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https://www.courtlistener.com/api/rest/v3/opinions/4622508/	Eugene E. Moore, Mary E. Moore v. Commissioner.Moore v. CommissionerDocket No. 35384.United States Tax Court1952 Tax Ct. Memo LEXIS 1; 11 T.C.M. (CCH) 1222; T.C.M. (RIA) 53004; December 31, 19521 Petitioner, a railway mail clerk, resided in Waycross, Georgia, and worked on trains running between Waycross and Albany, Georgia. Albany was petitioner's terminal post of duty, and his travel allowance, salary, and time were computed therefrom. Petitioner deducted $835.63 on his 1948 income tax return for meals, lodging, and incidental expenses incurred principally at Albany between scheduled runs. Held, such expenditures were not traveling expenses within the meaning of section 23 (a) (1) (A) of the Internal Revenue Code. E. E. Moore, Jr., Esq., 175 Auburn Ave., Atlanta, Ga., for the petitioners. Leigh A. Crockett, Esq., for the respondent. RICEMemorandum Findings of Fact and Opinion This proceeding2 in volves an income tax deficiency for 1948 in the amount of $203.92. The issue is whether respondent properly disallowed a deduction of $835.63 claimed as traveling expenses under section 23 (a) (1) (A) of the Internal Revenue Code. Findings of Fact Petitioners, husband and wife, filed a joint income tax return for 1948 with the collector of internal revenue for the district of Georgia. They have resided in Waycross, Georgia, since about 1909, where they have raised a family, established social and religious ties, and have their voting residence. Eugene E. Moore (hereinafter referred to as the petitioner) has been continuously employed for over 40 years as a mail clerk by the Railway Mail Service of the Post Office Department. In or about 1921, the Railway Mail Service assigned petitioner to the Waycross and Albany run of the Railway Post Office and such assignment continued through the year 1948. A schedule of the trains running between Albany, Georgia, and Waycross, Georgia, on which petitioner served as a railway mail clerk during 1948 was approximately as follows: Train No. 95Lv. Albany2:45 a.m.Ar. Waycross5:40 a.m.Train No. 18Lv. Waycross9:20 a.m.Ar. Albany12:35 p.m.Train No. 17Lv. Albany4:20 p.m.Ar. Waycross7:10 p.m.Train No. 94Lv. Waycross10:50 p.m.Ar. Albany2:00 a.m.3 Petitioner's terminal post of duty, or the service head-out for his runs, was Albany. His work day started about two hours before the train left Albany, and was completed when he returned to Albany. He received credit for the entire working time covered by each round trip. When petitioner was on a series of round trips, which was called a tour of duty, he incurred expenses for meals, lodgings, and incidentals. These expenses were incurred principally in Albany between his scheduled runs. When petitioner had a period of days off between tours of duty, he returned to Waycross. The following schedule shows petitioner's daily runs by trains, his single days off, his lay-off time spent at Waycross, and his days spent going back and forth (deadhead) from Waycross to his terminal post of duty (Albany) for a typical month (September) during the taxable year: DATES123456789101112131415TRAINSDay171717Day9595Dead-Lay-Off SpentDead-Off949494Off1818headat HomeheadDATES161718192021222324252627282930TRAINS959595951717Day171717Day9595Dead-Lay181818189494Off949494Off1818headOff4 Petitioner's orders and instructions pertaining to his employment and duties were issued out of the district superintendent's office of the Railway Mail Service in Atlanta, Georgia. The Railway Mail Service maintained no headquarters or office in connection with petitioner's employment in Albany. Petitioner's travel allowance, salary, and time were computed from Albany although he continued to live in Waycross. During the taxable year petitioner received a travel allowance from his employer in the amount of $234.80. The amount of this travel allowance was based upon the time his employment required him to be away from his terminal post of duty in Albany, including time spent in Waycross. On the joint return for 1948, petitioner reported total compensation from the Post Office Department of $4,550.65, consisting of $4,315.85 salary and $234.80 travel allowance, and claimed traveling expenses of $1,070.43. The items making up the deduction were $806.25 for 645 meals for 215 days away from home, $240 for room, fuel, and lights, and $24.18 for telephone. In determining the deficiency, the respondent allowed the $234.80 travel allowance as a deduction, but disallowed the remaining5 $835.63 claimed by petitioner. Opinion RICE, Judge: Section 23 (a) (1) (A) of the Internal Revenue Code authorizes a taxpayer to deduct as trade or business expenses " * * traveling expenses (including the entire amount expended for meals and lodging) while away from home in the pursuit of a trade or business; * * ". If, however, the claimed expenses are personal, living, or family expenses, their deduction is expressly prohibited by section 24 (a)(1) of the Code. Assuming, without deciding, that the amounts involved were actually expended, we are not convinced that such expenses were incurred while petitioner was "away from home in the pursuit of a trade or business". Petitioner resided in Waycross as a matter of personal choice. His terminal post of duty was Albany, and his scheduled runs began and ended there. When starting a tour of duty, he had to deadhead from Waycross to Albany to begin his day's work. When he finished his tour of duty and had a few days' lay-off, he had to deadhead from Albany to Waycross. If he had lived in Albany, it would have been unnecessary for petitioner to deadhead back and forth from the place he lived to the starting6 point of each day's run. It would also have been unnecessary for him to spend so much money for meals and lodging in Albany. Such expenses, therefore, resulted from petitioner's election to keep his place of abode in Waycross. In our opinion, the expenses were personal living expenses of the petitioner, and had no direct connection with carrying on the trade or business of his employer. The necessity for a direct connection between the expenditure and the carrying on of the trade or business of the taxpayer or of his employer was pointed out by the Supreme Court in Commissioner v. Flowers, 326 U.S. 465">326 U.S. 465 (1946). This was one of three conditions which the Court said a taxpayer must satisfy before he is entitled to deduct traveling expenses under section 23 (a) (1) (A). Another of the conditions under the Flowers rule which petitioner cannot satisfy is that the expenses must be incurred while "away from home". The courts have consistently construed this statutory phrase to mean the taxpayer's "place of business, employment, or post or station at which he is employed". Raymond E. Kershner, 14 T.C. 168">14 T.C. 168, 174 (1950), and cases there cited; Carragan v. Commissioner, 197 Fed. (2d) 246*7 (C.A. 2, 1952); Fred Marion Osteen, 14 T.C. 1261">14 T.C. 1261 (1950); cf. David G. Anderson, 18 T.C. 649">18 T.C. 649 (1952), where the taxpayer, a railway express messenger, was allowed to deduct the expense of meals purchased while traveling away from his home terminal. Since petitioner fails to satisfy two of the three conditions which must be met under the rule of the Flowers case, Decision will be entered for the respondent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622509/	RUSSELL A. WARD and PATRICIA A. WARD, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentWard v. CommissionerDocket No. 11515-83.United States Tax CourtT.C. Memo 1984-424; 1984 Tax Ct. Memo LEXIS 249; 48 T.C.M. (CCH) 815; T.C.M. (RIA) 84424; August 8, 1984. Albert E. Anderson, for petitioners. Mark H. Howard, for respondent. SWIFTMEMORANDUM FINDINGS OF FACT AND OPINION SWIFT, Judge: In a statutory notice dated February 13, 1983, respondent determined a deficiency of $9,438.00 in petitioners' 1979 Federal income tax liability. Following concessions by petitioners, the only issue is the allowability of a $58,892.00 deduction 1 which petitioners claimed as a business bad debt. 251 FINDINGS OF FACT Some of the facts have been stipulated and are so found. The petitioners, Russell A. Ward and Patricia A. Ward, are husband and wife and resided in Wheat Ridge, Colorado, at the time they filed their petition herein. Petitioners timely filed their 1979 joint Federal income tax return, Form 1040, and subsequently filed a timely amended return, Form 1040X. Patricia A. Ward is a petitioner in this case solely because she joined in filing those returns with Russell A. Ward. Subsequent references to "petitioner" refer only to Russell A. Ward. Petitioner is and has been employed full-time as an airline pilot for United Airlines for approximately twenty-eight years. Pursuant to regulations of the Federal Aviation Administration, he must retire upon reaching his 60th birthday, which will occur in February of 1985. The issue in this case arises out of petitioner's investment in a restaurant in Aspen, Colorado, known as "Don Giovanni's Fiesta Roma Ristoranti." The restaurant was owned by a corporation named "Don Giovanni's, Inc. (hereinafter referred to as "DGI"). Because of its location, the restaurant's business was seasonal in nature and primarily served skiers252 who visited the popular recreational area during the winter months. DGI was incorporated under the laws of the State of Colorado on October 24, 1973. At the time of incorporation, the president and sole shareholder was Robert Rynearson. Details concerning the capital which was contributed to DGI are not contained in the record. The original articles of incorporation did not include a plan for the issuance of Section 1244 stock. Petitioner became involved in the business in or around 1975, in hopes of developing a supplementary retirement income through the restaurant. Initially, his involvement consisted of advancing money and visiting the restaurant once or twice a month in order to review the books and records and to check generally on the operations of the business. During 1975 and 1976, Petitioner made a number of cash advances to DGI and/or to Robert Rynearson personally for use in operating the restaurant. The dates of the advances, amounts and interest rates are set forth below: DateAmountInterest RateJan 26, 1975$20,000.0012%June 4, 197510,000.0010%Nov. 9, 19751,850.00None statedDec. 29, 197510,000.00None statedDec. 29, 197525,000.009.5%Dec. 9, 19764,864.90None stated$71,714.90Total PrincipalAmount of Advances253 All advances except the last one were evidenced by promissory notes of DGI. The first three notes were also co-signed by Robert Rynearson. The last advance was a direct payment by petitioner to the respondent of employment taxes owed by DGI. On December 9, 1976, an agreement was entered into by petitioner, DGI, and Robert Rynearson in order to settle litigation which was then pending between them (the exact nature of which is not reflected in the record). As part of this agreement, all prior advances made by petitioner to DGI and/or Robert Rynearson were consolidated and a new promissory note was executed. The total of the advances made by petitioner to DGI and/or Robert Rynearson as of the date of the agreement was $71,714.90. Including accrued interest, the parties agreed upon a total liability of $80,821.87. A new promissory note was executed for this amount, bearing an interest rate of 9 1/2% and specifying that it was payable 30 days from December 9, 1976. The new note was signed by DGI and Robert Rynearson personally. The capital stock of DGI was pledged as security for the note. DGI and Robert Rynearson defaulted on the new note and petitioner, acting pursuant254 to the terms of the security agreement under Colorado law, foreclosed and became the owner of all GSI stock on or about February 11, 1977. Initially, Mr. Rynearson contested the legality of petitioner's foreclosure action in court. However, on March 12, 1977, a settlement agreement of the foreclosure action was reached. The primary provisions of that agreement were that Rynearson agreed not to contest petitioner's foreclosure action by which petitioner received ownership of all GSI stock, and petitioner agreed to make all reasonable efforts to sell the stock to a third party by placing it on the market within one year from the date of the agreement. The "prime consideration" was stated to be that of selling a viable business entity, and to that end petitioner was allowed to operate the business as he saw fit prior to the contemplated sale. The agreement also provided for the division of the ultimate sales proceeds if and when the business was sold. First, outside creditors were to be paid. Then, petitioner was to be paid the amount owed to him as a result of the note dated December 9, 1976. Finally, any remaining proceeds were to be divided 80% to petitioner and 20% to Rynearson. 255 The same agreement also provided that "at the time of execution of this agreement, Rynearson shall be released from any obligations he has under the note dated December 9, 1976, given by Rynearson and the Corporation to Ward." There was no comparable provision releasing the corporation from liability. On February 13, 1977, a special meeting of the Board of Directors of DGI was held. At this meeting, a plan was adopted to issue stock pursuant to Section 1244 of the Internal Revenue Code of 1954, as amended. On the same date, DGI issued 3,750 new shares of stock to petitioner. Petitioner, as the sole shareholder, managed the restaurant himself for over a year, i.e., from February, 1977 to April, 1978. He was evidently fairly successful, with the corporation grossing some $180,000 to $200,000 per year and reducing the outstanding debt by some $23,000, during which time petitioner advanced $13,000 of his own money. The corporation therefore made an economic "profit" of approximately $10,000 during this period, and petitioner felt that he had turned the business around. The restaurant was listed with a real estate broker on January 30, 1978 at a stated256 price of $172,500.00. An offer of $75,000 was received and a contract for purchase and sale of the assets of the restaurant was drawn up on or about April 16, 1978. The validity of the contract was made contingent upon the successful renegotiation of the lease by the purchaser with the landlord. The purchaser was unable to renegotiate the lease and therefore nullified the contract. Although the time frame is unclear from the record, the landlord subsequently served notice of eviction and evicted DGI.2 A lawsuit was filed by DGI against the landlord. However, the landlord filed a bankruptcy petition in Federal court that is apparently still pending. Due to the fact that petitioner's claim against the landlord is an unsecured claim and to the presence of many secured claims, the likelihood of any recovery in that lawsuit is minimal. Respondent does not contest that petitioner's investment/loans became worthless in 1979. 257 OPINION The issue to be decided in this case is whether petitioners are entitled to an ordinary deduction as a result of a business bad debt for the cash advances that petitioner made to DGI. Respondent argues that the advances constituted contributions to capital or, in the alternative, that the debts were non-business bad debts. The initial inquiry, therefore, is whether the advances involved constituted bona fide loans or were actually contributions to capital, as respondent contends. Analysis of this issue involves a consideration of the facts in light of the traditional debt versus equity criteria that have been identified by this Court and others. These criteria include, among others, the formal indicia of debt, the availability of outside credit, the repayment history and prospects, whether there was subordination of the debt, the use made of the loan proceeds, whether participation in management occurred as a result of the advances, the adequacy of the capital structure (including the debt/equity ratios) and the intent of the parties. See, e.g., Dixie Dairies, Corp. v. Commissioner,74 T.C. 476">74 T.C. 476, 493 (1980); United States v. Uneco, Inc.,532 F.2d 1204">532 F.2d 1204, 1207-1208 (8th Cir. 1976).258 Having considered the record herein in light of the above criteria, we find that the advances were bona fide loans. With one exception (i.e., direct payment by Ward of the employment taxes,) promissory notes were issued for each advance made, and these usually included a stated interest rate and due date. Prospects for repayment of the notes appeared fairly good when the loans were made. There was no subordination of the loans when they were incurred.Significant participation in management by petitioner did not occur until after he took over ownership of the stock. Although there is not sufficient evidence in the record from which we can pass judgment on the adequacy of DGI's capital structure, we find that the parties intended that the advances be treated as debt. It is not true, as respondent suggests, that the outstanding debt was extinguished when petitioner took over ownership of the stock. The settlement document of March 12, 1977, provides that Mr. Rynearson was relieved of personal liability on the outstanding debt, but it did not so provide with respect to the corporation. Indeed, the same document provided that petitioner would be paid in amount owed to him under the259 promissory note dated December 9, 1976, out of the sales proceeds. Having determined that the advances involved herein were bona fide debt, we now consider whether these debts constituted business or nonbusiness bad debts. Full deductibility from ordinary income is allowed for the worthlessness of business bad debts, whereas worthless nonbusiness bad debts are accorded short term capital loss treatment. Sections 166(a), and 166(d). 3In order to qualify as a business bad debt, the debt must have been created or acquired in connection with a trade or business of the taxpayer (section 166(d)(2)(A)), or the loss must have been incurred in petitioner's trade or business (section 166(d)(2)(B)). Petitioner must demonstrate that the loss resulting from the worthlessness of the debt bears a "proximate relationship" to a trade or business in which he was engaged at the time the debt became worthless. This is a question of fact. Sec. 1.166-5(b), Income Tax Regs.; United States v. Byck,325 F.2d 551">325 F.2d 551 (5th Cir. 1963).260 The test for determining whether a particular debt bears a "proximate relationship" to the taxpayer's trade or business was set forth by the Supreme Court in United States v. Generes,405 U.S. 93">405 U.S. 93 (1972), as follows: [I]n determining whether a bad debt has a "proximate" relation to the taxpayer's trade or business, as the Regulations specify, and thus qualifies as a business bad debt, the proper measure is that of dominant motivation, and that only significant motivation is not sufficient. (405 U.S. at 103). It has been held that a worthless bad debt resulting from a loan by a shareholder to a corporation may qualify as a business bad debt if the shareholder was engaged in the trade or business of promoting, organizing, financing, and selling businesses. Giblin v. Commissioner,227 F.2d 692">227 F.2d 692 (5th Cir. 1955). It is clear, however, that if the interest of the lender is predominantly that of an investor, the debt will be characterized as a nonbusiness bad debt, because management of one's own investments, no matter how extensive, does not constitute a trade or business. Higgins v. Commissioner,312 U.S. 212">312 U.S. 212 (1941).261 In Whipple v. Commissioner,373 U.S. 193">373 U.S. 193 (1963), the taxpayer was involved in numerous business ventures. The transactions in question consisted of loans which the taxpayer had made to a certain corporation in which he was a shareholder and for which he performed very substantial services. The Court held that the debts were nonbusiness bad debts and noted as follows: Devoting one's time and energies to the affairs of a corporation is not of itself, and without more, a trade or business of the person so engaged. Though such activities may produce income, profit or gain in the form of dividends or enhancement of the value of an investment, this return is distinctive to the process of investing and is generated by the successful operation of the corporation's business as distinguished from the trade or business of the taxpayer. (373 U.S. at 202). Thus, for these purposes, a corporation is treated as a taxable entity separate from an individual taxpayer, and the trade or business of the corporation is not attributable to the individual. See, e.g., Deputy v. DuPont,308 U.S. 488">308 U.S. 488, 493-494 (1940); Felmann v. Commissioner,77 T.C. 564">77 T.C. 564, 568 (1981).262 We believe that Whipple,supra, is dispositive of the instant case. Petitioner does not allege that he was in the business of promoting or selling businesses, but does allege that he was in the restaurant business. In order to establish a business separate and apart from that of the corporation, petitioner would have to show that the compensation he sought was other than the normal investor's return. Whipple,supra at 203. This he has failed to do. Petitioner states on brief that he made the loans for the purpose of obtaining a retirement trade or business. By this admission, it is clear that petitioner did not consider himself to be in the restaurant business at the time he made the loans, nor at the time they became worthless. Rather, he looked forward to the time when he would enter the restaurant business upon retiring from his trade or business of being an airline pilot. Petitioner attempts to distinguish Generes,supra, and Whipple,supra, on the basis that he, unlike the taxpayers in those cases, was not a shareholder at the time he made the loans.This difference is not significant263 in light of petitioner's failure to establish that he was engaged in any trade or business (separate from the corporation) to which the debts were proximately related. Also, petitioner had become a shareholder, indeed the sole shareholder, by the time the debts became worthless which, according to Sec. 1.166-5(b), Income Tax Regs., is the relevant time upon which our inquiry should focus for purposes of section 166(d)(2)(B). The factual situation herein is very similar to that in Hodgson v. Commissioner,T.C. Memo 1979-8">T.C. Memo. 1979-8. The petitioner in that case, an airline pilot employed by National Airlines, became a stockholder in and advanced money to a closely held corporation engaged in the aviation and industrial supply business. As in the instant case, petitioner became involved in the corporation with the hope that it would provide for him in his retirement years. This Court found that petitioner's dominant motive for becoming involved with the corporation was that of investment, and made the following observations: Petitioner's reasons for investing in IAS had nothing to do with protecting or somehow furthering his job at National, indeed they looked to a time264 when he would be retired from National. Since petitioner's motivation was aimed at possible future benefits, such as a return on his investment and possible future post-retirement employment, we conclude that petitioner's loans to IAS were nonbusiness debts whose worthlessness in 1971 resulted in a short term capital loss to petitioner * * . (38 T.C.M. (CCH) 21">38 T.C.M. 21, 25; 48 P-H Memo. T.C. par. 79,008 at 79-25). The motivation of petitioner herein was very similar to that of the taxpayer in Hodgson v. Commissioner,supra. Both looked to the corporation in which they were involved as a vehicle to provide future retirement benefits. In both cases, the loans extended to the corporations were not related to any current trade or business conducted by them when the debts became worthless. In light of the above analysis, we find that petitioner's dominant motivation was investment, and we hold that the debts involved were nonbusiness bad debts. Petitioner is entitled to a short-term capital loss, subject to the restrictions imposed on the deduction of capital losses by section 1211 and other appropriate code sections. Accordingly, Decision will265 be entered for the respondent.Footnotes1. The actual deduction claimed on petitioner's Federal income tax return was $71,715. However, the parties have stipulated that $12,823 of this amount will be allowed as an ordinary loss, pursuant to section 1244 of the Internal Revenue Code of 1954↩, as amended. This represents the portion of petitioner's stock that was issued pursuant to a plan under that Code section following petitioner's acquisition of the stock involved in this case.2. The eviction explains, in part, the sparseness in the evidence of records pertaining to the business. Petitioner states that they were stored on the premises and that he has been unable to obtain them due to the eviction and lack of cooperation on the part of the landlord.↩3. Unless otherwise indicated, all section references refer to the Internal Revenue Code of 1954, as amended, and in effect during the taxable year in issue.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622510/	JEROME E. KOZLOWSKI AND MARTHA E. KOZLOWSKI, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentKozlowski v. CommissionerDocket No. 31144-86United States Tax CourtT.C. Memo 1993-430; 1993 Tax Ct. Memo LEXIS 442; 66 T.C.M. (CCH) 754; September 15, 1993, Filed 442 An appropriate order will be issued and decision will be entered under Rule 155. For petitioners, Francis Burton Doyle. For respondent, Lamont R. Olson. FAYFAYMEMORANDUM OPINION FAY, Judge: This case was assigned to Special Trial Judge Carleton D. Powell pursuant to section 7443A(b)(4) and Rules 180, 181, and 183. 1 The Court agrees with and adopts the opinion of the Special Trial Judge which is set forth below. OPINION OF THE SPECIAL TRIAL JUDGE POWELL, Special Trial Judge: By notice of deficiency dated April 29, 1986, respondent determined a deficiency in petitioners' Federal income tax and an addition to tax under section 6653(a) for the taxable year 1980 in the respective amounts of $ 58,541 and $ 2,927. Respondent also determined that the deficiency was a substantial underpayment due to a tax motivated transaction443 and that the increased rate of interest under section 6621(c) was applicable. Petitioners filed a timely petition with this Court. At the time the petition was filed petitioners resided in Saratoga, California. The deficiency in this case results, in part, from the disallowance of a loss in the amount of $ 126,866 claimed with respect to alleged straddle transactions of forward contracts for government-backed financial securities with First Western Government Securities, Inc. (First Western). 2 The First Western losses were the subject of the Court's opinion in Freytag v. Commissioner, 89 T.C. 849">89 T.C. 849 (1987), affd. 904 F.2d 1011">904 F.2d 1011 (5th Cir. 1990), affd. on other grounds 501 U.S. , 111 S. Ct. 2631 (1991). The trial in that case lasted more than 16 weeks. The record includes a transcript containing more than 10,000 pages and approximately 100,000 exhibits. The Court found, based on that record, inter alia, that: "The transactions between First Western and its customers were illusory and fictitious and not bona fide transactions." Id. at 875. The Court also held444 that, even if the transactions had substance, they "were entered into primarily, if not solely, for tax-avoidance purposes." Id. at 876. Based on the finding that the transactions were not bona fide, the Court concluded that additional interest under section 6621(c) was due on the underpayments. Id. at 886-887. In concluding that the transactions were not bona fide, the Court examined various aspects of the First Western program, including the risk of profit and loss, the hedging operation, the margins required and fees charged, the pricing of the forward contracts, and the manner in which the transactions were closed. 445 In all of these areas we found that the First Western operations were deficient and not conducted as they should have been if bona fide financial transactions were being conducted. We also pointed out that there were other "gremlins" in First Western's world that dispelled the notion that these transactions were bottomed in financial reality -- reversing transactions months later, confirmations being months late, transactions being made with no documentation, etc. Id. at 882. In the case currently before the Court, petitioners concede that their transactions with First Western were conducted in the same way as the transactions discussed in Freytag, i.e., the same pricing algorithms were used and the transactions were closed in the same way. Based on petitioners' concessions, respondent moved for partial summary judgment with regard to that part of the deficiency arising from the disallowance of the First Western losses and whether the underpayment of tax resulting from those losses is subject to increased interest under section 6621(c). Petitioners apparently do not oppose the motion for partial summary judgment with respect to their liability446 for the deficiency resulting from the First Western losses, although they do not concede the issue. They do, however, oppose the motion with respect to the increased interest under section 6621(c) and they contest the addition to tax for negligence under section 6653(a). A trial was held concerning the latter issue. We first discuss respondent's motion for partial summary judgment as it pertains to the deficiency resulting from the First Western losses claimed and with respect to the increased interest provisions. 1. Summary JudgmentSummary judgment under Rule 121 is appropriate when "there is no genuine issue as to any material fact and * * a decision may be rendered as a matter of law." Krause v. Commissioner, 92 T.C. 1003">92 T.C. 1003, 1016 (1989). We believe that partial summary judgment is appropriate with respect to the First Western loss claimed and the increased interest under section 6621(c) based on our opinion in Freytag v. Commissioner, supra.While petitioners were not parties to the Freytag litigation and res judicata does not apply, the doctrine of stare decisis is applicable. Simmons v. Union News Co., 341 F.2d 531">341 F.2d 531, 533 (6th Cir. 1965);447 see also Leishman v. Radio Condenser Co., 167 F.2d 890 (9th Cir. 1948). Petitioners concede that their First Western transactions are identical to the transactions in Freytag v. Commissioner, supra.This Court found that based on that record the First Western transactions were illusory and fictitious in the Freytag case. That holding is controlling here. Petitioners contend that the increased interest under section 6621(c) is inapplicable to them, relying on Heasley v. Commissioner, 902 F.2d 380">902 F.2d 380 (5th Cir. 1990), revg. T.C. Memo. 1988-408. 3 Section 6621(c)(1) provides that, if there is a "substantial underpayment attributable to tax motivated transactions," the interest payable under section 6601 "shall be 120 percent of the underpayment rate". A substantial underpayment attributable to a tax motivated transaction means "any underpayment of taxes * * attributable to 1 or more tax motivated transactions if the amount of the underpayment for such year * * * exceeds $ 1,000." Sec. 6621(c)(2). The term "tax motivated transactions" means, inter alia, 448 "any sham or fraudulent transaction." Sec. 6621(c)(3)(v). From a literal reading of the statute, if a transaction is determined to be a "sham", the increased interest applies. In Freytag v. Commissioner, supra at 887, we sustained respondent's determinations that section 6621(c) applied to the First Western underpayments based on our finding that the transactions were "shams." Since petitioners concede that their transactions with First Western were identical to those in Freytag, additional interest under section 6621(c) is applicable here. See Howard v. Commissioner, 931 F.2d 578">931 F.2d 578, 582 (9th Cir. 1991), affg. T.C. Memo. 1988-531. 449 Heasley v. Commissioner, supra, is inapposite. In Heasley, this Court found that the transactions entered into were not entered into for profit, and, therefore, under section 301.6621-2T Q-4, Temporary Proced. and Admin. Regs., 49 Fed. Reg. 50392 (Dec. 28, 1984), the increased interest under section 6621(c) was applicable. Heasley v. Commissioner, T.C. Memo. 1988-408. The Court of Appeals concluded, however, that the taxpayers had "the requisite profit motive." Heasley v. Commissioner, 902 F.2d at 386. While it is true that in Freytag v. Commissioner, supra at 882-886, we held, in the alternative, that the transactions were not entered into for profit, we sustained the additional interest under section 6621(c) on the ground that the transactions factually were "shams", a finding affirmed by the Fifth Circuit, 904 F.2d at 1015-1016, and it is upon that ground that we sustain respondent's determination here. Thus, the determination of a profit motive, so crucial to the Heasley v. Commissioner, supra, result concerning450 section 6621(c), is irrelevant to our holding here. 42. NegligenceRespondent determined that an addition to tax under section 6653(a) was due for negligence. Section 6653(a) provides in relevant part that "If any part of any underpayment * * is due to negligence or intentional disregard of rules and regulations * * * there shall be added to the tax an amount equal to 5 percent of the underpayment." "Negligence is a lack of due care or the failure to do what a reasonable and ordinarily prudent person would do under the circumstances." Freytag v. Commissioner, 849">89 T.C. at 887 (quoting Marcello v. Commissioner, 380 F.2d 499">380 F.2d 499, 506 (5th Cir. 1967), affg. on this issue 43 T.C. 168">43 T.C. 168 (1964)); see also Zmuda v. Commissioner451 . 731 F.2d 1417">731 F.2d 1417, 1422 (9th Cir. 1984), affg. 79 T.C. 714">79 T.C. 714 (1982). Petitioners have the burden of establishing that their actions were not negligent. Zmuda v. Commissioner, supra at 1422. The negligence question focuses on petitioner Jerome Kozlowski. He entered into the transactions with First Western, and we will refer to him hereafter as petitioner. Petitioner contends that the addition to tax under section 6653(a) is unwarranted because he exercised due care when he entered into the transactions with First Western. The gravamens of his contention are that he relied on expert advice and that his motive for entering into the transactions was not to avoid taxes. Petitioner has a background in engineering. Over the years he had made investments in real estate and in other ventures. He was told about the First Western program by Mr. Disser, another engineer with whom petitioner worked. It does not appear that Mr. Disser had any expertise in dealing with straddles in forward contracts that were the heart of the First Western program. Petitioner relied on the information concerning the program452 that was supplied by First Western. This information contained a legal opinion as to the tax aspects of the program. Petitioner also relied on a certified public accountant who prepared his returns. It does not appear that the accountant had any expertise with forward contracts of the nature allegedly traded by First Western. Petitioner testified that most of his net worth was invested in short-term (12 to 18 month) bonds and that he invested in the First Western program to insure that if interest rates fell his income would be protected. Petitioner, however, could not explain how the program would accomplish this result. Furthermore, his interest rate forecast 5 submitted to First Western does not indicate whether interest rates would move up or down. 6453 With regard to petitioner's reliance on experts, such reliance, standing alone, will not insulate a taxpayer from the addition to tax for negligence. It must be shown that the expert had the expertise and knowledge of the pertinent facts to render such an opinion on the subject matter. Freytag v. Commissioner, 89 T.C. at 888. Petitioner has totally failed to establish that anyone he consulted with was qualified by reason of such expertise and knowledge to give an opinion whether the transactions of the First Western program were bona fide. It must be noted that these transactions could hardly454 be described as being run-of-the-mill, and petitioner admits that he did not understand the transactions. They involved alleged forward contracts to purchase and sell millions of dollars of mortgage backed securities. See Freytag v. Commissioner, 849">89 T.C. at 862-863. There was no market for these contracts, and First Western was on both sides of the transactions. Furthermore, the ratio of the tax losses compared with the payments was huge, between 8:1 and 10:1. This latter fact was particularly important because, as the Court of Appeals for the Ninth Circuit recognized in Zmuda v. Commissioner, 731 F.2d at 1422, during this period there was "extensive continuing press coverage of questionable tax shelter plans." As we noted in our opinion in Freytag v. Commissioner, 89 T.C. at 888, given this scenario, a taxpayer could not merely rely on the documents supplied by First Western and further investigation was clearly mandated. If there had been any serious examination of the program "No reasonable person would have expected the scheme to work." Id. at 889. 455 Compare Hanson v. Commissioner, 696 F.2d 1232">696 F.2d 1232, 1234 (9th Cir. 1983), affg. T.C. Memo. 1981-675. Finally, we note that petitioner's alleged motive for getting into the First Western transactions is simply cut from whole cloth. Petitioner was at a loss to explain how the program worked, much less how it could have been used to protect a future stream of income. Even if the transactions had been bona fide, it would have been virtually impossible to use the First Western program as a device for hedging interest rates. The raison d'etre of the program was to convert ordinary income into long term capital gains and defer income. Furthermore, any true hedging of interest rates would depend on there being the potentiality for delivery of the underlying securities. That was not a part of First Western's world. See Freytag v. Commissioner, 849">89 T.C. at 857. Moreover, even if this were a possibility, First Western's documents do not support petitioner's argument of a hedge of interest rates. Petitioner has not established that he had a profit motive in entering into these transactions. 7456 Petitioners have not shown that they used due care, and respondent's determination with respect to the addition to tax under section 6653(a) is sustained. An appropriate order will be issued and decision will be entered under Rule 155. Footnotes1. Unless otherwise indicated, section references are to the Internal Revenue Code in effect for the year in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.↩2. In the notice of deficiency, respondent made other adjustments to interest income, business expenses, boat and aircraft expenses, rental losses, and income from the sale of a capital asset. By stipulation, the parties have resolved these issues. The other adjustments are mathematical and will be resolved during the Rule 155 computations.↩3. Petitioners also contend that the increased interest provisions are not constitutional. We have rejected that argument. Solowiejczyk v. Commissioner, 85 T.C. 552">85 T.C. 552 (1985), affd. without published opinion 795 F.2d 1005">795 F.2d 1005↩ (2d Cir. 1986).4. Furthermore, as we discuss infra, Heasley v. Commissioner, 902 F.2d 380 (5th Cir. 1990), revg. T.C. Memo. 1988-408↩, is otherwise distinguishable.5. An interest rate forecast was an intergral part of First Western's program. The customer would forecast whether interest rates would increase or decrease in the future. Theoretically, this forecast was used in determining the long and short legs of the straddles. See Freytag v. Commissioner, 89 T.C. 849">89 T.C. 849, 852 (1987), affd. 904 F.2d 1011">904 F.2d 1011 (5th Cir. 1990), affd. 501 U.S. ↩, 111 S. Ct. 2631 (1991). As a practical matter, the forecast had little to do with the alleged transactions.6. The record is somewhat unclear as to whether petitioner dealt directly with First Western or through some type of a joint venture with Mr. Disser and a Mr. Fox. Mr. Disser's interest rate forecast was that rates would go up. If that controlled the alleged trading, and if the First Western program could have been used as a hedging device, then the account was hedged in the wrong direction.↩7. In discussing Heasley v. Commissioner, supra↩, and sec. 6621(c), we noted that the case was distinguishable. The Court of Appeals in that case found that there was a profit motive. There is no credible evidence of a profit motive here.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622511/	LOWELL L. AND MARILYN A. ROBERTSON, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, RespondentRobertson v. CommissionerDocket No. 15586-88United States Tax CourtT.C. Memo 1994-424; 1994 Tax Ct. Memo LEXIS 432; 68 T.C.M. (CCH) 540; T.C.M. (RIA) 94424; August 23, 1994, Filed 432 Decision will be entered under Rule 155. For petitioners: Michael I. Saltzman, Barbara T. Kaplan, and Thomas M. Lawler, Jr.For respondent: Michael D. Wilder, Steven R. Winningham, Paul N. Schneiderman, and Paulette Segal. WHALENWHALENMEMORANDUM FINDINGS OF FACT AND OPINION WHALEN, Judge: Respondent determined the following deficiency and additions to tax in petitioners' Federal income taxes: Additions to TaxYearDeficiencySec. 6653(a)(1) Sec. 6653(a)(2) Sec. 66611984$ 16,135$ 806.7550% of the $ 4,033.75interest due on $ 16,135 All section references are to the Internal Revenue Code as amended and in effect for the years in issue, unless otherwise stated. In the notice of deficiency, respondent also asserted an enhanced rate of interest under section 6621(c). We note that section 6621(c) was designated section 6621(d) during the year in question; however, for simplicity, we refer to the provision as section 6621(c). The issues for decision are as follows: (1) Whether the equipment-leasing transaction entered into by the Rosecrea Trust was a sham because it was not entered into with a business purpose and lacked economic433 substance; (2) whether the Rosecrea Trust acquired the benefits and burdens of ownership of the equipment in issue; (3) whether the purchase money note executed by the Rosecrea Trust represented bona fide indebtedness; (4) whether petitioners were "at risk" under section 465 for all or any part of the liabilities incurred by the Rosecrea Trust to acquire the equipment; (5) whether any resulting underpayment is due to negligence or intentional disregard of rules or regulations; (6) whether any resulting underpayment is a substantial understatement for which there was no substantial authority; (7) whether the transaction at issue is a "tax motivated transaction" resulting in the imposition of interest at the 120-percent rate provided by section 6621(c). 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. Petitioners filed a joint Federal income tax return for their 1984 taxable year. They resided in Paradise Valley, Arizona, when they filed their petition herein. References to "petitioner" are to Lowell L. Robertson. Petitioner is a "unitholder" in an entity called 434 the Rosecrea Trust (the Trust). The Trust was formed by 24 partners and principals of the accounting firm of Touche Ross & Co. (Touche Ross) specifically to facilitate their participation in the transaction at issue. There is no indication that the Trust engaged in any other activities. Respondent has not challenged the passthrough nature of the Trust. All of the issues presented herein involve the Trust's purchase and leaseback of interests in computer equipment in December 1982. The Trust bought certain interests in the computer equipment at the end of three series of transactions in which more than 20 entities participated. One series of transactions involved domestically used equipment manufactured by International Business Machines (IBM), another involved domestically used equipment made by Control Data Corp., and the third involved IBM equipment used in Europe. At the end of each of those series, the Trust acquired certain rights to the equipment in question from Systems Leasing, Inc. (Systems), which, in each case, had acquired such rights from one of two entities controlled by Equilease Corp. Acquisition of the Domestic IBM Equipment by Equilease MarketingUnder435 an "Equipment Lease Agreement" (Initial User Lease) dated March 3, 1982, CLG, Inc., agreed to lease certain IBM computer equipment to Burroughs Wellcome Co. (Burroughs), a major pharmaceutical company. Burroughs leased the equipment from CLG, Inc., for a 60-month term beginning April 11, 1982, for a monthly rental of $ 92,675.77. The lease was a "net lease", under which Burroughs was responsible for all costs and expenses arising out of the lease or the use of the equipment. To meet its obligation to Burroughs, CLG, Inc., entered into an agreement with IBM to purchase the following equipment (domestic IBM equipment) for $ 4,004,659: Model/QuantityTypeFunctionDescription 1IBM 3081D16Central processor 1IBM 308216Processor controller 1IBM 30871Coolant dist. unit 1IBM 3278A02Console On April 28, 1982, CLG, Inc., assigned all of its interest in the domestic IBM equipment and the Initial User Lease to CLG Enterprises, a partnership in which CLG, Inc., was a partner. On May 19, 1982, CLG Enterprises borrowed $ 3,726,702 from Burroughs to discharge its debt to IBM in regard to the purchase of the domestic IBM equipment. CLG Enterprises436 issued a promissory note to Burroughs in the principal amount of $ 3,726,702 at a 16-percent annual interest rate. The note required an initial payment of $ 11,434.34 of accrued interest on June 1, 1982, and thereafter monthly payments of $ 92,675.77 over a 58-month period, beginning on July 1, 1982. These monthly note payments precisely offset the payments owed by Burroughs under the Initial User Lease of March 3, 1982. Also, by an "Assignment" dated May 19, 1982, CLG Enterprises assigned to Burroughs all of CLG Enterprise's rights under the Initial User Lease. That assignment provides in pertinent part: FOR VALUE RECEIVED, CLG Enterprises, a Virginia general partnership, (hereinafter called "ASSIGNOR") hereby assigns to Burroughs Wellcome Co. (hereinafter called "ASSIGNEE") all of ASSIGNOR's right, title and interest, but none of ASSIGNOR'S obligations, under the Equipment Lease Agreement dated March 3, 1982 by and between CLG, Inc., as Lessor, and Burroughs Wellcome Co., as Lessee (hereinafter called the "Lease"), and the assignment thereof to ASSIGNOR dated April 28, 1982 (hereinafter called "First Assignment"). * * ASSIGNOR constitutes ASSIGNEE, its successors and 437 assigns, ASSIGNOR's attorney, irrevocably, with full power (in the name of ASSIGNOR or otherwise) to demand, receive and give releases for any and all moneys and claims for money due and to become due under or arising out of the Lease and First Assignment * * * * * ASSIGNOR does hereby warrant and represent that the Lease or First Assignment are in full force and effect; that there is no default or cause for default thereunder; that it has not assigned or pledged and hereby covenants without ASSIGNEE's prior written consent it will not assign or pledge, so long as this Assignment shall remain in effect, the whole or any part of the rights hereby assigned to anyone other than ASSIGNEE, its successors or assigns * * By a "Security Agreement" dated May 19, 1982, CLG Enterprises also granted to Burroughs a security interest in the domestic IBM equipment. CLG Enterprises sold its remaining interest in the domestic IBM equipment to Equilease Marketing Corp. (Equilease Marketing), an unrelated company, on May 12, 1982, for $ 440,512. The "Purchase Agreement" between those two entities acknowledges in the following manner the impending loan transaction with, and assignment to, 438 Burroughs that are described above: To finance the purchase price of the Equipment Seller [CLG Enterprises] expects to obtain a non-recourse loan (the "Loan") from a lender (the "Lender") in an amount not to exceed $ 3,726,702.37, such loan to be secured by a lien on the Equipment and an assignment of basic rental under the Lease and to be fully paid-off by such basic rental * * * * * * Subject to the terms and conditions hereinafter set forth, Seller agrees to sell, assign, transfer and convey to Buyer [Equilease Marketing], and Buyer agrees to purchase from Seller, (i) the Equipment and (ii) all of Seller's right, title and interest in and to the Lease.On May 25, 1982, Burroughs and Equilease Marketing executed a "Consent and Agreement". In that document, Equilease Marketing acknowledges that Burroughs' rights under the Assignment of May 19, 1982, supersede the ownership rights of Equilease Marketing, which were acquired under the Purchase Agreement of May 12, 1982. The Consent and Agreement provides, in pertinent part: WHEREAS CLG [Enterprises] has entered into a Security Agreement (the "Security Agreement") dated May 19, 1982 with [Burroughs] Wellcome pursuant439 to which it has granted [Burroughs] Wellcome a security interest in the Lease and Equipment to secure payment of an Installment Note (the "Note") between CLG [Enterprises], as Maker, and [Burroughs] Wellcome, as Payee, in the amount of $ 3,726,702.38, dated May 19, 1982; and WHEREAS to evidence its grant of a security interest in the Lease to [Burroughs] Wellcome, CLG [Enterprises] and [Burroughs] Wellcome entered into an Assignment (the "Assignment") dated May 19, 1982; * * Equilease [Marketing] acknowledges that it has acquired the Equipment and the Lease subject to the security interest of [Burroughs] Wellcome therein to secure amounts due under the Note and the Security Agreement, such security interest being created by the Security Agreement and the Assignment, and agrees to subordinate its right, title and interest in the Equipment and the Lease to the security interest of [Burroughs] Wellcome, its successors and assigns.Acquisition of the CDC Equipment by Equilease MarketingEarly in 1982, Equilease Marketing purchased the following peripheral equipment (the CDC equipment), from Control Data Corp. for $ 249,622: Model/QuantityTypeFunctionDescription 1CDC 383042Controller with 2 channel switches 2CDC 33502A2Disk storage unit 6CDC 33502B2Disk storage unit 440 Equilease Marketing leased the CDC equipment to First Computer Corp. (First Computer), pursuant to a net lease dated April 23, 1982 (Initial User Lease). The lease calls for First Computer to make payments of $ 7,500 each month over a 37-month term but does not indicate the date on which the lease term was to begin. Pursuant to a "Guaranty" dated June 29, 1982, First Bank System, Inc., guaranteed First Computer's performance under the Initial User Lease. On September 1, 1982, United Jersey Bank (UJB) lent Equilease Marketing $ 214,044. Also on that date, Equilease Marketing issued a note to UJB in the principal amount of $ 214,044. The note bore interest at a 16.75-percent rate and was payable in 36 monthly installments of $ 7,500. On the same date, UJB and Equilease Marketing also entered into a "Loan and Security Agreement" to secure the $ 214,044 loan. The collateral identified in the Loan and Security Agreement consisted of the CDC equipment and Equilease Marketing's rights in the Initial User Lease with First Computer. The agreement provides as follows: Borrower [Equilease Marketing] hereby grants a continuing security interest to UJB in the Collateral including, 441 but not limited to all of the monies, rentals, accounts, accounts receivable, general intangibles, chattel paper, contract rights and all other rights and benefits due and hereafter to become due or otherwise to accrue to the benefit of Borrower pursuant to the Lease * * * and specifically including a security interest in the Computer described in the Lease. * * * UJB is specifically granted the right to demand and receive from the Lessee all monies due and to become due pursuant to the Lease * * By an undated "Acknowledgement of Assignment and Agreement" (Acknowledgement), First Computer agreed to pay directly to UJB the $ 7,500 monthly rental fee that it owed to Equilease Marketing under the Initial User Lease. As of September 1, 1982, 36 monthly payments of $ 7,500 remained unpaid under the Initial User Lease. Thus, the payments from First Computer would precisely satisfy the obligations of Equilease Marketing to UJB. Sales to Equilease Partnership and to SystemsBy "Purchase Agreement" dated December 28, 1982, Equilease Marketing sold its interest in the domestic IBM equipment and the CDC equipment to a related entity named Equilease Associates I Limited Partnership442 (Equilease Partnership). The Purchase Agreement provides that: The purchase price * * * for the Covered Equipment is the amount set forth as the Covered Equipment Price in the Schedule [$ 4,425,276.37], payable concurrently with the execution and delivery of this Agreement, as follows: (i) by payment to the Vendor [Equilease Marketing] of the amount (the "Down Payment") set forth in the Schedule as the Down Payment [$ 484,530], in immediately available funds; and (ii) by acquiring the Equipment subject to the Applicable Lien.The Purchase Agreement explains the term "Applicable Lien" as follows: In connection with its acquisition of the Covered Equipment, Vendor [Equilease Marketing] borrowed from a lender (the "Lender") a portion of the purchase price (the "Applicable Indebtedness") and, as security for payment of principal of, and interest on, the Applicable Indebtedness granted to the Lender a security interest in the Equipment and assigned to the Lender [Burroughs or UJB] the rentals payable by the Applicable Initial User under the Applicable Initial User Lease (collectively, the "Applicable Lien"). The agreements, instruments and other documents creating, or otherwise443 affecting, the Applicable Indebtedness or the Applicable Lien are sometimes hereinafter referred to as the "Lien Documents".In the Purchase Agreement, Equilease Marketing assigned to Equilease Partnership its interest in the Initial User Leases as follows: Vendor [Equilease Marketing] hereby assigns to purchaser [Equilease Partnership] all of the right, title and interest of lessor under the Applicable Initial User Lease, subject and subordinate, however, to the rights of the Lender [Burroughs or UJB] under the Lien Documents.On the same date, December 28, 1982, Equilease Partnership sold its newly acquired interest in the domestic IBM equipment and the CDC equipment to Systems Leasing, Inc. (Systems), for $ 4,423,550. Systems paid $ 609,193 in cash and issued a "Purchaser Note" in the principal amount of $ 3,814,357, which bore interest at an 11.98-percent annual rate. Under the Purchaser Note, Systems was to make quarterly installments payments of $ 129,409.95 during 1983 and $ 199,758.97 thereafter, through December 1990. The Purchaser Note contains the following additional provision: The undersigned [Systems] and each party assuming the undersigned's obligations444 hereunder are sometimes hereinafter referred to collectively, as the "Payor * * * * * * Payor shall have the right * * * to set-off against any amount * * * then due to be paid hereunder, the amounts then due to be paid to Payor under the Master Lease, but unpaid.Also on December 28, 1982, Systems and Burroughs entered into a "Subordination and Consent Agreement". As part of that agreement, Systems recognized that "The Equipment and User Lease are subject to, among other things, a Security Agreement and a Collateral Assignment dated May 19, 1982" between Burroughs and CLG Enterprises. Leaseback of the Domestic IBM and CDC EquipmentOn December 28, 1982, the same day that it acquired rights in the domestic IBM equipment and the CDC equipment, Systems leased those rights back to Equilease Partnership. The "Master Lease Agreement" (Master Lease) spanned 96 months, ending on December 31, 1990. Equilease Partnership was to make quarterly "fixed rent" payments during the term of the lease: $ 129,409.95 during 1983 and $ 199,758.97 thereafter, through 1990. These fixed rents total $ 6,110,890 and precisely equal the note payments due from Systems to Equilease Partnership445 under the Purchaser Note. The Master Lease also provided that Systems was to receive "contingent rent" consisting of 50 percent of the net remarketing proceeds from any subsequent lease of the equipment between expiration of Initial User Leases and the end of the Master Lease. The Master Lease further provided that: Lessee [Equilease Partnership] shall have the right, exercisable upon notice to Lessor [Systems] to set-off against any amounts of rent then due to be paid hereunder, any amounts of principal, interest or both then due to be paid to Lessee under the Purchaser Note.On December 28, 1982, Equilease Corp., which controlled all the Equilease entities herein discussed, entered into a "Capitalization Agreement" with Systems. The agreement provides that: So long as Lessee [Equilease Partnership] shall receive, when due, each payment due to be paid to it under the Purchaser Note, Equilease [Corp.] shall make such loans, advances or capital contributions to the Lessee as are necessary to ensure the payment by Lessee, when due, of Rent. * Acquisition of the Foreign IBM Equipment by Equilease InternationalA German manufacturer, DuPont de Nemours Deutschland446 GmbH (DuPont), purchased the following computer equipment (the foreign IBM equipment) from IBM in October 1982: QuantityTypeModelDescription 2IBM 4341L01Central processor 2IBM 3350A02Direct access storage 1IBM 3350A2FDirect access storage 6IBM 3350B02Direct access storage 3IBM 3350B2FDirect access storage 2IBM 38032Tape control 4IBM 34208Tape unit The total price was 1.999.999,42 DM ($ 780,243.90). The equipment was already installed at DuPont at the time of its purchase. Klaus W. Schafer and Partner GmbH (Schafer) purchased the foreign IBM equipment from Dupont for 2.007.241,60 DM ($ 783,069.32) on October 29, 1982. On the same date, Schafer leased the equipment back to DuPont, pursuant to a net lease (Initial User Lease), under the following terms: Leasing LengthRent PerCertificate QuantityModel of LeaseMonth 114341-L0148 months9,945 DM214341-L0148 months11,667 DM313350-A2F36 months18,030 DM23350-A0236 months33350-B2F36 months63350-B0236 months423803-00236 months7,865 DM43420-00836 monthsOn November 11, 1982, 447 Schafer sold its interest in the foreign IBM equipment, plus its rights and obligations in the DuPont Initial User Lease, to Chemco Leasing GmbH (Chemco). The price was 2.052.241,60 DM ($ 800,435.12). Of that amount, Chemco agreed to pay 2.007.241,60 DM ($ 783,069.32) directly to DuPont to fulfill Schafer's obligation to DuPont. Chemco was to pay the balance, 45.000 DM ($ 17,365.80), to Schafer. On November 18, 1982, pursuant to a "Purchase Agreement", Chemco sold to Equilease International GmbH (Equilease International) its interest in the foreign IBM equipment. The Purchase Agreement provides that the purchase was made "subject to the rights of the Initial User [DuPont] under the Initial User Lease." Equilease International did not purchase Chemco's right to receive rent under the Initial User Lease. The Purchase Agreement also provides that, following the purchase, Chemco was authorized to: borrow from a third party (a "Lender") an amount (an "Indebtedness") equal to all, or any portion of, the Net Rental (as hereinafter defined), discounted to present value at the discount rate agreed upon by Seller and the Lender (an "Interest Rate") and, in connection with such borrowing, 448 to assign to the Lender, by way of security, such Net Rental, but only if the Indebtedness secured by such assignment, plus interest thereon, is fully serviced and liquidated by the Initial User's payment, when due, of such Net Rental * * The stated price under the Purchase Agreement was 3.022.490 DM ($ 1,177,807.60). Equilease International paid 218.301 DM in cash ($ 85,067) and issued a "Limited Recourse Installment Promissory Note" in the principal amount of 2.804.189 DM ($ 1,092,739.80), bearing interest at 5 percent semiannually. The note required 14 consecutive semiannual payments of 269.800,30 DM ($ 105,136.11). The note was in fact nonrecourse, and provided that Chemco could look only to the "collateral", an undefined term, in satisfaction of the obligation. Also on November 18, 1982, pursuant to a "Lease Agreement", Equilease International leased its interest in the equipment back to Chemco for 7 years. The lease required 14 consecutive semiannual payments of "Aggregate Rent" in the amount of 269.800,30 DM ($ 105,136.11). Thus, those payments precisely offset Equilease International's note payments. The lease provided that Chemco would receive "Additional Rent", 449 equal to a share of any net remarketing proceeds generated between the expiration of the Initial User Lease and the termination of the Lease Agreement. This share ranged from 25 percent to 60 percent. On the same date, Equilease International and Chemco entered into a "Collateral Assignment Agreement". The agreement provides as follows: Assignor [Chemco] hereby assigns to Assignee [Equilease International], by way of security all of Assignor's right, title and interest in, to and under: (i) the Initial User Lease and each and every subsequent User Lease; (ii) all User Lease Proceeds; (iii) any and all collateral or security given for the performance of User Leases or any of them; and (iv) any and all of the rights and remedies of Assignor under User Leases (collectively, the "Lease Collateral"). * * * Notwithstanding the assignment effected hereby, however, Assignee shall not proceed against any User Leases, or collect User Lease Proceeds, or exercise any other rights hereunder with respect to the Lease Collateral, except upon the occurrence and during the continuance of: (i) an Event of Default under the Lease; or (ii) any other default by Assignor in the payment or performance, 450 when due, of the Assignor Obligations which, if capable of being cured, is not cured within ten (10) days of Assignee's notice thereof to Assignor (any such Event of Default or other default being herein referred to as a "Default"). So long as no Default shall have occurred and be continuing, all User Lease Proceeds received by Assignor under, and in accordance with, each User Lease shall be received by Assignor free and clear of the rights of Assignee under this Collateral Assignment Agreement, and Assignee shall have no claim thereto and shall not be entitled to trace such User Lease Proceeds in the hands of Assignor * * [Emphasis added.]Assignment of the Foreign IBM Equipment to Equilease C.V. and Its Sale to SystemsOn December 31, 1982, Equilease International entered into an "Assignment Agreement" with Equilease Equipment Brokerage C.V. ("Equilease C.V."), a Netherlands corporation. Under the Assignment Agreement, Equilease International transferred to Equilease C.V. all of its rights in the foreign IBM equipment and any rights that it held in any leases or other agreements pertaining to that equipment. The parties to that agreement acknowledged that "This451 Assignment is made subject to any existing leases, liens or fiduciary rights". Pursuant to a "Master Purchase Agreement" dated December 28, 1982, Systems purchased from Equilease C.V. all of the interest of Equilease C.V. in the foreign IBM equipment. The record provides no explanation of how Equilease C.V., on December 28, 1982, transferred rights that it would not acquire until 3 days later. The stated purchase price of the interest in the equipment was $ 1,208,996. Systems paid $ 139,034.54 in cash and issued a "Purchaser Note", dated December 28, 1982, in the principal amount of $ 1,069,961.46, bearing interest at 14.39 percent per annum. During the 8-year term of the Purchaser Note, Systems was to make quarterly note payments to Equilease C.V. of $ 39,532.55 in 1983 and $ 61,022.48 thereafter, through 1990. The Purchaser Note also provides as follows: The undersigned [Systems] and each party assuming the undersigned's obligation hereunder are sometimes hereinafter referred to collectively, as the "Payor" * * * * * Payor shall have the right * * * to set-off against any amounts * * * then due to be paid hereunder, the amounts then due to be paid to Payor under452 the Master Lease, but unpaid.Leaseback of the Foreign IBM EquipmentOn the same date, December 28, 1982, Systems leased its interest in the foreign IBM equipment back to Equilease C.V., subject to the prior liens and lease rights. This "Master Lease Agreement" (Master Lease) ran for 96 months, ending on December 28, 1990. Under the Master Lease, Equilease C.V. agreed to make quarterly "fixed rent" payments of $ 39,532.56 in 1983 and $ 61,022.98 thereafter, through December 31, 1990. Thus, the fixed rent owed to Systems would almost exactly equal the note payments owed by Systems. Systems was also entitled to "contingent rent" equal to 50 percent of net remarketing proceeds generated between the termination of the DuPont Initial User Lease and the end of the Master Lease term. On December 28, 1982, Equilease Corp. entered into a "Capitalization Agreement" with Systems. The agreement provides that: So long as Lessee [Equilease C.V.] shall receive, when due, each payment due to be paid to it under the Purchaser Note, Equilease [Corp.] shall make such loans, advances or capital contributions to the Lessee as are necessary to ensure the payment by Lessee, when due, 453 of Rent. * * Purchase of the Equipment by the Rosecrea TrustA. Formation of the Rosecrea Trust and Negotiation of the DealThe Trust was formed in 1982 under the laws of the State of New York specifically to enter into the purchase and leaseback with Systems that are at issue. The Trust had 24 beneficial owners (unitholders), including petitioner. In 1982, each unitholder was either a principal or a partner in the accounting firm of Touche Ross. One of the unitholders, Mr. Alan Bernikow, acted as trustee. In 1982, Mr. Bernikow was the assistant to the managing partner of Touche Ross and head of its mergers and acquisitions department. Mr. James Crumlish was the unitholder instrumental in organizing the Trust. Mr. Crumlish met Mr. Allen Jordan, the president of Systems, in the summer or fall of 1982. At the time of their meeting, Mr. Crumlish hoped to develop Systems as a Touche Ross client. In fall 1982, Messrs. Crumlish and Jordan formulated a computer sale and leaseback transaction between Systems and a group to be organized by Mr. Crumlish. The pair decided that the deal would involve the domestic IBM equipment, the CDC equipment, and the foreign454 IBM equipment. The purchasers would acquire Systems' interest in the equipment and assume Systems' rights and responsibilities under the Master Leases with the Equilease entities. The purchase price was not negotiable; it was determined by the results of a valuation obtained by Systems. However, Messrs. Jordan and Crumlish did negotiate the amount of the downpayment. The rate of interest on the note to be issued by the purchasers was then set to ensure that the note payments precisely equaled the fixed rent payments due from the Equilease entities under the Master Leases. Mr. Crumlish insisted that Systems provide a written valuation of the equipment and a tax opinion. During the negotiations, Mr. Crumlish reviewed projections provided by Systems, which depict the anticipated financial and Federal tax results of the transaction. When Mr. Crumlish felt that the deal would move beyond the negotiation phase, he presented the projections to Mr. Bernikow. Mr. Bernikow then passed on the projections to other Touche Ross partners and principals in an effort to attract investors. The projections indicate that income would flow to the Trust from three sources: A total of $ 7,723,376455 in "fixed rent" to be paid by Equilease C.V. and Equilease Partnership over the 8-year term of the Master Leases; an estimated $ 914,175 in re-leasing income during 1985-1990; and projected sales receipts on disposal of the equipment in 1990 at prices reflecting 20 percent, 25 percent, and 30 percent of the 1982 sales price of $ 5,170,392. The projections further show that, after claiming interest expense and depreciation deductions, the Trust would generate losses of $ 3,602,708 in excess of income from 1982 through 1986. They also show that, from 1987 through 1990, the Trust would generate at least a total of $ 4,493,551 of net taxable income, provided that the Trust sold the equipment for at least 20 percent of its 1982 purchase price. Thus, the projections indicate that, by the end of 1990, the investment would generate at least $ 890,843 of total taxable income. However, if the equipment had zero residual value at the end of 1990, the trust would incur a total net loss of approximately $ 40,000. But, even in the event of this loss, the Trust would obtain a "cumulative benefit" of $ 387,159, consisting of tax benefits and income from re-leasing, invested at 10 percent. At456 the time of the negotiations, Mr. Crumlish had very limited experience with computers and he had investigated no other potential computer leasing deals. Mr. William Atkins and Mr. Charles Biggs, the Touche Ross computer systems consultants, analyzed the deal before investing in the Trust, but only after the equipment mix and the terms of the deal had been finalized. Mr. Crumlish did little investigation of Systems, other than learning that Mr. Jordan was a licensed securities trader. By the time of trial, respondent had issued to Mr. Crumlish a statutory notice of deficiency pertaining to his involvement in the transaction at issue. B. Investment Information Provided to Unitholders1. The Investment MemorandumThe trustee provided to prospective unitholders an "Investment Memorandum", which had been prepared by Austrian, Lance and Stewart (Austrian, Lance), attorneys to Systems. Among other things, the Investment Memorandum describes the equipment involved in the transaction, as well as the earlier sales, financing, and leasing of the equipment. The Investment Memorandum notifies prospective unitholders that the Trust was to purchase the equipment subject to 457 prior security interests in the equipment and in the Initial Users Leases, which had been granted to lenders and to other third parties. It specifically informs prospective unitholders that: The Foreign Equipment will be acquired by the Trustee, on behalf of the Unitholders, already encumbered by the Foreign User Lease and the Foreign Sublease, and the Foreign Bank Lien. The benefits of the Foreign User Lease and the Foreign Sublease (and any subsequent sublease of the Foreign Equipment) will flow to parties other than the Trustee or the Unitholders * * The Domestic Equipment will be acquired by the Trustee, on behalf of the Unitholders, already encumbered by the Domestic User Leases and the Domestic Bank Liens. The benefits of the Domestic Equipment will flow to parties other than the Trustee or the Unitholders * * * Although the rents payable under the User Leases * * * will be collaterally assigned to the Trustee as security for the performance of the Domestic Lessee's obligations under the Domestic Lease, that assignment will be subject and subordinate to the prior rights of the Domestic Banks to receive proceeds of the collateral until the Bank Domestic Debts [sic] are458 paid.The Investment Memorandum further notifies the prospective unitholders that Austrian, Lance, which provided the Investment Memorandum and the Tax Opinion attached thereto, serves as counsel to Systems, to Equilease Corp., and to some Equilease affiliates. The first page of the Investment Memorandum warns as follows about the risks of participating in the Trust: THE PROJECTIONS CONTAINED IN THIS MEMORANDUM HAVE BEEN PREPARED ON THE BASIS OF INTERPRETATIONS OF FEDERAL INCOME TAX LAW WHICH ARE LIKELY TO BE CHALLENGED BY THE INTERNAL REVENUE SERVICE. THE PROJECTED RESULTS OF INVESTMENT ARE BASED UPON THE MOST FAVORABLE TAX TREATMENT POSSIBLE OF A NUMBER OF ISSUES AND UPON THE SPECIFIC ASSUMPTIONS STATED AS TO CERTAIN TAX ELECTIONS MADE OR TO BE MADE BY INVESTORS. IN THE EVENT OF AUDIT, AN ADVERSE FINAL DETERMINATION ON ANY OF THOSE ISSUES MIGHT SIGNIFICANTLY REDUCE OR ELIMINATE VIRTUALLY ALL PROJECTED TAX BENEFITS OF AN INVESTMENT. * * AN INVESTMENT IS SUBJECT TO SIGNIFICANT ECONOMIC AND TAX RISKS AND IS SUITABLE ONLY FOR PERSONS QUALIFIED TO ASSUME THOSE RISKS. * * 2. The Tax Opinion LetterAppended to the Investment Memorandum is a Tax Opinion Letter, 459 dated December 15, 1982, written by Austrian, Lance. The "Facts" section of the Tax Opinion provides a description of the deal at issue and the transactions preceding that deal. It explains as follows the interests in the equipment and the Initial User Leases that had been assigned to Burroughs, United Jersey Bank, and Chemco: Burroughs Wellcome Company and United Jersey Bank (the "Domestic Banks"), each * * * received a security interest in a portion of the Domestic Equipment and an assignment of the rents from one of the Domestic User Leases * * * [Chemco] received a security interest in the Foreign Equipment and in the Foreign User Lease rents * * The body of the Tax Opinion examines four bases on which Respondent could be expected to challenge the substance or characterization of the deal. The first, which is not at issue in this case, is the Trust's legal status as a trust, rather than as an association or partnership. The second is the characterization of the deal as financing arrangement, as opposed to a sale-leaseback. In that respect, the Tax Opinion discusses and ,460 affd. per curiam . In distinguishing between financing arrangements and sale-leasebacks, the second portion of the Tax Opinion also examines factors bearing upon whether the Trust will be considered to have assumed the benefits and burdens of ownership of the equipment. The third area discussed is the includability of the Trust Note in the unitholders' basis in the equipment. In examining this potential problem, the Tax Opinion examines, inter alia, , affd. , , and . Although Austrian, Lance opined that the amount of the Trust Note should increase the unitholders' basis in the equipment, the firm warned that: It is possible, however, that if the fair market value of the Equipment is less than the amount of its purchase price, all or a portion of the Trust Note may not be includible in the Unitholders' basis in the Equipment for the purpose461 of computing depreciation thereon and that interest deductions could be reduced or denied.The final portion of the tax opinion deals with the at risk rules. This portion is divided into subsections analyzing three requirements: (1) That the borrowers be personally liable on the note; (2) that, under section 465(b)(3), the lender have no interest in the borrower's activities, other than that of a creditor; and (3) that the transaction not be an arrangement limiting loss. In regard to each of the four possible challenges discussed, Austrian, Lance concluded that "it is more likely than not" that petitioners are entitled to the Federal income tax treatment that they have claimed on their return. 3. Communigraphics ValuationAlso attached to the Offering Memorandum was a valuation of the equipment at issue, which was commissioned by Systems from Communigraphics, Inc. (Communigraphics). John Wilkins, the president of Communigraphics, valued the equipment. The document submitted by Communigraphics contains a three-page "Industry Background", which explains the history of magnetic tape units, disk storage units, and the IBM families of central processing units. Four attached462 exhibits catalog the equipment to be valued and their list prices. The valuation itself consists of a single page. It first states the length of each of the Initial User Leases and the rental fees due under each. The valuation then estimates the December 1982 present value of the Initial User Leases to be $ 4,331,327. We note that the Trust acquired no rights to the proceeds from the Initial User Leases. The valuation next estimates the 1982 present value of the residual values of the equipment at the end of the Initial User Leases to be $ 936,388. Mr. Wilkins totaled those figures to reach his valuation of $ 5,267,715 for the equipment. The valuation contains no estimate of the residual values as of the end of the Master Leases. There is no explanation of the methodology that Mr. Wilkins used in making his appraisal. C. Unitholders' Evaluation of the Equipment1. William AtkinsAt the time of trial, William Atkins was the National Managing Director for Information Technology Consulting at Deloitte & Touche, the successor to Touche Ross. He is also a unitholder in the Trust and, at the time of trial, had filed a petition in this Court related to the transaction463 at issue. Mr. Atkins has written three books on data processing functions. In the course of his professional duties, Mr. Atkins routinely acquires information about the cost of computer equipment from the sellers of such equipment as well as from outside research services. However, Mr. Atkins does not consult in the area of computer valuation, nor is he an expert in residual valuation. In December 1982, after the equipment to be involved in the deal was chosen, Mr. Bernikow approached Mr. Atkins regarding the deal. Mr. Atkins was familiar with the IBM Model 3081, which was by far the most valuable piece of equipment involved. At the time of the transaction, Mr. Atkins opined that, the Model 3081 had an economic life of 10 additional years. Mr. Atkins discussed the transaction with Mr. Bernikow and with petitioner, and he opined that the Trust was paying fair market value for the equipment. However, there is no indication that Mr. Atkins took into account the fact that the Trust was to acquire a limited interest in the equipment, and he never placed his evaluation in writing. 2. Charles BiggsCharles Biggs was also a partner at Touche Ross and a unitholder in the Trust. 464 At the time of trial, Mr. Biggs had a docketed Tax Court case concerning his participation in the Trust. Mr. Biggs is a management consultant, specializing in computer systems and computer installations. His professional duties require that he be familiar with various types of computer equipment and their prices. At the time of the transaction, Mr. Biggs was generally familiar with the European computer marketplace. However, Mr. Biggs was not a valuation expert, and he did no consulting regarding the residual value of computers. Further, Mr. Biggs was not an investment adviser, and he had no experience in computer leasing. Mr. Biggs began evaluating the transaction after Messrs. Crumlish and Jordan had determined the terms of the deal and the equipment to be involved. To evaluate the offering price, Mr. Biggs consulted sources that he maintained in his office. He felt that the price charged to the Trust was the market price of the equipment, but there is no indication that Mr. Biggs took into account the limited interest that the Trust was acquiring. At the time of the transaction, Mr. Biggs felt that each of the pieces of equipment would have an economic life of more than465 10 years and that it would produce a residual value, after expiration of the Master Leases, of about 25 percent of cost. Mr. Biggs reached his conclusion regarding the residual value of the equipment based on "what I believed the life of that equipment would be and what my general understanding in the marketplace was of the * * residual value of equipment." He did not consult any sources, and he paid little attention to the appraisal offered by the promoters of the investment. However, Mr. Biggs did discuss the equipment with Mr. Atkins. Mr. Biggs and Mr. Atkins informed the other members of the Trust of their estimates of the equipment's value and of its useful life. Mr. Biggs did not provide a written valuation. D. Unitholders' Evaluation of the Tax and Financial Ramifications1. Eli GerverEli Gerver is a C.P.A. and a lawyer with a master's degree in taxation. In 1982, he was a senior tax partner in the Stamford, Connecticut, office of Touche Ross. Mr. Gerver had substantial experience representing clients involved in long-term equipment leasing, but he did little, if any, work in computer leasing. Mr. Gerver is a unitholder in the Trust. By the time 466 of trial, the IRS had issued a notice of deficiency to Mr. Gerver regarding his participation in the Trust, and he had filed a petition in this Court. Mr. Gerver learned of the opportunity to participate in the Trust in November or December 1982, and he obtained a copy of the Offering Memorandum that had been provided by the promoters. He reviewed the Offering Memorandum and the Tax Opinion Letter written by Austrian, Lance. Mr. Gerver discussed the transaction with petitioner and advised him that the Tax Opinion Letter documented substantial authority for the depreciation and interest deductions to be claimed by the unitholders. He prepared no written tax opinion for either petitioner or the Trust. He testified that "I wasn't asked for an opinion from the trust. When I came to the trust it was as an investor." Sometime in the 2 years following the transaction, Mr. Crumlish left Touche Ross. Mr. Gerver then, on his own initiative, assumed the responsibility of distributing tax return information to the unitholders. 2. Information Provided to the Trustee and the Other UnitholdersBefore the sale-leaseback was consummated, Mr. Atkins and Mr. Biggs talked to Mr. Bernikow, 467 the trustee, about the type, price, and economic life of the computer equipment to be purchased. Mr. Bernikow also discussed with Messrs. Crumlish and Gerver the tax ramifications of investing in the Trust. Mr. Bernikow reviewed the income projections initially provided to him, as well as the revised projections contained in the Offering Memorandum. The potential unitholders met informally and discussed the deal. There were no formal meetings to explain the deal or to monitor its progress. The only organized meeting of the unitholders concerned the audit of the Trust by the IRS, which was initiated in 1986. The only written communications regarding the Trust were annual tax statements distributed to the unitholders. 3. Petitioner's Personal Financial AnalysisPetitioner was the managing partner of the Touche Ross Stamford, Connecticut, office at the time of the sale-leaseback. To that point, petitioner had spent approximately 15 years auditing leasing companies. His duties required him to confirm the existence of lease transactions, to evaluate the present values of future rentals for such leases, and to review projected residual values. Petitioner first heard about468 the transaction at issue in early December 1982, when discussing possible investment opportunities with two of his partners, Mr. Gerver and Mr. Philip Greenblatt. Thereafter, petitioner contacted Mr. Bernikow and was sent the first set of projections and, shortly thereafter, a copy of the Offering Memorandum. Before deciding to become a unitholder, petitioner read the Offering Memorandum and spoke with many of his partners, including Mr. Atkins and Mr. Gerver. Upon examining the projections, he determined that purchasing six units of the Trust would cost $ 57,240 in cash and that his projected tax savings for the first year would be 87.25 percent of his cash investment. Petitioner was aware that, during the term of the Master Leases, the Trust's note payments would exactly offset the fixed rental payments from the Equilease entities. Therefore, he knew that the only way to make an economic profit was to realize residual value on the equipment in excess of his cash downpayment. Part of this residual value would be composed of proceeds from releasing the equipment between the end of the Initial User Leases and the expiration of the Master Leases. The projections estimate that469 the Trust would receive $ 914,175 in such "additional income" from 1985 through 1990. Petitioner never inquired about the source of that estimate or questioned its validity. The other component of residual value would be the realizable value of the equipment as of December 1990, the end of the Master Leases. Without factoring in inflation, the projections show that, at 20-percent residual value, each unitholder would approximately break even on his cash investment. At 30 percent, he would earn a 50-percent return on his investment, and at 40-percent residual value, he would double his money. Petitioner never questioned the probability of achieving these returns. Prior to the transaction, petitioner had no experience with the lines of equipment involved in the transaction. In addition, he knew nothing of either Systems or Equilease. Although he read the Offering Memorandum before committing himself to the Trust, petitioner reviewed none of the documents relating to the previous transactions involving this equipment. There is no indication that he raised any questions regarding the substance or implications of those previous transactions. The Offering Memorandum contains projections470 that differ slightly from the initial projections. However, until the time of trial, petitioner was unaware that the projections had been modified. In December 1982, petitioner purchased six units of beneficial interest in the Trust for $ 57,240. After investing in the Trust, petitioner did not follow the financial success of the leasing venture. He did not keep track of the expiration dates of the Initial User Leases or inquire of the trustee regarding subsequent leases of the equipment. The trustee did not inform petitioner when the Initial User Leases expired. Until 2 weeks before trial, petitioner was unaware that two of the central processing units had been in storage for over 3-1/2 years. E. Purchase by the TrustPursuant to a "Purchase, Sale and Assignment Agreement" (Sale Agreement) dated December 28, 1982, the Trust purchased Systems' interest in the foreign IBM, domestic IBM, and CDC equipment and its interest in the Master Leases with the Equilease entities for a stated price of $ 5,170,392. The Sale Agreement provided that the Trust would receive all rents from the Equilease entities that were due to Systems under the domestic and foreign Master Leases. 471 The Sale Agreement states that the Trust bought the equipment subject to the rights of the domestic and foreign initial users and subject to the rights of the Equilease entities under the Master Leases. The Sale Agreement further states that the Trusts' rights would be subordinate to the following interests: (1) The security interests of Burroughs, UJB, and Chemco in the domestic IBM equipment, the CDC equipment, and the foreign IBM equipment, respectively; and (2) the assignment of the rents under the Initial User Leases of the domestic IBM and CDC equipment to Burroughs and UJB. In the Sale Agreement, Systems agreed to continue to make the payments that it owed to the Equilease entities as follows: 4.01 Transferor Indebtedness. Transferor [Systems] agrees: (i) to the extent it receives payments under the Installment Note to pay principal of, and interest on, the Transferor Indebtedness [to Equilease C.V. and Equilease Partnership], when due * * * * * * 7.01 Indemnity by Transferor. Transferor agrees to indemnify Transferee [the Trust], and to protect, defend, and hold it harmless, from and against any and all loss, cost, damage, injury or expense, including, without472 limitation, reasonable attorneys' fees and other legal expenses, which Transferee may incur for or by reason of: * * (ii) a breach by Transferor of any of the warranties and agreements of Transferor contained herein or in any of the other Final Documents.The Trust paid Systems $ 954,000 in cash. The transactional documents characterize $ 917,392 as a downpayment and the remaining $ 36,608 as a prepayment of interest due on the Trust's "Installment Note" in 1983. That Installment Note, issued to Systems in the principal amount of $ 4,253,000, bore an interest rate of 16.75 percent. The note called for quarterly payments of $ 168,942.50 during 1983. For the years 1984 through 1990, the note called for quarterly payments of $ 260,781.95. These note payments precisely equal the total quarterly payments due from Systems to the Equilease entities under the foreign and domestic Purchaser Notes. The note payments also exactly offset the lease payments that the Trust was entitled to from the Equilease entities under the Master Leases. The Trust also entered into two identical "Recognition Agreements". One was with Equilease Partnership and Systems and the other was with Equilease473 C.V. and Systems. The Recognition Agreements provided that: Vendor [Equilease C.V. or Equilease Partnership] agrees that it will not exercise any of the rights or remedies conferred upon it under the Master Security Agreement on account of a default by Purchaser [Systems] of the type referred to in clause (i) of Section 6 of the Purchaser Note (a "Payment Default"), unless and until it shall have given to Transferee [Trust] notice of the Payment Default and the Payment Default continues uncured for a period of ten (10) days after the giving of such notice and Transferee shall have the right to cure any such Payment Default as provided for in the Purchaser Note, in its capacity as a "Payor" thereunder.As an accommodation to Systems, National Community Bank of New Jersey (NCB) established accounts in the names of Equilease Partnership, Systems, and the Trust. No funds were ever deposited into any of these accounts. Every month, NCB credited and debited the three accounts with the full amount of the offsetting loan and leaseback payments owed in regard to the domestic IBM and CDC equipment. At all times, each of the accounts had a zero balance. The record does not indicate474 how the loan and leaseback payments were made with regard to the foreign IBM equipment. Subsequent Leases of the Computer EquipmentBeginning in July 1986, Mr. Bernikow began corresponding with Equilease Corp. in an effort to discover the status of the equipment that had come off lease and to prod Equilease to re-lease the equipment. He found out that the successor to First Computer had released the CDC equipment from January through June 1986, at $ 600 per month, and then on a month-to-month basis for $ 480 per month. The month-to-month lease continued at least through October 1986. The foreign IBM equipment was never re-leased. Burroughs declined to re-lease the domestic IBM equipment when its Initial User Lease expired on April 30, 1987. That equipment was re-leased to the Monsanto Corp. for 24 months, effective May 1, 1987, for $ 15,000 per month. The Trust received its agreed upon share of the rentals from these subsequent leases: Half of the gross proceeds, minus a remarketing fee. On April 30, 1990, 1 year after Monsanto's lease expired, the Trust sold the domestic IBM equipment to Equilease Marketing for $ 5,000. The CDC equipment and the foreign IBM equipment475 have been in storage since the end of their leases. The total residual proceeds to the Trust from the three groups of equipment equaled approximately $ 150,000. Petitioners' Tax ReturnsPetitioners' Federal income tax returns for the years 1982 through 1989 reflect the following amounts of rental income, expenses other than depreciation, depreciation, and net income or loss attributable to their participation in the Trust: YearRental Income ExpensesDepreciationIncome/Loss 1982--$ 356$ 47,743($ 48,099)1983$ 40,54632,80072,440(64,694)198462,58851,26563,347(52,024)198562,68837,53058,869(33,711)198663,15633,06057,078(26,982)198763,39628,0387,16428,194 198869,09624,0963,58241,418 198964,50618,462--46,044 Further, on their Federal income tax return for 1984, petitioners claimed an "amortization" deduction in the amount of $ 104 for the Trust's organizational costs. OPINION Sham TransactionThe first issue for decision is whether petitioners' investment in the domestic IBM, CDC, and foreign IBM equipment through the Trust was a sham transaction devoid of economic substance. Business476 transactions are not necessarily deprived of economic substance because of the existence of significant tax benefits that accrue to investors. ; . A transaction will not be considered a sham if it is a "genuine multiple party transaction with economic substance which is compelled or encouraged by business or regulatory realities, is imbued with tax-independent considerations, and is not shaped solely by tax-avoidance features that have meaningless labels attached". . Petitioners bear the burden of proving that the transactions at issue are not shams. Rule 142(a). The test we apply examines "both the taxpayers' subjective business motivation and the objective economic substance of the transactions". , affg. ; see also ,477 affg. . "The consideration of business purpose and economic substance are simply more precise factors to consider in the application of this court's traditional analysis; that is, whether the transaction had any practical economic effects other than the creation of tax losses." , affg. ; see also , affg. ; , affg. in part and revg. in part . A. Economic SubstanceA transaction has economic substance and will be recognized for tax purposes if the transaction offers a reasonable opportunity for profit exclusive of tax benefits. . In , we observed that478 several factors are particularly significant in determining whether a computer leasing transaction possesses economic substance. These include the presence or absence of arm's-length price negotiations, the reasonableness of the income and residual value projections, the structure of the financing, the degree of adherence to contractual terms, and -- most important in this case -- the relationship between the sales price and fair market value of the property acquired. See also , supplemented by , affd. without opinion ; ; , affd. in part . We find that the purchase of the interest in the equipment in this case was without economic substance. Although our conclusion is based on all of the facts and circumstances, the following factors are particularly noteworthy in reaching479 this conclusion. 1. Relationship Between Sales Price and Fair Market ValueThe Trust purchased System's interest in the equipment at issue for the stated price of $ 5,170,392. The primary point of fact argued by petitioner and respondent is whether the stated price approximated the fair market value of the computer equipment involved in the deal. The Court received extensive expert testimony regarding valuation of the equipment. However, as becomes clear upon examination of the facts, the Trust purchased only a partial interest in the equipment. It only obtained what Systems held: Legal ownership of the equipment, subordinate to the prior rights of the initial users, the security interests of Burroughs, UJB, and Chemco, and the rights of Burroughs, UJB, and Chemco to receive the rents due under the Initial User Leases. The stated price was not adjusted to account for the limited nature of the interest acquired. Thus, it is clear that the Trust paid an exaggerated price for its limited interest in the equipment. Three series of transactions were carefully orchestrated to inflate the prices of the interests transferred. First, early owners of the three sets of equipment480 stripped away the rights to the rents due under the Initial User Leases. Using sale-leaseback arrangements, the owners then sold the remaining rights for prices that did not reflect the limited nature of those rights. The bulk of the stated purchase prices were represented by notes. Inflated lease payments offset debt payments on equally inflated notes, and no cash changed hands in regard to the obligations. At the end of each series, the Trust paid overstated prices for the interests in the equipment to secure magnified depreciation and interest deductions. The Trust acquired the domestic IBM and CDC equipment in this manner. The domestic IBM equipment was originally purchased from IBM for $ 4,004,569 in early 1982. CLG Enterprises, an early owner of that equipment, assigned to Burroughs the rents from the Initial User Lease of the equipment. On May 12, 1982, CLG Enterprises sold its remaining interest in the domestic IBM equipment to Equilease Marketing for $ 440,512. Also in 1982, Equilease Marketing bought the CDC equipment from Control Data Corp. for $ 249,622. On September 1, 1982, Equilease Marketing assigned the initial user rents from the CDC equipment to UJB. 481 On December 28, 1982, Equilease Marketing sold its remaining interests in the domestic IBM and CDC equipment to its sister entity, Equilease Partnership, for a stated price of $ 4,425,276.37. In effect, Equilease Partnership agreed to pay more than six times the amount that Equilease Marketing had paid for the Equipment. This sale called for a downpayment of $ 484,530. The balance of $ 3,940,746.37 consisted of Equilease Partnership's "acquiring the Equipment subject to the Applicable Lien". The applicable lien included the assignment of the rents from the Initial User Leases to Burroughs and UJB. Equilease Partnership assumed no debt, and there was no provision made for Equilease Partnership to further compensate Equilease Marketing. Therefore, Equilease Partnership actually paid $ 484,530, rather than the inflated, stated price of $ 4,425,276.37. Also on December 28, 1982, Equilease Partnership entered into a sale-leaseback with Systems involving Equilease Partnerships's newly acquired interests in the domestic IBM and CDC equipment. The stated sales price was $ 4,423,550: $ 609,193 in cash and a note for $ 3,814,357. The payments due from Equilease Partnership under the482 8-year Master Lease precisely offset the note payments due from Systems. Further, Systems was entitled to withhold payment on its note to the extent that Equilease Partnership did not make its payments under the Master Lease. On that same date, as explained below, Systems sold its interest in the equipment to the Trust at a similarly inflated price. The transactions culminating in the Trust's acquisition of an interest in the foreign IBM equipment are similar. On November 11, 1982, Chemco paid $ 800,435 to acquire: (1) The foreign IBM equipment, subject to the rights of the initial users, and (2) the right to receive the rental income due under the Initial User Leases. One week later, on November 18, 1982, Chemco entered into a sale-leaseback with Equilease International. Equilease International agreed to pay a stated price of $ 1,177,807: $ 85,067 as a cash downpayment and $ 1,092,740 in the form of a note. However, Chemco sold its interest in the equipment only; it retained the right to collect rents from the Initial User Lease. Under the Collateral Assignment Agreement, Equilease International could claim the proceeds of the Initial User Lease only in the event that Chemco483 defaulted on its lease payments to Equilease International. Such default was highly improbable in the absence of bankruptcy because the note payments due from Equilease International to Chemco exactly mirrored the lease payments due from Chemco. Equilease International assigned its limited interest in the foreign equipment to another sister entity, Equilease C.V., on December 31, 1982. Equilease C.V. had already sold that interest to Systems on December 28, 1982, for a stated price of $ 1,208,996. That price consisted of a cash downpayment of $ 139,034.54 and a note in the principal amount of $ 1,069,961.46. Simultaneously, Equilease C.V. and Systems entered into a Master Lease that called for lease payments from Equilease C.V. that precisely equal the note payments due from Systems. The transactional documents provide that Systems could withhold note payments to the extent that Equilease C.V. failed to make its offsetting lease payments. On the same day, Systems sold to the Trust its interest in all three sets of equipment -- the domestic IBM, CDC, and foreign IBM equipment -- and the Trust assumed Systems' rights and responsibilities with regard to the Master Leases to the484 Equilease entities. The stated price of $ 5,170,392 consisted of a note in the principal amount of $ 4,253,000 and a total cash payment of $ 954,000 -- $ 917,392 characterized as a downpayment and the remaining $ 36,608 characterized as prepaid interest. The rental payments due to the Trust under the Master Leases exactly offset the payments due from the Trust on its note. As explained above, Systems and the Equilease entities also held identical offsetting liabilities. Thus, absent bankruptcy, none of the parties to this circle of liability would be liable for actual payments on the notes or leases. It is apparent that the Trust purchased interests from Systems that were stripped of much of their value. The Trust held no right to the use of, or the proceeds from, the equipment until the expiration of the Initial User Leases. Further, the Trust held the right to receive only approximately half of the net rental proceeds from the equipment between the end of the Initial User Leases and the end of the Master Leases. The other half of the net rental proceeds would flow to the Equilease entities under the Master Leases. Thus, the interests in the subject equipment were limited485 residual interests. The experts who testified in this case did not focus primarily on the value of the limited interests that the Trust actually acquired, but on the full fair market value of the equipment involved. However, there is ample evidence in the record for us to come to a conclusion regarding the value of the interests acquired. The parties have submitted extensive expert testimony concerning the anticipated residual value of the equipment as of the end of the Initial User Leases and the end of the Master Leases, viewed as of December 1982. The experts also testified regarding the contingent rent that could have been reasonably anticipated to flow to the Trust between the termination dates of the Initial User Leases and of the Master Leases. In addition, there is documentary evidence of arm's-length sales of the equipment that took place shortly before the transaction at issue. Petitioners offered the expert opinion of Esmond C. Lyons, Jr. Mr. Lyons is founder and president of Ecesis Co., Ltd., a consulting firm that specializes in the computer industry. Mr. Lyons has testified as an expert witness in many cases before this Court. From 1979 through 1986, he was 486 a member of the professional staff of SRI International (SRI), formerly known as the Stanford Research Institute. At SRI, Mr. Lyons provided consulting services "for companies that provide products and services of a computing nature." During his tenure with SRI, Mr. Lyons considered himself to be an expert regarding the computer industry, with emphasis in the following areas: Market management, strategic planning, product and market analysis and evaluation, product pricing and distribution, residual value forecasting, mergers and acquisitions, and international sales and marketing. Prior to his employment with SRI, Mr. Lyons worked in the computer industry as a programmer, sales representative, marketing manager, and vice president of marketing. In testimony outlining the foundations of his valuation, Mr. Lyons stressed that his estimates are based on his belief that technology does not improve at the rapid rate that others in the field tend to predict. However, Mr. Lyons acknowledged that many technical innovations were being discussed in the industry at the time of the transaction, and that major computer companies were attempting to develop some of these technologies at that487 time. As background to his valuation of the foreign IBM equipment, Mr. Lyons' report states that by late 1982, "there was little discrepancy discernable between domestic U.S. and European prices." He explained that this price similarity results from the arbitrage -- importation of lower priced American equipment into Europe -- that occurs when the price differential is significant. Because of this rough equality, Mr. Lyons used domestic valuations for the foreign IBM equipment. Mr. Lyons' report states that, as of December 1982, the following residual values could be reasonably expected at the end of the Initial User Leases and at the end of the Master Leases: Value After Value After User Leases Master Leases EquipmentMin.Max.Min.Max.Dom. IBM$ 537,076$ 1,074,152$ 0$ 358,051CDC122,528181,349056,718For. IBM181,948371,0688,13555,305Total841,5521,626,5698,135470,074In his report, Mr. Lyons also estimates the contingent rent that reasonably could be expected to flow from the equipment between the expiration of the Initial User Leases and the end of the Master Leases. Mr. Lyons determined the expected contingent488 rent by estimating the return that the investors could expect to receive on other investments. He then applied that rate of return to a principal amount equal to the value of the equipment at the end of the Initial User Leases minus its value at the end of the Master Leases. Mr. Lyons' report states that the reasonably expected contingent rent to the Trust would range from $ 659,363 to $ 925,877. The total residual value that the Trust would receive would consist of the residual value after the Master Leases plus the contingent rents. Therefore, combining the figures presented above, Mr. Lyons estimated that the total residual value from the equipment would range from a minimum of $ 667,498 to a maximum of $ 1,395,951. A mathematical error in Mr. Lyon's report accounts for the discrepancy between the $ 1,399,015 maximum contained therein and the $ 1,395,951 figure reported herein. Mr. Lyons explained that he used a modified version of the "SRI Curve" to derive his residual valuations following the Initial User Leases and the Master Leases. The SRI Curve is a graph, created by the Stanford Research Institute, that projects the residual values of computers. In the past, we have489 accepted the SRI Curve as a basis for predicting future values of computer equipment. See . The creators of the SRI curve based it upon a 5- to 6-year IBM product cycle, and they warned that: "A major limitation in the use of these curves is that they are valid for the period beginning about 1972 and probably will be valid through about 1977 after which time another survey of the market factors should be made."Mr. Lyons explained that, with the passage of time, the SRI curve must be constantly "adjusted". However, Mr. Lyons did not explain the modifications that he made to the 1975 SRI curve. In addition, Mr. Lyons' testified that "A curve was drawn for each particular piece of equipment. The curve was dependent upon the life or the lives of comparable preceding equipment. And the market factors that existed at the time of the transaction." Mr. Lyons did not submit to the Court copies of the curves that he drew. However, he did submit a copy of the 1975 SRI curve. In support of his conclusions that the equipment would retain substantial value, Mr. Lyons pointed to an article from490 the Wall Street Journal, dated October 27, 1976, in which the CEO of IBM is quoted as stating that "future changes in product lines will be 'evolutionary' rather than 'revolutionary.'" Mr. Lyons presented little other support. His report states that "the residual value forecasts of other organizations were considered." However, Mr. Lyons cites to none of those forecasts to corroborate his valuation. Petitioners also offered the opinion of Mr. David Thomas, a director of Penn Stream Consultants, a dealer and trader of new and used IBM Computer Equipment, located in London, England. Mr. Thomas' testimony concerned only the foreign IBM equipment. Although Mr. Thomas had worked almost exclusively in Great Britain at the time of the transaction, he was generally familiar with the continental computer market. At the time of trial, Mr. Thomas had been active in some capacity in the European computer business for 17 years. His occupation required him to make determinations of fair market value and residual value of computer equipment. Mr. Thomas prepared a report predicting only the residual values of the foreign IBM equipment as of the end of the Initial User Leases. The report notes491 that the December 1982 German list prices of the equipment totaled 2.765.660 DM ($ 1,163,753.42). It was his opinion that, when the Initial User Leases expired 48 months after the transaction at issue, the Model 4341 central processing units would still be worth 25 to 30 percent of their total December 1982 German list price of $ 525,790, or approximately $ 131,448 to $ 157,737. The report also predicts that the foreign peripheral equipment would retain about 40 to 43 percent of its December 1982 list price of $ 637,963, or a total of $ 255,185 to $ 274,324 when its Initial User Leases expired 36 months after the transaction. Thus, the report estimates a total residual value of $ 386,633 to $ 432,061 for the foreign IBM equipment at the end of the Initial User Leases. Mr. Thomas did not explain the methodology that he used to arrive at his conclusions, and his report provides no other support of its conclusions. Mr. Thomas testified that his conclusions were based solely on his "knowledge of the marketplace at that time". Further, Mr. Thomas did not project the residual values at the end of the Master Leases, nor did he predict contingent rents. Mr. Thomas indicated that, as492 of December 1982, the remaining economic life of each of the pieces of equipment would have reasonably been estimated to be 10 years. Respondent countered with the expert testimony of Mr. S. Paul Blumenthal. Mr. Blumenthal was senior vice president of American Technology Appraisal Service (ATAS) from 1977 to the time of trial. ATAS is the valuation consulting division of American Computer Group, Inc. ATAS provides valuation services to major corporations, banks, leasing institutions, governments, and manufacturers. Prior to his employment with ATAS, from 1955 through 1977, Mr. Blumenthal worked in the computer industry in technical, engineering, marketing, and management positions. He has published and lectured extensively on computer valuation issues. Mr. Blumenthal has testified numerous times before this Court as an expert witness. Mr. Blumenthal estimated the residual values of the equipment as of the end of the Initial User Leases and as of the end of the Master Leases, viewed as of December 1982. He also predicted the flow of contingent rents that would have been expected as of December 1982. He drew his estimated residual values from ATAS reports on the same models493 of equipment that had been prepared in 1981 and 1982 for ATAS clients. Mr. Blumenthal submitted copies of those earlier reports to the Court. Among the many factors considered in arriving at the values stated in the earlier client reports were: Blue Book price reports, news of industry conditions from trade journals, the historic life of predecessor lines of computer equipment, and innovations that were anticipated at the time that the reports were made. In support of his conclusions, Mr. Blumenthal also submitted an article from the September 1982 issue of "Leasing Digest", a computer industry trade journal. The article reported the results of contemporaneous valuations performed by other companies regarding the main piece of equipment, the IBM Model 3081D. It should be noted that Mr. Blumenthal did not gather direct evidence of European prices of the foreign IBM equipment at issue. However, over the years, in the course of his professional duties, he had examined data regarding a large number of European trades of computer equipment. From that data he had found that the value of used equipment in the European market tends to be between 75 percent and 125 percent of the value494 of the same equipment in the domestic market. We note that Mr. Lyons, petitioners' expert, also testified to this relationship. However, to generate a more generous valuation, Mr. Blumenthal multiplied his domestic residual value for that equipment by a factor of 1.5. Mr. Blumenthal's report states that, as of December 1982, the following residual values reasonably could be expected at the end of the Initial User Leases and at the end of the Master Leases: Value After Value After EquipmentUser Leases Master Leases Domestic IBM$ 339,018$ 10,000CDC49,0430Foreign IBM184,9890Total573,05010,000Mr. Blumenthal also gave the following estimates of the contingent rents that could be expected to derive from the equipment between the end of the Initial User Leases and the end of the Master Leases: DomesticIBMCDC IBM Other Foreign EquipmentEquipment 4341s IBM Equipment Total $ 210,339$ 33,287$ 57,496$ 116,057$ 417,179Thus, adding the two components of residual value, the value following the Master Leases ($ 10,000) and the expected contingent rents ($ 417,179), Mr. Blumenthal produced a total valuation of $ 427,179. 495 At trial, Mr. Blumenthal discussed the steps involved in calculating the applicable lease rate, and, thus, the contingent rents, under his methodology. His report also provides a thorough explanation of that methodology. The report discusses 15 factors to be considered in setting the lease rate on equipment. Those include: (1) List price of the equipment; (2) lease term; (3) prime rate at the time of the transaction; (4) lessor's rate of return after taxes; (5) face value of leveraged loan; (6) leveraged borrowing rate; (7) leveraged loan terms; (8) investment tax credits, if any; (9) anticipated residual value; (10) cost of disposing of the equipment; and (11) depreciation rate. Mr. Blumenthal explained how these factors interact to affect the expected return on a computer lease. Of special interest in this case is the effect that a leveraged purchase has on the necessary rate of return. Mr. Blumenthal worked through detailed examples and explained how interest and depreciation deductions reduce the level of economic return necessary to satisfy an investor. Mr. Blumenthal then went a step further and applied the same methodology to derive the contingent rents from the main496 asset, the Model 3081D, assuming the residual values that were reported to have been forecast by two other companies, International Data Corp. (IDC) and Computer Economics. The Model 3081D and its associated peripheral equipment constitute the domestic IBM equipment group. The experts in this case valued the group as a whole, rather than as individual pieces of equipment. Mr. Blumenthal's methodology assumes that the evaluators at IDC and Computer Economics did likewise, and petitioner has not questioned this assumption. The September 1982 issue of "Leasing Digest" reports that IDC had predicted that, sometime during 1987, the value of the Model 3081D would fall below 10 percent of list price, or $ 354,250. The same article reports that Computer Economics had more optimistically estimated that the Model 3081D would be worth at least 20 percent of list price, or $ 708,500, until the second half of 1987. Using those dollar values, Mr. Blumenthal applied his methodology to compute contingent rents for the Model 3081D. The IDC estimate results in contingent rent of $ 219,768. The Computer Economics figure results in contingent rent of $ 444,407. Adding each of those figures to497 Mr. Blumenthal's previously computed contingent rents from the remainder of the equipment ($ 206,840), the total re-lease revenues amount to $ 426,608 using the IDC estimate. Using the Computer Economics estimate, the total is $ 651,247. Given the assistance offered by the experts, we must determine the value of the Trust's limited interest in the equipment. As noted earlier, that interest was essentially the ownership of the equipment after the expiration of the Master Leases plus the right to approximately half of the net rental stream between the end of the Initial User Leases and the end of the Master Leases. Respondent's expert, Mr. Blumenthal, presented a well explained and well documented report. Mr. Blumenthal's conclusions are based on reports that his company completed in 1981 and 1982 concerning these same computer models. We note that some of Mr. Blumenthal's analysis in those earlier reports is based on anticipation of innovations expected to affect the computer market. Although a number of those breakthroughs did not materialize, the question is not who was correct in predicting the events that would actually transpire; rather, the question is what was reasonable498 to believe in December 1982 about the future residual value of the equipment. . We find reasonable the prognostications that Mr. Blumenthal's company made in 1981 and 1982 regarding the residual value of this equipment as of the dates corresponding to the end of the Initial User Leases and the end of the Master Leases. Using these contemporaneous predictions, Mr. Blumenthal concluded in this case that, at the end of the Initial User Leases, the equipment would be worth $ 573,050, without adjustment for inflation. The September 1982 "Leasing Digest" article regarding the IBM Model 3081D strongly supports Mr. Blumenthal's estimate. Such contemporaneous information from a trade publication is precisely the type of material that would have influenced an investor's opinion in 1982. Mr. Blumenthal's conclusion is further supported by prior sales of the equipment. A short time before the Trust acquired the equipment, the Equilease entities purchased it for a total of $ 569,530. In November 1982, Equilease International paid Chemco $ 85,067 for the foreign equipment, stripped of the initial user rents. On December499 28, 1982, Equilease Partnership paid Equilease Marketing $ 484,530 for the domestic IBM and CDC equipment, also stripped of its initial user rents. As this Court has stated: When two parties dealing at arms' length assign a certain value to property being sold, and when that value has economic significance to each of the parties, the value assigned by the parties is very persuasive evidence of its fair market value. [, affd. .]See also ; . We also approve of Mr. Blumenthal's well-explained methodology for deriving re-lease revenues. Under that methodology, the Trust's portion of those revenues equals $ 417,179. Mr. Blumenthal's estimate of the residual value of the equipment as of December 1990, the end of the Master Lease, was $ 10,000. Adding those two sums, Mr. Blumenthal reached his well documented and understandable estimate of the total reasonable expected residual500 value, $ 427,719. We note that even using the much higher reported estimate by Computer Economics of the residual value of the Model 3081D after the Initial User Leases, total contingent rents of only $ 651,247 are obtained. Petitioners' expert Mr. Thomas offered an estimate of the residual value of the foreign equipment at the end of the Initial User Leases. His range of $ 386,633 to $ 432,061 was far in excess of the estimate of either of the other two experts. Mr. Thomas did not explain the methodology that he used to arrive at his figures, and, therefore, we have little basis on which to judge its reasonableness. In addition, Mr. Thomas did not forecast the stream of contingent rent or the residual value following the Master Leases. He simply stated that his estimated residual values following the Initial User Leases "could reasonably have been expected to be recovered over the remaining economic life of the equipment either through subsequent leases or resale." However, even if we found reasonable Mr. Thomas's residual valuation following the Initial User Leases, his failure to provide estimates of contingent rent and residual value following the Master Leases would seriously501 limit the value of his opinion. These additional estimates are essential to determining the worth of the interest that the Trust purchased. Any net contingent rents generated between the end of the Initial User Leases and the end of the Master Leases would be divided between the Trust and the Equilease entities. In contrast, the Trust held full rights to all net proceeds from the equipment after the expiration of the Master Leases. Petitioners' other expert, Mr. Lyons, offered estimates of the reasonably foreseeable values of all three sets of equipment. However, like Mr. Thomas, Mr. Lyons offers inadequate support for his conclusions. In addition, Mr. Lyons presented nothing to lessen the impact of Mr. Blumenthal's contemporaneous valuations and the two valuations reported by "Leasing Digest" in September 1982. At trial he offered little more explanation than that his answers were based on his experience. Further, Mr. Lyons submitted an extremely broad ranges of values. His totals ranged from $ 667,498 to $ 1,399,015, for a difference of $ 731,517. We note that even the average of this range, $ 1,033,257, would likely be unattractive to legitimate investors. The prospect502 of tying up $ 954,000 in cash for 8 years for the chance of receiving a total nominal return of $ 79,257, or 8.3 percent, is hardly enticing. See . Based on the foregoing, we adopt Mr. Blumenthal's figure, $ 427,179, as the value of the interests that the Trust acquired in the three groups of equipment. Based on that valuation, there was no reasonable possibility that the Trust and its unitholders would recoup the cash payment of $ 954,000 made to Systems, and thus we find that they could not realize an economic profit. 2. Other FactorsThe evidence shows that there were no bona fide negotiations between Systems and the Trust regarding the majority of the terms of the purchase. Mr. Crumlish, on behalf of the Trust, negotiated only the amount of the downpayment. As discussed above, the note payments from the Trust to Systems would be completely and precisely offset by the lease payments due from the Equilease entities to the Trust. Therefore, in the absence of a bankruptcy, the downpayment constituted the total out-of-pocket cost to the Trust. Thus, the nominal purchase price503 of the equipment, which was not negotiable, and the interest rate on the note, which was contingent upon the amount of the loan principal, were irrelevant. Our earlier finding that there was no reasonable possibility of making a profit on this deal leads us to believe that the types of equipment and the identities of the initial users were also unimportant to the Trust, except as window dressing. Further, the income and residual value projections that petitioner and his fellow unitholders claim to have relied upon were unreasonable. The projections provided by Systems indicate that the Trust could expect $ 914,175 in net re-lease rents from 1985 through 1990. We have already found that a purchaser could have reasonably expected release rents of approximately $ 417,179. The projections also indicate three possible net residual values for the equipment following the Master Lease terms: $ 930,671, $ 1,163,338, and $ 1,396,006. We have found that a purchaser would have reasonably expected to recover only $ 10,000 at the end of the Master Leases. We note that even petitioners' expert Mr. Lyons, whose estimate we found to be excessive, forecasts a maximum residual value following504 the Master Leases of only $ 470,074. B. Business PurposeGenerally, we will not apply the business purpose test in situations involving sophisticated investors who should have been aware that the transaction at issue could not achieve a pretax profit. , affd. ; cf. ("We have never held that the mere presence of an individual's profit objective will require us to recognize for tax purposes a transaction which lacks economic substance."). However, even if we were to apply the business purpose test in this case, we would find a complete lack of business purpose. Petitioner bought into the Trust solely to acquire tax benefits; the only purpose of the Trust was to generate those tax benefits. The organizers of the Trust and all of the unitholders were partners and principals in a major accounting firm. Petitioner, as well as other unitholders, had extensive experience with leasing transactions. Certainly, he and the other unitholders had the capacity to discern505 from the Offering Memorandum the very limited nature of the interest that they were acquiring. A serious examination of the Offering Memorandum reveals that valuable rights in the equipment had previously been assigned away. Petitioner and the other unitholders had ample opportunity to scrutinize the Offering Memorandum. Messrs. Atkins and Biggs informed them that the Trust was paying Systems the fair market value of the equipment. Messrs. Atkins and Biggs did not indicate that they had taken into account the previous assignments and the limited interest that the Trust was to acquire. Petitioner and the other unitholders should have understood that they were agreeing to a grossly inflated price for their limited interest in this equipment. In spite of the clear indications that this deal could turn no economic profit, petitioner purchased a 6-percent interest in the Trust for $ 57,420. He then proceeded to claim a cumulative net loss of $ 225,510 in 1982 through 1986, as a result of his participation in the Trust. From 1987 through 1989, he reported $ 115,656 of income from the Trust. Thus, through 1989, petitioner reported a total, front-loaded net loss of $ 109,854 stemming506 from his participation in the Trust. Because of the lack of economic substance and business purpose, we hold that the transaction was a sham in substance, and we uphold respondent's disallowance of depreciation deductions. Rice's Toyota World, Inc. v. Commissioner, 752 F.2d at 95; . In addition, petitioners are not entitled to deductions for interest payments on the Trust's nominally recourse liability to Systems. We will not grant effect to "transactions between * * * organizations created to carry out a tax shelter scheme, notes given for amounts having no relation to economic reality, or notes which almost certainly would not be paid." . The Trust obligated itself to Systems under a note that bears no relation to the value of the asset being purchased. Obligations from the Equilease entities under the equally inflated Master Leases precisely offset the Trust's liabilities. Systems' obligations to the Equilease entities closed the circle of liability. There is no indication that the Trust incurred any 507 purchase cost beyond the downpayment. Even if we were to find that interest was actually paid, interest deductions are impermissible where a debt has been undertaken solely to obtain tax benefits. ; , affg. ; ; . Because we have found for respondent on this issue, there is no need to examine respondent's other arguments regarding the validity of the Trust note, the transfer of the benefits and burdens of ownership, and the "at risk" rules under section 465. Negligence AdditionsRespondent has asserted that petitioners are subject to additions to tax under section 6653(a)(1) and (2). Petitioners bear the burden of proving that respondent's determination is wrong. Rule 142(a). Section 6653(a)(1) provides for an addition to tax of 5 percent of the underpayment if any part of the underpayment is due to negligence508 or intentional disregard of rules or regulations. For purposes of section 6653(a), negligence is defined as the "'lack of due care or failure to do what a reasonable and ordinarily prudent person would do under the circumstances.'" (quoting , affg. in part and remanding in part ). In petitioners' opening brief, they argue that if there was an underpayment of tax, petitioners were not negligent because they "acted with due care" and "relied on competent tax advisors". Reliance upon the advice of experts may constitute a defense to the addition to tax for negligence. , affd. ; . We have held this to be the case even where the advice relied upon was erroneous. ,509 affd. . However, a taxpayer's reliance must be reasonable, and blind reliance upon the advice of an expert will not constitute a defense. , affd. . Further, reliance on a tax professional will not absolve taxpayers where they are aware that the "facts" upon which they predicate their deductions are not the facts of the transaction at issue. ; see also . Petitioners have shown this Court nothing to indicate that they acted with "due care". The facts indicate just the opposite. Petitioner and his fellow unitholders purchased limited rights in equipment for an enormously and purposefully inflated price. The Offering Memorandum reveals that rights bearing the majority of the value of the equipment previously had been contracted away and that the Trust was acquiring the equipment subject to the rights of various third parties. Petitioner510 read the Offering Memorandum. Although supplied with the facts of the deal, petitioner purported to rely on the oral valuations made by Messrs. Atkins and Biggs, which pertained to unencumbered equipment. Petitioner, a partner in a major accounting firm and a professional experienced in leasing transactions, did not act with due care. There is likewise no reason to favor petitioner's claim that he acted under the advice of competent tax counsel. The Offering Memorandum indicates that the "facts" upon which the deductions were based were incorrect. Petitioner was on notice that the valuation that he received from Systems was grossly inflated and that the corroboration of that valuation from his fellow unitholders, Messrs. Atkins and Biggs, was insupportable. See . Therefore, we sustain respondent's determination of additions under section 6653(a)(1) and (2). Addition Under Section 6661Respondent has also asserted an addition to tax under section 6661. Section 6661(a) provides that if there is a substantial understatement of income tax, there shall be added to the tax an amount equal to 25 percent511 of any underpayment attributable to such understatement. An understatement is substantial if it exceeds the greater of 10 percent of the tax required to be shown in the return or $ 5,000. Sec. 6661(b)(1)(A). The understatement of tax in this case is greater than both of those amounts. However, the amount of any understatement is to be reduced in regard to any item if there was substantial authority for the treatment of that item claimed by the taxpayer. Sec. 6661(b)(2)(B)(i). Petitioners have produced no authority whatsoever to support their deductions. Therefore, we sustain respondent on this addition. Increased Interest Under Section 6621(c)Respondent determined that the entire underpayment of tax is a "substantial underpayment attributable to tax motivated transactions" under section 6621(c), formerly section 6621(d). Petitioners bear the burden of proving that respondent's determination is incorrect. Rule 142(a). Section 6621(c)(1) provides that, in the case of a substantial underpayment attributable to a tax-motivated transaction, the annual rate of interest shall be 120 percent of the normal rate of interest applicable to an underpayment. For this purpose, 512 a substantial underpayment attributable to a tax-motivated transaction is defined as an underpayment that is attributable to one or more tax-motivated transactions if the amount of the underpayment for the year exceeds $ 1,000. Sec. 6621(c)(2). The definition of "tax-motivated transaction" includes "any sham or fraudulent transaction." Sec. 6621(c)(3)(A)(v); see also , affd. without published opinion sub nom. , affd. sub nom. Skeen v. commissioner, , affd. without published opinion , affd. sub nom. ; ; , affd. . Petitioners argue that there is no "tax-motivated transaction" because, inter alia, the transaction at issue was*513 not a sham or fraudulent. However, the facts show that the subject transaction was a sham. Accordingly, we sustain respondent's determination that the transaction is tax motivated for purposes of section 6621(c). Decision will be entered under Rule 155.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622512/	GENERAL MANIFOLD & PRINTING CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.General Manifold & Printing Co. v. CommissionerDocket No. 14577.United States Board of Tax Appeals12 B.T.A. 436; 1928 BTA LEXIS 3528; June 7, 1928, Promulgated 3528 Petitioner, in the year 1921, purchased some of its own bonds for less than their face or par value. Held, that it realized no taxable gain from such transaction. Joseph Getz, Esq., for the petitioner. W. F. Gibbs, Esq., for the respondent. LITTLETON436 The Commissioner determined a deficiency of $1,010.90 in income tax for the calendar year 1921. It is claimed that the Commissioner erroneously held that petitioner realized a taxable profit upon the purchase of its own bonds during the year 1921. The facts are stipulated. 437 FINDINGS OF FACT. Petitioner is a Pennsylvania corporation with principal office in Franklin. It succeeded to the business of the General Manifold Co., which had been incorporated in 1900. The assets and liabilities of the predecessor corporation were taken over by the present company under a plan of reorganization whereby the stockholders exchanged their stock for stock in the new company. Petitioner assumed a liability on first mortgage bonds of the predecessor company of a face value of $500,000, which were due July 1, 1907, and which incident to the plan of reorganization were extended3529 for an additional period of 15 years. Until December 31, 1920, the officers of petitioner had pursued a policy of purchasing these bonds from time to time from bondholders at amounts less than their face value. May 2, 1921, the policy adopted by the officers and board of directors was approved by the stockholders of the company at the annual meeting of the stockholders held May 2, 1921. At this meeting the following resolution was adopted: Resolved, That the action of the officers of the company in purchasing and placing in the Treasury during the year 1920, Ten Thousand Five Hundred Dollars ($10,500) additional First Mortgage Bonds, making the amount being held in the Treasury on December 31, 1920 $162,500.00, (par value), be and hereby is approved; Also be it Resolved, That the officers of the company are hereby authorized to continue the purchase of the outstanding bonds as opportunity is offered, at such figures as the judgment of the officers of the company shall approve. Entries were made upon the taxpayer's books, reducing the bonds payable outstanding account as of December 31, 1920, by the face value of the bonds purchased and crediting surplus account3530 for the difference between the purchase price and the face value. During the year 1921 the following bonds were purchased at 60 per cent of their face value: Vendor:Par valueCharles Miller, Franklin, Pa$16,000Joseph C. Sibley, Franklin, Pa10,000F. H. Hatch & Co., 74 Broadway, New York, N.Y.5,000Charles A. Day & Co., 44 Broad Street, New York, N.Y.1,000Total32,000For these bonds there was paid to the individuals a total of $19,200 and the balance of $12,800 was credited to the profit and loss account and was reported by petitioner as taxable income. The bonds were placed in the treasury of the company with bonds purchased in previous years and the balance sheets issued by petitioner 438 showed a reduction in the liability for bonds payable in the amount of $32,000 during the year 1921. OPINION. LITTLETON: The issue is whether the purchase by petitioner in 1921 of its own bonds at a price below the face value thereof resulted in taxable income. In other similar cases the Board has considered the question here involved and held that such transaction did not result in taxable income and on the authority of those decisions, *3531 this question is decided in favor of petitioner. ; ; ; and . Judgment will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622514/	HUGH J. SMITH, JR., Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentSmith v. CommissionerDocket No. 19774-92United States Tax CourtT.C. Memo 1994-427; 1994 Tax Ct. Memo LEXIS 435; 68 T.C.M. (CCH) 573; August 24, 1994, Filed 435 Decision will be entered for respondent. Hugh J. Smith, Jr., pro se. For respondent: Stevens E. Moore. POWELLPOWELLMEMORANDUM OPINION POWELL, Special Trial Judge: This case was assigned pursuant to the provisions of section 7443A(b)(3) and Rules 180, 181, and 182. 1By notice of deficiency issued on June 19, 1992, respondent determined a deficiency in petitioner's Federal income tax in the amount of $ 1,140 for the taxable year 1989. At the time the petition was timely filed, petitioner resided in Metairie, Louisiana. The issue is whether petitioner is entitled to deduct a theft loss under section 165 in the amount of $ 10,150. The facts may be summarized as follows. Petitioner and Kate Roberts Smith (now Kate Roberts Valentine) (Kate) were married in 1947. They had four children, one of whom is Michael Robert Smith436 (Michael). By 1989, the year before the Court, all of the children were over 21 years old. The marriage terminated in a divorce on June 9, 1954. The terms of an agreement between Kate and petitioner, dated October 20, 1953 (the 1953 agreement), which is discussed later, were incorporated by reference into the final decree of divorce. Under the decree, Kate was awarded custody of the children. Since 1940 petitioner has collected French glass, and he continued his collection activities after the marriage. Petitioner's collection included works of Steuben, Baccarat, Orrefors, and Lalique. Under the 1953 agreement, Kate was awarded a house in Scarsdale, New York, and all of the furniture, furnishings, fixtures, china, glass, linen, pictures, decorations, objects of art and all other personal property of any nature whatsoever located on such premises excepting only the articles listed on the Schedule annexed hereto which * * * [petitioner] shall have and own and excepting the articles listed on Schedule B annexed hereto which shall belong to the four said children and which, regardless of whether they may be in the physical possession of * * * [petitioner or Kate], 437 shall be held by either * * [petitioner or Kate], as the case may be, for the benefit of the four said children during their minority and shall not be disposed of by either * * * [petitioner or Kate] without the written consent of the other * * .Attached to the 1953 agreement are Schedules A and B. Schedule A is entitled "Articles belonging to Hugh J. Smith, Jr." and does not include any of the glass collection. Schedule B is entitled "Articles to be held for the benefit of the four children." This schedule includes, inter alia, a "Steuben gear bowl," "Steuben elephant, 2 fish, 2 horseheads, rabbit," "All Lalique glass," and various Orrefors bowls. On Form 4684, Casualties and Thefts, attached to petitioner's 1989 Federal income tax return, petitioner claimed a theft loss in the amount of $ 10,150 and described the property as "Glassware per list attached." 2 This refers to a letter written to Kate by an attorney requesting that she send to petitioner "for the children" the following items: a)One (1) Deep Steuben Bowl, designed byGeorge Thompson (semi globular withcut feet)$ 2,500.00b)Steuben collection -- two (2) horses,one (1) elephant and (1) rabbit$ 1,000.00c)One (1) large Lalique Glass Fish(Bronze base missing)$ 3,500.00d)Steuben Crystal Set of Tableware-48 pc. by Simon Gate$ 2,400.00 e)One (1) large Orrefors Crystal Vase(with semi-lunar cuts) by Simon Gate$ 750.00438 The alleged value of these items totals $ 10,150. Petitioner has no records reflecting the purchase of these items. He testified that he paid $ 120 for the Steuben bowl, $ 20 each for the horseheads, $ 50-60 for the elephant and rabbit, $ 75 for the Lalique glass fish, under $ 500 for the Steuben tableware, and $ 70 for the Orrefors vase. Petitioner contends that Kate, in violation of the 1953 agreement, sold these pieces and absconded with the proceeds. Petitioner has never initiated any legal action to enforce the 1953 agreement. In 1988 Michael, however, brought an action in Florida against Kate based on the 1953 agreement. That action was settled for $ 35,000. Section 165(a) provides that "There shall be allowed as a deduction any loss sustained during the taxable year and not compensated for by insurance or otherwise." Section 165(e) further439 provides that "any loss arising from theft shall be treated as sustained during the taxable year in which the taxpayer discovers such loss." The amount of the deduction is limited to the lesser of the fair market value of the property immediately before the theft or the taxpayer's basis in the property. See sec. 165(b); secs. 1.165-1(c), 1.165-7(a), 1.165-8(c), Income Tax Regs. A theft includes, but is not limited to, larceny, embezzlement, and robbery. Sec. 1.165-8(d), Income Tax Regs.There is clearly more than a touch of whimsy in the deduction that petitioner claims here. A predicate to any loss by theft is that the taxpayer owned the property of which he or she was nefariously dispossessed. Irrespective whether Kate violated the terms of the 1953 agreement, it is clear that petitioner had no interest in any of the objects that were contained in Schedule B of the 1953 agreement. That agreement provided that the objects would be held in trust for the benefit of the children until they reached their majority. The agreement was executed approximately 36 years before the alleged theft of which petitioner now claims to be the victim. Whatever petitioner's interest in the subjects440 of the 1953 agreement may have been, 3 it is clear that by 1989, that interest had long been terminated, and, if, assuming that there was some theft, the loss was a loss of the children and not petitioner. Respondent also argues that there are other foibles in petitioner's argument -- e.g., whether or not there was a theft by Kate, the year of discovery, the amount of an allowable deduction, etc. Given our holding that petitioner had no interest in the property, we see no reason to explore these areas, except to note that each issue would appear to militate further against petitioner's position. Decision will be entered for respondent. Footnotes1. Unless otherwise indicated, section references are to the Internal Revenue Code in effect for the year in issue, and Rule references are to the Tax Court Rules of Practice and Procedure.↩2. While the 1988 taxable year is not before the Court, it appears that petitioner claimed a similar deduction for that year. That return was apparently not examined.↩3. We are somewhat bemused to note that the Steuben tableware for which a loss was claimed does not appear to have been subject to the 1953 agreement.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622515/	MORELAND L. HARTWELL, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentHartwell v. CommissionerDocket No. 2826-80.United States Tax CourtT.C. Memo 1982-215; 1982 Tax Ct. Memo LEXIS 530; 43 T.C.M. (CCH) 1157; T.C.M. (RIA) 82215; April 22, 1982. Moreland L. Hartwell, pro se. Velda J. Moog, for the respondent. RAUMMEMORANDUM FINDINGS OF FACT AND OPINION RAUM, Judge: The Commissioner determined an income tax deficiency of $ 585.24 for the taxable year ended December 31, 1976. The only issue for decision is whether Moreland L. Hartwell (petitioner) is entitled to a deduction for travel expenses in the amount531 of $ 2,548. FINDINGS OF FACT Some of the facts have been stipulated. The stipulation of facts and attached exhibits are incorporated herein by this reference. At the time the petition was filed, petitioner resided in Longview, Washington. His trade is pipefitting and instrumentation control for industrial processes. From 1968 to 1975, petitioner worked and resided with his family in California. In January 1975, petitioner left his home in Lomita, California, to work for three months as instrument superintendent on a Fluor Corporation project in Longview, Washington. He was requested by Fluor to accept this position, and in part he did so because of marital difficulties which he hoped would abate after a short separation. Upon completion of the Fluor project, petitioner determined that employment opportunities were abundant in Longview and he asked his family to join him there. His wife refused to move, and he remained alone in Longview. At this time, petitioner did not intend to return to California. Petitioner lived in a motel room during his first six months in Longview, after which he moved into a house with a woman friend. He shared all expenses, and did some532 minor plumbing and painting around the house. The furniture belonged to his live-in companion, but petitioner purchased appliances and a television set for the house. During this period petitioner was informed by his wife that she had filed for divorce. Although he later learned that his wife obtained only a legal separation, he was convinced that his relationship with his wife was over. Petitioner flew to Los Angeles in the fall of 1975 in an unsuccessful attempt at reconciliation, but he never again lived with his wife, who is now deceased. The method by which petitioner normally obtained employment was through a union "local" to which he belonged. Since 1970 petitioner has been a member of the local in Los Angeles. Although it was more difficult for petitioner to obtain employment in Washington while a member of the Los Angeles local, he could not join a Washington local, at least in the year in question, because he could not satisfy the prerequisite of three years of "unbroken time" working out of a Washington local. While living in Washington in 1975, petitioner opened checking and savings accounts at the Ranier Bank. In addition, petitioner registered his automobile533 in Washington, though he continued to hold a California driver's license. Petitioner voted as a Washington resident in National and state elections in 1976. In late November of 1975, the steamfitters' union went on strike throughout Washington, and as a result petitioner was involuntarily unemployed. He collected "unemployment" for two months, and when it appeared that the strike would last several additional months, he called his "home local" in Los Angeles seeking work. He was able to obtain employment with C.F. Braun & Co., working as instrument foreman on a project at Standard Oil of California's El Segundo refinery, in the Los Angeles area. Petitioner was informed that his job would last for two to three months, with the possibility of additional work if Standard Oil could get the necessary clearance for other construction at that location. Although he thought that the additional construction might extend the El Segundo refinery project to approximately one year, petitioner accepted this employment with the intention of remaining in California only until the Washington steamfitters' strike terminated. Petitioner believed that the strike's duration would be less than one534 year. The longest strike that he had experienced was approximately six months, and in view of the number of large construction projects left idle by the steamfitters' strike, petitioner expected that the strike would be settled "in the near future". Upon his arrival in Los Angeles, petitioner stayed for three weeks at the Pen and Quill motel in Manhatten Beach, California, which was almost within walking distance of his job, and then stayed four weeks at another motel, the Proud Parrot, in Lomita, California, which was approximately eight miles from his job. The parties have stipulated that in 1976 the cost of a night's lodging at the Pen and Quill and the Proud Parrot was $ 18 and $ 14, respectively. At the beginning of March, petitioner learned that more work would be done at the El Segundo refinery, and that the project would last for perhaps two years. Although he still intended to return to Washington when the strike was over, he now expected the strike to last until the summer of 1976. In order to reduce expenses he rented an apartment in Hawthorne, California, approximately five miles from his job. Petitioner initially paid one month's rent of $ 155 plus a deposit535 of $ 135. On April 1, 1976, he paid rent of $ 155 for another month. The following day, petitioner was laid off at the El Segundo refinery job and he was unable to obtain further employment through his union local. Petitioner then vacated his apartment and returned to Longview, Washington. Because of his premature termination of the lease, petitioner was required to forfeit his $ 135 deposit and was refunded $ 116.25 (three-fourths) of his April rent. While petitioner was working in California in January-April of 1976 he continued sharing the expenses of the Longview house with his woman friend. On four occasions, he made weekend trips to Longview to see her. Petitioner returned to Longview in April 1976, but he was unable to commence working until August, some three weeks after the strike ended. He was not rehired for the project on which he had been working when the strike began, apparently because that project had been "sold," but he did substantial work in Longview during the remainder of 1976. 1 Except for a six-week job in California in 1977, petitioner lived in Longview and shared the house with his friend until 1979. 536 During the seven weeks in January and February of 1976 that petitioner was staying in motels in the Los Angeles area, he would pay the room charge each week, in advance, and immediately enter the payment in a diary. Receipts for each payment were kept in the diary. Petitioner followed the same procedure when making rental payments for the Hawthorne apartment. However, he did not enter meal expenses in the diary and he failed to get receipts therefor. Petitioner paid all of his expenses in cash. On or about March 27, 1978, petitioner's car was burglarized and among the items stolen was a metal box containing the expense diary and receipts. A police report was made of the burglary in which specific reference was made to the metal box. On his 1976 Federal income tax return, petitioner claimed a travel expense deduction in the amount of $ 2,548. This figure was apparently computed as follows: Lodging:91 days at $ 18/day$ 1,638Meals:91 days at $ 10/day910$ 2,548In disallowing the deductions the Commissioner ruled: (1) that petitioner failed to substantiate the expenditures in accordance with section 1.274-5, Income Tax Regs.; and (2) that537 these claimed travel expenses were nondeductible personal expenditures because they were incurred in a location in which petitioner was working for an indefinite period and was thus not "away from home". OPINION On brief, the Government concedes the "away from home" issue, leaving in controversy only the section 274(d) substantiation issue with respect to deductibility of petitioner's expenses for meals and lodging. Section 274(d) requires substantiation of each expense, as to amount, time, place and business purpose, "by adequate records or by sufficient evidence corroborating his own statement". 2 See Section 1.274-5(c), Income Tax Regs.538 Substantiation by "adequate records" requires maintenance of an account book, diary, or similar record, plus documentary evidence such as receipts, though duplication is not necessary "so long as such account book and receipt complement each other in an orderly manner". Section 1.274-5(c)(2)(i), Income Tax Regs.The cost of meals can be aggregated on a daily basis. Section 1.274-5(b)(2)(i), Income Tax Regs. Documentary evidence is required, however, for "[a]ny expenditure for lodging while * * * away from home", and, by implication, not for any other expenditures of less than $ 25. Section 1.274-5(c)(2)(iii) (a) and (b), Income Tax Regs. Substantiation by the alternative of "other sufficient evidence" allows the taxpayer to establish each element of an expenditure (section 1.274-5(c)(3), Income Tax Regs.): (i) By his own statement, whether written or oral, containing specific information in detail as to such element; and (ii) By other corroborative evidence sufficient to establish such element. It is clear that substantiation of expenses by "other sufficient evidence" must include the production of evidence to buttress a taxpayer's statements; Congress sought539 to preclude deductions claimed solely on the basis of a taxpayer's "unsupported, self-serving testimony". S. Rept. No. 1881, 87th Cong., 2d Sess. (1962), 3 C.B. 741">1962-3 C.B. 741; see Woodward v. Commissioner,50 T.C. 982">50 T.C. 982, 993 (1968); Sanford v. Commissioner,50 T.C. 823">50 T.C. 823, 830 (1968), affd. 412 F. 2d 201 (2d Cir. 1969), cert. denied 396 U.S. 841">396 U.S. 841 (1969). Within the foregoing regulatory framework we consider the evidence presented by petitioner to substantiate his expenses. Meals. In respect of the $ 910 claimed as expenses for meals, we have solely petitioner's estimate, made orally at trial and in writing in a letter to his accountant dated August 28, 1979. Petitioner testified that he neither had receipts nor made contemporaneous entries in his diary to record his costs for meals. Thus, he clearly did not satisfy the "adequate records" requirement of the regulations. Moreove, petitioner can find no relief in the provision for substantiation by "other sufficient evidence". As indicated above, petitioner's uncorroborated statements, either oral or written, will not suffice for the allowance of this540 deduction. Tempted as we may be to allow petitioner some deduction since he certainly incurred expense for meals while in Los Angeles, we cannot approve any deduction based solely on our estimate, because Congress specifically intended to preclude such a result in enacting section 274(d). See S. Rept. No. 1881, 87th Cong., 2d Sess. (1962), 3 C.B. 741">1962-3 C.B. 741 ("This provision is intended to overrule, with respect to such expenses the so-called cohan rule"). Lodging. Petitioner was considerably more diligent in keeping records in respect of his lodging expenses. These expenses, which he paid in cash, were recorded "at or near the time of the expenditure", section 1.274-5(c)(2)(ii), Income Tax Regs., and receipts were obtained and kept in his diary or log. With regard to these expenditures, then, the requirements for substantiation by "adequate records" were satisfied. Petitioner was unable to produce these records at trial because they were stolen from his automobile in 1978. Nevertheless, section 1.274-5(c)(5), Income Tax Regs., provides that if a taxpayer maintains adequate records, but such records are lost due to circumstances beyond his control, the541 deductions may be substantiated by "reasonable reconstruction of his expenditures". Since the records herein were stolen -- a circumstance plainly beyond his control, see James v. Commissioner,40 T.C.M. (CCH) 45">40 T.C.M. 45, 50 (1980), 49 P-H Memo T.C. par. 80,099 (1980); Ranheim v. Commissioner,39 T.C.M. (CCH) 720">39 T.C.M. 720, 722 (1979), 48 P-H Memo T.C. par. 79,502 (1979) --, petitioner is entitled to substantiate his costs by "reasonable reconstruction of his expenditures". At trial, petitioner testified in significant detail as to the amount, time, place, and business purpose of his lodging expenditures. His recollection of names of establishments, addresses, dates, amounts expended and (for his April rent) refunded, and proximity of lodging to his job location was all highly credible, and indeed the parties have stipulated the rental rates of the motels at which he stayed, as well as the rental for his apartment. We found as fact that he incurred the following lodging expenses: Pen & Quill, 21 days at $ 18$ 378.00Proud Parrot, 28 days at $ 14392.00Hawthorne Apartments, 1-1/4 monthsrent at $ 155193.75Hawthorne Apartment deposit, forfeited135.00$ 1,098.75542 This situation is to be sharply distinguished from an attempt to satisfy the substantiation requirement by "other sufficient evidence" where no diary or similar record with qualifying accompanying documentation is kept in the first place. Here, petitioner did maintain such records, but they were stolen. What constitutes an acceptable reconstruction of those original records must depend upon the circumstances of each case. And, in our view, petitioner's wholly credible and precise evidence in this case was sufficient. An entirely different result might conceivably be reached where the evidence is vague, where estimates or approximations may be required, where the relationship of the claimed expenditure to the taxpayer's business might fall in such murky areas as, for example, entertainment, that are often open to abuse, or where the evidence of the loss or theft of the records is not wholly satisfactory. Here, the relationship of the expenditures to petitioner's trade or business is undisputed, the amounts are precise and do not require any Cohan approach, and the adequate records that were kept in the first instance were convincingly shown by both documentary and testimonial*543 evidence to have been stolen. We hold that petitioner reasonably reconstructed his lodging expenses, and he is therefore entitled to a deduction of $ 1,098.75 for the taxable year ended December 31, 1976. Decision will be entered under Rule 155.Footnotes1. Petitioner's 1976 income tax return discloses earnings of $ 9,164.80 from the Swinerton & Walberg Co. of Longview, Washington.↩2. SEC. 274. DISALLOWANCE OF CERTAIN ENTERTAINMENT, ETC., EXPENSES. (d) Substantiation Required.--No deduction shall be allowed-- (1) under section 162 or 212 for any traveling expense (including meals and lodging while away from home), (2) for any item with respect to an activity which is of a type generally considered to constitute entertainment, amusement, or recreation, or with respect to a facility used in connection with such an activity, or (3) for any expense for gifts, unless the taxpayer substantiates by adequate records or by sufficient evidence corroborating his own statement (A) the amount of such expense or other item, (B) the time and place of the travel, entertainment, amusement, recreation, or use of the facility, or the date and description of the gift, (c) the business purpose of the expense or other item, and (D) the business relationship to the taxpayer of persons entertained, using the facility, or receiving the gift. The Secretary may by regulations provide that some or all of the requirements of the preceding sentence shall not apply in the case of an expense which does not exceed an amount prescribed pursuant to such regulations.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622516/	L. B. Maytag, and Estate of Catherine B. Maytag, Deceased, Lewis B. Maytag and the First National Bank of Colorado Springs, Colorado, Executors, Petitioners, v. Commissioner of Internal Revenue, RespondentMaytag v. CommissionerDocket No. 69521United States Tax Court32 T.C. 270; 1959 U.S. Tax Ct. LEXIS 176; 10 Oil & Gas Rep. 669; April 30, 1959, Filed 176 Decision will be entered under Rule 50. 1. In 1947, petitioners paid a lump sum of $ 5,000 for an undivided one-half interest in 2 oil and gas leases known as "Ownbey" and "Colorado," and 3 Federal oil and gas leases to be acquired from the United States Government, for which application was then pending. At the time of acquisition, all of said leaseholds were contiguous, covering a tract of approximately 6,715 acres in Park County, Colorado, and formed a continuous boundary. In 1950, petitioners surrendered their interest in the Colorado and 2 of the Federal leases; and in 1951, they canceled their interest in the Ownbey lease. The remaining Federal lease, containing 876.8 acres, was canceled February 1, 1953. Petitioners never allocated their aggregate cost to the respective leases on any basis. Prior to and including the taxable year 1953, petitioners did not claim any deduction on their Federal income tax returns with respect to the loss sustained when the underlying leases were surrendered or allowed to lapse. In their petition, for the first time, they claimed a loss in the full amount of $ 5,000 for the year 1953, alleging that the 5 leases constituted a "single property" 177 for loss deduction purposes under section 23(e)(2) of the 1939 Code. Held, that losses were deductible in the respective years in which the leases were canceled.Allocation of cost of lease canceled in 1953, and loss deductible in 1953 in relation thereto, determined.2. During 1953, petitioners, nondealers in securities and real estate, paid a total of $ 347.40 in Federal documentary stamp taxes, part of which was applicable to sales of dividend-paying corporate stock and part to the sale of real estate held for rental purposes. During 1954, petitioners also paid the amount of $ 916.50 in stamp taxes in connection with the sale of dividend-paying corporate stock. Said amounts were deducted as business expenses in petitioners' 1953 and 1954 returns, respectively. Held, that the amounts expended for stamp taxes are selling charges or offsets against the selling price of the aforesaid capital assets, and are not deductible from gross income under sections 23(c)(1)(F) and 164(b)(3) of the 1939 and 1954 Codes, respectively. William A. McDonald, C.P.A., for the petitioners.William J. McNamara, Esq., for the respondent. Fisher, Judge. FISHER271 This proceeding involves deficiencies in income tax determined against petitioners as follows:YearAmount1953$ 145.92195411.32Petitioners claim overpayments in income tax in amounts as follows:YearAmount1953$ 2,908.92195482.80.180 The principal issues presented for our decision herein are (1) whether petitioners incurred a deductible loss in the amount of $ 5,000, or any portion thereof, during the taxable year 1953 upon the abandonment of an oil and gas lease; and (2) whether petitioners, nondealers in securities and real estate, may deduct the amounts of $ 347.40 and $ 916.50, representing the cost of Federal documentary stamp taxes paid in the taxable years 1953 and 1954, respectively, in connection with the sale of rental property and corporate stocks, as ordinary and necessary business or nonbusiness expenses under sections 23(c)(1)(F), Code of 1939, and 164 (b)(3), Code of 1954.FINDINGS OF FACT.I.Some of the facts are stipulated and, as stipulated, are incorporated herein by this reference.Petitioners are an individual and the estate of his deceased wife, Catherine B. Maytag. During the taxable years 1953 and 1954, petitioners resided at Broadmoor, Colorado Springs, Colorado. They filed joint income tax returns for those years on a cash basis with the 272 director of internal revenue for the district of Colorado. Catherine B. Maytag died in August 1954.For simplicity, Catherine B. Maytag, 181 rather than her estate, will be referred to as a petitioner, and she and her husband will hereinafter be called petitioners.L. B. Maytag is a retired manufacturer who is not presently engaged in any business activities on a full time basis. He is a director of several corporations, has some ranch and real estate holdings, and has participated in several oil ventures.In June 1947, petitioners, through James L. Taylor, paid a lump sum amount of $ 5,000 for an undivided one-half interest in 2 oil and gas leases, known as the "Ownbey" and "Colorado," and assignments of 3 Federal oil and gas leases to be acquired from the United States of America through the Bureau of Land Management, Department of Interior. All of said property was located in Park County, Colorado. At the time of acquisition of the interests in said leases by petitioners, the tracts covered by said leases consisted of a total of approximately 6,715 acres which were contiguous and formed a continuous boundary.The first of the leases (an interest in which was assigned to petitioners in 1947), hereinafter called the Ownbey lease, was entered into on May 3, 1946, by and between John L. and Irene Ownbey, as lessors, 182 and R. W. Kramer, as lessee. The Ownbey lease covered approximately 3,200 acres of land, and ran for a primary term of 5 years.On May 14, 1946, R. W. Kramer assigned approximately 1,280 acres of property included in the Ownbey lease to C. C. Rasmussen. On June 13, 1947, C. C. Rasmussen, "in consideration of One Dollar (and other good and valuable considerations)," assigned all of his right, title, and interest in the 1,280 acres of property included in the Ownbey lease to the petitioners. Petitioners made all payments by check to C. C. Rasmussen but all dealings were made directly with Taylor. On May 28, 1951, petitioners surrendered all of their interest in the 1,280 acres of property included in the Ownbey lease to John L. and Irene Ownbey.The second of the leases assigned to petitioners in June 1947, hereinafter called the Colorado lease, was entered into on May 1, 1946, by and between the State of Colorado, as lessor, and C. C. Rasmussen, as lessee. The lease covered approximately 2,240 acres of land and ran for a primary term of 5 years.On June 11, 1947, Rasmussen assigned all of his right, title, and interest in the Colorado lease to petitioners. In 1950, the Colorado183 lease was allowed to lapse for nonpayment of rental due November 1, 1950.On February 1, 1948, Clifford L. Feldt, as lessee, entered into a lease agreement with the United States of America as lessor, through the 273 Bureau of Land Management, Department of Interior, under which the lessee obtained the exclusive right and privilege for a period of 5 years to drill for and extract oil and gas deposits on approximately 876.8 acres of land situated in Park County, Colorado. On February 1, 1953, said lease, D-053968, was canceled for nonpayment of rental for the year commencing February 1, 1953.Likewise, on February 1, 1948, Rasmussen, as lessee, entered into a lease agreement with the United States of America, as lessor, which contained substantially the same provisions as lease D-053968, under which the lessee obtained the exclusive right and privilege to drill for and extract oil and gas deposits on approximately 2,240 acres of land situated in Park County, Colorado. On December 27, 1950, said lease, D-053969, was canceled for nonpayment of rental for the year commencing February 1, 1951.Also, on February 1, 1948, Rasmussen, as lessee, entered into a lease agreement with 184 the United States of America, as lessor, which contained substantially the same provisions as lease D-053968, under which the lessee obtained the exclusive right and privilege to drill for and extract oil and gas deposits on approximately 78.44 acres of land situated in Park County, Colorado. On December 27, 1950, said lease, D-054041, was canceled for nonpayment of rental for the year commencing February 1, 1951.Petitioners executed no written cross-assignments of any portion of their interest in the Ownbey and Colorado leases. Feldt and Rasmussen executed no written assignments or cross-assignments of any portion of their respective interests in Federal leases D-053968, D-053969, and D-054041. No agreements of the kind known in the oil and gas industry as unitization agreements were entered into by petitioners with respect to development of the Ownbey and Colorado leases nor the Federal oil and gas leases.From the beginning of the transaction whereby the 5 leases were acquired by petitioners and Taylor, they had a verbal understanding that they would share in the profits on a 50-50 basis of any oil that might be discovered under the entire tract which covered approximately 6,715.24185 acres.Petitioners never allocated their aggregate cost to the 5 leases on any basis. There was never any drilling done on any part of said acreage by petitioners or Taylor.During the years 1947 to 1951, inclusive, when one-half of the delay rental became due on the Ownbey, Colorado, and Federal Government leases, the amounts due were paid by petitioners as follows:YearOwnbey and Colorado leasesFederal leases1947$ 140194860019496001950460$ 110.001051109.63274 During 1947 to 1951, inclusive, one-half of the delay rental becoming due on the Ownbey, Colorado, and Federal Government leases was paid by James Taylor as follows:YearOwnbey and Colorado leasesFederal leases1947$ 140194860019496001950460$ 109.251951109.62Prior to and including the taxable year 1953, petitioners did not claim any deduction on their Federal income tax returns with respect to the loss sustained when the 5 underlying leases, mentioned above, were surrendered or allowed to lapse. In their petition, for the first time, petitioners claimed a loss in the amount of $ 5,000 for the taxable year 1953 allegedly due to the abandonment186 of the aforesaid leases, and, therefore, claimed a refund in the amount of $ 2,908.92.The basis to petitioners of the lease canceled in 1953 was $ 652.77.II.During the taxable year 1953, petitioners paid a total of $ 347.40 in Federal documentary stamp taxes, of which the sum of $ 286.90 was applicable to sales of dividend-paying corporate stock, and $ 60.50 was applicable to the sale of real estate held for rental purposes. Said amounts of tax were deducted as a business expense in petitioners' 1953 income tax return. During the taxable year 1954, petitioners paid the amount of $ 916.50 in Federal documentary stamp taxes, all of which was paid in connection with the sale of dividend-paying corporate stock. Likewise, said amount of tax was deducted as a business expense in petitioners' 1954 income tax return.Respondent, in his notice of deficiency, disallowed the aforesaid deductions in each of the taxable years as ordinary and necessary expenses, but took into account the amounts expended as an adjustment reducing the gain on the sale of capital assets, resulting in a net decrease in recognized capital gain for the taxable years 1953 and 1954 in the amounts of $ 173.70187 and $ 458.25, respectively.Petitioners were not dealers in securities or real estate during either of the taxable years 1953 and 1954. The parties have stipulated that if the deduction sought by petitioners for Federal documentary stamp taxes is allowed as a business or nonbusiness expense, the additional deduction allowed in adjustments (e) of Schedule 1 and (b) of Schedule 4 of the statutory notice of deficiency will be eliminated from the computation of petitioners' income tax liability.275 OPINION.I.The first issue for our consideration involves the allowance, in whole or in part, of a loss in the aggregate amount of $ 5,000 claimed by petitioners to have been incurred in the taxable year 1953 when the last of 5 oil and gas leases was canceled or surrendered. Petitioners contend that they acquired, for a single lump-sum payment of $ 5,000, an interest in 5 oil and gas leases, which either constituted a single property or should be so treated for income tax purposes under section 23(e)(2), Code of 1939, and Regulations 111, sections 29.23(e)-3 and 29.23(m)-1-(i), and Regulations 118, sections 39.23(e)-3 and 39.23(m)-1(i). 1188 Respondent takes the position that petitioners' losses were incurred and were deductible in the respective years in which the underlying leases were canceled or surrendered, and that the aggregate loss of $ 5,000 was not allowable in 1953, the year in which the final lease was canceled, the other leases having been canceled or abandoned in prior 276 years. We agree with respondent's position on this issue for the reasons hereinafter stated.The burden of proof is upon the petitioners, since they claim a loss deduction, to establish their right to the deduction and the amount thereof. Green v. Commissioner, 133 F. 2d 76 (C.A. 10, 1943), affirming a Memorandum Opinion of this Court dated June 12, 1942; C. H. Goodwin, 9 B.T.A. 1209">9 B.T.A. 1209 (1928). It is fundamental, of course, that the extent of allowable deductions from gross income for the purpose of income taxation is dependent upon legislative grace; that only where there is clear statutory provision therefor may any particular deduction be allowed; and that a taxpayer claiming a deduction bears the burden of proving the facts on the basis of which such deduction is189 allowable under the applicable statutory provision. New Colonial Co. v. Helvering, 292 U.S. 435 (1934); United States v. Akin, 248 F. 2d 742 (C.A. 10, 1957); Chicago Mines Co. v. Commissioner, 164 F. 2d 785 (C.A. 10, 1947, affirming 7 T.C. 1103">7 T.C. 1103 (1946)).Section 23(e) of the Internal Revenue Code of 1939, on which petitioners rely, provides that, in computing net income there shall be permitted deduction of individual losses "sustained during the taxable year" and not compensated for by insurance or otherwise. The interpretative regulations promulgated pursuant to this section, mentioned hereinabove, provide that a loss, to be deductible, "must be evidenced by closed and completed transactions, fixed by identifiable events, bona fide and actually sustained during the taxable period for which allowed." Whether the loss which the taxpayer seeks to deduct is deductible during the taxable year is primarily a question of fact controlled by the circumstances in the particular case. Boehm v. Commissioner, 326 U.S. 287">326 U.S. 287 (1945),190 rehearing denied 326 U.S. 811">326 U.S. 811 (1946).In the instant case, it is stipulated that 4 of the 5 leases in controversy were canceled or surrendered separately in years prior to the taxable year 1953. Nevertheless, it is petitioners' position that the 5 leases constituted a single "property," under their construction of the regulations set forth in footnote 1, supra, and, hence, that the total cost of $ 5,000 was deductible under section 23(e) in the taxable year 1953 when, according to their contention, "the property" was completely 277 and permanently given up in its entirety upon the cancellation of the last of the underlying leases, i.e., Federal lease D-053968.Petitioner relies heavily upon the language of section 29.23(m)-1(i) of Regulations 111 and section 39.23(m)-1(i) of Regulations 118 (see footnote 1, supra) to the effect that "[the] property," as used in section 114(b)(2), (3), and (4), means the interest owned by the taxpayer in any mineral property; that taxpayer's interest in each separate property is a separate "property," but that where 2 or more mineral properties are included in a single tract or parcel of land, the taxpayer's191 interest in such mineral properties may be considered to be a single "property" provided such treatment is consistently followed.Assuming arguendo (although we do not think that petitioners have established the fact) that the 5 mineral properties in which petitioners had an interest were consistently treated as a single property, we do not think the provisions of the regulations support petitioners' contention. Here, our problem relates to losses on abandonment, cancellation, or termination of the leases. Section 114(b)(2), (3), and (4) referred to in the regulations relates solely to depletion, an entirely different concept. There is no suggestion in the regulations that the 5 interests may be treated as one for the purpose of determining the year or years of loss on abandonment, cancellation, or termination, especially where, as here, those events severed the respective interests abandoned, canceled, or terminated, in different years, from any conceptual whole or single interest. Moreover, section 29.23(e)-3 of Regulations 111 and section 39.23(e)-3 of Regulations 118 (footnote 1) relating to loss of useful value under circumstances similar to those here under consideration, 192 lead to the contrary conclusion and support the view that a loss deduction is to be taken in the year in which the loss occurred.We find no authority which supports petitioners' contention, and, in our opinion, Oliver Iron Mining Co., 13 T.C. 416">13 T.C. 416 (1949), is controlling to the contrary. In that case, the taxpayer was the sublessee of 12 iron ore properties leased in 1903. In 1914, the taxpayer purchased its lessor's interest in the 12 leases, and, with the exception of one lease which was terminated in the taxable year 1939, extracted oil from the various properties. The portion of the total purchase price allocable to each lease was reflected on the taxpayer's books. On its 1939 return, the taxpayer sought to deduct the cost of the lease abandoned in that year, and included the entire cost of said lease. The respondent contended that no part of the purchase price of the 12 leases was allocable to the lease abandoned in 1939, but that the 1914 contract was a unitary contract covering all of the properties embraced therein, and the cost of all must be recovered through depletion. 278 Holding that the taxpayer was entitled to deduct the cost193 of the separate lease in the year when the loss was actually sustained, we said (p. 418):The unrecovered cost of a lease is deductible as a loss when a lease is terminated under circumstances similar to those here present, and the Commissioner has recognized this rule by allowing a part of the loss. Oliver Iron Mining Co., 10 T.C. 908">10 T.C. 908; Berkshire Oil Co., 9 T.C. 903">9 T.C. 903; Henry C. Rowe, 19 B.T.A. 906">19 B.T.A. 906. A lump sum purchase price should be allocated to the several leases for the purpose, inter alia, of computing loss upon termination of a lease, unless such allocation is wholly impracticable. Berkshire Oil Co., supra;Nathan Blum, 5 T.C. 702">5 T.C. 702; Searles Real Estate Trust, 25 B.T.A. 1115">25 B.T.A. 1115; Biscayne Bay Islands Co., 23 B.T.A. 731">23 B.T.A. 731. * * See also Sneed v. Commissioner, 119 F. 2d 767 (C.A. 5, 1941) affirming 40 B.T.A. 1136">40 B.T.A. 1136 (1939).Petitioners stress Berkshire Oil Co., 9 T.C. 903">9 T.C. 903 (1947). In 194 that case, two contiguous tracts were treated as one separate property, as distinguished from two other noncontiguous tracts. The two contiguous tracts, however, were both released to the lessor in the same year, and the loss was allowed in that year. An allocation of cost between the two contiguous lots had no significance in relation to the issue there involved. To the extent of the issue actually determined (deduction of the loss in the year of release), the case is in no sense in conflict with the principles which we follow in the instant proceeding.Petitioner also relies upon Helvering v. Jewel Mining Co., 126 F. 2d 1011 (C.A. 8, 1942), reversing 43 B.T.A. 1123">43 B.T.A. 1123 (1941); Island Creek Coal Co., 30 T.C. 370">30 T.C. 370 (1958); and Amherst Coal Co., 11 T.C. 209">11 T.C. 209 (1948). Each of these cases, however, relates to depletion problems, and not to the question of whether gain or loss is to be recognized in the respective years in which separate leases were abandoned, canceled, or terminated. Witherspoon Oil Co., 34 B.T.A. 1130">34 B.T.A. 1130 (1936), involved 195 the disallowance of a deduction for undepleted cost of individual oil wells upon tracts containing other producing wells, and thus distinguishes itself from the instant case. We think it would serve no useful purpose to extend our discussion to a separate consideration of other cases cited on brief since we think it is clear that they are distinguishable on their respective facts, and are, in essence, disposed of by the principles already discussed herein.Upon the basis of the foregoing discussion, we hold that petitioners are entitled to a loss deduction in 1953 only with respect to Federal lease D-053968 which was canceled in that year.Our holding to the above effect, however, does not wholly dispose of the issue because petitioners have produced no evidence of basis (in this instance, cost) to be allocated to the lease canceled in 1953. There is some vague, generalized testimony from which it might be inferred 279 that this lease may have been proportionately somewhat more valuable than the respective 4 leases terminated in years prior to 1953. There is no evidence, however, showing how much greater such value may have been, or whether the difference was substantial or196 not. Actually, each of the 5 leases turned out to be a complete loss.Despite the lack of evidence as to basis, or the actual amount of the loss incurred in respect of the lease canceled in 1953, it is clear that some loss occurred in that year. We think the evidence warrants our application of the principles of Cohan v. Commissioner, 39 F. 2d 540 (C.A. 2, 1930). The only practical approach under the circumstances of this case is to allocate cost as between the 5 leases on a per acre basis, resulting in an allocation of $ 652.77 as the basis of the lease canceled in 1953, and determination of a loss in that amount for that year. No depletion deductions were allowable or taken as to any of the 5 leases. Respondent concedes a basis of approximately $ 650.Petitioner objects to a per acre allocation, and relies on Driscoll v. Commissioner, 147 F. 2d 493 (C.A. 5, 1945), reversing, in part, a Memorandum Opinion of this Court dated January 27, 1944. There are two answers to this objection. The first is that Driscoll, supra, involved depletion and not gain or loss on abandonment, 197 cancellation, or termination. The second is that if we do not allocate on a per acre basis, we would be forced to conclude that the basis for the lease canceled in 1953 must be taken as zero, petitioners having failed to meet the burden of proving a basis (other than that inferred by us on a per acre calculation in implementing the Cohan approach) for the lease in question.II.Turning to the documentary stamp tax issue, which is present in both of the taxable years involved herein, the facts, as wholly stipulated, show that in their income tax returns for said years, petitioners deducted as a claimed business expense, Federal documentary stamp taxes which they paid on the sale of dividend-paying stock and rental real estate. Petitioners urge that the expenditures in dispute are allowable as ordinary and necessary nonbusiness expenses incurred in the "production or collection of income" within the purview of section 23(a)(2) of the Code of 1939 and section 212 of the Code of 1954, and, hence, are deductible from gross income under sections 23(c)(1)(F) and 164(b)(3) of the 1939 and 1954 Codes, respectively. 2280 In essence, it is petitioners' position that since 198 profit was realized from the sale of the securities and rental property here in question, the documentary stamp taxes paid on the disposition thereof were an ordinary and necessary expense incurred for the production of this income.199 Respondent disallowed the deductions in question, either as business or nonbusiness expenses, treating them instead as capital expenditures in determining gain on the sale of capital assets.We think it is clearly established that when securities or other capital assets are sold or disposed of by one not a dealer, expenditures incident to the sale are not to be treated as ordinary and necessary expenses, but are to be considered in the nature of capital expenditures to be offset against the selling price or the amount realized from the sale. Spreckels v. Commissioner, 315 U.S. 626">315 U.S. 626 (1942). It is to be noted that Spreckels, supra, had to do with the deduction of commissions on sale of securities. As will appear from our discussion, infra, the statutory provisions relating to the deduction of stamp taxes differed in the years involved in Spreckels, supra, from the provisions applicable to the years here involved. The statutory provisions applicable to the instant case clearly bring expenditures for stamp taxes on sale of securities and real estate within the principles announced in200 Spreckels, supra, when applied to vendors not in the business of buying and selling the assets in question.In the instant case the facts are undisputed. Petitioners were not dealers in securities or real estate during either of the taxable years 1953 or 1954. The stamp taxes were paid by petitioners in connection with the sale of capital assets and were directly attributable to such sale. As such, they were not ordinary and necessary expenses for the production or collection of income within the meaning of section 23(a) (2), but were clearly capital expenditures under the principles announced in Spreckels, supra.As such, they are not deductible in full in determining gross income, but are to be treated as an offset against the selling price in the same manner as broker's fees or selling commissions. See also Helvering v. Winmill, 305 U.S. 79">305 U.S. 79 (1938). The determination of gain from the sale of the assets in question, of course, involves a computation under section 111 of the 1939 Code and section 1001 of the 1954 Code. These sections provide that the gain from 281 the sale of201 property shall be the excess of the amount realized over the adjusted basis, and the amount realized is the sum of any money received, plus the fair market value of whatever else is received. All expenses of sale, including the cost of documentary stamp taxes, enter into that computation. See Samuel C. Chapin, 12 T.C. 235">12 T.C. 235, 238 (1949), affirmed on another issue 180 F. 2d 140 (C.A. 8, 1950). See Rev. Rul. 55-756, 2 C.B. 536">1955-2 C.B. 536.Petitioners, relying on Regulations 118, section 39.23(a)-15(2) (b), 3 and Agnes Pyne Coke, 17 T.C. 403">17 T.C. 403 (1951), affd. 201 F.2d 742">201 F.2d 742 (C.A. 5, 1953), argue that the term "income," for the purposes of sections 23(a) (2) and 212, "is not confined to recurring income but applies as well to gains from the disposition of property," and hence the stamp taxes are deductible from gross income as ordinary and necessary expenses. We have carefully considered the aforesaid authorities and do not find them applicable to the instant factual situation or inconsistent with respondent's view. We have set forth the 202 provisions of section 39.23(a)-15 (1) and (2) (b) in footnote 3. We think a mere reading thereof shows their applicability to the facts of the instant case, and that further discussion of the regulations is unnecessary. In Agnes Pyne Coke, supra, the taxpayer instituted suit against her divorced husband, seeking the recovery of title to stock and options to which she claimed a one-half legal interest, and for all sums of money due her. After a compromise agreement whereby the taxpayer recovered her share of the stock and income, she sought to deduct the cost of legal fees under section 23(a)(2). We held that to the extent legal expenses were incurred by her to recover her basis and cost in the property (stock and options), such expenses were capital in nature, not deductible from gross income. We allowed the deduction of the remainder of the legal expenses incurred because they were 282 incurred in recovering "an amount of income which, if and when recovered, must be included in income." In the instant case, it is clear that the stamp taxes in question were not ordinary and necessary expenses, and were not paid by petitioners to recover income. 203 There is nothing in Agnes Pyne Coke, supra, which supports the view that expenditures for the sale of securities or real property are to be treated as other than capital expenditures under section 23(a)(2).204 In further support of their position, petitioners cited United States Playing Card Co., 15 B.T.A. 975">15 B.T.A. 975 (1929); Baltimore & Ohio Railroad Co., 30 B.T.A. 194">30 B.T.A. 194 (1934); and Alice G. K. Kleberg, 2 T.C. 1024">2 T.C. 1024, 1029, 1034 (1943), wherein we held that stamp taxes paid in connection with the purchase or sale of securities were deductible in full from gross income in the year paid. Significantly, these cases arose prior to the enactment of section 23(a)(2), added to the law by section 121 of the Revenue Act of 1942, and made applicable to taxable years beginning after December 31, 1943. We are mindful that until the Revenue Act of 1942, Federal stamp transfer taxes, along with many other Federal excise taxes, were deductible as a current expense from gross income. By that Act, subparagraph (F) was added to section 23(c)(1) of the 1939 Code so that the section thereafter provided that Federal excise and stamp taxes were not deductible unless they came within the provisions of section 23(a)(1) or (2), which provisions are not here applicable for the reasons stated supra. As mentioned in footnote 205 2, the corresponding provisions of the 1954 Code (section 164(b) (3)) are substantially the same. See I.T. 3806, 2 C.B. 41">1946-2 C.B. 41, where the Commissioner treats the cost of stamp taxes incurred by a non-dealer in securities or rental property as an offset against the selling price of the property.Petitioners have also called our attention to Hirshon v. United States, 126 Ct. Cl. 587">126 Ct. Cl. 587, 116 F. Supp. 135">116 F. Supp. 135 (1953), superseding 113 F. Supp. 444">113 F. Supp. 444, where the Court of Claims held that the taxpayer was entitled to deduct Federal excise stamp taxes as "ordinary and necessary business expenses" under section 23(a), which permits the deduction, inter alia, of ordinary and necessary expenses incurred in carrying on a trade or business. There was no reference in the court's opinion to section 23(a)(2). We have no occasion to discuss the question of whether or not the Court of Claims was correct in accepting the view that the taxpayer was in the business of buying and selling securities. The fact is that the Court of Claims so held. Once this holding is accepted, there is nothing in the206 application of the law by the Court of Claims which is inconsistent with the conclusions which we have reached in the instant case, in which it is stipulated that petitioners were not dealers in securities or real estate, and there is no evidence that they were in the business of buying and selling securities or real estate. If they had been, the treatment of their 283 gains and losses, as well as the expenses of purchase and sale, would receive different treatment.Since, upon the facts as accepted by the Court of Claims, the issue differs fundamentally from that presented in the instant case, there is no occasion for us to apply the rationale of Hirshon, supra, to the facts before us with respect to which the appropriate application of the law is well established and requires a different conclusion. See Rev. Rul. 55-756, supra.Upon the basis of the foregoing discussion, we sustain respondent's treatment of the stamp taxes paid in connection with the sale of securities and real estate.Decision will be entered under Rule 50. Footnotes1. SEC. 23. DEDUCTIONS FROM GROSS INCOME.In computing net income there shall be allowed as deductions: * * (e) Losses by Individuals. -- In the case of an individual, losses sustained during the taxable year and not compensated for by insurance or otherwise -- * * (2) if incurred in any transaction entered into for profit, though not connected with the trade or business; * Regs. 111.Sec. 29.23(e)-3. Loss of Useful Value. -- When, through some change in business conditions, the usefulness in the business of some or all of the capital assets is suddenly terminated, so that the taxpayer discontinues the business or discards such assets permanently from use in such business, he may claim as a loss for the year in which he takes such action the difference between the basis (adjusted as provided in section 113(b) and sections 29.113(a)(14)-1 and 29.113(b)(1)-1 to 29.113(b)(3)-2, inclusive) and the salvage value of the property. * ** * * Sec. 29.23(m)-1. Depletion of Mines, Oil and Gas Wells, Other Natural Deposits, and Timber; Depreciation of Improvements. -- Section 23(m) provides that there shall be allowed as a deduction in computing net income in the case of mines, oil and gas wells, other natural deposits, and timber, a reasonable allowance for depletion and for depreciation of improvements. Section 114 prescribes the bases upon which depreciation and depletion are to be allowed. * * (i) "The property," as used in section 114(b)(2), (3), and (4) and sections 29.23(m)-1 to 29.23(m)-19, inclusive, means the interest owned by the taxpayer in any mineral property. The taxpayer's interest in each separate mineral property is a separate "property"; but, where two or more mineral properties are included in a single tract or parcel of land, the taxpayer's interest in such mineral properties may be considered to be a single "property," provided such treatment is consistently followed.Regs. 118.Sec. 39.23(e)-3 Loss of useful value. (a) When, through some change in business conditions, the usefulness in the business of some or all of the assets is suddenly terminated, so that the taxpayer discontinues the business or discards such assets permanently from use in such business, he may claim as a loss for the year in which he takes such action the difference between the basis (adjusted as provided in section 113(b) and §§ 39.113(a)(14)-1 and 39.113(b)(1)-1 to 39.113(b)(4)-1, inclusive) and the salvage value of the property. * ** * * Sec. 39.23(m)-1 Depletion of mines, oil and gas wells, other natural deposits, and timber; depreciation of improvements. (a) Section 23(m) provides that there shall be allowed as a deduction in computing net income in the case of mines, oil and gas wells, other natural deposits, and timber, a reasonable allowance for depletion and for depreciation of improvements. Section 114 prescribes the bases upon which depreciation and depletion are to be allowed. * * (i) "The property," as used in section 114(b)(2), (3), and (4) and §§ 39.23(m)-1 to 39.23(m)-19, inclusive, means the interest owned by the taxpayer in any mineral property. The taxpayer's interest in each separate mineral property is a separate "property"; but, where two or more mineral properties are included in a single tract or parcel of land, the taxpayer's interest in such mineral properties may be considered to be a single "property," provided such treatment is consistently followed.Note: Regulations 118 are applicable to taxable years beginning after December 31, 1951.↩2. SEC. 23. DEDUCTIONS FROM GROSS INCOME.In computing net income there shall be allowed as deductions:(a) Expenses. -- * * (2) Non-trade or non-business expenses. -- In the case of an individual, all the ordinary and necessary expenses paid or incurred during the taxable year for the production or collection of income, or for the management, conservation, or maintenance of property held for the production of income. * * (c) Taxes Generally. -- (1) Allowance in general. -- Taxes paid or accrued within the taxable year, except -- * * (F) Federal import duties, and Federal excise and stamp taxes (not described in subparagraph (A), (B), (D), or (E)), but this subsection shall not prevent such duties and taxes from being deducted under subsection (a).Note: The corresponding provisions of the Code of 1954 (sec. 164(b)(3)↩) are substantially the same.3. Regs. 118.Sec. 39.23(a)-15 Nontrade or nonbusiness expenses. (a) Subject to the qualifications and limitations in chapter 1 and particularly in section 24, an expense may be deducted under section 23(a)(2) only upon the condition that:(1) It has been paid or incurred by the taxpayer during the taxable year (i) for the production or collection of income which, if and when realized, will be required to be included in income for Federal income tax purposes, or (ii) for the management, conservation, or maintenance of property held for the production of such income; and(2) It is an ordinary and necessary expense for either or both of the purposes stated in subparagraph (1) of this paragraph.(b) The term "income" for the purpose of section 23(a)(2)↩ comprehends not merely income of the taxable year but also income which the taxpayer has realized in a prior taxable year or may realize in subsequent taxable years; and is not confined to recurring income but applies as well to gains from the disposition of property. For example, if defaulted bonds, the interest from which if received would be includible in income, are purchased with the expectation of realizing capital gain on their resale, even though no current yield thereon is anticipated, ordinary and necessary expenses thereafter incurred in connection therewith are deductible. Similarly, ordinary and necessary expenses incurred in the management, conservation, or maintenance of a building devoted to rental purposes are deductible notwithstanding that there is actually no income therefrom in the taxable year, and regardless of the manner in which or the purpose for which the property in question was acquired. * *	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622517/	Harry J. Stahl and Theodora G. Stahl, Petitioners v. Commissioner of Internal Revenue, RespondentStahl v. CommissionerDocket No. 29441-85United States Tax Court96 T.C. 798; 1991 U.S. Tax Ct. LEXIS 45; 96 T.C. No. 37; June 10, 1991, Filed 45 Held: With respect to 1979 and 1980, the filing of partnership information returns does not affect the statute of limitations relating to respondent's authority to determine deficiencies against individual partners of a partnership. Kelley v. Commissioner, 877 F.2d 756">877 F.2d 756 (9th Cir. 1989), revg. and remanding T.C. Memo 1986-405">T.C. Memo. 1986-405, relating to subchapter S returns, is inapplicable. Larry Kars, for the petitioners.Marilyn Devin, for the respondent. Swift, Judge. SWIFT799 SUPPLEMENTAL OPINIONPetitioners move to vacate and revise our opinion herein filed on June 26, 1990. See Stahl v. Commissioner, T.C. Memo 1990-320">T.C. Memo. 1990-320.Petitioners' motion is based on the contention that respondent's notices of deficiency mailed to petitioners on May 2, 1985, were untimely because they reflect adjustments to the 1979 and 1980 income of a partnership and because respondent's notices were mailed beyond 3 years from the time the partnership filed its information returns with respect to 1979 and 1980. Petitioners cite a decision of the U.S. Court of Appeals for the Ninth Circuit in support of their46 motion. Kelley v. Commissioner, 877 F.2d 756">877 F.2d 756 (9th Cir. 1989), revg. and remanding T.C. Memo 1986-405">T.C. Memo. 1986-405. Since the Ninth Circuit is the court of appeals to which an appeal in this case would lie, Kelley, if applicable, would be controlling. 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).In Kelley v. Commissioner, supra, after obtaining from the taxpayers an extension of time to assess a tax deficiency with respect to the taxpayers' individual Federal income tax liability for 1980, respondent issued a notice of deficiency to the taxpayers relating to adjustments to the 1980 income of a subchapter S corporation in which the taxpayers owned stock. Respondent, however, in Kelley had not obtained from the subchapter S corporation a separate extension of time to make adjustments to the income of the subchapter S corporation for its 1980 taxable year. In Kelley, the Ninth Circuit held that the statute of limitations under section 6501(a)1 running against respondent with respect to adjustments47 to the income of a subchapter S corporation applies at the corporate level, and therefore that respondent's notice of deficiency to the individual taxpayer-shareholders in that case was barred by the statute of limitations. 877 F.2d at 759.In the instant case, we are not presented with adjustments to the income of a subchapter S corporation. Rather, 800 we addressed and sustained in our original opinion herein adjustments made by respondent to the income of a partnership in which petitioners had an interest. As explained below, for the years at issue, the statutory language applicable to respondent's authority to make adjustments to the income of partnerships is different from the statutory language applicable to respondent's authority to make adjustments to the income of subchapter S corporations. For that reason, the holding of the Ninth48 Circuit in Kelley v. Commissioner, supra, is not applicable to our resolution of the issue before us.With regard to both subchapter S corporations and partnerships, section 6501 provides the general rule that --Except as otherwise provided in this section, the amount of any tax imposed by this title shall be assessed within 3 years after the return was filed * * Section 6037, however, as applicable to the 1979 and 1980 taxable years of subchapter S corporations, specifically provides that returns shall be filed each year by subchapter S corporations and that --Any return filed pursuant to this section shall, for purposes of chapter 66 (relating to limitations), be treated as a return filed by the corporation under section 6012.Section 6031, on the other hand, as applicable to the 1979 and 1980 taxable years of partnerships, specifically provides only that returns shall be filed each year by partnerships. No language comparable to the above-quoted language from section 6037 with regard to subchapter S corporate returns is contained in section 6031 with regard to partnership returns. 249 The Ninth Circuit's analysis and holding in Kelley were based on the above-quoted specific language of section 6037, applicable only to subchapter S corporations. See Kelley v. Commissioner, 877 F.2d at 758-759. Although we do not 801 agree with the holding of Kelley (see Siben v. Commissioner, 930 F.2d 1034">930 F.2d 1034 (2d Cir., 1991), affg. a Memorandum Opinion of this Court; Fehlhaber v. Commissioner, 94 T.C. 863 (1990) (Court reviewed), on appeal (11th Cir., Oct. 15, 1990), Kelley is not controlling because of the material difference in the statutory language applicable to partnerships under section 6031. As respondent's brief notes --the cornerstone of the Ninth Circuit's Kelley rationale is the existence of a statutory limitations period at the entity level; this essential element simply does not exist in the partnership context. Thus, even if one wishes to apply the Kelley rule to the instant case it cannot be done, for nowhere in the statutes relied on by Kelley in the S corporation setting does one find a comparable limitations period for partnerships.It 50 is well established that under the above statutory language of section 6031 relating to partnership returns, the filing of partnership returns does not affect the 3-year statute of limitations applicable to individual partners of the partnerships. In Durovic v. Commissioner, 487 F.2d 36">487 F.2d 36 (7th Cir. 1973), affg. on this issue 54 T.C. 1364">54 T.C. 1364 (1970), the Seventh Circuit addressed this precise issue and held that --The filing of an informational partnership return, upon which no assessment can be made within the meaning of 26 U.S.C. § 6501, could not begin the running of the statute of limitations. * * * [487 F.2d at 40.]More recently, in Siben v. Commissioner, 930 F.2d 1034">930 F.2d 1034 (2d Cir. 1991), affg. a Memorandum Opinion of this Court, the Second Circuit followed Durovic and explained as follows:Petitioners argue that the similarity between the tax treatment of partnerships and S corporations should lead us to the same conclusion as the Kelley court. However, petitioners acknowledge that the quoted language of $ 6037 relating to51 S corporations has no counterpart in the partnership provisions at issue here. As we have previously observed, "as long as the sections of the Code governing subchapter S corporations differ from the partnership provisions, we are obliged to apply those sections differently, and taxpayers will gain or lose from those differences as the case may be." Ketchum v. Commissioner, 697 F.2d 466">697 F.2d 466, 471 (2d Cir. 1982). Thus, even if we agreed that $ 6501(a) was ambiguous, Kelley would not govern the statute of limitations applicable to the partnership adjustments at issue in this case. [Siben v. Commissioner, 930 F.2d at 1037.]802 As the Supreme Court stated in Automobile Club v. Commissioner, 353 U.S. 180">353 U.S. 180 (1957), information returns generally "lack the data necessary for the computation and assessment of deficiencies and are not therefore tax returns within the contemplation of [the predecessor to section 6501(a)]." 353 U.S. at 188.Petitioners contend that the entity-level partnership provisions of the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), 52 sec. 407, Pub. L. 97-248, 96 Stat. 670, support their position that the 3-year statute of limitations should apply at the partnership level, even though the TEFRA partnership provisions were not made effective until 1982. In the legislative history of the TEFRA partnership provisions, however, the pre-TEFRA law was discussed, and petitioners' interpretation thereof was expressly criticized as follows:Since a partnership is a conduit rather than a taxable entity, adjustments in tax liability may not be made at the partnership level. Rather, adjustments are made to each partner's income tax return at the time that return is audited. * In the case of a partnership, the income tax return of each of the partners begins that individual partner's period of limitations. Except in the case of Federally registered partnerships, the date of filing of the partnership return does not affect the individual partner's period of limitations. In order to extend the period of limitations with respect to partnership items, the IRS is required to obtain a consent for extension of the statute of limitations from each of the partners -- not the partnership. * [H. Rept. 97-760 (Conf.), at 53 599 (1982), 2 C.B. 600">1982-2 C.B. 600, 662.]For the reasons stated, petitioners' motion to vacate and revise our prior opinion herein will be denied.An appropriate order will be issued. 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.↩2. Sec. 6031 provides as follows:Every partnership (as defined in section 761(a)) shall make a return for each taxable year, stating specifically the items of its gross income and the deductions allowable by subtitle A, and such other information for the purpose of carrying out the provisions of subtitle A as the Secretary may by forms and regulations prescribe, and shall include in the return the names and addresses of the individuals who would be entitled to share in the taxable income if distributed and the amount of the distributive share of each individual.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622519/	Rapid Electric Co., Inc., et al., 1 Petitioners v. Commissioner of Internal Revenue, RespondentRapid Electric Co. v. CommissionerDocket Nos. 6621-71, 6622-71, 6623-71United States Tax Court61 T.C. 232; 1973 U.S. Tax Ct. LEXIS 21; 61 T.C. No. 25; November 15, 1973, Filed 21 Decisions will be entered under Rule 50 in docket Nos. 6622-71 and 6623-71.Decision will be entered for the respondent in docket No. 6621-71. Held, the extension of credit between two corporations did not result in a constructive dividend to the individual taxpayer owning the stock of both corporations where such credit was not granted primarily for the benefit of the taxpayer and he received no direct benefit therefrom. Held, further, corporate petitioner is not entitled to deduct certain personal expenditures made on behalf of its president and sole shareholder as compensation under sec. 162, I.R.C. 1954, where it failed to show that such amounts were intended as compensation. David R. Tillinghast, for the petitioners.Stanley J. Goldberg, for the respondent. Quealy, Judge. QUEALY232 Respondent determined the following deficiencies in these consolidated cases:Docket No.PetitionersTaxableDeficiencyyear6621-71Rapid Electric Co., Inc1964$ 1,597.36do19651,545.99do19661,090.206622-71James A. Viola196466,066.45do1965111,999.27623-71James A. Viola and Evelyn Viola196660,993.73James A. Viola, petitioner in docket No. 6622-71 and joint petitioner with his wife, Evelyn Viola, in docket No. 6623-71, is the owner of all the outstanding shares of stock of both Rapid Electric Co., Inc. (hereinafter referred to as Rapid New York), and Rapid Electric Co. of Puerto Rico, Inc. (hereinafter referred to as Rapid Puerto Rico). The principal23 issue for our decision is whether the extension of credit on its books by Rapid Puerto Rico to its sister corporation, Rapid New York, in the course of their business dealings in 1964, 1965, and 1966 resulted in a constructive dividend in each of such taxable years to their common shareholder, James A. Viola.In a somewhat unrelated matter, we must also decide whether Rapid New York, petitioner in docket No. 6621-71, is entitled to deduct as compensation under section 1622 certain personal expenditures made on behalf of its president and sole shareholder in each of the taxable years 1964, 1965, and 1966.233 FINDINGS OF FACTSome of the facts have been stipulated by the parties. Such stipulation and the exhibits attached thereto are incorporated herein by this reference.Rapid New York, petitioner in docket No. 6621-71, is a corporation organized in 1954 under the laws of the State of New York. It 24 filed its corporate income tax returns on the accrual method of accounting for each of the taxable years 1964, 1965, and 1966 with the district director of internal revenue, Manhattan District, New York. At the time of the filing of the petition herein, Rapid New York's principal office was located at 1300 Herschell Street, Bronx, New York.James A. Viola (hereinafter referred to as Viola), petitioner in docket No. 6622-71, timely filed his Federal individual income tax returns for the taxable years 1964 and 1965 with the district director of internal revenue, Manhattan District, New York, using the cash method of accounting, At the time of the filing of the petition herein, his legal residence was Candlewood Lake, Brookfield, Conn.Petitioners in docket No. 6623-71 are Viola and his wife, Evelyn Viola, whom he married in 1966. They filed a timely joint Federal income tax return for the taxable year 1966 on the cash method of accounting with the district director of internal revenue, Manhattan District, New York. Their legal residence at the time of the filing of the petition herein was Candlewood Lake, Brookfield, Conn. Evelyn Viola is a petitioner herein only by virtue of having25 filed a joint return with her husband.In 1944, Viola established a sole proprietorship under the name of Rapid Electric Co. to engage in the manufacture and sale of low-voltage or "electroplating" rectifiers. Rectifiers are electrical apparatus that convert alternating electrical current into direct electrical current. The rectifier operations were continued in the proprietorship form until January 1960, when its assets were transferred to Rapid New York, of which Viola was president and holder of all its outstanding stock. Since such time, Rapid New York has been continuously engaged in the manufacture and sale of rectifiers. Its plants were located in Bronx, New York, and in Brookfield, Conn., the latter being built in the late 1950's with the expectation that the entire operation could be moved there. Throughout the years in question, Rapid New York's employment level numbered approximately 150.During 1961 and 1962, the steadily increasing competition in the manufacture of low-voltage rectifiers was adversely affecting profits. As a consequence, Viola decided to expand the operations of Rapid New York to include high-voltage or "industrial" rectifiers of the 234 dry26 type, which though considerably more complex and sophisticated to produce, provided the opportunity for a higher profit margin. This decision was not without its risks, however, since the dry type of rectifier, as opposed to the commonly used oil-immersed type, had yet to be developed by any of the other rectifier manufacturers. The Brookfield, Conn., plant was chosen as the place to begin the operation since the facilities were better suited for the job.At the outset, Rapid New York encountered unexpected difficulties in perfecting the industrial rectifier. It also found itself faced with a sudden labor shortage in Brookfield which resulted in labor costs being 20 percent to 30 percent higher than those in the Bronx. The shortage prevented Rapid New York from consolidating its whole operation in Brookfield as originally planned. As a consequence, it had to operate two plants with a costly duplication of equipment and overhead. A combination of all these factors placed severe financial strain on the corporation. Such conditions continued to exist during the years in question, 1964 through 1966.On January 31, 1961, Viola formed Rapid Puerto Rico under the laws of Puerto Rico. 27 He has been the owner of all its outstanding stock and its president since its inception. At all times pertinent herein, Rapid Puerto Rico has been engaged in the manufacture and sale of metal containers or cabinets which are used to house both low- and high-voltage rectifiers. The purpose in forming Rapid Puerto Rico was to provide Rapid New York with an assured and dependable supply of containers for its rectifiers. Prior to the creation of Rapid Puerto Rico, Rapid New York had experienced considerable difficulty in obtaining prompt delivery of containers from independent suppliers. Much of this difficulty was attributable to the inability of Rapid New York to make timely payments to the suppliers which, in turn, was caused by its tenuous financial condition during this period.The decision by Viola to locate its supplier in Puerto Rico was based on the greater profit potential afforded by labor costs which were 50 percent lower than in the United States, and the added incentives offered by the Puerto Rican Government, which included 18 months free rent for its operations, and the funds necessary to train the personnel and to ship the manufacturing equipment to Puerto Rico28 from the United States. In return for the commitments by the Puerto Rican Government, Rapid Puerto Rico agreed to hire 15 local employees at its inception and reach a level of 21 within 2 years.Beginning in 1962, Rapid Puerto Rico supplied all the needs of Rapid New York with respect to metal containers. 3 The procedure 235 agreed upon by the two corporations for accounting for such sales was that Rapid Puerto Rico would set up an accounts receivable on its books for all amounts owed by Rapid New York by reason of such sales, against which would be credited any amounts expended by Rapid New York in purchasing raw materials on its behalf and any cash payments made against the account. A corresponding accounts payable was set up on the books of Rapid New York. This procedure was followed throughout the years in question.As of January 1, 1964, the opening balance due Rapid29 Puerto Rico from Rapid New York was $ 184,840.08. The following indicates the net increases to such account in each of the years in question:1964Sales from Rapid Puerto Rico to Rapid New York$ 182,625.06Less:Raw materials purchased by Rapid New York forthe account of Rapid Puerto Rico$ 74,692.50Cash payments from Rapid New York to RapidPuerto Rico17,500.00Total repayments92,192.50Net increase in the account90,432.561965Sales from Rapid Puerto Rico to Rapid New York$ 265,095.79Less:Raw materials purchased by Rapid New York forthe account of Rapid Puerto Rico$ 77,346.39Cash payments from Rapid New York to RapidPuerto Rico24,434.85Total repayments101,781.24Net increase in the account163,314.551966Sales from Rapid Puerto Rico to Rapid New York$ 311,308.97Less:Raw materials purchased by Rapid New York forthe account of Rapid Puerto Rico$ 96,581.55Cash payments from Rapid New York to RapidPuerto Rico111,500.00Total repayments208,081.55Net increase in the account103,227.42236 The closing balance of the accounts30 receivable of Rapid Puerto Rico at the end of 1966 was $ 541,814.61. Rapid New York made its purchases of raw materials several times each year at the request of Rapid Puerto Rico. The raw materials were shipped directly down to Rapid Puerto Rico and used in its business. It periodically made cash payments whenever it could spare the money without jeopardizing its business and financial position. The payments did not correspond to any particular invoice or invoices received from Rapid Puerto Rico.Rapid New York had a taxable income of $ 18,113.94, $ 25,812.94, and $ 48,658.72, respectively, during the years 1964 through 1966. Its balance sheets for the end of such years reflected as current assets and current liabilities, the following:196419651966Current assetsCash account$ 22,289.39$ 16,412.82$ 74,722.70Net accounts receivable352,810.19487,671.87526,812.60Inventory account375,172.00440,475.00558,990.00Investment in Government obligations1,500.001,500.001,500.00Total751,771.58946,059.691,162,025.30Current liabilitiesAccounts payable624,731.77791,252.501,018,933.87Mortgages, notes, and bonds payablein less than 1 year26,916.0030,476.00Other current liabilities35,405.3144,297.9644,340.25Total687,053.08866,026.461,063,274.1231 Rapid New York did not issue any notes or similar instruments of indebtedness to Rapid Puerto Rico with respect to any of the above balances owing. The additional working capital which became available to Rapid New York during such years as a result of Rapid Puerto Rico's extension of credit on its sales was principally used to build up its inventory. No portion of such additional working capital, however, nor any of its regular working capital, its assets, or the profits realized from its operations was used or disposed of in a way which was not related to its trade or business. 4Rapid Puerto Rico continued to sell containers to Rapid New York on the same basis in the years 1967 through 1969. The total sales for such years amounted to $ 273,817.29, $ 248,107.58, and $ 206,399.84, respectively, while the respective cash payments and purchases of raw materials for such years totaled 32 $ 196,235.49, $ 194,684.94, and $ 137,993.09. As of the end of 1969, its accounts receivable balance was $ 741,225.80.Rapid New York's purchases of containers from Rapid Puerto Rico accounted for 64 percent of its total sales in 1964 and 92 percent and 90 percent of its total sales respectively in 1965 and 1966.237 A certain part of purchases in 1965 and 1966 included amounts representing shipments of surplus containers which Rapid Puerto Rico held during each of those years. 5 Rapid Puerto Rico treated these surplus shipments as sales on its books.The manufacture of surplus containers by Rapid Puerto Rico was necessary to meet its commitment to the Puerto Rican Government to maintain an employment level of at least 15 workers. The commitment was originally made in the expectation that a viable independent market for its containers could be established in the Caribbean. Its subsequent failure33 to develop such an outside market by 1965 created a situation where production capacity exceeded the demand. 6 Nevertheless, in order to keep its employment commitment, it had to continue to make containers whether Rapid New York needed them or not. Its attempts to get the Puerto Rican Government to release it from its employment commitment were met only with demands that the incentives which it originally received be restored.Rapid Puerto Rico had accumulated earnings and profits of $ 149,894.06 as of January 1, 1964, and had current profits of $ 127,626.85, $ 110,844.92, and $ 171,986.79, respectively, during the taxable years 1964 through 1966.Neither Rapid New York nor Rapid Puerto Rico has paid a dividend since its inception.Respondent asserted deficiencies against Viola in 1964 and 1965 and against Viola and his wife in 1966 contending34 that the net increases in the accounts receivable of Rapid Puerto Rico for each of such years represented constructive dividends to Viola.During the taxable years 1964-66, Viola incurred the following travel and entertainment expenses:196419651966Cash$ 3,060$ 800$ 2,300Airlines -- Puerto Rico9861,221608Hotels -- Puerto Rico1,462869691Total5,5082,8903,599Rapid New York reimbursed Viola for the amounts so expended and claimed such amounts as deductions on its corporate returns for the years 1964 through 1966. It also claimed a deduction of $ 500 in each of such years as the cost of operating an automobile used by Viola. Respondent has disallowed all such claimed deductions except for $ 3 of travel and entertainment expense in 1964.238 Viola has conceded that all such disallowed amounts are includable in his income. Viola has not, however, conceded that such amounts should be characterized as dividends to him. Rapid New York is seeking to deduct such amounts on the basis that they represent additional compensation to Viola. Viola's compensation as president of Rapid New York during the years 1964 through 1966, excluding35 the amounts in issue, was $ 22,260, $ 36,154, and $ 37,332, respectively.OPINIONThe first question for our decision is whether the extension of credit on its books by Rapid Puerto Rico to its sister corporation, Rapid New York, in the course of their business dealings in 1964, 1965, and 1966, constitutes a constructive dividend in each of such years to their common sole shareholder.During the years in question, Rapid New York was in the business of manufacturing and selling rectifiers, which are electrical apparatus used to convert alternating electrical current into direct electrical current. Its brother corporation, Rapid Puerto Rico, was responsible for supplying all its requirements for metal containers which were used to house the rectifiers. In accordance with a procedure agreed to by both sides, Rapid Puerto Rico set up an accounts receivable on its books for all sales of metal containers it made to Rapid New York during each of the years 1964 through 1966, against which it would credit any cash payments made by Rapid New York and any amounts expended by Rapid New York to purchase raw materials on its behalf. A corresponding accounts payable was set up on the books of36 Rapid New York. In each of the years in question, there was a net balance in the accounts receivable. Rapid Puerto Rico decided not to force collection on any of such balances owing since Rapid New York was under serious financial pressures throughout this period and was already making whatever cash payments it could spare without jeopardizing its business. Instead, it extended a line of credit on all such amounts.Respondent contends that the net increases in the accounts receivable of Rapid Puerto Rico in each of the years in question constitute a constructive dividend to Viola. Although respondent does not question the bona fide nature of the obligation when initially reflected on Rapid Puerto Rico's books, he argues that the net increases in the accounts receivable became the equivalent of equity advances over the passage of time as a result of Rapid Puerto Rico's failure to collect thereon. 7239 Respondent contends that Viola, as sole shareholder of both corporations, had unfettered control over both the timing and the amount of these so-called equity advances. As respondent views this arrangement, Viola's control over the net increases in the accounts receivable37 is substantially equivalent to having received a dividend from Rapid Puerto Rico to the extent of such increases and a capital reinvestment by him of such amounts in Rapid New York.Respondent has not raised the issue of thin capitalization. Moreover, he also concedes that there is no basis for the application of section 482 since the sales prices of the containers sold by Rapid Puerto Rico to Rapid New York were reasonable in amount.It is well established that distribution by a corporation can be treated as a dividend to its shareholder if it is made for his personal benefit or in discharge of his personal obligations. This is so in spite of the fact that the funds are not distributed directly to him. Walter K. Dean, 57 T.C. 32 (1971); Edgar S. Idol, 38 T.C. 444">38 T.C. 444 (1962), affd. 319 F. 2d 647 (C.A. 8, 1963); Challenge Manufacturing Co., 37 T.C. 650">37 T.C. 650 (1962).38 The transfer of funds between related corporations will also constitute a dividend to the sole shareholder if it was made primarily for his benefit and if he received a direct or tangible benefit therefrom. W. B. Rushing, 52 T.C. 888">52 T.C. 888 (1969), affirmed on other grounds 441 F.2d 593">441 F.2d 593 (C.A. 5, 1971); Sammons v. Commissioner, 472 F. 2d 449 (C.A. 5, 1972), affirming, reversing, and remanding a Memorandum Opinion of this Court. The mere fact, however, that an individual as sole shareholder might derive some indirect or incidental benefit from the transfer will not be sufficient to give rise to a constructive dividend. W. B. Rushing, supra.Although no cash was ever transferred between Rapid Puerto Rico and Rapid New York, the extension of credit may be treated as the equivalent thereof since its effect, which was to give Rapid New York increased working capital, is similar in substance to a cash advance.Looking to the facts in our case, we find that the advances of credit in each of the years in question were neither made primarily for the benefit of Viola nor resulted39 in his receiving any direct benefit therefrom.Rapid New York was the dominant and principal customer of Rapid Puerto Rico as reflected by the fact that its purchases of metal containers accounted for 64 percent, 92 percent, and 90 percent, respectively, of Rapid Puerto Rico's total sales during the years 1964 through 1966. Rapid Puerto Rico was thus almost wholly dependent on Rapid New York for the sales of its metal containers. Either Rapid Puerto Rico or Rapid New York had to carry the surplus inventory of 240 containers which were manufactured in order that Rapid Puerto Rico might meet its employment commitment to the Puerto Rican Government. For all practical purposes, because of the common ownership of both corporations, it was immaterial which carried the surplus.Throughout this time, Rapid New York was experiencing financial difficulties as a result of increased competition in its sale of low-voltage rectifiers and its attempted expansion of its product line to include high-voltage rectifiers. Rapid New York made payments on the balances owing to Rapid Puerto Rico both in cash and in the form of raw materials purchased for the account of Rapid Puerto Rico to the40 fullest extent possible. Rapid New York was also faced with the necessity of carrying increased accounts receivable and inventories if the business of both corporations was to survive. The circumstances which necessitated the extension of credit by Rapid Puerto Rico to Rapid New York clearly negates any inference that such action was taken for the benefit of Viola. Cf. Sparks Nugget, Inc. v. Commissioner, 458 F.2d 631">458 F.2d 631 (C.A. 9, 1972); Equitable Publishing Co. v. Commissioner, 356 F. 2d 514 (C.A. 3, 1966), affirming a Memorandum Opinion of this Court, certiorari denied 385 U.S. 822">385 U.S. 822 (1966). Any benefit which may have accrued to Viola as a result of the extension of credit was merely derivative in nature and insufficient to justify the inference of a taxable dividend. W. B. Rushing, supra.Whether we classify the extension of credit as debt or as some other kind of investment, the working capital which was provided to Rapid New York by Rapid Puerto Rico remained in the corporate solution throughout the years in question. There is no indication that any of41 it was siphoned off to or for the benefit of Viola. Cf. Sparks Nugget, Inc., supra;Equitable Publishing Co. v. Commissioner, supra;Worcester v. Commissioner, 370 F. 2d 713 (C.A. 1, 1966); George R. Tollefsen, 52 T.C. 671">52 T.C. 671 (1969), affd. 431 F. 2d 511 (C.A. 2, 1970). Moreover, we find no basis for disregarding Rapid New York as a viable taxable entity separate and apart from its sole shareholder, Viola. What we have here is merely the reverse of the more commonplace situation where the manufacturer "carries" its supplier through financial difficulties with no direct benefit accruing to the supplier's shareholders.Respondent contends that this arrangement is a tax-avoidance device which allows Viola to make transfers of earnings from Rapid Puerto Rico, which is exempt from United States tax, to Rapid New York under the guise of a commercial transaction instead of a dividend. The fact that Congress enacted section 956 with such a device in mind and exempted Puerto Rican corporations like Rapid Puerto Rico from its provisions by way42 of section 957(c) is a clear indication of its intent in this matter. See Hearings before House Committee on Ways and Means on President's Recommendations on Tax Revision, 87th Cong., 1st Sess., vol. 4B, pp. 3534, 3549-3551 (1961). In accordance 241 with the above, we find no basis for concluding that a taxable dividend is chargeable to Viola on account of the intercorporate advances.The remaining issue for decision involves the deductibility by Rapid New York of certain travel and entertainment expenses and certain automobile expenses it incurred on behalf of Viola in each of the taxable years 1964 through 1966.Viola incurred travel and entertainment expenses of $ 5,508, $ 2,890, and $ 3,599, respectively, in the years 1964 through 1966. Rapid New York reimbursed Viola for the amounts so expended and claimed such amounts as deductions on its corporate returns in each of these years. It also claimed a deduction of $ 500 in each of such years as the cost of operating an automobile used by Viola. Respondent has disallowed all such claimed deductions except for $ 3 of travel and entertainment expense incurred in 1964 which consequently is not now in issue.Respondent has43 characterized these amounts as being constructive dividends to Viola and therefore nondeductible to Rapid New York. Viola has conceded that the contested amounts were income to him in each of the years in question. However, Rapid New York maintains it is entitled to deduct such amounts under section 162 as additional compensation. There is nothing in the record to indicate that Rapid New York intended such benefits to be compensation to Viola. See Challenge Manufacturing Co., 37 T.C. 650">37 T.C. 650 (1962). Accordingly, we are compelled to sustain the determination of the respondent for each of the years in issue.Decisions will be entered under Rule 50 in docket Nos. 6622-71 and 6623-71.Decision will be entered for the respondent in docket No. 6621-71. Footnotes1. Cases of the following petitioners are consolidated herewith: James A. Viola, docket No. 6622-71, and James A. Viola and Evelyn Viola, docket No. 6623-71.↩2. All statutory references are to the Internal Revenue Code of 1954, as amended, unless otherwise indicated.↩3. Respondent has conceded since the prices charged for the containers were reasonable there is no basis for an adjustment under sec. 482.↩4. One incidental exception to this was bona fide loans of $ 8,602.37 and $ 235.78, made to Viola in 1964 and 1966, respectively.↩5. It was estimated by Viola that Rapid New York had a surplus of $ 150,000 of cabinets on hand at the end of 1966.↩6. One of its largest potential customers, ITT Caribbean, discovered it could not use the containers as produced, but needed higher quality containers for its telephone equipment.↩7. The customary time for collection on its invoices in sales to unrelated parties was 90 to 120 days.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622520/	Michael August and Reba M. August, his wife v. Commissioner.August v. CommissionerDocket No. 368-62.United States Tax CourtT.C. Memo 1964-6; 1964 Tax Ct. Memo LEXIS 329; 23 T.C.M. (CCH) 24; T.C.M. (RIA) 64006; January 14, 1964D. Arthur Magaziner, 1616 Walnut St., Philadelphia, Pa., for the petitioners. William J. Hagan, for the respondent. MULRONEY Memorandum Findings of Fact and Opinion MULRONEY, Judge: The respondent determined a deficiency in petitioners' 1950 income tax in the amount of $1,803.04. The issue is whether in computing gain on the sale of real estate in 1949 and 1950 petitioners can include in the adjusted basis, the real estate taxes paid during prior years, to the extent that the tax deductions for said years did not result in income tax benefits. Findings of Fact Some of the facts have been stipulated and they are found accordingly. Petitioners, who live in Philadelphia, Pennsylvania, filed joint income tax returns with the collector of internal revenue for the first district of Pennsylvania for each of the taxable330 years 1943 through 1950. Petitioners purchased a vacant lot at Frankford Avenue and Charles Street, Philadelphia, Pennsylvania, in 1929 at a cost of $70,000 to which they made improvements at a cost of $1,552.91 in 1931 and 1932. Petitioners in the taxable year 1943 paid real property taxes due and payable prior to 1943 on the Frankford Avenue property in the amount of $5,542 and taxes due and payable in 1943 in the amount of $2,317.25, for a total of $7,859.25. In the year 1944 petitioners paid on the Frankford Avenue property real property taxes in the amount of $23,852.01, of which $1,934.88 represented current taxes and $21,917.13 represented taxes in arrears. In 1947 petitioners paid real estate taxes on the Frankford Avenue property in the sum of $2,977.30. Petitioners owned other real property at Germania Park, Ocean City, New Jersey, which they had acquired in 1930. In the 1943 tax return the entire amount of real property taxes paid with regard to the Frankford Avenue property was deducted, this being $7,859.25. This, along with the claimed loss on the Germania Park property which included real property taxes paid of $2,706.95 for a net loss of $2,023.74 on that property, 331 resulted in a net loss from rents and royalties of $9,891.67. This was offset against other income of $3,875.52. As a result there was no tax liability in 1943. In 1944 the entire amount of back taxes, as well as current taxes, paid in that year on both the Frankford Avenue property and the Germania Park property was deducted. The deduction on account of the Frankford Avenue property was $23,860.69, and on account of the Germania Park property a net loss of only $112.07 was deducted. On account of the latter property there was received $1,250 in rent but the property gave rise to other deductions. This was offset against other income in excess of $14,000. In 1945 there were real estate taxes paid on the Frankford Avenue property of $1,943.88 which taxes were deducted and offset by other income of the petitioners. As a result there was no tax liability. In 1946 there were also taxes deducted on the Frankford Avenue property of $1,943.88. This was absorbed against other income, a tax benefit to the petitioners. The Frankford Avenue property was sold in three separate transactions by the petitioners and reported in their tax returns on Schedule D as follows: DateSellingCost orExpense50% ofSoldFrontagePriceOther Basisof SaleGainGain1/1/48250 ft.