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https://www.courtlistener.com/api/rest/v3/opinions/4623925/	F. A. DOUTY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Douty v. CommissionerDocket No. 7477.United States Board of Tax Appeals9 B.T.A. 398; 1927 BTA LEXIS 2608; Nov. 28, 1927, Promulgated 2608 1. Petitioner held to have been the purchaser of certain stock as principal and not an agent for the Multnomah Lumber & Box Co. 2. Evidence held insufficient to show error on the part of respondent in determining gain realized on the surrender of stock for the cancellation of an indebtedness. John A. Collier, Esq., for the petitioner. George G. Witter, Esq., for the respondent. ARUNDELL398 This is a proceeding for the redetermination of a deficiency in income tax in the amount of $50,749.07 for the calendar year 1921. Petitioner alleges that the Commissioner erred in holding that a transaction involving stock of the Multnomah Lumber & Box Co. was a personal transaction, and if it was a personal transaction, that error was committed in determining the amount of petitioner's liability and in auditing and determining the distribution of certain amounts. FINDINGS OF FACT. Petitioner is an individual residing at Portland, Oreg. In 1918 he was president and manager of the Multnomah Lumber & Box Co. (hereinafter called the Box Company) and of the American Export Lumber Co. (hereinafter called the Export Company), both Oregon2609 corporations. Both companies were capitalized at $90,000, the stock in each case consisting of 900 shares. Petitioner was the largest individual stockholder in both companies. He owned a fraction less than one-third of the stock of the Box Company, the remaining stock being owned by the heirs of the Cook Estate and one Dooley. 399 A disagreement arose between petitioner and the Cooks over the question of cutting timber on two tracts owned by the companies, whereupon a contract was entered into, the material parts of which are set forth herewith: THIS AGREEMENT, made this 28th day of February, 1918, between A. W. Cook, J. H. Cook, HATTIE J. ROSS, and A. W. COOK, Administrator of the estate of Rebecca A. Cook, deceased, hereinafter referred to as the "COOKS," parties of the first part, F. A. DOUTY, and ESSIE GRACE DOUTY, his wife, parties of the second part, MULTNOMAH LUMBER & BOX COMPANY, and Oregon corporation, hereinafter referred to as the "BOX COMPANY" party of the third part, AMERICAN EXPORT LUMBER COMPANY, an Oregon Corporation, hereinafter referred to as the "EXPORT COMPANY," party of the fourth part, and PORTLAND TRUST COMPANY OF OREGON, a corporation, hereinafter2610 referred to as the "TRUST COMPANY," party of the fifth part. WITNESSETH: First. That the Cooks own in the aggregate 450 2/7 shares of the capital stock of the Box Company, being a majority of the capital stock thereof, and they own respectively an equal number of shares of the capital stock in the Export Company; that their respective ownerships in the capital stock of each of said corporations are as follows: S. W. COOK85 5/7J. H. COOK193 1/7HATTIE J. ROSS85 5/7A. W. COOK, Administrator of the estate of Rebecca A. Cook, deceased85 5/7 * * Fourth. That the said F. A. Douty is the largest individual holder of capital stock on both the Box Company and the Export Company and has been for a number of years last past the Manager of said Box Company. That the said Cooks desire to dispose of their capital stock in said corporation, that said Douty desires to purchase the capital stock holdings of the said forth [sic] and it is deemed to be for the best interests of said Box Company that said proposed sale be consummated on the terms and in the manner hereinafter provided. NOW, THEREFORE, in consideration of the premises and of the promises2611 and covenants made by the parties hereto as hereinafter provided, and for other good and valuable considerations, the parties hereto agree: 1. The Cooks agree to sell their said capital stock holdings in said Box Company and said Export Company for the sum of Two Hundred Twenty-five Thousand One Hundred Forty-two and 85/100 ($225,142.85) dollars, and the said F. A. Douty agrees to purchase same at said price upon the terms and conditions hereinafter set forth. That contemporaneous with the execution of this agreement the said Douty has paid to the said Cooks on said purchase price the sum of One Hundred Thousand ($100,000.00) Dollars, receipt of which by said Cooks is hereby acknowledged. That the balance of said purchase is evidenced by sixteen (16) promissory notes, executed by said F. A. Douty, all of even date herewith, aggregating One Hundred Twenty-five Thousand One Hundred Forty-two and 75/100 ($125,142.75) Dollars; that said notes are with respect to amounts and dates of maturity in sets of fours, to-wit: 400 [Here follows a description of the notes as to amounts, payees, and due dates.] * * * Except as to amounts, dates of maturity, and names of payee, 2612 said notes are of the same tenor, and the following is a copy of one thereof: PORTLANDOREGON, February 28, 1918.$13,419.49 "On or before October 1st, 1918, I promise to pay to the order of J. H. Cook, THIRTEEN THOUSAND FOUR HUNDRED NINETEEN AND FORTY-NINE HUNDREDTHS DOLLARS, for value received, with interest from date, payable quarterly, at the rate of seven per cent per annum until paid, and if interest is not so paid the whole sum of both principal and interest to become due immediately and collectible at the option of the holder of this note. Principal and interest payable in Gold Coin at the office of the PORTLAND TRUST COMPANY OF OREGON, in Portland, Oregon. And in case suit or action is instituted to collect this note or any portion thereof, I promise to pay such additional sum as the Court may adjudge reasonable as attorney's fees in such suit or action. This is one of the sixteen notes, all of even date, aggregating One Hundred Twenty-Five Thousand One Hundred Forty-Two Dollars and Seventy-five cents ($125,142.75) and all equally and ratable secured by 450-2/7 shares of the capital stock of Multnomah Lumber Box Company pledged with and standing in the name2613 of the Portland Trust Company of Oregon, as Trustee, and further secured by a Trust Indenture bearing even date herewith, executed by the undersigned and wife to said Trust Company, said Indenture being recorded in Wahkiakum and Cowlitz Counties in Washington, and in Columbia County in Oregon. Said sixteen notes comprise four for $13,419.49 each payable on or before October 1st, 1918, February 1st, 1919, August 1st, 1919, and February 1st, 1920, respectively, and twelve for $5,955.40 each, four of which are payable on or before October 1st, 1918, four on or before February 1st, 1919, four on or before August 1st, 1919, and four on or before February 1st, 1920. No one of said sixteen notes has any preference over any other note by reason of priority of maturity or otherwise, but each is equally and ratably secured by said pledged capital stock and under said Trust Indenture. (Signed) F. A. DOUTY." 2. That said Box Company agrees to and will contemporaneous with the execution of this agreement guarantee the payment of said notes according to the tenor thereof, by endorsement on the back of each thereof subscribed to and executed by said Box Company in the following language, 2614 to-wit: "For and in consideration of One Dollar to be paid by , receipt of which is hereby acknowledged, the undersigned, Multnomah Lumber & Box Company does hereby guarantee the payment of the within note, and consents to any extension of time granted the maker, and waives protest, demand and notice of non-payment thereof, and in case suit or action is instituted upon this guaranty for the collection of within note, it, the said Multnomah Lumber Box Company promises to pay such sum as the court may adjudge reasonable as attorney's fees in such suit or action. MULTNOMAH LUMBER & BOX COMPANY, By F. A. DOUTY, President.Attest: H. G. PLATT, Secretary.3. That the said Cooks shall forthwith surrender to the officers of said Box Company and said Export Company respectively said shares of capital stock 401 in said respective corporations, and said Box Company and said Export Company by their proper officers shall forthwith execute certificates of stock corresponding in amount of shares to those surrendered in favor of the Portland Trust Company of Oregon, Trustee, and said Trustee shall receive and hold the same as collateral security for the payment of said notes2615 according to their tenor until all of said notes have been paid in full, and the obligations assumed by said Douty and said Box Company in this agreement have been performed. 4. That from the date of the depositing of said stock with said Trust Company and until the said Douty or the said Box Company have defaulted in the payments called for by said notes, or breached any of the terms or obligations assumed by them in this agreement, the said F. A. Douty shall have and enjoy the voting power upon all of said capital stock so held by said Trustees. In case of default or breach by said Douty or said Box Company in the payment of said notes or any installments of interest thereon, or in case of the breach by said Box Company or said Douty of any promise, obligation or covenant made by them or either of them in this agreement, then and thereupon the voting power upon said capital stock shall be no longer enjoyed by said Douty, but shall be exercised by said Trustee for the benefit of the holders of said notes or any portion thereof remaining unpaid, and the voting of said stock in such or any of said contingencies shall be done by said Trustee pursuant to the written instructions2616 of a majority in amount of the holders of said outstanding and unpaid notes. * * * 6. That the Export Company shall forthwith convey to said F. A. Douty all and singular the premises and property real, personal and mixed, rights, franchises and appurtenances described in Paragraph Third of this agreement, and the latter shall enter into the possession thereof, subject, however, to the lien of the mortgage or deed of trust hereinafter provided for, and the Box Company grants to the said Douty the right to enter into and upon the premises described in Paragraph Second hereof (except the property of the said Box Company located in the City of Portland, Oregon), and to assume possession and control subject to the terms of this agreement, of the logging railroad and spurs, equipment, rolling stock, engines, motive power, machinery, fixtures and appurtenances upon said premises; and he, the said Douty, shall thereupon proceed by modern logging methods to cut, log and remove all of the timber standing, fallen or being upon said properties described in Paragraphs Second and Third of this agreement as aforesaid, and to cut the timber in question in a clean workmanlike manner, and to mark2617 the logs as cut with a distinguishing mark to enable identification thereof, to-wit; "L" in circle on logs from property described in Paragraph Second of this agreement, and "G.M." on logs from property described in Paragraph Third in this agreement, and he, the said Douty, shall maintain said railroad, logging outfit, equipment, motive power, machinery and supplies in good order and condtion until the logging of said premises contemplated and called for by this agreement is completed. * * 7. That said logs shall at all times until paid for as hereinafter provided, be and continue to be subject to the lien of the mortgage or deed of trust hereinafter provided for; that the logs hereinbefore referred to shall be scaled as assembled at said respective boom sites by the Columbia River Log Scaling Bureau, and the triplicate of said scale shall be made and same shall be transmitted by said Bureau as follows: One copy thereof to F. A. Douty, Portland, Oregon, one copy thereof to the Portland Trust Company of Oregon, Portland, 402 Oregon, and another copy to A. W. Cook, Cooksburg, Pa. That the said Douty shall on or before the 15th day of each month submit to the Box Company2618 a statement of the cost of conducting said logging operations as aforesaid, including in said expenses all the items involved in the operations hereinbefore called for, and the Box Company shall within fifteen (15) days thereafter pay to the said Douty said cost of conducting said logging operations incurred during the preceding calendar month, and it, the Box Company, shall, in addition thereto, within said fifteen (15) day period pay to the said Trust Company Three Dollars ($3.00) per thousand feet for all logs delivered or tendered to it at said boom sites, as aforesaid, by the said Douty during the said preceding month, * * * said sum of ($3.00) Dollars per thousand shall be applied as received by said Trustee monthly pro-rate on the note or notes next thereafter maturing, unless the holders of said note or notes agree upon the application of said proceeds in a different order. * * * 11. The said Box Company and the said Douty further covenant and agree that no stock dividends shall be declared by the former, nor shall any increase or increases be authorized or made of the capital stock of the Box Company while said notes or any thereof remain unpaid, and any cash dividends2619 declared by the Box Company, while said notes or any thereof remain unpaid, shall, to the extent of the capital stock pledged with the Trust Company as aforesaid, be paid to the Trust Company and applied pro rata upon the notes remaining unpaid at the time of such cash dividend. 12. Upon the written request of any holder of any unpaid note or notes the Trust Company shall promptly demand of the Box Company a financial statement reflecting the conditions of its business and affairs at such time, and the Box Company shall promptly furnish same, and upon similar request and the furnishing of the necessary funds to the Trust Company by such holder or holders, the Trust Company shall cause and the Box Company shall permit to be made an audit of the books of the Box Company to ascertain the financial condition of said corporation. 13. It is agreed by all parties hereto that the payment already made by said Douty nor the payments made from time to time as herein provided for, shall not operate to release any of the stock of the Box Company pledged with the Trustee as aforesaid, but all of said pledged stock shall remain and continue as security for said notes until all of them have2620 been fully paid. 14. If the said Douty and/or the said Box Company fail to pay any note or notes when due then and in such event the holder of any such note or notes shall have the option upon the expiration of fifteen (15) days after the maturing date of such note or notes to require the Trustee in writing to declare all of the remaining unpaid notes to be immediately due and payable, and said declaration shall be promptly made by said Trustee to said Douty and to said Box Company in writing and when made shall operate to cause all of the remaining unpaid notes immediately due and payable. 15. The said Box Company and the said F. A. Douty shall secure the release of the said Cooks and each of them from any obligation as security for either of said parties, or otherwise, and the said Box Company hereby releases and acquits the said Cooks and each and all of them from any and all liability of whatsoever character to it, the said Box Company, or to anyone for its account or benefit. 16. All Trustee's fees, recording fees, taxes, revenue charges for United States documentary stamps, and other incidental expenses incurred called for by this agreement shall be borne and paid2621 by the said F. A. Douty. 403 17. To the end that the management of and business affairs of the Box Company may be vested in and enjoyed by the said F. A. Douty during the time that he and the Box Company comply with the covenants, promises, undertakings, and obligations assumed by them in this agreement, and to permit of the transfers and transactions contemplated by this agreement, the said A. W. Cook and J. H. Cook agree to retire from the Board of Directors of said Box Company, and the said Douty agrees to qualify men of his selection to take their places upon the Board of Directors, and to cause said men to be elected Directors, all to the end that the agreements and stipulations herein contained may be accomplished and carried out. 18. If the said F. A. Douty default or fail in the making of any of the payments called for by said notes or by this contract, or in any other manner default or fail and comply with any of the covenants, promises or agreements herein contained, and undertaken to be by him performed or complied with, and such default or failure continue for a period of fifteen (15) days after demand by the Trustee upon said Douty for performance thereof, 2622 then and in every of such cases the Trustee shall upon the written request of a holder of any of said unpaid and outstanding note or notes hereinbefore described, by notice in writing delivered to the said F. A. Douty, or mailed to his principal address or place of business (1) declare the said F. A. Douty to be in default hereunder, (2) declare the principal and interest of the then outstanding and unpaid notes immediately due and payable, anything in this contract or in said notes to the contrary notwithstanding. In case of such default and declaration the Trustee shall be authorized and upon being secured for necessary costs and expenses by the holder or holders of said notes, shall proceed to sell or cause to be sold the said 450-2/7 shares of the capital stock of the said Box Company, and the same number of shares in the said Export Company in the manner provided by the Laws of the State of Oregon for the sale of personal property upon execution, and shall apply the proceeds as follows: (a) In the payment of costs and expenses of said sale: (b) in the payment of any moneys advanced for taxes or for the protection of the security described in this contract; (c) in payment of2623 the said unpaid notes, interest and attorney's fees. IN WITNESS WHEREOF, the Cooks and said F. A. Douty and wife have executed this agreement, and the said Box Company, Export Company and Trust Company have caused the same to be executed by their proper officers thereunto duly authorized, the day and year first herein written. A. W. COOK. [SEAL.] J. H. COOK. [SEAL.] A. W. COOK. [SEAL.] Adm. Estate Rebecca Cook.HATTIE J. ROSS. [SEAL.] By A. W. COOK. Witnesses as to the Cooks: T. H. WARD, A. C. SPENCER. F. A. DOUTY. [SEAL.] ESSIE GRACE DOUTY. [SEAL.] Witnesses as to the Doutys: T. H. WARD, A. C. SPENCER. 404 Of the consideration for the stock of the Cooks, petitioner paid about $17,000 from his own funds and the balance was paid by the Multnomah Lumber & Box Co. on behalf of petitioner. Dooley's stock in the Box Company, amounting to about 150 shares, was transferred in consideration of the cancellation by the Box Company of an indebtedness to the extent of $75,000 of a company in which Dooley had an interest. Two accounts were carried with petitioner on the books of the Box Company, one of which was known as his2624 personal account, and the other was denominated "F. A. Douty Special A/c." Payments made by the Box Company on petitioner's notes were charged against him in the special account. Interest on the notes to December 31, 1918, in the amount of $7,591.17 was charged against petitioner in the special account under date of February 28, 1919. Credits on the special account consisted mostly of amounts representing petitioner's monthly salary. After the notes were retired the escrow holder, the Portland Trust Co., delivered the stock of both the Box Company and the Export Company to petitioner, who was then the owner of all stock of the Box Company except the qualifying shares. Thereafter the Box Company increased its capital stock and issued to petitioner as a stock dividend 15,120.4667 shares. The issue of the stock dividend was entered on the company's books on June 30, 1921, as of March 31, 1921. Petitioner surrendered back to the company 1,020.4667 shares of its stock and turned in to it 900 shares of stock of the Export Company, and there was credited to the special account under date of June 30, 1921, the amount of $214,791.15. The credit was given by reason of petitioner's2625 surrender of the stock, and the amount thereof, together with the other credit entries balanced the total of the debits entered in the special account to and including August 31, 1921. At the time the entries above described were made the Box Company held a personal note of petitioner in the amount of $17,804.07, which amount was included in the indebtedness canceled. OPINION. ARUNDELL: The petitioner alleges that the purchase of the Box Company stock and the Export Company stock from the Cooks and Dooley was not a personal transaction, but was for and in behalf of the Box Company. The contract for the purchase of the stock, which we have set out at some length, does not sustain the petitioner's claim. It clearly sets forth the fact that the petitioner is the purchaser. He signed the contract as principal, and not as agent for 405 the Box Company; he was the maker and principal obligor of the notes given for the balance of the purchase price and the Box Company was merely a guarantor and hence only secondarily liable. In asking us to find that the Box Company was the purchaser of the stock, the petitioner is asking that we read into the agreement something that2626 will vary its terms which plainly name the petitioner as purchaser. We do not have in evidence the method of computing gain which respondent used in determining the deficiency involved. His counsel stated at the hearing that the amount of the gain was arrived at by deducting from $317,087.88, the amount of petitioner's indebtedness which was canceled, the cost of the stock turned in, $192,551.49, resulting in a gain of $124,536.39. The evidence is insufficient to permit of a check of the figures used by the respondent. Among the elements missing are the cost to petitioner of his original holdings of stock in the two companies and the cost of the Export Company stock subsequently acquired. Copies of both petitioner's personal and special accounts carried on the Box Company ledger were introduced in evidence, but both accounts contain many items that are unexplained, so that we are unable to find from them whether or not the Commissioner erred in his determination of the amount of indebtedness canceled. If, as a matter of law, a taxable gain might result from a transaction such as is here involved, we must, in view of the state of the record, assume that whatever the Commissioner's2627 computation was, it was correct. The transaction, in brief, was that petitioner purchased outstanding stock of the Export Company and the Box Company, paying therefor with funds advanced by the latter. After the stock was thus paid for, the Box Company issued a stock dividend to petitioner, who thereupon turned in to the Box Company his stock in the Export Company and surrendered to the Box Company a part of his stock in it, which company then canceled his indebtedness to it. The effect of the transaction was, as we see it, the same as if the Box Company had paid petitioner $317,087.88 for stock which cost him $192,551.49. The fact that a part of the $317,087.88 was advanced to petitioner to pay for the stock makes it none the less a part of the price received on its sale to the Box Company. In short, he received more than he paid for the stock and the amount of such excess constitutes income. Judgment will be entered for the respondent.Considered by STERNHAGEN and GREEN.