624 (D.C. Cir. 1997). 2 2 Reid-Witt attached a copy of the Hearing Officer’s Decision to her original Complaint, ECF No. 1, but attached nothing to her Amended Complaint. See generally Hearing Officer’s Decision. The District attached to its Motion all four versions of C.W.’s “Section 504 Plan,” which outline specific disability accommodations the school granted at various times and which Reid-Witt referenced in the Amended Complaint. ECF Nos. 8-1–8-4; see also Am. Compl. ¶¶ 30, 34, 52, 99 (referencing the plans). It also attached the letter in which it asked C.W. not to 4 III. Analysis Reid-Witt’s claims fall into three distinct categories even though they arise out of the same events. In Count I, Reid-Witt challenges the Hearing Officer’s administrative determination that C.W. was ineligible for special-education services under the IDEA. Am. Compl. ¶¶ 90–100. The IDEA is the primary vehicle for such claims and “is of particular importance in this case.” Holmes-Ramsey v. District of Columbia, 747 F. Supp. 2d 32, 35 (D.D.C. 2010). One of the Act’s purposes is “to ensure that all children with disabilities have available to them a free appropriate public education that emphasizes special education and related services designed to meet their unique needs and prepare them for further education, employment, and independent living.” 20 U.S.C. § 1400(d)(1)(A). “‘Implicit’ in the IDEA’s guarantee ‘is the requirement that the education to which access is provided be sufficient to confer some educational benefit upon the handicapped child.’” Holmes-Ramsey, 747 F. Supp. 2d at 35 (quoting Bd. of Educ. of Hendrick Hudson Cent. Sch. Dist. v. Rowley, 458 U.S. 176, 200 (1982)). To qualify for protection under the IDEA, a student must have a disability and, “by reason thereof, need[] special education and related services.” 20 U.S.C. § 1401(3)(A). The IDEA and its implementing regulations establish a comprehensive administrative process for adjudicating disputes, including the ability to file a due-process complaint and obtain an adjudication from a Hearing Officer. 20 U.S.C. § 1415; 34 C.F.R. §§ 300.507–15. Complainants who are “aggrieved by the findings and decisions made” by the Hearing Officer may “bring a civil action with respect to the complaint” in the district court. 20 U.S.C. § 1415(i)(2); 34 C.F.R. § 300.516. It is that administrative process in which students and their return to Banneker. ECF No. 8-5, see also Am. Compl. ¶ 166 (referencing the letter). Reid-Witt does not seem to object to the Court’s consideration of those documents. 5 families may challenge the alleged denial of a Free Appropriate Public Education because of particular problems with a student’s Individual Education Plan, or, as in this case, the determination that a student is ineligible for such services altogether. Id. Reid-Witt filed such a complaint and, having received an adverse determination, seeks judicial review of that decision in Count I. Am. Compl. ¶¶ 90–100. If Reid-Witt prevails on her IDEA claim, she will be entitled only to equitable relief in the form of compensatory education and reimbursement for out-of-pocket costs of “educational placements or related services to which [she] is later found to be entitled.” Walker v. District of Columbia, 969 F. Supp. 794, 795–96 (D.D.C. 1997). Reid-Witt’s other two sets of claims allege disability discrimination more generally. The IDEA does not preclude a student from raising additional claims under other statutes so long as the student first exhausts her administrative remedies under the IDEA. 20 U.S.C. § 1415(l). Unlike the IDEA, the Rehabilitation Act, ADA, and DCHRA may permit recovery of compensatory damages and other remedies. Walker, 969 F. Supp. at 797–98; but see Diaz- Fonseca v. Puerto Rico, 451 F.3d 13, 19 (1st Cir. 2006) (“Where the essence of the claim is one stated under the IDEA . . . , no greater remedies than those authorized under the IDEA are made available by recasting the claim as one brought under [other causes of action].”). Reid-Witt alleges a failure to accommodate C.W.’s individual disabilities under the Rehabilitation Act in Count II, Am. Compl. ¶¶ 101–69, and under the ADA and DCHRA in Count III, id. ¶¶ 176–250. Buried within those two counts, however, is a third theory of liability. Reid-Witt alleges that Banneker had no special-education students during the last few years and suggests that that fact implies that Banneker does not offer special education at all, calling into question whether DCPS’s denials of Reid-Witt’s requests were genuine. Am. Compl. ¶¶ 79–81. She therefore alleges that the District has an illegal policy-or-practice of refusing to fund special-education 6 programs at its selective high schools, denying such services to students at those schools under the pretext that the students do not qualify for them, and funneling the students to less competitive high schools where such services are available. Am. Compl. ¶¶ 170–75; 251–56. “While the [IDEA] addresses incorrect or erroneous special education treatment, the ADA[, Rehabilitation Act, and DCHRA] address[] discrimination against the disabled student.” Jackson v. District of Columbia, 826 F. Supp. 2d 109, 126 (D.D.C. 2011). Because the IDEA’s administrative process is the primary vehicle for adjudicating educational disputes, courts require plaintiffs to show “something more than a mere failure to provide the ‘free and appropriate education’ required by the [IDEA]” to state a claim under the other statutes. Walker, 969 F. Supp. at 797 (quoting Lunceford v. D.C. Bd. of Educ., 745 F.2d 1577, 1580 (D.C. Cir. 1984)). Here, the District argues that Reid-Witt fails to make that showing and moves to dismiss Counts II and III in their entirety. See generally Mot. A. As-Applied Disability Discrimination Claims 1. Count II: Rehabilitation Act Section 504 of the Rehabilitation Act states that “[n]o otherwise qualified individual with a disability . . . shall, solely by reason of her . . . disability, be excluded from the participation in, be denied the benefits of, or be subjected to discrimination under any program or activity receiving Federal financial assistance,” 29 U.S.C. § 794(a), including “a local educational agency,” id. § 794(b)(2)(B). It incorporates the ADA’s standards for evaluating disability- discrimination claims. Id. § 794(d). To state a claim, Reid-Witt must therefore plausibly allege “(1) that [C.W.] is qualified under the Acts; (2) that [C.W. was] excluded from participation in[ or has] been denied the benefits, services, programs, or other activities for which the [District] is responsible or otherwise discriminated against; and (3) that the exclusion, denial, or discrimination [was] by reason of [C.W.’s] disability.” Pl.’s Opp’n to Def.’s 2d Partial Mot. to 7 Dismiss (“Opp’n”) at 4, ECF No. 10 (citing Seth v. District of Columbia, No. 18-cv-1034, 2018 WL 4682023, at 9 (D.D.C. Sep. 28, 2018); Pierce v. District of Columbia, 128 F. Supp. 3d 250 (D.D.C. 2015)). Reid-Witt alleges a failure to accommodate C.W.’s disabilities but does not allege disparate treatment or impact. Opp’n at 4 (citing Seth, 2018 WL 4682023 at 10). a. Legal Standard for Evaluating Alleged Discrimination As explained above, to state a Rehabilitation Act claim in the educational context, Reid- Witt must satisfy the general criteria for disability discrimination and must also allege “something more than a mere failure to provide the ‘free appropriate education’ required by [the IDEA].” Lunceford, 745 F.2d at 1580 (quoting Monahan v. Nebraska, 687 F.2d 1164, 1170 (8th Cir. 1982)). In other words, “[she] must show that . . . [C.W.] was discriminated against ‘solely by reason of [her] handicap.’” Walker, 969 F. Supp. at 797 (quoting 29 U.S.C. § 794(a)) (emphasis added). To make that showing, judges in this jurisdiction typically require a plaintiff to allege either “bad faith or gross misjudgment on the part of a defendant.” Jackson, 826 F. Supp. 2d at 122. The D.C. Circuit has never squarely adopted that standard, but in Lunceford (which dealt with claims under the Rehabilitation Act and the Education for All Handicapped Children Act), it quoted the Eighth Circuit’s decision in Monahan for the general proposition that the Rehabilitation Act requires more than just a showing that the school’s response was inadequate. See Lunceford, 745 F.2d at 1580 (quoting Monahan, 687 F.2d at 1170). Judge Friedman later looked to Monahan for more guidance and adopted its “bad faith or gross misjudgment” standard. See Walker, 969 F. Supp. at 797 (quoting Monahan, 687 F.2d at 1170–71). All other judges in this District who have faced the question seem to have followed suit. See, e.g., R.S. v. District of Columbia, 292 F. Supp. 2d 23, 28 (D.D.C. 2003) (Huvelle, J.); Henneghan v. DCPS, 597 F. Supp. 2d 34, 37 (D.D.C. 2009) (Kennedy, J.); Holmes-Ramsey, 747 F. Supp. 2d at 38–39 8 (Kollar-Kotelly, J.); Alston v. District of Columbia, 770 F. Supp. 2d 289, 298 (D.D.C. 2011) (Urbina, J.); Jackson, 826 F. Supp. 2d at 122 (Rothstein, J.); B.D. v. District of Columbia, 66 F. Supp. 3d 75, 80 (D.D.C. 2014) (Leon, J.); DL v. District of Columbia, 109 F. Supp. 3d 12, 23–24 (D.D.C. 2015) (Lamberth, J.). Reid-Witt nevertheless argues for a different standard. She contends that, rather than “bad faith or gross misjudgment,” she should only have to allege “deliberate indifference.” Opp’n at 5. She relies primarily on Pierce for the proposition that “the Rehabilitation Act and ADA are targeted to address more subtle forms of discrimination than merely obviously exclusionary conduct, and it is consistent with these motivations to employ a standard of deliberate indifference, rather than one that targets animus.” 128 F. Supp. 3d at 278 (internal quotations omitted). But Pierce dealt with accommodations for prisoners, not students, id. at 254, and the obvious distinction is that the IDEA provides a separate process for students’ claims. Reid-Witt’s other citations fare no better. See Opp’n at 5 (citing Liese v. Indian River Cty. Hosp. Dist., 701 F.3d 334, 348 (11th Cir. 2012) (adopting deliberate-indifference standard for patient’s claim against hospital); Meagley v. City of Little Rock, 639 F.3d 384, 389 (8th Cir. 2011) (evaluating patron’s claim against zoo under the deliberate-indifference standard)). To be sure, some courts elsewhere have applied the deliberate-indifference standard to students’ claims; Pierce cited one such decision. See 128 F. Supp. 3d at 278 (citing S.H. ex rel Durrell v. Lower Merion Sch. Dist., 729 F.3d 248, 263 (3d Cir. 2013)); see also Opp’n at 6–7 (citing H. v. Montgomery Cty. Bd. of Educ., 784 F. Supp. 2d 1247, 1267–68 (M.D. Ala. 2011)). But Pierce had no occasion to address the educational context and did not cite any cases in this jurisdiction applying the tougher standard. See 128 F. Supp. 3d at 278–79. Likewise, S.H. took its standard from non-school Rehabilitation Act decisions without considering the interplay with 9 the IDEA, 729 F.3d at 262–63, and H. only used the deliberate-indifference standard because the parties there argued that it applied, so the court assumed that it was relevant without deciding the question, 784 F. Supp. 2d at 1261. Perhaps realizing that her citations do not sufficiently explain why the Court should depart from the standard applied by other judges in this district, Reid-Witt argues that “[d]eliberate indifference [is] just as bad if not worse than gross misconduct or bad faith.” Opp’n at 6. She relies heavily on a magistrate judge’s unpublished opinion containing a long discussion on the relationship between the two standards and how some conduct may satisfy either one. See Opp’n at 6 (citing Hamilton Sch. Dist. v. Doe, No. 04-C-876, 2005 WL 3240597 (E.D. Wis. Nov. 29, 2005)). There’s some merit to that argument; a plaintiff fails to show bad faith or gross misjudgment if the “officials involved have exercised professional judgment[] in such a way as not to depart grossly from accepted standards among educational professionals.” Walker v. District of Columbia, 157 F. Supp. 2d 11, 35–36 (D.D.C. 2001) (quoting Monahan, 687 F.2d at 1171). That requirement is similar to the deliberate-indifference standard prisoners must meet in Eighth Amendment claims alleging insufficient medical attention. See Estelle v. Gamble, 429 U.S. 97, 105–06 (1976). “[I]n those cases where unnecessary risk may be imperceptible to a lay person[,] . . . a medical professional’s treatment decision must be such a substantial departure from accepted professional judgment, practice, or standards as to demonstrate that the person responsible did not base the decision on such a judgment.” Petties v. Carter, 836 F.3d 722, 729 (7th Cir. 2016) (en banc) (internal quotation omitted). It’s possible, therefore, that deliberate indifference might be evidence of bad faith or gross misjudgment, cf. T.W. ex rel Wilson v. Sch. Bd. of Seminole Cty., 610 F.3d 588, 604–05 (11th Cir. 2010) (distinguishing between the two standards and declining to take a position), but 10 Reid-Witt has not given the Court any reason to depart from the more stringent standard plaintiffs must meet to state a Rehabilitation Act claim in conjunction with an IDEA claim. b. Reid-Witt’s Allegations For Count II to survive the Motion, Reid-Witt must therefore allege both that the District discriminated against C.W. “solely by reason of [her] handicap” and that it exhibited “bad faith or gross misjudgment” in doing so. Walker, 157 F. Supp. 2d at 35 (internal quotations omitted). “Only in the rarest of cases will a plaintiff be able to prove that a school system’s conduct is so persistent and egregious as to warrant such a unique remedy not otherwise provided for by the IDEA itself.” Id. at 36. In Douglass, for example, a student challenged a DCPS policy that prohibited him from earning graduation credit by taking special-education classes. Douglass v. District of Columbia, 605 F. Supp. 2d 156, 168 (D.D.C. 2009). That amounted to an allegation of gross misjudgment, the court held, because it alleged a facially discriminatory policy. Id. In other cases, courts have dismissed Rehabilitation Act claims because they usually “amount to garden variety IDEA violations and . . . contain[] no indication that the[] alleged violations occurred due to gross misjudgment.” Holmes-Ramsey, 747 F. Supp. 2d at 39. 3 In Walker, “conduct including misdiagnosing a student's disability, failing to provide an [Individual Education Plan] for several school years and failing to provide an appropriate placement for five years collectively did not meet th[e] standard.” Alston, 770 F. Supp. 2d at 300 (citing Walker, 157 F. Supp. 2d at 13–14). Other cases involved similar facts. See id. (collecting cases). Here, Reid-Witt cannot plausibly allege that the District was completely indifferent to C.W.’s disabilities. The school promulgated four separate accommodation plans allowing C.W. 3 In Henneghan, the court appears to have been generous in permitting a pro se plaintiff’s claim to move forward. 597 F. Supp. 2d at 37. 11 extra time to turn in assignments, the ability to complete and turn in work virtually, alternative testing times and locations, a pass to leave class at any time to see a school counselor, periodic psychological services, automatic distribution of class lecture notes or PowerPoint presentations, preferential seating in classrooms, increased progress monitoring and reporting, the ability to accumulate community service hours under alternative arrangements, and special conditions during standardized testing. See, e.g., Section 504 Plan of Aug. 31, 2017. Those steps surely do not amount to complete indifference to C.W.’s circumstances. Reid-Witt instead points to the following events as indications of the District’s bad faith: (1) the failure to grant accommodations recommended by C.W.’s physician, including home study, Am. Compl. ¶¶ 124, 130, 132, 147–50; (2) the failure to augment accommodations when they proved ineffective over time, id. ¶¶ 137–39, 143–44, 146, 154–58, 162–65; and (3) the District’s decision to transfer C.W. from Banneker to a less competitive high school rather than accommodate her disability, id. ¶¶ 166–75. But the cases on which she relies in arguing that she has adequately alleged bad faith are distinguishable. In H., the court found that a failure to update a student’s section 504 plan three years in a row could constitute deliberate indifference, but it made no observations about whether that same conduct may have constituted bad faith or gross misjudgment. See Opp’n at 6 (citing H., 784 F. Supp. 2d at 1267–68). Likewise, in K.D. ex rel J.D. v. Starr, an unexplained rescission of an accommodation recommended by the child’s doctor plus a consistent failure to implement accommodations the school had already approved in a Section 504 Plan stated a claim for bad faith or gross misjudgment. See Opp’n at 6–7 (citing 55 F. Supp. 3d 782 (D. Md. 2014)). Reid-Witt has not alleged any such conduct here. Finally, Reid-Witt looks to an Eighth Circuit case in which school officials may have exhibited bad faith or gross misjudgment by failing “to address a student’s needs with a parent 12 by returning phone calls.” Opp’n at 7 (citing M.P. ex rel K. v. Indep. Sch. Dist. No. 721, 326 F.3d 975, 982–83 (8th Cir. 2003)). A closer look at that decision, however, reveals that those officials (1) failed to update the student’s Section 504 Plan after his family disclosed to the school that the student had been diagnosed with schizophrenia; (2) failed to return the mother’s weekly phone calls to discuss both ongoing harassment of the student by other students because of his disability and the school’s plan “to either drastically alter [the student’s] school day or send him to an alternative school for behaviorally troubled students;” and (3) promised (prior to enrollment) to cover the costs of transporting the student to school and then withdrew that promise and left the student to pay for his own transportation after he matriculated. M.P., 326 F.3d at 982. Here, Reid-Witt has not alleged that the District failed to craft Section 504 Plans or failed to implement the accommodations those plans laid out in response to diagnoses from C.W.’s physician, nor has she alleged that the District rescinded benefits it had promised to confer or failed to address C.W.’s diagnosis altogether. Allegations that the District failed to grant specific accommodations and failed to update accommodations over time are central to Reid-Witt’s claim. Am. Compl. ¶¶ 124, 146–47, 162. But those allegations amount to “garden variety IDEA violations” and are not cognizable under the Rehabilitation Act. Holmes-Ramsey, 747 F. Supp. 2d at 39. Reasonable minds can disagree about which accommodations are appropriate (or even feasible), and the Amended Complaint’s own allegations state that the District at least engaged with those questions, even if the answers may not have been optimal. Reid-Witt has not stated a claim for failure to accommodate C.W.’s disabilities under the Rehabilitation Act. 2. Count III: ADA & DCHRA The as-applied portion of Count III repeats Count II’s allegations under different statutory causes of action. Am. Compl. ¶¶ 176–250. The ADA provides that “no qualified 13 individual with a disability shall, by reason of such disability, be excluded from participation in or denied the benefits of the services, programs, or activities of a public entity, or be subjected to discrimination by any such entity.” 42 U.S.C. § 12132. “A regulation implementing Title II requires a public entity to make ‘reasonable modifications’ to its ‘policies, practices, or procedures’ when necessary to avoid such discrimination.” Fry v. Napoleon Cmty. Schs., 137 S. Ct. 743, 749 (2017) (quoting 28 C.F.R. § 35.130(b)(7)). Claims under the DCHRA, in turn, are subject to the same standards as ADA claims, so the analysis merges. A.M. v. Bridges Pub. Charter Sch., No. 17-cv-177, 2019 WL 1932579, at 2 n.7 (D.D.C. May 1, 2019). The Parties argue at length over whether C.W. is a “qualified individual” and whether the denial of particular accommodations she requested—to include special-education services—was done “by reason of [her] disability.” 42 U.S.C. § 12132. But to the extent that Reid-Witt challenges the District’s determination that C.W. was ineligible for an Individual Education Plan or the school’s failure to grant particular accommodations, those allegations are duplicative of the IDEA claim contained in Count I and therefore fail to state a claim. The ADA’s standard is slightly less strict than the Rehabilitation Act’s standard because it does not require that the discrimination be “solely” because of C.W.’s disability; the disability must simply be a motivating factor in the alleged discrimination. Alston, 770 F. Supp. 2d at 297 (citing Foster v. Arthur Andersen, L.L.P., 168 F.3d 1029, 1033 (7th Cir. 1999), abrogated on other grounds by Serwatka v. Rockwell Automation, Inc., 591 F.3d 957 (7th Cir. 2010)). But as with the Rehabilitation Act, “something more than a mere violation of the [IDEA] is necessary in order to show a violation of the ADA.” Jackson, 826 F. Supp. 2d at 126. When pressed at oral argument on the question of how her allegations in Count III differ from those in Count I, Reid- Witt pointed repeatedly to accommodations she requested but which C.W. did not receive, such 14 as permission to take photographs of the whiteboard during and after class to augment her notes. Those sorts of allegations again “amount to garden variety IDEA violations” and are not cognizable under the ADA or DCHRA. Holmes-Ramsey, 747 F. Supp. 2d at 39. B. Policy-or-Practice Claim Beneath Reid-Witt’s allegations of specific failures to accommodate C.W.’s disabilities, however, lurks another claim that is different in kind. Reid-Witt argues, and the District concedes, that C.W. is a D.C. resident and therefore entitled to a free, public education. See Opp’n at 9 (citing 5A DCMR § 5001.1); Def.’s Reply in Supp. of its Partial Mot. to Dismiss Pl.’s Am. Compl. (“Reply”) at 8–9, ECF No. 11. That fact, Reid-Witt contends, is enough to establish that C.W. was a qualified individual under the Rehabilitation Act, ADA, and DCHRA and was therefore entitled to special-education services at Banneker. Opp’n at 9. The District gives two responses. It first argues that C.W.’s request for home instruction was unreasonable as a matter of law because it sought “‘to expand the substantive scope of a program or benefit,’ which is not required under the ADA or [the Rehabilitation Act.]” Reply at 12 (quoting Am. Council of the Blind v. Paulson, 525 F.3d 1256, 1267 (D.C. Cir. 2008)). Second, the District contends that, even with the many accommodations it granted her, C.W. still failed to maintain the minimum grade-point average or accumulate enough hours of community service to continue her enrollment at Banneker and so was unqualified to attend Banneker with or without special-education services. Reply at 9. The District’s first argument seems to respond directly to Reid-Witt’s allegations that Banneker High School offers no special-education services whatsoever. According to the Amended Complaint, Banneker “does not have any students with [Individual Education Plans]” under the IDEA and “does not have any special education teachers . . . [or] administrators.” Am. Compl. ¶¶ 172–74; 253–55. Based on that information, Reid-Witt alleges that the school 15 repeatedly denied her requests for special education not because C.W. did not qualify for them, as the school insisted, but because Banneker lacked the capability to provide them. Opp’n at 16– 17. She alleges that “DCPS has an unspoken policy and practice to exclude students from Banneker who require [Individual Education Plans],” Am. Compl. ¶¶ 171, 252, instead diverting them to “one of the District’s allegedly ‘easier typical’ high schools” where they may obtain less prestigious and less rigorous individualized instruction, id. ¶¶ 170, 251. Relying on a “Dear Colleague” Letter from the Department of Education, Reid-Witt argues that such a policy violates the Rehabilitation Act and the ADA. See Opp’n at 17 (citing Asst. Sec’y Stephanie J. Monroe’s Ltr. of Dec. 26, 2007, ECF No. 10-1). Reid-Witt supports her allegations with both anecdotes and data. She first points to hearing testimony from a Banneker teacher averring that “he had not taught a single student with an [Individual Education Plan] at Banneker in the 13 years he had been [a] teacher [there].” Am. Compl. ¶¶ 175, 256. Reid-Witt next cites a report from the District of Columbia Auditor that noted stark disparities between selective and non-selective DCPS high schools in the number of students with disabilities. See Opp’n at 17 (citing Office of the D.C. Auditor’s Report of May 24, 2019 (“Auditor’s Report”) at 2, ECF No. 10-2). According to the Report, the population at Banneker looks very little like the student body at non-selective high schools. Auditor’s Report at 2. At the far ends of the spectrum, 35% of the students at Anacostia High School have disabilities; Banneker has zero. Id. The District’s other selective high schools have similar figures. Id. The Report quotes hearing testimony stating that “[i]t is common knowledge . . . that there are certain DCPS schools considered so ‘elite,’ they simply refuse to comply with special education laws[,] and DCPS central leadership does nothing about it.’” Id. at 1. 