$100,000$39,621.96$ 197.75$60,180.29$30,090.148/3/4950 ft.20,0007,924.5032.7512,042.756,021.3810/6/50250 ft.100,00042,633.0810,160.5047,206.4223,603.21Total$90,179.54332 The above total adjusted basis of the Frankford Avenue property as computed by the taxpayers was composed of the following items: Original cost of acquisition$70,000.00Improvements1,552.91Part of real estate taxes paid in 19436,016.15Part of real estate taxes paid in 19449,633.18Real estate taxes paid in 19472,977.30Total$90,179.54On their tax return for the taxable year 1948 the petitioners added part of the real property taxes paid in 1943 and 1944 and real property taxes paid in 1947 to their basis of the Frankford property. The full amount of the 1947 taxes had been deducted by the petitioners on their return for that year, but the deduction resulted in no tax benefit because the taxpayers had already a loss of $29,936.75 for that year not connected with the real estate. Costs were allocated over the entire lot and applied pro rata on a front foot basis for each of the sales of fractional portions in 1948, 1949 and 1950. The adjusted basis for petitioner's entire lot, a fraction of which was sold in 1950, as computed in respondent's determination of deficiency eliminates the items of real property taxes paid in 1943, 1944 and 1947333 but includes petitioners' land cost, $70,000 and improvements, $1,552.91. The petition alleges error in respondent's failing to treat said tax payments as items of cost, to be added to the other undisputed cost items, in determining long-term capital gain on the 1950 sale. Opinion Petitioners owned a lot at Frankford Avenue and Charles Street in Philadelphia, Pennsylvania, portions of which were sold in 1948 and 1949, for $100,000 and $20,000, respectively. The remaining portion was sold in 1950 for $100,000. All three portions are merely described as so many feet of "frontage". In computing their gains on all three of these sales, petitioners started with their computed basis for the entire lot and allocated and applied this pro rata on a front foot basis to the portion sold in each of the years 1948, 1949 and 1950. While we are only concerned with 1950 income, a capital loss carry-over from 1949 is involved. We understand that all issues in this case will be resolved by finding the correct basis to be used for the entire lot. At least petitioner does not dispute respondent's computation of 1950 tax if it be held the correct basis for the entire lot does not include the portions334 of real estate taxes paid on the lot in 1943, 1944 and 1947, in the amounts of $6,016.15, $9,633.18 and $2,977.30, respectively. The items of original purchase price and cost improvements to the property are not in dispute. The amounts of taxes for 1943 ($6,016.15) and 1944 ($9,633.18) which petitioner would add to basis represent the portions of larger real estate tax payments on this lot that were not necessary to absorb other income reported in those years. The amount of tax for 1947 ($2,977.30) which petitioners would add to basis is the full amount of real estate taxes on this lot paid that year. In that year petitioners reported $5,000 income and a $29,936.75 loss from the sale of a partnership. Petitioners would add to basis the full amount of the 1947 taxes they paid on the lot because the tax deduction that year was not necessary to absorb income, because of the deductible loss they sustained that year. In short, what petitioners contend, at least with respect to 1943 and 1944 tax payments, is the right to split taxes paid, using part of them as a deduction against ordinary income in the years paid and part as an addition to basis. It is conceded petitioners did not own335 this Frankford Avenue property as part of any real estate business. The tax payments were made deductible by section 23(c)(1), Internal Revenue Code of 1939. But we know of no statute which permits such a property owner to capitalize so-called "unused" portions of such tax payments that were not necessary to cancel income. No law granting such permission is cited in petitioners' brief. The two cases cited by petitioners ( United States v. The Albertson Co., 219 F.2d 920">219 F. 2d 920, and Smyth v. Sullivan, 227 F. 2d 12) involve issues and principles which have no bearing at all on the situation here. Section 24(a)(7), Internal Revenue Code of 1939, gives some permission for the capitalization of taxes but this permission is circumscribed by regulations requiring an election and the manner of exercising it (Regs. 111, § 29.24-5). It is conceded here that petitioners are not proceeding under this statute or the regulations that implement it. Petitioners make some sort of an argument that the issue here should be resolved in their favor because of the actions or concessions of the Commissioner in other actions involving prior years. The record shows petitioners settled336 an earlier tax case (Docket No. 36729) pending in this Court with respect to their taxable years 1945 and 1948. This case had been consolidated with respect to their taxable years 1945 and 1948. This case had been consolidated with three other prior cases involving related taxpayers and all four cases resulted in stipulated deficiencies. Petitioners make no plea of estoppel and disclaim any contention of res adjudicata. It is their contention on brief that some issue with respect to their use of tax payments on the lot was involved in Docket No. 36729 "and that both the Petitioners and the Commissioner of Internal Revenue, on July 1, 1960, intended to settle and compromise and actually did settle and compromise all issues of fact and law relating to the real estate taxes aforesaid, and the carry-forward deduction thereof." There is no use pursuing the irrelevant argument advanced by petitioners. It is enough to say we are here concerned with the year 1950 and nothing that occurred in settlement negotiations that resulted in stipulated deficiencies in earlier years bars the Commissioner from asserting the deficiency here. Petitioners' contention is without merit. Decision will337 be entered for the respondent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622522/	Clarke Fashions, Inc. v. Commissioner. Maurice B. Clarke and Beatrice A. Clarke v. Commissioner.Clarke Fashions, Inc. v. CommissionerDocket Nos. 82524 and 82525.United States Tax CourtT.C. Memo 1961-121; 1961 Tax Ct. Memo LEXIS 230; 20 T.C.M. (CCH) 589; T.C.M. (RIA) 61121; April 28, 1961Lester H. Salter, Esq., 146 Westminster St., Providence, R.I., and James R. McGowan, Esq., for the petitioners. Charles T. Shea, Esq., for the respondent. SCOTT Memorandum Findings of Fact and Opinion SCOTT, Judge: The respondent determined deficiencies against Clarke Fashions, Inc. in income tax for the calendar years 1956 and 1957 in the respective amounts of $568.07 and $2,746.88. Respondent also determined deficiencies against Maurice and Beatrice Clarke in income tax for the calendar years 1955, 1956, and 1957 in the respective amounts of $636.43, $1,021.60 and $1,176.39. The issues to be decided are whether the amounts of $1,322.50, $2,678.75, $4,242, and $5,332, which were paid by Clarke Fashions, Inc. to Maurice Clarke or Murray Jay in the year 1954 and to Maurice Clarke in the years 1955, 1956, and 1957, respectively, 231 and were deducted by Clarke Fashions, Inc. as travel expenses, were properly deducted as travel expenses, or, as respondent has determined, did not constitute deductible travel expenditures to Clarke Fashions, Inc. and for the years 1955, 1956, and 1957 constituted gross income to Maurice and Beatrice Clarke under section 61 of the Internal Revenue Code of 1954, and whether Maurice and Beatrice Clarke are entitled to deductions in the amounts of $287.50 and $390 for the years 1955 and 1956, respectively, as expenses of business entertainment. Findings of Fact The petitioners in this case are Clarke Fashions, Inc., (hereinafter sometimes referred to as Clarke Fashions), a corporation organized and existing under the laws of Massachusetts with its principal office at 120 Harrison Avenue, Boston, Massachusetts, and Maurice and Beatrice Clarke, individuals residing at 49 Woodchester Drive, Chestnut Hill, Massachusetts. The income tax returns for the years here involved both corporate and individual, were filed with the district director of internal revenue at Boston, Massachusetts. Clarke Fashions kept its books of account and filed its income tax returns232 on an accrual basis and its taxable year was the calendar year. For some 29 years before April 1954, Maurice Clarke (hereinafter referred to as petitioner) was a salesman on the road for College Mode, Inc., a Boston firm engaged in manufacturing sportswear. In the latter few years with this enterprise petitioner had become a 25 percent owner and his duties extended to buying fabrics and styling the garment products, as well as selling. Petitioner's selling territory for College Mode consisted of Maine, New Hampshire, Vermont, western Massachusetts, and Connecticut. In April 1954, petitioner with Murray Jay, also a sportswear salesman, formed a Massachusetts corporation, Jay-Clarke Fashions, Inc., to manufacture women's sportswear for sale to retail stores, department stores, and specialty shops. Each invested $10,000 in the new corporation and received 50 percent of its stock. Murray Jay became president of Jay-Clarke Fashions, Inc., and petitioner became its treasurer. At the beginning of Jay-Clarke Fashions, Inc. it was planned that Murray Jay would spend most of his time in sales promotion, i.e. selling on the road, and that petitioner would handle the purchasing, design, 233 and production of the sportswear garments while at the same time continuing to contact on the road certain accounts with whom he had built up friendly relations. Murray Jay did, however, accompany petitioner on two business trips to New York City and also on various visits to local contractors all in order that he could learn that phase of the business relating to the purchase of the raw materials and manufacture of the garments. Within 3 or 4 months after the corporation was created in April 1954, a rift developed between petitioner and Murray Jay, primarily because of petitioner's dissatisfaction with Murray Jay's lack of aggressive salesmanship. Consequently, in the latter part of July 1954, Murray Jay was bought out and Ida Korey, petitioner's sister and the accountant for Jay-Clarke Fashions, Inc., succeeded to Murray Jay's interest in the corporation. At this time the corporation's name was changed to Clarke Fashions, Inc., and at about the same time petitioner became its president and treasurer. With the departure of Murray Jay from the enterprise, petitioner took over all the selling duties for the New England area. In the latter part of September 1954, the corporation234 hired another salesman, Harry Miller. Miller was given the Greater Boston, eastern Massachusetts, and Rhode Island areas as his selling territory, the petitioner retaining the other New England territories. Petitioner's duties as purchaser for the corporation necessitated his going to New York City on the average of once every 3 or 4 weeks. The length of these trips would vary from 3 or 4 days to a week or more. The center of the garment industry is located in New York City, and although fabrics are made in the South and elsewhere, one must go to New York City to make the necessary purchases. Clarke Fashions made purchases of fabric materials for the years 1954 through 1957 totalling $410,265.39. These purchases were made from 148 different suppliers of which 126 are located in New York City. Petitioner was responsible for these purchases. Once the fabric materials were purchased, petitioner did the necessary designing or styling and supervised the cutting which was done on the corporate premises. The cut materials were then sent out to contractors who did the necessary sewing, pressing and finishing. These contractors changed from time to time but they were all located within235 a few miles of Boston, e.g. Fall River, Lawrence, New Bedford, and Brockton, Massachusetts. In order to make sure that a contractor was properly set up to handle the work for Clarke Fashions, petitioner would go to the contractor's business premises to oversee the initial operation. Once the contractor was properly set up, Sam Zahar, the cutter for Clarke Fashions, would take over and iron out any further production problems with respect to the contractors. Petitioner's main activity with Clarke Fashions was selling on the road. During the years 1954 to 1957 petitioner made sales and sales visits to at least 112 department stores, specialty shops and sports shops which handle women's sportswear located in about 80 different cities and towns in Maine, Vermont, New Hampshire, Connecticut, New York and western MassachusettsPetitioner's selling activities commenced just after New Year's with the "spring line." This would consist of between 75 and 100 different styles, and each one would have to be shown on a hanger. Petitioner could make on the average only two sales presentations of the full line in one day. It took petitioner about 8 weeks to make the complete sales circuit when236 showing the spring line or the fall line which started in June or July of the year. At other times petitioner could complete his sales route in 3 weeks. Petitioner did not always stop at every store on very circuit. Sometimes he would telephone customers to ascertain whether they needed anything and, if so, take the order over the telephone. Larger or more regular customers received closer attention by petitioner, but even the less active accounts were visited by petitioner at least six times a year. Petitioner was on the road selling practically every week of the year with the exception of Thanksgiving and Christmas weeks or when he was in New York City buying fabrics. When Clarke Fashions had just started its business, petitioner would, while on the road, stay overnight at inexpensive tourist houses for about $2 a night in order to save the corporation money. In later years after the corporate earnings had improved and new motels had sprung up in the New England area, petitioner would stay overnight at these more expensive motels which offered nicer accommodations. Petitioner also made it a practice to take out to lunch any customers or prospective customers with whom he was dealing237 at the time. Also, petitioner charged to the corporation and received reimbursement for occasional 80-cent movies which he went to while on the road. While selling for Clarke Fashions, petitioner also did a small amount of selling for Clarke Sales. Clarke Sales was a corporation set up by petitioner and Murray Jay at the same time that Clarke Fashions, or Jay-Clarke Fashions, Inc., was created. The purpose in creating Clarke Sales was to enable petitioner and Murray Jay to continue to sell for other companies on a straight commission basis, a line of women's tee shirts, sweaters, and blouses, which line in no way was competitive with the products of Clarke Fashions. There was practically no investment made in Clarke Sales, just enough to buy stationery. When Murray Jay was bought out in July 1954, Ida Korey acquired his 50 percent interest in Clarke Sales. Thereafter, petitioner continued to make occasional sales of women's tee shirts and sweaters for Clarke Sales. In 1956 or 1957 Clarke Sales ceased its business operations. After Murray Jay left Clarke Fashions in 1954, the usual procedure for paying corporate travel expenses incurred by petitioner and Harry Miller was for the238 corporation to pay each of them a weekly advance of $50, which was charged to travel on the corporate books and records. Usually $50 a week did not fully compensate petitioner for his travel expenditures, so periodically additional adjusting travel payments were paid to petitioner. If in any one week petitioner did not have $50 of travel expenditures, this fact would also be considered in computing the amount of adjusting payments made to petitioner. Petitioner made notations of his travel expenditures in small notebooks and the data therein recorded was transcribed on to monthly expense sheets by an employee of Clarke Fashions. During the years 1955 and 1956 petitioner did small amounts of entertaining at his home and elsewhere for customers and their families when they were visiting in Boston. For the taxable period, which began with its incorporation in April 1954, and ended December 31, 1954, Clarke Fashions claimed on its Federal income tax return the following amounts as travel: Travel$2,440.83Employees' travel800.00The $800 represents amounts paid to Harry Miller by checks made payable to either Miller, cash, or payroll. The $2,440.83 amount is239 composed of payments charged to the following people or hotels: Petitioner$1,641.50Murray Jay510.00Hotels289.33$2,440.83The $1,641.50 charged to petitioner is composed of checks payable to petitioner totalling $916, of checks payable to payroll of which $650 is charged to travel expense, of a check payable to cash of which $50 is charged to travel, and cash payments or adjustments charged to petty cash in the amount of $25.50. The $510 charged to Murray Jay is composed of checks payable to Murray Jay of which $498.50 was charged to travel expenses, and a $11.50 adjustment charged to petty cash and treated as a travel expense. The $289.33 charged to hotels is composed of checks in the amount of $188.43 made payable and paid to various hotels, a $100 check payable to cash, and a 90-cent payment charged to petty cash. While Murray Jay was active as president of the corporation, he and petitioner co-signed all corporate checks. Of the checks made payable to petitioner and charged to travel expense, checks in the amount of $428 were co-signed by petitioner and Murray Jay, and all the checks payable to Murray Jay of which $498.50 was charged to travel240 expense were similarly co-signed. For the year 1954 of the $3,240.83 claimed as travel expenses respondent disallowed $1,322.50 representing a portion of the $2,151.50 shown on the books of Clarke Fashions as paid to petitioner and Murray Jay for travel expenses. For its taxable year 1955, Clarke Fashions claimed a deduction for travel of $6,565.05 of which all but $1 consisted of payments as follows: Petitioner$3,743.40Harry Miller2,495.00Sam Zahar150.00OthersHotel Edison$119.35Hotel Lexington54.35Petty Cash1.95175.65$6,564.05 The $3,743.40 amount paid to petitioner as travel expenses was paid by checks payable either to petitioner or payroll. The amounts paid to the hotels were paid by checks payable to the hotels. For the year 1955 of the $6,565.05 claimed as travel expenses respondent disallowed $2,678.75 representing a portion of the $3,743.40 shown on the books of Clarke Fashions as paid to petitioner for travel expenses. This $2,678.75 amount was treated by respondent as taxable income to petitioner for his taxable year 1955. For its taxable year 1956, Clarke Fashions deducted a total of $5,940.20 as travel expenses241 which represented payments made as follows: Petitioner$5,145.20Sam Zahar795.00$5,940.20 In addition Clarke Fashions deducted $3,025 as travel expenses incurred by Harry Miller which was claimed on the corporate return under commissions. The $5,145.20 amount paid to petitioner and designated as travel expenses was paid by checks payable either to petitioner or payroll. For the year 1956 of the $5,940.20 claimed as travel expenses respondent disallowed $4,242 representing a portion of the $5,145.20 shown on the books of Clarke Fashions as paid to petitioner for travel expenses. This $4,242 amount was treated by respondent as taxable income to petitioner for his taxable year 1956. For its taxable year 1957, Clarke Fashions deducted $6,529.76 as travel expenses which represented payments made as follows: Petitioner$6,447.00Fred Schlanger25.00Louis Nash56.86Petty cash.90$6,529.76 In addition Clarke Fashions deducted $3,938.38 as travel expenses incurred by Harry Miller which was claimed on the corporate return under commissions. The $6,447 amount paid to petitioner and designated as travel expenses was paid by checks payable242 either to petitioner or payroll. For the year 1957 of the $6,529.76 claimed as travel expenses respondent disallowed $5,332 representing a portion of the $6,447 shown on the books of Clarke Fashions as paid to petitioner for travel expenses. This $5,332 amount was treated by respondent as taxable income to petitioner for his taxable year 1957. Ultimate Findings of Fact Of the amounts claimed as travel expenses by Clarke Fashions for the years 1954, 1955, 1956, and 1957, the amounts of $1,998.75, $6,376.88, $5,682.94, and $6,207.41 for the respective years were ordinary and necessary business expenses of the corporation. For the years 1955, 1956, and 1957, petitioner received distributions from Clarke Fashions in the respective amounts of $187.17, $257.26, and $322.35 which are taxable as dividends to petitioner to the extent of the earnings and profits of Clarke Fashions. Petitioner spent $100 in each of the years 1955 and 1956 for business entertainment expenses. Opinion The question presented here is entirely factual. Respondent has disallowed deduction of certain amounts claimed by Clarke Fashions for the years 1954, 1955, 1956 and 1957 on the grounds that there is243 no substantiation that the amounts claimed as travel expenses were ever, in fact, paid. Moreover, for the years 1955, 1956 and 1957 respondent has treated the same amounts which he disallowed as deductions to Clarke Fashions as taxable income to Maurice Clarke. The issue is, therefore, whether the amounts claimed as travel expenses were actually paid for travel expenses. There is another factual issue, whether petitioner may deduct all or any part of amounts claimed as entertainment expenditures which respondent has also disallowed for lack of substantiation. Although no deficiencies were determined against Clarke Fashions for the years 1954 or 1955, a decision must be made with respect to those 2 years regarding the claimed travel expense deductions in order that the net operating losses to be carried over to the years 1956 and 1957 may be properly computed. In disallowing deduction for the claimed travel expenses, respondent has allowed a part of such claimed amounts and disallowed the balance. The amount of payments to either petitioner or Murray Jay for which respondent did allow deduction as travel expense to Clarke Fashions for the year 1954 was $729. For each of the years244 1955, 1956, and 1957 respondent allowed a deduction to Clarke Fashions as travel expenses for payments of $3,885.30, $1,698.20 and $1,197.76, respectively. The evidence in the record bearing on the substantiation of the amounts claimed as travel expenses consists of numerous checks drawn by Clarke Fashions or its predecessor, Jay-Clarke Fashions, Inc., and made payable to either petitioner, Murray Jay, payroll, cash, various hotels or other employees of Clarke Fashions, and the testimony of petitioner and Ida Korey. The corporate books in which the claimed amounts of travel expenses were recorded were available at the trial. Petitioner had kept notebooks of his travel expenditures and monthly travel expense statements had been drawn up from the information contained therein, which were the basis for the corporate disbursements charged to travel expenses. We have considered petitioner's testimony with respect to his travel expenditures and have found it credible. The record shows beyond doubt that petitioner is an extremely industrious man and that he is primarily responsible for the operation of Clarke Fashions. His testimony with respect to his travel is to some extent substantiated245 by corporate checks made payable to various hotels in New York City and elsewhere which presumably were in payment for hotel expenses incurred by petitioner. The far range of his selling territory and the frequency of his selling trips lend credence to the amounts of the claimed travel expenses. Also, the amounts claimed to have been spent by petitioner for travel are commensurate to the amounts spent by Harry Miller, an employee and not a stockholder, when it is considered that petitioner's sales territory takes him farther from his home and petitioner also took trips to New York City, for buying fabrics. Petitioner testified that while selling on the road he charged to travel expense an occasional "80 cent movie" and also that he did a small amount of selling for Clarke Sales, Inc., a corporation separate from Clarke Fashions. The amount or extent of petitioner's movie going or selling for Clarke Sales while on the road is not specified in the record. However, it is clear that expenses incurred in either activity would not be properly deductible by Clarke Fashions. We have weighed all the evidence carefully and have decided that for the years 1955, 1956, and 1957, 95 percent246 of the claimed deductions for payments to petitioner should be allowed as travel expenses to Clarke Fashions and consequently such payments do not constitute income to petitioner. For the year 1954 we again conclude that 95 percent of the payments to petitioner for travel expenses are deductible by Clarke Fashions. However, for 1954 the respondent's disallowance extends also to the amount of $510 claimed as travel expenses incurred by Murray Jay. The evidence respecting Murray Jay's travel expenses for the 3 to 4-month period he was associated with Clarke Fashions in 1954 is far from satisfactory. Apparently, he accompanied petitioner on two trips to New York and on several trips to various local contractors both to observe and learn how that phase of the business was conducted. Murray Jay did some selling for Clarke Fashions but there is no evidence in the record as to the amount of traveling he did in this work. We find that $150 of the $510 traveling expenses claimed to have been incurred by Murray Jay are deductible by Clarke Fashions. The next issue is whether the payments to petitioner to the extent of the 5 percent portion for the years 1955, 1956, and 1957 which we have247 not allowed as deductible expense items to Clarke Fashions are to be treated as income to petitioner. Petitioner argues that none of the money he received would constitute income to him because he derived no personal benefit or advantage from the payment, citing Weir v. Commissioner, 283 F. 2d 675 (C.A. 6, 1960), reversing a Memorandum Opinion of this Court. We feel, however, that petitioner's testimony regarding his movie going and selling activities for Clarke Sales effectively distinguishes this case from the Weir case. It is our conclusion that these 5 percent amounts constitute dividends to petitioner and are taxable to him as regular income to the extent of the corporation's earnings and profits. Petitioner has claimed deduction of $287.50 and $390 as entertainment expenses for the years 1955 and 1956. Ida Korey who made out petitioner's returns for these 2 years, arrived at these amounts after consulting with Beatrice Clarke, petitioner's wife. However, Beatrice never testified. The only proof that these expenditures were ever made was petitioner's testimony about his practice of entertaining business guests and their families when they were visiting in Boston. 248 No record of the amounts spent was ever made. Petitioner was not very specific on this point and some of his testimony related to his entertainment activities in years not in issue. Applying our best judgment to the facts at hand we find that $100 of the claimed deductions for entertainment expenses is allowable to petitioner in each year. Cf. Cohan v. Commissioner, 39 F. 2d 540 (C.A. 2, 1930). Decision will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622524/	Agnes L. Dana, Petitioner v. Commissioner.Dana v. CommissionerDocket No. 54562.United States Tax CourtT.C. Memo 1956-228; 1956 Tax Ct. Memo LEXIS 66; 15 T.C.M. (CCH) 1194; T.C.M. (RIA) 56228; October 10, 195666 Edward Pesin, Esq., for the petitioner. Norman A. Peil, Jr., Esq., for the respondent. RAUMMemorandum Findings of Fact and Opinion RAUM, Judge: The Commissioner determined a deficiency in income tax in the amount of $77,199.49 against petitioner for the year 1949. The sole issue presented for decision is whether a loss with respect to certain Florida real estate occurred in 1949. A stipulation of facts filed by the parties and certain facts stipulated orally by the parties at the hearing are incorporated herein by reference as part of our findings of fact. [Findings of Fact] The petitioner resides in New Jersey. In 1926, during a land boom in Florida, petitioner acquired certain real estate (consisting of two lots, a one-story dwelling and a garage) in Sarasota, Florida, at a total purchase price of $128,125. Thereafter petitioner regularly paid the annual taxes with respect to this property to both the county and city until 1948. She paid the 1947 taxes in May 1948, but the 1948 taxes which became delinquent in May 1949 were never paid by her. Prior to 1937 the property was rented on petitioner's behalf by a Florida real estate agent, but petitioner never67 received any rents since the agent informed her that they were consumed in paying the operating expenses of the property. About 1937 Claude S. Ginn, a stranger, began to receive rentals from the property. In 1945 the American Surety Company obtained a deed to Ginn's interest in the dwelling (but not the land), based upon a judgment, and, later in 1945 it conveyed to him its interest in the dwelling. Petitioner had placed the property in the hands of real estate agents for sale, and in July 1947 one of the agents negotiated a sale to Lewis Van Wezel for $13,500, receiving a deposit of $1,350. Consummation of the sale was prevented, however, when it appeared that Ginn was claiming title to the property by adverse possession and had been renting it to a Mrs. Kell who was operating a beauty parlor thereon. Thereafter, in June 1948, on advice of counsel, petitioner brought an action in ejectment. A demurrer filed by Ginn was sustained on January 11, 1949, and petitioner thereafter filed an amendment to her declaration. However, neither the original declaration nor the amendment thereto alleged possession by petitioner within a seven-year period as required by Florida law. See Sec. 95.1268 F.S.A. (Florida Statutes Annotated). Had the litigation arisen in such manner that Ginn were plaintiff and petitioner the defendant it appears highly doubtful whether Ginn could have prevailed on the basis of adverse possession under Florida law since he had not paid taxes upon the property, see Secs. 95.16-95.19, F.S.A., 1 and therefore could not succeed on the strength of his own title. However, as matters stood, the burden was on the petitioner. Petitioner's Florida counsel, although originally convinced as to the soundness of her position upon the basis of evidence which he thought was available, subsequently learned that such evidence was not available and reached the conclusion that her position could not be supported in the pending suit; he therefore recommended that it be dismissed. Accordingly, the suit was dismissed with prejudice on July 11, 1949. 69 [Opinion] Although we have not recounted all of the evidence, we are satisfied from a study of the entire record that the loss in fact occurred in 1949 and not before. Nor can we accept either of respondent's alternative positions that petitioner had abandoned the property prior to 1949 or that the loss occurred in 1951 when Ginn filed a suit to quiet title and obtained a decree. Plainly, there was no abandonment prior to 1949, and we think there is no merit to the contention that the loss occurred in 1951. Petitioner had entered no appearance in the 1951 suit; Ginn's rights against her had already been adjudicated in 1949; and the 1951 suit appears to have been merely in the nature of a formality that was necessary in order for Ginn to obtain a marketable title. We find as a fact and hold that the loss in question was sustained in 1949. Decision will be entered for the petitioner. Footnotes1. Although the provisions requiring the payment of taxes appear to have been enacted in 1939 and although they left undisturbed titles obtained prior thereto by adverse possession, we must reject respondent's contention that Ginn had obtained title prior to 1939 by adverse possession since it is our best judgment on the entire record that Ginn's adverse possession did not commence prior to 1937 and that he therefore could not have complied with the seven-year requirement by 1939.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622525/	Estate of Gilliat G. Schroeder, Deceased, Louisa R. Schroeder and Helen S. Croll, Executors v. Commissioner.Estate of Gilliat v. CommissionerDocket No. 9805.United States Tax Court1947 Tax Ct. Memo LEXIS 203; 6 T.C.M. (CCH) 568; T.C.M. (RIA) 47138; May 26, 1947203 In 1928 decedent transferred certain property in trust, the income from which was to be paid to him during his life and, upon his death, the principal of which was to be distributed to his daughter and son, if surviving him, or to their issue surviving them. No other remainderman was designated to take if the grantor survived all the remaindermen named. Held, that the value of the trust corpus is not includible in the decedent's gross estate under the provisions of section 811 (c) of the Internal Revenue Code. Estate of Edward P. Hughes, 7 T.C. 1348">7 T.C. 1348 and other similar cases, followed. George B. Francis, Esq., 42 Broadway, New York, N. Y., for the petitioner. Rigmor O. Carlsen, Esq., for the respondent. VAN FOSSAN 204 Memorandum Findings of Fact and Opinion The respondent determined a deficiency of $4,086.22 in the estate tax liability of the Estate of Gilliat G. Schroeder, deceased. The single issue is whether or not certain property transferred by the decedent in trust in 1928 is includible in his gross estate under the provisions of section 811 (c) of the Internal Revenue Code. Findings of Fact The facts were stipulated. The portions thereof material to the issue are as follows: The petitioner is the Estate of Gilliat G. Schroeder, Deceased, who died a resident of New York City, New York, on October 3, 1942. The executrices of said estate are Louisa R. Schroeder and Helen S. Croll, both residents of New York City, New York. They filed the estate tax return of the estate with the collector of internal revenue of the third collection district of New York. On January 11, 1928, the decedent executed an indenture of trust wherein Gilliat G. Schroeder was named the trustor, and the Title Guarantee and Trust Company, a corporation duly organized and existing under the laws of the State of New York, was named trustee. By the terms of the trust, the trustor transferred205 to the trustee certain mortgages and mortgage certificates of the total value of $28,350, the net interest and income from which was to be paid to the trustor for life, and upon his death, the principal of the trust was to be distributed in equal shares to Helen Stevens Schroeder and Gilliat G. Schroeder, Jr., daughter and son of the trustor; and if the daughter or son or either of them should not survive the trustor, the principal of the trust was to be distributed to the survivor and to the issue of the predeceased daughter or son, if any, such issue to take by right of representation. On January 11, 1928, decedent trustor was a widower, 45 years of age, and was the father of the two children mentioned as beneficiaries in the indenture of trust. At his death, the decedent was 60 years of age. At that time the following children and grandchildren of decedent were living: Gilliat G. Schroeder, son, born June 13, 1906 Helen S. Croll, daughter, born Jan. 27, 1911 Florence W. Schroeder, granddaughter, born Nov. 29, 1939 Gilliat G. Schroeder, grandson, born Sept. 16, 1941 Helen S. Croll, granddaughter, born Jan. 20, 1940 No part of the value of the trust property was included206 in the estate tax return filed by the executrices herein. The entire value of the trust property was included in the estate by the Commissioner, for estate tax purposes. Opinion VAN FOSSAN, Judge: In 1928 the decedent transferred property in trust, the net income from which was to be paid to him for life and upon his death the principal thereof was to be distributed to his daughter and son surviving him, or if predeceasing him, to the issue surviving the predeceased child. The sole issue is whether or not the property so transferred is includible in the decedent's gross estate under the provisions of section 811 (c), Internal Revenue Code. The respondent does not claim that the transfer was made in contemplation of death. The facts in the case at bar are on all fours with those in Estate of Edward P. Hughes, 7 T.C. 1348">7 T.C. 1348 and Estate of Nettie Friedman, 8 T.C. 68">8 T.C. 68. Upon the authority of those cases and in conformity with our decisions therein we hold that the transfers in controversy are not includible in the decedent's estate. See Central Hanover Bank & Trust Company, Trustee, v. United States, 58 Fed. Supp. 565. We*207 are not unmindful of the decision of the Circuit Court of Appeals for the Second Circuit in Commissioner v. Bayne's Estate, 155 Fed. (2d) 475, which is not in accord with our position set forth in the Hughes, Friedman and antecedent cases. 1 However, see the recent case of Commissioner v. Estate of Franklin Morse Singer, 161 Fed. (2d) 15, (April 15, 1947). Decision will be entered under Rule 50. Footnotes1. See Commissioner v. Bank of California, 155 Fed. (2d) 1 (CCA-9) and Commissioner v. Estate of Spiegel, 159 Fed. (2d) 257, (CCA-7) reversing the Tax Court [4 TCM 256, But see comm&ss&one- v. Estate of Church, 161 Fed. (2d) 11 (March 17, 1947) (CCA-3), affirming Memorandum Opinion of the Tax Court [3 TCM 1300↩,].	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622526/	Alice Ogden Smith, Petitioner, v. Commissioner of Internal Revenue, Respondent. Lester A. Smith, Petitioner, v. Commissioner of Internal Revenue, RespondentSmith v. CommissionerDocket Nos. 2801, 2802United States Tax Court4 T.C. 573; 1945 U.S. Tax Ct. LEXIS 250; January 16, 1945, Promulgated 250 Decisions will be entered under Rule 50. The petitioners were grantor-trustees of 3 irrevocable trusts for the sole benefit of their 3 children. The income of each trust was to be used for a college education of the beneficiary. The principal and undistributed income were to be paid to the beneficiary upon attaining the age of 30 years. Powers reserved to the grantor-trustees were solely for the benefit of the beneficiary. Held, that the petitioners are not taxable upon the income of the trusts. J. Lee Boothe, C. P. A., for the petitioners.Paul A. Sebastian, Esq., for the respondent. Smith, Judge. Black, J., concurring. Disney, J., agrees with the concurring opinion. Leech, Hill, Harron, Kern, and Opper, JJ., dissenting. SMITH573 These proceedings, consolidated for hearing, are for the redetermination of deficiencies in income tax as follows:Alice OgdenYearSmithLester A. SmithDocket No. 2801Docket No. 28021939$ 218.80$ 375.001940403.89908.961941351.85818.92574 The question in issue is whether the petitioners are taxable under the provisions of sections252 166, 167, and 22 (a) of the Internal Revenue Code upon the income of three trusts which they created for the benefit of their three minor children.FINDINGS OF FACT.The petitioners, husband and wife, are residents of Detroit, Michigan. They filed separate income tax returns for the years 1939, 1940, and 1941 with the collector of internal revenue at Detroit.The petitioners have three children, namely, John R. Smith, born in 1922; Marilyn Alice Smith, born in 1928; and Myron E. Smith, born in 1934.During the fall of 1935 Lester A. Smith, hereinafter referred to as petitioner, caused to be created the L. A. Smith Co. The company had an authorized capital stock of 5,000 shares, of which 1,000 shares were issued and outstanding. Of the 1,000 shares outstanding, 998 shares were issued to the petitioner at the inception of the corporation. One share was issued to the petitioner's wife and one share to the secretary of the corporation. Shortly thereafter petitioner transferred 400 shares to his wife. During the years in question the corporation was controlled by petitioner and his wife. From the inception of the corporation throughout the years here in question petitioner was president253 and treasurer of the L. A. Smith Co.Under dates of January 3, 1938, September 1, 1939, and January 6, 1941, respectively, petitioner and his wife created three separate irrevocable trusts in favor of their children, John, Marilyn, and Myron, each transferring to each of the trusts five shares of L. A. Smith Co. capital stock. They named themselves trustees of each trust. The provisions of the trust instruments were substantially alike. It was stated in each trust agreement that the principal purpose of the trust was to provide for the college education of the beneficiary and that the entire income and principal should be used by the trustees for that purpose and to give the beneficiary a start in life. The amount to be expended for educational purposes was within the absolute control of the trustees. It was further provided that all remaining trust funds were to be delivered to the beneficiary when he or she attained the age of 30 years.The trust indentures contain, in addition to others, the following material provisions:First: To receive, hold and manage all of the property conveyed by this Indenture together with any investitures by said Donors hereinafter made a part of254 this trust; to sell, transfer and to exchange all or any part of said property as though the absolute owner thereof; * * Second: To invest and reinvest money coming into their possession under the terms hereof subject to any limitations or conditions hereinafter specifically 575 imposed, in such loans, stocks, bonds, securities and real estate as they may in their uncontrolled discretion deem proper or suitable for the investment of trust funds, without being restricted to a class of investment which a Trustee is or may hereafter be permitted by law to make.Third: To retain by way of investment any property or securities transferred to them without liability for depreciation and in accepting title to real estate, said Trustee shall not be held to have assumed the payment of any encumbrances thereon nor any responsibilities as to the validity of the title conveyed to or held by them. All conveyances executed and delivered by them shall be without covenants of warranty except as against their own acts.Fourth: To cause securities which may from time to time comprise the trust fund, or any part thereof, to be registered in the names of said Trustees hereunder or in the name255 of their nominee, or to take and keep the same unregistered, and to retain them or any part thereof in such condition that they will pass by delivery.Fifth: To determine whether or not money or property coming into their possession shall be treated as principal or income and to charge or apportion expenses or losses to principal or income, according as they may deem just and equitable. * * Tenth: To represent and vote any stock or securities in any corporation, joint stock company or other similar organization whatsoever at any time held by said Trustees hereunder; to attend any and all corporate meetings; and to act upon any and all questions that may come before such meetings and in their discretion to grant proxies to authorize others to vote any such stock or securities at any and all meetings. * * Twelfth: To employ suitable counsel and agents in the discharge of their duties and to determine and pay to them reasonable compensation and expenses. However, said trustees shall not be liable for any neglect, omission or wrongdoing of such counsel or agent, provided reasonable care shall have been exercised in their selection, nor shall they be liable except for their own256 neglect or wilful default, for any loss or damage.Thirteenth: To require the Donors to make, execute and deliver in due form of law such other and further assignments, conveyances or other instruments as said Trustees may deem requisite or necessary to effectuate the purposes hereof.Fourteenth: To furnish to the Donors, during their lifetime and to the beneficiary after said Donors shall be deceased, whenever requested, a statement of the receipts and disbursements of said trust estate and at least once in each year to furnish the Donors and after their decease, said beneficiary, a full and complete schedule of all securities and other property comprising the subject matter of said trust.Fifteenth: To do all acts and things in their judgment needful or desirable for the proper and advantageous control and management of the property held in trust hereunder to the same extent and to the same effect as might be legally done by an individual in absolute ownership and control of said property.Sixteenth: Said Trustee shall in no event be liable for any mistakes in judgment in the making or retaining of investments so long as the same be made or retained in good faith.Seventeenth: Said257 Trustees may resign at any time or apply to any proper court for the settlement of their accounts and to be relieved and discharged from this trust.576 Eighteenth: In the event said Trustees or either of same shall resign, become disqualified or cease to act as Trustees, said Donors during their lifetime, or said beneficiary after their death, is hereby authorized and empowered by instrument in writing duly executed and acknowledged to select as successor to said trustees any qualified person or persons and the said successor trustee or trustees so selected are hereby appointed Trustees hereunder with all powers and duties herein conferred upon said Trustees.* * * Twenty-second: In the event of a division of said trust estate or any part thereof at any time, the trustees shall place such valuation upon the property to be divided as they may deem just and fair, and such valuation shall be binding upon all parties in interest under this agreement. The trustees in making distribution of principal hereunder, may do so in money, securities, or other property and the judgment of the trustees as to what shall constitute a just and proper division or apportionment among the beneficiaries258 hereunder, shall be binding and conclusive upon all parties in interest under this trust agreement.Twenty-third: If at any time in the judgment of the said Trustees the income of said trust fund shall not be sufficient to provide for the proper maintenance, support, medical attention, care or education of said beneficiary hereunder, said Trustees may pay to or upon behalf of said beneficiary, or may expend for his benefit, such portion of the principal held for such beneficiary as said Trustees in their sole discretion shall deem advisable therefor.In addition to the foregoing provisions the trust instruments also provided for the distribution of the corpus and income of each trust, in the event of the death of the named beneficiary, to his or her lawful issue per stirpes. In the event there were no surviving children, the share of the deceased beneficiary was to be distributed equally among the beneficiaries of the other trusts.The income of each of the three trusts consisted of dividends on the L. A. Smith Co. capital stock during the years 1939, 1940, and 1941 as follows:Marilyn AliceJohn R. SmithSmithMyron E. SmithYearEducationEducationEducationTrustTrustTrust1939$ 3,00019402,000$ 2,00019411,0001,000$ 1,000259 No separate books of account or records were kept by the trustees to reflect the corpus, income, or disbursements of the three trusts. No separate bank accounts were kept on behalf of or in the names of the trustees. All transactions relative to the trusts were handled through the books of account and records of the L. A. Smith Co. Ledger accounts were kept on the company's books in the name of each of the trusts, entitled "John R. Smith Education Trust," "Marilyn Alice Smith Education Trust," and "Myron E. Smith Education Trust." In each of these accounts there was debited the purchase of 577 Government bonds, series E, and there were credited the amount of certain cash dividends applicable to the L. A. Smith Co. stock in each trust and various amounts representing expenses.It was a policy of the L. A. Smith Co. to declare and pay cash dividends during December of each year. The proportionate part of cash dividends during 1939, 1940, and 1941 applicable to the shares held in the three trusts was never at any time distributed to the trustees, but was carried in the L. A. Smith Co. cash accounts and intermingled with its other cash funds. There was never any segregation260 of the cash applicable to the trust stock. The cash was carried in this manner until it was used to purchase Government bonds, for which a corporation check was issued. All other disbursements for expenses of the trust were also made by check of the L. A. Smith Co.There were purchased on behalf of John's trust, during 1940, eight Government bonds, series E, of the face value of $ 1,000 each at a cost of $ 6,000, and during 1941, one of the same type of bond, of a face value of $ 1,000, at a cost of $ 750. These purchases were charged to the account of John R. Smith Education Trust on the books of the L. A. Smith Co. Of the bonds purchased in 1940, one was in the name of John R. Smith, payable at death to Alice Ogden Smith, and the others were in the name of Alice Ogden Smith. The $ 1,000 bond purchased in 1941 was in the name of John R. Smith, payable at death to Myron E. Smith.During 1940 three Government bonds, series E, of a face value of $ 1,000 each, were purchased at a cost of $ 2,250 and charged to the account of Marilyn Alice Smith Education Trust. The bonds were in the name of Marilyn A. Smith, payable on her death to Alice Ogden Smith. During 1941 there was purchased261 one Government bond, series E, of a face value of $ 1,000, at a cost of $ 750, also charged to the account of Marilyn Alice Smith Education Trust on the books of the L. A. Smith Co. The bond was in the name of Marilyn A. Smith, payable on death to John R. Smith.During 1941 one Government bond, series E, of a face value of $ 1,000, was purchased at a cost of $ 750 and charged to the account of Myron E. Smith Education Trust on the books of the L. A. Smith Co. The bond was in the name of Myron E. Smith, payable at death to Marilyn A. Smith.All of the above described Government bonds are still intact. None of the income of the trusts has been expended for the education of any of the children. Marilyn and Myron, during the years in controversy, were in high school and grade school, respectively. John began his college education during the year 1940 at the age of 18 years. He continued to attend college until 1943, when he was inducted into the armed services of the United States. The expenses incident to 578 his attending college during the years 1940 to 1943, inclusive, were paid by the petitioner out of his personal funds and not from trust funds.The stock of the L. 262 A. Smith Co. issued in the names of the petitioner and his wife, as trustees, was voted by them at all meetings of stockholders and directors of the company in the same way as the shares which they owned.The petitioners, as trustees, filed income tax returns for the trusts for the tax years here in question, reporting the correct amount of net income for such years and paying the taxes due thereon.OPINION.It is the respondent's contention that the petitioners, as grantors of the trusts under consideration, are taxable on such net income under the doctrine of Helvering v. Clifford, 309 U.S. 331">309 U.S. 331. In that case it was held that where "the bundle of rights" retained by the settlor "as a result of the terms of the trust and the intimacy of the familial relationship" resulted in the retention of "the substance of full enjoyment of all the rights which previously he had in the property" the income is taxable to him under section 22 (a) of the Internal Revenue Code. The respondent submits that the rights retained by the petitioners in the trusts under consideration were so great as to make them in substance the owners of the income. He calls attention263 to the fact that by paragraphs first and fifteenth of the trust instruments the petitioners had the authority to manage, sell, transfer, and exchange trust property as though they were the absolute owners thereof; that the trust instruments gave them the further authority as trustees to invest the funds of the trusts in any securities they might in their uncontrolled discretion deem proper without restriction and to have any securities which were a part of the trust funds registered in their names as trustees or in the names of their nominees; that they were authorized to take and keep trust securities unregistered so that they could pass by delivery; and that they had the right, in the event of distribution of principal, to divide the principal in any manner they saw fit. He further points out that no books of account or records of the trusts were kept by the trustees, but that such accounts were kept on the books of the L. A. Smith Co.After careful consideration of the provisions of the trust instruments and the operations of the trusts during the taxable years here in question, we are of the opinion that nothing could have been done or was done by the trustees in respect of the264 trusts contrary to the best interests of the beneficiaries. We think that the petitioners as grantors of the trusts retained no powers which would relieve them from their 579 responsibilities as trustees. As trustees they were required to manage the trusts for the interests of the beneficiaries. There is nothing to indicate that they did not so manage the trusts during the taxable years. It was in no way detrimental to the trusts that their accounts were kept in the books of the L. A. Smith Co.In Phipps v. Commissioner (C. C. A., 2d Cir.), 137 Fed. (2d) 141, it was held that, where a grantor-trustee established a trust for the benefit of his wife and daughter and could control the allocation of the trust income among the members of his family only through a total disregard of the purposes of the trust, which disregard would result in judicial intervention, the trust income was not taxable to the husband-grantor.In Chandler v. Commissioner (C. C. A., 3d Cir.), 119 Fed. (2d) 623, the grantor-trustee provided in the trust instrument that:During the lifetime of Grantor, Trustee shall make such sale, exchange265 or other disposition either to Grantor or to a third party or third parties designated by him of all or any part of the Trust Fund and for such considerations and upon such terms as to credit or otherwise as Grantor shall at any one time or from time to time direct. * * In its opinion the court stated:In the present case there can be no doubt that the power to control reserved by Chandler was for his own benefit. In addition to broad powers of directing investments by the trustee, such as were present in the trust instrument in Carrier v. Carrier, supra [226 N. Y. 114; 123 N. E. 135], Chandler reserved to himself the right to sell to or buy from the trust estate at his own price and to direct the disposition to himself (other than by way of sale or exchange) of all or any part of the trust fund for such consideration and upon such terms as he might direct. We think that the reservation by the settlor of the power to deal with the trust assets for his own benefit is irreconcilable with the fundamental principle underlying all fiduciary relationships that the fiduciary must act solely in the interest of the cestui que trust and, therefore, may266 not have personal dealings with the trust property. Restatement, Trusts, § 170 and comments thereto. As owner of the assets Chandler, of course, had the right to reserve such a power. His doing so clearly indicates that he did not intend to impose upon himself fiduciary restraints enforceable by the trust beneficiaries. We think that the Board was entirely justified in construing the power as a reservation by the settlor of the right to revoke the trust.In the instant case the grantors retained no powers which gave them the right to acquire the trust principal or income at any time for their own benefit. We are therefore of the opinion that the facts disclosed by this record do not bring the case within the principle of Helvering v. Clifford, supra.The respondent stated in his brief that:It should be stated at the outset that it is the respondent's position that his determination in this case is controlled by Helvering v. Clifford, (1940) 309 U.S. 331">309 U.S. 331, without regard to Helvering v. R. Douglas Stuart, (1942) 317 U.S. 154">317 U.S. 154. 580 However, if the Tax Court should hold 267 that the Clifford decision is not controlling and that the respondent's determination is supported only by R. Douglas Stuart, supra, it is requested that the Court make specific findings of fact and of law in this regard so that the respondent may determine whether relief should be afforded petitioner under I. T. 3609, I. R. B. No. 10, May 25, 1943, page 40, upon application therefor, and upon compliance by petitioner with the terms of I. T. 3609.This request is based upon section 134 of the Revenue Act of 1943, which amended section 167 of the Internal Revenue Code by adding thereto the following:(c) Income of a trust shall not be considered taxable to the grantor under subsection (a) or any other provision of this chapter merely because such income, in the discretion of another person, the trustee, or the grantor acting as trustee or cotrustee, may be applied or distributed for the support or maintenance of a beneficiary whom the grantor is legally obligated to support or maintain, except to the extent that such income is so applied or distributed. In cases where the amounts so applied or distributed are paid out of corpus or out of other than268 income for the taxable year, such amounts shall be considered paid out of income to the extent of the income of the trust for such taxable year which is not paid, credited, or to be distributed under section 162 and which is not otherwise taxable to the grantor.The request of the respondent is granted. See J. O. Whiteley, 3 T. C. 1265.Decisions will be entered under Rule 50. BLACK Black, J., concurring: I concur in the result reached by the majority opinion, though I doubt if it can be distinguished from our Court's recent decision in Joel E. Hall, 4 T. C. 506, in which the opposite result was reached. I dissented in the Hall case and pointed out the reasons why I did not think the income of the irrevocable trust involved in that case should be taxed to the grantor.Another comparatively recent case by this Court which it might be thought is in conflict with the result reached in the instant case is Louis Stockstrom, 3 T.C. 255">3 T. C. 255; now on review, C. C. A., 8th Cir. However, after carefully reading the facts in that case and comparing them with those present in the instant case, 269 I do not believe the result reached in the instant case is in conflict with the Stockstrom case. In the Stockstrom case the three trusts which were made for the settlor's three adult children contained powers which enabled the settlor-trustee to shift income beneficiaries somewhat similar to the powers reserved to the grantor in Commissioner v. Buck, 120 Fed. (2d) 775. There are no such powers granted to the settlor-trustees in the instant case. In the Stockstrom case the seven trusts which were set up for the benefit 581 of Stockstrom's seven grandchildren, while not granting to the settlor-trustee powers which were as extensive as those contained in the trusts for his three adult children, did grant to the settlor-trustee the discretion to either accumulate the income or distribute it to the beneficiary. These trusts were for the lifetime of the beneficiaries. We construed this power as being broad enough to enable the settlor-trustee to completely withhold the income of the trust from the grandchild beneficiary throughout his lifetime. To quote from the opinion itself in the Stockstrom case, the settlor-trustee "was 270 not required to distribute any part of the income to any of the beneficiaries during his lifetime." We held that this power over the income, when coupled with the broad administrative powers granted the settlor-trustee over the corpus in these several trusts, caused the income to be taxable to the settlor, Stockstrom.In the instant case the primary purpose of the trusts is to provide for the education of the settlors' three minor children and any accumulated income and principal not used for that purpose is to be turned over to the beneficiary when he reaches 30 years of age. Thus each of the three trusts here involved is to completely terminate when the beneficiary reaches 30 years of age and all the corpus and accumulated income is to be turned over to the beneficiary. The trusts in that respect are not unlike those present in J. O. Whiteley, 3 T.C. 1265">3 T. C. 1265, where we held that Helvering v. Clifford was not applicable.The administrative powers granted to the trustees in the instant case are quite broad and are, I think, as broad as those present in the Stockstrom case, but I think the Supreme Court in Helvering v. Stuart, 317 U.S. 154">317 U.S. 154,*271 made clear that retention by the grantor of only broad administrative control over the corpus does not make the income of a long term family trust taxable to him.For these reasons above stated, I concur in the result reached in the majority opinion. LEECH; HILL; HARRON; KERN; OPPERLeech, Hill, Harron, Kern, and Opper, JJ., dissenting: We can not fairly distinguish the facts in either Louis Stockstrom, 3 T. C. 255, or Joel E. Hall, 4 T. C. 506, from those here. In addition, there are features of the conduct and operation of these trusts which are comparable to those leading to nonrecognition of the trusts in such earlier cases as Benjamin F. Wollman, 31 B. T. A. 37, and William C. Rands, 34 B. T. A. 1107, the true forerunners of the Clifford case. We accordingly dissent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622527/	BOBBY W. JENKINS, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentJenkins v. CommissionerDocket No. 28255-85.United States Tax CourtT.C. Memo 1988-326; 1988 Tax Ct. Memo LEXIS 354; 55 T.C.M. (CCH) 1354; T.C.M. (RIA) 88326; July 27, 1988; As amended July 29, 1988 Bobby W. Jenkins, pro se. Nancy W. Hale, for the respondent. WILLIAMSMEMORANDUM FINDINGS OF FACT AND OPINION WILLIAMS, Judge: The Commissioner355 determined deficiencies in Federal income tax of petitioner and his former wife Sarah Jenkins ("Sarah") in the amounts of $ 1,348 for 1980 and $ 6,101 for 1981 and an addition to petitioner's 1981 Federal income tax pursuant to section 6653(a)(1) and (2). After concessions, the only issues for decision are whether petitioner is entitled to relief as an innocent spouse pursuant to section 6013(e) 1 for the 1981 tax year and whether any part of the underpayment of tax for the 1981 tax year was due to negligent or intentional disregard of rules and regulations pursuant to section 6653(a). FINDINGS OF FACT Some of the facts have been stipulated and are so found. Petitioner resided in West Point, Mississippi at the time he filed a petition in this case. On April 15, 1982, petitioner filed a joint 1981 Federal income tax return with Sarah. Petitioner was married to Sara from September 4, 1980, until their divorce on March 27, 1985. Since the divorce, petitioner has had full custody of and has provided the sole support for his daughter who was356 born to petitioner and Sarah during their marriage. At the time of petitioner's marriage to Sarah, Sarah was working for Deluca General Contractor ("DGC") in Memphis, Tennessee. In 1981 DGC moved its office into petitioner's living room. Joe Deluca, the owner of DGC, was present in petitioner's home at least one or two times each week during 1981 discussing with Sarah business, bills to be paid, and errands to be run for DGC. Petitioner was under the impression that Sarah was working for DGC during 1981. During 1981 petitioner had two joint checking accounts with Sarah in which both petitioner's and Sarah's income was deposited. Sarah did all the banking for petitioner. Petitioner would take money from his pay for his monthly expenses and give the rest to Sarah to pay family expenses. Household expenses were paid out of the joint account with a combination of Sarah's income and petitioner's income. Petitioner noticed during 1981 that Sarah received larger amounts of money from DGC than the $ 200 per week salary petitioner believed she had been previously receiving. In explanation, Sarah told petitioner that she had been made vice president of DGC and that she was receiving357 commissions from jobs she worked on for Mr. Deluca. In reality, Sarah was paid $ 150 per week from August 1980 to February 1981 and $ 75 per week thereafter for answering the telephone and doing errands. In February of 1981 petitioner and Sarah moved from a two-bedroom apartment to a two-story house with double carport, four bedrooms, two bathrooms, a living room, formal dining room, kitchen and a study. The house was newly remodeled. Sarah secured the lease on the house without petitioner's assistance or participation. At the time petitioner was employed by Shippers Transport as a truck driver and was not often home. Sarah told petitioner that the house rental was $ 365 per month although the actual rental price was $ 450 per month. Sarah used checks from DGC to pay petitioner's rent and telephone bills during 1981 in part because DGC's office was in petitioner's house and his home phone was used as the DGC office phone. Sarah also purchased a number of household items during 1981 including a refrigerator, table and chairs, a coffee table, a bed, a tool box and $ 200 to $ 300 worth of tools. Moreover, petitioner and Sarah took a trip to Daytona Beach in July of 1981 which358 was paid for by Sarah with a DGC check. Petitioner did not know a DGC check was used to pay for the trip. During 1981 Sarah embezzled a $ 24,572.21 from DGC. Petitioner stipulated that he "became aware of the fact that Sarah Jenkins had embezzled funds from Deluca General Contractor no later than September 8, 1981" although at trial petitioner maintained that he did not know of the embezzled funds from DGC until after he filed the return in 1982. On September 8, 1981, Sarah was arrested. Petitioner was not given an explanation for the arrest by the police and was not given an opportunity to view any of the information against her. The night of the arrest Mr. Deluca told petitioner that Sarah had embezzled all his money and "that he didn't exactly know how to prove that she had, but that he was going to." Soon after the arrest petitioner found some joint checking account records recording deposits of approximately $ 24,000. Approximately $ 10,000 of these deposits were made with money petitioner had earned. The balance, petitioner reasonably believed, was attributable to Sarah's salary from DGC. He also found checks that he had written to pay his bills which Sarah never mailed. 359 In September 1981 Sarah was indicted for embezzlement by the Grand Jury for the Shelby County Criminal Court. Petitioner separated from Sarah in January of 1982 and had no contact with her until April 13 of that year. On April 13 petitioner called Sarah to inquire about any W-2 Forms she may have received for the 1981 tax year. At that time Sarah had not received a W-2 form from DGC and insisted that she had not embezzled any funds from DGC. Petitioner filed the 1981 return jointly which he signed for Sarah with her permission. The return did not report any income from Sarah's employment with DGC and did not report any income from the embezzlement perpetuated by Sarah. In May or June of 1982 petitioner received a W-2 Form from DGC reporting wages of $ 556 earned by Sarah. Petitioner did not file an amended return to reflect the income reported on this W-2 Form. On February 28, 1983, Sarah pled guilty to the charge of fraudulent breach of trust. OPINION The first issue we must decide is whether petitioner is entitled to relief as an innocent spouse pursuant to section 6013(e). 2 Generally spouses filing a joint tax return are jointly and severally liable for tax due. 360 Sec. 6013(d)(3). Section 6013(e) provides an exception to the general rule of joint and several liability. The burden of providing each element of section 6013(e) is on petitioner. Welch v. Helvering,290 U.S. 111">290 U.S. 111 (1933); Sonnenborn v. Commissioner,57 T.C. 373">57 T.C. 373, 383 (1971); Rule 142(a), Tax Court Rules of Practice and Procedure. Respondent has conceded that (1) petitioner filed a joint return, (2) there was a substantial understatement of tax for 1981 and (3) the substantial understatement was attributable to Sarah's grossly erroneous failure to report the funds that she embezzled. Nevertheless, to be relieve of liability for tax attributed to Sarah's omitted income petitioner must also prove (1) that in signing the return he did not know, and had no reason to know, that there was such substantial understatement, and (2) taking into account all the facts and circumstances, 361 it is inequitable to hold petitioner liable for the deficiency in tax. In order to satisfy his burden of proof that he had no knowledge and no reason to know of any omitted income, petitioner must establish that a reasonably prudent taxpayer, with his knowledge of family finances would have no reason to know of the omission. Sanders v. United States,509 F.2d 162">509 F.2d 162, 166-167 (5th Cir. 1975). The parties have stipulated that "petitioner became aware of the fact that Sarah Jenkins had embezzled funds from Deluca General Contractor no later than September 8, 1981." this date is seven months before he signed the 1981 joint return. Petitioner's testimony clarified this stipulation. At trial we were impressed with petitioner's truthfulness, and we believe that petitioner had no reason to believe that his wife was embezzling. A stipulation is to be treated as a conclusive admission by the parties, and may not be qualified, changed, or contradicted except with the Court's permission where justice requires. Rule 91(e), Tax Court Rules of Practice and Procedure. In light of petitioner's credibility and his lack of an attorney during litigation, we believe that justice requires362 that we allow petitioner to modify his stipulation. See Jasionowski v. Commissioner,66 T.C. 312">66 T.C. 312, 318 (1976). In September of 1981, Sarah was arrested and indicted on charges of embezzlement and conversion but petitioner was not given an explanation for the arrest by the police and was not given an opportunity to view any of the information against her. The only notice of embezzlement petitioner has was the accusations of Joe Deluca, Sarah's employer. The arrest and Deluca's accusations prompted petitioner to check his joint bank account records, and he found deposits of $ 24,000, $ 10,000 of which was attributed to petitioner's income and 14,000 of which was contributed by Sarah. Petitioner thus knew that Sarah has received $ 14,000, but because she had been working for DGC, petitioner reasonably attributed the source of this money to her bona fide employment at DGC. Petitioner had no knowledge and had no reason to know that these funds were embezzled. Nevertheless, petitioner should have reported the $ 14,000 despite DGC's failure to send a Form W-2. Petitioner should have known that there was a substantial underpayment of tax on the 1981 return attributable363 to this $ 14,000. Accordingly, as to that amount petitioner does not qualify as an innocent spouse and is not relieved of liability for the deficiency attributable to $ 14,000. On the other hand, petitioner has persuaded us that he had no knowledge of Sarah's embezzlement before he filed the 1981 joint Federal income tax return. We believe that it would be inequitable to hold him liable for the deficiency attributable to embezzled funds. While petitioner benefitted from the $ 14,000 that he knew should have been reported and which he believed was Sarah's salary from DGC, we do not believe that petitioner benefitted from funds exceeding $ 14,000. See section 1.6013-5(b), Income Tax Regs. Except from one trip to Daytona, Florida, the benefits he received from the $ 14,000 were no more than normal and incidental living expenses. Moreover, petitioner has full custody of and is the sole support for his daughter who was born to petitioner and Sarah during their marriage. Consequently, we hold that petitioner is an innocent spouse as to the deficiency attributable to funds exceeding $ 14,000 embezzled by Sarah. The next issue we must decide is whether any part of the underpayment364 of tax was due to negligent or intentional disregard of rules or regulations. Given petitioner's inability to marshal the true and accurate facts concerning his 1981 Federal income tax return because of Sarah's repeated deceit and petitioner's confusion over whether to report Sarah's salary because of DGC's failure to deliver to petitioner a timely W-2 form, we do not believe that this case is appropriate to impose additions to tax pursuant to 6653(a). Decision will be entered under Rule 155.Footnotes1. Unless otherwise indicated, all section references are to the Internal Revenue Code of 1954 as in effect for the year in issue. ↩2. Section 424(a) of the Tax Reform Act of 1984 amended section 6013(e), with retroactive application to all taxable years to which the Internal Revenue Code of 1954 and 1939 applies, Pub. L. 98-369, section 424, 98 Stat. 801; H. Rept. 98-432 (Part 2) 1501, 1503 (March 5, 1984). ↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622528/	Central Bag Company, A Corporation, Petitioner, v. Commissioner of Internal Revenue, RespondentCentral Bag Co. v. CommissionerDocket No. 31945United States Tax Court27 T.C. 230; 1956 U.S. Tax Ct. LEXIS 55; October 31, 1956, Filed 55 Decision will be entered for the respondent. Prior to 1937 petitioner operated a used bag business. In or about May 1937, petitioner expanded the business to include the manufacture and sale of new bags. Since petitioner operated on a fiscal year basis ending September 30, the expansion of its business occurred during its first base period year. Because of difficulties encountered primarily in developing its new bag business, petitioner seeks relief under section 722 (b) (4), Internal Revenue Code of 1939. Held, petitioner changed the character of its business, but failed to establish a fair and just amount representing normal earnings to be used as its constructive average base period net income. Arthur L. Ross, Esq., and John A. Ross, Esq., for the petitioner.David Karsted, Esq., for the respondent. Harron, 56 Judge. HARRON 230 Respondent disallowed petitioner's claims for relief under section 722, Internal Revenue Code of 1939, for the fiscal years ending September 30, 1943, 1944, 1945, and 1946. Petitioner seeks relief under section 722 (b) (4) upon the ground that it changed the character of its business during the base period and its average base period net income does not reflect the normal operation of its business for the entire base period.Sectional references and the word "Code," as used herein, refer to the Internal Revenue Code of 1939.FINDINGS OF FACT.The petitioner is a Missouri corporation organized October 1, 1934, with its principal office and place of business in Kansas City, Missouri. It kept its books and filed its tax returns on the accrual basis for fiscal years ending September 30. Its returns for the fiscal years involved herein were filed with the collector of Internal Revenue for the sixth district of Missouri.231 In 1928, Milton Silverman entered the used bag business, doing business as the Central Bag Company, sometimes hereinafter referred to as the Company. At that time he had one employee and conducted his business from a very small building. 57 The business grew and in 1934 Silverman incorporated it as the petitioner herein. Silverman has been the president and majority stockholder of the petitioner since its organization. His wife and brother also owned stock in the petitioner and were secretary and vice president thereof, respectively. By 1937, the used bag business started by Silverman employed about 75 people and occupied a 4-story building containing approximately 60,000 square feet of floor space.The used bag business conducted by the Company involved buying, cleaning, repairing, and selling all types and sizes of used paper, cotton, and burlap bags. Petitioner bought large and small quantities of used bags from whomever it could, including peddlers. Most purchases were made subject to petitioner's grading and sorting of the bags. Each lot purchased was cleaned, graded, sorted, and piled according to size and quality. Whenever 500 bags accumulated in a pile, the bags were baled, ticketed, and stored for sale. Used bags with holes therein were patched and sewn, after which they were stacked in piles of 500.The patching of used bags was done on sewing machines designed especially by the manufacturer for patching58 used bags. These sewing machines stitched in circles, back and forth, crisscross, or any direction the operator wanted to stitch.The volume of used bags purchased and sold by the Company increased from 1.7 million in 1928 to 16.9 million in 1936. By 1937, Silverman was convinced that the sale of used bags had reached a saturation point due to changes in the industry. One of these changes was the introduction of the dress print bag. These bags, made of colored print cloth, were designed to provide the consumer with a cloth print that could be converted into dresses, curtains, tablecloths, etc. Each conversion of an emptied dress print bag by the consumer permanently reduced the available supply of used bags and increased the need for new bags. Recognizing these facts, petitioner decided to go into the new bag business, producing dress print and white bags. The first sales of new bags by petitioner was in May 1937.In developing its new bag business petitioner encountered production and selling difficulties attributable in part to the lack of knowledge of its management and in part to the lack of experience of its labor. As management became familiar with the techniques of 59 manufacturing and labor became skilled in operating the equipment, the initial difficulties were overcome. Among the difficulties encountered were the following: Financial; inability to secure true sizing of bags from the cutting machines; lack of uniformity in meeting customers' specifications; 232 making plates to imprint customer's brand on his new bags; finding correct types of ink for printing; locating sources of supply for the various types, weights, and colors of materials specified by the customer; convincing the trade that it was a new bag house as well as a used bag house; and selling its new bags in competition with larger and better established manufacturers, such as Bemis Bag Company, Chase Bag Company, Fulton Bag Company, and Mente Bag Company. The new bag business, like the secondhand bag business, was very competitive.Upon entering the new bag business petitioner ordered as much equipment therefor as its credit would permit and employed some help experienced in manufacturing new bags. Although petitioner expanded its cloth inventory to the limit of its bank credit, it was impossible to carry in stock rolls of cloth in all types, weights, colors, and prints60 available. Orders from its customers varied according to the nature of the product to be packed, i. e., whether wet or dry, the season of the year, the humidity, colors, sizes, printing, and other specifications. As its business grew petitioner increased its cloth inventory until such inventory exceeded the used bag inventory. During the base period years petitioner manufactured new cotton, Osnaburg (a stout coarse cotton fabric used in overalls, sacking, etc.), burlap, jute, and onion bags. Initially, petitioner manufactured bags only on order and not for stock, but as it became more familiar with the problems of the new bag industry, it was able to stock the more popular sizes in anticipation of orders from customers. Petitioner manufactured cloth bags in approximately 100 different sizes, ranging from very small to very large, but it manufactured no paper bags.On April 17, 1937, petitioner's used bag business had about 45 pieces of productive equipment in operation. In developing its new bag business petitioner acquired additional productive equipment. By August 15, 1939, petitioner had about 71 pieces of productive equipment, 22 of which were new in petitioner's operations. 61 Such productive equipment included 13 high-speed sewing machines, a bag turning machine, a vacuum bag cleaning system, a power baling machine, 2 cloth cutters, an automatic label paster, an automatic bag cutter and folder, and a 2-color printing press. On or about November 9, 1939, petitioner purchased a 4-color printing press, which was delivered after December 31, 1939.At April 17, 1937, petitioner's productive equipment included 20 patching machines and 3 high-speed sewing machines. The average skilled operator produced 2,000 used bags daily on the patching machines and 4,000 new bags daily on the high-speed sewing machines. The maximum annual capacity of the 20 patching machines based on 300 working days per year totaled 12,000,000 used bags. On the same working day basis, the maximum annual capacity of the 3 high-speed 233 sewing machines was 3,600,000 new bags. By August 15, 1939, petitioner's maximum annual used bag capacity had increased to 12,600,000 units, by the addition of 1 patching machine, and its maximum annual new bag capacity had increased to 22,800,000 units, by the addition of 16 high-speed sewing machines.Petitioner continued its used bag business62 after it started manufacturing new bags. In or about 1936 or 1937, petitioner started buying processed used bags in carlots from other used bag houses. Such used bags were generally resold without appearing in petitioner's plant. When such carlot purchases were received at petitioner's plant, they were redistributed therefrom without further processing.The petitioner had, at all times after Apil 17, 1937, a larger productive capacity for new and used bags than it actually sold, as shown by the following table:Maximum productive capacityFiscal year Sept. 30,actual productionDateCapacityYearUnitsin unitsUsed BagsApr. 17, 193712,000,000193710,828,00019386,308,000Aug. 15, 193912,600,00019397,131,00019406,475,000New BagsApr. 17, 19373,600,0001937139,0001938456,000Aug. 15, 193922,800,00019391,062,00019402,138,000Salaries and wages increased after petitioner entered the new bag business as shown by the following table comparing net sales, salaries and wages, and percentage of the latter to the former from calendar year 1928 through the fiscal year 1940:YearNet salesSalaries andPer centwagesto salesCalendar:1928$ 113,273.10$ 11,698.0610.321929167,122.0819,937.3811.931930201,273.0225,083.5712.461931175,789.7312,149.536.911932168,486.737,213.174.281933232,960.618,922.433.839 months 1934229,369.1310,892.004.75Fiscal, Sept. 30:1935335,599.2814,761.884.401936466,101.6516,246.733.491937539,833.2847,576.468.811938386,500.1838,666.0710.001939466,538.0742,995.829.221940618,433.3060,482.179.7863 234 In its used bag business, petitioner received orders from customers for the printing of trade-marks and other descriptive matter on the used bags. Petitioner had no bag printing press, and such printing was contracted for with a third party. After it entered the new bag business, petitioner received orders for labels, that is, paper bands pasted or sewn on the bags, as well as for printing directly on such new bags. Until it acquired its own bag printing press, in or about 1939, petitioner continued to contract for its bag printing.During the base period years petitioner borrowed money from time to time to finance its operations. The end-of-the-month average of its outstanding bank loans for each of the base period years was as follows:CalendarAverage bank loansyearend of the month1936$ 9,167193721,438193815,896193912,583The raw materials used in manufacturing burlap bags are imported into this country. The outbreak of war in Europe, in September 1939, increased the demand for bags of all kinds. This increased demand was reflected in the increases in prices for burlap cloth and used bags during the last 4 months of 1939. Burlap prices64 per yard at New York in August 1939, were 4.3 cents for "8 oz., 40 in." and 5.5 cents for "10 1/2 oz., 40 in." The prices per yard jumped to 6.1 cents and 7.5 cents, respectively, in September 1939, and to a 1939 high of 7.8 cents and 11.1 cents, respectively, in November. Similarly, secondhand bags for coffee, Cuban sugar, fertilizer, potatoes, cottonseed meal, and feeds showed increases in prices of 50 to 100 per cent during September to December 1939, inclusive.Petitioner's sales, in dollars, and in units, and the unit average price for the calendar years 1928 to 1939, inclusive, in used and new bags, were as follows:Used bagsNew bagsCalendarSales dollarsSales unitsUnitSales dollarsSales unitsUnityearaverageaverage1928$ 113,359.061,770,070$ .06401929167,200.082,568,663.06501930201,273.023,104,602.06481931175,789.732,806,316.06261932168,486.732,945,765.05711933232,960.615,709,953.04081934316,008.687,383,862.04281935354,655.1710,025,382.03541936484,487.8116,941,239.02861937494,548.8810,828,283.0457$ 22,636.49139,099$ .16271938366,843.336,308,588.058128,979.08456,510.06351939436,486.027,131,753.061275,685.571,062,460.071265 235 Petitioner's net sales, cost of goods sold, expenses, operating net income, other income and deductions, and net income for specified taxable years, according to its books and records, prior to adjustments by respondent, were as follows:OperatingOtherTaxableNet salesCost of salesExpensesnet incomeincome orNet incomeyear 1deductions1928$ 113,273.10$ 82,536.53$ 22,817.27$ 7,919.30($ 234.46)$ 7,684.841929167,122.08120,948.3139,876.746,297.036,297.031930201,273.02145,874.3152,045.763,352.955.53 3,358.481931175,789.73129,041.5143,156.423,591.803,591.801932168,486.73127,453.8736,735.154,297.71314.84 4,612.551933232,960.61189,581.6038,748.884,630.13287.17 4,917.301934229,369.13187,931.2335,238.056,199.856,199.851935335,599.28285,125.7247,251.993,221.57237.50 3,459.071936466,101.65409,409.8652,440.194,251.60220.00 4,471.601937539,833.28435,026.09101,315.133,492.06390.00 3,882.061938386,500.18290,853.0290,568.955,078.21515.29 5,593.501939466,538.07345,310.07111,038.1910,189.81315.86 10,505.671940618,433.30458,496.96136,395.9323,540.41295.00 23,835.4166 After adjustments were made by respondent, primarily to the fiscal years 1937 to 1940, inclusive, petitioner's net sales, cost of sales, expenses, operating net income, and net income for such years were as follows:Fiscal yearNet salesCost of salesExpensesOperatingNet incomenet income1937$ 539,833.28$ 415,149.49$ 98,425.17$ 25,868.62$ 26,258.621938386,500.18270,330.3989,235.9026,418.6026,933.891939466,538.07324,804.07108,225.9633,192.1833,508.041940618,433.30390,719.55179,999.6947,419.0647,714.06Petitioner's accounting system was installed in 1928 by a certified public accountant, and since that time such system has been maintained continuously. A perpetual inventory record was a part of the accounting system so installed and such record was based upon a physical inventory of the Company's used bags. Thereafter, Milton Silverman, personally, kept the perpetual inventory record. Prior to and during the base period Silverman checked his67 perpetual inventory records two or three times a day on various items, and as a rule, over the course of a month, all used bag items carried in the perpetual inventory were checked. No physical inventory of petitioner's used bags was taken between 1928 and the latter part of 1943, when, at respondent's request, a physical inventory was taken by a third party as of November 6, 1943.The perpetual inventory record was used by petitioner in valuing its inventory for tax purposes. Petitioner's tax returns stated that inventory was valued at cost or market whichever was lower, but 236 actually such inventory was valued by considering each used bag to be a unit and each unit as weighing one-half pound, regardless of size. The total units shown by the perpetual inventory record was then reduced to pounds and valued according to the market price of scrap burlap. For the fiscal years 1937-1942, inclusive, petitioner reported that its inventory under this method had the following value:Taxable yearBurlap bagsYard goodsTotal1937$ 21,667.48$ 1,249.64$ 22,917.12193822,865.732,408.1825,273.91193932,683.634,138.4636,822.09194037,659.953,869.1941,529.14194150,719.6621,025.6071,745.26194231,669.2244,632.9676,302.1868 Petitioner insured its merchandise and its machinery and equipment (but not automobiles and trucks) under a 90 per cent co-insurance contract, which meant that the insurance carried represented only 90 per cent of the insurable values. Included in the merchandise so insured was merchandise on consignment to petitioner for repairs, the quantity of which varied from time to time. The amount of fire insurance carried by petitioner on the contents of its buildings at the end of the fiscal years 1934 to 1940, inclusive, was as follows:Fiscal yearending September 30Amount1934$ 50,000193562,000193698,5001937125,0001938125,0001939165.0001940179,000Petitioner's balance sheet for the fiscal year ended September 30, 1940, showed net depreciable assets (automobiles, trucks, and equipment) in the amount of $ 16,643.17.The installation of a system of cost accounting, as a part of its books and records, was considered by petitioner. A complete survey of petitioner's operations and of the factors involved in determining costs was made by a certified public accountant. After completing the survey, the accountant advised against such a system because 69 so many factors in its used bag business changed from day to day. Among the factors militating against a cost system were: Delayed adjustments of purchase prices; inaccurate count on "holey" bags and scraps; substitutions to fill orders; deterioration of bags packed with chemicals; 237 departures from normal in cases of misfit or individually sized bags; increased personnel for keeping cost accounting records; cost records would be bulky as used bag business seldom had a repeat order for a certain type of bag unless from the same customer. In lieu thereof petitioner maintained a month-to-month running analysis of sales in dollars and units.On or about July 21, 1943, a special agent of respondent's intelligence unit began investigating petitioner's books and records for the fiscal years 1940, 1941, and 1942. At that time these years were the only taxable years of the petitioner then open to investigation under the statute of limitations. The investigation lasted several months, during which time petitioner's accountant and attorney complied with all requests from the special agent for information and assistance. At the conclusion of his investigation the special agent proposed70 and the petitioner agreed to various adjustments, some favorable to petitioner and some against petitioner. The principal adjustment proposed by the special agent involved substantial increases in the value of petitioner's closing inventories for each of the 3 open years, due primarily to a repricing of the units in petitioner's inventory. The aggregate amount of the understatement of inventory at September 30, 1942, was approximately $ 178,000, and the amount thereof which the special agent proposed to allocate to the closing inventory for the fiscal year 1940 was $ 78,747.39. The special agent accepted petitioner's opening inventory valuation for the fiscal year 1940.At this stage of the investigation, an experienced revenue agent was assigned to the case, as the special agent had had no experience in excess profits tax cases. The revenue agent objected to placing $ 78,747.39 in petitioner's income for the last base period year because of the tax consequences that would flow therefrom under section 713 (f) of the Internal Revenue Code of 1939. After conferences between the parties, it was agreed that the $ 78,747.39 increase in fiscal 1940 inventory should be spread equally71 over the fiscal years ending September 30, 1937, 1938, 1939, and 1940. As a part of that agreement, petitioner paid additional taxes, resulting from the various adjustments, amounting to about $ 108,000, and withdrew its then pending applications for relief for the fiscal years ending September 30, 1941 and 1942.The inventory and other adjustments agreed to by the parties increased petitioner's excess profits net income for the fiscal years 1937-1940, inclusive, its average base period net income, and its average base period net income computed under section 713 (f) (7). The excess profits net income as reported and adjusted was as follows: 238 Excess profits net incomeFiscal yearReportedAdjusted1937$ 4,013.31$ 23,613.5419386,376.9224,324.96193911,071.6230,502.92194023,784.6143,135.26Average11,311.6230,394.17Growth formula (sec. 713 (f) (7))1 22,367.3938,924.4872 For the taxable years ending September 30, 1943 to 1946, inclusive, petitioner filed timely tax returns. For such taxable years respondent determined petitioner's excess profits tax liability to be, and the petitioner paid, the following amounts:Fiscal yearTax liability1943$ 129,482.851944119,440.881945237,335.51194665,175.52For each of the taxable years 1943 to 1946, inclusive, petitioner filed an application for relief (Form 991) under section 722 of the Internal Revenue Code of 1939. Such applications for relief were filed with respondent on November 20, 1947. Petitioner based its right to relief upon a change in the character of its business within the meaning of section 722 (b) (4) of the 1939 Code. In its applications for relief petitioner computed its average base period net income under section 713 (f) (7), without the benefit of section 722, as $ 38,924.48, and its constructive average base period net income under section 722 (b) (4), as $ 158,989.72. The refunds claimed by petitioner for the several taxable years in its applications for relief were as follows:Fiscal yearRefund claimed1943$ 12,834.461944106,925.31194571,933.33194617,492.5073 In 1937 petitioner changed the character of its business in that it entered into the manufacture and sale of new bags.Petitioner failed to show that its average base period net income was an inadequate standard of normal earnings because of the change in the character of its business during the base period.Petitioner failed to establish what would be a fair and just amount representing normal earnings to be used as a constructive average base period net income.Petitioner is not entitled to relief from excess profits tax under section 722 of the Code.239 The stipulated facts are found accordingly. Exhibit A, a comparative Profit and Loss Statement for the taxable periods between January 1, 1928, and September 30, 1940, Exhibit 2, a Monthly Analysis of Sales from January 1928 through September 1940, and Exhibit 5, a Certificate of Assessments and Payments of Income and Excess Profits Taxes for the Fiscal Years 1943 through 1946, are included herein by reference due to their detailed nature.OPINION.In this case petitioner's excess profits tax liability for the taxable years was determined by using an average base period net income of $ 38,924.48. This amount was computed74 under section 713(f) (6) and (7), which is the so-called growth formula. This statutory formula increased the excess profits credit petitioner would have otherwise had since its average base period net income, as adjusted by respondent, was $ 30,394.17.In its applications for relief and in its petition, the petitioner claimed that it was entitled to $ 158,989.72 as a fair and just amount representing normal earnings during the base period. The grounds asserted were that petitioner had changed the character of its business during the base period by entering into the manufacture and sale of new bags. At the hearing, petitioner admitted that it could not justify the $ 158,989.72 claim, and on brief, reduced its claim to $ 94,629.94.The statutory provisions which apply are found in section 722 (b) (4). The particular language therein upon which petitioner relies is that "the taxpayer * * * during the base period, * * * changed the character of the business and the average base period net income does not reflect the normal operation for the entire base period of the business." The term "change in the character of the business" is defined as including, inter alia, "a difference75 in the products or services furnished," and "a difference in the capacity for production or operation."It is apparent from the facts, and respondent admits, that petitioner changed the character of its used bag business during the base period years. Respondent insists, however, that this is not enough. He contends that petitioner must also establish a fair and just amount to be used as a constructive average base period net income, and that such amount exceeds the average base period net income computed under the provisions of section 713(f). Pittsburgh & Weirton Bus Co., 21 T. C. 888 (1954), reversed on another point 219 F. 2d 259 (C. A. 4, 1955); Green Spring Dairy, Inc., 18 T. C. 217 (1952), affirmed on another point 208 F. 2d 471 (C. A. 4, 1953); Powell-Hackney Grocery Co., 1489">17 T. C. 1489 (1952); Sartor Jewelry Co., 22 T. C. 773 (1954); Schwarz Paper Co., 23 T. C. 605 (1955); Wentworth Military, Scientific, 240 ., 22 T. C. 721 (1954);76 Acme Breweries, 14 T. C. 1034 (1950); Lamar Creamery Co., 8 T. C. 928 (1947).Since a qualifying factor has been established, we will examine next petitioner's contention that $ 94,629.94 is a fair and just amount to be used as a constructive average base period net income. In arriving at such amount, petitioner applied its version of the push-back rule upon the theory that, had it started the new bag business 2 years before it did, its net operating income would have increased during each of the base period years. After reconstructing its excess profits net income for each base period year, petitioner then applied section 713(f) (6) and (7), in order to secure the benefits of the growth formula in addition to the special relief claimed under section 722.It is now well established that a taxpayer cannot secure relief under both section 713 and section 722. Homer Laughlin China Co., 7 T. C. 1325 (1946); Stinson Mill Co., 7 T. C. 1065 (1946), affd. 163 F. 2d. 269 (C. A. 9, 1947) certiorari denied 332 U.S. 824">332 U.S. 824 (1947),77 rehearing denied 332 U.S. 839">332 U.S. 839 (1947); Dayton Rubber Co., 26 T. C. 389 (1956). The claimed constructive average base period net income of $ 94,629.94 is erroneous, therefore, to the extent of any portion thereof added under section 713 (f).Petitioner's reconstructed excess profits net income for the fiscal years ending September 30, without the benefit of the growth formula, was as follows: 1937 -- $ 40,354.98; 1938 -- $ 57,598.03; 1939 -- $ 64,103.20; 1940 -- $ 110,030. An average of the reconstructed net income for petitioner's base period years is $ 68,021.55, so that the difference between this average and the amount claimed of $ 94,629.94 is attributable to petitioner's application of the growth formula and must be excluded under the Stinson and Laughlin cases, supra.In view of the fact that petitioner's reconstructed average base period net income of $ 68,021.55 exceeds the $ 38,924.48 average computed under the growth formula, we will analyze petitioner's reconstruction further in order to determine whether $ 68,021.55 is a fair and just amount within the meaning of the statute.The various steps in petitioner's78 reconstruction for the base period years may be briefly stated as follows: Unit prices of new and used bags were determined by dividing dollar sales by unit sales; the percentages of cost of sales, salaries and wages, other expenses, and operating net income to net sales for each year were computed from petitioner's base period experience; unit sales of new and used bags were then reconstructed; next, unit prices were applied to reconstructed unit sales to arrive at total dollar sales for each base period year; dollar sales were then reduced by the use of the aforementioned percentages to determine cost of sales, salaries and wages, and other expenses, and to arrive at operating net income, which was then averaged.241 It was in connection with its reconstruction of new and used bag sales for the base period years that petitioner invoked its version of the push-back rule. This consisted of pushing back fiscal 1939 and 1940 sales to fiscal 1937 and 1938, respectively, and then reconstructing fiscal 1939 and 1940 sales. Ignoring the several assumptions made by petitioner, which respondent contends are erroneous, the reconstructed sales claimed by petitioner are as follows:Fiscal yearNew bagsUsed bags19371,062,0007,131,00019382,138,0006,475,00019393,678,8566,308,00019406,330,2076,308,00079 Petitioner's reconstruction assumes that there was a demand for, and that it could have sold in the competitive market in which it operated, the annual increase in new bags shown by its reconstructed sales. But there is no satisfactory proof in the record to support the assumption. The evidence shows that petitioner's productive capacity in each year of the base period was greater than the volume of bags it was able to sell; its sales were never circumscribed by its actual ability to produce. This was admitted by petitioner's principal witness. The new bag business was highly competitive. The record as a whole does not justify the conclusion that lack of capacity to produce restricted petitioner's sales. The evidence establishes that, rather, petitioner's earnings up until the latter part of 1938 were limited by its ability to sell its products and not by its ability to manufacture.Petitioner had 2 1/2 years experience in manufacturing and selling new bags before the beginning of its last base period year. Its record of monthly sales reached a more or less stable level in the latter part of 1938 which continued throughout 1939. The beginning of petitioner's last base period80 year was the time of the beginning of the war abroad and the evidence shows that thereafter the demand for all types of bags, and the prices, increased. Petitioner's principal witness has stated that from 1939 on sales could be made of all of the bags which could be supplied.The record does not justify reconstruction of petitioner's sales on the basis of its productive capacity since its capacity to produce was not a limiting factor of sales. Green Spring Dairy, Inc., supra;Farmers Creamery Co. of Fredericksburg, Va., 18 T. C. 241; Robinson Terminal Warehouse Corporation, 19 T. C. 1185; National Grinding Wheel Co., 8 T.C. 1278">8 T. C. 1278.Petitioner's reconstruction cannot be approved because it contains many erroneous assumptions and unexplained discrepancies which destroy its probity. For example, one of petitioner's unexplained discrepancies is its statement that 1937 sales of 139,000 new bags represented "the production for 3 months" during the fiscal year 1937. We 242 are unable to find any proof in the record to support this statement, or justify its use 81 by petitioner in annualizing its 1937 "fiscal year production" as 556,000 new bags. Actually, petitioner sold 139,099 new bags during the 8-month period May to December 31, 1937, and there is no basis in this record for assuming that such sales represented 3 months' production, 5 months' production (i. e., to the end of the fiscal year), or a full 8 months' production. Furthermore, petitioner's reconstruction makes use of post-December 31, 1939, events, which is strictly prohibited by statute, and which was recognized by petitioner in its offers of exhibits containing data relating to 1940 and later.The entire record has been carefully considered but we must conclude that petitioner's reconstruction is unacceptable, and that no fair and just amount has been established which can be used as a constructive average base period net income. Nor can we, after a careful analysis of the facts, arrive at a fair and just amount which would exceed the $ 38,924.48 determined by respondent.We see no merit in petitioner's contention that respondent has attempted to inject a standard issue by contending that petitioner's actual base period net income cannot be determined. This defense was raised*82 because of the arbitrary manner in which the parties settled the adjustments which were made to petitioner's base period income. The burden of showing that it was entitled to a larger excess profits credit than respondent allowed was on the petitioner. This it has failed to do, and respondent's determination of petitioner's excess profits tax liability for the taxable years is approved.Reviewed by the Special Division.Decision will be entered for the respondent. Footnotes1. Taxable years 1928 to 1934 are calendar years; 1934 is a 9-month period ending September 30, 1934; 1935 to 1940, inclusive, are fiscal years ending September 30.↩1. Petitioner's Exhibit 13, a revenue agent's report, received without objection, shows this amount. The correct amount under section 713 (f) (7) as limited by section 713 (f) (6), appears to be $ 19,546.95. If, as respondent contends on brief, $ 22,367.39 is the excess profits credit, then the growth formula average was computed without regard to the limitations in section 713 (f) (6) and (7)↩.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622530/	B. COHEN & SONS COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.B. Cohen & Sons Co. v. CommissionerDocket No. 97939.United States Board of Tax Appeals42 B.T.A. 1137; 1940 BTA LEXIS 899; November 1, 1940, Promulgated 899 BASIS - EXCHANGE FOR STOCK. - Where assets worth about $19,660 were transferred to petitioner for 75 percent of its stock and $1,300 in cash and, pursuant to the same plan, $1,500 in cash was paid by others for 25 percent of the stock, the petitioner's basis for the assets is cost to it of those assets and section 113(a)(8) of the Revenue Act of 1932 does not apply. Sigmund H. Steinberg, Esq., for the petitioner. Paul E. Waring, Esq., for the respondent. MURDOCK 1137 The Commissioner determined deficiencies in the petitioner's income and excess profits taxes for the taxable years ended June 30, 1934, and June 30, 1935, as follows: Year ended June 30 - Excess profits taxIncome tax1934$548.66$2,136.161935438.16The principal question for decision is whether or not the transaction whereby Florence E. Cohen transferred certain property 1138 to the petitioner in exchange for 45 shares of the petitioner's stock and cash was a transfer within the meaning of section 112(b)(5) of the Revenue Acts of 1932 and 1934 for the purpose of determining whether the basis of the property to the petitioner was the cost900 of the property to the transferor under section 113(a)(8) or the cost of the property to the petitioner. If the latter basis is to be used, then its amount must also be determined. Another question is whether or not the petitioner is entitled to deduct from its gross income for the year ended June 30, 1934, attorneys' fees of $500 assumed and paid by it for legal services rendered to Florence E. Cohen in connection with the purchase by her of the property transferred by her to the petitioner. The only other issue raised by the pleadings was abandoned at the hearing. FINDINGS OF FACT. The petitioner is a Pennsylvania corporation, organized on June 21, 1933, for the purpose of conducting a retail jewelry and optical business. It filed income tax returns for the periods here involved with the collector of internal revenue for the first district of Pennsylvania. A retail jewelry business, principally on the installment sales plan, had been conducted at 533 Market Street, Chester, Pennsylvania, for a number of years by members of the Cohen family, first as a partnership and later as a corporation. The latter was adjudicated a bankrupt in May 1933, but the business at the Chester901 store continued without interruption. The Chester store in April 1933, when the involuntary petition in bankruptcy was filed, had on its books approximately 1,900 installment sales accounts receivable. The total debit balance in those accounts at that time was about $36,000. The total debit balance in accounts upon which a payment had been received within 90 days of that date was $20,753.52. The total debit balance in accounts upon which a payment had been received within 180 days of that date was $1,536.88. The remaining accounts were worth less than $10 at that time. The total cost of the merchandise in the Chester store at that time was $8,096.69. That merchandise was new. Furniture, fixtures, and equipment in the store were modern and in good condition. The personal property in the store at the time of the bankruptcy was appraised for the purposes of the bankruptcy proceeding at $1,700 for the accounts receivable, and $2,211.10 for the merchandise, furniture, and fixtures. All of the assets of that store, consisting of accounts receivable, merchandise, furniture, fixtures, records, and good will were offered at public sale by the receiver in May 1933. The sale was902 well 1139 attended. Bids for all of the assets had reached approximately $9,000 and bidding was still in progress when those attending the sale learned that Anthony Cohen had obtained an option to lease the premises where the store was located. No other suitable store location was available in the vicinity and for that reason the bids were withdrawn and the sale was adjourned to a later date. Anthony Cohen had obtained the option to lease the premises on behalf of his wife, Florence E. Cohen. A second sale was held early in June at which the assets were sold to Florence, the highest bidder, for $6,800. The assets were transferred to her by a bill of sale dated June 14, 1933. Since the business of the store had continued without interruption, an adjustment had to be made for payments received upon accounts receivable and for merchandise during the period of the bankruptcy. Florence paid $5,363.55 in cash for the assets. The difference between that amount and the bid price of $6,800 represented the net earnings of the store during the bankruptcy. The purchase of the assets had cost Florence more than she felt she was able to invest and, therefore, she entered into903 an agreement with her mother, Anne Goldberg, and her brother-in-law, Morris Polish, whereby all agreed that they would form the petitioner corporation, Florence would transfer the assets of the Chester store to the petitioner in exchange for 45 shares of its stock and $1,300 in cash, Anne would pay $1,000 to the petitioner in exchange for 10 shares of its stock, and Polish would pay $500 to the petitioner in exchange for 5 shares of its stock. This plan was carried out. The assets and the lease for the premises were transferred to the petitioner on June 22, 1933, at which time Florence received 45 shares of the stock of the petitioner. Certificates for 10 and 5 shares, dated the following day, were issued to Anne Goldberg and Morris Polish, and they have since been the owners of those shares. They paid $1,500 in cash for the shares on July 12, 1933, after obtaining their funds from savings accounts which required notice. The $1,300 was paid to Florence on July 17, 1933. The assets were set up on the books of the petitioner as follows: Accounts receivable$25,466.05Merchandise inventory7,281.67Furniture and fixtures3,500.00The evidence does not show904 accurately the face value of accounts receivable or the cost of merchandise transferred to the petitioner. The fair market value of the accounts receivable at the time they were transferred to the petitioner was $14,000. The fair market value of the merchandise at the time it was transferred to the petitioner was $5,000. The fair market value of the furniture and fixtures at the time they were transferred to the petitioner was $460.29. 1140 The petitioner paid attorneys' fees of $500 for legal services rendered to Florence in connection with the purchase of the assets. It claimed a deduction of that amount on its income tax reutn for the fiscal year ended June 30, 1934. The Commissioner held that the amount was organization expense and disallowed the deduction. The Commissioner determined that the accounts receivable transferred to the petitioner had cost Florence $4,668.80 and that $10,221.31 of the amount realized from the liquidation of those accounts during the fiscal year ended June 30, 1934, was income and $2,203.97 of the amount realized through the liquidation of those accounts during the fiscal year ended June 30, 1935, was income. He determined that905 the merchandise transferred to the petitioner had cost Florence $2,234.46, $2,791.50 of the amount realized in the fiscal year ended June 30, 1934, from the sale of that merchandise was income, and $454.46 realized from the sale of that merchandise during the fiscal year ended June 30, 1935, was income. He also determined that the furniture and fixtures transferred to the petitioner had cost Florence $460.29 and allowed depreciation based upon that cost. He explained that the petitioner's basis for gain or loss and for depreciation on the assets acquired from Florence was the cost of the assets to Florence, since immediately after the transfer she controlled the corporation through the ownership of 45 shares. OPINION. MURDOCK: Section 112(b)(5) of the Revenue Act of 1932 provided that no gain or loss should be recognized if property was transferred to a corporation solely in exchange for stock of the corporation and immediately after the exchange the transferor was in control of the corporation, but if there were two or more transferors, the paragraph was to apply only if the amount of stock received by each was substantially in proportion to his interest in the property prior906 to the exchange. Section 112(c)(1) of that act provided that if an exchange would be within the provisions of (b)(5), save for the fact that money was received in addition to stock of the corporation, then the gain should be recognized, but in an amount not in excess of the money received. Section 113(a)(8) provided for the retention of the old basis where (b)(5) applies. The Commissioner has apparently determined the petitioner's bases under those provisions, although it is not clear how he arrived at the total basis of $7,363.55. He has regarded the payment of the cash by Anne and Polish as a separate transaction. He erred in so doing. The word property used in section 112(b)(5) includes money. ; ; ; Columbia1141 . Florence, Anne, and Polish transferred property to the petitioner in exchange for all of its stock. The transfer of property by Florence and the purchase of stock for cash by Anne and Polish were parts of a single plan. The control mentioned907 in the statute is determined at the completion of all of the inseparable steps in that plan. ; affd., ; certiorari denied, . Florence was not in control of the petitioner within the meaning of section 112(b)(5). However, Florence, Anne, and Polish, who transferred property to the petitioner in exchange for all of its stock, were in control of the petitioner immediately after the transfer. The respondent did not determine that the stock received by those three people was substantially in proportion to their interests in the property prior to the exchange and makes no such argument now. Furthermore, it is apparent that the value of the share of each transferor in the total assets before the exchange is not substantially in proportion to the amount of stock received by him. Cf. ;. The petitioner received $1,500 in cash and about $19,460 worth of assets and paid out $1,300 in cash, so that the net value of its assets was about $19,660. Florence, who contributed over 92 percent908 of that property, received only 75 percent of the stock, whereas Anne and Polish, who contributed less than 8 percent of the property, received 25 percent of the stock. Section 112(b)(5) has no application whatsoever. It is not suggested that there is any other provision of the statute which would require the petitioner to take as its basis for the property transferred to it the same basis which the property had in the hands of Florence. The petitioner's basis is the cost of the property to it. The petitioner paid for the property with 45 shares of its own stock and $1,300 in cash. Thus, the cost of those assets was $16,045 (45 shares, or 75 percent of its own stock, would be worth 75 percent of $19,660, the total value of its assets, or $14,745). A proper allocation of that cost under the facts of this case is as follows: To accounts receivable, $11,376.84; to merchandise, $4,207.87; to furniture and fixtures, $460.29. The Commissioner did not make a determination of the fair market value of the assets at the time they were transferred to the petitioner. The evidence in the case shows clearly that Florence purchased those assets at much less than their true value. Witnesses, 909 familiar with the value of accounts receivable and merchandise similar to these, testified that the accounts receivable upon which recent payments had been made were worth a large percentage of face value and the merchandise was worth from 90 to 100 percent of its cost. There 1142 was no opinion evidence of the value of the furniture and fixtures. There is other evidence, however, which tends to show that the values of the accounts receivable and the merchandise were less than the percentages stated by the witnesses. Some of that evidence as, for example, the bankruptcy appraisal, is not entitled to much weight. The bankruptcy sale was rather inconclusive as to value. The circumstances of the formation of the petitioner in connection with which Florence turned in the assets for 45 shares, whereas $1,500 in cash was paid for the remaining 15 shares is not determinative. Cf. . The business done by the store during the bankruptcy proceeding is also evidence. Nor may we overlook the fact that the exact amount of accounts receivable and merchandise transferred to the petitioner is not shown. We have endeavored to fix a value910 from all of the evidence, after giving due weight to the various kinds of evidence. Subsequent events give some corroboration to the values which we have determined. Others might fix the values differently, but we have determined values which we think the evidence warrants. The legal fee is not deductible under section 23(a) of the Revenue Act of 1932. The services were rendered in connection with the acquisition of title to the property. Such expenditures are capital expenditures and are not deductible from income. . Decision will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622531/	Jack C. Massengale v. Commissioner.Massengale v. Comm'rDocket No. 3846-65.United States Tax CourtT.C. Memo 1968-64; 1968 Tax Ct. Memo LEXIS 233; 27 T.C.M. (CCH) 346; T.C.M. (RIA) 68064; April 16, 1968. Filed 233 Jack C. Massengale, pro se, Route 2, Athens, Tenn. Sommers T. Brown and Donald Geerhart, for the respondent. MURDOCK Memorandum Findings of Fact and Opinion The Commissioner determined deficiencies in income tax and additions under section 6653(b) for fraud as follows: YearDeficiencySec. 6653(b)1961$ 3,442.84$ 1,721.42196221,721.7010,860.85Findings of Fact The petitioner filed his individual income tax returns and amended returns for the tax years with the director of internal revenue for the district of Cincinnati, Ohio. His place of business during 1961 and 1962 was at 123 East Sixth Street, Cincinnati, Ohio 45202. That was his address last known to the Commissioner on April 15, 1965, when the Commissioner timely mailed the notice of deficiency to the petitioner at that address. The petitioner received an LL.B. degree from the Simon T. Chase Law School of the Cincinnati Y.M.C.A. in 1953 and thereafter engaged at times in the practice of law in Cincinnati. He was also engaged during the tax years in detective and guard business which he carried on under various names for those businesses. Eugene and Dovado Massengale234 were the petitioner's parents and Mary Ann was his daughter. He claimed the three of them on his 1961 and 1962 returns as dependents. Dovado died on June 15, 1962. The petitioner did not keep a set of books during 1961 and 1962 which reflected accurately the income and expenses of the businesses which he conducted. The petitioner frequently in the course of his business activities signed another person's name to deeds or instruments and in some cases acknowledged the signing before a notary as if he were that other person. The person whose name he used either knew nothing about the misuse or, in two deeds, knew that misstatements were intentionally made in the document as if made by him. The petitioner also occasionally obtained permission from some associate to use that person's name as a principal party in a transaction in which that person was in no way involved. The record is clear that the petitioner had made such misrepresentations without disclosing any authority for his acts to those with whom he was dealing. He also sometimes misrepresented facts to those with whom he was dealing. The petitioner opened a number of bank accounts in names other than his own and used those235 accounts as his own for his own purposes. The Commissioner in determining the deficiencies used total bank deposits of $31,745.32 for 1961 and $61,121.29 for 1962 and deducted from those amounts business expenses of $18,579.96 for 1961 and $34,553.23 for 1962. The petitioner's initial return for the year 1961 reported total taxable business income from self employment as a detective of $50 and total long-term capital gain from payment received on a land contract of $5,334, resulting in total taxable income of $2,717 ($50 plus $2,667). No Schedule C or D was filed with the return, and nothing else was filed therewith to support and explain the characterization and computation of the foregoing figures. 347 The petitioner filed an amended return for the year 1961 on a short Form 1040A with a schedule of income and expenses attached thereto. The date appearing beside the petitioner's signature thereon indicates that it was signed on May 28, 1963. It was stamped on the schedule as having been received in the district director's office on May 31, 1963. The schedule attached to the petitioner's amended return for 1961 showed gross incomes from sources identified only as "Operations, 236 " "Windham," and "Cleves" totaling $4,169.70; a list of business expense deductions such as office rents, advertising and telephone totaling $5,953.71; and a resulting loss of $1,784.01. It also showed an unidentified capital gain of $9,000, $4,500 of which was treated as taxable income, resulting in the amount of $2,715.99 ($4,500 - $1,784.01) which was shown as taxable income. The return showed no income tax withheld from wages, and showed the tax due to be $4. The petitioner's individual return for the year 1962 consisted of an undated short Form 1040A with a schedule attached. The schedule showed unidentified income of $4,527.67, business expense deductions of $3,604.13, and a resulting net profit of $923.54. It also showed a capital gain of $4,000, of which $2,000 was added to the aforesaid $923.54 to produce a taxable income of $2,923.54. He showed no tax withheld on wages, and showed a tax due of $44. Frank Ottle's wife was a sister of the petitioner's mother. The petitioner purchased several pieces of real estate in the name of Frank Ottle during the years 1961 and 1962. Ottle knew that the petitioner was buying real estate in his name, but he did not know the specific237 pieces that were bought. Frank Ottle never has received any money from the sale of properties titled in his name by the petitioner with the exception of the sale of the Mt. Washington property. The petitioner purchased on June 28, 1962 a property called herein the Conroy Street property. The purchase was made in Ottle's name. The purchase price was $3,625. A foreclosure deed to the property from the Sheriff of Hamilton County, Ohio was executed on July 27, 1962 and recorded on September 4, 1962. The purchase price was paid from funds in accounts in Frank Ottle's name in the Fifth Third Trust Co. and the Southern Ohio National Bank. That property was conveyed to David Froehlich by deed stating to be Frank Ottle, "unmarried[,]" executed on August 20, 1962 and recorded on September 4, 1962. That deed was not signed by Frank Ottle but instead the petitioner signed Frank Ottle's name thereto. Another deed showing Frank Ottle, "unmarried," as grantor and David Froehlich as grantee, was recorded on October 15, 1962. It included a statement that it was to correct an error in the prior deed. Frank Ottle did not sign that deed but instead the petitioner signed Frank Ottle's name thereto238 and he also signed his own name to it as a witness to its execution. The documentary stamps on the deed indicated that the purchase price was $9,000. Frank Ottle did not receive any of the proceeds from the sale of that property. The Commissioner in determining the deficiency included $5,375 in the petitioner's income as short-term capital gain from the sale of that property. The petitioner acquired in 1946 a property on Salem Road in Mt. Washington, in or near Cincinnati. The petitioner and Margaret Massengale executed a deed to that property on January 1, 1960 naming Frank Ottle as grantee. Frank Ottle and Evelyn, his wife, conveyed the Mt. Washington property on June 12, 1962 to Daisy Donut Corporation for $37,000. The cash proceeds of the sale to Daisy Donut of $26,797.64 were deposited in the account in the name of Frank Ottle in Southern Ohio National Bank. Twenty-three thousand dollars was then transferred on June 21, 1962 to savings account No. X8276 in the name of Frank Ottle in the Fifth Third Union Trust Co. on which the petitioner had power to draw under a power of attorney and from which he drew from June 28, 1962 to December 24, 1962, $22,894.40. The petitioner also239 withdrew from that account $5,000 on August 7, 1962, $1,000 on August 20, 1962 and $1,000 on August 28, 1962 and paid that $7,000 to Stanley Sallee for use in Hi-Grade Import-Export Co. The Commissioner, in determining the deficiency for 1962, added to the petitioner's income for 1962, $13,195.20 representing onehalf of a long-term capital gain of $26,390.40 from the sale of the Mt. Washington property. There was no land contract and no transfer of funds between Frank Ottle and petitioner relating to the Mt. Washington property. Frank Ottle never received any rental income from the Salem Road property in Mt. Washington, although it was rented for at least a part of the time that the title was in his name. He never paid the taxes. 348 There was received for recording and recorded in the Deed Books of Hamilton County, Ohio at Book No. 3227, pages 639 and 640, on July 5, 1962 a document containing affidavits dated June 7, 1962 by Frank Ottle and Evelyn Ottle to the effects that they were then, and had been for more than 15 years, husband and wife, and that Frank Ottle never had been married to Minnie Reed Schmidt. Those affidavits were given in relation to the title status240 of the Salem Road property, and the document states on its face that it was prepared by the petitioner. Ottle believed those affidavits to be false when he signed them because he had been married to Minnie before his marriage to Evelyn. He swore thereto at the suggestion of the petitioner. The petitioner, when receiving cash upon the conversion of cashier's checks into cash in connection with withdrawals from the account in the name of Frank Ottle at the Fifth Third Union Trust Co. during the year 1962, always signed the receipt for the cash in the name of Frank Ottle rather than in his own name. The petitioner received in each of the years 1961 and in 1962 total taxable income substantially in excess of the amount he reported for that year. A part of the deficiency for each year is due to fraud with intent to evade tax. Opinion MURDOCK, Judge: Rule 7 of the Court's Rules of Practice requires that the issues be fully stated in the petition which shall contain clear and concise assignments of each error allegedly committed by the Commissioner in the determination of the deficiency. It shall include any fraud issue (even though the Commissioner has the burden of proof). The rule241 also requires that facts upon which the petitioner relies to sustain his assignments of error, on which he has the burden of proof, shall be clearly and concisely stated. The petitioner, in the document which he filed as a "Petition," has made no assignment of any error in the determination of the Commissioner as set forth and explained in the notice of deficiency. He did not state in that document any facts upon which he relies and he did not attach a copy of the notice of deficiency, as required by Rule 7. Those defects were never corrected. The petitioner has the burden of proof to show that the Commissioner erred in determining one or both of the deficiencies. No issues or facts upon which the petitioner relies have been pleaded. The Commissioner has pleaded, in accordance with the Rules of the Court, to raise the issue of fraud for each year. He has the burden of proof on those issues. The Commissioner, in determining the deficiency for 1961, allowed a standard deduction of $1,000 and reduced income by $2,667 representing profit reported on a sale of real estate which "did not occur during that year." Those adjustments for 1961 were not contested during the trial. The two242 other adjustments, one disallowing exemptions claimed for three "dependents" and the other, including in income additional profit of $13,115.36 from business, were the subject of some testimony. The Commissioner, in determining the deficiency for 1962, allowed the $1,000 standard deduction and disallowed three exemptions claimed for "dependents." He added $16,570.20 to income, based upon a net short-term capital gain of $5,375 on the sale of a property at 508 Conroy Street and a long-term capital gain of $26,390.40, less 1/2 of the latter and $2,000 reported on the return. He also added to reported income $25,644.52, representing additional income from business, and $2,467, representing net income from the business of exporting lumber. Evidence was introduced at the trial with respect to all of the above 1962 adjustments except the standard deduction. The Commissioner has conceded in his brief that the $2,467, representing 1962 income from exporting lumber, should be reduced to $1,017.36 and that $2,996.50 should be eliminated from 1962 income since it was merely a transfer from an account in one bank to one in another bank. The petitioner complains about the address to which243 the deficiency notice was mailed. His returns for 1961 and 1962 were filed with the district director of internal revenue in Cincinnati, Ohio. The first one showed an address in Norwood, Ohio, while the latter two gave an address in Cincinnati. It was stated in the "Petition" that, "Petitioner is a resident of Route 2, Athens, Tennessee." However, the Court attempted to serve a copy of the Commissioner's answer on the petitioner by mailing it to him at that address and that piece of mail was returned to the Court stamped "Addressee Unknown." The petitioner since then has refused to disclose where he resides. When questioned at the trial by government counsel and the 349 Court, he never gave his address and finally replied, "I believe I can invoke the Fifth Amendment to the Constitution." The notice of deficiency in this case was mailed on April 15, 1965 to Jack Massengale, 123 East Sixth Street, Cincinnati, Ohio 45202. That is the address at which the petitioner carried on his business during 1961 and 1962 and later. It was the address of the petitioner last known to the Commissioner on April 15, 1965 when the deficiency notice was mailed. It was stated in that notice that the244 deficiencies determined therein would be assessed within 90 days if, within that time, the recipient did not file a petition with this Court in accordance with its rules, a copy of which could be obtained by writing its Clerk, Box 70, Washington, D. C. 20044. A "Petition" was filed with this Court on July 1, 1965 captioned "Jack C. Massengale, Petitioner vs. Commissioner of Internal Revenue" and indicating that it was signed and sworn to by "Jack Massengale." The filing of the "Petition" within that 90-day period and statements in the "Petition" indicate that the petitioner had received the deficiency notice. He has shown no basis for complaint as to the Commissioner's use of the 123 E. Sixth Street address. The "Petition" contains numerous denials but no assignments of error, no statements of facts, and no copy of the notice of deficiency, as required by Rule 7 of the Rules of Practice of the Court. The petitioner's pleadings contain no assignment of error which would place in issue the question of whether the deficiencies determined by the Commissioner were in any way erroneous. This, if properly raised, would have been an issue on which the petitioner, under the law, would have245 had the burden of proof. Not only was no such issue properly raised but the petitioner has failed to plead any facts or introduce any evidence which would prove that either deficiency was erroneously determined by the Commissioner. The petitioner subpoenaed no witnesses but called two of the respondent's witnesses and himself. The petitioner claimed four exemptions for 1961 and 1962, one for himself and three for "dependents," his father, Eugene, his mother, Dovado, and his daughter, Mary Ann. The record does not show the total cost of the support of any one of the three or how much, if any, of the total cost of any one of the three was paid by the petitioner. There is no evidence of any cost or payment of any kind in money. There is evidence that Eugene and Dovado each received substantial amounts for services performed in connection with the businesses carried on at 123 East Sixth Street. Dovado died on June 15, 1962. Eugene answered "Yes" to the leading question from the petitioner, "Did Jack Massengale during the years 1961 and 1962 contribute more than one-half of the support of yourself?" He also answered "Yes" to similar questions in regard to Dovado and Mary Ann. Counsel246 for the Commissioner objected to those questions and the Court advised the petitioner that he should prove each person's total support costs and the petitioner's contributions in sufficient detail to show whether the petitioner paid enough to claim the persons as dependents. The advice was disregarded. The record contains no further reference to the daughter. The Commissioner allowed the petitioner an exemption for himself and disallowed those claimed for the three relatives. There is a failure of proof to show that the Commissioner erred in those disallowances. The Commissioner in determining income, in addition to that reported, from the business carried on at 123 East Sixth Street, started with the total deposits in several bank accounts for each tax year, he subtracted amounts to represent expenses paid in each year and subtracted also the income from business reported on the returns, $50 for 1961 and $923.54 for 1962. This action resulted in the determination of additional income of $13,115.56 for 1961 and $25,644.52 for 1962. There is no evidence to show any error in the amount of expenses allowed by the Commissioner, $18,579.96 for 1961 and $34,553.23 for 1962. The petitioner247 contends that Federal Detective Bureau, Inc. was a corporation and the monies in the Federal Detective Agency accounts did not belong to him and do not affect his income. He also contends that the Lakes Detective Agency belonged to Beechum Lakes and monies in its accounts did not belong to the petitioner or affect his income. All of the business carried on at the 123 East Sixth Street office of the petitioner was his business and he was in charge of it during 1961 and 1962. Federal Detective Bureau, Inc. carried on no business as a corporation and as such had no income or expenses. Expenses of the petitioner's business were paid from whatever bank account had a credit balance available regardless of whether the account was in 350 the Lakes name or the Federal name. The evidence definitely does not shown that the money in those accounts did not belong to the petitioner or that it belonged to any other. It was income of the petitioner. Frank Ottle's wife was a sister of the petitioner's mother and the record as to the business relationship between Ottle and the petitioner is in some respects confusing. Ottle apparently gave the petitioner a general power of attorney, time and purpose248 not very clear, which was in effect during 1961 and 1962. Ottle worked for a bakery and was never engaged in the detective or guard business carried on by the petitioner at 123 East Sixth Street. He apparently loaned some money to the petitioner shortly after World War II, at undisclosed dates and in undisclosed amounts, to help him get started in earning a living. The record does not show the use made of the money by the petitioner. The petitioner claims that he bought some properties for Ottle at sheriffs' sales but Ottle was not aware of some of them and the petitioner signed and acknowledged deeds in Ottle's name without disclosing in the deeds that he was not Ottle or that he was acting under a power of attorney for Ottle. It is clear that the petitioner was the operator of the businesses which were carried on during 1961 and 1962 at the 123 East Sixth Street office involved herein and that he was the sole owner of any profits realized from those businesses during 1961 and 1962. It is also clear that the bank accounts in the names of Lakes Detective Agency, Federal Detective Agency and others were used solely for the benefit of the petitioner as was the Berea bank account in249 his name. The record is not as clear as it might be in regard to the Frank Ottle accounts and Ottle's interest in the Export-Import lumber business. Ottle did not know that there was an account in his name at the Southern Ohio National Bank in Cincinnati. The only Ottle bank account that Ottle knew of was an account at the Berea Bank and Trust Company in Kentucky. The petitioner used the Ottle accounts for his own benefit. There is a failure of proof to show that the Commissioner erred in including deposits in and withdrawals from the Ottle Southern Ohio National Bank account in computing income of the petitioner or that he erred in determining the petitioner's income from the detective and guard businesses. The petitioner had at least a one-fourth interest in any 1962 profits of the lumber business. The petitioner has not shown by a fair preponderance of the evidence that he did not realize income of $1,017.36 in 1962 from the lumber business, and, consequently, the Commissioner's determination as to that item must stand. The petitioner has not shown that the Commissioner erred by including in 1962 income $5,375 as short-term capital gain from the sale of the Conroy Street property250 or by including in 1962 income of the petitioner $13,195.20 as 50 percent of the longterm capital gain from the sale of the Mt. Washington property. The Commissioner has proven by clear and convincing evidence that at least a substantial part of the deficiency for each year is due to fraud with intent to evade tax. The petitioner's use of bank accounts and names in his business, the lack of proper records and the confusion in those kept, his failure to disclose and admit the sources of his income, and his efforts to disguise transactions are sufficient in themselves to prove his intent to defraud and to evade income tax of these years due from him. Decision will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622532/	CHICAGO PNEUMATIC TOOL CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Chicago Pneumatic Tool Co. v. CommissionerDocket No. 29677.United States Board of Tax Appeals21 B.T.A. 569; 1930 BTA LEXIS 1835; December 5, 1930, Promulgated 1835 In order to enable its foreign subsidiaries to meet competition in the sale of goods and thereby to continue the outlet of the petitioner for its goods in the foreign market through such means, the petitioner found it necessary in 1923 to adjust and reduce the prices of inventory on hand representing goods already paid for, making a refund for the difference through credits on unpaid bills. Hold that the credits representing such payments are not capital contributions, but constitute deductible loss. George E. H. Goodner, Esq., and F. C. Rohwerder, C.P.A., for the petitioner. F. R. Shearer, Esq., for the respondent. TRAMMELL 569 This proceeding is for the redetermination of a deficiency in income tax of $27,884.17 for 1923. The only matter in controversy is the deductibility in determining taxable net income of an amount 570 of $190,000 representing credits allowed by the petitioner during the taxable year to foreign subsidiary corporations as a result of an agreement made in that year and based on purchases made by the subsidiary corporations from the petitioner prior to the taxable year. FINDINGS OF FACT. The petitioner1836 is a New Jersey corporation with its principal office in New York City. It filed its corporation income-tax return for 1923 with the collector of internal revenue for the third district of New York. Since incorporation the petitioner has been engaged in the manufacture and sale of compressed air tools, electric tools, air compressors, Diesel engines and similar products. The petitioner is and throughout the taxable year was the owner of all the capital stock of the Consolidated Pneumatic Tool Co., Ltd., of England, hereinafter referred to as the English company, and the Canadian Pneumatic Tool Co., Ltd., of Canada, hereinafter referred to as the Canadian company. The English and Canadian companies are, and in 1923 were, principally engaged in the business of distributing, as selling agencies, the manufactured products of the petitioner. Prior to the year beginning January 1, 1923, it was the consistent practice of the petitioner to bill its shipments to the foreign subsidiary corporations at the domestic selling price, which was the list price at which the petitioner sold its products in the United States less a discount and was in excess of cost to the petitioner. The1837 amount of such billings was included by the petitioner in its gross sales for the purpose of computing gross income for prior years. The petitioner's annual shipments to the English company increased from about $100,000 in 1902 to about $1,000,000 in 1918 or 1919, when they were at their maximum. Following the World war the petitioner's shipments abroad suffered a severe decline, dropping to about $100,000 in 1921. Conditions were such that it was no longer possible for the English company to market the petitioner's products at a profit under the method of billing theretofore followed. In 1921 the English and Canadian companies requested a reduction in billing prices to them on the ground that they could not longer compete under the old method of billing and under the new conditions following the war and that to continue under the old method meant bankruptcy and extermination for them. The petitioner did not accede to these requests at once. Believing the English company had inadequate supervision, and for the purpose 571 of ascertaining just what the petitioner should do in order to get back its volume of business, the petitioner's president, H. A. Jackson, selected1838 one H. B. Megary and sent him to London to take charge of the English company as its managing director. The English company operated branches in other countries, including Spain, Belgium, Holland, Italy, India, Australia, and South Africa. Megary, after straightening out things at the London office, went to India and South Africa. After studying the whole situation he returned to the United States and reported to Jackson that if the English company was to continue in existence, with conditions as they then existed, it would be necessary for the petitioner to change the method of billing and to bill the English company at cost. After discussions extending over a period of a year or two, Jackson, about the middle of 1923, agreed to Megary's proposal and gave instructions to the petitioner's accounting department to change the billing to cost on all goods shipped thereafter. With respect to goods shipped in 1923 prior to the acceptance of the proposal, it was agreed that the petitioner would allow the English company a credit representing the difference between the cost of such goods to the petitioner and the amounts at which they had been billed to the English company. Such credit1839 was made on the books of the petitioner and was allowed as a deduction by the respondent in determining the deficiency here involved. With respect to the English company's inventory at January 1, 1923, it was also agreed that the petitioner would allow that company as a credit an amount representing the difference between the cost to the petitioner of such goods and the amounts at which they had been billed to the English company. About the same time a similar agreement was made with the Canadian company, except that the bills to that company were to be on a cost-plus basis, the excess above cost being certain charges made to conform to the Canadian tariff laws. In accordance with the agreements the petitioner, prior to December 31, 1923, credited the English company with $170,000 and the Canadian company with $20,000, being the amounts which the petitioner computed as the difference between the cost to it of the goods in the inventories of the respective companies on January 1, 1923, and the amounts at which such goods had been billed to the companies. The total of these two amounts, $190,000, was charged to expense on the books of the petitioner and deducted from gross income1840 on its income-tax return for 1923. The deduction so taken was disallowed by the respondent in determining the deficiency. The petitioner's purpose in making the new arrangement with the English and Canadian companies was to enable them to meet competition in marketing the petitioner's goods abroad, thereby 572 continuing to afford the petitioner foreign outlets for an important amount of its products. The petitioner deemed it necessary to retain such outlets for its products, which had been an important factor in the past, in order to maintain volume of production and thereby help to absorb the overhead or "burden" in connection with its domestic business. The English company was faced with extermination or bankruptcy unless some rearrangement was made and at that time owed the petitioner between $300,000 and $400,000 on the basis of the old method of billing. This company had an inventory on January 1, 1923, of approximately $1,000,000. In making the new arrangement the question of taxation was not considered. The annual volume of business with the English company under the new arrangement gradually increased so that in 1929 it was close to the maximum volume prior1841 to 1923. This has absorbed 17 to 18 per cent of the petitioner's overhead expenses which otherwise would have increased costs and reduced its profits. While there is a close business relationship between the petitioner and the English and Canadian companies so far as the determination of policies is concerned, the petitioner does not dictate to them as to business operations. The condition of the English company has materially improved since 1923 and in 1929 made a profit of about $10,000. While the English company is "not a source of revenue to the petitioner," it is "a source of outlet" for the petitioner's goods and the petitioner is perfectly satisfied if the company will continue on that basis. Prior to 1923 the petitioner conducted its business in France through an independent French company over which the petitioner had no control and in which it and the English company had no stock ownership. The French company was confronted with the same problem as the English company. It could not operate profitably with the petitioner's products on the basis of the old method of billing, and also made demands insisting upon lower prices or larger discounts. The petitioner did1842 not accede to these demands of the French company, but caused to be incorporated its own company to handle its products in France. This new company was incorporated at considerable expense and has been run at a loss, but is maintained solely for the purpose of providing the petitioner with an outlet for its products and absorbing a portion of its "burden." OPINION. TRAMMELL: The petitioner contends that the amount of $190,000 representing $170,000 credited to the English company, and $20,000 credited to the Canadian company, in 1923, as the difference 573 between the cost to the petitioner of the merchandise in the inventories of the respective companies on January 1, 1923, and the amounts at which such merchandise had been billed to the companies, is an allowable deduction in determining its taxable net income for 1923, either as a business expense or as a loss. The respondent denies that the amount is deductible on either basis, and contends that it was in the nature of a capital expenditure made by the petitioner for the purpose of protecting and enhancing the investment already made by the petitioner as stockholder of the two companies. It was conceded at the hearing1843 that the cost of the goods to the foreign subsidiaries on hand and included in inventory in January, 1923, had already been paid to the petitioner. We must recognize the fact that the petitioner owned all the stock of the foreign subsidiaries and that as between the three companies it made no difference whether the petitioner retained the amount or whether the foreign subsidiaries had the benefit thereof. Taking the companies together, it made no difference. However, we are determining here, as we must do, the income of the petitioner as a separate corporation. While it was affiliated with the foreign corporations, it was neither required nor permitted to file a consolidated return with them for the year involved and neither the respondent nor the petitioner contends that this case presents a situation where the accounts should be consolidated. That issue is not involved in the case. We must also recognize the fact that by treating the corporations as entirely separate taxpayers, the petitioner has received income and has paid tax thereon by virtue of the sales to the foreign subsidiaries on the basis of the sales prices existing, as if it were an unrelated company. We can1844 not determine tax liability of the petitioner by treating the corporations as separate for determining income without also treating them in the same way for purposes of deductions. If the amount involved would be deductible as an ordinary and necessary expense or as a loss as between entirely separate and unrelated businesses, it should not be classified differently in this case because of the fact of affiliation, when no consolidated return was required or permitted and the taxpayer did not have the benefit of consolidating the accounts when losses of the foreign subsidiaries could be considered in determining the taxable income of the group. It is contended by the respondent that the transaction amounted to a contribution to, or additional investment in, the capital of the foreign companies. It is of course true that the amount did add to and increase the surplus of the foreign corporations, but, on the other hand, if it were in fact an ordinary and necessary expense or a 574 business loss, where the returns or the accounts are not permitted to be consolidated, that fact would not be material here. It is only natural that amounts paid by one corporation may add to1845 the surplus of the receiving corporation. We are concerned here with the paying corporation and if the amount is an ordinary and necessary expense or a business loss, on its part, it makes no difference that it adds to the surplus of the corporations receiving the payment. This case may be distinguished from cases where the principal stockholder cancels an indebtedness owing by a corporation to him, which we have held to be in the nature of a capital contribution and not allowable as a deduction. The indebtedness for the goods involved here had already been paid. The petitioner in effect paid out money to the foreign corporations. This payment merely took the form of a credit on what was then owing. It was thus not a cancellation of indebtedness, but a payment. This case is also distinguishable from cases involving assessments against stock. Such cases involve only the corporation to which the payments are made and not the business of the separate stockholders, but here the payment was made by the petitioner for its own business purposes and on account of its own necessities. It was not merely for the use and benefit of the corporation to which paid. Any benefit to the1846 subsidiary corporation was merely incidental. If the corporations to which the amounts were paid were alone involved and it was merely for their benefit and purposes that the payment was made, a different situation would be presented. Under such circumstances it might well be that the amount might be considered a capital contribution. The testimony is that the foreign companies involved could no longer carry on business on the basis of old prices due to the competition of foreign goods. During 1923 the foreign companies could not compete with other companies on the price at which the goods had been paid for. The English and Canadian companies were headed for bankruptcy. They could not make a profit and there was serious question as to whether they could pay the petitioner the amount owing, which was between $300,000 and $400,000. The petitioner desired to have the foreign markets afforded by the English and Canadian companies as a continuing outlet for its goods and the payment by way of a credit was made of the difference between old prices and the new for this business purpose. This was not a voluntary payment or contribution to the foreign corporations. The petitioner's1847 president, who made this adjustment, testified that it was absolutely necessary and was the "bitterest pill" he ever had 575 to swallow. Subsequent events showed the wisdom of the action from a business standpoint. It was not a mere voluntary transfer of surplus from one corporation to another, but a payment for what was considered, from all existing facts, a business necessity. We can see no difference in principle between this situation and that existing in the case of , where an individual, in order to assure the continuance of the business being conducted by a corporation of which he was a stockholder, gave up certain shares of his stock to bankers. This was held to be a deductible loss. There is no real difference between paying over the stock to the company, itself, for the purpose of paying the bankers, than paying the bankers direct. See , and . The foreign corporations had their own separate income, their own separate capital, separate management, and their own businesses. The petitioner1848 considered it necessary for these companies to continue to have income and to carry on their businesses and to be able to sell goods in competition with other companies engaged in the same business in foreign countries. The evidence is uncontradicted that they could not do so at the prices at which goods had been billed prior to 1923 and it was just as necessary to reduce the prices of inventories on hand for this purpose as it was to reduce the prices of goods sold in 1923. We see no real difference in principle between the goods sold in 1923 which had already been billed but not paid for at the existing prices, and goods sold in the previous years remaining on hand in 1923 which had been paid for. In one case, in order to make the adjustment for the substantial reasons testified to, it was necessary to make a refund of a portion of the price paid. In the other case, where the goods had not been paid for, the prices were reduced and the accounts credited, yet in the latter situation the respondent has not raised any objection. Our decisions also support this view. See 1849 ; . The adjustment, where the goods had been paid for, necessitated an outlay, a payment, however, which was effected by credits on other bills. The same motive impelled the action in both situations. The substance of the transactions was that the petitioner found it necessary to sacrifice a part of the profits it had already made, thereby sustaining a loss of income already received in order to assure the continuance of an outlet for its products in the manner considered best for its business interests. 576 It may well be that all would not agree as to the wisdom or necessity of the course pursued by the petitioner. What one may consider necessary to be done, another might not, but there is no requirement that the method pursued be recognized generally as the best or that an expenditure be absolutely essential in order to be deductible as a loss incurred in business or as an ordinary and necessary expense. It may well be that the petitioner could have permitted the foreign corporations to become hopelessly involved in debt, or to have gone into bankruptcy and1850 assumed all its debts and carried on business in an entirely different way. It could have paid its expenses direct, or, when its capital was impaired or exhausted, could have replenished it. Owning all the stock of the foreign corporations, the petitioner undoubtedly could have handled its foreign business differently from what it did, but it considered the method adopted most suitable to its business purposes. We are not to determine whether a business should be conducted in one way in preference to another, but being conducted in the manner adopted, we can not say that an expenditure was of a capital nature merely because the same result might in the end have been accomplished through the means of such an expenditure or that a loss sustained is not deductible because all would not agree as to the real necessity of sustaining it. We must consider what was actually done. The fact that this payment was made as it was may have and doubtless did prevent the necessity of a further payment into the capital or the direct payment of debts, but this fact does not make it of a capital nature and does not prevent the deduction allowed by statute for a loss actually sustained. The facts*1851 here, in our opinion, bring the case within the principle of , where we allowed as a loss a reduction in price of goods sold made necessary by existing conditions. From a consideration of all the evidence, we think that the expenditure involved, which took the form of credits, constituted a deductible loss in 1923 when made. Reviewed by the Board. Judgment will be entered under Rule 50.STERNHAGEN, TRUSSELL, ARUNDELL, and MURDOCK concur in the result only. SMITH SMITH, concurring: I concur in the result reached, but believe that the $190,000 in question should be allowed as a deduction from gross income as an ordinary and necessary expense of operation and not as a loss sustained. VAN FOSSAN and MATTHEWS dissent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622533/	ESTATE OF KATE S. WILBANKS, DECEASED, VIRGINIA KATE NICKERSON, PERSONAL REPRESENTATIVE, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentEstate of Wilbanks v. CommissionerDocket No. 6751-88United States Tax CourtT.C. Memo 1990-299; 1990 Tax Ct. Memo LEXIS 317; 59 T.C.M. (CCH) 896; T.C.M. (RIA) 90299; June 18, 1990, Filed 317 Held: Petitioner's motion for reconsideration of our opinion with respect to cross motions for summary judgment will be denied. D. William Garrett, Jr., for the petitioner. Larry D. Anderson, for the respondent. WHITAKER, Judge. WHITAKERSUPPLEMENTAL MEMORANDUM OPINION This case is before the Court on petitioner's motion for reconsideration of our opinion in Estate of Wilbanks v. Commissioner, 94 T.C. (filed March 6, 1990). The Court notified respondent of petitioner's pending motion and afforded318 him an opportunity to object within a specified period of time. Respondent did not avail himself of that opportunity. In that opinion, we decided that (1) respondent did not abuse his discretion by not approving petitioner's application for an extension of time to file decedent's estate tax return; (2) respondent did not exceed his statutory authority by determining an addition to tax under section 6651(a)(1) 1 after abatement of such addition by prior administrative action; and (3) petitioner's ultimate liability for the section 6651(a)(1) addition is a matter for decision after trial and not on the parties' cross motions for summary judgment. The opinion in Estate of Wilbanks v. Commissioner, supra, is incorporated herein by this reference. The granting of a motion for reconsideration rests within the discretion of the Court. Vaughn v. Commissioner, 87 T.C. 164">87 T.C. 164, 166-167 (1986).319 Motions for reconsideration will be denied in the absence of a showing of unusual circumstances or substantial error. Vaughn v. Commissioner, supra.Initially, petitioner argues that we reached a decision on the abuse of discretion issue without deciding whether respondent adequately considered the grounds upon which petitioner's application for an extension of time to file decedent's estate tax return was based. Petitioner correctly observed that our opinion did not include specific findings on that issue. However, the unexplained lateness of petitioner's application for an extension of time to file decedent's estate tax return rendered such findings unnecessary. Section 20.6081-1(b), Estate Tax Regs., provides that an application for an extension of time to file a decedent's estate tax return "should be made before the expiration of the time within which the return otherwise must be filed." Petitioner neither made the application for an extension of time to file when such application should have been made, nor offered any plausible explanation for failing to do so. Accordingly, we held that respondent did not abuse his discretion by not approving petitioner's320 application for an extension of time to file decedent's estate tax return. Next, petitioner argues that in three instances, not in any way related to this case, respondent approved applications to extend the time for filing estate tax returns which "stated that additional time was needed for the exact same reasons as this petitioner's application." Petitioner further argues that approval of those unrelated applications, which were attached as exhibits to petitioner's second supplemental brief in support of motion for summary judgment, shows that the grounds for petitioner's application constituted a "plausible explanation." 2321 Petitioner misjudges the significance of respondent's approval of the three unrelated applications. Unlike petitioner's application, each of those other applications was made when application for an extension of time to file a decedent's estate tax return should have been made, i.e., "before the expiration of the time within which the return otherwise must be filed." Sec. 20.6081-1(b), Estate Tax Regs. That distinction, which petitioner attempts to minimize, is critical. We consider the lateness of petitioner's application for an extension of time to file to be sufficient reason for disapproval in light of the fact that petitioner failed to offer any plausible explanation for not making such application when it should have been made. Thus, notwithstanding the purported similarity of grounds, respondent's disapproval of petitioner's application is not at odds with his approval of the three unrelated applications. The other points raised in petitioner's motion for reconsideration pertain to the circumstances surrounding and the effect of abatement of the section 6651(a)(1) addition by prior administrative action. We believe that our opinion adequately addresses the issues arising322 in connection with such abatement. Estate of Wilbanks v. Commissioner, supra (slip op. at 15-16). For purposes of clarification, however, we note that our decision on those issues did not depend upon the existence or content of the memorandum dated May 17, 1985. Thus, the fact that that memorandum was neither acknowledged nor admitted by petitioner is of no consequence. Finally, contrary to petitioner's assertion, we did not find as a matter of fact that "'it was the understanding of all parties involved that the applicability of the failure to file * * * penalt[y] would not be ascertained until the estate tax return had been audited,' and that that was the reason for abatement of the section 6651(a)(1) addition * * *." Rather, we indicated that respondent made an argument to that effect. Estate of Wilbanks v. Commissioner, supra (slip op. at 13). In accordance with the foregoing, petitioner's motion for reconsideration will be denied. An appropriate order will be issued. Footnotes1. Section references are to the Internal Revenue Code of 1954, as amended and in effect as of the date of decedent's death.↩2. Petitioner amended its motion for summary judgment so as to incorporate an explanation of why the application for an extension of time to file was not made before the original due date of decedent's estate tax return. In our prior opinion, we concluded that petitioner did not offer a "plausible explanation" for failing to do so. Thus, our use of those terms was limited to commenting upon the lateness of petitioner's application, not upon the merit of the grounds set forth in such application. This distinction has apparently been lost on petitioner.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622540/	Rand Beverage Company, Inc., Petitioner, v. Commissioner of Internal Revenue, RespondentRand Beverage Co. v. CommissionerDocket No. 30250United States Tax Court18 T.C. 275; 1952 U.S. Tax Ct. LEXIS 196; May 13, 1952, Promulgated 196 Decision will be entered under Rule 50. In 1937 petitioner commenced the business of producing and selling carbonated beverages. It claims relief from excess profits taxes for the years 1943, 1944, and 1945 under Code section 722 (a) and section 722 (b) (4) and (5). Petitioner's excess profits credits were computed on the invested-capital method. Held, petitioner qualifies for relief under section 722 (b) (4), but not (b) (5); that it did not reach, by the end of its base period, the earning level it would have reached if it had commenced business two years earlier; and reconstructed average base period net income determined. E. C. Eichenbaum, Esq., and W. S. Miller, Jr., Esq., for the petitioner.Allen Akin, Esq., for the respondent. Rice, Judge. RICE275 This proceeding arises from the Commissioner's197 disallowance of petitioner's claim for relief under section 722 (a) and 722 (b) (4) and ( 5) of the Internal Revenue Code for the calendar years 1943, 1944, and 1945 in the amounts of $ 27,836.34, $ 24,309.19, and $ 10,698.74, respectively. The question presented is whether the petitioner is entitled under such provisions of the Code to a refund of part of the excess profits taxes paid for such taxable years. Some of the facts were stipulated.FINDINGS OF FACT.The stipulated facts are so found and are incorporated herein.The petitioner is a corporation with its offices and place of business in Little Rock, Arkansas. It was incorporated on February 15, 1937, under the laws of the State of Arkansas, and was authorized to manufacture and sell nonalcoholic beverages. It actually began operations in April 1937, manufacturing various soft drinks for sale.Petitioner filed its excess profits tax returns on the calendar year basis with the collector of internal revenue for the district of Arkansas, and excess profits taxes were paid as follows:1943$ 32,049.24194425,473.90194527,691.86276 Applications for relief under section 722 were duly filed; and on June 198 14, 1950, the respondent mailed to petitioner his notice of disallowance of said applications for relief.Excess profits credits allowed the petitioner were based on invested capital and were in the following amounts:1943$ 963.2719441,577.2319452,755.17In April 1937 petitioner began the sale of Cleo-Cola, a cola-flavored drink in a 12-ounce bottle. This drink was distributed in petitioner's own trucks. In May 1937 petitioner began the production of two franchised, flavored, carbonated drinks under the names of New Yorker and Town Hall. 1 The extracts used in these drinks were acquired from the Monark Manufacturing Co. New Yorker was offered in 13 or 14 different flavors including the same flavors offered in Town Hall, and was bottled mostly in quart bottles, 12 of which constituted a case. A small quantity was bottled in 12-ounce bottles. Town Hall was offered in orange, strawberry, grape, root beer, cherry, lemon, and lemon-lime flavors, and was bottled in a pint-size bottle of which 24 constituted a case. New Yorker was distributed through the Economy Wholesale Grocery Company, owned by Roy Rand, the president of petitioner. Town Hall was distributed by 199 delivery salesmen in petitioner's own trucks, who took the orders and delivered the merchandise to the customers. The capacity of petitioner's bottling plant was approximately 1,600,000 quarts per year during the base period.In April 1938 petitioner ceased the production of Cleo-Cola and began the production of a different cola drink, known as Nichol-Kola, in a 12-ounce bottle.In November 1938 petitioner began the production of a drink known as Rand's Better Beverage, produced in the same seven flavors as Town Hall, bottled in a 10-ounce size bottle, and distributed by petitioner's own trucks. This drink was made from petitioner's own formula, with the exception of the orange flavor, the extract for which was purchased from Citrus Products Co. It was a higher quality drink than Town Hall.Petitioner promoted Nichol-Kola as a lead item, in competition with Coca-Cola, 200 in order to build up its sale of Rand's Better Beverages, on which petitioner intended to make its profit.Petitioner was not doing much business with Town Hall in the cities; its sales were mostly in the country. Petitioner wanted city 277 distribution, and thought that through a smaller bottle it could maintain its country distribution and increase its city sales. It was hoped that Rand's Better Beverages would be the leading drink, and it was planned to discontinue Town Hall and to continue producing Rand's Better Beverages. Petitioner changed its advertising and repainted all of its trucks to show "Rand's Better Beverages" where "Town Hall" formerly appeared. Production of Town Hall did not stop until sometime in 1942.Gross income and case sales of petitioner for the years 1937-1939 were as follows:RAND BEVERAGE COMPANY, INC.Gross Income and Case Sales1937-193919371938Gross incomeCasesGross incomeCasesCleo Cola$ 11,416.6414,426 1/2$ 1,215.001,545 New Yorker:32 ounce8,850.1014,750 13,631.2022,607 1/612 ounce445.00564 104.90133 Esquire1,836.402,289 1/2Nichol Kola:12 ounce12,264.2016,121 1/28 ounce932.301,330 1/2Town Hall16,102.7420,438 1/238,842.2049,568 Rand's Better Beverages1,755.552,508 Miscellaneous80.1185 30.29Totals36,894.5950,264 70,612.0496,102 2/3201 RAND BEVERAGE COMPANY, INC.Gross Income and Case Sales1937-19391939Gross incomeCasesCleo ColaNew Yorker:32 ounce$ 7,968.0813,128 1/4 12 ounce69.6087 Esquire393.60492 Nichol Kola:12 ounce8,329.9610,467 23/248 ounce1,323.171,894 Town Hall25,871.0232,431 2/3 Rand's Better Beverages27,533.9439,362 23/24Miscellaneous12.29Totals71,501.6697,863 10/12The 2,508 cases of Rand's Better Beverages, shown in the foregoing table to have been produced in 1938, were produced in the last two months of that year.The length of time it would require a bottling company commencing to produce soft drinks in Little Rock in 1937 to reach a normal level of earnings depended upon many factors, including efficiency of operations and merit of the product. If all factors were average and normal, it would require a period of four to five years. Such a new company would normally experience losses or subnormal earnings during the first two or three years of operation.The experience of other bottlers in the Little Rock area indicates that with normal efficiency of management and quality of product, 202 petitioner could reasonably have expected to increase the sale of its leading flavor drink by an over-all percentage of 27.5 per cent in the first year after 1939, and to effect an additional 23.6 per cent in the second year after 1939, under conditions as they existed on December 31, 1939.278 Petitioner's profit and loss statements for the calendar years 1937, 1938, and 1939, are as follows:RAND BEVERAGE COMPANYProfit and Loss StatementIncome:193719381939Sales$ 36,894.59$ 70,612.04 $ 71,501.66 Cost of Goods Sold13,659.3823,044.97 21,337.07 Gross Profit$ 23,235.21$ 47,567.07 $ 50,164.59 Expenses:Factory Labor3,100.64 5,622.73 5,480.77 Manufacturing Expenses:Rent650.00 805.00 780.00 Light and Power841.77 1,064.31 988.82 Fuel246.36 319.69 219.33 Water929.29 1,151.93 1,026.76 Machinery Repairs310.37 155.09 359.24 Insurance43.21 64.06 49.84 Factory Supplies223.54 420.17 379.64 Building Repairs84.84 110.60 18.32 General Factory Expense54.15 23.51 4.85 Depreciation -- Buildings278.03 392.48 392.52 Depreciation -- Machinery542.69 878.12 894.09 Bottle Breakage988.12 512.21 Total ManufacturingExpense4,204.25 6,373.08 5,635.62 Selling Expense:Jobbers Brokerage21.00 Sales Salaries2,810.13 4,368.18 4,451.32 Sales Commissions1,338.21 3,332.49 4,088.02 Traveling24.88 96.08 263.31 Advertising3,175.38 6,077.06 3,775.04 Advertising Shippers678.64 Advertising Free Goods4,076.54 2,424.24 Telephone and Telegraph149.70 230.38 217.12 General Selling Expense36.76 Total Selling Expense7,519.30 2 18,859.97 15,255.81 Delivery Expense:Gas, Oil and Grease1,871.78 4,719.33 5,391.91 Truck Repairs1,093.50 1,689.43 2,274.50 Truck Insurance296.74 620.06 815.07 Truck Depreciation1,184.57 2,661.29 2,858.11 Truck General Expense206.47 453.89 611.59 Cases Repairs23.57 370.56 Truck Hire5.19 Truck Tires1,048.59 1,555.49 Case Depreciation573.18 738.92 Freight Out625.04 477.98 General Delivery Expense449.92 Total Delivery Expense$ 4,681.82 12,761.37 15,173.49 Administration Expense:Executive Salaries1,228.27 1,860.78 1,076.43 Office Salaries1,360.67 1,759.84 2,031.25 Stationery and Supplies98.67 171.74 205.37 Postage16.62 43.97 83.13 Legal152.55 333.72 128.00 Dues and Subscriptions45.25 7.00 45.50 Insurance62.50 113.30 196.13 Furniture and FixturesDepreciation77.44 122.10 126.13 General AdministrativeExpense142.73 445.49 33.70 Security and Excise Taxes296.93 679.92 687.06 Cash Over and Short2.68 .30 (132.37)Taxes -- Other92.50 176.75 356.25 Bottles and Cases Loss919.26 673.86 Display Stands Depreciation30.26 42.76 42.76 Bank Service Charge andExchange5.82 33.82 50.94 Bad Debts61.11 Total AdministrationExpense4,532.15 5,791.49 3 5,695.25 Total Expenses24,038.16 49,408.64 47,240.94 Operating Profit(802.95)(1,841.57)2,923.65 Other Income:Profit on Sale of Truck and Car56.25 131.32 Net Profit(802.95)(1,785.32)3,054.97 203 279 Petitioner's income tax returns for the years 1940 and 1941 show a net loss of $ 814.61 for the year 1940 and a net profit of $ 3,554.01 for the year 1941.The comparative balance sheet of petitioner for the years 1937 to 1939, inclusive, is as follows: 280 RAND BEVERAGE CO., INC.Summarized Balance Sheets as Per Income Tax Returns as FiledAssets:12/31/3712/31/3812/31/39Cash$ 294.42 $ 354.24 $ 390.97 Notes and accounts receivable1,631.15 6,355.07 10,447.68 Other investments -- U. S. BondsInventories:Raw material1,253.26 4,010.92 4,447.59 Finished goods374.88 717.24 1,016.92 Supplies, etcPrepaid insurance, etc339.11 428.86 407.73 Fixed assets:Machinery7,288.10 8,194.13 8,131.63 Furniture and fixtures1,094.05 1,232.30 1,300.84 Delivery equipment5,016.80 9,978.07 11,434.60 Cases & cartons5,264.29 6,461.34 7,849.36 Leasehold1,177.43 1,177.43 1,177.43 Coolers and other332.12 268.91 637.92 Total$ 20,172.79 $ 27,312.18 $ 30,531.78 Less: Reserve for depreciation, etc[2,112.99][7,067.96][11,581.00]Bottles (net)12,713.50 22,582.38 27,560.11 Other assets40.00 352.54 2,369.33 Accounts receivable -- officersPost war refund dueDepositsTotal assets$ 34,706.12 $ 55,045.47 $ 65,591.11 Liabilities and Capital:Accounts payable$ 10,245.07 $ 872.66 Notes & mortgages payable24,372.67 53,338.06 61,168.21 Accrued expenses57.41 251.55 272.18 Customers' deposits533.92 2,192.83 3,384.02 Other liabilities678.64 Common stock300.00 300.00 300.00 Surplus[802.95][2,588.27]466.70 Total$ 34,706.12 $ 55,045.47 $ 65,591.11 204 When petitioner started in business, it did not get deposits on bottles left with customers. In getting new customers, it was the practice for the truck driver who sold and delivered the drinks to the customers to make deliveries on consignment. The customer would pay petitioner for the drinks after they were sold. When the drivers made repeat calls, they would leave as many cases of drinks as the customer wanted and would pick up whatever empties the customer had on hand.281 The amounts of $ 533.92, $ 2,192.83, and $ 3,384.02, appearing under "Customer Deposit" as a liability on the balance sheets for 1937, 1938, and 1939, represented the only money deposited on bottles during those years.For the years 1937 to 1939, inclusive, the petitioner purchased 5,964-17/144 gross of bottles at a cost of 3.7 cents a bottle, or an aggregate of $ 31,779.96, including freight.During the years 1937 to 1939, inclusive, the only charge on account of bottle loss taken by the petitioner was "Bottle Breakage" at the rate of one-half cent per case, which amounts were credited to the bottle account. There was no actual depreciation account for bottles on petitioner's books, the bottle breakage205 being charged off to manufacturing cost.The bottle account, the amount charged to manufacturing cost and credited yearly as depreciation to the bottle account, and the depreciation reserve, as shown on petitioner's Federal tax returns, are as follows:BottleDepreciationYearaccountYearly creditreserveDec. 31, 1937$ 13,231.47$ 517.971 $ 517.97Dec. 31, 193824,088.47988.121,506.09Dec. 31, 193929,418.69512.211,858.58Dec. 31, 194033,062.95547.092,405.67Dec. 31, 194135,214.64693.153.098.82Dec. 31, 19429,161.0020,747.110 As of December 31, 1939, petitioner's bottle account was carried on its books in the amount of $ 27,560.11, which amount was the net bottle account after deducting a depreciation charge of $ 1,858.58.On its return for the year 1942, petitioner charged off bottle breakage and loss in the amount of $ 20,747.11 and bad debt loss in the amount of $ 15,665.04. In that year due to sugar rationing, petitioner was forced to abandon considerable territory and restrict its distribution of beverages. At that time, since the abandonment206 of much of the territory involved the loss of many unreturned bottles, an inventory of bottles was taken. No breakdown between the amount of bottle and case loss attributable to annual depreciation and the loss attributable to the contracting of territory under wartime conditions was made on the records of petitioner. The petitioner did not take an inventory of bottles in 1937, 1938, or 1939. Five per cent of total sales for case and bottle loss is a reasonable figure. Such figure, however, would not include losses from uncollectible accounts and would have no relation to such losses.282 Petitioner's 1942 tax return contained an explanation with respect to the bad debt loss as follows:This item represents approximately 3,200 different small accounts, covering deposits on cases and bottles mostly, which are uncollectible. During 1942 the credit policy was changed. Merchandise was sold for cash only and actual cash deposits for the cases and bottles were taken.The bad debt amount of $ 15,665.04 was attributable, in large measure, to long-standing consignment charges that petitioner had not attempted to collect on a current basis, some of which proved to be uncollectible207 because certain customers had gone out of business or could not be located.Petitioner did not know what part of the bottle loss and bad debt loss had actually occurred in 1942. The bad debt charge-off in 1942 represented 3.245 per cent of the total sales of $ 482,662.28 for the period 1937 to 1942, inclusive.Notes and accounts receivable at the close of each of the years 1937 to 1942, inclusive, as shown by petitioner's tax returns, were as follows:12/31/3712/31/3812/31/39Notes and accounts receivable$ 1,631.15$ 6,355.07$ 10,447.6812/31/4012/31/4112/31/42Notes and accounts receivable$ 11,493.66$ 9,005.01$ 304.63The amounts of $ 24,372.67, $ 53,338.06, and $ 61,168.21 shown on the balance sheets for the years 1937, 1938, and 1939, respectively, as notes and mortgages payable were those owed to the Economy Wholesale Grocery Co. and Roy F. Rand. No interest was shown on the profit and loss statements or the income tax returns for the years 1937, 1938, and 1939, as having been paid on such amounts during those years. Rand owned the grocery company and was president of the petitioner and its principal stockholder. The amounts of this208 outstanding indebtedness and the interest deduction claimed in petitioner's tax returns in the years 1940 to 1944, inclusive, are as follows:MortgageInterestDatepayableexpenseDec. 31, 1940$ 68,970.670 Dec. 31, 194161,923.121 $ 115.56Dec. 31, 194219,701.9785.74Dec. 31, 19431,000.0011.93Dec. 31, 19440 111.83The record does not show that any other interest was owing by petitioner on such amounts.283 Advertising expenditures in petitioner's industry are controlled by management and can be considered a fixed expense or a variable expense which fluctuates with sales in the discretion of management. Normally, however, as sales increase, advertising expenses also increase.In July 1939 there were listed in the Little Rock telephone directory 10 different companies bottling soft drinks, and competition in Little Rock in the soft drink industry during the years 1937 to 1939, inclusive, was keen.In 1935 the 7-Up Orange Crush Beverage Company of Little Rock began bottling 7-Up, a nationally advertised, one-flavor, carbonated beverage which was in competition with all other soft drinks. 7-Up production209 increased in 1936 over 1935 by more than 27 per cent, and increased in 1937 over 1936 by more than 27 per cent. 7-Up had an advantage over Rand's Better Beverages because the company producing 7-Up had been in business quite a few years with an established trade and a nationally advertised drink.The Dr. Pepper Bottling Company in Little Rock manufactured a line of flavored drinks in 10-ounce bottles under the name of Moody's Made-Rite Bottled Beverages, and two franchised drinks, Dr. Pepper and NuGrape. This company had been operating since 1900 and commenced bottling Dr. Pepper in 1929, a nationally advertised drink in competition with all other carbonated beverages. It began bottling NuGrape in 1933. The company's production showed an increase in 1937 over 1936. The soft drink bottling business in Little Rock has shown an increase each year since 1933.The production of soft drinks in cases by the Dr. Pepper Company for the years 1937 to 1939, inclusive, is as follows:193719381939Dr. Pepper58,75464,57465,301NuGrape9,08318,95429,454Soda Water76,23672,09770,842Two Wayn1 3,772(1) (1) Total cases147,845155,625165,597210 Flavors of soda water were Orange, Cream, Strawberry, and Root Beer. Sales of cases of carbonated drinks bottled by the Dr. Pepper Company showed an increase in 1939 over 1937 of 12 per cent.The survey of cost averages for the years 1935 to 1939, inclusive, as prepared by the American Bottlers of Carbonated Beverages from 61 plants in 1935 to 198 plants in 1939 is as follows: 284 Table I. -- Cost averages -- 6 to 10 oz. (case of 24 bottles)Recommended comparatives (interquartileaverages -- see note 1)Cost item19351936193719381939CentsCentsCentsCentsCentsMaterial24.626.826.724.925.7Labor and overhead09.909.009.310.809.2Selling expense06.207.208.508.710.1Delivery expense11.910.611.311.112.2Administrative expense08.709.408.207.807.3Total cost (See Note 4)62.762.463.764.862.1Table II. -- Cost averages -- 12 to 16 oz. (case of 24 bottles)Recommended comparatives (interquartileaverages -- see note 1)Cost item19351936193719381939CentsCentsCentsCentsCentsMaterial30.930.032.132.129.3Labor and overhead14.212.011.211.210.7Selling expense10.308.708.708.710.6Delivery expense15.513.112.612.613.2Administrative expense08.806.206.406.406.2Total cost (See Note 4)76.770.569.069.069.3Table III. -- Cost averages -- 23 to 32 oz. (case of 12 bottles)Recommended comparatives (interquartileaverages -- see note 1)Cost item19351936193719381939CentsCentsCentsCentsCentsMaterial28.628.728.725.528.2Labor and overhead19.013.312.213.612.2Selling expense14.307.709.008.109.5Delivery expense21.313.912.410.613.9Administrative expense09.306.506.606.306.2Total cost (See Note 4)97.870.469.068.569.3211 NOTE 1: * * The figures representing unit costs for all plants reporting were arranged in order from the lowest cost to the highest cost reported in each classification of Cost Item. The first one-fourth of the figures shown in such arrangement (representing lowest costs) and the last one-fourth of such figures (representing highest costs) were then eliminated from consideration. The average of the individual plant costs appearing in the intermediate cost range (that is, between the lowest fourth and the highest fourth of the reports) was then determined, as the Inter-Quartile Average, and designated as the Recommended Comparative Average for the purposes of this survey.With the elimination of the lowest fourth and the highest fourth of the reported figures, the midsection is generally accepted as the best basis for an average representing usual conditions. In this way the very low costs and very high costs due to inaccuracies in determining unit costs or to unusual conditions in the individual plant, are allowed to have no effect upon the determination of the averages. * * *285 NOTE 4: The total cost shown in Tables I, II, and III, is the average of the 212 Total Costs reported by individual plants. It is NOT the total of the other Cost Items shown in these Tables.The aggregate of total average per case cost of all size bottles is as follows:1936193719381939CentsCentsCentsCents6 to 10 oz62.463.764.862.112 to 16 oz70.569.069.069.324 to 32 oz70.469.068.569.3Total203.3201.7202.3200.7Statistics of business conditions in Arkansas and in the Little Rock area during the base period are as follows:Index of compiledreceipts, all corporationsIndex of retailStatesales, LittleIndex of bankof Arkansas,Rock, Ark.clearances, LittleYear"Statistics of Income,"(Dun & Bradstreet -- twoRock, Ark.,Treasuryreports1939 as 100Department,averaged),1939 as 1001939 as 100193698.381.580.31937103.084.990.3193892.782.785.11939100.0100.0100.0Statistics of sales of one competitor of petitioner in Little Rock for the years 1937 to 1939, inclusive, together with an index with 1939 as 100, are as follows:Sales in totalIndex 1939 asYearcases1001937147,84589.31938155,62594.01939165,597100.0213 Statistics of earnings and investments of 13 nonalcoholic beverage companies as compiled by the Securities and Exchange Commission showing sales, net profit before income taxes, net worth, and an index with 1939 = 100 compiled from those figures for the years 1936 to 1939, inclusive, are as follows:Statistics on Earnings and Investment of Nonalcoholic Beverage Industry as Compiled by S. E. C. "Data on Profits and Operations 1936-1942" -- Part I, Page 199Net ProfitSalesIndex 1939BeforeYear(thousands)as 100%IncomeTaxes (thousands)1936$ 82,31852.37$ 29,0531937109,53269.6936,4781938119,62576.1137,8731939157,172100.0049,980Net WorthRatio ofYearIndex 1939(thousands)Income toas 100%Net Worth193658.13$ 77,67837.4193772.9883,13844.0193875.7889,75842.21939100.00106,19247.1286 Earnings of corporations engaged in the nonalcoholic beverage industry as shown by Statistics of Income, Part II, Treasury Department, and an index with 1939 = 100 compiled from those figures are as follows: 4Returns with net incomeTotalYearnumberof returnsNumberreturnsGross incomeNet income193618231106$ 232,087$ 56,024193719121105300,54768,102193818941038245,64539,557193919601144286,43349,646214 Returns with no net incomeYearNumberreturnsGross incomeNet deficit1936656$ 37,743$ 2,332193773945,3151,835193880842,3012,326193977843,2513,2361936193719381939Index of Net Income (1939 equals 100)115.69142.7980.22100.00A national income index based on an average for the years 1936-1939 = 100 from the Survey of Current Business, U. S. Department of Commerce, July 1950, Table 4, page 10, reduced to 100 for 1939 is as follows:NationalYearincome indexReduced to1936 - 1939 = 100100 for 1939193693.089.11937105.8101.3193896.892.71939104.4100.0A corporate profits index for the years 1936-1939, based on the years 1922-1939=100, from Internal Revenue Bulletin 1945, page 274, Table I, Column 5, reduced to 100 for 1939 is as follows:CorporateReduced toYearprofits index100 for 19391936127.397.01937128.397.7193846.835.61939131.3100.0215 Petitioner's excess profits tax for the calendar years 1943, 1944, and 1945 computed without the benefit of section 722 resulted in an excessive and discriminatory tax.Petitioner's average base period net income is an inadequate standard of normal earnings. Such net income does not reflect the normal operation for the entire base period, nor does it reflect the earning level which petitioner would have obtained if it had commenced business two years before it did.287 Petitioner's constructive average base period net income to be used in computing its excess profits credit for the years 1943, 1944, and 1945 is $ 5,700.OPINION.In its application for relief and in its petition, petitioner claimed relief under section 722 (b) (5) but did not press such claim in its brief. Since the facts of record do not indicate that any relief under subsection (b) (5) is warranted, relief under such provision is denied. Del Mar Turf Club, 16 T. C. 749 (1951).This leaves for our consideration (1) whether peitioner qualifies for relief under subsection (b) (4); (2) whether it is entitled to use the "2-year push-back rule"; and (3) if (1) and (2) are answered216 in the affirmative, what is a fair and just amount representing normal earnings of the petitioner to be used as a constructive average base period net income.Petitioner commenced business in April 1937 and therefore has one of the qualifying factors required by section 722 (b) (4). 5 We have found as a fact that petitioner's average base period net income is an inadequate standard of normal earnings. Petitioner also claims that the change from the promotion of a nationally franchised drink to a drink developed by petitioner and bearing its own brand name constituted 288 a difference in the products furnished under section 722 (b) (4). Respondent denies that such change was a change in the character of the business within the meaning of the statute. Whether or not it constituted a change in the character of the business need not be decided in this case because it is an alternative qualifying provision under the statute; and since petitioner meets the other qualifying factor, commencement of business in the base period, it is not necessary for it to meet the alternative qualifying factor also. This is not to say, however, that production and sale of the new-drink line are217 not to be considered in a reconstruction of average base period net income.218 Petitioner's excess profits credit was computed on the invested capital method and resulted in credits in the following amounts:1943$ 963.2719441,577.2319452,755.17Petitioner's net profits and net losses for the years 1937 through 1939 were as follows:1937$ 802.95 loss 19381,785.32 loss 19393,054.97 profitIf the business of a taxpayer does not reach, by the end of the base period, the earning level which it would have reached if the taxpayer had commenced business 2 years before it did so, it is deemed to have commenced the business at such earlier time. Sec. 722 (b) (4), supra.Petitioner's formative years followed the pattern of the industry of which it is a member. Two of petitioner's witnesses were engaged in the production of carbonated beverages in the Little Rock area in competition with petitioner. One of the witnesses was the manager and a partner of the 7-Up Orange Crush Beverage Company and had been engaged in the business since 1926. The other witness was the president and manager of the Dr. Pepper Bottling Company and had been in the business for 20 years. The testimony of said witnesses was to the effect that a normal development219 period for a new company similar to petitioner would be not less than 4 years and probably more. They both testified that the volume of increase in sales claimed in petitioner's reconstruction was reasonable in their opinion, and less than they had experienced under similar circumstances. We have found as a fact that petitioner had a normal development period of between four and five years, and that it did not reach by the end of the base period the earning level that would have been reached if the business had commenced in 1935 instead of 1937; and we, therefore, conclude that petitioner qualifies for relief under section 722 (b) (4) and is entitled to use "the 2-year push-back rule" in reconstructing its average base period net income.289 Respondent argues that petitioner's failure to qualify for relief is shown, in part at least, by the fact that it sustained a net loss of $ 814.61 in 1940, and realized a net profit of only $ 3,554.01 in 1941. Assuming that these facts may be considered, we do not agree that they disqualify petitioner from relief under subsection (b) (4). Petitioner's development period, as pointed out above, was between four and five years; and its 220 fifth year of existence -- 1941 -- saw it continuing to experience some development difficulties. The loss in 1940 and the comparatively small net profit in 1941 tend to corroborate our conclusion that petitioner had not reached its normal earning level during its last base period year.We then come to our final question -- "What is a fair and just amount representing normal earnings of the petitioner during the base period?" Both parties submitted reconstructions of average base period net income using the "2-year push-back rule." Petitioner's reconstruction arrived at an average figure of $ 10,170.49. Respondent's reconstruction showed a net loss of $ 10,211.78 for the last base period year. The main or basic differences between the two reconstructions related to the reconstruction of sales and the different treatment accorded certain bottle losses, interest expense, and bad debts. Petitioner reconstructed a sales volume for 1939 in the amount of $ 96,852.10. Respondent allowed the sum of $ 80,000. The figures used for cost of materials, factory labor, overhead, selling, delivery, and administrative expenses did not vary greatly in either reconstruction. Respondent added the221 following deductions as expenses:Additional bottle-loss depreciation$ 8,405.55Interest expenses3,434.98Bad debts2,596.00Total$ 14,436.53Petitioner's reconstruction allowed no deduction for interest and allowed $ 4,842.60 as a deduction for bottle and case loss and for bad debts. This figure is 5 per cent of reconstructed gross sales.Petitioner's reconstruction of expenses, other than the three just mentioned, was somewhat lower than the survey of cost averages prepared by the American Bottlers of Carbonated Beverages set out in our findings of fact; and although one of petitioner's expert witnesses testified that such cost averages for the base period years were a reliable index of costs in the carbonated beverage industry, such indices are national in scope and do not necessarily reflect to the last penny the costs of many local businesses in the industry.With respect to bottle and case loss, both of petitioner's expert witnesses testified that 5 per cent of sales was a reasonable figure for such loss, which is about three and one-half cents a case. With respect to the bad debt loss, it must be remembered that petitioner 290 was attempting to 222 break into a highly competitive business. The only market available for the petitioner's products (other than the franchised drink on which it claims no reconstructed increases in sales) was dependent upon its ability to capture a portion of the demand that was already being supplied by other members of the industry. Because of this intense competition, petitioner during the base period years sold its beverages on a consignment basis. Petitioner's competitors were on a strictly cash basis with their customers, and required them to make a deposit on all cases of drinks left with them. Petitioner did not require a deposit from its customers, and it did not charge off any uncollectible amounts during the base period years arising out of such consignment practice.In 1942, petitioner wrote off bad dabts in the amount of $ 15,665.04 with the explanation in its income tax return that it represented approximately 3,200 different small accounts which were uncollectible. It also changed its credit policy at that time, selling its merchandise for cash only, and requiring cash deposits on its cases and bottles in conformity with the practices of its competitors.The record shows that the223 normal practice in petitioner's industry was to sell its product on a cash basis rather than on a consignment basis; but it also shows that it was normal practice for petitioner to sell on the consignment basis. In seeking normality in a reconstruction, it is appropriate to give consideration and effect to any special circumstances peculiar to the specific taxpayer where such circumstances are normal for such taxpayer even though they might not be normal for another taxpayer engaged in the same business.Our last item of expense is interest. Petitioner was indebted to Roy F. Rand and the Economy Wholesale Grocery (owned by Rand) in the amounts of $ 24,372.67, $ 53,338.06, and $ 61,168.21 for the years 1937, 1938, and 1939, respectively. No deduction for interest on this indebtedness was claimed on petitioner's tax returns for those years. The respondent claims that interest on borrowed money is a normal business expense, and included in his reconstruction for petitioner's last base period year an amount of 6 per cent of the indebtedness as an additional expense. Petitioner argues that no interest (or, at most, a nominal amount) was owed on this indebtedness, and that interest224 which does not exist in fact is not a proper item to be considered in a reconstruction of normal earnings. While, generally speaking, interest is an ordinary and normal expense of business, it is not unusual or abnormal for the chief stockholder of a corporation to lend money to it in its formative years, or when it gets in financial difficulties, without requiring interest payments on such loans.As shown in our findings of fact, petitioner used an index from statistics of nonalcoholic beverages, published in the Treasury Department's 291 "Statistics of Income." Respondent argues that this is not a proper index for such purpose because of a reclassification in 1938 resulting in statistics for 1936 and 1937 not being comparable with those for 1938 and 1939. In support of this argument, he cites Treasury Department's "Statistics of Income for 1938, Part 2," pp. 256 and 266, which shows that in adopting a standard Industry Classification in 1938, reports of manufacturers of cider and mineral or spring water, classified in 1936 and 1937 under nonalcoholic beverages, were shifted to "Other Food, Including Flavoring Sirups," while mineral and spring-water bottling was shifted to225 "Wholesale Trade." We agree with respondent that use of such index is not warranted by this record when compared with the other indices set out in our findings of fact.Petitioner argues that the official compilation in "Statistics of Income" for all income tax returns filed by all manufacturers of nonalcoholic beverages shows a national, average net income of 14.1 per cent of sales for the year 1939, and a base period, average net profit of 16.4 per cent of sales. It also points to the testimony of the two expert witnesses, one of whom testified that a net profit before taxes of 8 cents to 15 cents a case, was normal during the base period; and the testimony of the other witness who said that a range of 10 cents to 15 cents a case was normal. In petitioner's reconstruction he claimed a net profit of 9.57 per cent of sales which amounts to 6.7 cents a case.We, therefore, conclude, based upon the entire record of this case, that petitioner is entitled to use a reconstructed average base period net income in the sum of $ 5,700. In arriving at such amount, we have considered carefully all the facts of record including the bottle loss, bad debt loss, and interest, and have accorded226 to each of the items the treatment we consider appropriate.Reviewed by the Special Division.Decision will be entered under Rule 50. Footnotes1. A franchised drink is one that is advertised and sold on a national scale and the flavoring extract for which is purchased from the national manufacturer.↩2. Actually adds $ 18,859.37.↩3. Actually adds $ 5,665.25.↩1. This amount used to reduce asset amount on balance sheet attached to return.↩1. Interest and exchange.↩1. Put into Soda Water.↩4. Amounts reported in thousands of dollars, before income taxes.↩5. SEC. 722. GENERAL RELIEF -- CONSTRUCTIVE AVERAGE BASE PERIOD NET INCOME.* * * (b) Taxpayers Using Average Earnings Method. -- The tax computed under this subchapter (without the benefit of this section) shall be considered to be excessive and discriminatory in the case of a taxpayer entitled to use the excess profits credit based on income pursuant to section 713, if its average base period net income is an inadequate standard of normal earnings because -- * * (4) the taxpayer, either during or immediately prior to the base period, commenced business or changed the character of the business and the average base period net income does not reflect the normal operation for the entire base period of the business. If the business of the taxpayer did not reach, by the end of the base period, the earning level which it would have reached if the taxpayer had commenced business or made the change in the character of the business two years before it did so, it shall be deemed to have commenced the business or made the change at such earlier time. For the purposes of this subparagraph, the term "change in the character of the business" includes a change in the operation or management of the business, a difference in the products or services furnished, a difference in the capacity for production or operation, a difference in the ratio of nonborrowed capital to total capital, and the acquisition before January 1, 1940, of all or part of the assets of a competitor, with the result that the competition of such competitor was eliminated or diminished. Any change in the capacity for production or operation of the business consummated during any taxable year ending after December 31, 1939, as a result of a course of action to which the taxpayer was committed prior to January 1, 1940, or any acquisition before May 31, 1941, from a competitor engaged in the dissemination of information through the public press, of substantially all the assets of such competitor employed in such business with the result that competition between the taxpayer and the competitor existing before January 1, 1940, was eliminated, shall be deemed to be a change on December 31, 1939, in the character of the business, or * * *↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622541/	VICTOR H. LEVY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. SYDNEY CHAPLIN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Levy v. CommissionerDocket Nos. 20465, 20466.United States Board of Tax Appeals16 B.T.A. 653; 1929 BTA LEXIS 2539; May 24, 1929, Promulgated 2539 A corporation filed fraudulent returns for 1918 and 1919, which fraud was known to the petitioners and actively participated in by them as officers and stockholders of such corporation. In 1923 the corporation was adjudicated a bankrupt, and the petitioners received dividends creditors on account of claims due them from the corporation, although they knew at the time that with a full disclosure of the fraud their dividends would be reduced on account of the liability of the corporation to the Government for taxes. Held that the petitioners are transferees under the provisions of section 280 of the Revenue Act of 1926. Theodore B. Benson, Esq., for the petitioners. C. H. Curl, Esq., and I. W. Carpenter, Esq., for the respondent. LITTLETON654 OPINION. LITTLETON: The Commissioner determined that under section 280 of the Revenue Act of 1926 petitioners were liable for certain amounts as transferees of property of the Sassy Jane Manufacturing Co., a corporation. The liabilities which it is sought to enforce are on account of income and profits taxes of the Sassy Jane Manufacturing Co. as follows: 1918, $2,966.40 plus penalty of $3,151.57, 2540 and 1919, $1,656 plus penalty of $2,442.56. The proceedings now come before the Board on a motion of the petitioners for judgment on the ground that they are not transferees under the provisions of the statute. The facts as alleged in the petitions and admitted by the answers or as alleged in the answers and admitted by the petitioners for the purposes of this motion are as follows: The petitioners are residents of Los Angeles, Calif., and were stockholders of the Sassy Jane Manufacturing Company. That corporation was organized in 1917, with an authorized capital of $100,000, of which only $10,000 was issued and paid for at the time of organization. On June 24, 1920, a stock dividend of $40,000 was declared and issued to the three stockholders, June Rand, Sydney Chaplin, and Victor H. Levy - June Rand receiving 50 per cent, Sydney Chaplin, 25 per cent, and Victor H. Levy, 25 per cent. The Sassy Jane Manufacturing Co. filed income-tax returns for the years 1918 and 1919, which were signed by June Rand as president and Victor H. Levy, as secretary. Among the deductions claimed in such returns were items of $3,600 for a salary to Victor H. Levy for each year. The salary2541 for 1918 was stated to have been for his services as secretary, to which, it was stated, he devoted one-half of his time. The salary for 1919 was stated to be for his services as secretary-buyer, and it was further stated that he devoted one-third of his time to his duties as secretary-buyer. Victor H. Levy did not perform any services for the Sassy Jane Manufacturing Co. other than the little time necessary to attend to his duties as secretary, and the deduction of $3,600 in each of the returns was claimed for the sole purpose of evading the just tax due from such corporation. That the salary deducted by the corporation was in order to evade tax was well known to all the stockholders of the corporation. June Rand and Sydney Chaplin passed the resolution authorizing the salary. The Commissioner disallowed the salary deduction of $3,600 on each of the corporation's returns for 1918 and 1919 and made other adjustments, which resulted in the proposed deficiencies. The Commissioner also determined that the returns were false and fraudulent and, accordingly, determined penalties on account thereof. For the 655 purpose of this motion the petitioners admit that the corporation's2542 returns were false and fraudulent, and that this was known to both of them. The corporation became insolvent on or about January 1, 1923, and was adjudicated a bankrupt. The petitioners were each substantial creditors of the corporation for money advanced to the corporation, as evidenced by notes held by them in the amount of $39,436.32 by Chaplin and $38,764.07 by Levy. In the final distribution of the assets of the bankrupt corporation, the stockholders received nothing on account of their stock, but the petitioners, or their assignees, as unsecured creditors, received a distribution in excess of the income-tax liability of the corporation as now determined by the respondent. At the time of the receipt of this distribution, the petitioners were each aware of the fact that the returns of the corporation for 1918 and 1919 were false and fraudulent, that there was an income-tax liability due the Government, and that such income-tax liability was a preferred claim of the Government against the assets of the bankrupt corporation. The only issue presented for consideration is whether the petitioners are transferees under the provisions of section 280, Revenue Act of 1926, which2543 reads in part as follows: (a) The amounts of the following liabilities shall, except as hereinafter in this section provided, be assessed, collected, and paid in the same manner and subject to the same provisions and limitations as in the case of a deficiency in a tax imposed by this title (including the provisions in case of delinquency in payment after notice and demand, the provisions authorizing distraint and proceedings in court for collection, and the provisions prohibiting claims and suits for refunds): (1) The liability, at law or in equity, of a transferee of property of a taxpayer, in respect of the tax (including interest, additional amounts, and additions to the tax provided by law) imposed upon the taxpayer by this title or by any prior income, excess-profits, or war-profits tax Act. * * (f) As used in this section, the term "transferee" includes heir, legatee, devisee, and distributee. Petitioners contend that they are not transferees and, therefore, do not come within the provisions of the foregoing section. The statute does not contain a definition of the word "transferee" and, in the opinion of the Board, the statement in section 280(f) of the Revenue2544 Act of 1926, that the term "transferee" includes "heirs, legatees, devisees and distributees" was not intended, as insisted by petitioners, to limit its meaning and application to the four classes mentioned, but was merely to make clear that all four were included. The word "transferee" is defined by Webster's New International Dictionary as "the person to whom a transfer is made." Bouvier's Law Dictionary defines it as "He to whom a transfer is made." 656 In the brief of counsel for petitioners it is contended: He who makes a loan and collects a part of what is due him is in no sense a transferee of the property of his debtors nor is he a legatee or distributee. Had Congress intended a transferee to include a payee it could easily have done so and further it would have omitted the words heir, legatee, devisee and distributee. The facts leading up to these proceedings can be expressed in words of Congress itself. The Sassy Jane Manufacturing Company was declared a bankrupt and bankruptcy proceedings followed and the amounts received by the petitioners were as the result thereof. Section 67 of the Bankruptcy Act provides that a referee shall "declare dividends and2545 prepare and deliver to trustees the dividend sheets showing the dividends declared and to whom payable." Section 75 of the Act provides that trustees shall collect and reduce to money the property of the bankrupt and deposit all money received in designated depositories and shall "pay dividends within ten days after they are declared by the referees." What actually transpired, therefore, when expressed in terms used by Congress itself, is that the claims of the petitioners were allowed and their dividends declared by the referee and paid by the trustee. The petitioners, therefore received the payment of dividends from the trustee. Congress having elected in the Bankruptcy Act to refer to what transpired in these cases as the payment of dividends certainly can not in the Revenue Act be considered to have referred to the same transaction as a transfer of property. Such contention is not in accord with court decisions. In (Dist. Ct., Dist. of Washington, N.D. 1899), it was held that payment of a debt in money is a transfer of property, within the purview of the Bankruptcy Act, section 60(a), providing that a debtor shall be deemed to have2546 given a preference if, being insolvent, he has made a transfer of any of his property, and the effect of the enforcement of such transfer will be to enable one of his creditors to obtain a greater percentage of his debt than other creditors of the same class. To the same effect, see ; 117 (Dist. Ct., S. Dist. Iowa); also In re Ft. Wayne Electric Corporation, 39 C.C.A., 7th Cir., 582; . In , a bankruptcy case, Mr. Justice McKenna, in delivering the opinion of the court, after quoting subdivision (a) of section 60 of the Bankruptcy Act of 1898, stated: It will be observed that payments in money are not expressly mentioned. Transfers of property are, and one of the contentions of appellants is that by "transfers of property," payments in money are not intended. The contention is easily disposed of. It is answered by the definitions contained in section 1. It is there provided that "'transfer' shall include the sale and every other and different mode of disposing of or parting with property or the possession of property, absolute or conditional, 2547 as a payment, pledge, mortgage, gift or security." It seems necessarily to mean that a transfer of property includes the giving or conveying anything or value - anything which has debt paying or debt securing power. We are not unaware that a distinction between money and other property is sometimes made, but it would be anomalous in the extreme that in a statute 657 which is concerned with the obligations of debtors and the prevention of preferences to creditors, the readiest and most potent instrumentality to give a preference should have been omitted. Money is certainly property, whether we regard any of its forms or any of its theories. It may be composed of a precious metal, and hence valuable of itself, gaining little or no addition of value from the attributes which give it its ready exchangeability and currency. And its other forms are immediately convertible into the same precious metal and even without such conversion have, at times, even greater commercial efficacy than it. It would be very strange indeed if such forms of property, with all their sanctions and powers, should be excluded from the statute, and the representatives of private debts, which we denominate2548 by the general term "securities" should be included. We certainly cannot so declare upon one meaning of the word "transfer." If the word itself permitted such declaration, which we do not admit, the definition in the statute forbids it. "Transfer" is defined to be not only the sale of property, but "every other mode of disposing or parting with property." All technicality and narrowness of meaning is precluded. The word is used in its most comprehensive sense, and is intended to include every means and manner by which property can pass from the ownership and possession of another, and by which the result forbidden by the statute may be accomplished - a preference enabling a creditor "to obtain a greater percentage of his debt than any other creditors of the same class." In bankruptcy proceedings, the amount due the Government for taxes is made by law a preferred liability and should be given priority over general creditors. Sec. 64, Bankruptcy Act of 1898 (30 Stat., ch. 541, pp. 544-563); . When the petitioners received their distributions, they did so with full knowledge that a fraudulent return had been filed by the corporation2549 from whose assets their debts were being paid and that with a disclosure of this fact the amounts which they were receiving would have been reduced on account of this preferred liability of the Government. The further fact exists that one of the petitioners, Levy, was secretary of the corporation in question and signed its return in that capacity. It also appears that the other petitioner, Chaplin, was one of the directors of the corporation and voted for the salary to Levy, which was deducted in the return, although he knew at the time that Levy had not performed services for which the salary was voted. Under such circumstances, the corporation return as filed was not merely fraudulent in so far as the corporation, as a separate entity, was concerned, but also the fraudulent acts in question were actively participated in by the petitioners before us, who seek to retain the advantage gained thereby. Under such circumstances we are of the opinion that the eptitioners are clearly transferees of property within the meaning of section 280 of the Revenue Act of 1926. The motion of the petitioners for judgment is, accordingly, denied upon the facts disclosed by the pleadings. The*2550 proceedings will be restored to the calendar for trial in due course on their merits. Reviewed by the Board.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622542/	ABRAHAM SEKULOW AND FLORENCE SEKULOW, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentSekulow v. CommissionerDocket No. 7836-78United States Tax CourtT.C. Memo 1980-564; 1980 Tax Ct. Memo LEXIS 25; 41 T.C.M. (CCH) 582; T.C.M. (RIA) 80564; December 17, 1980David R. Cohan, for the petitioners. John F. Dean, for the respondent. WILBURMEMORANDUM FINDINGS OF FACT AND OPINION WILBUR, Judge: Respondent determined a deficiency in the amount of $ 5,008 in petitioners' Federal income taxes for 1974. The issues for decision are: (1) whether petitioners advanced sums to a corporation; (2) whether such sums represented bona fide loans or contributions to the corporation's capital; (3) to the extent the funds advanced to the corporation are considered loans, did they constitute business bad debts under section 166; 1 and (4) if they are bad debts under section 166, were they partially worthless in 1974. FINDINGS26 OF FACT Some of the facts have been stipulated and are found accordingly. Petitioners 2 resided in Baltimore, Maryland at the time the petition in this case was filed. They filed their joint Federal income tax return for the year 1974 with the District Director at Philadelphia, Pennsylvania. Petitioner and his brother founded Sekulow Brothers over 50 years ago, and incorporated the business in 1940. Sekulow Brothers, Inc. is in the ladies' millinery business. The corporation was petitioner's sole source of income. In 1972, after buying up his brother's shares, petitioner became president and majority stockholder. Petitioner, his wife, and son then owned all the shares of the corporation. Starting around 1971, the corporation sustained operating losses which became progressively larger as the years went by. In 1973, the situation deteriorated and the corporation did not have the funds necessary to meet its payroll. In order to raise funds to continue operations, the corporation made substantial efforts to obtain27 loans from banks and other financial institutions, but was turned down whenever a loan was requested. Efforts were made to obtain inventory financing through sources other than banks, including personal and business acquaintances, but all efforts to obtain money from outside sources also were unsuccessful. To meet the payroll expenses, two withdrawals totalling $ 29,000 were made from the Sekulow Brothers, Inc. pension trust in 1973 and put into the ailing business. The pension trust account had been set up as a spendthrift trust in 1966 to provide retirement benefits to employees. Petitioner was a trustee. The trust entered the transaction on its books as a receivable from Sekulow Brothers, Inc. No notes or other evidence of indebtedness were created. In November 1973, $ 5,000 was paid back to the trust by the corporation. The business continued to lose money. By the end of the fiscal year ending August 31, 1973 operating losses totalled over $ 100,000 and by the end of the 1974 fiscal year, the losses had reached almost $ 300,000. Sekulow Brothers filed for a Chapter XI reorganization in 1974, and the plan was approved in January of 1976. The plan provided that creditors28 would get 20 cents on the dollar over the next five years, paid out 2-1/2 cents a year for the first two years, then 5 cents a year for the next 3 years. The trust was not listed among the outstanding creditors and petitioner did not file a creditor's claim for any amount. Petitioner, upon the advice of his attorney, was of the opinion that the outside creditors would not approve a plan, or at a minimum its chances for success would be severely jeopardized, were he to post a claim against the corporation's assets when the other creditors stood to lose 80 percent of their investment if he did not file a claim--and even more if he did submit one. No record of loans from stockholders appears until the fiscal year ending August 31, 1975, at which time loans of $ 38,500 were listed on the corporation's tax return. The trust was later terminated, and the proceeds went to pay benefits to all the employees save Mr. Sekulow. He alone suffered the loss of the sums advanced to the corporation. In March, 1979 the corporation went bankrupt. In 1974, petitioner deducted $ 15,200 from his income tax return as a partially worthless bad debt. He contends that the $ 38,500 ($ 29,000 from29 the trust and $ 9,500 from other unspecified sources) represented his own funds and his pension money, and that he loaned this sum to the corporation as a short-term loan, hopefully to have been paid back after the big hat season around Easter and Mother's Day. The money was not paid back, save for the $ 5,000 put back into the trust. Petitioner argues that the loan became at least 40 percent worthless in 1974. This 40 percent figure was arrived at after talking with his auditor. The respondent denied the deduction in full, arguing that (1) the advances did not come from Mr. Sekulow, but from the trust; (2) even if Mr. Sekulow was the source, the sums advanced represented contributions to capital and not loans; (3) if they were loans, they were nonbusiness loans; (4) even if they were bad debts under section 166, they were not partially worthless in 1974. OPINION Petitioner and his brother had been in the millinery business for over 50 years. Since 1940, they have been incorporated under the name Sekulow Brothers, Inc. In 1972, petitioner bought up his brother's shares. The corporation was then wholly owned by petitioner, his wife and his son. The business started losing30 money in the early 1970's. By the end of fiscal year 1974, the operating losses amounted to almost $ 300,000. The corporation could no longer obtain financing from banks or other sources. To meet payroll expenses in 1973, petitioner advanced $ 38,500 to the corporation. Of this amount, $ 29,000 came from the pension trust set up for corporate employees, of which petitioner was trustee and chief beneficiary. The remaining $ 9,500 was obtained from petitioner or unspecified sources. Petitioner argues that he intended the advance to be a short-term loan, to be paid back after the heavy reason from Easter to Mother's Day. No notes or other evidences of indebtedness were drawn up. In November 1973, $ 5,000 was repaid to the trust. No further repayments were made. In 1974 the corporation filed for Chapter XI reorganization. Neither petitioner nor the trust submitted a claim. The advances first appeared on the corporation's records for the 1975 fiscal year, at which time the entire $ 38,500 was listed as a debt to stockholders. Petitioner deducted $ 15,200 on his 1974 income tax return as a partially worthless bad debt. After discussions with his auditor, petitioner had concluded31 that at least 40 percent of the $ 38,500 advance was worthless. The Service disallowed the deduction. The first issue we must decide is whether the amounts advanced were loans or contributions to capital, as all the other issues before us depend upon the initial classification of the advances. We assume, arguendo, that the $ 38,500 amount advanced represented petitioner's own funds. 332 Section 1664 permits a deduction for bad debts which become partially (for business debts) or totally worthless during the taxable year. Only a bona fide debt qualifies for section 166 treatment. A bona fide debt is defined as a debt which arises from a debtor-creditor relationship based upon a valid and enforceable obligation to pay a fixed or determinable sum of money. Section 1.166-1(e), Income Tax Regs. Contributions to capital do not qualify for bad debt treatment. Section 1.166-1(c), Income Tax Regs.The characterization of advances is a question of fact to be determined from all the evidence, with the burden of establishing that the advances were loans resting on the taxpayer. 33 Gilbert v. Commissioner,262 F. 2d 512 (2d Cir. 1959), cert. denied 359 U.S. 1002">359 U.S. 1002 (1959); Yale Avenue Corp. v. Commissioner,58 T.C. 1062">58 T.C. 1062 (1972); Matter of Uneco, Inc.,532 F.2d 1204">532 F.2d 1204 (8th Cir. 1976). We have previously articulated the question thus: Was there a genuine intention to create a debt, with a reasonable expectation of repayment, and did that intention comport with the economic reality of creating a debtor-creditor relationship? Litton Business Systems, Inc. v. Commissioner,61 T.C. 367">61 T.C. 367, 377 (1973). The task is to determine whether the asset has been put at the risk of the corporate venture, thereby representing an equity investment, or whether it has been transferred with reasonable expectations of reimbursement regardless of the success of the business. Gilbert v. Commissioner,248 F.2d 399">248 F.2d 399 (2d Cir. 1957), remanding for further proceedings a Memorandum Opinion of this Court. To aid in the characterization of transactions as either debt or equity, the courts have looked to a number of factors. 5 No single factor is controlling. 34 Kelley Co. v. Commissioner,326 U.S. 521">326 U.S. 521 (1946). The transaction must be remeasured by these objective tests of economic reality. Scriptomatic, Inc. v. United States,555 F.2d 364">555 F.2d 364 (3d Cir. 1977). Applying the above factors to the transaction in question, we are convinced that the advances were contributions to capital and not bona fide loans. 35 First, none of the formal indicia of debt were present in this transaction. No written evidence of indebtedness was prepared. No fixed maturity date was set, although petitioner testified he hoped to be repaid sometime after the heavy season. No interest rate was fixed, if indeed any was ever contemplated, and the principal was to be repaid only if the corporation generated enough income to enable repayment. The corporation did not treat the advance as it treated other debts, and it was not listed on the Chapter XI reorganization schedule of debts. There was no formal indication of its existence until it appeared on the corporation income tax return for the 1975 fiscal year, after petitioner had written off 40 percent of the total amount of the advance. The transaction fails to satisfy the requirements of a classic debt, which is an unqualified obligation to pay a sum certain at a fixed maturity date along with specified interest payable regardless of the debtor's income or lack thereof. Gilbert v. Commissioner,248 F.2d 399">248 F.2d 399 (2d Cir. 1957). Another test used by the courts, which also incorporates several of the factors enumerated in note 5, supra, is36 the independent creditor test, described as the "touchstone of economic reality." Scriptomatic, Inc. v. United States,supra at 367. The analysis under this approach is expressed in terms of two lines of inquiry: (1) did the advance result from an arm's-length relationship, and/or (2) would an outside investor have advanced funds on similar terms. Scriptomatic, Inc. v. United States,supra at 368. If the shareholder's advance is far more speculative than an outsider would consider, then it may be a loan in name only. Fin Hay Realty Co. v. United States,398 F.2d 694">398 F.2d 694 (3d Cir. 1968). The parties have stipulated that Sekulow Brothers, Inc. could not, despite numerous efforts, obtain outside financing. When a loan is very risky, it may properly be regarded as venture capital. Gilbert v. Commissioner,supra. The business was failing, if indeed it was not already insolvent, and an advance under these circumstances may be characterized as a contribution to capital. See 37 Casco Bank and Trust Co. v. United States,544 F.2d 528">544 F.2d 528 (1st Cir. 1976). In cases of insolvency or severe financial difficulties with little hope for recovery, there can be very little hope of repayment. See Funk v. Commissioner,35 T.C. 42">35 T.C. 42 (1960). The advance herein fails the independent creditor test, as there was no arm's-length relationship, and outside investors would not, and in fact refused, to advance funds on similar terms. All of the objective criteria considered point towards characterizing the advance as a contribution to capital, and not as a loan. Accordingly, we hold that the advance was a contribution to capital. Therefore, the advance cannot be characterized as a bad debt under section 166, and no bad debt deduction will be allowed. Our holding on this issue obviates discussion of the other issues before us. Decision will be entered for the respondent. Footnotes1. All section references are to the Internal Revenue Code of 1954, as amended and in effect during the taxable year in question.↩2. Since Florence Sekulow is a party to this action by reason of filing a joint return with her husband, Abraham Sekulow will be referred to as petitioner.↩3. The respondent did not allege or present proof that the $ 9,500 came from any source other than the petitioner. As to the $ 29,000, we find petitioner's testimony regarding these transactions, occurring during what was surely a troubling time for him, to be very candid and convincing. He testified that it was his own personal pension money which was borrowed, and this was confimred when he did not receive any allotment upon the termination of the pension fund while attempting to ensure that all other employees were paid their full share of the fund. While the documentary evidence is unclear, and conflicting in some instances, the Sekulow Brother's fiscal year 1974 Federal income tax return does show a $ 38,500 debt owing to its shareholders. Additionally, we were most impressed with petitioner's own explanation of the events. Nevertheless, in light of our holding, it is unnecessary to determine the source of sources of the funds and the amounts allocable to each source.↩4. 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 charge off within the taxable year, as a deduction.↩5. There are at least 16 separate factors generally used by the courts in determining whether amounts advanced to a corporation constitute equity capital or indebtedness. They are: (1) the intent of the parties; (2) the identity between creditors and shareholders; (3) the extent of participation in management by the holder of the instrument; (4) the ability of the corporation to obtain funds from outside sources; (5) the "thinness" of the capital structure in relation to debt; (6) the risk involved; (7) the formal indicia of the arrangement; (8) the relative position of the obligees as to other creditors regarding the payment of interest and principal; (9) the voting power of the holder of the instrument; (10) the provision of a fixed rate of interest; (11) a contingency on the obligation to repay; (12) the source of the interest payments; (13) the presence or absence of a fixed maturity date; (14) a provision for redemption by the corporation; (15) a provision for redemption at the option of the holder; and (16) the timing of the advance with reference to the organization of the corporation. [Fin Hay Realty Co. v. United States,398 F.2d 694">398 F.2d 694, 696 (3d Cir. 1968). Fn. ref. omitted.] See also Matter of Uneco, Inc.,532 F.2d 1204">532 F.2d 1204 (8th Cir. 1976); In re Indian Lake Estates, Inc.,448 F. 2d 574 (5th Cir. 1971); Casco Bank and Trust Co. v. United States,544 F. 2d 528↩ (1st Cir. 1976).	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622543/	M. JOHN BORKOWSKI and LORRAINE BORKOWSKI, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentBorkowski v. CommissionerDocket No. 14957-79.United States Tax CourtT.C. Memo 1982-87; 1982 Tax Ct. Memo LEXIS 664; 43 T.C.M. (CCH) 593; T.C.M. (RIA) 82087; February 18, 1982. 664 (1) P, a dentist, incorporated his dental laboratory and transferred 40 percent of the stock of such corporation to 2 of his 5 children. Such corporation elected to be taxed as a small business corporation. Subsequently, P transferred 40 percent of the stock in such corporation, previously owned by him, to 2 of his other children. Held, such transfers were ineffective for Federal income tax purposes since they lacked economic reality, and P remained the beneficial owner of such stock; therefore, all the income of such corporation is taxable to P. (2) Such corporation used, in part, for business purposes an automobile owned by P and claimed deductions for the depreciation of such automobile. Held, since such corporation had no capital investment in such automobile, it is not entitled to deductions for depreciation thereof. (3) P purchased breeding cattle, and in connection with such purchase, paid fees, including initial management fees, to D. P claimed all of such initial management fees as a current deduction. Held, a portion of such fees was paid for the acquisition, rather than the raising, of such cattle; therefore, that portion of such fees must be capitalized.665 Sec. 1.162-12(a), Income Tax Regs.Robert E. Johnson, for the petitioners. 667 Michael J. Rusnak, for the respondent. SIMPSONMEMORANDUM FINDINGS OF FACT AND OPINION SIMPSON, Judge: The Commissioner determined deficiencies in the petitioners' Federal income taxes of $ 8,418.16 for 1976 and $ 8,890.48 for 1977. After concessions by the parties, the issues for decision are: (1) Whether, when Dr. Borkowski transferred some of the stock in an electing small business corporation to his children, they became the beneficial owners of such stock so that Dr. Borkowski was not required to report the income thereon; (2) whether such corporation is entitled to deductions for depreciation of an automobile which was owned by the petitioners and which was used, in part, by such corporation; and (3) whether certain initial management fees paid in connection with the petitioners' purchase of breeding cattle are currently deductible or must be capitalized. FINDINGS OF FACT Some of the facts have been stipulated, and those facts are so found. The petitioners, M. John and Lorraine Borkowski, husband and wife, resided in Indianapolis, Ind., at the time they filed their petition in this case. They filed joint Federal income tax returns for 1976668 and 19757 with the Internal Revenue Service Center, Memphis, Tenn.The petitioner M. John Borkowski is a dentist. During 1976 and 1977, Dr. Borkowski practiced dentistry in Indianapolis, specializing in crown and bridgework. Such practice required the use of a dental laboratory. Prior to December 1974, Dr. Borkowski maintained a dental laboratory as part of his dental practice and employed a laboratory technician.He discussed with his family the incorporation of such laboratory, and on December 6, 1974, at his suggestion, Avalon Laboratories, Inc. (Avalon), was organized as a corporation under Indiana law. Avalon's paid-in capital consisted of $ 1,000 in cash and equipment, which had been previously used in Dr. Borkowski's dental laboratory, with a value of $ 3,085. Such cash and equipment were contributed by Dr. Borkowski. At the time of Avalon's incorporation, 100 shares of common stock were issued to the following individuals: Dr. Borkowski60 sharesRobert Borkowski20 sharesChristine Borkowski20 sharesRobert Borkowski and Christine Borkowski are children of the petitioners. Robert's date of birth is February 26, 1956, and Christine's date of birth669 is April 12, 1960. Neither Robert nor Christine contributed anything to Avalon or to Dr. Borkowski in exchange for the shares issued to them. At the time Avalon was incorporated, Dr. Borkowski discussed with his family nd his attorney whether a custodian should be appointed for the shares issued to Robert and Christine. Although his attorney advised him to do so, Dr. Borkowski decided that a custodian should not be appointed. Through 1977, all of the stock certificates were kept with Avalon's corpdorate records, which were maintained at various times by Dr. Borkowski, his attorney, or his accountant. From the time of Avalon's incorporation through 1977, Dr. Borkowski, Mrs. Borkowski, Robert, and Christine were the directors of Avalon. During such period, Dr. Borkowski held the offices of president and treasurer, as well as chairman of the board of directors, and Mrs. Borkowski held the office of secretary. At the initial meeting of the board of directors, a fiscal year ending November 30 was chosen for Avalon, and it was decided that Avalon should elect to be taxed as a small business corporation, as defined in section 1371(b) of the Internal Revenue Code670 of 1954. 1 Such election and fiscal year remained in effect during 1976 and 1977. Avalon's place of business was in a dental building, which was constructed by Dr. Borkowski in 1974. Such building was used by Dr. Borkowski and other dentists and consisted of various dental operating rooms, a common reception area, and a dental laboratory occupied by Avalon. Avalon did not have a lease, nor did it pay rent to Dr. Borkowski for its use of such space. However, Avalon charged Dr. Borkowski, who was one of the principal users of its services, fees which were approximately 20 percent less than those charged by another dental laboratory in Indianapolis. During 1976 and 1977, approximately 6 other dentists, who worked in Dr. Borkowski's building or were otherwise associated with him, used Avalon's services, and they all paid fees similar to those charged Dr. Borkowski. In 1976 and 1977, Avalon employed a lab manager, who managed the day-to-day operations of the lab. He ordered supplies, recommended the employees to be hired and dismissed, and recommended the fees to671 be charged. However, Dr. and Mrs. Borkowski were the only persons with the authority to sign checks on behalf of Avalon; Dr. Borkowski supervised the operations of the lab; he hired and dismissed employees; and he made the final decision as to the fees to be charged, including those charged him. On November 13, 1976, Dr. Borkowski transferred 40 of his shares of Avalon to two of his other children, Catherine and David.Catherine's date of birth is March 26, 1963, and David's date of birth is January 29, 1965. After lsuch transfer, Avalon's stock was held as follows: Dr. Borkowski20 sharesRobert20 sharesChristine20 sharesCatherine20 sharesDavid20 shares100 sharesDr. Borkowski made a concerted effort to encourage his family's interest in dentistry. Mrs. Borkowski worked on almost a full-time basis in the reception area of Dr. Borkowski's dental building.Christine and Catherine, who were students during 1976 and 1977, worked, at times, on weekends or during their vacations as chairside assistants for Dr. Borkowski and the other dentists in the dental building. Although they occasionally observed work in the laboratory, neither Christine nor672 Catherine ever worked in the laboratory nor was an employee of Avalon. David, who was also a student during 1976 and 1977, did some work on the maintenance of the dental building. During 1976 and 1977, Robert was a full-time college student; he lived at college and commuted home most weekends. While he was at home, including the summer of 1976 and two summers while he was in high school, Robert worked in the laboratory, primarily maintaining its equipment, and also did maintenance work around the dental building. In December of each year, Avalon had regular annual meetings of its board of directors and shareholders. The corporate counsel and accountant also attended such meetings. In addition, the family had many informal meetings around the dinner table. At both the formal and informal meetings, Dr. Borkowski discussed the operations of his dental practice and the business of Avalon. However, he did not discuss with them the fees to be chared him and the other dentists for the services of Avalon. In November 1975, Dr. Borkowski purchased a medical reimbursement plan for Avalon's officers and employees. He did not discuss the purchase of such plan with his children or seek673 their approval for such purchase. Yet, in 1977, Dr. Borkowski decided to change medical reimbursement plans and sought his children's approval for such change. Christine did not know that Dr. Borkowski was treasurer of Avalon. Also, she did not understand the function of a director, nor did she know the difference between a shareholder, an officer, and a director; she was unaware that during 1976 and 1977 she was a director of Avalon. Although at the time of trial Robert understood the role of a shareholder, he erroneously believed that he was vice president of Avalon at the time of its formation. At the meeting of Avalon's shareholders held on December 13, 1976, a distribution of $ 2,500 per shareholder was authorized from Avalon's earnings for the year ended November 30, 1976. Checks, each in the amount of $ 2,500 and dated February 8, 1977, were drawn payable to Dr. Borkowski, Robert, Christine, Catherine, and David. On the same day, or soon thereafter, Dr. Borkowski handed the checks to his children and requested that they endorse them over to Avalon. In exchange for such endorsements, Dr. Borkowski offered his children his demand notes, which provided for annual compound674 interest at the rate of 6 percent. All of Dr. Borkowski's children complied with such requests. Dr. Borkowski had previously prepared such notes with his children's names. Neither at the time that he requested his children to endorse the distribution checks over to Avalon, nor previously, did Dr. Borkowski discuss with his children when he would repay such notes. Also, Dr. Borkowski unilaterally determined the interest rate on such notes; he did not discuss such interest rate with his children. At such time, the children were obtaining a 4-1/2- or 5-percent return on their savings accounts, and Dr. Borkowski could have borrowed money at an interest rate of 8 or 9 percent. After the children endorsed such checks, Dr. Borkowski retained custody and control over the demand notes. In late 1976 or early 1977, but prior to February 8, 1977, Dr. Borkowski borrowed $ 10,000 from Avalon. He did not discuss such loan with his wife or children, nor did he seek his children's approval; and he did not give a note or security to Avalon. Dr. Borkowski's children first became aware that he had borrowed money from Avalon when he requested that they endorse the distribution checks to Avalon675 in order for him to repay such loan. Dr. Borkowski borrowed such $ 10,000 from Avalon because he needed funds for personal reasons, including the payment of taxes, the making of Christmas gifts to him employees, and the purchase of a boat for his family; and Avalon had such ready cash assets. During 1976 and 1977, Dr. Borkowski supported all of his children and paid such children's expenses, including Robert's college education expenses. On their Federal income tax returns for 1976 and 1977, the petitioners claimed their 5 children as dependents. On June 24, 1978, Dr. Borkowski paid Christine $ 210 as interest on the $ 2,500 he had borrowed from her. Christine, without her parent's knowledge, "loaned" such funds to Robert in order for him to purchase parts for the automobile which she used. Such automobile was owned by the petitioners. On August 4, 1978, Dr. Borkowski paid Christine $ 2,500 as the amount he had borrowed from her. Christine deposited such funds into her checking account.Soon thereafter, she wrote a check on such account for college tuition in the approximate amount of $ 2,100. On June 24, 1978, Dr. Borkowski paid Robert $ 210 as interest on the $ 2,500676 he had borrowed from him. On August 14, 1978, Dr. Borkowski paid Robert $ 2,500 as the amount he had borrowed from him. Robert deposited such funds into his bank account, and shortly thereafter, he wrote a check on such account for college tuition in the amount of $ 2,255. On November 24, 1978, Dr. Borkowski paid $ 2,769.25 to David as interest and principal that he had borrowed from him. On January 11, 1979, Dr. Borkowski paid $ 2,809.00 to Catherine as interest and principal that he had borrowed from her. Catherine endorsed such check to Robert to enable him to acquire an automobile, so that Robert could "give" the automobile that he used to Christine and Christine could "give" the automobile that she used to Catherine. The automobiles used by the petitioners' children were all registered in the petitioners' names; none of such automobiles was registered in the name of the child. Individual Federal income tax returns were filed by Robert, Christine, Catherine, and David for 1976 and 1977, and joint Federal income tax returns were filed for such years by Dr. and Mrs. Borkowski. On their joint return for 1976, Dr. and Mrs. Borkowski reported $ 2,677 as their pro rata share677 (20 percent) of Avalon's taxable income for its taxable year ending November 30, 1976, and each of the children reported 20 percent of Avalon's income on his or her individual return for 1976. On their joint return for 1977, Dr. and Mrs. Borkowski reported $ 2,914 as their pro rate share (20 percent) of Avalon's taxable income for its taxable year ending November 30, 1977, and each of the children reported 20 percent of Avalon's income on his or her individual return for 1977. Dr. Borkowski or Mrs. Borkowski paid their children's tax liabilities for 1976 and 1977. In April 1978, Dr. Borkowski was advised by an agent of the IRS that the petitioners' return for 1976 was under examination. In May 1978, such agent sent a letter to the petitioners in which she advised them that the petitioners' returns for 1976 and 1977 and Avalon's returns for its fiscal years ending November 30, 1976, and November 30, 1977, were being audited.In June 1978, such agent raised with Dr. Borkowski's accountant the issue of the ownership of the Avalon stock by the children of Dr. Borkowski. In his notice of deficiency, the Commissioner determined that in substance, Dr. Borkowski was the owner of 100678 percent of the stock of Avalon and that, therefore, the full amount of its earnings and profits should have been reported on the petitioners' returns for 1976 and 1977. In August 1975, Dr. Borkowski purchased a 1975 Oldsmobile. Such automobile was purchased primarily for the use of his family. During 1976 and 1977, such automobile was used, part of the time, by Avalon to pickup supplies and to pickup and deliver work from other dentists, and Avalon and Dr. Borkowski shared the expenses for such automobile. Avalon did not own an automobile, and during such period, the Oldsmobile was registered in Dr. Borkowski's name. On its Federal corpaorate income tax returns for its taxable years ending November 30, 1976, and November 30, 1977, Avalon claimed depreciation deductions with respect to the Oldsmobile of $ 2,081.33 for each of such years. In his notice of deficiency, the Commissioner disallowed such deductions in their entirety on the ground that the Oldsmobile was not the property of Avalon. Therefore, the Commissioner determined that Avalon's taxable income was understated by $ 2,081.33 for each of such years and that accordingly the petitioners had understated the earnings679 and profits of Avalon for 1976 and 1977 to be reported by them. On December 19, 1977, Dr. Borkowski purchased 100 breeding cattle from Duck Creek Cattle Company, Inc. (Duck Creek), for $ 45,000. On such date, he entered into an "Owner's Maintenance and Feeding Contract" with Duck Creek. Pursuant to such contract, Dr. Borkowski paid Duck Creek $ 6,000 ($ 60 per cow) as a breeding fee and $ 4,000 ($ 40 per cow) as an initial management fee; such fees were nonrefundable. The initial management fee covered the following services: Amount perServiceHeadTotalVeterinarian and medication - cow$ 8.65$ 865Veterinarian and medication - calf6.75675Trucking3.00300Miscellaneous - ear tags, labor crew6.60660Duck Creek commission andservice - assembling cattle herd15.001,500Duck Creek's usual manner of operation was to act as manager (agent) for investors by acquiring cattle on their behalf and contracting with farmers who provided the land on which the cattle grazed and who took care of the feeding of the cattle. Usually, Duck Creek had to acquire the cattle for an investor and to transport such cattle to the farm where they would680 be maintained, but sometimes such cattle would already by on the farm where they would be maintained.There is no record of whether or not Dr Borkowski's cattle were transported to the farm where they were maintained. In any event, the full $ 40 per head initial management fee was charged to all "owners" at the time they entered into the "owner's contract," irrespective of whether transportation charges were actually incurred. The $ 15 per head fee for commission and assembling the herd was not a commission per se but represented Duck Creek's profit on the transaction. On their return for 1977, the petitioners capitalized and amortized the $ 6,000 breeding fee and claimed a current deduction for the $ 4,000 initial management fee, which they reported as "sales charges--cattle." In his notice of deficiency, the Commissioner allowed the petitioners' amortization of the breeding fee and allowed a current deduction for the portion of the initial management fee, $ 1,540, attributable to veterinarian and medication services; he disallowed a current deduction for the portion of such fee, $ 2,460, attributable to trucking, miscellaneous (ear tags, labor crew), and Duck Creek's fee for681 assembling the herd. Instead, he determined that such expenses were capital expenditures, recoverable through depreciation, and adjusted the petitioners' claimed deduction for depreciation of their cattle accordingly. OPINION The first issue for decision is whether all of Avalon's taxable income for its fiscal years ending November 30, 1976, and November 30, 1977, is attributable to Dr. Borkowski and should have been included in the petitioners' gross income for the calendar years 1976 and 1977. The resolution of such issue is dependent upon whether the petitioners' children were the true and beneficial owners of 80 percent of Avalon's stock during such years, rather than mere holders of legal title to such stock. The Commissioner contends that the transfers of stock to Robert, Christine, Catherine, and David were not effective for Federal income tax purposes, because their ownership of stock in Avalon was not bona fide and lacked economic reality. In support of such contention, he relies on the line of cases ( Speca v. Commissioner,630 F. 2d 554 (7th Cir. 1980), affg. a Memorandum Opinion of this Court; Beirne v. Commissioner,61 T.C. 268">61 T.C. 268 (1973);682 Beirne v. Commissioner,52 T.C. 210">52 T.C. 210 (1969); Anderson v. Commissioner,164 F. 2d 870 (7th Cir. 1947), affg. 5 T.C. 443">5 T.C. 443 (1945); Fundenberger v. Commissioner,T.C. Memo. 1980-113) which found intra-family transfers of stock in an electing small business corporation ineffective for Federal tax purposes, and he distinguishes the one case ( Kirkpatrick v. Commissioner,T.C. Memo. 1977-281) which found such a transfer to be effective for such purposes.The petitioners take the reverse position, arguing that their case is factually indistinguishable from Kirkpatrick and factually distinguishable from those cases which have reached the opposite conclusion. Ownership of property for Federal income tax purposes is a question of fact to be determined from all the facts and circumstances. Schoenberg v. Commissioner,302 F. 2d 416 (8th Cir. 1962), affg. a Memorandum Opinion of this Court; Snyder v. Commissioner,66 T.C. 785">66 T.C. 785 (1976). In determining the true owner of corporate stock,683 beneficial ownership, as opposed to mere legal title, is decisive. Beirne v. Commissioner,61 T.C. at 277; Hook v. Commissioner,58 T.C. 267">58 T.C. 267 (1972); Duarte v. Commissioner,44 T.C. 193">44 T.C. 193 (1965). In making such determination, "command over property or enjoyment of its economic benefits marks the real owners." Anderson v. Commissioner,164 F. 2d at 873; see Speca v. Commissioner,630 F. 2d at 557. That a transfer is valid under State law is not conclusive of its bona fides for purposes of Federal taxation unless such transfer is accompanied by a complete shift of the direct and indirect economic benefits of ownership. Commissioner v. Tower,327 U.S. 280">327 U.S. 280 (1946); Anderson v. Commissioner,supra.The substance of a transaction, rather than its mere form, is determinative of its tax consequences. Commissioner v. Court Holding Co.,324 U.S. 331">324 U.S. 331 (1945). Transfers of property between family members are "subject to special scrutiny in order to determine684 if they are in economic reality what they appear to be on their face." Fitz Gibbon v. Commissioner,19 T.C. 78">19 T.C. 78, 84 (1952). With respect to transfers of stock of an electing small business corporation, section 1.1373-1(a)(2), Income Tax Regs., provides, in part, that: A donee or purchaser of stock in the corporation is not considered a shareholder unless such stock is acquired in a bona fide transaction and the donee or purchaser is the real owner of such stock. The circumstances, not only as of the time of the purported transfer but also during the periods preceding and following it, will be taken into consideration in determining the bona fides of the transfer.Transactions between members of a family will be closely scrutinized. Such provision makes clear that if a transaction between members of a family is not bona fide, its effectiveness as an income-splitting device will be frustrated. Duarte v. Commissioner,44 T.C. at 197. 2685 In making the factual determination of whether children who received stock in an electing small business corporation beneficially owned such stock so as to be taxed on their distributive shares of the income of such corporation, the cases have applied the following four criteria, although no one criterion has been determinative: (1) Are the transferees within the family able to exercise effectively ownership rights over their shares; (2) did the transferor continue to exercise complete dominion and control over the transferred stock; (3) did the transferor continue to enjoy the economic benefits of ownership after conveyance of the stock; and (4) did the transferor deal at arm's length with the corporation involved. Speca v. Commissioner,630 F. 2d at 556 and cases cited therein. After carefully applying such criteria to the record, we are convinced that Dr. Borkowski's transfers of stock in Avalon to his children were not bona fide and lacked economic reality, and that during 1976 and 1977, he, and not his children, was the beneficial owner of such stock.(1) Were686 the petitioners' children able to exercise effectively ownership rights over their shares?The petitioners contend that their children actively participated in the management of Avalon and that they were able to exercise ownership rights over their shares, but such contention is not supported by the record. The shares transferred to such children were registered in their own names; no custodian was appointed for the shares issued to Christine, Catherine, and David, all of whom were minors. The absence of a custodian weighs heavily against the petitioners.See Speca v. Commissioner,supra; Beirne v. Commissioner,61 T.C. 268">61 T.C. 268; Beirne v. Commissioner,52 T.C. 210">52 T.C. 210; Duarte v. Commissioner,44 T.C. at 197; compare Kirkpatrick v. Commissioner,supra. Dr. Borkowski rejected the proposal to appoint a custodian because he said that he wished to give the children greater control over their stock, but in fact, the absence of a custodian had the opposite effect. Had there been a custodian holding the stock of the minor children, such custodian would have had a fiduciary duty to watch over the affairs of687 Avalon (see Ind. Ann. Stat. sec. 30-2-8-4 (Burns Supp. 1981)), and such custodian might have interposed an objection to any actions by Dr. Borkowski which appeared to be contrary to the best interests of the children; for example, such a custodian might have questioned the unsecured loan to Dr. Borkowski. It is clear from the record that the children and insufficient understanding of the business of Avalon and their rights as shareholders or directors to protect themselves, and since such children were still dependents and were receiving their support from Dr. Borkowski, it might have been unwise for them to interfere with his management of the affairs of Avalon even if they had the knowledge or desire to do so. Thus, the absence of a custodian effectively precluded the children from exercising their ownership rights over their shares. Also, Avalon's articles of incorporation provided that a shareholder could not dispose of his stock to a nonshareholder, other than by gift or bequest, without first offering such stock to the other shareholders on a pro rata basis. However, with the exception of Robert, the children were minors, and since no custodian had been appointed for them, 688 they would have been effectively unable to exercise the ownership right of selling their shares or purchasing additional shares if offered.See Ind. Ann. Stat. sec. 27-1-12-15 (Burns 1975); Ind. Ann. Stat. sec. 34-1-2-5.5 (Burns Supp. 1981). The petitioners argue that Mrs. Borkowski was actively involved with Avalon's affairs and that, like Mrs. Kirkpatrick, she actively looked after her children's interests. However, the record does not support such argument. Although she held the positions of director and secretary of Avalon, there is nothing in the record to show that she took any part in the management decisions. On the contrary, her only active involvement was with Dr. Borkowski's dental practice. What is more, since she was not appointed custodian, she had no affirmative duty or authority to look after her children's interests. Dr. Borkowski testified that he wanted to make Avalon a family venture and that he only gave stock in Avalon to those of his children who had an interest in dentistry. The record shows that through a discussion of his dental practice Dr. Borkowski encouraged his children to develop an interest in dentistry, and while we do not doubt that both689 formal and informal meetings were held where Avalon's affairs were discussed, the record, specifically the corporate minutes of Avalon, reveal few instances where other than ministerial corporate affairs were discussed or acted upon. There is no record in such minutes of the fees charged by Avalon, of Avalon's arrangement with Dr. Borkowski concerning its rental of space in his dental building, of its arrangement for the use of Dr. Borkowski's Oldsmobile, or of the $ 10,000 loan to Dr. Borkowski. The only management decisions discussed in such minutes were the raising of the lab manager's salary and a change in the medical reimbursement plan for Avalon's officers and employees, which actions were initiated by Dr. Borkowski. However, with respect to the medical reimbursement plan, Dr. Borkowski had previously purchased such a plan without discussing the matter with his wife or children. What is more, during 1976 and 1977, all of the children were full-time students and were too young to exercise, independent of a custodian, their ownership rights. Only Robert worked in the laboratory, but his work was similar to that performed by a dental technician; although such work may have690 given him insight into the working of the laboratory, it did not involve him with management decisions. See Speca v. Commissioner,supra. At trial, Robert testified that he was a vice president of Avalon; yet, no such position existed. Christine testified that she was unaware that she was a director of Avalon, that she did not know the difference between an officer, a director, and a shareholder, and that she never commented upon Avalon's business affairs. Robert and Christine are the oldest of the petitioners' children who were shareholders in Avalon. As such, we assume that they would have been more cognizant of their ownership rights than Catherine and David, who were only 13 and 11 years old in 1976. Since Robert and Christine were not fully aware of their ownership rights and the business affairs of Avalon, we are confident that Catherine and David would have been even less aware of their ownership rights. "[T]axation is an intensely practical process concerned less with legal formalities than with economic realities and that tax consequences flow from the substance rather than the form of a transaction." Anderson v. Commissioner,164 F. 2d at 873.691 The reality of the situation was that only Dr. Borkowski actively participated in the management decisions of Avalon, and in substance, the petitioners' children were unable to exercise effectively their ownership rights in the shares transferred to them. Speca v. Commissioner,supra; Anderson v. Commissioner,supra;Beirne v. Commissioner,61 T.C. 268">61 T.C. 268; Beirne v. Commissioner,52 T.C. 210">52 T.C. 210; Duarte v. Commissioner,supra.