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4623928/	JAMES LLOYD PHILLIPS, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent Phillips v. Comm'rDocket No. 14567-16 United States Tax Court2017 Tax Ct. Memo LEXIS 229; November 20, 2017, FiledDecision text below is the first available text from the court; it has not been editorially reviewed by LexisNexis. Publisher's editorial review, including Headnotes, Case Summary, Shepard's analysis or any amendments will be added in accordance with LexisNexis editorial guidelines.229 Docket No. 14567-16 Filed November 20, 2017.James Lloyd Phillips, pro se.Skyler K. Bradbury, for respondent.MEMORANDUM OPINIONGERBER, Judge: Pursuant to Rule 1211 respondent, in a motion filedAugust 30, 2017, moved for summary judgment, and petitioner, in a response filedOctober 19, 2017, asked the Court to deny respondent's motion.1Unless otherwise indicated, Rule references are to the Tax Court Rules of Practice and Procedure and section references are to the Internal Revenue Code.- 2 -[2]BackgroundThis case emanated from a notice of deficiency respondent issued forpetitioner's 2014 taxable year, in response to which petitioner timely filed apetition with this Court. Respondent's sole determination was that petitioner'sfailure to pay the alternative minimum tax (AMT) resulted in a $2,058 taxdeficiency. Respondent did not question any other item on the 2014 return, and itwas in all other respects accepted as filed.Petitioner reported $87,899 of salary and claimed the following itemizeddeductions on a Schedule A, Itemized Deductions: a $35,652 medical and dentalexpense and $24,015 in unreimbursed employee expenses, no part of whichrespondent disallowed. Respondent simply contends that petitioner230 is liable forthe AMT as a matter of law. Petitioner contended in his petition that respondent"[d]id not allow itemized deductions and business travel expenses associated withthe income being taxed. Now, living off Social Security and small FederalRetirement so cannot pay so need some relief." In his October 19, 2017, responseto the motion for summary judgment, petitioner did not make any further argumentas to why he does not owe the AMT. The main thrust of petitioner's arguments isthat respondent is unreasonable, petitioner wants his day in court, and he cannotafford to pay the tax.- 3 -[3]DiscussionSummary judgment may be granted when there is no genuine dispute ofmaterial fact and a decision may be rendered as a matter of law. Rule 121(b);Sundstrand Corp. v. Commissioner, 98 T.C. 518">98 T.C. 518, 520 (1992), aff'd, 17 F.3d 965">17 F.3d 965(7th Cir. 1994). The opposing party cannot rest upon mere allegations or denialsin his pleadings but must "set forth specific facts showing that there is a genuinedispute for trial." Rule 121(d). The moving party bears the burden of proving thatthere is no genuine dispute of material fact, and factual inferences will be read in amanner most favorable to the party opposing summary judgment. Dahlstrom v.Commissioner, 85 T.C. 812">85 T.C. 812, 821 (1985); Jacklin v. Commissioner, 79 T.C. 340">79 T.C. 340,344 (1982).Respondent, in his motion, lays231 out the statutory framework for the AMT insections 55 and 56. Specifically, respondent explains that in computing the AMTas relevant to this case, section 56(b)(1)(A) and (B) provides that no deductionsare allowed for any miscellaneous itemized deductions, except for medicalexpenses,2 and under section 56(b)(1)(E) no deduction is permitted for personalexemptions in the calculation of the AMT. Following the rules of those sections,2Specifically, sec. 67(b)(5) excludes medical deductions from the prescribed reduction of itemized deductions in arriving at the alternative minimum taxable income.- 4 -[4] petitioner's alternative taxable income is $47,047 (petitioner's income lessthe itemized deductions that are not allowable in the computation). This results ina larger taxable base and $2,058 in additional tax--the AMT.Petitioner argues that respondent has miscalculated the amount, but he doesnot provide any guidance as to how the miscalculation occurred other than hiscontention that respondent disallowed some of his itemized deductions.Petitioner's argument must fail as a matter of law, and we so hold. Althoughpetitioner seeks his day in court, it would be of no avail because his position isincorrect as a matter of law. Because we have found no dispute*232 as to the materialfacts in this case, a trial would not provide a different result. Accordingly,respondent's motion for summary judgment will be granted.To reflect the foregoing,An appropriate order anddecision will be entered forrespondent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4623930/	FRANK W. GUILFORD, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentGuilford v. CommissionerDocket No. 16307-83.United States Tax CourtT.C. Memo 1987-535; 1987 Tax Ct. Memo LEXIS 527; 54 T.C.M. (CCH) 939; T.C.M. (RIA) 87535; October 20, 1987. 527 Held, respondent's statutory notice of deficiency is valid; petitioner's arguments to the contrary are without merit. Robert Panoff, for the petitioner. Theodore J. Kletnick, for the respondent. WHITAKER528 MEMORANDUM FINDINGS OF FACT AND OPINION WHITAKER, Judge: Respondent determined a deficiency in petitioner's Federal income tax for 1979 in the amount of $ 108,789. The sole remaining issue is the validity of respondent's statutory notice of deficiency. 1FINDINGS OF FACT This case has been submitted pursuant to Rule 122, 2 the facts having been fully stipulated. The stipulation and attached exhibits are incorporated by this reference. 529 At the time of the filing of the petition herein, petitioner resided in Coconut Grove, Florida. He filed his 1979 individual income tax return with the Internal Revenue Service in Atlanta, Georgia, on April 15, 1980. During early 1981, the Internal Revenue Service conducted an audit of petitioner's 1979 income tax return. The purpose of the audit was to examine itemized deductions and issues relating to certain rental property. The audit did not concern any issues relating to the Leicester Partners, in which petitioner was a limited partner. The audit concluded with the issuance on June 3, 1981, of a "no change" letter. During 1979, petitioner was an investor in Leicester Partners and on his 1979 Federal income tax return petitioner claimed his distributive share of Leicester Partners' putative loss in the amount of $ 172,312. In April 1981 Leicester Partners was assigned to an examination group in respondent's Manhattan District Director's office. The examination of Leicester Partners' return was completed in February 1985. On October 7, 1982, respondent requested that petitioner execute a consent to extend the statute of limitations. This request was repeated on November 5, 1982, November 19, 1982, and530 January 10, 1983. All such requests were referred by petitioner to his accountants. However, respondent never received an executed Form 872 consent to extend the statute. Petitioner was not issued a 30-day letter and was not afforded an administrative appeal conference prior to the issuance of a statutory notice of deficiency dated April 5, 1983. The statutory notice did not relate to items other than Leicester Partners' transactions, and there was no additional inspection of petitioner's books and records other than respondent's actions with respect to Leicester Partners. OPINION Pursuant to the parties' stipulation of settlement, the sole remaining issue is the validity of respondent's statutory notice of deficiency dated April 5, 1983. Petitioner contends that respondent's statutory notice of deficiency is invalid on any one of three grounds; hence respondent is now barred from assessing any additional tax for 1979 by the 3-year statute of limitations. Initially, petitioner contends that respondent's examination of Leicester Partners' 1979 informational return was a second inspection of petitioner's books of account and that since respondent afforded petitioner no notice531 of such second inspection, respondent has not complied with section 7605(b) and section 601.105(j), Statement of Procedural Rules. Secondly, petitioner contends that respondent's failure to provide him with a 30-day letter, and failure to afford him an administrative appeal are in violation of section 601.101 et seq., Statement of Procedural Rules, which petitioner views as mandatory. Finally, petitioner argues that respondent has not complied with the notice provisions of section 6223. Petitioner's argument that an inspection of the books and records of a partnership in which he is a limited partner is an "additional inspection" as contemplated in section 7605(b) was explicity rejected by this Court in . Curtis is factually indistinguishable from the case at bar, a fact impliedly recognized by petitioner in making his argument that we reconsider and overrule Curtis. We decline to accept petitioner's invitation, and reaffirm our holding in Curtis.Petitioner also contends that section 601.105(j), Statement of Procedural Rules, operates to invalidate respondent's statutory notice. However, that section of the532 procedural rules deals with the reopening of cases closed after examination and since we find no reopening, our discussion concerning section 7605(b) is equally applicable. Petitioner also contends that respondent's statutory notice is invalid as petitioner was not afforded an appellate conference prior to the issuance of the statutory notice, nor was any 30-day letter issued. Secs. 601.105, 601.106, Statement of Procedural Rules. On brief, petitioner contends that he was not afforded such opportunities due to the negligence of respondent's agent, or more particularly, respondent's agent's failure to send petitioner the appropriate forms that would allow petitioner to extend the period of limitations. While the record would support a finding that petitioner was afforded ample opportunity to extend the statute of limitations so as to take advantage of such administrative procedures, such a finding is not necessary since respondent's procedural rules are merely directory and not mandatory. Petitioner's conclusion that the administrative remedies afforded by section 601.101 et seq., Statement of Procedural Rules, are mandatory and not merely directory is based upon language in533 , affg. , wherein the Court of Appeals for the Fifth Circuit, 3 in discussing section 601.201(1)(5), Statement of Procedural Rules, stated that "Treasury regulations are as binding upon tax officials as they are upon taxpayers, and tax officials are required to abide by regulations reasonably based on the statute." . We find that the facts of that case distinguish it from the case at bar, and in any event the language relied upon by petitioner does not overrule established precedent in the construction of section 601.101 et seq., Statement of Procedural Rules. Lansons, Inc., involved the retroactive revocation of a favorable ruling concerning the taxpayer's profit-sharing trust. The Fifth Circuit upheld this Court's determination that the revocation534 of the ruling was an abuse of the Commissioner's discretion and not in compliance with the Commissioner's procedural rules concerning ruling revocations. We find nothing of that sort in the present case. Further, the Fifth Circuit has recognized that the purpose of the Internal Revenue Service's Statement of Procedural Rules, section 601.101 et seq., "is to govern the internal affairs of the Internal Revenue Service. They do not have the force and effect of law." . See also ; ; . Precedent in this area is simply too well established to be reversed by a broad statement in a case involving unrelated issues. Finally, petitioner contends that respondent's failure to provide him with notice as required by section 6223(a) is sufficient to invalidate the statutory notice. 4 Sections 6221-6232 were added by the Tax Equity and Fiscal Responsibility Act of 1982, Pub. L. 97-248, for partnership tax years ending after September 3, 1982. 5*535 Therefore, the notice requirements of section 6223 are inapplicable. Petitioner asks that if we decline to hold respondent's statutory notice invalid, that we place the burden of proof on respondent. Petitioner has provided us with no authority for such a proposition, and in any event, the parties have stipulated as to the substantive issues. Decision will be entered in due course in accordance with the parties' stipulation.6Footnotes1. The parties have resolved the substantive issues relating to Leicester Partners, a tax straddle partnership, pursuant to a stipulation of settlement filed with the Court on October 2, 1985. The parties have agreed that if the decision of this Court in , appeal filed November 26, 1985, is affirmed, respondent will allow the straddle losses reported by petitioner. If such regulation is reinstated, petitioner will be allowed a deduction only to the extent of his cash investment. However, respondent has specifically reserved the right to argue that the straddles were sham transactions. ↩2. All Rule references are to the Tax Court Rules of Practice and Procedure, and all section references are to the Internal Revenue Code of 1954, as amended and in effect during the year in issue. ↩3. The Eleventh Circuit, to which any appeal in this case would lie, has declared that it would follow the decisions of the Fifth Circuit rendered up to and including September 30, 1981. . ↩4. The parties have not specifically stipulated that the notice required by section 6223(a) was not given. Our finding to this effect is based upon the omission from the stipulation of any mention of any such notice and the further stipulation that respondent sent no communications to petitioner other than those described in the stipulation. ↩5. See sec. 407, Pub. L. 97-248, Tax Equity and Fiscal Responsibility Act of 1982, 96 Stat. 670. ↩6. See n. 1, supra.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4623931/	W. Winne Cadby, Petitioner, v. Commissioner of Internal Revenue, RespondentCadby v. CommissionerDocket No. 49170United States Tax Court24 T.C. 899; 1955 U.S. Tax Ct. LEXIS 121; August 11, 1955, Filed 121 Decision will be entered for the petitioner. Sale of inherited option to buy stock below market held to have resulted in no gain since basis exceeded sales price. J. Gordon Mack, 3 T. C. 390, affd. (C. A. 3) 148 F. 2d 62, certiorari denied 326 U.S. 719">326 U.S. 719, distinguished. Charles B. Honikel, Esq., for the petitioner.James E. Markham, Jr., Esq., for the respondent. Opper, Judge. OPPER899 OPINION.What we have before us is an income tax deficiency of $ 3,912.59 for 1943 resulting from a 1942 transaction. The facts have all been agreed upon and are hereby found accordingly. Petitioner's return was filed with the collector of internal revenue for the fourteenth New York district.Petitioner's father died prior to April 2, 1942, on which date his will was admitted to probate. It included the following provision:I hereby authorize, empower and direct my said executor and trustee to sell to W. Winne Cadby and Charles D. DeFreest the five hundred (500) shares of preferred stock and the two hundred and seventy (270) shares of common stock of Cadby & Son, Inc., now owned by me, 122 upon the payment of Twenty-five thousand dollars ($ 25,000.00), provided satisfactory proof is given to my said executor and trustee that said persons have purchased from my said wife, Mabel A. Cadby, the sixty (60) shares of preferred stock of said corporation now owned by her and have paid to her the sum of Six thousand dollars ($ 6,000.00) therefor, and further provided that each of said purchases and payments shall have been made within two years from the date of my death. If said purchases and payments are not made within said period, I leave the sale of all of said certificates of stock owned by me at my death to the uncontrolled discretion of my said executor and trustee.On July 17, 1942, petitioner sold to DeFreest his rights under that provision for $ 13,000. The question is what part, if any, of that sum is income to petitioner.The parties agree that , affd. (C. A. 3) , certiorari denied , has something to do with the controversy. Respondent insists it is controlling, and fails to meet petitioner's argument that it is plainly distinguishable. 123 We think petitioner is correct although he refers us to no authority covering these facts and we have found none.In the Mack case an option similarly bequeathed to a taxpayer was exercised. On a subsequent sale of the property the taxpayer contended that his basis included both the cash paid for the property and the value of the option at the time of its receipt by inheritance. Our conclusion that only the cash should be considered was founded 900 principally upon , upon which respondent likewise relies here.In the latter case the March 1, 1913, value of an option to purchase was not permitted to be included in the optionee's basis when the property was subsequently sold after an exercise of the option in 1916. It was held that the real property sold was not "acquired" until 1916 and consequently was not owned on March 1, 1913. But the Court commented (at p. 498):The option itself was property, and doubtless was valuable. If it had been assignable, and the lessee had sold it at a profit, taxable gain would have resulted from the sale. But the option is admittedly not124 the same property as the land.Similarly, in the Mack case the Tax Court's opinion (at p. 395) makes it clear that:What the petitioner sold here was not the option to purchase. That was personal to the petitioner. It could not be transferred. What he did sell was the five shares * * The distinction between the sale of an option, and of property acquired by exercising it, is thus clearly apparent from the only authorities said to be in point. And here petitioner did the former. The option was property. It had value. See It acquired a basis by virtue of its transmission by inheritance. See ; , certiorari denied . And it was sold. We reject the notion that its basis was necessarily zero.Respondent insists that even if the option could have a basis as a matter of law, petitioner has failed to overcome the factual presumption of a zero basis resulting from the deficiency125 determination.The basis of property acquired by inheritance is ordinarily its fair market value at the date of death. . This can be established, at least presumptively, by the value adopted for estate tax purposes. In this case petitioner, we think correctly, computes the value of the option by deducting the option price from the value of the stock as shown and apparently accepted in the estate tax return.The result of this computation is not frustrated by respondent's further contention that the conditions attached to the option were so burdensome as to eliminate its value. The only requirement of any consequence is that the optionee shall purchase the 60 shares of the widow's preferred stock for $ 6,000. We cannot assume that this portion of the stock had no value, since the preferred stock was reported as worth $ 100 a share, so that the entire $ 6,000 was to be given for property of equal value. We see no reason to consider this condition unduly burdensome. The computation of the value of the option would then proceed as follows: 901 Value of stock per estate tax return:500 shares preferred$ 50,000.00270 shares common5,243.40$ 55,243.40Widow's preferred stock (60 shares)6,000.00$ 61,243.40Less:Option price$ 25,000.00Widow's payment6,000.0031,000.00Value of option$ 30,243.40Petitioner's 1/2 share15,121.70Sale price of option13,000.00Gain on sale0 126 In the absence of countervailing evidence adduced by respondent this seems to us sufficient to carry petitioner's burden of proof that no gain was realized on the sale of the option.Decision will be entered for the petitioner.