16 Taken together, Reid-Witt essentially alleges that DCPS has a policy or practice of excluding all disabled students from its elite high schools by failing to fund special-education services at those schools. Reid-Witt therefore contends that Banneker’s determination that C.W. was ineligible for those services was mere pretext; that C.W. could have maintained her grades and performed community service if she had received necessary special-education services; and that DCPS funneled C.W. to a less prestigious school to avoid having to spend money on special- education programs at Banneker. Am. Compl. ¶¶ 165–75, 245–56. The District’s arguments in response to that claim are unavailing. It first argues that the statutes do not require schools to offer home instruction because such accommodations are unreasonable as a matter of law. Mot. at 14–15. In any case, the District continues, the fact that C.W. was entitled to a free, public education does not mean that she had a right to special education at Banneker. Reply at 9. In the District’s words, it “has not, of course, barred C.W. from attending every public school in the District on the basis of her disability”—just the prestigious and academically rigorous schools. Id. To be sure, “where the plaintiff[] seek[s] to expand the substantive scope of a [government] program . . . , they likely seek a fundamental alteration to the existing program . . . and have not been denied meaningful access.” Mot. at 14 (quoting Am. Council of the Blind, 525 F.3d at 1267). But American Council of the Blind dealt with summary judgment, see 525 F.3d at 1260, and the Court cannot make a factual determination about whether it is overly burdensome for DCPS to offer special-education services at Banneker on a motion to dismiss. Moreover, at this early stage, the Court cannot determine whether, as a matter of law, the District is required to offer special education at every school or whether it may consolidate students with Individual Education Plans at a few schools. The Parties have not meaningfully briefed that issue and, in 17 light of the Department of Education’s letter and the D.C. Auditor’s Report that Plaintiff attached, it is not clear that the District would prevail on the question. Finally, the District contends that Reid-Witt has not successfully alleged that C.W. was qualified for special education in the first place, so she cannot credibly allege that DCPS denied her any benefit to which she was entitled whether or not such a policy exists. Reply at 8–9. In the District’s view, even if C.W. were eligible for an Individual Education Plan, those additional services would not have enabled her to perform the required number of hours of community service to maintain her enrollment at Banneker, so she cannot claim that she was a “qualified individual” under the Acts. Id. (citing Smith v. District of Columbia, No. 16-cv-1386, 2018 WL 4680208, at 9 (D.D.C. Sep. 28, 2018) (finding no discrimination where disabled student was denied opportunity to take Advanced Placement courses because he did not meet the generally applicable eligibility criteria); Vergara v. Wesleyan Acad., Inc., No. CV 17-1013, 2019 WL 4199911, at 12 (D.P.R. Sep. 4, 2019) (finding no discrimination where disabled student could not achieve requirements for maintaining enrollment at selective private school)). It may be the case that, even with an Individual Education Plan, C.W. would not have been able to succeed at Banneker. As the District points out, Reid-Witt admits that C.W. did not complete a private homeschooling curriculum during her senior year, so it is questionable whether she would have done any better with home instruction provided by DCPS. See Mot. at 15 n.7. The Court cannot answer those questions on a motion to dismiss, however, especially when the question of C.W.’s eligibility for special education remains a live issue under Count I. The Hearing Officer answered that question in the negative, Am. Compl. ¶¶ 94–95, but the Court has not yet upheld or overturned that decision. Smith and Vergara were both resolved on 18 summary judgment with the benefit of fully developed evidentiary records, so their applicability here is limited. See Smith, 2018 WL 4680208 at 1; Vergara, 2019 WL 4199911 at *1. If the Court eventually finds that C.W. was not eligible under the IDEA, it is doubtful that she will be able to sustain a claim that the District’s alleged policy-or-practice of denying services at Banneker led to any discrimination against her because of her disability. At this early stage, however, the Court must take the Amended Complaint’s allegations as true. Holy Land Found. for Relief & Dev., 333 F.3d at 165. And assuming that C.W. was, in fact, eligible for an Individual Education Plan, and in light of the supporting documentation Reid-Witt has provided, it is plausible that the District (1) has a policy or practice “to exclude [such] students from Banneker;” (2) following that policy, denied Reid-Witt’s requests for additional services under the pretext that C.W. was ineligible for them, and (3) counseled her out of the school so as not to have to fund special education at Banneker. Am. Compl. ¶¶ 170–75; 251–56. That claim plausibly alleges bad faith or gross misjudgment on the part of DCPS. In Douglass, the plaintiff alleged not only that DCPS “failed to fully implement” the student’s Individual Education Plan but also that DCPS “discriminated against Plaintiff solely based upon his disability because it provided only regular education students with the opportunity to earn [graduation credits] and work toward a regular high school diploma, but did not provide the same opportunity to special education students.” 605 F. Supp. 2d at 168 (internal quotation omitted). The Court held that Douglass had stated a claim under the Rehabilitation Act because such a policy facially discriminated against special-education students. 4 Id. Here, Reid-Witt has alleged not only that DCPS improperly denied C.W.’s requests for special education because it 4 The Court dismissed the claims for failure to exhaust administrative remedies. 605 F. Supp. 2d at 169. That result is irrelevant here, where the District does not argue failure to exhaust. 19 found that she was ineligible, Am. Compl. ¶¶ 101–69; 176–250, but also that DCPS has a policy or practice of denying such requests without seriously investigating whether a student is eligible because Banneker lacks the capability to provide them, id. ¶¶ 170–75; 251–56. That sort of exclusion—removing a student from an elite school because she needs special education while telling her that she does not qualify for such services—may constitute discrimination solely by reason of C.W.’s disability. Such allegations, if proven, might constitute bad faith or gross mismanagement and therefore state a claim for disability discrimination under the Rehabilitation Act, the ADA, and the DCHRA. Douglass, 605 F. Supp. 2d at 168. IV. Conclusion To the extent that Reid-Witt alleges that the District improperly evaluated C.W.’s educational needs, provided insufficient accommodations, or was less responsive to Reid-Witt’s communications than she would have liked, she may obtain relief through her IDEA claim. Reid-Witt has not alleged additional facts that bring her claims within the scope of the Rehabilitation Act, ADA, or DCHRA, and Counts II and III are dismissed in as far as they make such allegations. The portions of Counts II and III alleging that the District has an illegal policy or practice of excluding students requiring special education from its selective high schools, however, state a claim for relief and may proceed. An Order will be issued contemporaneously with this Memorandum Opinion. DATE: September 3, 2020 CARL J. NICHOLS United States District Judge 20	01-04-2023	09-03-2020
https://www.courtlistener.com/api/rest/v3/opinions/2112428/	478 N.W.2d 225 (1991) Debbie Joy WSCHOLA, Appellant, v. Margaret SNYDER, et al., Respondents. No. C0-91-690. Court of Appeals of Minnesota. December 10, 1991. Review Denied February 10, 1992. 226 Debra E. Schmidt, Grannis, Grannis, Hauge, Eide, Anderson & Keller, P.A., Eagan, for appellant. John F. Wagner, McDonough, Vandelist & Wagner, P.A., Apple Valley, for respondents. Considered and decided by NORTON, P.J., and LANSING and SHORT, JJ. OPINION LANSING, Judge. Applying the statute of limitations in effect when Wschola's cause of action accrued, the trial court dismissed her case. We reverse and remand. FACTS On June 23, 1988, Margaret Snyder Flor, manager of the Farmington Eagles Club, terminated Debbie Joy Wschola from her employment as a bartender. On April 27, 1989, 308 days after she was fired, Wschola filed a complaint in district court alleging she was terminated because of her pregnancy, in violation of the Minnesota Human Rights Act. Effective August 1, 1988, the Minnesota Legislature increased the limitations period for the MHRA from 300 days to one year, but did not specify whether it would be applied to causes of action not yet time barred under the old statute of limitations. Applying the 300-day limitations period, the district court granted a motion to dismiss Wschola's action. Wschola appeals. ISSUE Does the 300-day or one-year statute of limitations apply to the complaint brought under the Minnesota Human Rights Act? ANALYSIS Because a statute of limitations is a matter of remedy, not a matter of right, the legislature has the power to expand a limitations period for a cause of action accrued but not yet time barred. See Chase Sec. Corp. v. Donaldson, 325 U.S. 304, 314, 65 S.Ct. 1137, 1142, 89 L.Ed. 1628 (1945); Campbell v. Holt, 115 U.S. 620, 6 S.Ct. 209, 29 L.Ed. 483 (1885). This power extends to all areas of the law. Annotation, Validity, and Applicability to Causes of Action Not Already Barred, of a Statute Enlarging Limitation Period, 79 A.L.R.2d 1080 (1963). Historically, the rule has been that an extended limitations period will apply to causes of action not yet time barred under the old limitations period. State ex rel. Donovan v. Duluth St. Ry. Co., 150 Minn. 227 364, 185 N.W. 388 (1921) (when construction of the new statute operates as an extension and not a shortening of the limitations, the new statute controls existing claims). In contrast to the historical rule, Minnesota Statute § 645.21 (1986) provides that "[n]o law shall be construed to be retroactive unless clearly and manifestly so intended by the legislature." This statute was passed by the legislature in 1941, 20 years after Donovan stated the general rule applicable to extended limitations periods. In a case involving an extension of a limitations period decided two years after the enactment of § 645.21, the court did not specifically discuss or apply § 645.21, but recognized the statute's intent to apply to pending litigation. See Donaldson v. Chase Sec. Corp., 216 Minn. 269, 13 N.W.2d 1 (1943), aff'd, 325 U.S. 304, 65 S.Ct. 1137, 89 L.Ed. 1628 (1945). Since Chase, the Minnesota Supreme Court has, in workers' compensation and criminal law, construed statutes which expand a limitation but do not specify whether they affect pending but unbarred cases. The workers' compensation cases hold that the new statute of limitations applies. See Marose v. Maislin Transp., 413 N.W.2d 507 (Minn.1987); Klimmek v. Independent School Dist. No. 487, 299 N.W.2d 501 (Minn.1980). Klimmek suggests that the application of a new statute of limitations to an existing cause of action is not a retroactive application, but other cases appear to analyze this as within Minn.Stat. § 645.21. See id. at 503. The supreme court declined to apply an expanded statute of limitations in a criminal case involving a change from a three-year to a seven-year limitation period in a criminal sexual conduct prosecution. See State v. Traczyk, 421 N.W.2d 299 (Minn. 1988). The court distinguished the workers' compensation cases as relating to rights and duties in the employment relationship governed entirely by statute and historically expanded in favor of employees. Id. at 301 n. 4. In making the distinction, the court stated [t]hat distinction justifies any departures from the general rule that has arisen involving Minn.Stat. § 645.21, but because that distinction is absent from legislation regulating criminal law, we feel constrained to not extend that exception to the interpretation of the retroactivity issue in criminal cases. Id. The type of relief available under the Minnesota Human Rights Act parallels remedies available under the workers' compensation statutes. Like workers' compensation laws, the Minnesota Human Rights Act governs wholly statutory rights and duties which historically have been expanded in favor of employees. The statute itself provides that it should be construed liberally to effect its purposes. Minn.Stat. § 363.11 (1986). Moreover, although a civil defendant's repose is important, it does not receive constitutional protection. See Chase, 325 U.S. 304, 65 S.Ct. 1137. A defendant in a criminal prosecution risks a loss of liberty that implicates constitutional protections, but no such implication applies here. Neither is there a violation of the public policy that supports statutes of limitations as practical devices to exclude state claims and protect citizens from being put to a defense after memories have faded, evidence is lost, and witnesses are unavailable. See id. at 314, 65 S.Ct. at 1142. Construing the statute to include the additional sixty-five days is unlikely to exacerbate any problems of proof. The legislative history of the act indicates that the purpose of expanding the statute of limitations related not only to the manual difficulty of counting 300 days, but also to the inequity of retaining what was in 1988 the shortest statute of limitations for any similar suit. Hearings on H.F. 2054 Before the Civil Law Subcomm. of the House Judiciary Comm., 75th Minn. Legislature, 1988 Reg.Sess. (Feb. 26, 1988) (statement of Steven Cooper, Commissioner of Minn. Dept. of Human Rights). The policy considerations supporting the longer time period were reaffirmed by the legislature's passing a bill in 1991 expanding 228 the statute of limitations of this act to two years and specifically allowing it to be applied retroactively, permitting suits on existing claims over a period of three years. See S.F. 268, 77th Minn. Legislature, Reg.Sess., 1991 Minn.Laws Chap. 218. See also Lampf, Pleva, Lipkind, Prupis & Petigrow v. Gilbertson, ___ U.S. ___, 111 S.Ct. 2773, 2780, 115 L.Ed.2d 321 (1991) (no clearer indication of how a legislative body would have balanced the policy considerations implicit in any limitations provision than the balance struck by that body in limiting similar or related problems). DECISION The one-year statute of limitations applies to Wschola's cause of action under the Minnesota Human Rights Act. Reversed and remanded for trial on the merits. Reversed and remanded. SHORT, Judge (dissenting). I respectfully dissent. It is undisputed Wschola's complaint was served nine days after the expiration of the 300-day statutory limitation in effect at the time her cause of action commenced to accrue. See Minn.Stat. § 363.06, subd. 3 (1986). It is also undisputed Wschola has set forth no mitigating facts to toll that statute of limitations. See, e.g., State by Khalifa v. Russell Dieter Enter., 418 N.W.2d 202, 206 (Minn.App.1988). The 1988 amendment to the Minnesota Human Rights Act statute of limitations is silent as to whether it should be applied retroactively. No law shall be construed to be retroactive unless clearly and manifestly stated by the legislature. Minn.Stat. § 645.21 (1990). Donaldson v. Chase Securities Corp., 216 Minn. 269, 13 N.W.2d 1 (1943), aff'd Chase Securities Corp. v. Donaldson, 325 U.S. 304, 65 S.Ct. 1137, 89 L.Ed. 1628 (1945), does not alter this legislative mandate. The legislature clearly and manifestly stated its retroactive intent in the statute at issue in Chase. Section 645.21 is therefore not discussed in Chase; the only issue in Chase is whether such retroactive application is unconstitutional. The Supreme Court in Chase did not say that the retroactive approach was the better one; it only held that retroactive application was permissible and did not violate the Constitution. 325 U.S. at 313-16, 65 S.Ct. at 1142-43. While the Supreme Court held in Chase that a state has the power to apply a statute retroactively, section 645.21 declares that, as a general rule, that power will not be exercised unless the legislature clearly and manifestly states its intent to do so. Klimmek v. Independent School Dist. No. 487, 299 N.W.2d 501 (Minn.1980) does not alter this general rule. In 1988 the Minnesota Supreme Court had the opportunity to extend the Klimmek rule beyond workers' compensation cases and declined to do so. See State v. Traczyk, 421 N.W.2d 299 (Minn.1988). Instead, the Supreme Court in Traczyk characterized the rule in Klimmek and Marose v. Maislin Transport, 413 N.W.2d 507 (Minn.1987), as "one notable exception in the area of worker's compensation law" and a departure from the § 645.21 "general rule." Traczyk, 421 N.W.2d at 301, n. 4. It gave three justifications for this departure. First, in Klimmek and Marose the employees had already "effectively commenced a proceeding" through their prior claims for statutory benefits for their injuries. The actions in question were claims for additional disability benefits. Traczyk, 421 N.W.2d at 301, n. 4. Second, the result in Klimmek and Marose is consistent with Donovan v. Duluth St. Ry. Co., 150 Minn. 364, 185 N.W. 388 (1921), a workers' compensation case decided before enactment of section 645.21. Traczyk, 421 N.W.2d at 301, n. 4. Third, [b]ecause wholly statutory workers compensation laws comprehensively govern the rights and duties of the parties in an employment relationship and have historically been generally modified with the view of expanding employee benefits arising out of that relationship, workers' compensation cases are distinguishable from cases arising following statutory modifications in other areas of the law. Id. None of these justifications applied in Traczyk, a criminal case. While arguably 229 the third justification applies in Wschola's case, the first two do not. Extending the Klimmek exception beyond workers' compensation law to this case risks limiting the effect of section 645.21 to criminal cases only. This is a task for the legislature, not the courts. If the legislature had wanted to expand its 1988 amendment of section 363.06 to cover Wschola's case, it could have drafted the statute of limitations to apply to all actions pending. See, e.g., 1988 Minn.Laws ch. 607 § 3 ("Sections 1 and 2 are effective the day following final enactment and apply to matters pending on or instituted on or after the effective date."). I would affirm the trial court's decision that Wschola's claim is time barred.	01-04-2023	10-30-2013