(2) Did Dr. Borkowski continue to exercise complete dominion and control over the transferred shares?Although Dr. Borkowski complied with the formal requirements of giving his children notices of shareholder meetings and having his children attend such meetings, the record, as a whole, convinces us that Dr. Borkowski continued to exercise complete dominion and control over the shares that he transferred to his children. We have already pointed out that Dr. Borkowski made all the significant decisions in the management of the affairs of Avalon and that the children were given no opportunity to pass on such actions. Dr. Borkowski testified that he created the positions692 of directors and corporate officers for his children's impression, and that although a child may have held such a position, he did not expect or think it wise for the child to actually exercise the duties of such position. For example, with respect to why his children did not have authority to sign checks on behalf of Avalon, Dr. Borkowski testified that "It wouldn't be very smart for a child to write checks" and that he did not "see the point in * * * [his children] having the checkbook." Thus, although, in form, two of the children were directors of the corporation and four of the children were shareholders, they did not understand their rights, and they were given no opportunity to assert those rights. In fact, the record reveals that Dr. Borkowski controlled the affairs of Avalon as if he held all its stock. The petitioners argue that Dr. Borkowski only transferred stock in Avalon to such of his children as had an interest in Avalon. However, his motive for transferring such stock is not relevant. The question is whether he continued to exercise control over such stock after its transfer.Although he did not transfer stock to Catherine and David when Avalon was first created, 693 he did so when they were only 13 and 11, respectively, and there is not one scintilla of evidence that at their tender ages they interferred in any way with Dr. Borkowski's management of Avalon or that they ever asserted their rights as owners of the stock. The petitioners also argue that when Dr. Borkowski transferred stock to Catherine and David in 1976, he transferred his own shares and did not dilute the holdings of Robert and Christine. Such argument is an attempt to bring their case within Kirkpatrick and distinguish those cases (Beirne and Fundenberger) where such dilution occurred. The lack of such dilution bears in favor of the petitioners, but such circumstance is but one evidentiary factor to be considered and weighed against the other evidence in the record. See Speca v. Commissioner,supra. Based on the record as a whole, we are convinced that, as a practical matter, Dr. Borkowski continued to exercise complete dominion and control over the transferred stock. (3) Did Dr. Borkowski continue to enjoy the economic benefit of ownership after the transfer of the stock to his children?During the years in issue, the only dividend paid by Avalon694 was the $ 2,500 per shareholder distributed by checks on February 8, 1977. Dr. Borkowski handed such checks to his children but, at such time, requested that they endorse their checks to Avalon in order for him to repay the $ 10,000 which he had borrowed from Avalon. In exchange for such endorsements, Dr. Borkowski offered his demand notes, which provided for interest, compounded annually, at the rate of 6 percent. Subsequently, Dr. Borkowski repaid such notes with interest. The petitioners argue that such transactions are evidence that their children received the economic benefit of ownership of Avalon stock. We disagree. When Dr. Borkowski borrowed the $ 10,000 from Avalon, he did so without discussing such loan with his children. He did not give a note to Avalon in recognition of such indebtedness, nor did he pledge any security for such loan. Also, the record fails to show that he paid interest on such loan. Thus, for the month or two that such loan was outstanding, Dr. Borkowski received the identical benefits of ownership as if he were the sole owner of Avalon's stock. Moreover, although Dr. Borkowski purported to execute notes in favor of his children when they endorsed695 the checks to Avalon, such notes were illusory. Dr. Borkowski had the notes prepared without any consultation with the children, and he alone decided on the interest rate to be included therein.The notes were payable on demand and were not due at any fixed date. In addition, except for Robert, the other children were all minors, and there was no one to demand payment on their behalf. What is more, at all times, the notes were retained by Dr. Borkowski. In addition, no payments of interest or principal were made on any of such notes until June 1978, after Dr. Borkowski learned that the returns of the petitioners and Avalon were being audited and that the ownership of stock by his children was in issue. Almost immediately thereafter, Dr. Borkowski made interest payments to Christine and Robert, and he fully repaid all of such notes by January 1979. The timing of such payments raises a question as to whether the payments may have been motivated by the IRS audit and as to whether the children would have been paid in the absence of such audit. Furthermore, the use of the funds paid to the children casts additional doubt on whether such funds were used for the benefit of Dr. Borkowski696 or for the children. On August 4, 1978, Dr. Borkowski paid Christine the $ 2,500 which he had nominally borrowed from her, but soon thereafter, she used such funds to pay her college tuition. Similarly, on August 14, 1978, Dr. Borkowski paid Robert the $ 2,500 which he had ostensibly borrowed from him, but shortly thereafter, Robert used such funds to pay his college tuition. Previously, Dr. Borkowski had paid both Christine and Robert $ 210 as interest on their notes, and such money may have been used for their benefit. However, Dr. Borkowski testified that he supported all of his children, and under Indiana law, a parent's obligation of support continues until age 21 unless the child has become emancipated at an earlier date. Such obligation may, depending on the parents' financial resources and station in life, include expenses for higher education. See Ind. Ann. Stat. sec. 31-1-11.5-12(d) (Burns 1980); Brokaw v. Brokaw,398 N.E. 2d 1385 (Ind. Ct. App. 1980); DeLong v. DeLong,315 N.E. 2d 412 (Ind. Ct. App. 1974). Although in August 1978 Robert was697 22 years old, it is likely that the petitioners were still supporting him, and certainly with respect to Christine, the petitioners had a continuing obligation of support. The funds paid to Robert and Christine were used to defray expenses that otherwise would have been borne by Dr. Borkowski, and it is not clear that Robert and Christine received any separate or independent benefit from such funds. With respect to Catherine, the funds transferred to her as payment of the interest and principal on her note were, in effect, used to purchase an automobile which was registered in the petitioners' names. It is likely that Dr. Borkowski would have furnished an automobile for the use of Catherine in any event and, under the circumstances, the furnishing of an automobile might have been part of the support obligation of the petitioners. Thus, it is not at all clear that her holding stock in Avalon resulted in her receiving anything more than she would otherwise have received from her parents. The evidence with respect to David is unclear. Dr. Borkowski testified that he could not recall what David did with the funds paid to him, but he believed that David may have purchased a sailboat698 with such funds. The record fails to disclose in whose name such boat was registered, but since David was only 13 years old at the time, the boat may have been registered in the petitioners' names. Here, too, it is not clear that David acquired anything in addition to what his parents would otherwise have furnished him. In summary, the petitioners have failed to meet their burden of proving that Dr. Borkowski's children received the economic benefit of their purported stock ownership. Rule 142(a), Tax Court Rules of Practice and Procedure; Welch v. Helvering,290 U.S. 111">290 U.S. 111 (1933). Rather, it is clear that Dr. Borkowski used the funds that he allegedly borrowed from his children for his own personal benefit (compare Kirkpatrick v. Commissioner,supra), and the repayments of the loans may have been used to support the children or to make gifts to them that would have been made in any event. In substance, we see little difference between the manner in which he structured the transactions and an arrangement under which he borrowed $ 12,500 from Avalon and used such funds for his own personal purposes. (4) Did Dr. Borkowski deal at arm's699 length with Avalon?We have already pointed out that when Dr. Borkowski borrowed $ 10,000 from Avalon, he did not give a note or security for such loan, nor is there any evidence that he paid interest on such loan. Such conduct is evidence that Dr. Borkowski did not deal at arm's length with Avalon. See Speca v. Commissioner,supra; Beirne v. Commissioner,52 T.C. at 219; Fundenberger v. Commissioner,supra; compare Kirkpatrick v. Commissioner,supra. In addition, there is no evidence in the record that the arrangement that Dr. Borkowski had with Avalon for the use of space in his dental building was based on arm's length negotiations. Avalon was not charged rent for the space used by it, but Dr. Borkowski was charged fees that were lower than the prevailing rates for the services which he received. The record fails to show that such arrangement resulted from arm's length bargaining or that the discount represented a fair rental for the space. In summary, although Dr. Borkowski may have dealt with Avalon on an arm's length basis, we cannot conclude on the record that he did so. While the facts of this700 case are not as egregious as those of Anderson,Beirne, and Fundenberger, the petitioners have not shown that their actions come up to the level of the arm's length dealings in Kirkpatrick. Applying the four legal criteria to the facts of this case, we conclude that the children were unable to exercise effectively ownership rights over the stock transferred to them, that Dr. Borkowski continued to exercise complete dominion and control over the stock he transferred, that he retained the economic benefits of ownership of such stock, and that Dr. Borkowski did not deal at arm's length with the corporation. Accordingly, the petitioners must include in their gross income for 1976 and 1977 100 percent of Avalon's taxable income for its taxable years ending in such years. The next issue we consider is whether Avalon is entitled to depreciation deductions with respect to the 1975 Oldsmobile. The petitioners contend that such automobile was used exclusively by Avalon and that the depreciation deductions claimed by Avalon had the same economic effect as if the petitioners had leased such automobile to Avalon. As the petitioners view the transaction, had they leased the701 Oldsmobile to Avalon, they would have received rental income which would have been exactly offset by the depreciation deductions, and Avalon would have been entitled to rental expense deductions equal to the depreciation deductions claimed by it. On the other hand, the Commissioner contends that Avalon did not have an economic interest in the Oldsmobile and did not sustain an economic loss by reason of the depreciation of such automobile; therefore, he takes the position that Avalon is not entitled to depreciation deductions. We agree with the Commissioner. Generally, section 167 provides that there shall be allowed as a deduction for depreciation a reasonable allowance for exhaustion, wear, and tear of property used in the taxpayer's trade or business or held for the production of income. Sec. 167(a); sec. 1.167(a)-1(a), Income Tax Rega. Traditionally, such allowance is primarily intended to provide a nontaxable fund to restore property used in producing income at the end of such property's useful life and is granted to the person who uses property in his702 trade or business, or for the production of income, and who incurs a loss resulting from the depreciation of capital that he has invested. Helvering v. F. & R. Lazarus & Co.,308 U.S. 252">308 U.S. 252, 254 (1939); Ryman v. Commissioner,51 T.C. 799">51 T.C. 799, 802 n. 5 (1969). Thus, although ownership is not a prerequisite to a right to a depreciation deduction, only if the taxpayer has made a capital investment in property is he entitled to a depreciation deduction with respect to such property. Miller v. Commissioner,68 T.C. 767">68 T.C. 767, 775 (1977); Blake v. Commissioner,20 T.C. 721">20 T.C. 721, 732 (1953); Gladding Dry Goods Co. v. Commissioner,2 B.T.A. 336">2 B.T.A. 336, 338 (1925). During 1976 and 1977, the Oldsmobile was registered in the name of Dr. Borkowski. Although Avalon paid some of the expenses of such automobile during such period, it is clear that it did not have a capital investment in such automobile. Accordingly, Avalon is not entitled to any depreciation deductions with respect to such automobile. Miller v. Commissioner,supra;Gladding Dry Goods Co. v. Commissioner,supra.703 There is no merit in the petitioners' argument that the arrangement should be treated as if they leased the Oldsmobile to Avalon. The fact is no such lease existed, and "while a taxpayer is free to organize his affairs as he chooses, nevertheless, once having done so, he must accept the tax consequences of his choice, whether contemplated or not, * * and may not enjoy the benefit of some other route he might have chosen to follow but did not." Commissioner v. National Alfalfa Dehydrating & Milling Co.,417 U.S. 134">417 U.S. 134, 149 (1974). Moreover, even if we were to treat the arrangement as a lease of the automobile, the petitioners have failed to offer any evidence as to the fair rental value of the Oldsmobile or their basis for depreciation. Apparently, they assume that such a rental would equal the depreciation deductions claimed by Avalon; but we cannot make such assumption. The petitioners offered no evidence of the original purchase price of the Oldsmobile, or the fair market value of such automobile at the time it was allegedly converted to business use, 3 or such automobile's salvage value, if any. Accordingly, we have no means of determining the fair rental704 value of such automobile or the amount, if any, of depreciation deductions to which the petitioners might be entitled. Also, Dr. Borkowski testified that such automobile was not used exclusively by Avalon, but rather was used, in part, by his family. Where property is used partly for business and partly for personal uses, the cost basis of the asset must be apportioned between such uses, and only the business portion would be subject to an allowance for depreciation. Clark v. Commissioner,158 F. 2d 851 (6th Cir. 1946), affg. a Memorandum Opinion of this Court; James v. Commissioner,2 B.T.A. 1071">2 B.T.A. 1071 (1925). Since the petitioners have the burden of proving the extent of such business use (Rule 142(a), Tax Court Rules of Practice and Procedure; Welch v. Helvering,supra), their failure to produce any evidence as to the extent of Avalon's use of such automobile constitutes an additional reason for sustaining the Commissioner's determination on this issue. 705 The final issue for decision is whether the portion of the payment to Duck Creek attributable to trucking, miscellaneous (ear tags, labor crew), and Duck Creek's fee for assembling Dr. Borkowski's cattle herd is currently deductible, as an expense of raising livestock, or must be capitalized, as part of the purchase price of such cattle.Generally, the costs incurred in the acquisition or development of capital assets and other property used in a trade or business must be capitalized. Sec. 263(a). A farmer, such as Dr. Borkowski, who uses the cash method of accounting and who operates a farm for profit is entitled to currently deduct the expenses paid in raising livestock; but "Amounts expended in purchasing work, breeding, dairy, or sporting animals are regarded as investments of capital, and shall be depreciated." Sec. 1.162-12(a), Income Tax Regs.; United States v. Catto,384 U.S. 102">384 U.S. 102, 106 (1966); Wiener v. Commissioner,58 T.C. 81">58 T.C. 81, 88 (1972), affd. per curiam 494 F. 2d 691 (9th Cir. 1974). 4706 The petitioners contend that the full amount of the initial management fee was incurred in raising livestock and therefore is currently deductible. The Commissioner has allowed a deduction for a portion of such fee, but he contends that the portion attributable to trucking, miscellaneous, and Duck Creek's fee for assembling the herd does not relate to the raising of livestock, but rather to their acquisition and therefore was a capital expenditure recoverable through depreciation. We agree with the Commissioner. Whether a particular expenditure relates to the raising of livestock is a question of fact, and the petitioners bear the burden of proof. Rule 142(a), Tax Court Rules of Practice and Procedure; Welch v. Helvering,supra. The portion of the initial management fee in dispute was paid to Duck Creek for its services in selecting Dr. Borkowski's cattle, for transporting such cattle (if necessary) to the farm where they would be maintained, and for identifying them by means of ear tags since such cattle were to be commingled with the cattle of other owners. Also, 707 the fee of $ 15 per head paid to Duck Creek for assembling the herd, although not a commission per se, was intended to be additional compensation for its services. Moreover, even if all of such services were not performed, where, for example, Duck Creek already owned the cattle that were sold or such cattle were already on the farm where they were to be maintained, the amount of the initial management fee charged to an owner was not reduced to reflect such savings to Duck Creek. Accordingly, we find and hold that the initial management fee, other than the portion of such fee allocable to veterinarian and medication services, was totally unrelated to the raising of Dr. Borkowski's cattle; rather, such fee was part of the acquisition cost of such cattle and therefore must be capitalized. To reflect the concessions made by the Commissioner, Decision will be entered under Rule 155.Footnotes1. All statutory references are to the Internal Revenue Code of 1954 as in effect during the years in issue.↩2. While a desire to avoid taxes will not in itself taint an otherwise bona fide transfer of property, we are aware that an electing small business corporation may present a vehicle for shifting income among family members. See Speca v. Commissioner,T.C. Memo 1979-120">T.C. Memo. 1979-120, affd. 630 F. 2d 554↩ (7th Cir. 1980).3. Where property is converted from personal to business use, the basis for computing depreciation deductions is the lesser of the fair market value of such property at the time of conversion or such property's basis. Sec. 1.167(g)-1, Income Tax Regs.↩4. Even though Dr. Borkowski contracted with Duck Creek for the management of his cattle, as owner of such cattle, he bore the risk of their loss. Accordingly, he is entitled to the same tax benefits afforded farmers as if he had raised the cattle himself. Therefore, to the extent the expenses in issue relate to the cost of raising his cattle, such expenses are currently deductible. Maple v. Commissioner,440 F. 2d 1055, 1057 (9th Cir. 1971), affg. a Memorandum Opinion of this Court; Duggar v. Commissioner,71 T.C. 147">71 T.C. 147, 157-158↩ (1978).	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622544/	W. H. Hughes v. Commissioner.W. H. Hughes v. CommissionerDocket Nos. 21328, 35635.United States Tax Court1952 Tax Ct. Memo LEXIS 121; 11 T.C.M. (CCH) 797; T.C.M. (RIA) 52240; July 31, 1952James J. Dougherty, Esq., for the petitioner. Charles J. Hickey, Esq., for the respondent. JOHNSON Memorandum Findings of Fact and Opinion JOHNSON, Judge: Respondent determined deficiencies in income and victory tax for the year 1943 and income tax for the years 1944 through 1946 as follows: Docket No.YearDeficiency213281943$7,000.893563519443,093.8119451,668.831946869.81The respondent, by an amended answer filed on November 30, 1950, determined an increased deficiency for122 the taxable year 1943 from $7,000.89, as set forth in the deficiency notice, to the amount of $11,266.40. Respondent's amended answer alleges that an additional $7,400 as interest income was properly includible in petitioner's net income for 1943. However, on brief, respondent's determination as to this $7,400 for 1943 was waived. Petitioner alleged that the respondent erroneously disallowed a capital loss deduction in 1942 in the amount of $50,000. However, at the hearing, petitioner specifically waived this allegation of error. The deficiency for 1943 depended in part upon certain adjustments made in the net income for 1942. The following issues are presented in these consolidated proceedings: (1) Were certain sums received by the petitioner during the years 1943 through 1946 taxable as rental income, or as a return of capital? (2) The second issue is divided into two sub-issues: (a) What is the tax liability for certain sums which were payable to the petitioner as a beneficiary under a trust, but which were garnisheed as a result of a note maker's failure to pay these notes? (b) Is petitioner entitled to deductions for the payments made as guarantor on default of these123 notes? (3) Were certain sums received by the petitioner from the corporation in 1942 and 1943 taxable as interest income? (4) Has respondent properly increased the petitioner's compensation for the year 1943 by an adjustment of $1,000? Findings of Fact Some of the facts are stipulated and are so found. Petitioner, an individual, a resident of Pennsylvania, has his principal office in Cresson, Cambria County, Pennsylvania. He filed his returns for the years involved with the collector of internal revenue for the first district of Pennsylvania, at Philadelphia. Issue 1 Petitioner as an individual owned and operated his own coal mines. On October 29, 1918, petitioner entered into an agreement with two other individuals and the Forks Coal Mining Company, a Pennsylvania corporation (hereinafter sometimes referred to as the corporation). The agreement, in part, is as follows: "The party of the second part [petitioner] covenants and agrees to purchase or pay for the installation (with his own personal funds) of the necessary mine machinery, equipment, fixtures, improvements and property, for such extension and development of the mines and mining property of the Forks Coal124 Mining Company on its leasehold at South Fork, Cambria County, Pennsylvania, as may be reasonably required for the mining and preparing for market of the coal to be mined under said lease, his expenditures for such purposes, however, not to exceed the sum of Fifteen Thousand (15,000) Dollars; the purchase and installation of any such property and improvements, however, shall be with the concurrence and approval of Ray M. Schuster, so long as he, the said Ray M. Schuster, is a stockholder of the Company. The title of the property so purchased from time to time by the party of the second part shall be and remain vested in him, and he covenants and agrees to and does hereby lease the same to the said Company, so long as the said Company use the same in connection with the operation of its mines on the aforesaid leasehold, for the use of which equipment and property the Company will pay a monthly rental to the party of the second part equal to the net earnings of the said Company for each particular month, but which in no case shall be less than twenty-five (25) cents per net ton, for each and every net ton of coal mined by the said Company during each month, the said rental to be paid125 monthly on or about the 20th day of each and every month; the Company, however, is hereby given the option or privilege to purchase said property and improvements at any time, upon payment to the party of the second part of the amount paid by him for the same, plus interest at the rate of six (6) per centum per annum, from which shall be deducted the aggregate amount of rental paid by the Company to the party of the second part. Should the Company exercise its option to purchase said property, the party of the second part will execute and deliver to it a Bill of Sale for the same; however, until the Company exercises its option to purchase the said property, it agrees to keep the same in good repair and condition, make all necessary repairs thereto and replace any article of machinery, or parts thereof, which may be worn out or destroyed." In accordance with the terms of this contract petitioner purchased and installed $15,000 worth of mining equipment. Later it was determined that additional equipment would be necessary to put the mine in proper running condition. The parties to the agreement of October 29, 1918, made a supplemental agreement. The terms of the supplemental agreement126 were set forth in a letter dated May 22, 1919, and addressed to the petitioner. The letter, in part, is as follows: "Second - You shall immediately assume the full charge of the mining operations of the Forks Coal Mining Company, and the shipping of such coal as it shall mine. You shall arrange for the payment of all the present unpaid bills of the Forks Company. You shall rent to the Forks Company such additional equipment (in addition to the equipment amounting to about $15,000.00 in value, previously rented) as you will consider necessary for the successful operation of its mines. The Forks Coal Mining Company shall pay you a rental for the use of this equipment, the amount of rental to be paid from time to time to be determined by you from the financial condition of the Company at such times. The rental shall be paid you monthly, if practicable. At such time as the rentals paid for the use of this additional equipment shall equal the cost of the same to you, plus 6% interest, you shall transfer same to the Forks Coal Mining Company, with a bill of sale. You shall receive from the Forks Coal Mining Company 10" per net ton on all the coal mined by it from May 1st last, until the127 cessation of its mining operations at South Fork, Pa. This 10" per ton shall, however, be charged against the items of rental which you receive for the equipment above referred to (not including sundry supplies) until such time as the Company receives from you the bill of sale referred to for said equipment. The Company shall pay any taxes which may be levied against its personal property, which you have rented to it for its use. "Third - There shall be no further salaries paid to either Mr. Schuster, yourself or the writer until all of the indebtedness of the Company has been paid off, and in no case until such period as we can unanimously agree upon, dependent upon the condition of the affairs of the Company." Petitioner purchased additional equipment so that an aggregate of $45,000 worth of equipment was placed on the property at South Fork. On July 15, 1920, the Forks Coal Mining Company, the corporation, was dissolved; the business was carried on from that date as a partnership known as the Forks Coal Company (hereinafter sometimes referred to as the partnership). Petitioner received a one-half interest in the partnership. The partnership agreement incorporated by reference128 the agreement of May 22, 1919, and provided that this earlier agreement have "the same force and effect as if set forth herein verbatim" and "shall be the obligation of this partnership and will be fully performed in accordance with the terms thereof". By November 15, 1920, the first $45,000 worth of equipment which had been installed by petitioner was fully paid for, and petitioner then executed a bill of sale to the Forks Coal Company for this equipment. During the year 1920 petitioner equipped his own mine known as Hughes No. 1. However, within a year the vein of coal ran out and the mine was shut down. About this time the partnership leased a tract of coal land at Blandburg, Pa. Petitioner transferred all of the equipment from Hughes No. 1 to the Blandburg property, known as Hughes No. 11. This transfer was made during the earlier part of 1922 and the value of the equipment transferred was approximately $38,100. The partnership generally lost money from its operations and continued to do so until June 30, 1928. On July 1, 1928, the business known as the Forks Coal Company, the partnership, reverted to its original corporate form known as the Forks Coal Mining Company. Business129 continued to be unsuccessful and Hughes No. 11 mine was closed down from 1929 to 1932. Operations were resumed in the year 1932 and from that time until 1942 the company operated with indifferent success. The corporation paid petitioner the following sums: 1943$3,119.3019445,648.6819454,054.0219461,921.12It was the intent of the parties that the above amounts were received as purchase payments, and hence a return of capital, and were not received as rental payments. Issue 2 During the years before us petitioner was the beneficiary of a trust established by his mother. At this time petitioner was also a guarantor on certain business notes. Upon default of the makers, the trustee of his mother's trust was garnisheed. Accordingly, the trustee paid on the notes the sum of $1,481.77 in 1942. Petitioner did not report this sum as income. The respondent in the deficiency notice increased petitioner's income by this amount. In this year the sum of $1,249.27 was allowed as a bad debt deduction. For the year 1943 the amount of the trust income garnisheed was $1,353.29. Respondent increased petitioner's 1943 income by this sum and allowed the same amount130 as a capital loss deduction. The adjustment is as follows: (f) Additional allowable deduction for a capi-tal loss not previously claimed computedas follows: Payment as guarantor for SouthFork Bituminous Coal Company$1,353.29Altoona Textile Company282.00Total1,635.29Deduction allowable1,000.00Capital loss carry-over$ 635.29Petitioner received the above amounts of $1,481.77 in 1942 and $1,353.29 in 1943 as income from the trust established by his mother. Petitioner also sustained losses under section 23(e), I.R.C., in the amounts of $1,481.77 in 1942 and $1,353.29 in 1943. Issue 3 During the time that the business was operated as a partnership petitioner loaned the business $40,000. Upon the basis of this indebtedness, on July 1, 1928, the corporation issued the petitioner two notes, one in the amount of $40,000 representing principal, and the second in the amount of $8,400 representing accumulated interest. The corporation notes were 6 per cent interest-bearing notes. Both of these notes from the date of issue to July 21, 1947, were the personal property of the petitioner. The respondent increased the interest131 income of petitioner for the year 1942 in the amount of $6,129.49 and for the year 1943 in the amount of $8,416.95. His explanation in the deficiency notice for these adjustments was as follows: "(c) It is held that you constructively received interest income on obligations of the Forks Coal Mining Company, Inc., in the sum of $6,129.49 for the taxable year 1942 and in the sum of $8,416.95 for the taxable year 1943." The above adjustments were determined after an examination of the corporation's books indicated that petitioner's personal account contained an excess of debits over credits for the year 1942 in the amount of $6,129.49, and for 1943 in the amount of $8,416.95. Petitioner received the sum of $6,129.49 in 1942, and the sum of $8,416.95 in 1943 as interest income. Opinion Issue 1 Respondent contends that certain payments made to the petitioner by the Forks Coal Mining Company during the years 1943 through 1946 constituted rental income to the petitioner. Petitioner on the other hand alleges that these payments were received as a return of capital and hence are not taxable as income. There is no dispute as to the fact that the petitioner sold some $45,000 worth132 of mining equipment to the partnership under the agreements of October 29, 1918, and May 22, 1919. Dispute arises when the petitioner says that the money received from the corporation in 1943 through 1946 was received under the terms of these earlier agreements, and that it was received as a return of capital on a second installation of mining equipment placed on the partnership property. A brief resume of the facts will be helpful at this point. Petitioner is an individual but the issues before us arise out of his transactions with a business which was first a corporation, then on July 15, 1920, a partnership, and again on July 1, 1928, a corporation. On October 29, 1918, petitioner agreed to supply the corporation with such equipment as would be necessary to operate the mine at South Fork. Under the terms of the supplemental agreement petitioner was to supply additional equipment and to be paid for this equipment at the rate of 10" per ton of coal mined. Petitioner in compliance with the agreement supplied some $45,000 worth of equipment. On November 15, 1920, he executed a bill of sale and transferred title in this equipment to the partnership. In the latter part of 1921 petitioner133 equipped his own mine with approximately $38,100 worth of equipment. Later his coal vein ran out and shortly thereafter, about early 1922, he transferred his entire installation to a partnership coal tract in Blandburg, Pa. Petitioner now alleges that the money received in 1943 to 1946 was in fact a return of capital on this equipment. The basis of petitioner's contention is that the second installation of equipment was leased under the terms of the agreements dated October 29, 1918, and May 22, 1919, and like the taxpayer in Truman Bowen, 12 T.C. 446">12 T.C. 446 (dismissed on appeal), the moneys received were payments on purchase price. In the Bowen case we held that monthly payments called "rent" were not actually rent but were in effect part of the purchase price. In that case we distinguished between an ordinary lease and a conditional sale. We cited, on page 459, In Re Rainey, 31 Fed. (2d) 197, as follows: "* * * A lease contemplates only the use of property for a limited time and the return of it to the lessor at the expiration of that time; whereas, a conditional sale contemplates the ultimate ownership of the property by the buyer, together with the use of134 it in the meantime." From the evidence we conclude that the terms as embodied in the agreements of October 29, 1918, and May 22, 1919, did control the second installation of equipment. Next, we must determine the intent of the parties as established in the agreements. If we look at the agreements it is obvious that the intent of the parties was to provide for a conditional sale. The mining business was to be the ultimate owner of the property; the mining business, in fact, enjoyed the unrestricted use of the property for more than 20 years. Finally when economic conditions improved so that the business could pay the petitioner it did so in 1943, 1944, 1945 and 1946. The record as a whole sustains our finding of fact that the payments were intended as purchase payments rather than rent. An objection might be raised, if we should call these payments a return of capital, in that the agreements themselves denominate the payments as rent. It is necessary to look through the form to substance, and we will always look to the purpose of the transaction. There can be no question as to the purpose and results of the first transaction; its purpose was to provide the business with equipment135 to carry on its operation, and to make it possible for the business to buy its own equipment. We can not see how the second transaction differed from the first, except as to time. We find from the record as a whole that the petitioner received the following amounts: $3,119.30 in 1943, $5,648.68 in 1944, $4,054.02 in 1945 and $1,921.12 in 1946 as a return of capital, and on this issue we therefore sustain the petitioner. Issue 2 During the years 1942 and 1943 petitioner was the beneficiary of a trust established by his mother, and he was therefore entitled to receive income from the trust. Petitioner was also the guarantor on certain defaulted notes. The trustee was garnisheed and payments of $1,481.77 and $1,353.29 were made on these defaulted notes. In the deficiency notice respondent included the above sums in petitioner's income for the years 1942 and 1943. Although petitioner has alleged error in this adjustment, no argument in support of his allegation of error was presented. From the paucity of evidence on this issue we conclude that the petitioner was unrestrictedly entitled to the benefits of the trust and that the payments attached by the receiver were credited to petitioner's136 account as the guarantor of the notes. Accordingly, under section 162 (b) of the Code, 1 petitioner's current income from the trust, whether distributed to him or not, shall be included in computing his net income for 1942 and 1943. Petitioner further contends that these sums are deductions allowable in full for his individual income tax. Respondent has allowed $1,249.77 as a bad debt deduction for 1942. Petitioner only claimed $600 on his 1942 return. For 1943 respondent allowed no bad debt deductions but did allow $1,353.29 plus $282 as a capital loss and deductible137 to the maximum amount of $1,000 with the remainder as a carry-over. We must sustain the respondent in that these sums may not be taken as bad debt deductions. A bad debt deduction under these circumstances can only be allowed under the theory of subrogation wherein the guarantor has a claim against the principal debtor and further that this claim is worthless when the guarantor's payments were made. Evidence has been presented that the notes were not paid in full and under Pennsylvania law subrogation or substitution can not take place until the creditor has been fully paid. Gildner v. First National Bank & Trust Co. of Bethlehem, 19 Atl. 2d 910. We think that there is sufficient evidence to warrant a holding that the petitioner is entitled to deduct these sums as losses under section 23 (e). 2 That these payments of trust income represented a loss to the petitioner can not be seriously questioned. In the petitioner's own words, these losses were sustained "for moneys borrowed in connection with our coal properties". Hence, they were losses incurred in his trade or business and are deductible in the amounts of $1,481.77 and $1,353.29 for 1942 and 1943. See Abraham Greenspon, 8 T.C. 431">8 T.C. 431.138 Petitioner also alleged that additional payments were made on these defaulted notes. Respondent disallowed these claimed deductions. Except for his request for a finding of fact and a statement of error in the petition, the petitioner has presented no evidence as to these additionally alleged deductions for 1943, 1944, 1945 and 1946. Therefore, respondent's determination as to their disallowance must be sustained. The amounts included in this determination are as follows: YearAmount1943$2,250.0019442,433.7119451,263.0019462,200.00Issue 3 The next issue involves the sums of $6,129.49 and $8,416.95 which respondent has determined to be interest income. A yearly summary of the entries appearing in the personal account139 of petitioner with the corporation shows that on January 1, 1942, the debit balance was $23,483.30. Various credits and debits were made to the accounts for the year and on January 1, 1943, the debit balance was $29,612.79. The debit balance had increased some $6,129.49. On January 1, 1944, the debit balance was $38,029.73 or an increase over the preceding year in the amount of $8,416.94. 3The petitioner contends that the excess of withdrawals for 1941 and 1942 were amounts received as "payments on account of principal", meaning the $40,000 note. Respondent has determined that these sums represented interest payments. There is nothing in the record to indicate that these withdrawals were credited to principal or interest. We have no evidence that debtor or creditor recognized these payments to be either principal or interest. The Supreme Court of Pennsylvania in Kann v. Kann, 259 Pa. 583">259 Pa. 583; 103 Atl. 369, 371, recognized the well established rule that, except where otherwise agreed, a payment made on an indebtedness consisting of principal and interest, not applied by either party, will be applied140 first to interest due and then to principal. The petitioner has not asserted a preference for the application of these withdrawals. Therefore, when the respondent determined that the withdrawals were interest payments he must be sustained. Issue 4 The respondent in the deficiency notice increased the petitioner's 1943 net income by $1,000. The respondent's explanation for this adjustment is as follows: "(c) A credit to your personal account on the books of the Forks Coal Mining Company, Inc., of $1,000.00 on April 28, 1943, which appears to represent compensation received from the Brown Johnston Corporation, has been added to your gross income for the taxable year 1943." Petitioner has alleged this to be an erroneous determination, and that this $1,000 was a repayment for a loan. Petitioner has made no further reference to this allegation of error and proffered no evidence in support of his position. Therefore we must sustain the respondent. Decisions will be entered under Rule 50. Footnotes1. SEC. 162. NET INCOME. The net income of the estate or trust shall be computed in the same manner and on the same basis as in the case of an individual, except that - * (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. * ↩2. SEC. 23. DEDUCTIONS FROM GROSS INCOME. In computing net income there shall be allowed as deductions: * (e) Losses by Individuals. - In the case of an individual, losses sustained during the taxable year and not compensated for by insurance or otherwise - (1) if incurred in trade or business; or (2) if incurred in any transaction entered into for profit, though not connected with the trade or business; * *.↩3. The deficiency notice uses the figure of $8,416.95.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622545/	ESTATE OF MARY B. CONNELLY, Deceased, WILBUR THOMAS CONNELLY, Administrator, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentEstate of Connelly v. CommissionerDocket No. 7780-72.United States Tax CourtT.C. Memo 1975-328; 1975 Tax Ct. Memo LEXIS 42; 34 T.C.M. (CCH) 1429; T.C.M. (RIA) 750328; 53 Oil & Gas Rep. 599; November 6, 1975, Filed Wilbur Thomas Connelly, pro se. Johnny B. Mostiler and Daniel A. Taylor, Jr., for the respondent. SIMPSONMEMORANDUM FINDINGS OF FACT AND OPINION SIMPSON, Judge: The Commissioner determined the following deficiencies in the petitioner's Federal income taxes: Addition to taxSec. 6651(a), YearDeficiencyI.R.C. 19541969$1,683.00197032.00$8.00 We must decide whether, when Mrs. Connelly apparently acquired and disposed of certain oil and gas lease applications, she was the real owner of such applications or was acting as a nominee. We must also decide whether there was reasonable cause for the failure to file a signed 1970 Federal income tax return on behalf of Mrs. Connelly. FINDINGS OF FACT Some of the facts have been stipulated, and those facts43 are so found. The petitioner is the Estate of Mary B. Connelly, deceased, who died on March 10, 1971. Wilbur Thomas Connelly, her son, was appointed administrator of her estate on May 17, 1971. He resided in Houston, Tex., at the time of filing the petition herein. During the years 1968 through 1970, Mrs. Connelly resided in Houston, Tex. Her 1969 Federal income tax return was filed with the District Director of Internal Revenue, Austin, Tex. Her 1970 return was prepared and signed by her accountant as its preparer, but was not signed by her, nor by anyone authorized to sign for her. The return was mailed to the District Director of Internal Revenue, Austin, Tex., on or after April 14, 1971, by her son-in-law, Gene Van Dyke, who was named in Mrs. Connelly's will as her executor. Mr. Van Dyke operated an oil and gas exploration and development business. In 1968, large oil and gas reserves were discovered in Alaska, and Mr. Van Dyke sought to lease land that had such reserves. He located approximately 800,000 acres of such land (the Van Dyke block) which he believed were likely to be productive. However, in August 1968, he applied for leases in his own name on tracts totaling only44 298,000 acres because he understood that Federal regulations prevented him from applying for leases on tracts totaling in excess of 300,000 acres. Applications on the remaining acreage in the Van Dyke block were made by Don Simasko, a land broker in Alaska, and his wife, Lillian. As a land broker, Mr. Simasko customarily took title to interests in land purchased for his clients until a transfer was made to such clients. Yet, Mr. Simasko was anxious to transfer title to the acres he held in the Van Dyke block because he understood Federal regulations would prevent him from acquiring title to any more land in that leasing district so long as he held such acreage. It was decided that Mr. Simasko would transfer his interest in the Van Dyke block to Mr. Plumb, an employee of Mr. Van Dyke, who would hold the land as Mr. Van Dyke's nominee. Thereafter, at Mr. Van Dyke's direction, Mr. Plumb assigned the lease applications to Mrs. Connelly, and Lillian Simasko assigned her interest in the lease applications to Mrs. Van Dyke. The terms of the assignments had been completely negotiated by Mr. Van Dyke: It was provided that Mr. Simasko was to receive a 1-percent overriding royalty on the acreage45 assigned in the event oil was discovered, and that Mr. Van Dyke was to reimburse Mr. Simasko for all of his expenses connected with his initial filing of the lease applications. The transfer to Mrs. Connelly was effected by her filing applications for leases and by Mr. Simasko then withdrawing his applications. All arrangements for the transfer were made by Mr. Van Dyke, and on August 28, 1968, Mrs. Connelly signed 80 lease applications in Mr. Van Dyke's home. Mr. and Mrs. Van Dyke borrowed funds needed to pay the filing fees and advanced rental payments with respect to the lease applications. The loan was guaranteed by certain unrelated individuals, who were to receive for such guarantee an overriding royalty of one-half of one percent. Although Mrs. Connelly was not a party to the loan by the bank or to the guarantee, she, in accordance with the arrangements made by Mr. Van Dyke, assigned to one of the guarantors the same income interest as Mr. and Mrs. Van Dyke assigned with respect to their lease applications. Mrs. Connelly also assigned to one of the guarantors the right to receive any amounts refunded in the event her applications were withdrawn or rejected, even though46 she was not a party to the guarantee. Such right was transferred to the guarantors to assure them that the loan would be repaid in any event. Mrs. Connelly was a retired school nurse and had only enough income for her support. Mr. Van Dyke loaned Mrs. Connelly $95,383 for the filing fees for her applications, and she paid such fees on September 3, 1968. On the following day, she executed a promissory note to Mr. and Mrs. Van Dyke for such amount; the note was due in 120 days and bore 7-1/2 percent interest. Principal and interest payments past due bore interest at 10 percent. On December 6, 1968, Mrs. Connelly executed a new will in order to transfer her applications to Mr. Van Dyke upon her death. Mr. Van Dyke arranged for a partnership to purchase an interest in the lease applications filed on the Van Dyke block and to make a loan with respect to such applications. On February 6, 1969, the partnership entered into identical agreements with Mr. Van Dyke, Mrs. Van Dyke, and Mrs. Connelly. The partnership loaned Mrs. Connelly $85,000, for which she executed a promissory note with a 5-year term to the partnership secured by her applications. In the loan agreement, she promised she47 would not assign or convey her applications until the note was paid. On February 7, 1969, Mrs. Connelly deposited such proceeds in her checking account and, on the same day, drew a check for $85,000 to Mr. and Mrs. Van Dyke, on which she noted that the check was partial payment of their loan to her. Mrs. Connelly sold a 12-1/2 percent interest in her applications to the partnership for $19,000. On March 25, 1969, she deposited such proceeds in her checking account and, on the same day, drew a check for $19,000 to Mr. Van Dyke. Mr. Van Dyke applied the checks to the principal due on his and Mrs. Van Dyke's loan to Mrs. Connelly. The checks totaled more than the principal, and he used the excess to defray part of Mrs. Connelly's share of an account he had established for expenses incurred to investigate the Van Dyke block. He never computed the interest due on the loan and never applied any part of Mrs. Connelly's payments to such interest. On October 22, 1970, Mrs. Connelly transferred her applications, without consideration, to Mr. Van Dyke's oil and gas company. At the time of the trial of this case, November 14, 1974, the note from Mrs. Connelly to Mr. and Mrs. Van Dyke had48 not been canceled, although interest was still due on it. Nor had the leases for which Mr. and Mrs. Van Dyke and Mrs. Connelly applied been granted by such time. Mrs. Connelly deducted the filing fees for her applications on her 1968 Federal income tax return, resulting in a carryover loss claimed on her 1969 return. She did not report the sale of an interest in her applications to the partnership on her 1969 return. The Commissioner determined that such fees were not deductible, that there was no carryover loss to 1969, and that, in 1969, Mrs. Connelly realized a capital gain as a result of the sale to the partnership. The Commissioner also determined a deficiency for 1970, including an addition to tax for the failure to file a proper return for such year. OPINION We must decide whether Mrs. Connelly was the real or nominal owner of the lease applications for Federal income tax purposes. This issue poses a factual question, and hence, we must examine and evaluate all the facts and circumstances surrounding Mrs. Connelly's acquisition and disposition of the lease applications. Upon an examination of the evidence in this record, we conclude that Mrs. Connelly was merely the nominal49 owner of them. It has been observed many times that transactions between family members require careful scrutiny, since they are not always what they appear to be. , affg. a Memorandum Opinion of this Court; ; , affd. per curiam . In numerous cases, title to property was placed in the name of one family member; yet, it was found that another family member was the real owner for tax purposes. ;, affg. a Memorandum Opinion of this Court; , affd. ; , affd. , cert. denied ; In such situations, we have found certain factors are helpful in deciding the50 factual issue of who is the owner of property for tax purposes. These factors include the intent of the parties, which party controlled and enjoyed the property, and the financial stake of the parties. ;; ; ;;; We shall examine each of these factors in turn. A review of the evidence convinces us that all the transactions in this case were planned by Mr. Van Dyke and were designed to carry out his purposes. After some investigation, he located approximately 800,000 acres that he wanted to lease in Alaska. However, he understood that Federal regulations would prohibit him from personally leasing more than 300,000 acres in such region. Consequently, Mr. Van Dyke sought to find a way in which he could lease the 800,000 acres without running afoul of what he understood to be Federal law with respect to the lease applications. To accomplish51 this goal, Mr. Van Dyke applied for leases on tracts totaling 298,000 acres and initially had others apply for leases on the remaining acreage. In time, he arranged for some of the applications to be transferred to his wife and for the balance to be transferred to Mrs. Connelly. The evidence indicates that Mr. Van Dyke never intended Mrs. Connelly to be more than a nominal owner, and she understood this. Her only function with respect to the lease applications was to allow Mr. Van Dyke to do indirectly what he believed he could not do directly. Mrs. Connelly had no independent control over the lease applications; nor did she enjoy any of the benefits derived from them. It was Mr. Van Dyke who controlled the property, used it for his purposes, and enjoyed the benefits therefrom. Every action Mrs. Connelly took with respect to the applications was pursuant to a request from Mr. Van Dyke. Every aspect of Mrs. Connelly's involvement in the transaction was arranged, orchestrated, and implemented by Mr. Van Dyke. Mr. Van Dyke had lease applications drawn up in Mrs. Connelly's name, and at Mr. Van Dyke's request, she signed 80 lease applications, which he then had filed. Mr. Van Dyke52 arranged to have Mrs. Connelly grant an income interest in the lease applications she held to a guarantor of the loan obtained by Mr. and Mrs. Van Dyke. Mrs. Connelly never received anything from this guarantor, yet, Mr. Van Dyke was able to gain the guarantee by use in part of the applications in her name. She also gave the same guarantor the right to receive the refunds of the filing fees, which would result if she withdrew the applications or if they were rejected. The reason the guarantor was given this right was to make sure that Mr. Van Dyke's loan was repaid. Again, these facts show that Mr. Van Dyke controlled and enjoyed the applications and demonstrate his ownership of them. Mrs. Connelly was an elderly woman with a heart condition. As of the date the applications were made in Mrs. Connelly's name, her will provided that the residue of her estate, which would have included the lease applications, would go to her son, Mr. Connelly. However, 3 months after the applications had been filed in Mrs. Connelly's name, Mr. Van Dyke's attorneys redrafted her will to provide that he would get the lease applications upon her death. This change in Mrs. Connelly's will, arranged by Mr. 53 Van Dyke, is further evidence showing his ownership of the applications. See . An examination of Mrs. Connelly's financial stake in the lease applications further shows that she had no beneficial interest in them; nor did she take any risk in connection with them. She was a retired school nurse, who had only enough income for her support. She was induced by Mr. Van Dyke to take title to the lease applications by his assurances that she would not be taking any risks; he would supply all of the necessary funds. Mr. Van Dyke purported to loan Mrs. Connelly $95,383, the cost of filing fees for the applications, and Mrs. Connelly executed a promissory note. Under this purported note, repayment was due 4 months thereafter; however, it was not paid then, and no request for repayment was made then or at any later time. Interest on the outstanding and overdue principal was never computed and was never requested. Considering all the evidence, it is clear to us that there was no genuine loan by the Van Dykes to Mrs. Connelly, made at arm's length. See ; cf. ,54 affd. per curiam ; . The note merely served to keep up the fiction that Mrs. Connelly was the real owner of the lease applications. Furthermore, Mr. Van Dyke testified that Mrs. Connelly was very cautious about money and executed the promissory note only because there was no risk in connection therewith, since she could always withdraw the applications and receive a refund of the filing fees. This refund would be sufficient to repay the loan. Yet, Mr. Van Dyke had arranged for his guarantor to have a right to receive such refunds, and therefore, Mrs. Connelly could not look to such refunds to pay off the loan. Since Mrs. Connelly had no other means to pay off the loan, we cannot believe that she considered the loan to be a real obligation or that she was acting on her own behalf when she gave away the very means by which it is claimed she intended to pay off the loan. Mr. Van Dyke arranged for a partnership to make a loan secured by all the applications for leases on the Van Dyke block, including those in the name of Mrs. Connelly, and to purchase an interest in such applications. Mrs. Connelly55 was to receive $19,000 from the sale of the income interest and $85,000 from the loan. However, on the same day she received the checks for those amounts, she drew checks payable to Mr. Van Dyke for the same amounts. Thus, she paid $104,000 over to Mr. Van Dyke and retained none of the funds for herself. His explanation of the transaction was that he received $95,383 in repayment of the loan and that the remaining $8,617 was to be credited against his expenses in exploring the oil field. Yet, there was no indication that Mrs. Connelly had any knowledge that she was obligated to share in his expenses or that she intended for part of her payments to Mr. Van Dyke to be used for that purpose. In addition, 2 years after she executed the promissory note, Mrs. Connelly transferred the lease applications to Mr. Van Dyke's corporation for no consideration. In our opinion, her assignment of her lease applications to Mr. Van Dyke's corporation explodes any notion that Mrs. Connelly was the real owner. It simply overtaxes credulity to believe that Mrs. Connelly would have entered into the transaction with the expectation of profit, assumed large debts that she could only pay off with the lease56 applications, and then give away such applications. The evidence overwhelmingly supports our conclusion that Mrs. Connelly was merely the nominal owner of the lease applications. The Commissioner argued that, notwithstanding any private arrangement between Mrs. Connelly and Mr. Van Dyke, Mrs. Connelly must be treated as the owner of her applications for Federal income tax purposes, since the parties have assumed that it would be illegal for Mr. Van Dyke to own them. Whether applicable Federal regulations prohibited Mr. Van Dyke from leasing more than 300,000 acres of land in the same region of Alaska is a question we need not consider. Whether Mr. Van Dyke could legally own the applications in Mrs. Connelly's name would not alter the analysis as to who was the owner for Federal income tax purposes. We have recently dealt with a similar contention in . In that case, the Commissioner argued that since the applicable State law forbade corporations from acting as insurance agents, the corporations could not be treated as having earned insurance commissions. However, we held that possible violations of State or Federal law did not compel57 us to restructure transactions under scrutiny to comply with such law when the facts mandated otherwise. See ; . The Commissioner determined an addition to tax for the year 1970 because of the failure to file a signed statutory return for that year. On or after April 14, 1971, a return for 1970 was sent to the District Director of Internal Revenue, Austin, Tex., but it was not signed by Mrs. Connelly, nor by anyone authorized to sign for her. It appears that no signed return for 1970 was ever filed. An unsigned return does not qualify as a valid return for purposes of section 6651(a). , affd. on this issue ; . The petitioner argues that the failure to file a signed return was due to reasonable cause since it asserts that prior to the due date of the return, Mrs. Connelly died, and that on the due date of the return, no fiduciary, who could have signed the return, had either qualified or been appointed for her estate. The petitioner58 has offered no evidence to prove that Mr. Van Dyke, who was named executor in the will of Mrs. Connelly, was without authority to act for the estate when he mailed in the unsigned return of Mrs. Connelly. Moreover, if Mr. Van Dyke lacked such authority, it was Mr. Connelly's responsibility, upon his appointment as administrator in May 1971, to make sure that proper income tax returns were filed. No evidence was offered to explain why Mr. Connelly never filed a signed Federal income tax return. He claims that he was unable to secure necessary documentation from the accountant who prepared the return. Yet, the estate never offered any evidence to prove that Mr. Connelly made a timely request of the accountant to turn over the necessary records or that such a request was refused. On this record, we must sustain the Commissioner's determination of an addition to tax. . Since we have concluded that Mrs. Connelly did not, for Federal income tax purposes, own the lease applications, it follows that she is neither taxable on any gain realized by the sale of such applications, nor is she entitled to any losses claimed to have been*59 sustained in respect of them. The petitioner concedes that it is liable for the deficiency for 1970. Decision will be entered under Rule 155.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622546/	APPEAL OF TIBBY-BRAWNER GLASS CO.Tibby-Brawner Glass Co. v. CommissionerDocket No. 2860.United States Board of Tax Appeals2 B.T.A. 918; 1925 BTA LEXIS 2231; October 19, 1925, Decided Submitted July 6, 1925. 2231 Evidence held insufficient to prove value of assets. Franklin C. Parks, Esq., E. A. Ford Barnes, C.P.A.,, and J. J. Dyer, C.P.A., for the taxpayer. B. G. Simpich, Esq., for the Commissioner. GREEN 918 Before GREEN and MORRIS. The issue in this appeal is the right of the taxpayer to a paid-in suplus and depreciation disallowed by the Commissioner with a resulting deficiency in the sum of $9,071.97 for the year 1919. 919 FINDINGS OF FACT. The Tibby-Brawner Glass Co. is a Pennsylvania corporation with its principal office at Punxsutawney. It was originally organized under the name of the Wightman Glass Corporation and its name was changed in 1919. The Wightman Glass Co., situated in the same place, had gone into bankruptcy and, through some process not disclosed by the record, the plant and equipment of the Wightman Glass Co. became the property of the Chamber of Commerce of Punxsutawney. The Chamber of Commerce, being anxious to stimulate manufacturing in the community, offered to donate the plant and equipment to some corporation that would take it over and operate it. Pursuant to the offer the Wightman Glass Corporation2232 was organized with a paid-in capital stock of $15,000 and the plant and equipment were transferred to it. The taxpayer claims the right to include the value of the plant and equipment in its invested capital as paid-in surplus and to take depreciation thereon. The Commissioner concedes the right to include such value, if established, in its paid-in surplus, and the right to take depreciation thereon, but contends that the value has not been proven or established. DECISION. The determination of the Commissioner is approved. OPINION. GREEN: The taxpayer sought to establish the value of the plant and equipment by the introduction of a retrospective appraisal of the real estate, buildings, and equipment, which purported to fix the sound value thereof. A representative of the appraisal company was on the witness stand that testified as to the preparation of the appraisal. This witness stated that in determining the value of the real estate he had interviewed a number of persons in the vicinity of the property. He, himself, was unable to qualify as an expert and the Board sustained the Commissioner's objection to the evidence relative to valuations on the real estate. Cross2233 examination by counsel for the Commissioner and examination by members of the Board disclosed that the witness depended, to a large extent, upon statements of others, and that to such extent the appraisal was clearly hearsay. Only as to a very few items was he able, in any measure, to qualify as an expert. According to the witness he determined first the replacement value of the assets as of the date of acquisition by the taxpayer, and from such replacement value he determined the sound value. 920 The following questions and answers are illustrative of the weakness of this appraisal: Q. Have you, to any extent whatever, considered the market value of this property or of any of the assets, or have you simply computed the sound value? A. The sound, replacement and sound value. Q. No market value? A. No. Q. Is there any relationship between sound value, as you found it and testified to it and cash values as of January 1, 1916; that is, is one necessarily influenced by the other? A. Not necessarily, no. In the recent *2234 , we had occasion to discuss a similar appraisal at some length. That discussion is in the main equally applicable to this appraisal. We have in this case the additional fact that the Wightman Glass Co. became a bankrupt. This in itself indicates the probability of a material disparity between sound value fixed in the appraisal and in the then market or sale value. The appraisal was the only evidence offered as to the value of the plant and equipment, and it is far from being sufficient to overcome the presumption of the correctness of the Commissioner's determination and to serve as a basis either for a paid-in surplus or for depreciation.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622547/	LESLIE E. SPELL, JR., Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentSpell v. CommissionerDocket No. 14658-93United States Tax CourtT.C. Memo 1995-229; 1995 Tax Ct. Memo LEXIS 231; 69 T.C.M. (CCH) 2715; May 24, 1995, Filed 231 Decision will be entered under Rule 155. Leslie E. Spell, Jr., pro se. For Respondent: James E. Gray. PARKERPARKERMEMORANDUM FINDINGS OF FACT AND OPINION PARKER, Judge: Respondent determined a deficiency in petitioner's Federal income tax for the taxable year 1988 in the amount of $ 13,233 and an addition to tax for negligence under section 6653(a)(1) in the amount of $ 662. Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for the year before the Court, and all Rule references are to the Tax Court Rules of Practice and Procedure. After concessions by respondent, 1 the issue remaining to be decided is the amount of wages paid to petitioner by his employer during the taxable year 1988. Specifically, we must decide whether petitioner received wages in the amount of $ 26,000, from which his employer withheld $ 5,200 for Federal income taxes and $ 2,600 for State taxes and Federal Insurance Contributions Act (FICA) taxes, or whether petitioner received wages in the amount of $ 18,200, from which his employer failed to withhold any amount for Federal, State, or FICA taxes. 232 FINDINGS OF FACT Some of the facts have been stipulated and are so found. The stipulation of facts and the exhibits attached thereto are incorporated herein by this reference. Leslie E. Spell, Jr. (petitioner) resided in Turkey, North Carolina, at the time he filed his petition in this case. Petitioner grew up working on his father's farm, located in Sampson County, North Carolina. His father died when petitioner was 20 years old. Petitioner took over the farm, which was subject to a Farmer's Home Administration (FHA) loan. Petitioner lost the farm through a bankruptcy proceeding. In December of 1987, John R. Godbold (Godbold), a local farmer, offered petitioner a job working on Godbold's various farms in Duplin County, North Carolina. Prior to that time petitioner had never worked for anyone other than his father and possibly for a brief period harvesting soybeans for another farmer. Petitioner and Godbold discussed the amount of petitioner's pay. 2 The terms of petitioner's employment were not committed to writing. At the time he went to work for Godbold, petitioner did not know what a Form W-4 was, and he does not recall completing a Form W-4. The record does not 233 establish that petitioner filled out a Form W-4 for Godbold. About January 2, 1988, petitioner began working for Godbold. Petitioner was responsible for the daily operations of Godbold's farms. Godbold grew wheat, soybeans, tobacco, and corn. During 1988, petitioner received weekly wages from Godbold in the amount of $ 350. Godbold paid petitioner by personal checks. In the memo section of the checks were the words "crop money". These payments were not always on time, sometimes being as much as a month late; however, petitioner did receive all 52 weeks of pay for a total of $ 18,200 for the taxable year 1988. Although petitioner expected to receive a bonus based on the crop yield, he did not receive a bonus. Petitioner234 terminated his employment with Godbold in late 1988. By that time petitioner was not on the best of terms with Godbold, possibly because of the failure to receive a bonus but more likely because petitioner failed to pay Godbold for certain crop expenses that Godbold claimed he owed. During 1988, petitioner also was farming on his own behalf a 100-acre farm in Sampson County, located about 5 miles from Godbold's farms. Petitioner worked his farm in the evenings and on weekends after his work for Godbold was completed. This was the farm petitioner had lost through the bankruptcy, but he was able to lease this farm from the FHA through a special program. Godbold advanced petitioner $ 3,000 for payment of this lease. The crops raised on petitioner's farm in 1988 were wheat and soybeans, which were planted and harvested in sequence and not at the same time. The first crop, the wheat crop, was planted late and produced a low yield. Petitioner received $ 11,007 from the sale of his wheat. The succeeding soybean crop also was planted late and either was a failure or was sold in the following year. In either event, petitioner had no income in 1988 from his soybean crop. Petitioner235 used Godbold's equipment when farming his own land. He used Godbold's tractor and cutter to cut ditch banks. Godbold and petitioner together disked petitioner's land in preparation for planting the wheat crop. With respect to petitioner's wheat crop, Godbold purchased wheat seed, paid for the rental of a spreader truck to plant the seed, purchased fertilizer, and paid for the harvesting and hauling of the wheat. Similarly, Godbold provided seed, fertilizer, chemicals, and equipment for petitioner's soybean crop. Petitioner paid Godbold $ 4,072 by check dated July 14, 1988, as payment for the money advanced for the lease ($ 3,000) and towards the costs of fertilizer ($ 617) and wheat seeds ($ 455) used on petitioner's farm. In November 1988, Godbold requested repayment of the remaining expenses. Petitioner indicated he would not be able to pay until after the first of the year (1989), apparently when the soybean crop was to be sold. Godbold received no further payment on the expenses he incurred in regard to petitioner's farm. As of January 31, 1989, petitioner had not received a Form W-2 from Godbold for the taxable year 1988. Later, petitioner received a Form 1099 for that236 year reporting nonemployee compensation in the amount of $ 36,016.70 and zero withholdings; attached to the Form 1099 were three sheets of paper showing how Godbold had calculated the amount of nonemployee compensation shown on the Form 1099. Godbold listed the expenses he had incurred relating to petitioner's farm. The total of these expenses, including the payment of the lease, and amounts for equipment rental, for fertilizer, other chemicals, and seeds, and for harvesting costs for petitioner's wheat and soybean crops, was $ 21,888.70. 3 Godbold deducted the $ 4,072 that petitioner had paid towards these expenses to arrive at a figure of $ 17,816.70. To this, Godbold added $ 18,200 for petitioner's contract labor, for a total of $ 36,016.70. Petitioner believed the type of form and the amounts thereon237 to be erroneous. 4 Petitioner was not able to obtain a Form W-2 from Godbold. In order to have time to determine the proper course of action, petitioner requested an extension of time to file his 1988 return. Petitioner's accountant contacted representatives of the Internal Revenue Service (IRS) for advice. In accordance with the suggestions made by the IRS representatives, petitioner attached a statement to his 1988 return. In the statement, petitioner indicated that he had agreed to work for $ 500 per week, and that he had requested that his employer withhold $ 150 per week, for a net pay of $ 350 per week; petitioner stated that he had instructed his employer to allocate the amount of $ 100 each week for Federal income tax and the remaining $ 50 for State and FICA taxes. 5 Petitioner denied receiving the $ 17,816.70 6 in nonemployee compensation. On his Form 1040, petitioner reported his income from Godbold as wages of $ 26,000 ($ 500 X 52 weeks). Petitioner reported the income ($ 11,007) and expenses ($ 6,603) from the wheat crop on his own farm on Schedule F (Farm Income and Expenses) for a net farm profit of $ 4,404. Petitioner calculated the self-employment tax based238 on this $ 4,404 of farm income. Petitioner reported that $ 5,200 in Federal income tax had been withheld. 239 Respondent made the following adjustments to petitioner's 1988 return. Respondent increased petitioner's income from Godbold by $ 10,016 to reflect the $ 36,016 reported on the Form 1099. 7240 Based on average farm production in Duplin County, North Carolina, 8 respondent estimated petitioner's crop yield, and increased the gross farm income from $ 11,007 to $ 36,300, thereby increasing taxable farm income by $ 25,293. Respondent determined that all of the resulting total $ 65,713 in income was self-employment income, and therefore, subject to self-employment tax in the amount of $ 5,859. On April 8, 1993, respondent issued to petitioner a notice of deficiency for the taxable year 1988, showing a deficiency in tax in the amount of $ 13,233 and an addition to tax under section 6653(a)(1) in the amount of $ 662. Respondent now accepts petitioner's Schedule F and self-employment income based thereon, as reported by petitioner. That Schedule F reported the income from petitioner's wheat crop, and there was no income in 1988 from the soybean crop. Respondent also states that petitioner's wage income should be $ 18,200 rather than the $ 26,000 reported by petitioner. OPINION Respondent has essentially conceded the issues in this case. However, respondent says no tax has been paid, but petitioner wants credit for $ 5,200 in Federal income taxes that he contends his employer withheld from his gross wages of $ 26,000 in 1988. We must decide the amount of wages paid to petitioner in taxable year 1988. The parties have agreed that petitioner received checks from Godbold in the total amount of $ 18,200 during the taxable year 1988. Respondent's position is that this amount was gross pay, and that no taxes were withheld. Petitioner's position is that the $ 18,200 was net pay, and that $ 5,200 was withheld for Federal income taxes and another $ 2,600 for State income and FICA taxes. Section 3402(a) requires employers to withhold income taxes from the wages of their employees. Prior to 1990, however, section 3401(a)(2) specifically exempted the remuneration of agricultural labor, as defined in section 3121(g), from the definition of wages for purposes of the withholding requirements. 9Section 3121(g)(1) states that241 "agricultural labor" includes all service performed-- on a farm, in the employ of any person, in connection with cultivating the soil, or in connection with raising or harvesting any agricultural or horticultural commodity, * * In the present case, petitioner ran the daily operations of Godbold's farms. The crops raised were wheat, soybeans, tobacco, and corn. The work that petitioner performed falls within the definition of agricultural labor under section 3121(g). His earnings from Godbold, therefore, were not subject to the mandatory withholding242 of Federal income taxes. Where withholding is not mandatory, section 3402(p) permits voluntary withholding if the employer and employee agree. The agreement must take the form prescribed in the regulations. Section 31.3402(p)-1(b)(1), Employment Tax Regs., requires the employee desiring voluntary withholdings to furnish his employer with a completed Form W-4. 10 Also, No request for withholding under section 3402(p) shall be effective as an agreement between an employer and an employee until the employer accepts the request by commencing to withhold from the amounts with respect to which the request was made.Sec. 31.3402(p)-1(b)(1)(iii), Employment Tax Regs. If such agreement exists, the employee's remuneration or other payments are treated as if they were wages as defined in section 3401(a). Sec. 3402(p). 243 Section 31 allows the taxpayer a credit in the amount of taxes withheld against the amount of taxes due. The taxpayer may take this credit even where the employer has not paid the withheld tax over to the Government. Sec. 1.31-1, Income Tax Regs. The credit, however, only extends to taxes actually withheld. Church v. Commissioner, 810 F.2d 19 (2d Cir. 1987); Edwards v. Commissioner, 39 T.C. 78">39 T.C. 78, 83 (1962), affd. in part, revd. in part 323 F.2d 751">323 F.2d 751 (9th Cir. 1963). This Court has decided a case similar to the present one. In Chrisman v. Commissioner, T.C. Memo. 1990-305, the taxpayer contended he had an oral agreement for a net hourly rate of pay of $ 15. The Form W-2 which the taxpayer received stated an income equal to the total amount of the taxpayer's paychecks ($ 7,786.50) and zero Federal income tax withholding. In the Chrisman case, the taxpayer argued that: (1) The amount of gross wages on the W-2 should be increased to include the amount of tax that should have been withheld based on a net pay of $ 15 per hour, and (2) such amount had been withheld. 244 The taxpayer had no evidence other than his own statements to substantiate his claims, no records indicating that his wages were any amount other than $ 15 per hour, and no records indicating any withholding for Federal income tax. This Court held that the taxpayer's testimony alone was not enough to satisfy the burden of proof. Therefore, his gross wages were $ 7,786.50 as determined by respondent. In Hanns v. Commissioner, T.C. Memo. 1990-652, the taxpayer received checks in the amount of $ 250 per week in addition to his normal salary. His employer provided a Form 1099 reflecting this additional income as nonemployee compensation and no withholdings on such additional payments. The taxpayer had understood that his employer would take care of the taxes on the additional payments, i.e., that the $ 250 was a net payment, but he failed to establish that this was the agreement he had with his employer. This Court pointed out, however, that even if the taxpayer had established such an agreement existed, the employer's breach of this agreement would not relieve the taxpayer of the liability to pay Federal income taxes on the compensation he received245 for services rendered. In this case, petitioner did not complete a Form W-4, nor did he put his request for withholdings in writing to his employer. Petitioner provided no proof that Godbold accepted his request by withholding any amounts. There is no evidence of any withholding in this case. We find, therefore, no tax was withheld, and the amount of petitioner's gross wages for 1988 was $ 18,200. To reflect respondent's concessions and the above holding, Decision will be entered under Rule 155. Footnotes1. Respondent concedes that petitioner did not have income from his farming operations in excess of the amount reported by petitioner on Schedule F of his 1988 return; that petitioner was a common law employee with respect to amounts paid to petitioner by John R. Godbold and, therefore, is not liable for self-employment tax on such earnings; that $ 17,816.70 of the amount Godbold reported on the Form 1099 need not be included in petitioner's income; and that petitioner is not liable for the addition to tax under sec. 6653(a)(1)↩.2. Godbold recalled that wages of $ 350 a week were agreed upon, based on what petitioner had been receiving from the other farmer for harvesting soybeans. Petitioner agreed that he asked for $ 350 a week to live on, but he considers that to be net wages, not gross wages. See infra↩ note 5.3. Many of the items making up the $ 21,888.70 were based on estimates by Godbold. There is no evidence in the record to substantiate the estimates or the other figures in Godbold's computation of crop expenses.↩4. Petitioner believed he was Godbold's employee, not an independent contractor, and therefore should have received a Form W-2, not a Form 1099 for his wage income. Respondent conceded this issue. See supra↩ n. 1. The discrepancies as to the amounts of compensation and withholding comprise the central issue in this case.5. Godbold denied that a conversation to that effect ever occurred. Although petitioner may now sincerely believe he made such a request and gave such instructions to Godbold, the Court thinks it is unlikely that an inexperienced young man, who admittedly did not know what a Form W-4 was when he went to work for Godbold, would have discussed withholding of Federal, State, and FICA taxes. See supra↩ n. 2. However, the Court need not resolve this conflict in the testimony, since the Court would reach the same result in this case whether or not that conversation occurred.6. Petitioner's statement says $ 17,810.70, but the correct figure is $ 17,816.70 ($ 36,016.70 less $ 18,200).↩7. Respondent later conceded the issue of whether the $ 17,816.70 in unpaid farm expense debt should be included in petitioner's 1988 income. It appears respondent made this concession due to the corresponding deductions petitioner could have taken for these farm expenses that would have offset any additional income.↩8. Petitioner's farm was in Sampson County.↩9. For remuneration paid after Dec. 31, 1989, the exemption under sec. 3401(a)(2) has been narrowed so that payment for agricultural labor that fits the definition of wages under sec. 3121(a)↩ (generally, for agricultural labor, any amount over $ 150 paid in a year) is now subject to the withholding of Federal income tax. See Omnibus Budget Reconciliation Act of 1989, Pub. L. 101-239, sec. 7631(a), 103 Stat. 2106, 2378; H. Rept. 101-386, at 620-621 (1989).10. If the employee wishes voluntary withholdings and is already subject to mandatory withholding for other payments from that same employer, or wishes the voluntary withholdings to terminate on a specific date, then the employee also must provide a letter, the contents of which must conform to the requirements of sec. 31.3402(p)-1(b)(1)(ii), Employment Tax Regs.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622548/	SIDNEY B. BREWER and ARLINE B. BREWER, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentBrewer v. CommissionerDocket No. 4669-77.United States Tax CourtT.C. Memo 1978-357; 1978 Tax Ct. Memo LEXIS 155; 37 T.C.M. (CCH) 1495; T.C.M. (RIA) 78357; September 12, 1978, Filed Sidney B. Brewer, pro se. Marion K. Mortensen, for the respondent. DAWSONMEMORANDUM FINDINGS OF FACT AND OPINION DAWSON, Judge: This case was assigned to and heard by Special Trial Judge Fred S. Gilbert, Jr., pursuant to the provisions of section 7456(c) of the Internal Revenue Code156 , 1 and Rules 180 and 181, Tax Court Rules of Practice and Procedure.2 The Court agrees with and adopts his opinion which is set forth below. OPINION OF THE SPECIAL TRIAL JUDGE GILBERT, Special Trial Judge: Respondent determined a deficiency of $ 1,364 in petitioners' Federal income tax for the year 1974. The only questions for decision are: (1) whether petitioners are entitled to a deduction for medical expense, under section 213, in any amount; (2) whether petitioners are entitled to a deduction for charitable contributions, under section 170, in any amount greater than $ 150; (3) whether petitioners are entitled to a deduction for travel expense, under section 162, in any amount greater than $ 252; and (4) whether petitioners are entitled to miscellaneous deductions in any amount greater than $ 18. The petitioners filed a157 timely Federal income tax return for the year 1974. At the time the petition herein was filed, they resided at 229 Vega Avenue, Lompoc, California. On their income tax return for the year 1974, petitioners claimed a deduction for medical expense in the net amount of $ 2,602.42, after excluding $ 519.58 attributable to three percent of adjusted gross income. In the statutory notice of deficiency, the respondent disallowed the entire amount claimed on the grounds that the taxpayers did not submit information necessary to substantiate the deductions. At the trial, it was stipulated that the petitioners had substantiated medical expenditures in the total amount of $ 1,744.55, of which $ 396.61 was attributable to the payment of insurance premiums. Petitioners offered no documentary evidence of any further medical expenditures for that year, and testimony offered at the trial in this regard was vague and indefinite. The petitioners have failed to carry their burden of proof as to medical expenditures in any amount greater than the $ 1,744.55 agreed to in the stipulation. Therefore, we find that the petitioners are entitled to use medical expenditures in the amount stipulated in158 computing the medical deduction allowable for the year 1974. The petitioners claimed charitable contributions in the amount of $ 950. Respondent, in the statutory notice of deficiency, disallowed all but $ 150 of this amount, stating that a reasonable amount had been allowed based upon information submitted. The petitioners produced no documentary evidence to substantiate the amounts claimed as charitable contributions, although petitioner Sidney B. Brewer (hereinafter referred to as "petitioner") testified that he had attempted to obtain confirmation from several of the organizations to which they allegedly made contributions. Here, again, the petitioner's testimony at the trial was vague and indefinite. The evidence offered was simply insufficient to establish to whom and in what amounts contributions had been made. The petitioners claimed employee business expense in the total amount of $ 1,250, attributable to Arline B. Brewer, petitioner's wife, described as transportation from "first job to part-time job" -- $ 375 and "to course at UCLA -- 7 weeks" -- $ 875. In the statutory notice of deficiency, this entire item was labeled "travel" and was allowed only in the amount159 of $ 252, on the basis that "reconstruction of travel to second employer has been allowed" and that no information had been submitted regarding education expenses. No documentary evidence was offered on behalf of petitioners to substantiate these expenses of transportation and travel in any amount greater than that allowed by the respondent in the statutory notice. Again, petitioner's testimony in this regard was vague and indefinite. They have not established or substantiated expenditures in this regard in any amount greater than that allowed by the respondent. Since the petitioners have failed to establish the amount of the expenditures as a matter of fact, we need not address the question of whether the purpose for which the expenditures were made would have entitled them to a deduction as a matter of law. Petitioners claimed the following miscellaneous deductions: Education$ 750.00Books and supplies375.00Expense of office in home594.07Depreciation on library200.00Tax preparation17.50In the statutory notice of deficiency, the respondent allowed the deduction for tax preparation (rounded to $ 18) and disallowed the rest of these deductions. 160 At the trial, it was stipulated that the petitioners had substantiated the following expenditures made during 1974: Books$ 123.20Chapman College216.00Faculty association5.00$ 344.20It was also stipulated that the petitioners had paid $ 17.50 to C. Furphy for tax return preparation during 1974; but this item had already been allowed by the respondent in the statutory notice. The petitioners offered no documentary evidence to substantiate these expenditures claimed as miscellaneous deductions on their return. And, again, the petitioner's testimony was vague and indefinite, with respect to these alleged expenditures, as to amounts paid, to whom paid, etc. He did testify, however, that his wife is an art teacher at Hancock College, that she purchases many books for use in this job, and that she had attended Chapman College in order to maintain and improve her skills as an art teacher. Therefore, petitioners are allowed miscellaneous deductions in the amount of $ 344.20 as ordinary and necessary business expense under section 162. Here, again, since the various other expenses claimed are not substantiated as a matter of fact, we need not address the161 question of whether expenditures for such items as an office in the home, for example, are deductible as a matter of law. At the beginning of the trial, petitioner offered evidence to show that, on or about April 26, 1976, he and another man had been injured, when a C.B. antenna that they were attempting to repair came in contact with a 12,000 volt electrical line. The evidence indicated that the full force of the high-voltage electrical shock was transmitted back through the antenna into the petitioner's house, blackening all the electrical switches in one room and burning all the lamps and appliances that were plugged in at the time. The petitioner also testified that some of the records that he had, with respect to expenditures for which deductions were claimed, had been destroyed as a result of this accident. He also stated that he had difficulty in recalling some events, because the electrical shock sustained at that time had "imbalanced" him to a degree. We sympathize with the petitioner in his loss of records and, especially, in his loss of well-being as a result of this accident. It is difficult to understand, however, why the petitioner's wife did not appear and testify162 at the trial or, at least, assist him in preparing a reconstructed schedule of these expenditures to be used at the trial as an aid to his testimony. Especially is this true, since it appears that she was equally conversant with all of these expenditures and that most of them were attributed to her. No explanation of this was made at the trial. No suggestion was made that it was inconvenient or impossible for her to attend on the particular day for which the trial was set. No request was made that the trial be continued to another date, so that she could attend. In short, despite our sympathy for petitioner's loss of records and his physical impairment, we do not believe that the petitioners have exerted their best efforts to carry the burden of proof necessary to overcome the respondent's determination of deficiency. Accordingly, we hold for the respondent, except for those additional deductions specifically recognized and allowed above. * *In accordance with the foregoing, Decision will be entered under Rule 155.Footnotes1. Statutory references are to the Internal Revenue Code of 1954, as amended, unless otherwise indicated. ↩2. Pursuant to the order of assignment, on the authority of the "otherwise provided" language of Rule 182, Tax Court Rules of Practice and Procedure↩, the post-trial procedures set forth in that rule are not applicable to this case.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622550/	J. Earl Oden and Edith Oden, Et Al., 1 Petitioners v. Commissioner of Internal Revenue, RespondentOden v. CommissionerDocket Nos. 5546-67, 293-68, 294-68United States Tax Court56 T.C. 569; 1971 U.S. Tax Ct. LEXIS 117; June 21, 1971, Filed 117 Decisions will be entered for the respondent. In 1963, petitioners reported the proceeds from the sale of certain property under the installment sale provisions of sec. 453, I.R.C. 1954. Respondent determined that petitioners were not entitled to use that method on the ground that they received more than 30 percent of the selling price in the year of sale. Held, on the record, respondent's determination sustained. Joe P. Mathews, for the petitioners.John W. Dierker, for the respondent. Irwin, Judge. IRWIN569 The Commissioner determined deficiencies in income tax as follows:Docket No.YearAmount5546-671963$ 16,843.16293-68196317,360.9 294-6819639,755.9 118 The only issue for decision is whether petitioners were entitled to use the installment method of reporting income as provided in section 453 of the Internal Revenue Code of 1954. 2FINDINGS OF FACTSome of the facts have been stipulated by the parties. The stipulation and the exhibits attached thereto are incorporated herein by this reference.Petitioners are J. Earl Oden (hereinafter Earl) and his wife Edith Oden, John S. Braziel (hereinafter John) and his wife Betty Braziel, and James Ray Oden (hereinafter James) and his wife Patsy C. Oden. 570 Each of the aforementioned couples filed a joint Federal income tax return for the taxable year 1963 with the district director of internal revenue in Dallas, Tex.James and his wife resided in Abilene, Tex., at the time of the filing of the petitions herein, whereas the other petitioners resided in Comanche, Tex., at that time. 119 During the year at issue, Earl, John, and James were equal partners in the partnership of Oden, Braziel & Oden (hereinafter sometimes referred to as O.B. & O.). They also owned the following interests in the Choice Baking Co., Inc. (hereinafter Choice):Stock ownership (shares)Earl400John400James200Total1,000On April 1, 1961, Choice, with the consent of its shareholders, elected to be taxed under section 1372, thereby causing the stockholders to be taxed as individuals in accordance with the provision of subchapter S of the Internal Revenue Code of 1954. This election was effective during the year at issue.On February 15, 1963, Choice and the O.B. & O. partners agreed to sell certain personal and real property for a total consideration of $ 364,457 to the Norris Dairy Products Co., Inc. (hereinafter Norris Dairy), and to the Norris Dairy Products Co. Employees' Profit Sharing Trust (hereinafter Norris Trust). 3120 Of this total purchase price, Norris Trust agreed to pay $ 112,000 while Norris Dairy agreed to pay the remainder. 4On the closing date, March 18, 1963, Norris Dairy paid $ 23,000 in cash 5 toward its obligation and executed a promissory note in the amount of $ 229,457 to the order of Choice, Earl, James, and John. This note was payable in three consecutive annual installments as follows:Due dateAmount dueFebruary 15, 1964$ 76,485.66February 15, 196576,485.66February 15, 196676,485.68121 The note provided that there would be no interest on any installment prior to its maturity. However, it further stated that each installment 571 of the note would draw interest from the date due until paid at the rate of 10 percent per annum.The document purporting to be an agreement to sell was dated February 15, 1963, and provided that the promissory note was to be secured as follows: Norris Dairy agreed to place with the Mercantile National Bank in Dallas (hereinafter sometimes referred to as Mercantile National) three certificates of deposit 6 (hereinafter sometimes referred to as certificates) issued by the First National Bank of Dallas (hereinafter referred to sometimes as First National), each certificate being in an amount equal to one-third of the total principal amount of the note. This document was explicit with respect to these certificates and it stated as follows:These certificates of deposit are to be payable to the order of * * * [Norris Dairy] on the dates that each installment payment is due on the note. It is agreed that these certificates of deposit shall be subject to a first chattel mortgage or pledge lien in favor of Sellers. As long as said note122 is not in default the interest 7 accruing on said certificates * * shall belong to and be the property of * * * [Norris Dairy] and may be drawn by * * * [Norris Dairy].The Norris Trust also executed a promissory note on the closing date in the amount of $ 112,000. This note was identical to the note executed by the Norris Dairy in all but one respect: it was payable in five, rather than three, consecutive annual installments. The due date and amount of each installment were:Due dateAmount dueFeb. 15, 1964$ 33,600Feb. 15, 196519,600Feb. 15, 196619,600Feb. 15, 196719,600Feb. 15, 196819,600The document dated February 15, 1963, also recited that this note would be secured by certificates of deposit, each certificate having a principal amount and maturity date corresponding123 to the principal amount and maturity date of each installment of the note. The interest, at the rate of 3 1/2 percent per year, on these certificates was payable to the Norris Trust, unless it was in default on its note. These certificates were likewise placed in escrow with Mercantile National.On March 18, 1963, Norris signed a document called a collateral pledge agreement which stated that the pledged property consisted of the eight certificates of deposit described heretofore. Moreover, this document specifically recited that Choice and the O.B. & O. partners had a first and superior lien on the pledged property, but that they were not considered the owners thereof.572 The escrow agreement, dated March 19, 1963, and entered into by Norris, Choice, Earl, James, John, and Mercantile National provided, in pertinent part, as follows:2. Escrow Holder 8 shall not surrender possession of any of said certificates of deposit to any person or party whatever except as follows:(a). Upon receipt by Escrow Holder of cash or a Bank Cashier's check payable either to Escrow Holder or Pledgees 9 not later than three (3) days after the due date of each of the certificates of deposit124 described above in an amount equal to the principal amount of such certificates as are then due, then Escrow Holder shall release and deliver to Pledgors 10 such certificates or certificate as are then due and remit to Pledgees, in care of State National Bank, Comanche, Texas, the amount or bank cashier's check payable to Pledgees which has been received by Escrow Holder.The certificates of deposit were endorsed in blank when they were deposited in escrow.Despite the procedure outlined in the escrow agreement, on at least each of two occasions that a certificate of deposit became due, the certificate was presented to First National for payment by a messenger of Mercantile National with the following instructions:your instructions [are] to cause to be issued your bank's cashier's check for the principal sum of the Certificate of Deposit payable as follows:Choice Baking Company, Inc., J. E. Oden; James Oden and 125 J. S. Braziel Interest at 3 1/2 percent which has been earned to the maturity is to be credited to the commercial account with your bank of Norris * * It was the usual practice of Mercantile National to present each matured certificate for payment and to have the principal amount thereof issued to petitioners regardless of whether Norris was in default on the notes.The parties to the sale intended and agreed that the certificates of deposit were to be presented for payment at maturity and that the proceeds therefrom were to be released as payment to the sellers immediately thereafter.All the transactions in connection with the certificates of deposit were entered into the accounting books of Norris which relied upon First National and Mercantile National to handle the collection of the certificates of deposit as they became due.The First National Bank of Dallas made a loan to Norris in connection with the purchase of assets in question. This loan, which was personally guaranteed by Stanley Norris, the president and sole stockholder of Norris Dairy, was not secured in any respect by the certificates of deposit. In fact, First National waived any rights it might 573 have126 had against the certificates. Norris used part or all of this loan to obtain the certificates in question from First National.It was the sellers who insisted that the buyers purchase certificates of deposit. Insofar as the buyers were concerned they had no preference as to which maturity dates were to be put on the certificates.OPINIONOn February 15, 1963, Choice and the O.B. & O. partners, viz, the petitioners herein, agreed to sell certain personal and real property for a total consideration of $ 364,457 to Norris. Norris paid $ 23,000 in cash on the closing date and executed promissory notes payable in five consecutive annual installments. Documents purporting to be formal agreements provided that these notes were secured by certificates of deposit, each certificate having a principal amount and maturity date corresponding to the principal amount and maturity date of each installment of the notes. The certificates were endorsed in blank and deposited in escrow with the Mercantile National Bank in Dallas.The sellers in question elected to report the sale on the installment method. Respondent determined that petitioners 11 were not entitled to report the sale in that manner. 127 Section 453, 12 the installment method of reporting income, was enacted for the purpose of permitting the taxpayer to spread the tax due as a result of the sale of certain types of property over the period during which payments of the sale price are made, thereby enabling "the seller to actually realize the profit arising out of each installment before the tax [is] * * * paid so that the tax could be 574 paid from the proceeds collected rather than be advanced by the taxpayer." Everett Pozzi, 49 T.C. 119">49 T.C. 119, 126 (1967).128 Since the provisions allowing the use of the installment method of reporting income are relief provisions and exceptions to the general rule as to the year for reporting income, they must be strictly construed. Cappel House Furnishing Co. v. United States, 244 F. 2d 525, 529 (C.A. 6, 1957); Everett Pozzi, supra at 127; and Blum's, Incorporated, 17 B.T.A. 386">17 B.T.A. 386, 389 (1929).As we noted in Everett Pozzi, 13 supra, a "transaction purporting to be a sale on the installment basis that lacks reality will be no more effective in avoiding taxes than any other type of sale." See also Griffiths v. Commissioner, 308 U.S. 355">308 U.S. 355 (1939), and Williams v. United States, 219 F. 2d 523 (C.A. 5, 1955).129 Respondent sets forth in his brief two alternative theories to support his determination. He first contends that the entire proceeds of the sale were available to petitioners in the year of sale because Norris was ready, willing, and able to pay cash, but petitioners insisted on certificates of deposit and dictated the maturity dates thereof. Alternatively, respondent asserts that the promissory notes served no purpose, but were a nullity. This argument is summarized on brief as follows:Here we do not have a true obligation of the purchaser. On the contrary, his obligation was fully met at the time he purchased the certificates of deposit and endorsed them in blank. The petitioners thus received not an obligation of the purchasers but a right to the certificates of deposit. The certificates had value on the date of sale. This value would probably be the face amount but in any event would certainly be in excess of 30% of the face amount. Thus petitioners would have received cash or its equivalent in an amount in excess of 30% of the purchase price.575 Petitioners, on the other hand, contend that the notes issued by Norris do not constitute payment in the year of sale, 130 citing as authority for this proposition section 453(b)(2). See fn. 12 supra. Moreover, petitioners argue that the fact that certificates of deposit were placed in escrow as security for payment of the notes does not prevent the sale from coming within the terms of section 453.While we agree that petitioners' assertions are, in theory, legally sound, we must carefully examine and evaluate the record herein in search of the facts and circumstances necessary in order to add flesh to petitioners' "bones" of contention. After a thorough review of the entire record, and in particular the testimony 14 adduced at trial, we cannot conclude that the parties to the sale in question intended and agreed that the certificates of deposit were to serve merely as security for payment of the notes issued by Norris. Rather, we infer from the entire record, and hold, that the parties agreed and intended at the time of the sale that the certificates, less interest thereon, constitute the payment for the property sold. Therefore, we accept respondent's alternative argument that the buyers' notes herein served no purpose and were not in reality evidences of indebtedness of the purchasers.131 Petitioners and respondent agree that Norris in fact issued promissory notes payable to their order. The notes were in acceptable legal form. However, for tax purposes, conformity to legal forms is not necessarily determinative, 1432 Broadway Corporation, 4 T.C. 1158">4 T.C. 1158 (1945), affirmed per curiam 160 F. 2d 885 (C.A. 2, 1947), for the incidence of taxation depends upon the substance of a transaction. Commissioner v. Court Holding Co., 324 U.S. 331">324 U.S. 331 (1945). We --may look at actualities and upon determination that the form employed for * * * carrying out the challenged tax event is unreal or a sham [we] may sustain or disregard the effect of the fiction as best serves the purposes of the tax statute. * * * [Higgins v. Smith, 308 U.S. 473">308 U.S. 473, 477 (1940).]We are in no way bound to recognize as the substance of a transaction a technically elegant arrangement which a lawyer's ingenuity devised. Griffiths v. Commissioner, supra.See also Gregory v. Helvering, 293 U.S. 465 (1935); Everett Pozzi, supra;132 and 1432 Broadway Corporation, supra.Section 453(b)(2)(A)(ii) limits the application of the installment sale provisions to those situations where payments in the year of sale, exclusive of evidences of indebtedness of the purchaser, do not exceed 30 percent of the selling price.If Norris had given certificates of deposit directly to petitioners in the year of sale, these certificates would be valued and included as payment in that year.576 Petitioners would have us believe that the certificates of deposit served solely as security for the payment and discharge of the purchasers' obligations on their notes. They point to the collateral pledge agreement and the escrow agreement as evidence of this fact. However, we feel the true intention of the parties with respect to these certificates is more clearly reflected by what actually transpired.A representative of the Mercantile National Bank -- the escrow holder -- testified that usually as each certificate of deposit became due, it was presented for payment to the First National Bank with instructions thereto to issue a check in the principal amount thereof to the order of petitioners while depositing133 the accrued interest to the Norris accounts at First National. He also testified that as far as he was concerned, the aforementioned procedure was carried out in accordance with the terms of the written escrow agreement set out in our Findings of Fact. This written agreement provided that each matured certificate was to be released and delivered to Norris Dairy and Norris Trust upon receipt by Mercantile National of cash or a bank cashier's check payable either to Choice and the O.B. & O. partners or to Mercantile National in an amount equal to the principal amount of the certificate. In our opinion, the two procedures, i.e., the one outlined in the escrow agreement and the one actually followed by the parties involved as attested to by the testimony adduced at trial, are very different. The only inference we can draw from this testimony is that the representative of Mercantile National was acting upon the belief that he was complying with the true, original intention of the parties to the sale, viz, that the principal amount of each matured certificate of deposit be paid to petitioners and the interest to Norris. Allen Sanders of the First National Bank confirmed in his testimony134 that this was the original understanding of the parties. Therefore, we are in no way bound by the written escrow agreement nor by all the terms of the agreement to sell dated February 15, 1963, which, in our opinion, do not reflect the parties' true intention.Petitioners were not looking to the certificates of deposit merely as security in case of default by the buyers on their obligations. They knew and contemplated that as each certificate matured, the principal amount thereof would be paid to them irrespective of whether Norris was in default. We conclude that, in substance, petitioners did not regard Norris as being indebted to them, for the buyers had met their obligation in full when they purchased the certificates of deposit in 1963. Petitioners were not relying upon the Norris notes, but upon the certificates of deposit to serve as payments in connection with the sale.Moreover, petitioners' rights to the principal amount of the certificates of deposit were not restricted in any meaningful way by the 577 escrow arrangement. The escrow was mutually agreed upon by petitioners and Norris. Moreover, it was the sellers who insisted that the buyers purchase the certificates. 135 Insofar as the buyers were concerned, they had no preference as to which maturity dates were to be put on the certificates. Thus, the certificates of deposit were available to petitioners in 1963, but they agreed to impose the limitation of time upon their receipt. Under these circumstances, we hold that petitioners received the right to the principal amount of the certificates in 1963. See generally, Williams v. United States, supra;Everett Pozzi, supra;Rhodes v. United States, 243 F. Supp. 894">243 F. Supp. 894 (W.D.S.C. 1965). Although we have no specific evidence as to the value of this right, we feel it definitely exceeded 30 percent of the face amount of the certificates. Accordingly, we hold that petitioners are not entitled to use the installment sale provisions.Petitioners argue that the net interest cost to Norris on the sale was much less than it would have paid if the full purchase price had been paid to petitioners on the closing date. The basis for this conclusion, according to petitioners, is that Norris was earning interest on the certificates while not paying interest on the notes 136 it issued to petitioners.In reply to the foregoing contention, we observe first of all that the Norris notes did not bear interest. This fact could be construed against petitioners in considering whether there was any substance to the issuing of the notes by Norris. Furthermore, we have no evidence as to whether the purchase price would have been reduced in the event that Norris was not to receive the interest on the certificates. It is reasonable to conclude, absent more evidence on this point, that the parties adjusted the total purchase price so as to take account of the fact that the notes were noninterest bearing and that Norris was to receive the interest on the certificates of deposit. Therefore, we accord no particular weight to petitioners' argument nor do we accord much weight to the fact that the notes did not bear interest.Petitioners rely upon several cases and one revenue ruling to support their position.The cases cited by petitioners involving the use of escrow arrangements in connection with sales are distinguishable in that the receipt of money from the escrow accounts in those cases was subject to substantial conditions or limitations, other than time. For137 example, in Preston R. Bassett, 33 B.T.A. 182 (1935), part of the sales proceeds was escrowed as a guarantee that the warranties and representations made by the sellers were true and would be faithfully carried out.Petitioners also rely heavily upon Rev. Rul. 68-246, 1 C.B. 198">1968-1 C.B. 198. There, a taxpayer sold real property and received therefor cash and 578 notes of the purchaser, bearing interest at the rate of 6 percent per year and payable over a period of 5 years. The buyer secured the notes by executing a deed of trust, and the taxpayer elected to report the gain from the sale on the installment method. Thereafter, in the following year, the buyer, desirous of clearing title to real estate by canceling the deed of trust, agreed with the seller to deposit in escrow an amount of money sufficient to cover the remaining unpaid installments of the note in consideration for the taxpayer's cancellation of the deed of trust. Subsequent note payments were paid out of the escrow account.This ruling, is, we feel, distinguishable from the instant case in that there was no indication therein that the buyer and138 seller understood or intended at the time of the sale that the buyer would substitute money for the deed of trust. Moreover, the seller originally intended to look to the obligation of the buyer, and not to the money escrowed by the buyer 1 year after the sale took place. To the contrary, in the instant case, it was understood and intended by the parties at the time of the sale that the sellers would look to the escrowed certificates for payment as each became due. There is no sound reason for disturbing a transaction which was intended to and did in fact fit within the purview of section 453. However, here we have a transaction which, although in form was designed to meet the requirements of section 453, did not in substance qualify thereunder. See Everett Pozzi, supra.We also find distinguishable R. L. Brown Coal & Coke Co., 14 B.T.A. 609">14 B.T.A. 609 (1928), which was cited by petitioners for the proposition that a buyer's notes secured by certain "certificates of interest" issued by a State bank do not stand upon any different plane from other notes to the purchaser which were secured by the property sold. In that case there139 was no evidence that the seller was looking to the "certificates of interest" as more than mere security for the discharge of the buyer's obligation.Our conclusion on this issue is based on the facts and circumstances of this case. We are not saying that if a selling taxpayer actually carries through an installment sale transaction, he would be prevented from so reporting it even though the payments were made in installments at his insistence. Everett Pozzi, supra.In view of the foregoing, we need not reach the question whether the Norris interests were ready, willing, and able to pay the entire proceeds of sale to petitioners in 1963, thereby making the sales price available to them in that year.To reflect the conclusions reached herein,Decisions will be entered for the respondent. Footnotes1. The proceedings of the following petitioners are consolidated herewith: John S. Braziel and Betty Braziel, docket No. 293-68; and James Ray Oden and Pasty C. Oden, docket No. 294-68.↩2. All statutory references are to the Internal Revenue Code of 1954, as in effect during the year at issue, unless otherwise indicated.↩3. Norris Dairy and Norris Trust will sometimes hereinafter be referred to collectively as Norris.↩4. Although the original contract of sale obligated the Huggins-Knecht Leasing Co., Inc., to pay $ 229,457 toward the purchase price, an amendment thereto substituted Norris Dairy as the obligor therefor.↩5. Actually, the $ 23,000 cash payment was made as follows: Norris paid in full two promisory notes executed by Choice to State National Bank in Commanche, Tex.↩6. A certificate of deposit is a negotiable instrument which is set up to mature on a specific date in the future and which can bear interest.↩7. Interest on the certificates was computed at the rate of 3 1/2 percent.↩8. Mercantile National.↩9. Choice and O.B. & O. partners.↩10. Norris Dairy and Norris Trust.↩11. Choice is not a petitioner herein since it elected, with the consent of its shareholders, to be taxed under subch. S of the Internal Revenue Code. However, its three stockholders and their wives are petitioners herein.↩12. Sec. 453 provides, in pertinent part, as follows:SEC. 453. INSTALLMENT METHOD(a) Dealers in Personal Property. -- (1) In general. -- Under regulations prescribed by the Secretary or his delegate, a person who * * sells * * * property on the installment plan may return as income therefrom in any taxable year that proportion of the installment payments actually received in that year which the gross profit, realized or to be realized when payment is completed, bears to the total contract price.* * * (b) Sales of Realty and Casual Sales of Personalty. -- (1) General Rule. -- Income from -- (A) a sale or other disposition of real property, * ** * * (2) Limitation. -- Paragraph (1) shall apply -- (A) In the case of a sale or other disposition during a taxable year beginning after December 31, 1953 * * only if in the taxable year of the sale or other disposition --(i) there are no payments, or(ii) the payments (exclusive of evidences of indebtedness of the purchaser) do not exceed 30 percent of the selling price.↩13. In the Pozzi case, petitioner agreed in 1963 to sell to the buyer a ready-mix concrete plant and business which he had operated as a sole proprietorship. At the time petitioner agreed to make the sale, it was the desire and intention of the buyer to make a cash payment of the total sales price of $ 200,000. Petitioner insisted that the sale be made on an installment basis and would not accept in cash the total sales price. Moreover, he wanted as security for the buyer's note for the unpaid portion of the sale price not only the properties involved in the sale, but additional security.Extended negotiations ensued which resulted in the execution of a new agreement between petitioner and the buyer whereby the latter agreed to pay the total purchase price, with interest at 6 percent per year, in 20 successive installments semiannually.A sum equal to the full purchase price was deposited in cash into an escrow account as collateral security. The escrow holder purchased immediately thereafter five time certificates of deposit due on five separate dates. Four of the certificates were correlated to mature on four of the dates that installments were due on the purchase price.The buyer paid the escrow holder each installment due on the purchase price. The escrow holder, after receipt of each installment, issued a check payable to the seller. Immediately thereafter, the escrow holder redeemed the certificates of deposit, plus the accrued interest thereon, and paid the proceeds to the buyer.We held on those facts that the sale did not constitute a true statutory installment sale. Therefore, petitioner was not entitled to report the gain from the sale on the installment basis, but rather was required to report the gain in full in the year of sale because the full purchase price was either actually received by them in the form of financial benefit or, at the least, constructively received by them.↩14. It is noteworthy that none of the individual petitioners testified at trial.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622551/	ROBERT R. COLLIER AND CORA M. COLLIER, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentCollier v. CommissionerDocket No. 10286-81.United States Tax CourtT.C. Memo 1983-564; 1983 Tax Ct. Memo LEXIS 235; 46 T.C.M. (CCH) 1378; T.C.M. (RIA) 83564; September 12, 1983. 235 Held, Fraud addition sustained. Robert R. Collier and Cora M. Collier, pro se. David W. Johnson, for the respondent. WHITAKERMEMORANDUM FINDINGS OF FACT AND OPINION WHITAKER, Judge: Respondent mailed to each of the two petitioners a statutory notice of deficiency on February 24, 1981, showing the following amounts of deficiencies and additions to tax: Robert R. CollierAdditions to TaxYearDeficiencySec. 6651(a) 1Sec. 6653(a)Sec. 66541976$1,209.00$302.25$60.45$45.0719777,749.50387.4819782,659.00664.75132.9584.8919793,628.00907.00181.40152.07Cora M. CollierAdditions to TaxYearDeficiencySec. 6651(a)Sec. 6653(a)Sec. 66541976$1,209.00$302.25$60.45$45.0719777,749.50387.4819782,659.00664.75132.9584.8919793,628.00907.00181.40152.07Respondent requested and was granted leave to file an amended answer in which respondent claimed a $200 increase in the amount of the deficiency for each petitioner for the 1976 calendar year, thereby increasing the total 1976 deficiency from $1,209 to $1,409 for each petitioner. Respondent also alleged that part of the underpayment of tax due from each 236 petitioner for 1976 through 1979 was due to fraud with intent to evade tax so that each petitioner was liable for section 6653(b) additions to tax in the following amounts: Robert R. CollierCora M. CollierSec. 6653(b)Sec. 6653(b)YearAdditionYearAddition1976$704.501976$704.5019773,874.7519773,874.7519781,329.5019781.329.5019791,814.0019791,814.00By Court order dated April 28, 1982, all except paragraphs 5 and 6 of respondent's proposed stipulation of facts together with all exhibits pertinent thereto were deemed to be stipulated pursuant to Tax Court Rule 91(f). 2On June 16, 1982, respondent moved to dismiss the case with respect to issues upon which petitioners bear the burden of proof based upon petitioners' failure to answer interrogatories and to produce documents pursuant to an order of this Court dated April 14, 1982. 3 On June 18, 1982, respondent's motion to dismiss the case was granted as it pertains to the income tax deficiencies for each of the years 1976 through 1979, inclusive, in the amounts set forth in the statutory notice of deficiency issued on February 24, 1981. 4 Thus, the issues that remain 237 for decision are the merits of the section 6653(b) addition to tax for the years 1976 through 1979, inclusive, and the increase in the deficiency for the 1976 year with respect to which the respondent has the burden of proof. FINDINGS OF FACT Some of the facts have been stipulated.Petitioners, husband and wife, resided in Houston, Texas, when their petition in this 238 case was filed. Petitioners are calendar year, cash basis taxpayers. Mr. Collier was employed by J.E. Sirrine Company as a cost engineer and for the years 1976, 1977, 1978 and 1979, received wages in the amounts of $8,338.67, $18,148.70, $19,979.26, and $21,135.94, respectively. For each of these taxable years, Mr. Collier received Forms W-2 from his employer, J.E. Sirrine Company, which forms reflected these payments. During taxable year 1976, Mrs. Collier was employed by Wylie W. Vale & Associates (Wylie Vale) and received wages of $2,550 ($1,350 in excess of the amount stated in the statutory notice of deficiency), and by Weaver Oil & Gas Corporation and received wages of $1,784.80. During taxable year 1977, Mrs. Collier was employed by Weaver Oil & Gas Corporation and received wages of $10,500. During taxable year 1978, Mrs. Collier was employed by Weaver Oil & Gas Corporation and Coral Petroleum, Inc., and received wages of $2,514.74 and $7,912.53, respectively. During taxable year 1979, Mrs. Collier was employed by Coral Petroleum, Inc., and received wages of $13,615.26. Except for the payments by Wylie Vale, Mrs. Collier received Forms W-2 from her employers, which forms 239 reflected these payments for each of the taxable years. During the taxable years in issue Mr. and Mrs. Collier executed and submitted to their respective employers Forms W-4 and W-4E, claiming that withholding was either not applicable to them, they were exempt from it or claiming numerous exemptions. As a result, no tax was withheld from any of their salaries paid during the taxable years in issue. For the taxable year 1976, petitioners jointly filed three Forms 1040, not one of which contained both income figures and petitioners' signatures. No income tax was paid for this year. For the 1977 taxable year, Mr. Collier filed two Forms 1040 and one Form 1040X. On the first Form 1040 submitted, he reported a charitable contribution deduction equal to his reported salary, and on the second Form 1040 submitted for that year the amount he had previously reported as salary he reported as tax exempt income.On the third form submitted, Form 1040X, he reported the same amount of salary as on his first return submitted for the year but reported a tax liability of zero. On each of these forms he claimed a refund of $965.25, an amount previously withheld for FICA payment. He paid no income 240 tax for the year. For the 1977 taxable year, Mrs. Collier filed a Form 1040 reporting wages, and various itemized deductions including a charitable contribution deduction equal to one-half of her wages. She reported a zero tax liability and thus, paid no tax for this year. No other Forms 1040, amended 1040 or 1040X were filed by either petitioner for taxable years 1976, 1977, 1978 or 1979. Furthermore, petitioners did not file a return for tax years 1980 and 1981. There is no question that petitioners knew how to properly file returns, reporting their wages and tax liabilities, because they did so for the 1974 taxable year. They have chosen instead to do all they could to avoid cooperating with respondent and with this Court. At no time during investigation did petitioners produce any records or information as to their income or deductions. OPINION During the trial preparation of this case, respondent discovered Mrs. Collier had received $2,550 from Wylie Vale during 1976, a sum $1,350 in excess of that determined in the statutory notice of deficiency. Respondent amended his answer to increase the tax deficiency by $200 per petitioner during 1976 and thereby assumed the burden 241 of proof with respect to this increase. Rule 142(a). Mr. Collier testified that Mrs. Collier worked for Wylie Vale and received $2,550 in checks from him during the calendar year 1976. The law is well settled that payment in return for services performed is taxable for income tax purposes. Section 61(a)(1). Respondent has met his burden of proving the increased deficiency for the 1976 taxable year and one-half of this additional sum is taxable to each petitioner under the community property laws of Texas. United States v. Mitchell,403 U.S. 190">403 U.S. 190 (1971); Tex. Fam. Code Ann. Tit. 1, secs. 5.01 and 5.27 (Vernons 1975). Respondent has the burden of proving fraud by clear and convincing evidence. Section 7454, Rule 142(b). In recent cases, respondent has met his burden by relying on facts deemed admitted in accordance with the Rules of this Court. See Doncaster v. Commissioner,77 T.C. 334">77 T.C. 334 (1981). To prove fraud, it must be shown that petitioners intended to evade taxes by conduct intended to conceal, mislead, or otherwise prevent the assessment and collection of such taxes. Beaver v. Commissioner,55 T.C. 85">55 T.C. 85, 92 (1970). Petitioners' entire course of conduct can often be relied 242 on to establish circumstantially such fraudulent intent. Otsuki v. Commissioner,53 T.C. 96">53 T.C. 96, 105-106 (1969). Here respondent relies heavily on the facts and evidence deemed stipulated pursuant to Rule 91(f) and supporting documentary evidence. It is clear from the record that petitioners had sufficient income in each year in issue to require them to file a return. The proper filing for the 1974 tax year by petitioners demonstrates that they knew how to properly make and file a return and knew of their responsibility to do so. Although petitioners submitted numerous Forms 1040 for the 1976 year, none of them constituted valid returns. Two of the forms were signed but contained no information relating to petitioners' income and were therefore invalid. 5 The third form contained income information but was unsigned. 6243 For the 1977 taxable year, Mr. Collier again filed three forms, claiming first a charitable contribution equal to the wages he received, later reporting his wages as exempt income, and finally reporting the wages but claiming a tax liability of zero. No income tax was paid for the year, and a refund of $965.25, an amount withheld for FICA payment, was always requested. 7No other Forms 1040, amended Forms 1040 or Forms 1040X were submitted during the years in issue even though petitioners continued to receive Forms W-2 from their employers and continued 244 to execute and give to their employers Forms W-4 and W-4E requesting that income tax not be withheld from their salaries. A consistent pattern of failing to file, 8 coupled with the filing of false Forms W-4, 9 is further evidence of fraudulent intent to evade taxes. Petitioners have repeatedly refused to produce complete and adequate books of account and records of their income producing activities. Petitioners allege no facts whatsoever to even suggest there might be some constitutional infirmity in this case. The various vague constitutional objections concerning the jurisdiction of this Court, a right to a jury trial, and assertions regarding the privilege against self-incrimination, etc., have been rejected in other cases with similar facts presented. See, e.g., McCoy v. Commissioner,696 F.2d 1234">696 F.2d 1234 (9th Cir. 1983) (Fourth, Fifth, and Seventh Amendments), affg. 76 T.C. 1027">76 T.C. 1027 (1981); Wilkinson v. Commissioner,71 T.C. 633">71 T.C. 633, 638-639 (1979). In viewing the entire record, it is clear that respondent has established *245 by clear and convincing evidence that a part of the underpayment for each of the years in issue was due to fraud. Petitioners knew of their responsibility to file but yet consistently failed to do so for the four consecutive years in issue. Instead, they filed Forms W-4 and W-4E with their employers to insure no tax was withheld. They have refused to submit for examination for the years in issue when requested by respondent's representatives and have refused to disclose their records pertaining to their income producing activities pursuant to an order of this Court dated April 14, 1982. An appropriate order and decision will be entered.Footnotes1. Unless otherwise indicated, all statutory references are to the Internal Revenue Code of 1954, as amended.↩2. All Rule references are to the Tax Court Rules of Practice and Procedure.↩3. The respondent's motion to impose sanctions and the Court's order in this case were filed prior to the filing of the opinion in Rechtzigel v. Commissioner,79 T.C. 132">79 T.C. 132 (1982), affd. per curiam 703 F.2d 1063">703 F.2d 1063↩ (8th Cir. 1983), the holding of which would have permitted the entry of an order in respondent's favor on those issues upon which the respondent bears the burden of proof. 4. The deficiencies include the additions to tax under secs. 6651(a), 6653(a) and 6654. Sec. 6659 (now sec. 6662). The respondent did not concede that the determinations in respect to secs. 6651(a) and 6653(a) as set forth in the statutory notices of deficiency but recognized if fraud is found sec. 6653(d) precludes their application.Since fraud has been found, the order of June 18, 1982, is effective only as to the additions to tax under sec. 6654.↩5. To constitute a valid return, a document must contain sufficient information for the Commissioner to assess and compute liability. Automobile Club of Michigan v. Commissioner,353 U.S. 180">353 U.S. 180, 188 (1957); Commissioner v. Lane-Wells Co.,321 U.S. 219">321 U.S. 219↩ (1944). 6. To be valid, a return must be signed by the taxpayer under the penalties of perjury. Sec. 6065; Cupp v. Commissioner,65 T.C. 68">65 T.C. 68, 78-79 (1975), affd. 559 F.2d 1207">559 F.2d 1207↩ (3rd Cir. 1977).7. The documents filed with this Court disclose that Mr. Collier became a "minister" with the Basic Bible Church of America in 1977. Although petitioners have not argued that Mr. Collier is exempt from tax by reason of his status as a "minister," it should de pointed out that this Court has rejected the theory of an assignment of lifetime services and has cautioned that the facts might justify the additions to tax under sec. 6653(b). McGahen v. Commissioner,76 T.C. 468">76 T.C. 468, 483 (1981), affd. without published opinion F.2d (3rd Cir. 1983), Basic Bible Church v. Commissioner,74 T.C. 846">74 T.C. 846↩ (1980).8. Webb v. Commissioner,394 F.2d 366">394 F.2d 366↩ (5th Cir. 1968). 9. The filing of false Forms W-4 has been held to be an overt badge of fraud. Nielson v. Commissioner,T.C. Memo. 1980-453↩.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622553/	Irving Freedman and Thelma Freedman, Petitioners v. Commissioner of Internal Revenue, RespondentFreedman v. CommissionerDocket No. 3740-78United States Tax Court71 T.C. 564; 1979 U.S. Tax Ct. LEXIS 197; January 15, 1979, Filed 197 Respondent mailed petitioners a notice of deficiency determining an excise tax deficiency under sec. 1491, I.R.C. 1954. Held, the Tax Court has no jurisdiction to redetermine an excise tax imposed by sec. 1491. Arthur M. Gurfein, for the petitioners.Joan Ronder 200 Domike, for the respondent. Wilbur, Judge. WILBUR564 This matter comes before the Court on respondent's motion to dismiss for lack of jurisdiction insofar as the petition alleges error in the imposition of an excise tax pursuant to the provisions of section 1491. 1 The issue thus presented by respondent's motion is whether this Court has jurisdiction to redetermine an excise tax deficiency under section 1491.FINDINGS OF FACTPetitioners are Irving Freedman and Thelma Freedman, husband and wife, who resided in Hollywood, Fla., at the time they filed the petition in this case. They filed joint Federal income tax returns for the period involved herein with the office of the Internal Revenue Service at New York, N.Y.On January 12, 1978, respondent mailed petitioners a notice of deficiency (Internal Revenue Form L-50AD (Rev. 11-74)) determining201 an excise tax deficiency under section 1491 in the amount of $ 122,872. The transaction upon which the tax is asserted occurred on July 20, 1969, and involved petitioners' sale of I.O.S., Ltd., stock to the Freedman family trust. On January 12, 1978, respondent also mailed petitioners a notice of deficiency (Internal Revenue Form L-21AD (Rev. 11-74)) in income tax for the calendar year 1969 in the amount of $ 112,831. The income tax deficiency pertained to the same sale of stock as did the excise tax deficiency.Petitioners timely filed a petition with this Court in which they contested both the income and excise tax deficiencies. On 565 June 7, 1978, respondent filed a motion to dismiss the portion of the petition pertaining to the excise tax deficiency on the ground that this Court is without jurisdiction to redetermine petitioners' liability for the excise tax set forth in the petition.OPINIONThe issue presented involves the jurisdiction of this Court to redetermine an excise tax deficiency imposed under section 1491. We conclude that we lack such jurisdiction.Section 1491 is contained in chapter 5 of subtitle A of the Internal Revenue Code. It imposes an excise 202 tax upon the transfer of appreciated stocks or securities by United States persons to certain foreign entities. 2 Section 1494(a) provides that the tax imposed by section 1491 shall, without assessment or notice and demand, be due and payable by the transferor at the time of transfer. 3203 The jurisdiction of the Tax Court to redetermine a deficiency and determine an overpayment is conferred by statute. Sec. 7442. Cf. Burns, Stix Friedman & Co. v. Commissioner, 57 T.C. 392">57 T.C. 392, 396 (1971); Adams v. Commissioner, 70 T.C. 446">70 T.C. 446 (1978). Preconditions to our jurisdiction include respondent's mailing taxpayer a notice of deficiency under section 6212(a) (relating to deficiencies of income, estate, gift, and chapter 41, 42, 43, or 44 taxes), and the taxpayer's timely filing a petition with this Court. Sec. 6512(a).Section 6212(a) dealing with the notice of deficiency, currently provides:If the Secretary determines that there is a deficiency in respect of any tax 566 imposed by subtitle A or B or chapter 41, 42, 43, or 44, he is authorized to send notice of such deficiency to the taxpayer by * * * mail. 4A deficiency is currently defined by section 6211(a) as follows:(a) In General. -- * * * in the case of income, estate, and gift taxes imposed by subtitles A and B and excise taxes imposed by chapters 41, 42, 43, and 44 the term "deficiency" means the amount by which the tax imposed by subtitle A or204 B, or chapter 41, 42, 43, or 44 exceeds the excess of -- (1) the sum of (A) the amount shown as the tax by the taxpayer upon his return, if a return was made by the taxpayer and an amount was shown as the tax by the taxpayer thereon, plus(B) the amounts previously assessed (or collected without assessment) as a deficiency, over --(2) the amount of rebates, as defined in subsection (b)(2), made.Petitioner contends that this statute is broad enough to provide jurisdiction over the present controversy. We concede that section 6212(a) does provide for the issuance of a deficiency notice when it is determined that "there is a deficiency in respect of any tax imposed by subtitle A or B or chapter 41, 42, 43, or 44." (Emphasis added.) We also recognize that respondent has sent petitioner a deficiency notice with respect to the tax imposed by section 1491. Nevertheless, section 6212(a) and section 6211(a) must be read together. The latter section defines a deficiency with reference to "income, estate, and gift taxes imposed by subtitles A and B and excise taxes imposed by chapters 41, 42, 43, and 44." We believe our jurisdiction is governed by the more specific definition205 of a deficiency set out in section 6211(a), which includes only those excise taxes imposed by chapters 41, 42, 43, and 44.We believe the nature and purpose of the excise tax in issue reinforces our reading of the statute. We note that section 1494(a) provides that the tax "shall without assessment or notice and demand, be due and payable by the transferor at the time of the transfer, and shall be assessed, collected and paid under regulations prescribed by the Secretary." (Emphasis supplied.) Under section 1494(b), the tax may be abated, remitted, or refunded under certain circumstances. We believe this statutory framework contemplates expeditious assessment and206 collection 567 procedures giving the Secretary broad discretion wholly consistent with our reading of the statute. See H. Rept. 708, 72d Cong., 1st Sess. (1932), 1939-1 C.B. (Part 2) 457, 494; S. Rept. 665, 72d Cong., 1st Sess. (1932), 1939-1 C.B. (Part 2) 496, 536; H. Rept. 1492, 72d Cong., 1st Sess. (1932), 1939-1 C.B. (Part 2) 539, 552. 5Nor do we believe that minor drafting errors in the Tax Reform Act of 1969 require a different result. Prior to that207 Act, section 6211(a) then provided:in the case of income, estate, and gift taxes, imposed by subtitles A and B, the term "deficiency" means the amount by which the tax imposed by subtitles A or B exceeds the excess of * Section 6211(a) was amended by section 101(f) of the Tax Reform Act of 1969 to read as follows:in the case of income, estate, gift, and excise taxes, imposed by subtitles A and B, and chapter 42, the term "deficiency" means the amount by which the tax imposed by subtitle A or B or chapter 42 exceeds the excess of * The addition of the word "excise" to section 6211(a) in 1969 suggests the possibility that Congress intended to extend the statutory deficiency procedures, and the jurisdiction of this Court, to the excise tax imposed by section 1491. We do not believe the effective date of section 101(f) permits petitioner to claim the benefits of the drafting error. 6 But in any event, the legislative history of the Tax Reform Act of 1969 indicates that the amendment of section 6211(a) did not affect the authority to collect the tax imposed by section 1491 upon notice and demand, and that there was no intention of altering the procedures under section208 1494(a). See H. Rept. 91-413 (Part 2) (1969), 3 C.B. 340">1969-3 C.B. 340, 351. Moreover, to view the addition of the word "excise" to section 6211(a) as any more than a minor technical defect 7 in the drafting of a statute would undermine the policy behind the imposition of the section 1491 excise tax, giving the Commissioner the "widest latitude" in the exercise of sound discretion to 568 prevent avoidance of income tax. See S. Rept. 665, 72d Cong., 1st Sess. (1932), 1939-1 C.B. (Part 2) 496, 536. Accordingly, this Court lacks jurisdiction over section 1491 excise tax deficiencies. Cf. Rev. Rul. 72-29, 1 C.B. 283">1972-1 C.B. 283.209 Petitioners' argument that this Court possesses jurisdiction regarding section 1491 excise tax deficiencies rests heavily on language contained in the notice of excise tax deficiency mailed by respondent. This notice and the accompanying cover letter contained instructions to the petitioners on the manner in which to contest the determination in this Court. The answer to petitioners' argument is clear. The subject matter jurisdiction of this Court is prescribed by statute, and it cannot be enlarged by the actions of the parties. See National Builders, Inc. v. Secretary of War, 16 T.C. 1220">16 T.C. 1220, 1224-1225 (1951). Thus, since we have no authority to redetermine a section 1491 excise tax deficiency, we must grant respondent's motion.An appropriate order will be entered. Footnotes1. All section references are to the Internal Revenue Code of 1954, as amended and in effect for the year of the transaction in issue (1969), unless otherwise indicated.↩2. Sec. 1491. IMPOSITION OF TAX.There is hereby imposed on the transfer of stock or securities by a citizen or resident of the United States, or by a domestic corporation or partnership, or by a trust which is not a foreign trust, to a foreign corporation as paid-in surplus or as a contribution to capital, or to a foreign trust, or to a foreign partnership, an excise tax equal to 27 1/2 percent of the excess of -- (1) the value of the stock or securities so transferred, over(2) its adjusted basis (for determining gain) in the hands of the transferor.[Emphasis added.]↩3. SEC. 1494. PAYMENT AND COLLECTION(a) Time for Payment. -- The tax imposed by section 1491↩ shall, without assessment or notice and demand, be due and payable by the transferor at the time of the transfer, and shall be assessed, collected, and paid under regulations prescribed by the Secretary or his delegate.4. Subtitle A contains secs. 1-1564. These sections concern the income tax, although they also include the excise tax provisions here in issue (secs. 1491-1494). Subtitle B contains secs. 2001-2622, the estate and gift tax provisions. Chs. 41, 42, 43, and 44 contain secs. 4911-4981, certain miscellaneous excise tax provisions located in subtitle D.↩5. It should be noted that sec. 1057 does not apply to the instant case. Sec. 1057 provides that in lieu of payment of the tax imposed by sec. 1491, the taxpayer may elect to treat a transfer described in sec. 1491↩ as a sale or exchange of property for an amount equal in value to the fair market value of the transferred property and to recognize taxable gain. However, this section only applies to transfers of property after Oct. 2, 1975. Pub. L. 94-455, sec. 1015(c) (1976).6. Sec. 101(k)(1) of the Tax Reform Act provides that "the amendments made by this section shall take effect on January 1, 1970." Sec. 1491↩ imposes a transactional tax, and the transaction herein occurred on July 20, 1969.7. The order of the language of sec. 6211(a) was corrected by a conforming and clerical amendment in 1974. Sec. 1016(a)(9), Pub. L. 93-406 (Employee Retirement Income Security Act of 1974).↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622554/	FARMERS FEED CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Farmers Feed Co. v. CommissionerDocket No. 12398.United States Board of Tax Appeals10 B.T.A. 1069; 1928 BTA LEXIS 3963; February 29, 1928, Promulgated 3963 1. Statute of Limitations. - held, that where, on the pleadings, a prima facie showing is made that collection of a deficiency is barred by the statute of limitations provided in section 250(d) of the Revenue Act of 1921, the burden of pleading and proving any existing exception which would remove the case from the operation of the statute is on the respondent. 2. Id. - It appearing from the pleadings that the statute of limitations has run against the collection of the deficiency for 1917, and respondent having failed to show that any of the exceptions to the statutory period are applicable, held, collection is barred. 3. Id. - Held, deficiencies for 1918, 1919, and 1920 are not barred. Joy Floral Co. v. Commissioner,7 B.T.A. 800">7 B.T.A. 800, followed. Arthur B. Hyman, Esq., and Karl D. Loos, Esq., for the petitioner. A. C. Baird, Esq., for the respondent. ARUNDELL1070 Proceeding for the redetermination of income and profits taxes for the fiscal years and in the amounts as follows: Fiscal year ended September 30, 1917, overassessment$61,861.241918, deficiency107,650.011919, deficiency118,965.321920, deficiency4,228.323964 The proceeding was heard on petitioner's motion for judgment on the pleadings on the ground that assessment and/or collection of taxes for the above years are barred by the statute of limitations, and the further motion that, in the event of the failure of the Board to so find, the case be set for hearing on the merits in due course. FINDINGS OF FACT. Petitioner is a New York corporation with its principal office in New York City. For the fiscal year ended September 30, 1917, petitioner filed its income and profits-tax return on or about May 1, 1918. After the filing of the return the respondent assessed a tax of $35,348.98, which petitioner paid in full on May 3, 1918. On March 19, 1923, the respondent, after an examination and audit of petitioner's books, assessed an additional amount of $123,367.78. Petitioner filed a claim in which it asked the abatement of this assessment, which claim was allowed in the amount of $61,861.24 and rejected for $61,506.54. Petitioner filed its income and profits-tax return for the fiscal year ended September 30, 1918, on or about May 13, 1919. After the filing of the return the respondent assessed a tax for that year in the amount3965 of $21,856.41, which petitioner has paid in full, the last installment having been paid on or about May 13, 1919. Petitioner filed its income and profits-tax return for the fiscal year ended September 30, 1919, on or about January 14, 1920. After the filing of the return respondent assessed a tax for that year in the amount of $20,706.87, which amount petitioner has paid in full, the last installment having been paid on or about September 15, 1920. 1071 Petitioner filed its income and profits-tax return for the fiscal year ended September 30, 1920, on or about December 15, 1920. The return showed a net loss and no tax for that year was assessed by respondent or paid by petitioner. On or about November 13, 1925, petitioner filed with the respondent a duly executed waiver for the years 1918 and 1919, the body of which reads as follows: Treasury Department Internal Revenue Service Form 872A IT:CA:2117 INCOME AND PROFITS TAX WAIVER For Taxable Years Ended Prior to January 1, 1922 NOVEMBER 6, 1923. In pursuance of the provisions of existing Internal Revenue Laws, Farmers Feed Company, a taxpayer of New York, N.Y., and the Commissioner of Internal Revenue3966 hereby waive the time prescribed by law for making any assessment of the amount of income, excess-profits, or war-profits taxes due under any return made by or on behalf of said taxpayer for the year (or years) ending Sept. 30, 1918 and 1919 under existing revenue acts, or under prior revenue acts. This waiver of the time for making any assessment as aforementioned shall remain in effect until December 31, 1926, and shall then expire except that if a notice of deficiency in tax is sent to said taxpayer by registered mail before said date and (1) no appeal is filed therefrom with the United States Board of Tax Appeals then said date shall be extended sixty days, or (2) if an appeal is filed with said Board then said date shall be extended by the number of days between the date of mailing of said notice of deficiency and the date of final decision by said Board. On or about December 6, 1925, petitioner filed with respondent a waiver for the fiscal year ended September 30, 1920, of the same tenor as that above set out except that the words and figures "September 30th, 1920" are inserted in the place of those reading "Sept. 30, 1918 and 1919" in the waiver set out at length. 3967 On December 29, 1925, respondent mailed to petitioner a letter advising it of the results of a reexamination of its returns for 1909 to 1921, inclusive, to which a statement was attached showing the results for the years here involved as follows: YearDeficiency in taxOverassessment1917$61,861.241918$107,650.011919118,965.3219204,228.32From the letter of December 29, 1925, petitioner appealed to the Board. 1072 OPINION. ARUNDELL: To the proposed deficiencies the petitioner has interposed the bar of the statute of limitations. For the fiscal year 1917 the tax has been assessed and jurisdiction arises on the rejection in part of an abatement claim. For the fiscal years 1918, 1919, and 1920, the Commissioner has determined deficiencies from the notice of which this proceedings was brought. For the reasons which will hereafter appear, the proposed deficiency of the year 1917 will be treated separately from those for the later years. In determining the question raised as it applies to the fiscal year 1917, we are confronted in the first instance with the necessity of determining whether the pleadings are sufficient on which3968 to base a conclusion. It is alleged and admitted that the return was filed on May 1, 1918; that the additional tax of $123,367.78 was assessed on March 19, 1923, and that the notice of the rejection in part of the abatement claim filed in connection therewith was mailed to petitioner on December 29, 1925. Section 250(d) of the 1921 Act, the one in effect when the assessment was made, provided for a period of five years from the date the return was filed within which to assess and collect the tax. Section 278(d) of the Revenue Act of 1924, the Act in effect when the notice of December 29, 1925, was mailed, provided, however, that a tax assessed within the period provided by the statute might be collected at any time within six years after assessment, provided, however, that this section was not to revive a claim already barred at the time of its passage on June 2, 1924. As more than five years had expired from the date of the filing of the return at the time of the passage of the 1924 Act, it appears that the collection of the tax for that year is barred unless there existed facts which would extend the period within which the tax might be collected. This brings us to the real3969 question that has been raised by the respondent, and that is, whether it is necessary for the petitioner to allege and prove facts which show that it is not within the exceptions set forth in the statute which may serve to extend the statutory period of assessment and collection. In reaching a correct conclusion we are confronted at the outset with the unusual chanacter of the proceedings before the Board. A petitioner is in fact asking for a review of an affirmative action by the Commissioner. The hearing before the Board is in the nature of a trial de novo, and the taxpayer is the moving party and must sustain the burden of proof, and yet he is simply defending himself from a proposed action by the Commissioner. In one sense of the word he is a defendant and yet before the Board his position is that of a plaintiff. It is for that reason that it is difficult to apply the principles laid down in many of the decisions 1073 as to what must be alleged and proved by a defendant desiring to plead the statute of limitations or by a plaintiff who would avoid the running of the statute. It is stated as a general rule (37 C.J. 1224), that the plea of limitations need not3970 negative matters which might be set up in avoidance of the plea such as exceptions contained in the statute. As set forth on page 1231 of this same work, it is for the opposing party by appropriate pleading to set up matters in avoidance. The rule as laid down is (37 C.J. 1231): Where one party pleads the statute of limitations, the opposing party may by reply or other appropriate pleading set up any exception to, or matter in avoidance of, the statute which is relied upon to take the case out of the statute of limitations, such as a part payment within the statutory period. But a replication or reply setting up such matter in avoidance must be responsive to the plea, and not allege a cause of action not relied on in the complaint. It is proper to deny a plea of limitations generally, and also to set up matters in avoidance, although, except where allowed by statute or code practice, a reply stating more than one exception to the statute, or more than one defense to the plea, is bad on account of duplicity. * * * Where a party against whom limitations has been pleaded attempts to bring himself within a particular saving or exception, he must state with distinctness and particularly3971 all such facts as are essential to bring him within such exception, and the pleading in avoidance is ordinarily insufficient, if it consists of mere general allegations, or of statements of the evidence of facts, instead of the facts themselves, or presents mere matters of law. But it is sufficient to allege that the action could not be brought because the courts were closed by reason of war, where the facts as to time are alleged, or to allege facts showing defendant to be estopped to plead limitations. (P. 1233.) In 17 R.C.L., pp. 999, 1000, it is said: At common law, and frequently under statutory provision, the rule has been recognized that the plaintiff need not anticipate, and attempt to avoid, in his complaint, the defense of the statute of limitations, but that if it is pleaded as a defense, and the facts bring the case within any of the exceptions to the statute, the proper practice is to set them up in reply. * * If the statute of limitations is relied on as a bar, the plaintiff, if he would avoid it by any exception in the statute, must explicitly allege it in his bill, or specially reply to it, or amend his bill if it contains no suitable allegation to meet the3972 bar. * * A similar situation also exists in respect of the defendant, it being held that in pleading the statute he is not called upon the negative exceptions contained in the statute or to show that the plaintiff does not fall within any of such exceptions. In , the rule is thus stated by Mr. Justice Story: And the doctrine is now clearly established, that if the statute of limitations is relied on as a bar, the plaintiff, if he would avoid it by any exception in the statute, must explicitly allege it in his bill, or specially reply to it; or what is the modern practice amend his bill, if it contains no suitable allegation to meet the bar. 1074 A question very similar to the one raised by the respondent herein was before the Circuit Court of Appeals for the Sixth Circuit in the case of , wherein the court said: Concerning the first of these contentions, it is sufficient to say that when the defendants invoked the statutory bar of three years as a defense it was the duty of the plaintiff below, if the bar was not applicable because they had concealed themselves3973 or been absent from the state, to establish that fact by competent evidence. When it appears on the trial of a case, where the statute of limitations is pleaded, that the indebtedness became due beyond the statutory period, the courts do not presume, in favor of the plaintiff who seems to have been negligent, that the defendant has concealed himself to avoid the service of process or has been absent from the state, but require the plaintiff to make such proof. If the defendant proves a state of facts which brings him within the operation of a general rule, he need not prove further that his case does not fall within an exception that would deprive him of the benefit of the rule, but may call upon the plaintiff to prove affirmatively that his case is within the exception and that the general rule is not applicable. This is the general doctrine (State of Missouri, to the use of ; ); and it seems to be a doctrine which is fully recognized by the Supreme Court of Kansas (3974 . In that case the court observed "it has always been the duty of the plaintiff, both in courts of law and in courts of equity, to plead the exceptions where the question of the statute of limitations has been properly raised by the defendant. And it never was the duty of the defendant, in such a case, to negative the exceptions, ." In the case of , the plaintiff had sued on a promissory note which appeared on its face to be barred by the statute. In order to avoid a demurrer by defendant, the plaintiff pladed a part payment within the statutory period. The answer denied the payment and set up the statute. The trial court charged that the defendants having pleaded the statute of limitations must establish such defense by a preponderance of the proof which included proof that no payment was made within the statutory period as alleged by the plaintiff. The Supreme Court of Oregon in deciding the case pointed out, however, that to require the defendant to prove that he did not make a payment on account would be equivalent3975 to making the averments of the complaint in this regard prima facie true. The court said: In order to avoid a demurrer on the ground that the action was barred, the plaintiff was required to, and did, plead the payment. This averment is denied by the answer, and the defense of the statute of limitations pleaded. The plea is grounded on the denial, and, if the burden is on the defendants, the result will be a presumption that such payment was in fact made. Now, the note was barred, and therefore furnished no evidence of a present liability against the defendants, unless a payment was made thereon by them within six years prior to the commencement of the action. The burden of proof to establish such payment was on the plaintiff. * * * But the instruction, as given, relieved him of that duty, and imposed the burden of proving a negative on the defendants; and this we think was error. 1075 In United Statesv. Hayward, 26 Fed. Cas. No. 15336, Mr. Justice Story, after discussing at length the question of the necessity of pleading negative allegations, concludes with this statement: Without pretending to reconcile all the dicta in the books, it seems3976 to me that in respect to negative allegations the reasonable rule is that the burden of proof shall rest on the party who holds the affirmative, and especially when the facts are peculiarly within his privity and cognizance. The same conclusion is reached in , which involved the question of whether the plaintiff, suing to recover a penalty for violation of a statute (34 Stat. 607), was required to negative an exception contained in the statute. The opinion reads in part: Obviously it would be next to impossible for the government (plaintiff) to anticipate and by proof eliminate all the possible contingencies covered by the excepting clause. Even if it were held to be necessary for the plaintiff to plead against the exception, it might still be relieved from making proof, because it would thus plead a negative, and, further, because it pleads the absence of conditions, the evidence concerning which in many cases would be exclusively within the knowledge of the defendant. The opinion then proceeds to quote from United Statesv. Hayward, a part of which we have set out supra.The last two3977 cases are decidedly in point, for the facts that may bring into operation the several exceptions to the running of the statutory period are facts which are within the Commissioner's knowledge. Section 250(d) of the Revenue Act of 1921 provides that: The amount of income, excess-profits, or war-profits taxes due under any return made * * under prior income, excess-profits, or war-profits tax Acts, * * * shall be determined and assessed within five years after the return was filed, unless both the Commissioner and the taxpayer consent in writing to a later determination, assessment, and collection of the tax; * * : Provided further, That in the case of a false or fraudulent return with intent to evade tax, or of a failure to file a required return, the amount of tax due may be determined, assessed, and collected, and a suit or proceeding for the collection of such amount may be begun, at any time after it becomes due: Provided further, That in cases coming within the scope of paragraph (9) of subdivision (a) of section 214, or of paragraph (8) of subdivision (a) of section 234, or in cases of final settlement of losses and other deductions tentatively allowed by the Commissioner3978 pending a determination of the exact amount deductible, the amount of tax or deficiency in tax due may be determined, assessed, and collected at any time; * * * Is it necessary, in the light of the cases already cited and discussed, for petitioner to allege and prove the exceptions contained in section 250(d), or is it the duty of the respondent in his answer to plead in avoidance those exceptions? In our opinion it is not necessary for petitioner to negative the exceptions and it is for respondent in his answer to affirmatively plead matters in avoidance. This rule 1076 is entitled to added weight when we realize the relationship which exists between the parties. The Commissioner knows whether or not he has made or is now making the charge that the returns were false and fraudulent with intent to evade the tax; he knows whether or not the case is within the last proviso of section 250(d), and if there is already in existence a waiver, he has the custody of that document. There occurs to us no peculiar reason which would serve to take this case out of the general rule and to put on petitioner the burden of proving a negative. The determination of the tax controversies3979 which are daily before us requires a highly practical handling and we see no reason why the Commissioner should stand idly by and decline to present to us any matters in avoidance of petitioner's plea if in fact the limitation period has not run by reason of an exception contained in the statute. It is interesting to note in the instant case that the deficiency notice which has been attached to the petition, as required by our rules, contains no charge that the returns were false or fraudulent with intent to avade the tax, nor does it indicate that the deficiency arose from any adjustment which would serve to take the case out of the running of the statute of limitations. The allegations of the petition being sufficient to bring the petitioner within the general rule of the statute, and the Commissioner having failed to bring himself within a particular saving or exception, the petitioner has established a prima facie case on the running of the statute of limitations. It follows from the foregoing that the additional assessment for the year 1917 is barred by the running of the statute of limitations. There remains for discussion the question of whether the limitation period3980 has run for the fiscal years 1918, 1919, and 1920. For those years assessments were not made and waivers were given. The salient facts can readily be gathered from this table: Fiscal yearReturn filedWaiver filedDate of deficiency notice1918May 13, 1919Nov. 13, 1925Dec. 29, 19251919Jan. 14, 1920doDo.1920Dec. 14, 1920Dec. 6, 1925Do.The petitioner makes no point of the fact that the waivers for 1918 and 1919 were given more than five years after the returns were filed, and, in fact, concedes that the waivers for 1918, 1919, and 1920 are valid in so far as they extended the time for assessment. It denies, however, that the waivers served to extend the time within which to make collection. This question was considered and decided in , adversely to petitioner's contention. In that case, as in this, the waivers were executed 1077 and the notice of determination of deficiencies was sent out while the Revenue Act of 1924 was in effect. We there held: That Act [Act of 1924] provided a period of six years after assessment for collection. The period in which*3981 assessment might have been made not having expired when the Revenue Act of 1926 became effective, collection was not barred and the case does not fall within section 278(e) of the latter Act. We conclude that the deficiencies for the fiscal years ended September 30, 1918, 1919, and 1920 are not barred. Reviewed by the Board. There is no deficiency for the fiscal year ended September 30, 1917. Petitioner's motion for judgment for 1918, 1919, and 1920 is denied and the proceeding for those years will be restored to the general calendar for hearing on the merits in due course.MARQUETTE concurs in the result.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622556/	MARINE CONTRACTORS AND SUPPLY, INC., Petitioners v COMMISSONER OF INTERNAL REVENUE, RespondentMARINE CONTRS. & SUPPLY v. COMMISSONERDocket No. 9523-78.United States Tax CourtT.C. Memo 1982-22; 1982 Tax Ct. Memo LEXIS 724; 43 T.C.M. (CCH) 305; January 13, 1982. 724 X was the chief executive officer of P and X's wife and son owned both directly and indirectly all of the stock of P. X was also the sole individual general partner of certain limited partnerships and the chief executive officer of the only corporate general partner of the partnerships. P paid commission expenses of the limited partnerships owed to agents who sold partnership interests to outside investors. P acquired oil and gas drilling contracts from the limited partnerships with funds therefor coming from all the invested funds. Held: the acquisition of drilling contracts by P from the limited partnerships resulted from X's dominance over all the relevant entities. Thus, commissions paid by P but owed by the partnerships to selling agents were not an ordinary and necessary expense of P in the pursuit of its business. Held further: the commissions paid to selling agents were in essence nondeductible syndication fees of the partnerships. Accordingly, deductions for the commissions are disallowed when paid by P by virtue of X's dominance over P and the partnerships. Alvin L. Freeman, for the petitioner. David W. Johnson, for the respondent. IRWINMEMORANDUM FINDINGS OF FACT AND OPINION IRWIN, Judge: Respondent determined a deficiency of $ 78,712 in petitioner's 1974 Federal income tax. Due to concessions of petitioner, the sole issue presented for our determination is whether commission expenses paid by petitioner were ordinary and necessary business expenses of the petitioner pursuant to section 162. 1726 FINDINGS OF FACT Some of the facts have been stipulated. These facts, together with the exhibits attached thereto are incorporated herein by this reference. Petitioner, Marine Contractors and Supply, Inc., had its principal place of business in Houston, Texas, at the time its petition in this case was filed. The corporation filed its 1974 Federal income tax return with the Director, Internal Revenue Service Center, Austin, Texas. The petitioner is a Texas corporation engaged in contract drilling of oil and gas wells and related services. During 1974 Roger H. Evans, Jr., was the president and chief executive officer of the petitioner. The shareholders of the petitioner were Roger Evans, Jr.'s wife and son and a corporation known as Marlin Laboratories, Inc., which was wholly-owned by the wife of Roger Evans, Jr. During the year in issue, Roger Evans, Jr., and the Phoenix Energy Company (PEC) were the two general partners of each of the following oil and gas limited partnerships: (1) Phoenix Development Fund 74-1 (2) Phoenix Development Fund 74-2 (3) Phoenix Development Fund 74-3 (4) Phoenix Development Fund 74-4 (5) Phoenix Development Fund 74-R (6) Phoenix727 Development Fund 74-K Roger was the president and chief executive officer of PEC while his wife, Ann Evans, was the sole stockholder of the company. To procure financing for the operations of the partnerships, selling agents corresponded with the general partner, PEC, concerning the selling of partnership interests in each of the oil and gas limited partnerships. After having secured an investor-limited partner for limited partnership, the selling agent sent the gross amount received from the investor-limited partner as the investor's subscription, to the general partner, PEC. Upon receipt of the gross subscription by PEC, the petitioner issued a check on its own corporate bank account to the selling agent in payment of his commission which would be no greater than 10 percent of the gross subscription. There were no express agreements, invoices or bills between petitioner and the limited partnerships concerning the commission expenses paid by petitioner for the services of the selling agents in procuring capital for partnership operations from investors. However, Roger Evans, Jr., as a general partner of the limited partnerships and chief executive officer of both PEC, the other728 general partner, and the petitioner, entered into agreements with the selling agents that petitioner would pay the commission expenses. Roger Evans, Jr., was the organizer of the six oil and gas limited partnerships involved herein. From their inception it was intended that petitioner would be the drilling contractor for partnership operations. The various limited partnerships executed "turnkey" drilling contracts with petitioner, i.e., contracts which obligated the contractor to perform all the services and furnish all the materials applicable to drilling and completing a well. The basic steps for financing the drilling operation involved the following: (1) Petitioner estimated the costs of drilling a well. (2) The number of wells to be drilled was calculated by reference to the total funds contributed by investors to the limited partnership. (3) The limited partnerships were invoiced during 1974 by petitioner for prepaid expenses designated as "drilling costs," "completion costs" and "plug and abandonment costs" in the following total amounts: Limited PartnershipAmount InvoicedPhoenix Development Fund 74-1$ 1,339,720.61Phoenix Development Fund 74-21,624,528.23Phoenix Development Fund 74-31,644,500.00Phoenix Development Fund 74-4688,000.00Phoenix Development Fund 74-R477,624.55Phoenix Development Fund 74-K1,098,409.43$ 6,872,782.82729 These invoices represented the total amount of funds that the partnerships were able to raise for investment in oil and gas projects. Sales commissions were then paid by petitioner to the selling agents from the moneys transferred to petitioner from the partnerships. Petitioner did not report as income for 1974 any of the amounts received from or on behalf of the limited partnerships as petitioner reflected its gross receipts on the completed contract method of accounting.However, each limited partnership claimed a deduction on its partnership return for the total amount of intangible drilling costs listed above. 2In 1974 petitioner paid commission expenses of $ 304,105 to selling agents who procured financing for the partnerships. Petitioner deducted these expenses on its 1974 return and respondent has disallowed the deduction on the ground that the expenses were not ordinary and necessary expenses of the petitioner. 3730 OPINION The controversy in this case focuses on the propriety of petitioner's deduction for commission expenses paid to selling agents. The amounts so paid were to compensate selling agents for their efforts in inducing third parties to invest in oil and gas limited partnerships. The invested funds were then transferred to petitioner, a drilling corporation, pursuant to "turnkey" drilling contracts entered into by the partnerships and the petitioner. It is from these transferred funds that petitioner paid the commissions involved herein. Section 162 generally allows deductions for ordinary and necessary business expenses. Subject to the provisions of section 263 regarding capital expenditures, ordinary and necessary commissions are allowable business expenses, section 1.162-1(a), Income Tax Regs. Section 263 provides that capital expenditures are not deductible. The main thrust of petitioner's argument is that the commissions it paid were an ordinary and necessary expense, as securing funds from the limited partners was necessary to insure that petitioner would acquire the oil and gas drilling contracts so that income from the performance of the contract could be realized. 731 Respondent contends that the commission expenses in issue were not ordinary and necessary business expenses of petitioner and asserts further that in any event, the expenses were actually syndication expenses of the partnerships which are nondeductible by virtue of our opinions in Kimmelman v. Commissioner, 72 T.C. 294">72 T.C. 294, 304 (1979) and Cagle v. Commissioner, 63 T.C. 86 (1974), affd. 539 F.2d 409">539 F.2d 409 (5th Cir., 1976). 4Generally, payment by one taxpayer of the obligation of another taxpayer is not an ordinary and necessary business expense. Welch v. Helvering, 290 U.S. 111">290 U.S. 111, 114 (1933); Lohrke v. Commissioner, 48 T.C. 679">48 T.C. 679, 684 (1967). However, courts have allowed deductions when the expenditures were made by a taxpayer to protect or promote732 his own business, even though the transaction giving rise to the expense originated with another taxpayer. See e.g., Lutz v. Commissioner, 282 F.2d 614">282 F.2d 614 (5th Cir., 1960); Rushing v. Commissioner, 58 T.C. 996">58 T.C. 996 (1972); Lohrke v. Commissioner, supra; Snow v. Commissioner, 31 T.C. 585">31 T.C. 585 (1958); Dinardo v. Commissioner, 22 T.C. 430">22 T.C. 430 (1954). In Mensik v. Commissioner, 37 T.C. 703">37 T.C. 703 (1962), affd. 328 F.2d 147">328 F.2d 147 (7th Cir. 1964), the taxpayer owned over 98 percent of savings and loan institutions. He contracted with the institutions to pay for their advertising costs. In return, the institutions would refer their insurance business to him. Respondent argued that the advertising expenditures were capital expenditures made to enhance the business of the institutions which were almost wholly-owned by petitioner. The Court in sustaining respondent's position, held that in view of the taxpayer's control of the institutions he did not have to pay for their advertising in order to secure the insurance business. Thus, the expenditure was not made to protect or promote the taxpayer's733 business. Furthermore, the Court noted that the payments were essentially made to finance the launching of the new institutions and the agreements whereby the taxpayer was to pay for their advertising costs were merely "gimmicks" which were to supply the basis for deductions to be taken by the taxpayer. The instant case represents an even clearer scheme of gimmickry than that presented in Mensik. Quite similar to the situation in Mensik, we find in the case herein that Roger Evans, Jr., controlled and dominated the petitioner and the limited partnerships. He was the chief executive officer of the petitioner, the only individual general partner of the limited partnerships and the chief executive officer of the only corporate general partner of the partnerships. In addition, his wife, son and a corporation wholly-owned by his wife were the sole stockholders of petitioner. All of these relationships lead to the inescapable conclusion that Roger Evans, Jr., had, in practice, complete control over the operations of all the entities involved in the present controversy. Thus it seems quite evident that no matter which entity paid the commissions of the selling agents, petitioner734 would have acquired the drilling contracts from the limited partnerships. We therefore do not believe that the payment by petitioner of the selling commissions was for the acquisition of contracts which would promote its business. Furthermore, unlike Mensik, the moneys which eventually were used to pay the sales commissions flowed from the entities with which the expenses arose (the partnerships) to petitioner and were then paid. Considering that the commissions could more readily have been paid by the partnerships rather than petitioner, we are hardpressed to find on these facts that the expenses were the ordinary and necessary business expenses of the petitioner. Thus, we are even more compelled to disallow the deduction here than we were in Mensik where the existence alone of the taxpayer's dominance over the institutions which were the sources of advertising expenses was enough for this Court to find that the taxpayer did not make the expenditure to promote its own business. It is well settled, that a business expense will be considered an "ordinary" expense within the meaning of section 162 if the expenses is within a known type in the community of which the735 petitioner is a part. Welch V. Helvering, supra, at 114. Thus, it is on this premise that petitioner argues that there is a general industry practice to pay commissions for the costs of acquiring drilling contracts. True as this may be, petitioner misperceives the fact that in this case the sales commissions were paid for the efforts of selling agents who procured financing for partnership operations from outside investors. The payment of commissions to raise funds for the partnership was not an ordinary and necessary business expense of the petitioner in acquiring drilling contracts. Acquisition of the contracts was forthcoming to petitioner because of its chief executive officer's dominance over the limited partnerships. Furthermore, the commissions paid were in essence syndication fees of the partnerships, i.e., they were fees paid to agents who found investors willing to purchase limited partnership interests. As such, the fees are nondeductible capital expenditures. Kimmelman v. Commissioner, supra; Cagle v. Commissioner, supra.Thus, we are unwilling to convert an otherwise nondeductible expense into a deductible736 expense by virtue of an individual's dominance over other related entities such that he is able to cause another entity to make the expenditure. We have reviewed the cases cited by petitioner in support of its position and find them distinguishable from the case at bar on the ground that in each of the cases cited, the Court found that commissions paid were for valuable services rendered to the payor. In the case herein, valuable services have been rendered only to the partnerships to secure financing but not to the petitioner-payor. To reflect the foregoing, Decision will be entered for the respondent. Footnotes1. Unless otherwise indicated, all statutory references are to the Internal Revenue Code of 1954, as amended.↩2. The deductions claimed by the partnerships for intangible drilling costs are disputed by respondent, but are not in issue in this case.↩3. The amount of sales commissions deducted by petitioner and originally in dispute was $ 308,563. A total of $ 4,458 of the alleged sales commissions was disallowed by respondent on the ground that this amount was not for sales commissions and was subsequently reimbursed. Petitioner has conceded that this adjustment was proper and thus the amount of sales commissions in dispute in this case is $ 304,105.↩4. Pursuant to the Tax Reform Act of 1976, Pub. L. 94-455, 90 Stat. 1520, section 709 was added to the Internal Revenue Code to deal expressly with the organizations and syndication fees of a partnership. Section 709(a), applicable only to partnership taxable years beginning after December 31, 1975, provides that syndication fees are nondeductible expenditures.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622557/	L. M. BLUMSTEIN REALTY CORPORATION, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.L. M. Blumstein Realty Corp. v. CommissionerDocket No. 30353.United States Board of Tax Appeals20 B.T.A. 582; 1930 BTA LEXIS 2081; August 25, 1930, Promulgated 2081 Rate of depreciation determined. George J. Gruenberg, Esq., for the petitioner. Byron M. Coon, Esq., for respondent. PHILLIPS 582 OPINION. PHILLIPS: Respondent has determined deficiencies in income tax against petitioner for the fiscal years ending April 30, 1923, 1924, and 1925, in the respective amounts of $1,820.13, $217.54, and $260.01. The error alleged is that respondent has refused to allow depreciation at the rate of 2 1/2 per cent on a building owned by petitioner, situated in New York City and built for and operated as a department store. The building extends from 124th to 125th Street, with a frontage on the former of 160 feet and on the latter of 92 feet 6 inches. It is five stories high and has concrete foundations with walls faced with stone on 124th Street, six elevators, and a slag roof. The building was constructed in different units. Grillage steel beams were used in its construction. The parties have accepted the costs and the dates the various units were completed as correctly determined by respondent in his deficiency letter. The only issue is the rate to be used in computing the allowance for depreciation. 2082 Respondent has allowed a rate of 2 per cent, which petitioner insists is insufficient. Petitioner introduced two witnesses - a bookkeeper, and the architect who superintended the construction of the building. The latter was an architect of long and valuable experience and was thoroughly qualified to testify as to the costs and useful life of the various units, such as foundations, roof, walls, elevators, plumbing, wiring, ventilator and heating systems, and other component parts of the building. He reached the conclusion that an average rate of depreciation in excess of 3 per cent was required. In view of the testimony and the contentions made by counsel for the parties certain general observations regarding the method of determining a composite rate of depreciation may be justified. In the case of such items as painting and window glass, where removals are charged off as a part of the annual expense and allowed as deductions in computing taxable income, the original cost should be treated as recoverable over the life of the building rather than over the life of the particular item. Where, however, as in the case of elevators, plumbing and heating systems, roof and other items, 2083 the *583 life is less than that of the building and renewals are not charged off as an annual expense, the cost should be treated as recoverable over their useful life. The life of the exterior walls is only one factor to be considered. The evidence sustains the petitioner's claim for an allowance computed at the rate of 2 1/2 per cent. Decision will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622558/	Levitt & Sons, Inc., Petitioner, v. Commissioner of Internal Revenue, RespondentLevitt & Sons, Inc. v. CommissionerDocket No. 109482United States Tax Court5 T.C. 913; 1945 U.S. Tax Ct. LEXIS 62; October 15, 1945, Promulgated 62 Decision will be entered for the respondent. Petitioner was organized in 1938 in a merger of three corporations, one of which was Abraham Levitt & Sons, Inc. It acquired the assets of the predecessor organizations, subject to all liabilities. Among the assets acquired were some land and proceeds formerly owned by the Rockville Corporation, which had been acquired by Abraham Levitt & Sons, Inc., from 1930 to 1933. Abraham Levitt owned stock in Rockville Corporation and in petitioner. In 1938 dissatisfied stockholders of Rockville Corporation sought an accounting of the business of Rockville Corporation, which had been managed by Abraham Levitt, and they made demands upon Abraham Levitt, William Levitt, petitioner's president, and upon petitioner for damages to them as stockholders. The demand was made upon petitioner as an ultimate transferee of property of Rockville. After protracted negotiations, Abraham Levitt and petitioner effected a settlement in December 1939 with the complaining stockholders of Rockville Corporation, as a result of which they gave up their stock in Rockville Corporation, gained control of another corporation, Babylon Harbor, Inc., received lands from63 Abraham Levitt, and $ 65,000 cash from petitioner. Upon the facts, held, that the $ 65,000 did not constitute an ordinary and necessary expense of petitioner in the conduct of its business. The holding is made pursuant to further proceedings under a mandate of the United States Circuit Court of Appeals for the Second Circuit. See Levitt & Sons, Inc. v. Nunan, 142 Fed. (2d) 795. Carl Sherman, Esq., and Louis Goldring, Esq., for petitioner.Francis S. Gettle, Esq., for respondent. Harron, Judge. HARRON 914 Respondent64 made two adjustments in petitioner's taxable net income for the fiscal year ended June 30, 1940, which resulted in a deficiency in income tax of $ 14,785.49. Petitioner has conceded that one of the determinations is correct and that there is some deficiency in tax, but it contests the disallowance of a deduction of $ 65,000, a sum which was paid to stockholders of Rockville Centre Community Corporation. Petitioner claims that it is entitled to deduct the above amount as an ordinary and necessary business expense, and the only question to be decided is whether petitioner is entitled to such deduction. That question is now considered after further hearing of this proceeding pursuant to a mandate of the United States Circuit Court of Appeals for the Second Circuit, at which additional evidence was received. Upon that evidence, and the evidence adduced at the original hearing, new findings of fact are made.Memorandum findings of fact and opinion were entered on May 19, 1943. Upon the facts it was held that the expenditure in question was not deductible as an ordinary and necessary business expense, nor as a loss. Petitioner appealed to the United States Circuit Court of Appeals65 for the Second Circuit. The Circuit Court concluded that the expenditure was not deductible as a loss, but did not arrive at a conclusion upon the question of whether it was deductible as a business expense, in the absence of findings of fact by this Court under certain questions. The Circuit Court reversed the order of decision by this Court and remanded the cause to this Court to make findings of fact under the questions set forth below, and stated that under a new order of decision by this Court either party could take a new appeal. See Levitt & Sons, Inc. v. Nunan, 142 Fed. (2d) 795.The questions upon which we are directed to make findings of fact are:(1) Was the taxpayer entirely confident that any suit which Edelman might bring could not succeed?(2) Did it make the payment in question only for the purpose of avoiding the damage to its credit, its reputation, and its business generally which might result from such a suit?(3) Was any such fear which it may have had so far justified that a reasonable person in its place would have thought a settlement at that figure less than the damage which would follow from such a suit?915 FINDINGS66 OF FACT.Petitioner keeps its books and makes its returns on the accrual basis. The return for the taxable year involved was filed with the collector for the first district of New York.Petitioner, a New York corporation, was organized on July 1, 1938; its outstanding stock consists of 1,000 shares; its stock is owned by Abraham Levitt, William J. Levitt, and Alfred S. Levitt, and their wives. William and Alfred are sons of Abraham Levitt. William J. Levitt is president, general manager, and the chief executive officer of petitioner. Petitioner was organized in a merger of three corporations, Strathmore-at-Manhasset, Inc., Craftsmen's Guild, Inc., and Abraham Levitt & Sons, Inc. The stock of all of those corporations was owned by members of the Levitt family. Abraham Levitt had organized a partnership in 1930, in which he and William J. Levitt were partners, conducting a building business under the name of Abraham Levitt and William J. Levitt. The partnership business was incorporated in 1931 or 1932, and was conducted thereafter by the corporation, Abraham Levitt & Sons, Inc. Petitioner upon its organization acquired all of the assets of the three above named Levitt corporations, 67 subject to all liabilities, and petitioner's stock was issued in exchange for said assets, subject to liabilities.Petitioner is a distinct entity, separate from the corporations to which its stock was issued.Included in the assets which were transferred to petitioner in July 1938 were certain parcels of land and the profits and proceeds of certain lands which were formerly owned by Rockville Centre Community Corporation. Petitioner had no dealings with Rockville. It acquired said parcels of land, etc., as set forth above, from Abraham Levitt & Sons, Inc., and/or from William J. Levitt, and/or from Abraham Levitt, and the transactions under which Rockville parted with said property and from which proceeds resulted were made in 1930, 1931, or 1932, under circumstances which will be set forth hereinafter.Rockville Center Community Corporation and Babylon Harbor, Inc., were active corporations in 1927, and thereafter, and Abraham Levitt owned stock in both corporations. He was the president and manager of Rockville for several years. Both of these corporations had the same stockholders. Rockville owned a large tract of land near Rockville Centre, Nassau County, Long Island, and68 Babylon owned a large tract of land in Babylon, Suffolk County, Long Island. Rockville was engaged in the business of subdividing land into lots for sale to builders. In 1929 and 1930 the real estate market was inactive and Rockville Centre Community Corporation's sales of lots diminished. Rockville did not carry on any building operations. 916 Abraham Levitt organized the partnership of Abraham Levitt and William J. Levitt in the latter part of 1929 to engage in the business of building houses. Abraham Levitt at the time was the president and manager of Rockville. He entered into an arrangement under which the partnership was to purchase lots from Rockville. The partnership then built houses on the lots and sold the houses and lots. A running account with Rockville was set up on the books of the partnership and later on the books of the corporation, Abraham Levitt & Sons, Inc. The corporation continued the business of the partnership. The partnership and the corporation were successful in the building and sale of houses. During the years 1930 and 1931 these business enterprises purchased 147 1/2 lots from Rockville. Rockville received in consideration for the lots69 transferred to the Levitt concerns, and/or to Abraham Levitt, and/or to William J. Levitt, some cash plus the purchase money mortgages given by the vendees of the Levitt concerns. The Levitt concerns were able to sell the houses built on the lots acquired from Rockville within about 16 months after completion, so that by 1933 sales had been made of those houses.Abraham Levitt & Sons, Inc., expanded its business, purchased other land in Rockville Centre apart from the land acquired from Rockville Centre Corporation, and, in general, built up a profitable business.The issued stock of Rockville Centre Corporation and Babylon Harbor, Inc., amounted to 250 shares and 1,000 shares, respectively. Abraham Levitt owned 62 1/2 shares of the stock of Rockville and 250 shares of the stock of Babylon.In the latter part of 1938, after petitioner had been organized and had taken over the assets of the Levitt corporations, certain stockholders of Rockville and Babylon, to wit, Isaac Oshlag, Olga Margolin, Benjamin Shapiro, and A. Alexander Edelman, raised questions about the management of the business of Rockville Centre Corporation, the sales of its property, and the proceeds from the property70 of that corporation. The attorney for the above named stockholders of Rockville Centre Corporation made demands for the Rockville Centre Corporation and the above named stockholders upon petitioner, Levitt & Sons, Inc., and upon Abraham Levitt and William J. Levitt as well. The attorney for the dissatisfied stockholders of Rockville, Isidore Schneider, made a demand upon Abraham Levitt, William J. Levitt, and petitioner corporation for an accounting of the property that Rockville formerly owned, and he asked for an audit of the books of the Rockville and Babylon corporations, which were in the possession of petitioner. When the audit was made of the books of the two corporations, Edelman, Schneider, and the others believed that the audit showed that the moneys of Rockville had been spent for improper purposes. Edelman and the others asserted that property had 917 been transferred out of Rockville into corporations owned by the Levitts, or into individual names, for building purposes, and that the Levitts had taken money out of the Rockville Centre Corporation in salaries and in unreasonable charges to that corporation. A demand was made upon Abraham and William Levitt and71 the Levitt companies for the return of or compensation for the assets of Rockville. Most of the claims were made with respect to Abraham Levitt's management of Rockville Centre Corporation, and a few claims were made with respect to Babylon Harbor, Inc. Edelman and the others believed that some funds and property of Rockville Centre Corporation had been acquired by the petitioner corporation as an ultimate transferee, but the petitioner corporation was not the only Levitt corporation they had in mind.The claims of Edelman and the others related to the transactions of the partnership, Abraham and William Levitt, and of the corporation, Abraham Levitt & Sons, Inc., with Rockville Centre Corporation, and to Abraham Levitt's management of Rockville. The petitioner corporation was not organized until July 1938, and it never entered into any transactions with Rockville Centre Corporation.Petitioner had possession of the books of account of the Rockville Centre and Babylon Harbor corporations, and it permitted the accountants for Edelman and the others to examine those books, but did not permit an audit to be made of petitioner's books. Edelman and his associates were not seeking an72 accounting of petitioner's own business.At some time prior to March 23, 1939, Abraham and William Levitt, individually, and the petitioner corporation agreed with Edelman that the claims of Edelman and the others should be settled, and they agreed that $ 65,000 should be paid to Edelman, who was acting for the group of the dissatisfied stockholders of Rockville. Edelman executed an agreement on March 23, 1939, 1 which was accepted by the two Levitts and the petitioner corporation, which recited that the selling price of all of the stock in Rockville Centre Corporation, except the stock in the name of Abraham or William Levitt or Abraham Levitt & Sons, Inc., was $ 65,000, which purchase was "by the Levitts"; that, in addition, the "buyers" of the Rockville stock were to deliver all of their stock, 25 percent, in Babylon Harbor, Inc., and a formal assignment by Rockville Centre Corporation to Edelman of Rockville's claim against Babylon for about $ 111,000; and that $ 5,000 had been received from William and Abraham Levitt and Levitt & Sons, Inc., as a deposit on account of the selling price of the stock in Rockville Centre Corporation. The above agreement was subsequently canceled73 on December 20, 1939, at which time new agreements were executed.918 The understanding arrived at in March 1939, as set forth above, did not terminate the negotiations, and on November 10, 1939, Isidore Schneider wrote a letter to petitioner stating that he had been retained to commence an action in equity against Levitt & Sons, Inc., petitioner, "to account for certain real property or the proceeds thereof received by you in violation of the rights of my said clients, in which action I intend to apply for the appointment of a Receiver of your Company." However, such suit in equity and application for the appointment of a receiver was not instituted against petitioner. Negotiations were continued and in December 1939 the controversy was concluded by the execution of several agreements and releases.On December 20, 1939, Abraham Levitt executed an agreement, as an individual and as the president of Rockville corporation, with74 the four dissatisfied stockholders of Rockville, and with Babylon corporation, under which he agreed to forgive Babylon its indebtedness to him in the sum of $ 8,007.44 and to cause to be conveyed to Edelman certain lots and parcels of land in a tract known as Venetian Shores at Babylon, and to induce Levitt & Sons, Inc., "to settle its dispute with A. Alexander Edelman." The agreement provided that the transfers of land by Abraham Levitt were to be in consideration for the transfer to and the retirement by Rockville of all of its capital stock, except the stock in the name of Abraham Levitt, to wit, the stock owned by Edelman and his associates, and in consideration for the release from all damage claims by Edelman and the others against Abraham Levitt.Also, on December 20, 1939, Abraham Levitt executed a memorandum of sale, his signature being duly acknowledged, by which he purportedly sold his 250 shares of stock in Babylon to Edelman for $ 500.Also, on December 20, 1939, Edelman, Oshlag, and Margolin, as the owners of 187 1/2 shares of stock in Rockville, executed an assignment of said stock to Rockville corporation, their signatures to the assignment being duly acknowledged. 75 On December 20, 1939, and on other dates at about that time, several other documents were executed by Edelman, Shapiro, Margolin, and Oshlag. Some of the documents are releases, releasing the Levitts, as individuals, and certain Levitt corporations, and the petitioner corporation from all claims by them. Edelman, Margolin, and Oshlag assigned to Abraham Levitt all claims against Rockville which they had or might have. Edelman, as president of Babylon corporation, executed a release by Babylon of the Levitts, of petitioner, of other Levitt corporations, and of Rockville corporation from all claims in consideration for the forgiveness of Abraham Levitt of its debt to him of $ 8,007.44, and Edelman's forgiveness of its debt of $ 5,072.39 which petitioner, a creditor of Babylon, had assigned to Edelman, 919 and the acceptance by Rockville of certain property other than money in payment of Babylon's debt to Rockville. 276 On December 20, 1939, Abraham Levitt and William J. Levitt executed a document 3 under which they made certain warranties and representations to Edelman, Margolin, Oshlag, and Shapiro. Their signatures to the document were duly acknowledged before a notary public on December 20, 1939. The document recites, in part as follows:Whereas, Levitt and Sons, Incorporated, a domestic corporation, Rockville Centre Community Corporation, a domestic corporation, Babylon Harbor, Inc., a domestic corporation, A. Alexander Edelman, Abraham Levitt and certain other persons are entering into certain agreements relating to the settlement of claims and the assignment of certain real property and claims, the transfer and retirement of certain stock, the payment of the sum of Sixty-five Thousand ($ 65,000) Dollars, the delivery of certain general releases and other matters, all of which agreements and matters are incorporated herein by reference; andWhereas, to induce the execution of said documents, certain representations, warranties and indemnification agreements are required;Now, Therefore, in order to induce Olga Margolin, Isaac Oshlag, A. Alexander Edelman and Benjamin Shapiro to enter into77 the said agreements and consummate the transactions aforementioned pursuant to and in connection therewith, the undersigned Abraham Levitt and William J. Levitt hereby jointly and severally represent, warrant and agree with the above-named individuals as follows:1. That William J. Levitt is the President and Treasurer of Levitt and Sons, Incorporated and that Abraham Levitt is the President of Rockville Centre Community Corporation.* * * 3. That the aforementioned undertakings and transactions on the part of Levitt and Sons, Incorporated and Rockville Centre Community Corporation have been duly authorized and approved by all of the stockholders and directors thereof * 4. That there are no present obligations, absolute or contingent, matured or unmatured, of Babylon Harbor, Inc. and/or Rockville Centre Community Corporation, excepting mortgages of record and taxes or assessments of any kind, other than those appearing upon the books or in the records of said corporations and that those books and records reflect accurately said debts and obligations of the said corporations. That on March 23, 1939 there was unpaid on a certain mortgage recorded on October 22, 1925 in the office78 of the County Clerk of Suffolk County, in Liber 561, Page 537 of Mortgages, originally in the sum of Fifty Thousand ($ 50,000) Dollars, the principal sum of Twenty Thousand 920 Seven Hundred Twenty-five ($ 20,725) Dollars, and that interest thereon has been paid to April 1, 1939. * * 8. The undersigned jointly and severally further warrant and represent that the agreements and undertakings entered into by Levitt and Sons, Incorporated, delivered simultaneously herewith, and the instruments delivered by it pursuant thereto and in connection therewith are not ultra vires that corporation and that the compliance by the parties herewith indemnified and Babylon Harbor, Inc. with the terms and conditions of their agreements of settlement, assignment and release, delivered simultaneously herewith, shall and do constitute, good, valid and sufficient consideration to said corporation for its undertaking to pay said A. Alexander Edelman the sum of Sixty-five Thousand ($ 65,000) Dollars and for the other undertakings and agreements on its part entered into as part of said settlement, and the undersigned jointly and severally agree that the said corporation will at no time urge, raise79 or plead the defense (partial or complete) of ultra vires and/or want of good, valid or sufficient consideration to or against the said claim or demand against it for the payment in full of the said sum of Sixty-five Thousand ($ 65,000) Dollars, upon which there is now unpaid the sum of Thirty-seven Thousand ($ 37,000) Dollars, or to or against any claim or demand upon any of the aforementioned agreements and undertakings on its part, provided the parties herewith indemnified and Babylon Harbor, Inc. have complied with the terms and conditions on their part to be performed under the said agreements of settlement.* * * On December 20, 1939, the petitioner corporation received a refund of the $ 5,000 which was paid under the agreement of March80 23, 1939, and that agreement was canceled. On the same day the petitioner corporation, Babylon Harbor, Inc., Rockville Centre Community Corporation, Abraham Levitt and William J. Levitt, as individuals, and Edelman, Oshlag, Margolin, and Shapiro executed an agreement 4 in nine counterparts, by the terms of which the "claim against Levitt & Sons, Inc., and all other claims of any kind and nature against any of the persons or corporations to be released under paragraph 1" [and paragraph 2], was settled. The agreement recites that Rockville and Babylon are New York corporations, with stock issued in the respective amounts of 250 and 1,000 shares; and that Margolin, Oshlag, and Edelman own, in varying amounts, 187 1/2 shares of stock in Rockville, and 750 shares of stock in Babylon. The agreement recites further, in part, as follows:Whereas, certain real estate belonging to Rockville was heretofore transferred under circumstances which certain of the parties to this agreement claim made those transfers improper and said parties claim that the transferees of said property and of the proceeds realized upon the development and sale of said property are subject to suit by them; and81 Whereas, the transfers chiefly involved in said claim are described in Schedule "A" attached hereto and made a part hereof; and921 Whereas, it is claimed that among the ultimate and/or intermediate transferees liable for said reasons is a certain New York corporation known as Levitt and Sons, Incorporated; andWhereas, the validity of the said claim is disputed by said transferees, but the aforesaid parties have threatened to commence a suit in equity in which Levitt and Sons, Incorporated would be a defendant; and [Italics added.]* * * Attached to the agreement as "Schedule A" is the description by map and lot numbers of lots deeded from Rockville Centre Corporation to William J. Levitt (215-1/2 lots, by number), and to Abraham Levitt & Sons, Inc. (3 lots by number).By the terms of this agreement it was agreed that Margolin, Oshlag, Edelman, Shapiro, and Babylon Harbor, Inc., would and82 had executed a general release, made part of the agreement, releasing and discharging the petitioner corporation "and others" from all claims, as set forth in the release, and releasing Rockville Centre Corporation from all claims against it, subject to the prior assignment of the claims to Abraham Levitt and the forgiveness by him of said claims. It was agreed, further, that petitioner, Levitt & Sons, Inc., "and others" would and had executed a general release, made part of the agreement, releasing and discharging Margolin, Oshlag, Edelman, Shapiro, and Babylon Harbor, Inc., from all claims as set forth in the release.The agreement provided that, in consideration of the delivery of the releases and the settlement of all of the claims against petitioner and the persons and corporations named in the releases, the petitioner corporation agreed to pay $ 65,000 to Edelman, and to assign to him its claim against Babylon for a debt owing by Babylon in the amount of $ 5,972.39; and that Rockville Centre Corporation agreed to release the petitioner corporation and others from all claims against them.Levitt & Sons, Inc., paid Edelman $ 28,000 when it executed the above agreement, and agreed83 to pay the balance of $ 37,000 in installments.The settlement which was made in December 1939 related solely to Rockville corporation and its stockholders, and to the management of Rockville during years prior to 1938. For reasons which have not been disclosed, Abraham Levitt agreed to compromise the claims of the other stockholders of Rockville. The plan of the settlement appears to have been to eliminate intercompany debts owing by Babylon to Rockville, petitioner, and Abraham Levitt; to transfer lands and cash to Edelman, who was to retransfer such new assets to Babylon or to a new corporation; and to completely separate Edelman and his group from any association with the Levitt enterprises. Edelman acquired Abraham Levitt's stock in Babylon for $ 500, thus eliminating 922 Levitt from that corporation. Edelman and others surrendered their stock in Rockville. The financial condition of Babylon was improved, and Edelman and his associates, the dissatisfied stockholders of Rockville, gained complete control of Babylon.Before petitioner completed its payments to Edelman under the agreement of December 20, 1939, Edelman and his associates complained to the Levitts that 84 the unpaid balance due from Babylon Harbor, Inc., on the mortgage on its properties was $ 28,225 instead of $ 20,725, as was stated in the warranty agreement executed by the Levitts on December 20, 1939. They made a demand upon the Levitts in the spring of 1940 for a further payment of $ 7,500, being the difference, whereupon Abraham and William J. Levitt filed a "Summons and Complaint" against Edelman, Oshlag, Margolin, Shapiro, Isidore Schneider, Sydney Newman, Leonard Bisco, and others, on May 27, 1940, in Nassau County, in the Supreme Court of New York, asking that the warranty agreement executed by the Levitts on December 20, 1939 (Exhibit A attached to respondent's Exhibit E) be reformed by the court to substitute the figure "$ 28,225" for "$ 20,725," upon the allegation that Edelman knew, but concealed such knowledge from the Levitts, the true balance due on the mortgage on December 20, 1939, or at about that time. The Levitts filed, on June 14, 1941, a demand for a verified bill of particulars from the defendants. Among the items requested of the defendants were copies of all of the written agreements which constituted the settlement which was concluded in December 1939. 85 The defendants filed a bill of particulars on September 10, 1941, to which they attached copies of agreements and releases and other documents which constituted the settlement in December 1939. On October 17, 1941, the parties settled this suit by stipulation. The parties stipulated that the plaintiffs would pay the defendants $ 3,900 as a compromise, and that Levitt & Sons, Inc., would pay $ 3,000, the balance due under the agreement of December 20, 1939.Petitioner's business since its incorporation in 1938 has been the building of houses in areas where it bought tracts of land and developed residential sections. In 1938 its business amounted to $ 2,000,000 a year. In 1939 petitioner's business operations were extensive. It had a development of residential property at Village of North Hills, Manhasset, and at Great Neck, on Long Island, and at Yonkers, New York. Petitioner built 200 houses at Manhasset in 1938, which were sold for an average price of $ 10,000 each. At North Hills petitioner had purchased a tract of land which had been the Vanderbilt estate, and it planned a community development there which would center about a community clubhouse, swimming pool, and shopping86 center. The swimming pool had been built at a cost of $ 100,000. Negotiations were pending with New York department stores to lease locations to them for stores. Petitioner was negotiating with the town council 923 at Village of North Hills for their approval of the community clubhouse. Petitioner advertised its developments at great cost, as high as $ 100,000 a year. Petitioner had established a very satisfactory credit line with the Bank of Manhattan, and with vendors of building materials, including Johns-Manville and General Electric.Petitioner's attorney believed that the suit in equity which Edelman threatened to institute against petitioner would not be successful, but he advised petitioner's president, William Levitt, to consider the matter carefully because he, the attorney, knew of instances where such suits involved risks. Petitioner's accountant, David A. Berlin, advised that petitioner should compromise and settle the claim for business reasons. He believed that the publicity which would result from such contest in court would affect the petitioner's reputation, good will, credit, and sales, and would nullify the benefits to be derived from the large expenditures87 for advertising which petitioner was making. William Levitt agreed with Berlin's advice. He believed there was always a chance of losing in any litigation and that petitioner should work out a settlement.The controversy which was settled in December 1939 was among the stockholders of Rockville and Babylon corporations. The claim made was for the return of or compensation for property which Rockville had owned, and the claim which was made against petitioner, in particular, was made upon the belief that petitioner was a transferee or an ultimate transferee of some of Rockville's property. Petitioner's agreement to pay Edelman $ 65,000 was part of a broad plan of settlement among the stockholders of Babylon and Rockville, and petitioner's payments of cash were not the only consideration received by Edelman in the settlement of his claims. The claims and the dispute originated out of transactions between Rockville and business entities other than petitioner which took place before petitioner came into existence. The transaction, the claims, and the settlement did not develop from any business dealings of petitioner.The warranties made by Abraham and William Levitt under the document88 dated December 20, 1939, which is Exhibit A attached to respondent's Exhibit E, and the agreement among petitioner, Edelman, and others bearing the same date, which is respondent's Exhibit B, were part of the settlement under which petitioner paid the $ 65,000.Petitioner was obligated to pay the liabilities of Abraham Levitt & Sons, Inc.Petitioner was not entirely confident that any suit which Edelman might bring could not succeed.Petitioner did not make the payment in question only for the purpose of avoiding the damage to its credit, its reputation, and its business generally which might result from such a suit.924 The amount of $ 65,000 was arrived at by all of the parties to the entire settlement in connection with the arrangements whereby Babylon corporation was freed from obligations to pay debts which on the books of account were about $ 125,000, and Abraham Levitt agreed to deed a substantial number of lots at Venetian Shores to Edelman, and Edelman and others agreed to surrender their stock in Rockville, and Abraham Levitt agreed to transfer his stock in Babylon to Edelman. There is no evidence relating to the fair market value of the lots which Levitt agreed to89 transfer to Edelman, or the value of the total consideration received by Edelman in the entire settlement. Edelman had made a claim for about $ 200,000. Edelman regarded the $ 65,000 as part of the consideration for the surrender of the Rockville stock by himself and others.Petitioner's decision to pay $ 65,000, and the agreement by all the parties concerned that the sum of $ 65,000 from petitioner would be sufficient, had some relation to Abraham Levitt's agreements and to the entire consideration received by Edelman in the settlement. Petitioner's considerations with respect to whether it would agree to pay the amount of $ 65,000 or some other amount, more or less, were not founded solely upon comparative estimates of the costs of defending a lawsuit in which it would be the only defendant, or one of several defendants. Petitioner received releases from all claims of Edelman in consideration for the payment of $ 65,000 and his agreement not to institute a lawsuit in which petitioner would be named a defendant. 590 The sum of $ 65,000 was not paid or incurred by petitioner in the conduct of its own business, and it was not an ordinary expense.OPINION.Having heard further evidence in this proceeding and having before us a record which contains evidence which was lacking in the original record, it is necessary to make entirely new findings of fact, and with new findings of fact it is necessary to reconsider the question. The only question to be decided is whether petitioner is entitled to deduct $ 65,000 as an ordinary and necessary business expense incurred in carrying on its business within the provisions of section 23 (a) (1) of the Internal Revenue Code. Petitioner has the burden of proving that the expense comes within the statutory provision. There must be proof that the expense was incurred in the conduct of petitioner's business, and that it was both ordinary and necessary. Welch v. Helvering, 290 U.S. 111">290 U.S. 111.It is apparent that there was dissension between a group of stockholders of Rockville Centre Corporation and the Levitts. Petitioner's 925 witnesses testified that Edelman's claim was without merit and was made under such circumstances91 that it amounted to a "holdup" directed at petitioner only. On the other hand, respondent has introduced evidence which shows clearly that Edelman's claim was for an accounting of the assets of Rockville and that it was made against others besides petitioner. The evidence strongly indicates that if any suit had been instituted by Edelman it would have been against Abraham Levitt, William J. Levitt, Abraham Levitt & Sons, Inc. (if still in existence), and others, and that petitioner would have been joined in the action only as a transferee of the Levitts, as individuals, and/or of Abraham Levitt & Sons, Inc., with respect to Rockville's former assets.Petitioner has the burden of proving its contention that the expenditure in question was an ordinary and necessary business expense. Petitioner's evidence is limited. Petitioner offered only testimony of witnesses, and their testimony does not relate to the negotiations preceding the final settlement, or to the broad settlement, which respondent's evidence shows encompassed more than a cash payment by petitioner. Respondent's evidence, consisting of the agreements which were executed in the closing of the dispute, shows that a great92 deal more was involved in the settlement than petitioner would have us understand from its evidence. Some of respondent's evidence consists of documents which were executed in the settlement. Petitioner, at the trial, did not deny that these agreements and documents were executed and were part of a broad settlement, nor did petitioner cross-examine respondent's witness regarding these documents. Under such circumstances, they must be considered as evidence of what the settlement involved. And they emphasize the narrow area which petitioner's evidence covers.The evidence presented by petitioner is unsatisfactory in many respects, and part of it is unconvincing. For example: Petitioner's evidence does not show clearly against what persons, corporations, and property the claim of Edelman was directed. The implication of petitioner's evidence is that Edelman, acting for himself and other stockholders of Rockville, directed his claim against petitioner primarily, if not solely, for no reason other than to stage a "shakedown" at a time when petitioner was prosperous and when its affairs were at such a crucial point that petitioner could do nothing except to pay a ransom. Thus, Abraham93 Levitt, whose testimony was brief, testified that there was never any demand made upon him by Edelman "in any shape, manner or form." His testimony is understood to mean that no demand was made upon him by any of Rockville's stockholders at any time in 1938 or in 1939, during the period when Edelman made the demands which gave rise to the issue here. But when this proceeding came on for further hearing respondent called Edelman's 926 attorney as a witness and introduced evidence relating to the entire settlement made with Edelman, all of which evidence shows clearly that demands were made by Edelman upon Abraham Levitt.Petitioner's evidence carries the implication that Edelman's claims were satisfied solely by petitioner's payment of $ 65,000. Petitioner did not offer in evidence the agreement of December 20, 1939, pursuant to which it agreed to pay $ 65,000, nor the earlier agreement of March 23, 1939, which referred to payment of the same amount. Respondent has introduced those agreements in evidence, as well as about twenty other documents which relate to the settlement. All of this evidence rebuts the inference of petitioner's evidence that Edelman made claims against94 petitioner only and that the only consideration which he received from petitioner was $ 65,000, and that the only consideration he received in the entire settlement of his claim was the $ 65,000.Petitioner did not attempt to prove that the various agreements, most of which are attached to respondent's Exhibit G, were not in fact executed by Abraham Levitt, William Levitt, and other persons, and by corporations other than petitioner, or that the terms of such agreements were not carried out. Petitioner made a general objection to the receipt of any additional evidence, to all of respondent's evidence, upon the ground that further proceedings pursuant to the Circuit Court's mandate should not involve the receipt of any additional evidence. However, in its supplemental brief petitioner does not challenge the authenticity of the documents attached to Exhibit G, but, preserving the general objection, petitioner states that it is willing "to assume, for purposes of argument, that the testimony and exhibits have been properly admitted in evidence."The evidence shows that negotiations among the parties extended over many months in 1939 and that finally several adjustments were made whereby95 the dissatisfied stockholders of Rockville, who were also stockholders of Babylon, came out of the controversy in complete ownership of Babylon, and that the financial position of Babylon was changed and, apparently, improved. Edelman and his associates stepped out of Rockville by surrendering their stock. The settlement involved, primarily, adjustments of the assets and liabilities of Babylon. The question whether petitioner's contribution of $ 65,000 in the entire settlement was a business expense of petitioner can not be decided fairly and correctly without giving consideration to the entire settlement, including all of the consideration which Edelman and his associates received. When all of the evidence is carefully considered, petitioner's argument that Edelman was simply conspiring to put petitioner "over a barrel" and shake the change out of its corporate pockets is not convincing.927 Petitioner claims a deduction for a business expense. It is necessary for petitioner to show as clearly as possible for what it expended the sum in question, or, if that is not possible, why it made the expenditure. It has been stipulated that petitioner had agreed to pay the liabilities96 and obligations of the corporations which transferred their assets to petitioner in 1938. One of the corporations was Abraham Levitt & Sons, Inc., which we shall refer to as the Abraham Levitt corporation. Edelman was complaining about transfers of property from Rockville to the Abraham Levitt corporation, and, as far as we can observe from the evidence, the chief reason for lodging a claim against petitioner was that petitioner was said to be a transferee of the Abraham Levitt corporation's assets, or of the Levitts, individually. Edelman sought to recover property which had been transferred to the Levitt partnership, the Abraham Levitt corporation, and to any other corporation or persons, or to obtain consideration for such property. It is to be assumed that the Levitts did not admit that there were any improprieties committed in Abraham Levitt's management of Rockville and in the transactions between Rockville and the partnership and the Abraham Levitt corporation, but it appears to be true that Abraham Levitt deeded certain lands to Edelman and gave other considerations in the settlement. Thus, Edelman appears to have succeeded in recovering both property and money, as he97 set out to do. In this settlement, petitioner did not surrender any of the property which had come to it, which had been owned by Rockville, but petitioner did pay out $ 65,000. We can not assume that this payment had no relation whatever to two stipulated facts, which are, that petitioner was obligated to pay the liabilities of Abraham Levitt & Sons, Inc., and that it had received property and proceeds from property formerly owned by Rockville. If the payment of $ 65,000 by petitioner had no relation to those stipulated facts, petitioner should have and could have made the real facts clear.There was surely a time prior to the closing of the dispute when Abraham Levitt discussed with the president of petitioner, his son, what arrangements he was making with Edelman, how much cash was required in the settlement, and who should pay the cash, and why. There was just as surely a time in the negotiations when Edelman discussed how much or how little cash would be satisfactory to him in the entire settlement, and what other consideration he would require. We do not believe that no reason was declared by Edelman for requiring the payment of some cash, nor that, as between petitioner98 and Abraham Levitt, there was no reason why petitioner was to contribute cash to the settlement rather than Abraham Levitt, who, apparently, was willing to do other things, and purportedly did. Petitioner has not produced evidence relating to these pertinent questions. 928 Instead, petitioner drew a curtain over the scenes of the negotiations and produced only the testimony of its president and accountant to the effect that they believed it to be to petitioner's best interests to pay $ 65,000 and thereby avoid litigation.Respondent's evidence compels us to conclude that petitioner was fully aware of the entire settlement and of the contributions which Abraham Levitt made to the settlement. It would be unreasonable to believe that petitioner made its contribution blindfolded, or that the cash payment by petitioner was separate and apart from the other parts of the settlement. Upon all of the evidence, we find unconvincing petitioner's argument that it paid the sum in question only to avoid the embarrassment and expense of being a party to litigation such as Edelman threatened to institute. Petitioner's argument places an interpretation upon the expenditure and the circumstances99 attending the agreement to make the payment which is not supported by the evidence.The testimony given for petitioner in support of its contention that the expenditure was made only to avoid a lawsuit founded upon a claim without any legal merit, and to preserve its credit, good will, and business, can be given little weight in view of the general evidence. The testimony is, in part, prejudiced. 6 Also, it is misleading, in that it does not tell the whole story about the settlement which was made.After careful consideration of all of the evidence, it must be concluded that petitioner paid the $ 65,000 either in payment of a liability of Abraham Levitt100 & Sons, Inc., or to discharge obligations of Abraham Levitt. In either event, the payment can not be held to be an ordinary business expense of petitioner. The payment was either a part of the cost of the assets which petitioner acquired from Abraham Levitt & Sons, Inc., and, therefore, a capital expenditure; Athol Mfg. Co. v. Commissioner, 54 Fed. (2d) 230, affirming 22 B. T. A. 105; Caldwell & Co. v. Commissioner, 65 Fed. (2d) 1012, affirming 26 B. T. A. 790; Watab Paper Co., 27 B. T. A. 488; F. S. Stimson Corporation, 38 B. T. A. 303; Brown Fence & Wire Co., 46 B. T. A. 344; or it was a distribution to a stockholder, Abraham Levitt. See F. S. Stimson Corporation, supra.We think that the most reasonable view to take of the expenditure, on the entire evidence, is that petitioner made the payment as a transferee of the assets of Abraham Levitt & Sons, Inc., in payment of a liability of that corporation, and that, therefore, the 929 101 expenditure constitutes part of the cost of petitioner's original assets, and is a capital expenditure.There is a further reason for holding that the expenditure is not deductible as a business expense. We understand that there is the statutory requirement that an expenditure, to be a business expense, must be paid or incurred in carrying on the taxpayer's business. In Hales-Mullaly, Inc., 46 B. T. A. 25, 34, we said: "Moreover, we think it is also material, and incumbent upon petitioner to show, that the suit resulted, at least in part, from some action of the corporation either in, or incidental to, its ordinary business." The evidence shows that the controversy which was settled in December 1939 was between stockholders of Rockville over transactions between Rockville and business entities other than petitioner which were consummated prior to the incorporation of petitioner. The evidence strongly indicates that petitioner was drawn into the controversy only as an alleged transferee of property formerly owned by Rockville, which was transferred to petitioner, presumably, by Abraham Levitt & Sons, Inc. The evidence strongly indicates that the settlement102 was a settlement made primarily by Abraham Levitt with other stockholders of Babylon and Rockville, and that petitioner was a party to the settlement, again, because it was a transferee of Abraham Levitt & Sons, Inc. Upon all of the evidence, it must be concluded that the controversy did not arise out of any transaction of petitioner in or incidental to its ordinary business. In our opinion, the result to be reached in this case should be the same as in the Hales-Mullaly case, which we consider is controlling here.We have reviewed many cases where an expenditure made by a taxpayer to settle a lawsuit, or to avoid difficult consequences, or to compromise claims has been held to be a deductible business expense. Among such cases we find the following: Kornhauser v. United States, 276 U.S. 145">276 U.S. 145; First National Bank of Skowhegan, 35 B. T. A. 876; Edward J. Miller, 37 B. T. A. 830; Robert Gaylord, Inc., 41 B. T. A. 1119; Helvering v. Community Bond & Mortgage Corporation, 74 Fed. (2d) 727; International Shoe Co., 38 B. T. A. 81;103 Dunn & McCarthy v. Commissioner, 139 Fed. (2d) 242. The element which is common to all of the above cases, but which is lacking in this proceeding, is that in each case an expense was paid or incurred in a transaction which grew out of some business transaction of the taxpayer in the conduct of its business, or was made primarily to preserve existing business, reputation, and good will. In our opinion, the question in this proceeding does not come within the ambit of any of the above cases because the expenditure in question was not made in the conduct of petitioner's ordinary business.930 It is held that the expense in question was not an ordinary business expense. Petitioner has failed to overcome the prima facie correctness of respondent's determination, and respondent is sustained.We have made the findings we were directed to make by the Circuit Court under its questions one and two. 7 With respect to question three, a finding of fact has been made which relates to that question. A finding has been made to the effect, in general, that petitioner's payment had some relation to the agreements made by Abraham Levitt, and that the104 amount of $ 65,000 had some relation to the total consideration received by Edelman in the entire settlement. This finding is based upon respondent's evidence, which was not seriously questioned or denied by petitioner. We are obliged to express the view that we believe that the testimony of petitioner's witnesses to the effect that the sum in question was paid for no other reason than to obtain releases and a settlement of the threatened litigation is not entirely accurate, and that it does not reveal all of the reasons that entered into petitioner's agreement to contribute $ 65,000 to the settlement. The testimony for petitioner is that the amount was arrived at by a process of "bargaining." We believe that is true, but that the bargaining involved the agreements of Abraham Levitt and the arrangements affecting Babylon Harbor, Inc., as well as the payment of cash by petitioner.105 We have endeavored to make some finding of fact under question three which would come closer to the type of answer which the question requires, but that is impossible because of the new evidence which has been received. There is no evidence relating to any estimate in dollars of the costs of defending the threatened litigation or of the costs of the damages which petitioner's officers and directors feared. We believe that the amount which a "reasonable person" standing in petitioner's position would have thought should be paid in cash in working out the settlement would depend upon the knowledge which the "reasonable man" had of all of the negotiations and all of the consideration 931 which was to pass in the entire settlement. We have considered the question, and complied with the Circuit Court's direction to us, as far as can be done.Petitioner objected to the receipt of additional evidence in this case. Petitioner has not cited any authority to support its general objection that it was improper to receive further evidence, and it appears that petitioner has abandoned the general objection.Further evidence was received for the purpose of enabling this Court to make findings106 of fact upon certain questions, as we were directed to do by the Circuit Court. It is the statutory duty of this Court to make findings of fact in the proceedings before us. Sec. 907 (b), Revenue Act of 1926, as amended by sec. 601, Revenue Act of 1928; Diller v. Commissioner, 91 Fed. (2d) 194, and cases cited. It is our understanding that the admission of additional evidence after a cause is remanded is a matter resting within our discretion, and, also, that after reversal of the decision which has been reviewed by the Circuit Court and the remandment of the cause for further proceedings not inconsistent with the Circuit Court's opinion, our duty to act upon the petition for redetermination of the respondent's determination is not different from what it was before the erroneous decision was rendered. Swenson v. Commissioner, 69 Fed. (2d) 280, 281.The Circuit Court did not expressly remand this cause to this Court to take further evidence, but, in remanding the cause to us to make further findings of fact, we understand that the Circuit Court has left it to our discretion whether or not additional evidence 107 should be received. Cf. Belridge Oil Co. v. Helvering, 69 Fed. (2d) 432, 433; Kelleher v. Commissioner, 94 Fed. (2d) 294, 296; cf. Peavy-Byrnes Lumber Co. v. Commissioner, 86 Fed. (2d) 234, 235.The Circuit Court held that the expenditure in question is not deductible as a loss. That decision is now the law of the case. The Circuit Court did not make a decision upon the question whether the expenditure is deductible as a business expense under section 23 (a) (1), and so upon that question there is no established law of the case. The Circuit Court expressed the view that payments to protect a business "generally" are ordinary expenses. We do not understand that the court concluded and held that in this case the particular expenditure was "ordinary." The court did not decide that the expenditure was "necessary." The expenditure must be both ordinary and necessary. Welch v. Helvering, supra.This question, being left undecided by the Circuit Court on the appeal from our former decision, must be reconsidered and decided by this Court under the108 remand, and we have reconsidered and decided the question.Decision will be entered for the respondent. Footnotes1. This agreement is respondent's Exhibit C. It is incorporated herein by reference.↩2. These documents are attached to and made part of a bill of particulars which was filed by Edelman and his associates and his attorneys, as defendants, upon the demand of Abraham and William Levitt, as plaintiffs in the Supreme Court of New York, in Nassau County, on September 10, 1941, which bill of particulars is respondent's Exhibit G in this proceeding. The Levitts instituted a suit against Edelman in the Supreme Court on May 27, 1940.↩3. Respondent's Exhibit E in this proceeding is the complaint in the suit of Abraham Levitt and William Levitt v. Edelman and others↩, instituted in the Supreme Court of New York, Nassau County, on May 27, 1940. The above agreement is Exhibit A attached to said complaint.4. This agreement is respondent's Exhibit B in this proceeding. It is incorporated herein by reference.↩5. The above finding is made with reference to question three propounded by the Circuit Court.↩6. Berlin, petitioner's principal witness and accountant, was asked and answered as follows: Q. Did you know the facts on both sides, from the Levitt interest and the Edelman interests?A. Well, I am prejudiced as far as the other interests were concerned, Edelman and his associates, because I felt it was merely a matter of holding somebody up who had plenty.↩7. The record in this proceeding does not support a finding of fact that petitioner's officers "were not in the least troubled as to the possible success of the suit." Petitioner's president testified under a deposition that he went on "the theory that you can lose any kind of a case" (p. 16 of the deposition), and Gustave Simons, petitioner's attorney, testified that he could not guarantee that Edelman would not succeed eventually "because there have been similar cases that were very much like that where very competent counsel have been very much surprised on both sides" (p. 88 transcript of original hearing). The additional evidence received at the hearing under the mandate shows that petitioner and Abraham and William Levitt had agreed to pay Edelman $ 65,000 on March 23, 1939. Thereafter, other considerations appear to have reopened the negotiations, and finally on November 10, 1939, Edelman's attorney advised petitioner that he had "patiently negotiated the matter" and that unless it could be "amicably disposed of" and the damage claims of his clients satisfied, an action in equity would be commenced. Upon the entire record it has been found that petitioner was not entirely confident that any suit which Edelman might bring could not succeed.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622560/	KENNETH AUSTIN BROWN, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentBrown v. CommissionerDocket No. 572-77.United States Tax CourtT.C. Memo 1979-434; 1979 Tax Ct. Memo LEXIS 90; 39 T.C.M. (CCH) 397; T.C.M. (RIA) 79434; October 24, 1979, Filed 90 Petitioner operated a tutoring service for persons with learning disabilities. He rented an office. He later rented another office on a five-year lease and renovated it. He incurred telephone, promotion and transportation expenses in developing a computer monitoring program. Held, (1) petitioner is entitled to deduct under section 162, I.R.C. 1954, rental expenses paid for use of his 16th Street office; (2) costs of renovating his leased New Hampshire Avenue office constitute capital expenditures under section 263; and (3) the telephone, promotion and transportation expenditures for the computer monitoring program qualify as deductible business expenses under section 162 because they were related to the conduct of an existing business. Kenneth Austin Brown, pro se. Ruud L. DuVall, for the respondent. DAWSONMEMORANDUM FINDINGS OF FACT AND OPINION DAWSON, Judge: This case was assigned to and heard by Special Trial Judge Francis J. Cantrel pursuant to section 7456(c) of the Internal Revenue Code191 and General Order No. 6 of this Court, 69 T.C. XV. 2 The Court agrees with and adopts his opinion which is set forth below. OPINION OF SPECIAL TRIAL JUDGE CANTREL, Special Trial Judge: Respondent determined deficiencies in petitioner's Federal income taxes for 1969, 1970, and 1971 in the amounts of $773.84, $802.79, and $576.32, respectively. The issues for decision are (1) whether petitioner is entitled to deduct rental expenses of $1,324 paid for use of an office in 1972 as an ordinary and necessary business expense under section 162; (2) whether the costs of renovating a rented office are currently deductible under section 162 or whether such costs are capital expenditures under section 263; and (3) whether telephone, promotion, and transportation expenses incurred in 1972, 1973, and 1974 in the development of a computer monitoring program constitute deductible business expenses under section 162 or nondeductible preparatory expenses incurred in the development of a new trade or business. FINDINGS OF FACT Some of the facts were stipulated and are found accordingly. Petitioner 92 claimed net losses on his 1972, 1973, and 1974 tax returns in the amounts of $6,522.80, $6,890.45, and $6,884.63, respectively; each of these losses was carried back three years.3 The deficiencies in issue for the years 1969, 1970, and 1971 result from the carrybacks and reflect expenses disallowed by respondent for the years 1972, 1973, and 1974, respectively. Thus, the facts and issues discussed herein relate primarily to the years 1972, 1973, and 1974. Petitioner was a legal resident of Hyattsville, Maryland, when he filed his petition herein. He filed his individual Federal income tax returns for 1969, 1970, and 1971 with the office of the District Director, Internal Revenue Service, at Baltimore, Maryland. He worked for the Department of Commerce as a research analyst until late in 1971 when he was placed on leave without pay due to extended illness. He commenced proceedings to obtain permanent disability retirement during 1972 93 and began to receive a U.S. Civil Service disability retirement annuity in the amount of $680 per month in 1973. Petitioner suffers from hypertension, and his health has generally deteriorated since 1967 and throughout the years in issue. While working as a research analyst for the Department of Commerce in 1969, 1970, and 1971 petitioner received wages in the amounts of $13,089.71, $14,589.60, and $14,700.32, respectively. During this same period he operated a tutoring service as a sole proprietorship transacting business under the name of AAA Mathematics, Science & Computer Tutors. The tutoring service incurred a net loss in all three of these years, and the losses were deducted from petitioner's wage income on his 1969, 1970, and 1971 tax returns. 4 After 1971 petitioner's full-time occupation was the operation of his tutoring proprietorship. With the exception of $405.45 in wages in 1973 and $107.86 in interest income in 1974, petitioner's sole sources of income in 1972, 1973, and 1974 were disability payments and tutoring fees. Petitioner charged $10 per hour for his tutoring services, and during the years 1972, 1973, and 1974 he reported income based on 115, 127, and 102 94 lessons, respectively. During the year 1972 petitioner instructed about 65 students.He deducted $2,364 for rental expenses incurred in the operation of his tutoring business on his 1972 tax return. He rented two small single rooms suitable for one-to-one private tutoring at Sixth Street and at New Hampshire Avenue in Washington, D.C., for part of the year 1972. Respondent allowed the rental expense ($1,040) for these two facilities in his notice of deficiency. Petitioner also rented in 1972 an apartment at 16th Street, Washington, D.C., which served as his base of operations for conducting correspondence and administrative activities. The facility at 16th Street contained office furniture and a telephone but did not contain a couch, a bed, or any other personal furniture; petitioner did not stay overnight at that location. Petitioner decided in 1972 to concentrate his marketing efforts on obtaining business from Vietnam veterans through his contacts with the Veterans Administration (V.A.) and Washington, 95 D.C., area colleges. The V.A. and local colleges required tutoring services to maintain an office as an assurance of the legitimacy of the operation before they granted approval for their students' use of a particular tutoring business. The V.A. inspected petitioner's 16th Street office in 1972 before they granted approval of his business. Petitioner's correspondence and negotiations with the V.A. and colleges were conducted by telephone and mail from the 16th Street office. He taught a few lessons at the 16th Street office and spent a small amount of time there working on the research and development of his computer monitoring system (discussed infra). However, the 16th Street office existed primarily for correspondence and maintaining a necessary front for the agencies and colleges to assure them of the legitimacy of his operations. Petitioner deducted $1,324 expended for the rental of the 16th Street office as a business expense on his 1972 return. Respondent disallowed this deduction in his notice of deficiency on the ground that petitioner failed to show that the rent constituted an ordinary and necessary business expense. Petitioner abandoned the 16th Street facility 96 in 1973 and moved his tutoring business to an office at 6711 New Hampshire Avenue, Washington, D.C. n2 When petitioner obtained a five-year lease on the New Hampshire office in 1973, it was uninhabitable. He expended $2,265.86 in 1973 to renovate the premises and make it habitable. He expended an additional $540.73 in revovating the office in 1974. Most of these expenses were incurred in purchasing building materials, as much of the remodeling work was done by petitioner and friends. At the time of trial the business still maintained its office and principal place of business at this location. Petitioner deducted renovation expenses of $2,265.86 and $540.73, respectively, on his 1973 and 1974 tax returns as a business expense. Respondent determined in his notice of deficiency that these expenses constituted capital expenditures and, thus, were not wholly deductible in the year the expenses were incurred. Respondent capitalized these renovation expenses and allowed the appropriate depreciation deductions over the five-year life of the lease on the office. 6 Petitioner concedes that if he is not entitled to deduct all of the renovation expenses in 1973 and 1974 the depreciation 97 deductions allowed by respondent in his notice of deficiency are correct. 