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4623932/	William Bard and Erma Bard, et al. 1 v. Commissioner. Bard v. CommissionerDocket Nos. 3969-63, 3709-64, 3710-64. .United States Tax CourtT.C. Memo 1966-213; 1966 Tax Ct. Memo LEXIS 72; 25 T.C.M. (CCH) 1107; T.C.M. (RIA) 66213; September 28, 196672 1. Held, that the notice of income tax deficiency issued to petitioners William F. and Erma Bard for their taxable year 1959 was timely issued. 2. Held, that an automobile auction sale business known as Tollway Auto Auction, was not owned or operated by petitioner William Bard during the year 1959; and that, accordingly, he and his wife are not entitled to deduct any loss in respect of said business for said year. 3. Held further, that said Tollway Auto Auction was owned and operated as a partnership during the year 1959, by petitioners Thomas H. Sullivan and Edwin E. Bard as the copartners thereof; and that each of said petitioners is entitled to deduct for said year his distributive share of the loss sustained by said partnership in its operations of said year. The amounts of partnership losses so deductible are determined. Allan Smietanka, 105 W. Adams St., Chicago, Ill., and Joseph Smietanka, for the petitioners in Docket No. 3969-63. Thomas H. Sullivan, pro se, in Docket No. 3709-64. Edwin E. Bard, pro se, in Docket No. 3710-64. Myron Weiss, for the respondent. PIERCE Memorandum Findings of Fact and Opinion PIERCE, Judge: The Commissioner determined deficiencies in the income taxes of the several petitioners herein, as follows: TaxableDocketcalendarDefi-No.Petitioneryearciency3969-63William F. Bard andErma Bard1959$7,463.503709-64Thomas H. Sullivan1959684.923710-64Edwin E. and EstherBard19561,856.051957206.24 All of the cases were consolidated for trial. The issues for decision are - In the case of William F. and Erma Bard: (1) Whether the notice of deficiency to said petitioners was timely issued. (2) Whether the Commissioner erred in disallowing a deduction to said petitioners for a 1959 loss alleged to have been sustained by William F. Bard in his alleged operation of a business known as Tollway Auto Auction. In the cases74 of Thomas H. Sullivan and of Edwin E. and Esther Bard: (3) Whether the Commissioner erred in disallowing a deduction to each of said petitioners for a portion of a loss alleged to have been sustained in 1959 by an alleged partnership operated by Edwin E. Bard and Thomas H. Sullivan, as claimed copartners, under the partnership name of Tollway Auto Auction. Findings of Fact Some of the facts have been stipulated. The stipulation of facts and all exhibits identified therein are incorporated herein by reference. Petitioners William F. Bard and Erma Bard are husband and wife residing in Chicago, Illinois. They filed a joint Federal income tax return for their taxable year here involved with the district director of internal revenue at Chicago. Petitioner Thomas H. Sullivan is a resident of Evergreen Park, Illinois. He filed an individual income tax return for his taxable year here involved, with the district director of internal revenue at Chicago. Petitioners Edwin E. Bard and Esther Bard are husband and wife who resided during their taxable years here involved in Oak Lawn, Illinois. They filed a joint Federal income tax return for each of said taxable years with the district75 director of internal revenue at Chicago. Petitioners William F. Bard and Edwin E. Bard are brothers. Their wives are involved in this proceeding solely by reason of their having joined with their husbands in the filing of their above-mentioned joint income tax returns. For convenience, William F. Bard will hereinafter sometimes be called "William"; Edwin E. Bard will hereinafter sometimes be called "Edwin"; and Thomas H. Sullivan will hereinafter sometimes be called "Sullivan." Facts Re Issuance of Notice of Deficiency to William F. and Erma Bard The joint income tax return of William F. and Erma Bard for their taxable year 1959 here involved, was filed on April 15, 1960. Thereafter on February 2, 1963, said petitioners executed and filed with the district director of internal revenue at Chicago a Consent Agreement (Form 872) in which they agreed with said director that the period for assessment and collection of any income tax for their taxable year 1959 was extended to December 31, 1963. The Commissioner's notice of deficiency in the income tax of said petitioners for their taxable year 1959 was issued to said petitioners on July 17, 1963, which was within the period of limitation76 for their taxable year 1959, as extended by the above-mentioned Consent Agreement. Facts Re Organization and Operation of Tollway Auto Auction William, during the period from about 1950 through 1958, owned and operated a business for the sale of automobiles at auction, which was known as Arena Auto Auction. Edwin, who is William's brother, was engaged in an oil compound business in Chicago during this same period. The brothers were at that time very friendly, and they helped one another financially and otherwise in business matters. In 1958 William sold his Arena Auto Auction to persons not involved in the instant case. As part of said sale transaction William agreed with the buyers that he would not participate in the operation of any automobile auction business in the Chicago area for a period of 5 years from the time of said sale. Thereafter in about May 1959, Edwin and Sullivan, acting in accordance with a suggestion of William, orally agreed to join as partners in establishing and operating a new automobile auction business similar to that in which William had previously engaged, and to divide equally the profits and losses from the operation of such business. On May 16, 1959, Sullivan77 acting on behalf of said partnership signed a real estate sale contract with Mae Binkowski, a widow, for the purchase from her of approximately 17 acres of land located in the Village of Alsip in the Chicago area - which land was to be used by the partnership as its site for the new auto auction business that they planned to operate under the name of Tollway Auto Auction. The purchase price of said land, as provided in the contract, was $45,000; and the seller acknowledged receipt of $1,000 earnest money at the time the contract was executed. Thereafter in June 1959, Sullivan delivered to the seller a cashier's check in the amount of $24,000. Also at about this same time Edwin and Sullivan delivered to the seller their installment promissory note in the amount of $20,000, which represented payment of the balance of the purchase price of said real estate. Thereupon said seller executed and delivered to Edwin and Sullivan, as the grantees, a warranty deed for said real estate dated June 1, 1959. As security for payment of the above-mentioned promissory note, Edwin and Sullivan and their respective wives conveyed and warranted unto the Chicago Title and Trust Company as trustee on June 1, 1959, the78 real estate above mentioned. The first installment on the above-mentioned promissory note in the amount of $460.59 was paid by Sullivan to the seller on about August 1, 1959; and the balance due on said installment note was fully paid on October 1, 1959. In connection with the purchase of the above real estate (hereafter called the Tollway property) the seller petitioned for and obtained from the Village of Alsip, where the property was located, a rezoning of the property for an automobile auction business. Edwin paid $50 to the Zoning Board with respect to the above proceeding. Shortly thereafter the Village of Alsip issued a permit for construction of the new building on said Tollway property. In payment for this building permit, Sullivan issued his check for $537.42 to the Village. Shortly after the issuance of the building permit, the construction of the building was commenced. The layout of the building was suggested by William; and the architectural plans were then prepared in the name of Edwin. In connection with the improvement of the property, chain fencing was ordered, and various equipment and office furniture were purchased or leased. Also arrangements were made with79 public utilities for supplying light and heat for the premises. Most of the aforementioned arrangements for the business were made either by Edwin or Sullivan. In about July 1959, Edwin sold for a price of $22,000 the oil compound business in which he had been engaged for many years. The funds which he obtained from the sale, including amounts received from discounting a promissory note received in part payment of the sale price, were used by him to make contributions to the Tollway partnership and to pay various amounts owed by said partnership. On August 13, 1959, Sullivan executed and delivered to the First National Bank of Evergreen Park, Illinois, a so-called "partnership agreement" on behalf of the Tollway Auto Auction, in which it was certified that Edwin and Sullivan were the sole owners of the business operated by them as copartners under the partnership name above mentioned. Also in this same instrument, the bank was authorized to pay checks drawn by either Edwin or Sullivan against moneys deposited in the bank to the account of Tollway Auto Auction. On or about September 2, 1959, Edwin and Sullivan borrowed $100,000 from the Michigan Avenue National Bank in Chicago, 80 in order to finance the construction of buildings on the Tollway property. As security for payment of said sum, Edwin and Sullivan and their respective wives executed a mortgage to the Chicago Title and Trust Company covering the Tollway real estate. Also at this same time, for the purpose of enabling Edwin and Sullivan (who were designated as "Debtor") to obtain credit from time to time from said Michigan Avenue Bank, William executed and delivered to this bank an instrument in which he requested the bank "to extend to said Debtor such credit as the Bank may deem proper," and in which he (William) "guaranteed full and prompt payment to said Bank * * * of any and all indebtedness, liabilities and obligations" of said Debtor to the bank. As security for such guaranty, William and his wife executed a trust deed to the Chicago Title and Trust Company, covering their personal residence property. On or before September 23, 1959, another checking account in the name of Tollway Auto Auction was opened in the Michigan Avenue Bank; and on September 25, 1959, Sullivan issued his personal check upon the Chatham Bank of Chicago for $18,000, which was made payable to Tollway Auto Auction and81 was then deposited in this new checking account. Edwin, Sullivan, and the bookkeeper of Tollway were all authorized to draw checks on said account on behalf of Tollway. Tollway began the operation of its business in about the middle of November 1959; and shortly prior thereto, printed announcements of a grand opening were issued to the public by both Edwin and Sullivan who therein represented that they were the copartners of the Tollway business. About a week later Edwin and Sullivan, again designating themselves as the owners of Tollway Auto Auction, mailed "flyers" to auto dealers announcing the progress made on the opening day of Tollway. Still later, in December 1959, they sent printed Seasons Greetings to customers, which greetings were signed in the name of Tollway Auto Auction by "Tom Sullivan and Ed Bard, Owners." Under dates of December 17, 1959, and January 20, 1960, respectively, the certified public accounting firm of Ziegler, Shifris and Company certified to Tollway Auto Auction that it had examined the books and records of said business for the months of November and December 1959, without making an audit of the transactions. It attached to said certification, a "Statement82 of Financial Condition" and a "Statement of Results of Operations," prepared by it as of the close of each of said months. The statements thus prepared for the month ended on December 31, 1959, showed in substance, among other things, the following: Partnership EquityT. SullivanE. BardTotalBalance, November 1, 1959$33,560.12$34,548.00$68,108.12Less - drawings to 12/31/592,000.002,000.004,000.00$31,560.12$32,548.00$64,108.12Less loss for year ended 12/31/5914,504.9814,504.9829,009.96Balance, December 31, 1959$17,005.14$18,043.02$35,098.16On or about April 11, 1960, a U.S. Partnership Return of Income (Form 1065) of Tollway Auto Auction for its calendar year 1959, was filed with the Internal Revenue Service by Edwin as a partner of said firm. In this return there was reported a loss from the operation of the business for said year in the amount of $29,009.96, which is the same amount that was shown on the above-mentioned Statement of Financial Condition as of December 31, 1959. Said partnership return also showed the names of the partners and their respective shares of said loss to be as follows: Edwin E. Bard$14,504.98T. Sullivan14,504.98Total$29,009.9683 On February 29, 1960, Edwin and Sullivan sent a letter to William which stated in substance: (1) That Edwin and Sullivan, as owners of the business operated by them under the name of Tollway Auto Auction, offered to sell and transfer to William all the assets of said business, including the real estate; (2) That the consideration therefor would be: The assumption by William of all liabilities of the "partnership of the undersigned [Edwin and Sullivan] doing business as Tollway Auto Auction"; the release by William of Edwin and Sullivan from all their obligations to the Michigan Avenue National Bank; and the payment by William to them of an amount equal to the capital investments of Edwin and Sullivan in said business as of the time of the sale - which amount would be paid as follows: $2,500 to be paid in cash to each of Edwin and Sullivan at the time of the sale; and the balance of the difference between said cash payments and the amounts of their investments in the business to be paid by delivery to Edwin and Sullivan of certain non-interest bearing promissory notes of William. William thereupon accepted the above offer, by signing his name below the word "Accepted" at the84 end of said letter. Thereafter on March 3, 1960, a formal written agreement embodying the substance of the above sale agreement was executed by Sullivan and Edwin and their respective wives (therein called the "Sellers"), and by William (therein called the "Buyer"). Shortly thereafter Sullivan and Edwin sent letters to their creditors in which they stated in substance, that: The partnership under which they had theretofore been doing business as Tollway Auto Auction, had been dissolved; that said business had been purchased from them by William Bard who had assumed and would pay all existing liabilities of said business; and that they would not be liable or responsible for any liabilities incurred in the future by persons using the name of Tollway Auto Auction. Subsequently on March 14, 1960, the "Tollway Employees" sent a written statement to customers of Tollway, in which they stated that William Bard had become the new owner of Tollway. In the joint income tax return which William and his wife filed for the year 1959, William claimed a deduction for a loss alleged to have been incurred by him in the operation of Tollway Auto Auction during the year 1959. The Commissioner, 85 in his notice of deficiency to William and his wife, disallowed the entire amount of said claimed deduction on the ground that William had not established that he was entitled to the same. Sullivan in his income tax return for 1959 and Edwin in the joint return which he and his wife filed for the year 1959, each claimed a partnership loss equal to 50 percent of the loss shown in the 1959 partnership return of Tollway; and Edwin and his wife also claimed net operating loss carrybacks to the years 1956 and 1957. The Commissioner in the notices of deficiency issued to Sullivan and to Edwin and his wife, disallowed not only both of the abovementioned claimed deductions for partnership losses, but also the net operating loss carrybacks claimed by Edwin and his wife. Opinion The issues in this case are primarily issues of fact; and the burden of establishing any errors in the Commissioner's determinations respecting said issues is upon the petitioners. The testimony of William Bard on the one hand, and of Edwin Bard and Thomas Sullivan on the other hand, not only reflects the existence of a bitter controversy between these two groups of petitioners, but also includes numerous conflicting86 statements of fact and unsupported conclusions of the petitioners in each group. Furthermore, the accounting records of Tollway Auto Auction other than certain bank checks, were claimed to be missing at the time of trial, notwithstanding that the same had previously been examined by a revenue agent on the premises of William Bard. In this circumstance, we have very carefully examined, considered and weighed all of the evidence herein, including the stipulation of facts; and as the result of such examination and consideration, we have made the following ultimate findings of fact and the following holdings: Re Case of William F. Bard and Erma Bard. (1) We here find as an ultimate fact and here hold, that the notice of deficiency which the Commissioner issued to William F. and Erma Bard for the taxable year involved, was properly and timely issued within the period permitted by the Internal Revenue Code of 1954. Accordingly, we further hold: That this Court has jurisdiction to decide the present case of said petitioners; and also that the time for assessment and collection of any deficiency in the income tax of said petitioners for their taxable year 1959 is not barred by the statute87 of limitations. We decide this first issue in favor of the respondent. (2) Regarding the second issue, William's contention is in substance, that he was during the year 1959 the sole "silent owner" and operator of the business known as Tollway Auto Auction; that Edwin and Sullivan were merely employees or agents of his, who provided a "facade" for his "silent" ownership and operation of said business; and that he (William) is the only one entitled to the benefit of any loss sustained in the operation of said business during the year 1959. We regard this contention of William to be without merit. The evidence herein does not establish, in our opinion, that William was the sole "silent owner" and operator of said business during said year 1959; or that Edwin and Sullivan were or acted as employees or agents of William in the operation of said business; or that William actually invested any capital in said business during or prior to the year 1959. It is true that William did make certain arrangements with the Michigan Avenue National Bank, pursuant to which he guaranteed to said bank the repayment of any loans which the bank might make to Edwin and Sullivan in accordance with said88 arrangements. However such acts of William did not constitute the investment by William of capital in the Tollway business; and William's guarantee to the bank merely created a guarantor's contingent liability for repayment by him of any loans made by the bank to Edwin and Sullivan which might thereafter become delinquent. Moreover, William's action in agreeing in 1960, to purchase from Edwin and Sullivan at that time (which was subsequent to the taxable year here involved) all the business assets of Tollway Auto Auction for an amount equal to the sum of said sellers' capital contributions to the business and the assumption of all liabilities incurred by said sellers in the operation of said business prior to the time of said purchase - indicates, in our opinion, that William did not become the owner of said business until after his purchase of that business from Edwin and Sullivan during the subsequent year 1960. We hold that William has not borne the burden of establishing any error in the determinations made by the Commissioner in the notice of deficiency which he issued to William and his wife for the year here involved. We hereby approve said determinations of the Commissioner; 89 and we decide this second issue in favor of the respondent. Re Cases of Thomas H. Sullivan and of Edwin E. and Esther Bard. Based on our above-mentioned consideration and weighing of all the evidence herein, we here find as an ultimate fact and hold that the business of Tollway Auto Auction during the year 1959 was owned and operated by Thomas H. Sullivan and Edwin E. Bard, as equal copartners thereof; and that Sullivan and Edwin as such partners are each entitled to deduct one-half of the loss sustained by their said partnership in the operation of its business during the year 1959. As regards the amount of loss sustained by said Tollway Auto Auction from its 1959 operations, the respondent has on brief requested this Court to find as a fact, that the amount of loss sustained by Tollway Auto Auction during the year 1959 was $22,940.22 (which amount reflects a downward revision of the loss shown by the certified public accounting firm in its abovementioned statement of the partnership's operations). Petitioners Sullivan and Edwin have indicated in their briefs, that they accept said revised amount of the partnership loss which the respondent suggested. Accordingly, we here find90 as a fact and hold that the amount of loss sustained by Tollway Auto Auction in its operations for its calendar year 1959 was $22,940.22. Regarding the amounts of the adjusted bases of Edwin and Sullivan of their respective interests in Tollway Auto Auction as of December 31, 1959, we find and hold that such basis of each of said petitioners was in excess of his distributive share of the partnership loss which we have hereinabove found. Accordingly we here find and hold that the limitation on the allowance of partners' losses contained in section 704(d) of the 1954 Code 2 has been met by each of said partners; and that Edwin and Sullivan each is entitled to deduct for the year 1959, his distributive share of the partnership's loss as of the end of said year. We also hold that Edwin and his wife are entitled to any carrybacks to their taxable years 1956 and 1957, which the recomputation of tax herein may reveal to be properly allowable. We decide this third issue in favor of petitioners Edwin E. and Esther Bard and of petitioner Thomas H. Sullivan. Decision will be entered for the respondent in Docket No. 3969-63. Decisions will be entered under Rule 50 in Docket Nos. 3709-64 and91 3710-64. Footnotes1. Proceedings of the following petitioners are consolidated herewith: Thomas H. Sullivan, Docket No. 3709-64, and Edwin E. Bard and Esther Bard, Docket No. 3710-64.