https://www.courtlistener.com/api/rest/v3/opinions/4537677/	2020 WI 50 SUPREME COURT OF WISCONSIN CASE NO.: 2018AP659-D COMPLETE TITLE: In the Matter of Disciplinary Proceedings Against Robert C. Menard, Attorney at Law: Office of Lawyer Regulation, Complainant-Respondent, v. Robert C. Menard, Respondent-Appellant. DISCIPLINARY PROCEEDINGS AGAINST MENARD OPINION FILED: May 29, 2020 SUBMITTED ON BRIEFS: ORAL ARGUMENT: SOURCE OF APPEAL: COURT: COUNTY: JUDGE: JUSTICES: Per Curiam NOT PARTICIPATING: ATTORNEYS: For the respondent-appellant, there were briefs filed by Terry E. Johnson, Ryan P. Fetherston, and von Briesen & Roper, S.C., Milwaukee. For the complainant-respondent, there was a brief filed by John T. Payette and the Office of Lawyer Regulation, Madison. 2020 WI 50 NOTICE This opinion is subject to further editing and modification. The final version will appear in the bound volume of the official reports. No. 2018AP659-D STATE OF WISCONSIN : IN SUPREME COURT In the Matter of Disciplinary Proceedings Against Robert C. Menard, Attorney at Law: Office of Lawyer Regulation, FILED Complainant-Respondent, MAY 29, 2020 v. Sheila T. Reiff Clerk of Supreme Court Robert C. Menard, Respondent-Appellant. ATTORNEY disciplinary proceeding. Attorney's license revoked. ¶1 PER CURIAM. Attorney Robert C. Menard has appealed a referee's recommendation that his license to practice law in Wisconsin be revoked; that he be ordered to make restitution to a number of clients; and that he be ordered to pay the full costs of this proceeding, which are $18,191.42 as of October 25, 2019. Attorney Menard stipulated to 30 counts of misconduct and the only disputed issue left for the referee to decide was the appropriate sanction. Similarly, the only issue raised on appeal is what is reasonable and appropriate discipline for the misconduct in this No. 2018AP659-D case. We agree with the referee that revocation is the appropriate sanction. ¶2 Attorney Menard was admitted to practice law in Wisconsin in 1991. He has no prior disciplinary history. On March 20, 2020, the court, on its own motion pursuant to Supreme Court Rule (SCR) 22.21(1), determined that Attorney Menard's continued practice of law posed a threat to the interests of the public and the administration of justice, and it temporarily suspended his license. ¶3 On April 9, 2018, the Office of Lawyer Regulation (OLR) filed a complaint against Attorney Menard alleging 23 counts of misconduct arising out of 12 client matters. The complaint also alleged various counts of misconduct regarding commingling of funds, conducting prohibited bank transactions, various trust account violations, and making misrepresentations to the OLR. Referee James W. Mohr, Jr. was appointed on May 7, 2018. Attorney Menard filed an answer to the complaint on May 18, 2018. ¶4 On December 28, 2018, the OLR filed an amended complaint adding eight counts of misconduct. The amended complaint added three counts of misconduct involving one of the client matters set forth in the original complaint. It also added five counts of misconduct involving a client matter that was not part of the original complaint. Attorney Menard filed an answer to the amended complaint on January 18, 2019. ¶5 Attorney Menard eventually chose to admit the factual basis of counts 1 through 30 in the OLR's amended complaint, and the OLR agreed to dismiss count 31 with prejudice. A hearing on 2 No. 2018AP659-D sanction was held before the referee on August 19 and 20, 2019. At that time, the parties stipulated that the factual allegations in the amended complaint constituted a sufficient factual basis in the record for the referee to conclude that the misconduct alleged in counts 1 through 30 of the amended complaint had taken place. ¶6 The referee issued his report on October 10, 2019. He found that the OLR's uncontested motion for summary judgment and the stipulation put on the record at the evidentiary hearing supported the finding that the OLR had proven all 30 counts of misconduct by clear, satisfactory, and convincing evidence. The following factual recitation is taken from the amended complaint. ¶7 At all times material to the allegations in the amended complaint, Attorney Menard was a member of the firm Derzon & Menard, S.C. (More recently, he practiced with Menard & Menard.) He handled primarily worker's compensation and personal injury matters. Between August 2011 and September 2014, the firm maintained both a trust account and a business account at Park Bank. Between January 2014 and February 2016 the firm maintained both a trust account and a business account at U.S. Bank. Attorney Menard also maintained two joint savings accounts with his wife at U.S. Bank. He was responsible for trust account recordkeeping for his clients, and his partner, Alan Derzon, was responsible for such functions for his clients. However, Attorney Menard prepared most of the deposit slips and signed most of the transactions for the firm's trust and business accounts. ¶8 The first three counts set forth in the OLR's amended complaint involved Attorney Menard's representation of B.C., a 3 No. 2018AP659-D minor, in a personal injury matter. Attorney Menard was appointed guardian ad litem (GAL) for B.C. The circuit court approved a $47,500 minor settlement. As GAL, Attorney Menard was ordered to make a payment to Dean Health Care and was ordered to place money in a federally insured interest bearing account at Park Bank until B.C. reached the age of 18 in April 2014. ¶9 Attorney Menard deposited or directed the deposit of a $47,500 check, payable to the Derzon & Menard S.C. trust account, to the Park Bank trust account. He then transferred the entire settlement from the Park Bank trust account to the Park Bank business account. Those transfers were made by telephone. Immediately before these transfers, the Park Bank business account was overdrawn. The transfers restored the account to a positive balance. ¶10 The amended complaint alleged the following counts of misconduct with respect to B.C.'s case: Count 1: By disbursing and failing to hold in trust $29,105.65 that he received as B.C.'s GAL on February 1, 2013, Attorney Menard violated former SCR 20:1.15(j)(1).1 1 Effective July 1, 2016, substantial changes were made to Supreme Court Rule 20:1.15, the "trust account rule." See S. Ct. Order 14-07, 2016 WI 21 (issued Apr. 4, 2016, eff. July 1, 2016). Because the conduct underlying this case arose prior to July 1, 2016, unless otherwise indicated, all references to the supreme court rules will be to those in effect prior to July 1, 2016. Former SCR 20:1.15(j)(1) provided: A lawyer shall hold in trust, separate from the lawyer's own funds or property, those funds or that property of clients or 3rd parties that are in the lawyer's possession when acting in a fiduciary capacity 4 No. 2018AP659-D Count 2: By converting $29,105.65 belonging to B.C. between April 24, 2013 and May 16, 2013 to cover overdrafts on the Park Bank Business Account, Attorney Menard violated SCR 20:8.4(c).2 Count 3: By failing to place B.C.'s $29,105.65 in a federally insured interest bearing account until B.C. reached the age of 18 on April 2, 2014, Attorney Menard knowingly failed to abide by a court order and violated SCR 20:3.4(c).3 ¶11 The next four counts of misconduct alleged in the amended complaint arose out of Attorney Menard's representation of C.M. and D.D. Attorney Menard represented C.M. in a personal injury action. In December 2013, Attorney Menard deposited or directed the deposit of a $76,000 check related to C.M.'s claim to the Park Bank trust account. The firm also represented D.D. in a worker's compensation claim and a related civil action. Attorney Menard deposited or directed the deposit of a $90,000 check related to D.D.'s claim to the Park Bank trust account. ¶12 Between December 18, 2013 and February 3, 2014, Attorney Menard transferred $163,500 of the C.M. and D.D. settlements from the Park Bank trust account to the Park Bank business account. Most of the transfers occurred by telephone or internet. On that directly arises in the course of, or as a result of, a lawyer-client relationship or by appointment of a court. 2 SCR 20:8.4(c) provides: "It is professional misconduct for a lawyer to engage in conduct involving dishonesty, fraud, deceit or misrepresentation." 3 SCR 20:3.4(c) provides: "A lawyer shall not knowingly disobey an obligation under the rules of a tribunal, except for an open refusal based on an assertion that no valid obligation exists." 5 No. 2018AP659-D December 20, 2013, the Park Bank business account was overdrawn by more than $15,000. A transfer from the Park Bank trust account briefly restored the business account to a positive balance but soon thereafter the Park Bank business account was again overdrawn. The business account was restored to a positive balance with another transfer from the trust account. This pattern of the business account being overdrawn and then restored to a positive balance by more transfers from the trust account was repeated multiple times. ¶13 The amended complaint alleged the following counts of misconduct with respect to the C.M. and D.D. cases: Count 4: By disbursing and failing to hold in trust $46,919.15 of C.M.'s personal injury settlement between December 18, 2013 and February 3, 2014, Attorney Menard violated SCR 20:1.15(b)(1).4 Count 5: By converting $46,919.15 of C.M.'s settlement between December 18, 2013 and February 3, 2014 to cover overdrafts on the firm's business account, Attorney Menard violated SCR 20:8.4(c). Count 6: By disbursing and failing to hold in trust as much as $57,500 of D.D.'s settlement between December 23, 2013 and February 3, 2014, Attorney Menard violated SCR 20:1.15(b)(1). 4 SCR 20:1.15(b)(1) provides: A lawyer shall hold in trust, separate from the lawyer's own property, that property of clients and 3rd parties that is in the lawyer's possession in connection with a representation. All funds of clients and 3rd parties paid to a lawyer or law firm in connection with a representation shall be deposited in one or more identifiable trust accounts. 6 No. 2018AP659-D Count 7: By converting as much as $57,500 of D.D.'s settlement between December 23, 2013 and February 3, 2014 to cover overdrafts on the firm's business account, Attorney Menard violated SCR 20:8.4(c). ¶14 The next client matter detailed in the amended complaint involved Attorney Menard's firm's representation of D.S. in a personal injury matter. On November 26, 2012, Attorney Menard deposited or directed the deposit of a $190,000 check relating to the D.S. matter to the Park Bank business account. Between November 26, 2012 and November 30, 2012, Attorney Menard used the D.S. settlement proceeds to cover numerous transactions, including pre-authorized debits to AT&T, Target, CITI Card, and Austin Ford. ¶15 The amended complaint alleged the following count of misconduct with respect to D.S.'s settlement: Count 8: By converting as much as $117,300.02 of D.S.'s settlement between November 26, 2012 and December 18, 2012 to pay business and personal expenses and to make disbursements to himself of $13,500, Attorney Menard violated SCR 20:8.4(c). ¶16 The next client matter detailed in the amended complaint involved Attorney Menard's representation of B.H. in a personal injury matter. On December 3, 2012, Attorney Menard deposited or directed the deposit of a $93,893.53 check to the firm's Park Bank business account. By December 18, 2012, the Park Bank business account was overdrawn; none of the settlement proceeds had been paid to B.H.; and Attorney Menard had converted as much as $67,072.82 of the settlement. Attorney Menard eventually disbursed a total of $52,950 to B.H. despite the fact that the settlement breakdown specified that she was owed $62,950.32. 7 No. 2018AP659-D Attorney Menard has provided no evidence that B.H. received the remaining $10,000 of her settlement funds. ¶17 The OLR's amended complaint alleged the following count of misconduct with respect to Attorney Menard's handling of the B.H. settlement: Count 9: By converting as much as $67,072.82 of B.H.'s settlement between December 3, 2012 and December 18, 2012 in order to cover disbursements unrelated to his representation of B.H., Attorney Menard violated SCR 20:8.4(c). ¶18 The next client matter detailed in the amended complaint involved Attorney Menard's representation of M.B. in a worker's compensation claim. On December 19, 2012, Attorney Menard deposited or directed the deposit of a $63,491.97 check to the Park Bank business account. Another check payable to an attorney at Derzon & Menard was deposited the same day. Prior to those deposits, the Park Bank business account was overdrawn. The deposited funds were used to cover checks to Attorney Menard and wire transfers to other individuals. In addition, Attorney Menard disbursed four checks payable to "cash" totaling $16,000 from the funds. The amended complaint alleged the following count of misconduct with respect to the M.B. matter: Count 10: By converting as much as $63,491.97 of M.B.'s settlement between December 19, 2012 and January 4, 2013 in order to repay $42,259.46 that was owed to D.S. and make $11,000 in disbursements and wire transfers to Attorney Menard and others, as well as $16,000 in cash disbursements, Attorney Menard violated SCR 20:8.4(c). ¶19 The next client matter detailed in the amended complaint involved Attorney Menard's representation of J.B. regarding an 8 No. 2018AP659-D auto accident. On April 15, 2013, Attorney Menard deposited or directed the deposit of a $92,330 check to the Park Bank business account along with two other checks. Prior to this deposit, the business account was overdrawn. The deposit restored the account to a positive balance. Between April 15 and April 22, 2013, Attorney Menard made numerous disbursements from the Park Bank business account, including a $28,300 cashier's check to his wife. ¶20 At the close of business on April 22, 2013, the business account was overdrawn by $244.19; none of the funds had been disbursed to J.B. and Attorney Menard had converted as much as $55,648.44 relating to the J.B. matter. Attorney Menard continues to owe J.B., or her subrogated care providers, $12,648.44. ¶21 The amended complaint alleged the following count of misconduct with respect to Attorney Menard's representation of J.B.: Count 11: By converting as much as $55,648.44 of J.B.'s settlement between April 15, 2013 and April 22, 2013 in order to repay $27,500 to D.S., provide a $28,300 cashier's check to his wife, and cover numerous business or personal expenses, Attorney Menard violated SCR 20:8.4(c). ¶22 The next client matter detailed in the amended complaint involved Attorney Menard's representation of J.L.-M. in a personal injury action and a related third-party worker's compensation claim. The settlement in the matter was paid via two checks issued to the Derzon & Menard trust account: a $108,000 check dated May 13, 2013, and a $12,000 check dated June 3, 2013. On June 3, 2013, Attorney Menard deposited or directed the deposit of the $108,000 check to the Park Bank business account. Prior to this deposit 9 No. 2018AP659-D the account was overdrawn by over $12,000. Between June 3 and June 17, 2013, Attorney Menard made numerous disbursements from the business account for business and personal expenses. By June 17, 2013, the business account was overdrawn by $2,757.59 and no disbursements had been made to J.L.-M. Attorney Menard told J.L.- M. he had made disbursements in accordance with the settlement breakdown. ¶23 Specifically, Attorney Menard told J.L.-M. he had disbursed $12,491.77 to Athletic & Therapeutic Institute and $7,623.75 to Blount Orthopedic Clinic. Park Bank records show that neither check was ever presented for payment or cleared the business account. ¶24 In January 2014, against Attorney Menard's advice, J.L.- M. and her husband claimed all of her medical expenses as deductions on their 2013 joint income tax return. An IRS audit ensued in 2016. ¶25 J.L.-M. and her husband hired the law firm of Robinson & Henry, P.C., to represent them in the tax audit. Thereafter, both J.L.-M. and her new attorneys repeatedly requested medical billing information and documentation from Attorney Menard. While Attorney Menard was initially helpful in providing documents, he later became difficult to reach and never sent them all of the correct documents showing proof of medical payments he had made on J.L.-M.'s behalf. ¶26 Ultimately, the IRS did not allow the payments to Blount Orthopedic Clinic and Athletic & Therapeutic Institute to be included in its calculations because there was no proof those 10 No. 2018AP659-D medical expenses had been paid out of J.L.-M.'s settlement. J.L.- M. and her husband eventually settled with the IRS for an additional tax burden of $3,973, plus interest on their 2013 tax return. ¶27 On November 26, 2013, Attorney Menard issued a check from his Park Bank business account payable to Blount Orthopedic Clinic in the amount of $3,000, which was presented and paid in December 2013. Attorney Menard acknowledged to the OLR that this check was paid on behalf of J.L.-M. to settle the debt she owed to Blount Orthopedic Clinic. ¶28 On July 24, 2014, Attorney Menard issued a check from his U.S. Bank business account payable to Athletic & Therapeutic Institute in the amount of $8,000, which was presented and paid on August 20, 2014. Attorney Menard acknowledged to the OLR that this check was paid on behalf of J.L.-M. to settle the debt owed to Athletic & Therapeutic Institute. ¶29 Attorney Menard never advised either J.L.-M. or Robinson & Henry of these reduced payments, despite their repeated requests during the IRS audit for evidence of all medical payments made. Until July 2018, Attorney Menard had led J.L.-M. to believe that the full bills of both of those creditors had been paid. To date, Attorney Menard has not made any refund to J.L.-M., either the $4,623.75 balance of any funds after the $3,000 payment to Blunt Orthopedic Clinic or the $4,491.77 balance of funds after the $8,000 payment to Athletic & Therapeutic Institute. 11 No. 2018AP659-D ¶30 The amended complaint alleged the following counts of misconduct with respect to Attorney Menard's handling of the J.L.- M. case: Count 12: By converting as much as $78,727.28 of J.L.- M.'s settlement between June 3, 2013 and June 17, 2013 to cover numerous business or personal expenses, including $384 in overdraft fees; a $10,000 check to his mother; a $5,000 check to Entercom for advertising; checks to other clients and checks to "Cash," Attorney Menard, or Derzon & Menard totaling $10,400, Attorney Menard violated SCR 20:8.4(c). Count 13: By falsely informing J.L.-M. that he had paid Athletic & Therapeutic Institute $12,491.77 and Blunt Orthopedic Clinic $7,623.75 on her behalf from the settlement proceeds in her case, Attorney Menard violated SCR 20:8.4(c). Count 14: By failing to promptly deliver $12,491.77 to Athletic & Therapeutic Institute and $7,623.75 to Blount Orthopedic Clinic pursuant to the Settlement Agreement, or to promptly disburse the balance ($9,115.52) of any remaining funds to J.L.-M. after settling the claims of Athletic & Therapeutic Institute and Blount Orthopedic Clinic for lesser amounts, Attorney Menard violated SCR 20:1.15(e)(1).5 Count 15: By failing to fully and accurately respond to J.L.-M.'s request for information regarding the disbursement of her settlement funds to her creditors, including his failure to inform J.L.-M. that he had paid 5 SCR 20:1.15(e)(1) provides: Upon receiving funds or other property in which a client has an interest, or in which a lawyer has received notice that a 3rd party has an interest identified by a lien, court order, judgment, or contract, the lawyer shall promptly notify the client or 3rd party in writing. Except as stated in this rule or otherwise permitted by law or by agreement with the client, the lawyer shall promptly deliver to the client or 3rd party any funds or other property that the client or 3rd party is entitled to receive. 12 No. 2018AP659-D only $8,000 to Athletic & Therapeutic Institute and $3,000 to Blount Orthopedic Clinic and that she was entitled to a refund totaling $9,115.52, Attorney Menard violated SCR 20:1.4(a)(4).6 ¶31 The next client matter detailed in the amended complaint involved Attorney Menard's representation of P.D. in a personal injury case. Attorney Menard's records include a copy of a $50,000 check payable to the firm's client trust account in the P.D. matter, but Attorney Menard has not identified the account into which the $50,000 was deposited and has not identified any disbursements made to P.D. from those funds. ¶32 On March 13, 2014, Attorney Menard deposited or directed the deposit of a $75,000 check relating to the P.D. matter to the firm's U.S. Bank business account. ¶33 Between March 13 and March 26, 2014, Attorney Menard made numerous disbursements from the U.S. Bank business account, including over $40,000 for advertising and payments to Attorney Menard, his law firm, or cash. Attorney Menard also disbursed two checks totaling $23,000 to another client whose personal injury case had been settled in December of 2013. No funds belonging to that client were ever deposited to the U.S. Bank business account. ¶34 The amended complaint alleged the following count of misconduct with respect to Attorney Menard's representation of P.D.: Count 16: By converting as much as $74,313.81 of P.D.'s two settlements between approximately July 31, 2012 and May 22, 2014, at least some of which was used to cover 6 SCR 20:1.4(a)(4) provides: "A lawyer shall promptly comply with reasonable requests by the client for information." 13 No. 2018AP659-D business expenses, including advertising and payments to Attorney Menard, the firm, and "Cash," Attorney Menard violated SCR 20:8.4(c). ¶35 The next client matter detailed in the amended client involved Attorney Menard's representation of T.R. in a worker's compensation matter. On February 4, 2015, Attorney Menard deposited or directed the deposit of two checks to the U.S. Bank business account in the T.R. case: a $55,289.57 check payable to T.R., which was not endorsed, and a $14,710.43 check payable to Attorney Menard. Prior to that deposit, the balance in the U.S. Bank business account was $8,259.25. That same day, there were two electronic withdrawals from the U.S. Bank business account by YP Advertising. On February 6, 2015, a check for over $28,000 payable to the Wisconsin Department of Revenue cleared the U.S. Bank business account. By February 9, 2015, the business account was overdrawn by $16.30, and none of T.R.'s funds remained in the account. ¶36 The amended complaint alleged the following count of misconduct with respect to Attorney Menard's representation of T.R.: Count 17: By converting T.R.'s $55,289.57 worker's compensation settlement between February 4, 2015 and February 9, 2015 to cover business expenses, including advertising and a payment to the Wisconsin Department of Revenue, Attorney Menard violated SCR 20:8.4(c). ¶37 The next client matter detailed in the amended complaint arose out of Attorney Menard's representation of J.S. in a worker's compensation matter. On December 21, 2015, Attorney Menard deposited or directed the deposit of a $31,326.31 check to the 14 No. 2018AP659-D U.S. Bank business account. That amount represented Attorney Menard's fees and costs in the matter. On December 31, 2015, Attorney Menard deposited or directed the deposit of a $95,637.56 check payable to J.S. to the business account. Prior to this deposit, there was $9,119.39 in the business account. ¶38 Between December 31, 2015 and January 6, 2016, over $140,000 in transactions cleared the U.S. Bank business account, including payments to the Milwaukee Athletic Club, Bank of America, Chase, and GM Financial. ¶39 On January 6, 2016, Attorney Menard transferred $15,000 of J.S.'s funds from the U.S. Bank trust account to the U.S. Bank business account. By the close of business that day, the business account was overdrawn and none of J.S.'s funds had been disbursed to her. ¶40 Between January 7 and February 9, 2016, Attorney Menard transferred $73,000 belonging in part to J.S. from the U.S. Bank trust account to the U.S. Bank business account. None of those transfers were used to pay J.S. The funds were all used for business and personal purposes. ¶41 The amended complaint alleged the following count of misconduct with respect to Attorney Menard's representation of J.S.: Count 18: By converting J.S.'s $95,637.56 worker's compensation settlement to cover business expenses, including advertising, a $35,843.08 payment to ADP relating to a 401k plan and a $25,500 check to his new law firm, Attorney Menard violated SCR 20:8.4(c). 