5 Petitioner deducted $892.42 on his 1974 tax return for "teaching materials and equipment." He expended $500 of this total amount for a camera. Petitioner concedes that the $500 spent for the camera was not currently deductible as claimed on his return but rather should have been capitalized and depreciated over a five-year period at the rate of $100 per year as determined by respondent in his notice of deficiency. During 1972 petitioner expended $1,889.25 and $1,905.35, respectively, for promotion and transportation expenses. During 1973 he expended $506.40, $698.06, and $2,430.34, respectively, for telephone, promotion, and transportation. During 1974 he expended $689.67, $826.15, and $885.44, respectively, for telephone, promotion, and transportation. Petitioner deducted all of the above items as business expenses on his 1972, 1973, and 1974 returns. The parties stipulated that 75 percent of the promotion expenses and 50 percent of the transportation 98 expenses claimed on petitioner's 1972, 1973, and 1974 returns related to the development of the computer monitoring program (discussed infra). They further stipulated that $126.60 and $172.42, respectively, of the 1973 and 1974 telephone expenses related to the development of the computer monitoring program. Respondent, in his notice of deficiency, disallowed all expenses deducted in 1972, 1973, and 1974 which related to the development of the computer monitoring program on the ground that they were expenses incurred in promoting a contemplated "new business" and were, thus, nondeductible under section 162. 7Petitioner attended college over an extended period of years (approximately ten) and undertook the study of many subjects covering a wide range to topics for the specific purpose of developing the skills and knowledge he felt were necessary in the private tutoring of students possessing learning disabilities. 8 He tutored students since graduating from college 99 in 1963 in a broad range of subjects (e.g., music, foreign languages, mathematics, science, grammar). During 1967 petitioner's health became increasingly uncertain, to the extent that he was forced to turn down business referred to him by long-standing clients. Sometime during 1967, in the face of deteriorating health and business setbacks, he developed the concept of the "computer monitored program". He decided that the best way to continue the operation of his tutoring business was to find innovative ways to promote private tutoring and to develop a tool to lighten the administrative burden of operating the business and supervising additional tutors, if needed to handle the work load. When petitioner was declared disabled by doctors and forced to leave his job with the Federal Government, he intensified his efforts to develop the computer monitored program. During 1972, 1973, and 1974 he spent much of his time developing the computer monitored program, researching similar programs, exploring market areas, and trying to develop interest in the project. The research he performed during this period on the project did not deal primarily with computer technology. Much of the information 100 obtained from the research performed on the project enabled petitioner to improve teaching methods and educational psychology principles which he immediately applied in his tutoring activities in the form of refined teching techniques. The computer monitored program was designed to have three capabilities. First, it would direct the tutoring process by monitoring what the student and the instructor were doing. Second, it would enhance the supervisory function or administrative function by keeping track of much data that would otherwise be kept track of manually. Third, it would perform a diagnostic function in monitoring the student's progress with a particular subject matter. Petitioner developed teaching techniques and lesson plans which could be programmed into the computer by using a special code that he had developed. Various types of data could be stored in the computer. A profile of the student listed the student's name, address, educational institution, educational 101 background, beginning skills, goals, and subject matter the student was being tutored in. A subject matter profile listed the student's educational objectives, starting point, goals, lesson plans, and what progress was made during each lesson.The program could eliminate most of petitioner's record keeping and enable him to spend most of his time tutoring students. Since the computer would also keep track of each student's progress from lesson to lesson, the program could enable him to personally tutor a greater number of pupils. Ideally, petitioner believed the program could enable his business to tutor a large number of students and hire additional instructions. However, his primary goal in developing the system was not to increase his business profits but to enhance his teaching process by having specific information about each student's progress readily derivable and accessible. Petitioner did not complete the development of the computer monitoring system to the point where it could be placed into operation until 1976. 9102 While respondent does not question the legitimacy of petitioner's business or the substantiation of any of the claimed expenses, the expenditures were disallowed on the ground that they do not constitute deductible ordinary and necessary business expenses. OPINION Initially, we address the issue of the deductibility of the rental expense incurred in 1972 for the use of the 16th Street premises. Section 162(a)(3) provides that: 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, or property to which the taxpayer has not taken or is not taking title or in which he has no equity. We believe that the record clearly shows that petitioner's rental expense for use of this facility is deductible as an ordinary 103 and necessary business expense. The premises were used solely for business purposes. They were furnished with a telephone and office fixtures and no personal furniture. The correspondence and negotiations of petitioner's tutoring proprietorship were condcted by telephone and mail from this site. The maintenance of an office for administrative purposes, in addition to the use of the small single-room facilities used for one-to-one private tutoring, was a reasonable and ordinary expense for petitioner's tutoring proprietorship. Furthermore, the maintenance of an administrative office by the business was a necessary expense due to the requirement of local colleges and the V.A., which inspected the 16th Street premises, that the business maintain an office to assure the legitimacy of the tutoring operation before they would grant their approval of petitioner's tutoring business. 10104 Next we consider the issue of whether the renovation expenses incurred by petitioner in 1973 and 1974 are currently deductible business expenses under section 162 or whether such expenses are capital expenditures under section 263. Section 263(a) provides that no current deduction shall be allowed for capital expenditures. n1 11Section 1.162-11(b), Income Tax Regs., provides in part: Improvements by lessee on lessor's property. (1) The cost to a lessee of erecting buildings or making permanent improvements on property of which he is the lessee is a capital investment, and is not deductible as a business expense. * * It is necessary to take into consideration the purpose for which an expenditure is made in order to determine whether such expenditure is capital in nature or constitutes a current expense. Oberman Manufacturing Co. v. Commissioner,47 T.C. 471">47 T.C. 471, 482 (1967). 105 The cost of incidental repairs which neither materially add to the value of the property nor appreciably prolong its life, but keep it in an ordinarily efficient operating condition, may be deducted as an expense under section 162. Such expenditures are distinguishable from those for replacements, alterations, improvements or additions which prolong the useful life of the property, increase its value, or make it adaptable to a different use. Oberman Manufacturing Co. v. Commissioner,supra; Jones v. Commissioner,24 T.C. 563">24 T.C. 563 (1955), affd. 242 F.2d 616">242 F.2d 616 (5th Cir. 1957); Illinois Merchants Trust Co. v. Commissioner,4 B.T.A. 103">4 B.T.A. 103 (1926); sections 1.162-4 and 1.263(a)-1(a)(1), Income Tax Regs. The expenditures involved herein were not made for "incidental repairs" but were made to rehabilitate, restore, and improve an old office which was uninhabitable when petitioner obtained a lease on the premises in 1973. Petitioner testified that the New Hampshire office "was uninhabitable, and certainly not something you could bring a client into as an office. There were holes in the walls, the ceiling was torn out, the siding was bad. The finish on the walls was probably about five different 106 things." The New Hamphire office had passed beyond its "ordinary efficient operating condition" when petitioner took over the premises; the renovating expenditures materially added value to the office and gave it a new useful life. After renovating the premises in 1973 and 1974 petitioner used the office for the entire period of the five-year lease and was still using it at the time of trial. The renovation expenditures in question do not represent a currently deductible business expense but should be capitalized and recovered during the life of the lease as determined by respondent. Finally, we consider the issue of whether the telephone, promotion, and transportation expenses incurred in the development of the computer monitoring program are deductible as ordinary and necessary business expenses under section 162. Section 162(a) provides in part as follows: 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, * * . With respect to the relevant telephone, promotion, and transportation expenses incurred in 1972, 1973, and 1974, respondent maintains that petitioner's 107 computer monitoring program activities constituted a new or separate trade or business rather than an extension of his existing tutoring proprietorship. Therefore, concludes respondent, since the computer monitoring program was not operational until 1976, the initial costs in issue incurred by petitioner prior to that date were nondeductible preoperating costs. See Richmond Television Corporation v. United States,345 F.2d 901">345 F.2d 901 (4th Cir. 1965), vacated on other grounds 382 U.S. 68">382 U.S. 68 (1965), and cases cited therein. After carefully reviewing the record we think petitioner's activities in this respect did not constitute a new trade or business. Since 1963 petitioner has been actively engaged in the business of providing private one-to-one tutoring to students having learning difficulties and requiring individualized instruction. Although petitioner may have been a poor businessman during the years in issue, in the sense that his business operated at a loss, the record strongly convinces us that he was a competent, talented tutor who drew praise from the community in his success at assisting numerous troubled students.Since 1967 petitioner had pondered the idea of using the computer 108 to establish more effective and efficient teaching techniques. Due to declining health, loss of his government job, and the need to attract additional tutoring clientele, he stepped up his efforts to develop a program for a computer to monitor his teaching activities. The use of a computer as a supervisory tool to monitor petitioner's tutoring activities that had already been in existence for several years does not change the activity being monitored. The program is an administrative tool that enables the proprietorship to run more efficiently, employ improved teaching techniques, accept a greater number of students, and expand the business by hiring additional tutors, if necessary. Moreover, much of the research performed on the project enabled petitioner to improve teaching methods and educational psychology principles which he immediately applied in his tutoring activities in the form of refined teaching techniques. The computer monitored program enabled the proprietorship to carry on an old business--one-to-one private tutoring--in a new and more efficient way. A new method is distinguishable from a new business. Colorado Springs National Bank v. United States,505 F.2d 1185">505 F.2d 1185, 1190 (10th Cir. 1974). 109 Respondent maintains that "during 1972, 1973, and 1974 petitioner was engaged in part-time private tutoring in math, science and computer technology" and that petitioner contemplated a new enterprise in which he would "employ many different instructors in many different fields of learning in which he himself had no special expertise or skills." Accordingly, it is respondent's petition that petitioner was in the business of being a private tutor and that the expenses in issue were to prepare "to enter the business of establishing a school in which taxpayer obtained students and hired instructors." Respondent's contentions are unfounded. The record does not show petitioner's activities were designed toward the establishment of a school with petitioner as owner and chief administrator. Petitioner has been in the business of tutoring students in a vast array of subjects since 1963. Since 1971 his tutoring proprietorship has been his full-time sole occupation. The relevant expenses merely seek to take advantage of modern technology by expanding and improving the existing business of providing private one-to-one tutoring. Petitioner kept a student profile and progress report on his students 110 manually since the inception of his business; the program in issue merely enables him to continue these same record-keeping activities more efficiently by use of a computer. The courts have previously held that similar expenses (computer programming, advertising, promotional activities, training sessions, and manuals) related to a commercial bank's participation in a bank credit card system (Master Charge, Bank Americard) are currently deductible business expenses under section 162. Colorado Springs National Bank v. United States,supra;First National Bank of South Carolina v. United States,413 F. Supp. 1107">413 F.Supp. 1107 (D.S.C. 1976), affd. per curiam 588 F.2d 721">588 F.2d 721 (4th Cir. 1977); First Security Bank of Idaho, N.A., v. Commissioner,63 T.C. 644">63 T.C. 644 (1975), affd. 592 F.2d 1050">592 F.2d 1050 (9th Cir. 1979); Iowa-Des Moines National Bank v. Commissioner,68 T.C. 872">68 T.C. 872 (1977), affd. 592 F.2d 433">592 F.2d 433 (8th Cir. 1979). In arriving at this conclusion the courts rejected the Commissioner's principal argument that the expenses were preoperating costs of a new business, as well as his alternative contention that the expenses were not ordinary and deductible expenses since they generated future economic benefits.In reaching 111 its conclusion, the Tenth Circuit Court of Appeals in Colorado Springs National Bank v. United States,supra at 1190, stated: Before entering the credit card field, taxpayer made loans on accounts receivable and personal loans covering consumer transactions. For years banks, including taxpayer, have issued letters of credit. The credit card program furnishes a facility to handle these operations in a simple manner adaptable to operation through modern computers. * * * * * The credit card system takes advantage of modern technology. After a card is used, a key-punched sales slip is placed in a computer which processes and routes the transaction so that the necessary charges and credits will be made. To paraphrase the Comptroller, the use of these modern facilities furthers the objectives of our expanding national economy. The credit card system enables a bank to carry on an old business in a new way. A new method is distinguishable from a new business. * * (Emphasis added.) Likewise, petitioner here is carrying on his old business of private tutoring by taking advantage of the modern technology of a computer. Petitionerhs activities merely attempt to expand his old business 112 of providing one-to-one private tutoring in a more efficient and effective manner. Here we have an established and going tutoring proprietorship developing a system to expand and improve its existing business. Accordingly, petitioner has satisfied the business requirement of section 162. Respondent alternatively argues that the costs in issue represent nondeductible capital expenditures because the benefits would last beyond the taxable years the costs were incurred in and, thus, are not "ordinary" within the meaning of section 162(a). 12 The courts in First Security Bank of Idaho, N.A. v. Commissioner,supra at 650; Iowa-Des Moines National Bank v. Commissioner,supra at 878, 879; Colorado Springs National Bank v. United States,supra, were faced with the same argument and held that the various expenditures, similar to those in the present case, were deductible under section 162. We think the facts of this case are analogous to the factual situations in those cases and we follow their holdings. The distinction between 113 expenditures which are currently deductible and those which are capital in nature is the primary function of "ordinary" in section 162(a). Commissioner v. Lincoln Savings and Loan Association,403 U.S. 345">403 U.S. 345 (1971).Generally, expenditures to acquire assets which last beyond the taxable year must be capitalized. E.g., United States v. Mississippi Chemical Corporation,405 U.S. 298">405 U.S. 298 (1972). Nevertheless, the mere presence of some possible future benefit from an expenditure is not controlling where such payment was made to promote the taxpayer's existing business. Commissioner v. Lincoln Savings and Loan Association,supra;Colorado Springs National Bank v. United States,supra;Iowa-Des Moines National Bank v. Commissioner,supra.Applying these principles, it is clear that petitionerhs expenditures for telephone, promotion, and transportation were merely related to the conduct of an existing business. These expenditures involved transactions that are of a common and frequent occurrence in the operation of any business offering its services to the public. Expenses for telephone, promotion, and transportation are normal expenses which generally occur each day in operating a business. 114 Indeed, it is hard to imagine how a tutoring business could operate and attract students as potential customers without the incurrence of such recurring expenditures. See Iowa-Des Moines National Bank v. Commissioner,supra at 879.We therefore hold that petitioner's telephone, promotion, and transportation expenses are deductible business expenses under section 162. 13115 To reflect our conclusions herein, decision will be entered under Rule 155.Footnotes1. All statutory references are to the Internal Revenue Code of 1954, as amended, unless otherwise indicated. 2. Pursuant to General Order No. 6, dated March 8, 1978, the post-trial procedures set forth in Rule 182, Tax Court Rules of Practice and Procedure↩, are not applicable to this case.3. Petitioner filed an Application for Tentative Refund from Carryback of Net Operating Loss (Form 1045) for 1972, 1973, and 1974, carrying back the respective losses to 1969, 1970, and 1971.The tentative carrybacks were accepted and the refunds paid.↩4. Respondent did not question the deductibility of any of the tutoring service's business expenses listed on Schedule C of petitioner's tax returns for the years 1969 through 1971.↩6. A procedure in accord with sec. 1.162-11(b), Income Tax Regs.↩5. Petitioner listed this address as the proprietorship's business address on his 1973 and 1974 returns. ↩7. Respondent disallowed expenses related to the development of the computer monitoring program in the following amounts: ↩197219731974Telephone$ 126.60$172.42Promotion1,416.94523.54619.61Transportation952.681,215.17442.728. Petitioner acquired an interest in tutoring early in high school and junior college when he discovered he had a better "knack" for instructing students with learning difficulties than did school teachers.↩9. To illustrate the types of work and research done by petitioner on his program, several exhibits were submitted, including the following: Teaching and Learning Via Computer (TLC), Orientation for Coders; Coding Forms, Student's Planned Program of Study (SPPS); Coding Forms, Counselor's Report; Lesson Plans for a Hypothetical Student; Lesson Plans and Performance for a Specific Student.10. We note that the present case is quite different from the usual "office in home" situation (e.g., Meehan v. Commissioner,66 T.C. 794">66 T.C. 794 (1976), appeal dismissed (3d Cir. Aug. 31, 1977); Sharon v. Commissioner,66 T.C. 515">66 T.C. 515 (1976), affd. 591 F.2d 1273">591 F.2d 1273 (9th Cir. 1978), cert. denied June 18, 1979). Here, petitionr did not use a room or portion of his home but actually rented an apartment which he used solely↩ for his tutoring proprietorship.11. SEC. 263. CAPITAL EXPENDITURES. (a) GENERAL RULE.--No deduction shall be allowed for-- (1) Any amount paid out for new buildings or for permanent improvements or betterments made to increase the value of any property or estate. * * ↩12. Respondent summarily raises this alternative contention in the last two sentences of his brief without reasoning and without citing supporting case precedent.↩13. Furthermore, we note that in Rev. Proc. 69-21, 169-2 C.B. 303, the Internal Revenue Service ruled that the costs of developing computer software (whether or not the software is patented or copyrighted) in many respects so closely resemble the kind of research and experimental expenditures that fall within the purview of section 174 as to warrant accounting treatment similar to that accorded such costs under that section. Accordingly, the Service ruled it "will not disturb a taxpayer's treatment of costs incurred in developing software, either for his own use or to be held by him for sale or lease to others, where: 1.All of the costs properly attributable to the development of software by the taxpayer are consistently treated as current expenses and deducted in full in accordance with rules similar to those applicable under section 174(a) * *." Here the petitioner has consistently treated since 1967 his costs of developing the computer monitoring program as current, deductible expenses. We are not inclined to upset such consistent treatment in these circumstances.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622561/	MONITOR AMUSEMENT COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Monitor Amusement Co. v. CommissionerDocket No. 22215.United States Board of Tax Appeals22 B.T.A. 1214; 1931 BTA LEXIS 1990; April 16, 1931, Promulgated 1990 1. Verification of petition in an appeal proceeding is not a matter of jurisdiction and where the petition is signed by petitioner's attorney of record and verified by an officer of another corporation which owns all the capital stock of petitioner and where the respondent has filed his answer, a motion by the petitioner at the hearing to dismiss the appeal for lack of jurisdiction, will be denied. 2. Determination by respondent of deficiencies is presumed to be correct and where petitioner offers no evidence to show such determination to be incorrect, the determination of respondent will be approved. Lawrence A. Baker, Esq., and Henry Elliott, Esq., for the petitioner. F. R. Shearer, Esq., for the respondent. BLACK 1215 OPINION. BLACK: Respondent determined deficiencies against petitioner as follows: 1918$22,109.75191928,032.38Total50,142.13From this determination petitioner has appealed and alleges errors as follows: 1. Failure of the Commissioner to grant affiliation of this petitioner and other corporations. 2. Failure of the Commissioner to employ proper comparatives in computing the tax1991 under section 328, Revenue Act of 1918. Respondent in his answer entered denials to these allegations as follows: 1. Denies that the Commissioner erred in refusing to grant affiliation of the taxpayer with other corporations. 2. Denies that the Commissioner failed to employ proper comparatives in computing the tax under section 328, Revenue Act of 1918. The petition was signed by Lawrence A. Baker, whose name was entered as attorney of record for the petitioner in the proceeding and who has appeared for the petitioner in presenting several motions acted upon by the Board during the course of this proceeding. No question was raised that the petition was not what it purported to be, to wit, the petition of the Monitor Amusement Company. The petition was verified by James M. Brennan, the certificate of verification being in the following form: James M. Brennan, being duly sworn, says that he is the Comptroller of the Stanley Company of America, which Company acquired all of the stock of the taxpayer named in the foregoing petition, and as such officer of the Stanley Company of America is duly authorized to verify the foregoing petition; that he has read the said petition, 1992 or had the same read to him, and is familiar with the statements therein contained, and that the facts stated therein are true, except such facts as are stated to be upon information and belief and those facts he believes to be true. The proceeding came on for hearing March 16, 1931, at which time Lawrence A. Baker, attorney of record for petitioner, moved to dismiss the appeal for lack of jurisdiction, alleging in said motion that the petition was improperly verified in that it was not sworn to 1216 by an officer of petitioner but by James M. Brennan, comptroller of the Stanley Company of America, and that there was nothing to show that he had any authority from petitioner to verify said petition. This motion was denied for the same reasons stated in Gibson Amusement Company, Docket No. 22214, this day decided. We think there was no error in denying petitioner's motion to dismiss the appeal for lack of jurisdiction. , decided January 26, 1931, by the United States Circuit Court of Appeals for the Ninth Circuit. 1993 At the hearing petitioner offered no evidence in support of its allegations of error contained in the petition. Respondent's determination of the deficiencies is presumed to be correct and the burden of proof is on petitioner to show that the determination is incorrect. . This burden of proof petitioner has not sustained. 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/4622563/	Robert Lee Henry and Betty Jane Henry, Petitioners, v. Commissioner of Internal Revenue, RespondentHenry v. CommissionerDocket No. 71796United States Tax Court36 T.C. 879; 1961 U.S. Tax Ct. LEXIS 93; August 25, 1961, Filed 93 Decision will be entered for the respondent. Petitioner, a tax lawyer and accountant, purchased a yacht on which he flew a red, white, and blue pennant with the numerals "1040" on it, purportedly to provoke inquiries and thus promote petitioner's business by giving him contacts with people in yachting circles who might become clients in the future. Held, the cost of insurance and maintenance of the yacht, and depreciation thereon, are not deductible as ordinary and necessary expenses paid or incurred in carrying on petitioner's trade or business for the year 1954. Robert Lee Henry, Esq., pro se.Norman L. Rapkin, Esq., for the respondent. Drennen, Judge. DRENNEN94 879 In this proceeding respondent determined a deficiency in income tax due from petitioners for the taxable year 1954 in the amount of $ 4,375.88.The only issue for decision is whether petitioners are entitled to business deductions for the taxable year 1954, representing the expenses of maintenance and depreciation of a yacht during that year.FINDINGS OF FACT.Petitioners were husband and wife, residing in New York, New York, during the year 1954. They filed a joint Federal income tax return for the taxable year 1954 with the district director of internal revenue, Upper Manhattan District of New York.Robert Lee Henry, hereafter referred to as petitioner, is and was in 1954 a certified public accountant, licensed in the State of New York, and a member of the New York Bar. He is now a member of the Florida Bar. He belongs to the American Institute of Certified Public Accountants, the Bar Association of Nassau County, New York, and the Bar Association of Broward County, Florida. He is admitted to practice before this Court as well as before the United States District Courts for the Southern District of New York, the Eastern District of New York, and the Southern District95 of Florida. He has held a United States Treasury card for over 30 years. He has never been involved in any professional disciplinary action.As a CPA and lawyer, petitioner developed into a tax specialist, but his law practice is not devoted solely to that specialty. He has 880 recently undertaken admiralty and probate work, and before that he developed a real estate practice.In 1954, petitioner was employed by Powers Chemco, Inc., in Glen Cove, New York, at an annual salary of $ 10,400. In addition, he was a partner in a law partnership with offices in New York City, and a partner in a public accounting firm in Wilmington, Delaware.Petitioner learned to ride horses at an early age. In 1938, when he could afford to, he bought a hunter and commenced going into competition. He did fairly well in competition and developed a clientele among others interested in riding. When petitioner returned from service in the Navy in 1945, he found that the Army had discontinued its horse show team and he organized the United States horse show civilian team.Petitioner's activities with horses brought him into the horseracing field and his professional clientele now includes persons96 and corporations he has come in contact with in that field.In 1953, petitioner had to give up active participation in riding. He bought a 26-foot boat, the Bar Bill 1st, in June 1953 for $ 6,600. On June 25, 1954, he bought Bar Bill 2nd, a 40-foot Wheeler. The cost of Bar Bill 2nd, including the trade-in allowance which he received for Bar Bill 1st, was $ 18,500. He traded in Bar Bill 2nd in June 1955 for a 46.6-foot shrimp boat called North Star.When petitioner bought Bar Bill 1st, he hoped that he would be able to make contacts among yacht owners and that his professional clientele would consequently increase. Petitioner did not use the boat to entertain or transport existing or prospective clients or business contacts, nor to transport himself on business.As a conversation piece, petitioner conceived of and adopted a house flag colored red, white, and blue and bearing the numerals "1040." The flag provoked inquiries, and petitioners and their son would reply to such inquiries by stating that petitioner was a CPA and a lawyer practicing as a tax specialist and that the numerals "1040" represented the form number of a Federal individual income 97 tax return. Further opportunities to discuss business arose from these replies. Often these discussions concerned taxes.In the years 1957 through 1960, petitioner had clients whom he had met as a result of his interest in boats.In 1960, petitioner also had clients whom he had met as the result of his former activities with horses.In August 1954, Bar Bill 2nd was damaged by a hurricane. Petitioner's insurance covered the repairs and the cost of these repairs is not part of the deductions claimed herein by petitioner. Bar Bill 2nd was used very little by petitioner from June 1954, when he bought it, until it was damaged by the hurricane. In about September 1954, petitioner's doctor advised him to stop work, rest, and relax, and to 881 take the usual precautions that accompany heart trouble from which petitioner had been suffering in 1954. By this time, Bar Bill 2nd was repaired and petitioner had a friend run his boat from New York to Florida. Petitioner and his son were aboard. The trip took 14 days, and petitioner and his son spent the winter of 1954 in Florida. In addition, when petitioner himself used Bar Bill 2nd in 1954, his family was sometimes98 aboard.For the taxable year 1954, petitioner claimed on his income tax return the following expenses of operating Bar Bill 2nd as ordinary and necessary expenses of petitioner's trade or business:Depreciation$ 9,250.00Maintenance3,528.22Insurance651.08Total13,429.30The foregoing expenses represent petitioner's computation of 100 percent of the expenses incurred in maintaining Bar Bill 2nd in 1954; he made no allocation of such expenses for personal use of the boat.Petitioner has not shown that the expenses of maintaining Bar Bill 2nd in 1954, or any portion of such expenses, represented ordinary and necessary expenses of petitioner's trade or business. He has not shown that the acquisition and use of the boat was not primarily for personal purposes, or that the expenses of maintaining the boat in 1954, or any portion of such expenses, were proximately related to petitioner's trade or business.No part of petitioner's expenses in maintaining a boat in 1954 is deductible as business expenses by petitioners for the taxable year 1954.OPINION.Petitioner is a certified public accountant and a lawyer. He is a specialist in the field of Federal99 taxation although his legal practice is not confined to that field. On his return for 1954, he claimed, as expenses of his business, deductions amounting to $ 13,429.30, representing depreciation, costs of maintenance, and insurance expense of a boat, Bar Bill 2nd. The total amount of these deductions has been disallowed by respondent, who contends that none of the expenses of maintaining the boat are ordinary and necessary to petitioner's trade or business and that, in any event, petitioner has not substantiated all of the expenses which he claims are deductible, although respondent agrees that certain expenditures were, in fact, made.Petitioner maintains that his expenses incurred in connection with his boat were ordinary and necessary to his business in 1954. Although petitioner adduced evidence of these expenses at the hearing, he moved preliminarily that the Court rule that no issue of substantiation of expenses was involved in the case, since neither the explanatory 882 paragraph of the statutory notice of deficiency nor respondent's answer made reference to substantiation of the deductions, which, argued petitioner, were disallowed solely on the grounds that they100 were not ordinary and necessary to petitioner's business. The motion was taken under advisement and the parties discuss the point on brief. In view of our holding that whatever expenses petitioner incurred in connection with Bar Bill 2nd in 1954 are not allowable business deductions, it is unnecessary to pass on petitioner's motion.Petitioner bought his first boat, Bar Bill 1st, in June 1953 for $ 6,600. It was a 26-footer. He traded this boat for the boat in controversy in June 1954. Including the trade-in allowance, petitioner paid a total of $ 18,500 for Bar Bill 2nd. In June 1955, he traded Bar Bill 2nd for a 46.6-foot shrimp boat, North Star. He does not contend that Bar Bill 2nd was used for transportation in his business or that he needed it in order to entertain clients or prospective clients. He contends that he bought and operated the boat strictly as a promotional scheme; he says that, restricted by professional ethics as certified public accountants and lawyers are, he had to publicize his "calling in a dignified and discreet manner"; and that operation of Bar Bill 2nd in 1954 "presented such a method of permissive advertising." He 101 has summarized his position succinctly:I contend that I operated the boat in question as a promotion on the hope that rich clients might result -- much the same as if I had purchased a full page advertisement in a class magazine announcing that I was for hire.In support of this position, petitioner testified that he had come to appreciate the monetary value of sporting contacts before he went into yachting. He learned to ride a horse as a boy and, according to his testimony, he learned very well. In about 1938, he bought a hunter and engaged in competition, in which he did "fairly well." He fared better in his professional practice; soon he developed a clientele among the "horse people" most of whom "were rich -- very rich" and had tax problems. The horse activity led to "the racing field" and petitioner came to represent three important racing stables. However, in 1953, petitioner had to give up active participation in riding. He "became concerned about acquiring a new source of business and as a result [he] determined to make the yachting group [his] next source of business activity." To embark on this plan, he bought a boat in 1953 and later a larger boat, Bar Bill 2nd102 , in 1954, and began to build his contacts among yacht owners. To attract attention, he flew a house flag colored red, white, and blue and bearing the numerals "1040." As he hoped, other yacht owners did inquire about the meaning of the numbers on his flag. Petitioner, his wife, and their son adopted a standardized reply to such inquiries; they explained that the numerals represented the number of an individual Federal income tax form and that petitioner specialized as 883 a tax specialist. Arising from this gambit was the opportunity to talk business. Petitioner says that results from these discussions have been good and that his engagements have not been limited to tax matters.Petitioner maintains that he had some 25 clients at the date of hearing who had come to him as a result of his connections with horses. His estimate of the fees to be received in 1960 from those clients was $ 40,000. This estimate, he said, was on the lee side. His calculated plan of entree into the yachting fraternity has yielded tangible rewards, says petitioner; for example, some six clients had produced total fees of $ 1,993 in 1957, according to his evidence, although there was no evidence103 that he realized any income from this source prior to 1957.On brief, both parties rely on Welch v. Helvering, 290 U.S. 111">290 U.S. 111 (1933). Petitioner argues concisely that, by the rule of that case, what is "ordinary" to a taxpayer's trade or business is a "variable affected by time and place and circumstance," and that his evidence shows that the time, place, and circumstances under which he incurred the expenses in question prove them to be ordinary. Respondent contends that petitioner's claimed expenses were not "ordinary" according to conduct in the business world; that there is not the sufficient relationship between the expenses and the conduct of petitioner's practice to permit deduction under section 162 of the Internal Revenue Code of 1954; 1 and that the expenses smack of personal expenditures to be disallowed under section 262 of the 1954 Code. 2 Respondent argues further that petitioner's expenses were admittedly incurred in advertising in order to solicit clients and that such a purpose, being prohibited by the ethics of both of petitioner's professions, demonstrates that his expenses were not "ordinary." In this respect, however, it should104 be noted that respondent specifically disclaims argument that the claimed deductions are to be disallowed on the ground of a violation of clearly defined public policy. 3The question of whether the expenditures here involved105 qualify for deduction as ordinary and necessary expenses incurred in petitioner's trade or business is essentially one of fact. Commissioner v. Heininger, 320 U.S. 467 (1943); James Schulz, 16 T.C. 401 (1951); 884 Louis Boehm, 35 B.T.A. 1106">35 B.T.A. 1106 (1937). To prevail herein, petitioner must show that his expenditures incurred in maintenance of his yacht and the amount representing depreciation of the yacht in 1954 were both ordinary and necessary to the conduct of his activities as a lawyer and as a certified public accountant, within the scope of section 162 of the 1954 Code, the governing statutory provision. McDonald v. Commissioner, 323 U.S. 57 (1944); Welch v. Helvering, supra.Not only is it incumbent upon petitioner to show that the claimed business expenses do not in fact represent expenditures for primarily social or personal purposes, Chas. D. Long, 32 T.C. 511 (1959), affd. 277 F. 2d 239 (C.A. 8, 1960); Richard A. Sutter, 21 T.C. 170">21 T.C. 170 (1953);106 Louis Boehm, supra, but it must appear that there is a proximate -- rather than merely a remote or incidental -- relationship between the claimed expenses and petitioner's practice as a lawyer and an accountant, Alexander P. Reed, 35 T.C. 199 (1960); Ralph E. Larrabee, 33 T.C. 838 (1960).Applying these general principles to the instant question, petitioner has proved neither that the operation of his yacht in 1954 was "necessary" to his professional practice, in the sense that it was "appropriate and helpful," Welch v. Helvering, supra,Louis Boehm, supra, nor that it was "ordinary" in the sense that it was the "normal and natural response under the specific circumstances" in which petitioner found himself, Donald G. Graham, 35 T.C. 273">35 T.C. 273 (1960). In determining that which is "necessary" to a taxpayer's trade or business, the taxpayer is ordinarily the best judge on the matter, and we would hesitate to substitute our own discretion for his with regard to whether an expenditure is "appropriate and helpful," 107 in those cases in which he has decided to make the expenditure solely to serve the purposes of his business. See Welch v. Helvering, supra.But where, as in this case, the expenditures may well have been made to further ends which are primarily personal, this ordinary constraint does not prevail; petitioner must show affirmatively that his expenses were "necessary" to the conduct of his professions. See Anthony E. Spitaleri, 32 T.C. 988 (1959); Chas D. Long, supra;Richard A. Sutter, supra.We do not think petitioner has shown that the expenses of acquiring and maintaining a yacht were "necessary" to the conduct of his professions.It appears that petitioner took up boating when, for reasons of health, he was forced to give up riding, an activity from which he obviously derived personal enjoyment and in which he was active. He has not shown that in 1954 he was not merely substituting one personal interest or sport for another as he operated his boat; he has not proved that he took up boating solely or even primarily to serve the needs of his practice or that108 he would not have operated Bar Bill 885 2nd regardless of whatever business advantages he hoped to derive from this sport.In 1954, petitioner spent, by his evidence, the sum of $ 3,528.22 for maintenance of Bar Bill 2nd, and this amount is exclusive of depreciation. He stated that, for the first time in 1957, clients contacted through his yachting venture came to his offices. The total fees from these clients amounted to $ 1,993. For the year 1958, such fees totaled, according to petitioner, $ 758. 4 For 1954, 1955, and 1956, admittedly petitioner's yachting produced no fees. Although the fees attributed to boating contacts increased in 1959 and 1960, we believe that the claimed expenses, when considered in relation to the fees which petitioner attributes to yachting, are inordinate and do not indicate the requisite proximate relationship between his sporting activities and his business.109 Furthermore, petitioner has failed to offer a single example by which any of the clients, who in general terms he claims were derived from boating contacts, happened to come to his firms. The record does not show exactly how, and under what circumstances, petitioner's boating activities produced a single fee. He stated the general manner by which he, his wife, and their son might get the chance to inform other owners of yachts of his professional activities: Inquiries about his "conversation piece," the pennant, produced the opportunity. The pennant may have had some relationship to the conduct of his business. But the evidence does not show how any specific fee resulted from his operating a yacht.Nor do we think the expenses of acquiring and maintaining a yacht were "ordinary" expenses of petitioner's professions. Certainly in the common usage of the word it is not "ordinary" or usual for a lawyer or accountant to maintain a yacht for the promotion of his business. It is extremely doubtful, from a business standpoint, that the remotely possible future income that might be produced by this means would justify the expenditure. In fact, promotional and advertising expenses of110 any kind do not ordinarily appear in the profit and loss statements of either lawyers or accountants.We recognize, as petitioner urges, that the business success of a lawyer or an accountant rests upon the clients who may seek his professional services. We recognize moreover that these clients often come from the contacts -- business, social, personal, or political -- which a professional person, for whatever purpose and by whatever means, may develop or cultivate. Petitioner further requests that we recognize the fact, which we do, that generally a professional person should broaden his contacts in the interests of his practice, although 886 the efforts may be long in producing tangible results. But were we to recognize that expenditures for normally personal pursuits become deductible business expenses simply because they afford contacts with possible future clients without showing a more direct relationship to the production of business income, it is evident that most all club dues and similar expenditures, for example, as well as the expense of appearing at the right place at the right time with the right people, could be claimed as ordinary and necessary business expense. 111 Such would be an unwarranted extension of the scope of the deduction provision here involved. As we said in Louis Boehm, supra at 1109:We do not think the burden of proof is met by the petitioner's argument that in general, membership in social, political, and fraternal organizations is helpful in obtaining clients through contacts made thereby * The record does not convince us that the operation of petitioner's boat in 1954 was not for primarily personal ends, and that it was proximately related, and was ordinary and necessary, to petitioner's business. Petitioner argues that his points should be self-evident to any professional person. But it is not from a lack of appreciation of the economic realities of professional practice that we hold that nothing within the scope of judicial notice can compensate for the infirmities in petitioner's proof. Welch v. Helvering, supra.On the contrary, we cannot conceive how petitioner's "promotional" efforts in the manner which he has outlined were so closely related to the conduct of petitioner's business or business benefits expected as to have been "appropriate, 112 helpful, usual, or necessary," see Louis Boehm, supra; or how such efforts "would enhance either his skill, usefulness, or reputation as a lawyer" or as an accountant. See Long v. Commissioner, 239">277 F. 2d 239 (C.A. 8, 1960), affirming Chas. D. Long, supra.The conclusion that the expenditures here involved were primarily related to petitioner's pleasure and only incidentally related to his business seems inescapable.We conclude that the yacht expenses here involved are not deductible as ordinary and necessary expenses of carrying on petitioner's trade or business in the taxable year 1954.Decision will be entered for the respondent. Footnotes1. 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 * * *↩2. SEC. 262. PERSONAL, LIVING, AND FAMILY EXPENSES.Except as otherwise expressly provided in this chapter, no deduction shall be allowed for personal, living, or family expenses.↩3. In passing, two further points are to be noted. First, petitioner strongly denies that he violated the letter or the spirit of any provisions governing the ethics of either of his professions. Secondly, we do not reach this point of argument, and our holding herein is not in any way grounded upon a finding that petitioner's methods of promotion did or did not violate professional ethics.↩4. It is not clear whether these clients and the fees paid by them are attributable to petitioner's individual practices or to his partnerships.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622564/	George Daniels and Isabelle Daniels v. Commissioner.Daniels v. CommissionerDocket No. 58112.United States Tax CourtT.C. Memo 1957-209; 1957 Tax Ct. Memo LEXIS 45; 16 T.C.M. (CCH) 944; T.C.M. (RIA) 57209; October 31, 195745 Morris M. Grupp, Esq., Mills Tower Building, San Francisco, Calif., and Leon Schiller, Esq., for the petitioners. Leslie T. Jones, Jr., Esq., for the respondent. WITHEYMemorandum Findings of Fact and Opinion WITHEY, Judge: The respondent determined a deficiency of $118.73 in the petitioners' income tax for 1951. Issues presented by the pleadings are the correctness of the respondent's action (1) in disallowing a deduction of $83 for automobile casualty insurance, and (2) in disallowing a deduction for $499 for depreciation of automobiles. Findings of Fact The petitioners are and during 1951 were husband and wife with residence at Mendocino, California. They have three children. The petitioners filed their joint Federal income tax return for 1951 with the collector for the first district of California. Since petitioner Isabelle Daniels is joined here only by virtue of such joint return, the term "petitioner" will hereinafter be used with reference to George Daniels. Throughout 1951 the petitioner was employed as "pond foreman" by Caspar Lumber Company at its lumber mill at Caspar, California, where he regularly worked 6 days a week. On some occasions the petitioner46 was required to be at work prior to or by 6 o'clock in the morning. Also on some occasions he was required to work until dark. Caspar is 6 miles from Mendocino where petitioners lived in a home of their own. Mendocino and Caspar are and during 1951 were connected by a paved public road. At the beginning of 1951 the petitioner owned a 1946 model Nash automobile which he had acquired in 1949 or 1950 at a price of $1,500 or $1,600. The petitioner continued to own that automobile until December 1951 when he disposed of it in connection with the acquisition of a 1949 model Plymouth Suburban station wagon at a price of around $1,500 or $1,600. During the time he owned the Nash automobile in 1951 and thereafter during the remainder of the year when he owned the Plymouth automobile, the petitioner used the automobiles to travel or commute between his home in Mendocino and the place of his employment at Caspar. In addition to such use of the automobiles by the petitioner, they also, for about 50 per cent of the days the petitioner worked, were used by his wife to go to Fort Bragg, California, for medical treatment or to get medicine. During 1951 the petitioner's employer did not provide47 him with transportation between his home and the place of his employment. No public transportation between Mendocino and Caspar was available. No living accommodations for the petitioner and his family were available at Caspar. The petitioner was not required by the terms of his employment to have an automobile. In the schedule of their return for deducting "Losses from fire, storm, or other casualty, or theft" the petitioners deducted $83 which was explained as "Casualty Insurance" and which represented the amount paid as premiums by petitioner in 1951 for casualty insurance on the Nash and Plymouth automobiles the petitioner owned during that year. In the schedule of their return for deducting "Miscellaneous" the petitioners deducted $499 which was explained as "Depreciation" and represented the total of the amounts of $452 and $47 computed by petitioner as the depreciation of the Nash and Plymouth automobiles, respectively, during the time he owned them in 1951. In determining the deficiency here involved the respondent determined that the deductions taken for automobile casualty insurance and depreciation of the automobiles represented personal expenses and accordingly disallowed48 them. Opinion In their petition and on original brief the petitioners take the position that in the situation here presented it was necessary for petitioner George Daniels to use automotive equipment to travel between his home in Mendocino and Caspar where he was employed; that the use for such purpose of the Nash and Plymouth automobiles constituted their use in his business or trade; and caused all of the depreciation of and all of the cost of the casualty insurance on the automobiles to be deductible as ordinary and necessary business expense. In their reply brief the petitioners take the position that one-half of the use of the automobiles was for petitioner's travel between his home and his place of employment and the other half was for the travel of petitioner's wife to Fort Bragg to obtain medical treatment and to get medicine. Accordingly, they contend that one-half of the depreciation and one-half of the casualty insurance were deductible as a business expense and that the other one-half of those items was deductible as a medical expense. In Charles Crowther, 28 T.C. - (September 30, 1957), we considered the question of whether automobile expenses incurred by the taxpayer49 in traveling or commuting between his home and his place of employment were deductible as business expense. We there concluded that such expenses were personal expenses and were not deductible as business expenses. There, as here, the taxpayer's employer did not provide him with transportation between his home and the place of his employment. Public transportation between his home and his place of employment was not available. Nor were living accommodations for the taxpayer and his family available at or near the place of his employment. We think our holding in the Crowther case is applicable here and accordingly conclude that no part of the deductions taken for depreciation of and cost of casualty insurance on the Nash and Plymouth automobiles was deductible as business expense. The pleadings do not present any issue relating to the allowance to which the petitioners were entitled for 1951 for medical expenses. In John Gerber Co., 44 B.T.A. 26">44 B.T.A. 26, 31, it was said: "It is well established that issues not raised by the pleadings will be disregarded and not considered." Accordingly, we make no determination respecting the contention of the petitioners presented on reply brief50 that one-half of the depreciation of the automobiles and one-half of the cost of the casualty insurance were deductible by them as medical expenses. In their petition the petitioners have assigned certain errors and made certain allegations of fact, all of which the respondent has denied in his answer, and on brief have advanced certain contentions challenging the propriety of the administrative policy and procedures employed by the respondent prior to his determination of the deficiency here involved and challenging the propriety of his motives in making such determination. We have jurisdiction to consider and determine, and have considered and determined in the light of the evidence of record, the correctness of the respondent's determination of the deficiency here involved. However, we are without jurisdiction to consider and determine the propriety of the administrative policy and procedures the respondent employed prior to making such determination or to consider and determine the propriety of his motives in making such determination. Charles Crowther, supra. Decision will be entered for the respondent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622566/	Ransohoffs Inc., Petitioner, v. Commissioner of Internal Revenue, RespondentRansohoffs, Inc. v. CommissionerDocket No. 8930United States Tax Court9 T.C. 376; 1947 U.S. Tax Ct. LEXIS 103; September 19, 1947, Promulgated 103 Decision will be entered under Rule 50. In about 1902 the father of Robert, James, and Howard Ransohoff established the business of Ransohoffs. Later Robert and James and their father formed a partnership to conduct the business. The father died and in the early 1920's Howard joined the firm. In 1930 a written partnership agreement was executed by the three brothers. On May 20, 1938, they executed a further partnership agreement, providing for the continuation of the partnership after the death of a partner. On October 9, 1938, Howard died. Upon his death no liquidation of the firm occurred, its assets were not distributed, and it was continued in operation exactly as it had been prior thereto. Robert and James owned the partnership equally. In 1940 petitioner was incorporated, with Robert and James as owners of an equal amount of its stock. Held, that under section 740, Internal Revenue Code, petitioner is entitled to compute its excess profits tax credit by the income method as provided in section 713. Lawrence Livingston, Esq., and H. W. S. Leeker, Esq., for the petitioner.R. E. Maiden, Jr., Esq., for the respondent. Van Fossan, Judge. Kern, J., concurs only in the result. VAN FOSSAN 376 The respondent determined a deficiency of $ 5,341.68 in the petitioner's excess profits tax liability for its taxable year ended July 31, 1942.377 The single issue is whether or not the petitioner is entitled to compute its excess profits tax credit by the use of the income method, pursuant to the provisions of Supplement A of subchapter E, chapter 2, of the Internal Revenue Code.FINDINGS OF FACT.Certain facts were stipulated. The portions thereof material to the issue are as follows:The petitioner is a corporation, organized by the surviving partners of Ransohoffs on April 23, 1940, under 105 the laws of the State of California, with its principal place of business in San Francisco. It is known as Ransohoffs Inc. It filed its original and amended income tax returns for the taxable year with the collector of internal revenue for the first district of California. The petitioner filed its returns on the income method, under the provisions of Supplement A, subchapter E, chapter 2, of the Internal Revenue Code.On May 20, 1938, Robert Ransohoff, James B. Ransohoff, and Howard J. Ransohoff formed a partnership, doing business under the firm name and style of Ransohoffs. The three persons were brothers. Each brother owned a one-third interest in the partnership. The partnership was a continuation of a partnership among the same brothers as copartners, established by an agreement of partnership executed April 29, 1930. The partnership which was established in 1930 continued from the date of its inception until the formation of the partnership under the agreement of May 20, 1938. The business of the partnership was the purchasing and selling of women's apparel of all kinds and kindred merchandise.Howard J. Ransohoff died on October 9, 1938. At the time of his death the106 partnership was operating under the terms of the agreement of May 20, 1938, which had never been terminated, amended, or modified. At the time of the death of Howard, each brother owned a one-third interest in the partnership. Immediately upon his death the surviving partners, Robert and James, took possession of all of the property of the partnership and assumed liability for all its obligations. They continued the partnership and continued the operation of the partnership business under the terms and provisions of the agreement of May 20, 1938.After the death of Howard, the surviving partners, Robert and James, paid to the estate of the deceased partner an amount equal to one-third of the book value of the partnership as shown on its books as of the last day of the month immediately preceding the date of 378 the death of the deceased partner, plus or minus appropriate credits to or charges against the deceased partner, as shown by the books of the partnership. The payments have heretofore been made by the surviving partners without awaiting the full ten years allowed them by the agreement of May 20, 1938. (The contract provided for ten annual payments.)On July 31, 1940, 107 the partners, Robert and James, transferred all of the assets of the partnership to the petitioner in exchange for all its capital stock, each brother receiving 50 per cent of such stock. The corporation continued the operation of the business of the predecessor partnership without change or interruption.The articles of partnership of May 20, 1938, provided, among other things, as follows:The partnership shall continue in existence until the death of two of the parties hereto, unless sooner terminated by the parties hereto or the survivors of them, and the partnership may, notwithstanding the foregoing, continue in existence after the death of two of the parties hereto if prior to such time the parties, or the survivors thereof, shall so provide. For the purposes of this paragraph, the withdrawal of a partner pursuant to the provisions of this agreement shall have the same force and effect as the death of a partner. * * In the event of the death of any partner, the two survivors shall continue as partners under the same firm name and subject to the terms, covenants, and conditions of this agreement as then existing, or as hereafter amended or modified, and the interest of 108 the deceased partner shall be compensated for in the manner hereinafter provided.* * * Upon the death of the partner first to die, the surviving partners shall thereupon and immediately become the sole owners of all of the assets of the partnership and liable for all liabilities thereof, and said survivors agree to protect and save harmless the successors of such deceased partner against any and all such liabilities, whether presently then existing or future or contingent. * * No successor of a deceased partner shall have any interest, right or title in or to the business or management of said partnership or the assets thereof.The record discloses the following additional facts:The business of Ransohoffs was started by the father of Robert, James, and Howard Ransohoff and has been maintained under that name to the present time. Robert and James were associated with their father as partners in the venture until their father's death. In the early 1920's Howard joined the firm as a partner. No written partnership agreement was executed until 1930, but verbally the partners agreed to share the profits and losses. The written agreement was made with the understanding that the109 partners were to continue the business and, if one should die, the other two would 379 succeed him, take over his interest and duties, and carry on the business just as theretofore.After the death of Howard, the surviving partners, Robert and James, continued the partnership and its operation under the terms of the agreement of May 20, 1938. The conduct of the business was not altered in any manner, its assets were not distributed; it was not dissolved; its affairs were not terminated or wound up; there was no distribution of assets or profits; there was no liquidation of the firm; and the partnership continued in every respect exactly as it had prior to the death of Howard, except that the surviving brothers, Robert and James, owned the assets of the partnership in equal shares, with the obligation to compensate the heirs or successors of a deceased partner.It was stipulated at the hearing that the petitioner did not make the elections required by section 228 (f) of the Revenue Act of 1942 in order to have the provisions of section 740 (f) of the Internal Revenue Code made applicable retroactively to all taxable years beginning after December 31, 1939.OPINION.It is unnecessary110 to enter into any extended discussion of sections 740 and 744 of the Internal Revenue Code, under which the controversy in the case at bar arises. The precise issue is whether the petitioner is entitled thereunder to compute its excess profits credit by the income method, as provided in section 713, or by the invested capital method, as provided in section 714. The petitioner contends that it is entitled to use the income method. In order to do so the preceding partnership must be regarded as a "qualified component corporation" as defined in section 7401 and it must have been in existence on the date of the beginning of the petitioner's base period, August 1, 1936.111 380 The petitioner and the respondent agree that the partnership composed of Robert and James was a component corporation as defined by the statute. The respondent argues that the partnership was not a "qualified component corporation" because it was not in existence on August 1, 1936, due to the fact that the death of Howard in October 1938 terminated the prior partnership of Robert, James, and Howard, and that the partnership of Robert and James became a new entity.Therefore, the issue before us is narrowed to one of law -- Did the death of Howard dissolve the partnership composed of himself, Robert, and James and thus interrupt the continuity of the component corporation extending from the petitioner's taxable year to the beginning of its base period, as required by the statute?In his brief respondent expresses his position in the following language:The whole issue on appeal now hinges on the one point of whether the partnership, composed of Robert and James, was actually in existence on August 1, 1936. This presents on the facts of the case a cold question of law -- the law of partnerships, governed by the law of the State of California.He then cites section 112 2425 of the California Civil Code, 2 covering the dissolution of a partnership, and asserts that there is no provision of the California law which permits, by agreement or otherwise, the avoidance of a dissolution of a partnership upon the death of a partner. He seeks to distinguish the continuance of the business of a partnership from the continuance of the partnership itself. He construes the partnership agreement of May 20, 1938, as providing for the continuation of the business, but not of the partnership.The petitioner contends that, under the California decisions and under a proper interpretation of the Federal taxing statutes, a partnership may, by agreement, be continued after the death of one of the partners, that the continuity of the petitioner as the acquiring corporation and of its predecessors, the "component corporation," was thus preserved during the petitioner's base period, and that hence it has113 complied strictly with the requirements of the statute.The first question is whether or not after the death of Howard the partnership contract of May 20, 1938, continued the partnership, or merely the business being conducted by it. From a study of the history and background of Ransohoffs and of the stated intent and purpose to continue their family partnership as expressed in the contract, we conclude that after Howard's death the partnership was intended to, and did, continue in existence. The agreement provided that "the 381 partnership shall continue in existence until the death of two of the parties hereto * " and "In the event of the death of any partner, the two survivors shall continue as partners under the same firm name and subject to the terms, covenants, and conditions of this agreement as then existing, or as hereafter amended or modified, and the interest of the deceased partner shall be compensated for in the manner hereinafter provided." From this language it is plain that the fundamental intent was to carry on the family partnership, not merely to carry on the business enterprise. The collateral record lends ample support to this view.Addressing himself114 to the question of whether the partnership was actually continued after Howard's death and thus in existence on August 1, 1936, the respondent argues that, even though the agreement contemplated and provided for such continuance, it was ineffectual in the face of the California statute. In Robert E. Ford, 6 T. C. 499, we had a comparable question arising in Minnesota and relating to a proposed adjustment of the cost basis of the partnership for the capital asset it sold. The same basic principle of law was involved as is now before us. There we said:* * * The respondent suggests that the withdrawal of the partner whose interest was purchased on November 26, 1938, constituted a dissolution or termination of the partnership and the commencement of a new partnership. By the general rule of law, death or withdrawal of a partner dissolves the partnership, but it is competent for the parties to provide otherwise. As stated by Rowley in his work on Modern Law of Partnership (sec. 550): "* * * Whatever in the absence of express agreement of all partners may be the technical effect of the admission of a new member or retirement of an old member these115 conditions are ordinarily cared for by agreement, either under provisions in partnership articles authorizing a retirement, or arrangements made by the partners at the time of retirement. * "Cf. Burwell v. Mandeville's Executors, 2 How. 560">2 How. 560, 576.In the instant proceeding, the offer to purchase the partnership interest specifically provided for the continuation of the partnership without interruption. The partners having legally contracted for the continuation of the partnership and having actually continued it, those facts should be recognized and effect thereto given, unless prohibited by some provision of the taxing act. We are not aware of any such prohibition. Moreover, under section 27 of the Uniform Partnership Act, which has been adopted by the State of Minnesota, it is specifically provided that a transfer of a partnership interest does not of itself dissolve the partnership.See also Allan S. Lehman, 7 T. C. 1088, in which we said: * * the old partnership of Lehman Brothers continued to be carried on by the surviving partners, notwithstanding the death of Arthur Lehman, and that no new partnership116 came into existence as would start a new period of holding of the partnership interests of the surviving partners who continued to carry on the partnership business. * *382 The general provision of the California statute to the effect that the death of a partner causes dissolution of the partnership relied on by respondent does not render ineffective a specific agreement to continue the partnership thereafter. See section 2496 of the California Civil Code, which provides specifically:The * , death * * of a general partner dissolves the partnership, unless the business is continued by the remaining general partners.(a) Under a right so to do stated in the certificate, or(b) With the consent of all members.In Allan S. Lehman, supra, which arose in the State of New York, the statute of which governing the dissolution of partnerships is the same as that of California, we so held. The petitioner has cited several California cases which directly and indirectly conform to our conclusions. 3117 We have found no prohibition in the Federal taxing statutes against the continuance of a partnership for tax purposes after the death of a partner. Moreover, the basic purposes of section 740 must not be overlooked. It is a remedial measure and, as such, it is axiomatic that it be construed liberally. It was intended to give to the petitioner the benefit of the business experience of its predecessors.In Faigle Tool & Die Corporation, 7 T. C. 236, we said:However, Supplement A to the excess profits tax provisions of the Internal Revenue Code recognizes that even though a corporation may not actually have been in existence during any of the years 1936-1939, it may have acquired, in a tax-free reorganization, the properties of a corporation or another type of business organization which was in existence during those years. If so, the acquiring corporation may compute its excess profits credit under the income method, using as its average base period net income the history of earnings of the business organization it acquired. * There is no doubt that the petitioner corporation acquired and succeeded to the business organization of the Ransohoff118 partnership. We have held that the preceding partnership had a continuous existence. The history of the earnings of that partnership, whether composed of Robert, James, and Howard, or of Robert and James, is a proper measure of the average base period net income of the petitioner for excess profits tax purposes. Therefore, the petitioner is entitled to compute its excess profits tax credit upon the income method, as provided in section 713.Decision will be entered under Rule 50. Footnotes1. SEC. 740. DEFINITIONS.For the purposes of this Supplement --(a) Acquiring Corporation. -- The term "acquiring corporation" means --(1) A corporation which has acquired --* * * (D) Substantially all the properties of a partnership in an exchange to which section 112 (b) (5), or so much of section 112 (c) or (e) as refers to section 112 (b) (5), or to which a corresponding provision of a prior revenue law, is or was applicable. * * (b) Component Corporation. -- The term "component corporation" means -- * * (5) In the case of a transaction specified in subsection (a) (1) (D), the partnership whose properties were acquired. * * (c) Qualified Component Corporation. -- The term "qualified component corporation" means a component corporation which was in existence on the date of the beginning of the taxpayer's base period. * * ↩2. Section 2425: Causes of dissolution: Dissolution is caused: * * *(4) By the death of any partner.↩3. Thompson v. Gibb, 1 Cal. U. 173; California Employment Commission v. Walters↩, 64 Cal. A. (2d) 554.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622567/	Bellefontaine Federal Savings and Loan Association, Petitioner, v. Commissioner of Internal Revenue, RespondentBellefontaine Federal Sav. & Loan Asso. v. CommissionerDocket Nos. 64131, 76910United States Tax Court33 T.C. 808; 1960 U.S. Tax Ct. LEXIS 213; February 5, 1960, Filed 213 Decisions will be entered for the respondent. Held, in the circumstances of this case, additions to a reserve made by petitioner for the years 1952-1956 in compliance with regulations of the Federal Home Loan Bank Board were not deductible. Sec. 23(k)(1), I.R.C. 1939; secs. 166(c), 593, I.R.C. 1954. Clarence C. Roby, Esq., for the respondent. Raum, Judge. RAUM808 OPINION.The respondent determined deficiencies in the income tax of petitioner as follows:Taxable yearDeficiency1952$ 2,639.2419536,837.8319545,200.00195525,313.24195614,742.29214 Respondent, by amended answer, claims an increased deficiency for the year 1953 in the amount of $ 1,637.83.The sole issue is whether petitioner is entitled to deductions for additions to a reserve which it was required to make under regulations of the Federal Home Loan Bank Board. All of the facts have been stipulated.809 The principal office of petitioner is located in Bellefontaine, Ohio. It was organized under the laws of Ohio in 1894, and, in December 1937 was reorganized to become a Federal savings and loan association chartered under the Home Owners' Loan Act of 1933. Substantially all of its business is the making of loans to members.Federal income tax returns for the years 1952 through 1956 were filed by petitioner with the district director of internal revenue, Toledo, Ohio. Prior to 1952 petitioner was exempt from Federal income tax.Petitioner has Federal insurance coverage, the effective date of which was August 9, 1935, and it is governed by regulations of the Federal Home Loan Bank Board. Section 163.13 of those regulations requires each insured institution not only to credit annually to its Federal insurance reserve account an amount equal to at least215 three-tenths of 1 per cent of all insured accounts outstanding at the beginning of its fiscal year, but also to build up that reserve to an amount equal to at least 2 1/2 per cent of all insured accounts within 13 years from the effective date of insurance and to an amount equal to at least 5 per cent of all insured accounts within 20 years from such date. Amounts so credited to petitioner's insurance reserve could be used solely for the purpose of absorbing losses.In each of the years 1952, 1953, and 1954 petitioner added $ 10,000 1 to its Federal insurance reserve account and deducted that amount in its Federal income tax returns for those years in determining its taxable net income. The Commissioner disallowed the deductions.The Federal insurance reserve account on the books of216 petitioner at the beginning of each of the years 1952 through 1956 and at the end of the year 1956 reflected the following credit balances:Jan. 1, 1952$ 215,000.00Jan. 1, 1953225,000.00Jan. 1, 1954235,000.00Jan. 1, 19552 221,012.60Jan. 1, 1956283,678.53Dec. 31, 1956311,769.10Petitioner's insured accounts at the close of 1955 and 1956 showed the following balances:Dec. 31, 1955$ 5,673,570.60Dec. 31, 19566,235,381.98217 810 Since the 20th anniversary of petitioner's inclusion in Federal insurance coverage occurred in 1955, the required additions to its Federal insurance reserve account for 1955 and 1956 were $ 62,665.93 and $ 28,090.57, respectively, computed as follows:19555 per cent of all insured accounts$ 283,678.53Actual reserve balance221,012.60Required addition62,665.9319565 per cent of all insured accounts$ 311,769.10Actual reserve balance283,678.53Required addition28,090.57In its income tax returns for the years 1955 and 1956 petitioner took as deductions the additions to its Federal insurance reserve account in the foregoing amounts of $ 62,665.93 and $ 28,090.57, respectively, which were disallowed by the respondent.Prior to the enactment of the Revenue Act of 1951, domestic building and loan associations, such as petitioner, substantially all of the business of which was confined to making loans to members, were exempt from tax under the provisions of section 101(4), I.R.C. 1939. This exemption was repealed by section 313(b) of the Revenue Act of 1951 effective (section 313(j)) for all taxable years beginning after December 31, 1951. And, 218 at the same time, section 23(k) of the 1939 Code, relating to the deduction for bad debts, was amended by section 313(e) of the 1951 Act so as to read as follows (the italicized language being new material added by the 1951 Act): (k) Bad Debts. -- (1) General Rule. -- Debts which become worthless within the taxable year; or (in the discretion of the Commissioner) a reasonable addition to a reserve for bad debts; and when satisfied that a debt is recoverable only in part, the Commissioner may allow such debt, in an amount not in excess of the part charged off within the taxable year, as a deduction. * * In the case of a mutual savings bank not having capital stock represented by shares, a domestic building and loan association, and a cooperative bank without capital stock organized and operated for mutual purposes and without profit, the reasonable addition to a reserve for bad debts shall be determined with due regard to the amount of the taxpayer's surplus or bad debt reserves existing at the close of December 31, 1951. In the case of a taxpayer described in the preceding sentence, the reasonable addition to a reserve for bad debts for any taxable year shall in no case219 be less than the amount determined by the taxpayer as the reasonable addition for such year; except that the amount determined by the taxpayer under this sentence shall not be greater than the lesser of (A) the amount of its net income for the taxable year, computed without regard to this subsection, or (B) the amount by which 12 per centum of the total deposits or withdrawable accounts of its depositors at the close of such 811 year exceeds the sum of its surplus, undivided profits, and reserves at the beginning of the taxable year.The new material was thereafter incorporated in substance in section 593 of the 1954 Code, and the substance of the original provisions was carried over to section 166 of the 1954 Code.The new provisions relate directly and explicitly to the petitioner, and it becomes pertinent to inquire at once whether "12 per centum of the total deposits or withdrawable accounts of its depositors at the close of such [taxable] year exceeds the sum of its surplus, undivided profits, and reserves at the beginning of the taxable year."The amounts in question for each of the taxable years are shown in the following table:12 per cent ofSurplus, undividedWithdrawablewithdrawableprofits,Yearaccounts as ofaccounts atand reservesclose of yearclose of yearat beginningof year1952$ 4,126,695.37$ 495,203.44$ 601,616.5419534,580,776.03549,693.12657,209.4419544,915,888.07589,906.57712,168.7319555,869,814.60704,377.75746,016.6019566,401,567.15768,188.06788,845.01220 It is readily apparent from this table that 12 per cent of petitioner's withdrawable accounts did not exceed the sum of its surplus, undivided profits, and reserves at the critical dates for any of the years in controversy. Thus, if deductibility were to be determined pursuant to the new provisions added by the 1951 Act, petitioner would automatically fail to qualify for the deductions in question, even if it be assumed that the reserve in question is a "reserve for bad debts" within the meaning of the statute. The statutory formula is specific, and the stipulated facts do not bring petitioner within that formula.Indeed, petitioner recognizes in its brief that "the Internal Revenue Code does not permit any deduction for an addition to a Federal insurance reserve account when the existing surplus, undivided profits and reserves at the beginning of the year equal 12 percent or more of withdrawal accounts at the year end." Its sole contention is that "there is a conflict between the rules and regulations of * * [the Home Loan Bank Board] and the Internal Revenue Code and that this conflict should be resolved by permitting the petitioner to deduct from gross income mandatory221 additions made to a Federal insurance reserve account when arriving at net taxable income for Federal income tax purposes." This contention is without merit, since it has been consistently held that the accounting requirements of regulatory agencies are not controlling in the application of the revenue laws, which establish their own standards. Old Colony R. Co. v. Commissioner, 284 U.S. 552">284 U.S. 552, 562; Kansas City Southern Ry. Co. v. Commissioner, 812 52 F.2d 372">52 F. 2d 372, 378 (C.A. 8); Toledo Terminal Railroad Co., 13 T.C. 64">13 T.C. 64, 75; Gulf Power Co., 10 T.C. 852">10 T.C. 852, 858; National Airlines, Inc., 9 T.C. 159">9 T.C. 159, 161.Thus, the matter would seem to end but for a concession made by the Government (in its reply brief) that notwithstanding petitioner's failure to qualify for deduction under the new provisions, it might nevertheless be eligible for deduction under the general provisions of section 23(k)(1), quoted above, that were left undisturbed by the new legislation. This belated concession, which does not seem to be required by a reading222 of the statute, finds support in the Conference Report accompanying the 1951 legislation, where it was stated (H. Rept. No. 1213, 82d Cong., 1st Sess., pp. 73-74):Where the sum of the institution's surplus, undivided profits, and reserves at the beginning of the taxable year equals or exceeds 12 percent of its total deposits or withdrawable accounts at the close of such year, any deduction for such year for a reasonable addition to a reserve for bad debts will be determined under the general provisions of section 23(k)(1). 3The Government argues nevertheless that although the general provisions dealing with additions to bad debt reserves are applicable, petitioner has failed to bring itself within them.But petitioner has never made any such alternative contention based upon the general provisions of section 23(k) (1) of the 1939 Code or the cognate 223 provisions of section 593 of the 1954 Code; that issue is not properly before us, and we are not required by respondent's concession to embark upon an inquiry as to whether petitioner satisfies the requirements of statutory provisions that were not heretofore in controversy and upon which petitioner has not relied.Moreover, even if we were to consider that issue, the record would not support any claim to deduction of the amounts in question as a "reasonable addition to a reserve for bad debts." Under the statute a taxpayer is allowed a deduction for losses actually sustained by reason of bad debts, and alternatively a deduction for "reasonable" additions to a bad debt reserve. The burden is upon the taxpayer to show that the additions are "reasonable." Whether additions are "reasonable" may depend upon a variety of facts, such as its actual bad debt experience. But, as pointed out by respondent, an examination of petitioner's returns for the 5 years in controversy shows that no amounts were charged against the reserve for bad debt losses, thus disclosing that petitioner's bad debt experience during these years was nil. And there is also nothing to show that its bad debt experience224 for years prior thereto was other than negligible. The reserve maintained by petitioner was substantial and we cannot say on this record 813 that any further additions in respect of bad debts were "reasonable." It is to be noted further that the reserve in question was not limited to bad debts. The requirements of the Home Loan Bank Board regulations which were obviously calculated to promote the solvency of institutions like petitioner and to protect the interests of depositors related to losses generally and were not confined to bad debt losses. There is no provision in the statute allowing deductions with respect to reserves for losses generally, and even assuming that additions for bad debts to a general loss reserve might otherwise be deductible, nothing in this record establishes that any addition to a proper reserve for bad debts, already at a high level, would be "reasonable." Mitchell-Huron Production Credit Ass'n v. Welsh, 163 F. Supp. 883">163 F. Supp. 883 (D. S.Dak.), relied upon by petitioner in connection with the only issue raised by it, is distinguishable on its facts in relation to the foregoing discussion.Decisions will be entered*225 for the respondent. Footnotes1. Petitioner credited $ 10,000 to the reserve "in lieu of" using an amount exactly equal to three-tenths of 1 per cent of the insured accounts at the beginning of each of the 3 years, namely, $ 11,373.80, $ 12,200.73, and $ 13,260.76.↩2. The reduction in the credit balance occurring between Jan. 1, 1954, and Jan. 1, 1955, and the increases in the balance thereafter were explained in the stipulation of the parties as follows: "After the dispute arose concerning what additions to the Federal insurance reserve account would be allowable, the taxpayer returned the account to the balance which was reflected therein at the time taxpayer became subject to income taxes. Then, since the taxpayer achieved the 20th anniversary date of Federal insurance coverage in 1955, such additions as were required to maintain the reserve account at 5% of all insured accounts were made starting at the end of 1954."↩3. The same thought is also reflected in section 39.23(k)-5(b)(4) of Regulations 118 and section 1.593-2 of regulations under the Internal Revenue Code of 1954.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622568/	R. D. Mills v. Commissioner. Nona T. Mills v. Commissioner.Mills v. CommissionerDocket Nos. 57703, 57704.United States Tax CourtT.C. Memo 1958-26; 1958 Tax Ct. Memo LEXIS 206; 17 T.C.M. (CCH) 108; T.C.M. (RIA) 58026; 8 Oil & Gas Rep. 1181; February 20, 1958206 Gift tax: Valuation of mineral interests. - Held that the petitioners have failed to show error in the respondent's determination of the fair market value of gifts of mineral interests made by the petitioners in the year 1951. Arthur Glover, Esq., for the petitioners. Douglas M. Moore, Esq., for the respondent. ATKINSMemorandum Findings of Fact and Opinion ATKINS, J.: The respondent determined deficiencies in gift tax liability with respect to each of the petitioners for the year 1951 in the amount of $3,600. The sole issue relates to the fair market value of mineral interests transferred by deed of gift on November 1, 1951. Findings of Fact The petitioners are husband and wife and reside at Pampa, Texas. In 1951 they owned an 8,000 acre tract of land in "wildcat" territory in Roberts County, Texas. On November 1, 1951, they executed a deed of gift by which they transferred to their three children an undivided one-half interest in and to the oil, gas and other minerals in, on, and under this 8,000 acre tract of land. At the date of the gift the southern portion of the tract, constituting 3,000 acres of the 8,000 acres, was under lease to Humble Oil207 and Refining Company. The lease to that company had been entered into by the petitioners on February 6, 1945, and was for a primary term of 10 years. It gave the lessee a 7/8 working interest in the oil and gas in the 3,000 acres, the petitioners retaining a 1/8 royalty interest. As consideration for entering into the lease the lessors received a bonus of $2.50 per acre, or a total of $7,500. In addition the lease provided for delay rentals of $1.00 per acre per year. Humble Oil and Refining Company produced no oil or gas throughout the term of its lease. At the date of the gift, November 1, 1951, the northern 5,000 acres of the tract were not under lease. Thereafter, a representative of The Texas Company first approached the petitioners and offered to lease the land, and negotiations were conducted for several days. That company had not conducted any geophysical tests or surveys on the tract prior to that time. On November 19, 1951, the petitioners and their three children joined in a lease of the northern 5,000 acres to The Texas Company. That company was granted a 7/8 working interest in the oil and gas for a primary term of 10 years, for which it paid a bonus of $20 per acre, 208 or a total of $100,000. The lease also provided for annual delay rentals of $1.00 per acre per year and an additional declining royalty payable out of 1/16 of the lessee's 7/8 of oil or gas produced until the lessors received $50,000. The petitioners filed separate gift tax returns for the year 1951 with the collector of internal revenue at Dallas, in which each reported a gift of one-fourth of the mineral interests in the 8,000 acres of land to their three children. Such one-fourth interest was reported as having a fair market value of $25,000. Each petitioner reduced this amount by exclusions totaling $9,000 (being $3,000 for each of 3 donees), resulting in included gifts for the year 1951 of $16,000. Against this, each petitioner claimed a specific exemption of $16,000, resulting in no amount of net gifts subject to tax for that year. The respondent determined deficiencies in gift tax against each petitioner in the amount of $3,600, based upon a determination that the fair market value of the gift made by each petitioner was $65,000. In each notice of deficiency the respondent stated: "It has been determined that on date of gift, the minerals under 8,000 acres of land in Roberts209 County, Texas, had a fair market value of $40.00 per acre for minerals under 5,000 acres owned in fee, and $20.00 per acre for 3,000 acres of the property on which only royalty interest was owned. It is held, therefore, that the gift, being one-fourth of the 8,000 acres mentioned, has a fair market value of $65,000.00 (1/4 of $260,000.00)." From the $65,000 the respondent deducted total exclusions of $9,000, and allowed a specific exemption of $16,000 in each case, resulting in net gifts of $40,000, on which the gift tax liability was computed. In each notice of deficiency the respondent further stated: "Specific Exemption: You used only $16,000.00 specific exemption in 1951. Should you elect in writing, the remaining exemption available to you may be used, which would reduce the deficiency tax." Opinion The sole issue between the parties is the fair market value, for gift tax purposes, of the mineral interests transferred by the petitioners to their three children on November 1, 1951. 1The respondent210 in the notice of deficiency determined that the total mineral interest in the northern 5,000 acres had a fair market value of $40 per acre and that the total mineral interest owned by the petitioners in the southern 3,000 acres, consisting of a 1/8 royalty interest therein, had a value of $20 per acre. He thus determined that the total mineral interest owned by the petitioners immediately prior to the gift had a fair market value of $260,000 and that accordingly each petitioner made a gift of 1/4 of that amount, or $65,000. The burden of proof is upon the petitioners to show error in the respondent's determination. In view of the fact that The Texas Company, within three weeks after the gifts, paid the petitioners and their children $20 per acre, or $100,000, for a 7/8 working interest in the northern 5,000 acres, we think the evidence clearly shows that at the time of gift a 7/8 working interest in the 5,000 acres would have had an equal value. In this connection it is to be noted that there is no evidence whatever of any surveys or discoveries or other activities between the date of gift and the date of the lease which would indicate a change in value of mineral interests in that211 area during that interim. Since a 7/8 working interest in the 5,000 acres had a value of $20 per acre, or $100,000, at the date of gift, we think it clear that a remaining 1/8 royalty interest at the date of gift would have had substantial value at that time. Whether such value would have been approximately equal to the value of the 7/8 working interest, $20 per acre, as testified by one witness, we find it unnecessary to decide. The respondent has so determined and the evidence adduced is insufficient to show that it did not have such a value. Upon the record we hold that the petitioners have not sustained the burden of showing error in the respondent's determination that the entire mineral interest in the 5,000 acres owned by the petitioners immediately prior to the gift had a value of $200,000. The petitioners immediately prior to the gift owned only a 1/8 royalty interest in the southern 3,000 acres. The respondent similarly valued this interest at $20 per acre, or $60,000, and here again the evidence adduced by the petitioners does not establish error in the respondent's determination. This 3,000 acres was the southern portion of the overall 8,000 acre tract, and we have no212 reason to believe from the evidence that mineral values in the southern portion of the tract differed from those in the northern portion. We have given careful consideration to the testimony of the petitioner R. D. Mills that in his opinion the total value of his mineral interest immediately prior to the gift was approximately $100,000, and to the testimony of an independent gas producer who appeared as a witness on behalf of the petitioners to the effect that in his opinion the minerals under the 8,000 acres would not be worth more than $5 per acre. The testimony of this witness was based largely upon the fact that a 10,000 foot dry hole had been drilled in the latter part of 1950 on lands located about 2 or 3 miles south of the tract in question and the fact that on April 17, 1951, he and others had sold a mineral interest, apparently a 7/8 working interest in a 3,000 acre tract, the nearest boundary of which lay about 3 miles southwest of the land in question, for a bonus of $5 per acre. We do not consider this evidence determinative in view of the better evidence of value consisting of the lease of a portion of the very tract in question to The Texas Company within such a short213 time after the date of the gifts. We hold that the petitioners have not shown error in the respondent's determination that each petitioner transferred mineral interests to their children in 1951 of a fair market value of $65,000. Each petitioner, in the gift tax return, claimed a specific exemption of only $16,000. On brief the respondent concedes that each petitioner is entitled to use his remaining available exemption to reduce the deficiency. Adjustments in this respect will be made in the recomputations under Rule 50. Decisions will be entered under Rule 50. Footnotes1. Sec. 1005, Internal Revenue Code of 1939. If the gift is made in property, the value thereof at the date of the gift shall be considered the amount of the gift.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622569/	Charles H. Nehls v. Commissioner.Charles H. Nehls v. CommissionerDocket No. 16441.United States Tax Court1949 Tax Ct. Memo LEXIS 256; 8 T.C.M. (CCH) 195; T.C.M. (RIA) 49054; February 25, 1949256 On the record, held, the purported sale of certain merchandise by petitioner to his wife was not made pursuant to a bona fide transaction entered into at arm's length. The respondent's determination that the profit resulting from a resale thereof was the income of petitioner is sustained. Arthur L. Evely, Esq., Penobscot Bldg., Detroit, Mich., for the petitioner. Wesley A. Dierberger, Esq., for the respondent. LEECHMemorandum Findings of Fact and Opinion LEECH, Judge: This proceeding involves a deficiency in income and victory tax for the calendar year 1943 in the amount of $9,212.80. The sole issue is whether the gain realized from the sale of certain gasoline tank caps and adapters, allegedly made by petitioner's wife, is taxable to petitioner. The case was submitted on a stipulation consisting of exhibits, and oral testimony. Findings of Fact Petitioner, Charles H. Nehls, operated a sole proprietorship under the name of Wayne Metalcraft Company, in Detroit, Michigan. Petitioner's income tax returns for the years 1942 and 1943 were filed with the collector of internal revenue for the District of Michigan at Detroit, on the cash basis. The Wayne Metalcraft257 Company was established in 1939 by petitioner. It engaged in the manufacture and sale of locking gasoline tank caps and adapters used for converting the caps into locking devices for spare tires on automobiles. It also made and sold padlocks, bicycle locks and chains. These products were sold through wholesale outlets and sales were made to large auto accessory wholesalers. Originally the locking fuel tank caps were made out of a zinc die casting. At the beginning of 1942, due to scarcity of metal, the caps were made out of plastic material. Approximately 40,000 plastic caps were sold to the Firestone Tire and Rubber Company, which proved to be unsatisfactory. On May 26, 1942, Firestone wrote to petitioner directing the cancellation of specified releases for locking gas tank caps in accordance with "our phone conversation." Under date of May 26, 1942, petitioner confirmed the cancellation in accordance with request of May 26, 1942. On May 27, 1942, petitioner wrote to the Bethlehem Equipment Corporation, Ltd., of New York City, in part as follows: "I have been trying to get you on the telephone for the past two days but you were not at home or at the office. If possible, would258 like to have you come to Detroit to go over the gas cap situation. Jim Hogson would also like to see you before you call on Mallory, if you decide to come. If you cannot make a trip at this time, call me on the phone 'collect' and we can discuss the details. "I would like to have you stock a large quantity of caps in your warehouse as there is a question whether a manufacturer can deliver from warehouse due to War Production Board restrictions. Please keep this entire matter confidential." Prior to January 2, 1942, the Wayne Metalcraft Company was indebted to Mrs. A. Germer for $5,500, for which amount it had given its promissory note secured by a second mortgage on the home owned by petitioner and his wife, Mary W. Nehls, in their joint names. Both petitioner and his wife executed the mortgage. There was a first mortgage on the home, which mortgage was executed by petitioner and his wife. On January 2, 1942, petitioner's wife loaned him $5,500, for which she received a promissory note signed by the Wayne Metalcraft Company and petitioner individually. The proceeds of the loan were used to discharge the second mortgage held by Mrs. Germer. On March 2, 1942, Mrs. Nehls loaned petitioner259 an additional $2,000, whereupon the note for $5,500 was cancelled and a new note for $7,500, similarly executed, payable one year after date, with interest at six per cent, was delivered to Mrs. Nehls. Although both of the aforesaid notes bore interest, no interest was paid thereon during the year 1942. Mrs. Nehls did not require security for the $5,500 note, but requested security for the $7,500 note, whereupon the following agreement was entered into: "SALES AGREEMENT "THIS AGREEMENT made by and between Wayne Metalcraft Co. and Mary W Nehls. "As security for note in amount of $7,500.00 given to Mary W. Nehls, the Wayne Metalcraft Co. agrees to transfer title to forty thousand (40,000) plastic locking gas caps to Mary W. Nehls. "It is further agreed that should this merchandise become worthless or necessary to sell for less than face amount of note, that the Wayne Metalcraft Co. pay Mary W. Nehls the difference between sale and value and $7,500.00. "It is further agreed that Mary W. Nehls has the option to hold this merchandise for one year. At the end of one year the merchandise will be accepted as full payment of note, or title to merchandise reverts to Wayne Metalcraft260 Co. upon payment of fact value of note "WAYNE METALCRAFT CO. "Signed: Charles H. Nehls "Signed: Mary W. Nehls" A week or two subsequent to the execution of the foregoing agreement the 40,000 gas tank caps were moved from the factory to the garage of the Nehls' home, a distance of about 75 feet. The Wayne Metalcraft Company continued to produce a first grade plastic cap and enjoyed a good business in such caps in 1942. William H. Davidson was president of the Bethlehem Equipment Corporation, Ltd., which company was a distributor for various automobile accessory manufacturing houses. The Bethlehem Company had sold gas tank caps for the Wayne Metalcraft Company prior to 1942, and sold plastic gas caps for it during January through July 1942. Bethlehem sometimes purchased products of the Wayne Metalcraft Company outright, and sometimes sold its products on a commission basis. Mrs. Nehls had known Davidson prior to 1942. He had called the Nehls' home many times by telephone. Davidson contacted petitioner about the 40,000 defective gas tank caps, and was informed they had been sold to Mrs. Nehls. Davidson thereupon called upon Mrs. Nehls, and she agreed to sell the caps to him. 261 The date this arrangement was completed is not fixed. Among the stipulated exhibits are copies of bills of lading covering the shipment of various amounts of gas tank caps and adapters to the Bethlehem Equipment Corporation, Ltd., on dates commencing with June 12, 1942, and continuing on various dates to July 16, 1942, indicating the shipper to be M. W. Nehls (Mrs. Nehls). Invoices covering these shipments to the Bethlehem Equipment Corporation, Ltd., bear similar dates and carry the heading "M. W. Nehls, 16614 Harper Avenue, Detroit, Michigan." Mr. Alvey, a shipping clerk employed by the Wayne Metalcraft Company, handled these shipments. Under date of June 29, 1942, the Wayne Metalcraft Company invoiced to "Mary W. Nehls" 22,500 #145 adapters for a total price of $2,362.50. A check for that amount was drawn by "Mary W. Nehls" on October 12, 1942, on a joint account entitled "Charles H. Nehls or Mary W. Nehls." The promissory note dated March 2, 1942, given to Mary W. Nehls, for $7,500, bears across its face "cancelled June 30, 1942." Under date of December 16, 1942, the Wayne Metalcraft Company invoiced to "M. W. Nehls" 11,832 locking gas caps for the total amount of $5,916. 262 On December 17, 1942, this company invoiced to "M. W. Nehls" 780 "Misc. lot gas caps" for the total amount of $390. These two invoices total $6,306. On January 20, 1943, Mary W. Nehls drew a check for $6,306 on the joint account entitled "Charles H. Nehls or Mary W. Nehls." Mrs. Nehls inherited $20,000 from her father's estate in 1929. At the beginning of 1941 she had a balance of $468.63 in a savings account in a Detroit bank. Her only other account was a checking account in the Commonwealth Bank with less than $1,000 deposited. On June 19, 1941, Mrs. Nehls received a final payment from her father's estate of $8,000, which she deposited in her savings account. On September 23, 1942, Mrs. Nehls had $25,534.06 in her savings account. This account she closed, and opened a joint savings account with her husband with an initial deposit of $25,534.06. In October, 1942, Mrs. Nehls and her husband opened a joint checking account with the moneys taken from the joint savings account. A check in excess of $4,000 was drawn on the joint checking account to pay off the first mortgage on the home held in the joint names of petitioner and his wife. With some of the money received from the sale263 to the Bethlehem Equipment Corporation, Ltd., Mrs. Nehls bought some bonds which she thought had been taken in the joint names of herself and her husband, but didn't just remember. Mrs. Nehls, in her income tax return for 1942, reported a net profit of $15,147.13 on the above described transactions. In the year 1943 she reported no income, but apparently filed a return because of the provisions of the Current Tax Payment Act of 1943 The respondent determined that the gain of $15,147.13, reported by Mrs. Nehls for the year 1942, was includable in the income of petitioner for 1942. As a result of the provisions of the Current Tax Payment Act of 1943, this determination created the deficiency of $9,212.80 involved in this proceeding. Opinion The sole issue presented involves the propriety of the respondent's action in including in petitioner's gross income the profit derived from certain transactions whereby petitioner's wife purchased from petitioner certain merchandise which she purportedly sold to the Bethlehem Equipment Corporation, Ltd. The basis of the respondent's determination is that the transactions between petitioner and his wife were without substance and a mere arrangement264 for the division of income. The question is one of fact, with the burden upon petitioner of establishing that the arrangement was bona fide. Petitioner was engaged in the manufacture and sale of gasoline tank caps, adapters and other products, under the name of the Wayne Metalcraft Company, a sole proprietorship. In January 1942, petitioner's wife, Mary W. Nehls, had loaned to petitioner the sum of $5,500. On March 2, 1942, she loaned him an additional $2,000. For such loans she held his promissory note for that amount of $7,500, due in one year with interest at six per cent. Mrs. Nehls demanded security for this note, and an agreement, dated March 2, 1942, was executed pledging 40,000 plastic locking gas caps as security. Under this agreement Mrs. Nehls had the option to hold the merchandise for one year and, at the end of that period, if the note was not paid, the merchandise was to be accepted in full payment of the note. Petitioner testified that later Mrs. Nehls agreed to accept the merchandise in payment of the note, and the note thereupon was cancelled. Across the face of the note appears the notation "cancelled June 30, 1942." At some time, the date of which is not fixed265 by this record, Mrs. Nehls purportedly entered into an agreement of resale of the above-mentioned merchandise to the Bethlehem Equipment Corporation, Ltd. This latter corporation, prior to and during 1942, was an outlet for goods manufactured by petitioner on both an outright sale and a commission basis. That petitioner had contacted the Bethlehem Company in connection with the sale of the merchandise in question is rather strongly indicated by a letter dated May 27, 1942, addressed to it, requesting its president, Mr. Davidson, to come to Detroit "to go over the gas cap situation." This communication follows closely the formal cancellation by the Firestone Tire & Rubber Company of its order for 40,000 gas tank caps and adapters, which bears date of May 26, 1942. Davidson did come to Detroit and the arrangement for the resale of the merchandise was concluded. That the arrangement between Mrs. Nehls and Bethlehem had been concluded prior to her acceptance of the merchandise in payment of the promissory note, which was on June 30, 1942, is established by the bills of lading and invoices bearing the name of Mrs. Nehls, dated as early, as June 12, 1942, and addressed to the Bethlehem Equipment266 Corporation, Ltd., covering parts of the merchandise in question. This evidence indicates, rather clearly we think, that this transaction between petitioner and his wife was not really bona fide and at arm's length. Subsequent transactions between petitioner and his wife lend further support to such conclusion. This record establishes that the moneys received by Mrs. Nehls from Bethlehem from the sale of these 40,000 gasoline tank caps and adapters were deposited in Mrs. Nehls' personal bank account. On September 23, 1942, she transferred her then balance of $25,534.06 to a joint savings account, and later, in October, to a joint checking account in the name of "Charles H. Nehls or Mary W. Nehls." On June 29, 1942, petitioner's company invoiced to Mrs. Nehls 22,500 adapters at a price of $2,362.50. On October 12, 1942, a check for that amount payable to the petitioner's company was drawn by Mrs. Nehls on the joint checking account. Again, on December 16, 1942, petitioner's company invoiced to Mrs. Nehls 11,832 locking gas caps at a price of $5,916; and on December 12, 1942, a "Misc. lot gas caps" for a price of $390. These two items aggregate $6,306. On January 20, 1943, Mrs. Nehls267 drew a check for $6,306 on the joint checking account payable to petitioner's company. Mrs. Nehls further testified that with some of the proceeds of the sale to the Bethlehem Equipment Corporation, Ltd., she bought bonds which she thought were taken in the joint names of herself and petitioner. Although the notes which petitioner gave to Mrs. Nehls bore interest, none was ever paid. Moreover, Mrs. Nehls, either prior or subsequent to the year 1942, did not engage in any business. The bills of lading and the invoices covering the shipments in question were prepared in petitioner's office and the shipments attended to by one of petitioner's employees. In the light of this record, we are convinced that there was no actual bona fide sale of the merchandise in question to Mrs. Nehls, and that in selling it to Bethlehem Corporation, Ltd., she was in fact the agent of petitioner. For the reasons stated, the respondent's determination that the profit derived from the sale of the above-described merchandise by Mrs. Nehls was the income of petitioner is sustained. Decision will be entered for the respondent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622571/	WILLIAM N. WILSON AND SHERRY WILSON, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent; CALVIN F. MARTIN, JR. AND JANET MARTIN, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentWilson v. CommissionerDocket Nos. 40316-85; 13222-86.1United States Tax CourtT.C. Memo 1989-266; 1989 Tax Ct. Memo LEXIS 267; 57 T.C.M. (CCH) 576; T.C.M. (RIA) 89266; June 6, 1989. Neil Dilman, for the petitioners. Roger Glienke and Elizabeth Cassidy, for the respondent. FAYMEMORANDUM FINDINGS OF FACT AND OPINION FAY, Judge: This case was assigned to Special Trial Judge Stanley J. Goldberg pursuant to section 7443A(b)(4) of the Internal Revenue Code of 1986 and Rule 180 et seq. 2 The Court agrees with and adopts the opinion of the Special Trial Judge, which is set forth below. 269 OPINION OF THE SPECIAL TRIAL JUDGE GOLDBERG, Special Trial Judge: Respondent determined deficiencies in and additions to petitioners' Federal income taxes for the years and in the amounts as follows: PETITIONERS WILSONAdditions to TaxYearDeficiency§ 6653(a)§ 6653(a)(1)§ 6653(a)(2)§ 66591980$ 4,752$ 237.60----$ 1,425.601981995--$ 49.75 --19838,353--417.65* 2,505.90PETITIONERS MARTINAdditions to TaxYearDeficiency§ 6653(a)§ 6653(a)(1)§ 6653(a)(2)§ 66591980$ 2,513$ 125.65----$ 753.90198311,167--$ 558.35* 3,350.10Respondent further determined that the Martins are liable for additions to tax under section 6621(c)(formerly section 6621(d)). 3 Respondent asserted in his Answer that270 the Wilsons also are liable for additions to tax under section 6621(c). Respondent has filed motions in both cases seeking the award of damages pursuant to section 6673. The deficiencies are attributable to the disallowance of investment tax credits and investment tax credit carrybacks claimed on petitioners' respective joint income tax returns, together with the disallowance of lease payments deducted in connection with a medical equipment leasing activity. The issues for decision are: (1) whether petitioners are entitled to investment tax credits and investment tax credit carrybacks for Electrocaine XE-II medical equipment they leased; (2) whether petitioners are entitled to deductions for the payments they made to lease Electrocaine XE-II medical equipment; (3) whether petitioners are liable for the additions to tax under section 6653(a), section 6659, and section 6621(c); and (4) whether damages should be awarded to the United States under section 6673. FINDINGS OF FACT Some of the facts have been stipulated and are so271 found. The Stipulation of Facts and attached exhibits are incorporated herein by reference. BackgroundThese cases involve the leasing of medical equipment known as the Electrocaine XE-II. The Electrocaine XE-II (hereinafter "XE-II") is a transcutaneous electrical nerve stimulator, or TENS unit, an electrical device which is placed on various parts of the body to alleviate pain. The technology for TENS units has existed for years, but the Electrocaine prototype (XE-I) was developed in 1980 by Dr. Keith E. Kenyon. Dr. Kenyon agreed to allow Nelson L. Gross to market the original Electrocaine design, but eventually Mr. Gross, claiming to have further developed the unit, began marketing the successor unit known as the XE-II, as his own. The promotion became known as the "Electrocaine Medical Equipment Leasing Program" (the leasing program). In September 1983, Mr. Gross and the corporation he formed to market the XE-II, Neuro-Electro Dynamics, Inc. (NED), contacted John Paul Stroup. Mr. Stroup created an entity called Safe and Natural Succor, Inc. (SANS) for the purpose of buying XE-II units from NED and reselling them to leasing companies. NED granted SANS an exclusive272 distributorship and purportedly sold 25,000 XE-II units to SANS at a price of $ 950 per unit. In November 1983, NED hired Bon Aqua, Inc. to manufacture the XE-II units. By December 31, 1983, Bon Aqua had manufactured between 200 and 400 units. Each of these units was assigned a serial number for identification. The projected cost of producing 25,000 units, including parts, labor and overhead was $ 60.98 per unit. Promotional MaterialThe promotional material for the leasing program was prepared by Mr. Stroup. All material contained in the brochures, however, was subject to approval by Mr. Gross. The brochures did not contain an appraisal of the fair market value of the XE-II, but did contain a valuation of the leasing program (the Tunnell Report). Mr. Gross provided Mr. Stroup with the figures for the claimed income projections and tax benefits of the program. On this point, the material claims that an individual in the 50 percent tax bracket, who leases 20 XE-II units for 82 months at $ 300 per unit, will have realized $ 23,880 in gross income by the end of the lease term. The lessee also will be the beneficiary of an investment tax credit of $ 12,000 ($ 6,000 X273 10 percent X 20 units), and a tax savings of $ 3,000 on the first year advance rental payment. Tax savings also were projected for investors in 40 percent, 30 percent and 20 percent tax brackets. These brochures were distributed to each of the leasing companies involved in the promotion. Each leasing company adopted the brochures by printing it's name and address on the title page of the brochures under the words "Presented By." Medic Leasing, Inc.By late 1983, four leasing companies were formed by various individuals for the purpose of buying XE-II units from SANS and then leasing the units to investor/lessees. One of the four leasing companies, Medic Leasing, Inc. (Medic), was formed by Harry Abercrombie. SANS purportedly sold 12,500 XE-II units to Medic at a price of $ 6,000 per unit. To finance Medic's purchase of the XE-II units from SANS, Harry Abercrombie on behalf of Medic, made a small cash down payment and executed three promissory notes in favor of SANS. The principal payable under these three promissory notes totaled $ 72,375,170, with interest payable at the rate of 9 percent per annum. Although the notes claim to be recourse as to principal and nonrecourse274 as to interest, under the terms of the notes, no payment of principal or interest was due for 14 years, except from the equipment lease proceeds. Indeed, Medic never made any payments under the three promissory notes it had executed in favor of SANS. There was no negotiation of the per unit purchase price between SANS and Medic. Shortly thereafter, Harry Abercrombie and his son Rodger Abercrombie (the Abercrombies) began looking for investor/lessees for the XE-II units Medic had purchased. To find investors for the program, the Abercrombies solicited investment advisors, C.P.A.s, and financial planners. They also hired salesmen to promote the program. The leasing program operated such that investors were to lease a number of XE-II units from Medic and then sublease them to patients whose doctors had prescribed the units for their patients' pain. The units were to be subleased by patients for $ 120 per month. As part of the investment package, investors contracted with a management company which was to insure the XE-II units, and handle the actual leasing and maintenance of the units. Although the promotional material claimed that a number of management companies were available, 275 in these cases the management company was Electrocaine Medical Systems, Inc. (EMS), a corporation with which Nelson Gross was affiliated. AppraisalsRespondent's first expert witness, Donald R. McNeal, Ph.D., conducted a technical evaluation of the XE-II and compared it with two other TENS units that were available on the market. Dr. McNeal concluded that the XE-II had a three-year useful life and did not compare favorably with the other TENS units. More specifically, the XE-II was bulky, physically less attractive, had a single channel (as compared to dual channel), and had fewer performance options than the other commercially produced TENS units. The other TENS units used in the comparison had manufacturers' suggested retail prices of between $ 639 and $ 645. However, some retailers sold these units for as little as $ 450. With this in mind, Dr. McNeal concluded the fair market value of the XE-II during 1983 was less than $ 300. We find the actual fair market value of each XE-II unit was $ 295. Respondent's second expert witness, Herbert T. Spiro, examined the economics of the leasing program. Mr. Spiro concluded that the valuation of the leasing program contained276 in the promotional materials (the Tunnell Report) assumes many variables which are unrealistic. To begin with, the Tunnell Report relies solely on information contained in the promotional brochure. It assumes a utilization rate which does not take into account equipment problems or lag time between rentals, and it fails to consider the XE-II's three-year useful life (as determined by Dr. McNeal), as well as commercial obsolescence due to technological advancements in the TENS unit market. Moreover, the Tunnell Report ignores an industry-wide standard for health or medical insurance reimbursement. Health or medical insurance companies typically discontinue payments for leased medical equipment once the rental payments equal the cost of purchasing the equipment. Mr. Spiro concluded that based on the above factors, this investment would be undesirable because investors could not realize a profit on this leasing venture. Petitioners' TransactionsThe WilsonsPetitioners William N. Wilson and Sherry Wilson (the Wilsons) resided in Huntington Beach, California when they filed their petition. During 1983, Mr. Wilson was employed as an automobile mechanic and Mrs. Wilson277 was employed as a bookkeeper. Both of the Wilsons are high school graduates and each has obtained a few units of college credit. In October or November 1983, Mr. Wilson was introduced to the leasing program by his friend and former coworker, Rodger Abercrombie, one of the principals behind Medic. Mr. Wilson "skimmed" a promotional brochure at Medic's offices, but he did not receive any other written information about the leasing program prior to his investment. Rodger Abercrombie told Mr. Wilson that investors in the program could expect rental income from the units, as well as certain tax benefits. Mr. and Mrs. Wilson discussed the prospective investment. They had never seen a TENS unit, and they did not conduct any independent research into the XE-II, or other TENS units. They had no investment experience, and no experience in leasing medical equipment. Relying on Roger Abercrombie's representations, the Wilsons decided to invest in the leasing program. On December 20, 1983, the Wilsons signed an Electrocaine XE-II Equipment Lease with Medic. Under this agreement, the Wilsons agreed to lease 20 XE-II units from Medic for a period of 82 months. They also agreed to pay278 Medic advance rent in the amount of $ 6,000 ($ 300 per unit X 20 units). They did not attempt to negotiate any terms of the lease, or the amount of money required by Medic as advance rent. The Wilsons signed two promissory notes in favor of Medic: one in the amount of $ 3,600 due on February 15, 1984; and, the other in the amount of $ 2,400 due on June 1, 1984. The Wilsons paid the notes in full on March 10, 1984 and July 3, 1984, respectively. At the time the Wilsons signed the lease agreement, they elected to delegate the management of their leased XE-II unit to EMS. They signed a management agreement with EMS, without negotiating any of the terms of the agreement. In addition, Medic, as lessor, elected to pass the investment tax credit allegedly available on the units to the Wilsons, as lessees. The Wilsons were assigned serial numbers with respect to each of the units they leased. The units represented by the serial numbers assigned to the Wilsons had not been manufactured by the end of 1983. On Schedule C attached to their 1983 joint Federal income tax return, the Wilsons deducted the $ 6,000 advance rent they paid to Medic for the lease of their XE-II units. They also279 claimed an investment tax credit in 1983 and investment tax credit carrybacks to 1980 and 1981. The claimed investment credit and carrybacks were based on the price of $ 6,000 that Medic paid to SANS for each XE-II unit. The Wilsons had no income in 1983 from their leasing activities, and they did not know whether any of their XE-II units had ever been subleased. The MartinsCalvin F. Martin, Jr. and Janet Martin (the Martins) resided in El Segundo, California when they filed their petition. During 1983, Mr. Martin was employed as a manager in the engineering department at the Pacific Telephone & Telegraph Company and Mrs. Martin was employed as a secretary. Mr. Martin is a college graduate and Mrs. Martin has taken a few college courses. In November 1983, Mr. Martin was introduced to the leasing program by his tax return preparer, Jack Elliott. Mr. Elliott had received information pertaining to the leasing program from Robert J. Struth, a salesman hired by Harry Abercrombie. The Martins did not read any written information about the leasing program. Prior to his investment, Mr. Elliott told Mr. Martin that investors in the program could expect rental income from the280 units, as well as certain tax benefits. Mr. and Mrs. Martin discussed the prospective investment. However, they never saw an XE-II unit and they never investigated the viability of the leasing program. The Martins had no previous experience in leasing medical equipment, but they had previous investment experience. In 1982, they had invested in a limited partnership which produced television pilots. Relying on Mr. Elliott's advice, the Martins decided to invest in the leasing program. On December 23, 1983, Mr. Martin signed an Electrocaine XE-II Equipment Lease with Medic. Under this agreement, Mr. Martin agreed to lease 20 XE-II units from Medic for a period of 82 months. He also agreed to pay to Medic advance rent in the amount of $ 6,000 ($ 300 per unit X 20 units). Mr. Martin made no attempt to negotiate any terms of the lease, or the amount of money required by Medic as advance rent. As payment for the advance rent, Mr. Martin obtained a $ 6,000 personal loan from Security Pacific National Bank. The bank subsequently issued two cashier's checks totaling $ 6,000 to Medic. Mr. Martin repaid the loan on April 27, 1984. At the time Mr. Martin signed the lease agreement, 281 he elected to delegate the management of his leased XE-II units to EMS. He signed a management agreement with EMS, without negotiating any of the terms of the agreement. In addition, Medic, as lessor, elected to pass the investment tax credit allegedly available on the units to Mr. Martin, as lessee. Mr. Martin was assigned serial numbers with respect to each of the units he leased. The units represented by the serial numbers assigned to Mr. Martin had not been manufactured by the end of 1983. On Schedule C attached to their 1983 joint Federal income tax return, the Martins deducted the $ 6,000 advance rent Mr. Martin paid to Medic for the lease of his XE-II units. They also claimed an investment tax credit in 1983 and an investment tax credit carryback to 1980. The claimed investment credit and carryback were based on the price of $ 6,000 that Medic paid to SANS for each XE-II unit. The Martins had no income in 1983 from their leasing activities, and Mr. Martin did not know whether any of his XE-II units had ever been subleased. OPINION The first issue is whether petitioners are entitled to investment tax credits and investment tax credit carrybacks, as well as deductions282 for the lease payments they made with respect to their investments in the leasing program. Petitioners bear the burden of proving that they are entitled to the claimed credits and deductions. Rule 142(a). A common threshold for the claimed credits and deductions is the taxpayers must be engaged in an activity for profit. Sec. 183; Soriano v. Commissioner,90 T.C. 44">90 T.C. 44 (1988). Whether an activity is engaged in for profit depends on whether the activity was undertaken with the objective of making a profit. Jasionowski v. Commissioner,66 T.C. 312">66 T.C. 312, 319 (1976). Although petitioners need not have a reasonable expectation of making a profit, they must have entered into the activity with an actual and honest profit objective. Dreicer v. Commissioner,78 T.C. 642">78 T.C. 642, 644-645 (1982), affd. without opinion 702 F.2d 1205">702 F.2d 1205 (D.C. Cir. 1983). In this context, "profit" means economic profit, independent of tax savings. Seaman v. Commissioner,84 T.C. 564">84 T.C. 564, 588 (1985); Surloff v. Commissioner,81 T.C. 210">81 T.C. 210, 233 (1983). In Rose v. Commissioner,88 T.C. 386">88 T.C. 386 (1987), affd. 868 F.2d 851">868 F.2d 851 (6th Cir. 1989),283 we adopted an objective test under which transactions involving "generic tax shelters" are disregarded if they are devoid of economic substance. In the case of a generic tax shelter, "the presence or absence of a profit objective is to be determined from the examination of certain objective factors which tend to indicate whether or not the disputed transaction had economic substance." Horn v. Commissioner,90 T.C. 908">90 T.C. 908, 933 (1988); Rose v. Commissioner, supra at 414. Under the Rose criteria, a "generic tax shelter" possesses some or all of the following characteristics: (1) the materials promoting the program focus on the tax benefits; (2) the investors accepted the agreement without negotiation of price or terms; (3) the assets in question consist of packages of purported rights, difficult to value in the abstract and substantially overvalued in relation to tangible property included as part of the package; (4) the tangible assets were acquired or created at a relatively small cost shortly before the transaction in question; and (5) the bulk of the consideration was deferred by promissory notes, nonrecourse in form or in substance. Rose v. Commissioner, supra at 412.284 We find petitioners' lease of the Electrocaine XE-II units possesses the characteristics of a generic tax shelter. The promotional material for the leasing program emphasizes the tax benefits of the lease. The brochure contains sample tax forms and features "considerable tax savings" as a highlight of investing in the program. Although it is unclear whether all petitioners received the promotional material, the information they received focused primarily on the tax aspects of investing in the leasing program. Petitioners accepted the terms of their respective leases and the amounts required as advance rent without negotiation. Moreover, the XE-II units were overvalued. The record established that some XE-II units were manufactured shortly before they were purportedly leased to petitioners. Each unit was manufactured at a cost of $ 60.98, and had a fair market value of $ 295. The units were nevertheless sold by NED to SANS for $ 950 each, and then sold by SANS to Medic for $ 6,000 each. Early in the trial, the testimony of the manufacturer of the XE-II units established that the units represented by petitioners' assigned serial numbers had not been manufactured by the end of285 1983. The Martins obtained a bank loan and the Wilsons used notes to finance their respective leases with Medic. Medic, however, deferred the bulk of the consideration which it agreed to pay SANS for the XE-II units with the use of valueless promissory notes. Petitioners' activities with respect to the XE-II units fall within the definition of a generic tax shelter. Therefore, we apply the unified approach of Rose to determine whether the transaction is devoid of economic substance. The Rose approach evaluates the following factors: (1) the investment activities of petitioners, (2) the relationship between price and fair market value, (3) the structure of the financing, and (4) perceived Congressional intent. 1. Petitioners' Investment ActivitiesPrior to leasing the XE-II units, petitioners had no expertise or knowledge of the medical equipment leasing business. The individuals on whose advice petitioners relied when investing in the leasing program also had no expertise or knowledge of medical equipment or the leasing of TENS units. Petitioners did not independently investigate the economics of the leasing activity, nor did they contact someone knowledgable286 to study the viability of the program. No effort was made to confirm the potential profitability of leasing TENS units. In fact, petitioners had not seen any XE-II units before leasing them. Petitioners entered into a management agreement with EMS to distribute the XE-II units to sublessors. There is no evidence to show any of the units leased by petitioners were subleased by EMS. No rental income was generated by the purported subleasing of the units, and petitioners could not state, even generally, how much income they expected to receive from their leasing activities. 2. Relationship Between Fair Market Value and PriceBon Aqua was capable of manufacturing the XE-II at a cost of $ 60.98 per unit. Respondent's expert witness established that each fully assembled unit had a fair market value of less than $ 300. (We found the actual fair market value of each unit to be $ 295). SANS nevertheless purchased the units from NED for $ 950 per unit, and Medic purchased the units from SANS at a price of $ 6,000 per unit. The promotional materials for the leasing program did not contain an appraisal of the fair market value of the XE-II. The materials did contain, however, 287 a valuation of the leasing program. Despite the claims contained in the brochure, however, respondent's expert witness established that investors could not realize a profit on this leasing venture. The opinions of expert witnesses are admissible and relevant to the issue of value, but the opinions are weighed according to the experts' qualifications and other relevant evidence. See Johnson v. Commissioner,85 T.C. 469">85 T.C. 469, 477 (1985). This Court may reject expert testimony if judged appropriate to do so. Helvering v. National Grocery Co.,304 U.S. 282">304 U.S. 282 (1938); Chiu v. Commissioner,84 T.C. 722">84 T.C. 722 (1985). Respondent's expert witnesses were thorough and professional. Their appraisals were performed with care and we accept the appraisals as reasonably accurate. The witness petitioners presented, however, had no appraisal experience and limited familiarity with TENS units. Overall, this witness did not assist in the Court's understanding of the fair market value of XE-II units, and therefore we give no weight to his testimony. 3. Structure of the FinancingA sale financed by deferred debt which in substance or in fact is288 not likely to be paid, is an indicia of lack of economic substance. Rose v. Commissioner, supra at 419. Our analysis must focus on the substance rather than the form of the debt. Waddell v. Commissioner,86 T.C. 848">86 T.C. 848, 902 (1986), affd. 841 F.2d 264">841 F.2d 264 (9th Cir. 1988). In these cases, Medic executed three promissory notes totaling $ 72,375,170 to finance the purchase of 12,500 XE-II units from SANS. Although these notes were stated to be recourse as to principal and nonrecourse as to interest, no payment of principal or interest was due for 14 years, except from the equipment lease proceeds. The amount of these promissory notes was greatly inflated in relation to the value of the XE-II units. These notes were so commercially unreasonable, we do not believe they were ever intended to be repaid. Rather, these notes were used to inflate the value of the XE-II units to increase the amount of the investment tax credit. Although only nominal notes were created at the investor level, the investors did benefit from the inflated valuation when Medic elected to pass through the investment tax credit to petitioners. The promissory notes executed289 by Medic to SANS, therefore, were an integral part of the arrangement between Medic and petitioners and indicate lack of economic substance in these cases. 44. Perceived Congressional IntentWe do not believe Congress intended to encourage investment in medical equipment leasing ventures like the one at issue. See Rose v. Commissioner, supra at 421-422. From our analysis of petitioners' investment activities, the disparity between the claimed value of the XE-II and its actual fair market value, as well as the underlying financial structure of the leasing program, we find that petitioners' leasing activities were devoid of economic substance and should be disregarded for tax purposes. Therefore, petitioners are not entitled to deductions for the lease payments they made to Medic in 1983, nor are they entitled to their respective claimed investment tax credits and investment tax credit carrybacks. Section 6653(a) Addition to TaxAn addition to tax equal to five percent290 is imposed if any part of an underpayment of tax is due to negligence or intentional disregard of rules or regulations. 5 Sec. 6653(a)(1). In addition, section 6653(a)(2) imposes an addition to tax in an amount equal to 50 percent of the interest due on the portion of the underpayment attributable to negligence or intentional disregard of rules or regulations. Negligence is the lack of due care or the failure to do what a reasonable and ordinarily prudent person would do under the circumstances. Neely v. Commissioner,85 T.C. 934">85 T.C. 934, 947 (1985). Petitioners bear the burden of proof on this issue. Bixby v. Commissioner,58 T.C. 757">58 T.C. 757, 791-792 (1972). Petitioners entered into this leasing transaction without any experience in the medical equipment leasing industry and without seeking the advice of anyone who had experience with medical equipment. They had not examined any XE-II units prior to leasing them, and they did not seek the advice of anyone who could assess the program's viability. Petitioners did not even inquire into the existence of the XE-II units291 before paying advance rent or claiming investment tax credits. These facts demonstrate petitioners' failure to exercise the care of a reasonable and prudent person in entering this investment and in claiming the credits and deductions. See Neely v. Commissioner, supra.Accordingly, petitioners are liable for the additions to tax under section 6653(a) for 1980, and sections 6653(a)(1) and (2) for the years following 1980. Section 6659 Addition to TaxRespondent determined additions to tax under section 6659 for all petitioners for the taxable years 1980 and 1983. A graduated addition to tax is imposed on individuals whose underpayment of tax equals or exceeds $ 1,000 and is attributable to a valuation overstatement. Sec. 6659. A valuation overstatement exists if the value of any property claimed on any return is 150 percent or more of the amount determined to be the correct amount of such valuation. Sec. 6659(c)(1). If the valuation claimed exceeds 250 percent of the correct valuation, then the addition to tax is equal to 30 percent of the underpayment, but only to the extent the underpayment is attributable to the valuation overstatement. Section 6659292 does not apply to underpayments of tax which are not "attributable to" valuation overstatements. See Todd v. Commissioner,89 T.C. 912">89 T.C. 912 (1987), affd. 862 F.2d 540">862 F.2d 540 (5th Cir. 1988). At the conclusion of this trial, following seven days of testimony, petitioners offered to concede the XE-II units were neither in existence, nor placed in service during the years in which they claimed investment tax credits and lease payment deductions. Petitioners' concession was an attempt to avoid the section 6659 addition to tax by invoking Todd v. Commissioner, supra. If we accepted petitioners' concession, the claimed credits would be disallowed, not because the leasing activity lacked economic substance, but because the units were not placed in service during the years in issue. Todd v. Commissioner, supra. We decline to accept petitioners' concession. The Electrocaine Medical Equipment Leasing Program lacks economic substance. Where a leasing transaction lacks economic substance, all claimed credits and deductions associated with the transaction are disallowed entirely. The investment tax credits and lease payment deductions are not analyzed as separate293 items for purposes of disallowance. In this context, petitioners' concession is meaningless. Although they offer to concede the equipment did not exist by the end of 1983, petitioners insist the transaction was economically viable, and maintain they are entitled to the lease payment deductions. Essentially, petitioners ask us to evaluate the credits and deductions separately, each on their own merit. This we refuse to do. In McCrary v. Commissioner, 92 T.C. (April 17, 1989), the taxpayers were involved in a purported "lease" of a master recording. Shortly before trial, the taxpayers conceded they were not entitled to the investment tax credit, in an effort to avoid the section 6659 addition to tax. The taxpayers did not contend the recording had the value they claimed on their tax returns, and they did not claim there was any objective possibility of profit from the transaction. Instead, the taxpayers argued they were entitled to deductions for rent and a distributor's fee because "subjectively [they] had an actual and honest objective of making a profit * * ." Following Todd v. Commissioner, supra, we accepted the taxpayers' concession and concluded the section294 6659 addition to tax did not apply to any portion of the underpayment in that case. We made a determination of fair market value in McCrary, but only because of the additions to tax. The taxpayers did not require a trial that otherwise would have been unnecessary and the taxpayers did not force us to decide "difficult valuation issues where [the] case could be easily decided on other grounds." Todd v. Commissioner, 862 F.2d at 544. This case is distinguishable from McCrary v. Commissioner, supra. In the case at bar, petitioners' offer to concede came at the conclusion of a seven-day trial. Petitioners had ample opportunity to concede the investment tax credit issue either before the trial, or following the testimony of the XE-II manufacturer on the third day of trial. (The manufacturer's uncontroverted testimony established that the units assigned to petitioners were not manufactured in 1983.) Instead, petitioners steadfastly maintained throughout the trial that the equipment they purportedly leased was in existence by the end of 1983, that the equipment had the value they claimed on their tax returns, and that the transaction was economically viable. 295 Thus, we were required to determine fair market value as an integral part of our evaluation of whether the transaction lacked economic substance. Because valuation was inseparable from the grounds for disallowance (lack of economic substance), petitioners' last minute offer to concede is unacceptable and the section 6659 addition to tax is applicable. See Irom v. Commissioner,866 F.2d 545">866 F.2d 545 (2d Cir. 1989). The Wilsons and the Martins based their respective investment tax credits on a claimed fair market value of $ 6,000 for each of the 20 XE-II units they leased. This value was equal to the price purportedly paid by Medic to SANS for each unit. The actual fair market value of the XE-II bears no relationship to the values petitioners used in claiming their investment tax credits. We have found the fair market value to be $295. Thus, the section 6659 valuation overstatement addition to the tax applies. The disallowed investment tax credits and carrybacks created an underpayment attributable to a valuation overstatement. However, the underpayments attributable to the rental payments are not subject to the overvaluation addition. Soriano v. Commissioner,90 T.C. 44">90 T.C. 44, 62 (1988).296 Petitioners deducted the rental expenses as payments for the use of property. In deducting the rental payments, they made no claim as to the value of the underlying property. Soriano v. Commissioner, supra.Section 6621(c) Addition to TaxRespondent determined the Martins were liable for additional interest under section 6621(c) for the taxable years 1980 and 1983. Respondent asserted in his Answer the Wilsons are also liable for additional interest for the years 1980, 1981, and 1983. Respondent bears the burden of proving the Wilsons are liable for this additional interest. Rule 142(a); Parker v. Commissioner ,86 T.C. 547">86 T.C. 547, 566 (1986). Section 6621(c)(1) imposes an increased rate of interest when there is a "substantial underpayment attributable to * * * tax motivated transactions." For purposes of section 6621(c), an underpayment exceeding $ 1,000 is substantial. The additional interest accrues after December 31, 1984, even if the transaction was entered into prior to the enactment of section 6621(c). Solowiejczyk v. Commissioner,85 T.C. 552">85 T.C. 552 (1985), affd. per curiam without published opinion 795 F.2d 1005">795 F.2d 1005 (2d Cir. 1986).297 A tax motivated transaction includes any valuation overstatement within the meaning of section 6659(c). Sec. 6621(c)(3)(A)(i). Congress specifically amended section 6621(c)(3)(A) to add to the list of tax-motivated transactions: "(v) any sham or fraudulent transaction." 6 This Court has recently interpreted section 6621(c)(3)(A)(v) to include transactions which were without economic substance. Patin v. Commissioner,88 T.C. 1086">88 T.C. 1086, 1128-1129 (1987), affd. sub nom. without published opinion Hatheway v. Commissioner,856 F.2d 186">856 F.2d 186 (4th Cir. 1988), affd. sub nom. Skeen v. Commissioner,864 F.2d 93">864 F.2d 93 (9th Cir. 1989), affd. without published opinion Patin v. Commissioner,865 F.2d 1264">865 F.2d 1264 (5th Cir. 1989), affd. sub nom. Gomberg v. Commissioner,868 F.2d 865">868 F.2d 865 (6th Cir. 1989). We have determined the Wilsons and the Martins made a valuation overstatement with respect to that portion of the underpayments attributable to the disallowance of the investment tax credits298 and investment tax credit carrybacks claimed on their respective returns. We have also determined the transactions at issue were without economic substance and therefore a sham. Accordingly, for the Wilsons, respondent has met his burden of proof and interest will be imposed under section 6621(c) for 1980, 1981, and 1983. For the Martins, interest will be imposed under section 6621(c) for 1980 and 1983. Award of Damages Under Section 6673Under section 6673, this Court may award damages to the United States not in excess of $ 5,000 whenever it appears the taxpayer has instituted or maintained proceedings primarily for delay, the taxpayer's position in such proceedings is frivolous or groundless, or the taxpayer unreasonably failed to pursue available administrative remedies. Although we are tempted, we exercise our discretion in declining to award damages in these cases. Therefore, we deny respondent's motions for damages. To reflect the foregoing, Decisions will be entered under Rule 155.Footnotes1. These cases were consolidated for trial, briefing, ad opinion by Order of this Court dated October 5, 1987.↩2. Hereinafter, all section references are to the Internal Revenue Code of 1954 as amended and in effect for the years in issue. All Rule references are to the Tax Court Rules of Practice and Procedure.↩. 50 percent of the interest due on the underpayment of tax attributable to negligence or intentional disregard of rules or regulations.↩. 50 percent of the interest due on the underpayment of tax attributable to negligence or intentional disregard of rules or regulations.↩3. Section 6621(d) was amended and redesignated as section 6621(c) by the Tax Reform Act of 1986, sec. 1151(c)(1), Pub. L. 99-514, 100 Stat. 2744.↩4. See Avers v. Commissioner,T.C. Memo. 1988-176; Apperson v. Commissioner,T.C. Memo. 1987-571↩, on appeal (7th Cir. Mar. 9, 1988).5. For the taxable year 1980, this addition to tax is imposed under section 6653(a).↩6. Pub. L. 99-514, sec. 1535(a), 100 Stat. 2085, 2750. This amendment is effective with respect to interest accruing after December 31, 1984.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622572/	Horace E. and Edith B. Nichols, Petitioners v. Commissioner of Internal Revenue, RespondentNichols v. CommissionerDocket No. 2202-71United States Tax Court60 T.C. 236; 1973 U.S. Tax Ct. LEXIS 125; 60 T.C. No. 28; May 21, 1973, Filed 125 Decision will be entered for the respondent. Petitioner, after filling an interim vacancy on the Supreme Court of Georgia, was successfully elected to a full term as an associate justice on the Supreme Court of Georgia. In order to qualify as a candidate for this position in the 1968 Georgia primary election, petitioner was assessed an $ 1,800 filing fee by the Democratic Party of Georgia. Held, the filing fee is not deductible as a State tax under sec. 164, nor is it otherwise deductible under sec. 162 or sec. 212, I.R.C. 1954. Horace E. Nichols, pro se.Edward P. Phillips, for the respondent. Tannenwald, Judge. Fay, J., dissenting. Sterrett, J., agrees with this dissent. TANNENWALD236 OPINIONRespondent determined a deficiency in petitioners' Federal income tax for the taxable year 1968 in the amount of $ 610.44. The sole issue is whether a filing fee paid by petitioner Horace E. Nichols to the Democratic Party of Georgia in order to have his name placed on the State of Georgia's election ballot is a tax that qualifies for deduction for Federal income tax purposes under section 164 1 or is otherwise deductible under either section 162 or 212.All of the facts have been stipulated. The stipulation of facts and the exhibits attached thereto are incorporated herein by this reference. 127 Petitioners resided in Rome, Ga., at the time they filed their petition herein. They filed a joint Federal income tax return for the taxable year 1968 with the district director of internal revenue at Atlanta, Ga. Petitioner Edith B. Nichols is a party herein only by reason of having filed such joint return. Horace E. Nichols will hereinafter be referred to as petitioner.Petitioner was appointed to the office of associate justice of the Supreme Court of Georgia on November 15, 1966, to fill a then-existing 237 vacancy. The appointment was effective until the next general election on November 5, 1968.During the month of May 1968, petitioner qualified under the laws of the State of Georgia to run in the statewide Democratic primary election for the unexpired portion of his then-current term, i.e., November 6, 1968, through December 31, 1968, and for an ensuing 6-year term commencing on January 1, 1969.Petitioner was unopposed in the May 1968 primary election and was accordingly nominated by the Democratic Party of Georgia as its candidate in the November 1968 general election. Petitioner was also unopposed and consequently elected in that general election.Under the rules128 and regulations governing the Democratic Party of Georgia's 1968 primary election, petitioner was assessed an $ 1,800 filing fee in order to qualify as a candidate in the primary. Seventy-five percent of petitioner's filing fee was used to cover the cost of the Democratic Party of Georgia's 1968 primary election; the remaining 25 percent was used to finance the cost of that party's 1970 primary runoff. Petitioner deducted the $ 1,800 filing fee on his 1968 return, which respondent disallowed.We are again confronted with the question of the extent to which campaign expenditures constitute an allowable deduction for income tax purposes under the principles laid down in McDonald v. Commissioner, 323 U.S. 57">323 U.S. 57 (1944). We recently faced this question, in terms of the applicability of sections 162 and 212, and disallowed the deduction in James B. Carey, 56 T.C. 477">56 T.C. 477 (1971), affirmed per curiam 460 F. 2d 1259 (C.A. 4, 1972). In this case, there is the further complicating factor that petitioner claims that the filing fee in question is deductible as a State tax under section 164 even if the deduction129 is not available under section 162 or section 212.Prior to 1964, State taxes were generally deductible and, had the provisions of section 164 remained unchanged, we might have been constrained to conclude that petitioner should prevail on the ground that the filing fee constituted a State tax. Nichols v. United States, 223 F. Supp. 709 (N.D. Ga. 1963), vacating a prior decision against the petitioner on other grounds (201 F. Supp. 337">201 F. Supp. 337 (involving the filing fee of this petitioner for a lower county judgeship in a pre-1964 year)); cf. Campbell v. Davenport, 362 F. 2d 624 (C.A. 5, 1966); Maness v. United States, 237 F. Supp. 918 (M.D. Fla. 1965), affirmed on another issue 367 F. 2d 357 (C.A. 5, 1966); see Jack E. Golsen, 54 T.C. 742">54 T.C. 742, 756-758 (1970), affirmed on another issue 445 F. 2d 985 (C.A. 10, 1971). However, even assuming arguendo that the Georgia filing fee should properly be considered a State tax, we are now faced with a different question because the Revenue130 Act of 1964 substantially 238 modified section 164. As applicable to the taxable year involved herein, this section reads as follows:SEC. 164. TAXES.(a) General Rule. -- Except as otherwise provided in this section, the following taxes shall be allowed as a deduction for the taxable year within which paid or accrued: (1) State and local, and foreign, real property taxes.(2) State and local personal property taxes.(3) State and local, and foreign, income, war profits, and excess profits taxes.(4) State and local general sales taxes.(5) State and local taxes on the sale of gasoline, diesel fuel, and other motor fuels.In addition, there shall be allowed as a deduction State and local, and foreign, taxes not described in the preceding sentence which are paid or accrued within the taxable year in carrying on a trade or business or an activity described in section 212 (relating to expenses for production of income).Clearly, the filing fee paid by petitioner during the taxable year in question is not encompassed within the provisions of section 164(a) (1) through (5). Consequently, if it is deductible as a tax, it must meet the requirements of the catchall clause, 131 which allows a deduction for other State taxes "which are paid or accrued within the taxable year in carrying on a trade or business or an activity described in section 212 (relating to expenses for production of income)." (Emphasis added.) Thus, our path takes us back to sections 162 and 212.We think that, under the rationale of McDonald v. Commissioner, supra, petitioner has failed to meet the statutory conditions. In that case, the Supreme Court denied a deduction to a judicial candidate for amounts paid as a filing fee and as campaign expenses on the ground that such amounts were "not expenses incurred in being a judge but in trying to be a judge." See 323 U.S. at 60. As a consequence, the deduction was denied under both section 23(a)(1)(A) and section 23(a)(2) of the Internal Revenue Code of 1939 (the respective predecessors of sections 162 and 212).We had occasion in James B. Carey, supra, to analyze in some detail the impact of the McDonald decision and we see no need to repeat that analysis here. It is sufficient to note those critical factors which underpin our conclusion132 that McDonald is controlling herein.First, it is important to understand that the Supreme Court in McDonald focused on the phrase "carrying on any trade or business" and not on the phrase "ordinary and necessary." Such being the case, we view our task of construction as having the same frame of reference, free of any possible implication that, at least where a tax 239 is concerned, the "ordinary and necessary" requirement of section 162 may not have to be met. 2Second, we recognize, as we did in Carey, that we have refused to extend the rationale of McDonald to deny the deduction of employment agency fees. Leonard F. Cremona, 58 T.C. 219">58 T.C. 219 (1972), on appeal (C.A. 3, Dec. 27, 1972); 133 David J. Primuth, 54 T.C. 374">54 T.C. 374 (1970). But, as we pointed out in Carey, there is a sufficient disparity between employment agency fees and campaign expenditures to justify the conclusion that the former should be dealt with under a different rubric.Third, we are not impressed with petitioner's contention that filing fees, unlike general campaign expenses, are not variable and discretionary so that an allowance of a deduction for such fees would not tend to favor the wealthy by providing an inducement to persons of means to run for public office -- a result which might be considered as contravening public policy or as constituting an unconstitutional discrimination. Cf. Bullock v. Carter, 405 U.S. 134">405 U.S. 134 (1972). Moreover, it is an indisputable fact that a filing fee as well as campaign expenses was involved in McDonald and neither the opinion of Mr. Justice Frankfurter nor that of Mr. Justice Black drew any distinction between the two.Finally, we think a word about public policy is in order. There would appear to be an element of contradiction in the view that the allowance of the deduction of a filing fee otherwise134 properly required as a condition for running for public office would be against public policy. But that is not the frame of the public policy consideration involved in this case. Rather the question we have before us is whether this Court should allow, in the absence of an explicit legislative mandate, the deduction of expenditures that are an inextricable part of the election process -- one of the most sensitive elements in the fabric of the democratic way of life. We think that the considerations involved in such a question and the fact that the Supreme Court has spoken in an almost identical situation demand that we stay our hand.The long and the short of our position is that this case fits the mold of McDonald v. Commissioner, supra, and we hold that it controls so as to disallow the deduction under section 162 and section 212, and consequently under the catchall clause of section 164 as well. We are reinforced in our conclusion by Campbell v. Davenport, supra, which, in the course of holding that a deduction for a Texas filing fee was not allowable under section 162 or 212 3 but was deductible as a State135 tax 240 under the then-existing section 164, clearly implied that if the question of the filing fee in that case had arisen under the amendment to section 164 by the Revenue Act of 1964, the deduction as a State tax would also have been disallowed. See Jack E. Golsen, supra. See also Nichols v. United States, 201 F. Supp. 337 (N.D. Ga. 1962) (which denied the petitioner herein the right to deduct under either section 162 or 212 the filing fee for a lower court judgeship in a pre-1964 year).Decision will be entered for the respondent. FAYFay, J., dissenting: I respectfully submit that McDonald v. Commissioner, 323 U.S. 57">323 U.S. 57 (1944), does not compel the result reached by the majority. In McDonald the Supreme Court held that campaign expenses incurred by a State court judge, who was serving136 as an interim appointee, in seeking election for a full term were not deductible under the predecessor of section 162 (i.e., sec. 23(a)(1), I.R.C. 1939) on the ground that they were not sustained in the business of "being a judge but in trying to be a judge." (Emphasis added.) See McDonald v. Commissioner, supra at 60. The Supreme Court further observed that the predecessor of section 212 (i.e., sec. 23(a)(2), I.R.C. 1939) was also not applicable.In justifying its conclusion in McDonald the Supreme Court emphasized that there were strong public policy considerations for not allowing a deduction for campaign expenses incurred in running for public office and, therefore, that the sanctioning of such a deduction is more appropriately the prerogative of Congress rather than the judiciary.The expenditures in McDonald and the instant case initially seem to be indistinguishable since the expenditures in both cases were incurred in the effort to attain public office. However, after closer examination of McDonald, I am convinced that the public policy considerations which operated to preclude allowance of the deduction in McDonald137 are not present in the case at bar. I agree that the judiciary should not intercede to permit a deduction for Federal income tax purposes of such a variable, discretionary item as campaign expenses incurred in running for public office. The authorization of such a policy theoretically could act as an inducement for wealthy people to offer themselves for public office. Accordingly, authorization of such a policy is appropriately the responsibility of Congress and not that of the judiciary. See McDonald v. Commissioner, supra at 63.Nevertheless, the amount of petitioner's filing fee was not subject to his individual discretion. Each contestant for office in the Georgia Democratic Party primary was required to pay an assessed fee to finance the estimated cost of conducting the primary election. Each 241 contestant for the same office was assessed the same fee. Thus, since each contestant for the same office would be entitled to the same deductible amount, I believe that the public policy rationale underlying McDonald does not encompass items such as the instant filing fee. 1 Accordingly, I am convinced that the allowance of the deduction138 of the instant filing fee would not frustrate sharply defined public policy. See Commissioner v. Tellier, 383 U.S. 687">383 U.S. 687, 694 (1966); James B. Carey, 56 T.C. 477">56 T.C. 477, 485-486 (Judge Simpson's dissent) (1971), affirmed per curiam 460 F. 2d 1259 (C.A. 4, 1972), certiorari denied 409 U.S. 990">409 U.S. 990 (1972).As I read McDonald, the deductibility of the instant filing fee under section 212 is precluded only if the public policy considerations inherent in McDonald are also applicable 139 in the instant case. 2 Accordingly, since I have concluded that the public policy considerations of McDonald are not applicable in the instant case, and since petitioner's filing fee was expended in an effort to attain an income-producing activity, I would permit the deduction of this item under section 212.This conclusion is supported by this Court's decisions in James B. Carey, supra;David J. Primuth, 54 T.C. 374">54 T.C. 374 (1970); Leonard F. Cremona, 58 T.C. 219 (1972).140 In Carey this Court observed that --in light of the additional fact that the actual majority in McDonald was obtained by a simple concurrence in result by Mr. Justice Rutledge, it is questionable whether the legal theory espoused in the opinion of the Court [i.e., the Supreme Court of the United States] has as wide an application as respondent would have us believe. Indeed, the Court itself indicated that the broad brush stroke of its opinion might be more apparent than real, when it stated that it would leave to this Court the "detailed analysis of the special circumstances of various 'businesses' and expenses incident to their 'carrying on'" and the consequent determination of the "allowed or disallowed deductions." See 323 U.S. at 65. It seems to us that the Court clearly left room for different results in different factual situations. Compare Caruso v. United States, 236 F. Supp. 88">236 F. Supp. 88 (D.N.J. 1964). [Emphasis added. James B. Cary, supra at 480.]I believe that the case at bar involves one of those different factual situations which justifies a result different from that141 in McDonald.In Primuth and Cremona this Court concluded that employment agency fees were deductible under section 162 where the taxpayer is either successful (Primuth) or unsuccessful (Cremona) in his efforts *242 to obtain a new position of a type similar to his present one. The public policy considerations that were applicable in McDonald and Carey did not preclude the deduction under section 162 in either Primuth or Cremona. Analogously, I believe that these same public policy considerations are not applicable in the case at bar and thus should not preclude the deduction of petitioner's filing fee under section 212. 3Footnotes1. All section references are to the Internal Revenue Code of 1954.↩2. The legislative history indicates that the catchall language of sec. 164 was designed to permit deduction of taxes "even though otherwise they might have to be capitalized." See H. Rept. No. 749, 88th Cong., 1st Sess., p. 50 (1963); S. Rept. No. 830, 88th Cong., 2d Sess., p. 55 (1964).↩3. Maness v. United States, 357">367 F.2d 357↩ (C.A. 5, 1966), reaches the same conclusion.1. I recognize that the record does not clarify whether each participant in the primary was assessed a uniform, pro rata fee, or whether the amount of the fee was contingent upon the significance of the specific office within the State political structure. Since the issue of whether the filing fee was based on a sliding-scale method is not specifically before us in the instant case, I will not consider its impact at this time.↩2. In McDonald v. Commissioner, 323 U.S. 57">323 U.S. 57 (1944), the Supreme Court expressly stated that running for the office of a State court judge did not constitute the trade or business of being a judge. See McDonald v. Commissioner, supra↩ at 59-60. Therefore, since petitioner was also running for election as a judge and since this activity does not constitute a trade or business, petitioner's filing fee is not deductible under sec. 162.3. Since I have concluded that petitioner's filing fee is deductible under sec. 212↩, I do not find it necessary to consider petitioner's alternative argument that the filing fee is deductible as a State tax under sec. 164.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622573/	Estate of William G. Miller, Deceased, Morris Robinson, Administrator v. Commissioner.Estate of Miller v. CommissionerDocket No. 85948.United States Tax CourtT.C. Memo 1962-11; 1962 Tax Ct. Memo LEXIS 296; 21 T.C.M. (CCH) 43; T.C.M. (RIA) 62011; January 24, 1962296 The administrator's attorney filed application in probate court for the allowance of an attorney fee of $53,000. After hearing, in which the administrator and heirs appeared in resistance, the court allowed a $50,000 fee, which was paid. Held, the $50,000 was deductible from the gross estate in computing estate tax under Sec. 2053(a)(2), I.R.C. of 1954. Arthur S. Sachs, Esq., for the petitioner. Douglas D. Robertson, Esq., for the respondent. MULRONEY Memorandum Findings of Fact and Opinion MULRONEY, Judge: The respondent determined a deficiency in estate tax in297 the estate of William G. Miller, Deceased, in the amount of $11,376. The only issue is whether the attorney fee for the administrator's attorney, which was allowed and paid in the sum of $50,000 was deductible in full or in the sum of $17,000, which respondent determined. Findings of Fact William G. Miller, a resident of New Haven, Connecticut, died testate on December 9, 1955, leaving an estate of approximately $497,596.78 and a nephew and niece as his only heirs. Administration of the estate was had in the Probate Court, District of New Haven, and on or about February 21, 1956 Morris Robinson was appointed administrator of the estate and Howard A. Jacobs was employed as attorney for the administrator. Jacobs was not related to the heirs. Administration of the estate proceeded and in 1957 the administrator and attorney were each paid $10,000 partial fees. Also in that year the Federal estate tax return was filed with a remittance of $87,492.11 tax. This return showed $85,000 was "Reserved for Administrator's fees, attorneys' fees, accounting services, probate fees, administrator's bond premiums and disallowed claims." In the latter part of January 1959, at a time when administration298 of the estate was nearing the end, Jacobs filed an application with the probate court for allowance of additional fees to him as attorney and to the administrator. In this application it was stated that partial payments had been made on the United States Estate Tax and Connecticut Succession Tax due in connection with this estate but that it was essential to have the administrator and attorney fees determined so that final account could be filed. Shortly after the above application was filed, Robinson called Jacobs to discuss the question of the attorney fee Jacobs was going to ask the probate court to allow. Jacobs said he was going to ask for a total fee of $53,000, or an allowance of $43,000 in addition to the $10,000 he had received in 1957. Robinson said that did not meet with his approval and he notified Jacobs he was discharged as his attorney. Robinson notified the clerk of the probate court that there would be a contested hearing on the matter of the allowance of the attorney fee for Jacobs. The hearing was set for February 11, 1959, before the judge of the probate court and the clerk sent a notice of the time and place of the hearing to Jacobs and the clerk also made299 arrangements to have a stenographer present for the hearing. There was a postponement of a few days at Robinson's request in order to give his new attorney time for preparation. At the hearing before the probate judge held on or about February 11, 1959, Robinson and the two heirs were present and Robinson stated he and the heirs were objecting to the allowance of Jacobs' requested fee of $53,000. Jacobs was sworn and his testimony was a recital of what he had done over the three years in connection with the Administration of the estate. After he had concluded there was some remark made by Robinson that the heirs might not be firm in their objection and if they did not object he would not object to the requested allowance. The court asked Robinson and Jacobs if they would be willing to have him talk to the heirs in chambers and he asked the heirs if they would be willing to talk to him. Since all were willing, the judge and the clerk and the heirs talked in chambers. The heirs told the judge that while they were objecting they were anxious to have the estate settled. They said they had not had any knowledge prior to the hearing that Jacobs had been fired by Robinson and that they300 preferred that Jacobs remain and act as attorney. The judge told them that, while he had not made up his mind, he felt an attorney fee of $50,000 for Jacobs would not be unreasonable in view of the size of the estate and the character of the work done. When this private hearing terminated the judge and clerk and the heirs returned to the court. There was a "flareup" between Robinson and Jacobs over future charges and the judge made it clear that any fee he would allow would mean Jacobs would have to be rehired as attorney and the fee would be for all of his past and future services until the estate was closed. About a week or ten days later the judge entered an order awarding Jacobs a total fee of $50,000 for his services as attorney for the administrator and reappointed him to act until the estate was closed. At the same time an order was entered granting an additional $7,000 for Robinson. Shortly thereafter Robinson filed an appeal to the Superior Court of New Haven County from the probate order awarding Jacobs the $50,000 fee. This was never heard on the merits. It was immediately followed by an application in the probate court by the nephew-heir to have Robinson removed as administrator. 301 Robinson immediately thereafter again discharged Jacobs and he applied to the Superior Court of New Haven County for a writ of prohibition to restrain the probate court from acting on the petition to remove him. Finally on March 13, 1959 Robinson, Jacobs, and the two heirs settled their controversies by executing a written instrument which they all signed, whereby all actions were withdrawn. This agreement recites that the two heirs and Robinson "agreed that the fee awarded to Howard A. Jacobs in the amount of $50,000.00 by the Probate Court for the District of New Haven for services rendered to said estate is proper and will be paid forthwith." On August 20, 1959 the sixth preliminary administration account of the estate was prepared and it scheduled as an expense the balance of $40,000 due Jacobs under the fee award order. A hearing was had on this account and it was approved by the probate court and the $40,000 was paid to Jacobs prior to the final audit of the estate tax return. Respondent's determination of deficiency reflects his disallowance of $33,000 of the $50,000 paid Jacobs as an administration expense deduction. Opinion Section 2053, Internal Revenue Code302 of 1954, provides, in part: SEC. 2053. EXPENSES, INDEBTEDNESS, AND TAXES. (a) General Rule. - 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 such amounts - * (2) for administration expenses, * as are allowable by the laws of the jurisdiction, * * under which the estate is being administered. Section 20.2053-3(c), Estate Tax Regs., which respondent did not see fit to cite or discuss in his brief, deals specifically with the deductibility of attorneys' fees as an item of administration expense. It provides, in part, as follows: § 20.2053-3 Deduction for expenses of administering estate. * * (c) Attorney's fees. (1) The executor or administrator, in filing the estate tax return, may deduct such an amount of attorney's fees as has actually been paid, or an amount which at the time of filing may reasonably be expected to be paid. If on the final audit of a return the fees claimed have not been awarded by the proper court and paid, the deduction will, nevertheless, be allowed, if the district director is reasonably satisfied that the amount claimed303 will be paid and that it does not exceed a reasonable remuneration for the services rendered, taking into account the size and character of the estate and the local law and practice. * * Respondent argues on brief that the "order of the Probate Court of New Haven, Connecticut dated February 26, 1959 awarding additional attorney's fees in the amount of $40,000 to Howard A. Jacobs was not the result of a genuine contest in an adversary proceeding on the merits * * [and] the record is void of any competent evidence showing the nature of or the amount of work done for the estate by Howard A. Jacobs." Respondent further contends "that the attorney's fee of $50,000 received by Howard A. Jacobs was excessive and unreasonable for the size and complexity of this estate * * * [and] the presumption of correctness of the Commissioner's determination must be upheld." Respondent's regulation which has specific application with respect to the deductibility of attorney fees contains no requirement that the attorney's fee, in order to be deductible, must be allowed in a contested proceeding. It would seem the requirements of the statute and the special regulation with respect to attorney's304 fees could be satisfied by a showing that the fee was awarded by the proper state court and paid. Respondent cites Section 20.2053-1(b)(2), Estate Tax Regs., governing the effect generally of court decrees with respect to claims and administration expenses. This regulation states such decrees will be accepted as fixing allowable deductions if the court has passed upon the merits; that it will be presumed the court has passed on the merits if there was an active or genuine contest; and, if the decree was rendered by consent, it will be accepted and presumed bona fide if accepted by all parties having an interest adverse to the claimant. In the instant case the attorney fee deduction meets the test of both the general and specific regulations. It is admitted the Probate Court for the District of New Haven was the only court with jurisdiction to allow the attorney fee. That court made the award after a contested hearing on the merits or at least under circumstances that dispel all thoughts of collusion. It was even ultimately accepted by all parties having an adverse interest. It was paid in the court-allowed amount before final audit of the estate tax return. Such a showing on305 the part of the petitioner presents a prima facie case for deductibility of the attorney's fee as administration expense. Estate of A. Bluestein [Dec. 17,969], 15 T.C. 770">15 T.C. 770; Estate of Elizabeth L. Audenried, 26 T.C. 120">26 T.C. 120. Respondent introduced no evidence. There is no merit in respondent's argument that petitioner had a further burden to substantiate the deduction by evidence of the amount and value of the services rendered by Jacobs. Since the attorney fee was regularly allowed under state law and paid, no presumption of correctness attaches to respondent's determination that it was excessive by the sum of $33,000. We hold for petitioner on the issue presented. Decision will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622574/	FILIP M. DISANZA AND LINDA DISANZA, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentDiSanza v. CommissionerDocket No. 518-86United States Tax CourtT.C. Memo 1993-142; 1993 Tax Ct. Memo LEXIS 136; 65 T.C.M. (CCH) 2300; April 5, 1993, Filed 136 An appropriate order denying petitioners' motions will be issued. For Filip M. DiSanza, petitioner: Bernard Kobroff and Edward B. Safran (Specially Recognized). For Linda DiSanza, petitioner: Donald Pols and Schlomo Aaron Beilis. For respondent: Patricia A. Donahue and Moira Sullivan. DAWSONDAWSONMEMORANDUM FINDINGS OF FACT AND OPINION DAWSON, Judge: This case was assigned to Special Trial Judge Norman H. Wolfe pursuant to the provisions of section 7443A(b)(4) and Rules 180, 181, and 183. 1 The Court agrees with and adopts the opinion of the Special Trial Judge, which is set forth below. OPINION OF THE SPECIAL TRIAL JUDGE WOLFE, Special Trial Judge: This matter is before the Court on petitioners' Motions for Leave to File Motions to Vacate or Revise Tax Court Decision, filed pursuant to Rule 162, with proposed137 Motions to Vacate or Revise Decision lodged with the Court. The underlying issue is whether the final decision of this Court should be vacated on any of the following grounds urged by petitioners: (1) That the decision resulted from a "fraud on the Court"; (2) that the decision resulted from a mutual mistake of fact; or (3) as to petitioner Linda DiSanza, that the Court lacked jurisdiction over her because the purported filing of a petition on her behalf was unauthorized. FINDINGS OF FACT Respondent determined deficiencies in income tax due from petitioners Filip M. and Linda DiSanza for the taxable years 1977 and 1978 in the amounts of $ 79,825.45 and $ 207,809.75, respectively, and also additional interest under section 6621(c) for substantial underpayments attributable to tax-motivated transactions. A petition was filed in this case on behalf of petitioners on January 6, 1986, by David M. Schmudde, who was then their attorney of record in this case. Petitioners resided in New York, New York, when the petition was filed. A stipulated decision executed by respondent and Schmudde was entered on April 21, 1989. Petitioners were married on May 1, 1976, and divorced on December138 19, 1989. Linda DiSanza (Mrs. DiSanza) holds a master's degree in education and taught elementary school in the United States and Europe for several years. During 1977 and 1978, Filip DiSanza (Dr. DiSanza) was a practicing dentist. During those years, Mrs. DiSanza received wages from Dr. DiSanza's dental practice in the amounts of $ 15,000 and $ 16,200, respectively, and an allowance of $ 1,000 to $ 2,000 every 2 weeks from her husband. Throughout petitioners' marriage, Dr. DiSanza was responsible for handling his family's tax matters. When a document concerning such matters required his wife's signature, Dr. DiSanza presented it to her to sign. During her marriage Mrs. DiSanza signed joint tax returns, amended returns, powers of attorney, and a Tax Court petition for the 1984 and 1985 tax years. She did not review these documents or require any detailed explanation of them. Petitioners executed two Forms 2848, Power of Attorney and Declaration of Representative, signed by both petitioners delegating to Paul Dann (Dann) the authority to represent them before the IRS for the years 1972 through 1983. Dann is a certified public accountant and a partner in the firm of Apfel, 139 Levy, Zlotnick & Company. He prepared tax returns for Dr. DiSanza for approximately 20 years, including periods before, during, and after his marriage to Mrs. DiSanza. Under his standard procedures, Dann sent completed tax returns to Dr. DiSanza for signature. After signing the return, Dr. DiSanza gave the return to his wife for her signature. He then customarily had his office personnel follow the instructions provided by Dann and send the return to the address indicated on the instructions. Dr. DiSanza never advised or informed Dann that he was to represent only Dr. DiSanza and that he was not to represent Mrs. DiSanza. Petitioners signed and filed joint Federal income tax returns for taxable years 1977 and 1978. On their 1977 return, petitioners claimed losses from three tax-advantaged coal partnerships: Coupe, Arton, and Moorehead. On their 1978 return, petitioners claimed losses from Coupe, Arton, Moorehead, and the Benchmark coal program and also claimed losses from the Federal Securities Investments (FSI) Group. On their 1977 joint Federal income tax return, petitioners reported $ 185,000 in wage income, and claimed losses from investments in various partnerships in140 the amount of $ 179,754. In the notice of deficiency, respondent disallowed $ 141,440 of these losses. On their 1978 joint income tax return, petitioners reported $ 137,200 in wage income, and claimed losses from their partnership investments in the amount of $ 431,049, and from a Schedule C coal venture in the amount of $ 169,134. Respondent subsequently disallowed $ 435,798 of these claimed 1978 losses. Respondent sent a statutory notice of deficiency dated October 7, 1985, to petitioners with respect to their 1977 and 1978 tax years. A copy of this notice was sent to Dann. The statutory notice of deficiency disallowed income averaging and the following losses: 19771978Arton Associates$ 101,442$ 20,990Coupe Associates39,38745,650Moorehead Associates61124FSI Group-- 200,000Benchmark-- 169,134Totals$ 141,440$ 435,798Upon receipt of the statutory notice, Dr. DiSanza called Dann to discuss it. Dann advised Dr. DiSanza to seek counsel in the matter. Dr. DiSanza then called the general partner of the coal partnerships to inquire about the procedures he should undertake with respect to the notice of deficiency. He was informed that141 the law firm of Townsend, Rabinowitz, Pantaleoni & Valente (Townsend, Rabinowitz) had been retained by the coal partnerships and that he might call this firm. Townsend, Rabinowitz represented Alphanumeric Incorporated (Alphanumeric), its subsidiaries, and its principals in various litigation. Alphanumeric was either the general partner or the manager of approximately 20 coal programs, including the 4 in which petitioners invested. Mitchell Goldstone (Goldstone) was a director of Alphanumeric, its president, and a substantial shareholder. Alphanumeric employed Townsend, Rabinowitz to represent the coal partnerships in tax litigations. But neither Alphanumeric nor its president made any arrangement for Townsend, Rabinowitz to represent individual limited partners generally with respect to their individual income tax matters. Alphanumeric did not retain the law firm or pay it to provide such representation. After his calls to Dann and Alphanumeric, Dr. DiSanza called Townsend, Rabinowitz and was referred to David M. Schmudde (Schmudde), an attorney of counsel to the law firm. Schmudde had been told by Maynard Rabinowitz (Rabinowitz), a partner in the firm, that he would be filing142 petitions for the investors in the coal partnerships. Rabinowitz had a long-standing relationship with Goldstone. Generally, in cases involving limited partners in coal partnerships, Schmudde had contact only with the accountants and not with the individual investors in the partnerships. He never met either petitioner prior to the hearing on the present motion, and that was not unusual in his practice. Schmudde was concerned with litigation in more than 40 tax shelter-type partnerships and spoke to 20 to 30 accountants every day at the time that Dr. DiSanza contacted him with respect to filing the petition in this case. Schmudde asked Dr. DiSanza to send him all of the correspondence that he received from the IRS. Dr. DiSanza informed Dann that Schmudde was going to represent him in the Tax Court. Dann and Dr. DiSanza advised Schmudde that he would be handling the coal tax shelter issues and that the law firm of Kirkland & Ellis would be responsible for the terms of the resolution of the FSI issues. Dann was the liaison between the parties and was ultimately responsible for all issues and for coordinating all tax matters. Dann asked Schmudde to file the petition in this case143 because he did not believe that Kirkland & Ellis would be able to meet the time frame. Kirkland & Ellis provided appropriate language concerning FSI for inclusion in the petition. Dr. DiSanza never advised Schmudde to file the Tax Court petition solely in his name. Schmudde's practice was to file a petition on behalf of the persons listed on the statutory notice when a joint statutory notice was sent to a husband and wife even though only the husband had made an investment in the partnership. Schmudde never was asked to withdraw his representation of Mrs. DiSanza by either Dr. or Mrs. DiSanza until long after the decision in this case became final. Schmudde filed a joint petition to protect Mrs. DiSanza's interests. By letter to Schmudde dated December 19, 1985, Kirkland & Ellis confirmed their understanding that Schmudde would file a petition in response to the October 7, 1985, statutory notice and would be handling the DiSanza case. The Kirkland & Ellis letter indicates on its face that copies were sent to Dann and Dr. DiSanza. By letter dated December 23, 1985, Kirkland & Ellis sent sample language to Schmudde for use in drafting the Tax Court petition with respect to the144 FSI issues. Schmudde filed a joint petition in this matter on January 6, 1986, and by letter dated January 7, 1986, Schmudde sent a copy of the petition to Dann. Schmudde did not raise income averaging in the petition. Dann did not make any comments regarding the petition to Schmudde or Dr. DiSanza and never suggested to anyone that the petition be amended. After he filed the petition, Schmudde periodically received direct correspondence and copies of correspondence from Kirkland & Ellis regarding the progress of settlement negotiations with the IRS with respect to the FSI issues. By letter dated March 27, 1987, Lawrence Hill (Hill), an attorney with the Office of District Counsel in Washington, D.C., informed Schmudde of a proposed basis for settlement of the FSI issues. By letter dated April 10, 1987, Schmudde mailed to Dann a copy of Hill's letter of March 27, 1987, along with a letter dated March 23, 1987, from the general partner of FSI which together set forth the basis for settlement of the FSI issues. After he was informed of the basis for settlement of the FSI issues, Dann prepared amended returns for Dr. and Mrs. DiSanza for 1978 and 1980. In his view, the settlement145 agreement required an amended return for 1980 to reflect certain net operating losses and that change had an effect on the DiSanzas' 1978 tax liability. Dann sent copies of amended returns for 1978 and 1980 to petitioners with a cover instruction sheet dated April 30, 1987. The instruction sheet directed that "Upon Receipt" the amended returns should be signed by both taxpayers and mailed to the District Director of Internal Revenue, 1040 Waverly Avenue, Holtsville, N.Y. 00501. These instructions are consistent with the standard procedures employed by Dann and Dr. DiSanza in filing tax returns. They had been followed with respect to the filing of a previous amended return for 1980. Dr. DiSanza did not follow these procedures in 1987. He did not file the amended returns for 1978 and 1980 which Dann sent him with the instruction sheet directing filing. In a letter to Schmudde dated May 8, 1987, Dann enclosed copies of the amended 1978 and 1980 individual income tax returns, and he requested that Schmudde forward these returns to the "revenue agent". Dann did not discuss or explain the ramifications of the amended returns or the net operating loss in his correspondence with Schmudde, 146 but he did discuss the issue of the net operating loss with Filip DiSanza. Dr. DiSanza called Schmudde sometime in mid-1987 to confirm that he had received the amended tax returns from Dann. During this phone call, Schmudde and Dr. DiSanza spoke about the case and discussed the division of responsibility between Schmudde and Dann. Schmudde prepared a letter dated May 12, 1987, addressed to Hill, stating that he was enclosing copies of amended returns in connection with the FSI settlement. Neither this letter nor the copies of the amended returns now are available in IRS records. Those records do not reflect receipt of the copies of the amended returns, and they were not taken into consideration in the IRS' preparation of the stipulation for decision in this case. By letter to Schmudde dated June 9, 1987, IRS District Counsel, Manhattan, confirmed Schmudde's acceptance of an offer to settle Coupe, Arton, Moorehead, and Benchmark and requested out-of-pocket cash substantiation for petitioners' investments in these coal shelters. In a letter to Schmudde dated October 19, 1987, District Counsel, Manhattan, again requested cash verification and confirmed Schmudde's acceptance of147 the FSI settlement offer. Schmudde verified petitioners' cash contributions to the coal partnerships by letter to Patricia A. Donahue of the Manhattan District Counsel's Office, dated November 24, 1987. After Schmudde received the proposed decision from District Counsel, he forwarded it to Dann for his review. Schmudde requested in his letter that Dann review the items and call him with his comments. Schmudde, who is not experienced or knowledgeable about the preparation of computations, spoke to Dann before returning the documents to District Counsel. Schmudde signed the stipulation for decision on behalf of petitioners, and by letter dated April 5, 1989, sent the executed documents to respondent's counsel for filing with the Court. A stipulated decision in this case showing deficiencies for 1977 and 1978 in the amounts of $ 29,529 and $ 167,508, respectively, was entered by the Court on April 21, 1989. A revised computation was prepared by an IRS auditor in 1991 that would reduce the deficiency as reflected in the stipulated decision by $ 1,588 for 1977 and by $ 22,268 for 1978. OPINION Petitioners' motions for leave to file motions to vacate or revise the decision are 148 a prerequisite to the filing of the motions to vacate or revise decision which they have lodged with the Court. In deciding whether to grant or deny the motions for leave we may consider the merits of the underlying motion to vacate in order to determine whether further proceedings are appropriate. Brannon's of Shawnee, Inc. v. Commissioner, 69 T.C. 999 (1978). 1. The "Fraud on the Court" Issue(a) As to Both PetitionersPetitioners assert that Townsend, Rabinowitz's and Schmudde's representation of Alphanumeric and Goldstone and also petitioners amounted to a conflict of interest in that by continuing to represent petitioners without advising them or this Court of the conflict, Schmudde deceived both the Court and petitioners. Petitioners contend that this claimed conflict was injurious to them because, allegedly, Alphanumeric and Schmudde colluded to omit intentionally the net operating loss carryback from the tax computation for fear of litigation and the repercussions it would have on Alphanumeric and Goldstone. This Court is a court of limited jurisdiction and may exercise jurisdiction only to the extent expressly permitted by Congress. 149 See, e.g., Judge v. Commissioner, 88 T.C. 1175">88 T.C. 1175, 1180-1181 (1987). Sections 7481 and 7483 provide that a decision of this Court becomes final, in the absence of a timely filed notice of appeal, 90 days from the date the decision was entered. However, "in keeping with the inherent power of all courts", this Court has jurisdiction to vacate a void decision. Brannon's of Shawnee, Inc. v. Commissioner, 71 T.C. 108">71 T.C. 108, 112 (1978). Also, we have jurisdiction to set aside a decision which has become final where there is a fraud on the Court. Senate Realty Corporation v. Commissioner, 511 F.2d 929">511 F.2d 929 (2nd Cir. 1975); Abatti v. Commissioner, 86 T.C. 1319">86 T.C. 1319 (1986), affd. 859 F.2d 115">859 F.2d 115 (9th Cir. 1988). Because the decision in this case became final upon the expiration of the time allowed for filing a notice of appeal, petitioners must establish that a fraud on the Court exists or that the decision was void. The definition of "fraud on the Court" is a narrow one. Senate Realty Corp. v. Commissioner, supra at 932-933.150 In Abatti v. Commissioner, 86 T.C. at 1325, this Court stated that: Fraud on the Court is "only that species of fraud which does, or attempts to, defile the court itself, or is a fraud perpetrated by officers of the court so that the judicial machinery can not perform in the usual manner its impartial task of adjudging cases that are presented for adjudication. Fraud, inter parties, without more, should not be a fraud upon the court." Toscano v. Commissioner, 441 F.2d at 933, quoting 7 J. Moore, Federal Practice, par. 60.33 (2d ed. 1970). To prove such fraud, the petitioners must show that an intentional plan of deception designed to improperly influence the Court in its decision has had such an effect on the Court. * * [Citations omitted.] See also Pulitzer v. Commissioner, T.C. Memo. 1987-408. In Senate Realty Corp. v. Commissioner, supra at 932-933, the Court of Appeals for the Second Circuit stated: The narrow definition of such fraud which has found acceptance in this court generally reflects the policy of putting an end to litigation. 151 See Restatement of Judgments § 1 (1942). We see no good reason here to disturb the decision of the Tax Court. There is no showing of the evil intent, deceit or collusion which have marked those cases where final verdicts have been set aside. * * The burden is on the moving party to establish such fraud by clear and convincing evidence. Kraasch v. Commissioner, 70 T.C. 623">70 T.C. 623, 626 (1978). Petitioners have not met this burden. Although they assert that Schmudde intentionally failed to raise the net operating loss issue due to a fear that it would subject Alphanumeric to litigation, petitioners simply have failed to prove that allegation. The record establishes that Dr. DiSanza relied on his accountant, Dann, as his primary adviser and representative in tax matters. In the tax litigation here in question, Kirkland & Ellis was employed with respect to the FSI matters and Townsend, Rabinowitz and their associate or counsel, Schmudde, were employed with respect to the coal programs. Dann decided that Schmudde should file the petition and be the attorney of record and therefore petitioners' counsel in the litigation in Tax Court. Dann was authorized152 to make this appointment and it later was ratified by the actions of Dr. DiSanza for himself and his wife. See John Arnold Executrak Systems, Inc. v. Commissioner, T.C. Memo. 1990-6, also involving the exercise of delegated authority by an accountant entrusted with authority in tax matters. Schmudde handled the FSI matters as he was instructed by Kirkland & Ellis; he handled the coal programs consistently with settlements and the disposition of cases of many other limited partners; and he forwarded amended returns in accordance with Dann's instructions as he understood them. Schmudde forwarded proposed decision documents to Dann and discussed those documents with him. There is no suggestion of fraud on the Court in Schmudde's actions. Despite petitioners' argument to the contrary, there is no evidence that Alphanumeric would have been harmed if Schmudde had insisted upon changing the proposed decision documents to reflect an alleged net operating loss carryback. Instead, the evidence in this case is that any failure to obtain maximum benefits for petitioners may have been the result of misunderstandings or lack of diligence on the part of Dann 153 or Schmudde or petitioners' other advisers or even Dr. DiSanza himself. But even if we were to conclude that Schmudde was negligent in this matter, such conduct would not constitute fraud on the Court. See Kenner v. Commissioner, 387 F.2d 689">387 F.2d 689, 692 (7th Cir. 1968), affg. an unreported order of this Court; see also Dominguez v. United States, 583 F.2d 615">583 F.2d 615, 617 (2d Cir. 1978). Petitioners further assert that Schmudde failed to disclose his firm's representation of Alphanumeric and that such failure amounted to a fraud on the Court. This argument is not tenable because Dr. DiSanza was well aware of Townsend, Rabinowitz's representation of Alphanumeric and Goldstone. Goldstone had informed Dr. DiSanza of this relationship when he recommended the firm to him. Petitioners chose Schmudde to handle the coal partnerships even though (or perhaps because) Dr. DiSanza was aware of the law firm's representation of the coal partnerships and the general partner. Dr. DiSanza cannot now successfully argue that he was deceived by Townsend, Rabinowitz when the evidence clearly indicates that he was aware that the firm represented the154 general partner when he called Schmudde and asked him to file the petition and handle the Tax Court litigation concerning his investment in the coal partnerships. Unquestionably, there may be problems where an attorney or firm represents both the general partner and limited partners in a tax litigation. See, e.g., Rule 24(f), effective July 1, 1990. But after being informed that the attorney represents the general partner, a limited partner may choose such representation for any of a number of reasons of varying validity. The circumstances that Schmudde and Townsend, Rabinowitz represented petitioners, who were limited partners, when petitioners knew that the law firm also represented the general partner in that same partnership, may be less than ideal. But in this case, petitioners have failed to show that the apparent possibility of conflict of interest, known to petitioners, involved the "evil intent, deceit or collusion which have marked those cases where final verdicts have been set aside." See Senate Realty Corp. v. Commissioner, 511 F.2d at 933. The cases relied on by petitioners are not on point. See, e.g., Wilson v. Commissioner, 500 F.2d 645">500 F.2d 645 (2d Cir. 1974),155 revg. T.C. Memo 1973-92">T.C. Memo. 1973-92, which involved a motion for leave to file a motion to vacate a decision that had not become final; Cinema 5 Ltd. v. Cinerama Inc., 528 F.2d 1384">528 F.2d 1384 (2d Cir. 1976), which involved an appeal of an order removing plaintiff's attorney from the case due to the circumstance that he was also a member of the firm representing defendant in another action related to the action at issue. This case did not address the issues of fraud on the Court and the finality of Tax Court decisions. (b) Fraud as to Petitioner Mrs. DiSanzaPetitioners contend that there was an additional fraud upon the Court as to Mrs. DiSanza in that Schmudde failed to raise an innocent spouse defense on her behalf because of his alleged conflict of interest in representing petitioners and also representing Goldstone and Alphanumeric. They argue that Schmudde "could not represent Linda as an innocent spouse without being prepared to prove that the tax shelters promoted by Alphanumeric were 'phony'." The record here does not support the claim that counsel failed to make an innocent spouse argument because of a conflict of interest. The156 evidence is that petitioners and their tax adviser, Dann, were concerned with the consequences of the investments in FSI and coal programs, and they employed Townsend, Rabinowitz and Schmudde in their efforts to resolve those matters. Schmudde never met either petitioner and he never even spoke with Mrs. DiSanza. Neither petitioners nor their tax adviser gave Schmudde any reason to believe there was an innocent spouse issue in the case, and there is no reason to believe the issue was omitted from the case because of any collusion or fraud. Even if we were to conclude that Mrs. DiSanza was entitled to the benefits of section 6013(e), we should not vacate the stipulated decision because of the failure of counsel to raise that issue. See Slavin v. Commissioner, 932 F.2d 598">932 F.2d 598, 601 (7th Cir. 1991), revg. on another ground T.C. Memo. 1990-44, involving failure to raise an innocent spouse argument: There is no principle of effective assistance of counsel in civil cases. Shortcomings by counsel may be addressed in malpractice actions; they do not authorize the loser to litigate from scratch against the original adversary. [Citations157 omitted.] The argument for relief for Mrs. DiSanza under section 6013(e) may have been omitted through error or oversight or lack of communication or because counsel considered, correctly or incorrectly, that the argument was invalid, but the record here does not establish that such argument was omitted for reasons amounting to fraud on the Court. 2. Mutual Mistakes of FactPetitioners assert that there are three mutual mistakes of fact in this case. Petitioners contend that the FSI settlement was incorrectly set forth in the computation, the computation failed to allow petitioners a net operating loss carryback from 1980 to 1978, and the computation failed to allow petitioners the benefit of income averaging. Petitioners rely on Reo Motors, Inc. v. Commissioner, 219 F.2d 610">219 F.2d 610 (6th Cir. 1955), and argue that the decision entered in their case should be vacated because of mutual mistakes of fact. As an Article I court, the Tax Court lacks general equitable powers, Commissioner v. McCoy, 484 U.S. 3">484 U.S. 3, 7 (1987), and our jurisdiction to grant equitable relief of the type petitioners seek is limited. See Abatti v. Commissioner, 86 T.C. 1319">86 T.C. 1319 (1986),158 affd. 859 F.2d 115">859 F.2d 115 (9th Cir. 1988); see also Lentin v. Commissioner, 243 F.2d 907">243 F.2d 907 (7th Cir. 1957); Lasky v. Commissioner, 235 F.2d 97">235 F.2d 97, 99-100 (9th Cir. 1956) (criticizing Reo Motors, Inc. v. Commissioner, supra), affd. per curiam 352 U.S. 1027">352 U.S. 1027 (1957). This case does not involve mutual mistakes of fact. The erroneous computation which petitioners claim was due to a mutual mistake of fact was prepared and sent to petitioners' counsel for review and was returned to respondent. 2 The failure of petitioners to raise the net operating loss issue and the failure to compute the tax by income averaging were not mutual mistakes of fact, but were at most unilateral errors on the part of petitioners. Petitioners failed to raise these issues and now, long after the decision is final, they ask us to vacate the decision and try the case on new facts. We must decline to do so in the interest of bringing litigation to an end on the terms on which the parties agreed prior to entry of decision. See Stamm International Corp. v. Commissioner, 90 T.C. 315">90 T.C. 315 (1988).159 3. Mrs. DiSanza's Assertion that the Court Lacked Jurisdiction Over Her When the Decision was EnteredPetitioners contend that the decision should be vacated as to Mrs. DiSanza because, according to petitioners, she never intended to be a party to this action. Her argument is that she never employed Schmudde or Townsend, Rabinowitz and did not authorize anyone else to employ them on her behalf. She testified that she had no knowledge about the dispute with the IRS in this case until shortly before the hearing on the present motions. Consequently, Mrs. DiSanza's position is that because neither she nor an attorney or other person authorized to act on her behalf filed a petition, this Court never obtained jurisdiction over her and the decision should be vacated. Whether an attorney has authority to act on behalf of a taxpayer is a factual question. Adams v. Commissioner, 85 T.C. 359">85 T.C. 359, 369-372 (1985).160 Under common law rules of agency, applicable to determine the employment of an attorney, authority may be granted by an express statement or may be derived by implication from the principal's words or deeds. See John Arnold Executrak Systems, Inc. v. Commissioner, T.C. Memo. 1990-6 (citing Restatement, Agency 2d, sec. 26 (1957)). In Kraasch v. Commissioner, 70 T.C. 623">70 T.C. 623, 627 (1978), we decided that the taxpayers' practice of continually forwarding tax matters to their accountant established an implied grant of authority. Similarly in Shopsin v. Commissioner, T.C. Memo. 1984-151, affd. without published opinion 751 F.2d 371">751 F.2d 371 (2d Cir. 1984), we held that the taxpayers' accountant was authorized to petition the Tax Court because the taxpayers routinely and without question placed their tax affairs in the hands of their accountant. In Casey v. Commissioner, T.C. Memo. 1992-672, the taxpayer impliedly authorized her husband to represent her with respect to their joint income tax matters even after they established separate residences 161 a few years before divorce. She executed a power of attorney to their accountant and continued to forward communications from IRS to the accountant or her husband. We held that an attorney employed by her husband was authorized to file a joint petition as a result of her implied consent and that this Court had jurisdiction with respect to her. In the present case, Dr. DiSanza testified that he was responsible for his family's financial and tax matters, and Mrs. DiSanza agreed that she had no involvement in any of her husband's financial matters except for payment of ordinary household expenses. She also stated that she regularly set aside the family's business mail for her husband. With respect to the years in issue, she signed the joint tax returns and also executed the power of attorney authorizing Dann to act for her as well as her husband as to tax matters before the IRS for those and many other years. Mrs. DiSanza's admitted relinquishment of authority to her husband with respect to tax and financial matters was a delegation of authority that would allow Dr. DiSanza directly or through Dann, the family accountant and tax adviser, to hire a lawyer to represent her, especially162 with regard to matters arising out of their joint income tax returns. See Slavin v. Commissioner, 932 F.2d 598">932 F.2d 598, 600 (7th Cir. 1991), revg. T.C. Memo. 1990-44. Even if Mrs. DiSanza was not aware of the dispute with the IRS, her own admitted delegation of authority to her husband cannot now be revoked because she is unhappy with the outcome of her case. "Deficiencies ex post do not detract from authority ex ante." Id.The evidence in this case points inescapably to the conclusion that Dr. DiSanza acted on his wife's behalf and with her approval when he authorized Schmudde to petition this Court for a redetermination of the deficiencies and additions to tax for the years in issue. See Holt v. Commissioner, 67 T.C. 829">67 T.C. 829, 832 (1977); Brooks v. Commissioner, 63 T.C. 709">63 T.C. 709 (1975); Casey v. Commissioner, supra.Nevertheless, petitioners urge that the decision of this Court as to Mrs. DiSanza be vacated because she did not actually authorize Schmudde to file the petition on her behalf or subsequently ratify his act in doing so. Mrs. 163 DiSanza contends that her case is similar to Abeles v. Commissioner, 90 T.C. 103">90 T.C. 103 (1988), but the cases are plainly different. When the notice of deficiency was mailed and the petition and amended petition were filed, Mr. and Mrs. Abeles were in the process of divorce. Petitioners were still married in 1981 when Mrs. DiSanza signed the power of attorney, were still married in 1986 when the petition was filed, and were still married until after the decision in this case became final. Moreover, Mrs. Abeles was not aware that Federal income tax returns were filed for the years at issue, and never executed a power of attorney. Mrs. DiSanza signed the joint returns and executed two powers of attorney. The agency relationship that may have existed in the Abeles case was terminated by the severance of the marital relationship. The agency relationship in this case was not severed until after the decision was final. Mrs. DiSanza was aware or should have been aware that there was an audit underway when she signed the power of attorney forms. She delegated authority in tax matters to her husband and specifically employed Dann herself. They employed *164 Schmudde, who acted properly in petitioning the Tax Court on behalf of Dr. and Mrs. DiSanza. Under the circumstances here, Mrs. DiSanza impliedly consented to the filing of a joint petition. Consequently, this Court had jurisdiction with respect to her. Petitioners' motions for leave to file motions to vacate or revise the Court's decision entered on April 21, 1989, will be denied. An appropriate order denying petitioners' motions will be issued. Footnotes1. All section references are to the Internal Revenue Code in effect for the years in issue, unless otherwise indicated. All Rule references are to the Tax Court Rules of Practice and Procedure.↩2. A revised computation prepared by an IRS auditor in 1991 provides that the tax should be reduced by $ 1,588 in 1977 and $ 22,268 in 1978.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622576/	FLOYD R. LAMB, ET AL., 1 Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent Lamb v. CommissionerDocket Nos. 8575-76, 8555-79, 8556-79, 8557-79.United States Tax CourtT.C. Memo 1985-512; 1985 Tax Ct. Memo LEXIS 113; 50 T.C.M. (CCH) 1209; T.C.M. (RIA) 85512; September 30, 1985. Charles McNelis, for the petitioners. J. L. Millward, for the respondent. WRIGHTMEMORANDUM FINDINGS OF FACT AND OPINION WRIGHT, Judge:* In these consolidated cases, respondent determined deficiencies in and additions to petitioners' 114 Federal income tax as follows: Additions to TaxYearDeficiencySec. 6653(b) 21966$2,462.65$1,231.3319671,304.97652.4919681,100.48550.24196919,304.669,652.33197060,462.5130,231.26197115,241.387,620.69197249,930.9324,965.47After concessions by both parties, the issues for decision are (1) whether the statute of limitations bars the assessment of a deficiency and an addition to tax for each of the years in issue, (2) whether petitioners are liable for additions to tax under section 6653(b) for each of the years in issue, and (3) whether certain payments received in 1971 by petitioner Floyd R. Lamb constitute taxable income. FINDINGS OF FACT Some of the facts are stipulated and are found accordingly. The stipulation of facts and accompanying115 exhibits are incorporated herein by reference. 3Petitioners resided in Las Vegas, Nevada, when the petitions herein were filed. Floyd R. Lamb filed joint Federal income tax returns for 1966 with his then wife, Eleanor S. Lamb, and for 1967, 1969, 1970, and 1971 with his then wife, Nancy Lamb. He reported his status as "unmarried head of household" and "single" on the returns he filed for 1968 and 1972, respectively. Although both of Floyd Lamb's spouses during the years in issue petitioned this Court, the term "petitioner" will refer to Floyd Lamb, unless otherwise indicated. Petitioners reported their income and deductions on the cash method, except for certain items undisputed herein. Petitioner graduated from high school and attended one-half semester of college. One of petitioner's occupations is that116 of a cattleman. Petitioner was a partner in the Buckhorn Land and Cattle Company (Buckhorn) in Alamo, Nevada, prior to 1969, at which time he began operating the ranch as a sole proprietorship. In 1966, petitioner was employed by the Nevada Bank of Commerce, which later changed its name to Nevada National Bank, and he eventually served as director, president, chief executive officer, and chairman of the board. Petitioner was elected to the Nevada State Senate representing Lincoln County and served in that capacity until 1965 when he moved to Las Vegas, situated in Clark County. Subsequently, he was elected to the State Senate representing Clark County and served as a state senator and chairman of the Senate Finance Committee for the State of Nevada during the years in issue. Carl A. Brown, P.A., of Las Vegas, Nevada, prepared petitioner's tax returns for the years 1957 through 1975. The substance of Brown's agreement with petitioner was that he would prepare petitioner's return from the information he was furnished. Although Brown did, at times, contact those people and institutions named by petitioner as sources of information, Brown was under no obligation or duty to otherwise117 solicit or gather information for use in the preparation of petitioner's return. Petitioner did not advise Brown of any stock transactions other than the ones which were reported. In accordance with petitioner's instructions, his secretaries during the years in issue gave certain items pertaining to petitioner's tax return, including brokerage statements, to petitioner, and forwarded other items directly to Brown. On December 31, 1965, petitioner incurred a long-term capital loss of $50,000 from the worthlessness of certain stock. Pursuant to an examination of petitioner's 1965 Federal income tax return, the Internal Revenue Service allowed the capital loss. One-thousand dollars of such loss was deducted in 1965 and the remainder was carried forward. 1966From 1962 to 1965, petitioner was a member of the board of directors of First Western Savings and Loan Association, a subsidiary of First Western Financial Corporation (First Western Financial). In 1966, he commenced employment at the Nevada Bank of Commerce, a wholly-owned subsidiary of First Bancorporation, which was spun-off from First Western Financial. In connection with his acceptance of employment with the Nevada118 Bank of Commerce in 1966, petitioner thought it appropriate and desirable to hold stock in First Bancorporation, the parent company of his employer, instead of in First Western Financial. Therefore, on or about February 1, 1966, petitioner contacted Walter D. Bradley, the trust officer of the Nevada Bank of Commerce, and asked for his assistance in disposing of petitioner's First Western Financial stock and acquiring First Bancorporation stock. The June, 1966, Bradley left the employ of the Nevada Bank of Commerce and accepted a position as a salesman with Blythe and Company, a Reno, Nevada, stock brokerage firm. During 1966, Bradley assisted petitioner by opening accounts with brokerage firms, watching the market fluctuations, ordering sales of First Western Financial stock and purchases of First Bancorporation stock, and rendering an accounting to petitioner of such sales and purchases. In 11 separate transactions during the months of February and August 1966, Bradley, acting for petitioner, caused 20,801 shares of First Western Financial stock to be sold for $81,854.48. Of that amount $81,359.75 was used to purchase 11,925 shares of First Bancorporation stock. Bradley advised119 petitioner of the details of these transactions by way of telephone conversations, letters, and notes. Petitioner realized long-term capital gains totaling $60,143.13 from the above sale of First Western Financial stock. These gains were not reflected on petitioner's Federal income tax return for 1966 or any other year. In February, 1966, account number 19585 was opened in petitioner's name with the stock brokerage firm of Goodbody & Co. (Goodbody) in Las Vegas, Nevada. In May, 1967, account number 11673 was opened with Goodbody in the names of petitioner and his then wife, Eleanor S. Lamb. All purchases and sales of securities on these accounts were handled by Clifford Jones, petitioner's long-time friend, or by Jim Seals. Records pertaining to transactions on these accounts were maintained at petitioner's place of employment, the Nevada National Bank, by bank personnel. During 1966, petitioner, through his Goodbody account number 10585, engaged in a number of transactions resulting in a longterm capital gain of $1,313.43 and a short-term capital gain of $355.50. These gains were not reported on petitioner's Federal income tax return for 1966 or any other year. 1967120 During 1967, petitioner, through his Goodbody account number 10585, engaged in a number of transactions resulting in a short-term capital gain of $139.88, long-term capital gains aggregating $2,217.09, and short-term capital losses aggregating $708.77. These gains and losses were not reported on petitioner's Federal income tax return for 1967 or any other year. During 1967, petitioner's account number 10585 with Goodbody was credited with dividends aggregating $78 which were not reported on petitioner's Federal income tax return for 1967 or any other year. Interest expense of $123.24 was charged to petitioner's Goodbody account number 10585 during 1967. This expense was not claimed as a deduction on petitioner's Federal income tax return for 1967 or any other year. 1968During 1968, petitioner, through his Goodbody accounts numbered 10585 and 10673, engaged in a number of transactions resulting in a short-term capital gain of $3,257.03, long-term capital gains aggregating $1,587.76, and a long-term capital loss of $1,265.97. These gains and losses were not reported on petitioner's Federal income tax return for 1968 or any other year. On three separate dates during 1968, 121 petitioner's Goodbody account number 10585 was credited with dividends aggregating $109.45 and petitioner received dividends from various other sources totaling $46.55. These dividends were not reflected on petitioner's Federal income tax return for 1968 or any other year. During 1968, interest expense of $163.36 was charged to petitioner's Goodbody accounts. This expense was not claimed as a deduction on petitioner's Federal income tax return for 1968 or any other year. 1969Sale of stock during 1969 through petitioner's Goodbody account number 10585 resulted in a short-term capital gain of $549.46. This gain was not reported on petitioner's Federal income tax return for 1969 or any other year. On six separate dates during 1969, petitioner's Goodbody account number 10585 was credited with dividends aggregating $201.70. These dividends were not reported on petitioner's Federal income tax return for 1969 or any other year. Interest expense of $208.33 was charged to petitioner's Goodbody account number 10585 during 1969. This expense was not claimed as a deduction on petitioner's Federal income tax return for 1969 or any other year. During 1969, petitioner sold 5,000122 shares of First Bancorporation stock, the parent company of the Nevada National Bank (petitioner's employer), for $85,000, resulting in a long-term capital gain of $53,390.51. This gain was not reported on petitioner's Federal income tax return for 1969 or any other year. The proceeds from the sale of the First Bancorporation stock were credited to an "agency account" in petitioner's name with the trust department of the Nevada National Bank at Reno, Nevada. Within a week or two, $45,000 of the $85,000 was deposited in petitioner's checking account in Security National Bank in Las Vegas, Nevada, and was used to liquidate some of petitioner's obligations and the remaining $40,000 was invested in U.S. Treasury Bills. The sale of the First Bancorporation stock and the purchase of the Treasury Bills was handled by the trust department of the Nevada National Bank upon petitioner's instructions and with his knowledge and consent. On maturity of the Treasury Bills, the trust department reinvested the proceeds in additional Treasury Bills and other securities which generated interest income in the amount of $2,017.57 during 1969 On December 23, 1969, $40,253.57 of the above $40,000 ($39,420123 principal plus $833.57 interest income) was withdrawn and deposited in petitioner's checking account. Agency account transactions required petitioner's authorization. There was no agreed-upon procedure for providing petitioner with information concerning agency account transactions; such information was furnished only upon petitioner's request. Petitioner's return preparer had no access to the agency account. For 1969 petitioner claimed interest deductions from various sources aggregating $2,692.90; the allowable interest deduction for that year is $967.48. Petitioner reported interest income from various sources totaling $1,107.13 for 1969. The parties have agreed that the correct amount of interest income for that year is $3,213.07. During 1969 petitioner realized income of $4,735.03 from cattle sales. This income was not reported on petitioner's 1969 Federal income tax return. In connection with obtaining a loan, petitioner submitted to the First National Bank of Nevada a statement disclosing his financial situation as of May 31, 1969. In that statement he disclosed that he carried an account with Goodbody and valued that account at $20,000. 1970On eight separate124 dates during 1970, petitioner's Goodbody account number 10585 was credited with dividends aggregating $275.50. These dividends were not reported on petitioner's Federal income tax return for 1970 or any other year. Petitioner also received dividends totaling $491.20 from another source during 1970. These dividends were not reported on his Federal income tax return for 1970 or any other year. For 1970 petitioner claimed an interest deduction of $7,707.50 for interest paid on his loan account at the Valley Bank of Nevada. Although the loan record in petitioner's name at Valley Bank reflects that interest in that amount was paid in 1970, the underlying loan was an accommodation for Clifford Jones who, in fact, paid the interest. The parties have agreed that petitioner's allowable deduction for 1970 interest expenses is $284.07. For 1970, petitioner reported interest income of $504.83 from various sources. Pursuant to the parties' stipulation, the correct amount of such income is $2,000.32. For many years petitioner and Clifford Jones operated Buckhorn Land and Cattle Company as a partnership. In 1969 Jones sold his interest to petitioner, who then operated the cattle company125 as a sole proprietorship. The books and records of the company were maintained in its earlier years by Carl Brown, petitioner's return preparer, and in its later years by Clark Bingham, petitioner's son-in-law. During 1970, Bingham purchased $8,000 worth of cattle from Buckhorn and, instead of paying petitioner directly, applied the $8,000 to an outstanding loan carried in the name of Buckhorn. Also, cattle were sold by Buckhorn for $209 and $6,659.93. The two checks for these purchases were negotiated by Clark Bingham. The proceeds of these sales were not reflected on petitioner's Federal income tax return for 1970 or any other year. During 1970 Buckhorn received a check for $7,120 from the Southern Nevada Team Roping Association of which only $6,620 was deposited in the Buckhorn bank account. Only the deposited amount was reported as income. On petitioner's Federal income tax return for 1970 the cost of livestock sold by Buckhorn was overstated by $78,553.96. For 1970, petitioner claimed a deduction for gasoline, fuel, and oil of $4,370.00 and claimed a deduction on Schedule F (Farm Income and expenses) for interest of $7,694.09. The parties have agreed that the allowable126 deductions are $4,188.06 and $6,295.15, respectively. 1971On April 19, 1971, the trust department of the Nevada National Bank, at petitioner's request, sold 312 shares of First Western Financial for $777.15, resulting in a long-term capital gain of $554.03. This gain was not reflected on petitioner's Federal income tax return for 1971 or any other year. Petitioner directed that the proceeds of this sale be transferred to a savings account in his name. On eight separate occasions during 1971 petitioner's account with the brokerage firm of Merrill Lynch, Pierce, Fenner & Smith (Merrill Lynch), formerly Goodbody & Co., was credited with dividends aggregating $277. These dividends were not reflected on petitioner's Federal income tax return for 1971 or any other year. For 1971 petitioner claimed a deduction of $1,322.91 for interest paid to the First National Bank. Petitioner had no outstanding loan from that bank during 1971 and paid no interest to that bank. Pursuant to agreement of the parties petitioner's allowable deduction for interest in 1971 is $187.53. For 1971 petitioner reported interest income totaling $602.11 from various sources. The parties have agreed127 that the correct amount of such income is $1,985.50. During 1971 petitioner received payments totaling $2,600 from Harrah's Club (a Reno, Nevada, gambling casino and hotel) which were not reported on his Federal income tax return for 1971 or any other year. On his 1971 return petitioner claimed a net farm loss of $17,017.56, whereas there was actually a net farm profit of at least $10,190.73. 1972Petitioner's Federal incom tax return for 1972 understated the net income from Buckhorn by at least $47,713. 4On five separate dates during 1972 petitioner's Merrill Lynch account was credited with dividends aggregating $56.50. These dividends were not reported on petitioner's Federal income tax return for 1972 or any128 other year. During 1972, petitioner also received dividends from another source of $189 and interest income of $94.45 which were not reported on his Federal income tax return for 1972 or any other year. During 1972, petitioner sold an undeveloped parcel of land and realized a long-term capital gain of $30,000 of which only $18,000 was reported on his Federal income tax return for that year. In 1976 petitioner was charged, in a four-count indictment, with violations of section 7206(1), making and subscribing a false Federal income tax return, for 1969, 1970, 1971, and 1972. Petitioner was acquitted as to all counts. In his notices of deficiency, respondent determined a deficiency and further asserted an addition to tax for fraud under section 6653(b) for each of the years in issue. OPINION The central issue is whether the statute of limitations bars assessment of the deficiencies for the years in issue. Generally the amount of any tax must be assessed within three years after a return is filed. Sec. 6501(a). However, tax may be assessed "at any time" if respondent proves that the taxpayer's return was false or fraudulent with the intent to evade tax. Sec. 6501(c)(1). 129 Thus, absent proof of fraud on petitioner's part, respondent's assessment of deficiencies in the instant case is barred by the statute of limitations. The elements of the fraud under section 6501(c)(1) for limitations purposes are essentially the same as the elements of the fraud under section 6653(b), which provides for a 50 percent addition for any underpayment of tax "due to fraud." ; , affd. . The fraud envisioned by these sections is actual, intentional wrongdoing, and the intent required is the specific purpose to evade a tax believed to be owing. , cert. denied ; . Respondent must show that the taxpayer intended to evade taxes known or believed to be owing by conduct calculated to conceal, mislead, or otherwise prevent the collection of such taxes. ; 130 ;, affg. a Memorandum Opinion of this Court. The existence of fraud is a question of fact to be resolved upon consideration of the entire record. ;, affd. without published opinion ; .Fraud is never presumed, but rather must be established by affirmative evidence. . Direct proof of the taxpayer's intent is rarely available; therefore, fraud may be proved by circumstantial evidence. ; The taxpayer's entire course of conduct may establish the requisite fraudulent intent. ; The burden is on respondent to prove, by clear and convincing evidence, that131 petitioner has an underpayment and that some part of the underpayment for each year in issue was due to fraud. Sec. 7454(a); Rule 142(b); . In the instant case it is undisputed that in each of the years in issue, petitioner had income which was not reported on his Federal income tax return. Thus, respondent has met his burden with respect to proving the existence of an underpayment for each of the years in issue. We turn then to a consideration of whether any part of the underpayment for each year was due to fraud. Respondent need not prove that the entire amount of the underpayment was due to fraud but must instead establish that some portion of the underpayment for each year is attributable to fraud. Sec. 6653(b); ; . For the following reasons, we believe that respondent has met his burden. Initially, we note that we are unconvinced by petitioner's attempt to characterize himself as just a "cowboy", unschooled and unsophisticated in business matters and completely reliant upon others for guidance in financial132 dealings. Despite his limited formal education, petitioner is a successful businessman who for many years held high public office. In addition to his involvement in the operation of Buckhorn, petitioner was employed in various executive positions with the Nevada Bank of Commerce, later the Nevada National Bank. While so employed, he discharged his duties in a manner which resulted in his promotion to president and chairman of the board of directors. Petitioner also served in the Nevada State legislature for a number of years and, during the years in issue, served as chairman of the Senate Finance Committee for the State of Nevada. In view of his background, petitioner's claimed lack of knowledge with respect to his financial dealings is unbelievable. Petitioner argues generally that the facts of this case present none of the usual indicia of fraud or circumstances from which fraud could be inferred. These indicia or "badges" of fraud, usually present where this and other courts have found fraud, include "keeping a double set of books, making false entries or alterations, or false invoices or documents, destruction of books or records, concealment of assets or covering up133 sources of income, handling of one's affairs to avoid making the records usual in transactions of the kind, and anyconduct,the likely effect of which would be to mislead or to conceal." (emphasis added).As petitioner himself points out, however, the Supreme Court listed these factors only "by way of illustration," not in an attempt to designate specific facts, proof of which is required before a finding of fraud can be made. In any event, we reject petitioner's argument because we find that one of these factors is present in that petitioner herein has engaged in conduct intended to mislead or conceal a portion of his assets and income. In 1966 petitioner opened two accounts with the stock brokerage firm of Goodbody & Co. During each of the years in issue these accounts were credited or charged, as appropriate, with gains and losses, dividends, and interest. Despite numerous such transactions, however, no information pertaining to these accounts appeared on petitioner's returns for the years 1966 through 1972. Petitioner maintains that he either informed Brown, his return preparer, of all stock transactions, 134 or made the records of those transactions available to him. In order to find such assertion credible, however, we must find that Brown for some reason failed to report each and every one of numerous transactions on the Goodbody accounts. We do not believe that mere inadvertence was the cause of such omissions, extending as they did over a period of seven years. Because we find it unbelievable that all of these items were omitted through carelessness or oversight in each of seven consecutive years, we are left with no alternative but to find that these omissions are evidence of a continuing scheme designed to conceal a portion of petitioner's assets and income. See . Petitioner asserts that respondent failed his burden of proof because he failed to establish that petitioner was even aware of the activities reflected on the Goodbody accounts and their tax implications. In support of his position, petitioner points out that all transactions in his name on those accounts were handled by someone else, that proceeds of all sales and dividends were credited to the account, that all stock purchases and margin interest were135 charged to the account, and that no funds were withdrawn from the account by petitioner at any time. Once again, however, we find petitioner's assertions improbable and unsupported by the evidence. Petitioner asks us to find that he opened two brokerage accounts and deposited money therein, authorized agents to purchase and sell stock on his behalf, and allowed this mechanism to remain in place for seven years during which time he made no inquiry as to the status of the accounts. We cannot believe that a person of petitioner's experience and financial accumen would engage in such conduct. Furthermore, on a statement disclosing petitioner's financial situation as of May 31, 1969, signed by petitioner and submitted to the First National Bank of Nevada for the purpose of obtaining a loan, petitioner stated that he carried an account of $20,000 with Goodbody. Thus, petitioner demonstrated knowledge of the existence and approximate value of this account, about which information was never reported on his Federal income tax return for any year. He cannot, therefore, rely on his asserted lack of knowledge to preclude a finding of fraudulent intent. The Supreme Court has stated that "affirmative136 willful attempt may be inferred from * * any conduct, the likely effect of which would be to mislead or to conceal." Spies v. Commissioner,supra at 499. Petitioner's failure to report income and deduct expenses based on the activity in the Goodbody accounts is conduct which effectively concealed his assets and income and is, therefore, persuasive evidence of fraud. In his brief, petitioner maintains that he, either personally or through his secretarial staff, gave or caused to be made available to Brown all of the information necessary for correct completion of petitioner's returns. By such assertion and his admitted reliance upon Brown, petitioner seeks to demonstrate his lack of fraudulent intent. A taxpayer's reliance upon his accountant to prepare accurate returns may indicate an absence of fraudulent intent only where the accountant has been supplied with all of the information necessary to prepare accurate returns. ; (4th Cir., 1968). The evidence in this case, however, shows that petitioner failed to supply Brown with all of the information137 pertaining to petitioner's various transactions. First, as already discussed, we have found that petitioner did not provide Brown with information concerning transactions on the Goodbody accounts. Next, although Brown admitted that, in accordance with petitioner's instructions, he did contact certain people and institutions named by petitioner as sources of information, Brown maintained that his agreement with petitioner was that he would prepare petitioner's returns from the information he received and that he had not agreed to independently gather information. Brown testified that, with respect to each year in issue, petitioner had not advised him o any stock transactions other than those which were reported. He further stated that it was not his practice to question clients as to whether they had had any stock transactions during a given period because it was not his duty to seek out information, but only to prepare returns with the information he was provided. Although Brown's testimony that he did receive some information pertaining to petitioner's taxes from petitioner's office was corroborated by the testimony of petitioner's secretaries, their testimony shows that not138 all such information was forwarded. Petitioner's secretary in 1970 and later years stated that she gave brokerage statements to petitioner and sent to Brown other information pertaining to petitioner's taxes, but added that the provision of such information was on a "hit or miss basis." Furthermore, an employee of the trust department of the Nevada National Bank testified that there was no specific procedure for providing petitioner with information concerning transactions on his agency accounts, that such information was furnished to petitioner only upon his request, and that Brown had no access to the agency account. These facts, when considered with the numerous instances of unreported income and unclaimed deductions in the years at issue, including those resulting from activity on the Goodbody accounts, establish that petitioner did not supply Brown with the information necessary to accurately prepare petitioner's returns. Therefore, petitioner's reliance upon Brown to accurately prepare his returns cannot be taken to indicate a lack of fraudulent intent. In an attempt to negate the evidence of his fraudulent intent, petitioner asserts (1) that none of the returns for the139 years here at issue were completed sufficiently in advance of their due dates to afford petitioner adequate time to satisfy himself as to their correctness, and (2) that respondent failed to establish whether the Forms 1040 for the years here at issue were signed by petitioner and, if so, whether they were signed in blank or after they had been prepared. We find these arguments meritless in view of the clear evidence that petitioner knowingly concealed a portion of his assets and income from his return preparer. Accordingly, they do not nullify our finding of fraud. In a final attempt to rebut the strong evidence of fraud presented by respondent, petitioner offers various explanations for several of the numerous items of understated income and overstated deductions. For example, petitioner argues that certain amounts of gain which went unreported resulted from transactions of such complexity that the failure to understand and properly report them could not be considered evidence of fraudulent intent. Respondent is not required to prove the precise amount of underpayment resulting from fraud, but only that there is some underpayment and that some part of it is attributable to fraud. 140 . We have so found. Therefore, while the proffered explanations relating to some portions of petitioner's unreported income in some years may not be wholly without merit, we need not address them. Petitioner contends that the fact that he was acquitted as to four counts of making and subscribing a false Federal income tax return under section 7206(1) is relevant to our determination here. However, it is well settled that acquittal on a criminal charge is not a bar to a civil action by the Government arising out of the same facts on which the criminal proceeding was based. ; , and cases cited therein. Thus, the outcome of the prior criminal case against petitioner is not conclusive as to his liability for civil fraud in the present case. Upon consideration of the entire record, we hold that respondent has proved by clear and convincing evidence that petitioner's tax returns for the years 1966 through 1972 were filed with the fraudulent intent to evade taxes on the part of Floyd R. Lamb. Accordingly, 141 we conclude that assessment and collection of the deficiency for each of the years in issue is not barred by the statute of limitations, and we sustain the imposition of the additions to tax under section 6653(b). 5The remaining issue is whether certain payments received by petitioner in 1971 constitute income. During 1971 petitioner received from Harrah's Club in Reno, Nevada, cash payments totaling $2,600. Political funds are not taxable to the political candidate by or for whom they are received if they are used for the expenses of a political campaign or some similar purpose. Cf. . The testimony indicates that these payments were made for the142 purpose of funding petitioner's newspaper column concerning various issues of the political campaign in which he was then engaged. After careful consideration of the evidence, we find that the funds received by petitioner were so used and, therefore, did not constitute income to him. To reflect concessions and the foregoing, Decisions will be entered under Rule 155.Footnotes1. These consolidated cases involve the following petitioners and taxable years: docket No. 8575-76, Floyd R. Lamb (1972); docket No. 8555-79, Floyd R. Lamb and Nancy Lamb (1967, 1969, 1970, and 1971); docket No. 8556-79, Floyd R. Lamb (1968); and docket No. 8557-79, Floyd R. Lamb and Eleanor S. Lamb (1966).↩*. By order of the Chief Judge dated November 1, 1984, this case was reassigned from Judge Perry Shields to Judge Lawrence A. Wright for disposition. ↩2. Unless otherwise indicated, 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. The joint exhibits submitted herein include the transcript of petitioner's testimony, in 1976, before the Federal Grand Jury investigating alleged violations by petitioner of section 7206(1) and a portion of the transcript of petitioner's criminal trial for such violations for the years 1969 through 1972. All references herein to testimony are to those exhibits.↩4. This understatement resulted primarily from the following: (1) the cost of cattle sold during 1972 was overstated by $31,962.94, (2) a check for $2,293.83 was received on December 30, 1972, but not deposited to the Buckhorn account during that year, and (3) a check for $10,000 was deposited to a suspense account on December 19, 1972. Respondent concedes that the above $10,000 was included in Buckhorn's income and reported on petitioner's 1973 return.↩5. Eleanor S. Lamb and Nancy Lamb are not liable for the additions to tax under section 6653(b). They are, however, liable for the deficiencies pertaining to those years for which they filed joint returns with Floyd R. Lamb, because the finding of fraud on the part of Floyd R. Lamb for each of the years in issue removes the bar of the statute of limitations as to all petitioners. .↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622577/	Howard B. Lawton, Petitioner, et al., 1 v. Commissioner of Internal Revenue, RespondentLawton v. CommissionerDocket Nos. 5592, 5620, 5621, 5622, 5623, 5624United States Tax Court6 T.C. 1093; 1946 U.S. Tax Ct. LEXIS 187; May 21, 1946, Promulgated 187 Decisions will be entered under Rule 50. 1. Held, respondent erred in determination of good will as a factor in liquidation of a corporation.2. Respondent's determination that petitioner did not make bona fide gifts of stock sustained for lack of proof.3. Held, during the taxable years a bona fide partnership, composed of petitioner, his two adult sons, and another, existed in respect of a tool-manufacturing business, where petitioner contributed capital and services and the others contributed services constituting a substantial factor in the production of the income; held, further, the partnership is not recognized as to petitioner's wife and two daughters, who contributed no capital and performed only minor services, and petitioner is taxable on the respective shares of income credited to them. J. Lee Boothe, C. P. A., and Ethan C. Prewitt, Esq., for the petitioners.Melvin S. Huffaker, Esq., for the respondent. Van Fossan, Judge. VAN FOSSAN 1093 The respondent determined deficiencies in income tax for the years 1940 and 1941 as follows:DeficiencyPetitioner19401941Howard B. Lawton$ 44,208.93$ 185,763.10Norman B. Lawton and Helen S. Lawton89.06Leonard B. Lawton72.77Dorothy K. Whiton38.56Vivian Stanley28.77William Blakley187.91The issues are:(1) Whether or not taxable income was received in the year 1940 upon the dissolution of Star Cutter Co., a corporation, resulting from the distribution of good will to its stockholders in such dissolution and, if so, in what amount;(2) Whether or not the gain on the distribution of assets incidental to the dissolution of the corporation is taxable in its entirety to petitioner Howard B. Lawton; and(3) Whether or not a valid partnership was in existence after September 1, 1940, with respect to the ownership and operation of the Star Cutter Co.1094 FINDINGS OF FACT.The petitioners are individuals, residing in Detroit, Michigan, or suburbs189 thereof. With the exception of Norman B. Lawton and Helen S. Lawton, his wife, who filed joint returns for the years in question, the petitioners filed separate income tax returns for the years 1940 and 1941 with the collector of internal revenue at Detroit, Michigan.Petitioners Norman B. Lawton, Leonard B. Lawton, Dorothy K. Whiton, and Vivian Stanley are children of petitioner Howard B. Lawton and his wife, Lucy M. Lawton. Petitioner William Blakley is not related to the other petitioners. Since the contested issues relate principally to the tax liability of Howard B. Lawton, he alone will be referred to hereinafter as the petitioner.On February 19, 1927, the Star Cutter Co. (hereinafter called the Corporation) was incorporated under the laws of Michigan, with an authorized capital of 1,000 shares of common stock of a par value of $ 10 per share. The incorporators and the number of shares subscribed by each were as follows:Howard B. Lawton290 sharesJ. Frank Burgess190 sharesHoward G. Pillsbury10 sharesLucy M. Lawton10 sharesGertrude A. Burgess10 sharesIn 1929 Blakley purchased 10 shares of stock from Howard G. Pillsbury for $ 250. The petitioner acquired190 the remaining stock, except the 10 shares held by his wife. Immediately prior to September 1, 1937, the stock of the corporation was held as follows:Howard B. Lawton980 sharesLucy M. Lawton10 sharesWilliam Blakley10 sharesThe corporation was engaged in the manufacture of high speed precision cutting tools. Approximately 95 percent of its products consisted of special tools manufactured according to specifications. The remainder consisted of standard catalogue tools. Between 80 percent and 90 percent of the corporation's sales were made to the Chrysler Corporation and to General Motors.From the time he finished high school until the corporation was organized, the petitioner had worked for various companies engaged in the manufacture of similar products. His work consisted of the designing of special tools. His last employer was the Clark Cutter Co., of Detroit. In 1927 that corporation sold its physical assets to the Michigan Tool Co. The petitioner received an offer to go with the latter company, but decided instead to start his own business. That portion of the business of Clark Cutter Co. which involved special 1095 engineering and designing did191 not go to the Michigan Tool Co., but followed the petitioner to the Star Cutter Co.The petitioner was president and general manager of the corporation. During the early days of its activities, he also worked in the machine shop and looked after the sales, the designing, and the purchasing.The petitioner's son, Norman B. Lawton, started working full time for the corporation in 1936, after receiving an engineering degree from the University of Michigan. He was paid 50 cents per hour at the start, which was raised 5 cents per hour each month for the first 5 months he was there. His work kept him in the shop most of the time. He designed and supervised the erection of a "back-off" machine, which was more accurate for the work required than any other machine of that type then in use. Occasionally he did what was termed "outside work." This consisted of straightening out difficulties experienced by customers in the operation of machines. It was a regular service of the corporation and no separate charge was made therefor. In 1940 Norman was works manager, receiving a salary of $ 100 per week.The petitioner's other son, Leonard B. Lawton, began to work full time for the corporation192 in 1937. He also received a starting wage of 50 cents per hour, which was raised 5 cents per hour each month for the first 5 months. His work at first consisted of running machines and in learning how to operate them. He familiarized himself with the operation of all the machines in the shop. Later he worked outside the shop and was engaged both in selling and in "outside work." In 1940 or 1941, when the pressure of war orders eliminated the necessity for outside salesmen, Leonard came back into the shop and took charge of the third shift.Lucy M. Lawton, wife of the petitioner, started working for the corporation in 1927. Her duties at that time included assigning order numbers to the purchase orders and making out shop order forms and job tickets. She made out the invoices and statements at the end of the month and made the book entries for returned goods. She placed the orders for all materials. She worked six days a week from 1927 to 1931. From 1931 to 1940, she worked five days a week. She continued to work two or three days a week after that in order to help figure the pay roll. She received no salary for her services.In 1931 the petitioner's daughter, Vivian Stanley, 193 who at that time had just finished high school, began to work in the office. She did general office work of the same type as that performed by her mother. She received a salary of approximately $ 25 per week for her services. In 1937, owing to the birth of her child, she ceased to work for the corporation.1096 Dorothy K. Whiton, the petitioner's other daughter, started to work in the office in 1937. She did all the office work except that Mrs. Lawton continued to come in two or three days a week to help with the pay roll. Mrs. Whiton worked until 1944. She received a salary of $ 25 per week.William Blakley was employed by the corporation in 1927. In 1940 he was shop superintendent. He was in charge of manufacturing and had supervision over all the shifts.On September 1, 1937, the petitioner made transfers of shares of stock of the corporation to the persons named and in the amounts stated, as follows:SharesNameTransferredLucy M. Lawton400Norman B. Lawton50Leonard B. Lawton50Dorothy K. Whiton50Vivian Stanley50William Blakley40A gift tax return was filed with respect to these transfers, but no tax was paid because of the specific194 exemption.In 1938 the petitioner and his wife each transferred 25 shares of stock to each of their 4 children. In 1939 the petitioner transferred 8 shares to each of his children and 8 shares to Blakley. In the same year Mrs. Lawton transferred 32 shares to each of the children and a like amount to Blakley. In 1940 the petitioner transferred 10 shares to each of his children and 10 shares to Blakley. No gift tax returns were filed with respect to the transfers made in 1938, 1939, and 1940. In making the transfers the petitioner was motivated in part by tax saving reasons.The transfers were all made in an informal manner. The petitioner, as president, and Mrs. Lawton, as secretary, made the transfers on the stock record books. The old certificates were canceled and new ones issued. The canceled stubs and vouchers were placed in the minute book. Revenue stamps were affixed to the new certificates. The new certificates were not given to the purported donees, but were kept in the office safe.On August 31, 1940, the stock of the corporation was listed on the corporation's books as follows:Howard B. Lawton150 sharesLucy M. Lawton150 sharesNorman B. Lawton150 sharesLeonard B. Lawton150 sharesDorothy K. Whiton150 sharesVivian Stanley150 sharesWilliam Blakley100 shares195 No dividends were ever paid or declared on the stock during the existence of the corporation.1097 In 1940 the petitioner discussed with other businessmen the possibility that a saving in taxes would result from conducting the business as a partnership. He learned that if the business had been conducted as a partnership in 1939 there would have been a tax saving of $ 22,000 in that year. Because of this fact chiefly, and because he was of the opinion that the members of the family would work harder and would consider themselves as a part of the business if they were made partners, he decided to dissolve the corporation and form a partnership.On August 31, 1940, the corporation was dissolved. The assets of the corporation were appraised at that time at their book value and no allowance was made for good will. On October 9, 1940, the petitioner, Lucy M. Lawton, Norman B. Lawton, Leonard B. Lawton, Dorothy K. Whiton, Vivian Stanley, and William Blakley executed an instrument denominated "Articles of CoPartnership," the material provisions of which follow:1. The name of this copartnership is Star Cutter Company.2. The place of business is 10040 Freeland Avenue, Detroit, Michigan. 