↩2. SEC. 104. PARTNER'S DISTRIBUTIVE SHARE. * (d) LIMITATION ON ALLOWANCE OF LOSSES. - A partner's distributive share of partnership loss (including capital loss) shall be allowed only to the extent of the adjusted basis of such partner's interest in the partnership at the end of the partnership year in which such loss occurred. * *↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4623934/	Albert D. Roberts and Kathleen Roberts, Petitioners, v. Commissioner of Internal Revenue, RespondentRoberts v. CommissionerDocket No. 1397-63United States Tax Court43 T.C. 716; 1965 U.S. Tax Ct. LEXIS 122; February 23, 1965, Filed February 23, 1965, Filed 122 Decision will be entered under Rule 50. During the taxable year 1957 the petitioner commenced and operated a car sales business as a sole proprietorship. At the end of that year the balance to his credit in dealer reserve accounts was $ 49,857.63. He reported his net income from such business for 1957 on an accrual method of accounting, but did not in his return for that year treat the dealer reserve balances as accrued income. On January 1, 1958, the petitioner transferred all the assets and liabilities of the sole proprietorship, except his right to the balances in the dealer reserve accounts, to a corporation in exchange for all its stock. Held, that the petitioner is not a person to whom the Dealer Reserve Income Adjustment Act of 1960 applies, and that accordingly the petitioner may not elect, under the provisions of that Act, to pay in installments the tax for 1957 resulting from the inclusion of dealer reserve income in taxable income for that year. Donn Kemble, for the petitioners.Marion Malone, for the respondent. Atkins, Judge. ATKINS717 OPINIONThe respondent determined deficiencies in income tax for the taxable years 1957 and 1958 in the respective amounts of $ 27,229.27 123 and $ 26,470.13.The parties having agreed that the respondent properly included in the petitioners' taxable income for the taxable year 1957 the amount of $ 49,857.63 representing dealer reserve balances as of the end of that year, and that the respondent erred in including the same amount in taxable income for the taxable year 1958 and in disallowing for 1958 the claimed medical expense deduction of $ 485, the only issue remaining for decision is whether the petitioners are entitled, under the Dealer Reserve Income Adjustment Act of 1960, to pay in installments the deficiency in tax resulting from the inclusion of the amount of $ 49,857.63 in taxable income for the taxable year 1957.The facts have been stipulated and the stipulations are incorporated herein by this reference.The 124 petitioners are husband and wife who reside at Garden Grove, Calif. They filed joint Federal income tax returns for the taxable years 1957 and 1958 with the district director of internal revenue at Los Angeles, Calif. The petitioner Kathleen Roberts is involved only by reason of having filed joint income tax returns with the petitioner Albert D. Roberts, who hereinafter will be referred to as the petitioner.During the spring of 1957 the petitioner commenced a new and used car sales business as a sole proprietorship under the name of Al Roberts Plymouth. He reported his net income from such business for the taxable year 1957 on an accrual method of accounting and his other items of income and deduction (not connected with such business) for the taxable year 1957 and subsequent years on the cash method of accounting.718 In the conduct of this business, and with respect to credit sales, petitioner normally would sell automobiles to customers on conditional sales contracts, or, in the alternative, he would accept a promissory note payable in installments for the balance of the purchase price of an automobile. He would then sell such installment paper to various finance companies.In the 125 course of the sale of such installment paper to the various finance companies, the finance company would reserve or hold back, as a loss reserve, a portion of the balance of the sales price due the petitioner, which reserve was not to exceed a certain specified percentage of the total unpaid balances on all outstanding installment paper purchased by the finance companies. Any amount withheld as a loss reserve which was in excess of such percentage reserve requirement was to be returned to petitioner, unless the petitioner was in default in any of his obligations to the finance companies, the finance companies stopped purchasing installment paper from him, or if he ceased doing business as a going concern.At December 31, 1957, the balance of the dealer reserve accounts or holdbacks standing to the credit of petitioner was $ 49,857.63. Petitioner did not report such balance as income for the taxable year 1957.In December 1957, petitioner formed a corporation under the laws of the State of California named Al Roberts Plymouth, Inc., hereinafter referred to as the corporation.On January 1, 1958, petitioner transferred all the assets and liabilities of the sole proprietorship, with the 126 exception of the dealer reserve accounts in the amount of $ 49,857.63, to the corporation in exchange for 100 percent of its capital stock. Since he did not transfer to the corporation his rights to the various dealer reserve accounts, no capital stock was issued to him in exchange for his rights to such reserve balances.The petitioner at all times since January 1, 1958, has been the sole stockholder of the corporation, the new and used car sales business has been carried on in the same manner by the corporation and not by the petitioner as a sole proprietor, and the petitioner has served the corporation as its president and chief executive officer, receiving from the corporation a salary for his services.The corporation acted as the agent of, and acknowledged its liability to, petitioner with respect to the administration of the dealer reserve accounts existing at December 31, 1957, in the aggregate amount of $ 49,857.63. The corporation reported on its books of account yearend balances of dealer reserve accounts for the years 1958 through 1963 in the respective amounts of $ 47,309.26, $ 46,565.61, $ 46,876.97, $ 38,186.83, $ 32,679.60, and $ 37,404.11.719 The corporation has maintained 127 its books of account on an accrual method of accounting. However, it reported at the end of the years 1958 and 1959 only the net cash released by the finance companies from the dealer reserve accounts instead of the amount withheld as a loss reserve by the finance companies from the purchase price of the corporation's installment paper.In 1958 and 1959 the corporation received from the various financial institutions the respective amounts of $ 81,147.65 and $ 87,462.80, which amounts were reported as income on its respective income tax returns for those years.The corporation's dealer reserve holdbacks from its sales occurring in 1958 and 1959 were in the respective amounts of $ 78,599.28 and $ 86.719.15.The corporation, therefore, reported income for the years 1958 and 1959 in the amount of $ 3,292.02 in excess of the aggregate amount of the dealer reserve holdbacks from its sales during those years.Since the corporation reported more than the amounts withheld, it follows that it received and reported as its own income cash released by the finance companies which constituted a release of all or a portion of the dealer reserve accounts at December 31, 1957. As the balance in the dealer 128 reserve accounts on December 31, 1957, was the personal property of the petitioner, and as the corporation acted only as the agent of petitioner in the administration of these accounts, it follows that the corporation erroneously reported as its own income what should have been reported by the petitioner in his individual capacity.By reason of the fact that it was difficult to trace the cash receipts so reported by the corporation to pre-January 1, 1958, and post-January 1, 1958, holdbacks, the corporation assumed a first-in first-out method of accounting and requested a refund of the taxes it had paid in the year 1958 on the inclusion of the entire December 31, 1957, dealer reserve balance in the amount of $ 49,857.63 in its income for the year 1958. This refund was allowed by the Internal Revenue Service and taxes paid by the corporation on the inclusion of $ 49,857.63 as income for the year 1958 were refunded to the corporation.The portion of the reserve accounts released to the corporation by the finance companies in the years 1958 and 1959 in the total amount of $ 168,610.45 was used by the corporation in the operation of its business, and no portion of the released funds was 129 returned to the petitioner by the corporation in satisfaction of its obligation to the petitioner.Prior to the decision of the Supreme Court on June 22, 1959, in Commissioner v. Hansen, 360 U.S. 446">360 U.S. 446, there had been a conflict of view among the courts as to whether amounts retained by finance 720 companies and credited to dealer reserve accounts should be accrued as income by a dealer on the accrual method of accounting in the year the amounts were credited or in the year of actual payments to the dealer. In the Hansen case the Supreme Court held that such amounts constituted accrued income at the time the withheld amounts were entered on the books of the finance companies as liabilities to the dealers.Following the decision of the Supreme Court in the Hansen case, Congress enacted the Dealer Reserve Income Adjustment Act of 1960, 74 Stat. 124, as a relief measure for qualifying dealers who had not been reporting the dealer reserve credit as income at the time credited. It provides for two elections in the case of a person to whom the Act applies. Such a person might elect to have the change to the proper method of reporting treated under section 481 of the Internal Revenue Code of 1954130 as a change in method of accounting not initiated by the taxpayer, or he could elect to have such change not treated as a change in method of accounting to which section 481 applies, in which case he might also elect to pay any resulting net increase in tax in annual installments over a period of from 2 to 10 years.The corporation filed amended returns under the Dealer Reserve Income Adjustment Act of 1960 in which were reported the amounts withheld by the finance companies, rather than the amounts of cash released to the corporation, as follows:Amended returnsAmended returnsYearOriginal return(released amounts --under 1960 Act(released amounts)after refund for(withheld amounts)1958)1958$ 81,147.65$ 31,290.02$ 78,599.28195987,462.8087,462.8086,719.15Total168,610.45118,752.82165,318.43The corporation elected to pay the tax arising by reason of the inclusion of the difference between the amounts withheld by finance companies and the amounts of cash released to the corporation in the years 1958 and 1959 in installments, as allowed under the Dealer Reserve Adjustment Act of 1960. Such election was not challenged by the respondent.The petitioner on or after October 27, 1960, filed an 131 amended return for the taxable year 1957 under the Dealer Reserve Income Adjustment Act of 1960 in which was reported as additional income the balance of the dealer reserve accounts at December 31, 1957, in the amount of $ 49,857.63, resulting in an additional tax of $ 26,816.94 and interest of $ 3,820.31 to August 30, 1960, or a total of $ 30,637.25.On August 30, 1960, the petitioners made a timely election, under section 4(a) of the Dealer Reserve Income Adjustment Act of 1960, to have a change in the treatment of the dealer reserve income treated 721 as not a change in method of accounting to which section 481 of the Internal Revenue Code of 1954 applies and also an election under section 4(b) of the Act to pay the increase in tax in 10 equal annual installments.In the notice of deficiency for the taxable year 1957 the respondent determined that the petitioners were not persons to whom the Dealer Reserve Income Adjustment Act of 1960 applies and that accordingly they might not elect to pay their tax in installments as provided by section 4 of that Act.No notice and demand from the Secretary of the Treasury, or his delegate, has been served on the petitioners, pursuant to paragraph 132 4(f) of the Dealer Reserve Income Adjustment Act of 1960.In their joint income tax return for the taxable year 1958 the only income reported by the petitioners was $ 24,000 of salary or wages paid to the petitioner by the corporation.The Dealer Reserve Income Adjustment Act of 1960 provides in pertinent part as follows:SECTION 2. PERSONS TO WHOM THIS ACT APPLIES.This Act shall apply to any person who, for his most recent taxable year ending on or before June 22, 1959 -- (1) computed, or was required to compute, taxable income under an accrual method of accounting,(2) treated any dealer reserve income, which should have been taken into account (under the accrual method of accounting) for such taxable year, as accruable for a subsequent taxable year, and(3) before September 1, 1960, makes an election under section 3(a) or 4(a) of this Act.* * * SEC. 4. ELECTION TO HAVE SECTION 481 NOT APPLY; PAYMENT IN INSTALLMENTS.(a) General Rule. -- If a person to whom this Act applies makes an election under this subsection, then for purposes of chapter 1 of the Internal Revenue Code of 1954 (and the corresponding provisions of prior law) a change in the treatment of dealer reserve income to 133 a method proper under the accrual method of accounting shall be treated as not a change in method of accounting in respect of which section 481 of the Internal Revenue Code of 1954 applies. Any election under this subsection shall apply to all taxable years ending on or before June 22, 1959 (whether the provisions of the Internal Revenue Code of 1954 or the corresponding provisions of prior law apply), for which the assessment of any deficiency, or for which refund or credit of any overpayment, whichever is applicable, was not, on June 21, 1959, prevented by the operation of any law or rule of law.(b) Election To Pay Tax in Installments. -- (1) Eligibility. -- If the net increase in tax (as defined in paragraph (2)) which results solely from the effect of the election provided by subsection (a) exceeds $ 2,500, then the taxpayer may elect (at the time the election is made under subsection (a)) to pay in two or more (but not to exceed 10) equal 722 annual installments any portion of such net increase which (on the date of such election) is unpaid.(2) Net Increase in Tax Defined. -- For purposes of this section, the term "net increase in tax" means the amount (if any) by which -- (A) 134 the sum of the increases in tax (including interest) for all taxable years to which the election applies and which is attributable to the election, exceeds(B) the sum of the decreases in tax (including interest) for all taxable years to which the election applies and which is attributable to the election.* * * (f) Termination of Installment Payment Privilege. -- The extension of time provided by this section for payment of tax shall cease to apply, and any unpaid installments shall be paid upon notice and demand from the Secretary of the Treasury or his delegate, if -- (1) in the case of a taxpayer who is an individual, he dies or ceases to engage in a trade or business,The respondent determined, and maintains, that petitioner is not a person to whom the Act applies. The petitioner, on the other hand, contends that he is.Section 2 of the Act provides that the Act shall apply to any person who, for his most recent taxable year ending on or before June 22, 1959, (1) computed, or was required to compute, taxable income under an accrual method of accounting, and (2) treated any dealer reserve income, which should have been taken into account (under the accrual method of accounting) 135 for such taxable year, as accruable for a subsequent taxable year.The parties agree that the petitioner's most recent taxable year ending before June 22, 1959, was the calendar year 1958. In that year the automobile business, which the petitioner had theretofore conducted as an individual, was carried on by the corporation, and therefore no amount was credited to the petitioner in any dealer reserve accounts.The petitioner contends that the statute in question is remedial in nature, 1137 that the language should be so construed as to effectuate the 723 remedial purpose, and that so construed, he is entitled to the benefit of the installment method of payment. His position is that section 2 of the Act does not require that petitioner must have generated dealer reserve income in 1958 by discounting installment paper with financial institutions; rather, that it is enough if the petitioner had on hand in the year 1958 dealer reserve accounts which should have been taken into income in a prior year. He also argues that there need not actually have been dealer reserve income in 1958 which the petitioner treated as accruable for a subsequent taxable year; rather, in view of the use of the word 136 "any" in section 2, such section should be read as referring to the treatment which would have been accorded any such income had there been any in 1958. We cannot agree with the petitioner's interpretation of section 2 of the Act. In our view such section plainly requires that there shall have been dealer reserve income in 1958. 2138 Since the petitioner did not have such income in 1958, we are constrained to hold that he is not a person to whom the Dealer Reserve Income Adjustment Act of 1960 applies, and that hence he is not entitled to the benefit of the installment provisions of section 4(b) thereof in the payment of the tax attributable to the inclusion in income for 1957 of the dealer reserve balances in the amount of $ 49,857.63.Decision will be entered under Rule 50. Footnotes1. The petitioner refers to S. Rept. No. 1045, 86th Cong., 2d Sess., p. 2, which provides in part as follows:"Your committee agrees that dealer reserve income should be reported on a proper accrual accounting basis. Nevertheless, it believes that a hardship would be created by requiring all dealers to make a transition to this method of reporting this income in 1 year. It believes that in view of the fact that the Courts of Appeals in the Third Circuit, n1 the Fourth Circuit, n2 the Fifth Circuit, n3 the Eighth Circuit, n4 and the Ninth Circuit n5 have held that the reserves were not accruable as income until the year of withdrawal of the reserve, taxpayers had sufficient reasons for not reporting this income in the earlier year. This appears to be true even though in the sixth n6 and seventh n7 circuits and in numerous Tax Court cases the holdings were to the contrary. In view of the large number of circuit court decisions in favor of the taxpayers and the fact that from 1944 to 1958 without exception the circuit court holdings were in favor of the taxpayers, your committee believes it would be unfortunate to require the dealers involved to make substantial payments of tax for these back years all in the current year. This is believed to represent a particularly difficult hardship in the case of the many small dealers in personal property who have held what for them represent substantial sums tied up in these reserves. * * " (Footnotes omitted.)2. In Hulond R. Ryan, 42 T.C. 386">42 T.C. 386, we stated in part:"Petitioner's most recent taxable year ending on or before June 22, 1959, was his taxable year ending Dec. 31, 1958. For the Dealer Reserve Act to apply, petitioner, for that year, must have had dealer reserve income and treated such income, which should have been taken into account in 1958 under petitioner's accrual method of accounting, as accruable for a subsequent taxable year. * * Proof that petitioner included in income for 1958 dealer reserve income that was properly accruable in 1957 would not make the Act applicable to this petitioner. * *"↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4623935/	WICKLIFFE B. and DOROTHY E. HENDRY, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentHendry v. CommissionerDocket No. 10588-80.United States Tax CourtT.C. Memo 1981-740; 1981 Tax Ct. Memo LEXIS 5; 43 T.C.M. (CCH) 232; T.C.M. (RIA) 81740; December 31, 1981. Wickliffe B. Hendry, pro se. Barry Bledsoe, for the respondent. SCOTT MEMORANDUM OPINION SCOTT, Judge: Respondent determined a deficiency in petitioners' income tax for the calendar years 1977 and 1978 in the amounts of $ 2,374 and $ 2,273, respectively. The issue for decision is whether petitioners are entitled to deductions in the amounts of $ 6,125.72 and $ 5,952.84 for the calendar years 1977 and 1978, respectively, for the living expenses incurred by Wickliffe B. Hendry in connection with his employment at Eglin Air Force Base in Okaloosa County, Florida (Eglin). All of the facts have been stipulated and are found accordingly. Petitioners, husband6 and wife, who resided in Huntsville, Alabama, at the time of the filing of their petition in this case, filed a