15 No. 2018AP659-D ¶42 The next client matter detailed in the amended complaint involved Attorney Menard's representation of P.M., who is Attorney Menard's uncle. P.M. has a winter home in Florida. In February of 2014, he was struck by a car while he was mowing his lawn at his home in Florida and suffered severe injuries requiring medical and surgical treatment. ¶43 On April 10, 2014, P.M. hired Attorney Menard to represent him in a personal injury action against the driver who hit him. The parties entered into a contingent fee agreement which provided that P.M. agreed to pay Derzon & Menard 33 1/3 percent of whatever total sum was collected, plus costs and disbursements. ¶44 The driver had $1,000,000 in liability coverage through State Farm. P.M. denies that Attorney Menard informed him about the policy limit. Attorney Menard said he was concerned about potential contributory negligence since there were reports that P.M. had stepped into the road in front of the car while mowing his lawn. P.M. had no recollection of the accident and would not be able to testify to rebut those reports. ¶45 In June 2014, State Farm offered to settle the case for $325,000. P.M. agreed Attorney Menard should attempt to negotiate a higher settlement and, if there was not a higher offer, the initial offer would be accepted. Attorney Menard negotiated a higher settlement figure of $500,000. P.M. accepted that settlement amount. ¶46 On July 3, 2014, State Farm issued a $500,000 check payable to Derzon & Menard Attorneys at Law Trust Account and mailed it to Attorney Menard. The check was deposited in Derzon 16 No. 2018AP659-D & Menard's business account at U.S. Bank on July 8, 2014. Attorney Menard did not inform P.M. of the receipt of the funds. He did not disburse any portion of the settlement payment to P.M. or to any third party on P.M.'s behalf. ¶47 On July 9, 2014, P.M. signed a release agreeing to the $500,000 settlement. Between July 8 and July 28, 2014, Attorney Menard made numerous disbursements from the U.S. Bank business account for business and personal expenses unrelated to his representation of P.M. By October 17, 2014, following numerous deposits and disbursements unrelated to P.M.'s case, the balance in the U.S. Bank business account was $131.93. By November 24, 2014, the balance of the business account was $16.96. Thus, by November 24, 2014, Attorney Menard had converted $333,333.33 of P.M.'s settlement funds. ¶48 From April 2015 through early 2018, P.M. repeatedly contacted Attorney Menard by telephone and email inquiring about the status of his settlement proceeds. Attorney Menard gave excuses to P.M. as to why he was not able to disburse the funds. ¶49 P.M.'s own insurance agreed to cover his medical expenses. P.M.'s insurance carrier paid out $648,478.14 to medical care providers on P.M.'s behalf, discharging most of the medical bills for less than the original amount billed, which was $1,993,103.10. ¶50 Attorney Menard did not disburse any portion of the $500,000 settlement as payment for any of P.M.'s medical bills. ¶51 In early 2018, P.M. hired Attorneys Lenz and Meadows as successor counsel. In July 2018, P.M. sued Attorney Menard, his 17 No. 2018AP659-D former firm, his current firm, and others to recover the settlement proceeds to which he was entitled. The case settled following meditation. The settlement is confidential. ¶52 The amended complaint alleged the following counts of misconduct with respect to Attorney Menard's representation of P.M.: Count 19: By depositing or directing the July 8, 2014 deposit of a check in the amount of $500,000 in personal injury settlement proceeds for P.M. to his firm's U.S. Bank Business Account, rather than into the firm's trust account, Attorney Menard violated SCR 20:1.15(b)(1). Count 20: By failing to disburse settlement funds to P.M., Attorney Menard violated former SCR 20:1.15(d)(1)7 and current SCR 20:1.15(e)(1). Count 21: By converting funds from P.M.'s State Farm settlement between July 8, 2014 and November 24, 2014, Attorney Menard violated SCR 20:8.4(c). Count 22: By failing to fully and accurately respond to P.M.'s request for reports on the status of his settlement funds, Attorney Menard violated SCR 20:1.4(a)(4). Count 23: By failing to provide P.M. with a full accounting of his settlement funds upon their final 7 Former SCR 20:1.15(d)(1) provided: Upon receiving funds or other property in which a client has an interest, or in which the lawyer has received notice that a 3rd party has an interest identified by a lien, court order, judgment, or contract, the lawyer shall promptly notify the client or 3rd party in writing. Except as stated in this rule or otherwise permitted by law or by agreement with the client, the lawyer shall promptly deliver to the client or 3rd party any funds or other property that the client or 3rd party is entitled to receive. 18 No. 2018AP659-D distribution, Attorney Menard violated former SCR 20:1.15(d)(2), and current SCR 20:1.15(e)2.8 ¶53 The amended complaint alleges two counts of misconduct for commingling funds. It alleges that between December 2012 and February 2014, Attorney Menard deposited or directed the deposit of at least 72 checks to the Park Bank business account that were payable to the firm's trust account, to a specific client, to the firm and a specific client or a third party. Those deposits totaled $1,801,858.13. ¶54 Between March 2014 and September 2016, Attorney Menard deposited or directed the deposit of at least 102 checks to the U.S. Bank business account that were payable to the firm's trust account, to a specific client, to the firm and a specific client or a third party. Those 103 deposits total $2,806,497.51. ¶55 Attorney Menard admitted under oath in an interview conducted by the OLR that the checks deposited to the Park Bank business account were more likely than not all attorney fee checks from worker's compensation cases. He also admitted under oath he did not keep track of whose funds were deposited to the business account and that he would use funds in that account for his own purposes. ¶56 The amended complaint alleged the following counts of misconduct with respect to Attorney Menard's commingling of funds: 8 SCR 20:1.15(d)(2) was renumbered as SCR 20:1.15(e)(2). The text of the rule was not changed and provides: "Upon final distribution of any trust property or upon request by the client or a 3rd party having an ownership interest in the property, the lawyer shall promptly render a full written accounting regarding the property." 19 No. 2018AP659-D Count 24: By depositing or directing the deposit of as many as 72 checks totaling $1,801,858.13 to the Park Bank Business Account between December 2012 and February 2014, which checks were payable to the firm's trust account, specific clients, the firm and a specific client, or a third party, Attorney Menard violated SCR 20:1.15(b)(1). Count 25: By depositing or directing the deposit of as many as 103 checks totaling $2,806,497.51 to the U.S. Bank Business Account between March 2014 and September 2016, which checks were payable to the firm's trust account, to specific clients, the firm and a specific client, a third party, or which otherwise constituted trust property, Attorney Menard violated SCR 20:1.15(b)(1). Count 26: By conducting 46 telephone and internet transactions in his trust accounts at Park Bank and U.S. Bank between January 1, 2013 and February 16, 2016, Attorney Menard violated former SCR 20:1.15(e)(4)b. and c.9 ¶57 Finally, the amended complaint alleged additional trust account violations as follows: Count 27: By failing to preserve transaction registers and client ledgers for at least six years after the 9 Former SCR 20:1.15(e)(4)b. and c. provided: b. No deposits or disbursements shall be made to or from a pooled trust account by a telephone transfer of funds. This section does not prohibit any of the following: 1. wire transfers. 2. telephone transfers between non-pooled draft and non-pooled non-draft trust accounts that a lawyer maintains for a particular client. c. A lawyer shall not make deposits to or disbursements from a trust account by way of an Internet transaction. 20 No. 2018AP659-D termination of representation, Attorney Menard violated former SCR 20:1.15(e)(6).10 Count 28: By failing to produce transaction registers and client ledgers for funds received in trust, despite requests by the OLR on July 5, 2017, July 26, 2017, and July 31, 2017, Attorney Menard violated SCR 20:1.15(g)(2).11 Count 29: By maintaining trust account records by computer between at least December 1, 2012 and December 31, 2015, and failing to regularly back up those records, Attorney Menard violated former SCR 20:1.15(f)(4)a.12 Count 30: By failing to print a copy of the transaction register and client ledgers for the Derzon & Menard Trust 10 Former SCR 20:1.15(e)(6) provided: "A lawyer shall maintain complete records of trust account funds and other trust property and shall preserve those records for at least 6 years after the date of termination of the representation." 11 SCR 20:1.15(g)(2) provides: All trust account records have public aspects related to a lawyer's fitness to practice. Upon request of the office of lawyer regulation, or upon direction of the supreme court, the records shall be submitted to the office of lawyer regulation for its inspection, audit, use, and evidence under any conditions to protect the privilege of clients that the court may provide. The records, or an audit of the records, shall be produced at any disciplinary proceeding involving the lawyer, whenever material. 12 Former SCR 20:1.15(f)(4)a. provided: "A lawyer who maintains trust account records by computer shall maintain the transaction register, client ledgers, and reconciliation reports in a form that can be reproduced to printed hard copy. Electronic records must be regularly backed up by an appropriate storage device." 21 No. 2018AP659-D Account every 30 days, Attorney Menard violated former SCR 20:1.15(f)(4)b.13 ¶58 In his report, the referee noted that a number of witnesses testified at the hearing and, in the referee's opinion, the most convincing witness was Mary Hoeft Smith, the former Trust Account Program Administrator for the OLR, who is now retired. Ms. Smith testified that Attorney Menard was unable to produce the required trust account records, but he did produce voluminous business account records. She testified it was a common practice for him to move client trust funds into his business account and then use those funds to pay "very hefty expenses for things like advertising, radio, and billboards." She described this as a practice of "robbing Peter to pay Paul" and using funds belonging to one client in order to pay back a client who was previously the victim of a conversion by Attorney Menard. She testified that the matters that were charged in this case were only the largest of many, many conversions and in her opinion "virtually every client whose funds went into the business account were converted." ¶59 The referee noted that J.L.-M. testified by telephone from Colorado and the referee found her to be intelligent, honest, and straightforward. J.L.-M. testified she felt a lot of betrayal from Attorney Menard and that it had been a very harrowing experience. Former SCR 20:1.15(f)(4)b. provided: "In additional to the 13 requirements of sub. (f)(4)a., the transaction register, the subsidiary ledger, and the reconciliation report shall be printed every 30 days for the IOLTA account. The printed copy shall be retained for at least 6 years, as required under sub. (e)(6)." 22 No. 2018AP659-D ¶60 The referee noted that P.M., Attorney Menard's 71-year- old uncle, also testified and although the matter has been resolved and P.M. has no further claim for restitution, the entire experience has left a bad taste in P.M.'s mouth. ¶61 The referee found that Attorney Menard "gave the impression of not being entirely trustworthy." The referee said Attorney Menard felt he was entitled to the full $500,000 settlement proceeds from his uncle's settlement and that his uncle was entitled to nothing. The referee said "this assertion lacked a rational basis and was a rather cold-hearted way to treat a family member. It showed a distinct lack of remorse on Respondent's part in depriving his uncle of his settlement proceeds." ¶62 The referee also noted that Attorney Menard claimed that each of his clients gave him a power of attorney to do whatever he wanted with their money and that included depositing the money into the business account and using it for whatever purposes Attorney Menard wanted. The referee said: Frankly, I found it astonishing that an attorney would ask clients to sign a power of attorney allowing him to use their settlement money for the attorney's business purposes, and also apparently thought this practice would absolve him of the Supreme Court's trust account requirements. Interestingly, Respondent never produced any of those powers of attorney as exhibits at the hearing. (Emphasis added.) ¶63 The referee said Attorney Menard acknowledged that he was sloppy and "crappy" in regards to his accounting practices but 23 No. 2018AP659-D said "a revocation would ruin me and would ruin everything that I've worked for 30 years." ¶64 The referee said that the evidence revealed that over at least a six-year period, Attorney Menard converted over $1,000,000 in client funds. The referee said additionally, between December 2012 and September 2016, Attorney Menard deposited as many as 175 checks made out to clients, to his trust account, or to third parties, all of which should have gone into the trust account, into his business accounts and these out-of-trust deposits at two different banks totaled over $4,000,000. ¶65 After considering a variety of cases cited by both parties, the referee said this case was similar to In re Disciplinary Proceedings Against Weigel, 2012 WI 124, 345 Wis. 2d 7, 823 N.W.2d 798. Attorney Weigel was charged with ten counts of misconduct involving failure to maintain proper trust account records and converting funds belonging to clients. He claimed the trust account violations already existed when the former founding member of his law firm was bought out by Attorney Weigel and others. At times, the trust account may have been out of balance as much as $1,000,000, but by the time Attorney Weigel was charged the out of balance amount was down to $100,000. ¶66 The referee noted that Attorney Weigel claimed, as Attorney Menard does here, that the OLR did not present testimony from a client or third party demonstrating an actual monetary loss. Therefore, he argued that the OLR had failed to prove conversion. The referee noted that this court disagreed, noting that an attorney must hold the property of others with the care required 24 No. 2018AP659-D of a professional fiduciary. This court described Attorney Weigel's conduct, just as Mary Hoeft Smith did here, as "robbing Peter to pay Paul," and this court revoked Attorney Weigel's license to practice law. ¶67 The referee said that the conduct in Weigel is almost on all fours with the conduct involved here and in both cases, over an extended period of time, client trust funds were used as slush funds to pay off other clients, firm expenses, or whatever was most pressing at the moment. The referee said that Attorney Menard's trust accounts, as the Weigel trust account, were continuously overdrawn or out of trust. The referee said the amount converted here, well over $1,000,000, is in the same order of magnitude as in Weigel, and likely represents just the tip of the iceberg. In addition, the referee noted that over $4,600,000 was out of trust over a span of four years. The referee agreed with the OLR that revocation was the appropriate remedy. He said: The scope of Respondent's conduct in playing fast and loose with client money is simply breathtaking. Proper trust account records were never kept; money belonging to clients was commingled with that of other clients and used to pay vast sums in law firm and personal expenses; clients were not paid in a timely basis and often did not get paid until they complained; one client (ironically Respondent's uncle) was never paid at all – under some misguided theory that the attorney was entitled to the full proceeds of the settlement – and had to sue his own nephew for the nonpayment. This is far-reaching, deplorable and disreputable conduct. It reflects poorly on the practice of law in general and has jaded those clients that Respondent was to have served. This is clearly not the way lawyers should conduct themselves. Jeopardizing over $1,000,000 of client money on an extended 'rob Peter to pay Paul' 25 No. 2018AP659-D scheme is totally unacceptable. So is failing to keep over $4,600,000 in trust. ¶68 In addition to recommending revocation of Attorney Menard's license, the referee recommended that Attorney Menard be ordered to make restitution as follows:  To C.M. the sum of $459.58  To B.H. the sum of $5,000.32  To J.B. the sum of $12,648.44  To J.L.-M. the sum of $4,346.57  To P.D. the sum of $1,100  To J.S. the sum of $74,137.58 (less any or all of the $5,395.72 amount which Attorney Menard can demonstrate was paid on behalf of J.S. for legitimately due and owing medical expenses). ¶69 Finally, the referee recommended that Attorney Menard pay the full costs of the proceeding. ¶70 Attorney Menard has appealed the referee's recommendation of revocation as the appropriate sanction. He asserts that appropriate discipline should be a suspension between 18 and 24 months. ¶71 Attorney Menard notes that he testified at the evidentiary hearing that there were several reasons why he developed the practice of obtaining client consent to commingle funds in his business account rather than depositing them in trust, and for obtaining durable power of attorney forms from all clients in order to do so in the first place. He says he testified that some of his clients did not have bank accounts and they asked him 26 No. 2018AP659-D to cash checks and pay portions of the proceeds on demand, while other clients were afraid that depositing a large settlement check into their own accounts might upset their SSDI or Medicare status. He says still others felt overwhelmed with the prospect of having to resolve unpaid medical expenses and liens on their own out of the settlement proceeds and Attorney Menard agreed to handle those tasks on his clients' behalf. He says during the pertinent timeframe, his law business was generally good and he never perceived his accounting practices as "robbing Peter to pay Paul." ¶72 Attorney Menard says the evidence showed that none of his clients or former clients were harmed by his conceded trust account violations, with the exception of J.S., who he acknowledges is still owed $60,000 and who recently filed a claim with the Wisconsin Lawyers' Fund for Client Protection. However, he says he "was willing to pay whenever she requested" and she had stopped making requests. ¶73 Attorney Menard argues that "his business practices were uniquely set up in such a way to create financial flexibility for the benefit of his clients, and were set up as such with the expressed consent of his clients." He says the referee fails to discuss or simply overlooked the following:  Attorney Menard has never previously been the subject of a disciplinary proceeding.  Attorney Menard's bookkeeping practices were previously reviewed by the OLR in the context of a client complaint and were found to be satisfactory. 27 No. 2018AP659-D  Mary Hoeft Smith admitted her investigation was both rushed and incomplete.  Each and every client identified had signed a durable power of attorney and consent form for their funds to be commingled.  With the exception of P.M., which the matter has been resolved, not a single client at issue has made a claim for restitution to date. ¶74 Attorney Menard argues that the OLR fell short of proving that the alleged amounts that the referee recommends be paid as restitution were in fact owed. He complains that the OLR presented evidence inferring that, if Attorney Menard could not produce documentation proving full payment of settlement proceeds, when it was abundantly clear that his recordkeeping practice was sloppy at best, then he must owe restitution in the presumed, unproven deficit amount, irrespective of the fact that no one, except P.M., whose case has been settled, had made a claim against Attorney Menard for restitution owed. Attorney Menard again acknowledges that he is a poor record keeper, but he says poor recordkeeping and the absence of documentation available to confirm full satisfaction of settlement proceeds owed to clients is not the same as clear, satisfactory, and convincing evidence of nonpayment. ¶75 Attorney Menard complains that the referee unfairly compared his case to Weigel, in which the attorney's license was revoked. He says: 28 No. 2018AP659-D [H]is case is uniquely situated in that the evidence showed that his clients were made fully aware of the commingling at issue. In most, if not all cases, the evidence showed that his clients provided consent and/or signed waivers permitting Menard to hold on to their settlement proceeds, satisfy outstanding medical/third- party liens, and pay out client's shares in lump sum allocations on an 'as needed' basis. He also says unlike Weigel, he did keep records and settlement statements "providing a detailed picture of each and every client settlement and accounting of funds commingled, albeit, sloppy, unorganized records." Id. ¶76 Attorney Menard argues the fact he kept all of his clients and former clients informed about his accounting practices and the commingling of funds for purposes of resolving medical bills, negotiating subrogation liens, and paying clients structured settlement proceeds should have been a factor taken into consideration by the referee but it was not. ¶77 Rather than revocation, as was ordered in Weigel, Attorney Menard argues that his case is more similar to In re Disciplinary Proceedings Against Voss, 2014 WI 75, 356 Wis. 2d 382, 850 N.W.2d 190. The complaint in Voss alleged 11 counts of misconduct arising from Attorney Voss' work as a court- appointed guardian. Rather than setting up a guardianship account to handle his clients' income and expenses, Attorney Voss used a personal checking account not subject to interest accrual as a standard IOLTA account would have been, and he did not establish a separate fiduciary account for his clients' assets. In suspending Attorney Voss' license for 18 months, this court held that in spite of the fact it was Attorney Voss' third instance of 29 No. 2018AP659-D discipline, that the conduct went on for a significant period of time and that the client at issue was vulnerable, revocation was reserved for the most egregious cases and Attorney Voss' conduct, although serious, did not rise to that level. ¶78 The OLR argues that revocation is indeed appropriate for Attorney Menard's admitted 30 counts of misconduct. The OLR points out that although Attorney Menard claims he obtained powers of attorney or some other agreement from his clients purporting to authorize him to use their money as he saw fit, no such documents were ever introduced into evidence. In addition, the OLR says even if Attorney Menard had induced his clients to sign such documents, this would amount to nothing more than an attempt to circumvent this court's clear cut ethical rules, and even Attorney Menard confirmed that his scheme did not change his underlying ethical obligations or excuse the underlying misconduct. ¶79 As for Attorney Menard's claim that one reason he deposited client money into his business account was to shield clients from negative consequences in relation to their government benefits, the OLR says even if Attorney Menard was holding client funds to shield them from government discovery, he fails to explain why he could not have held that money in his trust account rather than his business account. In addition, the OLR says Attorney Menard does not explain why this alleged motivation required or allowed him to convert client funds to his own use. It says "under his theory the clients needed their money hidden, not spent by their attorney." In addition, the OLR says this claimed motivation smacks of fraud. The OLR asks whether Attorney Menard was hiding 30 No. 2018AP659-D client funds in his bank