196 3. The members thereof are: Howard B. LawtonLucy M. LawtonNorman B. LawtonLeonard B. LawtonDorothy K. LawtonVivian M. StanleyWilliam G. Blakley4. The interest of each member in said copartnership is as follows:Howard B. Lawton15%Lucy M. Lawton15%Norman B. Lawton15%Leonard B. Lawton15%Dorothy K. Lawton15%Vivian M. Stanley15%William G. Blakley10%5. The capital consists of all assets of the former Star Cutter Company, a Michigan Corporation, which was engaged in business at the same place, recently dissolved, which assets, subject to outstanding obligations, have been deeded and assigned by it to this copartnership.* * * 7. Profit and losses shall be shared in accordance with the various holdings of the members and division thereof shall be made annually.8. All funds shall be deposited in the Wabeek State Bank of Detroit, Fisher Building, in the copartnership name. Checks upon these funds shall be signed either by Howard B. Lawton, Lucy M. Lawton, Norman B. Lawton or William G. Blakley. All other papers such as contracts, notes, etc., whereby the partnership may be bound, shall be signed by any two members of the partnership. * * 12. 197 On the severance of a partner's connection with the copartnership by his voluntary retirement, death, bankruptcy or otherwise, his interest therein shall be determined by the book value thereof as it appears on the books of the company, and there shall be no allowance for good will.13. Any partner who shall be desirous of selling his share and interest in the business shall have the liberty to do so and shall in such case first offer such 1098 share and interest to the other partners, equal amounts to each partner, at the book value as the same appears on the books of the firm, and if the other partners shall not within one calendar month accept such offer, then the selling partner shall be at liberty to sell his share and interest to any other person or persons at the same or a higher price, but shall not sell the same to any other person at a less price unless and until it shall have been offered to the other partners for the time being at such less price and such last mentioned offer shall not have been accepted within one calendar month. In case of purchase, the partner or partners purchasing the share of the retiring partner, shall be allowed to pay for same in twelve198 equal monthly payments -- the first falling due thirty days from date of agreement to purchase.14. The severance of a partner's connection with the firm, either by death, voluntary retirement, bankruptcy or otherwise, shall not dissolve this copartnership.15. Between the partners, there shall be no benefit of survivorship and the executors and administrators of each partner who shall die, shall become entitled to his share as part of his personal estate, and in case of bankruptcy of any partner, his interest shall be considered personal property.16. The decision of a majority in value shall control on questions of management, matters of dispute and amendment of articles of copartnership.17. The term of existence of this copartnership shall be thirty years.18. Upon the final dissolution of the partnership, the assets remaining after all liabilities have been taken care of, shall be divided in accordance with the respective holdings of the members.Other than their purported shares in the assets of the corporation, nothing was contributed to the business by the parties to the contract at the time of its execution.A quitclaim deed and a bill of sale were executed, transferring 199 all the real and personal property, respectively, of Star Cutter Co., a corporation, to Star Cutter Co., a copartnership. The bank with which the corporation had done business was advised that the corporation had been dissolved and a partnership formed. The bank account was put in the name of Star Cutter Co., a partnership. Contracts with the War and Treasury Departments entered into after the execution of the articles of copartnership were made in the name of "Star Cutter Company, Partnership." Other customers of the business were informed of the change in the form of operation.The dissolution of the corporation and the creation of the partnership brought no new capital into the business and effected no change in the manner of carrying on the business, except that in lieu of salaries the purported partners drew sums as they needed them against the expected profits for the year.During the taxable years in question, and prior thereto, the household expenses of the petitioner and his wife were paid by Mrs. Lawton out of a joint checking account which was used by both the petitioner and Mrs. Lawton.In 1940 all the children of petitioner had reached the age of 21.1099 In their200 respective returns for 1940, each of the petitioners reported a net long term capital gain upon liquidation of the corporation. In computing the value of the assets received, nothing was included on account of good will. The respondent determined that the total value of the net assets received on liquidation included good will in the amount of $ 174,038. He further determined that the petitioner, Howard B. Lawton, was taxable on the entire gain realized on liquidation of the corporation.Partnership returns were filed for the fiscal years ended August 31, 1941, and August 31, 1942. These returns disclosed "partners' shares of income" and total income, as follows:IncomePartner9-1-40- to9-1-41 to8-31-418-31-42Howard B. Lawton$ 33,446.94$ 98,755.41Lucy M. Lawton33,446.9498,755.43Norman B. Lawton33,446.9498,755.43Leonard B. Lawton33,446.9498,755.43Dorothy K. Lawton33,446.9498,755.43Vivian Stanley33,446.9498,755.43William Blakley22,297.9965,836.95Total222,979.63658,369.51The respondent determined that the petitioner, Howard B. Lawton, was taxable upon the entire net income of the business under section 22 (a) 201 of the Internal Revenue Code. In the notice of deficiency the respondent made adjustments for salaries to Norman B. Lawton and Leonard B. Lawton at the annual rate of $ 5,400; to Dorothy K. Whiton and Vivian Stanley at the annual rate of $ 2,400; and to William Blakley at the annual rate of $ 12,000. No allowance for salary was made with respect to Lucy M. Lawton.OPINION.The first issue is whether or not there should be included in the value of the assets distributed on liquidation of the corporation an amount representing the value of good will and, if so, in what amount.In computing the value of the assets at the time of dissolution the officers of the corporation did not include any amount representing good will. In his notice of deficiency the respondent determined that the corporation possessed good will, the value of which he computed according to the capitalization of earnings method. This method has received approval in several cases. See Otis Steel Co., 6 B. T. A. 358; Schilling Grain Co., 8 B. T. A. 1048; Kaltenbach & Stephens, Inc., 12 B. T. A. 1009. Application of this 202 method, according to the respondent's 1100 contention, shows that as of August 31, 1940, the good will of the Star Cutter Co. had a value of $ 174,038, computed as follows:Period, 12-31-35 to 8-31-40Average net earnings$ 31,477.39Average capital and surplus$ 67,145.138 percent return on above5,371.61Earnings attributable to intangible assets26,105.78Capitalized at 15 percent (value of good will)174,038.00The petitioner contends that the corporation had no ascertainable good will at the date of its dissolution. He asserts that the excess earning power of the corporation was due not to good will, but to the skill and ability of the petitioner, of Norman and Leonard Lawton, and of Blakley. In the alternative, he contends that if good will did attach to the corporation, the value placed thereon by the respondent is excessive.Good will as a concept embraces many elements. No precise definition can be formulated. It is not necessarily confined to a name. It may also attach to a particular location where the business is transacted, or to a list of customers, or to other elements of value in the business as a going concern. Cf. C. C. Wyman & Co., 8 B. T. A. 408.203 However, good will does not attach to a business or a profession, the success of which depends solely on the personal skill, ability, integrity, or other personal characteristics of the owner, D. K. MacDonald, 3 T.C. 720">3 T. C. 720. As was said in Providence Mill Supply Co., 2 B. T. A. 791: "Ability, skill, experience, acquaintanceship or other personal characteristics or qualifications do not constitute good-will as an item of property."In the instant case, we think there can be little doubt that the success of the business depended almost entirely on the ability and personal qualifications of the individuals named. Ninety-five percent or more of the corporation's activities consisted in the designing and manufacture of special tools. The petitioner had a long experience in this type of work. Prior to the formation of the corporation he had been employed by several other companies as a designer of such tools. His personal reputation in the trade is shown by the fact that when he organized the corporation he retained the business of his former employer relating to the production of special tools.The business of the Star Cutter204 Co., both before and after the dissolution of the corporation, required a high degree of personal skill and ability. One of the petitioner's witnesses, a representative of Pontiac Division of General Motors, testified that, in many cases before the design for a tool was made, petitioner was called in and his opinion obtained. In addition, the Lawtons, on many occasions, were called upon to rectify any difficulty experienced in the operation of the 1101 tools installed by the corporation, or those of other manufacturers. No charge was made for this service. It is thus clear that the personal qualifications and ability of the Lawtons constituted the important factor in securing customers and producing the income of the corporation. One witness, the general tool supervisor of Chrysler-Dodge, testified, " * * as far as I am concerned, without the Lawtons I do not know anything about the Star Cutter Company."We are satisfied from the evidence that nothing is attributable to good will in the sense in which that term is used in the decided cases. It follows that the respondent erred in this phase of his determination.The second issue is whether or not the petitioner is taxable205 on the entire gain realized on the distribution of the assets of the corporation at the time of its dissolution. The respondent contends that prior to the purported gifts of stock the petitioner was the sole stockholder of the corporation; that the transfers of stock did not constitute completed valid gifts; that, consequently, the petitioner continued to be the sole stockholder of the corporation up to the time of its dissolution and is taxable on the entire gain incident thereto.It is to be noted that prior to September 1, 1937, the petitioner was the record holder of 980 shares. Of the remaining 20 shares, 10 were held by Mrs. Lawton and 10 by Blakley. The respondent argues that these were mere qualifying shares which did not, in any way, lessen the petitioner's complete ownership of the corporation.With respect to the 10 shares held by Blakley, we do not think it can be said that they were mere "qualifying" shares, nor that the petitioner was taxable on the gain applicable thereto. Blakley was not an original incorporator or director of the corporation. He was first employed in 1927, some two months after the corporation had been organized. He purchased the 10 shares in206 1929 from one of the original incorporators for the sum of $ 250. There is no suggestion that they were acquired otherwise than in an arm's length transaction. Consequently, we hold that the gain relating thereto is taxable to Blakley.We think, however, that the respondent must be sustained in his contention with respect to the 10 shares of which Mrs. Lawton was the record holder. She was one of the incorporators of the corporation and the shares were issued to her at the time of its organization. There is no evidence that Mrs. Lawton paid any consideration for these shares and no evidence that she exercised dominion or control over them. Such evidence as there is in the record tends to support the respondent's contention that they were mere qualifying shares and, in the absence of sufficient competent evidence to the contrary, he must be sustained.Whether or not the remainder of the gain on liquidation is taxable in toto to the petitioner depends on whether or not he made valid completed gifts of stock in 1937, 1938, 1939, and 1940.1102 A valid gift includes the following essential elements: (1) A donor competent to make the gift; (2) a donee capable of taking the207 gift; (3) a clear and unmistakable intention on the part of the donor absolutely and irrevocably to divest himself of the title, dominion, and control of the subject matter of the gift in praesenti; (4) the irrevocable transfer of the present legal title and of the dominion and control of the entire gift to the donee so that the donor can exercise no further act of dominion or control over it; (5) a delivery by the donor to the donee of the subject of the gift or of the most effectual means of commanding the dominion of it; and (6) acceptance of the gift by the donee. Adolph Weil, 31 B. T. A. 899, and cases cited therein.We do not think the evidence in the instant case is sufficient to support the petitioner's contention that valid, bona fide gifts of stock were made. The evidence consisted entirely of oral testimony, due to the loss of the books and records in 1942 or 1943. There is thus no direct evidence that the transfers of the certificates were made on the corporation's record books. The petitioner testified that he and Mrs. Lawton, as president and secretary of the corporation, respectively, canceled the old certificates and issued the208 new ones. This was done at the annual meetings, but he did not recall whether or not the purported donees were present at the time. It is undisputed that the stock certificates were not given to the supposed donees, but were kept in the company's safe. Blakley testified that he never saw the shares that were supposedly given to him.There are other factors indicating that the petitioner never relinquished the dominion and control of the subject of the gifts. There is no evidence that the purported donees ever exercised their voting rights on the stock. No dividends were paid, although the business was growing rapidly. We deem significant also the manner in which Mrs. Lawton's "gifts" paralleled those of her husband. Her "gifts" were complementary to those of the petitioner and were designed to equalize the holdings of each member of the family. The conclusion we are compelled to draw from this is that Mrs. Lawton never had an unfettered dominion over the shares purportedly given to her, but was completely amenable to the petitioner's wishes in the matter of their disposition. The petitioner was president and general manager of the corporation prior to the time of the alleged209 gifts. There is nothing in the record to indicate that his control of the corporation was any the less after they had been made. In Coffey v. Commissioner, 141 Fed. (2d) 204, the court said:* * * It is the general rule that in order to complete a gift the donor must do everything reasonably permitted by the nature of the property and the circumstances of the transaction in parting with all the incidences of ownership. 1103 Continued possession, dominion and control over the subject matter of the gift and the fruits thereof afford ample basis for the taxation of the income to the donor. * Here the evidence fails to show that the petitioner parted with the complete dominion and control of the subject matter of the gifts. Lacking such evidence, we must sustain the respondent.The last issue is whether or not a valid partnership existed after September 1, 1940, with respect to the ownership and operation of the Star Cutter Co.The petitioner contends that a valid partnership was in existence, composed of the petitioner, Lucy M. Lawton, Norman B. Lawton, Leonard B. Lawton, Dorothy K. Whiton, and Vivian Stanley, each having a 15 percent 210 interest therein, and William Blakley, having a 10 percent interest therein. The respondent contends that there was no partnership; that the business was owned solely by the petitioner during the taxable years; and that the income therefrom is taxable to him in its entirety.With respect to the interests in the partnership purportedly owned by Lucy M. Lawton, Dorothy K. Whiton, and Vivian Stanley, we think the case clearly comes within the rationale of Commissioner v. Tower, 327 U.S. 280">327 U.S. 280, and Lusthaus v. Commissioner, 327 U.S. 293">327 U.S. 293. In the Tower case, the Court said:There can be no question that a wife and husband may, under certain circumstances, become partners for tax, as for other purposes. If she either invests capital originating with her or substantially contributes to the control and management of the business, or otherwise performs vital additional services, or does all of these things she may be a partner as contemplated by 26 U. S. C. §§ 181, 182. * * * But when she does not share in the management and control of the business, contributes no vital additional service, 211 and where the husband purports in some way to have given her a partnership interest, The Tax Court may properly take these circumstances into consideration in determining whether the partnership is real within the meaning of the federal revenue laws.Here the individuals named contributed nothing to the capital of the business. Their supposed contributions consisted solely of their respective shares in the corporate assets as represented by the stock purportedly given to them. As we have held above, however, no completed gifts of stock were ever made by the petitioner, who continued to own and control the corporation to the time of its dissolution. There is no evidence that the petitioner's wife or daughters in any way participated in the management or control of the business. No more is there evidence of those "vital additional services" characterized as essential by the Supreme Court.Lucy M. Lawton rendered greater services to the corporation than to the partnership. During the taxable years she worked only three 1104 days a week, helping to make up the pay roll. Vivian Stanley worked for the corporation from 1931 to 1937. She did no work after that time and performed212 no services for the partnership. Dorothy K. Whiton worked in the office during the taxable years doing general office and clerical work. Her work for the partnership was of the same type as that performed for the corporation and for which she had received a salary of $ 25 per week. The services performed by her, as well as those by Mrs. Lawton, were obviously a negligible factor in the production of income. See M. M. Argo, 3 T. C. 1120. We conclude, therefore, that the respondent did not err in taxing to the petitioner the shares of the income credited to his wife and daughters. Cf. Lowry v. Commissioner, 154 Fed. (2d) 448.We think a different answer is called for, however, with regard to the shares of the income credited to the petitioner's sons and to William Blakley. The evidence shows that these individuals worked steadily for the business for many years, the youngest, Leonard B., coming in in 1937. Norman Lawton started to work for the corporation in 1936, after completing an engineering course at the University of Michigan. His work kept him in the shop most of the time. He developed a specialized machine213 which was more accurate than any of its kind in existence at that time. Occasionally he did "outside work," which called for highly developed skill and ability. In 1940 he was works manager of the entire shop.The petitioner's other son, Leonard, began his activities by familiarizing himself with the operation of all of the machines in the shop. Later he was engaged in selling and in performing "outside work." During the taxable years, when the pressure of war orders had eliminated the need for outside salesmen, Leonard was again in the shop, where he had charge of the third shift.Blakley has been with the business since shortly after the corporation was organized in 1927. While his duties were not shown in detail, it appears that in 1940 he was shop superintendent, was in charge of manufacturing, and had charge over all the shifts.In addition to his services, Blakley made a small contribution to the capital of the business represented by his shares of stock in the corporation. Although the petitioner's sons contributed no capital to the business this, of course, does not prevent their being partners if their services contributed substantially to the production of the income. 214 See Meehan v. Valentine, 145 U.S. 611">145 U.S. 611. As the Court said in the Tower case, supra: * * The question here is not simply who actually owned a share of the capital attributed to the wife on the partnership books. A person may be taxed on profits earned from property, where he neither owns nor controls it. Lucas v. Earle, supra. The issue is who earned the income and that issue depends on whether this husband and wife really intended to carry on business as a partnership. Those issues cannot be decided simply by looking at a single step 1105 in a complicated transaction. To decide who worked for, otherwise created or controlled the income, all steps in the process of earning the profits must be taken into consideration. * We think the evidence here amply shows that the services of Norman and Leonard Lawton and of William Blakley substantially contributed to the production of the income of the business and that these individuals and the petitioner "really intended" to carry on the business as a partnership. Consequently, we hold that they are taxable upon the shares of income credited to them and that the respondent 215 erred in taxing these amounts to the petitioner. Cf. Estate of Frank G. Ennis, Sr., 5 T.C. 1096">5 T. C. 1096.It appears from the record that a part of the income of the business for the year 1941 is subject to renegotiation. Any adjustment which may be necessary because of this can be made in the recomputation.Decisions will be entered under Rule 50. Footnotes1. Proceedings of the following petitioners are consolidated herewith: Norman B. Lawton and Helen S. Lawton; Leonard B. Lawton; Dorothy K. Whiton; Vivian Stanley; and William Blakley.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622578/	The Danco Company, Petitioner, v. Commissioner of Internal Revenue, RespondentDanco Co. v. CommissionerDocket No. 19519United States Tax Court17 T.C. 1493; 1952 U.S. Tax Ct. LEXIS 246; March 18, 1952, Promulgated 246 Decision will be entered under Rule 50. Excess Profits Tax -- Relief Under Section 722 (c) -- Constructive Average Base Period Net Income. -- Amount of constructive average base period net income determined. William C. Bracken, Esq., for the petitioner.Clarence E. Price, Esq., for the respondent. Arundell, Judge. ARUNDELL1493 This proceeding involves claims for relief from, and refund of, excess profits taxes for the calendar years 1942 and 1943. In 14 T.C. 276">14 T. C. 276, we decided against petitioner. Because of exceptional circumstances, a motion for rehearing was granted.FINDINGS OF FACT.The findings of fact contained in our prior report in this proceeding (14 T. C. 276) are incorporated herein by reference.The petitioner is an Ohio corporation with its principal247 office in Rocky River, Cuyahoga County, Ohio. Its Federal tax returns for the calendar years 1942 and 1943 were filed with the collector of internal revenue at Cleveland, Ohio.The petitioner was organized in April 1940 and during the taxable years was engaged in the business of manufacturing sheet metal products. Its original paid-in capital was $ 5,000. It was organized by C. George Danielson who had been engaged in the sheet metal business since 1907.The petitioner's statutory invested capital for the year 1942 was $ 8,410.49, and for 1943 it was $ 13,567.56. Excess profits net income for 1942 amounted to $ 18,342.50 and for 1943 it was $ 57,655.031494 The Overly-Hautz Company is a company engaged in the petitioner's industry. For the base period years and fiscal years ended October 31, 1942 and 1943, its net sales, gross profit, and net income before Federal taxes were as follows:Net incomeYear endedNet salesGross profitbefore FederaltaxesDec. 31, 1936$ 71,919.52$ 25,327.21$ 1,981.35Dec. 31, 193798,847.4630,572.982,091.33Dec. 31, 1938107,455.0234,254.89439.47Dec. 31, 1939158,903.8655,213.827,968.79Oct. 31, 19421,110,915.00640,604.65494,771.52Oct. 31, 1943609,636.11284,108.14127,747.55248 The Artisan Metal Works Company was another company in the petitioner's industry. For the base period years and fiscal years ended September 30, 1942 and 1943, its sales, gross profit, and net profit before Federal taxes were as follows:Net profitYear endedGross salesGross profitbefore FederaltaxesDec. 31, 1936$ 247,068.19$ 71,173.72$ 35,340.38Dec. 31, 1937304,530.2193,691.4531,507.68Dec. 31, 1938226,930.2179,537.2625,321.56Dec. 31, 1939314,221.85120,381.5141,762.57Sept. 30, 1942671,475.39269,032.06142,844.42Sept. 30, 1943768,216.91243,839.1990,601.26The petitioner's net sales, gross profit, expenses, and net income for the period April 10, 1940, through December 31, 1940, and for the years 1941, 1942, and 1943, after adjustments made by the respondent, were as follows:4-10-40through19411942194312-31-40Net sales$ 18,379.57 $ 58,689.45$ 154,759.34$ 234,913.79Gross profit4,284.63 16,234.8951,321.1198,948.79Total expenses4,958.57 11,367.7931,730.0739,244.34Net income(767.04)4,391.3018,311.6257,981.50In the years 1936 to 1939, the percentages 249 of gross profits to sales of Overly-Hautz Company and of Artisan Metal Works Company were as follows:1936193719381939AverageOverly-Hautz35.2230.9331.8834.2533.20Artisan Metal Works27.3329.0632.3532.5930.33For the year 1942 the percentage of the petitioner's gross profit to sales was 27.96 and for 1943 it was 37.97. The average for the two years was 32.95 per cent.1495 From 1936 through 1939, the Riester & Thesmacher Company was engaged in fabricating sheet metal products to customers' specifications and also engaged in producing sheet metal products, including architectural sheet metal, and ventilating and air conditioning equipment. Its sheet metal work to customers' specifications was similar to the work done by the Artisan Metal Works Company and the Overly-Hautz Company during the base period years of 1936 to 1939, inclusive. The machinery and tools used in this type of business, consisting of manufacturing products to customers' specifications, are similar to those used by the Artisan Metal Works Company and the Overly-Hautz Company, and the method or technique of manufacture is essentially the same in all three companies.250 C. George Danielson, who formed the petitioner in 1940, was vice president and a director of the Artisan Metal Works Company in 1936. The machines used by the petitioner in 1942 and 1943 in making the sheet metal products to customers' specifications were similar to those used by the Riester & Thesmacher Company during 1936 to 1939, inclusive, in its custom department. The general technique of operation was the same in all three companies in the custom department.The machines used by the petitioner in the years 1942 and 1943 were similar to the machines used in 1936 to 1939, inclusive, in the manufacturing departments of the Riester & Thesmacher Company, the Overly-Hautz Company and the Artisan Metal Works Company, and such machines were all designed to do the same kind of work. The general technique of operation of all four companies was similar.The petitioner rented the quarters that it used in manufacturing its products. The Artisan Metal Works Company, the Riester & Thesmacher Company, and the Overly-Hautz Company owned part of their plants. The Artisan Metal Works and the Overly-Hautz Company did the same kind of work in 1936 to 1939 as the petitioner did in 1942 and 1943. 251 In figuring on work, Mr. Danielson endeavored to realize the same margin of gross profit and net profit to the petitioner during the war years as on work prior to the war.The space occupied by the petitioner was sufficient to permit it to handle gross business of about $ 200,000 a year. The office force of the petitioner consisted of one full time employee and one part time employee.The business in which the petitioner was engaged was highly competitive, and it was necessary for the petitioner to bid against its competitors in order to obtain business.The Overly-Hautz Company, the Riester & Thesmacher Company, and the Artisan Metal Works Company were all engaged in sheet metal work to customers' specifications in the base period years. The companies were comparable to each other in the general technique of 1496 executing this type of work, and all three companies made a gross profit of approximately 33 per cent of sales. The petitioner's earnings in 1942 and 1943 varied with the volume of sales. In 1942, sales were $ 154,759.34, net earnings were $ 18,686.62; in 1943, sales were $ 234,913.79, net earnings were $ 57,764.88.The petitioner reconstructs earnings by applying252 a formula to actual sales for 1942 and 1943. The formula is based on the premise that labor and material costs in 1936-1939 were 99.78 per cent of actual costs in 1942 and 94.84 per cent of such costs in 1943. Those percentages are applied to actual sales in 1942 and 1943, respectively, which produces assumed sales in lesser amounts than actual sales. Net profit is determined by subtracting from such assumed sales the overhead expenses and assumed labor and material costs determined by applying the above percentages to actual labor and material costs. The result is that the petitioner computes a normal profit for 1942 in the amount of $ 18,646.19 as compared with actual net profit of $ 18,686.62, and for 1943 a normal profit of $ 54,779.74 as compared with actual net profit of $ 57,764.88.The amount of $ 12,500 is a fair and just amount representing normal earnings to be used as a constructive average base period net income for the purpose of computing the petitioner's excess profits tax for the taxable years.OPINION.In the opinion reported at 14 T. C. 276, we concluded that the evidence was insufficient for a determination of an amount of normal 253 earnings under the provisions of section 722 (a). At the second hearing, the parties filed a stipulation of facts which was devoted largely to showing the similarity of the operations of the petitioner to those of some of its competitors. Each party placed in evidence tables and statistics as to the financial results of the operations of the petitioner and of its competitors.The petitioner has proposed three methods of reconstruction. The one that it appears to rely on is the method described in the findings of fact. In that method it is assumed that sales in the base period would have been the same as actual sales in 1942 and 1943, reduced to amounts represented by the ratio that labor and material costs in the base period bore to such costs in 1942 and 1943. According to the petitioner's figures, labor and material costs in the base period were 99.78 per cent of such costs in 1942 and 94.84 per cent of such costs in 1943. An obvious fallacy in this method is the assumption that if the petitioner had been in business in the base period years, its sales would have been 99.78 per cent of those for 1942 and 94.84 per cent of those in 1943. Assuming that the petitioner had commenced254 business in the base period, there is no evidence in the record 1497 to support any finding that its sales in any years in that period would have so nearly approached the amount of sales for the years 1942 and 1943. Moreover, the evidence and the findings in our prior report show that a large portion of 1942 and 1943 sales were war-induced sales which, under the philosophy of section 722, have no place in the determination of an average constructive base period net income. A similar method, but based upon a different formula, was proposed by the petitioner on brief after the first hearing. In our opinion, we pointed out the impropriety of such method. In addition to its other infirmities, the proposed method fails to give an "average" base period figure, a matter upon which we specifically commented in the prior opinion.The respondent has placed in evidence data as to sales and profits of two of the petitioner's competitors in the base period and also in the years 1942 and 1943. The petitioner objects to the receipt and use of such data, because it fails to show the details of administrative expenses and because of the statutory restriction against regard to post-1939 255 events.The objection based on lack of detail as to administrative expenses is not sound. We pointed out in the prior opinion that the burden is on the petitioner to establish a constructive average base period net income. The net income of others in the same field of business may be a helpful factor in establishing that element of the petitioner's case. If there is any reason why net income of competitors is not a proper factor, that reason should be established by competent evidence. The mere statement of counsel that administrative expenses are out of line with those of the petitioner is not a sufficient reason to exclude the net profit figures as evidentiary facts.The objection on the ground of statutory restriction is likewise unsound. While Code section 722 (a) contains a general restriction against regard "to events or conditions * * occurring or existing after December 31, 1939," the same sentence of that section contains an exception thereto and directs that in section 722 (c) cases regard shall be had to the post-1939 "nature of the taxpayer and the character of its business under section 722 (c) to the extent necessary to establish the normal earnings to be used 256 as the constructive average base period net income." The respondent has construed the exception above mentioned in section 35.722-4 of Regulations 112 which reads in part as follows:In the case of a taxpayer commencing business after December 31, 1939, it is necessary to examine the type of business engaged in, the relationship between its profits and invested capital, its profits and sales, and the profits and invested capital and profits and sales of comparable concerns, the earning capacity of the taxpayer, the character and experience of the management, the nature of the competition encountered, and all other factors pertinent in constructing normal 1498 earnings. * * * any facts or conclusions derived with respect to the period after December 31, 1939, shall be related to the base period; * * .The propriety of the use of post-1939 data in section 722 (c) cases is also recognized in Part VII (E) of the Bulletin on section 722, as revised by E. P. C. 35, wherein it is said:Section 722 (a), in dealing with the post-1939 prohibition and the exceptions thereto, provides that in cases described in section 722 (c) "regard shall be had to * * the nature of the taxpayer 257 and the character of its business * * to the extent necessary to establish the normal earnings to be used as the constructive average base period net income."Where, as in this case, the taxpayer was not in existence in the base period, any comparison based on the operations of other concerns must of necessity be based on such operations after the base period with proper adjustments to eliminate from their operating results the effect of the war economy.In determining the amount of a proper constructive average base period net income, we have weighed the evidence as to the factors set forth in the respondent's regulations, including the type of the petitioner's business, the relation between its profits and capital and surplus and profits and sales, and profits, sales, and invested capital of other concerns in the same business, the petitioner's potential earning capacity, the experience of its founder and manager, and the competition in the petitioner's field of business. Findings of fact have been made as to these factors either in our prior report or in this one. In our consideration of the operating results of other concerns in the petitioner's field of business in the years*258 1942 and 1943, we have compared the results for those years with the results in the base period years. This we think was the intent of Congress in enacting section 722, namely, to eliminate from a reconstructed figure any war-induced profits.No reconstruction for a concern that was not in operation in the base period years can be absolute. The statute does not contemplate the determination of a figure that can be supported with mathematical exactness. All that it requires is the determination of a fair and just amount to be used as a constructive average base period net income by taxpayers who qualify for relief under the provisions of section 722. The statutory direction is that in determining such an amount regard shall be had to the nature of the taxpayer and the character of its business. This we have done in addition to considering the evidence as to numerous other factors as to which we have evidence. We conclude that $ 12,500 is a fair and just amount to be used as the petitioner's constructive average base period net income for the purpose of computing the excess profits tax for the taxable years.Decision will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622580/	Ethel I. Buckley v. Commissioner. Helen Hunter Davis v. Commissioner. Clare E. Good v. Commissioner. Lloyd A. Good v. Commissioner. Mary P. McDaniel v. Commissioner. Ernest B. Loveman v. Commissioner. John S. Thomas, Jr. v. Commissioner. Jean S. Heinritz v. Commissioner. Ethel S. Carpenter v. Commissioner. Lloyd A. Good, Jr. Trust v. Commissioner. Jane McLaughlin Timmons v. Commissioner.Buckley v. CommissionerDocket Nos. 2300, 2301, 2306, 2307, 2308, 2314, 2325, 2326, 2327, 2334, 2938.United States Tax Court1945 Tax Ct. Memo LEXIS 213; 4 T.C.M. (CCH) 460; T.C.M. (RIA) 45152; May 1, 1945Bruce Low, Esq., Charles C. Norris, Jr., Esq., and Matthew F. Dorsey, Esq., for the petitioners. William D. Harris, Esq., for the respondent. OPPERMemorandum Findings of Fact and Opinion OPPER, Judge: These proceedings dispute respondent's determinations of deficiencies in Federal income tax for the year 1940 of the respective petitioners, as follows: DocketNo.TaxpayerDeficiency2300Ethel I. Buckley$ 5,879.352301Helen Hunter Davis171,302.462306Clare E. Good502.412307Lloyd A. Good19,184.212308Mary P. McDaniel2,237.482314Ernest B. Loveman951.102325John S. Thomas, Jr.8,212.122326Jean S. Heinritz200.042327Ethel S. Carpenter374.132334Lloyd A. Good, Jr., Trust176.632938Jane McLaughlin Timmons2,262.16214 In Docket Nos. 2300, 2301, 2307, 2308, 2314, 2325, 2327, and 2938, the primary question presented is whether a transaction between a corporation and its shareholders, pursuant to an offer of the corporation to acquire its own stock, constituted a sale resulting in a long-term capital gain or a redemption of the stock in partial liquidation, taxable as a short-term capital gain under section 115(c) and (i) of the Internal Revenue Code. In Docket Nos. 2306, 2307, 2326, and 2334, the same ultimate question is presented, with the variation that these petitioners made tender of their shares after the stated expiration date of the offer made by the corporation to purchase the shares. A companion case to the ones here presented is Rose M. Everett, Docket No. 2313, also decided this day. A master stipulation of facts was submitted for all of the docket numbers involved, supplemented by further stipulations of facts for the respective individual petitioners. In addition there was evidence adduced at the hearing. Those facts hereinafter set forth which are not from the stipulations are facts otherwise found from the record. Findings of Fact All of the stipulated facts are hereby215 found accordingly. Petitioners are all residents of Philadelphia, Pennsylvania, and vicinity, who timely filed their income tax returns for 1940 with the collector of internal revenue for the first district of Pennsylvania. On or about June 2, 1932, Edward Davis, the husband of Helen Hunter Davis, by gift transferred to her 3,616 shares of the $5 preference stock of the Philadelphia Storage Battery Company, a Pennsylvania corporation, which he was entitled to receive as a stock dividend. The name of Philadelphia Storage Battery was later changed to Philco Corporation, either of which is sometimes referred to as the corporation. Edward Davis had retired in about 1930, but prior to that time had been president of the corporation. After retirement he had sold his common stock in the corporation. Petitioner Helen Davis continued to hold her preference stock until it was transferred to the corporation as hereinafter related. Helen Davis and her husband consulted their son-in-law. Charles Rowley, a trustee of the Massachusetts Investors Trust of Boston and a financier of experience, concerning their investments, and looked to him for advice concerning their security holdings. While216 Helen Davis and her husband were having dinner with Rowley on September 27, 1939, Rowley advised them that he had felt for some time that Helen Davis' holdings in the $5 preference stock of the corporation represented too large a portion of their joint holdings in a single security. Since the stock was not listed on any exchange and there was no established market for it, Helen Davis authorized Rowley to take such steps as he deemed necessary to dispose of all or a substantial portion of the stock which he believed at that time to consist of a total of 3,000 shares instead of the 3,616 shares actually held. Under date of September 28, 1939, Rowley, on behalf of Helen Davis, wrote Charles Norris of Philadelphia whom he personally knew and who he knew had represented the corporation for a number of years, inquiring if there were any restrictions on the sale of this stock, believing that the stock might first have to be offered to the corporation. Norris, under date of September 29, 1939, replied that there were no restrictions upon the stock and suggested that Rowley write directly to James T. Buckley, president of the corporation. He further expressed the view that the only market217 for the stock would be among the officers of the corporation. Under date of October 2, 1939, Rowley wrote Buckley of the desire to dispose of all or a very substantial part of this stock. Not having a reply, Rowley again wrote Buckley under date of October 10, 1939. On October 12, 1939, Buckley, in a reply to Rowley's letter of October 2, 1939, stated: "We are quite conscious of the problem involved and unfortunately it applies to the present officers of the Company also and there is no possibility of disposing of any of the Preference Stock in that direction." Not being satisfied with Buckley's reply, Rowley under date of October 20, 1939, wrote Buckley as follows: "On Mrs. Davis' behalf I would like to obtain a copy of the most recent balance sheet and income account of the company. It may become necessary on her behalf to examine the corporate records of the company to the extent that the law makes such records available to stockholders." Rowley desired this information because he did not think the company would want to furnish it and it would cause them to reconsider whether they would buy the stock, and because if he offered the stock on the open market he wanted the information218 as a basis of statements to make to prospective purchasers. Soon after receipt of this letter Buckley called Rowley by long distance telephone and suggested a conference in Philadelphia with the advantage of a personal discussion. A conference was held on November 3, 1939, and Buckley furnished Rowley with sufficient figures to satisfy him as to the condition and prospects of the company. Rowley decided that he would not make further efforts to dispose of the stock until after the first of the year and would not take the question up again with Buckley until possibly sometime in the spring. Rowley did not at that time hear of any plan regarding the conversion or substitution of any common stock for old common stock or new common stock for $5 preference stock or receive any information as to what the company intended to do. Buckley, on behalf of the corporation, himself, or the directors had no intention in November, 1939, of purchasing any of this stock. He did want to have another opportunity to purchase the stock before it was offered for sale to an outsider because the Philco Corporation was an employees' organization and practically all of the stock up to that time had been219 held by the employees or former employees. Buckley directly or impliedly requested Rowley to communicate with him before offering the stock at private sale. After Rowley's interview with Buckley the officers of the corporation discussed the matter of purchasing the Davis stock, and as the amount of money in the treasury of the corporation after the 1939 financial statements were available, reflected an improved cash position, and prospects for 1940 were good, it was decided that it was better to purchase the Davis stock than have it "kicked around the market" to the company's detriment. It was also thought that if the company bought the stock, whatever earnings the company had would remain with it. Just prior to February 19, 1940, the corporation had roughly $1,000,000 cash and it was concluded that if they could buy preference stock with that amount, they would do so in order to keep the earnings within the company and prevent indiscriminate distribution of financial information. It was thought that it would be unfair to all the stockholders to buy only the Davis stock and that the $1,000,000 in cash could be advantageously used and would settle and dispose of the problem presented220 by Rowley. On February 19, 1940, the corporation sent the following letter-announcement to the holders holders of its $5 preference stock: ANNOUNCEMENT "The corporation, through its officers, wishes to announce to the holders of its Prior Preference shares that it will purchase FOR ITS TREASURY AND NOT FOR RETIREMENT at par ($100.00 per share) approximately $1,000,000.00 total par value of all the Prior Preference shares of Philco Corporation (formerly Philadelphia Storage Battery Company) offered it by shareholders. For your information there is presently outstanding $3,884,500.00 par value of the Prior Preference Stock. "Should the offers to sell these shares to the corporation exceed approximately $1,000,000.00, the corporation reserves the right to accept the offers in the ratio they bear to the amount it is desired to purchase. "The corporation reserves the right to purchase (a) less than $1,000,000.00 total par value, if less than such amount is offered, or (b) more than $1,000,000.00 total par value, if a greater amount is offered and if, within the discretion of its officers and/or Board of Directors, it is found mete [mate] and proper and to the best interests221 of the corporation so to do. "This offer to purchase is to take effect immediately, and to expire on March 10, 1940. All purchases will be made as of March 10th after the payment of the regular quarterly dividend which has been declared payable March 8th." In acting upon this offer, Rowley obtained the information that Helen Davis owned 3,616 shares instead of 3,000. The full amount was regarded as tendered. Rowley believed the stock was purchased by the corporation for its treasury, not for retirement, otherwise he would not have sold it since as a lawyer he knew that the tax situation would be different if the stock was to be redeemed or retired. On or about June 2, 1932, Ethel I. Buckley's husband transferred to her by gift 500 shares of $5 preference stock of the Philadelphia Storage Battery Company, a Pennsylvania corporation. She continued to hold this stock as her individual property until sold to the corporation on March 15, 1940, pursuant to the offer to buy made by the announcement of February 19, 1940. On June 2, 1932, Lloyd A. Good received 900 shares of $5 preference stock as a stock dividend on an equal number of shares of common stock. On March 12, 1940, he222 sold 600 of his 900 shares of $5 preference stock to the corporation for $60,000 pursuant to the offer to buy made by the announcement of February 19, 1940. On May 1, 1940, after the expiration date of the offer of February 19, 1940, he sold the remaining 300 shares for $30,000, pursuant to the offer to buy made by the announcement of February 19, 1940. More than two years prior to March 13, 1940, Mary P. McDaniel acquired 80 shares of the $5 preference stock. On March 13, 1940, she sold her 80 shares of $5 preference stock to the corporation for $8,000 pursuant to the offer to buy made by the announcement of February 19, 1940. On or about June 2, 1932, Ernest B. Loveman received 96 shares of the $5 preference stock as a stock dividend, which he continued to hold as his individual property until sold to the corporation on March 29, 1940, pursuant to the offer to buy made in the announcement of February 19, 1940. More than two years prior to March 14, 1940, John S. Thomas, Jr., acquired 500 shares of the $5 preference stock. On March 14, 1940, he sold his 500 shares to the corporation for the sum of $50,000 pursuant to the offer to buy made by the announcement of February 19, 1940. 223 More than two years prior to March 12, 1940, Ethel S. Carpenter acquired 72 shares of the $5 preference stock. She continued to hold this stock until sold to the corporation on March 12, 1940, for the sum of $7,200 pursuant to the offer to buy made by the announcement dated February 19, 1940. On June 2, 1932, Jane McLaughlin Timmons received 400 shares of $5 preference stock of the corporation as a stock dividend. On March 13, 1940, she sold her 400 shares to the corporation for the sum of $40,000 pursuant to the offer to buy made by the announcement of February 19, 1940. Documentary transfer stamps in the appropriate amount were placed upon the stubs of all the certificates representing the shares acquired by the corporation from the foregoing petitioners. On March 11, 1940, the treasurer of the corporation reported to the board of directors that on that day 10,460 shares of $5 preference stock had been offered to the corporation and the treasurer was authorized to purchase all of these shares at $100 per share for immediate delivery. On March 29, 1940, a certificate for 10,460 shares of $5 preference stock of the corporation was issued to the corporation to be held as Treasury224 Stock. It was so carried upon the books of the corporation. This certificate included the shares purchased by the corporation from petitioners in docket numbers 2300, 2301, 2307 (to the extent of 600 shares), 2308, 2314, 2325, 2327, 2938. As of December 31, 1939, of the 40,000 authorized shares of $5 preference stock, 541 shares thereof were unissued, and in addition as of that date the corporation previously had purchased 614 shares from former stockholders, which were held in its treasury. After the acquisition of the 10,460 shares of $5 preference stock there were 28,385 shares of such stock outstanding, and 11,074 shares held in the treasury. In December, 1937, Clare E. Good acquired by gift 50 shares of the $5 preference stock. In December, 1928, she likewise acquired an additional 50 shares. She continued to hold this stock as her individual property until May 1, 1940, when she sold it to the corporation pursuant to the offer to buy made in the announcement of February 19, 1940. On March 21, 1938, Jean S. Heinritz bought 100 shares of $5 preference stock for $5,000. On July 11, 1940, she sold her 100 shares to the corporation for $10,000 pursuant to the offer to buy made225 by the announcement of February 19, 1940. On December 31, 1937, The Pennsylvania Company for Insurance on Lives nad Granting Annuities, as trustee for the Lloyd A. Good, Jr., Trust, received 100 shares of $5 preference stock. On May 1, 1940, it sold the 100 shares to the corporation for the sum of $10,000 pursuant to the offer to buy made by the announcement of February 19, 1940. It was felt by the officers of the corporation that a pooling agreement and restriction as to sales relating to the common stock created a difficult situation for the individual holders of this stock. The problem was recognized as an individual problem rather than a corporate one. There was no market for the common stock which was considered to have a book or actual value of between $375 and $500 per share. It was felt that if any of the owners of the stock should die, an estate problem might arise. A representative of the Treasury Department had brought up the possibility in connection with a similar situation in an estate tax case of a former employee. The corporation had the option to buy back this common stock at $110 a share, but it was not required to buy it back. In the latter part of 1938, after226 a decision by the Supreme Court of Delaware, in favor of the corporation in litigation with the Radio Corporation of America, it appeared that a revised licensing agreement would follow with R.C.A. and the existence of two corporations - a manufacturing company (Philadelphia Storage Battery Company) and a sales company (Philco Radio and Television Corporation) - would be unnecessary. At that time the directors began the discussion of creating a market for the common stock to eliminate the undesirable situation created under the terms of sale and the price limitations of the pooling agreement. The matter was further discussed by several of the directors while en route to Florida in January of 1940. This discussion led to the writing of a letter of introduction for its then treasurer, John Ballantyne, to a representative of Smith, Barney & Company named Sayers. On or about January 24, 1940, Ballantyne conferred with Sayers for 20 or 30 minutes on the problem. Some 10 days or two weeks later Smith, Barney & Company's analyst, named Moore, went to the corporation for the purpose of making a survey. He remained there some three weeks but did not discuss with the officers of the corporation227 the nature of his recommendations or conclusions contained in his report, a copy of which was not furnished to the corporation or its officers. Sometime later a firm of engineers doing business under the name of George A. Armstrong Company was employed by interested bankers to make an independent survey, and a representative of that company went to the corporation for this additional survey which took the remainder of March and part of April to complete. His findings or conclusions were not communicated to the corporation or any of its officers. Sometime late in March, 1940, the corporation employed C. Russell Feldman to represent it in its negotiations with Smith, Barney & Company. After negotiations in April, 1940, between Feldman and representatives of Smith, Barney & Company, a report was submitted to the corporation for reclassifying its common stock according to a number of different plans, one or more of which provided for the retaining of approximately $3,000,000 worth of preference stock. Just prior to April 12, 1940, the directors of the corporation decided that the particular plan submitted by Smith, Barney & Company which contemplated the "repurchase" of the remaining228 preference stock was the most feasible, and on April 12, 1940, Ballantyne as treasurer so reported to its directors. On April 12, 1940, the board of directors duly passed the following resolution: "Mr. Ballantyne stated that in the opinion of the bankers, Smith, Barney & Co., it was in the best interests of the corporation that the corporation should join with the stockholders in marketing sufficient shares of the new $3.00 par value common stock to allow the corporation to repurchase the outstanding Five Dollar Preference Stock of this corporation. Therefore, it was moved that the Treasurer be authorized to sell sufficient common stock, having a par value of $3.00 per share, at the established market price in order to repurchase the outstanding preference stock. Upon motion duly seconded, this resolution was approved." On April 12, 1940, the board of directors of the corporation authorized a conversion of 10,000 shares of $5 preference stock to common stock pursuant to section 801 of the Pennsylvania Corporation Law, subject to the approval of the stockholders, which was duly given on April 26, 1940. On April 29, 1940, these 10,000 shares of $5 preference stock were converted229 into 333,333 1/3 shares of $3 par value common stock of the corporation. Under a Plan of Recapitalization and by appropriate action of the board of directors on May 14, 1940, and pursuant to authorization of the stockholders at a meeting of April 26, 1940, the $100 par value common stock of Philco was converted into new $3 par value common stock and was exchanged on the basis of 33 1/3 shares of new common stock for each share of the old common stock. As a result, the then authorized common stock of $100 par value, consisting of 40,000 shares, was increased to 1,333,333 1/3 shares of new $3 par value common stock. Of this amount there were 7,800 shares unissued, 1,221,100 shares outstanding, and 104,433 1/3 shares held in the treasury and carried on the books of the corporation as treasury stock. The 333,333 1/3 shares of new $3 par value common stock resulting from the conversion of 10,000 shares of $5 preference stock (out of the 11,074 shares which had been held in the treasury as treasury stock) continued to be held in the treasury as treasury stock. 5,000 shares of authorized first preferred stock then held in the treasury as treasury stock were converted into 166,666 2/3 shares230 of new $3 par value common stock and held in the treasury and carried on the books of the corporation as treasury stock. 5,000 shares of second preferred stock then held in the treasury and carried on the books of the corporation as treasury stock were converted into 166,666 2/3 shares of new $3 par value common stock and held in the treasury and carried on the books of the corporation as treasury stock. As of May 14, 1940, after recapitalization, the authorized capital stock consisted of 30,000 shares of $5 preference stock and 2,000,000 shares of $3 par value common stock. There were then unissued 541 shares of $5 preference stock and 7,800 shares of the new common stock. There were outstanding 28,385 shares of $5 preference stock and 1,221,100 shares of the new common stock and there remained in the treasury 1,074 shares of $5 preference stock and 771,100 shares of the new common stock. A registration statement was filed by Philco Corporation with the Securities and Exchange Commission under date of May 23, 1940, and was subsequently amended on the following dates: June 4, 1940, June 18, 1940, June 27, 1940, and July 8, 1940. The registration statement as amended provided for231 the sale of 325,000 shares of $3 par common stock, of which 175,000 shares were to be sold by certain Philco stockholders who offered their old common stock to the underwriters at a stated price. The balance of 150,000 shares came from the $3 common treasury stock held by the Philco Corporation, for which the corporation was to receive $1,987,500. The registration statement was approved on July 10, 1940, as of July 7, 1940. On July 9, 1940, an agreement was formally entered into by Philco Corporation and selling stockholders with Smith, Barney & Co. of Philadelphia, acting on behalf of that company and other underwriters, to market 150,000 shares of common stock, par value $3 per share, the proceeds to be used in the redemption, retirement, and cancellation of the remaining $5 preference stock. The offer to the public of these shares was to be at $15 per share, from which were to be deducted certain expenses and discounts to brokers for other services. The Philco Corporation then prepared and had approved by the Securities and Exchange Commission a prospectus dated as of July 11, 1940, in which it was stated that after the redemption and cancellation of all $5 preference stock232 the only authorized capital stock of the company would consist of 2,000,000 shares of common stock $3 par value of which 1,371,100 shares would be outstanding, exclusive of shares held in the treasury of the company after giving effect to the sale of common stock to which the prospectus related. On October 24, 1940, the Philco Corporation made application to the Securities and Exchange Commission to list its stock on the New York Stock Exchange and the Philadelphia Stock Exchange. Upon approval the common stock was listed and sold on these Exchanges. On December 28, 1940, Philco Corporation exchanged 16,667 shares of its new common stock held in its treasury, share for share, for 16,667 shares of Simplex Radio Company, a subsidiary. On the same date Simplex Radio Company was liquidated and 15,574 of the outstanding new shares were returned to the treasury of Philco Corporation and 50 shares of the new common stock representing the fractional interests were purchased from Simplex Radio Company and held as treasury stock by Philco Corporation. As of December 31, 1940, there were 2,000,000 shares of the new common stock authorized, 7,800 shares of the new common stock unissued, 233 1,372,143 shares of the new common stock outstanding, and 620,057 shares of the new common stock were held in the treasury. As of December 31, 1940, all other shares authorized and outstanding as of December 31, 1939, had been converted into new common stock in accordance with the recapitalization of May 14, 1940, or retired in accordance with a resolution of the board of directors dated July 15, 1940. After the above transactions the stockholders who controlled the old corporation were not in control of the affairs of the recapitalized corporation. Recapitalization effected on May 14, 1940, as authorized by a directors' meeting on April 12, 1940, and a stockholders meeting on April 26, 1940, as well as the subsequent action on the part of the corporation with regard to securing authorization of reclassification and registration of its stock was consummated pursuant to section 801 et seq. of the Pennsylvania Business Corporation Law. The plan first discussed between Feldman and the representative of Smith, Barney & Company contemplated the sale of the new $3 par value common stock when created at $20 or $21 per share. However, due to the depressed condition of the stock market234 resulting from the European war situation, negotiations were not only interrupted but were completely discontinued by the underwriters. The officers of the corporation were doubtful whether sufficient stock could be secured to supply the 325,000 shares of new common stock required for registration. Petitioners all reported gain on the transactions as long-term capital gains and respondent has determined that the gains should be treated as short-term capital gains under Internal Revenue Code, section 115 (c) and (i). There is no dispute as to the basis to be used by the respective petitioners in computing their gains. The acquisition of the $5 preference shares (prior to July 9, 1940) was with the corporate intent to treat them as treasury shares and not for redemption or cancellation. The acquisition of the $5 preference shares after July 9, 1940, was with the corporate intent to redeem and cancel them. Opinion In discussing the sole issue as to all petitioners and deciding the narrow question whether in each case their stock was disposed of by sale to the corporation resulting in long-term capital gain, or was the subject of a partial liquidation, 235 1 the various situations presented must be considered in three different groups. As to the first series of transactions, all of which were completed within the time limit set by the company's offer to purchase "for its treasury and not for retirement," there seems to be little justification for any assumption that there was nevertheless a secret purpose to cancel and redeem. As to these petitioners we have consequently found as a fact that the disposition of the stock was exactly as it purported to be, and that as to these petitioners the transactions were sales and not dividends in partial236 liquidation. A comparatively small number of shares - 500 to be exact - were transferred to the company on May 1, 1940, 2 subsequent to the nominal expiration date of the prior offer. In the meantime, also, the company had authorized a recapitalization calling for the "repurchase" of all of the outstanding preference stock and the conversion into common of a part of it. The conclusion that the company still intended to hold this specific block in its treasury and not to retire it as of the date of acquisition would be seriously debatable were it not for the stipulated fact as to each of these petitioners that "petitioner sold" the shares in question to the corporation "pursuant to the offer to buy made by" the original offer. Since that offer was in terms stated to be for the company's treasury and not for retirement, and since there appears no unequivocal evidence of a contrary intention up to the date of transfer, the finding appears to be warranted that as to these petitioners also the transactions between them and the company were sales and not distributions in partial liquidation. Harold F. Hadley, 1 T.C. 496">1 T.C. 496. 237 With respect, however, to the 100 shares transferred by petitioner Jean S. Heinritz, there is no escape from the conclusion that the proceeds received for the stock were "in complete cancellation or redemption" 3 as called for by Internal Revenue Code, section 115(i). It is stipulated that the date of this transfer was July 11, 1940. Two days earlier, on July 9th, "an agreement was formally entered into between Philco Corporation and selling stockholders * * * to market 150,000 shares of common stock, par value $3.00 per share, the proceeds to be used in the redemption, retirement, and cancellation of the remaining $5.00 preference stock." On that date the shares in question belonging to this petitioner were a part of that remaining stock. It does not seem to us possible to reach any other conclusion but that the acquisition two days later was in pursuance of the intention manifested by the July 9 contract to redeem, retire, and cancel the preference stock. 238 The case of Alpers v. Commissioner, 126 Fed. (2d) 58, is heavily relied on by the petitioners. There the Circuit Court of Appeals, Second Circuit, said: * * the Board and the courts have made a distinction between acquisition by a corporation of its own stock for the purpose of retiring it that is, for "complete cancellation or redemption," and acquisition for the purpose of holding it as "treasury stock" until reissued. Acquisitions of the first type are within section 115 (c). * * * * * * the character of the transaction must be judged by what occurred when the petitioner surrendered his certificate in exchange for payment. * * * By July 11 it no longer remains possible to doubt that the corporate purpose was the complete cancellation and redemption of all the preference shares outstanding on July 9. The shares transferred by petitioner Heinritz being in that class, it follows that the payment received in exchange for them constitutes a distribution in partial liquidation and was taxable as such. If it is necessary in order to reach this result to disregard the terms of the contract between that petitioner and the corporation, the tax consequence of the undisputed239 record as to corporate intent cannot for that reason be altered. Amelia H. Cohen Trust v. Commissioner (C.C.A., 3rd Cir.) 121 Fed. (2d) 689. Whether a subsequent failure to cancel and retire the stock would alter this conclusion and whether or not the substitution of a different class of stock for the shares surrendered constitutes such cancellation or redemption are questions which need not be considered on this record. There is no evidence whatever of a failure to complete the process of retirement of the shares transferred by this petitioner. Some reference is made to the conversion of certain of the preference shares into common, but that is confined to the so-called recapitalization with respect to which it is stipulated: "As of May 14, 1940, after recapitalization, the authorized capital stock consisted of 30,000 shares of $5.00 preference stock * . There was outstanding 28,385 shares of $5.00 preference stock * ," among which, of course, was that held by petitioner Heinritz. This appears to be the interpretation placed upon the facts in petitioners' brief which recites that: "The recapitalization was effected on May 14, 1940, but this did not include240 the conversion of the then outstanding shares of $5.00 preference stock * * ." And when, for example, the brief asserts that "The $5.00 Preference Stock sold by the Petitioners to the Philco Corporation continued to be held as Treasury Stock, and after it was converted into new $3.00 par value Common Stock on May 14, 1940, it was likewise held as Treasury Stock * ," it seems evident that it could not have reference to the shares which on that date still remained in the hands of petitioner Heinritz. The final paragraph of the stipulation recites that: "As of December 31, 1940, all other shares authorized and outstanding as of December 31, 1939, had been converted into new common stock in accordance with the recapitalization of May 14, 1940, or retired in accordance with the resolution of the Board of Directors dated July 15, 1940." Since there is no evidence that this stock was converted in accordance with the recapitalization of May 14, and in fact it seems evident that no such conversion could have taken place, the necessary conclusion is that it actually was retired. As to the proceeding in which Jean S. Heinritz is petitioner, the respondent must accordingly prevail. In241 Docket No. 2326 decision will be entered for the respondent. In Docket Nos. 2308, 2314, 2327, and 2938 decisions will be entered for the petitioners. In Docket Nos. 2300, 2301, 2306, 2307, 2325, and 2334 decisions will be entered under Rule 50. Footnotes1. Internal Revenue Code. "SEC. 115. DISTRIBUTIONS BY CORPORATIONS. * * * * "(c) Distributions in Liquidation. - Amounts distributed in complete liquidation of a corporation shall be treated as in full payment in exchange for the stock, and amounts distributed in partial liquidation of a corporation shall be treated as in part or full payment in exchange for the stock. * * Despite the provisions of section 117, the gain so recognized shall be considered as a short-term capital gain, except in the case of amounts distributed in complete liquidation. * * *"↩2. Typical of numerous inconsistencies and omissions in the stipulated facts, the stipulation in the case of petitioner Clare E. Good shows the date as May 15th, but the master stipulation, paragraph 48, carries it as May 1st.↩3. "(i) Definition of Partial Liquidation. - As used in this section the term '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."↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622582/	REESE and MARY E. HOLLON, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentHollon v. CommissionerDocket No. 5863-78.United States Tax CourtT.C. Memo 1980-47; 1980 Tax Ct. Memo LEXIS 540; 39 T.C.M. (CCH) 1080; T.C.M. (RIA) 80047; February 26, 1980, Filed Reese Hollon, pro se. Barry Bledsoe, for the respondent. FAYMEMORANDUM FINDINGS OF FACT AND OPINION FAY, Judge: Respondent determined a deficiency in petitioners' Federal income tax for the year 1975 in the amount of $206.45. The only issues for decision are: (1) Whether petitioners are entitled to a deduction of $1,044.79 in 1975 for a contribution to an individual retirement account (IRA) of Reese Hollon (hereinafter referred to as petitioner), under section 219, 1 and (2) whether petitioners are liable for the excise tax of six percent that is imposed by section 4973 on "excess contributions" to an IRA. FINDINGS OF FACT Most of the facts have been stipulated and are found accordingly. Petitioners, Reese and Mary E. Hollon, husband and wife, resided542 in Prattville, Ala. at the time of filing their petition herein. Petitioners timely filed a Federal joint income tax return for the year 1975. In 1974, petitioner was elected to the Autauga County Commission (Commission). 2 The Commission administered a pension plan (the plan) for all of its employees that was a qualified pension plan under section 401(a) during 1975. 3 The plan was a noncontributory defined benefit plan under which an employee's rights were forfeitable until he had completed 15 years of continuous service. Petitioner was a participant in the plan during 1975. The Commission paid $59.53 into the plan on behalf of the petitioner in 1975. Petitioner established an Individual Retirement Account (IRA) at the First National Bank of Autauga County in 1975. Petitioner contributed543 $1,500 to this IRA in 1975. At the time petitioner established his IRA, he was unaware that he was covered by the Commission's qualified plan. When petitioner realized that participation in the Commission's plan would interfere with the income tax benefits of his IRA, he withdrew from the Commission's plan on July 18, 1977. On petitioners' 1975 Federal income tax return, they claimed a deduction of $1,044.79 for the contribution to petitioner's IRA. This deduction was equal to 15 percent of te compensation includible in petitioner's 1975 gross income. In the statutory notice, respondent disallowed this deduction in its entirety because it was determined that petitioner was an active participant in a qualified pension plan during 1975. Respondent also asserted the six percent excise tax pursuant to section 4973 for an excess contribution to an IRA. OPINION The first issue we must decide is whether petitioner is entitled to a deduction under section 219 in 1975 for a contribution he made to an IRA in that year. Section 219(a) allows an individual a deduction from gross income for cash contributions to an IRA. The amount of such deduction is limited to the lesser of $1,500544 or 15 percent of the individual's compensation includible in his gross income for the taxable year. Sec. 219(b)(1). Section 219(b)(2)(A) disallows any deduction under section 219(a) for the taxable year if the individual claiming the deduction was an "active participant" in a qualified pension under section 401(a) for any part of the year. While section 219 does not define the term "active participant," the report of the Ways and Means Committee states: An individual is to be considered an active participant in a plan if he is accruing benefits under the plan even if he only has forfeitable rights to those benefits. Otherwise, if an individual were able to e.g., accrue benefits under a qualified plan and also make contributions to an individual retirement account, when he later becomes vested in the accrued benefits he would receive tax-supported retirement benefits for the same year both from the qualified plan and the retirement savings deduction. * * [H. Rept. No. 93-807 (1974), 3 C.B. 236">1974-3 C.B. 236, 364 (Supp.)]. Thus, if petitioner was an "active participant" in the Commission's qualified pension plan during 1975, he is not entitled to deduct the contribution545 he made to his IRA in that year. Petitioner argues that in 1975 his rights were forfeitable under the Commission's plan and when he withdraw from the plan in 1977 he gave up the right to receive any benefits from the Commission's plan. Petitioner concludes that he never actually participated in the Commission's plan and, therefore, he should be entitled to deduct his IRA contribution in 1975. In Orzechowski v. Commissioner, 69 T.C. 750 (1978), affd. 592 F.2d 677">592 F.2d 677 (2d Cir. 1979), we held that the taxpayer was an "active participant" in a qualified pension plan even though the taxpayer's rights in the plan were forfeitable and, consequently, the taxpayer was not entitled to a deduction under section 219 for a contribution to an IRA. We are completely sympathetic with petitioner's position that on the facts of this case the law produces a harsh result, however, our decision in Orzechowski v. Commissioner, supra, is controlling here. Since petitioner was accruing benefits under the Commission's plan in 1975, even though these benefits were forfeitable, it is clear that during 1975 petitioner was an "active participant" in a546 qualified pension plan within the meaning of section 219(b)(2)(A). We are therefore constrained to hold that petitioner is not entitled to a deduction in 1975 for the contribution he made to his IRA in that year. The second issue we must decide is whether petitioners are liable for the excise tax of six percent for an "excess contribution" to an IRA under section 4973. Section 4973(a) imposes an excise tax of six percent on an "excess contribution" to an IRA. Section 4973(b) provides that the amount contributed to an IRA in excess of the amount allowable as a deduction under section 219 constitutes an "excess contribution". Since we have held that petitioner was entitled to no deduction in 1975 under section 219, the entire contribution petitioner made to his IRA in 1975 constitutes an "excess contribution" within the meaning of section 4973(b). See Orzechowski v. Commissioner, supra, at 756. We must therefore hold that petitioners are liable for the six percent excise tax imposed by section 4973(a). To refect the foregoing, Decision will be entered for respondent. Footnotes1. All section references are to the Internal Revenue Code of 1954, as amended.↩2. In addition to serving on the Commission, during 1975 petitioner operated his own sheet metal business under the name "Hollon Metal Works." ↩3. Although the Stipulation of Facts indicates that the pension plan was administered by the Autauga County Board of Revenue and Control, this Board is now known as the Autauga County Commission and will be referred to as such in this opinion.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622583/	Horace Lynn Wiggins and Jimmie Sue Wiggins, Petitioners v. Commissioner of Internal Revenue, RespondentWiggins v. Comm'rDocket No. 14077-88United States Tax Court92 T.C. 869; 1989 U.S. Tax Ct. LEXIS 58; 92 T.C. No. 52; April 19, 1989; As corrected April 25, 1989 April 19, 1989, Filed 58 Decision will be entered under Rule 155. Ps included the tax upon recapture of investment credits in determining the amount of their regular tax for purposes of the alternative minimum tax computation. The Deficit Reduction Act of 1984, enacted July 18, 1984, amended sec. 55(f)(2) of the Internal Revenue Code to clarify that the tax upon recapture of investment credits is excluded from regular tax in calculating taxpayers' alternative minimum tax liability. The Deficit Reduction Act of 1984 provided that this amendment is retroactive to tax years beginning after Dec. 31, 1982. Held, the retroactive application of amended sec. 55(f)(2) is not an unconstitutional taking of property under the due process clause of the Fifth Amendment. Held, further, Ps are liable for additions to tax for negligence since part of the underpayment was due to negligence. Joseph Ineich, for the respondent. Nims, Chief Judge. Wolfe, Special Trial Judge. NIMS; WOLFE869 OPINIONThis case was assigned to Special Trial Judge Norman H. Wolfe pursuant to the provisions of 870 section 7443A(b) and Rule 180 et seq. 1 The Court agrees with and adopts the opinion of the Special59 Trial Judge, which is set forth below.OPINION OF THE SPECIAL TRIAL JUDGEWolfe, Special Trial Judge: Respondent determined a deficiency in petitioners' 1983 Federal income tax in the amount of $ 4,502 and additions to tax under section 6653(a)(1) in the amount of $ 225.10 and under section 6653(a)(2) of 50 percent of the interest due on $ 4,502.After concessions, the two issues presented for decision are (1) whether the 1984 amendment to section 55(f)(2) [now section 55(c)(1)], which retroactively excluded the tax upon investment credit recapture from the computation of the alternative minimum tax for tax years beginning after December 31, 1982, is a taking of property in violation of the Fifth Amendment to the Constitution and (2) whether petitioners are liable for additions to tax due to negligence.All of the facts have60 been stipulated. The stipulation of facts and attached exhibits are incorporated herein by this reference.Petitioners were residents of Mansfield, Louisiana, at the time of filing of their petition herein. Petitioners concede that they had unreported interest and dividend income. Petitioners attached a Form 4255 to their 1983 Federal income tax return upon which they reported recapture of previously allowed investment credits in the aggregate amount of $ 3,986. This amount was reported as tax on petitioners' Form 1040. Petitioners were subject to the alternative minimum tax. In computing their alternative minimum tax liability, petitioners included the tax from the recapture of investment credits in computing the amount of their regular tax. After the due date of petitioners' 1983 return, on July 18, 1984, the Deficit Reduction Act of 1984, 98 Stat. 494, was enacted. 2 Section 711(a)(1) of that Act amended section 55(f)(2) to clarify that the amount of 871 investment credit recapture is not included in taxpayers' regular tax for purposes of computing alternative minimum tax liability. H. Rept. 98-432, Part 2, to accompany H.R. 4170 (Pub. L. 98-369), 98th Cong., 2d61 Sess. 1611 (1984). The statute made this amendment retroactive to tax years beginning after December 31, 1982. Sec. 715, Deficit Reduction Act of 1984, 98 Stat. 966. 3Since petitioners added the tax from the recapture of investment credits to their regular tax in computing the alternative minimum tax, their regular tax was62 overstated by $ 3,986 for purposes of the alternative minimum tax. This computation resulted in a corresponding decrease in petitioners' total tax liability and was contrary to the subsequent amendment to section 55(f)(2).Petitioners concede that respondent correctly computed the amount of alternative minimum tax due from them for the taxable year ended December 31, 1983, under the terms of the law. Petitioners argue that the retroactive application of amended section 55(f)(2) to the recapture of investment credits is a taking in violation of the Fifth Amendment. Petitioners further contend that to require them to comply with laws passed after the due date of their return is so arbitrary as to amount to a confiscation.Federal income tax provisions may be applied retroactively without infringing upon constitutional rights. United States v. Darusmont, 449 U.S. 292">449 U.S. 292, 297 (1981); Cooper v. United States, 280 U.S. 409">280 U.S. 409, 411 (1930); Brushaber v. Union Pacific R. Co., 240 U.S. 1">240 U.S. 1, 20 (1916). A retroactive statute is not of itself unconstitutional unless it violates the due process clause. Stockdale v. Insurance Cos., 87 U.S. (20 Wall.) 323, 331 (1873);63 Fife v. Commissioner, 82 T.C. 1">82 T.C. 1, 12 (1984). In determining whether the retroactive application of an income tax statute is constitutional, the test is whether "the nature of the tax and the circumstances in which it is laid * * is so harsh and oppressive as to transgress the constitutional limitation." Welch v. Henry, 305 U.S. 134">305 U.S. 134, 147 (1938); Fife v. Commissioner, supra at 12. The Supreme 872 Court noted that: "a distinction is made between a bare attempt of the legislature retroactively to create liabilities for transactions which, fully consummated in the past, are deemed to leave no ground for legislative intervention, and the case of a curative statute aptly designed to remedy mistakes and defects in the administration of government where the remedy can be applied without injustice." Graham & Foster v. Goodcell, 282 U.S. 409">282 U.S. 409, 429 (1931); Howell v. Commissioner, 77 T.C. 916">77 T.C. 916, 923 (1981). There is a difference between the retroactive application of a new tax which imposes taxation on an otherwise tax-free transaction64 and a mere change in rate or a technical amendment. Howell v. Commissioner, supra at 921. A corrective statute may be made retroactive beyond a fixed date without violating due process. Graham & Foster v. Goodcell, supra at 429; Howell v. Commissioner, supra at 922. The retroactive application of a taxing statute to a year prior to the year of enactment has been held not to violate due process. In Welch v. Henry, supra, the Supreme Court held that a Wisconsin statute enacted in 1935 and which retroactively taxed previously exempt dividends received in 1933, did not violate the due process clause of the 14th Amendment. More recently, this Court held that retroactive application of amendments made by the Tax Reform Act of 1976 to the 1973 tax year is constitutional. Fife v. Commissioner, supra at 12-14.Section 55(f)(2) was amended by Congress to clarify existing law and was "meant to carry out the intent of Congress in enacting the original legislation." H. Rept. 98-432, part 2, to accompany H.R. 4170 (Pub. L. 98-369), 89th65 Cong., 2d Sess. 1611 (1984). We are not dealing with the imposition of a new tax. Nor is this case an instance where petitioners had "no reason to suppose that any transactions of the sort will be taxed at all." Cohan v. Commissioner, 39 F.2d 540">39 F.2d 540, 545 (2d Cir. 1930); United States v. Darusmont, supra at 298. Recapture of investment credits was subject to an existing tax prior to the amendment of section 55(f)(2). Furthermore, the alternative minimum tax has been in effect since 1969. The amendment to section 55(f)(2) imposed no new tax, but merely clarified the treatment of the tax on investment credit recapture under 873 the alternative minimum tax. While we do not reach the issue, it is not at all certain that petitioners would have been entitled to include the tax from recapture of investment credits in computing their liability under the alternative minimum tax even absent the amendment to section 55(f)(2). The amended statute merely concerns the method of computing the alternative minimum tax and reaches nothing that it did not reach before.Lastly, we do not view the possible lack of actual or constructive66 notice of the change in the law as significant. While many cases have discussed the fact that a taxpayer had actual or constructive notice of a proposed change in the tax laws, a notice requirement never has been imposed with respect to retroactive tax legislation. Fife v. Commissioner, supra at 13. See United States v. Darusmont, supra at 299. Even if we were to assume that such notice were relevant, we note that the Tax Reform Act of 1983 (H.R. 4170), as reported by the Committee on Ways and Means, dated October 21, 1983, included the Technical Corrections Act of 1983 and provided notice of the provisions in issue.Petitioners have failed to demonstrate that the retroactive application of the amendment to section 55(f)(2) is "so harsh and oppressive" ( Welch v. Henry, supra at 147) as to constitute an unconstitutional taking or confiscation.The further question is whether petitioners are liable for additions to tax for negligence pursuant to section 6653(a)(1) and section 6653(a)(2). These sections impose additions to tax if any part of an underpayment of income tax is due to negligence67 or intentional disregard of rules and regulations. Negligence is defined as the "lack of due care or failure to do what a reasonable and ordinarily prudent person would do under the circumstances." Marcello v. Commissioner, 380 F.2d 499">380 F.2d 499, 506 (5th Cir. 1967), affg. 43 T.C. 168">43 T.C. 168 (1964); Neely v. Commissioner, 85 T.C. 934">85 T.C. 934, 947 (1985). Petitioner bears the burden of proof with respect to the negligence addition. Bell v. Commissioner, 85 T.C. 436">85 T.C. 436, 441 (1985). The additions to tax for negligence will not be applied where the deficiency is due to a mistaken interpretation of the law on which there can be an honest difference of opinion. Marcello v. Commissioner, supra at 506; Wesley 874 , 30 T.C. 10">30 T.C. 10, 26 (1958), affd. on another issue 267 F.2d 853">267 F.2d 853 (7th Cir. 1959).After the year in issue, Congress amended section 55(f)(2) to clarify the treatment of investment credit recapture in computing the alternative minimum tax. Petitioners did not have68 the benefit of this clarification when they made their return. It was not unreasonable for petitioners to believe that they could include the tax on investment credit recapture in computing their alternative minimum tax liability.Petitioners have conceded that they had unreported dividend and interest income. Since petitioners have failed to submit any proof on this issue, we find that the part of the underpayment of tax resulting from petitioners' failure to report dividend and interest income was due to negligence. Accordingly, respondent's determination is sustained as to the contested issues including the addition to tax determined under section 6653(a)(1) and that portion of the addition to tax under section 6653(a)(2) resulting from tax attributable to the unreported dividend and interest income.After concessions by both parties,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 year in issue. All Rule references are to the Tax Court Rules of Practice and Procedure.↩2. The Tax Reform Act of 1984 (Division A of the Deficit Reduction Act of 1984), Pub. L. 98-369, 98 Stat. 942 included the Technical Corrections Act to the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), Pub. L. 97-248, 96 Stat. 324.↩3. Sec. 715, of Pub. L. 98-369, 98 Stat. 966 states: "Any amendment made by this subtitle shall take effect as if included in the provisions of the Tax Equity and Fiscal Responsibility Act of 1982 [Pub. L. 97-248] to which such amendment relates." The Tax Equity and Fiscal Responsibility Act of 1982, 96 Stat. 324, 421, provides at sec. 201(e)(1) that "The amendments made by this section shall apply to taxable years beginning after December 31, 1982."↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622584/	O-W-R OIL COMPANY, A CORPORATION, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.O-W-R Oil Co. v. CommissionerDocket No. 78755.United States Board of Tax Appeals35 B.T.A. 452; 1937 BTA LEXIS 877; February 10, 1937, Promulgated 877 Petitioner contracted for drilling oil or gas wells under so-called "turn-key" contracts. After delivery of completed wells and payment therefor under that contract, petitioner purported to segregate, on its books of account, the separate amounts in the total so paid, constituting tangible and intangible drilling expenses. Respondent stipulated that such segregation was reasonable and proper. Held, Regulations 77, article 236, does not apply. Payments for completed wells, under such contract, are payments for capital assets and not deductible expenses. No actual segregation, after the event, is possible. Old Farmers Oil Co.,12 B.T.A. 203">12 B.T.A. 203, followed. W. B. Harrell, Esq., for the petitioner. Eugene Smith, Esq., for the respondent. LEECH452 OPINION. LEECH: This proceeding asks redetermination of a deficiency of $3,942.81, determined by respondent for the calendar year 1932. The error assigned is the refusal of respondent to allow the deduction from gross income of $55,056.10, which petitioner has charged on its books as intangible drilling and development costs. The parties stipulated the facts as follows: 878 [1.] The petitioner is a corporation organized and existing under the laws of the State of Texas, with its principal office and place of business in Dallas, Dallas County, Texas. [2.] The taxes in controversy are income taxes for the year 1932 in the amount of $3,942.81. [3.] In the year 1931, the petitioner entered into contracts with a drilling contractor for the drilling of four oil or gas wells on its oil and gas lease in Gregg County, Texas. These contracts were so-called "turn-key" contracts, that is to say, the contractor agreed to drill, equip and complete for petitioner these wells, and petitioner agreed to pay to the contractor for such completed wells the total sum of $83,119.32. Petitioner filed the original return for 1932, claiming the whole $83,119.32 as loss. Later the petitioner segregated the tangible from the intangible items in said $83,119.32 and set up on its books $28,063.22 of said total as capital investment, and set up $55,056.10 of said total amount as intangible drilling and development costs, and made an amended income tax return for the year 453 1932, setting up $28,063.22 as capital investment and charging $55,056.10 as intangible879 drilling and development costs, and deducted said intangible drilling and development costs from its gross income. [4.] It is agreed that under the contracts $28,063.22 is a reasonable and proper amount to charge for equipment, etc., having a salvage value, and that $55,056.10 is a reasonable and proper amount to charge for the intangible leasehold and development costs having no salvage value. Petitioner contends that, by the stipulation above set out, the respondent has agreed that the segregation of the tangible from the intangible items made by it on its books, of the total amount of $83,119.32, paid under contracts for completed wells, was correct and that the sum of $55,056.10 thus charged to intangible drilling costs was, in fact, the amount paid for such items. Upon this basis it is urged that respondent has admitted petitioner's compliance with article 236 of his Regulations 77. 1880 In , the identical question here was presented with the one exception that the respondent did not there admit that petitioner's allocation of the tangible and intangible drilling costs was "reasonable and proper." However, that decision was not premised upon the absence of such stipulated fact. In that case the petitioner, as here, had paid for the construction and equipment of certain oil wells under a so-called "turn-key" contract similar to the one here involved, that is, a contract providing for a lump sum payment to the contractor for a well completed and equipped. Petitioner on its books made an allocation of a certain part of the lump sum payment as constituting the cost to it of the intangible items. It then charged this amount to expense under a regulation of the respondent identical with that with which we are here concerned. Later petitioner sold the property and computed its profit upon a basis of cost which included the total amount paid under the turn-key contract, without adjustment for the portion thereof claimed and 454 allowed as expense. In sustaining petitioner as to the cost basis used, we held that881 the allowance of the expense deduction was in error for the reason that petitioner had made no expenditures for intangible drilling costs, since under a contract of this character the total expenditure occurred in acquisition of a completed well and constituted a capital outlay in its entirety. It is clear that under this decision, the quoted regulation of the Commissioner has no application here. That decision on this issue has been cited with approval by this Board in ; and . Our attention has been called to no contrary decision, by the courts or this Board. We are aware of the expressions of the courts, in several cases, indicating that allocation of intangible drilling costs under "turnkey" contracts might be possible. ; certiorari denied, ; ; . However, in none of these cases, we think, were such statements necessary to a decision therein. 882 In any event, no sufficient reason is perceived why we should depart from the position of the Board in The stipulation that, after the completed wells were delivered and the contract price therefor paid, the petitioner's allocation of the aggregate payment, between tangible and intangible drilling expenses, was reasonable and proper, does not affect the rule there adopted that " * * payments for completed wells are payments for capital assets." See , affirming . A necessary premise to any deduction of the contested amount as expenses is that such expenses be those of the taxpayer. . No actual segregation of tangible and intangible drilling expenses of the taxpayer, under such a contract, can be made. , and cases therein cited; ;;883 Decision will be entered for the respondent.Footnotes1. ART. 236 Charges to capital and to expense in the case of oil and gas wells. - * * (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 expens e or charged to capital account. Such expenditures have for convenience been termed intangible drilling and development costs. Examples of items to which this option applies are, all amounts paid for labor, fuel, repairs, hauling, and supplies, or any of them which are used (A) in the drilling, shooting, and cleaning of wells; (B) in such clearing of ground, draining, roadmaking, surveying, and geological work as are necessary in preparation for the drilling of wells; and (C) in the construction of such derricks, tanks, pipe lines, and other physical structures as are necessary for the drilling of wells and the preparation of wells for the production of oil or gas. In general, this option applies only to expenditures for those drilling and developing items which in themselves do not have a salvage value. For the purpose of this option labor, fuel, repairs, hauling, supplies, etc., are not considered as having a salvage value, even though used in connection with the installation of physical property which has a salvage value. Drilling and development costs shall not be excepted from the option merely because they are incurred under a contract providing for the drilling of a well to an agreed depth, or depths, at an agreed price per foot or other unit of measurement. * * * ↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622585/	JAMES E. RILEY, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentRiley v. CommissionerDocket No. 32908-83.United States Tax CourtT.C. Memo 1985-231; 1985 Tax Ct. Memo LEXIS 404; 49 T.C.M. (CCH) 1483; T.C.M. (RIA) 85231; May 13, 1985. Shirley M. Justice, for the petitioner. H. Karl Zeswitz, Jr., for the respondent. STERRETTMEMORANDUM FINDINGS OF FACT AND OPINION STERRETT, Judge: Respondent's Motion to Dismiss for Lack of Jurisdiction was assigned to Special Trial Judge Marvin F. Peterson for hearing, consideration and ruling thereon. 1 After a review of the record we agree with and adopt his opinion which is405 set forth below. OPINION OF THE SPECIAL TRIAL JUDGE Peterson, Special Trial Judge: This case is before the Court on respondent's Motion to Dismiss for Lack of Jurisdiction filed on January 19, 1984, which is based on the ground that the petition herein was not timely filed pursuant to sections 6213(a) and 7502. 2 Petitioner filed a response to respondent's motion on February 21, 1984. A hearing was held on respondent's motion at Mobile, Alabama on August 7, 1984. Both parties were represented by counsel at the hearing and both submitted briefs in support of their respective positions. The motion was taken under advisement. On June 3, 1982, respondent mailed a notice of deficiency by certified mail to James E. Riley, 960 Broakenbrough Court, Metairie, Louisiana 70005. In the notice, respondent determined deficiencies in Federal income taxes and additions to tax as follows: Additions to TaxI.R.C. 1954YearDeficiencySec. 6651(a)Sec. 6653(a)Sec. 66541971$40,724.56$8,994.57$2,036.23$1,307.19197232,327.386,727.991,616.371,031.29197355,360.7213,840.182,768.041,767.31197441,527.7610,381.942,076.391,325.70197555,474.3713,868.592,773.722,395.421976108,876.7727,219.195,443.844,054.98197759,620.4914,905.122,981.022,121.51406 On November 23, 1983, 532 days after the mailing of the notice of deficiency, petitioner filed a petition with this Court. At the time the petition was filed petitioner resided at 960 Brockenbraugh Court, Metairie, Louisiana 70005. Respondent has moved the Court to dismiss the petition in this case on the ground that the petition was not filed within the 90-day time period prescribed in section 6213(a). Petitioner contends that the notice of deficiency was not mailed to petitioner's last known address pursuant to section 6212 and, for that reason, argues that respondent's motion should be denied. Further, petitioner argues that this Court should retain jurisdiction since the petition was mailed within the 90-day time period prescribed in section 6213(a). Based on the issues framed by the parties we must first determine whether the notice of deficiency was mailed to petitioner's last known address. If we determine that the notice of deficiency was mailed to petitioner's last known address, respondent's motion will be granted since the facts are clear that the petition was not filed within 90 days from the date the notice of deficiency was mailed to petitioner. .407 Petitioner does not dispute this legal conclusion, but argues that this Court does have jurisdiction of this case on the ground that a petition was filed within 90 days after the notice of deficiency was received by petitioner. We disagree with petitioner's conclusion that this Court has jurisdiction. It is well settled that our jurisdiction depends upon the issuance of a notice of deficiency and the filing of a timely petition in this Court. ; , affd. without published opinion . Petitioner argues that the notice of deficiency was not mailed to his last known address. As such, he maintains that respondent may not rely on the "safe harbor" rule of section 6212(a). 3 Further, petitioner argues that since the notice of deficiency was not mailed to his last known address, the 90 day period for filing a petition did not commence until he actually received the notice of deficiency on September 23, 1983. On this premise, petitioner contends that this Court has jurisdiction since he filed his petition408 on November 23, 1983. Petitioner relies on for this proposition.In , we held that the notice was not mailed to petitioner when delivered to the post office since the postal service changed the mailing address on the envelope. Under this unique situation we concluded that the mailing of the notice of deficiency was not completed until petitioner received a copy of the notice of deficiency from the Commission. Also see . However, in the instant case the postal service did not make any changes to the face of the envelope containing the notice of deficiency. The postal service attempted to deliver the notice of deficiency based on the address used by respondent to mail the notice of deficiency. Accordingly, the petition must be dismissed and we must determine whether the dismissal should be based on the ground that the notice of deficiency was invalid or on the ground that a valid notice of deficiency was mailed to petitioner, but petitioner failed409 to file a timely petition in this Court. See . Petitioner admits that under the safe harbor rule there is no requirement that the taxpayer must actually receive a notice of deficiency prior to the expiration of the 90-day time period if the notice of deficiency was mailed to the taxpayer's last known address. ; ; . However, petitioner maintains that the notice of deficiency in the instant case was not mailed to his last known address because the name of the street was misspelled. There is no dispute that petitioner's name, street number, city and state, and postal zip code were correct, but respondent admits that the name of the street should have been spelled "brockenbraugh Court" (emphasis supplied) rather than "Broakenbrough Court" as set forth in the notice of deficiency. In the city of Metairie, Louisiana there is only one street with the name of Brockenbraugh Court. There is, however, a Brockenbraugh Street410 in the same delivery route. Brockenbraugh Court is an east-west street with house numbers from 100 through 1299, while Brockenbraugh Street is a north-south street with house numbers from 1400 through 1999. 4 Two letter carriers, who had delivered mail to the above-named streets during the time period when the notice of deficiency was mailed by respondent, testified that the spelling of the street name used to mail the notice of deficiency would not cause any confusion as to where the piece of mail should be delivered. Further evidence which shows there was no confusion over the misspelled address by the postal service is found in the delivery reminder or receipt (postal Form 3849B). This form is used to return unclaimed mail to the sender and requires that the addressee's address, as used on the envelope, be shown on the form. When the notice of deficiency was returned, the postal service correctly spelled petitioner's street address even though it was incorrectly spelled on the envelope. Further, petitioner had, on at least one occasion, received a letter from the Internal Revenue Service using the same incorrect spelling. 411 It is obvious that substituting an "a" for a "c" and an "o" for an "a" did not significantly change the understanding or recognition of the street name. Here, the incorrect spelling of the street was so slight that we cannot believe it caused the notice to be delivered to an address other than petitioner's. In addition, there is no evidence to even suggest the possibility that the notice of deficiency was delivered to the wrong address because of the misspelled street name. Although it is undisputed that petitioner did not actually receive the notice of deficiency until September 23, 1983, there is no dispute that delivery was attempted by the postal service. The face of the envelope containing the notice of deficiency shows that a delivery was attempted on June 5, 1982. Since the piece of mail was not accepted or refused, Form 3849B was left at the place where actual delivery was attempted pursuant to postal regulations. On June 15, 1982, another delivery reminder was left at the same address. The delivery reminder informed the addressee that a certified letter was being held at the post office. On June 23, 1982, the notice of deficiency was returned to respondent by the post412 office, not because the address was insufficient, but because the addresses did not claim the piece of mail within the time period prescribed by postal regulations. On these facts it is our belief that the reason the notice was not received by petitioner was not because the street address was misspelled, but because no one was present to sign for the certified letter when it was delivered to petitioner's address, and petitioner failed or refused to claim it at the post office. Surely, a de minimis error in the spelling of a street name should not be fatal to a notice of deficiency where such error does not cause any delay or confusion in the delivery of the notice. The statutory purpose requiring that a notice of deficiency be mailed to the taxpayer's last known address is to give a taxpayer notice that the Commissioner has determined a deficiency against him and to give the taxpayer an opportunity to file a petition in this Court. ; . Under the facts in this case the address used by the Commissioner to mail the notice of deficiency clearly met this statutory goal. *413 Under these circumstances, we find that the notice of deficiency was mailed to petitioner's last known address. Accordingly, the notice of deficiency is valid. Since petitioner failed to file a timely petition, respondent's motion will be granted. . An appropriate Order will be issued.Footnotes1. This case was assigned pursuant to Delegation Order No. 8 of this Court, 81 T.C. XXV (1983).↩2. All section references are to the Internal Revenue Code of 1954, as amended, unless otherwise indicated.↩3. See .↩4. It is noted that Metairie postal service's listing of street names according to routes for zip code 70005 spells "brockenbraugh" as "Brockenbro↩ugh."	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622587/	LEON FAULKNER, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentFaulkner v. CommissionerDocket No. 13548-78.United States Tax CourtT.C. Memo 1980-90; 1980 Tax Ct. Memo LEXIS 494; 40 T.C.M. (CCH) 1; T.C.M. (RIA) 80090; March 25, 1980, Filed Leon Faulkner, pro se. Louis Carluzzo, for the respondent. WILBURMEMORANDUM FINDINGS OF FACT AND OPINION WILBUR, Judge: Respondent determined a deficiency in the income tax of petitioner of $16,044.66 for the year 1975. In addition, he has asserted a late filing penalty under section 6651(a)1 of $2,406.70. The issues for our decision are whether petitioner is allowed a deduction for amounts wagered and lost in gambling during the year in issue, and whether the tardy filing of his income tax return was due to reasonable cause or willful neglect. 495 FINDINGS OF FACT Some of the facts have been stipulated. The stipulation of facts and the attached exhibits are incorporated herein by this reference. 2The petitioner is an individual who resided in Washington, D.C., at the time the petition was filed in this case. He filed his income tax returns for the year 1975 with the Internal Revenue Service in Philadelphia, Pennsylvania, on June 25, 1976. The petitioner did not request nor did the respondent grant to him, any extensions with respect to the filing of this return. On his income tax return, the petitioner indicated that he had income from two sources. The first was funds that he received as a result of a disability pension; the second was income identified as "race track winnings and profit." Petitioner computed his race track winnings and profits as follows: Winnings$37,867.60Less Wagers34,150.00Overall Profit3,717.60496 Petitioner reported as winnings only the amounts which were reflected on a United States Treasury Department Form 1099 (hereafter referred to as Form 1099). During 1975, petitioner had additional winnings which were not reflected on a Form 1099. Petitioner did not report these additional winnings as income on his income tax return because he believed that only Form 1099 winnings were taxable. Petitioner's Form 1099 winnings during 1975 totalled $41,511.70. The discrepancy between what petitioner reported as his Form 1099 winnings and the amount actually reflected on various Form 1099s for 1975 was due mainly to an error made in petitioner's computation of his 1099 winnings. In his notice of deficiency, the Commissioner increased petitioner's income to $41,511.70 so as to account for the erroneous computation; he did not increase petitioner's income to reflect additional winnings not reflected on a Form 1099. In addition, the Commissioner disallowed in full the amount petitioner claimed as deductible "wagers," the amount he claimed to have bet during the year. Petitioner did not retain any losing tickets with respect to amounts bet and lost. Petitioner did keep a monthly497 diary for 1975 which set forth the amount bet during the month and the resulting net win or loss. OPINION Petitioner, a disabled retiree, spent a great deal of time in 1975 gambling at various racetracks. On his income tax return for that year, he listed the sum of $3,717.60 as his overall profit from gambling. He arrived at this figure by subtracting the amount he bet during the year, or "wagers," listed as $34,150 from his winnings listed as $37,867.60. The only winnings he reported were those reflected on a Form 1099 filed by various racetracks. Petitioner concedes that he had other winnings, not reflected on a Form 1099, which were not reported as income on his return. The parties have stipulated that this omission was due to petitioner's belief at the time that only Form 1099 winnings were taxable. Upon audit, respondent increased petitioner's gambling income by $3,644.10 to reflect an error made by petitioner in computing his Form 1099 winnings. Respondent did not increase petitioner's income above that which was shown on the various Form 1099s. In addition, respondent disallowed in full the $34,150 petitioner listed as his wagers for the year under section 162(d)498 3 for lack of substantiation. The issues for our determination are the amount of income petitioner received from gambling and whether he is allowed a deduction for gambling losses under section 162(d). In addition, we must decide whether the filing of petitioner's income tax return 2 months and 10 days after the required date was the result of willful neglect or due to reasonable cause. Respondent argues that petitioner has not adequately substantiated the amount he deducted from his winnings, and thus under Schooler v. Commissioner,68 T.C. 867">68 T.C. 867 (1977), he is entitled to no deduction. Petitioner argues that he wagered large amounts of money during the year, that some months he sustained net losses, and that he kept a monthly record of his net winnings and losses, which accurately reflects his income from the racetracks. We agree with respondent that petitioner's income should be increased in the amount499 the Commissioner determined. However, we find the facts of this case distinguishable from Schooler v. Commissioner,supra, and therefore we allow petitioner a deduction for a determined amount of funds wagered and lost during the year. In addition, we uphold the application of the late filing penalty under section 6651(a), since petitioner has not convinced us that the tardiness in filing his income tax return was due to reasonable cause, rather than willful neglect.I. Gambling IncomeIn Schooler v. Commissioner,supra, the taxpayer kept no records whatsoever of his gambling activities and reported no income on his tax return attributable to gambling. The Commissioner, using the amounts shown on Form 1099s, attributed $14,773 as income to the taxpayer from gambling. At trial, the taxpayer argued that because he and his wife lived modestly during the year in issue and had to borrow sums of money, he had sufficiently proved to the Court that his gambling losses exceeded his gains. In upholding the Commissioner's determination, the Court held that the mere act of borrowing money and the absence of a lavish lifestyle did not in itself500 prove that gambling losses exceeded gains. 4 Although in other situations the Court had applied the rule laid down in Cohan v. Commissioner,39 F.2d 540">39 F.2d 540 (2d Cir. 1930), to permit deductions based on estimated losses, the Court reasoned that the Cohan rule was inapplicable in the case before it, since it was not convinced that net losses had in fact been sustained. Because the petitioner could not produce any evidence from which the Court could estimate petitioner's winnings and losses, no deduction for gambling losses was allowed. We find Schooler distinguishable from the case before us now, because petitioner has submitted evidence, a monthly diary, from which losses or winnings can be estimated, and we are convinced that in fact, petitioner did wager large amounts and did sustain losses during the year in issue. Petitioner reported the gambling winnings501 that he thought were taxable, and attached to his income tax return for 1975 a sheet which listed his Form 1099 winnings as well as the amounts wagered each month from his monthly records. Petitioner did not produce his monthly diary at trial but because we were convinced that he had indeed kept a diary and could possibly find it if given the time, we allowed the record to remain open with the consent of the respondent. Petitioner later submitted his records to the Court, and his monthly diary was admitted into evidence without objection. After close examination, we are satisfied that the monthly diary, in which petitioner recorded the amount he wAgered each month and his net winnings or losses therefrom accurately reflects his gambling winnings and losses for the year. The amounts recorded as "wagers" are in complete accord with the amounts listed each month on the sheet attached to his income tax return filed several years previously. Furthermore, the amounts recorded as winnings reflect not only his 1099 winnings, but the additional sums he won from gambling--winnings which respondent did not attribute to him in his notice of deficiency. Because the question is a factual one, 502 Schooler v. Commissioner,supra, we find that from the facts and circumstances before us, petitioner is entitled to a deduction for the amounts wagered and lost in excess of his admitted additional winnings in order to compute his income from gambling. The diary shows that petitioner wagered $34,150 during the year, and had winnings of $55,573. Respondent increased petitioner's income only to $41,511.70 to reflect a computation error in his Form 1099 winnings. Certainly, in view of the fact that there were admitted additional winnings, we find this adjustment appropriate. However, we also find that from the $41,511.70, petitioner is entitled to a deduction of $20,088.70 which reflects the excess of the sums wagered and lost over petitioner's admitted additional winnings which were not reflected on a Form 1099. II. Late Filing PenaltyPetitioner testified that the reason his income tax return was filed 2 and 1/2 months late was due to the illness of his tax preparer. However, petitioner is the person responsible for insuring that his tax returns are filed in a timely manner. Although he testified that he did turn over the relevant papers to his*503 tax preparer, there is nothing to indicate that petitioner took any further steps to assure the return was filed on time, such as making inquiries about the return or attempting to retrieve the papers so that he could take them to another preparer. Under these circumstances, we find that the illness of petitioner's tax preparer does not constitute reasonable cause for the late filing of petitioner's income tax return. See Robinson's Dairy, Inc. v. Commissioner,35 T.C. 601">35 T.C. 601 (1961); Schmidt v. Commissioner,28 T.C. 367">28 T.C. 367 (1957), revd. and remanded on another issue, 272 F.2d 423">272 F.2d 423 (9th Cir. 1959). Decision will be entered under Rule 155. Footnotes1. All section references are to the Internal Revenue Code of 1954, as in effect for the year in issue.↩2. In addition to the exhibits attached to the stipulation of facts, records were submitted by petitioner to the Court subsequent to trial, pursuant to an order by the Court to keep the record open for a period of time. These records were submitted without objection by the respondent and entered into evidence. They are also incorporated herein.↩3. Sec. 162(d) reads as follows: (d) WAGERING LOSSES.--Losses from wagering transactions shall be allowed only to the extent of the gains from such transactions.↩4. Indeed, in Schooler v. Commissioner,68 T.C. 867">68 T.C. 867↩ (1977) the Court found that the evidence revealed a comfortable lifestyle on the part of the petitioner. The sums borrowed were used, among other things, to build a swimming pool in petitioner's backyard next to his horse stables.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622589/	The Pantasote Leather Co., Now Known as The Pantasote Co., Petitioner, v. Commissioner of Internal Revenue, RespondentPantasote Leather Co. v. CommissionerDocket Nos. 12912, 15865United States Tax Court12 T.C. 635; 1949 U.S. Tax Ct. LEXIS 220; April 25, 1949, Promulgated 220 Decisions will be entered under Rule 50. Petitioner, a manufacturer of plastic-coated materials, engaged in research and development of particular processes and products, commencing in 1931, primarily to meet needs of the armed forces, derived a class of income falling within the purview of section 721 (a) (2) (C) of the code. Held, a portion of such income resulted from improvement in business, and the remainder is attributable to other years under section 721 (b), and is allocable to the years during which this research and development program was in operation. 221 Thomas N. Tarleau, Esq., and Sandow Holman, Esq., for the petitioner.Francis X. Gallagher, Esq., for the respondent. Kern, Judge. KERN 636 In these consolidated proceedings respondent determined deficiencies in income and excess profits taxes for the calendar year 1942, as follows:Docket No.TaxDeficiency12912Excess profits tax$ 127,669.6715865Income tax1,336.35In Docket No. 12912 there is also involved petitioner's claim for refund under section 721 of the Internal Revenue Code in the aggregate amount of $ 8,412.09 for the calendar year 1941. See sec. 732 (a), I. R. C.The sole issue presented is whether petitioner derived net abnormal income during the taxable years 1941 and 1942, within the class described in Internal Revenue Code section 721 (a) (2) (C), some of which can be said to be attributable to prior years, so as to entitle petitioner to the relief accorded by that section. The income tax deficiency presents no additional question. The decision on the issue raised will permit the parties to make the necessary computations in that docket.Some of the facts have been stipulated.FINDINGS OF FACT.The stipulated facts are hereby222 found accordingly, and they are incorporated herein by this reference.Petitioner is a New Jersey corporation, having its principal office at Passaic, New Jersey. Its returns for the taxable years involved, prepared on a calendar year accrual basis, were filed with the collector of internal revenue for the fifth collection district of New Jersey. Claims for refund of excess profits taxes for the year 1941, based on section 721 of the code, were filed with the same collector on March 16, 1943, and March 15, 1944.Since its incorporation in 1891 petitioner has been engaged in the business of manufacturing various types of coated fabrics, commonly classified as artificial leathers, which have been used for upholstery fabrics, railroad car curtains, and similar purposes.In 1931 petitioner commenced a program of research and development with two new products, designated by it as Pantex and C. C. Textasote. Later, in 1937, the petitioner started extensive laboratory experiments with a calender-manufacturing process which subsequently 637 was utilized in the production of Pantex and other types of thermo-plastic resin-coated materials. Each of these research programs extended 223 over a period of more than 12 months.Its research with Pantex was undertaken after the Navy Department approached petitioner, seeking a material that could be used for the manufacture of parachute bags. It was also thought that the final product might be useful as a cloth in making garments for aviators, by using the Pantex coating as a coating on poplins and shelter tent duck. Among the characteristics desired were waterproofness, flexibility at low temperatures, and non-self-adhesion. Development of this product was commenced with a 12-ounce duck fabric as a base, to which there were applied two thermo-plastic resin coatings from solution. These coatings were a secret Pantasote gum compound, applied from a conventional coating machine, using a technique described as a "spreader-sheeter" process.Continuation of the laboratory experiments with the coating compound and the manufacturing process used in Pantex was required because of the failure to achieve uniform waterproofing in a fabric which, at the same time, was designed to be flexible and nonadhesive. These essential characteristics of the product could not be easily reconciled, since the greater the saturation of the fabric224 with the waterproofing gum compound, the greater became the loss of flexibility. Problems also arose in the attempted production of colored fabrics, as requested by the Navy Department. These problems were primarily that the color would rub off and that there was considerable "strike-through," which is the saturation of the cloth with the coloring coating so that it shows through on the back of the material. Attempts to remedy some of the problems by combining Pantex with a top coating of petitioner's Textasote, a different substance from its C. C. Textasote, proved unsuccessful.In June 1934 petitioner completed its first commercial production of gray Pantex, the total production amounting to 53 yards. It also succeeded in developing a green Pantex at the same time. In June 1935 a substantial quantity of Pantex was produced, but it was found that there was a lack of uniformity in the final product. Its quality was also affected by the humidity of the weather prevailing at the time it was produced. Petitioner's manufacturing process by the so-called "spreader-sheeter" method was largely responsible for the lack of uniformity in the product.Experimentation continued in an effort225 to meet these difficulties, and, as new ideas and uses were suggested by the Navy Department and the War Department, petitioner sought to produce a fabric to meet those specifications.In 1940 a mildew-proof Pantex was sought by the United States Army to cover instrument cases, and petitioner finally was able to 638 develop a satisfactory Pantex for this use, which led to the production of 118,000 yards of this product in 1941.At all times petitioner was confronted with a serious problem in its process of manufacturing Pantex by "spreader-sheeter" machines. This manufacturing process proved to be extremely hazardous in that the static charges accumulated by these machines produced numerous fires. Experiments were conducted with the "spreader-sheeter" manufacturing process until 1942, when this method was definitely and finally abandoned in favor of the calender-manufacturing process.In 1937 laboratory experiments were commenced with the calender process for applying thermo-plastic resin coatings to fabrics. These experiments were continued until 1942, when the stage of technical development was reached which enabled petitioner to utilize the process in the manufacture of226 Pantex. The application of the calender process to the manufacture of Pantex greatly improved the quality of that product and the capacity for production. As a manufacturing process, the calender method had many points of superiority over the "spreader-sheeter" method. The thermo-plastic resin coating could be applied in any thickness in a single coating operation rather than by the previous two-coat method; the calender produced greater adhesion between the resin and the fabric and thus prevented "peeling"; fire hazards were completely eliminated; absolute uniformity of quality in the finished product was assured; and productive capacity was greatly increased thereby.The development of petitioner's calender-manufacturing process supplied it with the technique and "know-how" for manufacturing a variety of other thermo-plastic resin fabrics, such as vinyl-coated upholstery materials and vinyl film fabrics used for raincoat and shower curtain materials. These new products could not be manufactured during the taxable years in issue because the vinyl resins could be secured only on priority orders for Government work.The resin-coated fabrics and films which could have been manufactured227 by the calender process would have been superior to the rubber and pyroxylin-coated fabrics then in use. The process lent itself to the production of more versatile materials with many new uses. But for the existence of the war during the taxable years, which froze the supply of raw materials, there would have been a large demand for such thermo-plastic resin-coated materials.As with its developmental work with Pantex, petitioner's research and experiments with the product C. C. Textasote commenced in 1931, instituted by requests of the Navy Department for a pyroxylin-coated fabric that would be impervious to water, gasoline, and oil. It was intended as coverings for aircraft, particularly as coverings for engines 639 and cockpits, although it could have other outdoor uses. Petitioner's ordinary Textasote would not meet these requirements.Many years of experimentation were required to achieve satisfactory waterproofness and gasoline resistance. At the same time numerous objectional features inherent in the pyroxylin coating, such as "tackiness" * and inflammability, became evident and a long period of experimentation was necessary to eliminate these factors. Other experiments228 were conducted with various types of fabrics to replace the basic duck material, and with formulation and pigmentation problems.By 1939 the basic development of the C. C. Textasote product was completed. The material met all outdoor covering requirements and the technique for producing it in a variety of different fabrics had been achieved. Following 1939, the only experimentation undertaken on this product was to overcome shortages in essential ingredients and to develop new color combinations and special flame-resistant materials, none of which were basic developments.Not only the Navy, but other branches of the armed forces were interested in C. C. Textasote.In 1937 the Army issued specifications for a Textasote fabric, and petitioner's product was found acceptable. In 1940 a special C. C. Textasote was developed for the Marine Corps; and, having been found acceptable, large quantities were thereafter supplied to the Corps. In 1941 special C. C. Textasote229 products were purchased for both Army and Navy use. In the same year a flameproof product was manufactured that found considerable use in the construction of Flying Fortresses.Both Pantex and C. C. Textasote were sold on a competitive basis with pyroxylin-coated materials, and they are considered as belonging in that field.Four companies in addition to the petitioner have been on the Navy Department's approved list as suppliers of parachute pack fabric, and 10 companies in addition to petitioner have been approved as suppliers of waterproof cotton duck.Substantially all of petitioner's research and development incident to the production of Pantex and C. C. Textasote, up to and including the taxable years involved, were devoted to the creation of products satisfactory for use and application by the armed forces of the United States, although the products developed and the processing evolved as a result of petitioner's research had wider application.In the case of Pantex, petitioner had no other customers than the armed forces; in the case of C. C. Textasote, there were a limited number of sales to commercial users, including sales for awnings at 640 the New York World's 230 Fair in 1939, and earlier sales for coverings in the Chicago Cubs ball park.Statistics compiled by the United States Department of Commerce relative to the shipments and the value of such shipments of "pyroxylin-coated textiles" reveal an increase in both quantity shipped and value thereof for the years 1941 and 1942 over the average for the four-year period, 1936-1939, as follows:Value ofLineal yardsYearshipmentsIndexshippedIndex1936$ 20,889,11257,721,000193722,663,09461,631,000193817,478,04949,625,000193921,033,27961,238,00082,063,534230,215,000Base period average20,515,88357,553,750194021,049,6831.0360,637,0001.05194132,870,6651.6088,058,0001.53194227,935,9121.3665,631,0001.14194324,763,0951.2159,774,3661.04Petitioner's sales of Pantex and C. C. Textasote and gross profit thereon for the years ended December 31, 1937, through 1942 were as follows:193719381939Pantex:Net sales$ 7,587.07$ 5,300.99$ 2,243,85Cost of goods sold4,318.773,136.021,170.72Gross profit3,268.302,164.971,073.13C. C. Textasote:Net sales13,839.0916,907.0813,827.24Cost of goods sold9,339.7911,974.3611,362.15Gross profit4,499.304,932.722,465.09231 194019411942Pantex:Net sales$ 31,313.41$ 92,996.76$ 287,777.19Cost of goods sold17,088.7547,831.68180,385.04Gross profit14,224.6645,165.08107,392.15C. C. Textasote:Net sales99,032.40332,923.29966,219.93Cost of goods sold78,564.27250,393.55743,531.33Gross profit20,468.1382,529.74222,688.60An analysis of sales of petitioner's principal products from 1932 through 1942 reflects the following:193219331934Curtains and Pantasote$ 182,020.73$ 165,880.89$ 284,823.78Russialoid103,290.24112,662.56195,507.18Miscellaneous7,430.036,427.169,336.45Pantex7,718.41205.72Panmack2,826.231,116.233,511.68Syntex4,941.426,376.095,382.45C. C. TextasoteDritexLustraloidAquasoteTextaloidComposite clothNovasoteTotal300,508.65300,181.34498,767.2619351936Curtains and Pantasote$ 283,035.65$ 396,960.10Russialoid238,719.80265,425.01Miscellaneous16,334.6517,647.76Pantex7,778.469,178.40Panmack2,903.306,176.37Syntex7,906.8611,150.33C. C. Textasote13,899.72Dritex505.57LustraloidAquasoteTextaloidComposite clothNovasoteTotal556,678.22720,943.26232 641 193719381939Curtains and Pantasote$ 477,533.05$ 235,037.09$ 318,776.32Russialoid259,353.41186,593.42177,993.27Miscellaneous16,716.7011,607.537,386.10Pantex7,587.075,300.992,243.85Panmack6,781.674,315.705,553.62Syntex7,404.745,178.935,916.77C. C. Textasote13,839.0916,907.0813,827.24Dritex310.84273.88935.87Lustraloid2,114.684,536.54Aquasote2,215.00Textaloid1,348.01Composite clothNovasoteTotal789,526.57467,359.30540,732.59194019411942Curtains and Pantasote$ 307,494.32$ 463,185.53$ 377,361.69Russialoid133,852.11166,876.00116,317.65Miscellaneous6,995.876,925.7330,939.09Pantex31,313.4192,996.76287,777.19Panmack3,632.5013,231.342,885.10Syntex5,420.8214,787.764,237.63C. C. Textasote99,032.40332,923.29966,219.93Dritex2,386.194,031.2028,806.23Lustraloid4,865.794,892.7123.40Aquasote5,506.204,969.621,357.79Textaloid2,499.884,700.523,104.46Composite cloth23,082.6533,758.5927,090.76Novasote124.748,067.491,171.12Total626,206.881,151,346.541,847,292.04Petitioner's comparative233 profit and loss statements for the years ended December 31, 1937, through 1942, are as follows:193719381939Net sales$ 776,776.93$ 459,624.50 $ 530,752.99Cost of goods sold580,545.90355,960.21 387,621.33Gross profit on sales196,231.03103,664.29 143,131.66Selling and administrativeexpenses159,681.27117,311.55 123,294.0036,549.76(13,647.26)19,837.66Other income (net)11,704.565,854.39 7,589.4248,254.32(7,792.87)27,427.08Provision for contingenciesand post war adjustments48,254.32(7,792.87)27,427.08194019411942Net sales$ 615,447.76$ 1,131,821.29 $ 1,815,680.33Cost of goods sold449,392.56792.440.31 1,410,606.42Gross profit on sales166,055.20339,380.98 405,073.91Selling and administrativeexpenses137,237.81180,524.89 223,965.9228,817.39158,856.09 181,107.99Other income (net)8,899.5816,566.81 27,508.6037,716.97175,422.90 208,616.59Provision for contingenciesand post war adjustments70,000.0037,716.97175,422.90138,616.59642 Petitioner's system of accounting prior to the taxable years did not provide for a detailed costing234 of experimental expenses. By a reconstruction of its experimental costs on Pantex and C. C. Textasote based upon the number of yards of experimental material produced in each year, petitioner has shown that the annual amounts of such expenses were as follows:C. C.YearPantexTextasoteTotal1931$ 720.51$ 29.91$ 750.421932153.30104.67257.971933475.23354.67829.90193491.9891.981935229.9589.72319.671936433.62433.62193760.32319.25379.571938233.28419.18652.46193980.7280.721940414.90414.90194127.6627.661942155.13155.13Total4,394.00During 1941 and 1942 petitioner derived abnormal income from the sales of Pantex and C. C. Textasote, and had net abnormal income in the aggregate amounts, all as follows:AbnormalExcess overNet abnormalYearincome125% averageincome1941$ 127,694.82$ 111,102.22$ 52,004.291942330,080.75276,010.90123,404.12Fifty per cent of the net abnormal income for 1941 and 75 per cent of the net abnormal income for 1942 resulted from the improvement in business conditions, as reflected in a substantial increase in the demand235 for petitioner's products due to the war, and from other factors making such percentages of net abnormal income for those years not attributable to prior years.The remainder is attributable to the years 1931 through 1942, and is allocable to those years in the same proportion that the respective annual amount of experimental costs bears to the total of such costs for all of those years. Such remainder amounts so allocated do not include items of net abnormal income which are the result of high prices, low operating costs, or increased physical volume of sales due to increased demand for or decreased competition in the type of product sold by petitioner.OPINION.Section 721 of the Internal Revenue Code1237 sought to provide relief to a taxpayer which received an abnormal amount or 643 type of income in one year by permitting it to allocate such abnormal income over the years to which it was properly attributable, 2 and thereby decrease the amount of excess profits tax to which it otherwise would have been subjected. The present controversy seems to us to be limited by respondent's brief 3238 to the narrow issue of whether or not all or some part of petitioner's net abnormal236 income was properly attributable to years other than the ones in which it was earned and received. 4239 644 Respondent apparently has recognized that petitioner did have abnormal income and net abnormal income as defined in the code in both 1941 and 1942. 5Respondent assails petitioner's claim for relief under section 721 on the ground that such income arose solely out of an increased demand for petitioner's two products under discussion -- Pantex and C. C. Textasote -- by the armed forces and, consequently, no part of it was attributable to other years, under the statute and his regulations.Petitioner does not dispute respondent's premise that240 items of abnormal income are not attributable to other years to the extent that they have resulted from high prices, low operating costs, or increased volume of sales due to increased demand for the products. 6To meet this attack, petitioner has introduced data reflecting the general improvement in business conditions of the industry of which241 it is a part. By indices derived from these data it seeks to show us the portion of its net abnormal income due to the improvement in such business, and contends that the remainder of its net abnormal income is attributable to other years and is allocable over the years during 645 which its research and development program was in operation. The technique is not unlike that followed in the Knight case, supra; Rochester Button Co., 7 T. C. 529; and Ramsey Accessories Mfg. Corporation, 10 T.C. 482">10 T. C. 482.In order to support the reasonableness of these indices, petitioner has further attempted to demonstrate that actually no part of its abnormal income in the years before us can be said to have resulted from any of the conditions recited in the regulations which preclude attribution to other years. The argument advanced is that the demand in a normal peace time market for the products which it could have manufactured under a newly developed process would have been greater than that indicated by its sales of Pantex and C. C. Textasote but for the fact that the raw materials necessary to make these products were not available, 242 due to the advent of the war. Petitioner seems to misconstrue a dictum in Soabar Co., 7 T. C. 89, 97, as supporting its thesis. It is there stated:A case could be imagined in which the business normally to be expected from new patents or processes was still in the development stage in 1940 and 1941, so that a part of the increased profits of those years was not due to an increased demand resulting from war stimulated business, but was merely the realization in those years of growth (increase in profits) that would have occurred under normal conditions if there had been no war. * Petitioner is not seeking to prove what demand would have been a "normal" market for the particular products here under discussion, but rather what the demand might have been for some other types of new products that it might have been able to develop as a result of perfecting a new process if necessary raw materials were available. Much must be speculated in resolving issues under section 721, but not that much, we believe. Even if there were some merit in this contention of petitioner by way of supporting the reasonableness and usefulness of the index figures it has243 offered, the testimony upon which the argument is predicated is at best vague and unsatisfactory, and hardly supports petitioner's conclusion that in a peace time economy its income would have been as large as that realized through its sales of products for war end uses. 7244 646 That the actual income petitioner derived in the two years before us was, to a great extent, the result of increased demand and improvement in business accentuated by the war economy becomes at once apparent from the figures representing petitioner's sales of the products herein considered. For example, sales of C. C. Textasote more than tripled from 1940 to 1941, and approached that increase from 1941 to 1942. And it should further be observed that the basic development of this product was completed by 1939. 8 The increases in the sales of Pantex were even greater, but as to that product basic development continued into the years before us. It was increases in income caused by the impact of the war upon the nation's economy that the excess profits tax sought to reach, and abnormality in income so caused "would not suffice to justify special relief." Lindstedt-Hoffman Co., 11 T. C. 584; Soabar Co., supra.245 While we can not agree with petitioner that as large a part of its abnormal income is attributable to other years, as it seeks to have us find, we can not agree with respondent that all of it resulted "solely 9 from an increase in business due to the enlarged demands of the Armed Forces." To the extent that respondent's argument is directed to precluding relief to petitioner merely because the bulk of its production during the years in question was sold for use by the armed forces, we consider that it goes too far. The statute does not permit of such construction and, in fact, the legislative intent appears to have been otherwise. See 86 Cong. Rec. 11250. Moreover, our decision in Eitel-McCullough, Inc., 9 T. C. 1132, upon which respondent strongly relies, recognized that despite the fact that "the bulk of petitioner's production * * was for the Army and Navy * * . Undoubtedly, some of petitioner's income * * was the product of research and development * * ." There, relief was denied because of a complete absence of proof, among other reasons. We said, in part (p. 1147): * * There is no proof, however, from which we can formulate an approximation246 or even a guess of the amount properly attributable to the vital factors. Thus it is, there is no way on the record made by which to determine in either the 647 base period or the tax years the amount of income attributable to research and development and the amount attributable to manufacturing under improved business conditions, with the consequent inability to determine the amount of petitioner's abnormal income, if any.Although the "record leaves something to be desired," Rochester Button Co., supra, p. 552, we do not find that complete failure to meet the onerous burden placed upon taxpayers under section 721 that prevailed in the Eitel-McCullough case, supra. See Ramsey Accessories Mfg. Corporation, supra;Lindstedt-Hoffman Co., supra.Unlike our conclusion in such cases247 as Geyer, Cornell & Newell, Inc., 6 T. C. 96, and Soabar Co., supra, p. 97, we do not believe that in the instant case all of petitioner's "net abnormal income of the tax years was due [solely] to improved business conditions in the tax years which resulted in a greater demand for the petitioner's products in those years." We are convinced that some portion was the result of petitioner's long and intensive research program, and, therefore, is attributable to those years in which the program was being carried on.We are now confronted with the difficult task 10 of determining what part of petitioner's net abnormal income is attributable to the years during which the products were developed. Undoubtedly, "a consideration of so general a nature would still necessarily reduce in the last analysis to a matter of opinion," Rochester Button Co., supra, at page 553, upon which we must exercise "common sense and judgment in the light of the proven facts." Ramsey Accessories Mfg. Corporation, supra, at page 489. We have found as a fact what percentages we believe should248 be applied in reducing petitioner's net abnormal income in the determination of what part thereof arose out of its research and development, and what part arose out of other factors. Cf. Cohan v. Commissioner (CCA-2), 39 Fed. (2d) 540; Ramsey Accessories Mfg. Corporation, supra; and Lindstedt-Hoffman Co., supra.These ultimate findings, based upon a careful consideration of the whole record, decide the only controverted issue presented to us.Since respondent's sole contention is that petitioner's net abnormal income was attributable to the taxable years, rather than to prior years, because of the increased demand 249 in 1941 and 1942 for petitioner's products by the armed forces, and does not rely upon or mention any other factor (cf. Ramsey Accessories Mfg. Corporation, supra), it is unnecessary to speculate upon the existence in the instant case of factors shown to be material in the Ramsey case.Decisions will be entered under Rule 50. Footnotes. The adhesion of the material to itself when folded.↩1. SEC. 721. ABNORMALITIES IN INCOME IN TAXABLE PERIOD.(a) Definitions. -- For the purposes of this section --(1) Abnormal income. -- The term "abnormal income" means income of any class includible in the gross income of the taxpayer for any taxable year under this subchapter if it is abnormal for the taxpayer to derive income of such class, or, if the taxpayer normally derives income of such class but the amount of such income of such class includible in the gross income of the taxable year is in excess of 125 per centum of the average amount of the gross income of the same class for the four previous taxable years * * .(2) Separate classes of income. -- Each of the following subparagraphs shall be held to describe a separate class of income: * * (C) Income resulting from exploration, discovery, prospecting, research, or development of tangible property, patents, formulae, or processes, or any combination of the foregoing, extending over a period of more than 12 months; * * (3) Net abnormal income. -- The term "net abnormal income" means the amount of the abnormal income less, under regulations prescribed by the Commissioner with the approval of the Secretary, (A) 125 per centum of the average amount of the gross income of the same class determined under paragraph (1), and (B) an amount which bears the same ratio to the amount of any direct costs or expenses, deductible in determining the normal-tax net income of the taxable year, through the expenditure of which such abnormal income was in whole or in part derived as the excess of the amount of such abnormal income over 125 per centum of such average amount bears to the amount of such abnormal income.↩2. Section 721 (b) is to the following effect:(b) Amount Attributable to Other Years. -- The amount of the net abnormal income that is attributable to any previous or future taxable year or years shall be determined under regulations prescribed by the Commissioner with the approval of the Secretary. In the case of amounts otherwise attributable to future taxable years, if the taxpayer either transfers substantially all its properties or distributes any property in complete liquidation, then there shall be attributable to the first taxable year in which such transfer or distribution occurs (or if such year is previous to the taxable year in which the abnormal income is includible in gross income, to such latter taxable year) all amounts so attributable to future taxable years not included in the gross income of a previous taxable year.↩3. Respondent, upon brief, states: Counsel for the respondent stated the position of the respondent in his opening statement as follows:"Mr. Gallagher: The position of the Respondent can be very briefly stated, Your Honor."This so-called abnormal income resulted solely from an increase in business caused by large demands by the armed forces to which the bulk of these manufactured goods were delivered. * * " * * it is respectfully submitted that the income realized by petitioner from the two products in question resulted solely from an increase in business due to the enlarged demands of the Armed Forces.* * * " * * petitioner has at no time faced up to the position of the respondent, namely, that the income in the taxable years in question arose solely from an increase in business caused by the demand of the Armed Forces * * ."↩4. Regulations 109, section 30.721-3, as amended by T. D. 5045, C. B. 1941-1, pages 69 et seq., provides in part:"Amount Attributable to Other Years. -- The mere fact that an item includible in gross income is of a class abnormal either in kind or in amount does not result in the exclusion of any part of such item from excess profits net income. It is necessary that the item be found attributable under these regulations in whole or in part to other taxable years. Only that portion of the item which is found to be attributable to other years may be excluded from the gross income of the taxpayer for the year for which the excess profits tax is being computed.Items of net abnormal income are to be attributed to other years in the light of the events in which such items had their origin, and only in such amounts as are reasonable in the light of such events. To the extent that any items of net abnormal income in the taxable year are the result of high prices, low operating costs, or increased physical volume of sales due to increased demand for or decreased competition in the type of product sold by the taxpayer, such items shall not be attributed to other taxable years. Thus, no portion of an item is to be attributed to other years if such item is of a class of income which is in excess of 125 per cent of the average income of the same class for the four previous taxable years solely because of an improvement in business conditions. In attributing items of net abnormal income to other years, particular attention must be paid to changes in those years in the factors which determined the amount of such income, such as changes in prices, amount of production, and demand for the product. No portion of an item of net abnormal income is to be attributed to any previous year solely by reason of an investment by the taxpayer in assets, tangible or intangible, employed in or contributing to the production of such income."To the same effect, see Regulations 112, section 35.721-3, applicable to taxable years beginning after December 31, 1941.See also Regulations 109, section 30.721-8, and Regulations 112, section 35.721-7, which provide in part:"Exploration, Discovery, Prospecting, Research, or Development. --"In general, an item of net abnormal income of the class described in this section is to be attributed to the taxable years during which expenditures were made for the particular exploration, discovery, prospecting, research, or development which resulted in such item being realized and in the proportion which the amount of such expenditures made during each such year bears to the total of such expenditures. Allocation of items of net abnormal income of the class described in this section must be made according to the principles set forth in section 35.721-3."↩5. Petitioner has selected as the class of abnormal income, income resulting from research and development of two products -- Pantex and C. C. Textasote -- extending over a period of more than 12 months, as defined in section 721 (a) (2) (C)↩. It does not claim that such income is abnormal in type, but rather that it is abnormal in amount, i. e., that it is in excess of 125% of the average amount of the gross income of the same class for the four previous taxable years.6. In W. B. Knight Machinery Co., 6 T. C. 519, 534, we said in part:"But the mere fact that a taxpayer has net abnormal income in a taxable year does not entitle it to relief under section 721. There must be a further finding under the evidence as to what part, if any, of such net abnormal income is attributable to other years. If none is so attributable, then the taxpayer gets no relief. * First, we know that no part of such income can be so attributed which was due solely to improvement in business conditions. * "See also Premier Products Co., 2 T. C. 445↩; Rept. No. 146, 77th Cong., 1st sess., p. 9.7. The testimony of one of petitioner's vice presidents was, in part, as follows:"Q. Well, assuming we had not been in the War during 1941 and 1942, and that a normal peacetime market prevailed, what would you say was the extent of the demand of the market for the fabrics which could have been manufactured on those calenders? * * The Witness: Can I now ask a question? Are you now speaking of all calenders, or are you speaking of this? * * By Mr. Tarleau:"Q. I'm talking about the thermoplastic resin."A. That, I think, is a very difficult question to answer. I won't attempt to answer it other than to say this: That there was a demand, the demand was coming along very fast, but to tell you what the demand would be, I could not answer that. * * "Q. Can you express an opinion as to the volume of sales which the Pantasote Company might have developed with these various calender products that you mentioned as end products if they had been introduced in 1941 and 1942? * * "The Witness: That too is a very difficult answer. * *"By Mr. Tarleau:"Q. Well, assuming that there were other limitations or bottlenecks in the production, and that the dollar volume of production was not a million dollars but was limited to three hundred thousand dollars, do you think you could have sold three hundred thousand dollars worth of the product?"A. I think that would have been a very simple thing for any one man to do."↩8. Cf. Soabar Co., supra, pp. 96 and 97↩.9. "'Solely' leaves no leeway." Helvering v. Southwestern Consolidated Corporation, 315 U.S. 194">315 U.S. 194, 198↩.10. What Judge Learned Hand said in a wholly different connection is appropriate here: "The one sure way to do injustice in such cases is to allow nothing whatever upon the excuse that we cannot tell how much to allow." Commissioner v. Maresi↩ (CCA-2), 156 Fed. (2d) 929, 931.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622590/	LINDA D. DRUMMER, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentDrummer v. CommissionerDocket No. 9226-92United States Tax CourtT.C. Memo 1994-214; 1994 Tax Ct. Memo LEXIS 214; 67 T.C.M. (CCH) 2963; May 16, 1994, Filed 214 Decision will be entered under Rule 155. For petitioner: William C. Gambel. For respondent: Joseph Ineich. WELLSWELLSMEMORANDUM FINDINGS OF FACT AND OPINION WELLS, Judge: Respondent determined the following deficiencies in and additions to petitioner's Federal income taxes: Additions to TaxSec.Sec. Sec. Sec. Sec. YearDeficiency6653(b)(1)6653(b)(1)(A)6653(b)(1)(B)6654 6661 1986$ 11,488--$ 14,3571$ 305$ 4,51819876,686--5,0151363--19887,887$ 5,915----504--Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for the years in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure. After a concession, 1 the issues for decision are: (1) Whether petitioner may exclude from income her one-half share of community income pursuant to section 66 for taxable years 1986, 1987, and 1988; (2) whether petitioner is liable for additions to tax for fraud under section 6653(b) for the taxable years in issue; (3) whether petitioner is liable for additions to tax for failure to pay 215 estimated tax under section 6654 for the taxable years in issue; and (4) whether petitioner is liable for an addition to tax for substantially understating income tax under section 6661 for taxable year 1986. FINDINGS OF FACT Some of the facts and certain documents have been stipulated for trial pursuant to Rule 91. The stipulations are incorporated in this Memorandum Opinion by reference. At the time she filed her petition, petitioner resided in New Orleans, Louisiana. Petitioner was married to Joel Drummer (Mr. Drummer) for approximately 27 years, including all of the years in issue. Petitioner and Mr. Drummer have four children (the children). On July216 24, 1990, petitioner was divorced from Mr. Drummer. During 1976, petitioner and Mr. Drummer started operating several businesses in a low-income area of New Orleans, Louisiana. During the years in issue, the businesses included La Parisienne Liquor and Food Mart (the store) and La Parisienne Body Shop (the body shop). 2 Additionally, during the years in issue, petitioner and Mr. Drummer owned and managed several residential rental properties (the rental properties). 3Mr. Drummer was primarily responsible for the daily operation of the businesses. He managed the store and the body shop, and he collected rent from the tenants of the217 rental properties. Petitioner was also involved with the operation of the businesses. Almost every day, prior to the years in issue, she worked in the store. She also assisted Mr. Drummer in ascertaining selling prices of all of the items in the store. During the years prior to the years in issue, petitioner would occasionally collect money from the store and the rental properties. Additionally, petitioner was responsible for depositing a portion of the money collected from the businesses into joint bank accounts and for paying the bills. Because Mr. Drummer would retain some of the money to pay business and personal expenses, however, not all of it was deposited. After paying such expenses, he would give the balance to petitioner to deposit. During 1982, petitioner and Mr. Drummer built a two-story brick home at 6061 Wright Road, New Orleans, Louisiana (the Wright Road residence), where they lived until their divorce. Prior to 1982, they lived in the same neighborhood as their businesses, in one of the units, at 1725 Bayou Road, which they later rented out to tenants. Once the Wright Road residence was completed, however, petitioner rarely worked at the store, and merely218 substituted for Mr. Drummer when he was unavailable. Additionally, by 1986, Mr. Drummer made all deposits to the bank, rather than petitioner. Petitioner, however, still wrote checks for business expenses and for personal expenses such as mortgage payments on the Wright Road residence. Generally, Mr. Drummer deposited money each time a check needed to be written. However, he deposited only the amount needed to cover the check or checks. Petitioner and Mr. Drummer failed to file Federal income tax returns for taxable years 1977 through 1983. Consequently, during 1984, Internal Revenue Service (IRS) Revenue Agent Charles Atkins (Agent Atkins) began an audit of their taxable years 1977 through 1983 (the first audit). Agent Atkins discovered that petitioner and Mr. Drummer did not have records of all of the checks that they had written or of any income that they had received from their businesses or the rental properties. Petitioner and Mr. Drummer's records were inadequate, and they often used cash. Consequently, Agent Atkins reconstructed their income using an indirect method. During 1977 through 1983, because they opened a new account each time they overdrew an account, petitioner219 and Mr. Drummer had operated through approximately 26 different joint bank accounts. Petitioner had signatory authority over all of them. Petitioner, Mr. Drummer, and the children often would take items from the store for their personal use. Prior to Agent Atkins' examination, petitioner and Mr. Drummer had never taken a physical inventory of the store. In response to a request by Agent Atkins that a physical inventory be taken, petitioner, Mr. Drummer, and their children completed their first inventory. In surveying the records that petitioner and Mr. Drummer had provided, Mr. Atkins found prepared, but unfiled, tax returns for taxable years 1976 through 1979. Subsequently, petitioner and Mr. Drummer provided Agent Atkins with similarly prepared, but unfiled, returns for taxable years 1980 and 1981. Using information from petitioner and Mr. Drummer, records received from the bank, and the unfiled tax returns, respondent determined deficiencies totaling $ 30,192 from unreported income for taxable years 1977 through 1983. Respondent also determined additions to tax for fraud under section 6653(b) totaling $ 15,095 for taxable years 1977 through 1983. Additional assessments220 were made against Mr. Drummer for taxable years 1977 through 1983 for approximately $ 56,632. At the conclusion of the examination, Agent Atkins conducted a conference with petitioner and Mr. Drummer to explain the deficiencies and the additions to tax. Subsequently, petitioner and Mr. Drummer signed a consent agreeing to their tax liability and the additions to tax for taxable years 1977 through 1983. Agent Atkins also advised petitioner and Mr. Drummer of their duty to keep accurate records as well as their duty to file annual tax returns. During the conference, petitioner specifically acknowledged that she knew that tax returns were due each year. Neither petitioner nor Mr. Drummer was represented by counsel during the first audit. For taxable years 1986 through 1988, petitioner did not file tax returns, either jointly with Mr. Drummer or separately. Respondent became aware of petitioner's failure to file returns in the process of collecting the taxes determined to be due during the first audit. On July 12, 1989, an unsigned, reconstructed joint 1986 Form 1040 for petitioner and Mr. Drummer was submitted to respondent's collection division. Although the return was not 221 signed by petitioner or Mr. Drummer, it was processed by respondent. During October 1989, IRS Revenue Agent Susan Davis (Agent Davis) commenced an examination of petitioner and Mr. Drummer's taxable years 1986, 1987, and 1988 (the second audit). Agent Davis contacted petitioner at the Wright Road residence to arrange an initial interview. Petitioner suggested, instead, that Agent Davis contact Mr. Drummer at the store. Agent Davis promptly contacted Mr. Drummer, met with him, and inspected the various businesses on several occasions. During one of Agent Davis' visits to the store, she noticed, parked nearby, a new 1989 Lincoln Town Car which Mr. Drummer had leased for petitioner and on which he was paying approximately $ 500 a month in lease payments. During 1989, petitioner and Mr. Drummer opened a home health care business with $ 4,500 that Mr. Drummer had given petitioner during 1988. Agent Davis also drove by petitioner and Mr. Drummer's Wright Road residence to assess their standard of living. Agent Davis requested both personal and business records from Mr. Drummer for taxable years 1986 through 1988. While Agent Davis had to make several requests before Mr. Drummer 222 provided her with any records, she ultimately received, in a piecemeal manner, 56 grocery bags full of disorganized bank statements and canceled checks. Because the records were inadequate, Agent Davis used a summons to obtain more complete records from Liberty Bank. Agent Davis reviewed and catalogued each check she obtained. During 1986, petitioner and Mr. Drummer had five checking accounts at Liberty Bank. During 1987 and 1988, they maintained three checking accounts at Liberty Bank. 4 Petitioner had signatory authority over all of the accounts. As some of the checks were missing, Agent Davis was unable to analyze all of the checking account activity. For example, during taxable year 1986, petitioner or Mr. Drummer wrote checks, totaling approximately $ 46,000, on one of the accounts, but Agent Davis had not been able to obtain any checks to document who the payee or payees were. During the years in issue, petitioner wrote numerous223 checks from the joint checking accounts. During 1986, 1987, and 1988, petitioner signed checks from the personal accounts totaling $ 41,859.16, $ 33,814.02, and $ 52,339.90, for such years, respectively, for-a total of $ 128,013.08 over all 3 years. 5224 During 1986, 1987, and 1988, petitioner signed checks from the joint business checking accounts in the amounts of $ 40,947.08, $ 13,799.40, and $ 2,632.47, respectively, for a total of $ 57,378.95. 6 During 1986, 1987, and 1988, petitioner signed personal checks from the joint checking accounts payable to cash in the amounts of $ 100, $ 9,238.75, and $ 350, respectively, for a total of $ 9,688.75. Agent Davis also requested invoices from the store's suppliers, but she received few responses. Because the suppliers no longer accepted checks from petitioner and Mr. Drummer due to the receipt of bad checks, many of the suppliers were paid in cash. During the years in issue, petitioner and Mr. Drummer failed to maintain adequate records of 225 their personal finances or business activities. In order to reconstruct their income, Agent Davis met with both petitioner and Mr. Drummer during January 1990 to prepare statements of annual estimated personal and family expenses for each of the taxable years in issue. Petitioner provided Agent Davis with information on all of the family's personal living expenses that were not paid by check for 1986, 1987, and 1988. The information showed that Mr. Drummer had provided petitioner with cash to pay for groceries, laundry, dues, gasoline and automobile maintenance, allowances for the children, beauty supplies, recreational activities, doctors' bills, prescriptions, and mortgage payments. Upon completion of the statements, petitioner and Mr. Drummer reviewed them and verified that they were accurate. Petitioner and Mr. Drummer never indicated that they were separated or in the process of obtaining a divorce. Mr. Drummer never indicated that his home was at any location other than the Wright Road residence. Petitioner and Mr. Drummer claimed that they knew that the 1986, 1987, and 1988 returns were due, but merely had not filed them. Mr. Drummer stated in the initial interview that226 he did not file the returns because he did not have the money to pay the taxes. Both petitioner and Mr. Drummer claimed that they wanted to "straighten out their tax situation". As a result of the investigation, Agent Davis concluded that the only wage income petitioner had for the years in issue was the $ 9,821.83 which was reflected on a Form W-2 from the City of New Orleans for taxable year 1986 during which petitioner was employed by the Director of Finance. In addition, Agent Davis concluded that the only income received by petitioner and Mr. Drummer from a nontaxable source was a loan of $ 203,000 received during 1987 to refinance the Wright Road residence. During July 1990, Agent Davis conducted a closing conference with petitioner and Mr. Drummer. Agent Davis presented a report of the findings of her examination to petitioner and Mr. Drummer. Agent Davis explained how she had reconstructed their income using the source and application of funds method. Petitioner and Mr. Drummer had no objection to the method, but were distraught over the amount of tax due. Shortly after the conference, Agent Davis contacted petitioner by telephone to see if petitioner and Mr. Drummer227 agreed with the report. Petitioner explained that she and Mr. Drummer had recently obtained a divorce and that she could not agree to the report since Mr. Drummer was not paying any child support, and she did not have any money. Respondent issued two notices of deficiency based on Agent Davis' reconstruction of petitioner's income: The first notice was addressed to both petitioner and Mr. Drummer and was for taxable year 1986, using married, filing jointly status, and the second notice was addressed only to petitioner and was for taxable years 1987 and 1988, using married, filing separately status. Respondent determined that petitioner had underreported her income by $ 24,544, $ 47,360, and $ 54,002 for taxable years 1986 through 1988, respectively. Respondent also determined additions to tax for fraud and for failure to pay estimated tax for all years in issue as well as an addition to tax for substantial understatement of income tax for taxable year 1986. OPINION Community IncomePetitioner contends that section 66 relieves her of liability for Federal income taxes on her portion of community income. Specifically, petitioner contends that section 66(b) applies to her228 1986 taxable year and section 66(a) applies to her 1987 and 1988 taxable years. Respondent contends that petitioner is not entitled to relief under section 66 during any of the years in issue. We hold that petitioner has the burden of proof. 7 Rule 142(a). 229 Upon satisfaction of certain conditions, section 66 modifies the treatment of community income. Section 66(a) addresses the treatment of community income in the case of spouses who live apart. Section 66(b), on the other hand, allows the Secretary to deny community property benefits where one spouse fails to notify the other spouse of community income. 8 Section 66(b) provides the following: The Secretary may disallow the benefits of any community property law to any taxpayer with respect to any income if such taxpayer acted as if solely entitled to such income and failed to notify the taxpayer's spouse before the due date (including extensions) for filing the return for the taxable year in which the income was derived of the nature and amount of such income.Louisiana is a community property state. La. Civ. Code Ann. art. 2334 (West 1985). Community property is defined under Louisiana230 law as "property acquired during the existence of the legal regime [the marriage] through the effort, skill or industry of either spouse, * * and all other property not classified by law as separate property." La. Civ. Code Ann. art. 2338 (West 1985). Louisiana law provides a rebuttable presumption that all income or property acquired during the marriage is community property. La. Civ. Code Ann. art. 2340 (West 1985). As petitioner has not challenged such presumption, we proceed on the basis that all of the unreported income for taxable years 1986 through 1988 constitutes community income. Individuals who are married to each other and reside in a community property State, such as Louisiana, must each report one-half of their community income (if they file separately) for Federal income tax purposes. United States v. Mitchell, 403 U.S. 190 (1971). Accordingly, absent relief under section 66, petitioner is liable for Federal income taxes on one-half of the community income.9231 Petitioner contends that section 66(b) "relieves" her of liability for taxes on her portion of community income for taxable year 1986. 10232 We do not agree. Section 66(b) is not a relief provision as argued by petitioner. As we read section 66(b), the benefits of community property law (i.e., the allocation of half of the married couple's community income to the other spouse) is denied to a taxpayer who does not notify his or her spouse of community income. In other words, section 66(b) prevents a taxpayer from avoiding tax on one-half of community income if the taxpayer treated the income as solely his or hers and failed to notify his or her spouse of the nature and amount of the income prior to the due date of the return. Consequently, section 66(b) is not a "relief" provision. 11Rutledge v. Commissioner, T.C. Memo 1992-52">T.C. Memo. 1992-52, affd. without published opinion 4 F.3d 990">4 F.3d 990 (5th Cir. 1993); see Tseng v. Commissioner, T.C. Memo 1994-126">T.C. Memo. 1994-126. Accordingly, the unreported income is community income, and petitioner is liable for taxes on one-half of such income for taxable year 1986. As to taxable years 1987 and 1988, petitioner contends that section 66(a) insulates233 her from liability for taxes on her one-half of the community income for such years. Section 66(a) provides the following: -If- (1) 2 individuals are married to each other at any time during the calendar year; (2) such individuals- (A) live apart at all times during the calendar year, and (B) do not file a joint return under section 6013 with each other for a taxable year beginning or ending in the calendar year; (3) one or both of such individuals have earned income for the calendar year which is community income; and (4) no portion of such earned income is transferred (directly or indirectly) between such individuals before the close of the calendar year,then, for the purposes of this title, any community income of such individuals for the calendar year shall be treated in accordance with the rules provided by section 879(a). 12234 Petitioner argues that section 66(a) attributes all of the income and deductions from the businesses and the rental properties to Mr. Drummer and, therefore, she is not liable for taxes on such income. Respondent does not dispute that petitioner satisfies paragraphs (1), 2(B), and (3) of section 66(a). Respondent, however, contends that petitioner has failed to satisfy paragraphs 2(A) and (4). Respondent contends that the evidence does not support the conclusion that petitioner lived apart from Mr. Drummer at all times during 1987 and 1988. Respondent further contends that a large portion of earned income was transferred to petitioner during both 1987 and 1988. We agree with respondent. The only evidence in the record that petitioner and Mr. Drummer lived apart at all times during 1987 and 1988 is the testimony of petitioner and her daughter, Laquitter. Their testimony, however, is inconsistent with other evidence contained in the record. From the time Agent Davis began her investigation during October 1989 until after the closing conference in July 1990, neither petitioner nor Mr. Drummer ever mentioned that they had separated in 1986. Indeed, when Agent Davis met with235 petitioner and Mr. Drummer in January 1990 to complete a statement of personal living expenses, it was petitioner who provided most, if not all, of the information Agent Davis requested, and petitioner never indicated that the personal expenses reflected expenses of more than one household. We need not accept at face value the self-serving, uncorroborated testimony of petitioner and her daughter if it is questionable, improbable, or unreasonably. Quock Ting v. United States, 140 U.S. 417">140 U.S. 417, 420-421 (1891); Fleischer v. Commissioner, 403 F.2d 403">403 F.2d 403, 406 (2d Cir. 1968), affg. T.C. Memo. 1967-85; Boyett v. Commissioner, 204 F.2d 205">204 F.2d 205, 208 (5th Cir. 1953), affg. a Memorandum Opinion of this Court; Tokarski v. Commissioner, 87 T.C. 74">87 T.C. 74, 77 (1986). In light of petitioner's failure to mention to Agent Davis her alleged separation from petitioner during 1987 and 1988 and her failure to indicate that the personal expenses were for more than one household, we find the testimony of petitioner and her daughter to be questionable. Accordingly, we 236 hold that petitioner has failed to prove that she lived apart from her husband at all times during 1987 through 1988. Consequently, petitioner is not entitled to relief under section 66(a). Petitioner also fails to satisfy section 66(a) because she has failed to establish that no portion of their earned income was transferred between them before the close of the 1987 and 1988 calendar years. As mentioned above, all of the bank accounts at Liberty Bank were joint accounts over which petitioner had signatory authority. Petitioner wrote checks from all of the accounts 13 for both personal and business expenses using money that had been deposited into the accounts by Mr. Drummer. 237 Petitioner contends that transfers of de minimis amounts as well as transfers for the benefit of dependent children are to be disregarded when considering whether she has satisfied section 66(a)(4). 14 Even disregarding such amounts, we find that significant transfers were made from Mr. Drummer to petitioner for her benefit. 238 Mr. Drummer furnished funds during 1987 through 1988 which enabled petitioner to buy clothing, pay the beauty parlor, enjoy cable television, and make sizable charitable donations to the church. Mr. Drummer further provided funds to pay the mortgage on the Wright Road residence, where petitioner lived until 1990. Additionally, petitioner and Mr. Drummer opened a home health care business during 1989 with $ 4,500 that Mr. Drummer provided petitioner with during 1988. Such transfers were made for petitioner's benefit during 1987 through 1988 and were not de minimis. Petitioner contends the facts in the instant case are similar to those in Rutledge v. Commissioner, T.C. Memo. 1992-52, affd. without published opinion 4 F.3d 990">4 F.3d 990 (5th Cir. 1993). In Rutledge, the taxpayer did not write checks on the joint account and did not make any withdrawals. The taxpayer and his spouse did not communicate, and a court order prevented the taxpayer from obtaining access to the joint account. By contrast, in the instant case, the record establishes that petitioner wrote checks on many of the accounts. Indeed, petitioner wrote almost239 all of the checks on some of the accounts, 15 and all of the money in the accounts was the result of deposits made by Mr. Drummer. We hold that such deposits constitute transfers to petitioner. Accordingly, as petitioner has failed to satisfy the conditions of section 66(a), she is liable for taxes on her one-half share of community income. Additions to Tax for FraudRespondent determined that petitioner was liable for the additions to tax for fraud pursuant to section 6653(b) for all taxable years in issue. Section 6653(b) provides for an addition to tax of 50 percent of the amount of an underpayment for taxable years 1986 and 1987 and 75 percent of the amount of an underpayment for taxable year 1988. 16 Section 6653(b)(1)(B) also provides for an addition to tax in the amount of 50 percent of the interest payable with respect to the portion of the understatement attributable to fraud for taxable years 1986 and 1987. 240 "Fraud is defined as an intentional wrongdoing designed to evade tax believed to be owing." DiLeo v. Commissioner, 96 T.C. 858">96 T.C. 858, 874 (1991), affd. 959 F.2d 16">959 F.2d 16 (2d Cir. 1992). The existence of fraud is a question of fact to be resolved upon consideration of the entire record. Gajewski v. Commissioner, 67 T.C. 181">67 T.C. 181, 199 (1976), affd. without published opinion 578 F.2d 1383">578 F.2d 1383 (8th Cir. 1978). Fraud will never be presumed. Beaver v. Commissioner, 55 T.C. 85">55 T.C. 85, 92 (1970). Respondent has the burden of proving fraud by clear and convincing evidence. Sec. 7454(a); Rule 142(b). To establish petitioner's liability for the additions to tax for fraud, respondent must prove that petitioner underpaid her taxes for each of the years in issue. DiLeo v. Commissioner, supra at 873; Parks v. Commissioner, 94 T.C. 654">94 T.C. 654, 660-664 (1990); Hebrank v. Commissioner, 81 T.C. 640">81 T.C. 640, 642 (1983). Petitioner does not contest the fact that she underpaid her taxes for each241 of the years in issue. Respondent also has the burden of proving that petitioner had the requisite fraudulent intent. DiLeo v. Commissioner, supra at 873; Parks v. Commissioner, supra at 664-665; Hebrank v. Commissioner, supra at 642. Respondent's burden is met by a showing that petitioner intended to conceal, mislead, or otherwise prevent the collection of taxes. Stoltzfus v. United States, 398 F.2d 1002">398 F.2d 1002, 1004 (3d Cir. 1968); Katz v. Commissioner, 90 T.C. 1130">90 T.C. 1130, 1143 (1988); Rowlee v. Commissioner, 80 T.C. 1111">80 T.C. 1111, 1123 (1983). Fraudulent intent may be proved, however, by circumstantial evidence because direct proof of the taxpayer's intent is rarely available. DiLeo v. Commissioner, supra at 874-875; Parks v. Commissioner, supra at 664; Rowlee v. Commissioner, supra.The taxpayer's entire course of conduct may establish the requisite fraudulent intent. Stephenson v. Commissioner, 79 T.C. 995">79 T.C. 995, 1005-1006 (1982),242 affd. 748 F.2d 331">748 F.2d 331 (6th Cir. 1984); Stone v. Commissioner, 56 T.C. 213">56 T.C. 213, 223-224 (1971). In Bradford v. Commissioner, 796 F.2d 303">796 F.2d 303, 307-308 (9th Cir. 1986), affg. T.C. Memo 1984-601">T.C. Memo. 1984-601, the Ninth Circuit Court of Appeals enunciated a nonexhaustive list of factors which demonstrate fraudulent intent. These "badges of fraud" include: (1) Understating income; (2) maintaining inadequate records; (3) failing to file tax returns; (4) providing implausible or inconsistent explanations of behavior; (5) concealing assets; (6) failing to cooperate with the tax authorities; (7) engaging in illegal activities; (8) attempting to conceal illegal activities; (9) dealing in cash; and (10) failing to make estimated tax payments. Recklitis v. Commissioner, 91 T.C. 874">91 T.C. 874, 910 (1988). Respondent contends that the following acts, when viewed as a whole, establish petitioner's fraudulent intent: (1) Petitioner's understatement of income during 10 out of the 12 years spanning 1977 through 1988; (2) petitioner's failure to file tax returns for taxable years 1977243 through 1983 and 1986 through 1988; (3) petitioner's failure to keep adequate records, especially in light of Agent Atkins' warning; (4) petitioner's implausible explanations of her behavior; (5) petitioner's extensive dealings in cash; and (6) petitioner's failure to make estimated tax payments. Petitioner offers explanations to refute the inferences of fraud as to each badge, which we address in turn. Respondent's first contention is that petitioner's understatement of income during 10 out of 12 years from 1977 through 1988 is evidence of fraudulent intent. Petitioner contends that the mere failure to report income is insufficient to establish fraud. We do not accept petitioner's contention in the instant case. Although the mere failure to report income is insufficient to prove fraud, a pattern of consistent underreporting of income like the pattern involved in the instant case, 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, 137 (1954); Parks v. Commissioner, supra at 664. Respondent next contends that petitioner's244 continuous failure to file is evidence of fraud. The parties stipulated that petitioner did not file returns for taxable years 1977 through 1983 as well as for taxable years 1986 through 1988. Petitioner contends that the failure to file, without more, does not establish fraudulent intent. Although the mere failure to file does not per se establish fraud, the failure to file over an extended period of time is persuasive evidence of intent to defraud the Government. Marsellus v. Commissioner, 544 F.2d 883">544 F.2d 883, 885 (5th Cir. 1977), affg. T.C. Memo. 1975-368; Stoltzfus v. United States, supra at 1005. Moreover, petitioner's failure to file returns for taxable years 1986, 1987, and 1988, in light of her previous filing of Federal income tax returns for taxable years 1984 and 1985, weighs heavily against her. Castillo v. Commissioner, 84 T.C. 405">84 T.C. 405, 409 (1985). We also note that, during the first audit, petitioner admitted that she knew tax returns were due annually. We conclude that petitioner failed to file returns as an attempt to conceal income. Respondent's245 next contention is that petitioner's failure to keep adequate books and records establishes fraud. Petitioner contends that Mr. Drummer "ran" the store and controlled all of the books and records and that, therefore, the maintenance of adequate books and records was beyond her control. We disagree with petitioner. By petitioner's own admission, she had access to all of the joint checking accounts. Petitioner knew her husband was making deposits of the profits from the businesses and the rental properties into the accounts. Petitioner had been forewarned by Agent Atkins that she had a duty to keep adequate records. Despite such warning, she failed to maintain adequate records. Even if petitioner did not have access to all of the information at the businesses, she could have kept records with respect to the transactions that she did handle. Consequently, we find that petitioner's failure to maintain adequate records is evidence of fraud. Respondent next contends that petitioner has provided inconsistent and implausible explanations of her behavior. Specifically, respondent contends that petitioner's statements in her sworn affidavit 17 are implausible in light of the hundreds246 of checks she wrote for her personal benefit. Petitioner contends that her statement in the affidavit referred to her lack of control over the business accounts only and did not refer to her use of the personal accounts. We believe that petitioner was not merely referring to the business accounts when she used the term "joint accounts" in her affidavit. Indeed, the record indicates that petitioner wrote checks on the business accounts as well as the personal accounts. We conclude that petitioner had at least some control over the business accounts. Based on the foregoing, we find that petitioner's inconsistent explanations are indicative of fraud. Respondent also contends that petitioner's extensive use of cash is indicative of fraud. Petitioner does not dispute that she dealt in cash extensively. In fact, 247 petitioner regularly obtained cash from Mr. Drummer for personal expenses and was knowledgeable regarding the amount of cash spent for specific household items. We conclude that petitioner's use of cash was a mechanism to conceal income. Lastly, respondent contends that petitioner's failure to make estimated tax payments is probative of fraud because petitioner's frequent writing of checks to a variety of creditors (including a payment to the IRS for employment taxes) indicates her awareness of her responsibility to pay creditors during 1986 through 1988. Petitioner contends that, because she had limited access to the businesses, she was unable to make estimated payments or to accurately determine the amount of such payments. We do not believe petitioner's explanation. As we have previously stated, the record reflects that petitioner wrote checks covering thousands of dollars each year, indicating her involvement with the business and the rental properties. She wrote checks to many different creditors, but never paid taxes even though she knew taxes were due. Accordingly, we find that petitioner's failure to make estimated payments is also indicative of her fraudulent intent. 248 Considering petitioner's entire course of conduct, we hold that respondent has proved by clear and convincing evidence that the entire amount of each underpayment is due to fraud. Accordingly, we hold that petitioner is liable for the fraud additions to tax for each of the taxable years in issue. Additions to Tax for Failure To Make Estimated PaymentsRespondent determined that petitioner is liable for additions to tax under section 6654 for failure to pay estimated tax due during the years in issue. The addition to tax is mandatory unless the taxpayer establishes that one of certain narrow exceptions applies. Grosshandler v. Commissioner, 75 T.C. 1">75 T.C. 1, 20-21 (1980); Estate of Ruben v. Commissioner, 33 T.C. 1071">33 T.C. 1071-1072 (1960). Petitioner has failed to establish that she fits within one of the exceptions. Accordingly, we sustain the additions to tax under section 6654 for taxable years 1986 through 1988. Addition to Tax for Substantial Understatement of Income TaxSection 6661(a) imposes an addition to tax on a substantial understatement of income tax. An understatement is substantial where it exceeds the249 greater of 10 percent of the tax required to be shown on the return or $ 5,000. Sec. 6661(b)(1)(A). Petitioner had a substantial understatement for taxable year 1986. The section 6661 addition to tax is not applicable, however, if there was substantial authority for the taxpayer's treatment of the items in issue or if the relevant facts relating to the tax treatment were adequately disclosed on the return. Sec. 6661(b)(2)(B)(i) and (ii). Petitioner has not made any arguments regarding the substantial understatement addition to tax. Accordingly, we hold that petitioner is liable for the addition to tax under section 6661. All other arguments of petitioner have been considered and are found to be without merit. To reflect the foregoing, Decision will be entered under Rule 155. Footnotes1. 50 percent of the interest due on the deficiency.↩1. The notice of deficiency for 1987 lists that La Parisienne Liquor and Food Mart's expenses (including purchases) as used to reconstruct petitioner's income under the source and application method were $ 190,908.65. The parties, however, stipulated that the expenses were $ 190,123.43. Based on the stipulation, respondent concedes the difference of $ 785.22.↩2. Petitioner and Mr. Drummer operated the body shop only during 1986 and 1987.↩3. Petitioner and Mr. Drummer owned rental properties at the following locations in New Orleans during 1986, 1987, and 1988: 1717, 1719, 1725-1730, and 1734 Bayou Road; 1212, 1214, and 1216 North Derbigny; and 1241 and 1243 N. Claiborne. Throughout the years in issue, the properties were mortgaged.↩4. The term "checking accounts" includes both personal and business accounts.↩5. The following chart is a sampling of various payees to which petitioner wrote checks along with the amounts and corresponding totals: Payee198619871988TotalD.H. Holmes$ 642.60$ 305.00$ 157.19$ 1,104.79Maison Blanche/Gauchaux's1,554.15662.94609.842,826.93Nathalie's Fashion Shoppe343.5093.50-437.00Kelly School of Dance45.00- -45.00Krauss Department Store442.98292.82281.721,017.52Greater St. Stephen4,200.503,586.003,174.0010,960.50Baptist ChurchEvelyn's Beauty Shop570.00309.00205.001,084.00Sak's Fifth Avenue30.0013.87-43.87Gus Mayer's930.00816.00286.002,032.00Cox Cable Television110.78239.65269.59620.02Hurwitz-Mintz Furniture275.00352.72-627.72CompanySt. Mary's Academy-642.50695.501,338.00Macy's-80.00161.51241.51Kentwood Spring Water60.34125.01125.59310.94Totals9,204.857,519.015,965.9422,689.80Petitioner also wrote checks for insurance, mortgages, water service, utilities, gifts, travel, newspapers, dues, and miscellaneous personal and family expenses.↩6. The following chart reflects the dollar amounts of checks written by petitioner (the top figure) compared to the total dollar amounts written on the account (the bottom figure). Account #198619871988444-1281$ 17,318.60closedclosed(personal) Some checks for the businesses were written on this account.148,638.54545-276224,540.56$ 33,814.02$ 52,339.90(personal) 151,667.50164,651.5767,227.16215-7616110.972,656.102,632.47(store)211,168.87141,855.23137,352.00213-369540,836.1111,143.30The total dollar amount written on this account during 1988 is not a part of the record.2↩ -0- (rental42,957.2529,019.88properties)217-23210closedclosed(body shop)23,925.057. Petitioner devotes a substantial portion of her brief to her contention that the burden of proof should be shifted to respondent because the notices of deficiency are arbitrary. She argues that: (1) The source and application of funds method of reconstruction of income is an inadequate method of determining income; (2) that respondent failed to interview petitioner regarding community income; (3) that respondent did not consider whether sec. 66 applied to petitioner's case; (4) that respondent ignored evidence of petitioner's noninvolvement in the businesses; and (5) that respondent failed to calculate accurately under her chosen method. We treat petitioner's argument as one for shifting the burden of going forward with the evidence to respondent. See Schaeffer v. Commissioner, T.C. Memo. 1994-206. The record in the instant case contains direct evidence of petitioner's involvement with income-producing activities during the taxable years in issue. The instant case is distinguishable from the "naked assessment" cases in which the Government has been required to show the taxpayer's connection with certain illegal income-producing activities before the notice will be presumed correct. In the instant case, we hold that the burden of going forward with the evidence does not shift to respondent. The record indicates that petitioner and her husband managed several businesses, including rental properties, during 1986 through 1988, the expenses for which were paid by checks written by petitioner. We see no need to look behind the notices of deficiency in the instant case and hold that petitioner has the burden of proof.↩8. As petitioner has not raised the applicability of sec. 66(c) for any of the years in issue, we do not address sec. 66(c).↩9. For taxable year 1986, respondent issued a notice of deficiency jointly to petitioner and Mr. Drummer based on an unsigned joint 1986 Federal income tax return that was submitted to respondent. In the case of a married couple who elects to make a joint return, "the tax shall be computed on the aggregate income and the liability with respect to the tax shall be joint and several". Sec. 6013(d)(3). Accordingly, the $ 24,544 amount listed in the notice of deficiency as unreported income reflects the total amount of unreported income of petitioner and Mr. Drummer and not merely petitioner's one-half share of their community income. The parties have stipulated that petitioner did not file an individual income tax return, either separately or jointly, for any of the taxable years in issue. Accordingly, based upon such stipulation, petitioner is not jointly and severally liable with Mr. Drummer for Federal income taxes for taxable year 1986. Consequently, absent relief under sec. 66, petitioner is liable for taxes on only her one-half portion of the $ 24,544 of unreported income. We note that respondent properly allocated only one-half of the community income of petitioner and Mr. Drummer to petitioner for taxable years 1987 and 1988.↩10. Because petitioner and Mr. Drummer did not live apart at all times during the 1986 calendar year, petitioner concedes that sec. 66(a) is inapplicable for taxable year 1986. Consequently, we do not address sec. 66(a) for that year.↩11. Even if we were to construe sec. 66(b) as reallocating petitioner's one-half of the community income to Mr. Drummer, as petitioner argues, petitioner would have to show that Mr. Drummer acted as though he were solely entitled to all of the community income and did not notify her of the nature and amount of such income. The record establishes that petitioner and Mr. Drummer had five joint bank accounts during 1986. Petitioner had signatory authority over all of them and wrote checks from all of them. Mr. Drummer regularly made deposits of money from the various businesses and the rental properties into the accounts. Indeed, during 1986 petitioner wrote checks in the amount of $ 41,859.16 on the personal accounts and in the amount of $ 40,947.08 on the business accounts. Mr. Drummer also provided petitioner with cash during taxable years 1986 through 1988. The evidence suggests that Mr. Drummer did not treat such income as his own and that petitioner was on notice of the nature and amounts of such income.↩12. Sec. 879(a) provides for the tax treatment of community income of nonresident, alien individuals with respect to trade or business income. Sec. 879(a)(2) provides that trade or business income shall be treated as provided in sec. 1402(a)(5). Sec. 1402(a)(5) provides that community income derived from a trade or business shall be treated as belonging to the husband unless the wife exercises substantially all of the management and control over such trade or business.↩13. While petitioner has asked this Court to focus on the fact that petitioner wrote significantly more checks on the personal accounts than the business accounts, we fail to see how that would benefit petitioner's position. Our inquiry is whether money was transferred from Mr. Drummer to petitioner, and the accounts out of which petitioner primarily wrote checks are of little or no significance.↩14. S. Rept. 96-1036, at 8 (1980), states the following: For purposes of the * * income transfer test, the [Senate Finance] committee intends that transfers of de minimis amounts or value are not to be taken into account. It is anticipated that definitive guidance concerning these amounts will be prescribed in Treasury regulations, revenue rulings, or revenue procedures, and periodically revised as circumstances may warrant. Further, a transfer or payment to, or for the benefit of, the couple's dependent child is not to be treated as an indirect transfer to an abandoned spouse solely because the payment or transfer satisfies an obligation of support imposed on the abandoned spouse. To date, no regulations have been issued with respect to sec. 66.↩15. See supra↩ note 6.16. For taxable years 1986 and 1987, the specific Code section which sets forth the addition to tax for fraud is sec. 6653(b)(1)(A). For taxable year 1988, the specific Code section which sets forth the addition to tax for fraud is sec. 6653(b)(1).↩17. In the affidavit, petitioner stated that she had no control over the bank accounts since 1985 and had not made any withdrawals or applied any part of the money deposited by Mr. Drummer to her benefit.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622592/	Estate of John Russell Little, Deceased, Crocker National Bank, Executor, Petitioner v. Commissioner of Internal Revenue, RespondentEstate of Little v. CommissionerDocket No. 34590-83United States Tax Court87 T.C. 599; 1986 U.S. Tax Ct. LEXIS 53; 87 T.C. No. 34; September 11, 1986, Filed 53 Decision will be entered for the respondent. Decedent possessed at the time of his death a power to invade, for his benefit, income and corpus of a trust. The power was limited to the standard that the invasion be for decedent's "proper support, maintenance, welfare, health and general happiness in the manner to which he is accustomed at the time of the death of [his wife]." Held: The power is not excepted from the definition of general power of appointment under sec. 2041(b)(1)(A), I.R.C. 1954, because the standard which limits the power does not relate solely to the health, education, support, or maintenance of decedent. Respondent's determination is sustained. Neil F. Horton, for the petitioner.William E. Bonano, for the respondent. Fay, Judge. FAY599 OPINIONRespondent determined a deficiency of $ 191,087 in the Federal estate tax of the Estate of John Russell Little. The only issue is whether the value of assets of a trust of which John Russell Little was a beneficiary and the sole trustee is includable in his estate under section 2041. 156 This case has been submitted under Rule 122. All of the facts have been stipulated and are found accordingly. 2Petitioner Crocker National Bank is the executor of the Estate of John Russell Little. Petitioner's principal office was located in San Francisco, California, when the petition herein was filed. The Federal estate tax return here involved was filed with the District Director of Internal Revenue, San Francisco, California.John Russell Little (hereinafter sometimes referred to as decedent) died on August 2, 1979. At the time of his death, 600 he was a beneficiary and the sole trustee of a testamentary trust (hereinafter sometimes referred to as trust) created by the will of his wife, Grace Schaffer Little (hereinafter sometimes referred to as Mrs. Little), who died on November 11, 1971. The pertinent provisions of the trust are as follows:During the lifetime of John Russell Little, the trustee shall57 pay to or apply for the benefit of John Russell Little, so much of income and principal of the trust estate as is necessary, in the discretion of the Trustee after taking into consideration to the extent the Trustee deems advisable, other resources of John Russell Little available to him outside of this trust, for his proper support, maintenance, welfare, health and general happiness in the manner to which he is accustomed at the time of the death of Grace Schaffer Little.Decedent's gross estate, as computed on his estate's Federal estate tax return, did not include the value of the trust's assets, which the parties agree was $ 539,088.01 at the time of decedent's death. Respondent determined an estate tax deficiency of $ 191,087 after including the value of the trust's assets in decedent's estate under section 2041. 358 Under the three paragraphs of section 2041(a), the value of property is included in a decedent's gross estate in three distinct situations. Since we hold that the value of the trust's assets are included in decedent's gross estate under section 2041(a)(2), we do not consider whether a like result would obtain under section 2041(a)(1) or section 2041(a)(3).Section 2041(a)(2) states in relevant part, "The value of the gross estate shall include the value of all property * * * [to] the extent of any property with respect to which the decedent has at the time of his death a general power of appointment." Section 2041(b)(1) defines general power of appointment as a "power which is exercisable in favor of the decedent, his estate, his creditors, or the creditors of his estate." Section 2041(b)(1)(A) excepts powers which are "limited by an ascertainable standard relating to 601 the health, education, support, or maintenance of the decedent." 459 For the section 2041(b)(1)(A) exception to apply, the power of appointment must be limited to a standard that meets two requirements. The standard must be ascertainable and the standard must relate to the decedent's health, education, support, or maintenance. Estate of Sowell v. Commissioner, 74 T.C. 1001">74 T.C. 1001, 1003 (1980), revd. on other grounds 708 F.2d 1564">708 F.2d 1564 (10th Cir. 1983).Unless the section 2041(b)(1)(A) exception applies, the power held by decedent as sole trustee of the trust to invade income and corpus for his benefit is clearly a general power of appointment. We therefore must determine if the standard of "proper support, maintenance, welfare, health, and general happiness in the manner to which [decedent] is accustomed at the time of the death of [Mrs. Little]" is an ascertainable standard relating solely to the health, education, support, or maintenance of decedent. 560 We look to State law to determine whether the standard relates solely to the health, education, support, or maintenance of the decedent. See Morgan v. Commissioner, 309 U.S. 78">309 U.S. 78, 80 (1940); De Oliveira v. United States, 767 F.2d 1344">767 F.2d 1344, 1347 (9th Cir. 1985). Since Mrs. Little was a resident of California at the time of her death, California State law applies to the construction of the power held by decedent which was created by Mrs. Little's will. De Oliveira v. United States, supra at 1347; Estate of Stober, 108 Cal. App. 3d 591">108 Cal. App. 3d 591, 166 Cal. Rptr. 628">166 Cal. Rptr. 628 (1980).Petitioner argues that a California State court construing the standard would "limit it to refer to the the standard of support which the decedent enjoyed at the time of his wife's death." (Emphasis added.) Petitioner refers to Cal. Civ. Code sec. 2269 and In re Estate of Smith, 117 Cal. App. 3d 511">117 Cal. App. 3d 511, 172 Cal. Rptr. 788">172 Cal. Rptr. 788 (1981). Petitioner suggests that we 602 consider the language of Cal. Civ. Code sec. 2269 (West 1985) as substantially amended61 subsequent to decedent's death. Since section 2041(a)(2) refers to powers held by decedent "at the time of his death," we consider the language of section 2269 of the California Civil Code as enacted in 1872 and in effect at the time of decedent's death. 6 This version of the statute does not support petitioner's contention.In re Estate of Smith, 172 Cal. Rptr. at 790, in dicta, construed the following standard: "reasonable care, comfort, support and maintenance in accordance with the standard62 of living as of the date of [the trustor's] death." Relying heavily on the language "in accordance with the standard of living as of the date of [the trustor's] death" the court held that the standard was ascertainable. 763 Although the standard employed by the trust contains similar language, neither that language nor In re Estate of Smith supports petitioner's contention, as both are relevant only to whether the standard is ascertainable, an issue which we do not decide. 8 See note 12 infra.Having rejected petitioner's contention, we now consider whether a California State court would interpret the standard employed by the trust to relate solely to the health, education, support, or maintenance of decedent. Our research of California State law, as aided by the parties, has not revealed any case directly on point. Therefore, we will 603 consider the general rule of construing testamentary trusts under California State law. "A trust created by64 will is properly controlled by the expressed intention of the testatrix [and] the particular language used is always important." In re Miller's Estate, 230 Cal. App. 2d 888">230 Cal. App. 2d 888, 41 Cal. Rptr. 410">41 Cal. Rptr. 410, 422 (1964). "A trustee must * * follow all the directions of the trustor." Cal. Civ. Code sec. 2258 (West 1985). 9We are convinced that a California State court properly applying these general rules would recognize that the standard employed by the trust does not relate solely to the health, education, support, or maintenance of the decedent. "Were [it] confronted with a dispute between the [widower] 65 and the remaindermen over the propriety of an invasion, [it] would not adopt a grudging and narrow interpretation of [general happiness]." 10In re Estate of Nunn, 112 Cal. Rptr. 199">112 Cal. Rptr. 199, 204, 518 P. 2d 1151 (1974) (using the quoted language to interpret "need"); Estate of Allgeyer, 60 Cal. App. 3d 169">60 Cal. App. 3d 169, 129 Cal. Rptr. 820">129 Cal. Rptr. 820, 823 (1976) (using the quoted language to interpret "comfort").66 We are convinced that a California State court would recognize that there are items which fall within the ambit of "general happiness," but which do not fall within the ambit of "health, education, support, or maintenance." Consider, for example, "travel." The California State Supreme Court604 has intimated that "travel" does not relate to "support, maintenance, or education." 11In re Estate of Nunn, 112 Cal. Rptr. at 205. If it were necessary for decedent to travel to maintain the level of general happiness he enjoyed prior to his wife's death, he could invade the income and corpus of the trust to pay for such travel. Such an invasion is within the expressed intent of Mrs. Little: "the trustee shall pay to or apply for the benefit of [decedent], so much of income and principal * * as is necessary * * * for his * * * general happiness in the manner to which he is accustomed at the time of the death of [Mrs. Little]." See In re Miller's Estate, supra; Cal. Civ. Code sec. 2258 (West 1985).67 "Travel" is not the only example of a proper use of the assets of the trust that would not be proper if the power to invade was limited solely to decedent's health, education, support, or maintenance. A listing of other examples is not here necessary. That one exists is sufficient to show that the standard employed by the trust does not relate solely to decedent's health, education, support, or maintenance. Accordingly, we hold that the section 2041(b)(1)(A) exception to the definition of general power of appointment is not here applicable. 1268 Since none of the exceptions to general power of appointment apply, 13 we hold that decedent possessed, at the time of his death, a general power of appointment. The power of appointment was exercisable over the income and corpus of the trust. Respondent was therefore correct in including the value of the trust's assets in decedent's gross estate. Sec. 2041(a)(2).Decision will be entered for the respondent. Footnotes1. All section references are to the Internal Revenue Code of 1954 as amended and in effect at the time of decedent's death, unless otherwise indicated. All Rule references are to the Tax Court Rules of Practice and Procedure.↩2. The stipulations and the exhibits attached thereto are incorporated herein by this reference.↩3. Because Mrs. Little died less than 10 years before decedent's death and the value of the trust's assets was included in her estate, upon including the value of the trust's assets in decedent's estate, respondent allowed it an increase in the sec. 2013 prior transfers credit. The $ 191,087 deficiency reflects this increase in the sec. 2013 prior transfers credit.↩4. Sec. 2041(b)(1)(B) and (C)↩ also are exceptions to the definition of general power of appointment. However, both apply to powers exercisable by a "decedent only in conjunction with another person" and, accordingly, are not here applicable as the decedent was the sole trustee of the trust.5. Although sec. 2041(b)(1)(A) does not contain the word "solely," the statute must be construed as if it contained that word. Failure to so interpret sec. 2041(b)(1)(A) would obviate words chosen by Congress. See Matut v. Commissioner, 86 T.C. 686 (1986); Estate of Roy v. Commissioner, 54 T.C. 1317">54 T.C. 1317, 1323↩ (1970).6. Sec. 2269 of the California Civil Code, as enacted in 1872 and in effect at the time of decedent's death, which is reprinted in the Historical Note to Cal. Civ. Code sec. 2269 (West 1985), stated as follows:"Discretionary powers. A discretionary power conferred upon a trustee is presumed not to be left to his arbitrary discretion, but may be controlled by the proper Court if not reasonably exercised, unless an absolute discretion is clearly conferred by the declaration of trust."↩7. "A power to invade corpus to provide for a beneficiary's 'reasonable care, comfort, support and maintenance in accordance with the standard of living as of the date of decedent's death' creates a far more ascertainable standard than several approved in the regulation." In re Estate of Smith, 117 Cal. App. 3d 511">117 Cal. App. 3d 511, 172 Cal. Rptr. 788">172 Cal. Rptr. 788, 794 (1981). (Emphasis supplied.) This statement and, more importantly, the lack of others discussing health, education, support, or maintenance lead us to the conclusion that In re Estate of Smith↩ decided only that the standard was ascertainable.8. We envision only one situation in which the language referred to would affect whether the standard related solely to decedent's health, education, support, or maintenance. It may have been that decedent enjoyed no "general happiness" or "welfare" at the time of Mrs. Little's death. In such a case, the terms "general happiness" and "welfare" can be read out of the will as they refer to nothing. Even if petitioner had made such an argument before this Court, it would lose, as it has not proven that decedent's "general happiness" and "welfare" were nonexistent at the time of Mrs. Little's death. See Rules 142(a), 122(b), and 149(b).↩9. See also Cal. Prob. Code sec. 102 (West 1956), repealed for decedents dying after Dec. 31, 1984, 198 Cal. Stat. 842 and Cal. Prob. Code secs. 6103 and 6160↩ (West 1986 Supp.), which states in relevant part, "The words of a will are to receive an interpretation which will give to every expression some effect rather than one which will render any of the expressions inoperative."10. We, are aware that this Court has stated that a "word, such as 'happiness'" should be construed in the context in which it appears. Estate of Ford v. Commissioner, 53 T.C. 114">53 T.C. 114, 126 (1969), affd. 450 F.2d 878">450 F.2d 878 (2d Cir. 1971). We do not construe general happiness in isolation. However, the only language in the trust which limits the term is, "in the manner to which he is accustomed at the time of the death of [Mrs. Little]." We have already determined that this language, with one exception (see note 8 supra), relates only to whether the standard is ascertainable. Accordingly, we find no language in the trust which limits the term "general happiness" as it relates to our present discussion of whether the term is broader than health, education, support, or maintenance.We do not find it necessary for the disposition of this case to construe "welfare." However, we note that "welfare" has, in the past, been construed to be broader than health, education, support, or maintenance. Estate of Jones v. Commissioner, 56 T.C. 35">56 T.C. 35 (1971), affd. 474 F.2d 1338">474 F.2d 1338 (3d Cir. 1973) (construed under New Jersey State law); Franz v. United States, an unreported case ( E.D. Ky. 1977, 39 AFTR 2d 1658↩, 77-1 USTC par. 13,182) (construed under Kentucky State law).11. The court does not refer to "health," but we readily note that "travel" often does not relate to the health of the traveler, the two being, for the most part, independent of one another.Further, we note, as we feel the California State Supreme Court would, that "travel" might, in some situations, relate to "support, maintenance, or education," though, for the most part, "travel" is independent of "support, maintenance, or education."↩12. We need not consider whether the standard is ascertainable as our holding that the standard is not related solely to the health, education, support, or maintenance of the decedent is dispositive of the applicability of sec. 2041(b)(1)(A).In Brantingham v. United States, 631 F.2d 542">631 F.2d 542 (7th Cir. 1980), the Court of Appeals for the Seventh Circuit held that a power to invade for decedent's "maintenance, comfort, and happiness" was, under Massachusetts State law, limited by an ascertainable standard. It further held that the sec. 2041(b)(1)(A)↩ exception was applicable, although it did not address the issue determined in this opinion.13. See note 4 supra↩.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622593/	Estate of Timothy F. Carberry, Deceased, Manufacturer's Hanover Trust Co., and Ella J. Brady, f.k.a. Ella J. Carberry, Executors, and Ella J. Brady, f.k.a. Ella J. Carberry, Petitioners v. Commissioner of Internal Revenue, RespondentEstate of Carberry v. CommissionerDocket No. 27350-88United States Tax Court95 T.C. 65; 1990 U.S. Tax Ct. LEXIS 67; 95 T.C. No. 5; July 16, 1990, Filed 67 Decision will be entered for the respondent. Respondent determined a deficiency in which he disallowed a special allocation of partnership intangible drilling costs. Petitioners and respondent executed a Form 872-A extending the period of limitations. Held:1. The form was properly executed and is binding on both petitioners;2. Respondent is not estopped from asserting the deficiency;3. The special allocation did not have substantial economic effect and is not recognized pursuant to sec. 704(b)(2), I.R.C.; and4. The increased interest rate applies since the phrase "without substantial economic effect" is the equivalent of "without economic substance" and therefore "sham" under sec. 6621(c)(3)(A)(v), I.R.C.Patrick W. Hennessey and William L. O'Conor, Jr., for the petitioners.Scott P. Borsack, for the respondent. Tannenwald, Judge. TANNENWALD66 OPINIONRespondent determined a deficiency of $ 8,698 in Timothy F. Carberry's (decedent) and Ella J. Brady's (his wife) 1 income tax for the taxable year 1967 and increased the interest rate on the underlying deficiency under section 6621(c). 2 The deficiency arises in respect of a net operating loss 68 carryback from 1970. The issues for decision are whether: (1) A Form 872-A was properly executed; (2) respondent is estopped from asserting a deficiency because he failed to act diligently; (3) a special allocation of partnership intangible drilling costs (IDC) is valid under section 704(b); and (4) the increased interest rate is applicable.All of the facts have been stipulated, and the stipulation of facts and attached exhibits are incorporated herein by reference.At the time of the filing of the petition, petitioner Ella J. Brady resided in Boca Raton, Florida. Decedent and petitioner Ella J. Brady timely filed joint Federal income tax returns for 1967 and 1970 with the Internal Revenue Service.Decedent died on May69 8, 1972, and on June 6, 1972, petitioner Ella J. Brady and Manufacturers Hanover Trust Co. (Manufacturers) were appointed as coexecutors and cotrustees. Manufacturers executed and forwarded to respondent a Form 56, Notice of Fiduciary Relationship (under section 6903 of the Internal Revenue Code) on December 17, 1973 (executors), and on February 23, 1976 (trustees). From January 4, 1974 through March 16, 1979, a series of Forms 872 were executed which extended the statute of limitations for assessment for the 1970 and 1971 taxable years of decedent and petitioner Ella J. Brady, the latest date for assessment being extended to June 30, 1980. The forms were executed by Manufacturers as executor on behalf of the decedent and by Ella J. Carberry or Ella J. Brady as spouse. On March 27, 1980, prior to the expiration of the statute of limitations, respondent accepted and 67 executed a Form 872-A indefinitely extending the statute of limitations. The Form 872-A was signed by Helen Thome, Vice President, on behalf of the decedent. Above her signature appears the following handwritten statement: "Manufacturers Hanover Tr. Co. & E. Jane Brady, Executors." Additionally, the form70 is signed by "E. Jane Brady (formerly E. Jane Carberry)" on the line provided for "spouse's signature" without any designation as executor.The decedent's estate was settled by a decree of the Surrogate Court of Nassau County dated April 20, 1978. Respondent never filed with the Surrogate Court a notice of a claim, actual or contingent, for additional income taxes for the year 1967 or 1970 of the decedent.Decedent was a limited partner in Indonesian Marine Resources (Indomar) in 1970. Indomar was a partner in Southeast Exploration (Souex), an oil exploration general partnership. Indomar was formed to raise the funds necessary to finance the drilling for oil and gas from investors who would be limited partners. Under the Souex partnership agreement, Indomar's initial contribution totaled $ 8,750,000, which was to repay the partnership costs of the initial exploration program. After this initial contribution, all partners in Souex were required to make contributions in proportion to their partnership interest. The provisions of the Souex partnership agreement allocated income and expenditures, in part, as follows:(a) All Partnership income shall be allocated to the Partners 71 in the percentages set forth in paragraph (a) of Article I [IIAPCO 59 percent; Carver-Dodge 19.6131 percent; Warrior 7.8452 percent; and Indomar 13.5417 percent] * .(b) All deductions and credits shall be allocated to the Partners in the same proportion that they contribute to the expenditures that created such deductions and credits * . Without limiting the generality of the foregoing, all deductions and credits attributable to expenditures representing contributions under paragraph (b) of Article V [Indomar's contributions of not to exceed $ 8,750,000 to cover "the Partnership's costs of the Initial Exploration Program"] shall be allocated to INDOMAR. * [Brackets used in original.]During 1970, Indomar partners made investments in Indomar, and Indomar made investments in Souex, of $ 8,931,284. Souex's partnership return filed for 1970 reflected 68 no income and $ 11,777,288 in deductions, of which $ 9,004,322 was allocated to Indomar. The 1970 Indomar partnership return reflected losses of $ 9,224,632.42, which included the $ 9,004,321.59 partnership loss from Souex. Decedent was allocated his ratable share of Indomar's losses from Souex, which he carried back72 to 1967. On August 11, 1971, respondent received from decedent and petitioner Ella J. Brady a completed Form 1045, Application for Tentative Refund from Carryback of Net Operating Loss, or Unused Credit, on which they claimed a refund for the taxable year 1967 as a result of a carryback of a net operating loss for 1970 in the amount of $ 44,009. The claim was allowed, and a refund of $ 23,545 was issued.The Souex partnership agreement provided that the partnership would continue until January 1, 1990, unless terminated earlier in accordance with article XII. Under the partnership agreement, distributions upon dissolution were to be made as follows:(e) Upon the dissolution of the Partnership where the Partnership is not reconstituted as provided in paragraph (a) above, the Partnership shall be completely liquidated, a proper accounting shall be made of the accounts of the Partnership as of the date of dissolution in the same manner as Partnership accounting is made at the end of any fiscal period, and the Partnership's liabilities, obligations to creditors and expenses of liquidation shall be paid. The Partnership properties shall be distributed to the Partners in the manner 73 contemplated by paragraph (c) of this Article XII.Article XII, paragraph (c), of the Souex partnership agreement provided:(c) A Partner who withdraws after the First Withdrawal Date upon giving sixty days advance notice to the Partnership shall be entitled to receive an assignment of an undivided interest in the properties of the Partnership determined on an area-by-area or well-by-well basis in accordance with its share of the income therefrom under Article VI hereof, subject to its assumption of its pro rata share of the liabilities and obligations of the Partnership. Upon such withdrawal the withdrawing Partner shall sign and become a party to the Operating Agreement as such Operating Agreement shall be then in effect.Souex was dissolved by agreement of the partners after the close of business on August 31, 1971. The capital accounts of the Souex partners on the date of dissolution were as follows: 69 Cash invested byTotalpartners of SouexPre-Souexcapitalto purchase assetsconcession costsaccountsAmountRatioIIAPCO$ 5,577,92159.0000%$ 1,925,008$ 7,502,929Carver-Dodge1,854,24819.6131 639,9212,494,169Indomar1,280,23813.5417 1,280,238Warrior741,6967.8452 255,968997,664Total9,454,103100.0000 2,820,89712,275,00074 On July 18, 1988, respondent issued a notice of deficiency for 1967 which disallowed the carryback of decedent's distributive share of the special allocation of IDC for 1970 (see section 6501(h)) and which asserted the increased applicable interest rate on the underlying deficiency under section 6621(c).Before addressing the substantive issue of whether the special allocation of partnership losses should be approved, we dispose of certain procedural matters. Initially, petitioners argue that the Form 872-A executed on March 27, 1980, is invalid because the executors had no power to bind the estate since they were relieved of their duties as of April 20, 1978, and because petitioner Ella J. Brady never signed the Form 872-A in her individual capacity. We disagree.Section 6903 provides in part:SEC. 6903(a). Rights and Obligations of Fiduciaries. -- Upon notice to the Secretary that any person is acting for another person in a fiduciary capacity, such fiduciary shall assume the powers, rights, duties, and privileges of such other person in respect of a tax imposed by this title * * * until notice is given that the fiduciary capacity has terminated.In a similar case, involving75 the predecessor to section 6903, we held a Form 872 valid stating that "once a fiduciary gives notice to respondent of his powers, he is expected to have full authority to exercise these powers with respect to all taxable years until he has notified respondent of termination of such authority." Eversole v. Commissioner, 46 T.C. 56">46 T.C. 56, 63 (1966). Cf. Estate of Krueger v. Commissioner, 48 T.C. 824">48 T.C. 824, 831 (1967), where we adopted the same 70 standard in applying section 6903. 3 In the present case, respondent was not notified of the discharge of Manufacturers' authority to act on behalf of decedent, and therefore the Form 872-A executed by Manufacturers is valid. As far as Ella J. Brady is concerned, although the Form 872-A does indicate that she was an executor, she signed the form only on the line designated for "spouse's signature" without designation as executor. We conclude that the Form 872-A is valid as to her, as well as Manufacturers.76 We also reject any allegation that respondent should be estopped from asserting a deficiency because he waited until 1986 to indicate that there was a deficiency and until 1988 to send the notice of deficiency, thereby preventing the decedent's estate from deducting the proposed income tax liability for estate tax purposes. At the outset, we note that the foundation for petitioners' argument is far from established in the record. The decedent died in May 1972 so that his estate tax return should have been filed no later than 9 months after his death, February 1973. See sec. 6075. The period of limitations for claiming a refund to take this deduction would have expired in February 1976. Since the first Form 872 as to decedent's income tax is for 1970 and was executed in December 1973, it would appear that petitioners were well aware of the potential income tax liability in ample time to file a protective claim for refund of estate tax. Moreover, although the doctrines of estoppel and quasi-estoppel are applicable against the Commissioner, it is well established that these doctrines should be applied against him with the utmost caution and restraint. Here petitioners have not77 established the elements necessary for estoppel. Boulez v. Commissioner, 76 T.C. 209">76 T.C. 209, 214-215 (1981), affd. 810 F.2d 209">810 F.2d 209 (D.C. Cir. 1987). Further, at no time did petitioner Ella J. Brady or Manufacturers seek to terminate the properly executed Form 872-A and thereby accelerate the issuance of the notice of deficiency. Petitioners' assertion of estoppel is simply another version of the claim that a Form 872-A expires by operation of law after a reasonable time. We recently rejected this claim in Estate of Camara v. Commissioner, 957">91 T.C. 957 (1988) (Court reviewed), holding that termination requires a taxpayer to use 71 Form 872-T and reaffirming our prior decision to the same effect in Grunwald v. Commissioner, 85">86 T.C. 85 (1986). See also Kernen v. Commissioner, 902 F.2d 17 (9th Cir. 1990), affg. an order of this Court.We also reject any claim based on the assertion that respondent failed to mail the notice of deficiency to petitioner Ella J. Brady's last known address. The petition herein was timely filed on behalf of 78 both Manufacturers and Ella J. Brady as executors and Ella J. Brady individually. Such being the case, the notice is valid both for conferring jurisdiction on this Court and for tolling the statute of limitations, irrespective of whether it was mailed to the last known address. Frieling v. Commissioner, 81 T.C. 42">81 T.C. 42 (1983).We next address the substantive issue of whether the special allocation of partnership deductions should be recognized for tax purposes. We hold that it should not.For the taxable year 1970, section 704(b) provided:SEC. 704(b). Distributive Share Determined by Income or Loss Ratio. -- A partner's distributive share of any item of income, gain, loss, deduction, or credit shall be determined in accordance with his distributive share of taxable income or loss of the partnership * * * if -- * * * (2) the principal purpose of any provision in the partnership agreement with respect to the partner's distributive share of such item is the avoidance or evasion of any tax imposed by this subtitle.Although the relevant regulations in effect for the year in issue list several factors to consider in determining whether the principal79 purpose is the avoidance or evasion of taxes, the most important, and the sole test after 1976, is whether the allocation had "substantial economic effect." Sec. 1.704-1 (b)(2), Income Tax Regs.; Goldfine v. Commissioner, 80 T.C. 843">80 T.C. 843, 850 (1983). See also Elrod v. Commissioner, 87 T.C. 1046">87 T.C. 1046, 1083-1086 (1986). An allocation has substantial economic effect if it "may actually affect the dollar amount of the partners' shares of the total partnership income or loss independently of tax consequences." Sec. 1.704-1(b)(2), Income Tax Regs. The applicable standard in determining whether a special allocation has economic effect is that the partner who benefits from a special allocation must also bear the economic burden of such deduction. Goldfine v. Commissioner, supra at 851; Orrisch v. Commissioner, 55 T.C. 395">55 T.C. 395, 40372 (1970), affd. per curiam in an unpublished opinion (9th Cir. 1973). In order to have substantial economic effect, a partner's allocation of an item or deduction must be reflected in his capital account, and in the event of a partnership liquidation, 80 the liquidation proceeds of the entity must be distributed in accordance with the capital balances. Moreover, where a partner's capital account registers a deficit, he must have the obligation upon liquidation to restore the deficit; absent such an obligation, the other partners would have to bear the economic cost of the special allocation that resulted in the deficit. Elrod v. Commissioner, supra at 1083-1084; Goldfine v. Commissioner, supra at 852.Petitioners' position herein is based upon contentions that were the subject of critical analysis and rejection in Allison v. United States, 701 F.2d 933">701 F.2d 933 (Fed. Cir. 1983), a factually similar case, where taxpayer had invested in a partnership, which in turn invested in Indomar, which in turn invested in Souex, and the taxpayer received his distributive share of the special allocation of IDC from Souex for 1970. The Court of Appeals for the Federal Circuit held that the critical inquiry under section 704(b) was whether the provision for a special allocation had "substantial economic effect" and reversed the lower court's reliance on the business81 purpose of the allocation. 701 F.2d at 936-938. The Court of Appeals concluded that the terms of the Souex partnership agreement showed that the allocation to Indomar had no economic effect other than tax consequences for the Indomar partners. In reaching its decision, the Court of Appeals pointed to the fact that, although not fatal, the agreement did not contain a gain charge-back 4 provision. See 701 F.2d at 939. What was crucial was the fact that the agreement did not include a stipulation that Indomar's share of partnership assets on liquidation was to be computed according to the capital accounts adjusted for the special allocation. See 701 F.2d at 939-940. The Court of Appeals was unpersuaded by the fact that the agreement provided the books and records were to be kept in 73 accordance with usual and customary accounting practices and that the records seemed to show that Indomar's capital account was adjusted for tax purposes to reflect the amount of the special allocation.82 We adopted the Allison analysis in Elrod v. Commissioner, supra, and Ogden v. Commissioner, 84 T.C. 871">84 T.C. 871, 884-885 (1985), affd. 788 F.2d 252">788 F.2d 252 (5th Cir. 1986). 5 See also Gershkowitz v. Commissioner, 88 T.C. 984">88 T.C. 984, 1017-1019 (1987). Accordingly, we hold that the special allocation involved herein did not have substantial economic effect, and thus its principal purpose was the avoidance or evasion of taxes under section 704(b).We next address the imposition of additional interest under section 6621(c), which imposes interest at the rate of 120 percent of the normal rate for any substantial underpayment attributable to "tax motivated transactions." A "tax motivated transaction" includes any sham or fraudulent transaction. See sec. 6621(c)(3)(A)(v). The increased interest rate applies to interest accruing after83 December 31, 1984, even though the transaction was entered into prior to the date of enactment, and there is no question that the increased interest rate applies to returns filed prior to the enactment of section 6621(c). Ewing v. Commissioner, 91 T.C. 396">91 T.C. 396, 422 (1988).It is clear that a transaction without economic substance is considered "sham" within the meaning of section 6621(c)(3)(A)(v). Laverne v. Commissioner, 94 T.C. 637">94 T.C. 637 (1990); Ferrell v. Commissioner, 90 T.C. 1154">90 T.C. 1154, 1206 (1988). The only question is whether our holding that the special allocation herein was "without substantial economic effect" is the equivalent of holding that the allocation was "without economic substance." We think that it is. Both standards are the foundation of the same conclusion, namely that the principal purpose was tax avoidance. That purpose in turn is clearly the basic frame of reference of section 6621(c). It would be farcical to give a different meaning to the two standards, at least for the purposes of section 6621(c). 6 We find support for this conclusion in Holladay v. 74 , 72 T.C. 571">72 T.C. 571 (1979),84 affd. 649 F.2d 1176">649 F.2d 1176 (5th Cir. 1981), where we held that the allocation of "bottom line" losses of a joint venture lacked economic substance within the meaning of section 704 since the proceeds of the joint venture were to be distributed irrespective of the amount or deficit in the respective capital accounts of the joint venturers. 72 T.C. at 588. In affirming our decision, the Court of Appeals for the Fifth Circuit likewise focused upon the fact, among others, that the loss allocation had no effect on the taxpayer's capital account or upon his share in the event of dissolution and concluded that "the allocation of the venture's losses to Holladay lacked economic substance and was clearly a sham under IRC sec. 704(a)." 649 F.2d at 1180. We sustain respondent's imposition of increased interest accruing after December 31, 1984.*85 For the above reasons,Decision will be entered for the respondent. Footnotes1. Ella J. Brady was decedent's spouse and was formerly known as Ella J. Carberry.↩2. Unless otherwise indicated, all statutory 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. See also Estate of Coates v. Commissioner, T.C. Memo. 1986-574↩.4. A "gain charge-back" provision in the Souex partnership agreement would have provided that Indomar would have been charged with all, or substantially all, partnership profits until it had recouped the losses previously allocated to it. See W. McKee, W. Nelson, and R. Whitmire, Federal Taxation of Partnerships and Partners 10-19 (1977).↩5. See also Hogan v. Commissioner, T.C. Memo. 1990-295↩.6. See Young v. Commissioner, T.C. Memo. 1987-397, where we left open the question of whether these two standards are identical for the purposes of sec. 704(a) and (b)(2)↩.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622594/	Appeal of OPPENSTEIN BROTHERS.Oppenstein Bros. v. CommissionerDocket No. 117.United States Board of Tax Appeals1 B.T.A. 259; 1924 BTA LEXIS 198; December 29, 1924, decided Submitted November 6, 1924. 198 A taxpayer upon taking a lease of land agreed to raze the existing building and erect a new one, paying the necessary cost in the first instance, which cost, with the exception of an amount equal to the stipulated value of the old building, was to be repaid by the landlord over a period of years. Held that the stipulated value (less salvage) of the old building was not a loss to the taxpayer in the year of execution of the lease. H. E. Lunsford, C.P.A. and O. R. Abel, C.P.A., for the taxpayer. Robert A. Littleton, Esq. (Nelson T. Hartson, Solicitor of Internal Revenue) for the Commissioner. IVINS260 Before IVINS, KORNER, and MARQUETTE. This appeal came on for hearing on October 27, 1924, and from the facts set forth in the pleadings and exhibits filed at the hearing, the Board makes the following FINDINGS OF FACT. 1. During the year 1917 the taxpayer was a partnership doing business in Kansas City, Mo. At that time it owned a half interest in a lease of certain premises consisting of land and buildings. On February 27, 1917, it executed with the owners of the premises a new lease for a term of 50 years beginning July 1, 1917. 199 This lease was executed by Louis Oppenstein in his individual name, but apparently was taken by him on behalf of the partnership and one Sigmon Harzfeld, the partnership and Harzfeld each having a 50 per cent interest. By the terms of this lease the lessees agreed to remove at their own expense the building standing on the demised ground and to erect and construct a new building according to specifications set forth in a separate instrument. The lease provided for the reduction of the rent in a specified manner in order to reimburse the lessees for so much of the cost to them of the new building as should exceed the sum of $30,000, in the following language: It is agreed that the building now standing on the demised premises is of the value of $30,000, and that for and to the extent of whatever sum and amount of money the total cost and expenditure of constructing and erecting the new building upon the demised premises as herein provided for to be done shall exceed the sum of $30,000 the lessee shall be entitled to be reimbursed. * * 2. At the time of executing the said lease the lessees were holding the same premises under a lease dated May 11, 1910, which had not then expired200 but which was to terminate under the terms of the new lease upon the day the new lease should become effective. 3. The taxpayer and Harzfeld sold the building which stood on the premises to a wrecking company for $1,400, of which $700 was received by the taxpayer. They thereafter proceeded with the erection of a new building upon the premises which under the terms of the lease became the property of the landlords subject to the right of the lessees to occupy upon paying rent, etc. 4. In its profits tax return for 1917 the taxpayer claimed a deduction of $14,300 for loss on the sale of the old building. The Commissioner disallowed this deduction and accordingly found a deficiency against the taxpayer in the sum of $2,857.29. The taxpayer has appealed to this Board. DECISION. The deficiency should be recomputed in accordance with the following opinion. Final determination will be settled on consent or on seven days' notice in accordance with Rule 50. OPINION. IVINS: We are left in some uncertainty as to the date of expiration of the taxpayer's old lease. In the petition it is stated that on June 261 20, 1916, the taxpayer and Harzfeld secured a lease201 on the premises for a term of 20 years. In the brief filed on behalf of the taxpayer it appears that the taxpayer and Harzfeld secured a lease on May 11, 1910, which was to expire on June 30, 1916, and that this lease proved unprofitable and on February 27, 1917, was surrendered for a new lease effective from July 1, 1917. The new lease which was introduced in evidence refers to the lease of May 11, 1910, and provides that it shall be canceled on the day that the term of the new lease shall begin. In any case the parties seem agreed that the taxpayer and Harzfeld were holding under an existing lease which was canceled when the new lease became effective. The taxpayer takes the position that in effect it bought a half interest in the old building for $15,000 and sold it to the wrecker for $700 and is entitled to take a deduction for loss thereon. We can not find in the record any justification for such a position. The lessees finding their existing lease unprofitable negotiated for a new lease and the landlord said in effect "if you will sign up a new lease on specified terms we will cancel the old one." The terms of the new lease provided that the lessees should raze the existing202 building at their own expense and replace it with a more modern one for which they were to pay specified rents over a period of 50 years but the landlords were to reimburse the lessees for all this cost except $30,000 which was stipulated to be the value of the old building, such reimbursement to be made by allowing deductions from the stipulated rent. It was a single transaction, and there is no basis for saying that the taxpayer bought the old building and sold it at a loss. As a matter of fact it got $700 out of the wrecking of the old building, and the money it paid out was for the construction of a new building. The cost of the new building to the taxpayer, to the extent that it is not reimbursable to it by the landlords, constitutes cost of acquiring the new lease and may be written off by way of exhaustion over the period of the lease, but it is not deductible as a loss.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622595/	RALPH PULITZER AND MARGARET L. PULITZER, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Pulitzer v. CommissionerDocket No. 82246.United States Board of Tax Appeals36 B.T.A. 964; 1937 BTA LEXIS 633; November 26, 1937, Promulgated 633 The grantor of a trust who retains the power to appoint another with the right to terminate the trust and receive the fund, has a power to revest the fund in himself and is taxable upon the income of the trust. John G. Jackson, Esq., for the petitioners. Harold Allen, Esq., for the respondent. STERNHAGEN 964 The Commissioner determined an income tax deficiency of $4,357.49 for 1931, by reducing by the amount of capital losses the basis of the percentage limitation of deductions for charitable contributions and a deficiency of $22,287.11 for 1932 by taking petitioner Ralph Pulitzer upon the income of a trust established by him. FINDINGS OF FACT. Petitioners, husband and wife, are residents of New York, New York. They filed a joint income tax return for 1931 and separate returns for 1932. The notice of deficiency was addressed only to Ralph Pulitzer, and advised him that deficiencies had been determined in his income taxes for 1931 and 1932. 1. In 1931, petitioners made charitable contributions aggregating $36,445.05. The amount of their ordinary net income, computed without any deduction for charitable contributions or capital634 losses, was $249,961.62. The amount of capital losses was $242,956.15. 2. On December 31, 1931, Ralph Pulitzer transferred certain property to the Central Hanover Bank & Trust Co., as trustee, to hold in trust during the life of his wife and of one of their sons. The trustee was empowered to invest and reinvest the corpus, to collect the income, and pay expenses, and was directed to distribute the net income quarterly to the wife during her life and thereafter to their children in a specified manner, and, upon termination of the trust term, to distribute the corpus among the grantor's children or descendants according to given contingencies. The trust instrument further provided: SIXTEENTH: The right and power to terminate this trust as to the whole or any part thereof is hereby given and granted to such individual other than the Grantor as the Grantor shall designate and appoint by an instrument or instruments in writing duly signed and acknowledged by the Grantor, which instrument shall particularly specify the extent to which said trust may be revoked by the individual designated. Upon any such termination it shall be the duty of the Trustee to convey, assign, transfer635 and deliver free from and discharged 965 of all trusts the whole of the trust fund, or such part or parts thereof as to which the trust shall have been so terminated, unto the individual designated and appointed as above provided. In case the trust shall be terminated only as to a part of the trust fund, the Trustee shall thereafter continue to hold only the residue of the trust fund as to which he trust shall not then have been terminated, with like power in the Grantor to again designate and appoint an individual other than himself who shall have the right and power to terminate the trust as to such residue or any part thereof. The grantor further reserved the right to modify, supplement, or change the trust instrument: * * with respect to any administrative feature and with respect to the powers and authorities and duties of the Trustee * * . This reservation shall not extend to any right, power or authority to affect the devolution of the property or the income thereof, as herein provided. During 1932 the trustee distributed to the wife trust income of $46,855.16. OPINION. STERNHAGEN: Although at the hearing the question was suggested as to the participation636 in this proceeding of the wife, and both counsel were directed to deal with the subject, it has been ignored by them. Since no deficiency has been determined as to her or notice sent to her, there is no subject as to her within the jurisdiction of the Board, ; ; ; see ; ; ; . Her name is therefore stricken as a party petitioner, and the proceeding as to both years will be confined to a consideration of the deficiencies determined as to Ralph Pulitzer. 