joint Federal income tax return for each of the years 1977 and 1978 with the Internal Revenue Service Center in Chamblee, Georgia. From June 1962 through December 11, 1976, Wickliffe B. Hendry (petitioner) was employed as a general engineer with the Ballistic Missile Defense System Command, United States Army, in Huntsville, Alabama. During this period, petitioner and his wife lived in Huntsville where his wife was a teacher at the Huntsville High School. Petitioner was informed by a reduction in force (RIF) notice dated October 6, 1976, that he would be separated from his position of general engineer in Huntsville, Alabama, effective December 10, 1976. Petitioner appealed the anticipated RIF action to the Civil Service Commission. However, before the Civil Service Commission's decision became final, petitioner transferred to Eglin Air Force Base, Okaloosa County, Florida, effective December 12, 1976. At the time of his transfer to Eglin, petitioner was eligible for civil service retirement because of the RIF, but rather than opting for early retirement, petitioner7 chose to accept the transfer to Eglin because he could maintain his current GS-14 salary until September 1978 at which time it would decrease by about $ 9,000 per year. Also, petitioner would become 60 years of age on December 11, 1978, and be eligible for military reserve retirement pay. Upon acceptance of the position in Eglin, petitioner lost his eligibility for retirement because of the RIF notice and was not eligible for civil service retirement until December 1978. The Notification of Personnel Action given to petitioner in connection with his transfer showed the action to be "TRANSFER - CAREER" effective December 12, 1976, and showed the name of the position as "GENERAL ENGINEER", grade 12. Under date of December 6, 1976, petitioner received "Request and Authorization for DOD Civilian Permanent Duty Travel" by which he was authorized one-way travel between Huntsville and Eglin, temporary subsistence for 30 days, and shipment of household goods. The normal moving expenses authorized to petitioner had he chosen to move his family and household effects to Eglin would have been granted to him had he made the move anytime within two years from the date of his transfer. When8 petitioner accepted the transfer to Eglin, it was his intention to remain there only through December 1978 even though there was no limitation on his right to remain employed there after that date. Petitioner's wife did not move to Eglin with petitioner since she did not want to give up her job as a teacher at Huntsville High School to move to Florida for a two-year period. During 1977 and 1978 petitioner continued to pay Alabama income tax and to vote in Alabama. On their joint Federal income tax returns for the years 1977 and 1978, petitioners claimed $ 6,125.72 and $ 5,952.84, respectively, as the expenses for apartment rent, utilities, and travel home on weekends incurred by petitioner in connection with his employment at Eglin. Respondent in his notice of deficiency disallowed these claimed expenses. The parties agree that petitioner has substantiated the expenditures in connection with his stay at Eglin and the only issue is whether these amounts are properly deductible. Section 162(a) 1 provides for the allowance of a deduction for all ordinary and necessary expenses paid by a taxpayer during the taxable year in carrying on a trade or business and subsection (2) thereof9 provides that these expenses include traveling expenses while away from home in pursuit of a trade or business. It has long been settled that in order for a taxpayer to be entitled to a deduction for expenses incurred in living away from his family residence, the expenses must be (1) reasonable and necessary, (2) incurred while away from home, and (3) incurred in the pursuit of a trade or business. Commissioner v. Flowers, 326 U.S. 465">326 U.S. 465 (1946). Respondent in the instant case contends that petitioner's expenses were not incurred while away from home within the meaning of section 162(a)(2) and that they were not incurred in the pursuit of a trade or business within the meaning of that section. As was pointed out in Commissioner v. Flowers, supra, where a taxpayer's principal place of employment is other than the place of his residence, living expenses incurred by the taxpayer at his principal place of employment, because he chooses for personal reasons not to move his residence, are not expenses10 incurred in the taxpayer's trade or business. Rather, under these circumstances, the expenses are incurred for the personal reason that causes the taxpayer not to choose to move his family home. This Court has consistently held that a taxpayer who chooses for personal reasons not to move his family residence to his principal place of employment does not incur the living expenses at his principal place of employment because of his business but rather because of his personal choice of a place to live. This Court has further held that as a general rule the term "home" as used in section 162(a)(2) means the vicinity of a taxpayer's principal place of employment rather than the location of his family residence. Daly v. Commissioner, 72 T.C. 190">72 T.C. 190, 195 (1979), affd. F.2d (4th Cir. Oct. 14, 1981). An exception to this rule has been recognized where the principal place of employment of a taxpayer is temporary rather than indefinite. In such a case the taxpayer's home is not changed and his expenses at the place of his temporary employment are deductible both because he is away from home and because the expenses are incurred in pursuit of his trade or business. 11 Stricker v. Commissioner, 54 T.C. 355 (1970), affd. 438 F.2d 1216">438 F.2d 1216 (6th Cir. 1971). Whether this case is approached from the standpoint of determining if petitioner was "away from home" while working at Eglin or from the standpoint of determining if petitioner's living expenses at Eglin were "incurred in pursuit of a trade or business," the result is the same. Petitioner is not entitled to deduct the cost of his living expenses at Eglin unless his employment there was temporary rather than indefinite or indeterminate. See Steinhort v. Commissioner, 335 F.2d 496">335 F.2d 496, 504 (5th Cir. 1964), affirming and remanding a Memorandum Opinion of this Court. See also Peurifoy v. Commissioner, 358 U.S. 59">358 U.S. 59, 60 (1958). The facts here clearly show that petitioner's employment at Eglin was not temporary. Petitioners, however, argue that since petitioner's intent was to remain employed at Eglin for only two years, petitioner's employment was temporary. The subjective intent of a taxpayer as to the length of time he may wish to remain in a position which itself is indefinite or indeterminate is not the controlling criterion. This subjective*12 intent may change from time to time. The ultimate question is whether the nature of the position in which a taxpayer is employed is such that he could reasonably have been expected to move his residence. Tucker v. Commissioner, 55 T.C. 783">55 T.C. 783, 786 (1971). On the basis of the record in this case, we conclude that petitioner's employment at Eglin was not temporary but was indefinite or indeterminate. Even though during the years here in issue it may have been petitioner's subjective intent to remain in the position at Eglin only for two years until he became 60, his position or employment at Eglin was not temporary. Likewise, the fact that petitioners maintained their home in Hunsville because petitioner's wife was employed there does not cause petitioner to be entitled to deduct his living expenses at a place where he was employed in an indefinite or indeterminate position. Mitchell v. Commissioner, 74 T.C. 578">74 T.C. 578, 584 (1980). Decision will be entered for the respondent. Footnotes1. Unless otherwise indicated, all statutory references are to the Internal Revenue Code of 1954, as amended and in effect during the years in issue.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4623936/	APPEAL OF SUSIE M. ROOT, EXECUTRIX, ESTATE OF HENRY L. ROOT.Root v. CommissionerDocket No. 2825.United States Board of Tax Appeals5 B.T.A. 696; 1926 BTA LEXIS 2804; November 30, 1926, Promulgated 2804 1. The common law doctrine of estates by the entirety obtains in the State of Missouri. 2. The fact that the husband pays the full consideration out of his own funds for land conveyed to him and his wife as tenants by the entirety does not have the effect of constituting such grantees other than tenants by the entirety. 3. A rule of property established by the statutes or decisions of a State is binding on the Federal courts in costruing the transfer or devolution of property under such rule. 4. Under the laws of Missouri there is no transfer, by reason of the death of one spouse, of any interest or estate of that spouse in an estate by the entirety, to the surviving spouse. 5. Under the provisions of the Revenue Act of 1921, and estate tax is imposed on the transfer of the net estate of the decedent, and since, under the laws of Missouri, there was not a transfer of an estate to the surviving spouse on the death of the decedent, in land theretofore held by him and his wife as tenants by the entirety, the inclusion of the value of such an estate as a part of the gross estate of the decedent was without authority in law. John L. Gaylord, Esq., for the petitioner. 2805 J. F. Greaney, Esq., for the Commissioner. KORNER696 This appeal involves a deficiency asserted by the Commissioner under the estate-tax provisions of the Revenue Act of 1921. The issue presented is whether the value of real property owned by a decedent and his wife at the time of the death of the former, as tenants by the entirety, is properly to be included as a part of the gross estate of the decedent for estate-tax purposes. All of the facts were stipulated. FINDINGS OF FACT. Henry L. Root died on the 26th day of February, 1923, in Kansas City, Jackson County, Mo., and left surviving, as his sole heir, his 697 wife, Susie M. Root, who was duly appointed and qualified as executrix of his estate in the Probate Court of Jackson County, Missouri. On the 29th day of November, 1921, one James Ketner and Ethel N. Ketner, his wife, by warranty deed, conveyed to H. L. Root and Susie May Root, husband and wife, the following described real estate, to wit: All of Lot 12 and all of the East 25 feet of Lot 11, Block 15, of Country Club Ridge, an addition in Kansas City, Jackson County, Missouri. At the time of the death of Henry L. Root, 2806 the said Henry L. Root and Susie M. Root, husband and wife, were the owners of the real estate above described. The warranty deed above referred to was duly recorded on the 6th day of December, 1921, in the office of the Recorder of Deeds in and for the said Jackson County, Missouri, at Kansas City in that State. The actual value of the real property in question on the date of the death of Henry L. Root was $8,000. Susie M. Root, executrix of the estate of Henry L. Root, deceased, in conformity and in compliance with the provisions of the Revenue Act of 1921, and the Federal Estate Tax Regulations, prepared and caused to be filed in the office of the collector at Kansas City, Mo., in the Sixth Missouri District, a return for this estate on Treasury Department Form 706, for the determination of the estate tax thereon, the return having been filed on the 23rd day of February, 1924, and a tax in the amount of $1,922.76 was paid by said executrix on that day. The return filed by the executrix set out, as Item One in Sechedule "D" thereof, the property above described and the value thereof, and that return stated that said property was an estate by the entirety in the name of the2807 said Henry L. Root and Susie M. Root, husband and wife. On the 26th day of March, 1924, the above-mentioned return was examined by an agent of the Bureau of Internal Revenue, one Stewart B. Sturgis. The inclusion in the tax return of the value of the above described property as a part of the gross estate of Henry L. Root, deceased, was objected to and protested by the executrix to Sturgis, and was by him eliminated from the return and from his audit thereof, which audit was dated the 28th day of March, 1924. A copy thereof was furnished to the executrix. The elimination of the property in question, and its value, from the gross estate of the deceased, and other additional net adjustments allowed to the taxpayer, decreased the amount of the taxable estate $121,137.79 (as shown by the return) to $114,358.71 (as shown by the audit and report of Sturgis), resulting in a corresponding reduction in the amount of the tax liability of $135.59, which included the tax 698 on the value of the property in question, and being the difference between $1,922.76, the amount of tax paid by the executrix, and $1,787.17, the amount of tax liability of the estate as shown by the audit of2808 Sturgis. The Commissioner approved the report of Sturgis, with the exception of his action in eliminating the property in question from the gross estate. The Commissioner included the value of the property in question in the gross taxable estate, and as a result of its inclusion therein he found and assessed a deficiency in tax of $24.41. The petitioner was advised of the determination of the Commissioner and of the assessment of the said deficiency, by letter from the Commissioner under date of January 30, 1925. The exhibits attached to and made a part of petitioner's petition are true copies of the letters testamentary granted said executrix, the statutory deficiency notice of the Commissioner dated January 30, 1925, and the warranty deed, dated November 29, 1921, from James Ketner and Ethel N. Ketner, husband and wife, to H. L. Root and Susie May Root, husband and wife. From the documents referred to in the stipulation we find that the petitioner was appointed executrix of the estate of the decedent on March 5, 1923, by the Clerk of the Probate Court of Jackson County, Missouri, and duly qualified to act as such executrix. The material portions of the Commissioner's2809 statutory notice of deficiency, dated January 30, 1925, to the petitioner are as follows: Your claim is based upon the contention that the homestead of this decedent was held by himself and wife as tenants by the entirety and as such should not be included in the gross estate for tax. The record discloses that the widow of this decedent did not contribute any part of the purchase price and that her interest in this property is such as is specified in Section 402(d) of the Revenue Act of 1921 * . The evidence submitted by you is not sufficient to support your claim for refund, and it is therefore rejected in its entirety and the amount of tax remains as set out in Bureau Letter of July 17, 1924. This deficiency tax of $24.41 will bear interest at the rate of ten per centum per annum from one month after notice and demand by the Collector, until paid, in accordance with the provisions of Section 407 of the Revenue Act of 1921. The material portions of the deed of conveyance dated November 29, 1921, are as follows: THIS INDENTURE, Made on the 29th day of November, A.D. One Thousand Nine Hundred and Twenty-One, by and between James Ketner and Ethel N. Ketner, husband2810 and wife, of the County of Jackson, State of Missouri, parties of the first part, and H. L. Root and Susie May Root, husband and wife, of the County of Jackson, State of Missouri, parties of the second part; WITNESSETH: THAT THE SAID PARTIES OF THE FIRST PART, in consideration of the sum of One ($1.00) Dollar and other valuable considerations 699 to them paid by said parties of the second part (the receipt of which is hereby acknowledged) do by these presents, Grant, Bargain and Sell, Convey and Confirm unto the said parties of the second part, their heirs and assigns, the following described lots, tracts or parcels of land. * * [Here follows the description of the land set out above in these findings.] OPINION. KORNER, Chairman: The petitioner, Susie M. Root, brings this proceeding as executrix of her deceased husband to test the right of the Commissioner to assert a tax on the estate of the decedent, in the computation of which he has included as a part of the gross estate the value of a certain parcel of real property which was owned by the decedent and his wife up to the time of the death of the former. From the agreed statement of facts upon which the2811 case was submitted it appears that by warranty deed, executed November 29, 1921, there was conveyed to H. L. Root and Susie May Root, husband and wife, a lot of land in Kansas City. H. L. Root died on February 26, 1923, and left surviving, as his sole heir, his wife, Susie May Root, who was duly appointed and qualified as executrix of his estate. The value of the property is not in dispute. It is unnecessary to detail here the chronology of events leading up to the bringing of this proceeding. They are fully set out in the findings of fact. Suffice it to say that the Commissioner proposes to collect an estate tax from the estate of the decedent predicated upon the inclusion, as a part of the gross estate, of the value of the land just referred to. The petitioner contends that the land was conveyed to her and her deceased husband as tenants by the entirety and was so held by them until the death of the decedent, and that, as such, it is no part of decedent's estate and is, therefore, not properly to be included in the value of that estate under the provisions of the Revenue Act of 1921 relating to estate taxes. The Commissioner contends that the value of the land in question2812 should be so included, whether or not the grantees of the property were tenants by the entirety, for the reason that the value of property so held is specifically made a part of the gross estate by that statute. In answer to this contention of the Commissioner, the petitioner insists that, if such be the effect of the provisions of the Revenue Act, such provisions are in contravention of Article XIV, section 1, of the Constitution of the United States, in that it constitutes an unlawful taking of the property of Susie M. Root without due process of law. We are convinced from the authorities called to our attention that the common law doctrine of estates by the entirety obtains in the State of Missouri. Frost v. Frost,200 Mo. 474">200 Mo. 474; 98 S.W. 527">98 S.W. 527; Kegan v. Haslett,128 Mo.App. 286; 107 S.W. 17">107 S.W. 17. The portion of the Missouri statute, section 4600, R.S. 1899; Ann. Stat. 1906, p. 2499, 700 which was construed in Kegan v. Haslett, supra, has been carried forward into the revision of 1919, being section 2273, R.S. 1919. It is equally clear from the authorities that this doctrine obtains notwithstanding2813 the "Married Woman's Act." Frost v. Frost, supra;Stifel's Union Brewing Co. v. Saxy,273 Mo. 159">273 Mo. 159; 201 S.W. 67">201 S.W. 67; Ashbaugh v. Ashbaugh,273 Mo. 353">273 Mo. 353; 201 S.W. 72">201 S.W. 72. We are likewise convinced that under the laws of Missouri the deed to H. L. Root and Susie May Root, husband and wife, created in the grantees therein an estate by the entirety. Hume v. Hopkins,140 Mo. 65">140 Mo. 65; 41 S.W. 784">41 S.W. 784; Wilson v. Frost,186 Mo. 311">186 Mo. 311; 85 S.W. 375">85 S.W. 375; Holmes v. Kansas City,209 Mo. 513">209 Mo. 513; 108 S.W. 9">108 S.W. 9; Burke v. Murphy,275 Mo. 397">275 Mo. 397; 205 S.W. 32">205 S.W. 32; Traw v. Heydt (1919), 216 S.W. 1009">216 S.W. 1009; Elliott v. Roll (1920), 226 S.W. 590">226 S.W. 590. These decisions and others which have been brought to us leave no doubt in our minds that from the earliest days down to the time of the death of Henry L. Root the doctrine of estates by the entirety and the legal consequences flowing therefrom obtained and constituted a rule of real property in that State. We now inquire as to the effect2814 of a rule of property, established by the laws and decisions in a State, on a Federal court, in determining an issue arising out of the same state of facts. The petitioner contends that the laws and decisions of the State of Missouri defining and determining an estate by the entirety and the legal consequences flowing therefrom, constitute a rule of property in that State which is binding upon the Federal courts in the determination of the same question. Her contention is borne out by the highest authority. In Jackson v. Chew,12 Wheat. 153">12 Wheat. 