account so that government entities would not factor those sums into his clients' benefit eligibility determination. If so, it says it was not his place to assist clients in circumventing government benefit eligibility standards. ¶80 The OLR says another justification used by Attorney Menard is the fact that an alleged former client named Jessup, who he claims filed a grievance against him, resulted in an OLR investigation that ultimately resulted in no discipline. The OLR says this purported "evidence" provides no defense whatsoever since there is no evidence in the record as to the existence or facts of any Jessup grievance; what investigation, if any, the OLR did; or what the OLR advised or did not advise Attorney Menard regarding the matter. The OLR says it is barred by this court's rules from even confirming or denying that any client named Jessup ever filed a grievance. It notes that upon its objection at the evidentiary hearing, the referee confirmed he would not factor the alleged Jessup grievance into his decision. ¶81 The OLR says Attorney Menard's conduct is not analogous to that in the Voss case because Attorney Menard repeatedly conceded he did use client funds for his own personal or business needs and, unlike Voss, the conversions here involved at least 12 clients over the course of many years. In addition, the OLR notes Attorney Menard's conversions total over $1,000,000 and his out of trust deposits exceeded $4,000,000. ¶82 The OLR says the referee appropriately concluded that this case was analogous to Weigel. The OLR notes that Attorney Weigel's license was revoked despite no finding that his 31 No. 2018AP659-D conversions were to pad his own pocket, whereby in this case Attorney Menard repeatedly converted funds not only to pay clients and others in client matters, he also converted funds to his own use. ¶83 The OLR also argues that the referee appropriately ordered restitution in the amounts set forth above. While Attorney Menard complains that the OLR's restitution request shifts the burden of proof on restitution to him, the OLR says it repeatedly asked Attorney Menard for documents to support any payments he made to or on behalf of clients. It says Mary Hoeft Smith conducted her analysis based on what Attorney Menard produced and what she received from his banks. The OLR says while Attorney Menard is correct that SCR 22.38 requires the OLR to prove misconduct by evidence that is clear, satisfactory, and convincing, he fails to note the impact of SCR 22.39, which shifts the burden of proof to a respondent who fails to produce trust account records to the OLR, or provide an accounting or fiduciary property to the OLR by creating a presumption of trust account misconduct. See SCR 22.39(2). The OLR says Attorney Menard did not provide it with trust account records or accountings, and Mary Hoeft Smith had to recreate those records. The OLR says, "Menard did not provide a scintilla of documentary evidence, much less evidence that is clear, satisfactory or convincing to rebut OLR's restitution proof or any presumption permitted under SCR 22.39." ¶84 The OLR says Attorney Menard mischaracterizes Mary Hoeft Smith's testimony about her investigation by calling it "rushed and incomplete." The OLR says she never said any such thing and 32 No. 2018AP659-D to the contrary she testified that the OLR prioritized promptly presenting the case to the Preliminary Review Committee with some clients rather than waiting to conduct an exhaustive audit of each and every one of Attorney Menard's clients. ¶85 The OLR concludes by saying that the testimony at the hearing was clear, unequivocal, and compelling that Attorney Menard used his clients' funds as his own personal slush fund or piggy bank rather than holding them in trust as required by Supreme Court Rules. It says his scheme displayed an utter disregard for the most fundamental of an attorney's fiduciary obligations: the duty to hold his clients' funds in trust. It says his "rob Peter to pay Paul" pyramid scheme violates a most basic and important part of the Supreme Court Rules. ¶86 In his reply brief, Attorney Menard continues to argue that he tried to create a flexible and transparent accounting system for the benefit of his clients and with their expressed consent. He also argues that the previous Jessup investigation had an effect on his perception that his accounting practices were acceptable and creates at least an explanation for why those practices continued to be used. He says he has learned a painful lesson from this experience and is not at risk of repeating it. He asks the court to impose a suspension between 18 and 24 months. ¶87 A referee's findings of fact will not be set aside unless clearly erroneous. Conclusions of law are reviewed de novo. See In re Disciplinary Proceedings Against Eisenberg, 2004 WI 14, ¶5, 269 Wis. 2d 43, 675 N.W.2d 747. This court is free to impose whatever discipline it deems appropriate, regardless of the 33 No. 2018AP659-D referee's recommendation. See In re Disciplinary Proceedings Against Widule, 2003 WI 34, ¶44, 261 Wis. 2d 45, 660 N.W.2d 686. ¶88 Attorney Menard stipulated to 30 counts of misconduct. The record clearly supports the referee's findings of fact, based on that stipulation, that the OLR met its burden of proof on all of those counts. ¶89 Turning to the appropriate sanction, upon careful review of the matter, we agree with the referee that revocation of Attorney Menard's license is appropriate. Although no two disciplinary cases are identical, we agree with the referee's assessment that this case is very similar to Weigel. Here, as in Weigel, monies belonging to one client were routinely used to pay off other clients as well as firm and personal expenses. As in Weigel, in virtually every client matter he handled, Attorney Menard "robbed Peter to pay Paul." As we said in Weigel: [I]t would be difficult to imagine a more aggravated pattern of misconduct than the one presented here. We agree with the OLR that any sanction less than revocation would undermine the public's confidence in the honesty and integrity of the bar. Revocation . . . is the only sanction proportionate to the seriousness of the misconduct, and revocation will also protect the public, the courts, and the legal system, and it will deter other lawyers from engaging in similar misconduct. Weigel, 345 Wis. 2d at 39. ¶90 We also agree with the referee's recommendations that Attorney Menard should be assessed the full costs of the proceeding and that he should be ordered to make restitution to the clients mentioned above. 34 No. 2018AP659-D ¶91 IT IS ORDERED that the license of Robert C. Menard to practice law in Wisconsin is revoked, effective the date of this order. ¶92 IT IS FURTHER ORDERED that within 60 days of the date of this order, Robert C. Menard shall make restitution to the following clients:  To C.M. the sum of $459.58  To B.H. the sum of $5,000.32  To J.B. the sum of $12,648.44  To J.L.-M. the sum of $4,346.57  To P.D. the sum of $1,100  To J.S. the sum of $74,137.58 (less any or all of the $5,395.72 amount which Attorney Menard can demonstrate was paid on behalf of J.S. for legitimately due and owing medical expenses). ¶93 IT IS FURTHER ORDERED that within 60 days of the date of this order, Robert C. Menard shall pay to the Office of Law Regulation the costs of this proceeding, which are $18,191.42 as of October 25, 2019. ¶94 IT IS FURTHER ORDERED that the restitution specified above is to be completed prior to paying costs to the Office of Lawyer Regulation. ¶95 IT IS FURTHER ORDERED that, to the extent he has not already done so, Robert C. Menard shall comply with the provisions of SCR 22.26 concerning the duties of an attorney whose license to practice law has been revoked. 35 No. 2018AP659-D ¶96 IT IS FURTHER ORDERED that the temporary suspension of Robert C. Menard's license to practice law, which was issued on March 20, 2020, is hereby lifted. ¶97 Rebecca Frank Dallet, J., did not participate. 36 No. 2018AP659-D 1	01-04-2023	05-29-2020
https://www.courtlistener.com/api/rest/v3/opinions/4537675/	[Cite as State v. Thompson, 2020-Ohio-3131.] IN THE COURT OF APPEALS OF OHIO SIXTH APPELLATE DISTRICT LUCAS COUNTY State of Ohio Court of Appeals Nos. L-19-1077 L-19-1244 Appellee Trial Court Nos. CR0201803312 v. CR0201803204 Charles Thompson DECISION AND JUDGMENT Appellant Decided: May 29, 2020 *** Julia R. Bates, Lucas County Prosecuting Attorney, and Alyssa Breyman, Assistant Prosecuting Attorney, for appellee. Henry Schaefer, for appellant. *** MAYLE, J. {¶ 1} In this consolidated appeal, following a bench trial, defendant-appellant, Charles Thompson, appeals the March 26, 2019 judgments of the Lucas County Court of Common Pleas, convicting him of aggravated burglary and rape, and sentencing him to a total prison term of 20 years. For the following reasons, we affirm the trial court judgments. I. Background {¶ 2} On December 11, 2018, Charles Thompson was indicted in Lucas County case No. CR0201803204 on one count of aggravated burglary, a violation of R.C. 2911.11(A)(1) and (B). On December 31, 2018, he was indicted in Lucas County case No. CR0201803312 on one count of rape, a violation of R.C. 2907.02(A)(2) and (B). The state filed a motion for joinder of the offenses, which the trial court granted. {¶ 3} On March 5, 2019, Thompson executed a waiver of jury trial, and the case was tried to the bench that day. The trial judge announced his verdict on March 11, 2019. He found Thompson guilty of both offenses and sentenced him to ten years’ imprisonment on each conviction, to be served consecutively. He imposed a mandatory period of five years’ postrelease control and found Thompson to be a Tier III sex offender. {¶ 4} Thompson appealed. He assigns the following errors for our review: I. APPELLANT’S CONVICTION IS UNSUPPORTED BY SUFFICIENT EVIDENCE AND IS AGAINST THE MANIFEST WEIGHT OF THE EVIDENCE. II. THE TRIAL COURT ERRED IN GRANTING THE STATE’S MOTION TO STRIKE SURPLUSAGE. III. THE TRIAL COURT ERRED IN FAILING TO MERGE THE OFFENSES AT SENTENCING. 2. II. Law and Analysis {¶ 5} In his first assignment of error, Thompson challenges both the weight and the sufficiency of the evidence. In his second and third assignments of error, respectively, he claims that the trial court erred in granting the state’s motion to strike surplusage from the indictment and in failing to merge his convictions at sentencing. We consider each of these assignments in turn. A. Sufficiency and Weight of the Evidence {¶ 6} In his first assignment of error, Thompson argues that his convictions were based on insufficient evidence and were against the manifest weight of the evidence. Before addressing Thompson’s specific challenges, we summarize the facts as they were presented at trial. 1. The Evidence at Trial {¶ 7} Sixty-four-year-old M.B. was living in an apartment in Maumee, Ohio, with her Maltese dog. On the evening of August 13, 2018, before she went to bed, M.B. locked the doors and left the living room light on, as was her habit. She fell asleep in her bedroom watching television, but was awoken when her dog started growling and barking. M.B. left her bedroom, and as she walked down the hallway, she saw the living room light go off. A man put a towel over her face and pushed her into the bathroom. {¶ 8} The man raped M.B. in the bathroom, both vaginally and anally. He used his fingers and his penis. He then put soap and hot water on the towel and wiped down M.B.’s vagina. M.B. started to pray the Lord’s Prayer out loud and the man began to 3. recite it with her. M.B. reprimanded him and asked him what his mother would think if she knew what he was doing. {¶ 9} The man commanded M.B. into the bedroom. M.B. had suffered multiple strokes and had trouble standing up unassisted, so the man dragged her across the carpet into the bedroom, causing her knees to bleed. He put M.B. on the bed and covered her face with the mattress pad. Again he raped her vaginally and anally, digitally and with his penis. He finished, then left the room. M.B. does not know if the man ejaculated. {¶ 10} When all was quiet, M.B. left her bedroom and walked into the living room. She could see through the sun porch off the living room that the man was coming back. She grabbed her phone and hurried outside. The man ran away from her apartment through the parking lot. M.B. noticed that the screen to the door on the sun porch had been cut out. {¶ 11} M.B. called 9-1-1 at 12:43 a.m. on August 14, 2018. She was transported by ambulance to the University of Toledo Medical Center where she was examined by a sexual assault nurse examiner (“SANE nurse”). A rape kit was performed and photos of her injuries were taken. There were abrasions on her hands, wrists, and elbows; redness on her neck and back; redness on the back of her neck, possibly from the necklace she was wearing; and bilateral knee abrasions and lacerations. There was also an abrasion on her vagina, at the six o’clock position, early stages of a bruise at the seven o’clock position, and redness to the surrounding skin. The SANE nurse swabbed M.B.’s vagina; there was fresh blood on the swabs. 4. {¶ 12} M.B. was wearing only a t-shirt when she arrived at the hospital; that t-shirt was sent to the Ohio Bureau of Criminal Investigation (“BCI”), along with specimens collected as part of the rape kit, including vaginal and anal swabs and pubic hair combings. {¶ 13} The BCI identified no DNA profile foreign to M.B. in either the vaginal or anal specimens that it tested. Pubic hair combings revealed male DNA but the sample was too small to identify the contributor. The t-shirt was negative for the presence of semen or bodily fluid, but touch DNA was found on the t-shirt that matched Thompson’s DNA profile. The frequency for the occurrence of the DNA profile taken from the t-shirt was quantified as one in 20 billion. {¶ 14} In addition to identifying Thompson’s DNA on M.B.’s t-shirt, his cell phone records were obtained. Detective William Hunt of the Sylvania Township Police Department analyzed 32 days of cellular phone data. Detective Hunt explained that location data was available for 1,312 voice calls made from or received by the phone during that period—location information was not available for text messaging. This location data revealed that on the evening of August 13, 2018, Thompson’s cell phone accessed the cell phone tower visible from M.B.’s apartment complex at 9:36 p.m. and 9:53 p.m. It accessed a tower visible from his own residence on Hill Avenue on August 14, 2018, at 1:24 a.m.; Thompson’s residence is about a 12-minute drive from M.B.’s apartment. There was no activity on Thompson’s phone at all—voice calls or messaging—between 10:08 p.m. on August 13, 2018, and 12:59 a.m. on August 14, 5. 2018. Over the 32-day period studied by Detective Hunt, Thompson’s cell phone accessed the cell phone tower near M.B.’s apartment only four times—two of those times were August 13, 2018, the night M.B. was raped. The other two times were on August 6, 2018. {¶ 15} A log of Thompson’s jailhouse phone calls was admitted into evidence and discussed at trial. The log showed that two phone numbers frequently dialed by Thompson from the jail were the same two phone numbers from which his phone received calls on August 13, 2018. The state suggested that because these were numbers that Thompson frequently dialed, it may be inferred that he was in possession of his phone on August 13, 2018. {¶ 16} M.B. was shown a photo array of possible suspects on October 17, 2018. She identified her attacker as someone other than Thompson. M.B. testified that she wears glasses, but she was not wearing her glasses at the time of her attack. Additionally, for much of her attack, a towel or mattress pad was covering her face. M.B. also described that there was only a nightlight on in the bathroom, and the TV provided the only source of light in her bedroom. 2. Sufficiency of the Evidence {¶ 17} We begin by addressing Thompson’s challenge to the sufficiency of the evidence. Thompson argues that the state’s case lacked sufficient evidence because (1) M.B. did not testify that it was he who raped her; (2) she identified someone else; (3) his DNA was not found in any place consistent with sexual assault; (4) the only 6. evidence linking him to the crime is DNA on the t-shirt, but there was no evidence as to when or where M.B. purchased the t-shirt or when it was last laundered. Thompson submits that touch DNA could have been transferred to the t-shirt if he and the victim had brushed up against one another at a grocery store, and given that there was no evidence placing him in M.B.’s apartment, no rational trier of fact could have found him guilty of rape. {¶ 18} Whether there is sufficient evidence to support a conviction is a question of law. State v. Thompkins, 78 Ohio St. 3d 380, 386, 678 N.E.2d 541 (1997). In reviewing a challenge to the sufficiency of evidence, “[t]he relevant inquiry is whether, after viewing the evidence in a light most favorable to the prosecution, any rational trier of fact could have found the essential elements of the crime proven beyond a reasonable doubt.” (Internal citations omitted.) State v. Smith, 80 Ohio St. 3d 89, 113, 684 N.E.2d 668 (1997). In making that determination, the appellate court will not weigh the evidence or assess the credibility of the witnesses. State v. Walker, 55 Ohio St. 2d 208, 212, 378 N.E.2d 1049 (1978). {¶ 19} As to Thompson’s rape conviction, under R.C. 2907.02(A)(2), “[n]o person shall engage in sexual conduct with another when the offender purposely compels the other person to submit by force or threat of force.” The state presented testimony from M.B.—substantiated by the SANE nurse—indicating that M.B. was purposely compelled by force to engage in sexual conduct. Thompson’s challenge to the sufficiency of the evidence focuses on his identity as the perpetrator of M.B.’s rape. 7. {¶ 20} Ohio courts recognize that the identity of the perpetrator of an offense may be established by either direct or circumstantial evidence. State v. Littlejohn, 8th Dist. Cuyahoga No. 101549, 2015-Ohio-875, ¶ 37; State v. Golden, 8th Dist. Cuyahoga No. 88651, 2007-Ohio-3536, ¶ 16 (“Courts have repeatedly recognized that identification can be proved by circumstantial evidence.”); State v. Golston, 9th Dist. Summit No. 22154, 2005-Ohio-8, ¶ 17 (explaining that defendant’s identity as perpetrator of offense may be proven by direct or circumstantial evidence). “Circumstantial evidence and direct evidence inherently possess the same probative value * * .” State v. Jenks, 61 Ohio St.3d 259, 574 N.E.2d 492 (1991), paragraph one of the syllabus. “A conviction can be sustained based on circumstantial evidence alone.” State v. Franklin, 62 Ohio St. 3d 118, 124, 580 N.E.2d 1 (1991), citing State v. Nicely, 39 Ohio St. 3d 147, 154-55, 529 N.E.2d 1236 (1988). Circumstantial evidence is sufficient to uphold a conviction so long as the inferences to be drawn from the surrounding facts in evidence are not so weak or attenuated that no reasonable mind could find guilt beyond a reasonable doubt. State v. Willis, 6th Dist. Wood No. WD-88-38, 1989 WL 90636, 4 (Aug. 11, 1989). {¶ 21} It is not uncommon that a victim is unable to identify his or her attacker. This is especially true when the assailant wears a mask to conceal his or her identity or places something over the victim’s head. See State v. Cable, 2d Dist. Miami No. 2017- CA-23, 2018-Ohio-3923, ¶ 50 (noting that it was not surprising that victims could not identify assailants who had covered their heads and faces). Here, the state offered the following circumstantial evidence of Thompson’s identity as M.B.’s rapist: (1) that 8. Thompson’s DNA was found on M.B.’s t-shirt; and (2) that contrary to his typical pattern of cell phone usage, Thompson used his cell phone near M.B.’s home shortly before her attack. {¶ 22} Courts have found that this type of evidence is sufficient to establish the defendant’s identity as the perpetrator of an offense. See, e.g., State v. Bandy, 7th Dist. Mahoning No. 05-MA-49, 2007-Ohio-859, ¶ 85 (“Despite the fact that Stephanie was unable to identify appellant, the DNA evidence alone overwhelmingly supported the conclusion that appellant was Stephanie’s attacker.”); State v. Cable, 2d Dist. Miami No. 2017-CA-23, 2018-Ohio-3923, ¶ 53 (concluding that rational trier of fact could have found that defendant was assailant based on DNA test results, despite defendant’s father’s testimony that defendant was at his house at time of crime); State v. Kelly, 5th Dist. Delaware No. 17 CAA 04 0023, 2018-Ohio-378, 105 N.E.3d 527, ¶ 86 (rejecting sufficiency and weight challenges where, among other things, cell phone tower data was presented placing appellant and codefendants together in Delaware County); State v. Seymour, 5th Dist. Richland No. 03-CA-37, 2004-Ohio-3835, ¶ 61 (finding sufficient evidence that defendant killed victim where her cell phone placed call that originated from the area where the victim’s body was found, DNA of defendant and victim were found on cigarette butt, and defendant made incriminating statements). {¶ 23} While it is true that M.B. identified someone else when presented with a photo array months after her rape, this goes to the weight of the evidence, not its sufficiency. So too do Thompson’s possible explanations for why his DNA was found on 9. the victim’s t-shirt.1 We find that the state presented sufficient evidence to support Thompson’s rape conviction. As to Thompson’s aggravated burglary conviction, R.C. 2911.11(A)(2) provides that “[n]o person, by force, stealth, or deception, shall trespass in an occupied structure * * * when another person other than an accomplice of the offender is present, with purpose to commit in the structure * * * any criminal offense, if * * * [t]he offender inflicts, or attempts or threatens to inflict physical harm on another * * .” {¶ 24} M.B. testified that a man intruded into her apartment and repeatedly raped her, and the SANE nurse testified that the physical evidence was consistent with M.B.’s claim. The state presented evidence that the screen door to the sun porch had been cut out. While there was no evidence that the slider door had been tampered with, Ohio law is clear that the force element of an aggravated burglary charge may be established by evidence that the defendant entered the victim’s home by opening a closed but unlocked door. State v. Primous, 8th Dist. Cuyahoga No. 108341, 2020-Ohio-912, ¶ 29. We find that the state presented sufficient evidence to support Thompson’s aggravated burglary conviction. 3. Weight of the Evidence {¶ 25} We next turn to Thompson’s challenge to the weight of the evidence. Thompson argues that the evidence in the case overwhelmingly weighs against his 1 We would point out, however, that contrary to Thompson’s argument, the victim did state where she got the t-shirt. She said that she bought it from her church. 