1. The Commissioner computed the deduction for charitable contributions by applying the statutory 15 percent limit to a net income of $7,005.47, being the remainder after subtracting capital losses, $242,956.15, from ordinary net income, $249,961.62. The petitioner assails the subtraction of capital losses. The question is no longer open, 637 ; certiorari denied, , rehearing denied, ; ; certiorari denied, U.S. (Oct. 11, 1937); ; affd., ; (on review, C.C.A., 3d Cir.). The disallowance is sustained. 2. By paragraph sixteenth of the trust instrument, the power rests in the grantor to appoint an individual other than himself with the right to terminate the trust entirely or in part, whereupon the trustee shall transfer so much of the fund to the appointee as the terms of the appointment provide, up to the entire amount. The Commissioner 966 determined that this was a revocable trust and hence that the income is properly taxable to the petitioner. The respondent here supports this determination by sections 166 and 167, 1 Revenue Act of 1932, and by citing , and 638 . The petitioner argues, relying upon ; ; and , that because the power to revest the corpus is not reserved or given to the grantor by the express terms of the instrument itself, the statute is not applicable. 639 There is, however, no such restriction in the statute and nothing from which it can be implied. The statutory requirement that the income of a trust shall be attributed to the grantor operates whenever there exists in fact the described "power to revest." It is not limited to cases where such power is derived from the express terms of the instrument, ;; (on appeal C.C.A., 1st Cir.). That such a power actually is in the grantor of the present instrument seems plain. He may at any time, without let or hindrance from any of the beneficiaries, the trustee, or anyone else, appoint whomsoever he will, with the direction to terminate the trust. The direction may be made a contractual obligation upon the appointee; and although the trustee is required to transfer the fund directly to the appointee alone, there is nothing to prevent the creation by the grantor of a 967 legal obligation in his appointee to transfer the fund at once to the grantor. This ready and simple method available to the grantor for taking ownership640 and possession of the trust fund and having the trust terminate or diminish at his pleasure is hardly less than a power to revoke or revest. Indeed, the use of the word "revoke" in the instrument carries the implication that the control is intended to remain in the grantor, for strictly the word could not suitably be applied to the act of termination by another. The same considerations are here as moved the decision in , and require that the taxable income of the trust should be included in that of the grantor. The opinion of the Board in , was promulgated before the Supreme Court's opinion in , and must give way to the extent that it may conflict with the later and superior authority. In the Holmes case, the power of revocation held by the grantor was expressly conditioned upon the consent of the beneficiary, an adverse interest. In the Yeiser case, the husband was appointed by the instrument not only with power to terminate beyond the control of the grantor, but also to protect the interests of the minor children. *641 This was regarded by the court as substantially to circumscribe the power and control of the grantor. The determination of the Commissioner is sustained. Judgment will be entered for the respondent.Footnotes1. SEC. 166. REVOCABLE TRUSTS. Where at any time during the taxable year the power to revest in the grantor title to any part of the corpus of the trust is vested - (1) in the grantor, either alone or in conjunction with any person not having a substantial adverse interest in the disposition of such part of the corpus or the income therefrom, or (2) in any person not having a substantial adverse interest in the disposition of such part of the corpus or the income therefrom, then the income of such part of the trust for such taxable year shall be included in computing the net income of the grantor. SEC. 167. INCOME FOR BENEFIT OF GRANTOR. (a) Where any part of the income of a trust - (1) is, or in the discretion of the grantor or of any person not having a substantial adverse interest in the disposition of such part of the income may be, held or accumulated for future distribution to the grantor; or (2) may, in the discretion of the grantor or of any person not having a substantial adverse interest in the disposition of such part of the income, be distribution to the grantor; or (3) is, or in the discretion of the grantor or of any person not having a substantial adverse interest in the disposition of such part of the income may be, applied to the payment of premiums upon policies of insurance on the life of the grantor (except policies of insurance irrevocably payable for the purposes and in the manner specified in section 23(n), relating to the so-called "charitable contribution" deduction); then such part of the income of the trust shall be included in computing the net income of the grantor. (b) As used in this section, the term "in the discretion of the grantor" means "in the discretion of the grantor, either alone or in conjunction with any person not having a substantial adverse interest in the disposition of the part of the income in question." ↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622596/	Reserve Loan Life Insurance Company of Texas, Petitioner, v. Commissioner of Internal Revenue, RespondentReserve Loan Life Ins. Co. v. CommissionerDocket No. 3676United States Tax Court4 T.C. 732; 1945 U.S. Tax Ct. LEXIS 233; February 8, 1945, Promulgated 233 Decision will be entered for the petitioner. Petitioner, although in existence since 1939, became a life insurance company on March 23, 1940, within the definition of section 201 (a) of the Internal Revenue Code. Held, that it was entitled, under section 203 (a) (2) of the Internal Revenue Code, to a deduction based upon the mean of its reserves on March 23 and December 31, 1940. George S. Atkinson, Esq., for the petitioner.J. Marvin Kelley, Esq., for the respondent. Disney, Judge. DISNEY732 This case involves deficiencies in income tax for the taxable year ended December 31, 1940, in the amount of $ 34,818.34, and in excess profits tax for the same period in the amount of $ 21,923.20.The first issue presented is whether petitioner's taxable year, within the language of section 203 (a) (2) of the Internal Revenue Code, began on March 23, 1940, or, on the other hand, on January 1, 1940. The date affects the amount of petitioner's deduction based upon its reserve funds.The second issue is whether, in computing its excess profits tax liability for the taxable year ended December 31, 1940, petitioner is entitled to include in its invested capital the reserve funds held by it under the law for the fulfillment of its life insurance and annuity contracts.FINDINGS OF FACT.We incorporate herein by reference and make a part hereof the stipulation of facts filed, including the exhibits attached thereto and made235 a part thereof. The following is a summary of the stipulated facts and the exhibits attached thereto, together with additional facts the finding of which is based upon evidence adduced at the trial.733 Reserve Loan Life Insurance Co. of Texas, hereinafter referred to as petitioner, is a Texas corporation. Its charter was filed with and approved by the Board of Insurance Commissioners of the State of Texas on November 14, 1939, and was on the same day approved by the Attorney General of Texas. The original incorporators were C. W. Murchison, Toddie L. Wynne, and B. J. Wynne.Petitioner's purpose at the time it was chartered was to acquire all of the business and assets, reserves, contracts, and liabilities of every character of Reserve Loan Life Insurance Co. of Indianapolis, Indiana, hereinafter sometimes referred to as the Indiana company, to continue the business previously conducted by the Indiana company and to engage in business as a life insurance company. Negotiations to effect this purpose were commenced in June 1939. An amended charter was filed for the Indiana company in September 1939, embodying, inter alia, an amendment to its articles of incorporation 236 proposed by the board of directors on August 16, 1939, and adopted by the shareholders on September 19, 1939, whereby the capital stock of the Indiana company was increased from 20,000 shares of the par value of $ 10 each, aggregating $ 200,000, to 53,000 shares of the par value of $ 5 each, aggregating $ 265,000. The additional capital was contributed by C. W. Murchison and Toddie L. Wynne, in connection with their plan to acquire the Indiana company and move it to Texas. These changes in the Indiana company became advisable as a result of an examination of the Indiana company about that time by the Insurance Commissioner of the State of Indiana, in whose report the conclusion was reached that the Indiana company was in need of rehabilitation.An agreement of reinsurance, duly executed and dated March 9, 1940, under the terms of which petitioner was to acquire all the assets and assume all the liabilities of the Indiana company, was acknowledged on March 9, 1940, by the president and secretary of the Indiana company, and on March 11, 1940, by the president and secretary of petitioner. It was approved by the chairman of the board of Insurance Commissioners of Texas, on March 12, 237 1940, and by the Insurance Commissioner of Indiana on March 18, 1940. Petitioner's board of directors had held meetings with reference to this reinsurance agreement between November 14 and December 31, 1939. Petitioner's president, B. J. Wynne, held in trust the controlling interest of the Indiana company for the account of C. W. Murchison and Toddie L. Wynne. As petitioner's president, it was B. J. Wynne's job to get the Indiana company moved to Texas, and he conferred at various times prior to March 23, 1940, with the Insurance Commissioners of Texas and Indiana.Petitioner acquired all of the assets and assumed all the liabilities of the Indiana company as of March 23, 1940. As of that date petitioner 734 took over 52,080 shares of the 53,000 outstanding of the capital stock of the Indiana company and all of its business, assets, reserves, contracts, and liabilities of every character, in exchange for which the stockholders of the Indiana company received $ 4 per share in cash and $ 8 per share in units of beneficial interest in petitioner. Actual physical delivery of the reserve funds and assets to the Board of Insurance Commissioners of the State of Texas, at Dallas, 238 Texas, and to petitioner, and release by the Indiana company and by the Department of Insurance of the State of Indiana were not effected until March 29, 1940, after articles of reinsurance between the Indiana company and petitioner had been filed with and approved by the Insurance Commissioner of Indiana on March 23, 1940.Prior to March 23, 1940, petitioner did not employ any personnel; it had neither agents nor rate books, and its first policies were not printed until after March 23, 1940. Petitioner did not rent the building which it now occupies as its home office until after the reinsurance agreement had been approved by the parties, and it was agreed that the lease was not binding if the company did not move from Indiana. When the reinsurance agreement became effective on March 23, 1940, petitioner held a new election of officers, and it was not until March 28, 1940, that its first policy was written. Its activities prior to March 23, 1940, were limited to renting the building, as above stated, and to negotiating for taking over the business, assets, reserves, contracts, and liabilities of the Indiana company.On January 1, 1940, the Indiana company was a life insurance 239 company, engaged in the business of issuing life insurance and annuity contracts (including contracts of combined life, health, and accident insurance) and its reserve funds required by law and held for the fulfillment of such contracts on January 1, 1940, comprised more than 50 percent of its total reserve funds required by law and so held for the fulfillment of such contracts on January 1, 1940, and amounted to $ 10,258,754.85. Since the effective date of the articles of reinsurance, March 23, 1940, the Indiana company has been dormant and inactive and at December 31, 1940, reserve funds of the Indiana company held under the law for the fulfillment of its life insurance and annuity contracts were zero.On March 23, 1940, petitioner was an insurance company engaged in the business of issuing life insurance and annuity contracts (including contracts of combined life, health, and accident insurance), and its reserve funds required by law and held for the fulfillment of such contracts were $ 10,258,754.85 and comprised more than 50 percent of its total reserve funds. Prior to March 23, 1940, petitioner's reserve funds required by law and held for the fulfillment of such contracts were240 zero.735 On December 31, 1940, the petitioner was an insurance company engaged in the business of issuing life insurance and annuity contracts (including contracts of combined life, health, and accident insurance), and its reserve funds required by law and held for the fulfillment of such contracts on December 31, 1940, were $ 10,272,773.07, and comprised more than 50 percent of its total reserve funds.The mean of the reserve funds of petitioner required by law and held on March 23, 1940, for the fulfillment of life insurance and annuity contracts and contracts of combined life, health, and accident insurance and those reserves so held on December 31, 1940, amounted to $ 10,265,763.96. The reserve funds of petitioner and the Indiana company were computed at a lower assumption rate than 4 percent.Petitioner filed for the calendar year 1940 with the collector of internal revenue for the second collection district of Texas at Dallas, Texas, Form 1120L (headed "For Calendar Year 1940"), insurance company income and defense tax return, 1 and Form 1121, corporation excess profits tax return, reporting therein the taxable income and claiming therein deductions of petitioner and241 those of the Indiana company. Petitioner claimed deduction under section 203 (a) (2) of the Internal Revenue Code of $ 389,577.90, being 3 3/4 percent of $ 10,388,743.93, the mean of the reserve funds of the Indiana company at January 1, 1940, held as required by law for the fulfillment of life insurance and annuity contracts and contracts of combined life, health, and accident insurance and those of petitioner so held at December 31, 1940, as reported on the return. Petitioner makes that claim now only in the alternative, contending primarily that the mean of reserves at March 23, 1940, and December 31, 1940, should be used in computing net income. Schedule No. 1 of the Form 1120L showed separately income and deductions for the period January 1 to March 23, 1940, and income and deductions for the period March 23 to December 31, 1940, but listed as taxable some items of income covering both periods, and listed as deductions some items covering both periods. The computation showed no tax payable, but a loss of $ 36,452.31. A return for the period March 23 to December 31, 1940, would also have shown a loss, if the $ 389,577.90 deduction were taken.242 The respondent has disallowed $ 196,963.40 of the deduction of $ 389,577.90 claimed on the basis that, for the purpose of computing the deduction under section 203 (a) (2) of the Internal Revenue Code, the reserve funds required by law and held at January 1, 1940, 736 for the fulfillment of petitioner's life insurance and annuity contracts were zero and that such reserve funds so held at December 31, 1940, amounted to $ 10,272,773.07. Respondent has also eliminated from taxable income and deductions items designated in the notice of determination of deficiency as items of income and deductions belonging to the Indiana company for the period January 1 to March 23, 1940.In the computation of excess profits tax herein respondent has failed to include in invested capital reserve funds of petitioner required by law and held for the fulfillment of life insurance and annuity contracts (including contracts of combined life, health, and accident insurance), on the theory that they are not a part of invested capital for the computation of excess profits tax credit of 8 percent of the invested capital.March 23, 1940, was the beginning of petitioner's taxable year ended December 31, 243 1940, within the meaning of section 203 (a) (2) of the Internal Revenue Code.OPINION.Supplement G of chapter 1, subchapter C, of the Internal Revenue Code provides for income tax upon life insurance companies. Section 203 (a) (2), a part of Supplement G, provides:(a) General Rule. -- In the case of a life insurance company the term "net income" means the gross income less -- * * (2) Reserve Funds. -- An amount equal to 4 per centum of the mean of the reserve funds required by law and held at the beginning and end of the taxable year, except that in the case of any such reserve fund which is computed at a lower interest assumption rate, the rate of 3 3/4 per centum shall be substituted for 4 per centum. * It is agreed that the rate of 3 3/4 percent applies here.The first question in this case is whether March 23, 1940, is the beginning of petitioner's taxable year within the meaning of section 203 (a) (2). If so, petitioner is entitled to deduct from gross income the sum of $ 384,966.15, which is 3 3/4 percent of the mean of the reserve funds of $ 10,258,754.85 required by law and held by it on March 23, 1940, and reserve funds of $ 10,272,773.07 so held by it on December244 31, 1940. Respondent argues that petitioner's taxable year began January 1, 1940, so that petitioner may deduct only 3 3/4 percent of the mean between zero, the amount of petitioner's reserve on January 1, 1940, and the reserve held on December 31, 1940.To be entitled to any deduction based on its reserves, the petitioner must be a life insurance company. By section 201 (a), a life insurance company is defined as:(a) Definition. -- When used in this chapter the term "life insurance company" means an insurance company engaged in the business of issuing life insurance and 737 annuity contracts (including contracts 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.Until March 23, 1940, petitioner did not comply with the above definition because it did not earlier hold reserve funds for the fulfillment of its contracts of more than 50 percent of its total reserve funds. It possessed no reserve funds at all until that date. As to this fact there is no disagreement between the parties, and it is agreed that on March 23, 1940, it had reserve funds245 in the necessary amount. Therefore petitioner was not, within the intendment of the Federal statute here involved, a life insurance company until March 23, 1940, 2 and it follows that it could not, until that date, compute its net income as life insurance companies may do, by deducting the mean of its reserves at the beginning and end of the taxable year. The respondent argues that, because the petitioner's charter was issued in November 1939 and its officers negotiated with the Indiana Company until March 23, 1940, and rented an office building prior to March 23, 1940, it was a life insurance company from before January 1. Such facts are clearly insufficient to make the petitioner a life insurance company under the statutory definition. Bowers v. Lawyers' Mortgage Co., 285 U.S. 182">285 U.S. 182, 188.246 The petitioner, in effect, contends that because, as we above conclude, it was not a life insurance company until March 23, 1940, its taxable year began on that date, within the meaning of section 203 (a) (2); in other words, that the section, in referring to taxable year, refers only to its taxable year as a life insurance company. It cites Royal Highlanders, 1 T. C. 184 (reversed on other grounds, 138 Fed. (2d) 240), as authority that a life insurance company may consider its taxable year to begin, and use its reserves in the computation of the deduction, upon the day when it becomes a life insurance company, though it had prior thereto been in existence as a corporation. The respondent, however, takes the view (in addition as above, to contending that petitioner was a life insurance company from date of its charter in November 1939) not only that the petitioner's taxable year is to be measured by its existence as a corporation, so that the petitioner could not, under section 48 (a) of the Internal Revenue Code, 3 file a return for a fraction of a year, and so use the fraction as its taxable year, as was done in the 247 Royal Highlanders case, but that in fact the petitioner 738 did file a return for the entire calendar year and so can not, under the text of section 48 (a), have a taxable year beginning on March 23, 1940. To this the petitioner, in substance, answers that, though it did in its return cover the calendar year 1940, it divided both income and deductions into two periods, before and after March 23, thus in reality filing a return for a fractional part of a year, that it was required to cover the entire year by Regulations 103, section 19.201 (b)-1, requiring the return to be upon Form 1120L (which has the caption "For Calendar Year 1940"), also by the instructions issued with the form. In addition, the petitioner points out that the income reported and deductions taken, so far as covering the period January 1 to March 23, 1940, were eliminated by the Commissioner, leaving the return in effect one for a fraction of a year. Therefore, the petitioner says, it comes squarely within section 48 (a) and its taxable year began on March 23, 1940.248 In the consideration of this question, we seek first the purpose of the provision in section 203 (a) (2) which allows life insurance companies an unusual deduction, based upon a mean average of its reserves during its taxable year; for it is obvious that, though Supplement G does not provide an entirely separate tax code fully covering life insurance companies, 4 any application of other more general sections, such as 48 (a), should be interpreted in the light of the special nature of life insurance companies, as provided for in Supplement G. 5 The purpose of this deduction allowed life insurance companies by section 203 (a) (2) is clear: "The reason for allowing the deduction of 4 per cent. of the reserve is that a portion of the 'interest, dividends, and rents' received have to be used each year in maintaining the reserve; i. e., adding to it on the basis of a certain interest rate, varying from 3 per cent. to 4 per cent. according to the requirements of the statutes of the several states." Mr. Justice Brandeis, dissenting in National Life Ins. Co. v. United States, 277 U.S. 508">277 U.S. 508. The report of the Committee on Ways and Means on the Revenue Act249 of 1942 refers to "The liberal deduction allowed for the amount of interest required for the maintenance of reserves." It thus appears that the 3 3/4 percent deduction based upon the mean of reserves is an attempt to render tax-free an amount sufficient to cover the amount of income which must actually go into policy reserves under the state statutes governing insurance companies.The view of the respondent in this case, in our opinion, is opposed to the purpose of the statute, as above set forth; for the respondent would require a life insurance company to be in existence the entire calendar year in order to secure the deduction of 3 3/4 percent of the 739 mean reserves handled by it while engaged in life insurance business during such year, and a company which, on the respondent's theory, began business and had reserves250 on January 3 would, because of the use of zero as representing its reserves, receive only one-half of the deduction which would be received by a company starting on January 1 with the same reserves and ending with the same reserves at the end of the year. The one company, starting on January 1, would receive, in accordance with Congressional intent, deduction of approximately the amounts required to be placed in the reserve, but the second company, starting on January 3, would, though required to place identically the same amount in reserve, receive only one-half as much as a deduction. The same is true, except in degree, in the instant case or in any other case where the life insurance company engages in business for some fraction of a calendar year. 6253 Such a result should be countenanced only if clearly required by statute. We do not find such statute. 7Section 48 (a) of the Internal Revenue Code, as it existed in 1940, is not sufficiently clear in that respect to compel the result for which respondent argues. The first part of the section, defining "taxable year" as calendar year (or fiscal year), adds "upon the basis of which the net income is computed under this Part"; 251 but "this Part" does not include Supplement G, and section 14 (d) of the Internal Revenue Code, as amended by section 201 of the Revenue Act of 1939, specifically provides that, "In the case of insurance companies, the tax shall be as provided in Supplement G." That supplement provides for computation of net income of life insurance companies, by consideration of both income and deductions in a manner peculiar to such life insurance companies, and it appears no strained construction to say that such life insurance company income is not computed under Part IV of subchapter B, referred to as "this Part" in section 48 (a), but is computed under Supplement G, a part of subchapter C. The latter part of section 48 (a) provides specially that "'Taxable 740 year' includes, in the case of a return made for a fractional part of a year * * , the period for which such return is made" (italics supplied), and does not define the term as that section does after the amendment of "includes" to "means" by section 135 of the Revenue Act of 1942. Such language does not forbid us to consider taxable year as including, in this case, a portion of a year, even though we assume for the moment252 that the return was not filed merely for such portion of the year; and if under any circumstances the language of the latter part of section 48 (a) so permits, it would seem to be permissible here, where we are considering a special kind of income, with the object of the statute so clear as expressed in the quotations above set forth, and perhaps more particularly where, as here, the Commissioner in the deficiency notice does not increase the petitioner's income by any amounts contended to have been earned prior to March 23, 1940, but on the contrary has eliminated all income reported and deductions taken by the petitioner for the period from January 1 up to March 23, thus in effect leaving a return for a period beginning March 23.If the petitioner had filed a return strictly covering only the period from March 23 to December 31, 1940, we think it clear that, under Royal Highlanders, supra, the petitioner would be entitled to the deduction claimed, for therein the petitioner, as in this case, had been in existence throughout the entire year, though there as an exempt corporation. The petitioner reported only as to the fraction of the year covered by its business as a life insurance company, and we allowed deduction based upon consideration of its reserves at the date it began business as a life insurance company on May 4, 1937. Thus, the difference between this case and Royal Highlanders is the narrow one of possible difference between a return filed for the fraction of the year and one filed, as respondent contends and petitioner denies in this case, for the whole calendar year. We have above observed that section 48 (a) in its latter portion does not, in fact, limit254 taxable year (in case of fractional years) only to the fraction reported. That question, of course, did not need to be answered in the Royal Highlanders case, since the fraction of a year during which life insurance business was transacted was carefully reported. Such a narrow distinction, even if it existed in fact, would not, in view of the generality of "includes" in section 48 (a), be a sound basis upon which to base a holding so essentially out of line with Congressional purpose as the respondent's view herein entails.In fact, however, we think it may be said that the petitioner did file a return for a fractional part of the year. It did use Form 1120L, which is labeled "For Calendar Year 1940," but the same form was used in Royal Highlanders, yet we there found as a fact that the return 741 was for a fraction of a year. Regulations 103, section 19.201 (b)-1, and the instructions with Form 1120L require a domestic life insurance company to use that form. The petitioner may not, therefore, by the use thereof, be considered to have done more than obey regulations and instructions. It is true, of course, that the petitioner did report income and claim deductions255 covering the entire calendar year, but this was only compliance with the regulation and instructions. The income and deductions were separated into two periods, before and after March 23, indicating a recognition that a situation different from the earlier part of the year existed after that date, which can only have reference to the beginning of the life insurance business. The petitioner, reporting the entire year, reported no tax, but a loss of about $ 36,000; and a return for the fractional year beginning on March 23 would likewise have reported a loss, so that the petitioner was, tax-wise, not interested in whether the return included only its own income beginning on March 23 or the income also of the Indiana company up to that date. Under such circumstances, a return covering in one sense the entire year should not, in our opinion, be considered to cause such a distinction between this case and Royal Highlanders, supra, as to deny, to the extent of approximately one-half, a deduction which we consider Congress intended the petitioner to have. The petitioner in Royal Highlanders, though in existence during the entire calendar year, had no256 taxable income prior to the beginning of its life insurance status and business, and the same is true of the petitioner here. Great Southern Life Ins. Co., 33 B. T. A. 512; affd., 89 Fed. (2d) 54; and Western & Southern Life Ins. Co. v. Huwe, 116 Fed. (2d) 1008 (affirming U. S. Dist. Ct., S. Dist. Ohio, Aug. 14, 1939), are not authority contrary to Royal Highlanders, supra, or to our conclusion here; for in those cases the companies were life insurance companies from the beginning of the year and merely acquired business of other companies during the year, so that the effect of any reserve so acquired would be reflected in the reserves at the end of the year and the company thus would get deductions based thereon, within the intent of Congress and the rationale of our conclusion here. We hold that the petitioner's taxable year as a life insurance company began March 23, 1940, and that the respondent erred in denying the deduction based upon a mean between petitioner's reserves at March 23 and December 31, 1940.The parties are in agreement that the above conclusion*257 renders unnecessary the consideration of the second issue; and the same is true of petitioner's alternative contention.Decision will be entered for the petitioner. Footnotes1. Regulations 103, section 19.201 (b)-1, requires the return of life insurance companies to be upon Form 1120L, as do the instructions therewith, which state: "The return shall be for the calendar year ended December 31, 1940."↩2. Lamano-Panno-Fallo Industrial Ins. Co. v. Commissioner, 127 Fed. (2d) 56, 58. See also West Penn. Beneficial Assn. v. United States, 44 Fed. Supp. 575↩.3. SEC. 48. DEFINITIONS.When used in this chapter --(a) Taxable Year. -- "Taxable year" means the calendar year, or the fiscal year ending during such calendar year, upon the basis of which the net income is computed under this Part. "Taxable year" includes, in the case of a return made for a fractional part of a year under the provisions of this chapter or under regulations prescribed by the Commissioner with the approval of the Secretary, the period for which such return is made↩4. MacLaughlin v. Alliance Ins. Co., 286 U.S. 244">286 U.S. 244, 253, 254↩.5. Helvering v. Oregon Mutual Life Ins. Co., 311 U.S. 267">311 U.S. 267↩.6. If it be said that, on the other hand, the company which begins life insurance business late in the year will receive too much deduction, if the respondent's theory be not adopted, it is noted that as above seen the deduction was intended to be "liberal" under the statute in force in the taxable years. The Senate Finance Committee, considering the Revenue Act of 1932, recommended that the deduction "be computed at the interest rate at which the policy reserves are actually maintained." This recommendation the Senate did not follow, and Congress adopted the provision quoted above in Section 203 (a) (2) allowing a flat 3 3/4 percent deduction in any case where the interest assumption rate at which the reserve is maintained is less than 4 percent. It was not until the Revenue Act of 1942, section 163 (a), that an attempt was made to approach more closely, in a credit instead of the old deduction, to the actual experience of life insurance companies in maintaining reserves. Considering this history, it appears that the possibility of a liberal result, in case the life insurance company is engaged in that business only a brief period during the year, does not justify the result herein sought by the Commissioner, which we consider opposed to Congressional purpose. In Royal Highlanders↩, the company was in business a lesser fraction of the year than was the petitioner here.7. For a general discussion of this question, see Mertens, Law of Federal Income Taxation, vol. 8, § 44.25, pp. 70, 71.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622601/	JAMES B. MARTIN, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentMartin v. CommissionerDocket No. 26625-90United States Tax CourtT.C. Memo 1991-243; 1991 Tax Ct. Memo LEXIS 272; 61 T.C.M. (CCH) 2768; T.C.M. (RIA) 91243; June 3, 1991, Filed 272 An appropriate order of dismissal and decision will be entered. James McCann, for the respondent. DAWSON, Judge. GOLDBERG, Special Trial Judge. DAWSONMEMORANDUM OPINION This case was assigned to Special Trial Judge Stanley J. Goldberg pursuant to section 7443A(b)(4) and Rules 180 and 181. 1 The Court agrees with and adopts the opinion of the Special Trial Judge which is set forth below. OPINION OF THE SPECIAL TRIAL JUDGE This case is before the Court on respondent's motion to dismiss for failure to state a claim upon which relief can be granted and for a penalty pursuant to section 6673. The motion was calendared for hearing in Chicago, Illinois, on February 25, 1991. When this case was called from the calendar, counsel for respondent appeared and was heard. Petitioner did not appear nor did anyone appear on his 273 behalf. In a notice of deficiency sent to petitioner on August 28, 1990, respondent determined the following deficiency in, and additions to, petitioner's Federal income tax for 1988: Additions to Tax, SectionsDeficiency6651(a)6653(a)(1)6653(a)(2) 26661(a)$ 11,172$ 485$ 559$ 485On November 26, 1990, petitioner filed his petition with the Court seeking a redetermination of the deficiency and additions to tax. The only claims contained in the petition are (1) that the notice of deficiency was sent in direct274 violation of the U. S. Constitution and the Internal Revenue Code, and (2) that there are no grounds for sending the notice of deficiency. Petitioner has previously brought two causes of action in this Court. The first was in the case captioned James B. Martin, Petitioner v. Commissioner of Internal Revenue, Respondent, at docket No. 29663-89. In that case petitioner sought a redetermination of deficiencies in Federal income tax and additions to tax as follows: TaxableAdditions to Tax, SectionsYearDeficiency6651(a)6653(a)(1)6653(a)(1)(B)6653(a)(2)1984$ 8,163$ 2,022$ 40819858,5682,11142819869,7072,358$ 485TaxableAdditions to Tax, SectionsYear6653(a)(1)(B)6654(a)6661(a)1984$ 507$ 2,02219854822,11019864532,358His petition contained the same claims as the present one. Like this case, respondent filed a motion275 to dismiss for failure to state a claim and for a penalty pursuant to section 6673. The motion was heard in Washington, D.C., and in our oral findings of fact and opinion rendered March 14, 1990, we categorized petitioner as making various "tax protester" arguments which have been rejected by this and other courts. We granted respondent's motion, and in our Order of Dismissal and Decision entered March 20, 1990, required petitioner to pay a penalty of $ 4,000 to the United States. The second was in the case captioned James B. Martin, Petitioner v. Commissioner, Internal Revenue, Respondent, at docket No. 5012-90. In that case petitioner sought a redetermination of the following deficiency in Federal income tax and additions to tax for the taxable year 1987: Additions to Tax, SectionsDeficiency6651(a)6653(a)(1)(A)6653(a)(1)(B)6661(a)$ 9,950$ 650$ 498$ 650Again, his petition contained276 the same claims he made in the petition filed at docket No. 29663-89, and in this case. Respondent again filed a motion to dismiss for failure to state a claim and for a penalty pursuant to section 6673. The motion was heard in Washington, D.C. and in our oral findings of fact and opinion rendered on June 20, 1990, we stated that petitioner asserted "tax protester arguments" and raised these and similar arguments in the earlier case at docket No. 29663-89 which we dismissed. We granted respondent's motion, and in our Order of Dismissal and Decision entered June 26, 1990, required a penalty in the amount of $ 4,000. Rule 34(b)(4) provides that a petition filed in this Court shall contain clear and concise assignments of each and every error which petitioner alleges to have been committed by respondent in the determination of the deficiency and additions to tax in dispute. Rule 34(b)(5) provides that the petition shall contain clear and concise lettered statements of the facts on which petitioner bases the assignments of error. No justiciable error has been alleged in the petition filed by petitioner. Again, and unwisely, petitioner raises broad attacks on the Federal income 277 tax. Rule 40 provides that a party may file a motion to dismiss for failure to state a claim upon which relief can be granted. Generally, we may dismiss a petition for failure to state a claim upon respondent's motion when it appears beyond doubt that petitioner can prove no set of facts in support of his claim which would entitle him to relief. ; . The determinations made by respondent in his notice of deficiency are presumed correct. ; Rule 142(a). In addition, any issue not raised in the pleadings is deemed conceded. ; ; Rule 34(b)(4). Because petitioner has not raised any justiciable facts or issues in his petition, we will grant respondent's motion to dismiss. See ; ; .278 However, in our decision we will not sustain respondent's erroneous determination as to the addition to tax for 1988 purportedly under section 6653(a)(2) for 50 percent of the interest payable on the underpayment due to negligence. See footnote 2, supra. Finally, we turn to the portion of respondent's motion that moves for a penalty pursuant to section 6673(a)(1), which provides in pertinent part: (1) PROCEDURES INSTITUTED PRIMARILY FOR DELAY, ETC. -- Whenever it appears to the Tax Court that -- (A) proceedings before it have been instituted or maintained by the taxpayer primarily for delay (B) the taxpayer's position in such proceeding is frivolous or groundless, or * * the Tax Court, in its decision may require the taxpayer to pay the United States a penalty not in excess of $ 25,000.The record in this case establishes that petitioner instituted and maintained this proceeding primarily for delay. At the time he filed his petition in this case on November 26, 1990, he was well aware that his claims were discredited and totally rejected by this Court and other courts. The purpose of section 6673 "is to compel taxpayers to think and to conform their conduct279 to settled principles before they * * litigate. A petition to the Tax Court * * * is frivolous if it is contrary to established law and unsupported by a reasoned, colorable argument for change in the law." . Based upon established law, petitioner's position is both frivolous and groundless. Because we find that this proceeding has been instituted and maintained by petitioner primarily for delay and that his position is both frivolous and groundless, respondent's motion will be granted in this respect, and we require petitioner to pay to the United States a penalty of $ 7,500. Petitioner should now realize the futility of initiating senseless and meritless litigation in this Court. To reflect the foregoing, An appropriate order of dismissal and decision will be entered. Footnotes1. All section references are to the Internal Revenue Code as amended and in effect for the year in issue. All Rule references are to the Tax Court Rules of Practice and Procedure.↩2. Respondent erroneously determined that petitioner is liable under section 6653(a)(2) for 50 percent of the interest due on the underpayment of tax attributable to negligence or intentional disregard of rules or regulations. Section 1015(b)(2)(A) of the Technical and Miscellaneous Revenue Act of 1988, Pub. L. 100-647, 102 Stat. 3342, 3569, applicable to returns the due date for which is after December 31, 1988, amended section 6653(a) and eliminated this addition to tax.↩. 50 percent of the interest due on the underpayment of tax attributable to negligence.↩. 50 percent of the interest due on the underpayment of tax attributable to negligence.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622603/	Robert H. Montgomery v. Commissioner.Robert H. Montgomery v. CommissionerDocket No. 735.United States Tax Court1947 Tax Ct. Memo LEXIS 320; 6 T.C.M. (CCH) 77; T.C.M. (RIA) 47017; January 31, 1947320 J. Marvin Haynes, Esq., 1 E. 44th St., New York, N. Y., for the petitioner. Bernard D. Hathcock, Esq., for the respondent. VAN FOSSAN Memorandum Findings of Fact and Opinion The Commissioner determined a deficiency in income tax of $8,448.02 for the year 1940. The petitioner claimed a loss due to casualty in the amount of $13,500 in his 1940 return. The respondent allowed a deduction in the amount of $1,500 and disallowed the balance, $12,000. The petitioner asserts error in this respect, now claiming that he sustained a loss of $25,000 and that his taxes for 1940 have been overpaid to the extent of $8,093.46. Findings of Fact The petitioner is an attorney and a certified public accountant, having engaged in the practice of law and accounting for more than 50 years. His principal office is in New York and he filed his 1940 return in the third district of New York. In the summer of 1931 petitioner became interested in collecting and growing palm trees and other tropical trees and plants. In that connection he consulted with officials of the Department of Agriculture at Washington to ascertain whether land in the vicinity of Coral Gables, Florida, would be suitable for the purpose of 321 conducting an experiment by acquiring and growing rare and tender tropical palms and other plants. Some officials were interested in the project and encouraged and advised petitioner as to the required soil and location. Petitioner went to Coral Gables, Florida, and upon locating an area containing the suggested soil, he purchased, in 1932, for $10,000 seventy acres, consisting of 20 acres of low hammock land at $250 an acre and 50 acres of cut under pine land at $100 an acre. Between 1932 and 1935, inclusive, petitioner spent approximately $63,000 for the construction of a main house, or the residence of petitioner (costing about $15,000), a superintendent's house, a tool house, a greenhouse (about 20 X 50 feet), a slat house (about 60 X 90 feet), a small guest house, and a swimming pool. The palm collection was started in the summer of 1932. Petitioner and the head of the United States Plant Introduction Garden motored through Florida for a week or ten days looking for rare palms which had been brought in from other countries before quarantine was established. The depression prevailing at that time made it easy for petitioner to obtain many of the rare palms already in Florida. 322 Because of the quarantine, importation of growing palms was impossible. In this situation petitioner, in order to raise new species, brought in seeds through the help of the United States Department of Agriculture, Dr. David Fairchild, Principal Agricultural Explorer of that Department, Dr. E. D. Merrill, Administrator of Botanical Collections of Harvard University and Director of the Arnold Arboretum, and Dr. Thomas Barbour, Director of the Museum of Comparative Zoology, Harvard University, and Custodian, Harvard Biological Establishment, Soledad, Cuba. Using a letter head entitled "The Coconut Grove Palmetum, Coconut Grove, Florida," which also listed the above three scientists as an advisory board and petitioner as director, petitioner communicated with every tropical garden in the world in an effort to obtain seeds of new species by an exchange of seeds from Florida for seeds from other countries, in which the various botanical gardens were not allowed to sell seeds but were willing to exchange. In a comparatively short time petitioner acquired over 2,000 lots of seed. The seed was planted in the greenhouse and plants were grown in the slat house. It was necessary to acquire soil 323 sterilizing apparatus and other equipment to induce seed not only to sprout but to grow to a point where the plants could be set out. A water system was built covering fully 40 acres as the plants required watering for about two years after being set out. In 1932 the petitioner had about 30 men working on the estate. Thereafter the number decreased and from 1934 up to the time of the freeze in 1940, six or seven men were regularly employed with some occasional extra help. During 1932, 1933 and 1934 the cost of plants, grading, landscaping and planting amounted to a total of approximately $80,000. This included taking about 12,000 cubic yards of soil from the low land to the high land for planting purposes. The seed acquired by the petitioner cost no more than $100, as most of it was acquired in exchange. No segregation of the cost of developing and growing of plants, and the cost of the improvement of the land was made. After the first three years petitioner spent about $10,000 a year, most of which was spent for upkeep and maintenance and not considered as a capital expenditure by him. By 1934 the estate was well landscaped and was one of the show places in Dade County. It had the 324 appearance of age as well as beauty. By December 1939 petitioner had acquired 432 different species of growing palms, including some unidentified species and varieties. He also had 1,011 different species of trees, plants, shrubbery and vines growing by that time, including 50 of cycads, 130 of flowering trees, 199 of foliage and other trees, 397 of succulents, 77 of vines, 110 of tropical fruits, including cultivated varieties, 101 citrus, including cultivated varieties, and 37 of native trees in the hammock. This composed the largest collection of growing palms and other tropical plants in Florida, if not the world. There were many thousands of trees and plants growing on the estate. On January 27, 1940 the weather in Florida turned cold and by nine o'clock in the evening was below freezing and remained so until eleven o'clock of the morning of January 28, 1940, the temperature going as low as 24 degrees. Immediately after the freeze petitioner instructed his superintendent to prepare an inventory of the plants which had been destroyed or damaged by the freeze. A summary of the inventory prepared by the superintendent is as follows: Number of Value EstimatedDestroyedPlantsSpeciesBefore and AfterCost ofNursery Stock: Freeze RestorationTrees and shrubs (in pots or boxes)12819$ 122.80 Palms (4 to 10 inches)25423402.00 In open ground: Palms (4 to 20 feet)74251,452.50 DamagedNursery stock16415382.50$ 135.00$ 140.00 In open ground: Palms (4 to 35 feet)4651522,385.0013,760.004,197.00 Palms (3 to 25 feet)163195,375.002,753.001,261.00 Shrubs and trees Ranging from211216,259.002,227.002,068.00 Shrubs and trees 3 to 30 feet84261,102.00393.50402.00 Shrubs and trees in height387520.00210.00157.00 Vines436695.00371.00195.00 and othersMangoes535,875.004,300.00815.00 Loss of fruit estimated on previous yearscrops600.00 Avocadoes11425.00225.00115.00 Loss of fruit estimated on previous yearscrops$ 50.00 Bananas, 40 clumps$ 200.00$ 100.0050.00 Litchiis, 6 dead4.0024.00 Pineapples, estimated loss, part crop50.00 Papayas, loss of 800 lbs. of fruit40.00 Hawaiian Hibiscus, 33 grafts dead330.00 Hawaiian Hibiscus, 60 grafts damaged600.00400.00100.00 Poinsettias12120.0020.0012.00 Ixora Macrothyrsa1545.0015.0020.00 Four acres lawn1,000.00500.00200.00 Loss of vegetables200.00 Loss of cut flowers300.00 Loss of other decorative trees2,000.00Labor, for pruning, etc.200.00$49,664.80$25,409.50$10,826.0025,409.50Difference in value before and after freeze$24,255.30325 Subsequent to the taking of the above inventory some of the plants listed among the damaged plants died, had to be dug up and were destroyed. Some of the other plants cut to the ground in the hope of saving them merely produced suckers and as a result are not worth ten per cent of a good plant. On some palms the effect of the freeze was not apparent until two or three weeks thereafter. The damaged plants required considerable care, such as pruning, the bringing in of fresh soil from the low land, fertilizing and watering, - items which the superintendent included in his estimate of restoration cost. Petitioner has not been compensated in whole or in part by insurance or otherwise for the loss resulting from the freeze. The Florida estate is the residence of petitioner and is not connected with any trade or business. No part of the cost for the planting, the land, or the buildings on the estate has been deducted as expense items in any return filed by the petitioner. Since the petitioner acquired the estate in 1932 and up to 1940 he has claimed no other casualty loss except in his return for 1935, in which he deducted a loss of $4,103 326 sustained as the result of two hurricanes. The petitioner deducted as a loss not compensated for by insurance or otherwise, the amount of $13,500 in his 1940 return, which figure represented the stated value of the plants totally destroyed and the total amount of estimated restoration cost, as shown in the inventory made by the superintendent. The respondent allowed $1,500 and disallowed the balance. Within the time prescribed by law the petitioner filed a claim for refund of taxes of $8,093.46 in which he claimed that he had sustained in 1940 a loss from the freeze in an amount of at least $25,000, instead of $13,500, the amount deducted in his return. As a result of the freeze the value of petitioner's estate immediately after the freeze was $13,500 less than its value immediately before the freeze. Opinion VAN FOSSAN, Judge: The Commissioner does not contend that the petitioner, under section 23(e), Internal Revenue Code, 1 did not sustain any loss as a result of the freeze. On the contrary, he determined that the petitioner sustained a loss in 1940 "as a result of damage to plants and trees on your property at Coconut Grove, Florida, arising from a freeze." However, he reduced 327 the claimed amount of loss from $13,500 by $12,000, thus allowing as a casualty loss deduction the amount of $1,500 only. The petitioner now claims that he sustained a casualty loss of $25,000. Hence, the only question to be determined is the amount of the loss sustained, which is a question of fact. The amount of the loss sustained is the difference between the value of the estate immediately preceding the casualty and the value after the casualty, limited however to the amount of the adjusted basis of the estate. Helvering v. Owens, 305 U.S. 468">305 U.S. 468; Whipple v. United States, 25 Fed. (2d) 520; 328 Ray Durden, 3 T.C. 1">3 T.C. 1; John S. Hall, et al., Executors, 16 B.T.A. 71">16 B.T.A. 71; Mary Cheney Davis, 16 B.T.A. 65">16 B.T.A. 65; G.C.M. 21013, 1939-1, C.B. 101. It has been held under similar circumstances in determining loss due to casualty, trees and shrubbery destroyed should be treated as an integral part of the estate. Whipple v. United States, supra; Frederick H. Nash, 22 B.T.A. 482">22 B.T.A. 482; John S. Hall, et al., Executors, supra; Mary Cheney Davis, supra.See also Harry Johnston Grant, 30 B.T.A. 1028">30 B.T.A. 1028. The testimony as to the loss is quite extensive and widely at variance. Petitioner's superintendent made an estimate of the damage immediately after the freeze in the amount of $13,500, using as a gauge the estimated cost of restoring, repairing or replacing the damaged plants and trees. This is the amount claimed by the petitioner in his return. One of the petitioner's witnesses estimated the value of the estate before and after the freeze at $150,000 and $125,000, respectively, with a consequent loss figure of $25,000. Witnesses for the respondent were of the opinion that the value of the entire estate was $75,000 and $70,000 before and after the freeze, respectively, with a consequent loss of $5,000. 329 We are satisfied that petitioner's expert witnesses gave too great an emphasis to what might be termed the intangible elements involved in petitioner's pioneering project while respondent's witnesses, on the other hand, were too coldly realistic. In our judgment the correct figure lies somewhere between the two extremes. We have found that the value of petitioner's property after the freeze was $13,500 less than immediately before the freeze. This amount is less than petitioner's adjusted cost basis and was not compensated for by insurance or otherwise. The estate is a private residence not used for business purposes, no part of the cost of which has been deducted in the petitioner's tax returns. Consequently, the petitioner is entitled to a total loss deduction in the amount of $13,500. The above figure coincides with the amount originally claimed by petitioner in his return and with the amount of damage estimated by the petitioner's superintendent immediately after the freeze. It is not found for these reasons but represents our judgment based on the entire record of the nearest possible approximate estimate to a correct figure. Decision will be entered for the petitioner. Footnotes. Items included in deduction claimed in 1940 return.↩1. SEC. 23. DEDUCTIONS FROM GROSS INCOME. In computing net income there shall be allowed as deductions: * * (e) Losses by Individuals. - In the case of an individual, losses sustained during the taxable year and not compensated for by insurance or otherwise - * *(3) of property not connected with the trade or business, if the loss arises from fires, storms, shipwreck, or other casualty, or from theft. No loss shall be allowed as a deduction under this paragraph if at the time of the filing of the return such loss has been claimed as a deduction for estate tax purposes in the estate tax return.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622604/	RAYMOND C. AU AND FELICE L. AU, Petitioners v COMMISSIONER OF INTERNAL REVENUE, Respondent; AUGUSTINE AU AND ADRIENNE AU, Petitioners v COMMISSIONER OF INTERNAL REVENUE, RespondentAu v. CommissionerDocket Nos. 10228-88; 10229-88United States Tax CourtT.C. Memo 1990-203; 1990 Tax Ct. Memo LEXIS 220; 59 T.C.M. (CCH) 458; T.C.M. (RIA) 90203; April 19, 1990Raymond C. and Felice L. Au, pro se in docket No. 10228-88. Augustine and Adrienne Au, pro se in docket No. 10229-88. Lisa Primavera-Femia and Paul J. Sude, for the respondent. RAUMMEMORANDUM OPINION RAUM, Judge: The Commissioner determined the following deficiencies in income tax against petitioners: PetitionerDocket No.YearAmountRaymond C. & Felice L. Au10228-881982$ 15,505Augustine & Adrienne Au10229-8819821 15,876The petitioners in each docket No. are husband and wife. Each couple filed a joint income tax return for 1982. All of the petitioners resided in Pennsylvania at the time the petitions herein were filed. Petitioners claimed credit for rehabilitation expenditures under section 46(a)(2)(F). 2 At issue 221 is whether section 48(g)(2)(B)(i) prevents such expenditures from being treated as "qualified rehabilitation expenditures." If these expenditures are not qualified rehabilitation expenditures, the parties are in dispute as to the applicable Accelerated Cost Recovery System percentage to be applied to the expenditures. The case was submitted fully stipulated. The male petitioners are brothers. They are dentists, and each was a 50 percent partner in a partnership named Raymond C. and Augustine C. Au, D.D.S. In 1981 the partnership purchased a 40-year old building. The first floor of the building was placed in service as a rental property in 1981. Substantial improvements were made to the building during 1982 to make the upper floors usable. These improvements were completed and placed in service in December 1982. For the year 1981 the building shell was depreciated using the Accelerated Cost Recovery System (ACRS). The parties have stipulated that on its 1982 return, the partnership claimed the rehabilitation credit under section 46(a)(2)(F)222 [now section 46(a)(3)] 3 for the substantial improvements made to the building. Additionally, the partnership claimed depreciation on both the building and the substantial improvements using ACRS. The depreciation percentage stated on the return for the substantial improvements was 12 percent. Neither the partnership nor the individual petitioners elected the optional straight-line method for depreciating the building and the substantial improvements on their respective income tax returns as provided by section 168(b)(3), which is brought into play by section 48(g)(2)(B)(i). 4223 On their 1982 returns, petitioners claimed their distributive shares (50 percent for each couple) of both (1) the accelerated depreciation on the building, and (2) the accelerated depreciation and the rehabilitation credit for the substantial improvements. But, as just noted, they did not make any election on those returns to use the straight-line method of depreciation that was specified in section 48(g)(2)(B)(i) as a condition for classifying the cost of the substantial improvements as "qualified rehabilitation expenditures," nor was any such election made on the partnership returns. The audit of the 1982 partnership and individual returns commenced on or about March 21, 1985. On September 6, 1985, respondent's revenue agent met with petitioners' representative 224 and explained the proposed adjustments regarding the rehabilitation credit and depreciation and the basis therefor. At that meeting, the revenue agent explained that the rehabilitation credit was disallowed because petitioners did not make the required election under section 168(b)(3). At that time petitioners' representative responded orally that "petitioners wished to make the election." (Emphasis supplied. ) The record does not disclose that any written request was ever submitted on behalf of the partnership to make the election, notwithstanding that, in a letter from petitioners' representative to the revenue agent dated September 13, 1985, reference was made to the revenue agent's rejection of what was apparently the oral request on petitioners' behalf to change the ACRS depreciation to straight-line. 1. Petitioners' eligibility for the "qualified rehabilitation expenditures" credit. In DeMarco v. Commissioner, 87 T.C. 518">87 T.C. 518 (1986), affd. in an unpublished opinion 831 F. 2d 281 (1st Cir. 1987), a case with facts substantially similar to the facts herein, we examined the law and the legislative history relating to the rehabilitation credit. Our analysis in that case is equally 225 applicable here, and rather than attempt to restate that analysis in different words, we find it more useful and efficient to quote at length from that opinion (87 T.C. at 521-524): The improvements, and related expenditures, for which petitioners seek a tax credit were made in 1982. As effective for that year, section 46(a)(2)(F), I.R.C. 1954, allows a credit against income tax computed as a percentage of the taxpayer's "qualified rehabilitation expenditures". The credit, however, is conditioned on the expenditures coming within the definition of "qualified rehabilitation expenditure[s]" set out in section 48(g)(2),. I.R.C. 1954. That definition, in section 48(g)(2)(B)(i), specifies that: (B) * * The term "qualified rehabilitation expenditure" does not include -- (i) * * * Any expenditures with respect to which an election has not been made under section 168(b)(3) (to use the straight-line method of depreciation). [Emphasis supplied.] The effect of section 48(g)(2)(B) is to exclude those expenditures "with respect to which an election has not been made" from the definition of qualified expenditures, and thereby to condition the availability of the credit on the making of the 226 election "under section 168(b)(3) (to use the straight-line method of depreciation)." Section 168(b)(3), I.R.C. 1954, describes the election therein as follows: "the taxpayer may elect * * the applicable percentage [by which to depreciate] determined by use of the straight-line method." It is apparent from the legislative history accompanying the addition of this election condition to the definition of a "qualified rehabilitation expenditure" that "These [rehabilitation] credits are available only if the taxpayer elects to use the straight-line method of cost recovery with respect to rehabilitation expenditures". Conf. Rept. 97-215, at 221 (1981), 2 C.B. 494">1981-2 C.B. 494; S. Rept. 97-144, at 72 (1981), 2 C.B. 437">1981-2 C.B. 437. The language of section 48(g)(2)(B) itself, the language of its legislative history, and the fact that Congress' addition of the election condition coincided with its adoption of the Accelerated Cost Recovery System, [footnote ref. omitted] make it clear that the purpose of the election provision is to require the taxpayer to choose the benefits of either the accelerated depreciation method provided in ACRS or the rehabilitation tax credit. The taxpayer is thus to be entitled 227 to one of these benefits, but not both, and is required to make his election in a specified manner. * * Since the election required to be made by section 48(g)(2)(B) is an election under section 168(b)(3), the Code provision governing the "Manner and time for making elections" under section 168 applies to the election here. That provision is section 168(f)(4) and in relevant part [footnote ref. omitted] it demands that: (B)(i) * * * Any election under this section shall be made on the taxpayer's return of the tax imposed by this chapter for the taxable year concerned. * * * (C) * * * Any election under this section, once made, may be revoked only with the consent of the Secretary. Consequently, to qualify for the credit, petitioners must have elected, in accordance with section 168(f)(4)(B), [footnote ref. omitted] to depreciate the 1982 improvements using the straight line method. In section 168(f)(4)(b)(i), Congress prescribed that the election be made "on the taxpayer's return * * * for the taxable year concerned". Petitioners are required to follow Congress' prescription in order that their election be effective. Riley v. Commissioner, 311 U.S. 55">311 U.S. 55, 58 (1940). This, however, 228 petitioners simply did not do. We note that one of the decisions that we relied upon in DeMarco was thereafter affirmed by the Fourth Circuit. Atlantic Veneer Corp. v. Commissioner, 85 T.C. 1075">85 T.C. 1075 (1985), affd. 812 F. 2d 158 (4th Cir. 1987). It is undisputed in the present case that on its 1982 return, the partnership claimed the rehabilitation credit for the improvements and claimed depreciation on those improvements using ACRS, but not the straight-line method. The individual partners are bound by the method of depreciation chosen by the partnership with respect to these improvements (see section 703(b)) and in fact did deduct their proportionate share of the rehabilitation credit and the ACRS depreciation claimed on the 1982 partnership return. But section 48(g)(2)(B)(i) makes clear that the rehabilitation credit is available only if the straight-line method of depreciation is elected. And once a method of depreciation is elected, it "may be revoked only with the consent of the Secretary." Sec. 168(f)(4)(C). There is no allegation or evidence that the Secretary consented to a change in the election in this case. Petitioners contend, nevertheless, that they made an effective oral 229 election during the audit of the partnership return, changing the ACRS election to straight-line depreciation, and that this new "election" was timely pursuant to section 168(f)(4)(B)(ii). 5 We disagree. Apart from the requirement of approval by the Secretary, section 168(f)(4)(B)(ii) does not, as petitioners argue, give a taxpayer permission to make a change in the method of depreciating the rehabilitation expenditures from ACRS to straight-line during audit, 230 and certainly not an oral change. Rather, section 168(f)(4)(B)(ii) allows a taxpayer to change his election with respect to the original building under certain circumstances. It does not allow a taxpayer to change his election with regard to the improvements. We considered this matter at length in an extended footnote in DeMarco. We there explained the origin and intended scope of section 168(f)(4)(B)(ii), as follows (87 T.C. at 523 n.6): [S]ec. 168(f)(4)(B)(ii) * * is entitled "Special rule for qualified rehabilitated buildings" and it applies to an election with respect to the original building which has become the object of a rehabilitation effort. It was added by the Technical Corrections Act of 1982, Pub. L. 97-448, 96 Stat. 2371-2372, in order to remedy a perceived problem caused by the combination of two provisions added to the Code in 1981 in the Economic Recovery Tax Act, Pub. L. 97-34. Those two provisions are, first, sec. 168(f) and, second, sec. 48(g)(2)(B). Sec. 168(f) requires that components of section 1250 property be depreciated using the same method as is used for the building itself. It allows an exception to that rule for substantial improvements made 231 3 years or more after the building was placed in service. For substantial improvements, such as rehabilitation expenses, made within 3 years of the taxpayer's placing the building in service, the improvements must be depreciated using the same method as is used for the building. Under sec. 48(g)(2)(B), a credit is available for the expenses of rehabilitation improvements only if those improvements are depreciated using the optional straight line method in sec. 168(b)(3). A problem arose when these two Code sections, in combination, were applied to a taxpayer who had chosen an accelerated method of depreciating his building when he first placed it in service, and then, within the 3-year period made a rehabilitation improvement to the building. In this situation, the taxpayer would be required [emphasis in original] under sec. 48(g)(2)(B) to elect straight line depreciation of the improvements in order to be eligible for a rehabilitation credit and he would be prohibited [emphasis in original] under sec. 168(f) from electing straight line depreciation of the improvements because the building itself had been depreciated using an accelerated method. To remedy this problem affecting 232 rehabilitation improvements made within the 3-year period, Congress added sec. 168(f)(4)(B)(ii). In so doing, the committees explained, it allowed the taxpayer to "elect the straight-line method for the building shell at any time within 3 years after the shell is placed in service by the taxpayer". H. Rept. 97-794, at 8; S. Rept. 97-592, at 10, 1 C.B. 478">1983-1 C.B. 478. * * * [Emphasis added.] Section 168(f)(4)(B)(ii) is similarly inapplicable in this case. It does not allow petitioners to change the election with respect to the improvements for which the rehabilitation credit is claimed. That section is concerned only with the opportunity to change an election with respect to the original building if certain conditions are met. At the time of the audit of the 1982 returns, the partnership had already made an election to use ACRS to depreciate the building as well as the improvements. There is no evidence that the partnership ever made any appropriate attempt to change depreciation claimed by it to straight-line with regard to either the building or the improvements, let alone that the Secretary ever approved any such alleged attempted change. And, of course, the individual partners 233 are bound by any election made by the partnership in this respect, either originally or pursuant to a permissible change. (Section 703(b)). 6 Thus, petitioners' position is fatally defective here under section 168(f)(4)(B)(ii), not only because satisfactory evidence is lacking that the partnership ever sought to avail itself of those provisions in respect of the building, but also because the individual partners themselves had not made an election, either originally or by appropriate amendment, to use straight-line -- even assuming that they were free to elect a method of depreciation different from that used by the partnership. Petitioners state on brief that "the petitioner filed amended returns to retroactively reduce cost recovery allowances previously claimed." It is unclear to whom "the petitioner" (in the singular) was intended to refer. However, no such amended returns are in the record, and there is no evidence that any such returns 234 were in fact filed. Moreover, if there were any amended returns, we have no way of knowing whether they were returns of both the partnership and the individual partners, or of only the partnership, or of only the partners, or whether in any such returns the amendments sought changes in the election relating to the building or both. In the circumstances, we refuse to address the hypothetical question whether an amended return reducing cost recovery allowances previously claimed would be effective. We also note, as indicated above, that section 703(b) would preclude the individual partners from making an election in respect of the method of depreciation that was different from that made by the partnership. Thus, if petitioners amended only their own returns and the partnership return were not amended, their efforts to make an election different from the election of the partnership would have no effect. Rothenberg v. Commissioner, 48 T.C. 369">48 T.C. 369, 374 (1967). We need not pursue the matter further. We hold that the record fails to show that there was a permissible election to use straight-line depreciation upon which entitlement to a rehabilitation credit depends, and that petitioners 235 are accordingly ineligible for the rehabilitation credit claimed. 2. The applicable ACRS percentage for 1982 rehabilitation expenditures deduction. The parties have stipulated that a second issue before the Court is "Whether, if the Court determines that petitioners are not entitled to the credit, the applicable Accelerated Cost Recovery System percentage for the rehabilitation expenditures is 1%." The Commissioner dealt very summarily with this issue on brief. However, petitioners' brief contained nothing whatever on this point, and we could therefore treat it as having been abandoned by them. In any event, the Commissioner's position appears to be clearly correct. The Government does not disagree that 12 percent would be correct under ACRS if depreciation for 1982 were to be computed on the basis of a full year. However, although the partnership purchased the building in 1981 and placed the first floor in service in that same year, the 1982 improvements to make the upper floors usable were not completed and placed in service until December 1982. To the extent relevant here, the accelerated cost recovery method of depreciating 15-year real property 7 is set forth in section 168(b)(2)236 8, as follows: (2) 15-year real property. -- (A) In general. -- In the case of 15-year real property, the applicable percentage shall be determined in accordance with a table prescribed by the Secretary. In prescribing such table, the Secretary shall -- (i) assign to the property a 15-year recovery period, and (ii) assign percentages generally determined in accordance with use of the 175 percent declining balance method (200 percent declining balance method in the case of low-income housing), switching to the method described in section 167(b)(1) at a time to maximize the deduction allowable under subsection (a). For purposes of this subparagraph, the applicable percentage in the taxable year in which the property is placed in service shall be determined on the basis of the number of months in such year during which the property was in service . 9237 [Emphasis added.] Section 168(b)(2) clearly requires the applicable percentage to reflect the number of months that the property to be depreciated was actually in service during the taxable year in which the property was placed in service. That "applicable percentage" is determined by reference to "a table prescribed by the Secretary." The General Explanation of the Economic Recovery Tax Act of 1981 prepared by the Staff of the Joint Committee on Taxation states (p. 84) that the "Treasury has prescribed the following" table 10 "containing the accelerated recovery percentages for all 15-year real property (except low-income housing):" The applicable percentage is: (use the column forIf thethe month in the first year the property is placedrecovery(in service)year is:1 2 3 4 5 6 7 8 9 10 11 12 12 11 10 9 8 7 6 5 4 3 2 1 * * * * * Thus, under ACRS, the applicable percentage for the first year is based on the month of that year that the property is placed in service. 11 That 238 percentage, for property placed in service in December is 1 percent, i.e., one-twelfth of the undisputed annual rate of 12 percent. The validity of the Secretary's table has not been called into question. We hold that the applicable percentage to be applied to the improvements placed in service in December 1982 in this case, is 1 percent, as determined by the Commissioner. Decisions will be entered for the respondent. Footnotes1. The notice of deficiency sent to Augustine and Adrienne Au states that the deficiency for 1982 amounts to $ 15,876. In their petition, Augustine and Adrienne Au allege that the deficiency determined by the Commissioner for 1982 was in the amount of $ 15,505. The Government admits that allegation in its answer. However, the deficiency notice is before us as part of the stipulated record, and we take the amount determined from the notice itself.↩2. Unless otherwise indicated all section references herein are to the Internal Revenue Code as in effect and applicable to the year involved.↩3. Strictly speaking, the credit is allowed under section 38, which, however, provides that the credit is to be in "the amount determined under subpart B of this part." And subpart B consists of sections 46 through 50. Of particular relevance here are section 46 which is captioned "Amount of Credit" and section 48↩ which is captioned "Definitions; Special Rules." 4. Section 48(g)(2)(B)(i), which contains one of the "special rules," relating to the credit, provides that "The term qualified rehabilitation expenditure' does not include -- * * [a]ny expenditures with respect to which an election has not been made under section 168(b)(3) (to use the straight-line method of depreciation)." The caption to section 48(g)(2)(B)(i) reads "ACCELERATED METHODS OF DEPRECIATION MAY NOT BE USED." These provisions have since been revised to make even more clear that the straight-line method must be used. Section 168(b)(3) provides for an election to use the straight-line method, and section 168(f)(4)↩ specifies the manner and time for making the election.5. Section 168(f)(4) in its entirety provides: (4) Manner and time for making elections. -- (A) In general. -- Any election under this section shall be made for the taxable year in which the property is placed in service. (B) Election made on return. -- (i) In general. -- Except as provided in clause (ii) any election under this section shall be made on the taxpayer's return of the tax imposed by this chapter for the taxable year concerned. (ii) Special rule for qualified rehabilitated buildings. -- In the case of any qualified rehabilitated building (as defined in section 48(g)(1)), an election under subsection (b)(3) may be made at any time before the date 3 years after the building↩ was placed in service. [Emphasis supplied.]6. Section 703(b) provides that "Any election affecting the computation of taxable income derived from a partnership shall be made by the partnership [except certain specified elections inapplicable here] shall be made by each partner separately."↩7. There is no dispute between the parties that the improvements in this case are properly classifiable as 15-year real property. ↩8. These provisions have since been revised. Sec. 201(a) of the Tax Reform Act of 1986, Pub. L. 99-514, 100 Stat. 2085, 2121-2139. ↩9. In 1983, the last paragraph in section 168(b)(2) was amended by section 102(a)(5) of Pub. L. 97-448, 96 Stat. 2368, effective for property placed in service after December 31, 1980. This amendment defines the term "low-income housing" and makes other minor changes also not relevant herein.10. This table was also published in Notice 81-16, 2 C.B. 545">1981-2 C.B. 545, 546, and later in Proposed Income Tax Reg. 1.168 2 (b)(2), 49 Fed. Reg. 5943↩ (Feb. 16, 1984). 11. Personal property under ACRS is treated differently. See McKnight v. Commissioner, T.C. Memo. 1990-69↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622605/	Domenico E. Fazzio v. Commissioner. Josephine Fazio Fazzio v. Commissioner.Fazzio v. CommissionerDocket Nos. 111857, 112564.United States Tax Court1943 Tax Ct. Memo LEXIS 126; 2 T.C.M. (CCH) 737; T.C.M. (RIA) 43410; September 7, 1943126 Robert A. Ainsworth, Jr., Esq., 2208 American Bank Bldg., New Orleans, La., for the petitioners. J. L. Backstrom, Esq., for the respondent. KERN Memorandum Findings of Fact and Opinion The respondent has determined deficiencies in the income tax of each of the petitioners for the year 1939 in the sum of $425.34. That part of the deficiencies is here in issue which resulted from respondent's disallowance of deductions claimed by petitioners on account of "pin, claw and music tags" in the total amount of $7,603, which petitioners contend constituted deductible business expenses. Findings of Fact Domenico E. Fazzio and his wife, Josephine Fazio Fazzio, are residents of New Orleans, La., and filed income tax returns on the community property basis for the year 1939 with the collector of internal revenue for the district of Louisiana. The term "petitioner" will be used hereinafter for convenience to refer to Domenico E. Fazzio alone. Petitioner owned and was in the business of operating under profit-sharing arrangements with the owners of various restaurants, bars and places of amusement in the City of New Orleans, certain pinball, iron claw and automatic music machines. The payments127 which have been determined by the Commissioner not to constitute ordinary and necessary expenses of petitioner's business were payments to three so-called associations known respectively as the "New Orleans Coin Vending Machine Association," "Merchandise Vending Association," and "United Music Machine Operators Association," which will be referred to herein as the pinball, iron claw, and music machine "associations," respectively. The payments made by petitioner in 1939 to the respective associations and for which he received certain "tags" to be affixed to his machines as evidence that he was a member in good standing, were as follows: Pinball association$5,751.00Iron claw association1,350.50Music machine association502.00Total$7,603.50Sometime in 1937 petitioner received information from the owner of a place in which he had some of his pinball machines that his machine "had to be closed up." At the same time he was advised by another owner of pinball machines that in order to operate he "had to go to see" one Julius Pace. The operation of pinball machines was not illegal. Petitioner went to see Pace and was advised that he "had to have tags on his machines" 128 at a charge of $2 per month for each machine at that time. Pace also told petitioner that he should join the pinball association of which Pace was the president. Petitioner joined the association and made the payments required every month. Pace told the members at a meeting that if these association "dues" were not paid their machines would be picked up and destroyed. In 1939 the payments required were $8 per month per machine. Petitioner estimated that there were about 50 members of the association operating in the City of New Orleans. Petitioner does not know what was done with the money collected by the association, and he never asked an accounting from the association as to what was done with the money. The Association employed an attorney or some other agent to lobby before the legislature with respect to some bill which was pending to raise the cost of licenses or permits. State, City and parish license certificates were not paid for the operators by the association. The benefit which petitioner says he received from the association was that it kept other people from trying to get locations in which petitioner had already installed machines. In the fall of 1938 a meeting of129 the operators of the iron claw machines was called in the office of one George Brennan in which it was proposed to organize an association "for the mutual benefit of the operators." Petitioner objected that such an association would be of no benefit to him. Shortly after this meeting members of the association caused a number of incidents to be reported to petitioner from which petitioner concluded that pressure was being put on him by the police to join the iron claw association. The operation of iron claw machines was not illegal. The payments, required by such association were $4 per machine per month. The iron claw association in 1939 collected $34,052.50 which was reported on its income tax return to have been disbursed as "Commissions paid to G. A. Brennan as administrator and agent for association." Brennan was president of the association. Petitioner does not know what actually became of the money collected by the association, except that he knew that the association employed an attorney with whom he once consulted "about something." The primary purpose of the organization and source of benefit to petitioner from his membership therein was the restraint of competition among130 members. The by-laws of the iron claw association are incorporated herein by reference; their general character appears from the following excerpts: All matters of dispute or settlement of controversial questions shall be decided by G. A. Brennan. A list of locations for each member must be filed weekly, every Monday. * 1. Only one Operator will be allowed to operate in each location at any one time. * 6. No member will be allowed to solicit or obtain any other member's location, providing such member is in good standing. * 1. This amendment shall be considered as amplifying Article 6 of the By-Laws: Each machine in a location not bearing a current tag will make that location open to any other operator who is able to place his machine in said location, and to cause the present operator to remove such box not bearing current tag. Membership identification tags will be ready for delivery on call the first day of each month. Midnight of the fifth day of each month is expiration time for attachment of membership identification tags of the current month's issue. Tags should be placed in each machine so as to be readily seen for easy identification. This amendment131 is issued January 16, 1939. You are given five days from the present day to attach January's tags to each machine registered. 2. This amendment is to prohibit the solicitation of business where a vending machine of a member of this Association, in good standing, is in service. * * Where it is definitely proven that one member has unfairly attacked the business of another member by solicitation, the offending member shall be penalized the loss of two locations. The same to be chosen by the aggrieved member. In a circular letter dated January 28, 1939, which is appended to these by-laws, Brennan suggested to the membership, "From my personal viewpoint, I can not see why an operator of automatic vending machines would have any business in a location where he does not have a vending machine discussing any matter pertaining to vending machines." Petitioner was also a member of the Music Machine Association of which George Brennan was also president. Petitioner made payments to this association in 1939 at the rate of $2 per machine per month. This association collected $20,566 in 1939, which was reported on its income tax return to have been disbursed as "Commissions paid to G. 132 A. Brennan as administrator and agent for association." Petitioner does not know what actually became of the money collected except that he knew that the association had some attorneys representing it. The primary purpose of the organization and source of benefit arising from petitioner's membership therein was the suppression of competition. The By-laws of the Music Machine Association are incorporated herein by reference; their general character appears from the following excerpts: All matters of dispute or settlement or controversial questions shall be decided by the President. Failure to comply with decision rendered by the President shall automatically suspend offending member, and locations of suspended member shall be listed to all other members as open for solicitation. * * A list of locations for each member must be filed each month with order for Identification Tags. * 6. A new owner of location (new business) is entitled to have in his establishment any Automatic Phonograph he desires. * 8. No location owner is entitled to change machines unless operator fails to give fair service and supply fairly good records. 9. No member of this Association is 133 allowed to sell an Automatic Phonograph regardless of age except to members of this Association. * * 10. A machine in a location not bearing a current tag would make that location open to any other operator who is able to place his machine in said location, and deprive the present operator of the business therein. * (January 14, 1938) 17. Effective this date all operators must register each new location through this Office. * (December 27, 1939) 19. Effective this date no member of this Association shall place or service Automatic Phonographs in blacklisted locations on rental basis. * In a circular letter dated January 17, 1938, appended to these by-lays the reason for Rule 9 quoted above is explained as being to prevent establishments in New Orleans from acquiring obsolete or discarded Automatic Phonographs, since: * * These machines, no matter how old, would establish ownership of machine by the proprietor of a business, and could be operated for a very short while by the proprietor as his own machine. As soon as the proprietor desired, he could discard same after displacing a member, and contract with a new operator giving his reason for a change134 of operator as discarding his own Automatic Phonograph. The pinball association had by-laws along the same lines and covering the same matters as those of the Music Machine Association referred to above. Opinion KERN, Judge: The associations in question to which petitioner made the payments deducted during the taxable year from gross income may have been organized for the purpose of exacting tribute for the benefit of "racketeers" preying upon the fears and credulities of persons like the petitioner who were engaged in a business some phases of which were barely within the law; or for the purpose of "lobbying" before the State Legislature in opposition to legislation which might have outlawed the activities engaged in by members of some of the associations, or increasing the prices to be paid for licenses upon the use of the various machines owned by members of the Associations. If these were the objects of the associations, then dues paid to them would not be deductible. See , . However, after a careful consideration135 of the evidence herein we have concluded that the primary reason for petitioner's membership in the associations here in question, and the payment by him of sums sought to be deducted, was to eliminate competition in the various business enterprises which he carried on and that the primary purpose of the associations from the standpoint of their members was the restraint of trade by the prevention of competition. Such a purpose is contrary to public policy as stated in the Federal statutes and the law of the State of Louisiana. See , wherein the Court says: "All combination and arrangements which have for their purpose the unlawful stifling or restriction of competition, or which may probably have that effect, or necessarily have that tendency, are against public policy and unlawful." Although the expenditures may have been "ordinary" in the sense that they were not unusual, they can not be considered "necessary" "since the law will not recognize the necessity of engaging in illegal courses in the conduct of a business." See .*136 We see no difference in principle between contributions or dues paid for the purpose of effecting an illegal combination in restraint of trade and expenditures made afterwards in the unsuccessful defense of a criminal prosecution resulting from such a combination. In both cases public policy requires a holding that the expenditure in question is not a necessary expense of conducting business and is not deductible as an expense. Decision will be entered for respondent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622606/	The Sam W. Emerson Company, Petitioner, v. Commissioner of Internal Revenue, RespondentSam W. Emerson Co. v. CommissionerDocket No. 86754United States Tax Court37 T.C. 1063; 1962 U.S. Tax Ct. LEXIS 176; March 12, 1962, Filed 176 Decision will be entered under Rule 50. Since 1920 the petitioner, a corporation engaged in the construction business, has filed its returns and kept its books on a completed-contract method of accounting with respect to all of its long-term construction contracts. The long-term contracts were of various types, including "lump-sum," "unit price," "cost plus a percentage of cost with a guaranteed maximum," "cost plus a fixed fee," and "cost plus a percentage of cost" contracts. For the years 1955, 1956, and 1957 respondent determined that with regard to cost-plus contracts there was no valid basis for disregarding the annual accounting concept since income could be ascertained whenever periodic payments were made. Held, under the circumstances of this case the completed-contract method of accounting clearly reflected the petitioner's income from cost-plus contracts. Philip J. Wolf, Esq., and Robert G. Skinner, Esq., for the petitioner.Clarence C. Roby, Esq., for the respondent. Fay, Judge. Withey, J., dissents. FAY1064 The respondent has determined deficiencies in petitioner's income tax for the taxable years 1955, 1956, and 1957 in the amounts of $ 98,413.60, $ 107,864.82, and $ 241,445.42, respectively. The only issue for decision in this proceeding is whether petitioner was entitled to use the completed-contract method of reporting its income from certain "cost plus a percentage of cost" construction contracts.FINDINGS OF FACT.Some of the facts were stipulated and they are incorporated herein by this reference.The petitioner is a corporation organized under the laws of the State of Ohio. Since its incorporation in 1912 it has been engaged in the general contracting business in Ohio. Its Federal income tax returns for the periods here involved were filed with the district director of internal178 revenue, Cleveland, Ohio.Petitioner has on many occasions throughout the period from the date of its organization to the present time entered into and performed long-term construction contracts, that is, building, installation, or construction contracts which either covered a period in excess of 1 year from the date of execution to the date of completion and acceptance, or covered a period which, from the date of execution to the date of completion and acceptance, extended beyond the end of the taxable year within which the contract was executed. The long-term contracts were of various types, including "lump-sum," "unit price," "cost plus a percentage of cost with a guaranteed maximum," "cost plus a fixed fee," and "cost plus a percentage of cost" contracts.During the years 1955, 1956, and 1957 the petitioner was engaged in the performance, among others, of 14 "cost plus a percentage of cost" contracts, which hereinafter will be referred to as cost-plus contracts. The contracts called for the erection of completed structures and were indivisible in nature. All 14 of the cost-plus contracts covered a period in excess of 1 year from the date of execution to the date of completion179 and acceptance, or involved work which extended beyond the end of the taxable year in which the contract was executed, and for purposes of this proceeding contained the same general provisions. 11065 The agreement document usually provided, in part, that the contractor was to furnish all necessary labor and materials and that the owner would pay the contractor for the performance of the contract the cost as defined by the contract, plus a specified percentage of the cost. With regard to the manner of payment, the agreement provided as follows:The Owner shall make payment on account of the Contract as follows: On or about the first day of each month, the Contractor and the Architect shall determine the approximate value of the work done during the previous month, and the Owner shall make payment to the Contractor on or before the eighth day of the month.The Contractor shall, as soon as possible, deliver to the Architect an itemized statement, in duplicate, showing the total cost of the work performed during the preceding month, including percentages for Contractor's overhead and profit.This itemized statement shall be accompanied by a duplicate of all payrolls and invoices180 for the preceding month. After certification of this statement by the Architect and after deducting payment provided for in the first paragraph of this Article, the balance due shall be paid to the Contractor promptly. Any overcharge in first of month payment over itemized statement shall be credited in the itemized statement of the following month.Before final payment is made, upon completion of the work, the Contractor shall submit evidence satisfactory to the Owner that all payrolls, material bills, and other indebtedness have been paid.The specifications provided that "The title of all work completed and in course of construction, and of all materials, on account of which any payment has been made, shall be in the Owner." The General Conditions of the Contract provided that, "No certificate issued nor payment made to the Contractor, nor partial181 or entire use or occupancy of the work by the Owner, shall be an acceptance of any work or materials not in accordance with this contract."Under the contract the contractor was responsible for personal injury and property damage resulting from his work whether or not such liability was covered by insurance and was to replace work condemned by the architect as failing to conform to the contract. In the latter situation, however, the owner was given the right to receive an equitable reduction from the purchase price if it was deemed inexpedient to correct such work.Of the 14 cost-plus contracts performed by petitioner during the taxable years involved herein only 3 required more than 2 years to complete. 2 Of the latter, two required less than 3 years and one less than 4 1/2 years to complete.During the period from 1920 to and including 1954, petitioner entered into and performed 35 other building, installation, 182 and construction 1066 contracts of a cost-plus type which either covered a period in excess of 1 year from the date of execution to the date of completion and acceptance, or covered a period which extended beyond the end of the taxable year within which the contract was executed. Of the 35 cost-plus contracts performed by petitioner between 1920 and 1954, only 3 required more than 2 years to complete. The longest period required to complete a contract was slightly more than 3 years. Several of these contracts provided that no payment was to be made until the contract was completed.In connection with all its long-term construction contracts (i.e., "lump-sum," "cost plus a percentage of cost with a guaranteed maximum," "unit price," "cost plus a fixed fee" and "cost plus a percentage of cost"), petitioner since 1920 has maintained its books and records with regard to, and reported its income from, all such contracts on the completed-contract method of accounting.Except as respects the income derived from its long-term contracts, petitioner maintains its books and files its income tax returns on an accrual method of accounting.The completed-contract method of accounting is183 an established and recognized method of reporting income from long-term cost-plus contracts.OPINION.The evidence shows and we have found as a fact that during each of the years 1955, 1956, 1957, and prior thereto, the petitioner had several uncompleted construction contracts which either covered a period in excess of 1 year from the date of execution to the date of completion and acceptance or covered a period which extended beyond the end of the taxable year in which the contract was executed. The respondent does not dispute the characterization of all such contracts as long-term contracts.The provisions of the Internal Revenue Code of 1954 which are pertinent to this proceeding are sections 446 and 451. 3184 In addition, under the authority conferred upon the respondent by the revenue Acts to make all necessary regulations for their proper enforcement, he has in section 1.451-3 of the regulations prescribed certain methods 1067 for computing the income of taxpayers engaged in contracting operations extending over a period involving more than 1 taxable year. 4185 The petitioner was, therefore, entitled under the statutes and regulations to report the income from its long-term construction contracts either upon the percentage-of-completion method or upon the completed-contract method, provided the method chosen clearly reflected income. The petitioner chose the latter method, and in its books and on its Federal income tax returns from 1920 through the calendar year 1957 petitioner has consistently treated and reported as income only the actual profits on all contracts completed within the taxable year.The respondent has now made a determination that the petitioner's method of accounting insofar as it concerns cost-plus contracts is improper. The position of the respondent is that when the terms and nature of a contract are such that the income realized from the contract is assured and can be ascertained as work under the contract progresses, purportedly the situation in a cost-plus contract, the completed-contract method of accounting does not clearly reflect income.The question that we must decide, therefore, is whether the use of the completed-contract method of accounting for income from cost-plus construction contracts clearly reflects186 income. In essence, the crux of the problem is the language "clearly reflects income," and while the revenue Acts do not define the phrase, it is evident that what method will or will not clearly reflect income must vary greatly from business to business and from factual situation to factual situation. V. T. H. Bien, 20 T.C. 49">20 T.C. 49, 53 (1953).Ordinarily, a method of accounting which is in accordance with generally accepted accounting principles will be regarded as clearly 1068 reflecting income for tax purposes if it is used consistently and if the taxpayer continues in existence. Sec. 1.446-1(a)(2), Income Tax Regs.; Jud Plumbing & Heating, Inc., 5 T.C. 127">5 T.C. 127, 134 (1945), affd. 153 F. 2d 681 (C.A. 5, 1946); L. A. Wells Construction Co., 46 B.T.A. 302 (1942), affirmed per curiam 134 F. 2d 623 (C.A. 6, 1943), certiorari denied 319 U.S. 771">319 U.S. 771 (1943); R. G. Bent Co., 26 B.T.A. 1369">26 B.T.A. 1369 (1932), involving "flat contract price," "fixed fee with upset price," and "flat percentage" contracts; 187 Russell G. Finn et al., 22 B.T.A. 799">22 B.T.A. 799 (1931), involving "lump-sum" and "cost plus a percentage of cost" contracts; Alfred E. Badgley, 21 B.T.A. 1055">21 B.T.A. 1055 (1931), affirmed per curiam 59 F. 2d 203 (C.A. 2, 1932), involving "cost plus a fixed fee" contracts.After reviewing the expert testimony in this case and examining other authoritative materials, we are convinced, and accordingly have found as a fact, that the completed-contract method of accounting is a generally accepted method of reporting income from cost-plus contracts. Furthermore, the record in this case shows that the petitioner has consistently used this method since 1920 in reporting its income from long-term construction contracts, a key factor in the reporting of income regardless of the method or system of accounting employed. Advertisers Exchange, Inc., 25 T.C. 1086">25 T.C. 1086, 1092 (1956), affirmed per curiam 240 F. 2d 958 (C.A. 2, 1957). Thus, the method of accounting used by petitioner, on its face at least, would seem to satisfy the dictates of section 1.446-1(a)(2) of the regulations188 and the cases noted above.Respondent contends, however, that under the circumstances of this case this is not enough. He argues, in effect, that since the cost-plus contracts involved herein provided for periodic progress payments, which payments represented a reasonably accurate measure of the income earned during the periods covered by the payments, and inasmuch as the danger of subsequent loss of such income before completion of the contract was negligible, there no longer existed a basis for disregarding the annual accounting concept. The respondent does not contend nor is there any evidence in the record to indicate that the petitioner used the completed-contract method inconsistently or incorrectly or that its books were not kept honestly and accurately.Since it is not within the province of courts to weigh and determine the relative merits of methods of accounting, Brown v. Helvering, 291 U.S. 193">291 U.S. 193 (1934), we need only consider whether petitioner was justified in rejecting the annual accounting concept under the circumstances of this case. The record discloses that each of petitioner's cost-plus contracts was an integral indivisible unit. 189 Furthermore, because petitioner was potentially liable under the contracts for acts of negligence resulting from its work or for incorrect performance, its overall actual profit was not definitely ascertainable until the contract 1069 was completed and accepted. See Bent v. Commissioner, 56 F. 2d 99 (C.A. 9, 1932), affirming 19 B.T.A. 181">19 B.T.A. 181 (1930). Under such circumstances we believe that petitioner had a reasonable basis for preferring the completed-contract method over an annual accounting method for its long-term cost-plus construction contracts.In addition, considering that petitioner was at this same time also engaged in the performance of other types of long-term construction contracts, i.e., "lump-sum," "unit price," etc., and that most of petitioner's contracts required less than 2 years to perform, it is probable that the method of accounting employed consistently and uniformly by petitioner for its long-term contracts would over a period of time tend to produce less confusion and more clearly reflect income than the method suggested by respondent.In light of the foregoing, we are convinced that petitioner's190 method of accounting clearly reflects its income.Petitioner has conceded the correctness of respondent's determination with regard to the other adjustments set forth in the statutory notice.Decision will be entered under Rule 50. Footnotes1. The construction contracts actually consisted of the following documents: The Agreement, the General Conditions of the Contract, and the Drawings and Specifications.↩2. These figures were based upon time which elapsed from commencement of the work to completion of the contract.↩3. SEC. 446. GENERAL RULE FOR METHODS OF ACCOUNTING.(a) General Rule. -- Taxable income shall be computed under the method of accounting on the basis of which the taxpayer regularly computes his income in keeping his books.(b) Exceptions. -- 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 or his delegate, does clearly reflect income.SEC. 451. GENERAL RULE FOR TAXABLE YEAR OF INCLUSION.(a) General Rule. -- The amount of any item of gross income shall be included in the gross income for the taxable year in which received by the taxpayer, unless, under the method of accounting used in computing taxable income, such amount is to be properly accounted for as of a different period.↩4. Sec. 1.451-3 Long-term contracts.(a) Definition. The term "long-term contracts" means building, installation, or construction contracts covering a period in excess of one year from the date of execution of the contract to the date on which the contract is finally completed and accepted.(b) Methods. Income from long-term contracts (as defined in paragraph (a) of this section), determined in a manner consistent with the nature and terms of the contract, may be included in gross income in accordance with one of the following methods, provided such method clearly reflects income:(1) Percentage of completion method. Gross income derived from long-term contracts may be reported according to the percentage of completion method. Under this method, the portion of the gross contract price which corresponds to the percentage of the entire contract which has been completed during the taxable year shall be included in gross income for such taxable year. There shall then be deducted all expenditures made during the taxable year in connection with the contract, account being taken of the material and supplies on hand at the beginning and end of the taxable year for use in such contract. Certificates of architects or engineers showing the percentage of completion of each contract during the taxable year shall be available at the principal place of business of the taxpayer for inspection in connection with an examination of the income tax return.(2) Completed contract method↩. Gross income derived from long-term contracts may be reported for the taxable year in which the contract is finally completed and accepted. Under this method, there shall be deducted from gross income for such year all expenses which are properly allocable to the contract, taking into account any material and supplies charged to the contract but remaining on hand at the time of completion.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622610/	L. HYMAN & CO., INC., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.L. Hyman & Co. v. CommissionerDocket Nos. 30041, 41976.United States Board of Tax Appeals21 B.T.A. 159; 1930 BTA LEXIS 1902; November 3, 1930, Promulgated 1902 1. Minutes and income-tax returns of a corporation, and insurance policies in which it is designated as beneficiary, executed over a number of years and consistently describing the corporation as "S. Hyman Co.," may not, in the absence of any evidence of relationship or identity, be regarded as documents of or relating to a corporation bringing a proceeding under the name of "L. Hyman & Co., Inc.," particularly where the latter name, with minor variations, appears in later documents, and the State law imposes upon corporations, among others, the obligation to use in its business dealings and contracts the name stated in its certificate of incorporation. 2. The petitioner corporation's claim for deductions, as ordinary and necessary business expenses, of premiums on policies of insurance on the lives of its officers and sole stockholders is rejected for failure to prove (1) actual payment of the premiums; (2) the amount of the premiums and of the other compensation paid to the sum of which the test of reasonableness may be applied; (3) that the premiums were in fact salaries rather than distributions of profits; and (4) that substitution of the wives of the officers for the corporation1903 as beneficiaries, pursuant to the directions of corporate resolutions, was in fact made, thereby avoiding the inhibition of section 215(a)(4), Revenue Acts of 1921 and 1924. Joseph Sterling, Esq., and Maurice S. Preville, C.P.A., for the petitioner. P. A. Bayer, Esq., for the respondent. STERNHAGEN 159 Deficiencies in income tax were determined by the respondent as follows: YearDocket No.Amount192330041$48.131924419763,858.801925419764,011.91160 The issue is whether the petitioner is entitled to deduct, in computing its net income, certain amounts alleged to have been paid during the taxable years as premiums on policies of insurance on the lives of its officers. FINDINGS OF FACT. The petitioner is a corporation with its principal office at 26 Washington Place, New York, N.Y. It is a jobber of woolens and linings and its sales are made principally to the cap trade. The business was founded by Louis Hyman, and, during 1919 and at all times since, he and his sons, Abraham, Irving, Lawrence A., and Maxwell Hyman, were actively engaged in the business of petitioner and two other1904 companies known as the Maxwell Textile Co., Inc., and the Maxwell Silk Mills, Inc., which together filed consolidated returns for 1923, 1924, and 1925. During the taxable years there were no stockholders other than Louis Hyman and his four sons. Louis Hyman managed the financial affairs of the three corporations. Abraham Hyman was treasuer of the petitioner during the taxable years and has been actively and continuously engaged in the business of the petitioner throughout its existence. He was in charge of the woolens department and created styles. The petitioner's sales, exclusive of those of the Maxwell Textile Co., were as follows: 1919$2,014,538.8519231,584.464.6419241,786,267.2719251,856,695.63The principal sales were made by Abraham and Lawrence A. Hyman, who sold all kinds of goods handled by the petitioner. The sales consummated by them amounted to about 85 per cent of the foregoing total sales made in 1919, 1923, 1924, and 1925. Irving Hyman is an officer and director of the Maxwell Textile Co. and the Maxwell Silk Mills, Inc. The business of the former company was that of a jobber of silk, and its dealings were principally with1905 the dress and suit trade. Irving Hyman purchased both the grey and the raw silk and had the former dyed and the latter manufactured into dress goods; he sold goods and acted as general manager. The sales of the Maxwell Textile Co. were as follows: 1919$1,124,462.081923591,846.551924705,555.6119251,096,648.01161 The Maxwell Silk Mills, Inc., was organized in 1920 and was engaged in the manufacture of silk goods. Irving Hyman purchased all the raw material used by it and supervised the operation of the mill. The commission ordinarily paid to salesmen in the silk jobbing business is 2 per cent of the amount of sales made by them, less discount and goods returned. Lawrence A. Hyman is secretary of the petitioner and in charge of the lining department. He purchased all the grey and raw silk, had it converted and dyed, and designed patterns. During the taxable years the petitioner paid its salesmen the following commission of 2 per cent: Year2 per cent On sales of - Out of total commissionsales of-1923$4,271.10$213,555.00$1,584.464.6419247,229.05361,425.501,786,267.7219259,373.80468,690.001,856,695.631906 Maxwell Hyman was credit manager of petitioner and devoted his time to the business of petitioner and the Maxwell Textile Co. He is a lawyer, and also performed legal service for both companies. The net income of the petitioner and Maxwell Textile Co. for 1919, as shown on the returns for 1919, was $254.038.48. No cash dividends were paid by the petitioner during 1923, 1924, and 1925. The invested capital of S. Hyman Co. for 1919, as shown by its return, was $441,290.29, and that of the Maxwell Textile Co. for the same year, as shown by its return, was $82,633.40. In 1919 the petitioner used in its business $300,000 of borrowed money. Prior to December 1, 1919, Louis Hyman and his four sons had conferences or meetings at which the salaries paid the sons were discussed. The sons said they were entitled to increases. Louis Hyman said he also was entitled to an increase in salary. It was decided that insurance should be procured on the lives of the sons in which their wives should be named as beneficiaries, and also on the life of Louis Hyman. On December 1, 1919, the board of directors of S. Hyman Co., consisting of Louis Hyman and his four sons, passed a resolution1907 reading as follows: WHEREAS, preliminary reports submitted by the Certified Public Accountants of the corporation indicate that the earnings for the year 1919 will be the largest realized during the career of this Company, and it is desired to furnish the officers of the corporation with some inducement for keeping the earnings at the same rate in succeeding years, and to even stimulate them to greater efforts, upon motion duly made, seconded and carried the following resolution was unanimously adopted. 162 RESOLVED, that the Secretary of the corporation, be and hereby is authorized and directed to make applications in the name of S. Hyman Company for life insurance on the lives of the following officers in the following amounts: Louis Hyman$20,000.00Abraham Hyman25,000.00Lawrence A. Hyman25,000.00Irving Hyman25,000.00Maxwell Hyman25,000.00and he is further directed to make the respective wives of the aforementioned persons the beneficiaries of the said policies to receive the net sum due upon the death of the insured, without the right reserved to this corporation to change such designation of beneficiaries, and he is further authorized1908 and directed to use the funds of the corporation to pay the premiums for the aforementioned policies of insurance as same become due from time to time, and to charge such premiums as expenses of the corporation. The policies were applied for and issued by the Union Central Life Insurance Co. a short time before the resolution of December 1, 1919, with the exception of policy No. 629140, which was issued under date of December 16, 1919. They were as follows: Policy No.DateInsuredAmountAnnual premium623542 1Oct. 31, 1919Louis Hyman$10,000$1,126.80629140 2Dec. 16, 1919Louis Hyman10,0002,158.40625081 1Nov. 13, 1919Abraham Hyman20,0001,968.40625082 2Nov. 13, 1919Abraham Hyman5,0001,025.55624466 1Nov. 8, 1919Irving Hyman20,0001,959.40624467 2Nov. 8, 1919Irving Hyman5,0001,023.60624312 1Nov. 7, 1919Lawrence A. Hyman20,0001,952.00624313 2Nov. 7, 1919Lawrence A. Hyman5,0001,022.15624470 1Nov. 8, 1919Maxwell Hyman20,0001,955.40624472 2Nov. 8, 1919Maxwell Hyman5,0001,022.85Under the1909 terms of the foregoing policies the amount of insurance is payable to the wife of the insured if living at the death of the insured, otherwise to the administrators, executors, or assigns of the insured, upon proof of death of the insured during the continuance of the policy; or to the insured if living on the date of maturity. In all of them except those on the life of Louis Hyman there was no reservation of the right to change the beneficiary. In November, 1928, policies Nos. 625081, 624312, and 624470 were surrendered by the insured for their cash value, and policy No. 624466 was surrendered to the company at a date not disclosed by the record. Louis Hyman filed a certificate of change of beneficiary under policy No. 623542 in January, 1928, designating as beneficiaries the trustees under a certain trust agreement of December 13, 1927. In the case of policies Nos. 624470 and 624472, on the life of Maxwell Hyman, there are endorsements on the policies showing them to have been issued on October 10, 1923, in lieu of original policies of the same 163 number, and, attached to policy No. 624470 is an assignment, dated June 2, 1923, by Henrietta Hyman, the wife of Louis Hyman, 1910 to Maxwell Hyman, of all her rights under the policy, and a certificate by Maxwell Hyman, also dated June 2, 1923, designating his wife, Beatrice Hyman, as beneficiary in the event of his death. On December 8, 1919, the board of directors of S. Hyman Co. met and passed the following resolutions: WHEREAS this corporation is carrying the following described policies of life insurance: Policy No.Name of companyName of insuredAmount553250Union CentralLouis Hyman$25,0004517092New York LifeLouis Hyman25,000553006Union CentralAbraham Hyman25,0004516926New York LifeAbraham Hyman25,000553002Union CentralIrving Hyman25,0004516925New York LifeIrving Hyman25,000553352Union CentralLawrence A. Hyman25,000394839TravelersLawrence A. Hyman10,000and WHEREAS this corporation is desirous of recognizing the valuable services to the Company of the above named employees and of indemnifying the wife of each of said employees for the loss to said wife of her husband's salary in the event of his death while in the employ of the Company; RESOLVED that this Board hereby authorizes and directs that proper instruments1911 of absolute assignment be fully executed and filed transferring all the right, title and interest of the Company as a beneficiary under said policies, as follows: Policy #553250 to Henrietta, wife of Louis Hyman. Policy #4517092 to Henrietta, wife of Louis Hyman. Policy #553006 to Maude, wife of Abraham Hyman. Policy #4516926 to Maude, wife of Abraham Hyman. Policy #553002 to Fannie, wife of Irving Hyman. Policy #4516925 to Fannie, wife of Irving Hyman. Policy #553352 to Peggy, wife of Lawrence Hyman. Policy #394839 to Peggy, wife of Lawrence Hyman. RESOLVED FURTHER that this corporation continue to pay the premium cost of carrying the above described policies and to charge said cost to the operating expenses of the business until further action of this Board. On motion, duly made, seconded and carried, the following resolutions were unanimously adopted: WHEREAS this corporation is carrying a policy of life insurance #553381 on the life of Maxwell Hyman, for the amount of $25,000, in the Union Central Life Insurance Company; and WHEREAS this corporation is desirous of recognizing the valuable services to the Company of the said Maxwell Hyman, and of1912 indemnifying his dependents for the loss of his salary in the event of his death while in the employ of this Company; RESOLVED that this Board hereby authorizes and directs that a proper instrument of absolute assignment be duly executed and filed transferring all the right, 164 title and interest of the Company as beneficiary under said policy #553381 to the mother of the said Maxwell Hyman; viz. Henrietta Hyman. RESOLVED FURTHER that this corporation continue to pay the premium cost of carrying the said policy, and to charge said cost to the operating expenses of the business until further action of this Board. On the same day Louis Hyman and his four sons, as owners of all of the issued and outstanding capital stock of the S. Hyman Co., approved the foregoing resolution and consented to the assignment of the life insurance policies referred to therein. Of the policies referred to in the resolution, the five issued by the Union Central Life Insurance Co. were 10-year endowment policies. The dates of issue, amount of insurance, and prescribed annual premiums are as follows: Policy No.DateInsured AmountAnnual premium553250July 19, 1917Louis Hyman$25,000$2,746.00553006July 16, 1917Abraham Hyman25,0002,454.25553002July 16, 1917Irving Hyman25,0002,442.25553352July 20, 1917Lawrence A. Hyman25,0002,436.75553381July 20, 1917Maxwell Hyman25,0002,438.501913 Under the terms of these policies, except No. 553381, the insurance is payable to S. Hyman Co., its successors or assigns, upon the death of the insured during the continuance of the policy, or to the insured if living at maturity of the policy, and in all of them no reservation is made of the right to change the beneficiary. In the case of policy No. 553381, another policy was issued October 10, 1923, in lieu of the original policy of the same number, and by its terms the insurance is payable to the wife of Maxwell Hyman, the insured, if living at his death, otherwise to the administrators, executors or assigns of the insured, upon the death of the insured during the continuance of the policy, or to the insured if living at maturity. The policies referred to in the resolution of December 8, 1919, and issued by the New York Life Insurance Co., are as follows: Policy No.DateInsuredAmountAnnual premium4517092Nov. 3, 1913Louis Hyman$25,000$1,360.254516926Oct. 20, 1913Abraham Hyman25,000833.504516925Oct. 29, 1913Irving Hyman25,000766.50Policy No. 4517092 was an ordinary life policy and policies Nos. 45169261914 and 4516925 were "twenty-payment-life" policies. All three were payable to S. Hyman Co. or its legal representatives, with the right reserved to the insured to change the beneficiary. On January 23, 1928, Louis Hyman designated the trustees under a certain deed 165 of trust dated December 13, 1927, as beneficiaries of his policy. Loans were made on the policies of Abraham and Irving Hyman in March, 1925. There is no evidence concerning the nature or terms of policy No. 394839, issued by the Travelers Insurance Co., which was referred to in the resolution of December 8, 1919, as being carried on the life of Lawrence A. Hyman, in the amount of $ 0,000. The total amount of insurance carried on the lives of Louis Hyman and his sons in 1923, 1924, and 1925, and the total amount of the annual premiums fixed in the policies were as follows: InsuredAmount of Annual InsurancepremiumLouis Hyman$70,000$7,391.45Abraham Hyman75,0006,281.70Irving Hyman75,0006,191.75Lawrence A. Hyman50,0005,410.90Maxwell Hyman50,0005,416.75Total320,00030,692.55The respondent disallowed claimed deductions of premiums in the amounts1915 of $30,870.40 for 1924 and $30,860.85 for 1925. He also disallowed a claimed deduction for premiums for 1923. OPINION. STERNHAGEN: The petitioner seeks to deduct from its gross income for 1923, 1924, and 1925, as ordinary and necessary business expenses, premiums which it claims to have paid as additional compensation to its officers, on policies of insurance taken out on their lives. The respondent denies that such disbursements constitute ordinary and necessary business expenses, and, conceding for argument that they do represent additions to officers' salaries, denies that the salaries so augmented are reasonable in amount. He also denies that petitioner was not directly or indirectly a beneficiary under the policies, which would render the amounts of the premiums paid nondeductible under section 215(a)(4), Revenue Acts of 1921 and 1924. Petitioner has failed to offer any evidence regarding some of the elemental facts necessary to establish the deductibility of these premiums; unexplained contradictions and confusions, moreover, occur in the evidence introduced. Of the insurance policies involved it appears that ten were authorized by a resolution of the board of directors1916 of one S. Hyman Co. on December 1, 1919, to be taken out in the name of said company for the benefit of the wives of its officers, who are identical in name with the officers of L. Hyman & Co., Inc., the petitioner. By another resolution of December 8, 1919, 166 said board of directors further authorized that in nine other policies which S. Hyman Co. was carrying, the wives of its officers be substituted for the company as beneficiaries. In both instances future premiums were to be paid by the company. Petitioner has failed to show any connection between it and S. Hyman Co., and identity is not to be presumed or lightly inferred. The name of "S. Hyman Company" appears on a tax return for 1919, and on several policies bearing date prior to 1920, authorized by the aforesaid resolutions; petitioner's name with minor variations appears only on later documents. S. Hyman Co., as shown by the 1919 tax return, is a New York corporation. In the organization of business corporations under the law of New York, the name of the proposed corporation must be stated in the certificate of incorporation, Stock, Corporation Law, sec. 5; and "persons seeking to form a corporation under1917 any general law * * * must insert therein all the matter particularly required by the law." ; . "The name, therefore, is essential to its existence. * * * And, while by its use advantages are gained, corresponding obligations must be recognized, and one of these is that in its business dealings and contracts it must use the name given to it by the law of its existence. It can not change its name, either directly or by user; nor can the public give it a name other than that of its creation, by which it can be recognized in judicial proceedings." ; . The minutes, returns, and policies which purport to be of S. Hyman Co. must be regarded as relating to a corporate entity distinct from petitioner, and with respect to such necessary facts as petitioner has sought to establish by these documents alone there is a failure of proof. Petitioner has failed further to show that it actually paid any of the premiums which it claims as deductions, or even the amounts which became due during the taxable1918 years in question. Allegations in the petitions, which the answers deny, that premiums aggregating $28,099.25, $30,870.40, and $30,860.85 were paid in 1923, 1924, and 1925, respectively, are not established by proof of the amounts payable as premiums appearing on the policies; and there is no evidence concerning the treatment of any dividends received from the insurance companies, although the policies contemplate an annual declaration of dividends. Considerable testimony was offered by petitioner designed to establish what constituted reasonable compensation to its officers, it being respondent's contention that the sum of the insurance premiums plus other salary paid resulted in unreasonable salaries. The findings 167 contain such facts as the testimony in this respect seems to warrant, but neither the amount of the premiums nor of the other compensation paid is in evidence, and the Board is hence without evidence of the comparative sufficiency of the salaries claimed or paid. ; 1919 ; ; affd., . But there is another serious defect in petitioner's presentation. It has frequently been held by the courts and applied by the Board that where a corporation claims a deduction of salaries alleged to have been paid to persons who are not only employees or officers, but also substantial stockholders, it must be recognized that the corporation is in a position to distribute its profits in the guise of salaries and that to the extent this is done the deduction fails. When the corporation petitioner as proponent before the Board makes such a claim, the burden is upon it not only to prove that the amounts paid are reasonable as salaries, , but also that they are in fact entirely salaries and not partly or wholly profit distributions. , affirming . The petitioner has ignored this aspect of the alleged payments and has failed entirely to establish that no part of the amounts claimed1920 (assuming payment) could be fairly regarded as distributions of profits. With reference to the policies affected by the resolution of December 8, 1929, of which the S. Hyman Co. was then beneficiary, there is no evidence whatever tending to show that the beneficiary was in fact changed as contemplated by the resolution. Such a change of beneficiary is not established by incidental papers of later date, attached to some but not all of these policies, which the officers' wives signed as beneficiaries. Even if the S. Hyman Co. be held identical with petitioner, the proof is insufficient to show that it is not within the provisions of section 215(a)(4) barring deduction. ; . Judgment will be entered for the respondent.Footnotes1. 10-year endowment. ↩2. 5-year endowment. ↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622611/	WILLIAM N. CHURCH, JR., Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentChurch v. CommissionerDocket No. 562-77.United States Tax CourtT.C. Memo 1978-252; 1978 Tax Ct. Memo LEXIS 262; 37 T.C.M. (CCH) 1085; T.C.M. (RIA) 78252; July 10, 1978, Filed 262 Held, petitioner failed to satisfy the requirements of sec. 217, I.R.C. 1954, and therefore may not deduct his moving expenses. Held further, charitable contributions deduction determined. William N. Church, Jr., pro263 se. Diane L. Fox, for the respondent. WILESMEMORANDUM FINDINGS OF FACT AND OPINION WILES, Judge: Respondent determined a $ 878.32 deficiency in petitioner's 1974 Federal income taxes. We must decide whether petitioner has satisfied the requirements of section 2171 so that he is entitled to a moving expense deduction; and whether petitioner is entitled to a charitable contributions deduction larger than that allowed by respondent. FINDINGS OF FACT Some of the facts have been stipulated and are found accordingly.Petitioner timely filed his 1974 income tax return with the Internal Revenue Service Center, Cincinnati, Ohio. He was a resident of Akron, Ohio, when he filed his petition herein. In October 1973, petitioner was employed in Chicago by Clemson Automotive Fabrics, a division of Deering Milken.As a salesman for Clemson, petitioner worked in the Detroit territory which encompassed Indiana, Ohio, Ontario province, Michigan, and part of Kentucky. On August 4, 1974, after completing his initial training in Chicago, petitioner was transferred264 by Clemson to Detroit. After petitioner moved to Detroit he continued to work in the Detroit territory. On April 14, 1975, petitioner voluntarily left his job with Clemson so he could work for F. W. Means & Co. In order to take his new job with F. W. Means & Co., petitioner moved to Akron, Ohio. On his 1974 Federal income tax return petitioner deducted $ 2,385.00 in moving expenses incurred when he moved from Chicago to Detroit. Respondent, in his notice of deficiency, disallowed petitioner's moving expense deduction stating that petitioner "failed to establish that the requirements of sections 217(b)(1) and 217(c)(2) of the Internal Revenue Code have been satisfied * ." Shortly after petitioner moved to Chicago his wife left him and moved to California. Since this was petitioner's second marriage that had failed he became particularly upset and for solace began attending church regularly. In Chicago he went to the United Methodist Church in Rolling Meadows. In Detroit, after he moved, petitioner attended a Unitarian Church. It was his practice to put $ 20 in the collection plate each Sunday he attended church. On his 1974 income tax return petitioner deducted $ 1,120265 in charitable contributions which consisted primarily of church donations. Respondent disallowed all but $ 104 of petitione's chartiable contributions deduction because petitioner was unable to substantiate that he was entitled to a greater deduction. OPINION There are two issues: whether petitioner satisfied the requirements of section 217 and is therefore entitled to a claimed moving expense deduction in the amount of $ 2,385; and whether petitioner is entitled to a charitable contributions deduction larger than that allowed by respondent. Section 217 provides a deduction for moving expenses that are paid or incurred during the taxable year with the commencement of work by a taxpayer as an employee at a new principal place of business. Conditions are placed on this deduction by section 217(c), subsection (2) of which provides: (c) Conditions for Allowance.--No deduction shall be allowed under this section unless-- * * (2) either-- (A) During the 12-month period immediately following his arrival in the general location of his new principal place of work, the taxpayer is a full-time employee, in such general location, during at least 39 weeks, or (B) during266 the 24-month period immediately following his arrival in the general location of his new principal place of work, the taxpayer is a full-time employee or performs services as a self-employed individual on a full-time basis, in such general location, during at least 78 weeks, of which not less than 39 weeks are during the 12-month period referred to in subparagraph (A). Unfortunately for petitioner he has failed to satisfy the condition of section 217(c)(2) and therefore he is not entitled to deduct his moving expenses. Petitioner moved to Detroit, Michigan, on August 4, 1974.Thirty-seven weeks later, on April 14, 1975, he voluntarily quit his job with Clemson and moved to Akron, Ohio, so he could work for F. W. Means & Co. As a result petitioner failed to satisfy either the 39 or the 78-week condition imposed by section 217(c)(2). Although section 217(d) provides exceptions to the 39 or 78-week test, there are no facts before us to suggest that petitioner fell within any of these exceptions. Accordingly, we hold for respondent on this first issue.Next we must decide if petitioner is entitled to a charitable contribution deduction larger than the $ 104 allowed by respondent. *267 Although petitioner was unable to provide the Court with any documentation of his charitable contributions we found him to be a credible witness. As often happens during times of stress petitioner, after suffering a second divorce, looked for solace in the church. We found petitioner's account of where he went to church, why, and the amount of his weekly contributions to be credible and convincing. We are convinced that petitioner made contributions in an amount larger than that allowed by the Commissioner. Applying the rule of Cohan v. Commissioner,39 F.2d 540">39 F. 2d 540, 544 (2d Cir. 1930), we find that petitioner made deductible charitable contributions in 1974 totalling $ 650. To reflect the foregoing, Decision will be entered under Rule 155.Footnotes1. Statutory references are to the Internal Revenue Code of 1954, as amended and in effect during 1974.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622612/	CLARK EQUIPMENT COMPANY AND CONSOLIDATED SUBSIDIARIES, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentClark Equipment Co. v. CommissionerDocket No. 21912-85.United States Tax CourtT.C. Memo 1988-111; 1988 Tax Ct. Memo LEXIS 137; 55 T.C.M. (CCH) 389; T.C.M. (RIA) 88111; March 14, 1988; As amended March 14, 1988 137 Robert D. Heyde,Sonia M. Pawluc, and Cora Nell Haggard, for the petitioners. William E. Bogner and Sheldon M. Kay, for the respondents. COHENMEMORANDUM FINDINGS OF FACT AND OPINION 138 COHEN, Judge: Respondent determined the following deficiencies in petitioner's corporate income tax: YearDeficiency1974$ 93,445.0019752,554,661.0019762,395,109.00197710,454,606.35After concessions, the primary issue for decision is whether transfers by petitioner of excess parts out of its inventory to a warehousing company were bona fide sales for Federal income tax purposes. If that issue is decided against petitioner, we must also determine whether petitioner, an accrual basis taxpayer, may deduct amounts yet to be paid to the warehousing company to retrieve inventory located at the company's facilities. FINDINGS OF FACT Petitioner, Clarke Equipment Company and Consolidated Subsidiaries (Clark), is a corporation with its principal office in Buchanan, Michigan. Petitioner is a highly integrated manufacturer and distributor of axles, transmissions, 139 material handling equipment, and construction machinery. The availability of parts to service petitioner's long-lasting products is critical to petitioner's business. Petitioner's Central Parts Division (CPD) accordingly maintains extensive inventories of parts and supplies. During the years in issue, petitioner's inventory included parts that would be classified as "excess inventory." These were items for which where was little or no anticipated need because few, if any, orders were placed. Both before and during the years at issue, petitioner had several options in dealing with excess inventory. Petitioner could return the inventory to the vendor who had supplied the excess parts, disassemble the parts into their components to make them more saleable, or sell the inventory to a scrap dealer. When petitioner scrapped parts prior to 1973, it sold the excess parts to bonded scrap dealers. A bonded scrap dealer is a dealer who buys scrap parts and agrees not to resell the parts to third parties. Such dealers agree instead to mutilate or destroy the parts to make them unsalable. They agree to sell the items in question only as scrap metal. Petitioner did not seek to reacquire140 or repurchase petitioner's parts from scrap dealers after the dealers had purchased them as scrap. The scrap dealers to whom petitioner sold excess inventory accepted everything petitioner chose to sell, metal as well as nonmetal content, but paid petitioner only for the metal content. The scrap dealers paid local scrap price. Sajac Company, Inc. (Sajac), is a long-term warehouser of dormant parts. It was founded as a two-person partnership in 1971 by Jack Lemon (Lemon) and Sam Gingold (Gingold), and was incorporated in 1972 in Wisconsin. Sajac established multiple warehouses in small towns where land and labor were relatively inexpensive. Sajac acquires material from various manufacturers at scrap value, stores this inventory in tis densely packed warehouses, and, if the manufacturers want to "repurchase" any of their material, "resells" the material to the manufacturers at a percentage of their standard cost for the part. Sajac's advertising compared and contrasted what Sajac called the only alternatives for manufacturers with excess parts: maintaining the inventory, scrapping it, or selling it to Sajac. In a brochure entitled "Why Keep Inventory That Doesn't Earn its141 Keep?" Sajac described the third alternative as follows: THE SAJAC SOLUTIONSAJAC has designed an inventory management system which can give you the benefits of scrapping, plus the benefits of maintaining inventory. The unique SAJAC "banking" system allows you to reduce the inventory to meet future needs. And unlike scrap dealers, SAJAC does not find or develop markets for the parts in purchases. The SAJAC system of inventory management gives you: Relief from the financial and managerial burden of maintaining an inventory of slow-moving or dormant parts. * A readily accessible source of replacement parts at below manufacturing or replacement costs. * An improved parts service network that provides inventory quickly and efficiently. * A tax-deductible inventory loss. HOW THE SAJAC SYSTEM WORKSThe SAJAC system is based on the buying, holding and selling of excess parts inventories. There are three basic steps to this process. 1. You "Bank" Excess Inventory With SAJAC. You decide what inventory is slow-moving, and sell it to SAJAC at scrap prices. This allows you to devalue the inventory, and take advantage of substantial tax benefits. It also142 relieves you of responsibility for storing an managing the parts. It's like purchasing new warehouse space at yesterday's construction prices! 2. SAJAC Stores the Inventory. Upon purchase, the inventory is transferred to a nearby SAJAC processing center. Here the parts are prepared for high density storage in SAJAS'c unique warehousing system. The parts are identified and recorded in the SAJAC computerized warehousing log, and are stored in permanent locations until ordered. You receive periodic computer printouts of the parts SAJAC has on hand, so you are always aware of the inventory which is available. 3. You Purchase Inventory From SAJAC. When you order parts which have been sold to SAJAC, you can usually receive them faster than if they were housed in your own warehouse. You order parts through our computerized system utilizing your usual part number. The parts will be retrieved, and shipped within 24 hours via air, truck, rail, bus, APP or UPS. Same day service is available on rush orders. If SAJAC received parts in damaged condition, they can be cleaned, lubricated and painted before shipping. If you wish, all parts can even be shipped in your own new143 containers. Purchase price is set at a figure below current market value or replacement cost, so SAJAC will always be the most economical source for new parts. On May 25, 1973, Lemon sent Victor Varner (Varner), CPD's purchasing manager, a proposed agreement, which was accepted by petitioner on behalf of CPD on August 9, 1973. That agreement provided as follows: Sec. 1. Sajac will purchase mutually agreed upon inventory at local scrap prices. Sec. 2. Sajac will transport an store its inventory in its warehouse where it will be available for sale to you. In order to assure Clark of a continued availability of pieces from such inventory, Sajac agrees to refrain from selling or disposing of any of the inventory to anyone other than Clark. Sec. 3. You may purchase any portion of our inventory at 90% of your current standard cost at the time we bought the inventory -- plus 5% of that standard cost per year for each year we own the inventory. Sec. 4. Sajac will reduce its selling price to 10% of your standard cost (Sec. 3.) -- plus 5% of that standard cost per year for each year we own the inventory -- whenever your invoiced purchases for the calendar year exceed 10%144 of our total inventory, valued at your current standard cost at the time we bought it. Sec. 5. This agreement may be cancelled by either party providing 60 days written notice. Upon any such cancellation, Sajac will sell you whatever portion of the inventory you wish to purchase, and will destroy and scrap any inventory which Clark does not repurchase. The repurchase price shall be as described in Sec. 3 and 4. Sec. 6. At any time upon receipt of instructions from you, Sajac will destroy and scrap any portion of the inventory as instructed by you. Your representative may, at your option, be present to witness destruction and scrapping of inventory whether done pursuant to Sec. 5 or Sec. 6 of this agreement.Sections 2, 5, and 6 of the agreement had been drafted by petitioner's legal department and incorporated in the agreement at petitioner's request. Other divisions of petitioner, in addition to CPD, entered into agreements with Sajac similar to the agreement described above. During the years at issue, petitioner, not Sajac, determined what items from petitioner's inventory would be sent to Sajac. Sajac accepted all items selected and shipped by petitioner; it145 never refused any shipments during this period. The items selected by petitioner for shipment to Sajac were not limited to metal parts; the items sent included metal, plastic, glass, wood, cartons, and rubber. None of the material was separated by petitioner. Sajac would scrap parts that had arrived from petitioner if those parts had no numbers, were defective, had a flammable content, or had shelf lives such that the parts were unlikely to be sold prior to the expiration of their shelf lives. Sajac would not notify petitioner of such scrapping. On occasion, petitioner would notify Sajac that a part had become obsolete and been replaced. If there were engineering changes in a part that mandated destruction of a certain part, petitioner might advise Sajac to destroy the part. Sajac seldom, if ever, followed such advice. Sajac's reason for not scrapping such parts was that the manufacturer could have made a mistake; Sajac's customers did not always know whether a part would be needed in the future. Since 1968, petitioner had a marketing policy with its dealers known as the "dealer return program." Under this program petitioner's dealers could return a percentage, generally146 3.6 percent, of their annual parts purchased from CPD for credit. Some of the returned parts were restocked at CPD for possible resale; the remaining items were scrapped. Petitioner decided which dealer return items would stay with Sajac (those that petitioner did not want) and which items would be returned to CPD (those that petitioner wanted). Sajac had no say in the matter. During the years in issue, petitioner exercised its right under the inventory agreement to require Sajac to scrap (i.e., to physically destroy or mutilate) certain parts. Under the dealer return program, petitioner determined whether returned items were stocked or scrapped. If items were "stock," Sajac was to send them to CPD. For "scrap" items petitioner made an additional classification between "Sajac scrap" and "physical scrap." Sajac scrap was to be stored at Sajac. Physical scrap was to be rendered useless by Sajac. These provisions were contained in petitioner's written procedure initiating Sajac's participation in the dealer return program. It was petitioner's understanding that Sajac would hold its parts for possible reacquisition by petitioner and, in fact, the agreement was carried out in147 that manner, i.e., with Sajac holding the parts until petitioner reacquired them. It was important to petitioner that parts sent to Sajac not be sold to third parties because such parts might re-enter the parts market and compete with CPD's sales of parts. During the years at issue Sajac sent petitioner's parts only to petitioner. It refused to sell petitioner's parts to third parties. Sajac advertised that it would clean, oil, paint, derust, and refurbish parts it received if required by the manufacturer's quality assurance standards. Petitioner expected Sajac to perform these services. In August 1976, Varner of CPD wrote to John Cargen (Cargen) at Sajac with the following directions: Confirming our meeting of this date, the following should be considered part of our agreement on purchasing parts from Sajac. All items prior to shipment by Sajac are to be inspected to insure that every part appears new and can be sold as such. Any item which is rusty or dirty must be cleaned and painted if necessary and properly boxed. The formula for the cost to petitioner of reacquiring its material from Sajac was 90 percent of petitioner's standard cost. If petitioner acquired more148 than 10 percent of its inventory from Sajac during any calendar year, the prices for reacquisition for the rest of the year dropped to 10 percent. In either case, an amount equal to 5 percent of the standard cost was added for each year the inventory was held by Sajac. Standard cost as used by the parties to the agreement is the cost that petitioner would incur to replace items in its inventory, either by manufacturing the parts itself or by purchasing the parts from one of its vendors. Petitioner's standard cost amounts were set by petitioner. It advised Sajac of the amount to invoice petitioner by sending a price list of all Clark parts stored at Sajac. Petitioner's standard costs could and did fluctuate over time. Sajac did not know the standard cost of petitioner's parts other than from its own history, if any, of transactions with petitioner. If Sajac raised a question about the cost of a part, petitioner would review its records, determine the correct standard cost, and give it to Sajac. Petitioner had the final word on whether its standard cost was correct. The 5-percent feature of the agreement (whereby 5 percent of standard cost was added each year Sajac held the149 inventory) was dropped by agreement of the parties because petitioner kept its standard cost current, thus making 90 percent of standard cost the maximum amount Clark paid. It never paid more than 90 percent. On one occasion petitioner and Sajac negotiated a special reacquisition cost for a large volume shipment. The agreed upon rate was 75 percent of standard cost. Other than this special rate, the 90-percent amount stated in the agreement was the percent figure used in all of petitioner's reacquisitions from Sajac. The 90-percent price was considered a fair price by petitioner, but not a special price. The Clark parts held by Sajac were old and may have deteriorated or have been subject to engineering changes. The main benefit to petitioner was not the price but the availability in one central location -- Sajac -- of small quantities of parts ready for shipment. The 90 percent price allowed Sajac to make a profit on the agreement with petitioner. If petitioner wanted to reacquire a part from Sajac, it would contact Sajac, and Sajac would determine whether it had a part. Sajac, if it had the part, would ship at petitioner's instructions either to CPD or to a Clark dealer150 or other customer. Petitioner paid the freight on all parts repurchased. One of Sajac's services to manufacturers was the ability to locate parts at the manufacturer's request and drop ship them directly tot he manufacturer's customer as if the manufacturer had sold the parts to the customers. When Sajac drop shipped Clark parts, it shipped the parts in Clark boxes with Clark labels that petitioner provided. Petitioner also provided house pallets and packing dunnage. Petitioner wanted the parts shipped from Sajac to conform to petitioner's standards and to look like they came out of CPD. The words "CLARK," "GENUINE CLARK PARTS -- CENTRAL PARTS DIVISION," and "CLARK EQUIPMENT COMPANY" appeared prominently on the boxes used by Sajac to ship Clark parts. Upon reacquisition from Sajac, petitioner or its dealers would occasionally reject a part if it was defective or the wrong part. Sajac would in those cases issue credit for the part and might, if the part was valuable, ask the customer to return the part to Sajac, or if the part was not valuable, ask the customer to scrap the part. Petitioner's personnel inspected Sajac's warehouses and reviewed Sajac's methods of picking, 151 packing, and shipping inventory to make certain that parts shipped back to petitioner or to Clark dealers were new and unused. In inventorying its customers' parts, Sajac used the customers' part numbers. Sajac did not have its own numbering system for parts. When petitioner changed its parts numbering system, it notified Sajac of the changed system and told Sajac that "Any stock on hand at Sajac should be converted to the single piece number and the cartons remarked with proper quantities." There was no formal program whereby petitioner would keep Sajac informed of changes in Clark part numbers or engineering changes in Clark parts. Sajac sent petitioner a monthly printout of Clark part numbers and the quantity of such numbers located in Sajac's warehouses. Petitioner offered its parts for sale to its customers at current sale price. Petitioner's average markup from its standard cost for parts to current sales price was 100 percent. Petitioner made a profit on parts reacquired from Sajac and sold to its customers. On its books and records, petitioner accounted for sales to Sajac as it accounted for sales to scrap dealers. Petitioner accounted for purchases from Sajac in152 the same manner that it accounted for purchases from original vendors. In a notice of deficiency, respondent determined that petitioner's "sales" to Sajac were not bona fide sales for Federal income tax purposes, and disallowed petitioner's deductions for the cost of goods thus "sold." OPINIONI. The Transfers to SajacThe probable genesis of the transactions in issue here was considered in Thor Power Tool Co. v. Commissioner,439 U.S. 522">439 U.S. 522 (1979), affg. 563 F.2d 861">563 F.2d 861 (7th Cir. 1977), affg. 64 T.C. 154">64 T.C. 154 (1975). In accordance with generally accepted accounting principles, Thor Power Tool Co. valued its inventories at the lower of cost or market value. The Supreme Court upheld the Commissioner's position that such valuation of inventory failed to clearly reflect income. The Court observed that "market" value is defined in section 1.471-4(a), Income Tax Regs., as the current bid price for the particular merchandise. Section 1.471-4(b), Income Tax Regs., provides that if there is no open market153 or an inactive market, the taxpayer must use the available evidence of a fair market price, such as specific purchases or sales by the taxpayer in reasonable volume and made in good faith. In Thor, the taxpayer retained its "excess" inventory and continued to hold the goods for sale at original prices. The Supreme Court noted that the taxpayer had offered no objective evidence to verify its estimate of reduced market value, and it held that the taxpayer had thus failed to comply with the regulations. In this case, as in Thor, petitioner would not have been justified in writing down for tax parts inventory that it continued to hold for sale at original prices. In Paccar, Inc. v. Commissioner,85 T.C. 754">85 T.C. 754, 782 (1985), on appeal (9th Cir., May 7, 1987), we held that a Sajac warehousing arrangement substantially identical to the one at issue was an attempt to circumvent the rationale of our 1975 opinion in Thor Power Tool Co. v. Commissioner, supra, sustaining the Commissioner's previously asserted position. As in Paccar, the ultimate issue in this case is whether petitioner's "sales" to Sajac will be recognized. As in Paccar,154 we must recognize that "The question of whether a sale has occurred for purposes of Federal income taxation requires an examination of whether the benefits and burdens of ownership have been transferred." Paccar v. Commissioner,85 T.C. at 777; Grodt & McKay Realty, Inc. v. Commissioner,77 T.C. 1221">77 T.C. 1221, 1237 (1981). As in Paccar, we conclude that the following four factors are of particular significance in determining the character of the transactions between petitioner and Sajac: (1) Who determined what items were taken into inventory; (2) who determined when to scrap existing inventory; (3) who determined when to sell inventory; and (4) who decided whether to alter inventory. Paccar v. Commissioner,85 T.C. at 779; see Grodt & McKay Realty, Inc. v. Commissioner,77 T.C. at 1237-1238. (1) Items taken into inventory. Petitioner selected all items for shipment to Sajac. If there was any possibility that petitioner would sell the inventory in its normal course of business, petitioner shipped the inventory to Sajac155 for storage. If petitioner did not foresee a future need for inventory, the inventory was sold to scrap dealers. Sajac also exercised no control over items shipped pursuant to petitioner's dealer return program. Petitioner did not separate the metal from the nonmetal items is sent to Sajac. Sajac accepted everything: metal, plastic, glass, wood, cartons, rubber, etc. Petitioner attempts to distinguish Paccar by arguing that after Sajac accepted everything petitioner sent to it, Sajac removed a few items to be scrapped. Nothing in this record or in our findings of fact in Paccar suggests that Sajac did not follow similar procedures in that case. Petitioner also attempts to distinguish Paccar by maintaining that Sajac never refused a shipment from Paccar, whereas Sajac refused "at least one shipment from Clark." The testimony regarding the refused shipment referred to years after the years at issue in this case, and was contradicted by the testimony of one of petitioner's employees. In any event, neither of the purported distinctions compels the conclusion that Sajac was exercising rights inconsistent with ownership in petitioner. [Text Deleted by Court Emendation] 156 Sajac had rights under the contract to take only "mutually agreed upon inventory." It is the continuing control of petitioner over inventory accepted by Sajac that is significant to our decision. (2) Scrapping inventory. Section 5 of the agreement between petitioner and Sajac provided that, upon cancellation of the agreement, Sajac would destroy and scrap all inventory that petitioner decided not to repurchase. Section 6 gave petitioner the right to direct Sajac to destroy and scrap inventory at any time. These provisions were drafted by petitioner's legal department and incorporated in the agreement at petitioner's request. Petitioner argues that Sajac exercised its own judgment in deciding when to scrap; but acquiescence by petitioner does not alter its legal right to supersede Sajac's judgment. (3) Selling inventory. Section 2 of the agreement provided that Sajac would "refrain from selling or disposing of inventory to anyone other than Clark." This provision, which was drafted by petitioner's legal department and incorporated in the agreement at petitioner's request, reflected the conduct as well as the intent of petitioner and Sajac. During the years in issue, 157 Sajac refused to sell petitioner's inventory to third parties, and because Sajac hod no control over petitioner, it could not require petitioner to "repurchase" any amount of parts at any time. Sajac thus exercised no control over when petitioner's inventory was "sold." (4) Alteration of inventory. There is no evidence in the record that suggests that Sajac altered the inventory stored at its warehouses. The record does, however, suggest that Sajac was willing to do so at petitioner's request. Sajac advertised that it would refurbish parts received if required to do so by the manufacturer's quality assurance standards, and correspondence between petitioner and Sajac indicates that Sajac orally agreed to inspect, clean, and paint petitioner's inventory prior to shipment. Petitioner has introduced no evidence indicating that Sajac altered petitioner's inventory in any way inconsistent with petitioner's directions. Petitioner urges us to give greater weight here than we did in Paccar to the transaction's effect on the economic positions of the parties. That effect, however, was presumably a subject of negotiation in determining the contract terms. See Paccar, Inc. v. Commissioner,85 T.C. at 781.158 We do not doubt that the contract had arm's-length consequences to the parties. The question before us, however, is whether the substance of the relationship created a "sale" of its parts inventory. In any event, we decline to reconsider the approach adopted in Paccar, especially while that case is on appeal. Because petitioner retained dominion and control over its assets, we conclude that the transaction between petitioner and Sajac was not in substance a sale. Paccar v. Commissioner,85 T.C. at 781. Sajac accepted all inventory shipped by petitioner, stored it until petitioner needed it again, sold it to no one other than petitioner, and destroyed or altered it at petitioner's instructions. The only substantial right obtained by Sajac under the agreement was the right to receive an agreed amount for any item "repurchased" by petitioner. On these facts, we hold that petitioner is not entitled to recognize its inventory loss.II. Acrrual of DeductionsIn the alternative, petitioner argues that it is entitled to accrue current deductions for amount to be paid to "repurchase" its inventory from Sajac. 159 Accrual basis taxpayers must deduct expenses in 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." United States v. General Dynamics Corp., 481 U.S. (1987); section 1.461-1(a)(2), Income Tax Regs. Under this familiar "all events" test, it is fundamental that the fact and amount of the liability must be firmly established, not merely contingent or estimated. United States v. General Dynamics Corp., 481 U.S. at ; see United States v. Hughes Properties, Inc.,476 U.S. 593">476 U.S. 593 (1986); Dixie Pine Products Co. v. Commissioner,320 U.S. 516">320 U.S. 516, 519 (1944); Brown v. Helvering,291 U.S. 193">291 U.S. 193, 200 (1934). Petitioner focuses on the first requirement of the "all events" test (the fact of the liability) by maintaining that its arrangement with Sajac was, if not a sale, similar to a bailment. As to the second requirement of the test (the amount of the liability), petitioner asserts, without explanation or persuasion, that "the*160 amount of the liability is fixed at 90% of standard cost." Petitioner essentially asks us to recast the transaction in a form without foundation in fact or law. Under the agreement with Sajac, petitioner was under no obligation to "repurchase" any of the parts it transferred to Sajac. Moreover, the record contains no evidence from which petitioner's potential liability to Sajac can be determined with reasonable certainty. At the time of the transfers and at the end of each year in issue, petitioner did not know which parts or how many parts would be reacquired. Petitioner is thus not entitled to current deductions for "repurchase" prices not yet paid to Sajac. We have carefully considered the other arguments of the parties and find them unpersuasive or unnecessary to our resolution of the issues presented in this case. 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/4622615/	James H. Browning v. Commissioner.James H. Browning v. CommissionerDocket No. 12277.United States Tax Court1948 Tax Ct. Memo LEXIS 154; 7 T.C.M. (CCH) 394; T.C.M. (RIA) 48114; June 25, 1948154 The decedent, who died in 1911, bequeathed an annuity of $2,500 a year to his divorced wife, payable so long as she did not remarry. He placed a portion of his stockholdings in trust for his two nephews, who were also equal legatees of a residuary estate consisting in part of his remaining stock interests. The two nephews, one of whom is petitioner, qualified as administrators of the estate in 1918 following the death of the executor, and in 1923 they had the entire lot of stock issued to themselves as legatees. Petitioner and his brother paid the annuity from 1915 until the death of the latter in 1935, after which time petitioner paid the entire annuity. In 1939 decedent's divorced wife entered into an agreement with petitioner and with the executrix of his brother's estate whereby decedent's estate was allowed to be formally closed and petitioner in return undertook personally to pay the annuitant the sum of $2,500 per year. Held, petitioner's payments in 1942 and 1943 are not excludable from gross income under section 22 (b) (3), or deductible therefrom under section 23 (a) (2), I.R.C.Theodore Witkin, C.P.A., for the petitioner. Whitfield J. Collins, Esq., for the respondent. 155 ARUNDELLMemorandum Findings of Fact and Opinion This case involves an income and victory tax deficiency for petitioner's taxable year ended December 31, 1943, in the amount of $2,468.28. Certain minor adjustments to 1942 and 1943 income are not in issue, that of the earlier year being adjusted pursuant to the provisions of the Current Tax Payment Act of 1943. The sole question to be decided is whether payments by petitioner of $2,500 in each of the years 1942 and 1943 are proper exclusions from gross income under section 22 (b) (3), Internal Revenue Code, or are deductible therefrom under section 23 (a) (2) of the Code. Findings of Fact James H. Browning, petitioner, is an individual residing at Great Neck, Long Island, New York. His tax returns for 1942 and 1943 were filed with the collector of internal revenue for the second district of New York. Petitioner is one of the legatees under the will of Joseph P. Topping, who died on or about August 17, 1911. The will was admitted to probate by the Surrogate's Court, New York County, on or about October 26, 1911, and letters testamentary were issued to the decedent's brother, Herbert W. Topping, who duly qualified as executor. The will 156 of Joseph P. Topping provided (a) for the payment of debts and expenses; (b) the payment of an annuity of $2,500 a year to Lillian O. Topping (his divorced wife), payable in equal monthly installments as long as she remained unmarried, and (c) the creation of a trust consisting of 200 shares of the capital stock of a corporation known as "Topping Brothers," the income therefrom to be payable to the decedent's nephews, Gilbert Browning and petitioner, during the lifetime of his latter's death "the said two hundred shares of stock are to be conveyed and assigned unto the said GILBERT BROWNING AND JAMES BROWNING in absolute ownership in equal shares." Finally, the two nephews were named as equal residuary legatees, and Herbert W. Topping was appointed as executor and trustee. The decedent's brother died on or about April 17, 1915. Letters of administration, C.T.A., were granted on or about May 3, 1918, to petitioner and his brother, Gilbert Browning, who duly qualified as administrators of the estate of Joseph P. Topping. Joseph P. Topping at the time of his death owned 590 shares of the capital stock of Topping Brothers, hereinafter sometimes referred to as the corporation, which represented 157 50 per cent of the entire authorized and issued capital stock of the corporation. On November 7, 1923, half of this stock (295 shares) was transferred to petitioner and the other half was transferred to Gilbert Browning individually. Thereafter, the dividends accruing on this stock were credited by the corporation to the individual accounts of the transferees. Gilbert Browning died on or about September 18, 1935. Letters testamentary under his will were issued by the Probate Court, District of Greenwich, Connecticut, to his widow, Marjorie S. Browning (now Mrs. Selwyn Bywater), who duly qualified as executrix. In March and April, 1939, the 295 shares of the Topping Brothers stock, which were owned by Gilbert Browning, were transferred to his two daughters, 148 shares to Alice Browning and the remaining 147 shares to Jean Browning. From the time of the death of Joseph P. Topping in 1911, to and including December 31, 1943, the sum of $2,500 was paid annually in monthly installments to Lillian O. Topping by the corporation, pursuant to the successive requests of the executor, the administrators and the legatees of the estate of Joseph P. Topping. Such payments were charged by the corporation 158 against the accounts of petitioner and Gilbert Browning, equally, to and including the fifth day of September, 1935, and thereafter the entire sum of $2,500 annually was charged against the account of petitioner. Soon after the death of Gilbert Browning, efforts were made to close the estate of Joseph P. Topping in order to close the estate of petitioner's brother. A document entitled "Release of Administrators" and dated February 18, 1937, was signed by Marjorie S. Browning, as executrix of the last will and testament of Gilbert Browning, legatee and co-administrator, by petitioner as legatee and co-administrator, and by Lillian O. Topping as legatee. The instrument was executed by Marjorie S. Browning on February 18, 1937, by petitioner on January 25, 1939, and by Lillian O. Topping on February 10, 1939. The latter was induced to sign the release on the assurance of petitioner that he would personally continue to pay her the annuity of $2,500 per year. The release contained the following provision: "WHEREAS, The undersigned have settled with said administrators all matters and things whatsoever relating to said estate and to all claims and interest therein, and have received the 159 amount of their respective claims and distributive shares so far as there were sufficient assets to pay the same, the receipt whereof we hereby severally acknowledge, and in consideration of a mutual agreement to waive a judicial accounting, we the undersigned creditors and persons entitled to distributive shares do, and each of us acting individually and without regard to the execution of these presents by the others, does hereby remise, release and forever discharge the said administrators, James H. Browning, Gilbert Browning, (now deceased), the Estate of Gilbert Browning, deceased, and the Royal Indemnity Company, the sureties upon the official bond of said administrators, of and from any and every claim, demand, action and cause of action, account, reckoning and liability of every name and nature for and on account of any and every matter and thing whatsoever arising from or in any manner relating to or connected with the estate of said deceased or with the administration thereof, and we and the said administrators, who also subscribe these presents severally, request the Surrogate of said County to record this instrument as required by law." Shortly after the death of Gilbert 160 Browning, petitioner talked with his widow, executrix of her husband's estate, and stated that he would pay the full amount of the $2,500 annuity to Lillian O. Topping out of his own funds. At that time he requested her support of his management of the business. Thereafter, he personally paid the annuity to Lillian O. Topping while Marjorie S. Browning during the period from 1935 to 1946 voted the stock generally in the support of petitioner's management policies. Petitioner held the following offices in Topping Brothers: director from 1912 to date; vice-president from 1912 to 1935; president from 1935 to 1946, and general manager from 1922 to 1946. During each of the taxable years 1942 and 1943 petitioner received an annual salary of $20,000 from the corporation. Dividends were declared on the corporate stock owned by petitioner in the amount of $11,800 for each of the two years. Petitioner included the above salaries and dividends in his taxable income for the years 1942 and 1943 but deducted the $2,500 annuity payments from his gross income for each year. These deductions were disallowed by respondent and a deficiency in income and victory tax was accordingly determined. Opinion 161 ARUNDELL, Judge: A brief resume of the facts, we think, will prove helpful. The decedent, Topping, died in 1911 and by his will provided for an annuity of $2,500 a year to his divorced wife; placed in trust 200 shares of stock in Topping Brothers for the benefit of his two nephews - petitioner and his brother Gilbert - the shares to be paid to them when the named trustee died; and the residue of the estate, consisting of 390 shares of Topping Brothers stock, was left to the same two nephews. In 1915 the trustee died and petitioner and his brother Gilbert were named as administrators of the decedent's estate. In 1923 the 590 shares - the 200 shares in the trust and the 390 shares constituting the residue of the estate - were distributed equally to petitioner and his brother without court order directing this action. During the period from 1915 to the date of Gilbert's death in 1935, each brother paid $1,250 a year to the annuitant. In 1939 an agreement was entered into by petitioner, the widow of his brother Gilbert, who was executrix of the latter's estate, and the annuitant, whereby the estate of the decedent was permitted to be finally closed and the administrators discharged without 162 the necessity of an accounting, and by this agreement the annuitant released her claim against the estate and in effect ratified the earlier distribution of the property of the estate to the residuary legatees. The annuitant's discharge of the estate from its obligation to continue to pay her the annuity was given in consideration of petitioner's promise and agreement to thereafter personally pay the annuitant $2,500 per year. The question raised is whether the amounts paid by petitioner under his contract obligation, $2,500 in 1942 and also in 1943, are excluded from his taxable income under section 22 (b) (3)1163 or are deductible from his gross income for each year under section 23 (a) (2)2 of the code. The facts herein are very similar to those found in Elliott R. Corbett, 28 B.T.A. 46">28 B.T.A. 46. There the decedent bequeathed $1,000 per month to his widow, payable out of the income derived from real estate which was devised to three sons as residuary legatees. Nine years after death the brothers agreed to pay the annuity to their mother in consideration of her release of the estate and the executors from 164 all claims. The estate was thereupon closed and the property was distributed. We held that the payments to the widow under the contract were in the nature of capital expenditures and not deductible in computing taxable net income. In our opinion we stated: "It clearly appears that in 1912 Emma L. Corbett wholly relinquished any rights she might have against the estate, and consented to the distribution of the remaining corpus and to the closing of the administration. That consent was the consideration given by her for a promise by the petitioner and his brothers to pay her a fixed monthly income. That the amount to be paid coincided with the amount bequeathed to her under the will does not alter the fact that a contract was made and carried out by which petitioner and his brother took the property free of the charge against the income. The contract superseded the will and the latter then passed out of consideration. Had petitioner and his brothers failed to make the agreed payments they would have been liable not for breach of trust as fiduciaries, but for damages for breach of contract as individuals. In our opinion the payments in question constituted capital expenditures, and are 165 not deductible in computing taxable net income." Petitioner contends, however, that Corbett, supra, is not controlling because the law applicable to the taxable years herein did not apply to the taxable years there involved. We are unable to see why any different result would follow under the new statutory provisions set out in Footnote 1. In 1939 the annuitant gave up all claim of right against the estate and accepted in lieu thereof the contract obligation of petitioner to pay her $2,500 per year. Petitioner then became the absolute owner of the 295 shares of stock in Topping Brothers, and all subsequent dividends belonged to him and were taxable to him in toto. It may well be that if Mrs. Topping had continued to hold her claim against the Topping stock of the estate, that section 22 (b) (3) would warrant an exclusion of the sum so paid her from the dividends on the stock held in petitioner's name. Frank R. Malloy, 5 T.C. 1112">5 T.C. 1112. But the basis for such action disappeared when she released the estate and accepted in lieu of any claim against it petitioner's contract liability to pay her $2,500 per year. Nor would the $1,250 paid as the primary liability on the part of petitioner 166 be allowable as a deduction from gross income under section 23 (a) (2) as petitioner claims in the alternative. As we have already pointed out, the sum so paid was not an ordinary and necessary expense but was a capital expenditure. Elliott R. Corbett, supra. Petitioner further argues that the $1,250 - half of the annuity payment - paid by his brother prior to his death and thereafter assumed by petitioner should be deductible under section 23 (a) (2). He bases this contention on the claim that his undertaking in this particular was made in consideration of an agreement of Marjorie S. Browning, as executrix, to vote the corporate stock in support of petitioner's management of Topping Brothers. We have found that petitioner suggested this course to his brother's widow but have not found that she in fact entered into such an agreement. We are constrained to reach this conclusion in view of the stipulation by the parties that she would have denied making the agreement had she testified, coupled with the general circumstances surrounding the offer by petitioner. In any event, we do not believe that a sum paid for such a purpose would constitute an ordinary and necessary expense paid 167 or incurred for the production or collection of income, or for the management, conservation, or maintenance of the property held for the production of income. Certainly this record does not warrant a finding that the expenditure was necessary to "the production of income," whether that income be petitioner's salary as president of the corporation or income in the way of dividends on his shares. Nor are we convinced that it is ordinary to pay a stockholder, and particularly a stockholder acting in a fiduciary capacity, for her support in maintaining petitioner in his position as president of the corporation. By the same token, we are of the opinion that the sum paid to Mrs. Topping does not constitute an ordinary and necessary expense paid or incurred in the management, conservation, or maintenance of petitioner's property. Commissioner v. Heide, 165 Fed. (2d) 699. While petitioner has not asked for the deduction under section 23 (a) (1) as an ordinary and necessary expense in carrying on his business as president of the corporation, there would appear to be no reason why a different treatment should be accorded the payment as a business expense. Decision will be entered under Rule 168 50. Footnotes1. SEC. 22. GROSS INCOME. * (b) Exclusions from Gross Income. - The following items shall not be included in gross income and shall be exempt from taxation under this chapter: * (3) Gifts, Bequests, Devises, and Inheritances. - The value of property acquired by gift, bequest, devise, or inheritance. There shall not be excluded from gross income under this paragraph, the income from such property, or, in case the gift, bequest, devise, or inheritance is of income from property, the amount of such income. For the purposes of this paragraph, if, under the terms of the gift, bequest, devise, or inheritance, payment, crediting, or distribution thereof is to be made at intervals, to the extent that it is paid or credited or to be distributed out of income from property, it shall be considered a gift, bequest, devise, or inheritance of income from property. 2. SEC. 23. DEDUCTIONS FROM GROSS INCOME. In computing net income there shall be allowed as deductions: (a) Expenses. - * *(2) Non-trade or Non-business Expenses. - In the case of an individual, all the ordinary and necessary expenses paid or incurred during the taxable year for the production or collection of income, or for the management, conservation, or maintenance of property held for the production of income.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622617/	CLIFFORD R. CASHMAN, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentCashman v. CommissionerDocket No. 24384-89United States Tax CourtT.C. Memo 1991-359; 1991 Tax Ct. Memo LEXIS 408; 62 T.C.M. (CCH) 322; T.C.M. (RIA) 91359; August 5, 1991, Filed 408 Decision will be entered under Rule 155. Clifford R. Cashman, pro se. Donna J. Pankowski, for the respondent. RUWE, Judge. RUWEMEMORANDUM FINDINGS OF FACT AND OPINION Respondent determined deficiencies and additions to tax in petitioner's Federal income taxes as follows: Additions to TaxYearDeficiencySec. 6653(a)(1)1Sec. 6653(a)(2)Sec. 666121982$ 2,255.34$ 112.77--19833,165.63158.28--19848,089.00404.50$ 2,022.50198511,986.76599.352,996.75After concessions by the parties, the issues for decision are: (1) Whether petitioner sustained a business bad 409 debt of $ 63,470.42 in 1982; (2) whether petitioner is entitled to an investment tax credit of $ 4,310.00 in 1985. (Resolution of this issue is dependent upon resolution of the bad debt issue because if respondent's determination regarding the bad debt issue is sustained, the investment tax credit would be fully utilized in 1982); and (3) whether petitioner is liable for the additions to tax for negligence or intentional disregard of rules and regulations under section 6653(a)(1) and (2) for 1982, 1983, 1984, and 1985. FINDINGS OF FACT Most of the facts have been stipulated. The stipulation of facts and attached exhibits are incorporated herein by this reference. Petitioner resided in Altoona, Pennsylvania, when he filed his petition in this case. In the early 1970s, petitioner was an insurance salesman. He was also the proprietor of a pizza and sandwich shop. Clyde Lynn was also an insurance salesman and the proprietor of a pizza and sandwich shop. In 1973, petitioner and Mr. Lynn formed a partnership known as Cashman and Lynn Associates (C & L Assocs.). The business of the partnership included an insurance agency, some rental properties, and the operation of the two pizza410 shops. The pizza shops were operated under the name "Sizzler." From 1973 to 1976, C & L Assocs. opened additional Sizzler locations. However, by the end of 1976, only two Sizzler shops remained open. During 1976, C & L Assocs. purchased a restaurant named Chilcoat's. Altoona Ice Cream Parlors, Inc. (Altoona) was a corporation formed in 1970. Altoona operated a restaurant doing business under the name of "Alaskaland." On October 31, 1977, petitioner and Mr. Lynn purchased 100 percent of the stock in Altoona for $ 150,000. Fifty percent of the stock ownership was attributed to petitioner. One hundred twenty-five thousand dollars ($ 125,000) of the purchase price was borrowed by petitioner and Mr. Lynn from Mid-State Bank. Altoona guaranteed the $ 125,000 loan. Altoona reported income of $ 1,394.67 in 1977. In 1978, Altoona elected to be treated as a subchapter S corporation. The corporation experienced losses in 1978, 1979, 1980, and 1981 in the respective amounts of $ 33,636.63, $ 30,922.47, $ 79,912.19, and $ 15,630.57. Petitioner claimed his distributive share of Altoona's losses for those years in the amounts of $ 16,818.31, $ 15,461.23, $ 39,956.09, and $ 7,815.28, 411 respectively. The corporation reported a profit of $ 963.83 for 1982. Petitioner received no wages from the corporation during the years 1979 through 1982. As of January 1, 1979, petitioner and Mr. Lynn dissolved their C & L Assocs. partnership. Pursuant to the terms of the dissolution, Chilcoat's Restaurant and one Sizzler were retained by Mr. Lynn, while petitioner kept the other Sizzler and the insurance agency. Each partner was to assume responsibility for all debts and mortgages connected with the respective businesses which he acquired upon the partnership termination. No changes were made to the stock ownership in Altoona. The partnership termination agreement is silent with regard to any amounts which were advanced by it to Altoona. In September 1979, Altoona secured a loan from Mid-State Bank to purchase additional equipment. In 1981, petitioner and Mr. Lynn personally borrowed $ 30,000 from Laurel Bank. Twenty-five thousand dollars ($ 25,000) of this was transferred to Altoona. Sometime in 1981, Altoona ceased to operate the Alaskaland restaurant and the restaurant was leased to Nancy Pietrolunzo. Ms. Pietrolunzo wished to purchase the business but was unable 412 to obtain financing. In 1982, petitioner abandoned all efforts to make Altoona profitable and locked the premises. At that time, money was still owed on the loan for the purchase of the stock, the personal loan from Laurel Bank, and the loan for the equipment purchase. After petitioner abandoned efforts to make the corporation profitable, Mr. Lynn decided personally to take over the corporation's business. To effectuate this, the corporation transferred its equipment to Mr. Lynn and Mr. Lynn took over the leased premises. The corporation treated the transfer as a sale of the equipment for its book value of $ 15,468.67. Mr. Lynn "paid" that amount by reducing the amount shown as "advances" which he made to Altoona and by assuming the remaining balance due on the equipment loan. Mr. Lynn also assumed the remaining obligation at Mid-State Bank for the initial stock purchase, while petitioner assumed the obligation at Laurel Bank. Altoona was dissolved at the end of 1982. During the period from 1978 through 1982, petitioner and Mr. Lynn supplied funds to the corporation to pay operating expenses. Petitioner claims that he made annual advances to Altoona in the following net amounts: 413 YearAdvances1978($ 4,530.12)197926,118.90198011,144.15198127,960.431982 7,346.10$ 68,039.46 These numbers are derived from petitioner's accountant's reconstruction entitled "Cliff Cashman - Analysis of Advances 1978 to 1982." There is a negative balance for 1978 because the accountant's reconstruction shows that corporate funds transferred to petitioner exceeded the amounts which he advanced to the corporation. The accountant's reconstruction includes funds which were transferred from C & L Assocs. to the corporation. The workpapers prepared by the accountant indicate that one-half of the transfers from C & L Assocs. were treated as advances by petitioner. In a letter dated September 8, 1983, to petitioner and Mr. Lynn, the accountant states that he has "presented all advances to the corporation as stockholder loans." Altoona's Federal corporate income tax returns, Form 1120S, for the years 1979 through 1982 report increasing amounts of loans from shareholders. However, Altoona's 1979 through 1982 Pennsylvania corporate tax returns indicate that it had no indebtedness to any Pennsylvania individual or partnership. On his 414 1982 return, petitioner deducted $ 63,470.42 as an "ordinary loss on worthless stock" with regard to his Altoona stock. Petitioner computed this loss in the following manner: Original Cost of stock - year 1977$ 75,000.00 Net Sub-chapter S Losses1978 to 1982(79,569.04)$ ( 4,569.04)Additional Funds Advanced to corporation1977 to 1982 not collectible dueto inventory68,039.46 Line 1 - Part 1 - Form 4797 - ordinary loss$ 63,470.42 The loss was not fully utilized in 1982; and petitioner elected to carry the loss forward to 1983, 1984, and 1985. The loss and the carryforwards were disallowed by respondent, but petitioner was allowed capital losses of $ 3,000.00 for each of the years 1982, 1983, 1984, and 1985. Petitioner conceded, prior to trial, that he was not entitled to a worthless stock deduction, but contends that the $ 63,470.42 represented a business bad debt which became worthless in 1982. No promissory notes were ever executed on behalf of Altoona for the advances made by petitioner. There was no stated maturity date for repayment of the advances, no interest was charged for the advances, and no security was given for the advances. 415 OPINION The primary issue for decision is whether petitioner may deduct $ 63,470.42 in 1982 as a business bad debt under section 166. Section 166(a) allows a deduction for any debt which becomes worthless within the taxable year. Section 166(d) distinguishes between business and nonbusiness bad debts. "Only a bona fide debt qualifies for purposes of section 166. A bona fide debt is a debt which arises from a debtor-creditor relationship based upon a valid and enforceable obligation to pay a fixed or determinable sum of money." Sec. 1.166-1(c), Income Tax Regs. This is in contrast to an equity investment or contribution to capital. A contribution to capital is not a debt. Kean v. Commissioner, 91 T.C. 575">91 T.C. 575, 594 (1988). Therefore, in analyzing whether petitioner is entitled to a bad debt deduction, we must first determine whether the "advances" which petitioner claims were made between 1978 and 1982 constitute debt or equity for Federal tax purposes. Respondent's determination is presumed correct and petitioner bears the burden of proof. Rule 142. The characterization of advances to a corporation by a shareholder is a question of fact to be determined416 from all of the facts and circumstances with the burden on the taxpayer to establish that the advances were loans. P. M. Finance Corp. v. Commissioner, 302 F.2d 786">302 F.2d 786, 789 (3d Cir. 1962), affg. a Memorandum Opinion of this Court. The courts have enumerated a nonexclusive list of factors to be considered in determining whether "advances," such as those involved in the instant case, are loans or equity investments. The Third Circuit has considered the following list of factors in making debt-equity determinations. (1) the intent of the parties; (2) the identity between creditors and shareholders; (3) the extent of participation in management by the holder of the instrument; (4) the ability of the corporation to obtain funds from outside sources; (5) the "thinness" of the capital structure in relation to debt; (6) the risk involved; (7) the formal indicia of the arrangement; (8) the relative position of the obligees as to other creditors regarding the payment of interest and principal; (9) the voting power of the holder of the instrument; (10) the provision of a fixed rate of interest; (11) a contingency on the obligation to repay; (12) the source of the interest417 payments; (13) the presence or absence of a fixed maturity date; (14) a provision for redemption by the corporation; (15) a provision for redemption at the option of the holder; and (16) the timing of the advance with reference to the organization of the corporation. [Fin Hay Realty Co. v. United States, 398 F.2d 694">398 F.2d 694, 696 (3d Cir. 1968) (fn. ref. omitted).]The court in Fin Hay went on to state that; The various factors which have been identified in the cases are only aids in answering the ultimate question whether the investment, analyzed in terms of its economic reality, constitutes risk capital entirely subject to the fortunes of the corporate venture or represents a strict debtor-creditor relationship. * * * [Fin Hay Realty Co. v. United States, supra at 697; fn. ref. omitted.]This language makes clear that the ultimate issue and the key to the analysis is whether an outside creditor would have made a loan on the same terms and in the same form as the shareholder-creditor. Segel v. Commissioner, 89 T.C. 816">89 T.C. 816, 828 (1987) (citing Scriptomatic, Inc. v. United States, 555 F.2d 364">555 F.2d 364, 367 (3d Cir. 1977)).418 We find that petitioner has failed to carry his burden of proof. Many of the Fin Hay factors cannot be considered in light of the scarcity of evidence. However, those factors that can be considered militate against petitioner's position. Petitioner owned 50 percent of the stock of Altoona and was involved in the management of its business on a daily basis. His numerous advances to the corporation were made without formal indicia of a loan arrangement. There were no promissory notes or other documents to evidence a debtor-creditor relationship. There was no provision for interest on the advances, nor was there a stated maturity date. Petitioner has failed to present any credible evidence of any provision for repayment of the advances. 3 Clearly, no third-party creditor would have made loans to Altoona under these conditions. 419 Petitioner's attempt to deduct these advances on his 1982 return as losses on worthless stock appears to be inconsistent with his present contention that they were loans. While the treatment of an item on a return is not binding on petitioner, it constitutes some evidence that petitioner intended the advances as contributions to capital. Southern Pacific Transportation Co. v. Commissioner, 75 T.C. 497">75 T.C. 497, 663 (1980), supplemented by 82 T.C. 122">82 T.C. 122 (1984); Siewert v. Commissioner, 72 T.C. 326">72 T.C. 326, 337 (1979). Upon review of the entire record, we find petitioner has failed to carry his burden. The next issue concerns respondent's disallowance of an investment tax credit of $ 4,310.00 claimed by petitioner in 1985. This issue is directly dependent upon resolution of the bad debt issue. As a result of our disallowance of the claimed bad debt of $ 63,470.42, the investment tax credit will be fully utilized in 1982. The next issue for decision is whether petitioner is liable for the additions to tax for negligence under section 6653(a)(1) and (2) for the years 1982, 1983, 1984, and 1985. Section 6653(a)(1) provides that if any part 420 of any underpayment of any tax is due to negligence or intentional disregard of rules and regulations, there shall be added to the tax an amount equal to 5 percent of the underpayment. Section 6653(a)(2) provides that there shall be added to the tax, in addition to the 5 percent addition provided in section 6653(a)(1), an amount equal to 50 percent of the interest payable under section 6601 with respect to the portion of such underpayment which is attributable to negligence. For purposes of this section, negligence 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). Respondent's determination of negligence is presumed correct and petitioner bears the burden of proving otherwise. Hall v. Commissioner, 729 F.2d 632">729 F.2d 632, 635 (9th Cir. 1984), affg. a Memorandum Opinion of this Court; Bixby v. Commissioner, 58 T.C. 757">58 T.C. 757, 791 (1972). Petitioner initially reported on his 1982 return that the $ 63,470.42 was deductible as an ordinary loss from worthless stock. He has since conceded this position and, based on the421 evidence presented, petitioner has not proven that he had a reasonable basis to believe that the "advances" to Altoona were deductible as a bad debt. Petitioner has conceded that he failed to report income from insurance sales in both 1983 and 1984. He offered no evidence that these omissions were due to reasonable cause. In light of the foregoing, we find that all of the understatements are due to negligence and that petitioner is liable for additions to tax under section 6653(a)(1) and (2) for the years 1982, 1983, 1984, and 1985. Decision will be entered under Rule 155. Footnotes1. Unless otherwise indicated, all section references are to the Internal Revenue Code as amended and in effect for the years in issue. All Rule references are to the Tax Court Rules of Practice and Procedure. ↩2. Respondent concedes that petitioner is not liable for the section 6661 additions to tax.↩*. 50 percent of the interest due on the entire deficiency. ↩3. Altoona's corporate Federal income tax returns for 1979 through 1982, report increasing amounts of shareholder loans on its balance sheets. However, Altoona's Federal tax returns are directly contradicted by its corporate income tax returns for the Commonwealth of Pennsylvania for those years, in which Altoona denied having any outstanding indebtedness to any Pennsylvania resident individual, or partnership.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622620/	HENRY F. DUPONT, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Du Pont v. CommissionerDocket No. 85519.United States Board of Tax Appeals38 B.T.A. 1317; 1938 BTA LEXIS 755; December 7, 1938, Promulgated 755 During 1932 the petitioner, through his broker, made many short sales of shares of stock at a time when he had in long accounts with the same broker equivalent amounts of the shares sold short. During 1932 some of the short contracts were closed out by purchases; the balance by transfers of shares of stock from the long accounts to the short accounts. The gains made from the transactions were from short sales of stock. Held, that the profits were gains from sales of stock which were not capital assets; held, further, that in computing the gains or losses from the short contracts short dividends are to be added to the cost basis in arriving at the gains or losses on the sales. William L. Hennessy, Esq., for the petitioner. James D. Head, Esq., and Joseph D. Hughes, Esq., for the respondent. SMITH 1318 OPINION. SMITH: The respondent has determined a deficiency of $204,148.59 in petitioner's income tax for the calendar year 1932. The allegations of error set forth in the petition are as follows: (A) In determining the taxable net income of the petitioner for the year 1932, the Commissioner erroneously included as ordinary756 gain the profit on the sale of a block of 62,500 shares of duPont common stock which had been owned by the petitioner for more than two years and the profit realized upon the sale was reported by the petitioner in his income tax return as capital gain. The 62,500 shares of duPont common stock was acquired in 1915 and had a unit cost of $21.709 per share. The corrected cost is $1,356,812.38, sale price April 21, 1932, $1,999,250.00 capital gain $642,437.62. (B) In determining the taxable net income of the petitioner for the year 1932, the Commissioner would not allow as a deduction from income $46,875.00 which represented a bookkeeping entry for "short dividends" charged to petitioner's brokerage account and supposed to represent a cash dividend paid by the duPont Company on June 15, 1932, on the 62,500 shares of stock sold and delivered on April 21, 1932. (C) In determining the taxable net income of the petitioner for the year 1932, the Commissioner would not allow as a deduction from income as an ordinary and necessary expense short dividends in the amount of $52,237.50 paid by the petitioner on account of short sales made during 1932. The facts have been stipulated in757 great detail and we adopt the written stipulation as our findings of fact. The petitioner filed with the collector at Wilmington an income tax return for 1932 which showed capital gains and losses from the sale of shares of stock held two or more years as follows: ItemDescriptionProfitLoss115,000 shares duPont common$413,258.42239,000 shares duPont common489,235.3938,700 shares duPont common84,647.05462,500 shares duPont common567,794.68540,000 shares General Motors$313,121.21628,375 shares General Motors456,990.391,554,935.54770,111.60Net profit784,823.94He also reported in schedule C of the return a net loss of $263,990.20 from the sale of shares of stock taxable at ordinary rates. Upon the audit of the return the respondent determined that the petitioner's profits and losses from the sale of shares of stock were all ordinary gains and losses and not capital gains and losses. The petitioner does not question the correctness of such determination except as it relates to the sale of 62,500 shares of duPont common stock. The petitioner contends that that profit was a capital gain. Certain758 errors of computation made by the petitioner in the compilation of his income tax return have been corrected by the stipulation of facts filed in this case. From this stipulation the gain or loss 1319 from the sale of shares of stock by the petitioner in 1932, without taking into account the question whether the gain or loss was a capital gain or a capital loss, was as follows: ItemDescriptionProfitLoss115,000 shares duPont common$445,494.09239,000 shares duPont common573,031.5138,700 shares duPont common84,647.0543,100 shares duPont common10,720.30540,000 shares General Motors$48,378.82628,375 shares General Motors721,732.7872,400 shares General Electric754.00810,000 shares General Electric156,000.009500 shares American Gas & Electric Co167.50105,100 shares American Gas & Electric Co114,656.001162,500 shares duPont common451,762.88122,400 shares duPont common7,142.12132,200 shares General Motors5,080.1014300 shares General Motors627.40153,300 shares General Motors7,873.60Total1,574,450.931,053,617.22Net gain520,833.71The sales759 of the shares of stock in items 1 to 12, inclusive, are shown by both the broker's and the petitioner's books of account as having been short sales. The gains and losses from the sales shown in items 13, 14, and 15 were from sales of long stock held for a period of less than two years. The short sales shown by items 4, 7, and 9 were covered by purchases during 1932. At the time when the short sales were made, represented by items 1 to 11, inclusive, the petitioner had, in long accounts with the same broker who made the short sales, equivalent amounts of shares of long stock. All of the outstanding short accounts were closed out upon instructions from the petitioner not later than October 19, 1932, by transfers to the short accounts from the long accounts. In most cases the shares thus transferred from the long accounts had been owned by the petitioner for a period of more than two years at the date of transfer. In the above tabulation the gain or loss has been determined by adding to the cost base (proceeds from the short sales) short dividends charged against the petitioner while the short contracts were outstanding. The short dividends added were as follows: ItemDescriptionShort dividends239,000 shares duPont common$29,250.0038,700 shares duPont common6,525.00628,375 shares General Motors14,187.50810,000 shares General Electric1,000.00105,100 shares American Gas & Electric Co1,275.001162,500 shares duPont common46,875.00Total99,112.50760 In this proceeding the petition contests, so far as the question of capital gain or ordinary gain is involved, only the respondent's 1320 determination that the gain on the sale of 62,500 shares of duPont common stock (item 11) was ordinary gain. He contends that that gain was capital gain. The petitioner is a resident of Winterthur, Delaware. During 1932 the petitioner was not engaged in the trade or business of buying and selling securities. He was not a member of or connected with any stock exchange or brokerage firm. He was, however, a holder of substantial blocks of stock of the duPont Co., General Motors Corporation, and other corporations. He purchased and sold large quantities of stock during 1932. He had offices in the duPont Building at Wilmington. J. F. Otwell, his secretary, was in charge of the office. Raymond W. Ellis for a number of years prior to 1932, and during all of the period from January 1 to September 30, 1932, was an employee of Laird, Bissell & Meeds, a firm of stock brokers and members of the New York Stock Exchange, with offices located in the duPont Building at Wilmington and also in New York City. During all of the period from761 January 1 to September 30, 1932, Ellis was employed as a customers' man by Laird, Bissell & Meeds. He had a clientele of his own and maintained an office separate and apart from that of Laird, Bissell & Meeds but located in the same building. The petitioner was accustomed during the year 1932 and for several years prior thereto to rely upon the advice of Ellis as to all matters concerning the purchase and sale of securities. Neither the petitioner nor his secretary, Otwell, was familiar with the provisions of the Federal income tax laws, but Ellis was considered an expert in that field. It was petitioner's custom in buying and selling securities either personally or through Otwell to advise Ellis of the transactions he wished to make. Petitioner was not accustomed to instruct Ellis as to the manner in which purchases or sales should be made, nor as to which one of his accounts purchases or sales should be made for, but relied upon Ellis to handle such transactions in whatever way would be most advantageous to petitioner from the standpoint of income taxes or other taxes. In consideration of Ellis' services in this connection petitioner placed all of his orders for the purchase762 and sale of securities during the year 1932 through Ellis and paid Ellis a yearly fee of $1,000 for such services. The petitioner's Federal income tax return for 1932 was prepared for the petitioner by Ellis and the petitioner verified the return before Ellis as a notary public of the State of Delaware. Ellis died on March 24, 1933. The petitioner maintained five accounts during the calendar year 1932 with the Wilmington office of his brokers, Laird, Bissell & Meeds. These accounts were designated respectively "H. F. duPont" 1321 (sometimes referred to hereinafter as the "regular" account), "H. F. duPont Special", "H. F. duPont Short", "H. F. duPont Short No. 2", and "H. F. duPont Special Short." Orders for all of the above listed sales of stocks in 1932 (with the exception of the 62,500 shares of duPont common stock) were placed with the Wilmington office of Laird, Bissell & Meeds by Ellis pursuant to oral instructions from the petitioner and then sent by telephone to Laird, Bissell & Meeds' New York office, and the sales were made by the brokers on the floor of the New York Stock Exchange in the ordinary course of business. Deliveries to purchasers were made on the763 following full business day out of shares belonging to Laird, Bissell & Meeds or their customers, or from shares borrowed by them from other brokers. The proceeds of the sales were credited to petitioner's respective accounts as directed by Ellis. Any dividends declared on shares sold short between the date of the sale and the closing date were debited to the short accounts. As of April 1, 1932, the petitioner was indebted to the Bankers Trust Co. of New York in the amount of $4,000,000. The indebtedness was secured by collateral which included 90,000 shares of the common stock of the duPont Co. The Bankers Trust Co. requested the petitioner to deposit additional collateral or else to reduce the indebtedness. The Bankers Trust Co. was willing to release 62,500 shares of the duPont stock upon the payment to it of $2,000,000. The petitioner contracted to sell to the Christiana Securities Co. 62,500 shares of duPont common stock at that price. The Christiana Securities Co. made an arrangement with J. P. Morgan & Co. of New York to lend it $2,000,000 upon the security of 62,500 shares of duPont stock. On or about April 20, 1932, the petitioner advised Ellis of the arrangements764 which he had made with the Bankers Trust Co. and the Christiana Securities Co. and requested Ellis "to handle the matter" for petitioner through Laird, Bissell & Meeds. On the same day Ellis wrote and transmitted to the New York office of Laird, Bissell & Meeds a memorandum of instructions reading as follows: April 20, 1932. MEMORANDUM TO: Mr. John Ross FROM: R. W. Ellis You are to pay to the Bankers Trust Company two million dollars ($2,000,000), receiving sixty two thousand five hundred (62,500) shares duPont Common in the name of H. F. duPont. You are to place in the name of Laird, Bissell & Meeds the sixty two thousand five hundred (62,500) shares duPont Common. We will make delivery in Wilmington of sixty two thousand five hundred (62,500) shares duPont Common, preferably in stock other than certificates which you receive from the Bankers Trust Company. In fact, to eliminate any possible chance of being taxed on the sale, we must see to it that none of the Bankers Trust certificates are used in making this delivery. [Signed] R. W. ELLIS 1322 On April 21, 1932, Ellis, in his own handwriting and using the form of buy and sell orders used by Laird, Bissell765 & Meeds for investment purchases and sales for its own account (as distinguished from the form of buy and sell orders for the accounts of customers), made out a buy order showing that Laird, Bissell & Meeds purchased 62,500 shares of duPont Co. common stock for $2,000,000 from "H. F. duPont Short No. 2" account, and a sell order showing that Laird, Bissell & Meeds sold for $2,000,000 to the Christiana Securities Co. 62,500 shares of duPont Co. common stock. Upon receipt of the memorandum of instructions from Ellis, the New York office of Laird, Bissell & Meeds received from the Bankers Trust Co. through the Stock Clearing Corporation 62,500 shares of common stock of the duPont Co. The certificates were all registered in the name of the petitioner and were accompanied by blank powers of attorney for transfer properly endorsed by the petitioner. At the same time the Bankers Trust Co. billed Laird, Bissell & Meeds through the Stock Clearing Corporation for $2,000,000 against this delivery of 62,500 shares of the common stock of the duPont Co. and payment was made by Laird, Bissell & Meeds to the Bankers Trust Co. through the Stock Clearing Corporation in their daily settlement check766 (which check represents the net difference between their purchases or items received for payment through the Stock Clearing House). The certificates which Laird, Bissell & Meeds received from the Bankers Trust Co. were delivered to the transfer agent of the duPont Co. on April 21, 1932, and new stock certificates were received by Laird, Bissell & Meeds from the transfer agent the same day, all in the name of Laird, Bissell & Meeds. On the same day, namely, April 21, 1932, Laird, Bissell & Meeds delivered to J. P. Morgan & Co. stock certificates for 62,500 shares of the common stock of the duPont Co. and received from J. P. Morgan & Co. a check drawn to the order of Laird, Bissell & Meeds in the amount of $2,000,000, which check was deposited to the credit of Laird, Bissell & Meeds in the Guaranty Trust Co. Of the stock certificates delivered by Laird, Bissell & Meeds to J. P. Morgan & Co. on April 21, 1932, certificates representing 40,500 shares of the common stock of the duPont Co. were part of the certificates previously on the same day issued in the name of Laird, Bissell & Meeds by the transfer agent of the duPont Co. The remaining certificates, representing 22,000 shares767 of the common stock of the duPont Co. were either in the name of Laird, Bissell & Meeds or in street names but were not out of the series which Laird, Bissell & Meeds had on the same day received from the transfer agent. The accounting records of Laird, Bissell Meeds show 62,500 shares of duPont Co. common stock received from the New York 1323 office for the "H. F. duPont Special" account (a long account) at a charge of $2,000,000. They also show 62,500 shares of the duPont stock delivered to the New York office for the Christiana Securities Co. account at a charge of $2,000,000. On April 21, 1932, Laird, Bissell & Meeds delivered confirmation notices to the petitioner notifying him that his "H. F. duPont Short No. 2" account was credited in the sum of $1,999,250 as the proceeds of the sale of 62,500 shares of duPont Co. common stock, and that his "H. F. duPont Special" account was charged in the sum of $2,000,000 against receipt of 62,500 shares of the same stock. Upon receipt of these confirmation notices entries were made on petitioner's books in accordance therewith as shown in petitioner's ledger accounts entitled "Laird Bissell and Meeds - H. F. duPont Short Account768 #2" and "Laird Bissell and Meeds - H. F. duPont Special Account." The investment ledger of Laird, Bissell & Meeds reflects purchases and sales by Laird, Bissell & Meeds for its own account as principal. On April 21, 1932, an entry was made in the Laird, Bissell & Meeds investment ledger account entitled "E. I. duPont de Nemours & Co. Common Stock", showing a purchase on that date from "H. F. duPont Short No. 2" account of 62,500 shares for $2,000,000 and a sale on that date to the Christiana Securities Co. of 62,500 shares at a price of $2,000,000. The sale by petitioner of 62,500 shares of duPont Co. common stock is recorded in the ledger account entitled "H. F. duPont Short No. 2" under date of April 22, 1932. The receipt of 62,500 shares is recorded in the account entitled "H. F. duPont Special" under date of April 21, 1932. On August 19, 1932, petitioner through Ellis instructed his brokers, Laird, Bissell & Meeds, to transfer the entire balance of 62,500 shares of common stock of the duPont Co. in his "H. F. duPont Special" account to his "H. F. duPont" or "regular" account. These instructions were executed by the brokers on the same day. Likewise, on August 19, 1932, petitioner769 through Ellis instructed his brokers, Laird, Bissell & Meeds, to transfer to his "H. F. duPont Short No. 2" account, to be applied against the sale in that account on April 21, 1932, of 62,500 shares of common stock of the duPont Co. as shown in the preceding paragraph, 62,500 shares of the common stock of the duPont Co. in his "H. F. duPont" or "regular" account. These instructions were executed by the brokers on the same day and the sale of 62,500 shares of common stock of the duPont Co. in the "H. F. duPont Short No. 2" account, as shown in the preceding paragraph, was closed by such transaction. A dividend at the rate of 75 cents a share was declared on the duPont Co. common stock, payable June 15, 1932, to stockholders of record of May 25, 1932. On June 15, 1932, Laird, Bissell & Meeds 1324 charged the "H. F. duPonst Short No. 2" account in the sum of $46,875 representing an amount equal to the dividend paid June 15, 1932, on 62,500 shares of duPont Co. common stock. On the same day Laird, Bissell & Meeds credited the "H. F. duPont Special" account in the sum of $46,875 representing June 15, 1932, dividends on 62,500 shares of duPont Co. common stock. The sum of770 $46,875 shown in this account under date of June 15, 1932, as dividends on 62,500 shares of duPont Co. common stock was included in the total sum of $573,977.95 reported by the petitioner in his Federal income tax return for the year 1932 as "dividends on stock of domestic corporations." The rule of the New York Stock Exchange in force during all of the year 1932 in respect to margin requirements is contained in chapter XII, section 1, of the rules of the New York Stock Exchange, and reads as follows: SEC. 1. The acceptance and carrying of an account for a customer, whether a member or a non-member, without proper and adequate margin, may constitute an act detrimental to the interest or welfare of the Exchange. For the purpose of computing the margin for carrying the accounts of the petitioner during the year 1932, his brokers, Laird, Bissell & Meeds, considered his "H. F. duPont" or "regular" account, "H. F. duPont Short", "H. F. duPont Special", "H. F. duPont Short No. 2", and "H. F. duPont Special Short" as one consolidated account. Chapter VII, section 10, of the rules of the New York Stock Exchange which were in force during all of the year 1932 reads as follows: 771 SEC. 10. An allowance for interest on short sales of stock shall not be more than the loan market rates for the stocks borrowed or used for such short sales. On April 8, 1932, the committee on business conduct of the New York Stock Exchange promulgated a rule covering reports on overnight short positions which reads in material part as follows: TO MEMBERS OF THE EXCHANGE: As of the close of business April 9, 1932, the Committee on Business Conduct rescinds all circular letters on the subject of reports on overnight short positions, and in lieu thereof directs that members report the short position, including odd lots, in each stock, for each account or customer, giving the name of the owner of the account, as of the close of business every clearing day commencing April 8, 1932. Do not include as short positions the following: (1) Sales for "Cash" with stocks not yet received from the seller. (2) Sales or "short" positions against "long" positions in the same stocks where definite instructions have been given to deliver other certificates. (3) Sales or "short" positions where it is actually known, without further inquiry, that the seller has the same long stocks772 in his possession or has an offsetting position against his short sales in the same stocks. 1325 During all of the year 1932 Laird, Bissell & Meeds maintained daily records showing the long and short positions of its customers. These records consisted of large sheets of paper, one side of which was designated with the name of the stock involved and the word "long" and the other side was captioned with the name of the stock and the word "short." The names of the customers were listed alphabetically on each side of these sheets with the number of shares long or short at the close of the business day covered by each sheet. The petitioner and the respondent are agreed that all of the sales listed in items 1 to 11, inclusive, of the complete tabulation of sales of stock by the petitioner in 1932, including the sale of the 62,500 shares of common stock of the duPont Co. shown in the "H. F. duPont Short No. 2" account, were listed on the long and short position record of Laird, Bissell & Meeds as short sales, and that each of such entries bears the penciled word "offset", which was intended to show that the petitioner had long positions equal to or in excess of his short positions773 on the days in question. The parties are further agreed that neither the sale of the 62,500 shares of common stock of the duPont Co. nor any of the transactions listed in the above referred to items 1 to 11, inclusive, were reported by Laird, Bissell & Meeds to the New York Stock Exchange in its reports of overnight short positions required under the rule of the committee on business conduct promulgated April 8, 1932. Upon this background of the stipulated facts the petitioner contends that there was no short sale of the 62,500 shares of duPont Co. common stock in April 1932 and that the transaction does not come within the provisions of section 23(s) of the Revenue Act of 1932, which provides in material part as follows: SEC. 23. DEDUCTIONS FROM GROSS INCOME. In computing net income there shall be allowed as deductions: * * (s) SAME - SHORT SALES. - For the purposes of this title, gains or losses (A) from short sales of stocks and bonds, or (B) attributable to privileges or options to buy or sell such stocks and bonds, or (C) from sales or exchanges of such privileges or options, shall be considered as gains or losses from sales or exchanges of stocks or bonds which774 are not capital assets. The petitioner contends that the profit realized from the sale of the 62,500 shares was from the sale of shares of stock owned by him for a period of more than two years and that he is entitled to be taxed thereon at capital gain rates. The essential facts bearing upon this point are that in April 1932 the petitioner was carrying in a long account with his brokers, Laird, Bissell & Meeds, more than 62,500 shares of duPont common stock. He was also the owner of 90,000 shares of duPont common stock which were deposited as collateral with the Bankers Trust Co. of 1326 New York. The Bankers Trust Co. agreed with the petitioner to release 62,500 shares of the duPont common stock upon the payment of $2,000,000. The petitioner contracted to sell to the Christiana Securities Co. 62,500 shares of duPont common stock for $2,000,000. The petitioner informed Ellis, his agent, and also an employee of Laird, Bissell & Meeds, to "handle the matter." Ellis handled the matter after this fashion: He made a short sale for the petitioner of 62,500 shares of duPont common stock, the purchaser of the shares being Laird, Bissell & Meeds. On the same day, Laird, 775 Bissell & Meeds acquired from the Bankers Trust Co. 62,500 shares of duPont common stock, paying therefor $2,000,000. Although these shares were immediately transferred to the name of the brokers, they were credited to the "H. F. duPont Special" account, which was a long account and the petitioner was charged $2,000,000 therefor. On the same day, Laird, Bissell & Meeds, as principal, sold 62,500 shares of duPont common stock to the Christiana Securities Co., delivering them to J. P. Morgan & Co. and receiving $2,000,000 therefor. All of the above transactions took place on April 21, 1932. At the close of the day the petitioner was shown by the broker's books of account as being "short" 62,500 shares duPont Co. common stock and "long" an equal amount of stock representing the shares acquired from the Bankers Trust Co. The petitioner was informed of the "short" sale and of the purchase of long stock made by the brokers for him. He knew that the brokers had charged him with a short sale of the 62,500 shares and that his long account was augmented by an equal number of shares. Counsel for the petitioner submits that the attempt of Ellis to set up long and short positions in respect776 of the sale and acquisition of the 62,500 shares of stock in question was "uncalled for, unnecessary and to say the least, very unethical." These are questions which we are not required to pass upon. The facts do not show that the acts of Ellis and of the brokers were not within the authority granted by the petitioner and that their records of the transactions are not genuine and correct. The Board in several recent cases has had occasion to pass upon the question whether sales made under circumstances somewhat similar to those obtaining in the instant case were "short" sales within the meaning of the quoted provisions of the statute. A thorough exposition of the question, particularly with reference to the factors which distinguish short sales from ordinary sales, is found in . We held in that case that, where a taxpayer made several sales of shares of stock through a broker during 1931, the sales being treated as short sales, and the sales were covered in 1932 by the transfer of shares of the same stock 1327 which the taxpayer had held for more than two years, the sales were short sales within the meaning777 of the statute and the gains thereon were taxable in 1932 as ordinary gains. In our opinion in that case we said: Thus, a short sale may be made, not only by one who does not own any securities of the kind which he sells, but also by one who actually owns securities of the kind he sells. Short sales must frequently be made by brokers who are not informed whether or not their principal is the owner of shares which he could sell and deliver if he so desired. One of the chief differences between a regular sale and a "short sale" is that, in the former, the seller delivers his own shares to the purchaser and thus closes the transaction, while in the latter, he delivers "borrowed" shares and the transaction is not closed so far as the seller is concerned until he delivers shares to repay the "loan". If the shares sold are not furnished by the seller at the time of the sale but are supplied by the broker, the transaction is a short sale and sets in motion the short sale process. * * * Petitioner cites , in support of his contentions in this proceeding that the petitioner made no short sale of his 62,500 shares of duPont Co. common stock778 on April 21, 1932. There, the taxpayer while visiting in Florida instructed his broker in Chicago to sell certain specified shares of stock represented by certificates held in his safe deposit box in Chicago. The sale was actually made on the following day through another broker in New York, with delivery of borrowed shares. On the same day the Chicago broker credited the proceeds of the sale to the taxpayer and charged him with the shares sold. About a month later the taxpayer on his return to Chicago obtained the certificates from his safe deposit box and delivered them to his broker, as he had previously agreed to do. We held, contrary to the Commissioner's determination, that the sale of the shares in question was a cash sale and not a short sale. It was conceded that the facts in the Dashiell case were similar to those in , where a like result was reached. In that case we said: * * "A short sale is a contract for the sale of shares which the sller does not own or the certificates for which are not within his control so as to be available for delivery at the time when, under the rules of the Exchange, delivery must be779 made." . Here the petitioner owned the shares and they were within her control and available for delivery. She intended to sell the shares that she owned, and it is stipulated that they were sold. Mere failure to deliver certificates is not alone enough to establish a short sale. ; affd., . Accordingly, it is held that the sales of Westinghouse and United States Steel shares were not short sales. ; affd., , involved similar facts. There, the taxpayer instructed his broker to sell for him 800 shares of Continental Can Co. stock, the certificates for which 1328 were in his safe deposit box. The broker sold 800 shares of the stock for taxpayer's account and later received certificates for 800 shares out of lots of the same stock which he had purchased for the taxpayer. In our opinion we said: * * * But the evidence shows that the petitioner intended to sell the 800 shares which he owned, that he instructed the broker to sell such shares, and, in view of the fact that780 the broker promptly sold 800 shares, the conclusion is inescapable that the broker was carrying out the instructions and sold the shares he was directed to sell. There is not the slightest reason to believe that either the petitioner or the broker was considering a short sale, and the mere failure of petitioner to deliver the certificates is not alone sufficient to establish one. In all of the above cases where it was held that the sales were not short sales the evidence showed that at the time of the transaction the taxpayer had a clear intention to sell the specific shares which he then held, and so instructed his broker. No such facts obtain in the proceeding at bar. The petitioner did not instruct Ellis as to how the transactions should be carried out. The general authority under which Ellis acted warranted him in making a short sale of the 62,500 shares of duPont Co. common stock if he desired to do so. He certainly made what he considered was a valid short sale. We think it was. In , the court stated: James Edward Meeker, Economist to the New York Stock Exchange, states in his book "Short781 Selling," "A short sale may be briefly but comprehensively defined as a sale which creates a debt in terms of good." * * * Judged by this definition, the brokers made a short sale on April 21, 1932, of 62,500 shares of duPont Co. common stock for the account of the petitioner. The effect of the transaction reflected on the broker's books under date of April 21, 1932, in "H. F. duPont Short No. 2" account was to create "a debt in terms of goods" owing by the petitioner to the brokers. We do not think that it can be doubted that, if the petitioner had in August 1932 instructed his brokers to close his short account by a covering purchase of 62,500 shares of duPont common stock and the purchase had been made, the gain or loss upon the transaction reflected in the short account would be the difference between the proceeds from the short sale and the cost of the covering purchase. Compare , in which it was held that the "first in, first out" rule was inapplicable in determining taxable gain on the sale of corporate stock purchased on margin where the margin trader had through his broker designated the securities to be sold as those782 purchased on a particular date and at a particular price. The intention of the customer as shown by instructions to his broker either personally or through an agent is to be given effect. 1329 The petitioner in his brief makes an extended argument that, since under the rules of the New York Stock Exchange long accounts and short accounts with a broker may be consolidated for the purpose of determining margins, the long and short accounts are likewise to be consolidated for the purpose of determining whether a short sale has been made. In short, the argument is that a man can not make a short sale of shares of stock through a broker who is carrying for him long stock of an equivalent amount. This was the point in issue in The court held that a person might sell shares short through a broker who was carrying an equivalent amount of long stock for the customer and that, where the short contract was closed by a transfer from the long account to the short account of shares of stock which had been owned by the customer for a period of more than two years, the gain was, under the same provision of the statute as is involved783 herein, an ordinary gain and not a capital gain. Upon the authority of , we sustain the respondent's contention that the profit realized by the petitioner from the sale of the 62,500 shares of duPont Co. common stock was not from the sale of capital assets within the meaning of the taxing statute. The remaining question for our consideration is whether the short dividends charged against the petitioner and treated by him and by the respondent in the determination of the deficiency as additions to the cost basis of the shares sold were properly so treated or should be regarded as ordinary and necessary expenses deductible from gross income. The evidence shows that the petitioner was not a broker nor engaged in a business of buying and selling securities. The decision of the Board in ; affd., , is dispositive of the issue and confirms the treatment of the short dividends made both by the petitioner in his return and the respondent in the determination of the deficiency. Reviewed by the Board. Judgment will be entered under Rule784 50.ARUNDELLARUNDELL, dissenting: The majority holding of a short sale is based on the negative proposition that the facts do not show that the acts of Ellis and the brokers were not within the authority granted by the petitioner and that their records are not genuine and correct. Stated otherwise, the holding is predicated on a presumption of authority in Ellis and the brokerage firm to act as principal and of 1330 entries in accordance with such authority. Against this is the presumption that the brokers were acting as agents. A broker in securities to whom an order to buy or sell is entrusted may not, without the full knowledge and consent of his customer, sell to or buy from himself. Meyer, Law of Stockbrokers and Stock Exchanges, § 51 and cases cited therein. The rules of New York Stock Exchange, with limited exceptions that do not apply here, prohibit a member while acting as a broker from buying or selling for his own account securities for which he or his firm has accepted an order to buy or sell. Ch. XI of the rules of the stock exchange. The effect of the holding in this case is to say that the brokerage firm violated the rules of the exchange, 785 and this I think we should hesitate to do without clear evidence of the fact. I realize fully that a short sale may be made by one who actually owns securities of the kind he sells. . But a sale of the same kind of securities is not the same as a sale of the specific securities. The latter is a long sale, even though delivery of the certificates is temporarily delayed. ; . Here, as I understand the facts, the petitioner owned 90,000 shares of duPont stock, the certificates for which were held by a bank as security for a loan. The petitioner contracted to sell 62,500 of those shares to the Christiana Securities Co. for cash. The course of dealings establishes quite clearly that the shares in the hands of the bank, and not some other shares, were the subject of the contract to sell. The bank was demanding either additional collateral or a reduction of the loan, and petitioner arranged to take up 62,500 shares from the bank upon payment of $2,000,000 which he was to receive from the Christiana Securities786 Co. He did not arrange with the Christiana Securities Co. to sell it other duPont shares, nor did he contract with any one else to sell the shares held by the bank. It seems to me that this is the only possible conclusion on the facts given in the majority opinion; indeed the majority opinion does not hold otherwise. When petitioner had made the contract his agent carried it out by delivering duPont stock and collecting the sale price agreed upon between the seller and the buyer. This, it seems to me, was an ordinary sale within the rules of the Mott case, supra, and its character was not changed by reason of book entries made by the agent. It is not without significance that all of the transactions within the taxable year shown on the books of Laird, Bissell & Meeds as short sales, except the one here in question, were actually put through as short sales on the floor of the Stock Exchange in the ordinary course of business. This difference in procedure indicates that no short sale was made or intended in 1331 connection with the shares purchased by the Christiana Securities Co. and leads to the conclusion that the brokers had no intention of buying any stock*787 on their own account, buy merely effected delivery to the Christiana Securities Co. of stock sold to that company by the petitioner. Intent to pass title is one of the governing factors in question concerning sales of specific goods. Petitioner intended and contracted to sell his specific shares to the Christiana Securities Co. I think the majority opinion errs in disregarding the agreement of sale between the petitioner and the Christiana Securities Co. and in putting the decision on the records of the agent. TURNER and ARNOLD agree with this dissent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622621/	Anthony Scaglione v. Commissioner.Scaglione v. CommissionerDocket Nos. 3497-69, 2601-70.United States Tax CourtT.C. Memo 1972-78; 1972 Tax Ct. Memo LEXIS 176; 31 T.C.M. (CCH) 312; T.C.M. (RIA) 72078; March 30, 1972, Filed 176 John F. Kane, 2066 Penobscot Bldg., Detroit, Mich., for the petitioner. James C. Lynch, for the respondent. STERRETTMemorandum Findings of Fact and Opinion STERRETT, Judge: Respondent determined the following deficiencies in petitioner's Federal income tax and additions to tax: Additions totaxYearDeficiencyunder sec.6653(a) 11965$ 926.96$ 46.3519664,893.88244.69The issues for decision are whether respondent, through the use of petitioner's bank deposits plus cash expenditures, correctly determined petitioner's gross income. And, if so, whether any part of the deficiencies is due to negligence or intentional disregard of rules and regulations. Findings of Fact Some of the facts have been stipulated. The stipulation together with the exhibits attached thereto are incorporated herein by this reference. Petitioner is Anthony Scaglione, whose legal address was Warren, Michigan, as of the date his petitions were filed with the Tax Court. His Federal income tax returns for the taxable years 1965 and 1966 were177 filed on the cash basis with the district director of internal revenue at Detroit, Michigan. During the years in issue, petitioner was a single man who lived with his mother, Mary Scaglione (hereinafter sometimes referred to as Mrs. Scaglione). They maintained a home at Grosse Pointe Woods, Michigan, for the greater part of 1965. In December of that year petitioner sold the home for approximately $44,000 subject however to a $12,000 mortgage. He received a $500 down payment and the remainder shortly thereafter. He then purchased land and had a new residence built in Warren, Michigan, petitioner's present address. Petitioner was unemployed from at least 1963 through 1966. Sometime prior to 1963 he was engaged in the used car business. Petitioner maintained a safety deposit box at Manufacturers National Bank of Detroit until approximately 1965 when he transferred said box to the Michigan Bank where it is presently located. He also maintains a deposit box at the National Bank of Detroit. There was however little if any cash in any of the above noted facilities during the years in issue. During 1965 and 1966 petitioner maintained a checking account at the Michigan Bank. He made deposits178 of at least $7,694.12 during 1965 and $52,587.86 during 1966. The great majority of these deposits was made in cash rather than by check. Of the 1966 total, $1,266.60 represented redeposits. A portion of the deposits represented nontaxable income from a veteran's pension, principal on two land contracts, proceeds from the sale of his residence, and the cash surrender value of a life insurance policy. The funds acquired on the surrender of the policy represent the liquidation of a mortgage life insurance policy on petitioner's life acquired in connection with the Grosse Pointe Woods house. Such amounts are reflected in the following schedule: 19651966Proceeds from Veteran's pension$1,456.00$ 1,632.00Land contracts:Smith2,340.235,642.31Holcomb690.00715.00Sale of Residence500.0031,955.99Insurance Policy1,565.27Total$4,986.23$41,510.57 Petitioner expended approximately $150 per week during 1965 and 1966 for living expenses for himself and his mother. Of this amount $125 per week represents petitioner's own personal expense. Such amounts were, for the most part, paid in cash and were not derived from funds deposited in petitioner's179 checking account. Utility and medical bills were in addition to the above noted figures and were paid by check. 314 During the years in issue petitioner wrote a total of seven checks to "cash" in the following amounts: DateCheck #Amount2/14/65234$ 50012/17/652002/17/663211,0003/ 1/66325503/ 7/663278004/20/663851,5006/29/663725Total$4,055 Petitioner also cashed a $200 check for an Alice Volpe during 1966. The land petitioner purchased in 1966 in Warren cost $4,500 and he applied at least $2,500 of the proceeds from the sale of the Grosse Pointe Woods house toward that amount. Petitioner's mother also maintained a safety deposit box during the years in question. This box contained cash which was inherited from her husband who had passed away in 1955. The extent of the cash contained therein during 1965 and 1966 is uncertain. She also had two savings accounts, each containing $10,000. The origin of these funds cannot be ascertained. The savings account statements indicated no withdrawals made to petitioner. Mrs. Scaglione received an estimated $1,000 per year in interest from the two accounts. She also180 received $70 per month in social security benefits. Such amounts were used to defray the living expenses incurred by herself and petitioner. Petitioner's Federal income tax returns filed for the years 1963-1966 report the following amounts of gross income:1966$270.581965559.771964908.251963929.99 Such amounts are characterized as interest income received from petitioner's land contracts. Petitioner failed to keep adequate books and records with respect to his taxable income for the years 1965 and 1966. Though respondent asserts petitioner's living expenses should be increased from $3,600 to $6,500, thereby providing evidence of further taxable income, respondent is not making any claim for an increased deficiency. Opinion The issues presented for decision relate to whether respondent, through the use of the bank deposits plus cash expenditures method, correctly determined petitioner's gross income. If we agree with respondent that there are deficiencies in petitioner's income taxes for the years 1965 and 1966, a further determination must then be made with respect to the applicability of the penalty provided in section 6653(a) where deficiencies181 are found to be due to negligence or intentional disregard of rules and regulations. Where a taxpayer has failed to keep adequate books and records, the propriety of the bank deposits plus cash expenditures method in reconstructing a taxpayer's income is well established. (C.A. 5, 1967), affirming on this issue a Memorandum Opinion of this Court. . Such method presents evidence which can be rebutted. However, as with other deficiencies, petitioner has the burden of disproving respondent's determination. Petitioner has failed to satisfy his burden of proof. The facts noted above indicate that petitioner, during 1965 and 1966, made deposits in his checking account of at least $7,694.12 and $52,587.86 respectively, while his Federal income tax returns for the same period reported only $559.77 and $270.58 of gross income. Though a substantial portion of the deposits was attributable to nontaxable income, the remainder greatly exceeded the amounts reported on the returns. In addition, he expended $150 per week for living expenses. Such amounts were paid in cash and were not derived182 from funds deposited in petitioner's checking account. Petitioner attempts to explain away this disparity by asserting that the added funds were acquired from: (1) income saved during his business years, (2) money received from his mother, and (3) sale of an automobile. 2We can deal quickly with these claims. First, petitioner's returns showed no savings account interest or stock dividend income. Petitioner informed the revenue agent that though he had a safety deposit box there was no money stored in it. 315 Further petitioner testified he was in the used car business through 1964. However, the returns for years 1963 and 1964 clearly indicate to the contrary; petitioner was unemployed with no income from an automobile business during that period. Hence, petitioner has failed to offer evidence with respect to the source for such savings and, in fact, the record militates against there being a source. Secondly, his mother's savings accounts indicate no withdrawals to or for petitioner. Though his mother had some183 cash in a deposit box, her testimony on this score was unclear; stating on the one hand that she had spent a portion of the money contained therein while also asserting that the box contained the same amount of cash at the date of trial as on the date of her husband's death. Petitioner's reference to cash received as an insurance reimbursement from a robbery is unsubstantiated. He has failed to produce either police records confirming the theft or an insurance report indicating the payment of a claim. Finally, petitioner has again failed to present any substantive evidence which would indicate the sale of an automobile. The fact is that petitioner's entire case rests on his self-serving testimony. Due to the innumerable conflicts contained therein we can give such evidence little weight. Accordingly we hold that petitioner has failed to report the following amounts of income: 1965Deposits to Michigan Bank$7,694.12Less--Nontaxable Deposits:Veteran's pension$1,456.00Land Contracts Smith2,340.23Holcomb690.00Sale of Residence500.00Cash Surrender Value of LifeInsurance PolicyRedeposits4,986.23Net Taxable Deposits:$2,707.89Additional Cash Expenditures$7,800.00Personal Living ExpensesLess--Mother's Social Security$ 840.00paymentsMother's interest income1,000.001,840.00+5,960.00Correct Gross Income$8,667.89Amount Reported on Return- 559.77Increase in Taxable Income3 $8,108.12184 1966Deposits to Michigan Bank$52,587.86Less--Nontaxable Deposits:Veteran's pension$1,632.00Land Contracts Smith5,642.31Holcomb715.00Sale of Residence31,955.99Cash Surrender Value of Life1,565.27Insurance PolicyRedeposits1,266.6042,777.17Net Taxable Deposits:$ 9,810.69Additional Cash Expenditures$7,800.00Personal Living ExpensesLess--Mother's Social Security$ 840.00paymentsMother's interest income1,000.001,840.00+ 5,960.00Correct Gross Income$15,770.69Amount Reported on Return- 270.58Increase in Taxable Income$15,500.11Petitioner has the burden to show that no part of any underpayment was due to negligence or intentional disregard of rules or regulations. ; . In the instant case, due to petitioner's substantial understatement of income and his lack of financial records, we hold that such understatement, without proof to the contrary, 185 was due to negligence or the intentional disregard of rules and regulations as provided in section 6653(a). ; ; . Decisions will be entered under Rule 50. Footnotes1. All statutory references are to the Internal Revenue Code of 1954 unless otherwise indicated.↩2. Petitioner does not contend that any portion of the checks made out to "cash" were used to pay his personal living expenses, i. e. food, clothing, etc.↩3. Though respondent increased petitioner's personal living exenses he is not claiming an increased deficiency.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4537694/	Notice: This opinion is subject to formal revision before publication in the Atlantic and Maryland Reporters. Users are requested to notify the Clerk of the Court of any formal errors so that corrections may be made before the bound volumes go to press. DISTRICT OF COLUMBIA COURT OF APPEALS No. 19-AA-335 MARIA RAMOS, PETITIONER, V. DISTRICT OF COLUMBIA DEPARTMENT OF EMPLOYMENT SERVICES, RESPONDENT, and P&R ENTERPRISES, INC. and TRAVELERS INSURANCE COMPANY, INTERVENORS. On Petition for Review of an Order of the District of Columbia Department of Employment Services Compensation Review Board (CRB-4-19) (Argued March 13, 2020 Decided May 28, 2020) Carlos A. Espinosa, with whom Ivan M. Waldman, was on brief, for petitioner. Caroline S. Van Zile, Deputy Solicitor General, with whom Karl A. Racine, Attorney General, and Loren L. Alikhan, Solicitor General, filed a statement in lieu of a brief, for respondent. Amy L. Epstein for intervenors. Before GLICKMAN, EASTERLY, and DEAHL, Associate Judges. 2 DEAHL, Associate Judge: Maria Ramos suffered a stroke in the course of her custodial work. She brought a claim for workers’ compensation benefits under the District of Columbia Workers’ Compensation Act. See D.C. Code §§ 32-1501, et seq. (2019 Repl.). The Administrative Law Judge (ALJ) denied her claim, and the Compensation Review Board (CRB) affirmed that denial, each concluding that her stroke was not causally related to her work. Ms. Ramos now appeals the CRB’s judgment. The Workers’ Compensation Act affords claimants a presumption that an injury is causally connected to their work, and therefore compensable, whenever they present “some evidence” of “a work-related event, activity, or requirement which has the potential of resulting in or contributing to the death or disability.” Ferreira v. District of Columbia. Dep’t of Emp’t Servs., 531 A.2d 651, 655 (D.C. 1987); D.C. Code § 32-1521(1). Once triggered, the employer may sever this presumed causal connection only by presenting “substantial evidence” “specific and comprehensive enough to sever the potential connection between a particular injury and a job-related event.” Ferreira, 531 A.2d at 655 (quoting Swinton v. J. Frank Kelly, Inc., 554 F.2d 1075, 1083 (D.C. Cir. 1976)). The CRB reasoned that while Ms. Ramos had triggered the presumption of causality—a finding that is not 3 challenged here—her employer presented substantial evidence sufficient to rebut that presumption. We disagree. We reverse and remand for further proceedings. I. Ms. Ramos worked as a janitor for P&R Enterprises, Inc. Her job involved emptying trash cans and cleaning offices on two floors of a large office building that spanned a city block. According to her credited testimony, the trash cans were often filled with books and paper so that they could be “very heavy,” 1 and she had to move quickly in order to complete her work within her five-hour shift. On April 19, 2016, Ms. Ramos was working hurriedly when, about halfway through her five-hour shift, a “heat wave” came over her, her extremities went numb, and she collapsed. She got up only to collapse again. Ms. Ramos’s supervisor called for an ambulance which transported her to the hospital where she was diagnosed as having suffered from a hemorrhagic stroke. 1 Ms. Ramos’s supervisor estimated that even when filled to the brim with paper or books, each trash can Ms. Ramos had to lift would weigh only “10 pounds approximately.” The larger receptacle that she emptied the smaller cans into was on wheels so that she would only have to push rather than lift it. 4 Ms. Ramos’s stroke did not come without warning. She was diabetic and had a history of hypertension, as well as a pattern of skipping the medications prescribed to control her high blood pressure. Eight months before her stroke, she was admitted to the hospital following an automobile accident and her blood pressure was measured at an alarming 242 (systolic) / 152 (diastolic).2 In the months following her stroke, Ms. Ramos’s treating physician, Dr. Claudia Husni, opined that her stroke was “a consequence of” her hypertension, further noting that the stroke had left her permanently unable to use her left hand and arm. Ms. Ramos filed a claim for workers’ compensation benefits and ultimately requested a formal hearing before an ALJ. Ahead of the hearing, the parties indicated that the only contested issue between them was whether Ms. Ramos’s stroke was causally related to her employment. The medical evidence as to that question came primarily from Dr. Allen A. Nimetz, who at the request of the employer, performed an independent medical evaluation of Ms. Ramos and 2 As a reference point, Dr. Nimetz testified that high blood pressure was once defined as anything above 140 systolic and 90 diastolic, and that those numbers had dropped even lower in the year prior to his testimony. Ms. Ramos’s 242 / 152 reading was well past the point that qualifies a person as being in the midst of a hypertensive crisis. See High Blood Pressure, AM. HEART ASS’N, https://www.heart.org/en/health-topics/high-blood-pressure (categorizing a person with blood pressure higher than 180 (systolic), or higher than 120 (diastolic), as experiencing a hypertensive crisis). 5 examined her medical records. Dr. Nimetz testified and authored a report that was admitted into the record. In his report, he opined that “[t]he major contributory factors [of Ms. Ramos’s stroke] were uncontrolled hypertension and poorly controlled diabetes mellitus,” and he concluded, “I would not attribute the cerebrovascular event [to] her employment.” He repeated that conclusion in his testimony, noting that Ms. Ramos’s diabetes and high blood pressure were conditions that “she brought into work when she started,” leading him to conclude that she did not suffer “a work related injury or work related disease.” On cross-examination, Dr. Nimetz agreed that physical exertion will increase a person’s blood pressure, including a person who already has high blood pressure, and agreed that strokes could result from high blood pressure. The ALJ then intervened and asked Dr. Nimetz, who had heard Ms. Ramos’s testimony, whether he had “an opinion as to whether or not [Ms. Ramos’s] job responsibilities would in any way cause her to have the stroke.” He replied, “No. I have not witnessed what the responsibilities involve, and not looking at how much heavy duty it is, what the environment is. So I really can’t make a[n] opinion on that.” In her closing arguments before the ALJ, Ms. Ramos maintained that her stroke was brought on by aggravation of her hypertension. She argued that injuries 6 are compensable even when the work merely contributes to the injury by aggravating a pre-existing condition, and that the evidence—including Dr. Nimetz’s own testimony—was sufficient to trigger the presumption of compensability. In response, the employer pointed out that neither Dr. Nimetz nor Ms. Ramos’s treating physicians ever stated that Ms. Ramos’s employment responsibilities caused her stroke. The employer argued that Ms. Ramos was not even entitled to a presumption of causation because there was no medical evidence showing a causal relationship between her work responsibilities and her stroke. The ALJ found that Ms. Ramos had produced enough evidence to trigger the statutory presumption of compensability but that Dr. Nimetz’s report and testimony constituted “substantial evidence” rebutting the presumption. Having disposed of the presumption, the ALJ concluded that Ms. Ramos had not proven causation by a preponderance of the evidence. The compensation order dismissed Ms. Ramos’s claim without mentioning her aggravation theory specifically, although it did note Dr. Nimetz’s opinion that hypertension and diabetes were the “major contributory factors” of the stroke. Ms. Ramos sought review by the CRB, contending that the ALJ had improperly found that the presumption had been rebutted. She reiterated her 7 argument that Dr. Nimetz’s testimony about elevated blood pressure supported her theory of causation. In its response, the employer abandoned its argument that Ms. Ramos did not present sufficient evidence to trigger the presumption that her stroke was causally related to her employment. It instead relied upon its argument that it had adequately rebutted that presumption with “substantial evidence,” as the ALJ had found. The CRB agreed, concluding that “Dr. Nimetz . . . rendered an unambiguous opinion that Claimant’s stroke was not causally related to her employment.”3 The CRB discounted Dr. Nimetz’s cross-examination testimony that he had no opinion as to whether Ms. Ramos’s “job responsibilities would in any way cause her to have the stroke” as mere “answers to [] hypothetic questions, which we do not equate to be substantial evidence.” The CRB affirmed the ALJ’s conclusion that the presumed causal connection between Ms. Ramos’s work and her stroke had been rebutted by “substantial evidence.” 3 The CRB described this as an “undisputed” point, a misplaced descriptor as this was the central point of the dispute before it. See Ms. Ramos’s Mem. in Supp. of Appl. for Review at 10 (Feb. 13, 2019) (“Dr. Nimetz’s testimony . . . provided a clear causal connection between Ms. Ramos’s work related injury and her employment.”). 8 II. The only issue presented on appeal is whether the employer, P&R Enterprises, presented substantial evidence sufficient to rebut the presumption that Ms. Ramos’s stroke was causally related to her work. 4 While we defer to the factual findings below, what constitutes substantial evidence sufficient to rebut the presumption that one’s work is causally related to their injury is a legal question that we review de novo. See Washington Post v. District of Columbia Dep’t of Emp’t Servs., 852 A.2d 909, 914 (D.C. 2004) (quoting Safeway Stores, Inc. v. District of Columbia Dep’t of Emp’t Servs., 806 A.2d 1214, 1219 (D.C. 2002)). We review the CRB’s final order, mindful that “we cannot ignore the compensation order which is the subject of the Board’s review.” Georgetown Univ. Hosp. v. District of Columbia Dep’t of Emp’t Servs., 916 A.2d 149, 151 (D.C. 2007). 4 The employer does not dispute that Ms. Ramos presented evidence sufficient to trigger the legal presumption of causation. For her part, Ms. Ramos does not dispute that she cannot prevail if that legal presumption was in fact rebutted, as that would have left her with the burden of proving causation by a preponderance of the evidence, see McCamey v. District of Columbia Dep’t of Emp’t Servs., 947 A.2d 1191, 1214 (D.C. 2008) (en banc), and she does not purport to have carried that burden. Ms. Ramos’s sole point of contention is that the employer’s evidence “does not raise [sic] to the level of substantial evidence required under the Act.” 9 In analyzing the issue presented, it helps to first identify the precise target that substantial evidence was needed to rebut. The only theory of causation offered by Ms. Ramos, and the only one supported by some evidence, was that her work as a custodian involved physical exertion, which in turn may have raised her already high blood pressure, which in turn had the potential to trigger her stroke. As her counsel argued in closing, the evidence supported the possibility (at least enough to trigger the presumption of causality) that her high blood pressure “coupled with her activities at work” caused her stroke. Ms. Ramos reiterates on appeal that it was this theory that triggered the presumption in her favor—that her “stroke was caused as a result if [sic] her hypertension coupled with the normal blood pressure increase due to her physical exertion while doing her job”—and the employer does not contest that understanding or offer any alternative to it. 5 Put another way, Ms. Ramos’s theory was that her work aggravated her pre- existing hypertension. It is undisputed and well-established that this is a valid theory 5 The ALJ found that Ms. Ramos triggered the presumption of causality because she “was emptying the trash at the time she fell and as a result was diagnosed with a hemorrhagic stroke,” and the CRB did not revisit the question because it was uncontested before it. The ALJ’s finding, while somewhat opaque, is best understood as a nod to Ms. Ramos’s causal theory that the strain of her work exacerbated her high blood pressure thereby triggering a stroke and, in any event, that understanding is undisputed here. 10 of compensability under the Workers’ Compensation Act. See King v. District of Columbia Dep’t of Emp’t Servs., 742 A.2d 460, 468 (D.C. 1999) (citing Ferreira, 531 A.2d at 660). Under our “aggravation rule,” it does not matter that work-related activities may have contributed to the injury only in part, that the injury would not have happened but for a pre-existing condition, or that the injury “might just as well have been caused by a similar strain at home or at recreation.” Id. (quoting Wheatley v. Adler, 407 F.2d 307, 312 (D.C. Cir. 1968) (en banc)). Whether Ms. Ramos was teetering on the edge of a stroke independent of her work is thus beside the point; if her work inched her over that edge, however slightly, her injury is compensable. Having nailed down the theory to be rebutted, we turn to whether the employer presented substantial evidence to accomplish that feat. We as a court have not endeavored to pinpoint a “precise quantum of proof needed to meet the substantial evidence threshold.” Washington Hosp. Ctr. v. District of Columbia Dep’t of Emp’t Servs., 744 A.2d 992, 1000 (D.C. 2000). Instead we have said that “substantial evidence” means evidence that is “specific and comprehensive enough to sever the potential connection between a particular injury and a job-related event.” Ferreira, 531 A.2d at 655 (quoting Swinton, 554 F.2d at 1083). 11 Critical to this case is that an employer’s substantial evidence must address the employee’s specific theory of causation. Our recent opinion in Battle illustrates the point. Battle v. District of Columbia Dep’t of Emp’t Servs., 176 A.3d 129 (D.C. 2018). In Battle, the employee triggered the presumption of causality by presenting some evidence that the cumulative impact of driving a bus for many years had caused or aggravated his back condition. Id. at 131–32. The employer’s expert opined that the back condition was not job-related because it was not caused by any single incident. Id. at 135. But, we explained, “this was not the theory of causation that [the employee] advanced.” Id. The employer had failed to address the employee’s “cumulative impact” theory altogether. Id. “If the employer fails to address and rebut [the employee’s] theory with substantial evidence, the presumption of compensability stands.” Id. at 136. The employer in Battle had failed to rebut the presumption with evidence that was “specific and comprehensive enough” to sever the potential connection. Id. at 135. So too here. Dr. Nimetz’s report and testimony were generally non- responsive to Ms. Ramos’s aggravation theory, and when he was ultimately pressed on it, he was agnostic. In his report, Dr. Nimetz opined that “[t]he major contributory factors” to Ms. Ramos’s stroke “were uncontrolled hypertension and poorly controlled diabetes,” and that he “would not attribute” Ms. Ramos’s stroke to “her 12 employment.” Those opinions do not address much less undermine Ms. Ramos’s aggravation theory. The relevant question is not whether her work was the most dominant or even a major contributory factor to her stroke; it is whether it was a contributing factor, a question Dr. Nimetz’s report does not opine on. 6 While Dr. Nimetz opined that he would not attribute the stroke to her work, that statement in context suggests that he would attribute Ms. Ramos’s stroke only to the major contributing factors, to wit, the two major contributory factors he had just identified (diabetes and high blood pressure). That is in fact the only plausible explanation given that Dr. Nimetz admitted in his testimony that he did not know anything about Ms. Ramos’s work activities when authoring his report. 7 His opinion was based 6 For the same reason, the underlying medical records and statements by other doctors do not constitute substantial evidence either. For example, Dr. Husni’s statement that the stroke was “a consequence of” Ms. Ramos’s hypertension is undoubtedly true, but consistent with aggravation, as explained above. 7 During his testimony Dr. Nimetz indicated that Ms. Ramos’s work “never came up when [he] saw her,” and as to the strain of her work, he could “only judge from what she said today.” As discussed further below, once he learned of Ms. Ramos’s work responsibilities Dr. Nimetz became agnostic in his testimony about whether they contributed to her stroke. As discussed supra note 1, there was at least some tension between Ms. Ramos’s description of her lifting “very heavy” waste bins and her supervisor’s testimony that the bins would weigh about ten pounds when full, but neither Dr. Nimetz nor any other evidence suggested that discrepancy was of any import. In finding the presumption of causation rebutted the ALJ and CRB referred to Dr. Nimetz’s report, his testimony, and Ms. Ramos’s medical records—none of which addressed whether the job’s manual labor was insufficiently strenuous to contribute to her stroke. There is nothing in the supervisor’s opinion about the weight of the trash cans that, even if credited over Ms. Ramos’s testimony, 13 largely on her medical records’ failure to attribute the stroke to her work responsibilities, and we do not think those records’ silence on the point can constitute substantial evidence any more than Dr. Nimetz’s agnosticism could. 8 Dr. Nimetz’s testimony drives home the point that the opinions in his report were non-responsive to Ms. Ramos’s aggravation theory. The one time he was asked to home in on the aggravation theory and express an opinion about how likely it was that Ms. Ramos’s work triggered her stroke, Dr. Nimetz was utterly agnostic. When the ALJ asked Dr. Nimetz whether he had any opinion “as to whether or not [Ms. Ramos’s] job responsibilities would in any way cause her to have the stroke,” he responded with a resounding “No,” that he had formed no “opinion on that.” Read in light of that important concession, Dr. Nimetz’s other statements attributing Ms. could meaningfully contribute to a finding of substantial evidence rebutting Ms. Ramos’s theory. It is undisputed that Ms. Ramos’s work consisted of some manual labor, and the potential that it contributed to her stroke was not rebutted, regardless of the precise strain her work involved. 8 Treating physicians may quite reasonably identify the predominant causes for medical events without surveying the universe of more minor contributing causes, or opine about physiological causes for injuries without cataloging broader environmental causes. Without some evidence that Ms. Ramos’s treating physicians considered whether the nature of her work was a potential cause of her stroke, we do not construe their silence on that question as answering it in the negative. Just as Dr. Nimetz lacked (and expressly disavowed) any relevant knowledge about whether Ms. Ramos’s work involved the sort of activity that would contribute to a stroke, there is every reason on this record to think her treating physicians did likewise. 14 Ramos’s stroke to her pre-existing conditions are unilluminating and beside the point. The CRB was thus wrong to conclude “that Dr. Nimetz . . . rendered an unambiguous opinion that Claimant’s stroke was not causally related to her employment.” He rendered no opinion at all about that. He offered only non- sequiturs and, once focused on this critical question, agnosticism. Wheatley v. Adler, 407 F.2d 307 (D.C. Cir. 1968) (en banc), is instructive. There, Mr. Wheatley had a pre-existing condition—“arteriosclerotic heart disease”—and suffered a fatal heart attack on the job. Id. at 309. Just before his heart attack, Mr. Wheatley had urinated outside in the cold, and his widow presented evidence that “the strain of urinating on a cold day could have” triggered his heart attack. Id. at 310. The employer’s medical expert testified and, “assuming in hypothetical form [Mr. Wheatley’s account of his day] (including the urinating in the cold),” opined that his death “was not the result of any activity involved” in Mr. Wheatley’s employment. Id. The expert reiterated the conclusion, “that the attack was in no way related to his employment.” Id. But when asked on cross- examination to focus on the particular aggravation theory presented by Mr. Wheatley, like here, the expert offered no opinion at all: “Asked whether [urinating in the cold] was more likely than not the cause, he said he could not really give a yes 15 or no answer.” Id. at 311. 9 That record, the court concluded, did not “contain substantial evidence to dispel the statutory presumption” of causation and the court reversed the finding that Mr. Wheatley’s heart attack “did not arise out of and in the course of his employment” Id. at 309, 314. Wheatley compels the same result here. It bears stressing that substantial evidence need not be conclusive or even particularly compelling; but it does need to be targeted. An employer need not show, in order to rebut the presumption of causation, that causation was “impossible.” Safeway Stores, 806 A.2d at 1220 (quoting Washington Hosp. Ctr., 744 A.2d at 1000). It need only present evidence that “a reasonable mind might accept as adequate to support” the conclusion that there was no causal link between the employment and the injury. Washington Post, 852 A.2d at 914. For example, if Dr. Nimetz had opined that Ms. Ramos’s exertion at work was unlikely to have triggered her stroke, that bare expression of unlikelihood might have cleared the substantial evidence bar. See, e.g., Wheatley, 407 F.2d at 313 (to rebut the presumption of causation on an aggravation theory, one “at least” would have “to articulate that this 9 The court in Wheatley acknowledged that “[c]omplaints have been voiced against the aggravation rule as applied to cardiac cases” but noted that precedent nonetheless dictated its application and that any desired change in the rule would be “appropriately addressed to Congress.” 407 F.2d at 312. There is no dispute here that the aggravation theory presented by Ms. Ramos was a valid one. 16 possibility was improbable”). Yet Dr. Nimetz disavowed any such opinion and no other evidence directly addressed the aggravation theory. The presumption was therefore unrebutted and Ms. Ramos’s claims are compensable. III. We reverse the decision of the CRB and remand for further proceedings consistent with this opinion. Given our conclusion that there was insufficient evidence to rebut the presumption of compensability, the issue is not subject to reconsideration on remand. See Battle, 176 A.3d at 136 (citing Parodi v. District of Columbia Dep’t of Emp’t Servs., 560 A.2d 524, 526 & n.5 (D.C. 1989)). So ordered.	01-04-2023	05-29-2020