153, 167-169, the court said: After such a settled course of decisions, and two of them in the highest court of law in the state, upon the very clause in the will now under consideration, deciding that Joseph Eden did not take an estate-tail, a contrary decision by this court would present a conflict between the state courts and those of the United States, productive of incalculable mischief. If, after such an uninterrupted series of decisions for twenty years, this question is not at rest in New York, it is difficult to say, when any question can be so considered. And it will be seen, by reference to the decisions of this2815 court, that to establish a contrary doctrine here, would be repugnant to the principles which have always governed this court in like cases. * * * * * * This court adopts the state decisions, because they settle the law applicable to the case; and the reasons assigned for this course, apply as well to rules of construction growing out of the common law, as the statute law of the state, when applied to the title of lands. And such a course is indispensable, in order to preserve uniformity; otherwise, the peculiar constitution of the judicial tribunals of the states and of the United States, would be productive of the greatest mischief and confusion. * * * And whether these rules of land titles grow out of the statutes of a state, or principles of the common law adopted and applied to such titles, can make no difference. There is the same necessity and fitness in 701 preserving uniformity of decisions in the one case as in the other. * * * * * After such a series of adjudications for such a length of time, in the state courts, upon the very point now before us, and relating to a rule of landed property in that state, we do not feel ourselves at liberty to treat it2816 as an open question. The same court in Suydam v. Williamson,24 How. 427">24 How. 427, 433-434, approved this doctrine and quoted from Jackson's case, supra, as follows: The inquiry is very much narrowed by applying the rule which has uniformly governed this court, that where any principle of law establishing a rule of real property has been settled in the State courts, the same rule will be applied by this court that would be applied by the State tribunals. Mr. Justice Story, in United States v. Crosby, 7 Cr. 115, 116, said: The question presented for consideration, is, whether the lex loci contractus or the lex loci rei sitoe is to govern, in the disposal of real estates. The court entertain no doubt on the subject; and are clearly of opinion, that the title to land can be acquired and lost only in the manner prescribed by the law of the place where such land is situate. To like effect the Supreme Court, in Clarke v. Clarke, 178 U.S. 186, 191, quoting from DeVaughn v. Hutchinson,165 U.S. 566">165 U.S. 566, 570, said: It is a principle firmly established that to the law of the State in which the land is situated2817 we must look for the rules which govern its descent, alienation and transfer, and for the effect and construction of wills and other conveyances. To the same effect see the recent decision in United States v. Title Insurance & Trust Co.,265 U.S. 472">265 U.S. 472, 486. Many decisions of the Supreme Court affirming this principle are to be found. Decisions of Federal courts inferior to the Supreme Court are to the same effect. The District Court for the Northern District of California, in deciding Blum v. Wardell,270 Fed. 309, at p. 313, said: The plaintiffs further contend that this court is not bound by the construction placed upon the laws of California by the highest court of the state. With this contention I am unable to agree. The federal tax is imposed on the transfer of the net estate, and whether there is a transfer upon the death of the husband depends upon the statutes and rule of decision in the state where the parties reside and the property is situate. (Italics ours.) The Circuit Court of Appeals, Ninth Circuit, affirming the decision of the 2818 District Court (276 Fed. 226) went further and held that if the law of the State determined that, for purposes of the State inheritance tax there was no transfer, that determination is binding on the Government for purposes of Federal estate tax. In that case the Supreme Court denied the Government's petition for a writ of certiorari. To the same effect see First National Bank v. Obion County, 3 Fed.(2d) 623, 626-627; Bellamy v. Pitts, 4 Fed.(2d) 523, 525 (C.C.A., Fifth Circuit). In view of these decisions, we conclude that our consideration of the issue in the instant case must be in the 702 light of the law and decisions of the State of Missouri in respect of estates by the entirety. We turn, then, to the decisions of the courts of Missouri, which may be regarded as stating not merely a rule of law but also a rule of property in that State, to determine what those rules are with respect to estates by the entirety. In Gibson v. Zimmerman,12 Mo. 385">12 Mo. 385, it is stated that husband and wife are the only persons who can be tenants by the entirety; that this tenancy must be created or take effect during2819 coverture, and owes its qualities to the unity of the persons of husband and wife. The court states that it is well settled, that if an estate be given to a man and his wife, they take, neither as joint tenants, nor as tenants in common, for, being considered as one person in law, they can not take by moieties, but both are seized of the entirety, the consequence of which is that neither of them can dispose of any part without the assent of the other, but the whole goes to the survivor. In Garner v. Jones,52 Mo. 68">52 Mo. 68, the court held that in the case of an estate by the entireties there was no survivorship as in joint tenancies, but a continuance of the estate in the survivor as it originally stood. The only change by death was in the person, not in the estate. Before death both spouses constituted one person holding the entire estate, and after the death of either, the survivor remained as the only holder of the entire estate. This case was quoted with approval in Stifel's Union Brewing Co. v. Saxy,273 Mo. 159">273 Mo. 159; 2820 201 S.W. 67">201 S.W. 67, 68. In Frost v. Frost, supra, the Supreme Court of Missouri said: Washburn, speaking of estates in entirety, says: "But, if the estate is conveyed to them originally as husband and wife, they are neither tenants in common nor properly joint tenants, though having the right of survivorship, but are what are called 'tenants by entirety.' While such estates have, like a joint tenancy, the quality of survivorship, they differ from that in this essential respect, that neither can convey his or her interest so as to affect the right of survivorship in the other. They are not seized, in the eye of the law, of moieties, but of entireties." 1 Washburn, R.P. (6th Ed.) p. 562. The common-law doctrine of estates in entirety is the law of this state. Hall v. Stephens,65 Mo. 670">65 Mo. 670, 27 Am. Rep. 302">27 Am.Rep. 302; Bank v. Fry,168 Mo. 492">168 Mo. 492, 68 S.W. 348">68 S.W. 348. The text-writer last above quoted, on the same subject, adds that on the death of either the survivor does not acquire a new title, but holds only the same title which he or she took in the beginning, freed of the contingency. 2821 The decisions of the courts of Missouri are replete with utterances in line with those just given, but the law of that State is exhaustively treated and seems to be well summarized in the recent cases of Stifel's Union Brewing Co. v. Saxy, supra (decided in 1918), and in Ashbaugh v. Ashbaugh, supra (decided in 1918). In the former case the court said: Warvelle on Real Property, § 111, says: "It differs from the estate of joint tenancy in that joint tenants take by moieties and at the same time are each seized of an undivided part of the 703 whole. In the estate by entirety neither tenant is seized of a part, or moiety, but both of them have the entire estate, and as this involves in itself a physical impossibility in the case of ordinary individuals it necessarily follows that effect can only be given to the grant by regarding both tenants as constituting but one person. But this, in fact, is just what the law does, and as this unity of person is never recognized save in the case of husband and wife, the estate by entirety is confined exclusively to persons within the marriage relation." * * * "Both would therefore be seized2822 of the entire estate; neither could dispose of any part of same without the assent of the other, and upon the death of either the whole estate would remain in the survivor. In this latter respect while the right of survivorship gives to the estate an apparent resemblance to joint tenancy, it yet differs materially from joint tenancy, for the survivor succeeds to the whole not by the right of survivorship simply, as is the case with joint tenants, but by virtue of the grant which vested the entire estate in each grantee, or, in contemplation of law, in one person with a dual body and consciousness." Stewart says (section 306): "On the death of either, the other has the whole estate, continuing alone his or her former holding, and not taking by survivorship in the sense that a surviving joint tenant does." (Italics ours.) The Court then, after quoting with approval from Garner v. Jones, supra, continues: In Thornton v. Thornton, 3 Rand. (Va.) 179, it was said: "But husband and wife have the whole from the moment of the conveyance to them; and the death of either cannot give the survivor more." 2823 In Ashbaugh v. Ashbaugh, supra, the court said: An estate by the entireties is created by a conveyance to the husband and wife by a deed in the usual form. It is one estate vested in two individuals who are by a fiction of law treated as one person, each being vested with entire estate. Neither can dispose of it or any part of it without the concurrence of the other, and in case of the death of either the other retains the estate. It differs from a joint tenancy where the survivor succeeds to the whole estate by right of the survivorship; in an estate by entireties the whole estate continues in the survivor. The estate remains the same as it was in the first place, except that there is only one tenant of the whole estate whereas before the death there were two. (Italics ours.) That the rule obtaining in the State of Missouri is the general and accepted rule of the common law is evidenced by the opinion of Mr. Chief Justice Fuller, in Hunt v. Blackburn,128 U.S. 464">128 U.S. 464, 469, wherein he said: Undoubtedly, at common law, husband and wife did not take under a conveyance of land to them jointly, as tenants in common or as joint tenants, 2824 but each became seized of the entirety, per tout, et non per my; the consequence of which was that neither could dispose of any part without the assent of the other, but the whole remained to the survivor under the original grant. The fact that the husband pays with his own funds for the land taken by him and his wife as tenants by the entirety, does not make 704 any difference. They become thereby owners by the entirety. Elliott v. Roll, supra;Bender v. Bender,281 Mo. 473">281 Mo. 473; 220 S.W. 929">220 S.W. 929. The Commissioner's position is simply stated. It is, in effect, that the statute requires that to the extent of his interest therein held as tenants by the entirety by the decedent and any other person, the value of such interest shall be included in the value of the gross estate, and that in view of this requirement the value of the property in question here must be so included. Let us examine this matter closely. The provisions of law under which this controversy arises are sections 401 and 402 of the Revenue Act of 1921, which, so far as material here, are as follows: SEC. 401. That, in lieu of the tax imposed by2825 Title IV of the Revenue Act of 1918, a tax equal to the sum of the following percentages of the value of the net estate (determined as provided in section 403) is hereby imposed upon the transfer of the net estate of every decedent dying after the passage of this Act. * * SEC. 402. That the value of the gross estate of the decedent shall be determined by including the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated. * * * (d) To the extent of the interest therein held jointly or as tenants in the entirety by the decedent or any other person. * * * It will be noted that the imposition of the tax is upon the "transfer" of the net estate of the decedent. This is conformable to the language of the Supreme Court in Knowlton v. Moore,178 U.S. 41">178 U.S. 41, 56, wherein, after an exhaustive review of the subject of death duties, Mr. Justice White said: * * * Although different modes of assessing such duties prevail, and although they have different accidental names, such as probate duties, stamp duties, taxes on the transaction, or the act of passing of an estate or a succession, legacy taxes, estate taxes, 2826 or privilege taxes, nevertheless tax laws of this nature in all countries rest in their assent upon the principle that death is the generating source from which the particular taxing power takes its being and that it is the power to transmit, or the transmission from the dead to the living, on which such taxes are more immediately rested. If, as the statute provides and the Supreme Court holds, the tax is imposed on a "transfer" from the dead to the living, there remains for determination the sole question of what was transferred by the decedent, H. L. Root, to his wife. The rule of the common law as to estates by the entirety is clear, and the application of the rule in the State of Missouri is no less so, that there is no transfer of interest or estate to the survivor on the death of either spouse. This is necessarily so because each took the whole estate by the original 705 grant by reason of the unity of person existing under the marriage relation. The death of one spouse added nothing to the interest or estate of the survivor. The conclusion is, therefore, irresistible that there was not a transfer of any estate from H. L. Root to Susie M. Root. The effect of the2827 Commissioner's proposed action would be to tax the executrix on an alleged transfer to her of property which, as we have seen from the rule of property established in Missouri, has not and can not be transferred to the executrix by, or because of, the death of the decedent, and which property, as we have seen, belonged to Susie May Root in her own right, both before and after the death of her husband. In other words, the effect of the Commissioner's proposed action would be to make the estate of the decedent pay an estate tax for the transfer of property to Susie M. Root which was always hers and which was not transferred to her by her husband at any time. It is argued that what this statute taxes is not necessarily the interest or estate to which Susie M. Root succeeded on the death of her husband, or the interest or estate transferred to her thereby, but that it is the interest of the decedent which ceased by reason of his death. This point has been raised in other similar cases. The Circuit Court of Appeals, speaking to this point in 2828 Lynch v. Congdon, 1 Fed.(2d) 133, 135, said: * * * It is the theory of the plaintiff in error that the tax is not upon the transfer of property included in the gross estate, but upon the cessation of decedent's interest in these deposits; that it is not a question of transfer from a joint depositor to the surviving joint depositor; that there is in fact no such transfer, each depositor being an owner of the entire interest in the entire property during their joint lives, and therefore there is no passing of property from decedent to the survivor, but merely a cessation of decedent's interest in the property; that such property is the same as any other property, and that Chester A. Congdon had the entire interest in the same, and that it ceased by reason of his death. However interesting and debatable as a matter of first impression this theory may be, we think consideration of it foreclosed by the decision of the Supreme Court of the United States in Shwab v. Doyle,258 U.S. 529">258 U.S. 529, 42 Sup.Ct. 391, 66 L. Ed. 747">66 L.Ed. 747, 26 A.L.R. 1454">26 A.L.R. 1454 and companion cases. We do not find that it has been held that an estate tax was or could be a tax on an interest2829 which was annihilated at death. The decedent could not transmit, transfer or devise to someone else at his death such interest as he had in the real estate here in question. At his death his interest was reduced to nothing; it was as if it had never existed. It was annihilated - wiped out. In our opinion, cases like Y.M.C.A. v. Davis,264 U.S. 47">264 U.S. 47, and Edwards v. Slocum,264 U.S. 61">264 U.S. 61, are inapplicable, for there it was held that, where there has been a transfer to the executor, the residuary legatee may have to pay a tax more logically assessed against primary legatees. 706 In a recent decision of the Court of Claims in Blount v. United States,59 Ct. Cl. 328">59 Ct.Cl. 328, the court considered the same point and, at p. 346, said: In a late case it is said that what this law taxes is not the interest to which legatees or devisees succeeded on death, but the interest of the decedent which ceased by reason of his death. See Y.M.C.A. v. Davis,264 U.S. 47">264 U.S. 47. But this does not mean that the tax is upon an estate which ceases by reason of the death. 2830 It would hardly be contended that this statute imposes a tax on an estate for life held by one at the time of his death on the theory that the tax is upon an interest which ceases by reason of the death. It was said by Mr. Justice White, in Knowlton v. Moore,178 U.S. 41">178 U.S. 41, 57: "Confusion of thought may arise unless it be always remembered that, fundamentally considered, it is the power to transmit or the transmission or receipt of property by death which is the subject levied upon by all death duties." The tax here is upon the transfer of an estate which passes from the decedent, and is not upon an estate which ceases with his death. In the Blount case the court was speaking of an estate by the entirety. In that case the facts were in all material respects on all fours with those in the instant case. The only essential difference between the two cases is the fact that in the Blount case the grant of the estate by the entireties took place before the enactment of the statute under which the tax was sought to be imposed, while in the instant case the grant was made after the enactment of the Revenue Act of 1921 under which this controversy arises. In2831 the Blount case the decision was not, however, made to turn on that point. After discussing the application of the doctrine of estates by the entirety in the District of Columbia, where that case arose, in connection with the Revenue Act of 1916, the terms of which are essentially identical with those of the Revenue Act of 1921 in so far as they relate to the subject matter here, the court concluded: It follows that the tax should not be assessed against the estate of tenants by the entirety because the wife did not take as upon a transfer from the husband at his death, but took under the original grant, his estate ceasing. In the Blount case an appeal was taken to the Supreme Court of the United States, but when the case came on for argument the appeal was dismissed on the motion of the Solicitor General. In our opinion the conclusion of the Court of Claims above quoted was the correct conclusion. We are unable to distinguish it in principle from the instant case. In our opinion the fact that the conveyance of the land in question here was made to H. L. Root and his wife subsequent to the enactment of the Revenue Act of 1921 does not alter the case. 2832 The argument is made that it is within the power of Congress to tax the value of such an estate as is here under consideration. It is argued that while in United States v. Field,255 U.S. 257">255 U.S. 257, the 707 court held that the existence of a power of appointment does not of itself vest any interest in the donee in the appointed estate, which may be included as a part of the deceased donee's gross estate, that nevertheless, the decision of the court was made to turn on the point that, in the statute under consideration in that case, there was not an express purpose to tax property passing under a general power of appointment exercised by a decedent had such a purpose existed. It was further argued that the court there left the question open as to what the rule would be in a case wherein the grant was executed subject to the passage of an act specifically including such property in the gross estate. From this it is argued that, in the instant case, Congress had specifically provided for the inclusion as a part of the gross estate of the interest held by decedent as tenants by the entirety with his wife or any other person, and that it was within the power of2833 Congress so to provide. To our minds, this argument is beside the point. We choose rather to look to what Congresshas provided, that to what it might have provided. We are impressed with the fact that each case before us carries within itself its full burden of difficulties, and we prefer to bear these than to fly to others which may be highly interesting and, under a different statute, worthy of the gravest consideration. We opine that we have fulfilled our duty in a case when we confine our views to the given situation and render a decision on thtat alone. Section 401 of the Revenue Act of 1921 contains the only provision where an estate tax is imposed. That section is the imposing clause of the Federal estate tax. There is no such tax imposed by any other section. Section 402 provides the method of determining the value of the gross estate out of which the net estate (determined as provided in section 403) is evolved. When the value of the net estate is determined, the basis of the tax is found. But before the net estate can be used as a basis for such a tax it must have been transferred by the decedent at his death. The section which imposes the tax, 2834 the only section which does so, provides that "a tax * * * is hereby imposed upon the transfer of the net estate of every decedent * * ." Note that the tax is not upon the net estate. If it were, we would have a different question to decide, but, as we have said, we are now considering only what is provided by the statute. Since Congress has imposed the tax on the transfer of a certain estate, the whole argument and the conclusions therefrom must rest on the premise that there was a transfer. The first step to be taken, then, is to determine if there was a transfer of something. If there was, then the next step is to determine what was transferred and the value thereof. On the other hand, if it be 708 determined that nothing was transferred, then the conclusion is both logical and irresistible that there is nothing on which to impose a tax. If the estate in question was not transferred, it becomes unnecessary and even