10. conviction. He points out that M.B. testified that she locked the door before going to bed, but her assailant entered without forcing the door open or damaging it. He maintains that M.B.’s testimony suggests either that her memory was faulty or that she invited her assailant into the apartment. He insists that this raises doubt as to whether the sexual conduct was consensual and defeats the trespass element of the aggravated burglary conviction. {¶ 26} Thompson also contends that M.B. identified someone else as her assailant and the state presented no evidence why law enforcement suspected him in the first place. He argues that the state leaps from evidence that Thompson at some point touched M.B.’s t-shirt to the conclusion that he raped her. He contends that this is the exceptional case requiring reversal on manifest-weight grounds. {¶ 27} When reviewing a claim that a verdict is against the manifest weight of the evidence, the appellate court must weigh the evidence and all reasonable inferences, consider the credibility of witnesses, and determine whether the jury clearly lost its way in resolving evidentiary conflicts so as to create such a manifest miscarriage of justice that the conviction must be reversed and a new trial ordered. Thompkins, 78 Ohio St. 3d at 387, 678 N.E.2d 541. We do not view the evidence in a light most favorable to the state. “Instead, we sit as a ‘thirteenth juror’ and scrutinize ‘the factfinder’s resolution of the conflicting testimony.’” State v. Robinson, 6th Dist. Lucas No. L-10-1369, 2012- Ohio-6068, ¶ 15, citing Thompkins at 388. Reversal on manifest weight grounds is reserved for “the exceptional case in which the evidence weighs heavily against the 11. conviction.” Thompkins at 387, quoting State v. Martin, 20 Ohio App. 3d 172, 175, 485 N.E.2d 717 (1st Dist.1983). {¶ 28} We acknowledge that M.B. was shown a photo array, identified her rapist as someone other than Thompson, and was never able to identify Thompson as her attacker. But M.B. testified that her assailant put a towel over her head, then a mattress pad, she did not have her glasses on, and the rooms where the attack took place were poorly lit. A rational trier of fact could have concluded that these factors caused M.B. to misidentify her attacker. See, e.g., State v. Strowder, 8th Dist. Cuyahoga No. 105569, 2018-Ohio-1292, ¶ 34 (rejecting appellant’s manifest weight argument even though victim misidentified other individuals as her assailants in two separate photo arrays). {¶ 29} A rational trier of fact could also have concluded that Thompson was the perpetrator based on the presence of his DNA on the t-shirt M.B. was wearing. This conclusion is strengthened by the fact that Thompson’s cell phone accessed the tower near M.B.’s home just before the attack, even though his cell phone had accessed this tower only four times (out of 1,312 phone calls) in a period of 32 days. {¶ 30} As to the fact that the slider door was not damaged, a rational trier of fact could reasonably have concluded that M.B. was mistaken in recalling that she locked the door or that her attacker was able to gain access by manipulating the lock without damaging it. It was reasonable for the trier of fact to reject any suggestion that M.B. engaged in consensual sexual conduct, particularly given M.B.’s testimony to the contrary and the evidence of the injuries she suffered. 12. {¶ 31} Although under a manifest-weight standard we consider the credibility of witnesses, we must nonetheless extend special deference to the fact-finder’s credibility determinations given that it is the fact-finder who has the benefit of seeing the witnesses testify, observing their facial expressions and body language, hearing their voice inflections, and discerning qualities such as hesitancy, equivocation, and candor. State v. Fell, 6th Dist. Lucas No. L-10-1162, 2012-Ohio-616, ¶ 14. Here we find that the trial judge did not clearly lose his way in resolving evidentiary conflicts adverse to Thompson. This is not the exceptional case requiring reversal. {¶ 32} We find Thompson’s first assignment of error not well-taken. B. Motion to Strike Surplusage {¶ 33} On February 28, 2019, the state moved under Crim.R. 7(C) to strike surplusage from the indictment. Specifically, it sought to strike the mens rea of “knowingly” that was contained in the indictment, when the requisite mens rea under R.C. 2907.02(A)(2) is “purposely.” Thompson filed no opposition to the state’s motion. The trial court granted the motion on March 7, 2019. Thompson now argues that the trial court erred in granting the motion. {¶ 34} Generally, we review a trial court’s decision to permit the amendment of an indictment under an abuse-of-discretion standard. State v. Stuckman, 6th Dist. Sandusky No. S-17-039, 2018-Ohio-4050, ¶ 52. Because he failed to object, however, Thompson has forfeited all but plain error. State v. Shockey, 2019-Ohio-2417, 139 N.E.3d 486, ¶ 7 (9th Dist.). Plain error is error that affects substantial rights. Crim.R. 52(B). In 13. determining whether plain error occurred, we must examine the alleged error in light of all of the evidence properly admitted at trial. State v. Hill, 92 Ohio St. 3d 191, 203, 749 N.E.2d 274 (2001). Plain error should be found “only in exceptional circumstances and only to prevent a manifest miscarriage of justice.” Id., citing State v. Long, 53 Ohio St. 2d 91, 372 N.E.2d 804 (1978), paragraph three of the syllabus. “Reversal is warranted only if the outcome of the trial clearly would have been different absent the error.” Id., citing Long at paragraph two of the syllabus. {¶ 35} “The court on motion of the defendant or the prosecuting attorney may strike surplusage from the indictment or information.” Crim.R. 7(C). Additionally, under Crim.R. 7(D), “[t]he court may at any time before, during, or after a trial amend the indictment * * in respect to any defect, imperfection, or omission in form or substance, or of any variance with the evidence, provided no change is made in the name or identity of the crime charged.” {¶ 36} Here, the indictment provided as follows: CHARLES THOMPSON, on or about the 13TH day of AUGUST, 2018, in Lucas County, Ohio, did knowingly engage in sexual conduct with another when the offender purposely compelled the other to submit by force or threat of force, in violation of § 2907.02(A)(2) and (B) OF THE OHIO REVISED CODE, RAPE, BEING A FELONY OF THE FIRST DEGREE PUNISHABLE PURSUANT TO § 2907.02(B) * * . 14. The indictment identified the correct statute and the amendment requested by the state did not change the name or identity of the crime charged. {¶ 37} The Ninth District considered a similar issue in State v. Yockey, 9th Dist. Wayne No. C.A. 2257, 1987 WL 16914, 2 (Sept. 9, 1987). In Yockey, the indictment listed “purposely/knowingly” as the culpable mental state, instead of “purposely,” as is provided in R.C. 2907.02(A)(2). The trial court allowed the indictment to be amended to strike the word “knowingly.” The appellate court affirmed. It held that “the word ‘knowingly’ was mere surplusage, * * * [t]he indictment was sufficient to inform the defendant of the charges against him[,] * * * [and] deletion of the word ‘knowingly’ changed neither the name nor the identity of the crime charged.” Id. at *2. {¶ 38} We reach the same conclusion here. The trial court neither abused its discretion nor committed plain error in granting the state’s motion to strike the word “knowingly” from the indictment. {¶ 39} We find Thompson’s second assignment of error not well-taken. C. Merger {¶ 40} In his third assignment of error, Thompson argues that the trial court erred in failing to merge the rape and aggravated burglary convictions at sentencing. He argues that aside from the rape of which he was convicted, there was “no separate harm to the victim stemming from the burglary.” Accordingly, he claims, “the offenses are not of dissimilar import” and they should have merged at sentencing. 15. {¶ 41} The Double Jeopardy Clause of the Fifth Amendment to the U.S. Constitution, applicable to the state through the Fourteenth Amendment, provides that no person shall “be subject for the same offence to be twice put in jeopardy of life or limb.” State v. Ruff, 143 Ohio St. 3d 114, 2015-Ohio-995, 34 N.E.3d 892, ¶ 10. The Double Jeopardy Clause protects against a number of abuses. Id. Pertinent to this case is the protection against multiple punishments for the same offense. Id. To that end, the General Assembly enacted R.C. 2941.25, which directs when multiple punishments may be imposed. Id. It prohibits multiple convictions for allied offenses of similar import arising out of the same conduct: (A) Where the same conduct by defendant can be construed to constitute two or more allied offenses of similar import, the indictment or information may contain counts for all such offenses, but the defendant may be convicted of only one. (B) Where the defendant’s conduct constitutes two or more offenses of dissimilar import, or where his conduct results in two or more offenses of the same or similar kind committed separately or with a separate animus as to each, the indictment or information may contain counts for all such offenses, and the defendant may be convicted of all of them. {¶ 42} In Ruff, the Ohio Supreme Court examined in detail the analysis that must be performed in determining whether offenses are allied offenses of similar import under R.C. 2941.25. It identified three questions that must be asked: “(1) Were the offenses 16. dissimilar in import or significance? (2) Were they committed separately? and (3) Were they committed with separate animus or motivation?” Id. at ¶ 31. If the answer to any of these questions is “yes,” the defendant may be convicted and sentenced for multiple offenses. Id. at ¶ 25, 30. The court explained that offenses are of dissimilar import “when the defendant’s conduct constitutes offenses involving separate victims or if the harm that results from each offense is separate and identifiable.” Id. at ¶ 23. It emphasized that the analysis must focus on the defendant’s conduct, rather than simply compare the elements of two offenses. Id. at ¶ 30. {¶ 43} Thompson contends that “there are no other acts of rape other than that for which Appellant was found guilty.” This is an inaccurate characterization of the evidence. While it is true that Thompson was charged with and convicted of only one count of rape here, the victim testified to multiple instances of rape. The victim testified at trial that Thompson raped her vaginally and anally in the bathroom, dragged her into the bedroom, and raped her again. He inserted both his fingers and his penis into her vagina and anus. Ohio law is clear that each of these acts of rape, if charged, would support a separate count of rape and multiple rape counts do not merge. See, e.g., State v. Barnes, 68 Ohio St. 2d 13, 14-15, 427 N.E.2d 517 (1981); State v. Trevino, 6th Dist. Erie No. E-13-042, 2014-Ohio-3363 ¶ 15-16. The issue here is whether the uncharged acts of rape may be considered in a merger analysis. {¶ 44} In State v. Greely, 6th Dist. Lucas No. L-16-1161, 2017-Ohio-4469, we found that separate and identifiable harm resulted from the aggravated burglary where the 17. victim had been raped multiple times, even though each rape was not charged as separate crimes. The defendant in Greeley argued that because he was convicted of only one rape, all of the additional acts of rape should be ignored because “uncharged conduct” cannot be considered in a merger analysis under R.C. 2941.25(B). {¶ 45} As explained in the concurring opinion in Greeley, a conviction for aggravated burglary under R.C. 2911.11(A)(1) requires that in addition to breaking into an occupied structure with the intent to commit any criminal offense, “the offender inflicts, or attempts or threatens to inflict physical harm on another.” The statute does not require, however, that the “physical harm” element of aggravated burglary result in a separately-charged criminal offense. {¶ 46} As in Greeley, regardless of which singular act of rape underlies Thompson’s rape conviction, the aggravated burglary resulted in harm that is separate and identifiable from the harm of the rape offense—i.e., the aggravated burglary resulted in multiple other rapes against the same victim. It is immaterial that those additional rapes could have been, but were not, charged as separate crimes. Because the additional rapes resulted in separate and identifiable harm, Thompson’s rape and aggravated burglary convictions are offenses of dissimilar import under R.C. 2941.25(B) and were not subject to merger. {¶ 47} We find Thompson’s third assignment of error not well-taken. 18. III. Conclusion {¶ 48} Thompson’s convictions for rape and aggravated burglary were not against the sufficiency or weight of the evidence. Even though the victim identified someone else in a photo array, a rational trier of fact could have concluded that Thompson was the perpetrator of the crimes based on the presence of his DNA on the victim’s t-shirt and the location data generated by his cell phone. Additionally, regardless of whether the victim correctly recalled locking the sliding door to her sun porch, the force element of an aggravated burglary charge may be established by evidence that the defendant entered the victim’s home by opening a closed but unlocked door. We find Thompson’s first assignment of error not well-taken. {¶ 49} The trial court neither abused its discretion nor committed plain error in granting the state’s motion to strike the word “knowingly” from the indictment for rape. The word “knowingly” was mere surplusage, the indictment sufficiently informed Thompson of the charges against him, and deletion of the word did not change the name or the identity of the crime charged. We find Thompson’s second assignment of error not well-taken. {¶ 50} The trial court properly refused to merge Thompson’s rape and aggravated burglary convictions at sentencing. While Thompson was convicted of only one count of rape, there were multiple additional rapes committed during the burglary that could have been, but were not, charged as separate crimes. Those additional rapes constituted 19. separate and identifiable harm for purposes of the merger analysis. We find Thompson’s third assignment of error not well-taken. {¶ 51} We affirm the March 26, 2019 judgments of the Lucas County Court of Common Pleas. Thompson is ordered to pay the costs of this appeal under App.R. 24. Judgments affirmed. A certified copy of this entry shall constitute the mandate pursuant to App.R. 27. See also 6th Dist.Loc.App.R. 4. Mark L. Pietrykowski, J. _______________________________ JUDGE Arlene Singer, J. _______________________________ Christine E. Mayle, J. JUDGE CONCUR. _______________________________ JUDGE This decision is subject to further editing by the Supreme Court of Ohio’s Reporter of Decisions. Parties interested in viewing the final reported version are advised to visit the Ohio Supreme Court’s web site at: http://www.supremecourt.ohio.gov/ROD/docs/. 20.	01-04-2023	05-29-2020
https://www.courtlistener.com/api/rest/v3/opinions/4475641/	OPINION. Van Fossan, Judge: Under the applicable provisions of the State of Pennsylvania Insurance Company Law1 petitioner was required to, and did, set aside in a reinsurance reserve fund during the taxable year an amount equal to 10 per cent of the title insurance premiums received by it. When a title insurance premium was received from a customer it was first deposited in a separate “Settlement Suspense Account” together with purchase money to be held in escrow, recording fees and other funds received on settlement. This account was under the supervision and control of petitioner’s Title Department. At the end of each month an authorized person drew a check on this account for an amount equal to 10 per cent of all title insurance premiums received during that month. This check was then delivered to petitioner’s Trust Department. The Trust Department in turn deposited the check in petitioner’s trust fund account with the Girard Trust Company of Philadelphia, Pennsylvania, and credited such deposit on its trust books to an account entitled “Title Insurance Reserve, Corpus of Estate (Principal Cash and Investments).” The amount so set aside during the year here involved as representing a sum equal to 10 per cent of the total premiums collected was $2,018.23. In his notice of deficiency respondent disallowed this amount as a deduction from petitioner’s gross income. Since a relatively minor portion of its gross income for the taxable year was derived from its title insurance business, petitioner has asserted that it is not an insurance company for Federal tax purposes and that section 204 of the Internal Revenue Code has no application here. Rather, it has taken the position that the general provisions of the Code pertaining to corporations are applicable to it and now argues that the amount in dispute did not, in the first instance, constitute a part of its gross income within the meaning of section 22 (a) of the Interna] Revenue Code.2 Alternatively, it urges that should such an amount be considered income, it is then deductible therefrom as an ordinary and necessary business expense under section 23 (a) (1) (A) of the Interna] Revenue Code.3 The name of a corporation, its charter powers and its subjection to State insurance laws are significant in determining the business which it is empowered and intends to carry on. However, the character of the business actually done during the taxable year is purely a question of fact and is determinative of whether the corporation is to be taxed as an insurance company under the Internal Revenue Code. Bowers v. Lawyers' Mortgage Co., 285 U. S. 182. Here the record shows that petitioner carried on as its chief activity a general banking and trust business and that the insurance business was but a minor part of its total business. The amount set apart as a reinsurance reserve, in accordance with the Pennsylvania statutes, was $2,018.23. This sum represented 10 per cent of the total insurance premiums received by petitioner. It takes but elementary arithmetic to determine that the entire amount realized from petitioner’s insurance business was $20,182.30, and that this figure is but 9.44 per cent of its total income of $213,680.88 for the taxable year. The insurance business being such a small part of petitioner’s total activity, petitioner is not entitled to classification as an insurance company within the meaning of the Internal Revenue Code nor the respondent’s regulations. Bowers v. Lawyers's Mortgage Co., supra. See, also, Regulations 111, section 29.3797-7, and Columbia Title Insurance Co., 3 T. C. 1099. In support of its primary contention that the amount in question was not income, petitioner maintains that the $2,018.23 deposited in the reinsurance reserve fund was received by it to be held in trust for the benefit of its policyholders. It points to the line of so-called “cemetery .cases” for the proposition that the amounts so received are excludible from the gross income of the recipient. It has long been held that if there is a legally valid and recognizable trust, whether expressed or implied, created by a cemetery association to provide a means for the permanent care of a cemetery lot or crypt and a prescribed part of the purchase price of such lot or crypt can be said to be received in trust for that purpose, such part is then impressed with a trust and so much of the association’s gross receipts is thus removed from its taxable income. Commissioner v. Cedar Park Cemetery Association, Inc., 183 F. 2d 553; Portland Cremation Association v. Commissioner, 31 F. 2d 843; American Cemetery Co. v. United States, 28 F. 2d 918: Mountain View Cemetery Association, 35 B. T. A. 893; Community Mausoleum Co., 33 B. T. A. 19; Woodlawn Cemetery Association, 28 B. T. A. 882; Acacia Park Cemetery Association, Inc., 27 B. T. A. 233; Evergreen Cemetery Association of Chicago, 21 B. T. A. 1194; Inglewood Park Cemetery Association, 6 B. T. A. 386; Los Angeles Cemetery Association, 2 B. T. A. 495; Troost Avenue Cemetery Association, 4 B. T. A. 1169. “The vital question in these * * * cases is whether payments are impressed with a trust. The money must be impressed with a trust when received; it is unimportant that a reserve is set up or that a trust is afterwards set up * * .” 2 Merten’s Law of Federal Income Taxation, sec. 12.71. This brings us to the narrow question of whether the disputed amount was impressed with a trust at the time it was received by petitioner. The facts here do not indicate that the funds received by petitioner were so impressed. In the cases cited the arrangement giving rise to the trust was concluded between the taxpayer-cemetery association and its payor-vendee. Here, petitioner’s policyholder was party to no' such arrangement. The funds were deposited in the reinsurance reserve fund and the “trust” arose by virtue of the Pennsylvania statute. Furthermore, in the cemetery cases the amount deposited to be held in trust could never at any time become a part of the taxpayer’s general assets. The income therefrom could never inure to its benefit, but had to be used to provide certain services which the taxpayer had obligated itself to render. Here, the income derived from the funds held in reserve becomes k part of petitioner’s general assets and if a policy was canceled the company which shall have issued such policy of title insurance could withdraw so much of the fund as constituted that policy’s reserve. 40 Purdon’s Pennsylvania Statutes, Annotated, 901, 903. Moreover, the Pennsylvania statute involved does not impress with a trust the specified percentages of premiums paid but rather provides for the accumulation of a reinsurance, reserve fund from deposits made which are equal to a certain specified percentage “of the premium paid on each policy which such company may * * issue” until a certain amount is thus amassed. This amount may be accumulated by any one or all of the following ways: 1. By setting aside the specified percentages of premiums paid as noted above. 2. By use of the reserve fund accumulated under Title 40, sections 151-159, prior to the passage in 1937 of the existing statute. 3. By setting aside at any time or from time to time, out of such surplus or undivided profits as may be available for that purpose in accordance with existing law or the regulations of the Department of Banking. 