https://www.courtlistener.com/api/rest/v3/opinions/4669026/	In The Court of Appeals Seventh District of Texas at Amarillo No. 07-20-00339-CV IN THE INTEREST OF J.D. AND J.D., CHILDREN On Appeal from the 251st District Court Randall County, Texas Trial Court No. 68,638-C, Honorable Jack M. Graham, Associate Judge Presiding March 17, 2021 MEMORANDUM OPINION Before QUINN, C.J., and PIRTLE and PARKER, JJ. Appellant, O.D., appeals from the trial court’s order terminating his parental rights to his children, J.D. and J.D., in a suit brought by the Department of Family and Protective Services.1 On appeal, O.D. contends that the trial court reversibly erred by failing to appoint counsel to represent him at the termination hearing.2 The Department concedes that 1 To protect the privacy of the parties involved, we refer to them by their initials. See TEX. FAM. CODE ANN. § 109.002(d) (West Supp. 2020); TEX. R. APP. P. 9.8(b). The mother’s parental rights were also terminated in this proceeding. However, she is not a party to this appeal. 2 O.D., proceeding pro se, appealed the trial court’s order of termination. Because O.D. filed a statement of inability to afford costs with this Court, we abated the appeal and remanded the cause to the reversible error exists on this record in that O.D. was incarcerated for the entirety of the case, his location was known, he filed a letter in opposition to termination a month before the trial, and no inquiry was made to determine his indigency. In its briefing, the Department cites to this Court’s opinion in In re J.M., 361 S.W.3d 734, 738-39 (Tex. App.—Amarillo Feb. 1, 2012, no pet.), and, based on our holding in that case, concedes the trial court reversibly erred. After reviewing the record, we agree the circumstances presented are sufficiently similar to those in In re J.M. to require reversal here as well. Accordingly, we reverse the order terminating O.D.’s parental rights and remand the case. Our mandate shall issue forthwith. See TEX. R. APP. 18.6. Per Curiam trial court to determine whether O.D. is indigent and entitled to appointed appellate counsel. On remand, the trial court found O.D. indigent and entitled to appointed appellate counsel. 2	01-04-2023	03-18-2021
https://www.courtlistener.com/api/rest/v3/opinions/4537682/	07-9054-am In re Gell UNITED STATES COURT OF APPEALS FOR THE SECOND CIRCUIT SUMMARY ORDER RULINGS BY SUMMARY ORDER DO NOT HAVE PRECEDENTIAL EFFECT. CITATION TO A SUMMARY ORDER FILED ON OR AFTER JANUARY 1, 2007, IS PERMITTED AND IS GOVERNED BY FEDERAL RULE OF APPELLATE PROCEDURE 32.1 AND THIS COURT=S LOCAL RULE 32.1.1. WHEN CITING A SUMMARY ORDER IN A DOCUMENT FILED WITH THIS COURT, A PARTY MUST CITE EITHER THE FEDERAL APPENDIX OR AN ELECTRONIC DATABASE (WITH THE NOTATION ASUMMARY ORDER@). A PARTY CITING TO A SUMMARY ORDER MUST SERVE A COPY OF IT ON ANY PARTY NOT REPRESENTED BY COUNSEL. At a stated term of the United States Court of Appeals for the Second Circuit, held at the Thurgood Marshall United States Courthouse, 40 Foley Square, in the City of New York, on the 29th day of May, two thousand twenty. PRESENT: José A. Cabranes, Robert D. Sack, Richard C. Wesley, Circuit Judges. _____________________________________ In re Amy Gell, also known as Amy Lauren Nussbaum, 1 07-9054-am Attorney. ORDER OF GRIEVANCE PANEL _____________________________________ FOR AMY GELL: Hal R. Lieberman, Esq., Emery Celli Brinckerhoff & Abady LLP, New York, New York. 1 Gell is admitted to the bars of New York State and this Court as Amy Lauren Nussbaum. She has used the names Amy Nussbaum Gell and Amy Lauren Nussbaum Gell in this Court. This Court’s Committee on Admissions and Grievances (the “Committee”) has recommended that Amy Gell be disciplined for her misconduct in this Court and that she be permitted to voluntarily withdraw from the bar of this Court. Gell does not object to those recommendations. Upon due consideration, it is hereby ORDERED, ADJUDGED, AND DECREED that Amy Gell be and hereby is PUBLICLY REPRIMANDED for engaging in conduct unbecoming a member of the bar. It is further ORDERED that Gell is granted leave to voluntarily withdraw from the Court’s bar. I. Overview and Summary of Proceedings Gell was admitted to the New York State bar in 1987, and to this Court’s bar in 2006. In 2010, she was publicly reprimanded by this Court, primarily for “fail[ing] to comply with the Court’s scheduling orders, resulting in the dismissal of a substantial number of cases.” In re Gell, No. 07-9054- am, 2010 WL 4942215, at *1 (2d Cir. Dec. 7, 2010) (summary order). In August 2017, Gell was again referred to this panel, based on her defaults in additional cases in this Court. After ordering Gell to address the new defaults and considering her response, we referred her to the Committee for further investigation of her conduct in both this Court and a federal immigration agency, and for preparation of a report on whether she should be subject to disciplinary or other corrective measures. During the Committee’s proceedings, Gell had the opportunity to address the matters discussed in our referral order and to testify under oath at a hearing held before Committee members Paul C. Curnin, Terrence M. Connors, and the Honorable Howard A. Levine. Thereafter, the Committee filed with the Court the record of the Committee’s proceedings and its report and recommendations. In its report, the Committee found clear and convincing evidence that Gell had engaged in a pattern of misconduct warranting the imposition of discipline, primarily based on her failure to timely 2 file required documents in over 40 appeals, resulting in dismissal of six appeals. See Report at 5-11, 13- 14. After considering several mitigating and aggravating factors, id. at 11-14, the Committee recommended that Gell be publicly reprimanded and that she be permitted to voluntarily withdraw from the bar of this Court, id. at 14-15. In response to the Committee’s report, Gell states “that she does not object to any aspect of the Committee’s findings with respect to her appellate practice before the Second Circuit,” or to its recommendation on discipline, or to its recommendation that she be permitted to voluntarily withdraw from the Court’s bar. Response at 1, 5-6. However, Gell disagrees with the Committee’s determination that her conduct before the immigration agency demonstrates that there is a pattern of misconduct that goes beyond her practice in this Court. Id. at 3-5, 6. II. Discussion “We give ‘particular deference’ to the factual findings of the Committee members who presided over an attorney-disciplinary hearing where those findings are based on demeanor-based credibility determinations, and ‘somewhat lesser deference’ to credibility findings based on an analysis of a witness’s testimony.” In re Gordon, 780 F.3d 156, 158 (2d Cir. 2015). “The Committee members who preside over a hearing are ‘in the best position to evaluate a witness’s demeanor and tone of voice as well as other mannerisms that bear heavily on one’s belief in what the witness says.’” Id. (quoting Donato v. Plainview-Old Bethpage Cent. Sch. Dist., 96 F.3d 623, 634 (2d Cir. 1996)). In general, the credibility determinations of the presiding Committee members will not be overruled unless they are clearly erroneous. Id. “Where there are two permissible views of the evidence, the factfinder’s choice between them cannot be clearly erroneous.” United States v. Murphy, 703 F.3d 182, 188 (2d Cir. 2012). We accept the Committee’s credibility determinations and its other factual findings, as they are not clearly erroneous. While we also accept the Committee’s recommended disposition, a public 3 reprimand, we note that Gell’s new misconduct in this Court would ordinarily warrant a period of suspension. The misconduct covered by the present proceeding cannot be viewed in isolation; it comes after Gell was previously reprimanded by this Court for similar misconduct. Gell’s failure to fully heed the warning provided by that prior public reprimand is a significant aggravating factor. However, we agree that the mitigating factors discussed by the Committee are strong enough that a public reprimand should be imposed rather than a suspension. Among the mitigating factors we have considered is Gell’s decision to request voluntary withdrawal from this Court’s bar. In some cases, withdrawal from the bar has been viewed as an attempted evasive maneuver, a means by which an attorney can avoid disciplinary measures. See, e.g., In re Saghir, 595 F.3d 472, 474 (2d Cir. 2010) (“Just as an attorney who practices in this Court may not evade this Court’s disciplinary authority by failing to first become a member of this Court’s bar, an attorney likewise may not evade that disciplinary authority through strategic withdrawal after disciplinary proceedings have commenced.” (internal citation omitted)). In the present case, we view Gell’s request as a remedial measure that reduces her caseload and refocuses her practice in a forum in which she is more comfortable, the administrative immigration courts. 2 We also accord significant weight to the character and fitness testimony provided by two retired immigration judges, which the Committee found “unusually compelling” and “particularly strong.” Report at 1, 12, 14; see Hearing Transcript at 64-95 (testimony of character and fitness witnesses). Upon due consideration of the Committee’s report, the underlying record, and Gell’s response to the report, we adopt the Committee’s findings and recommendations, as supplemented by the above 2 One might conclude that, as a practical matter, withdrawal moots the issue of whether a suspension is appropriate. However, since leave of the Court is required before an attorney may withdraw during a disciplinary proceeding, we do not see this as a moot issue in the present case. 4 discussion, and publicly reprimand Gell. However, in reaching this conclusion, we express no opinion about Gell’s conduct before the immigration agency; the public reprimand we impose is based on her misconduct in this Court alone. III. Request for Leave to Withdraw from the Court’s Bar As suggested above, Gell stated during the Committee’s proceedings and in her response to the Committee’s report that she wished to voluntarily withdraw from this Court’s bar and to refocus her practice on representing clients at the agency level. See, e.g., Report at 1, 3, 14; Response at 1, 5-6. We construe those statements as a motion to this panel for leave to voluntarily withdraw from the Court’s bar. An attorney who is the subject of a disciplinary proceeding in this Court may resign from the Court’s bar upon obtaining leave of the Court. In re Saghir, 595 F.3d at 473–74; In re Yan Wang, 389 F. App’x 2, 4 (2d Cir. 2010). For the reasons noted by the Committee, we grant Gell leave to withdraw. The circumstances are significantly different from those in Saghir and In re Jaffe, 585 F.3d 118 (2d Cir. 2009), where leave to withdraw was denied. Since we are publicly reprimanding Gell, she is not avoiding discipline by resigning from the Court’s bar, and the public, the bar, and other courts and agencies are unlikely to be misled about the resolution of this disciplinary proceeding. See In re Warburgh, 644 F.3d 173, 182 (2d Cir. 2011) (granting leave to withdraw from bar; discussing relevant factors); Yan Wang, 389 F. App’x at 4 (same); cf. Jaffe, 585 F.3d at 125 (denying leave). IV. Notice to Public and Other Courts The Clerk of Court is directed to release this decision to the public by posting it on this Court’s web site and providing copies to the public in the same manner as all other unpublished decisions of 5 this Court. Copies are to be served on Gell and to all courts and jurisdictions to which this Court distributes disciplinary decisions in the ordinary course. 3 FOR THE COURT: Catherine O=Hagan Wolfe, Clerk of Court 3 Because the Committee’s report and other documents in the record disclose medical and other personal information, the report and remainder of the record will remain confidential. However, counsel to this panel is authorized to provide, upon request, all documents from the record of this proceeding to other courts and attorney disciplinary authorities. While we request that those documents remain confidential to the extent circumstances allow, we of course leave to the discretion of those other courts and disciplinary authorities the decision of whether specific documents, or portions of documents, should be made available to any person or the public. 6	01-04-2023	05-29-2020
https://www.courtlistener.com/api/rest/v3/opinions/4653907/	IN THE SUPREME COURT OF PENNSYLVANIA MIDDLE DISTRICT IN THE INTEREST OF A.M.M. : No. 1 MM 2021 : : PETITION OF: M.P.M, FATHER : : IN THE INTEREST OF C.P.M. : : : PETITION OF FATHER: M.P.M., FATHER : ORDER PER CURIAM AND NOW, this 20th day of January, 2021, the Petition for Leave to File Petition for Allowance of Appeal Nunc Pro Tunc is DENIED.	01-04-2023	01-22-2021
https://www.courtlistener.com/api/rest/v3/opinions/4622654/	EMI CORPORATION, AN ILLINOIS CORPORATION, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentEMI Corp. v. CommissionerDocket No. 1163-81.United States Tax CourtT.C. Memo 1985-386; 1985 Tax Ct. Memo LEXIS 248; 50 T.C.M. (CCH) 569; T.C.M. (RIA) 85386; July 31, 1985. Leslie R. Bishop,Robert A. Hall, and Leonard S. DeFranco, for the petitioner. Thomas E. Ritter, for the respondent. PARKERMEMORANDUM FINDINGS OF FACT AND OPINION PARKER, Judge: Respondent determined deficiencies in petitioner's corporate income tax of $41,600.72, $49,041.66, and $104,576.55 for its respective fiscal years ending August 31, 1975, August 31, 1976, and August 31, 1977. The sole issue for decision252 is whether, under section 532(a), 1 petitioner was availed of for the purpose of avoiding the income tax with respect to its shareholders, by permitting its earnings and profits to accumulate instead of being divided or distributed so that petitioner is therefore subject to the accumulated earnings tax imposed by section 531. FINDINGS OF FACT Some of the facts have been stipulated and are so found. The stipulations of facts and exhibits attached thereto are incorporated herein by this reference. Petitioner, an Illinois corporation, had its principal place of business in Des Plaines, Illinois, at the time it filed its petition in this case. Petitioner keeps its books and records and reports its income on a fiscal year basis ending August 31. Petitioner uses the completed contract method of reporting income within the meaning of section 1.451-3(d)(1), Income Tax Regs. Petitioner timely filed its fiscal 1975, 1976, and 1977 corporate income tax returns253 (Forms 1120) with the Internal Revenue Service. Petitioner was organized in 1957 by Edward J. Loew to provide consultation services in the field of industrial extraction and processing of vegetable and animal products. Loew, a chemical engineer, had extensive experience in the extraction of vegetable oils. In organizing and operating his company, Loew followed a very conservative business philosophy and tried to protect against all foreseeable risks and to avoid getting over his head financially. Loew had began the business with a capital investment of only two to four thousand dollars, and slowly built up the business over the years. Around 1960, Edward D. Milligan, Arnold M. Gavin, and Ralph W. Berger--all of whom were chemical engineers--began working for petitioner. Milligan's experience, like Loew's was primarily in oil extraction. Gavin and Berger were experienced in oil refining and related fats and oils technologies. By 1970, all three were shareholders in petitioner. Originally, petitioner was simply a consulting firm, observing and recommending changes for its clients' plant operations. Throughout the early 1960's, the scope of petitioner's business grew to include254 the acquisition and resale of equipment to clients. By the late 1960's, petitioner had begun to design and engineer entire processing plants, including purchasing, storing, and shipping the equipment to be installed in such plants. Petitioner sometimes supervised construction, testing, and placing into operation of the plants. By 1970, petitioner was completely owned and run by Loew, Milligan, Gavin, and Berger. These four individuals owned the following percentages of petitioner's stock and held the following positions in petitioner: PercentageIndividualOwnershipPositionsLoew60%President, DirectorMilligan13-1/3%Vice-President, DirectorGavin13-1/3%Vice-President, Secretary, DirectorBerger13-1/3%Vice-President, Treasurer, DirectorOn September 1, 1970, petitioner and its shareholders entered into a stock purchase agreement. Under this agreement, the shareholders were required to offer their shares for sale only to petitioner, and petitioner was required to purchase all shares so offered. The agreement also provided that the corporation would redeem all of the shares of a stockholder who had died, retired, become disabled, or255 left petitioner's employ. The selling price of any stock so purchased was based upon the book value of the shares--100 percent of book value in the event of death or disability, and 90 percent of book value in the event of retirement, severance of employment, or sale pursuant to an offer. The agreement defined book value as "the total assets of the Corporation (not including any value for goodwill, patents, trademarks, licensing agreements or contracts) less total liabilities of the Corporation, computed on the accrual basis of accounting . . . in accordance with generally accepted accounting principles." [Emphasis supplied.] Book value was to be conclusively determined in an audit by an independent Certified Public Accountant. At the time of the stock purchase agreement, Loew was 59 years of age, Milligan 45, Gavin 47, and Berger 50. From 1970 through the years in issue, petitioner specialized in designing and providing equipment and materials for the construction of plants to extract and process oil from various vegetable and animal raw materials. Each of petitioner's contracts had varying specifications and work to be performed. Petitioner's basic contract would be256 to provide the design of the facility and the materials and equipment necessary to complete the design.Each plant was essentially a custom-designed plant. Sometimes, petitioner would have to design and provide the superstructure for the customer's facility. In certain cases, petitioner was requested to provide on-site engineering services during the construction of the plant, and on-site inspection of the equipment once construction was completed. Occasionally, petitioner was requested to provide the contractor to actually build the facilities and/or to supervise such construction. Petitioner did not itself perform any construction work. Petitioner did not fabricate any of the material or equipment that it shipped to its customers; instead petitioner subcontracted that work to other companies. Because of the nature of its business, petitioner had no regularly recurring cycle of work. The bulk of petitioner's gross sales was bunched in a limited number of contracts of relatively long duration, as follows: FiscalAverageYearNumber of ContractsDuration1975919.33 months1976621.67 months1977714.29 monthsBecause petitioner reported257 its income on the completed contract method of accounting, its gross sales from contracts completed and reported did not necessarily correspond to the cash it received during these taxable years. Nearly all of petitioner's contracts guaranteed that each of the plants would provide a certain quantity and quality of product, given certain measurable variables such as raw materials processed, available utilities, climate and plant location. The proposals and contracts also guaranteed the performance of the equipment acquired and sold by petitioner. Petitioner could not obtain performance bonding for its contracts because of the prohibitive costs. Petitioner's management was aware that the plants it designed generally occupied an intermediate stage in its customers' overall operations. Petitioner's management was equally aware that failure of its plants could severely disrupt its customers' businesses. Petitioner's contracts contained clauses attempting to disavow any liability for consequential damages, but petitioner's management doubted the validity and efficacy of such exculpatory clauses. During the years 1970 through 1977, petitioner incurred losses on two of its contracts. 258 Those losses were incurred as a result of design and construction deficiencies that, due to its guarantees, petitioner had to rectify at its own expense. At no time from petitioner's inception through the taxable year 1977 did petitioner so wholly fail to meet contract specifications that it was required to return all monies previously paid. However, petitioner's profits on certain contracts were reduced by various modifications to plant processes and equipment that petitioner was required to make pursuant to its guarantees. During the years in issue, approximately half of petitioner's contracts were for facilities located in the United States and the other half for facilities located in foreign countries. On its domestic contracts, petitioner usually obtained a down payment of approximately 10 percent of the contract price and then made progress billings as its work progressed. On its foreign contracts, petitioner obtained a down payment, sometimes as much as 20 percent of the contract price, and received the balance when it shipped the equipment, generally pursuant to short term letters of credit. On many of its foreign contracts, petitioner obtained insurance from the Foreign259 Credit Insurance Association, a Federal agency that helped promote exports by providing insurance policies to cover various political and economic risks of doing business in foreign countries. That insurance did not cover petitioner's liability under its process and equipment guarantees. The manufacturing processes that petitioner incorporated into the plants it designed and sold involved the use of highly volatile chemicals. Similar plants designed by some of petitioner's competitors had experienced safety problems, including explosions causing loss of life and substantial destruction of property. Many of the plants petitioner designed and sold produced vegetable and animal oils for human consumption. Similar plants designed by some of petitioner's competitors had malfunctioned, producing adulterated oils that killed several people. None of petitioner's plants had encountered either problem up through the years before the Court. From its inception through its fiscal year 1977 petitioner had never been sued and had been threatened with only one lawsuit. Petitioner was considerably smaller than any of its competitors. Petitioner self-financed all of its business operations260 from its own capital and retained earnings. Petitioner has never received a loan from any bank or commercial lending institution. Although petitioner self-insures most of its various business risks, such as legal fees, warranty and process guarantees, and products liability, it has not booked formal reserves for these or other contingencies. Despite the absence of such formal reserves, petitioner's management was at all times well aware of its potential liabilities. Petitioner's market was highly unpredictable, subject not only to general business cycles of "booms or busts" but particularly to fluctuations in the agricultural industry. From time to time, petitioner has been unable to obtain any new contracts for as long as six months. It cost petitioner about $25,000 (mostly salary) per month just to keep its doors open. Despite concerns over its financial health, petitioner has always managed to meet its payroll and other basic expenses. However, because of the variations in the business from period to period, petitioner's management has never been able to forecast or predict these hills or valleys in its business operations. It has been very difficult for petitioner's management261 to determine the minimum working capital needs of the business at any given time. In comparison to its competitors, petitioner was a tiny company and its operations were on a very small scale. Because of the nature of its business, petitioner had little equipment or other fixed assets, and its net worth was reflected primarily in its liquid assets and retained earnings. To judge petitioner's ability to perform its contemplated contracts and to meet the attendant guarantees, some of petitioner's customers sought financial data from petitioner. On occasion, petitioner has lost contracts to competitors because of its small size and its limited financial resources. Petitioner sought to increase its net worth in order to obtain larger contracts and increase its business. During the 1970's, petitioner continued to grow slowly, reflecting Loew's conservative business philosophy. Milligan, Gavin, and Berger favored more rapid growth, including larger scale plants and heavier emphasis on foreign sales to offset slow periods in the domestic market. During 1975 and 1976, this long-continuing management dispute escalated and became fairly open and intense, reducing petitioner's productivity. 262 The minority group (Milligan, Gavin, and Berger) were considering leaving petitioner for other companies. Loew, the majority shareholder, considered selling his shares to outsiders but decided against it for a number of reasons. First, the minority group represented a large part of petitioner's management and engineering talent. Loew recognized that without their expertise petitioner would not be an attractive investment to an outsider; the minority stockholders had indicated that they would be unwilling to continue their employment with any new company taking over petitioner. Loew was also fearful that the minority group would leave and set up their own company in competition with petitioner. More importantly, Loew was obligated under the terms of the 1970 Stock Purchase Agreement to offer his shares only to petitioner; thus, Loew could not sell his shares to an outsider without the consent of the minority group (e.g., without a rescission of the 1970 agreement). Late in 1976, Loew chose to eliminate the management dispute by retiring, having the corporation redeem his shares pursuant to the 1970 agreement, and thus leaving management and ownership of petitioner to Milligan, 263 Gavin, and Berger. Loew had never given any thought to retiring up until about a year before he left. He was in good physical condition at the time and had no particular desire to retire. However, he did not want to see EMI, the company he had worked so long and so hard to build up, destroyed by his continuing conflict with the minority shareholders. In November of 1976, Loew resigned from his positions with petitioner. Pursuant to the 1970 Stock Purchase Agreement, petitioner purchased Loew's outstanding shares for $654,000. The transaction was designed to comply with section 302(b)(3). Although he was advised that an installment sale would be more beneficial to him from a tax viewpoint, Loew insisted upon and received a lump sum cash payment for his shares. He did so because he did not want to subject any portion of his payment to the minority group's future management of petitioner. With his conservative business philosophy, Loew could not accept the views of the minority group as to business expansion, and was unwilling to risk his interest in the business to their policies. At the same time, Low and petitioner entered into a covenant not to compete under which petitioner264 agreed to pay Loew $180,000 in monthly installments of $3,000 for his promise not to engage in any competing business activities for five years. Although 65 years old at the time he retired from petitioner, Loew was vigorous and in good health. Since his retirement from petitioner, Loew has continued in good health and has engaged in some business activities, including some consulting work for petitioner. After Loew's departure in 1976, Milligan became petitioner's president. Milligan, Gavin, and Berger instituted many changes in petitioner's operations. In accordance with their growth plans, they began seeking more foreign business and began seeking to design and sell larger plants. The new management group also opened up stock ownership in petitioner to more of petitioner's employees. They modernized their office equipment, including adding a Telex machine and word processing.They also embarked on a program of expanded employee benefits (for both shareholder and nonshareholder employees), including expense reimbursements, medical benefits, employee loans, and salary continuation during illness or injury. Because of the depletion of petitioner's cash and other liquid assets,265 which were used to buy back Loew's shares, the new management was seriously concerned about the survival of the business and had to work very hard the next couple of years to assure its survival and to implement growth plans for the future. The balance sheet (Schedule L) included in petitioner's fiscal 1975 return reported the following items for the beginning of the taxable year (e.g., as of September 1, 1974): ASSETSCash$ 91,946.19Trade notes and accounts receivable723,210.09Inventories182,473.28Other Current Assets: Time deposits$700,000.00Accrued interest6,423.85Prepaid insurance1,716.11$ 708,139.96Municipal bonds94,206.45Buildings and other fixeddepreciable assets21,869.98Less accumulated depreciation15,435.926,434.06Intangible assets (amortizable only)2,162.28Less accumulated amortization1,729.85432.43Other Assets: Foreign tax credits26,468.80Employee travel advances1,950.0028,418.80Total Assets$1,835,261.26LIABILITIES AND STOCKHOLDERS' EQUITYAccounts payable$ 340,796.04Other Current Liabilities: Federal income tax refund (under audit)$ 6,776.46Profit sharing trust contributions35,000.00Deposits on contracts501,899.13Accrued salaries119,900.00Accrued FICA employer204.75Federal corporation income tax41,665.11Accrued costs on closed contracts27,436.00Deferred interest on investments1,765.37State income tax4,206.67Accrued state unemployment comp.44.08Accrued Federal unemployment comp.24.49Accrued state franchise tax117.51Accrued dividends payable739,039.57Capital stock: Common stock460,000.00Paid-in or capital surplus9,856.90Retained earnings--appropriated(attached sch.)Retained earnings--Unappropriated285,568.75Total liabilities and stockholders' equity$1,835,261.26266 Petitioner's quarterly balance sheets, prepared in-house and unaudited, reflected the following: ASSETS7411750275057508Current AssetsCash127,354.12182,350.6470,804.7084,460.50Marketable securities94,325.55327,579.45224,455.42119,600.81Commercial paper200,000.00800,000.00800,000.00Certificate of deposit300,000.00200,000.00U.S. Treasury bills250,000.00Employee loanAccounts receivable206,162.35239,555.90117,809.87608,744.27Accounts receivableunbilled2,938.944,750.00Accrued Interestreceivable3,162.152,879.334,534.872,220.94Prepaid Insurance1,017.29318.47705.74943.38Prepaid rentInventory of work inprocess424,715.49960,993.801,264,363.25466,717.66Notes receivable lessdiscount30,285.0030,285.0025,237.5025,237.50Foreign tax credits28,061.7427,748.301,279.50Federal and state taxdepositsCorporate preferredstock1,668,022.631,976,460.892,509,190.852,108,005.06Fixed assetsAutomobilesoffice equipment andfurniture22,306.0422,306.0421,941.0722,300.17Less accumulateddepreciation15,799.0716,187.9016,482.8916,857.536,506.976,118.145,458.185,442.64Other assetsTravel advance3,050.002,650.001,800.001,750.00Organization expenseless amortization324.32261.21108.103,374.322,911.211,908.101,750.001,677,903.921,985,490.242,516,557.132,115,197.70267 7511760276057608Current AssetsCash99,239.4632,200.4322,435.2077,708.76Marketable securitles69,492.3769,495.4369,498.4969,501.55Commercial papaer1,000,000.001,000,000.00900,000.00900,000.00Certiticate of deposit300,000.00300,000.00U.S. Treasury billsEmployee loanAccounts receivable29,853.77192,474.10241,281.9983,558.69Accounts receivableunbilled29,283.33Accrued Interestreceivable3,323.075,042.914,912.081,407.72Prepaid Insurance497.871.947.821,306.72Prepaid rentInventory of work inprocess672,483.81525,791.69290,545.4842,033.05Notes receivable lessdiscount48,014.0045,231.6040,184.1037,401.70Foreign tax credits2,599.382,599.38Federal and state taxdepositsCorporate preferredstock1,922,904.351,872,835.541,902,687.871,512,918.19Fixed assetsAutomobilesoffice equipment andfurniture23,413.1124,616.4124,616.4124,709.44Less accumulateddepreciation17,240.0417,679.8518,133.9918,516.276,173.076,936.566,482.426,193.17Other assetsTravel advance1,750.001,750.002,600.002,000.00Organization expenseless amortization1,750.001,750.002,600.002,000.001,930,827.421,881,522.101,911,770.291,521,111.36268 766770277057708Current AssetsCash199,801.54154,609.69 223,302.83 71,383.15 Marketable69,504.6169,188.70 116,475.27 115,498.05 securitlesCommercial paper200,000.00699,505.00 Certificate200,000.00 300,000.00 200,000.00 of depositU.S. Treasury147,254.86 177,483.00 billsEmployee loan30,000.00 22,000.00 Accounts175,061.27 179,923.28 125.677.10 375,962.75 receivableAccountsreceivableunbilled55,224.80208,380.09 75,564.13 334,265.73 Accrued Interestreceivable5,293.258,468.64 7,397.07 7,662.82 Prepaid Insurance662.5557.95 (604.48)2,964.06 Prepaid rentInventoryof work inprocess69,662.38177,302.06 346,366.49 127,977.83 Notesreceivable lessdiscount32,354.2030,963.00 23,133.10 21,741.90 Foreign tax creditsFederal andstate taxdepositsCorporate preferredstock48,300.00 48,300.00 807,564.601,176,148.27 1,473,094.51 2,027,261.29 Fixed assetsAutomobiles15,640.87 23,661.92 21,610.18 office equipment andfurniture24,709.4417,394.97 18,937.66 38,815.93 Less accumulateddepreciation18,895.73(8,078.37)(9,541.67)(9,389.41)5,813.7124,957.47 33,057.91 51,036.70 Other assetsTravel advance2,000.002,250.00 2,400.00 2,400.00 Organization expenseless amortization2,000.002,250.00 2,400.00 2,400.00 815,378.311,203,355.74 1,508,552.42 2,060.697.99 269 LIABILITIESEMI CORPORATION Balance Sheet Liabilities7411750275057508Current LiabilitiesAccount payables76,110.2611,753.6515,822.6271,513.51 Contract deposits674,464.881,105,473.581,478,689.62704,660.33 Federal Income tax56,907.2611,894.4438,388.52105,310.76 State Income tax5,188.691,434.434,609.0711,229.81 Accrued engineering20,926.0013,482.0015,344.0032,390.00 Project prepayment51,500.00Deferred credits4,475.722,886.092,050.32 Accrued payroll tax41.64203.4147.865.38 Accrued compensation& profit sharingcontributions22,400.0045,000.00115,000.00240,184.85 Accrued dividend46,000.00 912,014.451,189,241.511,670,787.781,213,344.96 Stockholders equityCommon stock460,000.00460,000.00460,000.00460,000.00 Paid on capital9,856.909,856.909,856.909,856.90 Retained earnings285,568.75285,568.75285,568.75285,568.75 Net Income10,463.8240,778.0890,343.70192,427.09 Dividends paid(46,000.00)Treasury stock765,889.47796,203.73845,769.35901,852.74 1,677,903.921,985,445.242,516,557.132,115,197.10 270 Liabilities7511760276057608Current LiabilitiesAccount payables18,122.4013,000.1132,253.6020,256.30 Contract deposits898,860.36718,145.44454,303.7689,676.42 Federal Income tax54,726.4843,438.7559,456.8354,896.41 State Income tax11,737.194,715.6513,464.1813,188.46 Accrued engineering18,530.0022,198.0027,424.0024,450.00 Project prepaymentDeferred credits1,903.473,426.054,601.352,131.80 Accrued payroll tax7.48247.3126.00236.00 Accrued compensation& profit sharingcontributions16,800.0098,000.00225,000.00206,954.62 Accrued dividend55,200.00 1,020,687.38903,171.31816,529.72466,990.01 Stockholders equityCommon stock460,000.00460,000.00460,000.00460,000.00 Paid on capital9,856.909,856.909,856.909,856.90 Retained earnings431,995.84431,995.84431,995.84431,995.84 Net Income8,287.3076,854.91193,387.83207,468.62 Dividends paid(55,200.00)Treasury stock910,140.04978,707.651,095,240.571,054,121.36 1,930,827.421,881,878.961,911,770,291,521,111.37 Liabilities7611770277057708CurrentLiabilitiesAccount payables47,146.74 124,241.23 20,923.05 514,651.96 Contract deposits250,244.51 505,457.27 880,260.96 214.153.39 Federal Income tax34,792.88 8,812.37 (1,491.90)206,606.45 State Income tax14,513.33 119.61 (536.90)18,888.74 Accrued engineering26,690.00 26,516.00 21,122.00 36,338.00 ProjectPrepaymentDeferred credits490.97 Accrued payroll tax30.36 1,486.88 321.20 362.51 Accrued compensation& profit sharingcontributions17,316.00 84,417.13 120,231.07 334,312.59 Accrued dividend27,771.15 391,224.79 751,050.49 1,040,829.48 1,353,084.79 StockholdersequityCommon stock460,000,00 460,000.00 460,000.00 460,000.00 Paid on capital9,856.90 9,856.90 9,856.90 10,169.58 Retained earnings584,264.46 584,264.46 584,264.46 584,264.46 Net Income24,032.16 44,258.31 57,295.10 337,066.34 Dividends paid(27,771.15)Treasury stock(654,000.00)(646,074.42)(643,693.52)(636,116.03)424,153.52 452,305.25 467,722.94 727,613.20 815,378.31 1,203,355.74 1,508,552.42 2,080,697.99 271 Note: The imbalances for petitioner's fiscal quarters 7502 (February 28, 1975), 7602 (February 29, 1976), and 7608 (August 31, 1976), reflect mathematical errors in these statements, a stipulated joint exhibit, that we have been unable to reconcile. Respondent contends in this proceeding that petitioner's balance sheet accounting for its uncompleted contracts did not follow generally accepted accounting principles and that only petitioner's balance sheet for its fiscal quarter 7611 (November 30, 1976), which was prepared by an independent outside CPA firm in conjunction with the determination of the book value of Loew's shares pursuant to the stock purchase agreement, was prepared in accordance with proper accounting standards. See footnote 2 below. However, respondent has never asserted that petitioner's method of accounting failed to clearly reflect income under section 446.Respondent, in determining petitioner's net liquid assets, working capital needs under the Bardahl-Mead formula, and accumulated taxable income, utilized the information from petitioner's tax returns, including the Schedule L balance sheets. In computing petitioner's accumulated taxable income, respondent's272 revenue agent and appeals conferee calculated petitioner's working capital needs using the formula set forth in Bardahl Manufacturing Corp. v. Commissioner,T.C. Memo. 1965-200, as modified by W.L. Mead, Inc. v. Commissioner,T.C. Memo. 1975-215, affd. 551 F. 2d 121 (6th Cir. 1977). The revenue agent's Bardahl-Mead calculations, corrected to reflect respondent's concessions on brief and certain methematical errors, are as follows: 197619771. Yearly revenues $2,441,583. $2,539,744. $3,206,635. 2. Average accounts receivable 678,595. 377,419. 426,465. 3. Turnover rate (line 1 divided by line 2)3.5986.73 7.52 4. Days in accounts receivable cycle (365 divided by line 3)101.45 54.23 48.54 5. Accounts receivable as percentof year (line 4 divided by 365)27.79%14.86%13.30%6. Yearly expenses 2,170,189. 2,228,923. 2,653,938. 7. Expenses needed for accountsreceivable cycle603,096. 331,218. 352,974. (line 6 X line 5)8. Average accounts payable 206,154. 45,884. 267,454. 9. Turnover rate of average accountspayable (line 610.53 48.58 9.92 divided by line 8)10. Days in accountspayable cycle(365 divided by line 9)34.66 7.51 36.79 11. Difference inaccounts receivableand accounts66.79 46.72 11.75 payable cycles (line 4minus line 10)12. Nondeferredexpenses for oneaccounts receivable cycle (line11 divided by line 4).658.86 .24213. Operatingcapital needs for onebusiness$ 396,837. $ 285,510. $ 85,420. cycle (line 7 X line 12)273 Current Assets197519761977Cash$ 84,460$ 77,708$ 71,383Accounts Receivable633,981120,960731,970Inventory466,71742,033127,978Other current assets803,1641,202,714958,432Other investments: Municipal Bonds119,68169,502115,498Loans to Stockholders22,000$2,108,003$1,512,917$2,027,261Current Liabilities197519761977Accounts Payable$ 71,513$ 20,256$ 514,652Other current liabilities1,141,831446,734838,433Total Liabilities$1,213,344$ 466,990$1,353,085Total Available WorkingCapital (Current Assets -Current Liabilities)$ 894,659$1,045,927$ 674,176Working Capital Needs forBusiness Cycle396,837285,51085,420Excess Available Working$ 497,822$ 760,417$ 588,756CapitalRespondent's computations came from the financiall data from the balance sheets (Schedules L) attached to petitioner's corporate Federal income tax returns for the years in issue, using an average of the opening and closing figures. Respondent's agent did not include an inventory cycle in computing petitioner's working capital needs under the Bardahl-Mead formula.274 2Petitioner's275 management, in determining working capital needs, used the figures from its tax return balance sheets, as respondent did, but applied a rough rule of thumb, a ratio of current assets to current liabilities to determine the level of working capital needed. The current net liquid asset to current liability ratios for fiscal years 1975, 1976, and 1977 were 2.13 to 1, 3.36 to 1, and 1.52 to 1. Petitioner's management normally sought to maintain a 3.0 to 1 ratio. Petitioner's balance sheets (both tax return balance sheets and in-house quarterly balance sheets) showed the following unappropriated retained earnings for the fiscal years 1975 through 1977: Fiscal YearRetainedIncrease overEnded 8-31EarningsPrior Year1974$285,568.751975431,995.84146,427.091976584,264.46152,268.621977893,559.65309,295.19The redemption of Loew's shares on November 30, 1976 did not reduce the corporation's retained earnings on its balance sheets, but petitioner's liquid assets were reduced by the $654,000 cash payment. 3276 Both respondent and petitioner determined petitioner's available net liquid assets using figures from petitioner's tax return balance sheets (Schedules L), with slight differences from rounding off and errors in addition. 4 The available net liquid assets (current liquid assets less current liabilities) were as follows: Fiscal Year1975$894,66019761,045,9281977674,176The gross income and taxable income for each of petitioner's shareholders for the taxable years 1974 through 1977 were as follows: Marginal Rate ShareholderYearGross IncomeTaxable IncomeTax BracketLoew1974$68,208.75$55,204.3353%/62%1975119,443.83106,612.1262%/70%1976458,726.60 442,091.1670%/70%197770,449.98 * 58,653.3553%/62%Berger197469,854.4361,248.7653%/64%197598,114.8787,994.5758%/68%1976110,119.5199,237.2860%/69%1977149,171.25 * 141,890.8464%/70%Gavin197443,870.0035,904.0042%/50%197566,355.0057,331.0053%/62%197676,297.0066,849.7755%/64%1977132,128.00 * 125,335.0064%/70%Milligan197449,012.0037,032.0045%/50%197574,093.0061,375.0053%/64%197683,882.0571,013.5155%/66%1977133,652.72 *** 125,255.3164%/70%277 In 1976 petitioner loaned Milligan, a shareholder, officer and director of petitioner, $33,000 for Milligan to finance the purchase of a pleasure boat.During the years in issue, there were no other loans by petitioner to employees, officers, shareholders or directors. However, on February 11, 1977, at a special meeting, petitioner's board authorized a program of employee loans on the following terms: 1. Any loan granted would carry278 an interest rate at least equal to available short term rates. 2. Any loan granted must be protected by a promissory note and must be paid in a period no longer than four years, with interest, and on a pre-arranged payback schedule. 3. Security requirements for loans granted would be established by the Board of Directors on a case-by-case basis and would depend upon all of the factors involved in the loan. Petitioner declared and distributed to its shareholders the following dividends: FYEDividend8-31-708-31-718-31-728-31-738-31-748-31-7546,000.008-31-7655,200.008-31-7727,771.008-31-7841,050.008-31-7951,312.508-31-80157,687.50The dividends during the years before the Court represented 25%, 26%, and 8.5%, respectively, of petitioner's net income after Federal taxes for each such year. Petitioner's returns for its fiscal years in issue reported its income and expenses follows: Item197519761977Gross receipts/sales$2,441,583.24 $2,539,744.82 $3,206,635.28 Cost of goods sold(1,564,505.32)(1,557,852.17)(1,716,582.89)Gross profit877,077.92 981,892.65 1,490,052.39 Other income (interest, etc.)60,072.37 70,474.74 49,773.46 Total income937,150.29 1,052,367.39 1,539,825.85 Operating expenses(605,683.68)(671,071.26)(937,356.15)Noncash deductions(depreciation, amortization,etc.)(1,854.04)(1,658.74)(6,812.33)Taxable Income329,612.57 379,637.39 595,657.37 Federal income taxes(145,707.83)(170,552.31)(269,043.57)Net income after Federalincome taxes$ 183,904.74 $ 209,085.08 $ 326,613.80 279 Respondent, in his statutory notice, accepted these figures. In his statutory notice, respondent computed petitioner's accumulated earnings tax liability as follows: Computation of Accumulated750876087708Taxable IncomeTaxable Income (Line 4, Schedule 1)$329,612.57$379,637.39$595,657.37Add: Special deductions1,356.18disallowed, section 535(b)(3)Total329,612.57379,637.39597,013.55Less: Federal income145,707.83165,885.64269,043.57tax paid per returnForeign income tax paid per return1,279.502,599.38Taxable income as adjusted182,625.24211,152.37327,969.98Less: Dividends paid46,000.0055,200.0027,771.15deduction (section 535(a))Current earnings and profits retained136,625.24155,952.37300,198.83Less: Accumulated earnings creditAccumulated taxable income$136,625.24$155,952.37$300,198.83Computation of AccumulatedEarnings TaxAccumulated taxable income$136,625.24$155,952.37$300,198.8327 1/2% on first $100,000.0027,500.0027,500.0027,500.0038 1/2% excess over $100,000.0014,100.7221,541.6677,076.55Total accumulated earnings tax$ 41,600.72$ 49,041.66$104,576.55Computation of AccumulatedEarnings CreditMinimum accumulated$150,000.00$150,000.00$150,000.00earnings creditLess: Accumulated285,568.75431,995.84584,264.46earnings as of close of prior yearAllowable minimum creditunder section 535(c)(2)Current earnings andprofitsdetermined to be retainedfor reasonable needs ofbusiness, (section 535(c)(1)(A)Less: Deduction for long-termcapital gains,(section 535(b)(6)Allowable credit undersection 535(c)(1)280 ULTIMATE FINDING OF FACT Petitioner was not availed of for the purpose of avoiding the income tax with respect to its shareholders. OPINION An accumulated earnings tax is imposed upon "every corporation * * * formed or availed of for the purpose of avoiding the income tax with respect to its shareholders or the shareholders of any other corporation, by permitting earnings and profits to accumulate instead of being divided or distributed." Secs. 532(a), 531. The ultimate question, upon which the corporate taxpayer has the burden of proof, is whether a purpose of its accumulation was avoiding the income tax with respect to its shareholders (the "proscribed purpose"). United States v. Donruss Co.,393 U.S. 297">393 U.S. 297 (1969). This is a question of fact. Atlantic Properties, Inc. v. Commissioner,519 F. 2d 1233, 1235 (1st Cir. 1975), affg. 62 T.C. 644">62 T.C. 644, 656 (1974); American Metal Products Corp. v. Commissioner,287 F.2d 860">287 F. 2d 860, 863-864 (8th Cir. 1961), affg. 34 T.C. 89">34 T.C. 89 (1960); Kerr-Cochran, Inc. v. Commissioner,253 F. 2d 121, 124 (8th Cir. 1958), affg. a Memorandum Opinion of this Court. 281 The major factor in determining the applicability of the accumulated earnings tax is the taxpayer's reasonable business needs for accumulating its earnings and profits. See United States v. Donruss Co.,supra,393 U.S. at 307; Faber Cement Block Co. v. Commissioner,50 T.C. 317">50 T.C. 317, 327 (1968). A determination of reasonable business needs is critical in two respects: (1) to compute the section 535(c) credit in calculating the accumulated taxable income, and (2) the decide whether the presumption of a tax-avoidance purpose under section 533 applies. If the taxpayer can show that all of its current earnings were accumulated for the reasonable needs of its business, there is no accumulated earnings tax since the accumulated earnings credit, section 535(c), eliminates the amount against which the tax is imposed. Chaney & Hope, Inc. v. Commissioner,80 T.C. 263">80 T.C. 263, 281 (1983); Magic Mart, Inc. v. Commissioner,51 T.C. 775">51 T.C. 775, 799 (1969); John P. Scripps Newspapers v. Commissioner,44 T.C. 453">44 T.C. 453, 474 (1965). Even if the retention of all of its current earnings is not justified, the amount of the taxpayer's reasonable282 business needs is nonetheless necessary to properly determine the section 535(c) credit. Whether a taxpayer's accumulation of earnings and profits is in excess of its reasonable business needs is also a question of fact. Helvering v. National Grocery Co.,304 U.S. 282">304 U.S. 282 (1938). In determining the reasonable business needs of a corporation, we are reluctant to substitute out judgment for the business judgment of corporate management who are most familiar with the complexities and make-up of their corporation and its business, and we will not substitute our judgment unless the facts and circumstances compel our doing so. Atlantic Properties, Inc. v. Commissioner,supra; Faber Cement Block Co. v. Commissioner,supra,50 T.C. at 329, and cases cited therein. A taxpayer's reasonable business needs include its reasonably anticipated business needs. Sec. 537(a)(1). Section 1.537-1(b)(1), Income Tax Regs., provides: In order for a corporation to justify an accumulation of earnings and profits for reasonably anticipated future needs, there must be an indication that the future needs of the business require such accumulation, and the corporation283 must have specific, definite, and feasible plans for the use of such accumulation. Such an accumulation need not be used immediately, nor must the plans for its use be consummated within a short period after the close of the taxable year, provided that such accumulation will be used within a reasonable time depending upon all the facts and circumstances relating to the future needs of the business. Where the future needs of the business are uncertain or vague, where the plans for the future use of an accumulation are not specific, definite, and feasible, or where the execution of such a plan is postponed indefinitely, an accumulation cannot be justified on the grounds of reasonably anticipated needs of the business. In a closely held corporation, the type of corporation normally involved in an accumulated earnings case, it is not necessary that the "specific, definite, and feasible" plans alleged in support of an accumulation be inscribed in formal minutes. Doug-Long, Inc. v. Commissioner,72 T.C. 158">72 T.C. 158, 171 (1979); John P. Scripps Newspapers v. Commissioner,supra,44 T.C. at 469. And the taxpayer need not produce meticulously drawn formal blueprints284 for action. Faber Cement Block Co. v. Commissioner,supra,50 T.C. at 332; John P. Scripps Newspapers v. Commissioner,supra,44 T.C. at 469. It is not sufficient, however, for the corporation merely to recognize a future need and discuss possible and alternative solutions concerning the same. Atlantic Commerce and Shipping Co. v. Commissioner,500 F.2d 937">500 F. 2d 937, 940 (2d Cir. 1974), affg. a Memorandum Opinion of this Court; Estate of Lucas v. Commissioner,71 T.C. 838">71 T.C. 838, 853 (1979), affd. 657 F. 2d 841 (6th Cir. 1981). Definiteness of plan coupled with action taken toward the consummation thereof are essential. Dixie, Inc. v. Commissioner,277 F. 2d 526, 528 (2d Cir. 1960), affg. 31 T.C. 415">31 T.C. 415 (1958), cert. den. 364 U.S. 827">364 U.S. 827 (1960); Doug-Long, Inc. v. Commissioner,supra,72 T.C. at 171; Estate of Lucas v. Commissioner,supra,71 T.C. at 853. In other words, "the intention claimed must be manifested by some contemporaneous course of conduct directed toward the claimed purpose." Smoot Sand & Gravel Corp. v. Commissioner,241 F. 2d 197, 202 (4th Cir. 1957),285 affg. in part a Memorandum Opinion of this Court, cert. denied 354 U.S. 922">354 U.S. 922 (1957). The test is a practical one, namely, whether the alleged plan appears to have been "a real consideration during the taxable year, and not simply an afterthought to justify challenged accumulations." Faber Cement Block Co. v. Commissioner,supra,50 T.C. at 332-333. In determining whether the earnings and profits of any taxable year have been accumulated beyond the reasonable needs of the business, it is necessary to consider whether accumulated earnings and profits of prior years were sufficient to meet the taxpayer's reasonable business needs (including reasonably anticipated needs) for the current year. Atlantic Properties,Inc. v. Commissioner,supra, 62 T.C. at 656. We do not, however, merely compare the total amount needed in the business with the taxpayer's total accumulated earnings and profits. Rather, we look to the accumulated earnings and profits that are reflected in net liquid assets. Ivan Allen Co. v. United States,422 U.S. 617">422 U.S. 617, 628 (1975); Smoot Sand & Gravel Corp. v. Commissioner,274 F. 2d 495, 501 (4th Cir. 1960),286 cert. denied 362 U.S. 976">362 U.S. 976 (1960), affg. a Memorandum Opinion of this Court; Montgomery Co. v. Commissioner,54 T.C. 986">54 T.C. 986, 1008 (1970). As the Supreme Court said in Ivan Allen Co. v. United States,supra,422 U.S. at 628, "The question, therefore, is not how much capital of all sorts, but how much in the way of quick or liquid assets, it is reasonable to keep on hand for the business." When accumulated surplus is retained in the form of liquid assets, it is available to meet business needs, and if sufficient to meet the current and reasonably anticipated future business needs of the corporation, there is a strong indication that any additional accumulation of profits of the current year is beyond the reasonable needs of the business. Atlantic Properties, Inc. v. Commissioner,supra, 62 T.C. at 656; Novelart Manufacturing Co. v. Commissioner,52 T.C. 794">52 T.C. 794 (1969), affd. 434 F. 2d 1011 (6th Cir. 1970), cert. denied, 403 U.S. 918">403 U.S. 918 (1971); John P. Scripps Newspapers v. Commissioner,supra,44 T.C. at 467-468; sec. 1.535-3(b)(1)(ii), Income Tax Regs.The287 fact that a corporation has accumulated its earnings and profits beyond its reasonable business needs raises a presumption that the accumulation was for the proscribed purpose, "unless the corporation by the preponderance of the evidence shall prove to the contrary." Sec. 533(a). For the accumulated earnings tax to apply, it is enough if the proscribed purpose is one of the purposes behind the accumulation, even if it is not the "dominant, controlling, or impelling" one. United States v. Donruss Co.,supra,393 U.S. at 301. Indeed, the taxpayer must show a complete lack of the proscribed purpose. Pelton Steel Casting Co. v. Commissioner,28 T.C. 153">28 T.C. 153, 174 (1957), affd. 251 F. 2d 278 (7th Cir. 1958), cert. denied 356 U.S. 958">356 U.S. 958 (1958). With the foregoing principles in mind, we turn to the facts of this case. Petitioner has the burden of proving the reasonable business needs for its accumulations and the overall burden of proving the absence of the proscribed purpose. 5 While the decisional law furnishes us many guidelines and virtually innumerable cases can be cited for the various legal propositions, the inquiry nonetheless288 remains quintessentially a factual one. Reasonable business needs cannot be determined in a vacuum or out of the context of the given business or industry. In evaluating petitioner's reasonable business needs, we must keep in mind the nature of petitioner's particular business and the business environment in which it operated. Petitioner's business is to design and engineer complete processing plants for its customers. Petitioner's work involves engineering services, design and purchase of equipment and material for such plants, on-site engineering and inspection services during construction, and inspection and testing of the completed plants. Each such plant is essentially custom-designed. Each of petitioner's contracts has varying specifications and work to be performed. The bulk of petitioner's289 gross sales is bunched in just a few contracts of relatively long duration. Because of the nature of its work, petitioner has no regularly recurring cycle of work and petitioner reports its income for tax purposes on the completed contract method of accounting. Petitioner is a small company, much smaller than any of its competitors. Because of the nature of its business petitioner has few fixed assets and its net worth is reflected in its liquid assets and retained earnings. Because petitioner is so small, customers often seek financial data about petitioner's net worth and petitioner occasionally loses prospective contracts because of its small size. Petitioner tries to increase its net worth in order to obtain larger contracts and increase its business. Petitioner self-finances all of its operations and has never borrowed any money. Petitioner also self-insures its various business risks. Since about half of its work is in foreign countries, petitioner encounters additional risks, political and economic, flowing from that fact. Petitioner's contracts guarantee that the plants it designs will provide a certain quantity and quality of product. Petitioner also guarantees the290 performance of the equipment it sells to its customers. Petitioner cannot obtain performance bonding to cover its work and these process and equipment performance guaranties because of prohibitive cost. The plants designed by petitioner occupy an intermediate stage in the customer's overall operations, and any failure of such plant will have a ripple effect throughout the customer's business. Petitioner tries to include exculpatory clauses in its contracts to protect itself at least from claims for consequential damages from malfunctioning or failure of plants it designs. However, petitioner's management doubts the efficacy of such exculpatory clauses and is well aware of the company's potential liabilities. Occasionally there are design and construction deficiencies that petitioner has to rectify at its own expense, and therefore petitioner occasionally suffers a loss on a contract. Also many of these plants use volatile raw materials with potential for explosions, and many of the plants process materials for human consumption, with attendant risks of product liability claims. Petitioner has not had any explosions or other product liability claims, but its competitors have. 291 Petitioner does not set up formal reserves on its books for these various items, but its management is will aware of and has in mind these various needs for its liquid assets and retained earnings. Respondent accords little consideration to the peculiar nature of petitioner's business, the competitive environment in which it operates, or the various factors that petitioner's management think warrant the retention of liquid assets and its accumulated earnings. Respondent seemingly looks only to what he regards as petitioner's high liquidity 6 and to his computation of working capital needs, which is the only business need respondent acknowledges and which respondent computes under the Bardahl-Mead formula. BardahlManufacturing Corp. v. Commissioner,T.C. Memo. 1965-200, as modified by W.L. Mead, Inc. v. Commissioner,T.C. Memo 1975-215">T.C. Memo. 1975-215, affd. 551 F. 2d 121 (6th Cir. 1976). Respondent's computation includes no inventory cycle although petitioner has a substantial inventory of equipment and materials it purchases for installation in the plants it designs for its customers. First, we will discuss petitioner's working capital292 needs and then its other reasonable business needs. 293 A. Reasonable Business Needs1. Working Capital NeedsWorking capital is of course a reasonable business need. Sec. 1.537-2(b)(4), Income Tax Regs.; Doug-Long, Inc. v. Commissioner,supra,72 T.C. at 176; Magic Mart, Inc. v. Commissioner,supra,51 T.C. at 791-793. To inject a degree of objectivity into this determination, we have generally endeavored to calculate a taxpayer's working capital needs for a single, complete operating cycle. This cycle attempts to trace a taxpayer's application of cash, representing working capital, through the taxpayer's operations until it emerges again as cash. Generally, an operating cycle is the period of time needed to convert cash into raw materials, raw materials into finished goods, inventory into sales and accounts receivable, and any accounts receivable into cash. See Bardahl Manufacturing Corp. v. Commissioner,supra;Alma Piston Co. v. Commissioner,T.C. Memo 1976-107">T.C. Memo. 1976-107, affd. 579 F. 2d 1000 (6th Cir. 1978). We and other courts have employed the Bardahl operating cycle test flexibly to reflect more accurately the business realities294 of the particular taxpayer involved. See Cataphote Corp. of Mississippi v. United States,210 Ct. Cl. 125">210 Ct. Cl. 125, 535 F.2d 1225">535 F. 2d 1225, 1234-1235 (1976); Magic Mart, Inc. v. Commissioner,supra,51 T.C. at 791-794; Suwannee Lumber Manufacturing Co. v. Commissioner,T.C. Memo. 1979-477 and cases cited at n. 16; Delaware Trucking Co., Inc. v. Commissioner,T.C. Memo. 1973-29. Indeed, we and other courts have approved application of the Bardahl operating cycle approach to various non-manufacturing businesses, including service businesses, although generally with certain modifications to reflect the particular taxpayer's circumstances. See Central Motor Co. v. United States,583 F. 2d 470, 482-483 (10th Cir. 1978) (finance companies); C.E. Hooper, Inc. v. United States,210 Ct. Cl. 615">210 Ct. Cl. 615, 539 F. 2d 1276 (1976) (market analysis corporation); W.L. Mead, Inc. v. Commissioner,supra (motor freight company). However, the operating cycle approach is not a rule of law--" [T]heBardahl formula is an attempt to inject a degree of objectivity into a quantification of business295 needs; it is a tool to be used when helpful and its use is not mandated in all events." Thompson Engineering Co. v. Commissioner,80 T.C. 672">80 T.C. 672, 697 (1983), revd. on another point 751 F. 2d 191 (6th Cir. 1985). See also Dielectric Materials Co. v. Commissioner,57 T.C. 587">57 T.C. 587, 599 (1972). Respondent argues that the Bardahl-Mead formula has been "sanctioned" by this Court and should be applied in this case. We disagree. Because of the computational steps in the Bardahl-Mead formula, its application here would create an illusion of exactitude and would leave a strong impression of mathematical certainty. We think, however, any such impression of mathematical precision is wholly illusory in this particular case. This is graphically demonstrated by comparing respondent's computations set out in our Findings of Fact with our own vastly different computations set out in Appendix I to this opinion. Quite apart from respondent's failure to include an inventory cycle, which we have rectified in our computation (Appendix I), the fundamental flaw here is that there simply is no recurring business cycle. To try to erect such a cycle through296 the computational steps of the Bardahl formula, with or without the Mead modification, is misleading. We agree with petitioner's officers that the peaks and valleys in its business cannot be predicted with any reasonable degree of accuracy and that its "lean years" and its "fat years" simply do not lend themselves to the formulistic quantification of Bardahl-Mead. The Court believed the testimony of petitioner's officers that they themselves could never predict their working capital needs with any degree of accuracy. That being so, the Court is peculiarly loathe to substitute its judgment for the business judgment of petitioner's management on this matter. That is particularly so where the Court has little faith in its own Bardahl computation (Appendix I) save a belief that it is more accurate than respondent's computation. For example, respondent's Bardahl-Mead computation determines working capital needs of only $85,420 for 1977. We think that is a totally unrealistic figure. The record shows that there were periods of up to six months during which petitioner could obtain no new contracts and that it cost petitioner about $25,000 a month (mainly salary) 297 just to keep its doors open. The Court thinks that a bare minimum working capital figure for petitioner would be $150,000 (6 months X $25,000) per year. The Court also finds respondent's $85,420 figure for 1977 wholly unacceptable because that was a year when there was an increase in gross revenue and a sharp decrease in liquid assets as a result of the redemption of Loew's shares for a lump sum cash payment of $654,000. The record shows that the new controlling management group was cash-starved after the redemption, had doubts as to whether the corporation would survive, and had to work extremely hard to rebuild the liquid assets needed to operate the business. Even the Court's Bardahl computation shows some decline in working capital needs that year (which we think is clearly not the case), but certainly a less precipitous decline than that proposed by respondent. Under the circumstances of this case, with petitioner's longterm contracts, with its income bunched in just a few contracts of relatively long duration, with its use of the completed contract method of accounting, and most importantly with the absence of any regularly recurring operating cycle, we decline to apply298 the Bardahl formula. We think that any attempt to apply the Bardahl formula "flexibly" or otherwise in this case would be no more accurate than applying a rough rule of thumb to determine working capital needs. We also think an attempt to use the Bardahl formula might well give an air of precision to something that would be simply a usurpation of petitioner's exercise of its own best business judgment. We are not suggesting, however, that we must always defer to the business person's "judgment calls" in such cases. Petitioner's management used a rough rule of thumb (current liquid assets to current liability ratio of 3.0 to 1) to forecast working capital needs. That may be too rough a guideline and may perhaps too often result in a negative figure (working capital needs in excess of current net liquid assets). Still some kind of rule of thumb may well be a reasonable way for petitioner's management to try to even out the hills and valleys in their efforts to estimate reasonable working capital needs from year to year. Because of our conclusion that petitioner also had other reasonable business needs each year, the need for working capital is not the sole determining299 factor, as respondent assumes it to be. Suffice it to say, the Court does not wholly accept petitioner's rule of thumb. On the other hand, the Court is satisfied that petitioner's working capital needs for each year somewhat exceeded those recomputed by the Court under the Bardahl formula (Appendix I), probably by an amount of $150,000 (the bare minimum working capital figure). We would add this $150,000 figure each year because fiscal 1975 and 1976 were slow years as far as obtaining new business, which was another source of tension between Loew and the minority group, and because in fiscal 1977 after Loew's departure there was a cash crunch just when the new controlling group was trying to expand petitioner's operations, particularly in the foreign market. Therefore, we conclude petitioner's management would not be acting unreasonably in assuming that the working capital needs projected for the next year would be liquid assets of approximately 1.0 to 1.5 times its liabilities at the end of each year, and thus a reasonable amount to retain at the end of each year. This historical approach would have some degree of accuracy as to the actual liabilities it had encountered, 300 with some factor for contingencies or expanded needs that might occur in the future. We will next discuss the factor of contingent liabilities. 2. Contingent LiabilitiesA taxpayer may reasonably accumulate earnings as a reserve against some contingent liabilities. "[A] contingency is a reasonable need for which a business may provide if the likelihood of its occurrence reasonably appears to a prudent businessman." Dahlem Foundation, Inc. v. United States,405 F.2d 993">405 F. 2d 993, 1003 (6th Cir. 1969); C.E. Hooper, Inc. v. United States,supra, 569 F. 2d at 1289; Smoot Sand & Gravel Co. v. Commissioner,supra,241 F. 2d at 206. On the other hand, an accumulation is not justifiable if the contingent liability is merely a remote possibility. Chaney & Hope, Inc. v. Commissioner,supra,80 T.C. at 285-286; J. Gordon Turnbull, Inc. v. Commissioner,41 T.C. 358">41 T.C. 358, 374-375 (1963), affd. 373 F. 2d 87 (5th Cir. 1967). Whether a corporation's accumulation of earnings for a contingent liability is reasonable depends upon all the facts and circumstances. William C. Atwater & Co. v. Commissioner,10 T.C. 218">10 T.C. 218, 230 (1948);301 Estate of Kriesel v. Commissioner,T.C. Memo 1978-50">T.C. Memo. 1978-50. Petitioner argues that it was entitled to accumulate earnings to satisfy its process and equitpment performance guarantees, including possible consequential damages from the interruption of its customers' manufacturing processes, and as a reserve against potential legal liability arising from plant accidents or adulterated food products at the plants it designed and sold. Respondent argues that the liability for additional costs petitioner incurred in satisfying its warranty obligations were already accounted for in the same manner as a formal reserve by the deferred profit element in petitioner's customer deposits liability account. Respondet also argues that any potential legal liability of petitioner from these risks is entirely too remote and speculative to justify an accumulation of earnings. We do not fully agree with either party. The record clearly indicates that petitioner incurred substantial costs in satisfying its equipment and process guarantees, reducing its overall profit on these contracts. The record, however, also indicates that petitioner deducted these expenses as incurred. To the extent302 that such costs were accrued but not paid at year's end, they were already reflected in liability accounts on petitioner's books. This liability has already reduced petitioner's net liquid asset figures. Moreover, these deductions have already been taken into account in petitioner's taxable income for each year in issue, the starting point for calculating the accumulated earnings tax. See sec. 535(a). Accordingly, we do not allow any additional amount as a reasonable business need justifying retention of accumulated earnings. We reject respondent's argument that the clauses in petitioner's contracts with its clients by whith it attempted to exculpate itself from consequential damages preclude any accumulation of earnings for such a potential liability. Such exculpatory clauses are of uncertain enforceability, see UCC § 2-719 (1976); Restatement (Second) Contracts §§ 356, 208 and 356 commented (1981), a fact that petitioner's management recognized. We also reject respondent's argument that as a matter of law, "there must be some actual or threatened legal action justifying the reserve or, at least, an historical basis303 from which future liability appears likely or uncertain." An accumulation as a reserve against a potential liability is not precluded simply because the taxpayer itself has no history of such liability. See Wilcox Manufacturing Co., Inc. v. Commissioner,T.C. Memo. 1979-92. We must examine all the facts to ascertain whether a prudent business person in petitioner's position would reasonably anticipate and hedge against such a potential liability. We are persuaded that these potential legal liabilities were reasonably anticipated business needs of petitioner's that justified some accumulations of earnings. Although petitioner had no history of damage claims for plant accidents, adulterated food-stuffs, or consequential damages from plant breakdowns, we think that a prudent business person would nonetheless endeavor to guard against such risks. Petitioner's competitors had suffered plant accidents and food adulteration of large magnitude, involving loss of life and large scale destruction of property. Similarly, the ripple effects from the interruption of the middle stage of a large, integrated manufacturing process are obvious. A business person cannot prudently304 ignore such risks simply because the business had been sufficiently competent (or lucky) in the past to avoid any such liability. Moreover, even assuming successful legal defense against such claims, the possibility of litigation expense is neither remote nor speculative. Given the nature of petitioner's business, we do not consider such possibilities too remote. Exercising our best judgment on the facts in this case, including some cushion provided by the unrealized profit on petitioner's uncompleted contracts reflected in its customer deposits and considering the expansion of the scope and scale of petitioner's business after the buy-out of Loew, we hold that petitioner was entitled to accumulate $50,000 in fiscal 1975 and 1976, and $100,000 in fiscal 1977, as reserves against these potential liabilities. 3. Business ExpansionA corporation may reasonably accumulate earnings to fund an expansion of its business. Sec. 1.537-2(b)(1), Income Tax Regs.; Chaney & Hope, Inc. v. Commissioner,supra,80 T.C. at 290-291; Bremerton Sun Publishing Co. v. Commissioner,supra, 44 T.C. 583; Crawford County Printing & Publishing Co. v. Commissioner,17 T.C. 1404">17 T.C. 1404, 1414 (1952).305 Of course, a taxpayer's plans to expand must be "specific, definite, and feasible" to justify the accumulation of earnings for such plans. Sec. 1.537-1(b)(1), Income Tax Regs.Because petitioner was unable to obtain performance bonds, some potential clients looked to petitioner's financial status (net worth) to satisfy themselves that petitioner would be able to perform its contractual obligations. Because of its small size in relation to its competitors, petitioner lost some potential clients. Petitioner argues that it accumulated its earnings to increase its net worth to make itself more attractive to potential clients and to enable it to bid on larger contracts. We agree, but the stockholders disagreed among themselves over how to use effectively any such increased net worth. Loew, as majority stockholder in fiscal 1975 and 1976, wanted more or less passively to increase net worth and have the clients seek petitioner out. Loew wanted to rely upon the considerable expertise and reputation of the four individual stockholders, assuming that would continue to bring in prospective clients and that increased net worth would assure petitioner of getting more of the contracts from306 those clients. The minority stockholders wanted to pursue new business, particularly in the foreign market, more vigorously--i.e. spend money to make money. During petitioner's fiscal years 1975 and 1976, it is clear that petitioner had no plans to expand. Loew and his conservative business philosophy were still in the ascendant. It was Loew's slow-growth policy that caused the feud with the minority group, eventually leading to Loew's retirement and petitioner's redemption of Loew's shares. While Loew was in control of petitioner, there were no expansion plans as such. From our observance of Loew and his testimony at trial, we are satisfied that he genuinely believed his "plan" (slow steady growth through plowing the earnings back into the business) was in the best interest of the company. He simply could not accept the views of the minority stockholders as shown by the fact that he insisted on a lump-sum payment for his shares even though he knew that installment payments would result in a considerable tax saving to him. Loew simply would not risk his interest in the business to the control of the minority stockholders and their plans for more rapid expansion of the business. 307 During petitioner's fiscal year 1977 after Loew's departure, the new management group sought to expand petitioner's business. However, because the liquid assets of the company were reduced by the $654,000 cash payment to Loew and the payments on the covenant not to compete, the new managers were short of cash and did not draw up or implement any specific plan of action that first year. The record does show that they made a number of changes in petitioner's operations and did pursue contracts for larger scale plants and more foreign business. While respondent urges that there was no "specific, definite and feasible" plan of expansion (sec. 1.537-1(b)(1), Income Tax Regs.), we think respondent overemphasizes formalities in this instance. We think the new controlling group at least made a beginning. While we are not able or willing to place a dollar figure on expansion plans as a reasonable business need, we think it is clear from the record as a whole that that was nonetheless a real consideration in the minds of petitioner's management at least in 1977 and in the minds of the monority shareholders in all three years. As it turned out, the minority shareholders could do little308 until Loew's shares were redeemed by the corporation. 4. Redemption NeedsA corporation may reasonably accumulate its earnings to fund a redemption of the shares of dissident or departing minority stockholders. C.E. Hooper, Inc. v. United States,supra,539 F. 2d at 1289-1290; Mountain State Steel Foundries, Inc. v. Commissioner,284 F.2d 737">284 F. 2d 737, 744-745 (4th Cir. 1960), revg. T.C. Memo. 1959-59; Dill Manufacturing Co. v. Commissioner,39 B.T.A. 1023">39 B.T.A. 1023 (1939). 7 Whether the redemption of a majority stockholder's shares is a reasonable business need for the accumulation of the corporation's earnings and profits is a more difficult question. Compare Pelton Steel Casting Co. v. Commissioner,251 F. 2d 278 (7th Cir. 1958), affg. 28 T.C. 153">28 T.C. 153 (1957), cert. denied 356 U.S. 958">356 U.S. 958 (1958) and Lamark Shipping Agency, Inc. v. Commissioner,T.C. Memo. 1981-284 with Vulcan Steam Forging Co. v. Commissioner,T.C. Memo 1976-29">T.C. Memo. 1976-29. See generally, D. Herwitz, Stock Redemptions and the Accumulated Earnings Tax, 74 Harv. L. Rev. 866">74 Harv. L. Rev. 866, 908-931 (1961).309 Relying on Pelton Steel Casting Co. v. Commissioner,supra, respondent paints a picture of Loew, as majority stockholder, causing the corporation to accumulate its earnings beyond its reasonable business needs for his personal reasons, namely, in order to redeem his shares so he can bail out his earnings and profits from the business at capital gains rates. Respondent emphasizes the fact that the corporate minutes state Loew was retiring because of age--age 65 which respondent describes as "a standard time in life to retire." We think the facts of the present case are wholly different from those in Pelton SteelCasting.Here there was a stock purchase agreement whereby all shareholders were required to sell their shares only to the corporation and at a stated percentage of book value. This 1970 Stock Purchase Agreement long antedated the redemption of Loew's shares. There is no suggestion that this Stock Purchase Agreement was designed to serve the personal interests of the310 stockholders rather than the business interest of the corporation. Moreover, despite respondent's arguments to the contrary, Loew at age 65 was vigorous, in good health, and had no desire to retire. He had never thought about retirement until the last year before the redemption. He retired because the tension and disputes with the minority shareholders, caused by the clash of his conservative business philosophy with their more aggressive plans for the company's future, could not be resolved. He retired because he did not want to see the company he had worked so long and so hard to build up destroyed. Under the facts of this case, we think redemption of the majority stockholder's shares served a corporate purpose and could be a reasonable business need of the company. However, petitioner has never argued that it was accumulating its earnings in order to redeem Loew's share, and we need not resolve the question of redemption of a majority stockholder's shares as a reasonable business need. What petitioner argues is that its obligation under the 1970 Stock Purchase Agreement to purchase the shares of any stockholder leaving petitioner's employ justifies accumulations of $57,114, 311 $86,399, and $116,853 during its respective fiscal years 1975, 1976 and 1977. Those figures apparently represent 20 percent of petitioner's total accumulated earnings for each preceding fiscal year. While we do not necessarily accept the basis for these figures, we agree with the general idea. Without regard to Loew, any of the minority shareholders, each of whom had a 13.33 percent ownership interest, could have required petitioner to purchase his shares at 90 percent of book value at any time. Since the minority shareholders were threatening to leave the company, petitioner had a reasonable business need to be able to purchase the shares of at least one minority stockholder or possibly all three minority stockholders. Since the redemption price for one minority stockholder could be as much as $145,333.33 and that for all three as much as $436,000, 8 petitioner's figures seem eminently reasonable, and no doubt much too low. If we used the 20 percent of accumulated earnings approach, we would apply that rate to the current year's accumulation, for figures of $86,399, $116,853, and $178,712, for fiscal years 1975, 1976, and 1977, respectively. That is because we are determining312 the portion of the total earnings petitioner could reasonably retain at the end of each year. 5. Summary of Reasonable Business NeedsWe must summarize our conclusions as to petitioner's reasonable business needs to determine whether petitioner accumulated and retained its earnings beyond its reasonable business needs so as to give rise to the presumption of the existence of the proscribed tax-avoidance purpose. Sec. 533(a). Since we have not availed ourselves of a Bardahl-Mead computation and have determined working capital needs within a range of figures and since we have found other reasonable business needs, some quantified and some not and some of which may be subsumed in the category of working capital needs and some not, our holdings cannot be readily or neatly tabulated. In our opinion, the bare minimum working capital needs for each year would be no less than the Court's Bardahl computation figures (Appendix I) which we think should be increased by $150,000 for each313 year as discussed above; the maximum would be 1.5 times petitioner's liabilities each year. Thus, the range for petitioner's working capital needs would be as follows: Court's BardahlPetitioner's Quick AssetFiscalCourt's BardahlComputationto Liability Ratio(Appendix I)YearComputationPlus $150,0001.01.5(Appendix I)1975$627,566$777,566$1,213,344$1,820,1661976573,472723,472 466,990700,4851977540,339690,3391,353,0852,029,628For contingent liabilities, we have found an amount of $50,000 for 1975 and 1976 and $100,000 for 1977. We have allowed no specific dollar amount for expansion plans although we think it was314 a genuine consideration in each year, even by Loew in his own conservative view of how the company should continue to develop. For redemption needs which we think were critical for the company's survival given the impasse between Loew and the minority stockholders, we think a range from $145,000 to $436,000 was a bare minimum for 1975 and 1976. Because of possible overlapping, we would use the high figure with the low working capital figure and the low figure with the high working capital figures. Since the net liquid assets for the years at issue were only $894,660, $1,045,928, and $674,176, respectively, it is clear that under any combination of our figures, petitioner's reasonable business needs exceeded its net liquid assets each year. B. The Proscribed PurposeWe have compared petitioner's reasonable business needs to its net liquid assets above, and concluded that the net liquid assets did not exceed petitioner's reasonable business needs. We think, however, a comparison of petitioner's total accumulated earnings to its net liquid assets is also instructive in this case. Total AccumulatedFiscal YearNet Liquid AssetsEarnings1975$894,660$431,995.8419761,045,928584,264.461977674,176893,559.65315 The proscription of the statute is against an unreasonable accumulation of earnings (for the proscribed purpose), not against the company's having its assets in liquid form. The total accumulated earnings were 48.3%, 55.9%, and 133% of net liquid assets in each respective year. In 1977 the total accumulated earnings exceeded petitioner's net liquid assets by $219,383.65; in other words, after the redemption of Loew's shares, the company was short of cash and other liquid assets. In the two previous years when the net liquid assets were much higher, they greatly exceeded petitioner's total accumulation of earnings. This satisfies the Court that the nature of petitioner's business and its method of operation called for large amounts of liquid assets, and that petitioner's high liquidity was not necessarily related to some plan to try to avoid tax on the shareholders or to bail out the majority shareholder's earnings and profits in the corporation at capital gains rates. Since we have found that petitioner did not retain or accumulate its earnings beyond its reasonable business needs in the years before the Court, the presumption of a tax-avoidance purpose under section 533(a) does316 not come into play. Moreover, with or without any such presumption, we would not find the proscribed purpose in this case. The record is simply devoid of any evidence that in the 1975 and 1976 fiscal years Loew's tax situation (let alone that of the minority shareholders) played any part in the corporation's decision to retain or accumulate earnings. The Court believed Loew's testimony that the accumulations were for entirely different reasons, namely, his conservative business philosophy of growth through increasing the company's net worth. In fiscal 1975 and 1976, petitioner paid dividends amounting to 25 and 26 percent of its net income after Federal taxes. Contrary to respondent's scenario, Loew did not cause the corporation to accumulate its earnings so that he could bail out his share of the earnings at capital gains rates. Certainly in 1977 the new controlling group never gave any thought to availing of the corporation to reduce their own income taxes; the new owners were busy trying to rebuild the depleted liquid assets and to expand the business. Even in fiscal 1977 when the new management group was struggling to expand the corporation's operations, petitioner paid dividends317 of 8.5 percent of its net income after taxes. In any event, having found that petitioner did not retain or accumulate its earnings beyond its reasonable business needs, we really need not consider whether petitioner was availed of for the proscribed purpose in the years before the Court. John P. Scripps Newspapers v. Commissioner,supra,44 T.C. at 474. That is so because the accumulated earnings credit provided for in section 535(c) would be equal to the full amount of petitioner's current earnings and profits retained in those years (amounts or $146,427.09, $152,268.62, and $309,295.19 for the fiscal years 1975, 1976, and 1977, respectively). This would result in accumulated taxable income equal to zero. We, therefore, hold that petitioner is not liable for accumulated earnings tax in any of its fiscal years 1975, 1976, or 1977. See Chaney and Hope, Inc. v. Commissioner,supra,80 T.C. at 281 and cases cited therein. To reflect the above holdings, Decision will be entered for petitioner.APPENDIX I To determine petitioner's working capital needs under the Bardahl-Mead formula, we would first adjust petitioner's unaudited318 balance sheets to more closely reflect proper accounting principles (which will be discused below) as follows: ASSETS7411750275057508Current AssetsCash127,354.12182,350.6470,804.7084,460.50Marketable securities94,325.55327,579.45224,455.42119,680.81Commercial paper200,000.00800,000.00800,000.00Certificate of deposit300,000.00200,000.00U.S. Treasury bills250,000.00Employee LoanAccounts receivable206,162.35239,555.90117,809.87600,744.27Accounts receivableunbilled2,938.944,750.00Accrued interestreceivable3,162.152,879.334,534.872,220.94Prepaid insurance1,017.29318.47705.74943.38Prepaid rentInventory of work inprocess21,235.7848,049.6963,218.1623,335.88Notes receivable lessdiscount30,285.0030,285.0025,237.5025,237.50Foreign tax credits28,061.7427,748.301,279.50Federal and state taxdepositsCorporate preferredstock1,264,542.921,063,516.781,308,045.761,664,623.28Fixed assetsAutomobilesoffice equipment andfurniture22,306.0422,306.0421,941.0722,300.17furnitureLess accumulateddepreciation15,799.0716,187.9016,482.8916,857.536,506.976,118.145,458.185,442.64Other assetsTravel advance3,050.002,650.001,800.001,750.00Organization expenseLess amortization324.32261.21108.103,374.322,911.211,908.101,750.001,274,424.211,072,546.131,315,412.041,671,815.92319 7511760276057608Current AssetsCash99,239.4632,200.4322,435.2077,708.76Marketable securities69,492.3769,495.4369,498.4969,501.55Commercial paper1,000,000.001,000,000.00900,000.00900,000.00Certificate of deposit300,000.00300,000.00U.S. Treasury billsEmployee loanAccounts receivable29,853.77192,474.10241,281.9983,550.69Accounts receivableunbilled29,283.33Accrued interestreceivable3,323.075,042.914,912.081,407.72Prepaid insurance497.871,947.821,306.72Prepaid rentInventory of work inprocess33,624.1926,289.5814,527.272,101.65Notes receivable lessdiscount48,014.0045,231.6040,184.1037,401.70Foreign tax credits2,599.382,599.38Federal and state taxdepositsCorporate preferredstock1,284,044.731,373,333.431,626,669.661,472,986.79Fixed assetsAutomobilesoffice equipment andfurniture23,413.1124,616.4124,616.4124,709.44Less accumulateddepreciation17,240.0417,679.8518,133.9918,516,276,173.076,936.566,482.426,193.17Other assetsTravel advance1,750.001,750.002,600.002,000.00Organization expenseless amortization1,750.001,750.002,600.002,000.001,291,967.801,382,019.991,635,752.081,481,179.96320 7611770277057708Current AssetsCash199,801.54 154,609.69 223,302.83 71,383.15 Marketablesecurities69,188.70 69,188.70 116,475.27 115,498.05 Commercial paper199,185.00 699,505.00 Certificateof deposit200,000.00 300,000.00 200,000.00 U.S. Treasurybills147,254.86 177,483.00 Employee loan30,000.00 22,000.00 Accountsreceivable175,061.27 179,923.28 125,677.10 375,962.75 Accountsreceivableunbilled55,224.80 208,380.09 75,564.13 334,265.73 Accrued interestreceivable5,618.00 8,468.64 7,397.07 7,662.82 Prepaid insurance662.55 57.95 (604.48)2,964.06 Prepaid rentInventory ofwork inprocess2,525.00 17,730.21 51,954.97 25,595.57 Notes receivablelessdiscount32,354.20 30,963.00 23,133.10 21,741:90 Foreign taxcreditsFederal andstate taxdepositsCorporate preferredstock48,300.00 48,300.00 739,621.06 1,016,576.72 1,178,682.99 1,924,879.03 Fixed assetsAutomobiles15,640.87 23,661.92 21,610.18 officeequipment andfurniture24,709.44 17,394.97 18,937.66 38,815.93 Less accumulateddepreciation(18,895.73)(8,078.37)(9,541.67)(9,389.41)5,813.71 24,957.47 33,057.91 51,036.70 Other assetsTravel advance2,000.00 2,250.00 2,400.00 2,400.00 Organizationexpenseless amortization2,000.00 2,250.00 2,400.00 2,400.00 747,434.77 1,043,783.89 1,214,140.90 1,978,315.73 321 LIABILITIES7411750275057508Current LiabilitiesAccount payable76,110.2611,753.6515,822.6271,513.51 Contract deposits270,985.17192,529.47277,544.53261,278.55Federal income tax56,907.2611,894.4438,388.52105,310.76 State income tax5,188.691,434.434,609.0711,229.81 Other taxesAccrued engineering20,926.0013,482.0015,344.0032,390.00 Project prepayment51,500.00Deferred credits4,475.722,886.092,050.32 Accrued payroll tax41.64203.4147.865.38 Accrued compensation& profit sharingcontributions22,400.0045,000.00115,000.00240,184.85 Accrued dividend46,000.00 508,534.74276,297.40469,642.69769,963.18 Stockholders equityCommon stock460,000.00460,000.00460,000.00460,000.00 Paid on capital9,856.909,856.909,856.909,856.90 Retained earnings285,568.75285,568.75285,568.75285,568.75 Net income10,463.8240,778,0890,343.70192,427.09 Dividends paid(46,000.00)Treasury stock765,889.47796,203.73845,769.35901,852.74 1,274,424.211,072,501.131,315,412.041,671,815.92 7511760276057608Current LiabilitiesAccount payables18,122.4013,000.1132,253.6020,256.30 Contract deposits260,000.74218,643.33178,285.5549,745.02 Federal income tax54,726.4843,438.7559,456.8354,896.41 State income tax11,737.194,715.6513,464.1813,188.46 Other taxesAccrued engineering18,530.0022,198.0027,424.0024,450.00 Project prepaymentDeferred credits1,903.473,426.054,601.352,131.80 Accrued payroll tax7.48247.3126.00236.00 Accrued compensation& profit sharingcontributions16,800.0098,000.00225,000.00206,954.62 Accrued dividend55,200.00 361,827.76403,669.20540,511.51427,058.61 Stockholders equityCommon stock460,000.00460,000.00460,000.00460,000.00 Paid on capital9,856.909,856.909,856.909,856.90 Retained earnings431,995.84431,995.84431,995.84431,995.84 Net income8,827.3076,854.91193,387.83207,468.62 Dividends paid(55,200.00)Treasury stock910,140.04978,707.651,095,240.571,054,121.36 1,291,967.801,382,376.851,635,752.081,481,179.97 322 7611770277057708Current LiabilitiesAccount payables47,731.00 124,241.23 20,923.05 514,651.96 Contract deposits183,108.00 345,885.42 585,849.44 111,771.13 Federal income tax34,792.88 8,812.37 (1,491.90)206,606.45 State income tax14,513.33 119.61 (536.90)18,888.74 Other taxes2,409.20 Accrued engineering26,690.00 26,516.00 21,122.00 36,338.00 Project prepaymentDeferred credits875.00 Accrued payroll tax30.36 1,486.88 321.20 362.51 Accrued compensation& profit sharingcontributions17,316.00 84,417.13 120,231.07 334,312.59 Accrued dividend27,771.15 327,465.77 591,478.64 746,417.96 1,250,702.53 Stockholders equityCommon stock460,000.00 460,000.00 460,000.00 460,000.00 Paid on capital9,856.90 9,856.90 9,856.90 10,169.58 Retained earnings584,264.46 584,264.46 584,264.46 584,264.46 Net income19,848.00 44,258.31 57,295.10 337,066.34 Dividends paid(27,771.15)Treasury stock(654,000.00)(646,074.42)(643,693.52)(636,116.03)419,969.36 452,305.25 467,722.94 727,613.20 747,435.13 1,043,783.89 1,214,140.90 1,978,315.73 323 Note: Petitioner's balance sheet for its fiscal quarter 7611 (November 30, 1976) reflects the figures in the balance sheet prepared for that quarter by petitioner's outside CPA. The slight discrepancy between total assets and liabilities for this quarter results from the fact that the in-house balance sheet included cents while the outside statement was rounded to even dollars. The above adjustments to petitioner's unaudited balance sheets involve on the asset side decreasing the item of "Inventory of work in process" and on the liability side decreasing the item of "Contract deposits." These decreases are to reflect costs not reimbursed by the client deposits and progress payments, primarily those on foreign contracts, as explained below. Petitioner objects strenuously to respondent's omission of an inventory cycle from his Bardahl-Mead calculation, noting that petitioner in fact purchases and resells equipment. Petitioner's books reflect as an asset item its "Inventory of work in process." This represents equipment, engineering, and other related costs on petitioner's uncompleted contracts. Respondent argues that the omission of the inventory cycle is justified because324 petitioner's so-called inventory costs are funded through the deposits and progress payments it receives from its clients. We agree with respondent that petitioner's equipment and other related costs on its uncompleted contracts should not be included in an operating cycle calculation to the extent that such costs are met through client deposits and progress payments on such contracts. Petitioner may not reasonably accumulate earnings for working capital to fund costs already paid by its clients. To the extent that petitioner's "Inventory of work in process" account represent costs not reimbursed by the client deposits and progress payments, however, it represents a cost to which petitioner must devote its own working capital. Consequently, we think that to the extent petitioner's "Inventory of work in process" accounts represents its own use of its working capital, it is appropriate to include an "inventory" cycle in determining petitioner's operating cycle. We are unpersuaded by respondent's argument that the clients' deposits on petitioner's uncompleted contracts adequately perform the function of an inventory cycle. We think respondent's argument mixes apples and oranges. 325 The inventory cycle is part of a working cycle determination that attempts to trace a taxpayer's application and recoupment of its working capital. Petitioner's customer deposits on its uncompleted contracts represent a source of funds for its interim costs on its uncompleted contracts, generally reflected as accounts receivable, cash, or other liquid assets. Such deposits do not represent an application of petitioner's working capital and hence do not serve the function of an inventory cycle. Unfortunately, petitioner's books and records do not indicate the extent to which its "Inventory of work in process" account represents its use of its own working capital rather than client deposits. Petitioner reported as an asset item on its quarterly balance sheets the gross amounts of its costs on its uncompleted contracts; it similarly reported as liabilities the gross amounts of customer deposits on the uncompleted contracts. This reporting position is contrary to generally accepted accounting principles. The proper method of reporting these items involves netting on a contract-by-contract basis. The asset item "Costs of uncompleted contracts in excess of related billings"326 (the description preferred over "Inventory of work in process") properly includes only the sum of the amounts of excess costs incurred over related billings for that group of contracts having excess costs. Likewise, the liability item "Billings on uncompleted contracts in excess of related costs" (e.g., "customer deposits"), properly includes only the sum of the excess of billings over related costs for the group of contracts having excess billings. The separate asset and liability accounts, however, are not netted. See AICPA Accounting Research Bulletin No. 45 (ARB 45). See also Construction Contractors, Audit and Accounting Guide 50-51 (AICPA 1981). Although accounting principles are not conclusive for tax purposes, Thor Power Tool Co. v. Commissioner,435 U.S. 914">435 U.S. 914 (1978), we think that a taxpayer's books and records under the completed contract method of accounting prepared in accordance with ARB 45 will more accurately identify the amount of a taxpayer's excess costs over related billings on its uncompleted contracts, which we think is the proper measure of that taxpayer's "inventory" cycle in making an operating cycle analysis. For petitioner's fiscal quarter327 ending November 30, 1976, its books and records were audited by an outside CPA in conjunction with petitioner's purchase of Edward Loew's shares pursuant to the 1970 Stock Purchase Agreement. The audited balance sheet, prepared in accordance with ARB 45, showed $2,525 as "Costs of uncompleted contracts in excess of related billings" instead of the $69,662 of "Inventory of work in process" shown on petitioner's unaudited statement. Likewise, the audited balance sheet reported as a liability the amount of $183,108, identified as "Billings on uncompleted contracts in excess of related costs" rather than the $250,245 of "contract deposits" reported on petitioner's unaudited balance sheets. Except for this one quarter, there is no precise way of reconstructing petitioner's unaudited balance sheets under ARB 45 to accurately show the amount of petitioner's excess costs over related billings, which we have determined to be the appropriate starting point for the so-called "inventory" cycle. Nonetheless, in light of the large amount of foreign contracts (about 50 percent) for which petitioner could not obtain progress payments, we are persuaded that petitioner did in fact incur costs on many328 of its uncompleted contracts in excess of its related billings. Respondent's total omission of this element from the working cycle was erroneous. Accordingly, exercising our best judgment upon the facts of record, we would recast petitioner's books and records to approximate what we think would be the proper reportings under ARB 45. See Cohan v. Commissioner,39 F. 2d 540 (2d Cir. 1930). Our revision, reported in the above statements of assets and liabilities, also reflects petitioner's expansion of its foreign business after Loew's retirement in November of 1976. Finally, in computing petitioner's basic working capital needs under the working cycle formula, we would have used its peak inventory and accounts receivable figures rather than the average figures used by respondent's revenue agent. Most cases using peak figures have determined the period during which the aggregate of accounts receivable and inventory was the highest, rather than the separate periods during which each figure was highest. See Suwannee Lumber Manufacturing Co. v. Commissioner,T.C. Memo. 1979-477 n. 16 and cases cited therein. The underlying theory for this aggregation329 is that a peak accounts receivable period will usually follow a peak inventory period, representing a single application of the taxpayer's working capital in a single working cycle, and thus, the aggregation is necessary to prevent double dipping. In determining working capital needs as with the taxpayer's other reasonable business needs, we must allow accumulations that a prudent businessman would consider appropriate for his present and reasonably anticipated future business needs. Sec. 1.537-1(a), Income Tax Regs. Given the fluctuations of petitioner's market, we believe that a prudent businessman in petitioner's position would reasonably accumulate enough working capital to satisfy his peak needs. Moreover, given the long duration of the bulk of petitioner's contracts (14.29 to 21.67 months), we would use separate rather than aggregated peaks for inventory and accounts receivable; this long duration eliminates the double dipping concern. Our determination of petitioner's working capital under the Bardahl-Mead formula for one operating cycle would be as follows: Fiscal YearItem1975197619771. Gross sales/receipts $2,441,583.24$2,539,744.82$3,206,635.282. Peak accounts receivable 723,210.09633,981.77731,970.383. Cost of goods sold 1,564,505.321,557,852.171,716,582.894. Peak "work in process" 63,218.1633,624.1951,954.975. Annual operating expenses 2,170,621.432,228,923.432,652,582.866. Average accounts payable * 103,199.2231,029.18145,443.867. Accounts receivable cycle as percentage of tax year(line 2 divided by line 1).2962054 .2496242 .2282674 8. "Inventory" cycle as per- centage of tax year(line 4 divided by line 3).0404078 .0215837 .0302665 9. Accounts payable cycle as percentage of tax year(line 6 divided by line 5).0475436 .0139212 .0548310 10. Working cycle as percentageof tax year (line 7 plus line8 minus line 9).2891182 .2572867 .2037029 11. Working capital needed forone cycle (rounded)(line 5 times line 10)$ 627,566.00$ 573,472.00$ 540,339.00330 APPENDIX II We would thus determine net liquid assets as follows: Current Assets197519761977Cash$ 84,460.50$ 77,708.76$ 71,383.15Marketalbe securities119,680.8169,501.55163,798.05Commercial paper800,000.00900,000.00699,505.00Certificates of deposit300,000.00200,000.00Accounts receivable608,744.2783,558.69710,228.481 "Inventory of work in process" 23,335.882,101.6525,595.572 Other current assets 3,164.322,714.4432,626.88Total Current Assets$1,639,385.781,435,585.09$1,903,137.13Current LiabilitiesAccounts payable$ 71,513.51$ 20,256.30$ 514,651.961 "Contract deposits" 261,278.5549,745.02111,771.133 Taxes 116,540.5768,084.87225,495.194 Other current liabilities 320,630.55289,972.42398,784.25Total Current Liabilities$ 769,963.18$ 427,058.61$1,250,702.53Net Liquid Assets (Currentassets minus current$ 869,423.00$1,008,526.00$ 652,435.00liabilities) (Rounded)331 Footnotes1. Unless otherwise indicated, all section references are to the Internal Revenue Code of 1954, as amended and in effect during the years in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.↩2. As will be discussed in the Opinion below, we conclude that application of the Bardahl-Mead formula for determining petitioner's working capital needs is inappropriate under the facts of this case. Moreover, were we to apply that formula, we would reach a result entirely different from that reached by respondent. If the Bardahl-Mead formula were to be used, then petitioner's balance sheets should be revised to follow generally accepted accounting principles and to correct the errors in petitioner's accounting for its uncompleted contracts that respondent pointed out. We would use peak figures rather than an average of opening and closing figures. Also petitioner did have inventory, and an inventory cycle should have been included in respondent's Bardahl-Mead computation. Thus, were we to apply the Bardahl-Mead↩ formula in this case, we would find that petitioner's working capital needs under that formula would be $627,566, $573,472, and $540,339 for fiscal years 1975, 1976, and 1977, respectively, rather than the $396,837, $285,510, and $85,420 determined by respondent. See Appendix I to this Opinion for such computations and discussion thereof.3. Generally, a distribution in redemption of stock is treated as a distribution of earnings and profits to the extent not properly chargeable to the capital account. Sec. 312(a), (2). Of course, under section 535(c), such distributions do not reduce "accumulated taxable income." The parties have not raised, and we have not addressed, the nettlesome issue presented in GPD, Inc. v. Commissioner,60 T.C. 480">60 T.C. 480 (1973) (Court reviewed), revd. and remanded 508 F. 2d 1076↩ (6th Cir. 1974). There has been no argument in this case that the redemption of Loew's shares reduced petitioner's earnings and profits so that there was no accumulation of earnings in fiscal 1977. Here the issue is whether accumulation of some part of the earnings to fund purchases of stock by the corporation under the 1970 Stock Purchase Agreement was a reasonable business need of the corporation in fiscal 1975 and 1976.4. We will use these same figures. We are aware that if we used the balance sheets as adjusted to reflect generally accepted accounting principles (Footnote 2 and Appendix I to this Opinion), petitioner's available net liquid assets would be somewhat less, namely, $869,423, $1,008,526, and $652,435 for fiscal years 1975, 1976, and 1977, respectively. See Appendix II to this Opinion. Because of the result we reach in this case, we need not recast the balance sheets, particularly since neither party has requested us to do so. This $466,990 figure for working capital for 1976 would be clearly understated. That was the year during which the impasse between Loew and the minority stockholders was at its most critical point. That year there was little new business coming in and petitioner was spending practically nothing to try to obtain new business, hence the exacerbation of the problems between the factions. In this instance the 1.5 ratio is clearly the more reasonable figure and will be used.* The first rate assumes each shareholder was married and filed joint returns; the second assumes each was single. This includes Loew's net gain from petitioner's redemption of his shares. * Tax table income.↩5. Although petitioner submitted a timely statement pursuant to section 534(c), we found the grounds stated therein to be inadequate and accordingly denied petitioner's motion to shift the burden of proof to respondent pursuant to section 534(c)(2). See Rule 142(e). See generally Rutter v. Commissioner,81 T.C. 937">81 T.C. 937↩ (1983) (on appeal 5th Cir. March 8, 1984).6. While petitioner's balance sheets may show high liquidity, we cannot ignore the reasons for maintaining the assets in liquid form. In view of petitioner's business and method of operation, we do not regard the total net liquid assets as unusually large: amounts of $894,660, $1,045,928, and $674,176 for fiscal years 1975, 1976, and 1977, respectively. In any event, the total accumulated earnings and the yearly increases in same are considerably smaller for 1975 and 1976: FiscalAmount ofIncrease OverYearAccumulated EarningsPrior Year1974$285,568.751975431,995.84$146,427.091976584,264.46152,268.621977893,559.65309,295.19While accumulated earnings for 1977 and the increase for that year may seem substantial, the net liquid assets had in fact been substantially reduced that year by the corporation's redemption of Loew's shares for $654,000 in cash (which will be discussed in the text below), and the new controlling management group was cash-starved. The total accumulated earnings shown on the books exceeded the net liquid assets by some $219,383 in fiscal 1977.↩7. See also Wilcox Manufacturing Co. v. Commissioner,T.C. Memo. 1979-92; Farmers and Merchants Investment Co. v. Commissioner,T.C. Memo. 1970-161↩.8. Since Loew received $654,000 under the terms of the 1970 Stock Purchase Agreement for his 60 percent stock interest, the minority would be entitled to $436,000 under that agreement.↩*. The cases uniformly apply an average accounts payable figure in determining the accounts payable cycle, even in those cases where peak inventory and accounts receivable figures are used. We do likewise here. Our average accounts payable for each taxable year is calculated using the quarterly figures reflected in petitioner's in-house balance sheets rather than on the basis of the opening and closing figures used by respondent's revenue agent.↩1. These items use petitioner's labels, but the amounts are revised to reflect our adjustment to petitioner's books and records to follow generally accepted accounting principles, as discussed in Appendix I to this Opinion. ↩2. Employee Loan, accrued interest, and prepaid insurance. It appears that petitioner's asset "notes receivable less discount" was a long-term asset. The only period for which we are able to ascertain the current portion of this long-term asset was petitioner's fiscal quarter ended November 30, 1976. We are unable to ascertain the current portion of any of the periods herein; accordingly, we have excluded the full amounts of the notes. ↩3. Federal income taxes, state income taxes, and other taxes. ↩4. Accrued engineering (e.g., costs on completed contracts) deferred credits, accrued payroll taxes, accrued compensation and profit sharing contributions, and accrued dividends.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622655/	Mary Claire Heyser v. Commissioner.Heyser v. CommissionerDocket No. 655.United States Tax Court1944 Tax Ct. Memo LEXIS 203; 3 T.C.M. (CCH) 582; T.C.M. (RIA) 44213; June 14, 1944203 George S. Atkinson, Esq., Dallas Nat. Bank Bldg., Dallas, Tex., for the petitioner. J. Marvin Kelley, Esq., for the respondent. ARUNDELLMemorandum Findings of Fact and Opinion The Commissioner has determined a deficiency in income tax for the year 1940 in the amount of $1,353.63. This deficiency resulted from the inclusion in the gross income of the petitioner of certain amounts paid in accordance with the provision of three life insurance policies. The sole question presented for decision is whether or not those amounts constituted taxable income to the petitioner. The facts have been stipulated. Findings of Fact The petitioner, Mary Claire Heyser, is the widow of Estill Samuel Heyser. She filed her return for the period here involved with the Collector of Internal Revenue for the second district of Texas. Estill Samuel Heyser died on March 12, 1938, leaving three life insurance policies. The first of these, No. 159211, issued on May 25, 1926, in the amount of $25,000, named petitioner as the primary beneficiary, subject to the right of the insured to change the beneficiary. The policy provided that the insured might change the mode of payment in accordance with any of several204 specified options. By a rider dated August 14, 1934, the proceeds of the policy were made payable as follows: - $5,000 in cash to petitioner at the insured's death, the remainder to be held by the company in trust, with interest at the guaranteed rate of 3 1/2 per cent per annum and such additional interest as might be apportioned by the company from surplus interest earnings to be added at the end of each year to the fund held in trust. The rider provided that the trust fund should be paid to petitioner in monthly installments of $100.00 each, beginning one month from the date of the insured's death and continuing until the trust fund should be exhausted, with the provision that petitioner should have the right and option of withdrawing from the fund from time to time additional amounts not exceeding $2,500 in any one year while the trust fund should be sufficient to permit such withdrawals. The rider further provided that if petitioner should die before all of the trust fund should have been exhausted, the remainder should be paid to the insured's son, in a specified manner, or, in case of the son's death, to the insured's estate. Upon the death of E. S. Heyser the policy was 205 surrendered and cancelled and a contract was issued by the company whereby it promised to pay $20,000, with interest, in accordance with the terms of the rider, the first monthly installment of $100.00 being payable on April 12, 1938. During the taxable year 1940 the company paid to petitioner $1,200 under the provisions of this policy and on April 12, 1940, added to the trust fund interest in the sum of $756.29, of which $662.06 represented interest at the guaranteed rate of 3 1/2 per cent per annum and $94.23 represented additional surplus interest allowed by the company. The second policy, No. 159214-T, also issued on May 25, 1926, in the amount of $25,000, named the insured's estate as beneficiary subject to the right of the insured to change the beneficiary. By a rider dated August 14, 1934, it was provided that the proceeds of the policy should be held by the company in trust, and interest thereon at the guaranteed rate of 3 1/2 per cent per annum and such additional interest as might be apportioned by the company from surplus interest earnings, should be paid in monthly installments to petitioner so long as she lived. The rider further provided that upon the death of petitioner, 206 the trust fund should be held for the benefit of the insured's son, or paid over to him, or to insured's estate, according to specified conditions. Upon the death of E. S. Heyser this policy was surrendered and cancelled and a contract was issued by the company whereby it promised to pay petitioner interest as specified in the rider, so long as she should live, and after her death to discharge the trust in accordance with the provisions of the rider. The contract provided that the interest would be paid monthly as it accrued, the first payment to be made on May 15, 1938. During the taxable year 1940 the company paid to petitioner $981.00 under the provisions of this policy, being interest at the guaranteed rate of 3 1/2 per cent per annum in the amount of $876.00 and additional interest allowed by the company in the amount of $105.00. The third policy, No. 291110, issued on May 25, 1932, in the amount of $20,000, named the insured's mother as primary beneficiary, subject to the right of the insured to change the beneficiary. By a rider dated August 14, 1934, it was provided that the proceeds of the policy should be paid to the insured's mother in monthly installments of $150.00207 each, until the entire proceeds of the policy, with interest as therein specified, had been paid. The rider provided that interest at the guaranteed rate of 3 1/2 per cent per annum and such additional interest as might be apportioned by the company from surplus interest earnings would be allowed by the company and added at the end of each year to the amount remaining in the hands of the company. The rider further provided that after the death of insured's mother the payments would be made to petitioner, and after petitioner's death to insured's son or his estate in accordance with specified conditions. Upon the death of E. S. Heyser the third policy was surrendered and cancelled and a contract was issued by the company whereby it promised to pay the proceeds of the policy in accordance with the provisions of the rider. Estill Heyser's mother died some time prior to the year 1940. During the taxable year 1940 the company paid to the petitioner $1,800 under the provisions of this policy and added to the balance remaining in its hands $712.54, being interest at the guaranteed rate of 3 1/2 per cent per annum of $623.65 and additional interest allowed by the company in the amount of208 $88.89. On her income tax return for 1940 the petitioner reported as nontaxable income from the insurance contracts the amount of $2,449.83, which is the sum of the amounts of interest above set forth. In the statutory deficiency notice this amount was added to taxable income. Opinion ARUNDELL, Judge: The sole question posed and argued by counsel for the respective parties is whether or not the amount of $2,449.83 represents exempt income under section 22 (b) (1) of the Internal Revenue Code. That section reads as follows: Exclusions from Gross Income. - The following items shall not be included in gross income and shall be exempt from taxation under this chapter: "(1) Life Insurance. - Amounts received under a life insurance contract paid by reason of the death of the insured, whether in a single sum or otherwise (but if such amounts are held by the insurer under an agreement to pay interest thereon, the interest payments shall be included in gross income)." The respondent contends that the amounts in question fall within the parenthetical phrase of the above quoted section and argues that in this contention he is squarely supported by United States v. Heilbroner, 100 Fed. (2d) 379,209 and Edith M. Kinnear, 20 B.T.A. 718">20 B.T.A. 718. In the Heilbroner case, supra, the petitioner was the beneficiary of certain insurance policies by the terms of which the insurer was to pay annually to her for life a guaranteed sum equal to 3 per cent of the face value of the policies and such additional sums as might be apportioned to her by the insurer, the proceeds of the policies to be retained by the insurer until her death and then distributed to others. Amounts paid under the policies were held to be taxable income. In our opinion this case is controlling as to the payments received by the petitioner under the second policy described in our findings of fact. The amount of $981 paid to the petitioner under policy No. 159214-T and the deferred payment agreement issued in accordance therewith, we hold, was taxable to the petitioner. Under the first and third policies set forth in our findings of fact the beneficiary was to be paid fixed monthly installments as long as the funds should last and not, as in the case of the second policy, simply the interest on the face amount of the policy left with the insurer. It is true that to the balance of the210 funds each year was to be added interest at the rate of 3 1/2 per cent and such additional interest as might be apportioned by the insurer from surplus interest earnings. Although the amounts ultimately payable are thereby greater than the amounts that would have been payable in a lump sum if the insurer had not exercised his options, we think that the monthly installments received by the petitioner were "amounts received under a life insurance contract paid by reason of the death of the insured * * ." Commissioner v. Winslow, 113 Fed. (2d) 418, affirming 39 B.T.A. 373">39 B.T.A. 373; Commissioner v. Bartlett, 113 Fed. (2d) 766; Commissioner v. Buck, 120 Fed. (2d) 775, affirming 41 B.T.A. 99">41 B.T.A. 99; Allis v. LaBudde, 128 Fed. (2d) 838; and Kaufman v. United States, 131 Fed. (2d) 854. This conclusion is consonant with the position taken in General Counsel's Memorandum 23523 ( 1943 Internal Revenue Bulletin, No. 6, p. 9) in which it was stated that "under section 22 (b) (1) of the Internal211 Revenue Code and corresponding sections of the Revenue Acts of 1934, 1936, and 1938, there should be excluded from gross income not only the principal sum or capital value of a life insurance policy as of the date of death of the insured, but also any amounts added to such principal sum (when it is paid in installments), pursuant to an option exercised by the insured, by reason of the running of time." On authority of the above cited cases we hold that the payments made to petitioner under the first and third policies are not taxable to her under section 22 (b) (1) of the Internal Revenue Code. While what we have already said serves to dispose of the issues it may not be amiss to point out that it is at least questionable whether the petitioner has actually received or been credited with the amounts here in controversy under the first and third policies. The stipulation of facts has been drawn and the case argued upon the theory that what the petitioner was actually paid represented proceeds of the policies and that the interest was credited to the balances still with the insurer. The petitioner's right to this interest would appear to be purely contingent upon her survival. In the*212 circumstances it would seem doubtful, in any event, that the interest could be held to constitute income to the petitioner in the year 1940. Decision will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622659/	PHEBE WARREN MCKEAN DOWNS, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Downs v. CommissionerDocket No. 86798.United States Board of Tax Appeals36 B.T.A. 1129; 1937 BTA LEXIS 624; December 9, 1937, Promulgated 624 1. The grantor created a trust under which she retained no power to revoke or to have any of the income used for her benefit, ubt only the power to alter the distributive shares of principal and income of the beneficiaries of the classes named in the trust instrument. While the grantor reserved the power to alter the distributive shares of the beneficiaries, the proper construction of the trust instrument requires that all of the income and principal be paid over to some of the beneficiaries of the classes specified, and the grantor is without power to reduce all of the beneficial shares to a nominal sum and thereby effect a resulting trust for herself. Held, the income of the trust is not taxable to the grantor under either section 166 or 167, Revenue Act of 1934. 2. Part of the income of a trust was paid to a person other than the grantor pursuant to the mandatory terms of the trust. The grantor had no such powers over this part of the trust income as are the basis of tax undersection 167, Revenue Act of 1934, nor was the income used to discharge any legal obligations of the grantor. Held, that this part of the trust income is not taxable to the grantor under section625 167, Revenue Act of 1934, nor under the principle of Douglas v. Willcuts,296 U.S. 1">296 U.S. 1; held, further, that since there was not, within the meaning of the statute, any power vested in the grantor or any other person to revest in the grantor title to any part of the corpus, this income was not subject to tax under section 166, Revenue Act of 1934, although by the terms of the trust it would terminate and the corpus would revert to the grantor or her assignees by will upon the death or remarriage of the beneficiary of this part of the income. Virgil Y. Moore, Esq., for the petitioner. F. R. Shearer, Esq., and D. A. Taylor, Esq., for the respondent. HARRON 1130 This proceeding involves a deficiency in income tax for the year 1934 in the amount of $9,324.59 and a claimed overpayment by the petitioner of $2,883.16. The respondent added to the petitioner's reported income $13,426.84 as income of one trust and $4,000 as income of another trust, and disallowed a deduction of $5,000 from the petitioner's distributive share of a trust created by the petitioner's father. FINDINGS OF FACT. The facts have been stipulated626 and the stipulation is incorporated herein by reference. The following is a summary of the material facts contained in the stipulation: The petitioner is an individual residing in Bryn Mawr, Pennsylvania. Petitioner filed income tax return for the year 1934 with the collector in Philadelphia. The notice of deficiency was mailed to petitioner September 11, 1936. 1. On April 6, 1923, the petitioner created a trust with hereself and the Girard Trust Co. of Philadelphia as cotrustees, whereby she conveyed to the trustees, in trust, certain securities. The beneficiaries of the income of the trust named in the trust deed were the two sons and three daughters of the grantor, all of whom had attained majority and were under no disability at the time of the trust. The trust indenture directed the trustees, after the deduction of all proper and necessary charges and expenses, "to pay over the entire 1131 net income, quarterly, Three Thousand Dollars ($3,000) thereof per annum unto S. W. McK. Downs, son of Grantor, and the balance of the said net income equally share and share alike unto T. McKean Downs, son of Grantor, Elizabeth Wharton Evans, wife of Rowland Evans, daughter627 of Grantor, Phebe McKean Sargent, wife of J. Weir Sargent, daughter of Grantor, and Sarah Atlee Fisher, wife of Robert L. Fisher, daughter of Grantor, for and during the term of the respective natural lives of the said sons and daughters of Grantor." Upon the death of any of these children of the grantor the share of the net income was to be paid to the descendants of the deceased son or daughter of grantor per stirpes upon the principle of representation for and during the natural life of the survivor. After the death of the survivor of the grantor's children the net income was to be paid to the grantor's grandchildren share and share alike, descendants of deceased grandchildren to take their parent's share per stirpes upon the principle of representation. Upon the death of the survivor of grantor's children and the survivor of the grandchildren of the grantor living at the date of execution of the trust deed, the trustees were directed to pay over and distribute the corpus of the trust "together with all accumulations thereon and additions thereto" to all the grandchildren of grantor share and share alike, descendants of deceased grandchildren to take per stirpes upon628 the principle of representation. The last paragraph of the deed of trust declared the trust "to be irrevocable, save and except that Grantor reserves the right by deed duly executed by her and lodged with Trustees to alter, vary, and change the distributive shares of any and all distributees of either principal or income under this deed." The trust deed was delivered to and accepted by the trustees on April 6, 1923, who have functioned as such from that date to the present. The petitioner by seven subsequent deeds exercised her reserved power of altering the interests of the various beneficaries. Distributions of income of the trust have been made in accordance therewith. The last change, which was made May 20, 1935, at the same time that petitioner executed her will, provided for payment of "the entire net income" during her life to the three daughters, equally, and upon her death $200,000 of the corpus to be set aside to be paid to her grandson, Norris, Downs, 3rd, when he should reach 21, and prior thereto its income to be used for his support and education, the balance of the corpus to be distributed on the grantor's death to the three daughters and one of the sons, equally. 629 The entire net income of the trust each year was distributed to the beneficiaries and none was ever distributed to the grantor, or accumulated. 1132 During the taxable year 1934 the net income of the trust totaled $13,426.84, which was distributed to the three daughters of petitioner under the distribution in force at that time. No part of said income was distributed to the petitioner in 1934 or at all, and no part of said income was reported as income in petitioner's income tax return for the year 1934. The grantor never attempted to make any change in the trust instrument whereby any amount less than the whole income and corpus of the trust would be distributable to beneficiaries of the classes named in the trust instrument. In 1934 the beneficiaries of the trust, the daughters, were 37, 34, and 32 years of age. The two sons, who were originally beneficiaries, had been excluded from participation in receipt of the trust income. One son died prior to 1934 and T. McKean Downs was excluded from participation in the income of the trust in and after 1928 by the petitioner. 2. On May 22, 1931, the petitioner, as grantor, executed a deed of trust to the Fidelity-Philadelphia630 Trust Co. as trustee, whereby she conveyed to the trustee certain securities and cash for purposes stated in the trust deed. Prior to creation of this trust petitioner's son and daughter-in-law contemplated a divorce. Since the son did not have sufficient property to make appropriate provision for the support of his wife and child after divorce, petitioner voluntarily executed the trust to provide such support. The divorce was granted subsequent to execution of the trust. At the time of execution of trust the daughter-in-law was of full age and under no disability. The daughter-in-law, Anne Merrick Downs, was made beneficiary of the trust to the extent of $4,000 per annum for life or until her remarriage, any excess of the income of the trust to be paid to the petitioner and any deficiency in the income in any year to be made up out of corpus. Upon the death or remarriage of the daughter-in-law the trust was to terminate and the corpus was to revert to the granter or to her inter vivos assignees or her appointees by will. She reserved no powers of management or any other control over the trust corpus or over the $4,000 income payable annually to Anne Merrick Downs, expressly631 declaring the trust to be irrevocable and herself without power "at any time to revoke, change or annul" any of its provisions. During the taxable year 1934, Anne Merrick Downs was living and unmarried and received distributions from the trust in the amount of $4,000 and reported it in her income tax return. The excess of the net income of the trust over that amount was distributed to the petitioner, who reported it in her income tax return for that year. No part of the $4,000 was reported by petitioner in her income tax return. In his determination of the deficiency, respondent added to petitioner's taxable income $13,426.84, which was the total net income in 1133 1934 of the first trust; and $4,000, part of the net income of the second trust, proposing an overassessment in favor of Anne Merrick Downs on the basis of excluding this amount of $4,000 from her gross income. Respondent also disallowed a claimed deduction of $5,000 for interest. At the hearing respondent conceded this last item of determination to be in error. OPINION. HARRON: Respondent has conceded that petitioner properly deducted $5,000 from gross income which represented interest paid by petitioner632 on her indebtedness to a trust created by the will of her father. There is no issue remaining as to this item. The two remaining issues relate to whether petitioner is taxable on the net income of two trusts of which she was the grantor. Respondent contends that the income of the first trust created in 1923 is taxable to the petitioner under the provisions of section 167 of the Revenue Act of 1934, quoted below. 1 The first trust was created in 1923 by the petitioner with her children and grandchildren as the beneficiaries. None of the income of the trust was, under the terms of the trust, currently distributable to the grantor or could, in her discretion, be accumulated for future distribution to her. There was no provision in the trust instrument for revesting in the grantor title to the corpus of the trust. In fact, the trust was expressly "declared by Grantor, after due consideration, to be irrevocable." All of the children of the grantor, who were the immediate income beneficiaries, had already attained their majority at the time of creation of the trust so that the respondent concedes that the income would not be taxable as that of the grantor under the principle of633 ; ; and , because it did not go to discharge any legal obligation of the petitioner's to support her minor children. The respondent's case rests on the power 1134 reserved by the petitioner to alter the distributive shares of the distributees and his theory is, that under this reserved power the grantor might reduce the distributive shares of every beneficiary of income or principal to a nominal sum of, for example, $1 each. Then, since there was no disposition in the trust instrument of the balance of the income and principal, there would arise by operation of law a resulting trust in the grantor, and presumably she could draw down such principal and any accumulated income upon a possible termination of the trust. We do not need to consider the question of whether she could obtain a termination of the trust during her lifetime, under the law of resulting trusts, which appears doubtful and which apparently would be a necessary condition to the application of either section 167 or section 166 of the Revenue Act634 of 1934. We believe respondent's position must be disapproved on his construction of the power reserved by the grantor in the trust instrument itself. 635 We are of the opinion that the grantor did not retain the power to reduce the share of income and principal of every distributee to a nominal sum and thus effect a resulting trust for hereself, but that all of the income and principal was required to be distributed to beneficiaries of the classes specified in the trust instrument and that the only power retained was to alter the distribution as among those beneficiaries. This conclusion is based on our construction of the whole instrument, together with the apparent intention of the grantor as manifested therein, and the conduct of the parties during its operation. At the very outset the instrument provides for current distribution of the "entire net income" to the named beneficiaries. It then provides minutely the terms of distribution of income and principal to children and grandchildren and descendants of deceased children and grandchildren, with no reservation whatever of any income or remainder interest in the corpus to the grantor. But the respondent's case is based upon his construction of the last paragraph of the instrument. It reads: "All the trusts herein named and established are declared by Grantor, 636 after due consideration, to be irrevocable, save and except that Grantor reserves the right by deed duly executed by her and lodged with Trustees to alter, vary and change the distributive shares of any and all distributees of either principal or income under this deed." The general grant is contained in the first part of the sentence and clearly declares the instrument to be irrevocable; the "save and except" clause, like any exception to a grant, must necessarily be something of a smaller quantum than the grant itself else the grant would be a nullity. That construction is favored which makes the grant effective, and the trust instrument is always construed against the grantor and in favor of the beneficiaries. The excepting clause here, since it is an excepting clause, must be limited despite 1135 its broad terms to the power to alter the distribution as between beneficiaries of the named classes, for otherwise, as the respondent rightly contends, it would comprise the power to revoke, which is absolutely inconsistent with the preceding clause containing the irrevocable grant. When the trust instrument was declared to be irrevocable we think that meant irrevocable637 by any means whatever, whether by a direct revocation or by the exercise of a power reserved under the instrument coupled with the operation of a rule of law such as the rule regarding resulting trusts. We do not think the grantor's reserved power extended any farther than to alter the distribution as between the classes of beneficiaries specified. It does not appear to have been the grantor's intention to retain any interest whatever in the income or corpus of the trust for herself, and in the construction of a trust instrument the intention of the grantor is of utmost importance. The instrument carefully provides for the distribution of principal and income to her descendants upon all possible contingencies and the grantor is not named as a beneficiary under any conditions. Furthermore, the conduct of the parties to the trust which can be looked to for assistance in the construction of a trust instrument also bears out our conclusion. Although she made seven alterations in the distributive shares of beneficiaries at various dates from 1923 to 1935, she never attempted in any of these changes to prevent the distribution of the entire net income and principal of the trust to the638 beneficiaries or to cause any of it to be returned to herself. In fact all of the net income was each year distributed to all of the named beneficiaries. Construing her reserved power as limited to alterations of the distribution as among beneficiaries of the classes named in the trust instrument, the petitioner is not taxable upon the income of this trust under either section 167 or 166 because there was no possibility whatever of her obtaining possession or beneficial use of either the principal or income of the trust. The $13,426.84 income of this trust, for the year 1934, is not taxable to the petitioner. The second trust with which we are concerned was created by the petitioner on May 22, 1931. Under its terms $4,000 was to be paid annually to grantor's then daughter-in-law, Anne Merrick Downs, out of the income of the trust if sufficient, and if not, the deficiency in any year was to be paid out of principal. Any excess of income over $4,000 was distributable to the grantor. In the tax year involved there was such an excess which was distributed to the petitioner and she paid income tax thereon. The daughter-in-law was contemplating a divorce at the time of creation639 of the trust, and the trust instrument provided that the trust should terminate at the time of her death or remarriage and the corpus of the trust should 1136 be paid over to the grantor or to her inter vivos assignees or appointees by will. The grantor had no management or other powers over the corpus for the duration of the trust. The trust was expressly made irrevocable. The respondent is attempting to tax as income to the petitioner the $4,000 earned by the trust and paid to Anne Merrick Downs during the taxable year, in other words, respondent's contention is that all of the icnome of such a trust is taxable to the donor under section 166. The theory on which he bases this tax is not altogether clear. The deficiency letter lumps together both this trust and the one discussed above and says that the income of both is taxable to the grantor because "the agreement creating the trusts" reserves the right in the grantor to "alter, vary and change the distributive shares of any and all distributees of principal or income." However, the trusts are in actuality two separate trusts and the instrument creating the Anne Merrick Downs trust contains no such reservation640 as that quoted in the deficiency letter and no power of alteration whatever was reserved. At the hearing the respondent's counsel by his line of questioning indicated that he was attempting to show that the trust was established for the purpose of legally benefiting the grantor by warding off, for example, a suit for alienation of affections by Anne Merrick Downs against the grantor. However, none of the testimony supported such premise. There are no facts present to show that the income remained "in substance that of the grantor" within the rationale of ; see Regulations 94, art. 166-1. There was no legal obligation of any kind owing by the grantor to Anne Merrick Downs, nor does it appear that there was any motive of tax avoidance in establishment of the trust by the petitioner rather than by her son because it affirmatively appears that the son was without the property necessary to furnish the required trust corpus. There was not and is not any agreement for repayment by the son to the petitioner on account of her establishment of the trust. She received no legal benefit and discharged no legal obligation by her act and641 is, therefore, not taxable under the principle of On brief the respondent elected to submit his case on this issue "without argument." It is our opinion that respondent's action respecting the income of the second trust is in error because clearly the trust, by its terms, does not have such characteristics as would result in the application of section 167, Revenue Act of 1934, and we are of the opinion that it is not such trust as comes within the provisions 1137 of section 166 quoted in the margin. 2 That section deals with "revocable trusts", which are a well understood type of trust where a power to revoke either in whole or in part is retained by the grantor. Here the trust was expressly declared to be "irrevocable" in its entirety, the grantor being without power "at any time to revoke, change or annul any of the provisions herein contained." Respondent has not argued that the possibility of a reversion to the grantor upon the death or remarriage of Anne Merrick Downs brings the trust within section 166. A possibility of a reverter is, in our opinion, different from "the power to revest" which is comprehended by section642 166. We have here a trust for an indefinite term, "pour autre vie" or until the occurrence of a contingency over which the grantor has no control. No exercise of volition by the grantor is required nor would have any effect upon the return of the corpus to her. When and if it returns to the grantor or her assignees or appointees it will return by operation of the terms of the trust instrument itself and not by the exercise of any "power" retained by the grantor. We believe such a trust is not covered by the terms or intendment of section 166. See , where a trust for a term of one year at the end of which the trust property would revert to the grantor was held to be without the scope of section 166 of the Revenue Act of 1928, 3 which contains language of apparently the same import in the particulars material to this question as section 166 of the Revenue Act of 1934.4 See also, Magill, Taxable Income, pp. 281, 282. But compare , where the facts are distinguishable. There a grantor was held taxable under section 166 of the Revenue Act of 1934643 on income of a trust with a power of the ordinary type to amend or revoke although exercisable only upon certain conditions. We are satisfied that under its terms the trust is outside the scope of both sections 166 and 167. 1138 644 Petitioner has made claim for a refund and it appears that the Commissioner has made an adjustment in the item of foreign dividends in his determination, not at issue. Therefore, although all the issues are decided for the petitioner, a recomputation may be necessary under Rule 50. Decision will be entered under Rule 50.Footnotes1. SEC. 167. INCOME FOR BENEFIT OF GRANTOR. (a) Where any part of the income of a trust - (1) is, or in the discretion of the grantor or of any person not having a substantial adverse interest in the disposition of such part of the income may be, held or accumulated for future distribution to the grantor; or (2) may, in the discretion of the grantor or of any person not having a substantial adverse interest in the disposition of such part of the income, be distributed to the grantor; or (3) is, or in the discretion of the grantor or of any person not having a substantial adverse interest in the disposition of such part of the income may be, applied to the payment of premiums upon policies of insurance on the life of the grantor (except policies of insurance irrevocably payable for the purposes and in the manner specified in section 23(o) relating to the so-called "charitable contribution" deduction); then such part of the income of the trust shall be included in computing the net income of the grantor. (b) As used in this section, the term "in the discretion of the grantor" means "in the discretion of the grantor, either alone or in conjunction with any person not having a substantial adverse interest in the disposition of the part of the income in question." ↩2. SEC. 166. REVOCABLE TRUSTS. Where at any time the power to revest in the grantor title to any part of the corpus of the trust is vested - (1) in the grantor, either alone or in conjunction with any person not having a substantial adverse interest in the disposition of such part of the corpus or the income therefrom, or (2) in any person not having a substantial adverse interest in the disposition of such part of the corpus or the income therefrom, then the income of such part of the trust shall be included in computing the net income of the grantor. ↩3. SEC. 166. REVOCABLE TRUSTS. Where the grantor of a trust has, * * * the power to revest↩ in himself title to any part of the copus of the trust * * . [Italics supplied.] 4. SEC. 166. REVOCABLE TRUSTS. Where * * the power to revest in the grantor title to any part of the corpus of the trust is vested - (1) In the grantor, * * * . [Italics supplied.] ↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622622/	WEST HUNTSVILLE COTTON MILLS COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. HUNTSVILLE WAREHOUSE COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.West Huntsville Cotton Mills Co. v. CommissionerDocket Nos. 17843, 18741, 18743.United States Board of Tax Appeals22 B.T.A. 1216; 1931 BTA LEXIS 1991; April 16, 1931, Promulgated 1991 Held, the petitioners were not affiliated during the years 1918, 1919, and 1920, within the meaning of section 240(b) of the Revenue Act of 1918. William S. Pritchard, Esq., for the petitioners. Byron M. Coon, Esq., for the respondent. TRAMMELL1216 These are proceedings for the redetermination of deficiencies in income and profits taxes as follows: Docket No. 18741, for the fiscal year ended August 31, 1918, in the amount of $10,725.16, which represents the rejected portion of a claim for abatement; Docket No. 18743, for the fiscal year ended August 31, 1918, in the amount of $1,933.18, which represents the rejected portion of a claim for abatement; and Docket No. 17843, for the period from May 20, 1919, to August 31, 1919, and for the fiscal year ended August 31, 1920, in the amounts to $204.55 and $1,130.51, respectively. 1217 The proceedings were consolidated for hearing and decision, and all issues were settled by stipulation of the parties, except the issue involving affiliation of the petitioners, and except that upon redetermination of the deficiencies in accordance with our opinion herein, if the petitioners so1992 desire, further proceedings will be had under Rule 62(c). FINDINGS OF FACT. The petitioner, West Huntsville Cotton Mills Company, is an Alabama corporation with its principal place of business at Huntsville. It was organized in 1892, with an authorized capital stock of $50,000, divided into 500 shares of the par value of $100 each. During the taxable years, this corporation was engaged in the business of manufacturing cotton yarn. The petitioner, Huntsville Warehouse Company, is an Alabama corporation with its principal office at Huntsville. It was organized in 1895, with an authorized capital stock of $25,000 divided into 500 shares of the par value of $50 each. The cotton mills company was organized primarily for the purpose of manufacturing cotton yarn. No warehouse was provided for the storage of cotton at the time of its organization. Later, the directors decided that it was advisable to incorporate a separate company to operate a warehouse, and accordingly the warehouse company, one of the petitioners herein, was organized for the purpose of providing a storage house for cotton to be manufactured in the mills, and also to provide a medium for the purchase of1993 cotton and to operate a cotton gin for the ultimate benefit of the mills. The warehouse company also operated a fertilizer and feed business. From the date of organization of the warehouse company down to and through the taxable years, the same individuals comprised the directors and officers of the two corporations. The warehouse company built its warehouse on the block adjoining that occupied by the cotton mills. Shortly thereafter, a cotton gin, connected with the mills and the warehouse, was built. A small fertilizer and feed industry, operated by the warehouse company, was established in a separate location about three blocks away. All operations of both companies were controlled by one manager through a single office. T. W. Pratt was secretary and treasurer of both corporations from 1899 to 1928, in which latter year he died. He was actively in charge of the affairs of both companies throughout said period. The plants of the cotton mills company and of the warehouse company were physically connected by a track running from the 1218 mills to the warehouse, so that cotton could be moved directly from the warehouse into the mills. After the cotton gin was built, 1994 an overhead flume was constructed from the gin condenser to the warehouse bin so that the cotton after ginning could be passed through the flume by air process directly into the mills. The issued and outstanding stock of the cotton mills company was owned and held during the taxable years as follows: COTTON MILLS COMPANYAug. 31, 1917, to Aug. 31, 1918Aug. 31, 1918, to Aug. 31, 1919Aug. 31, 1919, to Aug. 31, 1920StockholdersSharesPer centSharesPer centSharesPer cent1. T. W. Pratt4013.564013.564016.252. A. P. Pierce258.47258.473. Ellie M. Davis258.47258.472510.164. Carroll M. Davis258.47258.472510.165. Emma M. Pierce5518.655518.655522.366. Jennie Pierce135.307. K. B. Seebach41.638. Marion Pierce41.639. Raymond C. Pierce41.6310. Lawrence Cooper1.4111. C. D. Fenhagen12542.3812542.387530.47Total295100.00295100.00246100.00The issued and outstanding stock of the warehouse company was owned and held during the taxable years as follows: WAREHOUSE COMPANYAug. 31, 1917, to Aug 31, 1918Aug. 31, 1918, to Aug. 31, 1919Aug. 31, 1919, to Aug. 31, 1920StockholdersSharesPer centSharesPer centSharesPer cent1. T. W. Pratt15831.615831.628356.62. J. Coons255.0255.0255.03. R. A. Pratt255.0255.0255.04. Gordon M. Buck12525.012525.0(1)5. A. P. Pierce428.4428.4(2)6. Ellie M. Davis428.4428.4428.47. Carroll M. Davis418.2418.2418.28. Emma C. Pierce428.4428.4428.49. Jennie Pierce214.210. K. B. Seebach71.411. Marion Pierce71.412. Raymond C. Pierce71.4Total500100.0500100.0500100.01995 The petitioner, West Huntsville Cotton Mills Company, during the fiscal year ended August 31, 1918, paid to T. W. Pratt, its president and secretary, the sum of $6,525.86 as salary for said year, and is entitled to deduct said amount from its gross income for said year. 1219 The petitioner, Huntsville Warehouse Company, is entitled to deduct from gross income for the fiscal year ended August 31, 1919, the sum of $3,600 paid to T. W. Pratt, its president and treasurer, as salary for said year. OPINION. TRAMMELL: The issues relating to salary deductions have been settled by stipulation of the parties, in accordance with which we have found that the petitioner, West Huntsville Cotton Mills Company, is entitled to deduct from its gross income for the fiscal year ended August 31, 1918, the amount of $6,525.86 on account of salary paid in said year to T. W. Pratt, its president and secretary. The allowance of said amount is in lieu of a deduction of $15,000 claimed by the petitioner and $3,600 allowed by the respondent. As stipulated by the parties, we have found that the petitioner, Huntsville Warehouse Company, is entitled to deduct from1996 gross income for the fiscal year ended August 31, 1919, the amount of $3,600 on account of salary paid in said year to T. W. Pratt, its president and treasurer, which is the amount allowed by the respondent. No other deductions for salary are claimed by or allowable to either petitioner, and the deficiencies will be recomputed accordingly. This leaves for decision here the single issue whether or not the petitioner corporations were affiliated during the taxable years within the meaning of section 240(b) of the Revenue Act of 1918, which provides that: (b) For the purpose of this section two or more domestic corporations shall be deemed to be affiliated * * * (2) if substantially all of the stock of two or more corporations is owned or controlled by the same interests. The respondent determined that the corporations were affiliated during the first taxable year, that is, the fiscal year ended August 31, 1918, and computed the deficiency for said year on the basis of a consolidated return. The respondent determined that the corporations were not affiliated during the fiscal years ended August 31, 1919, and 1920, and computed the deficiencies for those years on the basis of1997 separate returns. The petitioners allege that either they were not affiliated during any of the taxable years or were affiliated during all of the taxable years, and contend that if the respondent was correct in forcing consolidation for 1918, which resulted in an increased tax liability, then, since there was no change in stock ownership or control during the two remaining taxable years, they are entitled as a matter of right to such benefits as result from having their tax liability computed for those years on a consolidated basis also. 1220 The issue being raised as to the correctness of the respondent's determination respecting affiliation in 1918, we may not merely examine the record to determine whether or not there was any change in stock ownership or control in the subsequent years. The action of the Commissioner in requiring affiliation for 1918 is presumed to be correct, but affiliation for 1919 and 1920 can not be established by estoppel of the Commissioner on account of his action in a prior year. The precise question presented here is whether or not "substantially all of the stock" of the two corporations was "owned or controlled by the same interests" 1998 during all of the taxable years. In many respects, the evidence adduced is unsatisfactory in so far as it bears on the issue above stated. The stock record books of the two corporations were offered in evidence. They were in a confused state and from them it is difficult to determine the facts as to stock ownership during the respective years, but a statement of the stock ownership of each corporation was made up from the books. These statements, the parties stipulated, correctly set forth the ownership of the stock in the taxable years as disclosed by the stock books. From these statements, we have set forth in our findings of fact the names of the stockholders of each company, the number of shares shown to have been owned by each during each of the taxable years, and the percentages of the outstanding stock so standing in the names of such persons. In addition, the petitioners offered the testimony of the witness Stanley on the question of stock ownership. This witness became connected with the corporations in 1899, and has been with them continuously to the present time. Originally he was the bookkeeper, and later office manager, for both companies. He testified that1999 the stock books disclosed the true ownership of the stock of the petitioners during the taxable years "absolutely," but also testified contrary to the books and the stipulated statements as to their contents. A portion of his testimony is as follows: Q. Now, I will ask you whether shortly after this [beginning of the first taxable year] Mr. Pratt acquired the shares of Messrs. Coons, Winright and Fenhagen too? A. No, he acquired, as I understand it, he acquired the shares of most of these long before this. Q. I am wondering if your list is correct? A. That is what I am wondering too. He must have had Winright's long before this. It appears that the witness was testifying from a memorandum apparently inconsistent with the books which had been made up by some undisclosed person, and that he, the witness, had no personal knowledge on the subject. The witness stated that he had "never had charge of the certificate books," and was not familiar with the 1221 contents of those records. We do not think that this witness' testimony, which is contrary to the book records and statements taken therefrom, is entitled to weight, since he had no personal knowledge2000 of the facts. The stock book of the cotton mills company shows that certain certificates were canceled, the dates of cancellation not being shown, and that the stock was not thereafter reissued. Other certificates are shown merely to have been canceled and the dates of cancellation not shown. However, the record does not establish that the stock book of either company is in any wise incorrect, but only incomplete in the particulars mentioned. In finding the facts, we have accepted these records as establishing the ownership of the stock of the petitioners during the taxable years, in so far as definitely shown. We can not assume that stock shown by the certificate book to have been canceled was canceled subsequent to the taxable years, nor can we assume or find that canceled stock was reissued, or that any assignments were made, in the absence of some evidence. On the question of the relationship of the parties the witness was asked a question which purported to set forth certain relationships between the parties, but it does not appear that the witness answered the question or even intended to affirm the statement. 2001 Affiliation is a question of fact and a statutory status, the determination of which depends upon the evidence in each case, and must be determined separately for each year. , and authorities there cited. In , we discussed at length the question of what constitutes "control" of corporate stocks and what constitutes "the same interests" within the meaning of the taxing statute. There we reviewed many of the court decisions on the subject and referred to our own prior decisions. And, in the light of the facts disclosed by the evidence before us in the present proceedings, a discussion in detail of these points is not deemed necessary here. The record shows that during the fiscal years ended August 31, 1918, and August 31, 1919, C. D. Fenhagen owned 125 shares or 42.38 per cent of the total outstanding stock of the cotton mills company, and did not own any stock in the warehouse company. During the fiscal year ended August 31, 1920, Fenhagen owned 75 shares or 30.47 per cent of the outstanding stock of the cotton mills company, and no stock in the warehouse company. 2002 During the fiscal years ended in 1918 and 1919, Gordon M. Buck owned 125 shares or 25 per cent of the stock of the warehouse company, and did not own any stock in the cotton mills company. During the fiscal year 1920, Buck owned no stock in either company. 1222 During all three fiscal years, J. Coons and R. A. Pratt each owned 25 shares or a total of 10 per cent of the warehouse company's stock, but owned no stock in the cotton mills company. Thus, during 1918 and 1919, 35 per cent of the warehouse company stock was owned by persons who held no stock in the other company. During those same years, 42.38 per cent of the cotton mills company's stock was owned by a person who held no stock in the warehouse company. And it is not shown that the stock standing in the names of these persons was "controlled" in any manner by anyone else. Most of the remaining stockholders did not own the same percentage of stock in each company. For example, in 1918, T. W. Pratt owned 13.56 in one corporation and 31.6 in the other. Emma Pierce owned 18.65 in the one and 8.4 in the other. The record fails to show the relation of these persons to each other and does not disclose any facts2003 from which we can determine whether or not they constituted "the same interests." But, if it be true that all of the holders of stock in both companies together constituted "the same interests," yet they owned and/or controlled in the years 1918 and 1919 only 65 per cent of the outstanding stock of the one company and 57.62 per cent of the stock of the other. Under no theory approved by the courts or accepted in our prior decisions could it be said that these facts establish that "substantially all" of the stock of these two corporations was "owned or controlled by the same interests" in 1918 or 1919. During the fiscal year ended in 1920, the percentages of stock owned by holders common to both companies was somewhat higher, amounting to approximately 69.53 in one company and 90 in the other. However, in the absence of any facts from which we can determine what persons constituted "the same interests," we can not say that the respondent erred in holding that the petitioners were not affiliated in said year. We can not say that the above percentages of stock ownership constitute ownership of substantially all the stock in both corporations, nor does the evidence establish control2004 of minority stock not owned. We hold, therefore, that the petitioners were not affiliated within the meaning of the statute during any of the taxable years involved. In reaching this conclusion, we have carefully considered the opinion of the Court in , and we think the instant case on the facts is clearly distinguishable therefrom. In the Pelican case Behre and his family owned more than 95 per cent of the ice company's stock and they owned or controlled directly or indirectly through their holdings in the ice company, 90 per cent of the cold storage company's stock, if the stock held by Edenborn 1223 be not considered. The Court found that Edenborn held his stock as security for the amount he had advanced upon the purchase price of certain land, and that he could not sell his stock to an outsider without the consent of Behre and his family. No such situation is presented in the case at bar. As pointed out above, if we regard all the holders of stock in both companies here as constituting "the same interests," they owned or controlled in 1918 and 1919 only 65 per cent of the stock in one*2005 company and 57.62 per cent in the other. In 1920, the holders common to both companies held 90 per cent of the stock in the one and 69.53 in the other. We can not conclude, therefore, as did the Court in the Pelican case, that "substantially all" of the stock in these two corporations was held during the taxable years by "the same interests." The petitioners having raised the issue that the respondent failed to use proper comparatives in determining the profits tax under the provisions of section 328 of the Revenue Act of 1918, and all other issues having been disposed of herein, unless the parties agree upon the correct amount of the deficiencies recomputed in accordance with this opinion, Further proceedings will be had under Rule 62(c).Footnotes1. Sold. ↩2. Died. ↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622623/	WILLARD G. ROLFE, EXECUTOR, ESTATE OF CHARLES R. NOYES, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Rolfe v. CommissionerDocket No. 18486.United States Board of Tax Appeals16 B.T.A. 519; 1929 BTA LEXIS 2573; May 13, 1929, Promulgated 2573 1. ESTATE TAX - DEDUCTION FOR PROPERTY PREVIOUSLY TAXED WITHIN FIVE YEARS. - Certain Liberty bonds of the par value of $25,200 acquired by the present decedent with funds resulting from the sale of United States Steel preferred received from a prior decedent within five years identified as property previously taxed and allowed as a deduction from the gross estate of the present decedent. 2. Id. - Cash in the amount of $34,706.71, received by the present decedent from a prior decedent within five years and invested by the present decedent in the capital of a mercantile business conducted by the present decedent during his life, identified as property previously taxed in an amount equivalent to the same proportion to the total of such capital at its low point between the time when the $34,706.71 was added thereto and the date of the decedent's death was to the total at the time the contribution was made thereto. 3. TRANSFERS IN CONTEMPLATION OF DEATH. - Liberty bonds of par value of $25,000 placed by decedent in the hands of one of his business associates to be held or used for the benefit of two employees of decedent's business, held to have been gifts made in contemplation2574 of death and properly included in gross estate. O. W. Taylor, Esq., for the petitioner. L. L. Hight, Esq., for the respondent. TRUSSELL 520 The deficiencies here involved are in estate taxes and the petitioner alleges that the respondent erred (1) in refusing to allow a deduction as previously taxed property in the amount of $34,706.71, cash received from a prior decedent and invested as capital in the mercantile business of the present decedent, (2) in refusing to allow a deduction as previously taxed property of the amount of $24,844.31, value of Liberty bonds alleged to have been acquired in exchange for United States Steel preferred, received by the present decedent from a prior decedent, and (3) in refusing to allow a deduction as previously taxed property of the amount of $194.68, the value of certain Liberty bonds alleged to have been acquired by the present decedent in exchange for United States Steel preferred received from a prior decedent. FINDINGS OF FACT. The petitioner is the duly appointed, qualified and acting executor of the estate of Charles R. Noyes, who died on March 13, 1922. The prior decedent herein referred to2575 was Rossie L. Noyes, wife of Charles R. Noyes, who died on October 15, 1921. Charles R. Noyes, the present decedent, was the sole beneficiary under the will of his wife, Rossie L. Noyes, and executor of her estate. An estate-tax return was made for the estate of Rossie L. Noyes, which showed a total gross estate in the amount of $267,080.40 and a net estate after all deductions in the amount of $212,780.47, and an estate-tax liability in the amount of $4,383.41. Included in the estate of Rossie L. Noyes, as returned for Federal estate tax, and in Schedule B of such return, there were 300 shares of United States Steel preferred, valued at the date of her death in the amount of $33,037.50, plus $287.50 of accrued dividends. There was also included in the estate of Rossie L. Noyes, as returned for estate tax in Schedule C thereof, cash deposit balance in the First National Bank of Boston, with interest to October 15, 1921, $57,854.37. On November 7, 1921, Charles R. Noyes, as executor of his wife's estate, drew a check against her deposit in the First National Bank in the amount of $50,000 payable to W. W. & C. R. Noyes, a business then owned and conducted by the said Charles2576 R. Noyes, and there was then opened on the books of the said W. W. & C. R. Noyes an account with the estate of Rossie L. Noyes, and such account was on November 7, 1921, credited with the sum of $50,000. In the course of the administration of the estate of Rossie L. Noyes, and in the payments required during such administration, Charles R. Noyes drew against the above-mentioned $50,000 account various disbursements, until on December 21, 1921, the said balance in said account 521 was reduced to the amount of $34,706.71, and on that day, December 21, 1921, the said Charles R. Noyes caused the said balance of $34,706.71 to be transferred to his own capital account in the business of W. W. & C. R. Noyes. The said account of the estate of Rossie L. Noyes on the books of W. W. & C. R. Noyes was then closed. On December 21, 1921, the capital account of Charles R. Noyes on the books of W. W. & C. R. Noyes, and prior to the transfer of the said amount from the account of Rossie L. Noyes, stood in the amount of $56,373.56, and after the transfer of the balance of the said Rossie L. Noyes account Charles R. Noyes' capital account stood at $91,080.27. Following December 21, 1921, decedent's2577 capital account in this business decreased until it reached its low point of $79,958.07 on February 11, 1922. Thereafter, this capital account gradually increased and on March 13, 1922, the day of the death of Charles R. Noyes, the balance in his capital account on the books of W. W. & C. R. Noyes was $84,366.60. On December 5, 1921, Charles R. Noyes delivered the certificates representing the 300 shares of United States Steel preferred, received from his wife's estate, to Kidder, Peabody & Co., brokers and investment bankers, and caused the said certificates to be transferred from the name of Rossie L. Noyes to the name of Charles R. Noyes, and on or about December 10, 1921, received the transferred certificates as requested. On February 2, 1922, the said Charles R. Noyes caused the said transferred steel certificates to be again delivered to Kidder, Peabody & Co., with instructions to sell the same and with the proceeds thereof to purchase United States Fourth Liberty bonds due in 1938. His instructions were carried out by the brokers and on February 4 Kidder, Peabody & Co. delivered to the said Charles R. Noyes United States Liberty bonds of the issue above-mentioned in the2578 amount of $35,200 par, together with a check for $73.58, representing the balance due from the sale of the steel stock above referred to. Upon the receipt of said Liberty bonds the said Charles R. Noyes placed them in the hands of his associate, Willard G. Rolfe, with instructions directing Rolfe to lay aside $15,000 par value of said bonds for W. H. Fails and to hold $10,000 par value of said bonds for the benefit of James A. Flagg. Fails and Flagg were employees of the business of W. W. & C. R. Noyes. The $200 par value of said bonds was to be held for the benefit of Charles R. Noyes. In the estate-tax return made for the estate of Charles R. Noyes there was reported - In Schedule B:2 Fourth Liberty bonds par $200 valued at date of death$194.68In Schedule D:Interest in partnership of W. W. and C. R. Noyes, valued at dateof death as adjusted by respondent84,366.60In Schedule E:Transfers, the return showed $25,000 Fourth Liberty bonds, valuedat date of death24,771.80Together with 15 other gifts or transfers, none of which are herein controversy, aggregating95,675.00The total of Schedule H, funeral and administration expenses, andSchedule I, debts of decedent, were adjusted by the respondent inthe amount of35,561.712579 522 The respondent as shown by his deficiency notice, found the gross estate to be $636,984.03, and after allowing deductions for property previously taxed in the amount of $98,200, expenses of administration and debts in the amount of $35,561.71, and the specific exemption of $50,000, determined the net estate to be $453,222.34. The $98,200 allowed by the respondent as property previously taxed does not include the amounts here in controversy. All of these properties were situated in the United States. It is here found that Liberty bonds in the amount of $24,771.80 and $194.68 and interest in partnership capital in the amount of $34,706.71 are identified as property previously taxed and these amounts added to the deductions heretofore allowed by the respondent produce a total of less than one-half of the gross estate as determined by the respondent, and no parts of the properties identified as previously taxed were deducted under paragraphs 1 and 3 of subdivision (a) of section 403 of the Revenue Act of 1921. OPINION. TRUSSELL: The issues here in controversy are governed by the Revenue Act of 1921 and section 403(a), which provides as follows: SEC. 403. That2580 for the purpose of the tax the value of the net estate shall be determined - (a) In the case of a resident, by deducting from the value of the gross estate - (1) Such amounts for funeral expenses, administration expenses, claims against the estate, unpaid mortgages upon, or any indebtedness in respect to, property (except, in the case of a resident decedent, where such property is not situated in the United States), losses incurred during the settlement of the estate arising from fires, storms, shipwreck, or other casualty, or from theft, when such losses are not compensated for by insurance or otherwise, and such amounts reasonably required and actually expended for the support during the settlement of the estate of those dependent upon the decedent, as are allowed by the laws of the jurisdiction, whether within or without the United States, under which the estate is being administered, but not including any income taxes upon income received after the death of the decedent, or any estate, succession, legacy, or inheritance taxes; (2) An amount equal to the value of any property forming a part of the gross estate situated in the United States of any person who died within five2581 years prior to the death of the decedent where such property can be identified as having been received by the decedent from such prior decedent 523 by gift, bequest, devise, or inheritance, or which can be identified as having been acquired in exchange for property so received: Provided, That this deduction shall be allowed only where an estate tax under this or any prior Act of Congress was paid by or on behalf of the estate of such prior decedent, and only in the amount of the value palced by the Commissioner on such property in determining the value of the gross estate of such prior decedent, and only to the extent that the value of such property is included in the decedent's gross estate and not deducted under paragraphs (1) or (3) of subdivision (a) of this section. This deduction shall be made in case of the estates of all decedents who have died since September 8, 1916; (3) The amount of all bequests, legacies, devises, or transfers, except bona fide sales for a fair consideration in money or money's worth, in contemplation of or intended to take effect in possession or enjoyment at or after the decedent's death, to or for the use of the United States, any State, 2582 Territory, any political subdivision thereof, or the District of Columbia, for exclusively public purposes, or to or for the use of any corporation organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes, including the encouragement of art and the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private stockholder or individual, or to a trustee or trustees exclusively for such religious, charitable, scientific, literary, or educational purposes. This deduction shall be made in case of the estates of all decedents who have died since December 31, 1917; and (4) An exemption of $50,000. In a long line of decisions this Board has uniformly held that property acquired by a decedent with funds obtained from the sale or other disposition of properties acquired from a prior decedent and taxed within five years and identified as thus acquired may be deducted from the gross estate of a present decedent. Elmer E. Rodenbough, Executor,1 B.T.A. 477">1 B.T.A. 477; 2583 Estate of Isabella C. Hoffman,3 B.T.A. 1361">3 B.T.A. 1361; Estate of George W. Burkitt,3 B.T.A. 1158">3 B.T.A. 1158; Walter G. Pietsch, Executor,6 B.T.A. 582">6 B.T.A. 582; Honoro Gibson Pelton, Executrix,7 B.T.A. 1144">7 B.T.A. 1144; John F. Archbold, Executor,8 B.T.A. 919">8 B.T.A. 919; John D. Ankeny, Executor,9 B.T.A. 1302">9 B.T.A. 1302; Northern Trust Co., Executor,9 B.T.A. 1310">9 B.T.A. 1310; Seaboard National Bank, Executor,11 B.T.A. 1386">11 B.T.A. 1386; Moses E. Greenebaum, Executor,12 B.T.A. 823">12 B.T.A. 823; Arthur W. Bingham, Executor,15 B.T.A. 1001">15 B.T.A. 1001; and Frances Brawner, Executrix,15 B.T.A. 1122">15 B.T.A. 1122. Two of these decisions have been approved and affirmed by circuit courts in Rodenbough v. United States, 25 Fed.(2d) 13, and Archbold v. Blair, 30 Fed.(2d) 774. These cited cases, without exception, are authority for holding in this case that all the Liberty bonds here in controversy are sufficiently identified as to entitle them to be deducted as property previously taxed. In the recent case of Frances Brawner, Executrix, v. Commissioner, supra, we have held2584 that where a decedent received from a prior decedent cash in the amount of $100,000 and deposited the 524 same to his credit in a bank that the undrawn balance of said amount remaining in the bank at the date of decedent's death was sufficiently identified as property previously taxed to authorize its deduction from gross estate, although other funds had been deposited in and withdrawn from the same account. In the case of Arthur W. Bingham, Executor, supra, we have recently held, where a decedent had received from a prior decedent certain railroad stocks and had sold them, realizing from such sale the amount of $28,987.50, and had used such funds, together with $21,012.50 acquired from other sources, with which it purchased $50,000 par value of stock in a corporation in which decedent had prior thereto already held an interest, that the $28,987.50 interest in such stock was sufficiently identified as property previously taxed to authorize its deduction from gross estate. In the present case we find that the decedent received from a prior-taxed estate the sum of $34,706.71 and that with this amount he acquired an additional capital interest in a mercantile2585 business in which he had previously held an interest and that at the time he acquired this additional interest in the business his total interest therein amounted to $91,080.27, and that on the day of his death his capital interest in said business amounted to the total of $84,366.60, which latter figure has been included in his gross estate. This case differs from the situation described in the Bingham case, supra, only in respect to the evidence of ownership of interest in a business. In the Bingham case the decedent acquired a capital interest in an incorporated business evidenced by certificates of stock, while in the present case the decedent acquired a capital interest in a mercantile business evidenced by his book account of capital contributed to such business. The true character of the properties involved in these two cases is not essentially different. We are, therefore, led to the conclusion that the proportionate part of the $34,706.71 remaining in the capital account of this decedent on the day when such capital account stood at the lowest point between the date when the amount was added to the account and the date of decedent's death is a proper deduction2586 from gross estate under the provisions of law authorizing the deduction of property previously taxed. The evidence respecting the transfer of $25,000 par value of Liberty bonds made prior to decedent's death leads us to believe that such transfer was made to take effect at death and that said bonds were properly included in the decedent's gross estate by the respondent. Having found, however, that said bonds are deductible from gross estate as previously taxed properties, the issue becomes unimportant. 525 The deficiency should be recomputed in accordance with the foregoing findings of fact and opinion. Reviewed by the Board. Decision will be made pursuant to Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622625/	ERNEST L. HENTON, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Henton v. CommissionerDocket No. 24508.United States Board of Tax Appeals10 B.T.A. 21; 1928 BTA LEXIS 4217; January 19, 1928, Promulgated 4217 Net income received by a lessee from the operation of an oil well upon the restricted lands of a citizen of the Cherokee Tribe of Indians, held to be taxable. L. A. Rowland, Esq., and E. R. Willson, C.P.A., for the petitioner. Shelby S. Faulkner, Esq., for the respondent. MILLIKEN 21 This proceeding results from the determination by respondent of a deficiency in income tax for the calendar year 1920, in the sum of $757.44. Three errors are assigned: (1) The failure of respondent to allow as a deduction a loss sustained on the stock of the Automatic Bookkeeping Co.; (2) failure of respondent to allow as a deduction a loss sustained in the amount of $1,000, on the stock of the Cinnebar Company and a loss of $1,000 represented by a note endorsed by petitioner for the Cinnebar Company, which petitioner was forced to pay; (3) the net income received by petitioner from the operation of an oil well upon the restricted lands of a citizen of the Cherokee Tribe of Indians does not constitute taxable income. At the hearing of this cause, petitioner waived error (1), and respondent confessed error relative to error (2). FINDINGS OF FACT. 4218 Sally E. Hicks was a citizen of the Cherokee Nation, and executed an oil and gas mining lease in favor of Arthur E. Paulger, covering certain lands situate in the State of Oklahoma, which lease bears an endorsement of two subsequent assignments, finally vesting an undivided one-fourth interest in the lease in favor of petitioner. All of the assignments of the lease were approved by the Secretary of the Interior. Sally E. Hicks was a full-blooded Cherokee, restricted and the restrictions against alienation of her lands have not been removed by the Secretary of the Interior. During the year 1920, the net income received by petitioner on account of the oil and gas lease of which he was the lessee, amounted to $1,396.64. OPINION. MILLIKEN: The parties having filed a stipulation relative to errors (1) and (2), there is left for consideration only the question of the taxability of the net income received as a lessee in the year 1920 from the oil and gas lease here in question. In , we considered the same question and upon authority of the decision of the United States Supreme Court in the 22 case of *4219 , we held the net income received to be taxable. 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/4622626/	Richard P. and Betty Lou Joyce v. Commissioner.Joyce v. CommissionerDocket No. 2655-69-SC.United States Tax CourtT.C. Memo 1969-258; 1969 Tax Ct. Memo LEXIS 34; 28 T.C.M. (CCH) 1333; T.C.M. (RIA) 69258; December 4, 1969, Filed. Richard P. Joyce, pro se, 2936 Strong St., Highland, Ind. Bernard J. Boyle and Wayne I. Chertow, for the respondent. TIETJENSMemorandum Findings of Fact and Opinion TIETJENS, Judge: The Commissioner determined a deficiency in petitioners' Federal income tax for the taxable year 1966 in the amount of $167.14 resulting from the disallowance of claimed deductions and corresponding adjustments to income in the amount of $879.15. Petitioners contest only $573.36 of the disallowed deductions which relate generally to educational expenses of Richard. Findings of Fact Richard P. and Betty Lou Joyce (hereinafter referred to as petitioners35 or Richard and Betty) resided in Highland, Indiana at the time the petition herein was filed. They filed their Federal income tax return for the taxable year 1966 with the district director of internal revenue, Indianapolis, Indiana. Petitioner Richard is employed by I.I.T.Research Institute as an associate research engineer and is a member of the professional staff of that organization and has been such since 1962. His work involves a combination of both electrical and mechanical engineering directed to making physical measurements by instrumentation. During 1966 Richard took two courses at the Illinois Institute of Technology in Chicago; the courses were in French and chemistry. Richard received a degree from Illinois Institute of Technology in June 1967 and thereafter received a promotion to his present position as an associate research engineer. I.I.T. did not require Richard to seek additional education in order to maintain his former position as an assistant engineer. Richard is doing the same type of work now as he was engaged in when he joined I.I.T. in 1962. The two courses were not specifically or directly related to Richard's job as an engineer. On his 1966 Federal36 income tax return, Richard deducted the following amounts as "expense for education:" Tuition$195.00Books and Supplies48.36Transportation 330.00Total$573.36The Commissioner totally disallowed this deduction, and in conjunction with other disallowances, determined the deficiency involved herein. Opinion The only question presented is whether the claimed deductions for educational expenses are allowable under section 162, I.R.C. 1954, and specifically section 1.162-5, Income Tax Regs., or are not allowable as personal expenses under section 262, I.R.C. 1954. The regulations provide in part: Section 1.162-5 Expenses for education. (a) General rule. Expenditures made by an individual for education * * * are deductible as ordinary and necessary business expenses (even though the education may lead to a degree) if the education - (1) Maintains or improves skills required by the individual in his employment * * , or (2) Meets the express requirements of the individual's employer * * imposed as a condition to the retention by the individual of an established employment37 relationship, status, or rate of compensation. 1334 To qualify under subsection (a)(2), the educational requirement must be an express one of the employer. Lawrence H. Bakken, 51 T.C. 603">51 T.C. 603, on appeal (C.A. 9, April 11, 1969). Richard specifically testified there was no such requirement, although promotion without a degree would be more difficult and he further testified that his job was not in jeopardy. Therefore, under subsection (a)(2), his claimed deduction is not allowable. Under subsection (a)(1), Richard must show that the education was undertaken primarily to maintain or improve his job skills. James A. Carroll, 51 T.C. 213">51 T.C. 213, affd. - F. 2d - (C.A. 7, Oct. 22, 1969). Again, he testified that the two courses he took had no direct relationship to the performance of his duties in his employment capacity and further that he is performing the same work as he performed when he first began his employment. Therefore, Richard is not entitled to a deduction under subsection (a)(1). We hold that Richard has failed to establish that he is entitled to his claimed deduction for educational expenses, including transportation. Accordingly, Decision will38 be entered for the respondent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622630/	LILLIAN T. LATTY, EXECUTRIX OF THE ESTATE OF S. D. LATTY, DECEASED, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Latty v. CommissionerDocket No. 40484.United States Board of Tax Appeals23 B.T.A. 1250; 1931 BTA LEXIS 1743; July 27, 1931, Promulgated 1743 1. Decedent, contemporaneously with the execution of his will leaving his estate to another, agreed to provide a trust fund for his daughter, either in his lifetime or after his death, in consideration of her promise to accept the agreement in full satisfaction of all claims, legal, moral and sentimental, growing out of her relationship to him, and to make no further claim or demand whatsoever against him or his estate, and not to contest any will theretofore or thereafter made by him. The decedent did not during his lifetime pay in trust any part of the amount mentioned in the agreement, and, after his death, his executrix made a payment directly to the daughter and claims the deduction thereof in determining the net estate. Held (assuming that, by virtue of the contract, there was a claim against the estate, and without questioning the bona fides of the transaction or the sufficiency of the consideration to support the contract as a matter of law), that the consideration was in essence a promise to refrain from claiming more, and was not in money's worth within the requirement of section 303(a)(1), Revenue Act of 1924. 2. Proceeds in excess of $40,000 of insurance on1744 the life of decedent payable to beneficiaries other than the estate which, so far as the record shows, may be subject to the decedent's right to change the beneficiaries, are within decedent's gross estate. John T. Scott, Esq., for the petitioner. Arthur Carnduff, Esq., and Frank J. Doudican, Esq., for the respondent. STERNHAGEN 1250 The respondent determined a deficiency in estate tax of $5,275.85, (1) disallowing as a deduction $53,381.55, a claim said to be "incurred or contracted bona fide and for a fair consideration in money or money's worth"; and (2) including in the gross estate the proceeds of certain insurance policies on the life of decedent in excess of $40,000. 1251 The petitioner alleges and the answer admits that inheritance tax in the sum of $28,839.94 has been paid to the State of Ohio in respect of the property in the estate of decedent, and that, if it be determined that any additional tax should be assessed against the estate, the amount of such additional tax should be credited with an amount equal to 25 per cent thereof on account of the inheritance tax paid to the State of Ohio. FINDINGS OF FACT. 1745 S. D. Latty died on January 31, 1926, a resident of Lakewood, Ohio. He was survived by his widow, Lillian T. Latty, who was his second wife, and by a daughter by his first wife, Helen Latty Jackson, who, before her marriage, was known as Helen Marie Latty. He had no other children. The decedent left no real estate. 1. The decedent left a last will and testament, executed on December 1, 1923, which was admitted to probate in Cuyhahoga County, Ohio. After bequeathing the sum of $100 to each of any children born after the execution of his will, the decedent bequeathed and devised the residue of his estate to his wife, Lillian T. Latty, absolutely and in fee simple. The will contained the following recital: I make no provision herein for my daughter, Helen Marie Latty, for the reason that I have heretofore made ample provision for her to her full satisfaction, as evidenced by a certain agreement between her and myself, dated December 1, 1923. The agreement referred to in the above-quoted paragraph of the will is as follows: THAT WHEREAS the Father, on or about the 26th day of October, 1892, intermattied with Miss Edith Petitt, and to such union was born the Daughter on1746 or about the 9th day of October, 1900, being the only child of such union; and thereafter, on or about the 2nd day of July, 1904, the father and the mother of the said Daughter, disagreeing on many and divers things, were divorced by action of the Common Pleas Court of Cuyahoga County, Ohio, and a decree thereof was duly entered, and a full and adequate settlement of alimony was made between the parties to the suit; and thereafter, on or about the year 1905, the mother, Edith P. Latty, inter-married with one Harry Johnson, and the Daughter went to reside with her mother in the City of South Bend, Indiana; and thereafter the said Mrs. Johnson demanded of the Father compensation for the maintenance, education and support during minority of the Daughter, and in pursuance of this demand, upon which suit was brought, a settlement was made in full for the said maintenance, education and support of the Daughter in the sum of $10,000; and WHEREAS thereafter, the said Harry Johnson died; and on or about the 9th day of October, 1918, the said Daughter became of age and the mother and Daughter have since resided together in various places in the United States, and for some time last past in1747 southern California; and before the majority of the Daughter the Father paid her way at school, and for the last five or six years, whether in Miss Merrell's School, in New York, or while residing with 1252 her mother in California or elsewhere, the Father has supported the Daughter and has paid for her entire maintenance; and WHEREAS the said Father, after the said decree of divorce and after the marriage of said Edith P. Latty to said Harry Johnson, inter-married with Miss Lillian I. Thomas on or about the 14th day of September, 1905, with whom he has lived and is now living, and who, by her careful management and full companionship with the Father, has been of great assistance in the progress of his social life as well as his business affairs, and to whom the said Father believes himself under great obligations for making an agreeable and satisfactory home life, and for participating in the solution of his business and financial problems; and WHEREAS because the Father's home life has been so full of companionship during its long continuance while he has been deprived, by virtue of the circumstances, of the companionship of the Daughter, the Father is desirous of doing1748 his full duty in the making of any will or other provision for the enjoyment of his property after his death by the said Mrs. Lillian T. Latty; and WHEREAS the Daughter has fully appreciated the family situation with respect to her mother and Mrs. Lillian T. Latty, but has been told that the Father's health was failing and that he was unable to make a last will and testament disposing of his property in such a manner as to stand inquiry in the courts as to his capacity to make such disposition; but nevertheless and by reason thereof, is desirous of bringing such matters to the attention of the Father for such solution as may be mutually agreeable, occupying such relations as they do, inasmuch as such questions can be better settled in this way than for them to remain in a state of mutual ignorance and distrust; and WHEREAS the Daughter has approached the father on the subject of the disposition of his property and has expressed an anxiety as to its disposition and wishes to avoid any alienation of her father's interest in her; that might result even in the cutting off of the Daughter from participation as an heir to the said property of the Father, and it has been mutually agreeable1749 to the parties hereto to discuss these questions with a view of making some present adjustment and without permitting resort to the courts of anybody that might be interested therein in case of the death of the Father; and WHEREAS the Daughter has made an examination of the affairs of the Father and of his mental condition and capacity, and has found by conversation with him and with those around him and with his physician, that he is of absolutely sound and disposing mind and judgment and that he is not in failing health, physically or mentally, and desires to make this agreement in full view of the facts which she has found to be true, and which she herein and hereby agrees and irrevocably concedes upon the considerations hereinafter named, are true, namely, that there is not the slightest impediment of any kind of description in the health, mind or memory of the said Father precluding in any manner the fullest settlement of his relations with the Daughter as herein set forth; and WHEREAS the Daughter has further taken account of all the relationships of the Father and has advised with counsel, being in fact the same counsel as has represented her mother in relations heretofore1750 described with the father, to wit, Mr. Andrew Squire, of Cleveland, Ohio, and has been advised and has found upon such advice the fact to be that the provision herein made and to be made for her out of the property of her father is, under all the circumstances, fair, adequate, just and complete, and that the terms of the settlement hereinafter made are not only to her advantage for the monetary provision therein made for her, but are a source of satisfaction to her and to the Father by virtue of the complete accord herein witnessed for all time, so that neither party 1253 hereto shall have any anxiety beyond the performance of this agreement with reference to the future relations during the lifetime of both or of the situation and well-being of the survivor; and WHEREAS the Daughter upon her part realizing that she is the only child of the Father and that under the peculiar circumstances she has not been able to abide with him continuously as in ordinary life, recognizes that he is fully justified in settling the claims and demands of others of his family and of Mrs. Lillian T. Latty, and that he has and should have the fullest latitude to care for any and all objects of1751 his concern and bounty in the making of any disposition of his property that he may deem best, apart from the provision made for her herein, and also is willing to agree, and hereby does agree, that any disposition he may make of the rest of his property not covered by this contract is fair, just and proper, and that she is not concerned in any degree in his making such disposition of the remainder of his property, looking only to this contract and the provisions herein made for her full, complete and adequate participation in any and all of the property of the said Father, wheresoever situate, whenever acquired and howsoever disposed of; NOW, THEREFORE, being fully advised in the premises and agreeing, upon the conditions hereinafter named, that the situation is as above described, the said Daughter upon her part agrees to accept and does hereby accept the agreement of the Father hereinafter contained as a full settlement and discharge of all claims, legal, moral and sentimental, which she has or ought to have or any time in the future may have against the Father growing out of her relationship as a daughter to him; and she further agrees that he is of sound and disposing mind and1752 memory, that this contract was made while he was in the fullest possession of his faculties, that it is a fair and just provision under all the circumstances surrounding his life and condition, and that she will make no claim or demand against the Father either during his life or after his death for any support, maintenance or distribution to her as an heir-at-law or in any other way, shape or manner, that she will respect and abide by any last will and testament that the said Father may have made or may hereafter make, that she will enter into no suit to contest any such will, and will permit any court of competent jurisdiction to enjoin her fully and completely from so doing, and that she does hereby preclude herself by solemn agreement from making any demand against the estate or property of the said Father, from making any contest of any last will and testament he may leave, and to protect his estate free, clear and harmless from any such claim or demand made through or under her or by her authority or in her behalf. In consideration of all of the said agreements of the said Daughter and in full settlement of all of his obligations as a Father, legal, moral and sentimental, 1753 and in full settlement of any right which, but for this agreement, might vest in the Daughter during the lifetime of the Father, or might exist against his estate after his death, the Father does hereby agree to make the following provision for the Daughter, to wit: He will pay or cause to be paid to The Union Trust Company, of Cleveland, Ohio, or such other Trust Company as he may at the time of such payment select, and in accordance with the following conditions, and for her benefit, either in cash or in such securities as may be acceptable by The Union Trust Company as of the amount herein mentioned, the sum of Fifty Thousand Dollars ($50,000.00), and that until such time as he shall make such payment, he will pay to her as income thereon Twenty-five Hundred Dollars ($25,000.00) per year, or five per cent. (5%) upon such amount, payable semi-monthly on the first and fifteen day of each month, by mailing a check to her order or 1254 to the order of any bank that she may from time to time designate, it being understood that said sum of Fifty Thousand Dollars ($50,000.00) may, at the election of the Father, be paid in installments from time to time as may be convenient to1754 him, and that to the extent of such payments from time to time, said yearly payment of Twenty-five Hundred Dollars ($2500.00) to the Daughter shall be proportionately reduced. Said sum of Fifty Thousand Dollars ($50,000.00) or any part thereof when so paid by the Father or his estate to said Trust Company in cash or securities, together with the income therefrom, shall be by said Trust Company held in trust for the said Daughter, subject to the following terms and conditions: 1. The trustee shall have full power and authority to assign, sell, transfer and deliver the said trust property, to invest, reinvest, mortgage, manage, control and deal therewith upon such terms and conditions as in its judgment it may see fit as full and absolute owner, and in the execution of said trust, to comply with all legal requirements as to writings, deeds, mortgages or other formalities. All statutory limitations or requirements as to the investment of trust funds are hereby expressly waived. The trustee shall have full power and authority to decide as to what is income and what is principal as to any of the obligations of the said trust, and the decision of said Trustee shall be final. A liberal1755 allowance, however, in favor of income shall be made by the trustee. Said trustee shall not be liable in carrying out the terms of this trust for any act or misconduct of its agents or attorneys, but only for its own willful misconduct. 2. The trustee shall pay the net income to said Daughter at least semiannually and shall make at least annual statements of the investments, income, etc., such payments shall be made to her during the period of her natural life, without power of anticipation, except as hereinafter provided, and without any right or power in the said beneficiary to assign, sell, mortgage or otherwise alienate the said income or the principal of said trust fund. At the death of the said beneficiary, the trust fund shall be distributed by the said Trust Company as she may have by last will and testament appointed, or should she die intestate, as the laws of the State under which her estate shall be administered shall direct. 3. In the event of any pledge, assignment, legal process, or attempted alienation, voluntary or involuntary, affecting the income or principal of this trust, or of any rights of beneficiary hereunder, or in the event of any attempt by any1756 creditor or other person or persons to subject the said income or principal to any claim or demand whatsoever, the said trustee or its successor in trust, shall have the right to terminate any and all payments hereunder, and are authorized to retain the said income allowing it to accumulate and be added to the principal for distribution, providing, however, the Trust Company may, if desirable in its full discretion, apply the said income to the support and maintenance of the said beneficiary, the Daughter, or to the support, maintenance and education of any child or children which she may have at that time, but such application shall be in amount and manner subject to the sole and uncontrolled discretion of the Trustee, and shall in no event accrue; directly or indirectly, for the benefit of any other person or persons, except the said beneficiary or her children. Should the beneficiary, by reason of age, sickness or other casualty, be in a position where, in the judgment of the trustee, an allowance of principal should be made for her care, support and maintenance, or that of any child or children she may have, they are authorized to use such part as in their judgment may be desirable, 1757 with the view of seeing that the amount may out-last the life of the beneficiary, and may be wisely used for her comfort and contentment, to the end of her natural life. 1255 4. The obligation of the Father hereunder, until the trust fund herein provided for shall have been established, is subject to all the foregoing terms and conditions made applicable herein to the management of the trust estate. The meaning and intent of this agreement is to finally and for all time settle the relations between the parties hereto as to all property matters so that all anxiety of either party as to the future relationships of each to the other shall be definitely and finally determined, and the said Father, recognizing the relationship between the Mother of the said Daughter and the Daughter, hereby agrees that in case of the death of the said Daughter before his decease, without leaving a valid last will and testament, he will assign and transfer to the Mother of the said Daughter, should she be living, any right, title and interest that he may have in the estate of the said Daughter, and especially in any fund that may have been created by him under the trust provisions of this1758 agreement. However, should the said Daughter die before said fund shall have been created, no heirs or legatees of the said Daughter shall have any rights in and to this agreement, except for any installment that may be at that time due, provided, however, that should the said Daughter at the time of her decease leave a child or children surviving her, the provisions of this contract shall inure as fully to said child or children and shall be strictly performed in their behalf, except that the said sum which is provided for herein for the said Daughter shall be paid to any guardian that may be legally appointed for their use and benefit absolutely. In view of the mutual desire of the parties hereto to settle and dispose of all questions between them that now exist or may hereafter arise, the said Daughter agrees that, in the event of any claim or demand being made by her or in her behalf for any further part of the property of the said Father, or in the event of any attempt by her or in her behalf to contest any will, contract, trust agreement, or other form of disposition of his property, or any part thereof that may be made after the date hereof, she will forfeit all right and1759 interest in this agreement and trust fund created and to any part of the assets or property of the said Father which he may have now or may dispose of by such last will and testament, or other form of disposition. She makes this agreement voluntarily to forestall the effect of any influence that may be brought to bear upon her from any source whatsoever, or that may be made effective by virtue of any guardianship or other person acting in her behalf, and desires to preclude any such act or action by the imposition of the completest forfeiture of any and all claims and demands under any will or as heir at law in the disposition of the Father's property. The Father in making this agreement is actuated by a desire to arrange money matters definitely and irrevocably so that all future relationships with the Daughter may be free from any suspicion of sordid motives on either side, and feels that by the provisions hereof which make her a preferred beneficiary of his property without regard to the risks, industrial and otherwise, to which his property is subject, he has provided for her in a way to meet his full responsibility in the premises even though with good fortune attending, his1760 estate at the time of his demise might be more than is represented apparently by this gift. Under all the circumstances and feeling the greatest affection for the Daughter he satisfies himself that he has done and herewith is doing the best thing for her welfare, peace of mind and happiness. The decedent did not during his lifetime pay over any part of the principal sum of $50,000 as provided in the agreement and the petitioner, as executrix of the estate, paid to Helen Latty Jackson the sum of $53,381.55. 1256 In her Federal estate-tax return the petitioner deducted as debts of the decedent two items of $50,000 and $3,381.55, which were designated in the schedule of debts as "Helen L. Jackson, contract debt." The respondent disallowed the deductions. 2. At the time of the death of decedent there were in force the following policies of insurance on his life in which Lillian T. Latty was named as beneficiary: CompanyAmountTaken outBeneficiary namedBankers Life Co$2,000June, 1909June, 1909.Bankers Life Co2,000June, 1909June, 1909.Aetna Life Ins. Co3,000May, 1919May, 1919.Connecticut General Life Ins. Co90,000October 11, 1920October 11, 1920.Cleveland Accident Ins. Co2,000December 13, 1890July 12, 1911.1761 The amount of these policies, together with the proceeds of another policy, was reported in the estate-tax return as insurance receivable by beneficiaries other than the estate, and the excess over $40,000 was included in the gross estate. OPINION. STERNHAGEN: 1. The estate contends that the amount paid to decedent's daughter was a deduction in determining the net estate Section 303(a)(1) of the Revenue Act of 1924 governs. It permits the deduction of "claims against the estate * * * to the extent that such claims * * * were incurred or contracted bona fide and for a fair consideration in money or money's worth * * ," and the question is whether the amount represents such a claim. There appears at once the question whether this is a "claim" within the contemplation of the Act. If one contracts in life to make a legacy or to permit property to descend by law, is the amount of such legacy or distribution a claim against the estate merely because it was contractually obligatory? Here the decedent agreed to provide a trust fund for his daughter either in life or after death. He failed to do so in life, so his estate became charged with the obligation. Instead of placing1762 the money in trust, the executors paid the entire principal directly to the daughter. It may be doubted, without deciding, whether this was such a claim as was intended by the Act. But passing that, and assuming that by virtue of the contract there was a claim against the estate, it may only be deducted if "incurred or contracted bona fide and for a fair consideration in money or money's worth." It is not suggested that there was any lack of bona fides, nor is there need to inquire whether the contract was valid or the consideration fair enough to support it. If the consideration 1257 was not both fair and in money or money's worth, the claim is not deductible. The consideration for the alleged claim was in essence merely a promise to refrain from claiming more. The daughter gave up no money and nothing which could be called moneys' worth. Her right to contest any will which her father might make was not the equivalent of cash to her or to any one else. To hold it to be a fair consideration in money's worth would not only shock the common understanding of ordinary language, but would frustrate the plain purpose of the statutory limitation of the deduction. There1763 is no sense in taxing testamentary transfers and yet permitting the deduction of such sums as are transferred at death pursuant to a contract with a natural beneficiary who has agreed not to contest the will. Such a plan should only be found in clear, impelling language. The transfer is still testamentary and the primary object of the tax, and the tax is not to be reduced by calling it a claim based on an antecedent consideration. The phrase "fair consideration in money or money's worth" appears not only in section 303, but several times in section 302, and to construe it broadly enough to cover the daughter's promise would result in defeating the clear purpose of its use throughout the Act. 2. The petitioner contends that no part of the amount of the insurance policies set forth in the findings is part of the decedent's gross estate. The argument is in substance the same as that rejected by the Supreme Court in . For all that appears, the policies were subject to decedent's right until his death to change the beneficiary; and under such circumstances, the amount thereof in excess of $40,000 is by section1764 302(g) properly included in the gross estate. . 3. The credit of 25 per cent on account of State inheritance tax will be adjusted. Reviewed by the Board. Judgment will be entered under Rule 50.VAN FOSSAN VAN FOSSAN, dissenting: I find myself in disagreement with the majority of the Board on the first point involved in this case. The question is whether or not the failure of the decedent to perform fully his agreement with his daughter gave rise to a valid, enforceable claim against his estate, the amount of which is deductible from the value of his gross estate. Section 303(a)(1) of the Revenue Act of 1924 is applicable to this question. Pursuant to that section the value of the decedent's 1258 net estate is to be determined by deducting from the value of the gross estate certain items, specified in the section, including claims and indebtedness which were incurred or contracted "bona fide and for a fair consideration in money or money's worth." The respondent does not contend that there was any lack of good faith in the agreement executed December 1, 1923, by the decedent and his1765 daughter. He contends, however, that the decedent's obligations as set forth in the agreement were not supported by a fair consideration in money or money's worth. Examination of the terms of the agreement discloses that the daughter not only contracted to make no further claims or demands against her father during his life or against his estate after his death, but also covenanted to "respect and abide by any last will and testament" executed by her father and not to enter into any suit "to contest any such will." On his part the decedent agreed to pay over for his daughter's benefit the sum of $50,000 and to pay her an income at the rate of $2,500 per year until such time as the principal sum should be paid by him. While it is true that at common law a mere possibility could not be assigned, equity recognized the force of such agreements as the one now in question and gave them effect and validity. ; . In Story's Equity Jurisprudence, vol. 2, sec. 1040(c), it is stated that: The naked possibility or expectancy of an heir to his ancestor's estate may become the subject of a contract of sale or1766 settlement, and in such case if made bona fide for a valuable consideration it will be enforced in equity after the death of the ancestor; not indeed, as a trust attaching to the estate but as a right of contract. In ; ; , the court held that: An heir at law may for a sufficient consideration release to his father the share which he might have at the parent's decease in the latter's estate, either or personal, so that he will thereby be estopped from establishing any claim thereto as one of the heirs at law or next of kin. There has never been any question about agreements made between the heirs or next of kin and the representative of an estate, after the death of the testator, concerning compromises and settlements. These have always been sustained by the courts when made in good faith and not against public policy. ; ; ; 1767 ; ; . The present proceeding, however, is not such a case. In ; , the court discussed the enforceability of an agreement essentially similar to the one in question in this proceeding. In that case the court said: 1259 We are not here dealing with agreements made after the death of the testator, but agreements made before the death of the testator regarding the future disposition to be made of an estate and the claims of the parties thereto. Such agreements are akin to those implied in the taking of a legacy bequeathed upon the conditions stated in the will that no contest shall be made. Such provisions have been recognized as good. ; 2 Jarmon on Wills 902; 2 Redfield on Wills 298; ; * * . Every consideration of justice would demand that such an agreement fairly and openly made while the testatrix was alive, and relied upon in disposing of her property, should1768 be supported. Under the agreement in this proceeding the decedent's daughter, Helen Marie Latty, became as a stranger to his estate. In consideration of her father's promise she parted with a valuable right, namely, her right as heir as next of kin to endeavor, if she chose, by means of a contest of her father's will, after his death, to secure a large share of his estate, which, as the facts show, amounted to more than $900,000. Whether or not there were grounds for such a contest is a question of no moment. The right to contest her parent's will after his death was of itself a right of value, ; , and in my opinion the surrender of this right by the daughter constituted a fair consideration in money or money's worth to support the promise made by the decedent. . For the foregoing reasons I am of the opinion that, because of the decedent's failure to perform the terms of the agreement on his part to be performed, there arose an enforceable claim against the decedent's estate for the sum of $50,000 with interest. Since*1769 the executrix settled this claim by its payment in full, the amount thereof is deductible from the gross estate of the decedent under the provisions of section 303(a)(1) of the Revenue Act of 1924. For these reasons I must dissent from the conclusion reached.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622631/	Fred Schooler and Carolyn J. Schooler, Petitioners v. Commissioner of Internal Revenue, RespondentSchooler v. CommissionerDocket No. 520-76United States Tax Court68 T.C. 867; 1977 U.S. Tax Ct. LEXIS 52; September 7, 1977, Filed 52 Decision will be entered under Rule 155. Held, P, who kept no record of either winnings or losses from racetrack betting, failed to establish that his losses exceeded his unreported income from wagering, and therefore, he was not entitled to a deduction for his claimed losses. Fred Schooler, pro se.Gregory A. Robinson, for the respondent. Simpson, Judge. SIMPSON867 The Commissioner determined a deficiency of $ 5,291 in the petitioners' Federal income taxes for 1973. The sole issue remaining for decision is whether Mr. Schooler has substantiated wagering losses in excess of his unreported gains from wagering transactions.FINDINGS OF FACTSome of the facts have been stipulated, and those facts are so found.The petitioners, Fred Schooler and Carolyn J. Schooler, were husband and wife and resided in Scottsdale, Ariz., at the time of filing their petition in this case. They filed a joint Federal income tax return for the taxable year 1973 with the Internal Revenue Service Center, Ogden, Utah. Fred Schooler will be referred to as the petitioner.From the late fifties through 1975, the petitioner frequently patronized the racetracks, betting heavily on both dog and horse races. He was 54 a part owner of a carpet-laying business and worked at that business when he was not at the racetracks. However, he spent many days at the tracks: Turf Paradise, near Phoenix, Ariz., operated for 90 days a year, 868 and Prescott Downs, not far from Phoenix, operated 26 days a year; the petitioner was at those tracks virtually every day of racing, and in addition, he often went to other tracks farther from Phoenix.There is no evidence as to the precise amount the petitioner bet each day, but it was substantial. He considered himself poor if he began the day with as little as $ 200. He usually bet on every race, often as much as $ 200 to $ 500 a race. He was considered a good "handicapper," but he had the reputation of often following hunches or tips.At least from 1969 and continuing through 1975, the petitioner frequently borrowed money, some of which was used for gambling. At the track, he frequently borrowed money from his friends to continue betting. Such loans were sometimes repaid the same day and usually within a week or a month. When he ran out of money, he often cashed personal checks. At Turf Paradise, the cashier's window advanced him money to be repaid the55 same day and cashed personal checks for him, but those privileges were discontinued sometime after 1973. In addition, the petitioner borrowed funds from finance companies, from his brothers, and from friends. Such loans were generally repaid, but it often took some time to do so. In 1973, the petitioner and his wife secured the following specific loans:LenderDateAmountGertrude H. Shulenberger2/19/73$ 800.00Dial Finance Corp11/5/73979.82Model Finance Co11/8/732,020.63Arizona State Employees'Credit Union11/13/732,851.55Total6,652.00The petitioner maintained no records of his racetrack winnings or losses for 1973 and reported no gains or losses from wagering on his income tax return for that year. The Commissioner determined, based upon U.S. information returns (Forms 1099) filed by various racetracks, that the petitioner had income from wagering of $ 14,773 in 1973, and the petitioner did not dispute receiving such income. In addition, he won bets on many races which were not reported on such forms.869 In 1973, the petitioner lived in a three-bedroom house situated on an acre of land in Paradise Valley. The purchase price56 of the house in 1970 was $ 29,000. In 1973, the petitioner had four thoroughbred racing horses; to accommodate them, there was a substantial corral with a fence around it and at least two horse pens. In addition, the petitioner installed a swimming pool at a cost of approximately $ 5,000; the pool was financed with a bank loan which was repaid over a period of 5 years. In 1973, the petitioner's wife also worked; on their joint Federal income tax return, they reported taxable income of $ 17,916.In his notice of deficiency, the Commissioner determined that the petitioners received additional income in the amount of the winnings reported on the Forms 1099. He did not find any additional wagering income, nor did he allow any deductions for wagering losses.OPINIONSection 165(d) of the Internal Revenue Code of 1954 permits the deduction of "Losses from wagering transactions * * only to the extent of the gains from such transactions." The petitioner has the burden of proving that his alleged losses were in fact sustained; the issue is a factual one, to be decided on the basis of all the evidence. Fogel v. Commissioner, 237 F.2d 917">237 F.2d 917 (6th Cir. 1956),57 affg. per curiam a Memorandum Opinion of this Court; Green v. Commissioner, 66 T.C. 538">66 T.C. 538, 544 (1976).The petitioner admits receiving the gambling winnings reported on the Forms 1099 and other winnings not so reported; nevertheless, he claims that the fact that he and his wife lived modestly but had to borrow substantial money in 1973 shows that his losses for the year exceeded his total winnings for the year. Since there were unreported winnings, the petitioner must establish that his losses exceeded the unreported winnings in order to be entitled to deduct any such losses. Donovan v. Commissioner, 359 F.2d 64">359 F.2d 64 (1st Cir. 1966), affg. per curiam a Memorandum Opinion of this Court.We cannot accept the petitioner's conclusion. The evidence shows that the petitioner wagered substantial amounts; he was a big loser at times, but he also was a big winner at other times. The evidence contains no indication as to the amount 870 actually won, or lost, in 1973. The petitioner produced personal checks in the amount of $ 6,050 which he cashed at the tracks to obtain funds for betting, but we do not know whether those funds58 were lost, or whether they resulted in winnings.Nor can we conclude from the petitioner's borrowings in 1973 that he lost money in that year. The evidence shows that he had a history of borrowing money: he borrowed in years before 1973, and he continued to borrow in the years after 1973; and the record does not indicate whether his borrowings in the other years were more or less than the amounts borrowed in 1973. In other words, we do not know whether he was any worse off in 1973 than in other years. Furthermore, the fact that the finance companies and his friends were willing to continue to loan him money in 1973 and in later years suggests that they did not consider him a poor risk. In addition, we do not know what loans were outstanding against him at the beginning of 1973 and whether the loans secured in that year may have been for the purpose of repaying earlier loans. Finally, the fact that his check-cashing privilege was canceled sometime after 1973 tends to indicate that his financial difficulties did not reach their peak until sometime after 1973. In short, the borrowing of money in that year is simply insufficient evidence to indicate that his losses for the year 59 exceeded his winnings.The absence of a lavish lifestyle is also insufficient to carry the petitioner's burden of proof. Although there was no evidence of unusual or extravagant expenditures, there was every indication that the petitioner and his wife lived comfortably during 1973. In fact, we have some doubts that the petitioner could have sustained such a comfortable standard of living if his gambling losses had been as dramatic as he alleged.The petitioner complains that if we do not accept his evidence as establishing his losses, it is impossible for a taxpayer to prove wagering losses. We appreciate that many taxpayers do not keep a detailed record of their wagering winnings and losses. Yet, section 1.6001-1(a), Income Tax Regs., imposes on all taxpayers the duty of maintaining "permanent books of account or records * * * as are sufficient to establish the amount of gross income, deductions, credits, 871 or other matters required to be shown by such person in any return of such tax or information." In addition, there are many specific recordkeeping requirements; for example, section 274(d) and the regulations thereunder set forth the specific records which must be kept60 to substantiate a deduction for business travel and entertainment. There is no indication that the petitioner or other taxpayers engaged in wagering transactions could not maintain comparable records, such as a daily diary setting forth all the wagering transactions. Deductions for other purposes are not allowable unless substantiated by adequate records. E.g., sec. 1.170-1(a)(3)(iii), Income Tax Regs. (charitable contributions); sec. 1.213-1(h), Income Tax Regs. (medical expenses); Roberts v. Commissioner, 62 T.C. 834 (1974) (casualty loss and medical expense deduction); Kasey v. Commissioner, 54 T.C. 1642">54 T.C. 1642 (1970), affd. per curiam 457 F.2d 369">457 F.2d 369 (9th Cir. 1972) (travel expenses and moving expenses); Sanford v. Commissioner, 50 T.C. 823">50 T.C. 823 (1968), affd. per curiam 412 F.2d 201">412 F.2d 201 (2d Cir. 1969), cert. denied 396 U.S. 841">396 U.S. 841 (1969) (travel and entertainment expenses). It is clear that for such purposes, the kind of general evidence presented by the petitioner in this case is not sufficient. There is surely no reason 61 to treat taxpayers such as the petitioner who claim to have sustained wagering losses more favorably than other taxpayers, by allowing a deduction for wagering losses when the evidence is vague and inadequate. We recognize that this Court has applied the rule of Cohan v. Commissioner, 39 F.2d 540">39 F.2d 540, 543-544 (2d Cir. 1930), and permitted deductions based on estimates where it was convinced that net losses were in fact sustained; however, the record in the case before us provides no satisfactory basis for estimating the amount of the petitioner's winnings or losses, nor does it convince us that in fact his losses exceeded his unreported gains. Accordingly, we must conclude and hold that he has failed to carry his burden of proof in this case and that he is taxable on the gambling winnings determined by the Commissioner. Compare Donovan v. Commissioner, supra, and Stein v. Commissioner, 322 F.2d 78">322 F.2d 78 (5th Cir. 1963), affg. a 872 Memorandum Opinion of this Court, with Drews v. Commissioner, 25 T.C. 1354 (1956).Decision will be entered under Rule 155.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622632/	AUGUST HORRMANN, PETITIONER, ET AL., 1v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Horrmann v. CommissionerDocket Nos. 77141, 77142, 77143, 77144, 77145, 77200.United States Board of Tax Appeals34 B.T.A. 1178; 1936 BTA LEXIS 587; October 21, 1936, Promulgated 587 1. STOCK DIVIDEND - EFFECT ON EARNINGS OR PROFITS. - A stock dividend that is not taxable to the shareholder does not diminish earnings or profits available for subsequent distribution. 2. REDEMPTION OF STOCK. - Redemption in 1927 of preferred stock issued as a dividend in 1922, held, not shown to be essentially equivalent to the distribution of a taxable dividend. 