absurd to attempt to find the value of a nonexistent element. Sections 402 and 403 enumerate the elements entering into the value of the estate and provide the method for measuring that value; If a given estate is transferred, it becomes necessary2835 to determine its value, and at that point it may be important and interesting to consider whether Congress had acted within the scope of its power and authority in providing for its inclusion among the elements going to make up that value. But, as we have said, if it be first determined that at his death the decedent did not transfer a given estate, the question as to whether Congressmight have taxed its value if it had been transferred becomes a moot question and unnecessary of decision. We have shown heretofore that the estate by the entirety held by decedent and his wife, prior to the former's death, was not transferred by his death to anyone. Since it was not so transferred, no tax is imposed by the statute in respect of it, and it becomes unnecessary to discuss its value or the power of Congress to predicate a tax on the inclusion of its value in the decedent's estate. The statute imposes on this Board the duty of redetermining de novo the correct deficiency involved in any proceeding properly brought before it. If, in our opinion, the deficiency proposed to be collected by the Commissioner is not a correct and proper deficiency, we conceive it to be our duty2836 to so determine. It is our opinion that the deficiency proposed here is not a correct or proper deficiency and we so hold. Judgment will be entered for the petitioner after 15 days' notice, under Rule 50.MORRIS, STERNHAGEN, and MILLIKEN concur in the result only. GREEN GREEN: I am able to concur in the result only. To me, it appears that the constitutionality of the Act is involved and should have been decided; LOVE LOVE, dissenting: I do not agree with the argument used in the opinion in this case, nor do I agree with the conclusions of law announced therein. The Revenue Acts of 1918, 1921, 1924, and 1926, prescribe that for estate-tax purposes, the gross estate of a decedent shall be determined by including the value at the time of his death of all property, real or personal, tangible or intangible wherever situated. I 709 have found no theory advanced nor any opinion of a court holding that at the time of his death the decedent owned no property right in real estate held by him as tenant in the entirety. Having conceded that premise, it follows that the statute prescribes that the value of such property must be included in his2837 gross estate. With slight variation in verbiage the acts above referred to specifically include in the gross estate any interest held by the decedent as tenant in the entirety. Section 403 of the 1918 and 1921 Acts and section 303 of the 1924 and 1926 Acts prescribe that the net estate shall be determined by deducting from the value of the gross estate funeral expenses, administration expenses and certain claims against the estate. Hence, it is perfectly apparent that Congress intended that the value so obtained should be included in the net estate. Sections 401 and 301 of the respective acts above referred to prescribe that: A tax equal to the sum of the following percentages of the value of the net estate (determined as provided in section 303 [403]) is hereby imposed upon the transfer of the net estate of every decedent dying after the enactment of this act. It is therefore perfectly apparent that Congress intended to include such property in the net estate and burdened itself with special effort to so express that intent, and intended to levy a tax on it. To hold that the value of such property must be excluded from the gross estate or the net estate, or that it2838 is not subject to estate tax is, to all intents and purposes, a holding that those acts are unconstitutional. I do not believe that they are unconstitutional. The Supreme Court has not so held. I fully understand the position taken, that is, let the value of that property go into gross estate; let it form a part of the net estate. But they contend that it is not transferred and that section 301 levies a tax only on the transfer. It occurs to me that such a view restricts the import and use of the word "transfer" entirely too much. A transfer may be accomplished by operation of law. Did the surviving wife have anything after the death of her husband, which she did not have prior to his death? It is the recognized law of tenancy by entirety that neither spouse may alienate the property without being joined by the other. This lack of power to alienate any part of the property evidences beyond question the lack of a fee simple title in either spouse. The right and power to alienate is a sine qua non of a fee simple title. After the death of the husband, the wife may alienate the property, that is, by the death of the husband the fee simple title to the property passed2839 to her. It is the rule in most, if not all of the States that recognize tenancy by the entirety, that during coverture the husband and the 710 wife each is entitled to one-half the rents and profits coming from such real estate. After the death of one spouse, the survivor is entitled to the whole profits. In the event of dissolution of the marriage relation otherwise than by death, each is entitled to the property in proportion to contribution to purchase price. Elliott v. Roll,226 S.W. 590">226 S.W. 590. Briefly stated, the law governing tenancy by the entirety as applied by the courts of the several States where that tenancy is recognized is that, with respect to every incident of property ownership, save and except the right to alienate, the husband and the wife each, is treated as a separate entity. When they desire to alienate the property, the myth that was created by law, the myth of the idea of the oneness of husband and wife, must act by and through the joint action of both. By the dissolution of the marriage relation the myth dies, and the title theretofore held by that myth passes, in the event of death, to the survivor, in the event of divorce, 2840 to each, in proportion to contribution to purchase price of the property. Does nothing pass at death of one spouse, by operation of law, to the survivor? Is nothing transferred? During coverture, where the husband and wife make separate income-tax returns, who returns the rents and profits from the real estate so held as tenants by the entirety? Will each be required to return the whole? Will either return the whole and the other return no part of same? If so, the one who suffers a loss will avail himself of that right in order to offset such profit against his loss. Will not each return one-half of such income? An affirmative answer to the last question is an irrefutable declaration that each in his own right as a separate entity owns and holds a half interest in that property, with all the incidents of property ownership except the right to alienate the same. The legal myth holds the legal title to the fee. On the death of one spouse, the fee simple title passes, is transferred by operation of law from the myth to the survivor, and with the passing of that fee simple title there passes all the property rights theretofore held by the decedent, which property rights the statute2841 demands shall be included in the gross estate and net estate of the decedent, and shall be subject to the estate tax. I realize the fact that the few decisions, directly in point, that have been handed down by our courts are, seemingly, against my theory and contentions, but the Supreme Court has not yet passed upon this question and, until that court finally determines the controversy, I feel that I am justified in recording my views. I desire also to state that I have purposely refrained from burdening this opinion with a citation of authorities. Every individual proposition of law announced herein is amply supported by 711 court decisions. It is only the final conclusion of law that is not supported by such decisions. I believe the determination of the Commissioner should be approved.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4623937/	RUDY G. LEEWAYE AND HELEN M. LEEWAYE, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentLeewaye v. CommissionerDocket No. 23335-87.United States Tax CourtT.C. Memo 1988-129; 1988 Tax Ct. Memo LEXIS 157; 55 T.C.M. (CCH) 485; T.C.M. (RIA) 88129; March 28, 1988. Alan R. Herson, for the petitioners. Alice M. Harbutte, for the respondent. PETERSONMEMORANDUM OPINION PETERSON, Special Trial Judge: This case was assigned to Special Trial Judge Marvin F. Peterson pursuant to the provisions of section 7443A(b) of the Code. 1 This case is before the Court on Petitioners' Motion for Award of Litigation Costs filed158 on November 5, 1987, pursuant to section 7430 and Rule 231(a)(2). 2 The issues for decision are (1) whether respondent's position in the civil proceeding was not substantially justified and, if so, (2) the amount of litigation costs to be awarded. BACKGROUND Sometimes prior to February 9, 1987, respondent requested that petitioners provide certain information with respect to a proposed Federal income tax deficiency for their 1984 tax year. The largest proposed adjustment concerned petitioners' failure to include in income a $ 150,000 payment from the Brunswick Corporation (the "Brunswick payment"), petitioner Rudy G. Leewaye's former employer. On February 9, 1987, petitioners sent an explanation which was received by the Internal Revenue Service Center for the Western Region (Service Center). However, on April 30, 1987, the Service Center sent petitioners a 30-day letter which indicated that petitioners' February 9, 1987, letter had not been received. On May 29, 1987, respondent issued159 a statutory notice of deficiency for petitioners' 1984 tax year. The deficiency of $ 66,381 was based upon petitioners' failure to include in income the Brunswick payment and an additional $ 249 of interest. Respondent also determined that petitioners were liable for additions to tax under sections 6661(a) and 6653(a). On July 13, 1987, petitioners filed their petition claiming that "Respondent erred in determining a deficiency in income tax for 1984 of $ 66,381" and in determining the additions to tax. However, petitioners did not allege any facts to put in issue the amount of the deficiency that was attributable to their failure to include the $ 249 of interest income. On August 5, 1987, a letter was sent to petitioners from the Service Center indicating that their February 9, 1987, explanation of the Brunswick payment was sufficient and that respondent had changed the proposed adjustments. On August 30, 1987, District Counsel received the administrative file which included the August 5, 1987, letter. However, District Counsel did not review the file before filing an answer. On September 1, 1987, respondent filed his answer and, inter alia, denied "for lack of sufficient160 information" that petitioners' receipt of the Brunswick payment was not taxable. On September 3, 1987, petitioners wrote to District Counsel advising respondent of the Service Center's change in position with respect to the Brunswick payment. Petitioners also indicated that they were willing to settle the case on the basis of the findings contained in the August 5, 1987, report. Further, petitioners requested that respondent stipulate to pay litigation costs. Respondent decided to settle the case after a review "of the file and facts." Respondent contacted petitioners' counsel by telephone and conceded that the Brunswick payment was not taxable. On September 14, 1987, respondent wrote to petitioners and agreed to settle the case on the basis of the August 5, 1987, report. However, respondent did not agree to pay petitioners' litigation costs. On November 5, 1987, the parties filed a Stipulation of Settlement which indicated that the Brunswick payment was not taxable as compensation, that petitioners failed to report additional interest in the amount of $ 249, that an addition to tax pursuant to section 6653(a)(1) was appropriate and that there would be no addition to tax161 under section 6661(a). DISCUSSION Pursuant to section 7430(a) a prevailing party in civil tax proceedings may be awarded a judgment for reasonable litigation costs. Respondent does not disagree that petitioners are the "prevailing party" and are entitled to certain costs, provided we find that respondent's position in the civil proceeding was not substantially justified under section 7430(c)(2)(A)(i). First, petitioners claim that the statutory notice of deficiency should not have been issued because respondent already had all the information that was necessary to resolve the case. Second, petitioners contend that respondent was not justified to ignore the August 5, 1987, letter when drafting his answer. Petitioner's first argument questions the propriety of respondent's behavior prior to the time the petition was filed. However, section 7430(c)(4)(B) states that the relevant position of respondent includes "any administrative action or inaction by the District Counsel of the Internal Revenue Service * * ." Accordingly, our focus on respondent's pre-petition administrative action is limited to that taken by District Counsel. .162 Here, there is no evidence of involvement by District Counsel before the petition was filed; therefore, petitioners must show that respondent acted unreasonably after the petition was filed. We agree with respondent that the standard for determining whether his post-petition activity was unreasonable is to be based upon all facts and circumstances surrounding the civil proceeding. , vacated and remanded on another issue . After a review of all of the facts in this case we conclude that the position taken by respondent in his answer was not substantially justified. The petition in this case alleged facts which, if true, would have resolved this case in petitioners' favor. 3 District Counsel did not examine the administrative file which contained the August 5, 1987, letter wherein the Service Center accepted petitioners' explanation why the Brunswick payment was not taxable income. Instead, District Counsel chose to file an answer which denied the pertinent allegations "for lack of sufficient information." Further, we find no evidence indicating that respondent did anything more163 than examine the administrative file prior to agreeing to concede the case. Our rules require that the parties take their pleadings more seriously than did respondent. Rule 36(b) requires that the answer shall contain a specific admission or denial of each material allegation in the petition, except where respondent is without knowledge or information sufficient to form a belief as to the truth of an allegation. We acknowledge that in many instances District Counsel does not receive the administrative file prior to the time that an answer is due to be filed. We also realize that District Counsel may need time to verify that the allegations in the petition are true. In those circumstances it would not be unreasonable for respondent to enter a general denial of the allegations made in a petition. However, in this case District Counsel admittedly had possession of164 the administrative file several days before the answer was filed and did not examine the pertinent document in the file until after the answer was filed. Further, respondent does not claim that additional information was needed before the case could be settled. Respondent cites , and , and claims that respondent may refuse to concede a case until he is satisfied that petitioners' claims are accurate and the delays as long as two months may be reasonable. We agree with respondent that the delays were reasonable in those instances. However, in this case respondent has failed to show that it was reasonable to draft the answer without reviewing the administrative file that he had in his possession. Respondent's failure to review petitioners' administrative file in a reasonable and timely manner caused petitioners to incur more attorneys' fees than should have been necessary. Therefore, petitioners are entitled to an award for litigation costs which were unnecessarily incurred. Petitioners claim that they are entitled to an award for all of the costs they have incurred in*165 this litigation. However, petitioners' award is limited to those costs that were unnecessarily incurred. . Respondent concedes that petitioners are entitled to attorneys' fees for the 6 hours their attorney spent preparing the Stipulation of Settlement and Motion. In addition to the costs that respondent had conceded, we believe that petitioners are entitled to receive an award of costs for the .4 hours that their attorney spent reviewing the answer and drafting the letter in response to the answer. Accordingly, petitioners will be awarded total costs of $ 480 (6.4 hours x $ 75 per hour). An appropriate order will be entered.Footnotes1. Statutory references are to the Internal Revenue Code of 1986, as amended, unless otherwise indicated. ↩2. All rule references are to the Tax Court Rules of Practice and Procedure. ↩3. Pursuant to Rule 34(b)(4), petitioners had conceded the interest income issue by failing to include in their petition the required assignment of error with respect to this amount. Accordingly, the only issues in dispute were the tax treatment of the Brunswick payment and the corresponding additions to tax. ↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4623939/	Walter H. Potter and Gladys L. Erickson (formerly Gladys L. Potter), Petitioners, v. Commissioner of Internal Revenue, Respondent; Walter H. Potter and Mary D. Potter, Petitioners, v. Commissioner of Internal Revenue, RespondentPotter v. CommissionerDocket Nos. 81795, 86259United States Tax Court44 T.C. 159; 1965 U.S. Tax Ct. LEXIS 89; May 13, 1965, Filed 89 Decisions will be entered under Rule 50. Petitioner was in the business of building and selling houses. Upon the sale of each house he would receive a small downpayment plus a note, secured by a first deed of trust, for the balance of the price. Each year petitioner included the face amount of all the notes in gross receipts and then deducted therefrom an arbitrary number of such notes which were designated "deferred contracts." All the deeds and notes were identical in all relevant respects. The respondent required, and petitioner agreed, that all of the notes should have been included in the computation of taxable income for the years in which they were received at their fair market value of 83 percent of face value. Held: (1) Respondent's adjustments to petitioner's inconsistent treatment of the first trust deed notes did not constitute a change in method of accounting. (2) Respondent did not prove the first trust deed notes were installment obligations. (3) The first trust deed notes were not speculative and thus 17 percent of each payment on each note should be reported as discount income. J. Everett Blum, for the petitioners. Robert L. Gnaizda, for the respondent. Train, 90 Judge. TRAIN159 In these consolidated proceedings, respondent determined deficiencies in income tax of $ 328,563.55 in docket No. 81795 for 1955 and of $ 22,668.56 and $ 28,307.22 in docket No. 86259 for 1956 and 1957, respectively. These deficiencies arise mainly from respondent's inclusion in petitioners' 1955 and 1956 taxable income of the outstanding balance of certain first trust deed notes which petitioners received in years prior to 1955, and in 1955 and 1956, but excluded by them from the computation of taxable income for such 160 years. 1 The parties have stipulated that for the taxable year 1957 an overassessment in favor of the petitioners may occur. The amount of overassessment, if any, will be determined under Rule 50 of this Court. As respects 1955, petitioners maintain that respondent's adjustment constituted a change in petitioners' method of accounting and 91 that to the extent the deficiency is attributable to amounts still due on notes received prior to January 1, 1954, it is barred by the provisions of section 481(a)(2) of the Internal Revenue Code of 1954. 2By amended answer filed in docket No. 81795, respondent admitted error in the inclusion of certain items 3 in petitioners' 1955 taxable income and determined that certain dispositions of trust deed notes between petitioners, incident to a division of community property, 4 were taxable dispositions of installment obligations. 592 The adjusted deficiency for 1955 set forth in the amended answer is $ 260,860.07. 