40 Purdon’s Pennsylvania Statutes, 900, supra. Thus, it is clear that the money collected as premiums is not impressed with a trust when received. And, as pointed out above, it is unimportant that a trust may be later set up. The full amount of the premiums collected were income to petitioner and must be reported as such. In the alternative, petitioner contends that, as a condition to doing business, it is required to accumulate the reserve under discussion and that it is-entitled to deduct the amounts deposited in such reserve as an ordinary and necessary business expense under section 23 (a) (1) (A), supra. We do not agree. The reserve here involved is a reserve for reinsurance. “Reinsurance is a contract whereby one for a consideration agrees to indemnify another, either in whole or in part, against a loss or liability, the risk of which the latter has assumed. * * ” 1 Couch on Insurance, Sec. 44. It follows that a reserve for reinsurance maintained by an insurance company is analogous to a reserve for insurance maintained by a taxpayer which is not an insurance company. A company maintaining such a reserve is really a self-insurer until such time as it actually insures or reinsures itself against loss. Further, a reserve of this nature is in essence a reserve against- a contingent liability, and it is well settled that amounts deposited in a reserve to cover a contingent liability may not be deducted until such liability becomes fixed. Lucas v. American Code Co., 280 U. S. 445; Brown v. Hel-vering, 291 U. S. 193; Lane Construction Corp., 4 B. T. A. 1133. Likewise, amounts set aside as insurance funds are not deductible despite the fact that the taxpayer may be required by State law to carry insurance or act as a self-insurer. Spring Canyon Coal Co., 13 B. T. A. 189, affd., 43 F. 2d 78, certiorari denied, 284 U. S. 654; American Title Co., 29 B. T. A. 479, affd., 76 F. 2d 332. While the primary purpose of the reserve in this case is to protect the interests of petitioner’s policyholders, as pointed out above, the principal of the reserve is a van able to discharge petitioner’s legal obligations to such policyholders and the income therefrom is available to satisfy its legal obligations generally. No deduction may be taken since there has been no real expense incurred. Accordingly, the respondent’s determination will not be disturbed. Decision will he entered for the respondent. PURDON’S PENNSYLVANIA STATUTES ANNOTATED, Title 40, Sec. 900 — Establishment and maintenance of reinsurance reserve fund. Each company, which shall possess the power to insure owners of real property, mortgagees, and others interested in real property, from loss by reason of defective titles, liens, and encumbrances, shall establish and maintain a reinsurance reserve fund, by setting aside a sum equal to ten per céntum of the premium (that is the sum charged for insurance over and above examination and settlement fee) paid on each policy which such company may hereafter issue, until the total amount set aside (including any reserve heretofore set up under any prior act of Assembly) shall equal the sum of two hundred fifty thousand dollars; and thereafter shall set aside a sum equal to five per centum of such premiums, until the total amount shall equal a sum not less than five hundred thousand dollars: Provided, That such premiums sh^ll not be less than one-quarter of one per centum on the amount of insurance as issued, or, if less than one-quarter of one per centum, the amount set aside shall be equal to two and one-half per centum of said one-quarter of one per centum, provided that the total reserve fund or amounts in excess of that required by the foregoing provisions may be set aside at any time, or from time to time, out of such surplus or undivided profits as may be available for that purpose, in accordance with existing law or the regulations of the Department of Banking; and provided further, that any company, which at the time of the effective date of this act has set aside and is maintaining an Insurance reserve fund as required by the act of April 26, 1929 (Pamphlet Laws, 8341,1 is hereby empowered to use the srxne as part of the reserve required to be set up and maintained by this act. The reserve fund set up by any company shall he maintained as herein provided, so long as any policies shall be outstanding. Sections 151-159 of this title. SEC. 22. GROSS INCOME. (a) General Definitions. — “Gross income” includes gains, profits, and income derived from salaries, wages, or compensation for personal service (including personal service as an officer or employee of a State, or any political subdivision thereof, or any agency or instrumentality of any one or more of the foregoing), of whatever kind and in whatever form paid, or from professions, vocations, trades, businesses, commerce, or sales, or dealings in property, whether real or personal, growing out of the ownership or use of or interest in such property; also from interest, rent, dividends, securities, or the transaction of any business carried on for gain or profit, or gains or profits and income derived from any source whatever. In the case of Presidents of the United States and judges of courts of the United States taking office after June 6, 1932, the compensation received as such shall be included in gross income; and all Acts fixing the compensation of such Presidents and judges are hereby amended accordingly. In the case of judges of courts of the United States who took office on or before June 6, 1982, the compensation received as such shall be included in gross income. SEC. 23. DEDUCTIONS FROM GROSS INCOME. In computing net income there shall be allowed as deductions : (a) Expenses.— (1) Tr^de 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, * *.	01-04-2023	01-16-2020
https://www.courtlistener.com/api/rest/v3/opinions/4475643/	■OPINION. Disney, Judge: The only question for our determination is whether the amount of $241,973.34 received by petitioner on or about November 23, 1945, under a settlement agreement is taxable as ordinary income or as a long term capital gain. The petitioner alleges that the sole claim that it asserted against Hartford in 1945 was a claim based upon the fraudulent taking of its cash and assets by Hartford in 1936 (hereinafter sometimes referred to as the fraud claim), and that the amount of $241,973.34 received in the settlement with Hartford constituted a return of capital and consideration for the sale of capital assets and not, as contended by the respondent, a return of rents and royalties. The claim for the return of rents and royalties by the licensees of Hartford will hereinafter sometimes be referred to as the refund claim. In short, the petitioner argues that it had no refund claim, while the respondent urges that the fraud claim was abandoned. In the alternative, the petitioner contends that if the fraud claim was not the only claim settled, that both the fraud claim and refund claim were settled, and that the $241,973.34 should be allocated between them. Though both parties have argued at some length as to the validity of each claim, we consider it unnecessary to decide upon such validity, as to either, for our question is not their validity, but the nature, for tax purposes, of an amount received in settlement, which rests not upon the validity but upon the nature of the matter settled. Helvering v. Safe Deposit & Trust Co. of Baltimore, 316 U. S. 56; Raytheon Production Corp., 1 T. C. 952, affd., 144 F. 2d 110, certiorari denied, 323 U. S. 779. Moreover, we do not find in the record before us sufficient facts from which we could decide upon the validity of either claim. We proceed to determine the nature of the matter settled in consideration of the moneys paid and here involved. By order of the District Court, the amount of rental and royalty payments made to the receiver by the various licensees of Hartford -was to be set aside and specially earmarked as coming from each licensee, and * * * upon confirmation by the Supreme Court of the decree to he entered herein, such receipts so collected and set aside are to be returned, without interest, to the various licensees. It is clear from the language of the District Court’s opinion, United States v. Hartford-Empire Co., 46 F. Supp. 541, that the payments made by the licensees of Hartford (including petitioner), after the .court’s order, were made with the expectation under the order that at least some of the amount would be returned. The opinion gave that right. The matter was not fully disposed of by the Supreme Court until April 2, 1945, the date of the rendering of the second Supreme Court opinion on the matter. The first Supreme Court opinion, dated January 8, 1945, Hartford-Empire Co. v. United States, 323 U. S. 386, 411, stated that the royalties that had been paid to the receiver by Hartford’s licensees may, in the absence of certain conditions, none of which apparently apply .here, be paid over to Hartford. The second Supreme Court opinion, dated April 2, 1945, Harfford-Empire Co. et al. v. United States, 324 U. S. 570, 572, pointed out that the licensees ought not to be put into the position of recovering from Hartford royalties paid to the receiver. After further explanation of the situation in regard to the payment of royalties the Court said: In view of the modifications required-by the opinion of this court, such licensees ■must pay reasonable rental and service charges on a quantum meruit basis (leaving out of consideration any amount otherwise payable for the privilege of practicing the patented inventions involved) in respect of the machines used in the interim. Unless Hartford, since the entry of the decree by the District Court, has been guilty of some added violation of the anti-trust laws, licensees must elect (a) to remain licensees on-such reasonable rental and royalty basis for the future as the District Court may fix, or (b) repudiate the leases and litigate their rights as against Hartford to retain any portion of the rents and royalties paid. Depending upon such election of each of the lessees, the District Court may, on the application of each, make an appropriate order for the disposition of the fund in the light of the licensees’ election and the principles stated in the opinion of this Court. The petitioner, on brief, points out that a dissent filed in the second Supreme Court opinion states that the opinion as written by the majority of the Court is not clear in regard to the disposition of the royalties paid by the licensees to the receiver. Notwithstanding the dissent, Hartford through its representatives worked with a committee representing the non-defendant licensees of Hartford, i. e., the licensees that had paid the fund into the hands of the receiver, to negotiate a program in conformity with the Court’s opinion which could be recommended to the Court as a reasonable and equitable basis of relationship for the future between Hartford and its licensees. The negotiations were not restricted to discussing the future relationship between Hartford and the licensees but also considered the question of a cash refund of a portion of the amount paid by the licensees to the receiver. For the petitioner, its general counsel testified that the only claim asserted by the petitioner against Hartford was its fraud claim3.and that petitioner made no claim for a return of royalties. Such testimony is not conclusive. We may not rely on it alone to decide the point, but must consider the payment of the amount here in question in the light of all the circumstances and determine the motive behind the payment. Petitioner cites Inaja Land Co., Ltd., 9 T. C. 727, as “seemingly” authority for the principle that if a taxpayer asserts but one claim, although he might have several, the amount received in settlement is taxable according to the claim asserted. As we read the Inaja case, such an interpretation is too broad. The Court there held that the petitioner had “satisfactorily established” that the consideration paid was for the property right (the one claim) alleged by the petitioner. Our question here is whether the petitioner has so established, contrary to the Commissioners determination that royalty refunds were received. In this connection, petitioner, on brief, also argues that Hartford was negotiating with its own money, to which the petitioner had no legal claim whatsoever. We can not see reason in such a view. The final opinion of the-Supreme Court, even if we assume that it was not altogether definite as to disposition of the impounded royalties, did not award the fund outright to Hartford nor deprive the licensees of all claims to it. Again the petitioner suggests that the licensees, including petitioner, acquired no right to a return of the royalties as such, so that in receiving the $241,973.34 it was .not receiving a return of royalties. As authority, Buck Glass Co. v. Hofferbert, 176 F. 2d 250, is cited, but we find it of no assistance to the petitioner. The court merely pointed out that the question of the payments being made as a matter of right did not of itself affect the taxability of the amount of the recovery in the light of the governing principle, i. e., that amounts expended and deducted in prior years are income when recovered. In short, the moneys were recovered, whether as of right or not, and therefore were taxable, and the court held that the payments to the taxpayer constituted a return of rental and royalty payments that had been previously deducted in computing Federal income tax for prior years and that the amount so recovered was taxable as income in the year of recovery. We note at this point that the Buck case contradicts petitioner’s further argument, in substance, that the fact that the licensees were each to receive a “sum equal to” 60 per cent of the impounded fund paid in by it, indicates that there was no return of royalties. Pointing out that the moneys were earmarked by the order of the District Court, as paid in by each individual licensee, that had the licensees not continued the royalty payments there would have been no fund for distribution, and that in its final order the District Court directed return to the taxpayer of 60 per cent of the funds held in its name (less expenses), the Court says that the agreement “did in fact provide for a return to Taxpayer of 60% of the funds held by the receiver in its name,” and adds: * * * Nor is that fact altered by the language of the agreement, embodied in the judgment, to the effect that each licensee was to receive “a sum equal to” 60% of the funds earmarked as coming from it. Since the Buck case grew out of the same receivership proceedings against Hartford as here involved and decided the same question except for the “outside claim” it is clear that the above language therefrom negatives petitioner’s view that there was no return to petitioner of its own funds, because of the expression in the agreement. The same conclusion applies to the petitioner’s argument, in substance, that the use of the expression “which for purposes of such computation only” preceding “is designated as an amount equal to sixty percent (60%) of the balance” indicates that the money received was not refund of royalties. These conclusions, however, do not settle the question as to whether, in fact, the recovery by compromise was of refund, or, on the other hand, for fraud. The petitioner, in fact, received the same percentage as the large number of other licensees receiving 60 per cent of royalties paid to the receiver — and obviously the fact is significant. The fact that the percentage received was common to all indicates settlement of a claim common to all so receiving it. But the licensees did not all possess a common claim as to anything except royalties, for some, such as petitioner and Knox Glass Company, had “outside claims,” amounting in petitioner’s case to about $1,000,000. The amount of other “outside claims” does not appear. Thus, it appears that the only common claim was for return of royalties, and that in compromise thereof a percentage, common to all participating, was received. Moreover, petitioner’s directors’ minutes of October 1, 1945, indicate recognition by petitioner at that time that Hartford took the view that “there were no funds available to settle with us for the 1936 transaction”; yet the same minutes show authority to conclude an agreement. Obviously, therefore, there was some thought of settlement on some basis not involving the 1936 fraud transaction. Likewise, the minutes of November 5,1945, show recognition that the court required the licensees “to surrender any right or claim for refund” and show authority given petitioner’s officers to surrender all claims for refund of royalties paid the receiver as well as to execute the general release for the consideration mentioned. Thus, it appears that there was intentional surrender by petitioner of claims for refund of royalties (even if along with general release) contrary to petitioner’s primary contention now that there was no such claim, or release of such claim. It is true, of course, that the minutes of November 5, 1945, recite the opinion of counsel that the fund was no longer earmarked as coming from royalties, and mention the net settlement fund; but the fact remains that the minutes of October 1, 1945, disclose intent further to consider the matter. In this connection we find significance in the fact that though on September 4, 1945, the committee was told that petitioner would not “go along” and that the minutes of October 1, 1945, show a report that the Industry meeting had been told by petitioner’s representative on September 18 that petitioner would not “go along” with any settlement requiring release without consideration for the 1936 matter, nevertheless negotiations for an agreement were ordered continued, and, after the Industry meeting, convinced that it would have to “go along with the industry,” petitioner “chose to go along”; and petitioner did “finally join in the industry settlement.” Except for the minutes, the quotations are from the testimony of petitioner’s general counsel. In other words, there was reversal of the previous position. Hartford had taken the view that it did not agree with petitioner’s position asking restitution for the patents and feeders and money paid, in the amount of about $1,000,000, and had urged petitioner to accept the same formula of settlement as the balance of the industry. Petitioner’s decision to “go along” appears reasonably as not only a joinder in the same position as the other licensees accepting settlement, but an abandonment of the previous claim for restitution for the 1936 matter. The crux of the previous difference between Hartford and petitioner was whether basis of settlement should be the restitution of cash, patents and feeders because of fraud, or the participation with the industry, in the royalty refund. Petitioner decided to go along — which means to us go along with the other licensees in common acceptance of a percentage of the refund of royalties. The petitioner’s previous contention then became immaterial. What was desired was a settlement, and it was effected, not on the basis of petitioner’s earlier contention, but the alternative, urged by Hartford and the committee, and finally accepted. The nature of the settlement was not the same as the prior contention of the petitioner, for it was to “go along,” that is, it acceded to a different basis of settlement. In our view, neither mention of the previous demand, in the minutes of October 1, 1945, nor the opinion of petitioner’s counsel, set forth in those of November 5, 1945, when the matter was being closed, in effect that the amount received would cover the 1936 claim, is sufficient to overcome the realities of the situation, that the former view had been abandoned. Had it not been so, there apparently would have been no settlement. Nothing before us is convincing that petitioner merely received $241,973.34 on its claim for about $1,000,000. It in fact participated with and received the same percentage as those licensees who had nothing but claim for refund. Petitioner, if it had had no “outside” claim, would have received $241,973.34, as it did. The petitioner in urging that it settled with Hartford a claim for feeders, patents, and cash, had the burden of so showing. Petitioner’s witness Eldred was vice president in charge of operations of Hartford. He was not asked and did not state what claim was settled, but stated only the position taken by Tygart at the meeting in September 1945, to the effect that Tygart took the position that it could not entertain settlement under the terms offered, that Tygart felt it had a special situation and wanted restitution for patents, feeders, and damages paid to Hartford, but that Hartford did not agree with such position and urged acceptance of the formula accepted by the industry. With Hartford’s representative on the witness stand it would appear that petitioner could, had he been willing to support petitioner’s view, have elicited from him whether the feeder-patent-cash claim was settled. Such evidence would tend to support the petitioner, and failure so to inquire is noticeable. It may well be that Hartford had reason to wish to settle the royalty claim instead of the 1936-fraud allegedly capital transaction — for instance, because of possibility of deduction or exclusion by it of royalty payments involved in the refund, an element not applicable to settlement of a capital transaction. It would appear that Hartford would otherwise not have been averse to a settlement of the fraud claim, for the same amount of money payable under the refund claim, and that the settlement could definitely, in such case, have so stated. It does not do so. Any such self-interest against settlement of the 1936-fraud claim, on the part of Hartford, would tend to explain its refusal to settle that claim with petitioner; and the record shows a change of mind not on the part of Hartford, but on the part of petitioner — a change away from its proposal of settlement of the allegedly capital matter. That Hartford was not without tax consciousness at the time of the settlement in 1945 is indicated by the reference to payment of taxes, in Hartford’s proposition, and in the letter from the committee to the non-defendant licensees both of which refer to the payment of taxes. Again, though petitioner contends that the payment of the amount here in question was in settlement of its fraud claim, petitioner’s own witness testified that the “outside claims” were never discussed “as such” between the committee and Hartford’s representatives. Since Hartford, as above seen, urged petitioner to accept the same formula for settlement that the balance of the industry had accepted it would appear from this testimony that the refund claim of petitioner was, when the industry formula was accepted by petitioner, at least the primary matter settled. As explanation of why the industry formula of settlement was accepted by petitioner, it is argued that all non-defendant licensees were in effect required to do so. One of petitioner’s witnesses testified that the judge of the District Court advised the industry that unless there was a 100 per cent acceptance of the industry settlement formula the entire settlement would fall through.4 But the fact is that 16 non-defendant licensees did not joi-n the others in the settlement, which proves that a 100 per cent acceptance of the industry settlement formula was not required. One of the 16 was Hazel-Atlas Glass Co. which apparently had a situation considerably analogous to that of petitioner, for it was because of the judgments against it, and Shawkee Manufacturing Company, in Hartford’s favor, that counsel for petitioner advised the settlement in 1936. Thus, it appears that petitioner has not shown that its joinder in the settlement in 1945 was involuntary. After careful study of all of the various arguments made, and the extensive facts involved, though we have not considered all necessary of discussion, we are not convinced that there is showing that the fraud claim was the basis of the settlement made, but, in our view, that claim was abandoned, and settlement made on the basis of the royalty refund. In our view, there is illogic in a contention that a settlement was negotiated with a committee representing a group of licensees on the basis of giving the individual members of the entire group the same percentage of the amount of rents and royalties they had previously paid in to the earmarked fund, but that as to one of the group (petitioner) the settlement was made on the basis of an “outside claim” (the fraud claim) which was never discussed “as such” between Hartford and the committee. The realistic approach appears to us to be that the settlement was made on the basis of the refund claim which in reality determined the amount that each licensee should receive. We hold, therefore, that the real basis of the settlement was the refund claim and that the amount received constituted a return of rental and royalty payments that had been previously deducted in computing Federal income taxes for prior years, and that the amount here in question was ordinary income, not capital gain, for the fiscal year ending September 30, 1946. This conclusion makes it unnecessary to consider petitioner’s theory of allocation or valuation of the fraud claim. Decision will be entered for the respondent. Contrary to petitioner’s argument, Eldred, vice-president of Hartford, did not denominate the fraud claim as petitioner’s only claim. The witness also stated: “However, later on there were a few companies who had minor claims which were dropped out of the settlement.” No further explanation is given why 100 per cent acceptance was required, yet a few companies were dropped out*	01-04-2023	01-16-2020