3. Id. - Redemption of preferred stock at par, which was a partial liquidation, held, properly chargeable in part to capital account, the part so chargeable being represented by the ratio of the paid-in capital to the total capital structure. 4. TRUSTS - DISTRIBUTABLE INCOME. - A will creating trusts directed that "extraordinary dividends" on stock in the trusts be treated as capital. Held, that a cash dividend of $240,000 was an extraordinary dividend and was properly treated by the trustees as corpus of the trusts rather than as income distributable to the beneficiaries. Edgar J. Goodrich, Esq., and Eugene Untermyer, Esq., for the petitioners in Docket Nos. 77141-77145. Theodore B. Benson, Esq., for the petitioner in Docket No. 77200. Hartford Allen, Esq., and588 Walter W. Kerr, Esq., for the respondent. ARUNDELL1179 These proceedings, which were consolidated for hearing, involve deficiencies in income tax for the year 1930 in the following amounts: Docket No.DeficiencyAugust Horrmann77141$5,937.14Paula Uhl771422,849.90Frances Horrmann7714313,218.73Ellen Horrmann77144$71.89William C. Horrmann, Jr.77145172.44Minnie Badenhausen772002,283.29The part of the deficiencies in dispute arises from the respondent's treatment of $240,000 cash distribution by the Rubsam & Horrmann Brewing Co. to its stockholders. The respondent treated this distribution as a taxable dividend. The petitioners claim that the distribution was from earnings and profits accumulated prior to March 1, 1913, and not taxable. Petitioners Frances Horrmann and William C. Horrmann, Jr., further claim that in their cases the distribution constituted corpus of trusts of which they were beneficiaries, rather than distributable income. The facts have been stipulated in considerable detail. We herewith set forth as our findings of fact those material to a decision of the questions presented. 589 FINDINGS OF FACT. The Rubsam & Horrmann Brewing Co., hereinafter called the company, is a New York corporation organized in 1888, at which time its authorized capital was $400,000, divided into 400 shares of a par value of $1,000 each, which capitalization remained unchanged until 1922. In December 1922 two changes in the capital structures of the company were effected. First, the par value of the common stock was reduced from $1,000 to $100 per share: the number of shares was 1180 increased from 400 to 4,000; and 10 shares of the new stock were exchanged for each share of the old. Second, a few days later, in December 1922, the capital stock of the company was increased from 4,000 shares to 10,000 shares. After this increase the stock consisted of 6,000 shares of common and 4,000 shares of preferred stock. The increase in stock was distributed to shareholders by the declaration and payment of a 150 percent stock dividend, of which 100 percent was paid in preferred stock and 50 percent in common stock. The holder of each $100 in previously outstanding common stock thereby became the holder $150of in par value in common stock and $100 in par value in preferred stock. 590 Later in December 1922, the 6,000 shares of common stock then of the par value of $100 each were changed into 6,000 shares of no par value. A stated value of $5 per share, aggregating $30,000, was assigned to the no par value common stock and the balance of $570,000 was credited to an account designated as "Paid in Surplus", which account has remained unchanged to date. The 6,000 shares of no par value common stock have remained issued and outstanding to the present time. The preferred stock retained its par value of $100 per share at all times while it remained outstanding. There were no further changes affecting the company's capital structure until 1927, when all the outstanding preferred stock of the par value of $400,000 which had been issued in 1922 as a dividend was redeemed and retired for cash at par. The basis of the preferred stock to the stockholders was $100 per share, and, as they considered that there was neither gain nor loss on the redemption, they did not report it on their returns. On February 8, 1930, the company made a cash distribution of $240,000, which was at the rate of $40 on each outstanding share of common stock. Each of these petitioners except591 Frances Horrmann and William C. Horrmann, Jr., was then a stockholder of the company and each received a proportionate share of the distribution. At February 8, 1930, the basis of the common stock to each of the holders thereof was in excess of $40 per share. At March 1, 1913, the undistributed net earnings of the company accumulated prior thereto amounted to $635,786.16. From that date to the end of 1922 the accumulated net earnings less cash dividends totaled $510,577.67. Thereafter, the company's earnings were less than the cash dividends paid and its accumulated earnings (after March 1, 1913) at the end of 1926 were $394,468.33; at the end of 1927, $373,932.03; and on February 8, 1930, $321,268.11. These figures in each case are net amounts after allowance for cash dividends paid, but do not take into account the stock dividend issued in 1922, the redemption of preferred stock in 1927, or the cash distribution on February 8, 1930. 1181 Petitioners Frances Horrmann and William C. Horrmann, Jr., are, respectively, the widow and the son of William C. Horrmann, who at the time of his death on June 5, 1927, was a stockholder of the company. Under the decedent's will592 his stock in the company was placed in trust for these two petitioners. Under the provisions of the will the trustees were to pay the income to the beneficiaries in such installments as they should request. The will contained the following provision: All stock dividends or extraordinary dividends declared by any corporation whose securities at any time form part of my estate are to be treated as capital. Of the $240,000 cash distribution on February 8, 1930, the sum of $73,680 was paid to the trustees of the Frances Horrmann trust and $12,280 was paid to the trustees of the William C. Horrmann, Jr., trust. In their fiduciary returns for 1930 the trustees disclosed the receipt of the above amounts, but did not include them in income. They added the amounts so received to the corpus of each trust. In the case of the Frances Horrmann trust the addition of the amount of $73,680 to the corpus was approved by the Surrogate's Court of Richmond County, in a decree entered July 15, 1932. No formal accounting was filed in the William C. Horrmann, Jr., trust as he received the corpus of the trust upon attaining the age of 25 years, which occurred after February 8, 1930. OPINION. 593 ARUNDELL: The respondent has treated the $240,000 cash distribution by the brewing company in 1930 as a distribution out of the corporate earnings or profits accumulated after February 28, 1913, hence, taxable as a dividend under section 115 of the Revenue Act of 1928. 1 The petitioners claim that the post-1913 earnings were exhausted before the 1930 distribution. Consequently, that distribution was from earnings prior to March 1, 1913, and was not taxable. Between February 28, 1913, and the time of the increase in capitalization in 1922 the company accumulated earnings in the amount of $510,577.67. This sum, the petitioners say, was exhausted by the issuance of the $400,000 preferred stock in 1922, plus subsequent losses. In 1927 when the preferred stock was redeemed, the accumulated post-1913594 earnings were $373,931.03. This sum, it is contended, was exhausted by the redemption of the preferred stock in 1927 for 1182 $400,000. If either of these propositions be sound, there was no post-1913 accumulation of earnings available for dividends in 1930 and the distribution in that year is tax-free. We are of the opinion that the first proposition can not be sustained and that the second one is right only in part. Much of the argument here is addressed to the matter of the nature of dividends paid in stock and their effect on corporate earnings and surplus. A dividend in cash, of course, operates to diminish earnings and profits. A stock dividend of the type dealt with in Eisner v. Macomber,252 U.S. 189">252 U.S. 189, does not. Hugh R. Wilson,3 B.T.A. 957">3 B.T.A. 957; J. T. Hedrick,24 B.T.A. 444">24 B.T.A. 444; Edward D. Untermyer,24 B.T.A. 906">24 B.T.A. 906; J. W. McCulloch,29 B.T.A. 67">29 B.T.A. 67; H. Y. McCord,31 B.T.A. 342">31 B.T.A. 342; Walker v. Hopkins, 12 Fed.(2d) 262. The dividend in the Eisner v. Macomber case, supra, was in common stock on stock of the same kind; here, it is in preferred595 stock on common stock, which was the only class outstanding. We held in Pearl B. Brown, Executrix,26 B.T.A. 901">26 B.T.A. 901; affd., 69 Fed.(2d) 602, that a dividend like the present one, namely, in preferred stock on common, where only common was outstanding, was a pure stock dividend "constitutionally free from tax", following Eisner v. Macomber, supra.We said that its effect was "a mere proliferation of existing interests." Further: At the moment of change, each shareholder's proportionate rights were absolutely and relatively the same, except that each in the same ratio had preferred as well as common shares, a difference without significance here. These are the essential characteristics of a stock dividend - those which have always given point to the cases in which the question has arisen. Gibbons v. Mahon,136 U.S. 549">136 U.S. 549; Towne v. Eisner,245 U.S. 418">245 U.S. 418; Eisner v. Macomber,252 U.S. 189">252 U.S. 189; La Belle Iron Works v. United States,256 U.S. 377">256 U.S. 377; see also 596 Graves v. Graves,120 Atl. 420; Kaufman v. Charlottesville ,Co.,23 S.E. 1003">23 S.E. 1003; United States v. Siegel, 52 Fed.(2d) 63. To the same effect are Alfred A. Laun,26 B.T.A. 764">26 B.T.A. 764; Frances Elliott Clark,28 B.T.A. 1225">28 B.T.A. 1225; affd., 77 Fed.(2d) 89; and H. C. Gowran,32 B.T.A. 820">32 B.T.A. 820. In the last cited proceeding we summarized the holding of the several cases as follows: In all those cases, no preferred stock was outstanding when the preferred in question was distributed as a dividend on or in partial exchange for common stock. Thus, since (1) there was no severance of assets from the declarant corporations, and (2) there was no alteration of the preexisting proportionate interest of the stockholders, but "only a proliferation of preexisting interests" (Pearl B. Brown, Executrix, supra), the disputed dividend was held nontaxable. We do not believe that the recent case of Koshland v. Helvering,297 U.S. 702">297 U.S. 702, requires a different conclusion. The facts there were different in that both common and preferred stock were outstanding597 when a dividend on the preferred was paid in common stock. There is, as pointed out in the Koshland decision, a distinction between 1183 cases like the Macomber case and those where "the proportional interests of the stockholder after the distribution was essentially different from his former interest. * * * Where a stock dividend gives the stockholder an interest different from that which his former stock holdings represented, he receives income." The quoted words state the theory upon which the Board and the Circuit Court of Appeals proceeded in Tillotson Manufacturing Co.,27 B.T.A. 913">27 B.T.A. 913; affd., 76 Fed.(2d) 189. In that case there were both common and preferred stock outstanding when the dividend on the preferred was paid in common stock. But whether we are right or wrong in our interpretation of the Koshland case and whether or not the preferred stock dividend of 1922 was income, we are of the opinion that it was not taxable to the stockholders. Of course, if it was a stock dividend within the compass of Eisner v. Macomber, it was not income under the Sixteenth Amendment; if it was income as in the Koshland case, 598 it was nevertheless a stock dividend which was specifically exempt from tax under section 201(d) of the Revenue Act of 1921. 2This exemption has been of long standing as pointed out in the opinion in the Koshland case. All of the revenue acts from 1921 to 1934, inclusive, have specifically provided for the exemption and the Treasury regulations over an equally long period of time have broadly held stock dividends nontaxable. The next question under this branch of the case is whether the preferred stock dividend effected a "distribution of earnings or profits" within the meaning of the statute. It is obvious that dividends in cash (Lynch v. Hornby,247 U.S. 339">247 U.S. 339) or in property of the corporation (Peabody v. Eisner,247 U.S. 347">247 U.S. 347) reduce the corporate assets and are in fact distributions. But the possible effect upon the corporate earnings of the several different kinds of stock dividends is not so clear and the matter has not been, as far as we know, squarely decided in any of the cases. It is our view that a stock dividend is a statutory "distribution599 of earnings or profits" only when it is of a kind that is taxable to the stockholder. The provisions of the statute relating to distribution are concerned with the effect on the stockholder of the distribution and not with its effect on the corporation. The aim is to tax to the stockholder the income realized by him through the distribution of earnings or profits accumulated after March 1, 1913. This aim would be defeated if a nontaxable stock dividend were treated as diminishing the amount of earnings and profits available for subsequent distribution. Conversely, if a stock dividend were taxable and corporate earnings were not thereby diminished, the imposition of the tax on a subsequent distribution in cash or property would result in a 1184 double tax. A correlation between taxability to the stockholder and the effect on corporate earnings or profits avoids these situations. It does no violence to the statute, but rather harmonizes its provisions; in fact, it accords with what we believe was the intent of the statute as clarified by subsequent enactments hereinafter discussed. It also accords with the construction that has been given to the somewhat analogous question600 of the effect of stock issued in connection with a reorganization. In Commissioner v. Sansome, 60 Fed.(2d) 931, the court, speaking of the Revenue Act of 1921, said that "Section 202(c)(2) [recognition of gain or loss on an exchange] should be read as a gloss upon Section 201 [dividends]." The court held that an amount not recognized as gain under the exchange provisions should not be recognized as "changing accumulated profits into capital." In the latter case of Harter v. Helvering, 79 Fed.(2d) 12, involving a reorganization, the same court held: When the Philadelphia Paper Manufacturing Company and the Fibre Container Company merged on June 30, 1923, no gain was "recognized" to the shareholders for it was a "reorganization" under Sec. 202(c)(2) of the Revenue Act of 1921, and Sec. 203(b)(2) of the Act of 1926. A consequence of this is that for the purposes of allocating dividends under Sec. 201(b) of the Act of 1926, against earnings before and after March 1, 1913, the surplus is regarded as unchanged [Italics ours.] The Harter case arose under the Revenue Act of 1926, as did 601 Murcheson's Estate v. Commissioner (C.C.A., 5th Cir.), 76 Fed.(2d) 641, in which the same result was reached. To the same effect are United States v. Kaufman (C.C.A., 9th Cir.), 62 Fed.(2d) 1045; George F. Baker, Jr., Executor,28 B.T.A. 704">28 B.T.A. 704; affd., 80 Fed.(2d) 813; Helen V. Crocker,29 B.T.A. 773">29 B.T.A. 773. Any doubt as to the correctness of the holding in the above cases was removed in the Revenue Act of 1934 where by section 115(h) it was provided that a distribution of stock or securities in a reorganization "shall not be considered a distribution of earnings or profits * * for the purpose of determining the taxability of subsequent distributions * * ." The same rule is more broadly stated in the Revenue Act of 1936 (sec. 115(h)) 3 with the explanation by the Senate Finance Committee that the section makes no change in the 1185 rule as applied under existing law. 4 This enactment and the explanation thereof confirm our view expressed above that the intent of the taxing law is to produce correlation between the taxability of dividends to the stockholder and the effect of dividends on corporate602 earnings or profits. As we have held above that the 1922 stock dividend was not taxable to the stockholders of the brewing company, it follows that that dividend did not operate to diminish earnings for the purpose of determining the taxability of subsequent distributions. 603 The alternative claim is that the redemption of the preferred stock in 1927 for $400,000 was "essentially equivalent to a taxable dividend" under section 201(g) of the Revenue Act of 1926, 5 and that no part of the funds used for redemption was properly chargeable to capital account under section 201(c).6 If the redemption was essentially equivalent to a taxable dividend it would more than exhaust the earnings or profits accumulated after March 1, 1913. We find no evidence here to establish that the redemption was essentially equivalent to a taxable dividend. In the recent case of Commissioner v. Rockwood, 82 Fed.(2d) 359, it is pointed out that normally the redemption of stock is a return of capital and that a normal situation should be held to exist "unless there is a series of acts, which bring to a court or administrative officer the conclusion that the taxpayer has intentionally planned such series of independent acts with the purpose, through such continuity, of bringing about evasion of the law." See 604 Pearl B. Brown, supra, in which it was said: * * The statute does not provide that every cash redemption of shares shall be treated per se as a dividend, but only those which because of some 1186 circumstance of time and manner are in fact the essential equivalent of a dividend. * * See also Henry B. Babson,27 B.T.A. 859">27 B.T.A. 859; affd., 70 Fed.(2d) 304; Louis Rorimer,27 B.T.A. 871">27 B.T.A. 871; Annie Watts Hill,27 B.T.A. 73">27 B.T.A. 73; affd., 66 Fed.(2d) 45. The petitioners here do not point out any circumstance of time or manner and we find none in the record which brings the case within the statute as interpreted by the above decisions. We accordingly hold that the redemption in 1927 was not essentially equivalent to a taxable dividend. 605 claim that the 1927 redemption was essentially equivalent to the distribution of a taxable dividend, there is no occasion to consider respondent's of a taxable dividend, there is no occasion to consider respondent's argument that petitioners are estopped to so claim. Since we hold the $400,000 distribution in 1927 to be a distribution in partial liquidation, it becomes necessary under the statute to determine what part of the liquidation is "properly chargeable against capital account" within the meaning of section 201(c), the remainder being chargeable against earnings and profits. As an accounting matter the whole would be chargeable against capital because as a matter of accounting the capital account would have been increased to cover the new stock when issued. However, we think the "capital account" referred to by the statute is not increased by the issuance of a nontaxable stock dividend, but comprises only the paid-in capital. Therefore, it would be improper to charge the whole redemption against capital account; such procedure here would wipe out the entire capital account, leaving no capital to represent the common stock still outstanding. The petitioner argues that606 the whole redemption is properly chargeable against surplus in that the issuance of the stock served only to earmark a part of the surplus. This seems to us equally improper. We are unwilling to disregard the interest which shares of stock represent in the assets of the corporation and to say that they serve only to earmark a portion of surplus. Also, we are unwilling to attempt to earmark shares of stock and say that the redemption of the original shares is entirely chargeable against capital account (to the extent of the amount originally paid in) while the redemption of dividend shares is chargeable in no part against capital. We think that a proportional part of the paid-in capital must be considered as standing behind each of the shares outstanding at any particular time, so that on redemption of any of them a certain part of the redemption is properly chargeable against capital account. Since the capital structure as distinguished from the statutory "capital account" was increased to $1,000,000 by the issuance of new stock of the par value of $600,000 in 1922, while the paid-in capital (the statutory capital account) remained at $400,000, we think that the 1927 redemption607 should be chargeable against 1187 capital account in the ratio of $400,000 to $1,000,000. The reduction of the common stock to a nominal par value before 1927 and the corresponding responding creation of paid-in surplus was a mere bookkeeping entry and did not alter the capital structure, which includes both capital stock and paid-in surplus accounts. Using the ratio indicated above, $160,000 of the 1927 redemption is chargeable against capital account and $240,000 is chargeable against post-1913 earnings. Applying this method of calculation, the taxable portion of the 1930 distribution will be found by subtracting from the post-1913 earnings the $240,000 of the 1927 redemption chargeable thereto and the losses sustained between the 1927 redemption and February 8, 1930. Counsel for the petitioners cite Harter v. Helvering, supra, as authority on the point last discussed. We do not regard that case as decisive of the point at issue here. While in that case the court said that the redemption of stock "must be marshaled first against the earnings after February 28, 1913", it does not appear that the question of allocating a part of the redemption price608 against capital was presented to or considered by the court. The issue, as stated by the court, was whether the distribution in redemption was out of earnings before or after March 1, 1913. The final issue is whether the $85,960 received by the two trusts for the benefit of Frances Horrmann and William Horrmann, Jr., respectively, is taxable to the beneficiaries as income "which is to be distributed currently by the fiduciary to the beneficiaries" (sec. 162, Revenue Act of 1928). Whether this amount was currently distributable by the trusts depends on the directions of the will under which they were created, which provided that: All stock dividends or extraordinary dividends declared by any corporation whose securities at any time form part of my estate are to be treated as capital. The question is whether the cash distribution here was such an "extraordinary dividend." The considerations controlling this determination are stated in the A.L.I. Restatement of Trusts, comments on section 226: Whether a dividend is an ordinary or an extraordinary dividend depends upon all the circumstances of the case. Among the circumstances which may be of importance in determining whether609 a dividend is an ordinary dividend are the following: (1) whether similar dividends have been declared with regularity in the past; (2) whether such dividends are regularly paid out of current earnings; (3) the frequency with which such dividends are declared; (4) the size of the dividend in relation to the market value of the shares at the time of the creation of the trust; (5) the designation, if any, placed upon it by the directors of the corporation; (6) the source of the earnings from which the distribution is made. When the $240,000 was distributed in 1930 there had never been a comparable dividend in the 17 years of the company's history 1188 of which we have evidence. There had been no dividend at all in six of the preceding eleven years, and no dividends in any of the other five years had ever exceeded $28,000. In 1930 and in four out of the five preceding years, the company operated at a loss. The source of the 1930 distribution was entirely from earnings of the corporation prior to the creation of the trusts in 1927. We are of the opinion that the $240,000 dividend was an "extraordinary dividend", and therefore not distributable under the will. The Surrogate's610 Court so held in approving the retention of the dividends by the trustees in the case of the Frances Horrmann trust. We hold the distributions to the two trusts are not taxable to the beneficiaries. Reviewed by the Board. Decision will be entered under Rule 50.BLACK, STERNHAGEN, TURNER, DISNEY, and HARRON concur only in the result. LEECHLEECH, dissenting: I dissent from the result reached in the majority ity opinion because I think its conclusion on the first point is wrong on both its premises. Commissioner v. Tillotson Manufacturing Co., 76 Fed.(2d) 189, affirming 27 B.T.A. 913">27 B.T.A. 913; H. C. Gowran,32 B.T.A. 820">32 B.T.A. 820; James H. Torrens,31 B.T.A. 787">31 B.T.A. 787. MORRIS agrees with this dissent. Footnotes1. On motion of counsel for petitioners proceedings of the following petitioners were consolidated with the above entitled case: Paula Uhl; Frances Horrmann; Ellen Horrmann; William C. Horrmann, Jr.; and Minnie Badenhausen. ↩1. SEC. 115. DISTRIBUTIONS BY CORPORATION. (a) Definition of dividend.↩ - The term "dividend" when used in this title (except in section 203(a)(4) and section 208(c)(1), relating to insurance companies) means any distribution made by a corporation to its shareholders, whether in money or in other property, out of its earnings or profits accumulated after February 28, 1913. 2. SEC. 201. (d) A stock dividend shall not be subject to tax * * . ↩3. SEC. 115. (h) EFFECT ON EARNINGS AND PROFITS OF DISTRIBUTIONS OF STOCK. - The distribution (whether before January 1, 1936, or on or after such date) to a distributee by or on behalf of a corporation of its stock or securities or stock or securities in another corporation shall not be considered a distribution of earnings or earnings or profits of any corporation - (1) if no gain to such distributee from the receipt of such stock or securities was recognized by law, or (2) if the distribution was not subject to tax in the hands of such distributee because it did not constitute income to him within the meaning of the Sixteenth Amendment to the Constitution↩ or because exempt to him under section 115(f) of the Revenue Act of 1934 or a corresponding provision of a prior Revenue Act. * * 4. The rule, under existing law, with respect to the effect on corporate earnings or profits of a distribution which, under the applicable tax law, is a nontaxable stock dividend or a distribution of stock or securities in connection with a reorganization or other exchange, on which gain is not recognized in full, is that such earnings or profits are not diminished by such distribution. In such cases, earnings or profits remain intact and hence available for distribution as dividends by the corporation making such distribution, or by another corporation to which the earnings or profits are transferred upon such reorganization or other exchange. This rule is stated only in part in section 115(h) of the Revenue Act of 1934, and corresponding provisions of prior acts, but is the rule which is applied by the Treasury and supported by the Courts in Commissioner v. Sansome, 60 Fed.(2) 931; U.S. v. Kauffmann, 62 Fed.(2) 1045; Murcheson v. Comm.,↩ 76 Fed.(2) 641. While making no change in the rule as applied under existing law, the recommended amendment is desirable in the interest of greater clarity. [Rept. No. 2156, p. 19.] 5. SEC. 201. (g) If a corporation cancels or redeems its stock (whether or not such stock was issued as a stock dividend) at such time and in such manner as to make the distribution and cancellation or redemption in whole or in part essentially equivalent to the distribution of a taxable dividend, the amount so distributed in redemption or cancellation of the stock, to the extent that it represents a distribution of earnings of profits accumulated after February 28, 1913, shall be treated as a taxable dividend. In the case of the cancellation or redemption of stock not issued as a stock dividend this subdivision shall apply only if the cancellation or redemption is made after January 1, 1926. ↩6. SEC. 201. (c) * * * In the case of amounts distributed in partial liquidation (other than a distribution within the provisions of subdivision (g) of section 203 of stock or securities in connection with a reorganization) the part of such distribution which is properly chargeable to capital account↩ shall not be considered a distribution of earnings or profits within the meaning of subdivision (b) of this section for the purpose of determining the taxability of subsequent distributions by the corporation. [Italics supplied.]	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622634/	Gerling International Insurance Company, Petitioner v. Commissioner of Internal Revenue, RespondentGerling International Ins. Co. v. CommissionerDocket No. 26765-83United States Tax Court87 T.C. 679; 1986 U.S. Tax Ct. LEXIS 48; 87 T.C. No. 41; September 24, 1986, Filed 48 In implementation of its prior opinion, see 86 T.C. 468">86 T.C. 468 (1986), the Court determined that petitioner should be precluded from introducing into evidence the books and records of a deemed related Swiss corporation or any information derived therefrom. Held, no change should be made in the two orders of the Court, dated Mar. 12, 1986, and Apr. 9, 1986, and accordingly petitioner's motion for summary judgment is denied. Held, further, respondent's motion for summary judgment is granted. Lawrence Gerzog, for the petitioner.David Brodsky, for the respondent. Tannenwald, Judge. TANNENWALD679 OPINIONThis case is again before us on cross motions for summary judgment. The parties agree 680 (and we concur) that, in the present posture of the case, there are no genuine49 issues of material fact involved; consequently, we may dispose of the case by decision as a matter of law. Rule 121, Tax Court Rules of Practice and Procedure.The factual background, which provides the foundation for the motions herein, is largely set forth in our prior opinion, 86 T.C. 468">86 T.C. 468 (1986), and will not be repeated herein. Rather, we will set forth what has occurred since the memorandum sur order, which subsequently became the aforementioned published opinion, was issued on March 12, 1986.Simultaneously with the issuance of the memorandum sur order, an order was entered. A copy of that order is set forth as Exhibit A to this opinion. Thereafter, the parties attempted to arrive at a mutually acceptable procedure pursuant to which respondent would be afforded the opportunity to examine the books and records of Universale Reinsurance Co., Ltd. (Universale). Their attempt failed for the reasons hereinafter set forth. As a consequence, the Court issued a further order, dated April 9, 1986, copy of which is set forth as Exhibit B to this opinion.Upon the basis of the two above-mentioned orders of the Court and other material of record herein, 50 respondent moved for summary judgment contending that, because of the preclusion of evidence provision of the Court's April 9, 1986, order, petitioner would, as a matter of law, be unable to meet its burden of proof and that consequently a decision should be entered for respondent. 1Petitioner countered respondent's motion for summary judgment with a cross motion for summary judgment. In support of its cross motion, petitioner argues that: (1) Respondent has ignored the economic reality of its relationship with Universale; (2) while the Court (incorrectly according to petitioner) rejected that argument in its prior opinion, the argument nevertheless supports the contention that respondent has acted arbitrarily51 and unreasonably in issuing the deficiency notice herein, particularly in light of 681 respondent's prior acceptance of petitioner's method of reporting, for U.S. tax purposes, only the net income or loss revealed by the annual statements furnished it by Universale; (3) petitioner has made every effort to permit respondent to audit the books and records of Universale and the condition, insisted upon by respondent, that the audit first be approved by the Swiss Federal Government (see p. 682 infra), is unreasonable and was properly rejected by Universale and consequently by petitioner.Petitioner's first two arguments have essentially been disposed of by our prior opinion. See 86 T.C. at 473-474. Petitioner's "economic reality" argument ignores the nature of the relationship between petitioner and Universale, namely agent (Universale) and principal (petitioner). See Colonial Surety Co. v. United States, 147 Ct. Cl. 643">147 Ct. Cl. 643, 178 F. Supp. 600">178 F. Supp. 600, 602 (1959). If, in fact, Universale has ascribed to petitioner more than its proper share of losses and expenses, petitioner has not received the share of the net income52 due it. It is well established that income received by an agent is taxable to a principal at the time of receipt by the agent, rather than at the time of payment by the agent to the principal. Maryland Casualty Co. v. United States, 251 U.S. 342">251 U.S. 342, 347 (1920); Alsop v. Commissioner, 290 F.2d 726">290 F.2d 726, 728 (2d Cir. 1961), affg. 34 T.C. 606">34 T.C. 606 (1960). See also McGahen v. Commissioner, 76 T.C. 468">76 T.C. 468, 478 (1981), affd. without published opinion 720 F.2d 664">720 F.2d 664 (3d Cir. 1983).Petitioner seeks to avoid the principal-agent characterization by contending that its arrangement with Universale was one of indemnity, as distinguished from assumption, reinsurance. See secs. 1.809-4(a)(1)(iii) and 1.809-5(a)(7)(ii), Income Tax Regs. Aside from the fact that we have serious doubts as to the validity of petitioner's position in light of the terms of the treaty between petitioner and Universale, and particularly article 4 thereof (see 86 T.C. at 469-470), we think any such distinction is irrelevant under the facts and circumstances herein. 53 Cf. International Life Insurance Co. v. Commissioner, 51 T.C. 765">51 T.C. 765, 772 (1969), affd. per curiam 427 F.2d 137">427 F.2d 137 (6th Cir. 1970). To permit any such distinction, in the context of the instant case, would preclude respondent from questioning the underpinnings of any indemnity arrangement in order to determine the proper tax consequences 682 flowing therefrom and to obtain the information necessary to make such questioning effective.We are unable to perceive why, having refused to accept petitioner's "economic reality" argument as a matter of substantive law, we should nevertheless apply that argument in order to hold that respondent's determinations in the notice of deficiency were arbitrary. Nor are we persuaded that we should do so because respondent did not question petitioner's method of reporting its transactions with Universale over a period of 18 years and, in fact, accepted such method after examining petitioner's returns for the taxable years 1959, 1960, and 1961. It is well established that a taxpayer is not entitled to continue the treatment of an item of income or deduction simply because respondent either 54 has not objected in the past or has approved like treatment of the item in an earlier year. Coors v. Commissioner, 60 T.C. 368">60 T.C. 368, 406 (1973), affd. 519 F.2d 1280">519 F.2d 1280 (10th Cir. 1975); 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).We now turn to the third prong of petitioner's argument. See pp. 680-681, supra. Both prior and subsequent to the Court's order of March 12, 1986 (Exhibit A), discussions took place between petitioner (who consulted Universale) and respondent. As a result of those discussions, Universale, through petitioner, offered to have an American C.P.A. firm, with an office in Switzerland, selected and paid by respondent, audit the relevant books and records of Universale at Universale's office in Zurich, Switzerland, and transmit the results of that audit to respondent. Respondent, however, was concerned about the effect of article 271 of the Swiss Penal Code, 2 and insisted that the Swiss Federal Government be informed of, and approve, the audit. Universale refused to accede to that55 condition because it did not want "to engender Swiss governmental intrusion into a matter in which neither Universale nor the Swiss government are parties" and asked that the auditors "do the audit 683 on an invitation-type basis." See Petitioner's Memorandum in Support of its Cross-Motion for Summary Judgment, pp. 9-10. As a consequence of that refusal, respondent returned to his original position that Universale's books and records be produced in the United States for examination by respondent's agents, a situation described by petitioner as an "impractical and inequitable demand." Supra at p. 10.56 Petitioner vigorously asserts that respondent's insistence on approval of the audit in Switzerland by the Swiss Federal Government is unreasonable. We disagree.In the first place, article 271 of the Swiss Penal Law clearly prohibits an examination in Switzerland by respondent's agents. See note 2 supra; United States v. Vetco, Inc., 691 F.2d 1281">691 F.2d 1281, 1290 (9th Cir. 1981). Clearly, we should not countenance action by agents of the United States Government which would cause a violation of the laws of a nation with whom we have friendly relations. See Application of Chase Manhattan Bank, 297 F.2d 611">297 F.2d 611, 613 (2d Cir. 1962). 3 Nothing in article 271 suggests that an "invitation-type" audit, i.e., an audit with Universale's consent, would remove respondent's agents from the sanctions of article 271. In the second place, even if the use of an "invitation-type" audit might arguably avoid the need for the approval of the Swiss Federal Government, we do not think it is within our province to second-guess respondent on this issue. It is common knowledge that the efforts of the United States to obtain the cooperation of the Swiss57 Federal Government in facilitating the enforcement of our tax laws have involved delicate and sometimes difficult negotiations. "[The] courts must take care not to impinge upon the prerogatives and responsibilities of the political branches of the government in the extremely sensitive and delicate area of foreign affairs." See United States v. First National City Bank, 396 F.2d 897">396 F.2d 897, 901 (2d Cir. 1968). See also United States v. Davis, 767 F.2d 1025">767 F.2d 1025, 1035 (2d Cir. 1985). The fact that the alternative of producing the books and records of Universale in the United States may be 684 expensive or cumbersome and therefore impose some hardship on petitioner and Universale does not make respondent's position unreasonable. See United States v. Vetco, Inc., supra at 1289, 1291. We hold that respondent's condition that the approval of the audit by the Swiss Federal Government should be obtained is not unreasonable.58 At one point in these proceedings, petitioner suggested that disclosure of its books and records by Universale to respondent's agents might violate article 273 of the Swiss Penal Law dealing with disclosure by any person of a "business secret * * to a foreign authority." 4 Petitioner has not, however, pursued this line of argument and, in any event, we are of the view that article 273 should not relieve petitioner of its obligation to cause the books and records to be produced. United States v. Vetco, Inc., supra at 1289-1291; Fontaine v. Securities and Exchange Commission, 259 F. Supp. 880">259 F. Supp. 880, 887-889 (D. Puerto Rico 1966); cf. United States v. First National City Bank, supra.See also United States v. Vetco, Inc., supra at 1288 n. 8. Similarly, petitioner's passing reference to the possible use of letters rogatory by respondent (a line of argument also not pursued) is without merit. See United States v. Vetco, Inc., supra at 1290.59 In sum, we see no reason to modify our prior orders of March 12, 1986, and April 9, 1986 (Exhibits A and B). Accordingly, petitioner's cross-motion for summary judgment is denied. 560 685 We now turn to respondent's motion for summary judgment. There appears to be no possibility, given the preclusion of evidence provision of our order of April 9, 1986, that petitioner can carry its burden of proof. We are therefore satisfied that respondent's motion should be granted. We observe that, although this action appears to amount to the sanction of dismissal of the proceeding -- a sanction which the Supreme Court admonished should be applied with extreme care in Societe Internationale, Etc. v. Rogers, 357 U.S. 197">357 U.S. 197 (1958) -- the fact of the matter is that we take this action only after having given petitioner (and Universale) an opportunity to produce material which we considered essential to enable respondent adequately to defend against the evidence which petitioner proposed to present in order to sustain its position that respondent's notice of deficiency was erroneous. Cf. Fontaine v. Securities and Exchange Commission, supra at 885. Our reasoning with respect to the appropriateness of using the authority of the Court to make this material available to respondent and the considerations which lead61 us to believe that we have stayed within the parameters outlined by the Supreme Court are set forth in our prior opinion, and we see no purpose to be served by repeating them here. See also United States v. Vetco, Inc., supra at 1287-1288. Given the deemed relationship between petitioner, Universale, and Robert Gerling described in that opinion, we are satisfied that we have appropriately balanced the interests of the parties, Universale and the Swiss Federal Government herein (see United States v. Vetco, Inc., supra at 1288-1291; United States v. Chase Manhattan Bank, N.A., 584 F. Supp. 1080">584 F. Supp. 1080, 1083-1087 and 590 F. Supp. 1160">590 F. Supp. 1160 (S.D. N.Y. 1984); see also Gerling International Insurance Co. v. Commissioner, supra at 476.) 6 and that our disposition of this proceeding in respondent's favor is merited even though it will result in a substantial liability on the part of petitioner -- a liability much greater than that 686 which may well have existed if Universale's books and records had been made available.62 An appropriate order will be entered.EXHIBIT AUNITED STATES TAX COURTWashington, D.C. 20217GERLING INTERNATIONAL INSURANCE CO. Petitioner, V. COMMISSIONER OF INTERNAL REVENUE, Respondent.Docket No. 26765-83ORDERRespondent having, on February 11, 1985 filed a Motion for Order Compelling Petitioner to Answer Respondent's Interrogatories or to Impose Sanctions; a hearing having been held thereon on April 22, 1985; the Court having, on April 29, 1985, issued an order directing petitioner to respond to certain of said interrogatories and having indicated in said order the likely consequence of petitioner failing satisfactorily to do so; petitioner having submitted to respondent responses to said interrogatories; further hearing having been held on respondent's motion on November 20, 1985; respondent having, on December 30, 1985, filed a Motion for an Order Compelling Petitioner to Comply with Respondent's Response for Production of Documents or to Impose Sanctions; a hearing on both of respondent's said motions having been held on January 14, 1986, and the Court having, in a telephone conference held on March 3, 1986 informed the parties of its intention to issue this 63 order and set the above-docketed case for trial on April 16, 1986, pursuant to the accompanying memorandum sur order, it isORDERED: that such part of respondent's motion as requests sanctions for petitioner's failure to respond satisfactorily to interrogatories 687 Nos. 45 and 81 is granted in that the following items are conclusively presumed to be true solely for the purposes of the above docketed case: (1) At least from January 1, 1976 to the present and continuing, Robert Gerling owned substantially all the stock of Universale Reinsurance Company, Ltd, Zurich, Switzerland (hereinafter Universale);(2) At least from January 1, 1976 to the present and continuing, by virtue of his position as Chairman of the Board of Directors and the owner of substantially all the stock of Universale, Robert Gerling was, and is, in a position to help make arrangements so as to enable petitioner to comply with respondent's request that there be made available to respondent any and all books and records which reflect the premiums, losses, expenses and other items subject to the reinsurance treaty between petitioner and Universale.(3) Petitioner shall, on or before April 2, 1986, cause64 the aforesaid books and records of Universale to be produced or made available to respondent at the office of respondent's counsel or at such other location as may be mutually satisfactory. It is furtherORDERED: that nothing in this order shall be construed as discouraging the continued efforts by the parties to make arrangements for such production or availability, including the geographical location thereof, and the Court is prepared to render all appropriate assistance to the furtherance of such efforts. If the Court is informed that such arrangements have been made, the Court will take appropriate action to extend the aforementioned April 2, 1986 date and/or to make such other modifications of the within order as it deems advisable.This order constitutes official notice to the parties of the contents thereof.(S) Theodore Tannewald, Jr.Theodore Tannewald, Jr.JudgeDated: Washington, D.C.March 12, 1986688 EXHIBIT BUNITED STATES TAX COURTWashington, D.C. 20217GERLING INTERNATIONAL INSURANCE CO. Petitioner, V. COMMISSIONER OF INTERNAL REVENUE, Respondent.Docket No. 26765-83ORDERThe Court having issued an order dated March 12, 1986, directing petitioner, 65 on or before April 2, 1986, to cause certain books and records of Universale Reinsurance Company, Ltd. (Universale) to be produced or made available to respondent and the Court having been informed in a telephone conference with Counsel for the parties on April 1, 1986, that petitioner would not comply with said order because Universale refused to make said books and records available, after due consideration and pursuant to the memorandum sur order, dated March 12, 1986 (later published as an opinion of the Court, 86 T.C. No. 31 (March 26, 1986), it isORDERED: that petitioner is hereby precluded from offering into evidence at the trial of this case any books and records of Universale which reflect the premiums, losses, expenses and other items subject to the reinsurance treaty between petitioner and Universale and/or any evidence reflecting information derived fronm said books and records, including but not limited to the annual statements received by petitioner from Universale (sometimes referred to as the "Exercise" and "Technical Figures,") the publications of the Swiss Insurance Department, and the deposition of Horst Kurnik, taken on April 18, 1984, 66 including the accompanying exhibits.This order constitutes official notice to the parties of the contents.(S) Theodore Tannenwald, Jr.Theodore Tannenwald, Jr.JudgeDated: Washington, D.C.April 9, 1986 Footnotes1. Such preclusion would prevent petitioner from satisfying its burden of proof, not only as to the amount of the allowable deductions for losses and expenses, but also the adjustments by respondent as to the proper year for reporting of petitioner's share of the premiums, losses, and expenses, of Universale.↩2. Art. 271 of the Swiss Penal Code provides in translation as follows:"Anyone who, without authorization, takes in Switzerland for a foreign state any action which is within the powers of the public authorities,"Anyone who takes such actions for a foreign party or for any other foreign organization,"Anyone who facilitates such actions,"Shall be punished with imprisonment, in serious cases with penitentiary confinement."↩3. Petitioner's suggestion that somehow the American C.P.A. firm conducting the audit would not be an agent of respondent for the purposes of art. 271 of the Swiss Penal Law is disingenuous to say the least. Cf. Application of Chase Manhattan Bank, 297 F.2d 611">297 F.2d 611, 613↩ (2d Cir. 1962).4. Art. 273 of the Swiss Penal Code in translation provides as follows:"Whoever explores a manufacturing or business secret in order to make it accessible to a foreign authority or a foreign organization or a foreign private business enterprise or their agents,"Whoever makes a manufacturing or business secret accessible to a foreign authority or a foreign organization or a foreign private business enterprise or their agents,"Shall be punished with imprisonment, in serious cases with penitentiary confinement. This deprivation of liberty can be combined with a fine."See also United States v. Vetco, Inc., 691 F.2d 1281">691 F.2d 1281, 1287 (9th Cir. 1981); Fontaine v. Securities and Exchange Commission, 259 F. Supp. 880">259 F. Supp. 880, 888↩ n. 7 (D. Puerto Rico 1966).5. We note in passing that, even if we were to accept petitioner's argument, we would not equate arbitrariness on the part of respondent with making his notice of deficiency invalid. At most, we would have shifted the burden of going forward with the evidence to respondent. Respondent's disallowance of the deductions for losses and expenses does not fall within the exception to the rule which has been fashioned by the Second Circuit Court of Appeals (to which an appeal in this case will lie) and which expands the character of the relief available where the circumstances, i.e., absence of linkage of the taxpayer with an income-producing activity, dictate that a notice of deficiency should be held to be arbitrary. See Llorente v. Commissioner, 649 F.2d 152">649 F.2d 152 (2d Cir. 1981), affg. in part, revg. in part, and remanding 74 T.C. 260">74 T.C. 260 (1980); Tokarski v. Commissioner, 87 T.C. 74">87 T.C. 74 (1986); Dellacroce v. Commissioner, 83 T.C. 269">83 T.C. 269, 287 (1984). See also Gerling International Insurance Co. v. Commissioner, 86 T.C. 468">86 T.C. 468, 476↩ n. 5 (1986).6. For a comprehensive discussion of the relationship between discovery and foreign law compulsion, see American Law Institute Restatement of the Law, Foreign Relations of the United States (Revised) Tentative Draft No. 7, adopted in May 1986.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622635/	Ah Pah Redwood Co., Petitioner, v. Commissioner of Internal Revenue, RespondentAh Pah Redwood Co. v. CommissionerDocket No. 50695United States Tax Court26 T.C. 1197; 1956 U.S. Tax Ct. LEXIS 71; September 28, 1956, Filed 71 Decision will be entered for the respondent. 1. Held, the amounts received by petitioner in 1948 and 1949 from Coast Redwood Co. for timber cut by the latter in those years from the property of petitioner are properly taxable as ordinary income.2. Where petitioner did not in fact ascertain at any time during 1948 and 1949 a discrepancy between its actual timber resources and prior estimates, even though such fact was at all times readily ascertainable, a revision of petitioner's depletion allowance effective for the years 1948 and 1949 is not warranted under section 23 (m), I. R. C. 1939. James C. Dezendorf, Esq., for the petitioner.Wendell M. Basye, Esq., for the respondent. Van Fossan, Judge. Murdock, J., dissenting. VAN FOSSAN 1197 The respondent determined deficiencies in income tax of petitioner, and additions thereto, pursuant to section 291 (a) of the Internal Revenue Code of 1939, for failure to file timely returns, for years and in amounts as follows:YearDeficiencyAddition to tax1948$ 2,654.84$ 663.71194935,649.378,912.35Respondent's imposition of the additions to tax is not contested. Nor is error assigned with respect to various adjustments made by respondent in his determination. The issues framed by the pleadings and here to be resolved are:1198 (1) Whether the amounts received by petitioner in 1948 and 1949 from Coast Redwood Co. for timber cut by the latter from the property of petitioner73 are properly taxable as long-term capital gains.(2) Whether petitioner's depletion allowance for the taxable years 1948 and 1949 is properly to be adjusted subsequent to the close thereof by revision of the estimated amount of units of timber standing on petitioner's property during such years.FINDINGS OF FACT.The stipulation of facts filed by the parties, with exhibits attached, is adopted and, by this reference, made a part hereof.The petitioner, Ah Pah Redwood Co., is a corporation organized under the laws of California, with its main office at Portland, Oregon. The returns for the periods here involved were filed with the then collector 1 of internal revenue for the district of Oregon. Such returns were filed on a calendar year basis.Upon its organization in October 1947, petitioner purchased all the right, title, and interest of "the74 buyer" in a certain purchase agreement (hereinafter called the Sage Agreement), and all the timber and land covered thereby, dated December 13, 1946, between Sage Land & Lumber Company, Inc. (hereinafter called Sage), as seller, and Union Bond & Trust Company (hereinafter called Union), as buyer. The timber and land involved are located in Humboldt County, California, and the purchase price paid by petitioner was $ 1,443,838.99. Shortly after the purchase of this tract (hereinafter called the Sage Tract), petitioner, in October 1947, under an oral or implied contract with Coast Redwood Co. (hereinafter called Coast), allowed the latter to begin cutting timber from the Sage Tract and pay therefor $ 5 per thousand feet as removed. On January 9, 1950, petitioner entered into a formal written agreement with Coast, pursuant to which petitioner agreed to sell all of the timber and land covered by the Sage Agreement to Coast.In the years 1948 and 1949, petitioner reported its income on the sales of timber to Coast as long-term capital gains. In so reporting its income on the timber thus sold to Coast, petitioner used the basis for depletion of $ 3.941566 per thousand board feet. Respondent75 also used such basis in computing a portion of the deficiencies here in question. This basis for depletion was computed by both parties by dividing the amount of timber on the Sage Tract, as was shown on schedule A of the Sage Agreement per the French cruise, which amount petitioner assumed to be the correct quantity thereof, into the total purchase price paid by petitioner for such agreement. In 1952, petitioner 1199 first became aware of the fact that schedule A of the Sage Agreement erroneously overstated the quantity of timber on the Sage Tract by a substantial amount. Upon an actual cruise made shortly after logging operations ceased in November 1954, it was ascertained that such overstatement was approximately double the actual amount and that there was a "fall-down" of approximatealy 48 per cent.In addition to other sales, petitioner sold 33,883,000 board feet of timber covered by the Sage Agreement to A. K. Wilson Lumber Company in 1950. This quantity of timber was assumed to be the above amount on the basis of the quantities shown in schedule A to the Sage Agreement. Prior to petitioner's acquisition of the Sage Agreement, International Pacific Pulp and Paper 76 Co. sold 16,022,060 board feet of the timber covered thereby to Coast in the years 1946 and 1947.OPINION.The first issue is whether the amounts received by petitioner in 1948 and 1949 from Coast for timber cut in those years by the latter from the Sage Tract are properly taxable as capital gains, as urged by petitioner, or as ordinary income, as determined by respondent. The statutes involved are sections 117 (j) (1) and 117 (k) (2) of the Internal Revenue Code of 1939, as amended, the pertinent provisions of both of which are set forth below. 2 It is petitioner's position that the only question to be resolved under this issue is whether or not its oral arrangement with Coast, whereby Coast commenced logging operations on the Sage Tract, as indicated in our findings above, in October 1947, shortly after petitioner's acquisition thereof, from which logging operations the amounts in dispute were received, constituted a "disposal" by petitioner of all of the timber standing thereon within the meaning of section 117 (k) (2).77 In line with this view, petitioner makes the argument on brief that such oral arrangement was ineffective to pass title to all of the standing 1200 timber in question in October 1947, the date the oral agreement was made, because of the California Statute of Frauds (Cal. Civ. Code Ann. sec. 1091 (West)); Anderson v. Palladine, 178 P. 553">178 P. 553; see, also, 34 Am. Jur. 498), and that it therefore could not and did not constitute a "disposal" of such timber within the ambit of the cited statute at any time prior to the execution of the written agreement in 1950. Further, petitioner advances the theory that while its oral agreement with Coast was not effective as a contract to sell standing timber, it did constitute a license to cut, which license ripened into a contract for the sale of logs upon the severance of each individual tree.Whether or not petitioner's theory be valid, its application will not constitute a disposition of the issue framed in the pleadings. Thus to narrow the issue is to make the unwarranted assumption that the timber involved in the transaction at issue constituted a capital asset to petitioner at the time of such transaction, 78 within the definition contained in section 117 (a) (1) of the Internal Revenue Code of 1939, 3 or property used in petitioner's trade or business within the meaning of section 117 (j) (1), supra. In this connection, respondent makes the point, which we feel to be well taken, that petitioner at no time engaged in any logging activities, but, rather, merely sold the Sage timber to others under arrangements whereby the vendees would do the logging; that these sales of timber were the only business activity entered into by petitioner; that it is thus to be considered as having been engaged in the trade or business of selling timber; and that the timber in dispute, whether or not it was standing, was held for sale to customers in the ordinary course of such business.79 The facts found on this record lead to the conclusion that petitioner was engaged in the trade or business of selling timber and that the timber in controversy was held for sale to customers in the ordinary course thereof. Petitioner does not deny the nature of its business activity and the purpose for which the Sage timber was held. Nor does it claim that the timber comes within the definition of section 117 (a) (1), supra. In fact, petitioner bases its entire case upon the applicability of section 117 (j). In this connection, petitioner's position is summed up in its statement on brief that section 117 (j) "includes timber to which Section 117 (k) (2) is applicable and allows capital gain treatment of income therefrom without regard to the nature of the taxpayer's business or the purpose for which the timber is held." (Emphasis supplied.)1201 The view thus expressed is in direct conflict with the plain wording of the statute relied upon. Section 117 (j), by its own language, specifically excludes from its operation all property held for sale to customers in the ordinary course of business. This being true, the gains derived from the sale of the Sage timber, 80 regardless of the time of such sale, would not qualify for capital gains treatment under either section 117 (a) (1) or section 117 (j).While there is no direct evidence of the precise terms of the oral cutting contract entered into between petitioner and Coast, such contract, for aught that is shown, looked immediately to the severance and removal of all timber standing upon the Sage Tract. Under the provisions of the Uniform Sales Act which was enacted in California in 1931 (See title 1, Sales of Goods, Stats. 1931, ch. 1070, p. 2234, sec. 1; Cal. Civ. Code Ann. secs. 1721-1800 (West)), the sale of "things attached to or forming a part of the land," which category includes fructus naturales, or standing timber, pursuant to a contract according to the terms of which the trees are to be severed and removed as soon as possible, is a sale of goods, i. e., personalty, and not of an interest in land. See sec. 1796, supra; Brown, Personal Property sec. 164 (2d ed.). Thus it is, that, in our opinion, petitioner's cutting contract with Coast was fully enforceable by the latter in the California courts and not invalid for noncompliance with the Statute of Frauds. See sec. 1091, 81 supra; see, also, secs. 1723, 1724, supra. By being allowed access to the Sage Tract and by beginning its logging operations, Coast partly performed on its contract with petitioner and by such partial performance removed the contract from the application of the Statute of Frauds. McGinn v. Willey, 24 Cal. App. 303">24 Cal. App. 303, 141 Pac. 49; cf. Forbes v. City of Los Angeles, 101 Cal. App. 781">101 Cal. App. 781, 282 Pac. 528; 101 A. L. R. 923; see sec. 1724, supra.Accordingly, it is our view that petitioner's oral agreement with Coast, under either rationale, constituted a disposition of the Sage timber within 6 months of the acquisition thereof in direct opposition to the specific statutory language defining capital gains. See sec. 117 (k) (2), supra, and footnote 2.The recent case, L. D. Wilson, 26 T. C. 474, is clearly distinguishable from that now before us. There the issues framed were whether the partnership, of which the petitioners therein were members, could be considered the "owner" of the timber in question within the intendment82 of section 117 (k) (2), supra, and, if so, whether the timber cutting arrangement involved was sufficient to constitute a "disposal" of the timber within the scope of the statute involved. We answered both questions in the affirmative.In the instant case, albeit the existing oral cutting arrangement between petitioner and Coast constitutes a valid cutting contract for 1202 the disposition of the Sage timber, such contract does not meet the prerequisites of a "disposal" within the statutory purview, in that at the time it was entered into, petitioner had been the owner of the Sage timber for a period of less than 6 months. Nor, contrary to the instant case, could the partnership in L. D. Wilson, supra, on the facts there present, be considered as having been in the trade or business of selling stumpage to customers in the ordinary course of such business.In view of all the foregoing, respondent's determination on this point is affirmed.The second issue involves petitioner's allegation that an erroneous basis for depletion was applied by both petitioner and the respondent to timber cut from its property in the taxable years.The facts adduced83 herein show that the amount of recoverable units of timber standing on the Sage Tract was substantially less than the original estimate which was used in computing petitioner's depletion allowance at $ 3.941566 per thousand board feet. Petitioner first became aware of the error in 1952 and upon an actual cruise made shortly following the cessation of logging activities in November 1954, the amount of fall-down was ascertained to be approximately 48 per cent.Petitioner here seeks revision of its depletion allowance for the years 1948 and 1949, citing section 23 (m), Internal Revenue Code of 1939, 4 and our opinion in Marion A. Burt Beck, 15 T. C. 642, affd. 194 F. 2d 537, as authorizing such adjustment. Petitioner reasons that since the amount of fall-down in its timber resources was readily ascertainable at all times during the taxable years, a revision of its depletion allowance should be made effective for those years. We do not agree.84 The Beck case does not stand for the proposition advanced by the petitioner. There the taxpayer was contesting a downward revision by respondent of her depletion allowance for the years there involved. However, the record made in that proceeding was adequate to warrant our finding as a fact that the taxpayer on the basis of facts known and reasonably ascertainable in the taxable years had discovered the discrepancy between the amount of units of ore actually recoverable and the prior estimates thereof. This being true, we sustained respondent's action, saying, in part:1203 The statute does not imply that the party to whom it would be an immediate tax-wise advantage to suppress the information of a need for adjustment, has any privilege not to come forward and make the necessary correction in the return. * * The evidence here affords us no basis for making any finding that petitioner at any time in the taxable years knew or even suspected that its prior estimate of standing timber was erroneous. Albeit such error was readily ascertainable, it was not in fact ascertained at any time within either of the taxable years. In our view, therefore, the revision sought by85 petitioner does not qualify under the statutory provision that the allowance "for subsequent taxable years shall be based upon such revised estimate." Cf. Petit Anse Co. v. Commissioner, 155 F.2d 797">155 F.2d 797, certiorari denied 329 U.S. 732">329 U.S. 732. Respondent's determination on this issue is approved.Decision will be entered for the respondent. MURDOCK Murdock, J., dissenting: The legislative history of section 117 (k) indicates clearly that Congress was trying to give capital gains treatment to timber owners when they disposed of their timber. See Helga Carlen, 20 T. C. 573. This taxpayer seems to come precisely within the terms of section 117 (k) (2) and, therefore, is entitled to its benefits.I also have doubt on the depletion issue. The facts in regard to the true content were reasonably ascertainable during the taxable year, and under such circumstances a reasonable allowance for depletion could be based on such ascertainable facts. Footnotes1. The stipulation, as well as the petition, reads "Director", but this is obviously erroneous inasmuch as such office did not come into being until after the taxable years.↩2. SEC. 117. CAPITAL GAINS AND LOSSES.(j) Gains and Losses From Involuntary Conversion and From the Sale or Exchange of Certain Property Used in the Trade or Business. -- (1) Definition of property used in the trade or business. -- For the purposes of this subsection, the term "property used in the trade or business" means property used in the trade or business, of a character which is subject to the allowance for depreciation provided in section 23 (l), held for more than 6 months, and real property used in the trade or business, held for more than 6 months, which is not * * * (B) property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business. Such term also includes timber with respect to which subsection (k) (1) or (2) is applicable. * * ** * * (k) Gain or Loss Upon the Cutting of Timber. -- * * (2) In the case of the disposal of timber (held for more than six months prior to such disposal) by the owner thereof under any form or type of contract by virtue of which the owner retains an economic interest in such timber, the difference between the amount received for such timber and the adjusted depletion basis thereof shall be considered as though it were a gain or loss, as the case may be, upon the sale of such timber.↩3. SEC. 117. CAPITAL GAINS AND LOSSES.(a) Definition. -- As used in this chapter -- (1) Capital Assets. -- The term "capital assets" means property held by the taxpayer (whether or not connected with his trade or business), but does not include * * property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business, * * ↩4. SEC. 23. DEDUCTIONS FROM GROSS INCOME.In computing net income there shall be allowed as deductions: * * (m) Depletion. -- * * In any case in which it is ascertained as a result of operations or of development work that the recoverable units are greater or less than the prior estimate thereof, then such prior estimate (but not the basis for depletion) shall be revised and the allowance under this subsection for subsequent taxable years shall be based upon such revised estimate. * * *↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622636/	MATTHEW J. STACOM AND ESTATE OF CLAIRE P. STACOM, DECEASED, MARK A. BERLIN, EXECUTOR, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentStacom v. CommissionerDocket No. 28610-88United States Tax CourtT.C. Memo 1991-231; 1991 Tax Ct. Memo LEXIS 260; 61 T.C.M. (CCH) 2691; T.C.M. (RIA) 91231; May 23, 1991, Filed 260 Decision will be entered under Rule 155. Bernard S. Mark, Richard S. Kestenbaum, and Mark A. Berlin, for the petitioners. Michael D. Wilder, Roland Barral, Mark L. Hulse, and Paulette Segal, for the respondent. COLVIN, Judge. COLVINMEMORANDUM FINDINGS OF FACT AND OPINION Petitioners took deductions with respect to purchases and leasebacks of computer equipment. The deductions were disallowed on grounds that they were structured as a tax-avoidance scheme devoid of economic substance which should be disregarded for Federal income tax purposes. Respondent determined deficiencies in petitioners' Federal income tax for 1978, 1979, 1980, and 1981 in the amounts of $ 249,546, $ 1,187,321, $ 692,943, and $ 787,242, respectively. The statutory notice of deficiency determined increased interest attributable to tax-motivated transactions under section 6621(c) for 1978, 1979, 1980, and 1981. The issues for decision are: (1) Whether the sales and leasebacks of computer equipment had sufficient economic substance and business purpose. We hold that they did not. (2) Whether petitioners acquired the benefits and burdens of ownership in the equipment. 261 We need not reach this issue and the remaining issues, other than the increased interest, based on our holding above. (3) Whether petitioners had an actual and honest profit objective. (4) Whether section 465(a) 1 limits petitioners' ability to deduct losses from the sale and leaseback transaction because they were not at risk in excess of their cash investments. a. Whether petitioners were protected against loss. b. Whether petitioners' equipment installment notes ran in favor of parties with interests in the computer-leasing activities other than as creditors. (5) Whether petitioners are liable for increased interest under section 6621(c) for underpayments attributable to tax-motivated transactions. We hold that they are. References to petitioner in the singular are to petitioner Matthew262 Stacom. References to petitioners are to Matthew Stacom and the Estate of Claire Stacom. References to the Stacoms are to Matthew and Claire Stacom. FINDINGS OF FACT Some of the facts have been stipulated and are so found. Our use of terms such as payment, purchase, sell, own, note, lease, loss, gain, and transaction to describe the events is not necessarily to be construed as a finding that the transactions had economic substance. 1. PetitionersPetitioners Matthew Stacom and the Estate of Claire Stacom resided in Palm Beach, Florida, when the petition was filed. Petitioner received a bachelor of arts degree from Lehigh University in 1941 and a master of arts degree from New York University in 1948. From 1946 until trial, he was employed by Cushman and Wakefield, Inc., the largest commercial real estate brokerage firm in the United States. Since about 1974, he has been the vice chairman and on the executive committee and board of directors of Cushman and Wakefield, Inc.Petitioner was paid on a commission basis as a Cushman and Wakefield, Inc. broker. Petitioner's average working day was very long. His income was primarily derived from transactions originating263 in the New York metropolitan area. Nevertheless, he traveled throughout the country with respect to major real estate transactions, including regular travel to Cleveland, St. Louis, and Chicago. During the early 1970's, petitioner sold to Sears the land upon which Sears constructed the tallest building in the world, the Sears Tower. Cushman and Wakefield, Inc., supervised the construction of the building in Chicago and managed it for 10 years. Petitioner became a stockholder in Cushman and Wakefield, Inc., in the mid-1950's and remained a stockholder until 1970, when RCA acquired the firm and purchased his stock for $ 2,000,000. Cushman and Wakefield, Inc., had a policy which prohibited its brokers from individually investing in real estate. Petitioner met his wife, Claire, in 1954. At that time, Claire Stacom had extensive business experience and was earning even more than petitioner, which was a substantial amount. During the time petitioner knew her, Claire Stacom was a very successful businessperson. Petitioner and his wife were partners in their family finances during their marriage. However, Claire Stacom played a larger role in the family finances. Using a family264 account, she made the deposits and paid the family's bills. All of petitioner's income went into the family account. However, Claire Stacom wrote nearly every check. Petitioner wrote almost no checks. Claire Stacom, more than petitioner, dealt with financial professionals representing the family. Claire Stacom was a very competent negotiator. Petitioner believed that Claire Stacom had the competence to make the family financial decisions, and he relied upon her business acumen, experience, and expertise. The Stacoms used a portion of the RCA proceeds to purchase a large home in Greenwich, Connecticut. A substantial portion of the balance of the sales proceeds was deposited with the Irving Trust Company for investment on a very conservative, income-earning basis. The Stacoms invested some of the remainder of the funds in more speculative ventures. 2. Mark A. BerlinMr. Berlin is an attorney and certified public accountant in active practice since 1969. He has a bachelor of science degree in economics from New York University, a juris doctor degree from Brooklyn Law School, and a master of law in taxation from the New York University School of Law. His areas of specialty265 include taxation and corporate law. As an attorney specializing in taxation, Mr. Berlin reviewed and sometimes wrote offering memoranda and tax opinions in connection with high-risk investments. The Stacoms met Mr. Berlin in the mid-1970's while they were adversaries during a coal mining investment negotiation. After the coal transaction closed, the Stacoms asked Mr. Berlin to be their family accountant and attorney. Initially, as their accountant, Mr. Berlin prepared the Stacom family member tax returns. However, he later became intimately involved with the Stacom family finances. Mr. Berlin's law firm represented the Stacom family in all matters, including litigation and estate planning. Mr. Berlin became very close to the Stacoms and their children. He became involved in the Stacom family's day-to-day operations and business dealings, dealing principally with Claire Stacom. He was appointed executor of Mrs. Stacom's estate and was selected as guardian of their minor children. After Claire Stacom's death, Mr. Berlin's contact with the Stacom family increased. He became a confidant to the Stacom children and undertook Claire Stacom's role of paying the family's bills, 266 making the deposits, maintaining the books and records, and investing the family's money. 3. Introduction to Computer InvestmentMark A. Berlin advised petitioner and Claire Stacom on some of the investment ventures. During the 1970's the Stacoms invested in oil and gas transactions and coal mining ventures. Petitioner also personally invested some of his money. However, petitioner relied primarily upon Claire Stacom for family financial decisions. During the years at issue, the Stacoms reported substantial income. In 1978 they reported a $ 747,338 gain from the sale of RCA stock. For 1979 through 1981, they reported combined salaries of $ 1,915,725, $ 951,433, and $ 1,263,427, respectively. They attempted to shelter part of that income from income taxes. To do so, they attempted to find a reputable and viable means of sheltering their income. Claire Stacom knew of Mr. Berlin's involvement with computer equipment. She also read about computer leasing. In July 1979, Claire Stacom asked Mr. Berlin about computer leasing. Claire Stacom reviewed lists of computer equipment with Mr. Berlin. She decided to invest in computer transactions. Initially, Claire Stacom received267 all of the lease payments and made all the installment payments for the computer transactions. Tragically, Claire Stacom was killed in an automobile accident in 1983. 4. Salber Equipment CompanyBeginning in the mid-1970's Mr. Berlin and Jeffrey Saltzer, a New York certified public accountant, formed Salber Equipment Company (Salber), a New York general partnership. Salber acted as investment consultants and brokers for computer equipment leasing companies, such as OPM Leasing Services, Inc. (OPM), Sha-Li Leasing Associates (Sha-Li), Funding Systems, Comdisco, and Finalco. The transactions involved primarily IBM mainframe computers. Salber's principal customers were high-net-worth individuals. Salber received commissions for arranging computer equipment sales. All computer sale and lease transactions in which Salber acted as a broker included an independent middle sales company. The middle sales company may have been partly for securities law purposes, but they were primarily an attempt to avoid at-risk problems of section 465. 5. The Sale and Leaseback Transactionsa. BackgroundIn July 1979, Claire Stacom asked Mr. Berlin to locate computer equipment268 as an investment for her family. Petitioner relied primarily upon Claire Stacom and Mr. Berlin for advice concerning this investment. Mr. Berlin asked Mr. Saltzer to provide a list of computer equipment that was available from various leasing companies. Both Mr. Berlin and Mr. Saltzer believed that it was more prudent to acquire older generation IBM equipment at a deep discount rather than to pay top of the market prices for new equipment. They selected the older IBM 370/158 (158) and 370/168 (168) (collectively the IBM 370 series) computer equipment. After considering and rejecting a substantial number of computers through various independent leasing companies, Mr. Berlin and Mr. Saltzer focused on OPM and Sha-Li. In his capacity as the Stacom's representative, Mr. Berlin was able to extract concessions from Mr. Saltzer and Salber, OPM, and Sha-Li. For example, Mr. Berlin was able to reduce petitioner's cash investment required for the transaction. He also arranged for the Stacoms to pay the initial installment in four payments and to pay a reduced commission to Salber. In deciding whether to recommend particular computer equipment to the Stacoms, Mr. Berlin considered the269 credit rating for the end-user and the terms of the end-user lease. Mr. Berlin insisted that the rent under the initial end-user lease be sufficient to pay off the underlying debt to the bank that had a lien on the equipment to avoid the risk of foreclosure in the event of default. He also insisted that the lease require the end-user to pay a termination fee in an amount equal to or exceeding the loan due to the bank holding the underlying purchase lien if the end-user wanted to terminate the lease. Mr. Berlin also insisted that the computer have an IBM maintenance agreement to insure that the leased computer equipment be properly maintained. He also gave serious consideration to the tax benefits of the transaction. Mr. Saltzer checked with appraisers, including Harvey Berlent, for a fair market value appraisal and anticipated residual values appraisal for the OPM and Sha-Li equipment. Mr. Berlent was provided with the transaction prices before he made his appraisals. He was actually retained and paid by OPM and Sha-Li rather than the Stacoms. Mr. Berlent believed that after 9 years the equipment would have a value of approximately 20 percent of its cost to the Stacom family. 270 Before accepting the proposed OPM and Sha-Li transactions, Mr. Berlin and Claire Stacom reviewed a flowchart analysis prepared by Mr. Saltzer. They discussed the fair market value and anticipated residual value of the OPM and Sha-Li computer equipment that the Stacoms were considering. They also discussed anticipated secondary markets for the equipment to smaller companies and companies located overseas. The flowcharts reflected an economic worst case of no residual value. The flowcharts also demonstrated tax benefits of the transactions. The flowcharts showed that if the Stacoms obtained a 13-percent residual value based on the equipment cost, they would break even on the transaction. Mr. Berlin and Claire Stacom discussed the possibility of a cash profit based upon residual values indicated by the appraiser. Before closing the transactions, the Stacoms received written appraisals from Harvey Berlent confirming the oral appraisal he had given Mr. Saltzer. The appraisals reflect a fair market value and a residual value after 9 years of $ 2,100,000 and 20 percent for the Sha-Li equipment, and $ 2,900,000 and 20 percent for the OPM equipment, respectively. There were two separate271 closings. Mr. Berlin and Claire Stacom again discussed the tax consequences of the transactions before the closings. At the closings, Mr. Berlin discussed tax consequences of the transactions with petitioner and Claire Stacom. Petitioner reviewed all the documents at the closings with Mr. Berlin, discussed the economics of the transactions, and signed all the papers, executed bank checks, and furnished letters of credit. b. OPM Transaction(1) The Parties, OPM Leasing Services and Beta Delta Leasing, Inc. (Beta) OPM was a major lessor of IBM mainframe equipment. It was owned by Marion Goodman and Mordecai Wiseman. OPM was involved in a major fraud that was discovered in 1980. However, the fraud relates to different transactions than the one before us. OPM also filed for bankruptcy protection on March 11, 1981. Another leasing entity, Beta, was inserted into the transaction in part as an attempt to avoid at-risk problems under section 465. (2) OPM's Equipment and Leases to End-UsersOPM purchased one IBM 370/168, two IBM 370/158's and associated peripheral equipment and leased them to Univar, Saks, and Ideal Industries. The OPM purchase consisted of the following272 IBM equipment: ModelSerial #End User316860312Univar306660598Univar306761582Univar288062570Univar370/158 U3424407Saks321311300Saks370/158 U3423184Ideal321310215Ideal(3) OPM Sale to BetaOn December 26, 1979, Beta purchased the same computer equipment from OPM (OPM equipment) for $ 2,890,000. The purchase price was $ 62,500 in cash and a $ 2,827,500 note. The note was payable as follows: December 26, 1979$ 62,000 (prepaidinterest)25 monthly paymentsbeginning December 31, 1979,each in the amount of$ 23,082.19November 15, 1980$ 170,000 plus 9 percentinterest per annum fromDecember 26, 1979June 15, 1981$ 110,000 plus 9 percentinterest per annum fromDecember 26, 1979June 15, 1982$ 20,500 plus 9 percentinterest per annum fromDecember 26, 197983 monthly paymentsbeginning January 31, 1982,each in the amount of$ 56,448.78(4) Beta Sale to StacomsOn the same day, December 26, 1979, the Stacoms purchased the OPM equipment from Beta for $ 2,900,000, subject to the OPM end-user leases. The purchase price was $ 72,500 in cash and a $ 2,827,500 note. The note payments from petitioner to Beta in their installment273 note were on the same payment schedule as the note payments between OPM and Beta except that the 25 monthly payments beginning December 31, 1979, were each in the amount of $ 23,200 instead of the $ 23,082.19 due from Beta to OPM. Also, the 83 monthly payments beginning January 31, 1982, were each in the amount of $ 56,529.05 instead of the $ 56,448.78 due from Beta to OPM. The Stacom OPM Equipment Installment Note was backed by three recourse notes. The purchase agreement between Beta and petitioner closed before December 31, 1979. One of the reasons for closing in 1979 was so that petitioner and Claire Stacom could enjoy tax benefits from the deal in the 1979 taxable year. All of the OPM equipment was on line and subject to IBM maintenance. Salber's 3-percent commission for the transaction was paid by OPM. (5) Stacom's Leaseback to OPMUnder an agreement between petitioner and OPM, petitioner leased the equipment he purchased from Beta back to OPM on the same day, December 26, 1979. Under the terms of the lease, OPM leased the equipment for nine years until December 31, 1988, with 25 monthly fixed lease rent payments due beginning December 31, 1979, each in the amount274 of $ 23,666.07, and 83 monthly payments beginning January 31, 1982, each in the amount of $ 56,995.12. The Stacoms did not know whether OPM had the unrestricted right to pledge the equipment. The Stacom OPM Equipment Purchase Agreement provides that "In connection with any New Loan, OPM shall not have the right, without the consent of the Buyer [Stacom] * * to use the Equipment as collateral." Petitioner relied exclusively on Claire Stacom and Berlin with respect to the computer transactions. Whether a third party could use equipment purchased by petitioner as collateral for loans was not investigated by petitioner because if Mark Berlin was satisfied with the transaction, petitioner would sign the documents without investigating the contents. Before these computer transactions, petitioner had no dealings with OPM. He did not personally investigate OPM's business dealings or personally inspect the OPM equipment he purchased from Beta because he relied upon his wife and their attorney and financial adviser, Mark Berlin. He did not personally review the promissory note he signed. The Stacom OPM equipment installment note provided that petitioner was liable for principal and275 interest due under "Anything in the Note or any other agreement, instrument or document executed in connection with or related to the transactions described herein to the contrary notwithstanding." However, the same note indicates that if OPM did not make lease payments to petitioner, he could defer the payments to Beta until February 28, 1996. It also indicates that if petitioner so chose, no interest would accrue on the deferred principal or interest. Moreover, the note indicates that if OPM did not make lease payments to petitioner, petitioner could reduce each of his payments of principal and interest as it became due to the extent any amount of rent was not received. After OPM stopped making payments to petitioner, he stopped making payments to Beta. On October 18, 1983, petitioner, Beta, and the Trustee in Bankruptcy for OPM agreed that OPM's Trustee would assume the OPM lease from the Stacoms. The agreement also provided the right of setoff in the event of a default. After OPM declared bankruptcy, it stopped making lease payments to petitioner. (6) OPM Marketing AgreementPetitioner and OPM entered into a marketing agreement under which OPM was to market the equipment276 for re-lease or sale after the OPM lease expired in 1988. In return for its services, OPM was entitled to be reimbursed for all costs and expenses of marketing, plus 10 percent of the net proceeds from the marketing. c. Sha-Li TransactionThe transaction involving the equipment initially owned by Sha-Li was very similar to the OPM transaction described above. (1) The Parties -- Sha-Li Leasing Associates and Proz Leasing Associates, Inc. Like OPM, Sha-Li Leasing Associates was a company that leased, sold, and financed IBM equipment to large companies. In 1981, it was located at 40 Wall Street, New York. George Prussin was Sha-Li's principal. He had been a salesman working in OPM's marketing department form 1978 until the end of 1979. Michael Zwick was the vice president of Sha-Li in December 1979. He was employed by OPM before working at Sha-Li. Ellen Slow was the senior vice president in charge of equity administration at Sha-Li. Sha-Li performed administrative functions for Proz Leasing Associates, Inc. (Proz), such as handling checks and bank accounts. Sha-Li maintained Proz's original records. Thus, if Proz wished to examine its own original records, it would277 be necessary for Proz to visit Sha-Li's offices. In 1981 Proz was co-located with Sha-Li at 40 Wall Street, New York. The following year, they shared offices at 39 Broadway, New York. Like Beta, Proz was inserted into the transaction as an attempt to avoid at-risk problems under section 465. (2) The Sha-Li Equipment and Leases to End-UsersSha-Li purchased IBM computer equipment. On July 12, 1979, Sha-Li leased three IBM 370/158's and associated peripheral equipment to Brown University, E.G. & G., and Scoa. The IBM equipment was as follows: ModelSerial #End User3158J23855E.G. & G.383041219E.G. & G.321330280E.G. & G.3158-U3123834Brown3158-U3423182Scoa2313-110210Scoa(3) Sha-Li Sale to ProzOn December 21, 1979, Sha-Li sold the equipment to Proz for $ 2,098,000 payable in $ 30,500 in cash and a $ 2,067,500 note. The $ 2,067,500 note from Proz to Sha Li was payable as follows: December 21, 1979$ 20,000 (prepaidinterest)25 monthly paymentsbeginning December 31, 1979each in the amount of$ 16,912June 15, 1980$ 126,000 plus interestfrom December 21, 1979 atthe rate of 9 percent perannumJune 15, 1981$ 84,000 plus interestfrom December 21, 1979 atthe rate of 9 percent perannumJune 15, 1982$ 52,500 plus interestfrom December 21, 1979 atthe rate of 9 percent perannum83 monthly paymentsbeginning January 31, 1982,each in the amount of$ 40,934.78278 (4) Proz Sale to the StacomsOn the same day, December 21, 1979, Proz sold the equipment to petitioner for $ 2,100,000 payable in $ 32,500 in cash and a $ 2,067,500 note. The equipment was still subject to the end-user leases. Under the Stacom Sha-Li equipment installment note, petitioner was to make payments in precisely the same amounts and on the same dates as the note between petitioner and Proz. The Stacom Sha-Li equipment installment note was backed by three separate recourse notes. The purchase agreement provides language similar to the OPM agreement with regard to Sha-Li's right to pledge the Sha-Li equipment as collateral. As with the OPM transaction, petitioner relied exclusively on Claire Stacom and Mr. Berlin to investigate, analyze, and negotiate the Sha-Li transaction. Salber received 3 percent of $ 2.1 million as broker fees in the Sha-Li transaction. (5) Stacom Leaseback to Sha-LiOn the same day, December 21, 1979, petitioner leased the equipment to Sha-Li. The lease payment schedule from Sha-Li to petitioner mirrored the payments due from petitioner to Proz, under the note to Proz, and the payments due from Proz to Sha-Li under the note to Sha-Li. 279 The leaseback to Sha-Li had the following terms: 25 monthly paymentsfrom December 31, 1979$ 17,249.9683 monthly paymentsfrom January 31, 1982$ 41,272.74The Stacom Sha-Li equipment installment note included language similar to the Stacom OPM equipment installment note concerning petitioner's personal liability, deferred payments until February 28, 1996, and reduced principal and interest payment to the extent rent is not received. (6) Sha-Li Marketing AgreementAs with OPM, petitioner and Sha-Li entered into a marketing agreement under which Sha-Li was to market the equipment for release or sale after the Sha-Li lease expired in December 1988. In return for its services, Sha-Li was entitled to be reimbursed for all costs and expenses of marketing, plus 10 percent of the net proceeds received from the marketing. 6. Residual Valuations and The ExpertsSeveral significant facts affected the residual valuations of the subject IBM 370/158 and 370/168 computer equipment. At the time at issue, each new line of IBM equipment had a lower price and greater performance than the prior line. Older IBM equipment used more space and energy than newer models. The280 IBM 303X series was announced in March 1977. The IBM 303X series decreased the fair market value and residual value of the IBM 370/158 and 370/168 computers somewhat. However, some IBM 370 users felt the IBM 303X series was too expensive. It was sold with premiums for placing an order. In addition, it was the least popular computer series ever introduced by IBM. Memory for the IBM 370's became significantly cheaper around November 1979. More importantly, IBM announced their IBM 4300 series in January 1979, nearly a year before the subject transactions. The IBM 4300 series had three times the processing capability and one-third the cost of prior IBM equipment. The long-term effect of the IBM 4300 series was to significantly decrease the fair market values and residual values of the IBM 370/158 and 370/168 computers. a. S. Paul BlumenthalMr. Blumenthal testified as respondent's expert. He conducted his analysis in 1989. He believed that in December 1979 the fair market value of the OPM equipment was $ 2,224,932 and the Sha-Li equipment was $ 1,944,539. He then projected the residual value of the equipment as scrap as of December 1988. He believed that in December281 1988 the residual value of the OPM equipment was $ 2,380 and the Sha-Li equipment was $ 1,895. Mr. Blumenthal did not consider the facts that the equipment was on lease, located, installed, and operating in particular locations with end-users and IBM maintenance agreements. However, he believed that keeping equipment on an IBM maintenance contract is a positive factor in determining residual value. Mr. Blumenthal made his fair market value and residual value analysis by relying on the Computer Price Guide or Bluebook and list prices for comparable equipment. The Computer Price Guide is a widely recognized authority on the value of used computer equipment. b. Harvey BerlentMr. Berlent made the only appraisal near the time of the transaction. He prepared a report on both the OPM and Sha-Li equipment. OPM and Sha-Li paid for these reports. Mr. Berlent's fair market valuation of the OPM and Sha-Li equipment was precisely the same as the purchase price of the equipment. He believed that as of December 1979, the fair market value was between $ 2,300,000 and $ 2,400,000 for the OPM equipment and $ 2,900,000 for the Sha-Li equipment. He projected the residual value of the282 equipment in December 1988 to be 20 percent of the estimated fair market value of the equipment in December 1979. Mr. Berlent believed that the IBM series 303X and 4300 did not represent an improvement on the IBM 370 series machines, but were really clones of the IBM 370. c. Jerry MinskyDuring the years at issue, Mr. Minsky was president of one of the five largest computer leasing companies in the United States. He bought, sold, and leased primarily IBM equipment including IBM 370/158's and 370/168's. He believed that computer equipment does not deteriorate because there is a user for every piece of computer equipment at some price. He also acknowledged the major price reductions for memory on most IBM 370 processors. However, he did not believe that the IBM 303X series had an increase in performance and a decrease in price from the IBM 370/158 and 370/168 computers. He did not believe that the IBM 303X series or 4300 series represented an increase in technology from the IBM 370/158 and 370/168 series. He felt that the IBM 4300 series had no impact on the value of IBM 370/158 and 370/168 computers. He did not mention the IBM 4300 series in his report. He based his283 valuation in part on "gut feel." Mr. Minsky was somewhat selective in his reliance upon Computerworld articles. He relied on one report that indicates that the highest residual value that the International Data Corporation projected in February 1979 for January 1987 for IBM 370/158's and IBM 370/168/'s is 6 percent. Before he made his appraisal, he looked at a copy of the Berlent appraisal. Mr. Minsky's residual values were precisely the same as Mr. Berlent's.d. Actual Residual ValuesThe OPM equipment was sold as scrap for $ 5,800 by a successor of OPM to Residual Materials, Inc. The Sha-Li equipment was also sold as scrap. OPINION 1. Economic Substance, GenerallyA transaction is recognized for tax purposes only if it has "economic substance which is compelled or encouraged by business or regulatory realities, is imbued with tax-independent considerations, and is not shaped solely by tax-avoidance features that have meaningless labels attached." Frank Lyon Co. v. United States, 435 U.S. 561">435 U.S. 561, 583-584, 55 L. Ed. 2d 550">55 L. Ed. 2d 550, 98 S. Ct. 1291">98 S. Ct. 1291 (1978); James v. Commissioner, 899 F.2d 905">899 F.2d 905, 908 (10th Cir. 1990), affg. 87 T.C. 905">87 T.C. 905 (1986). Taxpayers 284 are generally free to structure their business transactions as they please although motivated by tax reduction considerations. Gregory v. Helvering, 293 U.S. 465">293 U.S. 465, 79 L. Ed. 596">79 L. Ed. 596, 55 S. Ct. 266">55 S. Ct. 266 (1935); Larsen v. Commissioner, 89 T.C. 1229">89 T.C. 1229, 1251 (1987), affd. on this issue, revd. and remanded on other grounds sub nom. Casebeer v. Commissioner, 909 F.2d 1360">909 F.2d 1360 (9th Cir. 1990); Rice's Toyota World, Inc. v. Commissioner, 81 T.C. 184">81 T.C. 184, 196 (1983), affd. on this issue 752 F.2d 89">752 F.2d 89 (4th Cir. 1985). The existence of tax benefits accruing to an investor does not necessarily deprive a transaction of economic substance. Frank Lyon Co. v. United States, supra at 580-581; Levy v. Commissioner, 91 T.C. 838">91 T.C. 838, 853 (1988); Larsen v. Commissioner, 89 T.C. at 1252; Estate of Thomas v. Commissioner, 84 T.C. 412">84 T.C. 412, 432 (1985). However, it is well established that transactions lacking an appreciable effect, other than tax reduction, on a taxpayer's beneficial interest will not be recognized for tax purposes. See Knetsch v. United States, 364 U.S. 361">364 U.S. 361, 366, 5 L. Ed. 2d 128">5 L. Ed. 2d 128, 81 S. Ct. 132">81 S. Ct. 132 (1960).285 More specifically, a transaction entered into solely for the purpose of tax reduction, and which is without economic, commercial, or legal purpose other than the expected tax benefits, is an economic sham without effect for Federal income tax purposes. Frank Lyon Co. v. United States, supra; Larsen v. Commissioner, supra; Rice's Toyota World, Inc. v. Commissioner, 81 T.C. at 196; Grodt & McKay Realty, Inc. v. Commissioner, 77 T.C. 1221">77 T.C. 1221, 1243 (1981). Whether a transaction lacks economic substance or business purpose is a question of fact. Levy v. Commissioner, supra at 854; Larsen v. Commissioner, 89 T.C. at 1252; Torres v. Commissioner, 88 T.C. 702">88 T.C. 702, 718-719 (1987); Mukerji v. Commissioner, 87 T.C. 926">87 T.C. 926, 960 (1986); James v. Commissioner, 87 T.C. 905">87 T.C. 905 (1986); affd. 899 F.2d 905">899 F.2d 905 (10th Cir. 1990); Coleman v. Commissioner, 87 T.C. 178">87 T.C. 178 (1986), affd. per curiam 833 F.2d 303">833 F.2d 303 (3d Cir. 1987); Estate of Thomas v. Commissioner, supra;286 Rice's Toyota World, Inc. v. Commissioner, 81 T.C. at 203; but see Swift Dodge v. Commissioner, 692 F.2d 651">692 F.2d 651, 652 (9th Cir. 1982), revg. 76 T.C. 547">76 T.C. 547 (1981) (citing Frank Lyon); American Realty Trust v. United States, 498 F.2d 1194">498 F.2d 1194, 1198-1199 (4th Cir. 1974) (cited with approval in Frank Lyon). 2. Economic Substance in a Sale and Leaseback ContextIn Levy v. Commissioner, supra at 856, we held that in analyzing whether a transaction has economic substance, the following five factors are particularly significant: (1) The presence or absence of arm's-length price negotiations, Helba v. Commissioner, 87 T.C. 983">87 T.C. 983, 1005-1007 (1986), affd. 860 F.2d 1075">860 F.2d 1075 (3d Cir. 1988); see also Karme v. Commissioner, 73 T.C. 1163">73 T.C. 1163, 1186 (1980), affd. 673 F.2d 1062">673 F.2d 1062 (9th Cir. 1982); (2) the relationship between the sales price and fair market value, Zirker v. Commissioner, 87 T.C. 970">87 T.C. 970, 976 (1986); Helba v. Commissioner, supra at 1005-1007, 1009-1011; (3) the structure of the financing, 287 Helba v. Commissioner, supra at 1007-1011; (4) the degree of adherence to contractual terms, Helba v. Commissioner, supra at 1011; and (5) the reasonableness of the income and residual value projections, Rice's Toyota World, Inc. v. Commissioner, 81 T.C. at 204-207. Considering these factors, we conclude that the subject transactions lacked economic substance. We are not persuaded that there were arm's-length price negotiations between OPM and Beta, or Sha-Li and Proz. Sha-Li and Proz appear to be the same entity. The relationship between OPM and Beta is less clear. Also, while he negotiated as the Stacoms' agent, Mr. Berlin's relationship to Salber is not clear. We believe the sales prices were somewhat high, but had some relationship to the fair market value. The financing was structured to provide petitioners with a tax benefit in exchange for cash. Petitioner financed both transactions with small cash payments and the remainder with stated recourse notes. Most of the purchase price is covered by installment notes that allow the interest-free deferral of note payments by petitioner for many years if the288 lease payments are not made to petitioner. In addition, the installment notes provide for a reduction of note payments by petitioner against lease payments not made to him. The contract terms were designed to allow petitioners to obtain tax benefits with little or no risk. In each instance the sales to the middle company, then to petitioner, and leaseback to the original seller occurred on the same day. In addition, OPM declared bankruptcy and was in default. Both OPM and Sha-Li were often late with their payments. Most troubling are the residual value projections of the computer equipment after the leases expired. Petitioners provided testimony of two experts, Mr. Berlent and Mr. Minsky. Mr. Berlent was the only expert who made an appraisal at the time of the transactions. His appraisal reflected that the selling price of the equipment was fair market value, a reasonable estimate of the residual value of the equipment at the end of the lease was 20 percent of the selling price, and the equipment would have a useful life of more than 9 years from December 31, 1979. Mr. Berlent was hired and paid by the equipment sellers. He also knew the equipment selling prices before 289 he made his appraisals. His appraised values exactly coincided with the equipment selling prices. In his report Mr. Berlent acknowledged the announcement of the IBM 4300 series in January 1979, but failed to appropriately account for its effect. His report and testimony do not provide any information on how, if at all, the IBM 4300 series affected the IBM 370/158 and 370/168 series computers. His report, which was provided to OPM, Sha-Li, and eventually to petitioner, did not state what methodology he used to determine the residual value of the equipment. Mr. Berlent's appraisals of other equipment do not appear consistent with his opinion here. For example, he opined that similar equipment with lease expirations years apart has the same value. Moreover, the value he assigned to the Sha-Li IBM 370/158's was more than twice the value that he assigned on the previous day to the OPM IBM 370/158's. Mr. Minsky was the other expert for petitioner. Using some hindsight and "gut feel," Mr. Minsky also concluded that the residual value was 20 percent of the selling price. However, his report did not mention the IBM 4300 Series. He testified that the announcement of the new IBM 4300290 Series nearly a year before the subject transactions had no effect on the values of IBM 370/158 and 370/168 series computers. Mr. Minsky's values exactly mirrored those of Mr. Berlent. His report listed many factors; however, he was unable to explain how those factors affected his conclusion in this case. Respondent's only expert, Mr. Blumenthal, concluded that the purchase price of the OPM and Sha-Li equipment was overvalued by 30 percent and 8 percent, respectively. He concluded that the residual values of the equipment in December 1988 were basically limited to scrap value. Mr. Blumenthal's report appeared to consist of parts of several previously prepared reports. His report also appears to have been prepared in large part by Jonathan C. Moody and others. He was unable to identify the parts of his expert report that he personally prepared. He also apparently spent little time to analyze the fair market value and residual value for his report. He did so by relying upon the Computer Price Guide or Bluebook, and adding up the list prices for comparable equipment. He stated many factors, but was unable to indicate how they affected his valuation. He also did not consider291 facts such as that the equipment was on lease, located, installed, and operated in a particular location by reputable end-users and subject to IBM maintenance. We have previously held that a lease premium of 15 percent is appropriate in determining the value of equipment on lease. Larsen v. Commissioner, 89 T.C. at 1268; Mukerji v. Commissioner, 87 T.C. at 967-968. We are not convinced by the opinions of the experts for either party. However, we are more concerned with petitioners' experts' failure to appropriately consider the effects of the introduction of newer and more powerful IBM computers, such as the IBM 303X and 4300 series, in analyzing the fair market and residual values of the subject computer equipment. We believe the newer computers reduced the fair market and residual values of the computer equipment at issue here. This is consistent with our findings in previous cases where, for example, we have found that the announcement of the IBM 4300 series had an immediate, drastic, and devastating effect on the fair market and residual values of earlier IBM computers. Larsen v. Commissioner, supra at 1243-1246;292 Gefen v. Commissioner, 87 T.C. 1471">87 T.C. 1471, 1487 (1986); Coleman v. Commissioner, 87 T.C. at 198-199; B & A Distributing Co. v. Commissioner, T.C. Memo 1988-589">T.C. Memo 1988-589; Ockels v. Commissioner, T.C. Memo 1987-507">T.C. Memo 1987-507. See also Greenbaum v. Commissioner, T.C. Memo 1987-222">T.C. Memo 1987-222. Petitioner paid cash in the amounts of $ 32,500 to Proz (Sha-Li transaction) and $ 72,500 to Beta (OPM transaction). He was obligated to make payments of principal and interest totaling $ 4,136,434.00 for the Sha-Li equipment and $ 5,605,898.60 for the OPM equipment. Thus, his total payments were to be $ 4,168,934.20 for the Sha-Li equipment and $ 5,678,398.60 for the OPM equipment. Petitioner was entitled to rental income of $ 3,856,886.40 for the Sha-Li equipment and $ 5,322,246.60 for the OPM equipment. Thus, to make a profit, petitioner would need to recover $ 312,047.80 (14.86 percent of the purchase price) for the Sha-Li equipment and $ 356,152 (12.28 percent of the purchase price) for the OPM equipment. These figures are understated in that they do not include costs such as accounting, legal, or brokerage fees, or sale293 or lease of this equipment. Although we do not agree that scrap value was the only reasonable residual value, we cannot accept the values provided by petitioners' experts. After reviewing the expert opinions in this case, we believe the residual values of the subject equipment to be substantially less than 13 percent of the purchase price. In light of all the facts and circumstances of this case and the foregoing discussion, we believe four out of the five factors show that the computer equipment transactions lacked economic substance. The only factor not contrary to petitioner's position is our finding that the equipment purchase price had some relationship to its fair market value. 3. Business Purpose in a Sale and Leaseback ContextBecause of our finding that petitioner's residual values were unreasonable, we also conclude that petitioners lacked sufficient business purpose. The Stacoms were nonuser recipients of tax benefits as a result of the sale and leaseback of computer equipment. A nonuser recipient of tax benefits in a sale and leaseback context must specifically establish that his entry into the transaction was motivated by a business purpose sufficient to294 justify the form of the transaction, and that the transaction was supported by economic substance. Rice's Toyota World, Inc. v. Commissioner, 81 T.C. at 201-203. Tests developed under the sham transaction doctrine are applied to determine whether a threshold level of business purpose or economic substance is present. Rice's Toyota World, Inc. v. Commissioner, supra at 196. The presence of a business purpose does not entitle a transaction to be recognized for Federal tax purposes where objective indicia of economic substance indicating a realistic potential for economic profit are not manifest. Cherin v. Commissioner, 89 T.C. 986">89 T.C. 986, 993-994 (1987). Specifically, in sale-leaseback transactions, the form of the transactions will be respected for Federal income tax purposes as long as the lessors retain significant and genuine attributes of traditional lessors. Frank Lyon Co. v. United States, 435 U.S. 561">435 U.S. 561, 584, 55 L. Ed. 2d 550">55 L. Ed. 2d 550, 98 S. Ct. 1291">98 S. Ct. 1291 (1978); Levy v. Commissioner, 91 T.C. at 853; Estate of Thomas v. Commissioner, 84 T.C. 412">84 T.C. 412, 432 (1985). However, we must disregard sale-leaseback transactions295 as economic shams where we find that investors entered into such transactions with the sole purpose of obtaining tax benefits and where the transactions are devoid of economic substance because no reasonable opportunity for economic profit existed, exclusive of tax benefits. Levy v. Commissioner, supra at 853-854; Torres v. Commissioner, 88 T.C. 702">88 T.C. 702, 718 (1987), Rice's Toyota World, Inc. v. Commissioner, supra at 209-210; Estate of Thomas v. Commissioner, supra at 438-439. The focus of our inquiry is to perform an objective analysis of the transactions to determine whether any realistic opportunity for economic profit existed exclusive of the anticipated tax benefits. The business purpose test focuses on whether petitioner had an actual and honest profit objective. Rose v. Commissioner, 88 T.C. 386">88 T.C. 386, 411 (1987), affd. 868 F.2d 851">868 F.2d 851 (6th Cir. 1989). We analyze the transaction as would a prudent investor, Rice's Toyota World, Inc. v. Commissioner, supra at 209, but in conducting such an analysis we do not make unrealistic demands 296 for certainty. Gefen v. Commissioner, 87 T.C. 1471">87 T.C. 1471, 1492 (1986). Drawing a precise line of demarcation between valid and invalid transactions is invariably difficult. Rice's Toyota World, Inc. v. Commissioner, supra at 197. In this context, petitioners bear the burden of proof. Respondent's determination that the transaction was simply a tax-avoidance scheme devoid of economic substance is presumptively correct. Welch v. Helvering, 290 U.S. 111">290 U.S. 111, 115, 78 L. Ed. 212">78 L. Ed. 212, 54 S. Ct. 8">54 S. Ct. 8 (1933); Rule 142(a). Petitioners relied in large part upon expert testimony to show that they had a realistic opportunity for profit exclusive of tax benefits. In this case profit opportunity turns on whether the anticipated residual values of the computers at the conclusion of their leases were reasonable. As discussed above, we are not convinced that petitioners' anticipated residual values were reasonable. Thus, we are not persuaded that petitioners had a realistic opportunity to make a profit exclusive of tax benefits. In addition, while we believe it may be reasonable and prudent in certain circumstances to rely upon one's competent and capable spouse and a 297 professional financial adviser, we do not believe the taxpayer may hide behind such persons where, as here, there is no realistic opportunity to make a profit exclusive of tax benefits. We are not persuaded that petitioners or their agents ever intended or attempted to remarket or release the equipment. Here, we believe that the Stacoms had substantial income that they sought to shelter in a manner that would work. Claire Stacom asked their attorney and financial adviser, Mr. Berlin, about the computer transactions. Unfortunately, he directed them to a transaction that did not work. We think petitioners were primarily motivated by tax considerations. We hold that petitioners do not meet the threshold business purpose requirement. Having held that petitioners have failed to meet the threshold requirements of business purpose and economic substance, we need not reach the remaining issues except that which concerns the increased interest. 4. Increased Interest Under Section 6621(c)Respondent determined that petitioners are liable for increased interest under section 6621(c). Section 6621(c) (formerly section 6621(d)) provides for an increase in the interest rate where298 there is a substantial underpayment (an underpayment exceeding $ 1,000) in any taxable year "attributable to 1 or more tax motivated transactions." The increased interest is effective as to interest accruing after December 31, 1984 (the date of enactment of the original section 6621(d)), even though the tax-motivated transaction was entered into prior to that date and regardless of the date the return was filed. H. Rept. 98-861 (Conf.), 1984-3 C.B. (Vol. 2) 1, 239; Solowiejczyk v. Commissioner, 85 T.C. 552">85 T.C. 552, 555-556 (1985), affd. without published opinion 795 F.2d 1005">795 F.2d 1005 (2d Cir. 1986). Section 6621(c)(3)(A)(V) defines a tax-motivated transaction as any sham or fraudulent transaction. Having found that petitioners entered into computer sale and leaseback transactions that are without economic substance, we hold that they are liable for increased interest under section 6621(c). To reflect concessions of both parties, Decision will be entered under Rule 155. Footnotes1. Unless otherwise indicated, all section references are to the Internal Revenue Code as amended and in effect for the taxable 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/4622637/	LEWIS D. DARBY, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentDarby v. CommissionerDocket No. 44488-86United States Tax Court97 T.C. 51; 1991 U.S. Tax Ct. LEXIS 63; 97 T.C. No. 4; 14 Employee Benefits Cas. (BNA) 1153; July 24, 199163 Decision will be entered for the respondent. When petitioner (H) was divorced from his former wife (W), in 1976, H was a fully vested participant in his employer's tax-qualified profit-sharing plan. The divorce decree ordered H to pay $ 75,000 to W, about half of the value of H's interest in the plan at that time. The decree ordered H to pay the $ 75,000 at the rate of $ 60 per week until (1) it was all paid, or (2) H died or retired (in which event the balance was due as a lump sum). The decree also ordered H to assign to W that portion of H's interest in the plan needed to satisfy H's obligation to W; H made the assignment. H retired in 1983, received a lump-sum distribution from the plan, and paid the remaining balance due (about $ 53,000) to W. Held: (1) H, not W, is the distributee and must include the entire 1983 plan distribution in his income. Sec. 402(a)(1), I.R.C. 1954. (2) No portion of the $ 75,000 H paid to W is excludable from H's income under sec. 72, I.R.C. 1954. Clinton Meyering, for the petitioner. Julia A. Caroff, for the respondent. CHABOT, Judge. CHABOT52 Respondent determined a deficiency in Federal individual income tax against petitioner64 for 1983 in the amount of $ 19,056.58. After a concession by petitioner, 1 the issues for decision are as follows: (1) Whether petitioner properly excluded from income the portion of a lump-sum distribution he received from his employer's profit-sharing plan, which he paid to his former wife pursuant to a court order, on the basis that she (and not he) was the distributee for purposes of section 402(a)(1)2 for that portion of the distribution. (2) Alternatively, whether all or any portion of the amount petitioner paid to his former wife is excludable from65 petitioner's gross income under section 72.FINDINGS OF FACT Some of the facts have been stipulated; the stipulation and the stipulated exhibits are incorporated herein by this reference. When the petition was filed in the instant case, petitioner resided in Farmington Hills, Michigan. Petitioner's former wife, Yolanda Darby (hereinafter sometimes referred to as "Yolanda"), was granted a divorce from petitioner on November 8, 1976, by the Circuit Court for Wayne County, Michigan. 53 At the time of this divorce, petitioner was a fully vested participant in "The Savings and Profit Sharing Fund of Sears Employees" (hereinafter sometimes referred to as "the Sears Plan"). The Sears Plan was a tax-qualified profit-sharing plan under section 401(a). The "Default Judgment of Divorce" (hereinafter sometimes referred to as "the Divorce Decree") provides, in pertinent part, as follows: ALIMONYIT IS FURTHER ORDERED AND ADJUDGED that neither the Plaintiff [Yolanda] nor the Defendant [petitioner] are entitled to any permanent alimony from each other. * * PROPERTY SETTLEMENTIT IS FURTHER ORDERED AND ADJUDGED that the household furniture, furnishings and appliances owned66 by the parties hereto and presently in and upon the marital premises of the parties * * shall on and after this date be the sole and separate property of the Plaintiff, YOLANDA DARBY, free and clear of any claim of the Defendant, LEWIS D. DARBY, and that the personal belongings of the parties be and are hereby awarded to the respective parties as an equitable division and settlement thereof. [Each is to have the automobile that is registered in that one's name. Each is to have the checking and savings accounts that are registered in that one's name.] IT IS FURTHER ORDERED AND ADJUDGED that the marital property located at 15410 Greenfield Road, Detroit, Michigan, * * * is hereby awarded to the Plaintiff, YOLANDA DARBY, free and clear of any interest or claim of the Defendant; IT IS FURTHER ORDERED AND ADJUDGED that the vacant property located at Highland, Michigan, * * * is hereby awarded to the Defendant, LEWIS D. DARBY, free and clear of any interest or claim of the Plaintiff; IT IS FURTHER ORDERED AND ADJUDGED that the Defendant, LEWIS D. DARBY, shall pay to the Plaintiff, YOLANDA DARBY, the sum of Seventy Five Thousand Dollars ($ 75,000.00) as follows: The Defendant LEWIS67 D. DARBY, is to pay the same at the rate of Sixty Dollars ($ 60.00) per week by way of a wage Assignment, and continue to so pay until such time as the Seventy Five Thousand Dollars ($ 75,000.00) is paid in full, or Defendant dies, or shall retire from his employment, whichever is sooner, at which time the balance of said sum shall be due and owing to Plaintiff as a lump sum payment, and Defendant hereby ASSIGNS to Plaintiff such portion of his interest in Savings and Profit Sharing Fund of Sears Employes, [sic] necessary to satisfy the balance, determined at the time of his death or retirement as aforesaid, and the 54 Defendant shall notify said Fund of the above Assignment, and the Assignment, or this Judgment in lieu thereof, may be recorded in the County Register of Deeds or appropriate office, wherein the Fund is located so as to give notice of the same. IT IS FURTHER ORDERED AND ADJUDGED that the Defendant, LEWIS D. DARBY, is hereby awarded his interest in said Pension and Profit Sharing Plan of Sears, Roebuck & Co., subject, however, to Plaintiff's interest in same as hereinabove set forth. ITIS [sic] FURTHER ORDERED AND ADJUDGED that each party hereto shall forthwith execute68 and deliver to the other suitable Quit Claim Deeds Assignments and Bills of Sale to such property to effect such transfer of title, and on the failure thereof, this Judgment shall stand in lieu thereof and a copy of same may be recorded in the Office of the Register of Deed in the County wherein said property is located.The $ 75,000 awarded to Yolanda in the Divorce Decree was determined by reference to the estimated value of petitioner's interest in the Sears Plan at the time of the divorce and is about one-half of that value. Both petitioner and Yolanda understood the $ 75,000 to represent Yolanda's share of petitioner's interest in the Sears Plan. The Sears Plan was the subject of discussion between petitioner's and Yolanda's attorneys. Pursuant to the Divorce Decree, petitioner executed a document entitled "Assignment of Partial Interest of Lewis D. Darby in his Savings and Profit Sharing Fund of Sears Employes" [sic] (hereinafter sometimes referred to as "the Assignment"). The Assignment, 3 dated October 27, 1976, 4 was directed to the Sears Plan and provides in pertinent part as follows: You are hereby notified that the undersigned has ASSIGNED to YOLANDA DARBY, 69 under Court Order of Judgment of Divorce, * * * the sum of Seventy Five Thousand Dollars ($ 75,000.00), or the portion of the same, remaining unpaid at the time of my death or my retirement, whichever is sooner, a copy of which Judgment is attached. This document is your authority to pay moneys which may become due to me under my contract with said [Sears Plan], BUT, you are further ordered not to pay any money to YOLANDA DARBY until the amount of the balance of the Seventy Five Thousand Dollars ($ 75,000.00) due and 55 owing at the time of my death or retirement, as aforesaid, is determined by appropriate and reasonable proofs.The Assignment was filed with70 the plan administrator of the Sears Plan (hereinafter sometimes referred to as "the Plan Administrator"). The $ 60 payments required under the Divorce Decree were deducted weekly from petitioner's pay check, beginning shortly after the Divorce Decree was entered and continuing until his retirement in January 1983. A total of $ 22,030 was paid to Yolanda in this manner. 5 Petitioner did not deduct any portion of this $ 22,030 as alimony on his tax returns for 1976 through 1983. Yolanda did not remember whether she included any of the $ 22,030 in her income for those years. 71 On his retirement, petitioner received a lump sum distribution (within the meaning of section 402(e)) under the Sears Plan in the amount of $ 182,481.39. The distribution consisted of 6,485 shares of Sears, Roebuck and Co. (hereinafter sometimes referred to as "Sears") stock and a check in an amount exceeding $ 52,970. Petitioner deposited the check in his personal bank account. Sometime later, on two separate occasions, petitioner sold the Sears stock. On February 1, 1983, petitioner drew a check on his personal account in the amount of $ 52,970, payable to Yolanda. In the "Memo" section of the check he wrote "Property Settlement." This amount represented the balance of the $ 75,000 due to Yolanda pursuant to the Divorce Decree. Yolanda did not report any portion of the $ 52,970 on her 1983 tax return. The $ 182,481.39 lump sum distribution under the Sears Plan consisted entirely of contributions made by Sears and earnings on those contributions. Petitioner did not include in his gross income in the year contributed or in any other year the contributions Sears made under the Sears Plan on his behalf, or the earnings on those contributions. The Plan Administrator did not72 make any distribution under the plan directly to Yolanda. When petitioner retired 56 from Sears, the Sears Plan contained a provision prohibiting any participant from assigning his or her benefits. This provision reads as follows: 7.7 Non-Alienation of Benefits. Except as otherwise expressly provided herein, no participant or beneficiary shall be entitled to withdraw, transfer, assign or hypothecate the money and securities, or any part thereof, credited to the participant's accounts in the [Sears Plan]. No interest in the [Sears Plan] shall be anticipated, charged or encumbered by any participant or beneficiary. Except as may be required by the tax withholding provisions of any statutes, the interest or interests of each and every participant or beneficiary in the [Sears Plan] shall not be subject to, or reached by, any legal process in satisfaction of any debt, claim, liability or obligation--including alimony and child support payments--prior to the receipt thereof by the participant or beneficiary.Petitioner reported $ 107,481.39 of the $ 182,481.39 lump sum distribution on Form 4972 (Special 10- Year Averaging Method) included with his 1983 tax return. The difference73 between the amount reported and the amount received under the Sears Plan is the $ 75,000 petitioner paid to Yolanda pursuant to the Divorce Decree. On the Form 4972, petitioner treated $ 85,274.49 of the $ 107,481.39 as capital gain and $ 22,206.90 as ordinary income. Petitioner did not file a Schedule D listing the $ 85,274.49 as capital gain or include the taxable portion of the capital gain on the appropriate line of the income section of his Federal individual income tax return. (See n.1, supra.) OPINION Petitioner seeks to exclude from income $ 75,000 of the $ 182,481.39 lump sum distribution he received in 1983 under the Sears Plan. He contends that, under Michigan law, the Divorce Decree and the Assignment resulted in a 1976 legal transfer of $ 75,000 of petitioner's interest under the Sears Plan. As a result, he maintains, when the 1983 distribution was made under the Sears Plan, petitioner was not a distributee of the $ 75,000 and so that amount was not includable in his income under section 402. Alternatively, petitioner contends that, if he was a distributee, then he had a $ 75,000 investment in the contract by virtue of his payment to Yolanda, and was entitled74 to exclude that amount under section 72. 57 Respondent contends that "Since a plan cannot qualify under section 401(a) unless distributions are made to employees or their beneficiaries, and section 402(a)(1) applies to distributions of funds from a qualified plan, the term 'distributees' must be limited to employees or their beneficiaries." Respondent contends that Yolanda was not a designated beneficiary of the Sears Plan nor did the plan ever pay anything to her. As a result, Yolanda could not be a distributee. Respondent argues further that the judicially created "family support" exception to the antiassignment rule of section 401(a)(13) does not relieve the distributee from the tax obligation imposed by section 402(a)(1). In addition, respondent contends that, even if the Sears Plan would have paid the $ 52,970 balance directly to Yolanda, the payment was compensation for services rendered by petitioner and, as such, is taxable to him under the assignment of income doctrine. Finally, respondent argues that the payments petitioner made to Yolanda in settlement of a property distribution do not constitute an investment in the contract and, therefore, petitioner may not exclude75 those payments from the $ 182,481.39 distribution he received in 1983. We agree with respondent's conclusions. In particular, we hold that, absent the statutory modifications enacted in 1984 (discussed infra), petitioner is the distributee of the entire 1983 lump sum distribution and Yolanda is not the distributee of any part of it. Further, we hold that, under the special tax provisions that petitioner elected to apply to his lump sum distribution (secs. 402(e), 72(f), and 402(a)(2)), no part of the $ 75,000 paid to Yolanda is excludable from petitioner's income. Finally, we conclude that, even if petitioner had not elected to apply the special lump sum rules, section 72 would not allow petitioner to exclude any part of the $ 75,000. 658 Gross income includes income from pensions. Sec. 76 61(a)(11). 7 In general, this income is taxable in the year in which it is received. Sec. 451(a). 8 However, for the employees' plan area, the Congress has provided more specialized rules. Under section 402(a)(1), 9 the general rule is that a distribution from an exempt employees' trust (under a tax-qualified employees' plan) is taxed to the "distributee" under section 72, which generally provides for current taxation of distributions as ordinary income. 77 We consider first whether petitioner or Yolanda is the distributee (sec. 402(a)(1)) and then how the distribution is to be taxed. I. Who Is the Distributee?The statute does not define the word "distributee" as used in section 402(a)(1); neither do the regulations. Neither side has directed our attention to any cases that deal with the definition. We conclude that a distributee of a distribution under a plan ordinarily is the participant or beneficiary who, under the plan, is entitled to receive the distribution. In particular, the mere fact that the distribution is made by the plan administrator to A rather than to B does not make A the distributee. Also, if a court order gives A an interest in B's interest under a plan, we do not search for the sometimes subtle State law distinction between whether A has been 59 thereby given an ownership interest or merely a security interest. Thus, if a distribution is made under a plan and B is the participant or beneficiary entitled under the plan to receive the distribution, then B is the distributee in both of the above-noted hypothetical situations. We believe that the contrary conclusions (and supporting analysis) advocated by78 petitioner are inconsistent with the statutory matrix which the Congress understood and modified in the Retirement Equity Act of 1984 (hereinafter sometimes referred to as "REA '84"), Pub. L. 98-397, 98 Stat. 1426, and the Tax Reform Act of 1986 (hereinafter sometimes referred to as "TRA '86"), Pub. L. 99-514, 100 Stat. 2085. Our conclusions derive largely from the implications of later legislation. We are aware of the hazards of attempting to use a later statute to interpret an earlier one. Yet, when there is nothing better to guide us to the meaning of the statute, the actions of later Congresses "should not be rejected out of hand". Andrus v. Shell Oil Co., 446 U.S. 657">446 U.S. 657, 666, 64 L. Ed. 2d 593">64 L. Ed. 2d 593, 100 S. Ct. 1932">100 S. Ct. 1932 n.8 (1980). See Boddie v. American Broadcasting Companies, Inc., 881 F.2d 267">881 F.2d 267, 269 (CA6 1989). See generally Estate of Ceppi v. Commissioner, 78 T.C. 320">78 T.C. 320, 324-325 (1982), and cases and materials there cited, affd. on other grounds 698 F.2d 17">698 F.2d 17 (CA1 1983). With that caution, we proceed. Before the enactment of the Employee Retirement Income Security Act of 1974 (hereinafter sometimes referred to as "ERISA"), Pub. L. 93-406, 8879 Stat. 829, attachments of a participant's interest in a tax-qualified plan were not prohibited by the Internal Revenue Code. Section 1021(a) of ERISA added Code section 401(a)(13), which requires tax-qualified plans to provide "that benefits provided under the plan may not be assigned or alienated." Section 206(d)(1) of ERISA (29 U.S.C. 1056(d)(1)) sets forth the same rule for pension plans generally, whether or not tax-qualified. (Under section 3(2) of ERISA, "pension plan" is defined to include, for purposes of title I (the labor title) of ERISA, what the Internal Revenue Code refers to as "profit-sharing" plans.) Also, section 514(a) of ERISA (29 U.S.C. 1144(a)) provides that the labor title of ERISA preempts State laws. 60 Within a few years after the enactment of ERISA, disputes arose as to whether the ERISA preemption and antialienation provisions apply to family support obligations and State community property laws. The Congress responded to this development by enacting REA '84, which it described as follows (S. Rept. 98-575, at 19; 2 C.B. 447">1984-2 C.B. 447, 456): Explanation of ProvisionIn generalThe bill clarifies the spendthrift provisions by providing80 new rules for the treatment of certain domestic relations orders. In addition, the bill creates an exception to the ERISA preemption provision with respect to these orders. The bill also provides procedures to be followed by a plan administrator (including the Pension Benefit Guaranty Corporation (PBGC)) and an alternate payee (a child, spouse, former spouse, or other dependent of a participant) with respect to domestic relations orders. Under the bill, if a domestic relations order requires the distribution of all or a part of a participant's benefits under a qualified plan to an alternate payee, then the creation, recognition, or assignment of the alternate payee's right to the benefits is not considered an assignment or alienation of benefits under the plan if and only if the order is a qualified domestic relations order. Because rights created, recognized, or assigned by a qualified domestic relations order, and benefit payments pursuant to such an order, are specifically permitted under the bill, State law providing for these rights and payments under a qualified domestic relations order will continue to be exempt from Federal preemption under ERISA.To the same effect, 81 see H. Rept. 98-655 (Part 1, Comm. on Education and Labor), at 39 (1984); H. Rept. 98-655 (Part 2, Comm. on Ways and Means), at 18 (1984). The reasons why the Congress acted are set forth as follows (S. Rept. 98-575, pp. 18-19, 2 C.B. 447">1984-2 C.B. 447, 456): Present LawGenerally, under present law, benefits under a pension, profit-sharing, or stock bonus plan (pension plan) are subject to prohibitions against assignment or alienation (spendthrift provisions.) [sic] Under present law, 21 certain provisions of ERISA supersede (preempt) State laws relating to pension, etc., plans. A plan that does not include these required spendthrift provisions is not a qualified plan under the Code, and State law permitting such an assignment or alienation is generally preempted by ERISA. Several cases have arisen in which courts have been required to determine whether the ERISA preemption and spendthrift provisions 61 apply to family support obligations (e.g., alimony, separate maintenance, 82 and child support obligations). In some of these cases, the courts have held that ERISA was not intended to preempt State domestic relations law permitting the attachment of vested benefits for the purpose of meeting these obligations. 22 Some courts have held that the ERISA preemption provision does not prevent application of State law permitting attachment of nonvested benefits for the purpose of meeting family support obligations. 23 There is a divergence of opinion among the courts as to whether ERISA preempts State community property laws insofar as they relate to the rights of a married couple to benefits under a pension, etc., plan. 2483 The IRS has ruled that the spendthrift provisions are not violated when a plan trustee complies with a court order requiring the distribution of benefits of a participant in pay status to the participant's spouse or children in order to meet the participant's alimony or child support obligations. 25 The IRS has not taken any position with respect to this issue in cases in which the participant's benefits are not in pay status. Reasons for ChangeThe committee believes that the spendthrift rules should be clarified by creating a limited exception that permits benefits under a pension, etc., plan to be divided under certain circumstances. In order to provide rational rules for plan administrators, the committee believes it is necessary to establish guidelines for determining whether the exception to the spendthrift rules applies. In addition, the committee believes that conforming changes to the ERISA preemption provision are necessary to ensure that84 only those orders that are excepted from the spendthrift provisions are not preempted by ERISA.To the same effect, see H. Rept. 98-655 (Part 1, Comm. on Education and Labor), at 39-43 (1984); H. Rept. 98-655 (Part 2, Comm. on Ways and Means), at 17-22 (1984). 62 The preemption provisions are modified by section 104(b) of REA '84. The antialienation provisions are modified by sections 104(a) and 204(a) and (b) of REA '84. (Section 204(b) of REA '84 adds section 414(p) to the Code, defining "qualified domestic relations order" (hereinafter sometimes referred to as "QDRO") in almost three pages of detail.) In addition, section 204(c)(1) of REA '84 adds section 402(a)(9)10 to the Code to provide for the taxability of an "alternate payee" (as defined in sec. 414(p)(8) as enacted by REA '84). 1185 Sections 402(a)(9) and 414(p)(8), as enacted by REA '84, provide that (1) if a QDRO designates the spouse, or a former spouse, child, or other dependent, of the plan participant as a person who is to receive the benefits payable with respect to the participant, then that payee is an "alternate payee" and (2) the alternate payee is to be treated as the "distributee" for purposes of determining taxability of the payments under the plan. In that situation, the alternate payee, and not the plan participant, would be taxed on the distributions to the alternate payee. These provisions took effect on January 1, 1985 (sec. 303(d) of REA '84, 98 Stat. 1453). TRA '86 modified section 402(a)(9), as enacted by REA '84, to provide that an alternate payee would be the distributee only if the alternate payee were the spouse or former spouse of the plan participant. (Sec. 1898(c)(1)(A) of TRA '86, 100 Stat. 2951.) 63 The explanation for the Congress' 1986 action is set forth as follows (S. Rept. 99-313, at 1103-1104, 1986-3 C.B. (Vol. 3) 1103-1104): C. Qualified Domestic Relations Orders (sec. 1897(c) of the bill, sec. 206 of ERISA, and secs. 502 and 414(p) of the Code) Under86 present law, neither ERISA nor the Code treats a qualified domestic relations order as a prohibited assignment or alienation of benefits under a pension plan. In addition, the Act creates an exception to the ERISA preemption provision only with respect to these orders. A "qualified domestic relations order" is a domestic relations order that (1) creates or recognizes the existence of an alternate payee's right to, or assigns to an alternate payee the right to receive all or a portion of the benefits payable with respect to a participant under a pension plan, and (2) meets certain other requirements. A domestic relations order is any judgment, decree, or order (including approval of a property settlement agreement) that relates to the provision of child support, alimony payments, or marital property rights to a spouse, former spouse, child, or other dependent of the participant, and is made pursuant to a State domestic relations law (including community property law). An alternate payee includes any spouse, former spouse, child, or other dependent of a participant who is recognized by a qualified domestic relations order as having a right to receive all, or a portion of, the benefits87 payable under a plan with respect to the participant. The qualified domestic relations order provisions do not prevent the payment of amounts in pay status with respect to an alternate payee to a State agency that is an agent of an alternate payee or the payment of such amounts if the alternate payee consents to such payment (for example, to meet the requirements relating to Aid to Families with Dependent Children). In such a case, payment to the agency does not result in disqualification of the order and, under normal principles of constructive receipt, the alternate payee is treated as having received the amounts paid under the order. 1. Tax treatment of divorce distributions Present LawSpecial rules are provided for determining the tax treatment of benefits subject to a qualified domestic relations order. For purposes of determining the taxability of benefits, the alternate payee is treated as a distributee with respect to payments received from or under a plan. In addition, net employee contributions (together with other amounts treated as the participant's investment in the contract) are apportioned between the participant and the alternate payee under regulations88 prescribed by the Secretary of the Treasury. Explanation of ProvisionThe bill provides that the special rules for determining the taxability of benefits subject to a qualified domestic relations order apply only to 64 distributions made to an alternate payee who is the spouse or the former spouse of the participant. Thus, distributions to a spouse or former spouse generally will be included in the gross income of the spouse or former spouse. Under the bill, however, a distribution to an alternate payee other than a spouse (e.g., a child) is generally to be includible in the gross income of the participant. (For purposes of lump sum treatment, amounts paid to an alternate payee other than a spouse, or former spouse, shall be treated as part of the balance to the credit of the participant). In addition, under the bill, the rules for allocating an employee's investment in the contract between the employee and an alternate payee apply only if the alternate payee is a spouse or former spouse of the participant. If the alternate payee is not a spouse or former spouse, then the investment in the contract is not allocated to the alternate payee and is recovered by the participant89 under the general basis recovery rules applicable to the participant.To substantially the same effect, see H. Rept. 99-426, at 1065-1066, 3 C.B. 1065">1986-3 C.B. 1065-1066 (Vol. 2); J. Comm. on Taxation, Explanation of Technical Corrections to the Tax Reform Act of 1984 and Other Recent Tax Legislation (JCS-11-87), at 222-223 (J. Comm. Print 1987) (hereinafter sometimes referred to as "the Staff Blue Book"). We have examined each of the opinions, and the ruling, cited in the REA '84 legislative history set forth supra, and also Sav. & Profit Sharing Fund of Sears Emp. v. Gago, 717 F.2d 1038">717 F.2d 1038 (CA7 1983). The opinions deal with the ERISA preemption and antialienation provisions. Some of the opinions and the ruling deal with the Code's antialienation provision in the context of the tax-qualified status of the employees' plan there involved. Neither the ruling nor any of the opinions deals with the question of who is the distributee, or with any other aspect of who is to include the distribution (or any part thereof) in income. We conclude that the person to whom a distribution is made is not thereby automatically the distributee. Our conclusion90 is based on the Congress' decision to enact section 402(a)(9) in REA '84, as well as the form of section 402(a)(9). If section 402(a)(1) were understood to impose a tax on the recipient of a distribution, then it would automatically follow that obedience to a QDRO would result in the alternate payee being taxed. The fact that the Congress thought statutory language was needed in order 65 to achieve the result of taxing the alternate payee indicates that the Congress thought that otherwise someone else would be taxed under section 402(a)(1). The form of section 402(a)(9) as enacted by REA '84, providing that "the alternate payee shall be treated as the distributee" (emphasis added), further indicates that the Congress understood that the alternate payee is not really the "distributee" even though the alternate payee receives the distribution under the plan. Finally, the TRA '86 amendment also requires the conclusion we have set forth. The present language of sections 402(a)(1) and 402(a)(9) as amended by TRA '86 does not specifically state any rule as being applicable to alternate payees who are children or other dependents of the plan participant. If "distributee" means "recipient", 91 then children and other dependents who are recipients under QDRO's are thereby distributees. However, the committee reports (and the Staff Blue Book) for TRA '86 make it plain that the Congress understood that the effect of the TRA '86 amendment is that a distribution under a QDRO to a child or other dependent is "includible in the gross income of the participant." This result can follow only if "distributee" does not mean "recipient". Analysis of the same materials causes us to conclude that the owner of the interest under the plan is not thereby the distributee. Under the statute (section 414(p)(1)(A)(i) as enacted by REA '84 12), the status of an order as a QDRO is not affected by whether the order makes the alternate payee an owner of the interest under the plan or merely gives the owner a lien or other security interest in the plan. (Cf. Daniel v. Commissioner, 56 T.C. 655">56 T.C. 655, 659 (1971), affd. 461 F.2d 1265">461 F.2d 1265 (CA5 1972), relating to an interest in a testamentary trust.) The focus is designation of a right to 66 receive a benefit payable under the plan. If "distributee" had meant "owner", then children and other dependents who are awarded ownership92 interests would thereby be distributees. However, the TRA '86 legislative history makes it plain that distributions to children and other dependents are includable in the participants' incomes. This result can follow only if "distributee" does not mean "owner". A conclusion that "distributee" means "participant (or beneficiary) under the plan" appears to be consistent with the Congress' understanding when it enacted REA '84 and TRA '86. We do not have to decide in the instant case whether93 that is the definitive or only meaning of "distributee". It is enough for purposes of the instant case to conclude that that approximates the meaning of "distributee", that that results in requiring the distribution to be included in petitioner's income, and that no alternative pointing to Yolanda as distributee is tenable. Petitioner does not contend that the Divorce Decree would constitute a QDRO. Even if the Divorce Decree would constitute a QDRO under the REA '84 amendments' definition, that would not help petitioner. Although the REA '84 amendments may be said to "clarify" prior law as to the preemption and antialienation rules enacted by ERISA, the REA '84 amendments clearly changed prior law as to taxability under section 402. And, although we use the REA '84 amendments to help us understand what prior law was, the amendments themselves did not take effect until almost 2 years after the distribution in issue in the instant case. We have no authority to apply the REA '84 amendments with retroactivity that the Congress did not choose to provide. Gunther v. Commissioner, 909 F.2d 291">909 F.2d 291, 297 (CA7 1990), affg. 92 T.C. 39">92 T.C. 39 (1989); Sallies v. Commissioner, 83 T.C. 44">83 T.C. 44, 53 n.12 (1984).94 Petitioner points out that "distributee" appears twice and "employee" appears once in section 402(a)(1). He concludes that this means that "distributee" is not the same as "employee". We agree with that conclusion, but we do not agree that that conclusion helps petitioner's case. The second sentence of section 402(a)(1) uses "employee" in providing that "The amount actually distributed to any distributee shall not include net unrealized appreciation in 67 securities of the employer corporation attributable to the amount contributed by the employee". The relevant contributions are those of the employee. The distributee may be the participant or the participant's beneficiary. (The Sears Plan provides that each participant may designate a beneficiary "to whom his interest in the Fund is to be paid if he dies before he receives all of such interest." If there were no effective beneficiary designation when the participant dies, then the Fund would pay the interest to (1) the surviving spouse, if any, or (2) the estate.) Under the Sears Plan, Yolanda could have been designated petitioner's beneficiary, but she could not be a distributee on the facts of the instant case because petitioner95 was alive when the distribution in dispute was made. Under the terms of the Sears Plan, the beneficiary can take only if the participant is dead. Thus, the statute draws a distinction between "distributee" and "employee", but that distinction does not apply under the facts of the instant case. In our research we did not find any cases directly on point with the instant case. We did, however, find Memorandum Opinions in which this Court held that the nonemployee spouse must include in income pension benefits paid to her as her share of her former husband's retirement benefits. Each of these Memorandum Opinions, Eatinger v. Commissioner, T.C. Memo. 1990-310, Denbow v. Commissioner, T.C. Memo. 1989-92, and Lowe v. Commissioner, T.C. Memo. 1981-350, involved a determination of the effect of community property laws on the incidence of taxation of distributions under Federal military retirement programs. Since the instant case does not involve community property and does not involve Federal military retirement programs (which are subject to other statutes), we do not have to determine in the instant case how section 402(a)(1)96 is to interact with those other laws. As to the precedential value of Memorandum Opinions, see, e.g., Newman v. Commissioner, 68 T.C. 494">68 T.C. 494, 502 n.4 (1977). We hold, for respondent, that petitioner (and not Yolanda) was the distributee (within the meaning of section 402(a)(1)) of the entire distribution here in dispute. 68 II. Taxability of the DistributionPreliminarily, we note that the apparent effect of petitioner's contention that section 72 authorizes him to exclude $ 75,000 from income -- if we were to agree with it -- is that no one would be taxed on the $ 75,000. Petitioner would not be taxed because he had an investment in the contract and Yolanda would not be taxed because she was not the distributee. Unless the Congress has clearly provided otherwise, we should not interpret the Code to result in such a double benefit. See United States v. Skelly Oil Co., 394 U.S. 678">394 U.S. 678, 684, 22 L. Ed. 2d 642">22 L. Ed. 2d 642, 89 S. Ct. 1379">89 S. Ct. 1379 (1969); Charles Ilfeld Co. v. Hernandez, 292 U.S. 62">292 U.S. 62, 68, 78 L. Ed. 1127">78 L. Ed. 1127, 54 S. Ct. 596">54 S. Ct. 596 (1934). We do not lightly assume that the Congress has legislated eccentrically. J.C. Penney Co. v. Commissioner, 312 F.2d 65">312 F.2d 65, 68 (CA2 1962), affg. 37 T.C. 1013">37 T.C. 1013 (1962).97 Only if the language of the statute or the legislative history compelled it would we reach a result apparently so at odds with accepted tax policy. Cf. Haserot v. Commissioner, 41 T.C. 562">41 T.C. 562, 572 (1964), affd. sub nom. Commissioner v. Stickney, 399 F.2d 828">399 F.2d 828 (CA6 1968). Although the general rule of section 402(a)(1) (n.9, supra) provides that a distributee under a tax-qualified plan is to be taxed under section 72, the Congress has provided an alternative for lump sum distributions, taxable under sections 402(a)(2)13 (capital gains) and 402(e) 14 (10-year averaging). 69 The parties have stipulated that the 1983 distribution to petitioner was a lump sum distribution. An examination of petitioner's 1983 tax return makes it plain that petitioner elected the special lump sum distribution tax treatment. 98 Under section 402(a)(2), a portion of the distribution, determined by reference to "the total taxable amount (as defined in subparagraph (D) of subsection (e)(4))", is treated as a capital gain. The 10-year averaging rule of section 402(e) also depends on a determination of the total taxable amount. Section 402(e)(4)(D) defines the total taxable amount as the amount of the lump sum distribution, reduced by the sum of -- (i) the amounts considered contributed by the employee (determined by applying section 72(f)) * * and unrealized appreciation in employer securities. (There is no dispute about the treatment of the unrealized appreciation in employer securities in the instant case.) 70 Section 72(f)15 provides that amounts contributed by the employer shall be considered as contributed by the employee only to the extent that (1) the employer's contributions were includable in the employee's gross income or (2) the employer's contributions would not have been includable in the employee's gross income if they had been paid directly to the employee instead of contributed under the plan. 99 As to the first alternative, the parties have stipulated that (a) the 1983 lump sum distribution consists entirely of Sears' contributions and (b) the contributions were not included in petitioner's gross income. As to the second alternative, no evidence appears, and no contention is made by petitioner, that petitioner could have properly excluded Sears' contributions from his gross income if the contributions had been paid directly to him instead of having been made under the Sears Plan. See sec. 1.72-8(a)(5), Income Tax Regs.16100 71 Thus, under section 72(f), no part of the lump sum distribution is treated as having been contributed by petitioner, and under section 402(e)(4)(D), the total taxable amount is the total amount of the lump sum distribution. It follows that the entire lump sum distribution is taken into account in determining petitioner's tax liability under the method that petitioner chose in reporting the lump sum distribution on his 1983 tax return. We conclude that petitioner may not reduce the amount of the lump sum distribution by any amount he paid to Yolanda. We believe that the result would have been the same under section 72 even if petitioner had not elected the special tax treatment for lump sum distributions. Section 72(b) provides the exclusion ratio rules for amounts received as annuities, and section 72(e) provides the rules for amounts not received as annuities. Both subsections require exclusion of amounts which constitute investment in the contract. For section 72(b) the definition is provided in section 72(c)(1), and for section 72(e) the definition is provided in section 72(e)(6). Section 72(f), which we have already considered (see n.15, supra), then provides rules101 for those definitions. Once again, petitioner confronts the barrier that -- (1) amounts contributed by the employer are treated as "premiums or other consideration paid" by the employee only if (a) those amounts had been included in the employee's gross income or (b) those amounts would not have been includible in the employee's gross income if they had been paid directly to the employee instead of contributed under the plan, (2) the 1983 distribution consists entirely of contributions made by Sears, (3) the contributions were not included in petitioner's gross income, and (4) if Sears had paid the amounts directly to petitioner instead of contributing them under the plan then the amounts apparently would have been includible in petitioner's gross income.Thus, even if petitioner had not elected to be taxed under the special lump sum distribution rules, the regular rules of 72 section 72 would have barred him from excluding any part of the $ 75,000 that was paid to Yolanda. Petitioner relies on Gasman v. Commissioner, T.C. Memo. 1967-42, in support of his position that the $ 75,000 he paid to Yolanda should be treated as his investment in the contract. 102 In Gasman, the taxpayer, pursuant to a settlement agreement entered into by the taxpayer and his former wife incident to their divorce, paid $ 9,000 to his former wife for her interest in certain property they had acquired as tenants by the entirety during the marriage. The taxpayer later sold this property during one of the years in suit. We determined that the taxpayer's basis in the property was increased by the $ 9,000 he paid to his former wife for her interest in the property. The facts of Gasman are distinguishable from the facts in the instant case. In Gasman the former wife's interest in the property arose before the divorce. There, the taxpayer purchased his former wife's preexisting interest in the property for cash. In the instant case, there is no evidence that Yolanda had an interest in the Sears Plan before the Divorce Decree. Moreover, neither petitioner nor Yolanda made contributions under the Sears Plan. The portion of the lump sum distribution petitioner paid to Yolanda came from previously untaxed employer contributions and earnings attributable to those contributions. Also, neither petitioner nor Yolanda recognized income on the division 103 of petitioner's interest in the Sears Plan as a result of the divorce. Consequently, neither petitioner nor Yolanda had any basis in the Sears Plan which petitioner could use to reduce the taxable portion of the distribution. Petitioner further contends that, under section 72(g)(1), 1773 to the extent he is considered a distributee with respect to all or any portion of the $ 75,000, he must also be treated as having paid valuable consideration to his former spouse for the right to receive that portion as to which he is considered a distributee. Respondent argues that there is no evidence that Yolanda transferred to petitioner a contract or interest in a qualified plan; accordingly, section 72(g) does not apply. We agree with respondent's conclusion. 104 Under section 72(g), a transferee of a contract subject to section 72 becomes an investor in the contract when a policy or any interest in the policy is transferred to the transferee for a valuable consideration. The transferee's investment in the contract then is limited to the actual value of the consideration paid to the transferor for the contract plus any premiums and other consideration the transferee pays on the contract after the transfer. Sec. 72(g)(1). See Hacker v. Commissioner, 36 B.T.A. 659">36 B.T.A. 659, 662 (1937). However, petitioner received his interest in the Sears Plan because of his status as an employee of Sears, not because he paid $ 75,000 to Yolanda. Yolanda did not transfer any interest in the Sears Plan to petitioner. In the instant case, petitioner paid $ 75,000 to Yolanda as a property settlement for her interest in the marital estate, not as consideration for her interest, if any, in the Sears Plan. Consequently, petitioner may not exclude from income any portion of his 1983 lump sum distribution, merely because of the requirement (which he honored) that a portion of the distribution go to Yolanda. We hold for respondent on this issue. 105 To reflect the foregoing, Decision will be entered for the respondent. Footnotes1. Petitioner concedes that, due to an error on his 1983 tax return, the capital gain portion of the distribution in issue which was shown on line 1 of his Form 4972 (Special 10-Year Averaging Method) was omitted from the Schedule D to the tax return. Consequently, petitioner concedes about $ 6,900 of the deficiency. ↩2. Unless indicated otherwise, all section references are to sections of the Internal Revenue Code of 1954 as in effect for the year in issue.↩3. The use of the word "assignment" is for descriptive purposes only and is not intended to delineate our conclusion as to the legal effect of that document. ↩4. The parties have not explained how a document dated October 27, 1976, came to be executed "pursuant to" a judgment entered November 8, 1976; however, they have so stipulated and so we have so found.↩5. The parties have stipulated to the rate of the payments ($ 60 per week) and the period of the payments ("commencing shortly after the divorce decree was entered [November 8, 1976] and continuing until January of 1983"). At that rate and for that period, the payments should have totalled a little over $ 19,000. The parties have not explained the discrepancy between the latter amount and the stipulated $ 22,030 total payments. Our findings are in accordance with the parties' stipulations.↩6. Neither side in the instant case contends that secs. 71 and 215 are applicable to the payments at issue here. We do not examine that issue. See, e.g., Jackson v. Commissioner, 54 T.C. 125">54 T.C. 125, 129↩ (1970).7. SEC. 61. GROSS INCOME DEFINED. (a) General Definition.--Except as otherwise provided in this subtitle, gross income means all income from whatever source derived, including (but not limited to) the following items: * * * (11) Pensions; ↩8. Sec. 451. GENERAL RULE FOR TAXABLE YEAR OF INCLUSION. (a) General Rule.--The amount of any item of gross income shall be included in the gross income for the taxable year in which received by the taxpayer, unless, under the method of accounting used in computing taxable income, such amount is to be properly accounted for as of a different period. ↩9. Section 402(a)(1) provides, in pertinent part, as follows: SEC. 402. TAXABILITY OF BENEFICIARY OF EMPLOYEES' TRUST. (a) Taxability of Beneficiary of Exempt Trust.-- (1) General Rule.--Except as provided in paragraphs (2) and (4), the amount actually distributed to any distributee by any employees' trust described in section 401(a) which is exempt from tax under section 501(a) shall be taxable to him, in the year in which so distributed, under section 72 (relating to annuities). * * * [The subsequent amendment of this provision by sec. 1011A(b)(8)(A) of the Technical and Miscellaneous Revenue Act of 1988, Pub. L. 100-647, 102 Stat. 3342, 3473, does not affect the instant case.]↩21. Sec. 514 of ERISA.↩22. See, e.g., American Telephone and Telegraph Co. v. Merry, 592 F.2d 118 (2d Cir. 1979); Cody v. Riecker, 594 F.2d 314">594 F.2d 314↩ (2d Cir. 1979). 23. See, e.g., Weir v. Weir, * * * [413] A.2d 638 ([N.J. Super Ct. Ch. Div.] 1980); Kikkert v. Kikkert, 177 N.J. Super. 471">177 N.J. Super. 471, 427 A.2d 76">427 A.2d 76↩ ([N.J. Super. App. Div.] 1981).24. In Stone v. Stone, * * * [632] F.2d 740 (9th Cir. 1980), the court held that ERISA was not intended to preempt community property laws and that a court order requiring a division of retirement benefits did not violate the anti-assignment provisions. In Francis v. United Technology Corp.458 F. Supp. 84">458 F. Supp. 84↩ (N.D. Cal. 1978), however, the court held that ERISA's preemption provision prevents the application of State community property law permitting attachment of plan benefits for family support purposes.25. Rev. Rul. 80-27↩, 1980-1 C.B. * * * [85].10. SEC. 402. TAXABILITY OF BENEFICIARY OF EMPLOYEES' TRUST. (a) Taxability of Beneficiary of Exempt Trust.-- * * * (9) Alternate payee under qualified domestic relations order treated as distributee.--For purposes of subsection (a)(1) and section 72, the alternate payee shall be treated as the distributee of any distribution or payment made to the alternate payee under a qualified domestic relations order (as defined in section 414(p)). [This provision took effect on January 1, 1985 (sec. 303(d) of REA '84, 98 Stat. 1453). This provision was amended by sec. 1898(c)(1)(A) of the Tax Reform Act of 1986 (Pub. L. 99-514, 100 Stat. 2085, 2951), discussed infra↩.] 11. SEC. 414. DEFINITIONS AND SPECIAL RULES. * * * (p) Qualified Domestic Relations Order Defined.--For purposes of this subsection and section 401(a)(13)-- * * * (8) Alternate payee defined.--The term "alternate payee" means any spouse, former spouse, child or other dependent of a participant who is recognized by a domestic relations order as having a right to receive all, or a portion of, the benefits payable under a plan with respect to such participant.↩12. SEC. 414. DEFINITIONS AND SPECIAL RULES. * * * (p) Qualified Domestic Relations Order Defined. -- For purposes of this subsection and section 401(a)(13) -- (1) In general. -- (A) Qualified domestic relations order. -- The term "qualified domestic relations order" means a domestic relations order -- (i) which creates or recognizes the existence of an alternate payee's right to, or assigns to an alternate payee the right to, receive all or a portion of the benefits payable with respect to a participant under a plan, * * ↩13. Sec. 402(a)(2) provides, in pertinent part, as follows: SEC. 402. TAXABILITY OF BENEFICIARY OF EMPLOYEES' TRUST. (a) Taxability of Beneficiary of Exempt Trust. -- * * (2) Capital gains treatment for portion of lump sum distributions. -- In the case of an employee trust described in section 401(a), which is exempt from tax under section 501(a), so much of the total taxable amount (as defined in subparagraph (D) of subsection (e)(4)) of a lump sum distribution as is equal to the product of such total taxable amount multiplied by a fraction -- (A) the numerator of which is the number of calendar years of active participation by the employee in such plan before January 1, 1974, and (B) the denominator of which is the number of calendar years of active participation by the employee in such plan, shall be treated as a gain from the sale or exchange of a capital asset held for more than 1 year. * * * [The subsequent repeal of this provision by sec. 1122(b)(1)(A) of the Tax Reform Act of 1986, Pub. L. 99-514, 100 Stat. 2085, 2466, applies to amounts distributed after December 31, 1986, and so does not affect the instant case.] ↩14. Sec. 402(e) provides, in pertinent part, as follows: SEC. 402. TAXABILITY OF BENEFICIARY OF EMPLOYEES' TRUST. * * * (e) Tax on Lump Sum Distributions. -- (1) Imposition of separate tax on lump sum distributions. -- (A) Separate tax. -- There is hereby imposed a tax (in the amount determined under subparagraph (B)) on the ordinary income portion of a lump sum distribution. (B) Amount of tax. -- The amount of tax imposed by subparagraph (A) for any taxable year shall be an amount equal to the amount of the initial separate tax for such taxable year multiplied by a fraction, the numerator of which is the ordinary income portion of the lump sum distribution for the taxable year and the denominator of which is the total taxable amount of such distribution for such year. (C) Initial separate tax. -- The initial separate tax for any taxable year is an amount equal to 10 times the tax which would be imposed by subsection (c) of section 1 if the recipient were an individual referred to in such subsection and the taxable income were an amount equal to the zero bracket amount applicable to such an individual for the taxable year plus one-tenth of the excess of -- (i) the total taxable amount of the lump sum distribution for the taxable year, over (ii) the minimum distribution allowance. * * * (4) Definitions and special rules. -- * * * (D) Total taxable amount. -- For purposes of this section and section 403, the term "total taxable amount" means, with respect to a lump sum distribution, the amount of such distribution which exceeds the sum of -- (i) the amounts considered contributed by the employee (determined by applying section 72(f)), which employee contributions shall be reduced by any amounts theretofore distributed to him which were not includible in gross income, and (ii) the net unrealized appreciation attributable to that part of the distribution which consists of the securities of the employer corporation so distributed. [The subsequent amendments of these provisions by secs. 104(b)(5), 1122(a)(2), and 1122(b)(2)(B) of the Tax Reform Act of 1986 (Pub. L. 99-514, 100 Stat. 2085, 2105, 2466, 2467), and by pars. (8)(E) and (10) of sec. 1011A(b) of the Technical and Miscellaneous Revenue Act of 1988 (Pub. L. 100-647, 102 Stat. 3342, 3474), do not affect the instant case. The amendments made by sec. 1122(a)(2) of the 1986 Act changed the provision from 10-year averaging to 5-year averaging.]↩15. Section 72(f) provides, in pertinent part, as follows: SEC. 72. ANNUITIES; CERTAIN PROCEEDS OF ENDOWMENT AND LIFE INSURANCE CONTRACTS. * * * (f) Special Rules for Computing Employees' Contributions. -- In computing, for purposes of subsection (c)(1)(A), the aggregate amount of premiums or other consideration paid for the contract, for purposes of subsection (d)(1), the consideration for the contract contributed by the employee, and for purposes of subsection (e)(1)(B), the aggregate premiums or other consideration paid, amounts contributed by the employer shall be included, but only to the extent that -- (1) such amounts were includible in the gross income of the employee under this subtitle or prior income tax laws; or (2) if such amounts had been paid directly to the employee at the time they were contributed, they would not have been includible in the gross income of the employee under the law applicable at the time of such contribution. * * * [The subsequent amendments of this provision, by sec. 1852(c)(3) of the Tax Reform Act of 1986 (Pub. L. 99-514, 100 Stat. 2085, 2867), and sec. 1011A(b)(1) of the Technical and Miscellaneous Revenue Act of 1988 (Pub. L. 100-647, 102 Stat. 3342, 3472), do not affect the instant case.]↩16. § 1.72-8. Effect of certain employer contributions with respect to premiums or other consideration paid or contributed by an employee. (a) Contributions in the nature of compensation -- * * * (5) Amounts not includible in gross income of employee under subtitle A of the Code or prior income tax laws. Amounts contributed by an employer which were not includible in the gross income of the employee under subtitle A of the Code or prior income tax laws, but which would have been includible therein had they been paid directly to the employee, do not constitute consideration paid or contributed by the employee for the purposes of section 72↩. For example, contributions made by an employer under a qualified employees' trust or plan, which contributions would have been includible in the gross income of the employee had such contributions been paid to him directly as compensation, do not constitute consideration paid or contributed by the employee. Accordingly, the aggregate amount of premiums or other consideration paid or contributed by an employee, insofar as compensatory employer contributions are concerned, consists solely of the (i) sum of all amounts actually contributed by the employee, plus (ii) contributions in the nature of compensation which are deemed to be paid or contributed by the employee under this paragraph.17. SEC. 72. ANNUITIES; CERTAIN PROCEEDS OF ENDOWMENT AND LIFE INSURANCE CONTRACTS. * * * (g) Rules For Transferee Where Transfer Was For Value. -- Where any contract (or any interest therein) is transferred (by assignment or otherwise) for a valuable consideration, to the extent that the contract (or interest therein) does not, in the hands of the transferee, have a basis which is determined by reference to the basis in the hands of the transferor, then -- (1) for purposes of this section, only the actual value of such consideration, plus the amount of the premiums and other consideration paid by the transferee after the transfer, shall be taken into account in computing the aggregate amount of the premiums or other consideration paid for the contract; * * * For purposes of this subsection, the term "transferee" includes a beneficiary of, or the estate of, the transferee.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622639/	GEORGE H. WEIGHTMAN, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentWeightman v. CommissionerDocket No. 7129-79.United States Tax CourtT.C. Memo 1981-301; 1981 Tax Ct. Memo LEXIS 442; 42 T.C.M. (CCH) 104; T.C.M. (RIA) 81301; June 18, 1981. George H. Weightman, pro se. Robert J. Alter, for the respondent. PARKERMEMORANDUM FINDINGS OF FACT AND OPINION PARKER, Judge: Respondent determined a deficiency in petitioner's 1976 Federal income tax in the amount of $ 411.87. The sole issue for determination is whether petitioner, a college professor, is entitled to a home office deduction under section 280A. 1FINDINGS OF FACT George H. Weightman (hereinafter petitioner) resided at 250 East 39th Street, Apt. No. 11B, New York, New York 10016 at the time he filed the petition in this case. During the taxable year 1976, petitioner was a full time tenured Associate Professor of Sociology at the Herbert H. Lehman College of the City University of New York (hereinafter sometimes referred to as the college) located in New York City. 2 During this period of time, petitioner taught the following courses each of which met three hours a week: 444 SemesterCourse No.Course TitleEnrollmentFall 1975 3Sociology 319Population 24 UndergraduatesSociology 227Family 40 UndergraduatesSociology 239Social Problems 88 Undergraduates(2 sections)Spring 1976Sociology 231Social Problems115 Undergraduates(2 sections)Sociology 239Population 35 UndergraduatesSociology 750Family$ 7 Graduate StudentsFall 1976Sociology 227Family 38 UndergraduatesSociology 231Social Problems 70 Undergraduates(2 sections)Sociology 720Advanced 6 Graduate StudentsPopulationEach of these classes met three days each week. The two graduate courses listed above also required individual consultations on a regular basis with the students enrolled therein. In addition, petitioner was required to maintain on-campus office hours for at least three hours each week for the purpose of conferring with undergraduate students. Petitioner445 had the normal range of duties relating to the classes he taught. He had to prepare and present the lectures, prepare and grade exams, read term papers and occasionally work with students. In addition to teaching, petitioner conducted research and served on various teaching-related committees which met regularly and periodically on the college campus while regular classes were in session. During 1976 petitioner also served as a Faculty Senator in the college government. Petitioner also engaged in professional development. Petitioner considered his role as a researcher more important to Lehman College and to his position with the college than his role as a teacher. Petitioner at various times used the New York Public Library for his research, but most of his research in 1976 was brought back from his field work during the summer months in Canada. See Footnote 2. Petitioner and some of his colleagues felt that in the college's consideration of candidates for tenure and promotion, research was the most important criterion. Petitioner and some of his colleagues believed that candidates must gain recognition in their academic fields by professional development, including research446 projects, writing, publishing, and attending various conferences. In 1976 petitioner published two book reviews, participated in at least two scholarly panel discussions in California, and attended at least two other academic conferences during the year. 4 He conducted research and wrote a chapter dealing with sociology in the Philippines, but he derived no income from any of his publishing activities in 1976. Professional development work of the type petitioner engaged in takes considerable time, energy, and resources, including space in which to work. During 1976, Lehman College provided petitioner with an on-campus office in which to work and meet with students. He shared this office, which was approximately 11 X 20 feet in size, with two other members of the faculty. The building in which his office was located was open on Monday through Thursday from 8:00 a.m. to 9:00 p.m. and on Friday from 8:00 a.m. to 4:00 p.m. Those were also the hours during which classes were offered at the college and the hours during which the college library was open. The building447 in which petitioner's office was located was closed on weekends, as was the college library. Petitioner's office was furnished with desks, chairs, filing cabinets, and bookshelves. There was a telephone system which served four offices, but there were no separate telephones at each desk or in each office. The telephone system was for incoming calls only and since 12 or more people received calls on this system, the telephone rang frequently throughout the day. Petitioner maintained office hours in this office at least three hours a week; and if he met with any graduate or undergraduate students outside of the class-room, he met with them in that office. Lehman College is located in the Bronx in New York City. At all times relevant to this case, security was a problem at Lehman College. Numerous burglaries and assaults had been committed in and around the college and even in the building in which petitioner's office was located. Petitioner and some of his colleagues felt that it was not safe to leave any of their personal belongings in their offices nor to stay at the college any longer than necessary. Petitioner did not store any of the books he used for his research or for448 his lectures in his office on campus. Petitioner would leave a book in his on-campus office only when he was sure he had a duplicate copy of the book, such as a textbook. Furthermore, he would not leave exams and term papers in the office for the same security reasons. Petitioner and some of his colleagues also would not leave personal items such as briefcases unattended for more than a few minutes for fear of theft.Petitioner and some of his colleagues also feared for their personal safety. Petitioner rode the subway to work, and felt that was also dangerous. Petitioner also feared for his safety in and around the college. During 1975, the college building where petitioner's office was located had been taken over by student demonstrators. In 1976 there was some fear of a similar occurrence, and in 1977 there was another such incident. Although the faculty offices were available throughout the week, petitioner came to the college only when necessary and left as early as possible. He generally left around 2:00 p.m. - 3:00 p.m., spending only four to five hours on campus. His classes generally met three days a week.Petitioner normally tried to schedule any other meetings on449 one of those three days, with the result that petitioner usually came to the college only on those three days. During 1976 petitioner, a bachelor, lived alone in an apartment located on the East Side in Manhattan. The apartment consisted of a living room, bedroom, small kitchen, and a bathroom. Petitioner was not required by Lehman College, either by contract or as a condition of employment, to maintain an office in his home, but he used a portion of his bedroom as a home office. He prepared his classroom lectures, graded papers and exams, did some research, and did almost all of his professional writing in his home office. Since exam grades had to be turned in within 48 hours, any exams given on Fridays had to be graded at home. Petitioner testified that a specific area or portion of his bedroom was used exclusively as his home office. This specific area was furnished with a desk, a chair, two file cabinets, and three bookcases. In the other portion or area of the bedroom petitioner had his bed and a dresser. He insisted that although the two areas were located within a single room, they were separate and discrete areas. However, the two areas of the room were not separated450 by any wall, partition, curtain, or other physical demarcation. Certain books that petitioner occasionally used in his work as a college professor and the telephone that he also occasionally used in connection with his job were located in his living room. On his individual Federal income tax return for 1976, petitioner deducted $ 1,042.35 as expenses in connection with his home office. 5 Respondent disallowed the deduction, contending that petitioner did not meet the requirements of section 280A. OPINION The Tax Reform Act of 1976, Pub. 451 L. 94-455, 90 Stat. 1520, changed the law with respect to an office in the home. Section 601(a) of that Act added a new section 280A to the Internal Revenue Code, which strictly limited deductions for expenses of an office in the home, effective for taxable years beginning after December 31, 1975. 90 Stat. 1569-1572. The tax year involved in this case was the first year that the new law was in effect. Section 280A(a) provides that no deduction (otherwise allowable) shall be allowed with respect to the use of a dwelling unit used by the taxpayer during the taxable year as his residence, but section 280A(c)(1) carves out certain exceptions to this general rule of nondeductibility. 6 Petitioner relies upon the exception in section 280A(c)(1)(A), covering situations where the office in the home constitutes the taxpayer's principal place of business. Section 280A(c)(1)(A) provides that the general rule of nondeductibility shall not apply to "any item to the extent such item is allocable to a portion of the dwelling unit which is exclusively used on a regular basis * * * as the taxpayer's principal place of business." (Emphasis added.) In the case of an452 employee, such as petitioner, the exception applies "only if the exclusive use * * is for the convenience of his employer." Before we get to the "principal place of business" and "convenience of [the] employer" requirements, respondent says petitioner cannot, in any event, satisfy the453 exclusive use test because his office in the home was not an entire room or some portion or area of a room physically separated in some manner from the rest of the bedroom. It is true that there was no wall, partition, curtain nor any other physical demarcation to separate the office portion of the room from the bedroom portion of that room. The question is whether section 280A(c) requires a separate room or some physically separated portion of a single room. We think it does not, and that the issue is one of fact. Section 280A(c) does not use the word room but simply the term "a portion of the dwelling unit." 7 The legislative history discusses the phrase "a portion of the dwelling unit" solely in the context of exclusive use on a regular basis. The Senate Finance Committee report stated as follows: 454 Exclusive use of a portion of a taxpayer's dwelling unit means that the taxpayer must use a specific part of a dwelling unit solely for the purpose of carrying on his trade or business.The use of a portion of a dwelling unit for both personal purposes and for the carrying on of a trade or business does not meet the exclusive use test. Thus, for example, a taxpayer who uses a den in his dwelling unit to write legal briefs, prepare tax returns, or engage in similar activities as well for personal purposes, will be denied a deduction for the expenses paid o incurred in connection with the use of the residence which are allocable to these activities. * * * [S. Rept. 94-938 (1976), 1976-3 C.B. (Vol. 3) 49, 186.] See also H. Rept. 94-658 (1975), 1976-3 C.B. (Vol. 2) 695, 853; Joint Committee Explanation, 1976-3 C.B. (Vol. 2) 1, 152. Thus the legislative history speaks only of "a portion of a taxpayer's dwelling unit" or "a specific part of a dwelling unit." Nothing in the statute or its legislative history compels the interpretation urged by respondent. The Court is mindful that Congress intended section 280A(c) to provide "definitive455 rules" regarding deductions for an office in the home and that Congress wished to alleviate the administrative burdens, uncertainties, and potential for abuse that existed under the prior case law in regard to offices in the home. S. Rept. 94-938, supra, 184-186. Respondent warns that, unless the Court adopts respondent's restrictive view as to what constitutes "a portion of the dwelling unit," it will resurrect these uncertainties and possible abuses. We think the issue is merely a question of fact. The problems of proof are essentially the same whether the Court is asked to determine the exclusive use of an entire room for business purposes or the exclusive use of a portion of that room for business purposes. The Court must resolve any issues of credibility and make its own factual determination based upon all of the evidence in the record. The presence or absence of a wall, partition, curtain, or some other physical barrier separating the two areas is a factor for the Court to weigh. Absent a wall, partition, curtain, or other physical demarcation of the business area, the Court as the trier of fact may well view with a somewhat more critical eye the evidence adduced456 by the taxpayer to establish that there was in fact some separate, though unmarked, area that he used exclusively and on a regular basis as his home office. Here the Court, having had the opportunity to observe the demeanor of the taxpayer, finds the taxpayer's testimony credible and is convinced that there was a separate area or portion of his bedroom that was used exclusively as his home office. This case is distinguishable on its facts from the situation where the taxpayer's business use and personal use of a single room are so intermingled that the Court cannot make the necessary finding of fact that a specific portion of the room was used exclusively and regularly for business purposes. 8 We are satisfied that petitioner has met the exclusive use test.9457 The next issue is whether or not petitioner's office in the home can be considered as his principal place of business. We conclude that it cannot. Petitioner was a full time associate professor of sociology at the Herbert H. Lehman College of the City University of New York. His various duties and activities as a college professor are set out in detail in the findings of fact and will not be repeated here. In summary petitioner argues that his office in his home should be treated as his principal place of business, because his office on campus was not, in his opinion, particularly convenient or suitable for his work, because he spent as little time as possible on campus out of concern for the safety of his belongings and his own personal safety, and because he regarded his research activities as more important than his teaching activities. In determining a taxpayer's principal place of business within the meaning of section 280A(c)(1)(A), the Court must ascertain the "focal point" of the taxpayer's business activities. Jackson v. Commissioner, 76 T.C. (May 4, 1981); Baie v. Commissioner,74 T.C. 105">74 T.C. 105, 109 (1980).458 The focal point of a teacher's activities would normally be the school where he teaches. While preparation of lectures, grading of papers and exams, and professional development, including research activities, are important and indeed essential to the work of a college professor, they do not serve to shift the focal point of the professor's activities from the school to his office in his home. Just as the preparation of the food in her home was an essential part of the taxpayer's business activities in the Baie case, the focal point of her business was the hot dog stand where the food was sold. Here petitioner was a classroom teacher, and the record does not remotely suggest that the college ever employed him as a researcher rather than as a teacher. Just as we have done in other cases involving teachers, we must conclude that petitioner's principal place of business was the school and not his office in his home. 10 Moreover, petitioner has not established that his use of a home office was for the convenience of his employer. 11 For these reasons, petitioner is not entitled to a deduction for the expenses connected with his office in the home. *459 Decision will be entered for respondent. Footnotes1. All section references are to the Internal Revenue Code of 1954, as amended and in effect during the year in issue, unless otherwise stated.↩2. For a two-week period in May-June 1976, Lehman College completely closed its doors and shut down for lack of money. On brief, petitioner petitioner places great emphasis on this period when his on-campus office was not available to him, but he does not mention the two-month period when he worked in Canada and used neither his on-campus office nor his home office in connection with his job as a professor at Lehman College. During the months of July and August of 1976, petitioner worked in Canada, teaching a sociology-related course at Saint Mary's University in Halifax and conducting research on certain Canadian minority groups. The Court will disregard both periods in deciding the issue in this case.↩3. Although 1975 is not in issue, these courses continued into the winter of 1976, and the parties have stipulated that petitioner taught these various courses during the period from January 1, 1976 to December 31, 1976.↩4. The deductions for the expenses incurred in connection with these activities are not in issue in this case.↩5. The parties stipulated that this amount represented an allocation of about 25 percent of the rent ($ 4,073) and five percent of the utility expenses ($ 96) for the apartment for 1976, but 25 percent of both figures comes out to $ 1,042.25. However, the amount petitioner deducted may have included an amount for the business portion of the telephone usage. Petitioner testified that he allocated $ 2.00 per month for the business portion of his telephone expense. If $ 20 (10 months) for telephone is added to the parties' stipulated allocation percentages, it results in a total of $ 1,043.05 which again is close but not the exact figure.↩6. SEC. 280A. DISALLOWANCE OF CERTAIN EXPENSES IN CONNECTION WITH BUSINESS USE OF HOME, RENTAL OF VACATION HOMES, ETC.(a) General Rule.--Except as otherwise provided in this section, in the case of a taxpayer who is an individual or an electing small business corporation, no deduction otherwise allowable under this chapter shall be allowed with respect to the use of a dwelling unit which is used by the taxpayer during the taxable year as a residence. (c) Exceptions for Certain Business or Rental Use; Limitation on Deductions for Such Use.-- (1) Certain Business Use.--Subsection (a) shall not apply to any item to the extent such item is allocable to a portion of the dwelling unit which is exclusively used on a regular basis-- (A) as the taxpayer's principal place of business.↩7. Respondent's proposed regulations under section 280A(c) fail to define the term but would define "dwelling unit" as including a "house, apartment, condominium, mobile home, boat, or similar property, which provides basic living accommodations such as sleeping space, toilet and cooking facilities." Sec. 1.280A-1(c)(1), Prop. Income Tax Regs.↩ published in Fed. Register August 7, 1980. Some of these dwelling units would not necessarily have rooms as such.8. See, for example, Gomez v. Commissioner,T.C. Memo. 1980-565, and Weiner v. Commissioner,T.C. Memo. 1980-317↩. 9. Respondent also argues that petitioner fails to satisfy that test, because some of his books and the telephone were located in his living room rather than in the office portion of the bedroom. However, petitioner is not claiming any expenses allocable to the living room, and business telephone expense, if properly substantiated, would be deductible under section 162(a) quite apart from section 280A.Petitioner did not establish the amount of any business telephone expense, and we cannot allow any deduction in that regard. See Footnote 5.↩10. See Kastin v. Commissioner,T.C. Memo. 1980-341 ([physical education teacher and track and field coach]; [physical education teacher and track and field coach]; Chauls v. Commissioner,T.C. Memo. 1980-471 [college music instructor]; Cousino v. Commissioner,T.C. Memo. 1981-19↩ (on appeal to the 6th Cir.) [junior high school teacher and member of Board of Trustees for local community college]. 11. After the trial, petitioner attached to his brief a letter written by the Lehman College Provost which stated that "use of space and facilities as a professional office in the home of a college faculty member for the performance of college duties is entirely appropriate, helpful, and usually necessary." This letter was not properly offered or introduced into evidence, and cannot be considered by the Court. However, that letter would not satisfy the convenience of the employer test in any event. Congress specifically eliminated the "appropriate and helpful" standard and substituted this convenience of the employer test. S. Rept.No. 94-938 (1976), 1976-3 C.B. (Vol. 3) 49, 185-186; H. Rept. No. 94-658 (1975), 1976-3 (Vol. 2) 695, 852-853; Joint Committee Explanation, 1976-3 C.B. (Vol. 2) 1, 151-152.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622640/	MIHALY and GISELA M. BACSMAI, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentBacsmai v. CommissionerDocket No. 13838-80.United States Tax CourtT.C. Memo 1981-450; 1981 Tax Ct. Memo LEXIS 295; 42 T.C.M. (CCH) 816; T.C.M. (RIA) 81450; August 24, 1981. 295 Held, petitioner's transportation expenses are not deductible under section 162(a), I.R.C. 1954. Mihaly Bacsmai, pro se. Karen A. Perez, for the respondent. WILESMEMORANDUM FINDINGS OF FACT AND OPINION WILES, Judge: Respondent determined a deficiency of $ 416 in petitioners' 1977 Federal income tax. After concessions, the sole issue for decision is whether transportation expenses incurred by petitioner Mihaly Bacsmai with respect to his employment are deductible under section 162(a). 1296 FINDINGS OF FACT Some of the facts have been stipulated and are found accordingly. Mihaly and Gisela M. Bacsmai resided in Colorado Springs, Colorado, at the time they filed their petition in this case. Mihaly Bacsmai (hereinafter petitioner) was a Non-Commissioned Officer in the United States Army during 1974 through 1977. In 1975, petitioner received orders to work in Frankfurt, Germany, which was 20 miles from his home and previous job in Hanau, Germany. Petitioner expected his job in Frankfurt to continue for a substantial period of time and such job lasted for 20 months. Petitioner continued to live in his home in Hanau and every morning he drove to his worksite in Frankfurt. Petitioner's job in Frankfurt required him to determine the supply needs of some brigades and occasionally petitioner made field trips to determine such needs. Petitioner never filed a voucher to obtain reimbursement for his field trip expenses, nor has he ever received any such reimbursement. On his 1977 Federal income tax return, petitioner claimed deductions for transportation expenses totaling $ 1,067, consisting of $ 904 for transportation from Hanau to Frankfurt and $ 163 for transportation297 on field trips. In his notice of deficiency, respondent disallowed these deductions. OPINION Petitioner argues that the expenses he incurred on his daily transportation to work were deductible. Respondent's position is that petitioner is unable to deduct such expenses if the job to which he commuted does not qualify as temporary. Thus, our decision in Turner v. Commissioner, 56 T.C. 27">56 T.C. 27 (1971), vacated and remanded on respondent's motion by an unpublished order (2d Cir., Mar. 21, 1972) has no bearing in this case. Temporary employment means "the sort of employment in which termination within a short period could be foreseen." Albert v. Commissioner, 13 T.C. 129">13 T.C. 129, 131 (1949). See also Norwood v. Commissioner, 66 T.C. 467">66 T.C. 467, 470 (1976); McCallister v. Commissioner, 70 T.C. 505">70 T.C. 505, 509 (1978). Since petitioner expected his employment in Frankfurt to last for a substantial period of time we are unable to classify such employment as temporary. We view petitioner's daily transportation expenses as nondeductible commuting expenses. See Norwood v. Commissioner, supra; McCallister v. Commissioner, supra;298 sec. 1.162-2(e), Income Tax Regs.; sec. 262. Petitioner also claims that the transportation expenses he incurred when making field trips to the brigades were deductible under section 162(a). We uphold respondent's disallowance of such deduction because petitioner has not established that the expenses were "necessary" within the meaning of section 162(a). Petitioner has the burden of proving that the determination in respondent's notice of deficiency is incorrect. Welch v. Helvering, 290 U.S. 111 (1933); Rule 142(a), Tax Court Rules of Practice and Procedure.This Court has held that business expenses are not necessary when an employee incurs such expenses and is entitled to be reimbursed for them, but fails to make a claim for reimbursement from his employer. Podems v. Commissioner, 24 T.C. 21">24 T.C. 21 (1955). Petitioner did not establish whether he was entitled to reimbursement from the United States Army for his field trip expenses. Furthermore, he never filed a claim seeking reimbursement from his employer. Consequently, we hold that petitioner's field trip expenses were not necessary. To reflect the foregoing, Decision will be entered*299 for the respondent. Footnotes1. Statutory references are to the Internal Revenue Code of 1954, as amended.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622641/	THIRD DIVIDEND/ DARDANOS ASSOCIATES, A CALIFORNIA LIMITED PARTNERSHIP, DIVIDEND DEVELOPMENT CORPORATION, TAX MATTERS PARTNER, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent; THIRD DIVIDEND/ DARDANOS ASSOCIATES, A CALIFORNIA LIMITED PARTNERSHIP, RICHARD B. OLIVER and DOUGLAS WATSON, PARTNERS OTHER THAN THE TAX MATTERS PARTNERS, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentThird Dividend/Dardanos Assocs. v. CommissionerDocket Nos. 3892-93, 3930-93United States Tax CourtT.C. Memo 1994-412; 1994 Tax Ct. Memo LEXIS 421; 68 T.C.M. (CCH) 496; August 22, 1994, Filed 421 Orders of Dismissal for Lack of Jurisdiction will be entered. For petitioners: Curtis W. Berner. For respondent: Henry Schneiderman, Pamela Satterfield, and Curtis G. Wilson. DAWSONDAWSONMEMORANDUM OPINION DAWSON, Judge: 1 These cases are before us to determine jurisdiction. Summary of FactsIn docket No. 3892-93, respondent mailed on September 23, 1992, a notice of Final Partnership Administrative Adjustment (FPAA) to the Tax Matters Partner (TMP) of Third Dividend/Dardanos Associates (the partnership) for the partnership's tax year ended December 31, 1987. On February 24, 1993, a timely petition for readjustment was filed by Dividend Development Corporation (DDC) as the TMP in its capacity as notice partner. DDC, an S corporation, was a general partner holding a 50-percent interest in the partnership. For the 1987 tax year, DDC had422 two shareholders, Richard B. Oliver and Douglas Watson, each holding a 50-percent interest. On February 25, 1993, a timely petition for readjustment was filed in docket No. 3930-93 by Richard B. Oliver and Douglas Watson as notice partners. For the tax year ended December 31, 1987, the partnership consisted of three partners. Morgan Pacific Realty Corporation, a subchapter C corporation, was a general partner holding a one-percent interest. Brookside Partners III, a limited partnership, was a limited partner holding a 49-percent interest. DDC owned the remaining 50-percent interest. On February 20, 1992, prior to issuance of the FPAA and the filing of the Tax Court petitions, DDC filed a petition under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the Central District of California. By letters dated June 12, 1992, the Internal Revenue Service (IRS) informed DDC that it no longer was a party to the administrative proceedings because its partnership items had converted to nonpartnership items under section 6231(c)2 and the temporary regulations thereunder. In addition, the letters informed DDC that it no longer qualified as the TMP and that the423 partnership should designate a successor TMP. By letter dated July 13, 1992, IRS selected Morgan Pacific Realty Corporation as the TMP for the partnership's tax year ended December 31, 1987. Respondent filed in docket No. 3930-93 a Motion to Dismiss for Lack of Jurisdiction, pursuant to section 6226(b)(2) and (b)(4) on the ground that the petition is a duplication of the previously filed petition in docket No. 3892-93. The Court later set respondent's motion for hearing. Before the hearing, the parties had a conference call with Special Trial Judge Buckley to explain that it was respondent's intention to withdraw the motion to dismiss filed in docket No. 3930-93 and to file a motion to dismiss for lack of jurisdiction in docket No. 3892-93. Respondent's counsel stated that it was no longer respondent's position that the later filed petition was duplicative because respondent had subsequently concluded that the first petition424 in docket No. 3892-93 was invalid. It was then agreed that Special Trial Judge Buckley would hear the oral arguments of the parties with respect to the validity of the petitions filed in both cases without requiring respondent to withdraw her initial motion in docket No. 3930-93 and substitute a motion to dismiss the petition in docket No. 3892-93. Following oral arguments, respondent filed a post-hearing memorandum brief, and petitioners filed a reply brief. 1. Docket No. 3892-93Respondent's position is that the petition filed in docket No. 3892-93 is invalid, and the case should be dismissed for lack of jurisdiction. The reason given is that, on the date the petition was filed, DDC was ineligible to file a petition from the FPAA under section 6226(d) because the partnership items converted to nonpartnership items upon its filing a petition in bankruptcy. Petitioners agree that docket No. 3892-93 should be dismissed for lack of jurisdiction, although for somewhat different reasons. DDC filed the petition in docket No. 3892-93 in its capacity as a notice partner, not in its capacity as TMP. In Barbados #6, Ltd. v. Commissioner, 85 T.C. 900 (1985),425 this Court held that a TMP may file a petition as a notice partner if it so qualifies. To qualify as a notice partner, section 6226(d) requires that a partner have an interest in the outcome of the proceeding. A partner no longer has an interest in the outcome of a partnership proceeding if that partner's partnership items become nonpartnership items by reason of any of the events described in section 6231(b). Sec. 6226(d)(1)(A). Moreover, a partner cannot file a petition unless such partner would be treated as a party to the proceeding. Sec. 6226(d)(2). Section 6231(b)(1)(D) provides that partnership items become nonpartnership items under circumstances that the Secretary has determined present special enforcement considerations. Under the authority of section 6231(c)(1)(E), the Secretary has determined by regulation that the bankruptcy of a partner is a special enforcement area. Section 301.6231(c)-7T(a), Temporary Proced. & Admin. Regs., 52 Fed. Reg. 6793 (Mar. 5, 1987), provides as follows: (a) Bankruptcy. The treatment of items as partnership items with respect to a partner named as a debtor in a bankruptcy proceeding will interfere426 with the effective and efficient enforcement of the internal revenue laws. Accordingly, partnership items of such a partner arising in any partnership taxable year ending on or before the last day of the latest taxable year of the partner with respect to which the United States could file a claim for income tax due in the bankruptcy proceeding shall be treated as nonpartnership items as of the date the petition naming the partner as debtor is filed in bankruptcy.At issue is whether the partnership items of an S corporation that is a pass-thru partner convert to nonpartnership items when the S corporation files a bankruptcy petition. If the S corporation's partnership items convert to nonpartnership items, then it no longer has an interest in the outcome of the partnership proceeding. As a notice partner that no longer has an interest in the outcome, the S corporation is ineligible to file a petition because it is not a party to the proceeding. Sec. 6226(d). Respondent contends that the partnership items of the S corporation converted to nonpartnership items upon its filing a petition in bankruptcy. Section 301.6231(c)-7T(a), Temporary Proced. & Admin. Regs., supra, provides427 that partnership items shall be treated as nonpartnership items if the United Statescould file a claim for income tax due in the bankruptcy proceeding. Generally, S corporations are not subject to income tax at the entity level because items of income, gain, loss, deduction or credit flow through and are reported on the individual shareholders' returns. Secs. 1363(a), 1366(a). 3There are, of course, certain circumstances in which S corporations may be liable for income tax. For example, section 1374 provides for a tax at the entity level on built-in gains, and section 1375 provides for a tax at the entity level on excessive428 passive investment income. Thus, the Code provides potential situations in which the United States "could" file a claim for income tax due where an S corporation is a debtor in bankruptcy. Section 301.6231(c)-7T(a), Temporary Proced. & Admin. Regs., supra, does not distinguish those situations in which the debtor/partner is a pass-thru partner or simply a partner. See Dionne v. Commissioner, T.C. Memo. 1993-117. Nor does the bankruptcy conversion regulation require the United States to have an actual claim for income tax liability against the debtor. In fact, the temporary regulation would be unworkable if it required actual income tax liability on the part of the debtor. This is because conversion of the partnership items to nonpartnership items occurs automatically by operation of law on the date the bankruptcy petition is filed. On the date of conversion the United States may not be aware of actual income tax liability and may be unable to determine if such liability exists if, for example, an audit of the relevant taxable years has not commenced. Here the partnership items of DDC converted to nonpartnership items before it filed the petition429 in docket No. 3892-93 because the United Statescould file a claim for income tax due against the S corporation in the bankruptcy proceeding. Consequently, DDC no longer had an interest in the outcome of the proceeding because of the conversion, and it was not permitted to file a petition as a notice partner on behalf of the partners in the partnership. Therefore, we hold that the petition filed in docket No. 3892-93 is invalid, and, on the Court's own motion, that case will be dismissed for lack of jurisdiction. 2. Docket No. 3930-93At the hearing before Special Trial Judge Buckley petitioners Oliver and Watson raised the issue of whether the partnership items of the indirect partners converted to nonpartnership items when the pass-thru partner filed a petition in bankruptcy. DDC is a pass-thru partner within the meaning of section 6231(a)(9) because it is an entity through which other persons hold an interest in the source partnership. In turn, the shareholders of DDC are indirect partners in the source partnership within the meaning of section 6231(a)(10). Petitioners asserted at the hearing and in their reply brief that if their items converted, the petition430 in docket No. 3930-93 is invalid because the indirect partners are no longer parties to the proceeding and do not have an interest in the outcome of the proceeding. Respondent takes a contrary view and contends that petitioners' position is unsupported by law. On brief respondent makes the following arguments: The bankruptcy of a tier should be treated the same as the bankruptcy of a partnership. American Principals Leasing Corp. v. United States, 904 F.2d 477 (9th Cir. 1990), involved a partnership-level proceeding where the partnership was in bankruptcy, but the partners were not. Although this case did not involve a tier situation because there were no pass-thru partners, the Court's reasoning is applicable to the facts of this case. The Court of Appeals for the Ninth Circuit concluded that section 505 of the Bankruptcy Code grants bankruptcy courts jurisdiction to determine the tax liability of the debtor, but they do not have jurisdiction to determine the tax consequences to third parties. 904 F.2d at 481. Thus, where a partnership is in bankruptcy, the bankruptcy court does not have jurisdiction over the partners431 in the partnership because the partners are not the debtor. Id.; see also Western Reserve Oil & Gas Co. v. Commissioner, 95 T.C. 51">95 T.C. 51 (1990) (where partnership in the bankruptcy, court held TEFRA partnership proceeding need not be stayed because partnership proceeding ultimately affects only the tax liability of the partners); Chef's Choice Produce, Ltd. v. Commissioner, 95 T.C. 388 (1990) (where partnership in bankruptcy, court held partners, not partnership, real parties in interest; therefore, continued existence of partnership not essential to operation of partnership procedures). In Dionne v. Commissioner, T.C. Memo. 1993-117, an indirect partner held an interest in a TEFRA partnership through an S corporation. The Court held that an indirect partner's partnership items attributable to a source partnership convert to nonpartnership items upon such indirect partner's filing a bankruptcy petition because indirect partners are partners in the source partnership within the meaning of section 6231(a)(2)(B). Respondent submits that only an event personal to the indirect partner will convert432 the indirect partner's partnership items to nonpartnership items and that the bankruptcy of the pass-thru partner should be ignored. In this case, the pass-thru partner is in bankruptcy but the indirect partners are not. Under section 505 of the Bankruptcy Code, the bankruptcy court has jurisdiction to determine the tax liability of DDC, the debtor in bankruptcy, but it does not have jurisdiction to determine the tax liability of the individual shareholders, the petitioners in this case. See In re Brandt-Airflex Corp., 843 F.2d 90">843 F.2d 90 (2d Cir. 1988); United States v. Huckabee Auto Co., 783 F.2d 1546">783 F.2d 1546 (11th Cir. 1986); see also In re Aboussie Brothers Construction Co., 8 B.R. 302 (E.D. Mo. 1981). Moreover, section 301.6231(c)-7T(a) only provides for conversion of partnership items of a partner where the United States could file a claim against the debtor/partner. The partnership items of the indirect partners did not convert to nonpartnership items when the pass-thru partner filed a petition in bankruptcy because they are not debtors in the bankruptcy proceeding, and thus, the United States433 could not file a claim for income tax due from the indirect partners in the pass-thru partner's bankruptcy proceeding. Therefore, the petition filed in this case is valid.We agree with petitioners. Messrs. Oliver and Watson, the petitioners in docket No. 3930-93, are the only shareholders of DDC, each having a 50-percent interest in the issued and outstanding stock of DDC. They have no direct interest in the partnership. Their only interest in the partnership is as indirect partners (section 6231(a)(10)) through DDC. Their only link to the partnership is through DDC. Under section 6223(a), the Commissioner is required to send notices relating to the beginning and completion of administrative proceedings for the adjustment at the partnership level of partnership items to those partners whose names and addresses have been furnished to her. See sec. 6230(e). However, the Commissioner is not required to send any such notices to indirect partners who have not met the requirements of section 6223(c)(3) and section 301.6223(b)-1T(c)(6), Temporary Proced. & Admin. Regs., 52 Fed. Reg. 6784-6785 (Mar. 5, 1987) (the identification requirements), nor is434 the Commissioner required to furnish to any partner any other notices or information. As respondent points out, however, and as petitioners agree, Messrs. Oliver and Watson have not satisfied the identification requirements. Even though the Commissioner is not required to give notices to indirect partners who have not satisfied the identification requirements (and did not in fact give any such notices to Messrs. Oliver or Watson), the statutory scheme imposes certain responsibilities upon the TMP. These responsibilities include forwarding the Commissioner's notices to partners (including indirect partners) not entitled to receive notices directly from the Commissioner. Secs. 301.6223(g)-1T(a)(1) and (2), Temporary Proced. & Admin. Regs., 52 Fed. Reg. 6785 (Mar. 5, 1987). In addition, the TMP is required to provide additional information relating to administrative and judicial proceedings to certain partners. Sec. 301.6223(g)-1T(b), Temporary Proced. & Admin. Regs., 52 Fed. Reg. 6785 (Mar. 5, 1987). However, the TMP is not required to give any such notices to any partner once its partnership items have been converted to nonpartnership435 items. Sec. 301.6223(g)-1T(a)(3)(i) and (b)(2)(i), Temporary Proced. & Admin. Regs., 52 Fed. Reg. 6785, 6786 (Mar. 5, 1987). Consequently, once DDC's partnership items converted to nonpartnership items by reason of its bankruptcy, and after respondent selected a new TMP, Morgan Pacific Realty Corporation, the TMP of the partnership was no longer required to keep DDC informed of the administrative and judicial proceedings for the adjustment at the partnership level of partnership items. Nor was the new TMP required to give any notices or information of administrative or judicial proceedings to the shareholders of DDC (indirect partners). Sec. 301.6223(g)-1T(a)(3)(ii) and (b)(2)(ii), Temporary Proced. & Admin. Regs., 52 Fed. Reg. 6785, 6786 (Mar. 5, 1987). Consequently, as a result of cutting the link between the indirect partners and the partnership by virtue of DDC's bankruptcy, the indirect partners' source of information ceased with respect to the administrative and judicial proceedings for the adjustment at the partnership level of the partnership items. The statutory scheme also imposes certain responsibilities upon pass-thru436 partners. When a pass-thru partner receives a notice with respect to a partnership proceeding from the Commissioner, the TMP or another pass-thru partner, the pass-thru partner is required to forward a copy of the notice to the person or persons holding an interest (through the pass-thru partner) in the profits or losses of the partnership for the partnership taxable year to which the notice relates. Sec. 6223(h)(1). After a pass-thru partner's partnership items are converted to nonpartnership items because of a bankruptcy filing, the pass-thru partner is no longer entitled to receive information from the TMP relating to the administrative and judicial proceedings for the adjustment at the partnership level of partnership items. Sec. 301.6223(g)-1T(a)(3)(i), supra. Consequently, the pass-thru partner is no longer able to meet its obligations under section 6223(h)(1). The link between the indirect partners and the partnership has been cut. The indirect partners no longer have access to information relating to the judicial or administrative proceedings for the adjustment at the partnership level of partnership items. Thus it is appropriate to treat the partnership items 437 of the indirect partners as converted to nonpartnership items at the same time as the conversion of the pass-thru partner's items occurred. It therefore follows that the Court has no jurisdiction over docket No. 3930-93 because Messrs. Oliver and Watson had no interest in the outcome of the proceeding at the time they filed their petition. Sec. 6226(d)(1)(A). Alternatively, respondent contends that, while petitioners did not meet the identification requirements to become notice partners under section 6223, they did have an aggregate profits interest of 5 percent or more for the tax year ended December 31, 1987, and therefore their petition in docket No. 3930-93 was validly filed in that capacity. However, respondent's argument assumes that Messrs. Oliver and Watson still had an interest in the outcome of the proceeding for purposes of section 6226(d). That is a jurisdictional requirement not only for notice partners, but also for members of a 5-percent group. There is no distinction between notice partners and members of a 5-percent group in section 6226(d). As respondent correctly notes, indirect partners are deemed partners under section 6231(a)(2)(B). As partners, they must438 have an interest in the outcome of the proceeding under section 6226(d) to confer jurisdiction upon this Court over their petition. However, because their partnership items converted to nonpartnership items at the same time as DDC's partnership items converted (February 20, 1992, the date of DDC's bankruptcy filing), they had no interest in the outcome of the proceeding at the time they filed their petition. Accordingly, we conclude that this Court does not have jurisdiction in docket No. 3930-93, and, on the Court's own motion, that case will be dismissed. One final point. Respondent argues that because the bankruptcy of a "source" partnership is ignored for purposes of determining the income tax liability of its partners, the bankruptcy of a pass-thru partner should be ignored for purposes of determining whether the partnership items of the indirect partners have been converted to nonpartnership items. We think this is incorrect. Respondent ignores the fact that the pass-thru partner, DDC, is the only link between the partnership and the indirect partners, Messrs. Oliver and Watson -- a link that has been broken by the conversion of DDC's items as a result of its bankruptcy439 filing. The cases cited by respondent are not analogous. They hold that a bankruptcy court does not have the power in a bankruptcy proceeding involving a partnership as a debtor to determine the income tax liability of its partners. But that legal conclusion is not relevant for determining whether the partnership items of an indirect partner are automatically converted by the conversion of the partnership items of the pass-thru partner through which the indirect partners hold an interest in the "source" partnership. Respondent cites Dionne v. Commissioner, T.C. Memo. 1993-117, in support of her argument. In Dionne, the pass-thru partner was a subchapter S corporation. It did not file a bankruptcy petition; rather, an indirect partner, a partner in the pass-thru S corporation, filed a bankruptcy petition. We concluded that the filing of a bankruptcy petition by an indirect partner, who was a partner within the meaning of section 6231(a)(2)(B), converted that indirect partner's partnership items in the "source" partnership to nonpartnership items. The Dionne case does not address the issue of what happens to the partnership items of an 440 indirect partner upon the conversion of the pass-thru partner's partnership items to nonpartnership items. ConclusionFor the reasons stated herein, we hold that both cases, docket No. 3892-93 and docket No. 3930-93, should be dismissed for lack of jurisdiction on the ground that both petitions are invalid. Therefore, Orders of Dismissal for Lack of Jurisdiction will be entered. Footnotes1. These cases were reassigned on Aug. 8, 1994, from Special Trial Judge Helen A. Buckley to Judge Howard A. Dawson, Jr.↩, for disposition of the jurisdictional matters.2. Unless otherwise indicated, all Code section references are to the Internal Revenue Code.↩3. Respondent asserts that the result may be different where the pass-thru partner is a partnership because the Code and legislative history recognize that there are distinctions between S corporations and partnerships. See sec. 6244; S. Rept. 97-640, at 25 (1982), 2 C.B. 718">1982-2 C.B. 718, 729; H. Rept. 97-826, at 24 (1982), 2 C.B. 730">1982-2 C.B. 730↩, 741.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622642/	APPEAL OF EDGAR MUNSON, EXECUTOR OF THE ESTATE OF HARRIET A. CURTIS, DECEASED.Munson v. CommissionerDocket No. 442.United States Board of Tax Appeals3 B.T.A. 185; 1925 BTA LEXIS 2007; December 1, 1925, Decided Submitted January 17, 1925. 2007 The New York State transfer tax paid by the executor of the estate of a decedent is a legal deduction from gross income in the income-tax return filed for the decedent's estate in the process of settlement for the year in which such tax was paid, under the provisions of section 214(a)(3) of the Revenue Act of 1918. Russell L. Bradford, Esq., for the taxpayer. Robert A. Littleton, Esq., for the Commissioner. SMITH 185 Before LANSDON, LITTLETON, and SMITH. This appeal is from the determination of a deficiency of $3,036.03 in income tax, for the year 1920, of the estate of Harriet A. Curtis, deceased. From the pleadings and documentary evidence introduced, the Board makes the following FINDINGS OF FACT. Edgar Munson is the sole surviving executor of the estate of Harriet A. Curtis, deceased. As such executor he made an incometax return for the estate for the year 1920, which showed a total income of $30,196.47. From the gross income the executor claimed a deduction of $33,611.45, which represents the amount of the New York State transfer tax paid by him as executor of the estate of the decedent to the Comptroller of the State of New2008 York on July 23 and July 24, 1920. The return showed no net income. The Commissioner amended the return by disallowing the deduction of the $33,611.45 transfer tax paid. The deficiency in tax is due to such disallowance. DECISION. The deficiency determined by the Commissioner is disallowed. OPINION. SMITH: This appeal raises the single question of the right of an estate in the process of settlement in 1920 to deduct from the gross income shown in an income-tax return of the estate for 1920 the New York transfer tax paid by the executor during the year. In accordance with the provisions of section 219 of the Revenue Act of 1918, the executor of the estate of Harriet A. Curtis, deceased, filed an income-tax return of the income of the estate for which he was acting for the calendar year 1920 and deducted from 186 the gross income $33,611.45, which is the amount of the New York transfer tax paid by him on July 23 and July 24, 1920. This deduction was made under the provisions of section 214(a) of the Revenue Act of 1918, which permits the deduction from gross income of (3) Taxes paid or accrued within the taxable year imposed * * * (c) by the authority of any2009 State or Territory * * not including those assessed against local benefits of a kind tending to increase the value of the property assessed * * . The Commissioner has disallowed the deduction on the ground that the New York transfer tax is imposed not upon the estate of the decedent but upon the heirsLegatees, or devisees; that the tax which is paid by the administrator or executor is paid by him only as agent; and that the tax is a legal deduction from the gross income of the distributees only for whom it is paid. (I.T. 1474; C.B., I-2, p. 103.) The New York transfer tax is imposed by section 220, et seq., of the New York Tax Law. In section 220 it is provided: A tax shall be and is hereby imposed upon the transfer of * * property * * * to persons or corporations in the following cases, * * * 1. When the transfer is by will or by the intestate laws of this state * * * 4. When the transfer is * * * by deed * * * intended to take effect in possession or enjoyment at or after such death. * * * 8. The tax imposed hereby shall be upon the clear market value of such property at the rates hereinafter prescribed. Section 224 of the tax law reads in full as follows: 2010 224. LIEN OF TAX AND COLLECTION BY EXECUTORS, ADMINISTRATORS AND TRUSTEES. - Every such tax shall be and remain a lien upon the property transferred until paid and the person to whom the property is so transferred, and the executors, administrators and trustees of every estate so transferred shall be personally liable for such tax until its payment. Every executor, administrator or trustee shall have full power to sell so much of the property of the decedent as will enable him to pay such tax in the same manner as he might be entitled by law to do for the payment of the debts of the testator or intestate. Any such executor, administrator or trustee having in charge or in trust any legacy or property for distribution subject to such tax shall deduct the tax therefrom and shall pay over the same to the state comptroller or county treasurer, as herein provided. If such legacy or property be not in money, he shall collect the tax thereon upon the appraised value thereof from the person entitled thereto. He shall not deliver or be compelled to deliver any specific legacy or property subject to tax under this article to any person until he shall have collected the tax thereon. If2011 any such legacy shall be charged upon or payable out of real property, the heir or devisee shall deduct such tax therefrom and pay it to the executor, administrator or trustee, and the tax shall remain a lien or charge on such real property until paid; and the payment thereof shall be enforced by the executor, administrator or trustee in the same manner that payment of the legacy might be enforced, or by the 187 district attorney under section two hundred and thirty-five of this chapter. If any such legacy shall be given in money to any such person for a limited period, the executor, administrator or trustee shall retain the tax upon the whole amount, but if it be not in money, he shall make application to the court having jurisdiction of an accounting by him, to make an apportionment, if the case require it, of the sum to be paid into his hands by such legatees, and for such further order relative thereto as the case may require. (Thus amended by L. 1921, chap. 476, in effect July 1, 1921.) The obligation for the payment of the tax is placed upon the executor, administrator, or trustee. He is authorized to sell so much of the property of the decedent as will enable him2012 to pay the tax in the same manner as he might be entitled by law to do for the payment of the debts of the testator or intestate. If a legacy be money, the executor shall deduct from the legacy such portion of the transfer tax paid or payable by him as is properly apportionable to the legacy; if the legacy is in some other form of personal property than money, the executor shall collect from the legatee the amount of the transfer tax properly apportionable to the legacy and shall not pay over to the legatee the bequeathed property until the transfer tax has been paid; if the testator has devised real property, the executor shall collect from the devisee the portion of the total transfer tax properly apportionable to the real estate in question, and the tax shall remain a lien upon the real property until it is paid. If the decedent is an intestate, the transfer tax is collected from the heirs in a similar manner. Is the New York transfer tax thus payable by the executor, administrator, or trustee such a tax as is comprehended by the words "taxes paid or accrued," contained in section 214(a)(3) of the Revenue Act of 1918? 2013 These words are comprehensive. They include all taxes except those specifically excepted. In United States v. Woodward (1921), 256 U.S. 632">256 U.S. 632, 634, the United States Supreme Court said, relative to the words "taxes paid or accrued within the taxable year," as follows: This last provision is the important one here. It is not ambiguous, but explicit, and leaves little room for construction. The words of its major clause are comprehensive and include every tas which is charged against the estate by the authority of the United States. The excepting clause specifically enumerates what is to be excepted. The implication from the latter is that the taxes which it enumerates would be within the major clause were they not expressly excepted, and also that there was no purpose to except any others. Estate taxes were as well known at the time the provision was framed as the ones particularly excepted. (Italics ours.) At the time of the enactment of the Revenue Act of 1918, the New York transfer tax was as well known as the Federal estate tax; the latter was not enacted until September 8, 1916, whereas the New York transfer tax has been upon the statute books2014 continuously from 1885. We do not think that it can be doubted that the New 188 York transfer tax is a tax comprehended by the words "taxes paid," as used in section 214(a)(3) of the Revenue Act of 1918. If the New York transfer tax is deductible from the gross income of some taxpayer, from the gross income of what taxpayer is it deductible? It clearly is not deductible from the gross income of the decedent, for it was neither paid nor accrued during the decedent's lifetime. Is it deductible from the gross income of the beneficiary of the estate or is it deductible from the gross income of the estate as a taxable entity when paid by the executor, administrator, or trustee during the period of settlement? The Commissioner formerly held that the tax was not a legal deduction from the gross income of a legatee or beneficiary. This was upon the theory that the amount paid as transfer tax was not in reality a tax. The question whether it was deductible from the gross income of the legatee or beneficiary was before the courts in the case of 2015 Prentiss v. Eisner,260 Fed. 589, affd. 267 Fed. 16. The higher court held that the New York transfer tax was not a deduction from the income of the legatee of an estate, on the ground that it was not paid by the legatee nor was the tax paid on his or her behalf. It held that the New York transfer tax is one imposed upon the right to dispose of property. This was in accordance with the decision of the United States Supreme Court in the case of United States v. Perkins,163 U.S. 625">163 U.S. 625, and the court said that, until the Court of Appeals of New York took a different view of the New York transfer tax from that taken by the Supreme Court of the United States in the above-mentioned case, it would follow that decision. A writ of certiorari for a review of the decision of the circuit court of appeals in the case of Prentiss v. Eisner was denied by the United States Supreme Court in 254 U.S. 647">254 U.S. 647. Thereafter the United States Supreme Court rendered its decision in 2016 United States v. Woodward, supra, and held that the Federal estate tax was a tax within the meaning of the words "taxes paid," contained in section 214(a)(3) of the Revenue Act of 1918. Thereupon, the Commissioner reached a conclusion that the New York transfer tax was also a tax deductible from gross income in an income-tax return, but held that it was deductible from the gross income of the beneficiary and not from the gross income of an estate in process of settlement (I.T. 1474, C.B., 1-2, p. 103), thus rejecting the decision of the courts in Prentiss v. Eisner, supra.In the Matter of Merriam,141 N.Y. 479">141 N.Y. 479, the question of the nature of the transfer tax was squarely raised in New York. The decedent, William W. Merriam, bequeathed his estate to the United States and the question arose, naturally, whether the State of New York could levy a tax on the transfer to the United States. It was held by the court of appeals that the tax as imposed was rightly exacted. In the course of its opinion the court said (p. 484): 189 This tax, in effect, limits the power of testamentary disposition, and legatees and devisees take their2017 bequests and devises subject to this tax imposed upon the succession of property. This view eliminates from the case the point urged by the appellant, that to collect this tax would be in violation of the well-established rule that the State can not tax the property of the United states. Assuming this legacy vested in the United States at the moment of testator's death, yet, in contemplation of law, the tax was fixed on the succession at the same instant of time. This is not a tax imposed by the state on the property of the United States. The property that vests in the United States under this will is the net amount of its legacy after the succession tax is paid. This case was appealed to the United States Supreme Court under title of United States v. Perkins,163 U.S. 625">163 U.S. 625, 628, and that court upheld the right of the State of New York to impose the tax, saying: Thus the tax is not upon the property, in the ordinary sense of the term, but upon the right to dispose of it. * * (Italics ours). After tracing the right of the State to impose restrictions on the transfer of property by descent or distribution, both in the common law and subsequent to2018 the Statute of Wills enacted in the reign of Henry VIII, the court said (p. 628): In this view, the so-called inheritance tax of the State of New York is in reality a limitation upon the power of the testator to bequeath his property to whom he pleases; a declaration that, in the exercise of the power, he shall contribute a certain percentage to the public use; in other words, that the right to dispose of his property by will shall remain, but subject to a condition that the State has a right to impose. Certainly, if it be true that the right of testamentary disposition is purely statutory, the State has a right to require a contribution to the public treasury before the bequest shall take effect. Thus the tax is not upon the property, in the ordinary sense of the term, but upon the right to dispose of it, and it is not until it has yielded its contribution to the State that it becomes the property of the legatee. (Italics ours). The Court of Appeals of the State of New York, as late as October 24, 1922 (234 N.Y. 175">234 N.Y. 175) in the Matter of Hubbard, in speaking of the New York transfer tax, said: The transfer tax is imposed upon the estate of the decedent2019 as it exists at the hour of his death, and its value is to be fixed as of that time. We are not unmindful of the fact that there are a number of decisions of the courts of the State of New York which speak of the New York transfer tax as a tax upon the legatee or beneficiary. Thus, in the case of In re Gihon's Estate,169 N.Y. 433">169 N.Y. 433; 62 N.E. 561">62 N.E. 561, the court said: The federal tax [section 29 of the Revenue Act of June 13, 1898] is exactly of the same nature as the state tax - a tax not on property, but on succession; that is to say, a tax on the legatee for the privilege of succeeding to property. Knowlton v. Moore, 178 U.S.41, 20 Sup.Ct. 747, 44 L. Ed. 969">44 L.Ed. 969. The federal tax is necessarily of this character; for a direct tax, unless apportioned according to population, would be repugnant to the constitution of the United States. Under that statute, also, it is the amount of the legacy, not of the estate, that determines the rate of taxation. Therefore, though the administrator190 or executor is required to pay the tax, he pays it out of the legacy for the legatee, not on account of the estate. The requirement2020 of the statute that the executor or administrator shall make the payment is prescribed to secure such payment, because the government is unwilling to trust solely to the legatee. No one questions that where a legacy is given for a specified amount the tax must be deducted from the amount of the legacy and the balance only given to the legatee. A testator may direct that the tax on a particular legacy shall be paid out of his estate; nevertheless, in reality, the tax is still paid out of the legacy, the effect of the direction of the testator being merely to increase the legacy by the amount of the tax. * * * The full amount of the legacy is in law paid to the legatee, and the deduction made from it and paid to the state or federal government is paid on account of the legatee from the legacy which he receives. * * * (Italics ours). This decision was under consideration by the United States Circuit Court of Appeals in the case of Prentiss v. Eisner,267 Fed. 16, and the court said relative to it and other cases: We admit that the New York cases on the subject of taxable transfers are confused and not always clear and consistent. But, until the New York2021 Court of Appeals authoritatively states that the law of New York is not what the Supreme Court of the United States said it was in the Perkins Case, this court has no alternative but to hold that the New York Transfer Tax Act does not impose a tax on a legatee's right of succession which is deductible in her income tax return. The legacy which the plaintiff herein received under the will of her father did not become her property until after it had suffered a diminution to the amount of the tax, and the tax that was paid thereon was not a tax paid out of the plaintiff's individual estate, but was a payment out of the estate of her deceased father of that part of his estate which the state of New York had appropriated to itself, which payment was the condition precedent to the allowance by the state of the vesting of the remainder in the legatee. In Home Trust Co. v. Law (1923), 204 App.Div. 590, affirmed by the court of appeals without opinion, 236 N.Y. 607">236 N.Y. 607, the question of the character of the New York transfer tax was squarely presented to the appellate division of the Supreme Court of New York. The question in issue was whether the New York2022 transfer tax paid by the executor of an estate in process of settlement was deductible from the gross income of the estate in the State income-tax return filed for the estate by the executor. The New York State income-tax law was patterned after the Federal income-tax law, and in all respects here material was the same as the Federal income-tax law. The appellate division held that the transfer tax was imposed upon the estate and was therefore deductible from the gross income of the estate in process of settlement. As above indicated, this decision of the lower court was approved without a written opinion by the highest court of the State of New York. As above noted, the United States Circuit Court of Appeals, in Prentiss v. Eisner, supra, stated that it had no alternative but to hold that the New York transfer tax does not impose a tax upon a legatee's right of succession which is deductible in the legatee's 191 income-tax return unless or until the New York Court of Appeals authoritatively states that the law of New York is not what the Supreme Court said it was in the Perkins Case, supra.Since that time the New York Court of Appeals has held not that the2023 New York transfer tax is otherwise than what it was construed to be in the Perkins case, but has put its stamp of approval upon the proposition that the tax is on the right of the decedent to dispose of property by will or to transfer title to his heirs-at-law in case the decedent was an intestate. It is a cardinal principle of statutory construction that the interpretation of a State statute by the highest court of that State is controlling upon the Federal court. Massingill v. Downs (1849), 7 How. 760">7 How. 760; Des Moines National Bank v. Fairweather (1923), 263 U.S. 103">263 U.S. 103; Cudahy Packing Co. v. Parramore (1923), 263 U.S. 418">263 U.S. 418. The exact question in point in the appeal at bar has been decided in the case of Johnson v. Keith,294 Fed. 264. In that case the United States District Court for the Eastern District of New York held that the New York transfer tax is a tax imposed on the right to dispose of property and that it is not until the property has yielded its contribution to the State that it becomes the property of the beneficiary, and hence that the tax is payable by the estate, and not by the beneficiary. 2024 This case was appealed to the United States Circuit Court of Appeals for the Second Circuit and, on November 21, 1924, the decision of that court was handed down affirming the decision below. The circuit court of appeals in this case said: The case at bar therefore turns on whether the New York inheritance tax is "imposed" on him. At least, if it is so imposed, section 5 covers him. That is a question of New York law, and we are bound by the decisions of the New York Court of Appeals on that question. Keith v. Johnson, 3 Fed.(2d) 361. We have carefully considered the arguments of the Commissioner to the effect that the New York transfer tax paid by an executor is not a legal deduction from the gross income of the estate in an income-tax return filed for the estate during the period of settlement. His principal argument appears to be based upon language used by the United States Supreme Court in the case of New York Trust Co. v. Eisner,256 U.S. 345">256 U.S. 345. That court held that the New York inheritance tax was not a deduction in calculating the net estate liable to the Federal estate tax. I commenting upon this case the United States Circuit2025 Court of Appeals for the Second Circuit, in Keith v. Johnson, supra, decided on November 21, 1924, said: That case turned on the meaning of section 203(a)(1) of the Act of 1916, especially the words "such other charges against the estate as are allowed by 192 the laws of the jurisdiction * * under which the estate is being administered." It is quite true that the reason given was that inheritance taxes were "taxes on the right of individual beneficiaries," and for that reason not "charges that affect the estate as a whole." Literally the first clause quoted contradicts U.S. v. Perkins, supra, but the cases may be reconciled by understanding that the "charges" intended are only such as are imposed on the executor as successor stricti juris, like the income tax itself, and not such as arise because he must distribute the estate, as is the inheritance tax. There was reason to impute such a distinction to Congress, since the income tax is collected yearly, while the inheritance tax is levied once and for all. Both sovereigns might well insist upon an exaction on the whole estate for the privilege of its transfer. *2026 We are of the opinion that the decision of the United States Supreme Court in New York Trust Co. v. Eisner, supra, is not controlling in the appeal at bar. Cf. Appeal of Farmers Loan & Trust Co.,3 B.T.A. 97">3 B.T.A. 97. PHILLIPS concurs in the result only.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622643/	J. G. TOMLINSON, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Tomlinson v. CommissionerDocket No. 7068.United States Board of Tax Appeals7 B.T.A. 961; 1927 BTA LEXIS 3072; August 1, 1927, Promulgated 3072 Where liquidating dividends are received over a period of years from a corporation in process of dissolution and liquidation, and a stockholder is subsequently required, by reason of a tax deficiency of the corporation, to repay a portion of the dividends so received, the amounts repaid are properly set off first against the dividend last received. Laurence Graves, Esq., for the petitioner. L. C. Mitchell, Esq., for the respondent. STERNHAGEN 961 This proceeding involves deficiencies in income taxes for 1919 and 1920 of $205.06 and $1,237.22, respectively. Of the issues raised by the pleadings, some have been withdrawn by the petitioner and others have been agreed upon, leaving only for decision the question of whether certain liquidating dividends received by petitioner during the year 1920 are properly reducible by repayments subsequently made by him. FINDINGS OF FACT. The petitioner is an individual residing at Troy, N.C.He was the owner of 96 shares of stock of the Capelsie Cotton Mills, a North Carolina corporation. In 1920 the corporation sold all its property, consisting principally of a mill, mill property, land, and machinery. 3073 It retained only a safe, an office desk, some accounts receivable, and some Government bonds. Petitioner received in 1920 a liquidating dividend of $49,492.80, another liquidating dividend of $2,592 in 1921, and a further liquidating dividend of $2,573.76 in 1922. On March 6, 1924, the petitioner repaid $267.65 because the company had insufficient funds to pay certain Federal taxes. In 1926 the petitioner received from the secretary-treasurer of the corporation the following notice: Final assessment has been made against the Capelsie Cotton Mills for the additional income tax due. The amount necessary to be paid by each stockholder is $14.133 per share. Your 96 shares figure that you will be due to pay back$1,356.76Less amount already advanced by you, including interest on same304.511,052.25Kindly let us have your check for this amount. On August 20, 1926, the petitioner paid the amount of $1,052.25. The corporation was dissolved shortly after the sale of its assets in 1920. 962 The petitioner owned 30 shares of stock of the Francis Cotton Mills, Inc. In 1920 that company sold its assets and in the same year the petitioner received3074 liquidating dividends of $12,660. No dividends were received thereafter. Petitioner received a notice from the secretary-treasurer of the corporation dated November 14, 1923, advising him that the liability of the company for income taxes had been determined to be $111,000, that only $45,387 was on hand to pay the taxes, that it would be necessary to raise by assessment $65,505, and that petitioner's share was $1,650. This amount was paid by petitioner on January 6, 1924. The Francis Cotton Mills, Inc., was dissolved in 1920 or 1921. The respondent determined that the amount received by petitioner on liquidation of the Francis Cotton Mills, Inc., was $374.74 a share. OPINION. STERNHAGEN: The petitioner assigns the following errors on the part of the respondent in determining the deficiencies here involved: 1. That for 1919 he disallowed the deduction of $2,809.51 expended for fertilizer, and $830.65 expended for repairs. 2. That for 1920 he failed to include in income rents of $3,535, and also failed to allow the deduction of $8,547.26 expended for fertilizer. 3. That he incorrectly determined the gain realized in 1920 on liquidating dividends received from3075 the Capelsie Cotton Mills by reason of using an incorrect value as of March 1, 1913. 4. That he erroneously determined that petitioner received income in 1920 from the Troy Garment Manufacturing Co., a partnership. 5. That he refused to reduce the amount of a liquidating dividend received in 1920 from the Capelsie Cotton Mills by amounts subsequently repaid to the corporation to enable it to pay Federal income tax. 6. That he refused to reduce the amount of liquidating dividends received in 1920 from the Francis Cotton Mills, Inc., by an amount subsequently repaid to the corporation to enable it to pay Federal income tax. With regard to the first assignment of error, the parties have agreed that the petitioner is entitled to a deduction of $1,777.50 for expenditures for fertilizer and repairs in 1919. This amount shall be allowed as a deduction in computing the deficiency for that year. With regard to the second assignment of error, the parties have agreed that the rents of $3,535 shall be added to the petitioner's income for 1920, and that he is entitled to a deduction of $3,207.94 on account of expenditures for fertilizer, instead of $8,547.26 as alleged. 963 3076 The third and fourth assignments of error were withdrawn, and the action of the respondent complained of in these assignments of error is sustained. The only matter remaining for consideration is the question whether the income derived from liquidating dividends in 1920 should be reduced by the amounts repaid in subsequent years. The question has already been decided. In , it was held that stockholders receive liquidating dividends impressed with a trust to the extent that the amounts received encroach upon the equity of the corporation's creditors, and it was held that in computing tax on such dividends they should be reduced by the amount the stockholder returns to the corporation to satisfy claims against the corporation. This was followed in , and . This petitioner received $12,660 from the Francis Cotton Mills, Inc., as liquidating dividends in 1920, and no further dividends were received thereafter. In 1924 he was required to and did repay $1,650. These facts are clearly within the principle laid down in the Barker and other cases *3077 supra, and in recomputing the deficiency for 1920 the liquidating dividends should be reduced to $11,010. The conclusion in respect of the liquidating dividends received in 1920 from the Capelsie Cotton Mills must be for the respondent. The petitioner received three liquidating dividends, $46,492.80 in 1920, $2,592 in 1921, and $2,573.76 in 1922. He repaid $267.65 in 1924, and $152.25 in 1926, to enable the corporation to pay its Federal taxes. He now seeks to apply these two payments, aggregating $419.90, against the first dividend of 1920. It will be readily seen that this can not be. There is no trust impressed upon the first liquidating dividend since it did not impair the equity of creditors. . In , it was held consistently with this that the amount returned is to be set off against the last distribution received. Judgment will be entered on 15 days' notice, under Rule 50.Considered by GREEN and ARUNDELL.	01-04-2023	11-21-2020

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