https://www.courtlistener.com/api/rest/v3/opinions/4475644/	OPINION. Van Fossan, Judge: Petitioner is settlor and life beneficiary of an irrevocable trust with remainders over. As a part of its corpus, the trust holds, among other things, 1,717 shares of the outstanding stock of Percival E. Foerderer, Inc., a Delaware corporation, which is a personal holding company. Further, it holds directly and indirectly a total of 4,507.5 shares of the capital stock of Robert H. Foerderer Estate, Inc., another Delaware corporation, which is also a personal holding company. At the beginning of the taxable year the capital of these corporations was impaired to the extent of $151,934.52 and $469,787.35, respectively. During the taxable year both corporations suffered further capital losses in the amounts of $10,110.40 and $19,489.54, respectively. Since such losses were not deductible when computing the Subchapter A net income of either corporation (Seotion 505, Internal Revenue Code), both corporations had Subehapter A net income in the amounts of $5,650.54 and $19,331.41, respectively. Despite this continued impairment of capital these corporations, during the year here involved, declared and paid taxable dividends to The Trust amounting to a total of $14,142.85. The parties are agreed that this amount constitutes taxable income and that if it is distributable to petitioner as beneficiary of The Trust, it is taxable to him and deductible by The Trust in accordance with section 162 (b), Internal Revenue Code.1 Therefore, stripped of non-essentials, the issue is whether the amount so received by The Trust is or is not distributable to petitioner. Legal interests and rights in the administration of trusts are essentially matters of local law. Helvering v. Stuart, 317 U. S. 154, 161. The determination of whether or not income, is distributable to a particular beneficiary depends upon the terms of the trust and the applicable state law. Blair v. Commissioner, 300 U. S. 5, 9; Freuler v. Helvering, 291 U. S. 35, 43-45; Henricksen v. Baker-Boyer National Bank, 139 F. 2d 877. Once this determination is made, the pertinent Federal revenue act then attaches to designate to whom such income is taxable. Helvering v. Stuart, supra. Here, The Trust was created in Pennsylvania. Its trustee, as well as its life beneficiary, is a resident of that state. Accordingly, the determination of whether the income which it received was distributable to petitioner during the taxable year should be made in accordance with the law of the Commonwealth of Pennsylvania. Where a trust has been created and its trustee is directed by the trust indenture to pay the income therefrom to a certain beneficiary for life and upon his death to pay the principal to designated re-maindermen, the trustee is under a duty so to administer the trust as to protect the interests of both the life tenant and the remaindermen. 2 Scott on Trusts § 232. Accordingly, when a dividend is received on stock held as a part of the trust res, he must determine whether such dividend should be treated as accruing to the corpus and held for the remaindermen or constitutes income distributable to the life beneficiary. The authorities are in substantial agreement on the proposition that a dividend which represents a reduction or impairment of capital belongs to corpus and not to income. Vinton's Appeal, 99 Pa. 434, 44 Am. Rep. 116; Gray v. Hemenway, 268 Mass. 515, 168 N. E. 102; Hite v. Hite, 93 Ky. 257, 20 S. W. 778; 24 A. L. R. 92. And any impairment of the trust assets must be made good before anything is awarded to income. Cf. McKeown's Estate, 263 Pa. 78, 106 A. 189. Here, the corporations from which The Trust received the dividends in question had suffered capital losses in the years preceding the one under review to the extent that their capital structure had been substantially impaired. During the taxable year they sustained further capital losses in excess of their income. However, they were personal holding companies, and such losses were stipulated not to be deductible in the computation of their Subchapter A net income. Consequently, for tax purposes they had current income. And it was from this source that the dividends were paid. If we look to the substance of the situation, we find that had the corporations been allowed to deduct their capital losses, they -frould have had no income from which to pay these dividends. The funds from which the payments were made constituted income only for the purposes of Subchapter A and not for the purpose of determining the proper allocation to be made of such payments as between corpus and distributable income. These payments further impaired the capital of the corporations, and should be allocated to corpus. To hold otherwise would be to defeat the purposes of the trust instrument by giving petitioner, the life beneficiary, access to the principal of the trust fund, thereby totally defeating the gift over to the remaindermen. Accordingly, we hold that the dividends received by the trustee from Robert H. Foerderer Estate, Inc., and Percival E. Foerderer, Inc., should not be awarded to income to be distributed to the life beneficiary but, to the contrary, should be allocated to corpus with The Trust paying the taxes thereon. Decision will be entered wider Ride 50. SEC. 162. NET INCOME. •»»** (b) There shall be allowed as an additional deduction in computing the net Income of the estate or trust the amount of the income of the estate or trust for its taxable year ■which is to be distributed currently by the fiduciary to the legatees, heirs, or beneficiaries, but the amount so allowed as a deduction shall be included in computing the net income of the legatees, heirs, or beneficiaries whether distributed to them or not. As used in this subsection, “income which is to be distributed currently” includes income for the taxable year of the estate or trust which, within the taxable year, becomes payable to the legatee, heir, or beneficiary. * * »	01-04-2023	01-16-2020
https://www.courtlistener.com/api/rest/v3/opinions/4475645/	OPINION. LeMiee, Judge: The respondent has determined a deficiency of $3,262.70 in petitioner’s income tax for 1944. One of the two issues presented by the pleadings has been settled by stipulation. The remaining issue involves a loss deduction claimed on the sale of a parcel of improved real estate. The essential facts have been stipulated and are found as set out in the written’Stipulation. On December 12, 1930, petitioner acquired by gift from his mother a bond and mortgage on a parcel of real estate known as 2240 Cedar Avenue, Bronx, New York, of $12,000 to secure a loan which she had made in 1930 to Beilin Service Corporation. On June 12,1935, Beilin Service Corporation deeded the property to petitioner under an agreement whereby petitioner agreed to pay, and did pay soon thereafter, a tax arrearage against the property of $1,303.94, and the mortgagor was to be permitted to continue to occupy the premises at a rental of $35 per month. In acquiring title to the property petitioner incurred expenses and fees of $38.09. The property was conveyed to petitioner subject to the first mortgage which he then held and without any release of the mortgagor’s obligation on the bond and mortgage. The deed of conveyance specifically provided that the mortgage was not intended to merge in the fee. The parties have stipulated that the bond and mortgage had a value when acquired by petitioner of $12,000 and that the property had a net value when deeded to the petitioner in 1935 of $10,000. On November 9, 1944, petitioner sold the property for $7,000, of which $2,500 was paid in cash and the balance by reducing the existing mortgage, which the purchaser assumed, to $4,500. In making the sale the petitioner paid broker’s commissions and other expenses amounting to $552.75, making the net amount received by him $6,447.25. The parties further stipulated that if this Court should decide that the fair market value of the land and building when acquired by the petitioner in 1935, as adjusted by depreciation allowed or allowable, shall be the basis for measuring gain or loss on the sale in 1944, the amount of petitioner’s loss on the sale is $389.42. The narrow question here presented is the basis for computing peti-i tioner’s loss on the sale of the Cedar Avenue property. The proper basis, as the parties agree, is the adjusted cost basis determined under section 113 (a), (b), Internal Bevenue Code. The respondent has determined that this basis is $6,836.67, which is the fair market value of the property at the time petitioner acquired it from the mortgagor in partial satisfaction of the mortgage debt adjusted for depreciation allowed or allowable. Petitioner contends that the mortgage basis is the amount of his donor’s original $12,000 loan on the property, plus the taxes and incidental expenses up to the time he acquired title to the property. Petitioner used that basis, $12,000 plus taxes, for computing depreciation deductions on the property in his returns for the years 1935 to 1944. Petitioner contends that there was no closed transaction with respect to the mortgage loan which his mother made on the property until he sold the property in 1944. Ordinarily, a taxpayer who, by mortgage foreclosure or by voluntary conveyance, acquires title to property securing the mortgage loan reduces the indebtedness by the amount of the fair market value of the property so acquired and is entitled to charge off the balance of the mortgage indebtedness as a bad debt owing to the extent that it is shown to be uncollectible. See Bingham v. Commissioner, 105 F. 2d 971; Commissioner v. Spreckels, 120 F. 2d 517; and John H. Wood Co., 46 B. T. A. 895. The basis for computing gain or loss upon a subsequent sale of the property is its fair market value when so acquired, adjusted to the date of sale. The petitioner argues that the rule of these cases is not applicable where, as here, the mortgage obligation is not satisfied or extinguished at the time the property is acquired. There is no merit in that contention. The unsatisfied portion of the mortgage obligation continues as an unsecured debt of the mortgagor. It can be deducted, as a bad debt, only in the year when it becomes worthless. See section.23 (k) (1), Internal Revenue Code. The evidence before us does not show when the debt in question became worthless and petitioner does not claim any bad debt deduction. The respondent is sustained on his adjustment of the deduction claimed. Decision will be entered under Rule 50.	01-04-2023	01-16-2020
https://www.courtlistener.com/api/rest/v3/opinions/4475646/	OPINION. HaRRON, Judge: A gift of property may comprise a gift of a present interest and a gift of a future interest. Fisher v. Commissioner (C. A. 9, 1942), 132 F. 2d 283; and Sensenbrenner v. Commissioner (C. A. 7, 1943), 134 F. 2d 883. The petitioner admits that the gifts to the trust were gifts of future interests with respect to the principal and income accumulations under the rules of Helvering v. Hutchings, 312 U. S. 393 (1940), and United States v. Pelzer, 312 U. S. 399 (1940). The petitioner contends that a gift of a present interest was made with respect to the trust income, which the respondent denies. The petitioner relies upon Commissioner v. Sharp (C. A. 9, 1946), 153 F. 2d 163, and Smith v. Commissioner (C. A. 8, 1942), 131 F. 2d 254.1 The respondent relies upon Vivian B. Allen, 3 T. C. 1224 (1944), and upon the rationale of Commissioner v. Disston, 325 U. S. 442 (1945). The meaning of the clause “future interests in property” in section 1003 (b) (3) of the Code, and in corresponding sections of the earlier revenue acts, and in the applicable regulations of the Commissioner, and the principles to be applied in making the distinction between a gift of a present interest and a gift of a future interest have been clarified by the Supreme Court in Ryerson v. United States, 312 U. S. 405 (1941); United States v. Pelzer, supra; Fondren v. Commissioner, 324 U. S. 18 (1945); and Commissioner v. Disston, supra. See John W. Kieckhefer, 15 T. C. 111. In order to obtain tbe exclusion from taxable net gifts under section 1003 (b) (3), tbe taxpayer must show that tbe donee of the gift received “the right presently to use, possess or enjoy” the property or an interest therein. United States v. Pelzer, supra, p. 403. It must be proved by the taxpayer, Commissioner v. Disston, supra, that property or interest in property which is given is not a future interest within the meaning of the statute and of the regulation which interprets the statute and defines the clause “future interests in property,” which interpretation of the statute has received Congressional approval. Fondren v. Commissioner, supra. The meaning of the term “future interests,” as used in the statute, is an interest in property “whether vested or contingent, * * * which are [is] limited to commence in use, possession, or enjoyment at some future time * * *.” Section 86.11, Regulations 108. The issue in this proceeding, upon its particular facts, turns on whether the interest in trust income which was acquired by the beneficiary of the trust was limited or restricted in his enjoyment, use, or possession thereof at the date of the gift, so that his possession and use were to be in the future. Neither party devotes argument to the point that the beneficiary was a minor at the date of the gift, nor to the motives of the petitioner-donor, so that we are not obliged to consider such aspects of the problem; but since it is a fact that the trust beneficiary was an infant at the dates of the gifts, it should be noted that this factor is relevant, chiefly, to the extent that it has bearing upon the element of the time for use and enjoyment of the trust income, or for the deferment thereof. It was stated in Fondren v. Commissioner, supra, that “The statute in this respect purports to make no distinction between gifts to minors and gifts to adults. If there is deferment in either case the exemption is denied.” Under the trust agreement the trustee, a corporation, is directed to pay to Willis Alexander Wood so much of the net income of the trust in a year “as may be requested in writing by Robert M. Wood, the father of said Willis Alexander Wood” during the life of Robert M. Wood, and after his death, so much of the net income as may be requested in writing by the mother, guardian, or other person having the care and control of Willis Wood. The total payments to Willis Wood in one year shall not exceed the net income of the trust fund for such year. If the payments which are made to the beneficiary in a year are less than the total net income of the trust for such year, the trustee shall accumulate such balance as it retains until the beneficiary becomes 21 years old. Under the trust agreement the donor makes a gift of all accumulated income to Willis Wood, the beneficiary. The trustee is not given any discretion in the matter of making payments of trust income to the beneficiary. Rather, he is empowered to make distributions of income only upon the request, or demand, of a designated person, and unless he receives such request, he is not obligated to make any distribution of income to the beneficiary. Likewise, the beneficiary has no right to receive any of the trust income except after the person designated in the trust agreement has made a written request to the trustee to pay income to the beneficiary. There is, therefore, a restriction upon the trustee’s power to make payments of trust income to the beneficiary, and the beneficiary’s right to receive payment of income is contingent upon the making of the written request by the person designated to do so. It is implicit in the trust provision that the person designated to make demand upon the trustee for payment of income to the beneficiary is given the absolute discretion to decide whether any payment of trust income shall be made by the trustee, in any year, and the discretion is entirely unlimited, unguided, and unrestricted. It also seems to be clear, under the trust provision, that if the designated person makes no request for the payment of income to the beneficiary in a year, the trustee shall accumulate the net income of the trust for such year. However, if this latter construction of the trust provision is doubtful, this matter does not alter the conclusion which is made under the issue presented. There can be no doubt that the trustee is directed to accumulate undistributed income and that he has a right to withhold distribution if no request is made for distribution. It is concluded that the interest of the beneficiary in the trust income was restricted and limited by the discretion which the donor gave to the person designated to make the requests to the trustee for the payment of income. Since the person so designated has an absolute and unlimited discretion, the contingency that he will exercise his discretion in favor of the accumulation of income by the trustee is as great as and is equal to the contingency that he will exercise his discretion in favor of the distribution of income to the beneficiary. Furthermore, there is the contingency that he will exercise his discretion at various times in different ways so as to allow varying amounts of income in different years to accumulate, or conversely, to request the payment of income to the beneficiary in varying amounts, depending upon the judgment of the designated person. These contingencies constitute a barrier to the beneficiary’s certain and present use, possession, and enjoyment of all or any definite part of the trust income from year to year and compel the conclusion that at the dates of the gifts in question, the beneficiary, Willis Alexander Wood, did not receive an absolute right to the immediate enjoyment of trust income; that he did not receive the gift of an interest in the trust income which was to commence in use, possession, or enjoyment at the date of the gift; and that he received a gift of an interest in the income which was to commence only at such time as the designated person made written demand on the trustee to distribute income. Since the beneficiary’s right was dependent upon the act of another, whose act was not required to be exercised in his favor “currently,” the beneficiary’s interest in trust income was a “future interest” at the date of the gift within the meaning of that term in the statute. It is so held. It has been held that where a donee’s enjoyment and use of a gift are subject to the exercise of the discretion of a trustee, the donee’s interest is a future interest', and the statutory exclusion has been denied. Welch v. Paine (C. A. 1, 1942), 130 F. 2d 990; Commissioner v. Brandegee (C. A. 1, 1941), 123 F. 2d 58. The same reasoning must be applied where the discretion is placed in someone other than the trustee. It is noted, also, that in determining whether a fiduciary is entitled to take deductions under section 162 of the Code, for purposes of the income tax, and in determining whether a beneficiary is taxable on income, the effectuation of the statutory scheme under section 162 requires determining whether a fiduciary is under an absolute obligation by direction of a trust to pay income to a beneficiary, whether he has done so or not, and whether the beneficiary is entitled to receive income as a matter of right. Plimpton v. Commissioner (C. A. 1, 1943), 135 F. 2d 482, 486; Commissioner v. Stearns (C. A. 2, 1933), 65 F. 2d 371. It has been held, for purposes of section 162, that where it is in the discretion of the trustee either to accumulate or distribute income, the income is taxable to the trust, if there has been no distribution. Plimpton v. Commissioner, supra. It is provided in section 1005 of the Code that the value of a gift at the date of the gift shall be considered the amount of the gift. Where the right of the donee to receive possession of property, or the enjoyment and use of an interest therein, is dependent upon a contingency which carries with it uncertainty as to the value of that which the donee receives, the value of the gift to the donee is not ascertainable. If there can be doubt as to the correctness of our above holding, then we are confronted with the same problem which existed in Commissioner v. Disston, supra, because here, as in that case, the trust provision lacks indicia that there will be “a steady flow of some ascertainable portion of income” to the beneficiary under the requirements of the trust. In this situation, the value of a gift of an interest in trust income cannot be ascertained through the application of any actuarial methods. When a taxpayer is unable to-ascertain the value or amount of a gift for which he seeks exclusion or deduction from the amount of taxable gifts, the exclusion or deduction must be denied, and the result is of the taxpayer’s making. Robinette v. Helvering, 318 U. S. 184; Commissioner v. Disston, supra; Vivian B. Allen, supra; Welch v. Paine, supra. This Court has previously considered the decision in the case of Smith v. Commissioner, supra. See Mary M. Hutchings, 1 T. C. 692, 697, affd., 141 F. 2d 422. The Smith case is distinguishable on the facts from this proceeding for the same reasons as we discussed in the Hutchings case. The Sharp case, supra, on which petitioner relies, is likewise distinguishable. Upon review of the Sharp case, the Court of Appeals concluded that under that trust, the trustee “had no discretion to determine if he would or would not pay over the income” to the beneficiary, and that “the trustee had no right to withhold income of the trust estate.” The respondent’s determinations are sustained. Decision will he entered for the respondent. The petitioner relies upon other cases which can no longer be followed because they were decided upon the authority of Commissioner v. Wells (C. A. 7, 1937), 88 F. 2d 339, which was, in effect, overruled by Helvering v. Hutchings, 312 U. S. 393, and United States v. Pelzer, 312 U. S. 399. See Commissioner v. Gardner (C. A. 7, 1942), 127 F. 2d 929.	01-04-2023	01-16-2020

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