6The parties have agreed that 83 percent of the face value of all first trust deed notes represented the fair market value of those notes and should have been included in income in the years the notes were received. Thus, the final issue for decision is whether the 17-percent discount income received by petitioners is taxable as payments on the first trust deed notes are received, or only after the receipt of the 83-percent capital.Several other issues have been settled by stipulation of the parties, conceded, or abandoned. Consequently, decisions will be entered under Rule 50.FINDINGS OF FACTMost of the facts have been stipulated and the stipulations of facts, together with the exhibits attached thereto, are incorporated herein by this reference.Petitioners Walter H. Potter (hereinafter referred to as petitioner) and Gladys L. Erickson (formerly Gladys L. Potter and hereinafter referred to as Gladys) were husband and wife during the year 1955 and filed their joint income tax return for the calendar year ended 161 December 93 31, 1955, with the district director of internal revenue at Los Angeles, Calif. Petitioner and Mary D. Potter were husband and wife during the years 1956 and 1957 and filed their joint income tax returns for those years with the district director of internal revenue at Los Angeles, Calif. The returns for the years in question were prepared essentially on the cash receipts and disbursements basis. The profit-and-loss schedules (Schedule C) for those years were prepared on a basis similar to a completed-contract basis. However, in the profit-and-loss schedule certain first trust deed notes received in 1955 and 1956 were included in gross receipts in the years received and then deducted therefrom so that they were not included in the computation of taxable income for those years.Petitioner was in the business of building and selling houses in 1955, 1956, and 1957 and for many years prior thereto. His usual method of selling houses was to receive a small cash payment plus a note, secured by a deed of trust on the individual house sold, to cover the balance of the sale price. Generally, the costs of construction of the houses so built were financed by borrowing from financial institutions 94 and giving to the institutions notes secured by first deeds of trust. In these instances petitioner received second deeds of trust. Occasionally, petitioner used his own capital to finance the cost of construction of the houses he built and received notes secured by first deeds of trust.The first trust deed notes received by petitioner were payable monthly for periods of as long as 18 years. The parties have stipulated that all first trust deed notes received by petitioner in 1955, 1956, and 1957 had a fair market value of 83 percent of face value. The parties have also stipulated that the second trust deed notes had "a fair market value on the date received by petitioner of zero -- that is, they had no fair market value." The face value of first trust deed notes received by petitioner in 1955 and 1956 was $ 219,950.04 and $ 186,861.57, respectively. All of these first trust deeds and first trust deed notes were identical in all relevant respects.All of the first trust deed notes received by petitioner in 1955 and 1956 were included in gross receipts at face value. However, approximately 42 percent ($ 93,000) of the face value of the 1955 notes and 15 percent ($ 28,408) of the 95 face value of the 1956 notes were then deducted by petitioner from gross receipts. All costs incurred in completing the houses for which notes secured by first trust deeds were received in 1955 and 1956 were deducted in the year the deeds and notes were received (including the costs allocable to the first trust deed notes not included by petitioner in his computation of taxable income).In examining and auditing petitioner's 1955 income tax return, respondent required, and petitioner agreed, that all first trust deed 162 notes received by petitioner in 1955 and subsequent years should have been included in the computation of taxable income at their fair market value of 83 percent of face value.Petitioner's manner of treatment, for income tax purposes, of the first trust deed notes he received was initiated in approximately 1947. The principal from the notes which was deducted from gross income on petitioner's returns when the notes were received, was included in the computation of taxable income on petitioner's returns for the years in which payments on the notes were received. Principal from first trust deed notes received before 1954 and not included in income before 1954 was in the 96 amount of $ 188,081.31 as of January 1, 1955. The parties have stipulated that, if it is determined that respondent changed petitioner's method of accounting, this amount will never be included in petitioner's taxable income because of the provisions of section 481.The sum of $ 11,662.02, representing return of principal received in 1956 on pre-1954 first trust deed notes, was included in taxable income in 1956. The parties have stipulated that, if it is determined in docket No. 81795 that respondent changed petitioner's method of accounting, this amount should be excluded from income in 1956. The sum of $ 9,852.38 was received in 1956 from second trust deed notes taken in prior years; the parties have stipulated that this sum should be included in 1956 income. The sum of $ 13,093.70 was received in 1957 from second trust deed notes taken in prior years; the parties have stipulated that this sum should be included in 1957 income. (These two sums were reported in income by the petitioners. However, respondent's amended answer excluded one-half of each of these sums from 1956 and 1957 income. Based upon the stipulation of facts filed in docket No. 81795, the parties have agreed 97 that the amended answer is superseded and these sums are to be fully included in 1956 and 1957 income.)In 1956 and 1957 petitioner collected principal in the amounts of $ 925.41 and $ 966.57, respectively, from first trust deed notes received prior to 1954. The parties have stipulated that, if it is determined in docket No. 81795 that respondent changed petitioner's method of accounting, none of these amounts are ever to be included in income. The parties also have stipulated that, if it is determined that respondent did not change petitioner's method of accounting, the entire amounts will be included in income in 1956 and 1957 except that, if it is determined in docket No. 81795 that the first trust deed notes disposed of in 1955 between petitioner and Gladys were installment obligations, only one-half of these amounts will be included in income.On December 1, 1955, petitioner and Gladys divided their community property. This division occurred as a result of a property settlement included in a decree of divorce dated April 16, 1956. The 163 division of community property included a disposition by Gladys of first trust deed notes in the face amount of $ 20,118.41 to petitioner and 98 a disposition by petitioner of first trust deed notes in the face amount of $ 141,643.37 to Gladys. Being community property, petitioner and Gladys each had a one-half interest in all the notes. The fair market value of these notes at the time of their disposition was 83 percent of their face amount. Gladys also disposed of second trust deed notes in the face amount of $ 54,292.84. 7 The fair market value of these notes at the time of their disposition was "zero."The first trust deed notes disposed of between Gladys and petitioner were acquired over a number of years. The face amount of these notes as of December 1, 1955, represented the amounts remaining due on notes which had never been included in income. At the time these notes were originally received they had a fair market value but they were erroneously not included in income. Instead, the entire principal amount of these notes was included in income as the amounts were received. Petitioner contends these notes were reported as deferred contracts not on the installment method. Respondent contends these notes constituted 99 installment obligations within the meaning of section 453. The parties have stipulated that, if these notes constituted installment obligations for purposes of section 453, then 83 percent of the face value of the first trust deed notes disposed of between Gladys and petitioner is taxable and the disposition of the second trust deed notes is not taxable.The parties have stipulated that petitioner's experience with first trust deed notes in 1955 and 1956, as well as with those received in the years 1947 through 1954, has been as follows:(1) From 1947 through 1956, petitioner received at least 50 first trust deed notes.(2) No foreclosures have occurred with respect to any of these first trust deed notes.(3) On occasion, first trust deed notes, although not seasoned, have been valued and accepted at face amount by independent parties.(4) The prevailing marketplace rate of interest on first trust deed notes similar to those received in 1955 and 1956 was at least 6 percent. The rate of interest on the first trust deed notes received in 1955 and 1956 was 5 percent.(5) The value of the property which secured the first trust deed notes received in 1955 and 1956, at the time these notes were 100 received, was in excess of the face amount of these notes. The value of the property securing these notes had always been in excess of the unpaid balances on these notes. As the unpaid balances decreased, the value of the property in relation to the unpaid balances has increased.164 OPINIONIssue 1Petitioner maintains that respondent's determination that the fair market value of all first trust deed notes should have been included in the computation of taxable income for the year in which they were received constituted a change in petitioner's method of accounting under section 446. 8101 Petitioner first contends that his original manner of reporting the receipts from first trust deed notes, i.e., including all such notes in gross receipts and then deducting the face amount of an arbitrary number of them which were termed "deferred contracts," was a method of accounting under section 1.446-1(a) (1), Income Tax Regs. He contends that the method of reporting receipts from the notes required by respondent, and agreed to by petitioner, was a method of accounting under section 1.446-1(a)(1), Income Tax Regs., different than petitioner's original method. Petitioner then cites sections 1.446-1(e)(2) (i) and (ii) and 1.481-1(a)(11), Income Tax Regs., for the proposition that the change initiated and required by respondent was a change in petitioner's method of accounting because it required a change in the treatment of a material item. Finally, petitioner contends that although 102 each individual note may be a subitem of the overall item of first trust deed notes, the subitems themselves are material items within the meaning of sections 1.446-1(a)(1) and 1.446-1(e)(2) (i) and (ii), Income Tax Regs.Respondent contends that petitioner was not required to change his treatment of a material item but merely to correct an inconsistency in such treatment. Respondent contends petitioner was treating identical notes differently by reporting some at face value and some at "zero" value and that respondent simply was requiring identical treatment for all of these identical notes. Finally, respondent contends that nothing in reported case law or legislative history justifies petitioner's contention that a correction of the treatment of some 165 identical subitems of one material item results in a change of accounting method.Petitioner cites numerous cases for the proposition that a change in the treatment of a material item results in a change of accounting method. He asserts that a number of them stand for the proposition that a change in the treatment of a subitem of a material item constitutes a change in the treatment of a material item. Respondent contends none of 103 the cited cases support petitioner because they all involve the treatment of an entire item while the instant case involves the inconsistent treatment of identical subitems of an entire item. 9 We have carefully examined all of the cited cases but, in holding for the respondent on this issue, we find it unnecessary to consider what constitutes a material item. Petitioner's practices fail the much more basic tests of consistency, regularity, and proper reflection of income.In promulgating section 446 of the 104 Revenue Act of 1954 (H.R. 8300, 83d Cong., 2d Sess. (1954)), Congress saw fit to expand substantially the ambit of what constitutes a method of accounting for purposes of the Internal Revenue Code.Present law provides that the net income of a taxpayer shall be computed in accordance with the method of accounting regularly employed by the taxpayer, if such method clearly reflects the income, and the regulations state that approved standard methods of accounting will ordinarily be regarded as clearly reflecting taxable income. Nevertheless, as a result of court decisions and rulings, there have developed many divergencies between the computation of income for tax purposes and income for business purposes as computed under generally accepted accounting principles. The areas of difference are confined almost entirely to questions of when certain types of revenue and expenses should be taken into account in arriving at net income.The changes embodied in the House bill and in your committee's bill are designed to bring the income-tax provisions of the law into harmony with generally accepted accounting principles, and to assure that all items of income and deductions are to be taken into 105 account once, but only once in the computation of taxable income. [S. Rept. No. 1622, 83d Cong., 2d Sess., p. 62 (1954).]* * * In subsection (c) the permissible methods of accounting subject to the provisions of subsections (a) and (b) are enumerated. All methods of accounting recognized under existing law are continued. In addition one or more hybrid methods may be authorized in the regulations issued under paragraph (4). One such method, in the case of a small retail store, will be an accrual of items affecting gross income such as purchases, sales of goods, accounts payable, and accounts receivable. In such a case items of deduction such as rent, interest, 166 clerks' salaries, insurance and similar items may be accounted for on a cash basis. Any such hybrid method is, of course, subject to the requirements of subsection (b) that there be a clear reflection of income under the method. [Emphasis supplied. S. Rept. No. 1622, 83d Cong., 2d Sess., p. 300 (1954).]Hybrid methods of accounting were not permissible under the 1939 Code or prior revenue laws. See United States v. Anderson, 269 U.S. 422">269 U.S. 422 (1926), and numerous subsequent cases which have required a taxpayer who reported income 106 on an accrual basis to deduct from gross income all liabilities which accrued in the same taxable year. Also see Mass. Mutual Life Ins. Co. v. United States, 288 U.S. 269">288 U.S. 269 (1933), where the Supreme Court said at pages 273-274:The regulations of the Treasury under all the Revenue Acts since 1916 have required taxpayers to report on the cash or accrual basis, depending on which method was pursued in their accounting. Since the adoption of the Revenue Act of 1921 the requirement has been statutory. It is settled beyond cavil that taxpayers other than insurance companies may not accrue receipts and treat expenditures on a cash basis, or vice versa. Nor may they accrue a portion of income and deal with the remainder on a cash basis, nor take deductions partly on one and partly on the other basis.This concept was also very succinctly expressed in Hygienic Products Co. v. Commissioner, 111 F. 2d 330 (C.A. 6, 1940), affirming 37 B.T.A. 202">37 B.T.A. 202 (1938), where the Court of Appeals said at page 331:Petitioner characterizes its system of accounting as "hybrid." No such system, however, is recognized by the Act; unless the system conforms to the one method, it does not reflect income in accordance 107 with the Act, and the Commissioner is empowered to make such corrections as are necessary to make the return accurately reflect income. * * Congress effected its intent as expressed in S. Rept. No. 1622, supra, by enacting section 446(c) which reads, in part, as follows:SEC. 446. GENERAL RULE FOR METHODS OF ACCOUNTING.(c) Permissible Methods. -- Subject to the provisions of subsections (a) and (b), a taxpayer may compute taxable income under any of the following methods of accounting -- (1) the cash receipts and disbursements method;(2) an accrual method;(3) any other method permitted by this chapter; or(4) any combination of the foregoing methods permitted under regulations prescribed by the Secretary or his delegate.The Commissioner implemented section 446(c)(4) in his regulations which read, in part, as follows:Sec. 1.446-1 General rule for methods of accounting.(c) Permissible methods -- (1) In general. Subject to the provisions of paragraphs (a) and (b) of this section, a taxpayer may compute his taxable income under any of the following methods of accounting: * * (iv) Combinations of the foregoing methods. (a) In accordance with the following rules, any combination of 108 the foregoing methods of accounting will be 167 permitted in connection with a trade or business if such combination clearly reflects income and is consistently used. Where a combination of methods of accounting includes any special methods, such as those referred to in subdivision (iii) of this subparagraph, the taxpayer must comply with the requirements relating to such special methods. A taxpayer using an accrual method of accounting with respect to purchases and sales may use the cash method in computing all other items of income and expense. However, a taxpayer who uses the cash method of accounting in computing gross income from his trade or business shall use the cash method in computing expenses of such trade or business. Similarly, a taxpayer who uses an accrual method of accounting in computing business expenses shall use an accrual method in computing items affecting gross income from his trade or business.(b) A taxpayer using one method of accounting in computing items of income and deductions of his trade or business may compute other items of income and deductions not connected with his trade or business under a different method of accounting.The Commissioner's regulations 109 under section 446 are replete with expressions of the requirement that methods of accounting be regular, consistent, and clearly reflect income. 10110 111 Petitioner has stipulated that his failure to include the fair market value of all first trust deed notes in the computation of taxable income 168 for the years in which they were received was erroneous. He has made no effort to present evidence as to how and why he determined that an arbitrary number of identical first trust deed notes received in each year were "deferred contracts" to be deducted from gross receipts, while the rest were to be included in the computation of taxable income.The parties have stipulated a typical example of petitioner's practices in reporting his income from the sale of houses as follows:Typical Example of Potter System of Reporting Income From Sale ofHouses: Valuation of Identical Notes at 100 and 0 Percent of Face Amount In 1955 Potter --(1) Built 10 similar houses.(2) Sold houses for $ 10,000 each$ 100,000(a) Received $ 1,500 per house in cash$ 15,000 (b) Received 10 identical First Trust DeedNotes, in face amount of $ 8,500 each 85,000 100,000 * * (3) Included in 1955 income all cash receivedfrom sale of houses 15,000 (4) Reported the face amount of all 10 FirstT.D. Notes 85,000 (5) Deducted the face amount of 2 of the 10First T.D. Notes (net effect is inclusion of only 8 of 10 identical notes in (17,000)1 income) $ 83,000(6) Total included in income83,000(7) Deducted in 1955 the 1955 costs relating to all 10 houses($ 8,000 each) 80,000(8) Profit reported3,000(9) Profit if included in income face amount of all 10 First T.D.Notes 20,000112 As we understand the evidence presented to us, an arbitrary change of the number of first trust deed notes deducted in item (5) of the example, supra, would typify petitioner's practice from year to year. Petitioner claims this to have been his "regular" practice throughout the years. If this is so, then we find that petitioner has been regularly inconsistent throughout the years. As was said in Advertisers Exchange, Inc., 25 T.C. 1086">25 T.C. 1086 (1956), affirmed per curiam 240 F. 2d 958 (C.A. 2, 1957), at page 1092:169 Consistency is the key and is required regardless of the method or system of accounting used. Beacon Publishing Co., 21 T.C. 610">21 T.C. 610, revd. 218 F.2d 697">218 F. 2d 697; Curtis R. Andrews, 23 T.C. 1026">23 T.C. 1026; E. W. Schuessler, 24 T.C. 247">24 T.C. 247; United States v. Mitchell, 271 U.S. 9">271 U.S. 9; Cecil v. Commissioner, 100 F. 2d 896. 11 Petitioner has stipulated his income 113 tax returns were prepared essentially on the cash receipts and disbursements basis and that the profit-and-loss schedule (Schedule C) was filed on a basis similar to a completed-contract method. The ordinary meaning of the cash receipts and disbursements method is set forth in section 1.446-1(c)(1)(i), Income Tax Regs.:Sec 1.446-1 General rule for methods of accounting.(c) Permissible methods -- (1) In general. * * (i) Cash receipts and disbursements method. Generally, under the cash receipts and disbursements method in the computation of taxable income, all items which constitute gross income (whether in the form of cash, property, or services) are to be included for the taxable year in which actually or constructively received. Expenditures are to be deducted for the taxable year in which actually made. * * [Emphasis supplied.]If we assume that petitioner filed his income tax returns on this method, then certainly his deduction from gross receipts of the face amount of an arbitrary number of the first trust deed notes received each year was inconsistent with the method and as a result prevented proper reflection of his income from the sale of houses. As we have already set 114 forth, petitioner has stipulated all of such notes had a fair market value and that his practice was erroneous.Petitioner contends he reported his receipts from the building of houses on a "deferred contract" basis while respondent contends petitioner really reported the receipts on an installment basis. Since we have reserved this question to be considered as issue 2 of this opinion, we merely note at this point that petitioner's practice was consistent with neither method. The rules for the treatment of a sale of real property on the installment method are set forth in section 1.453-5(a), Income Tax Regs.:Sec. 1.453-5 Sale of real property treated on installment method.(a) In general. In any transaction described in paragraph (b) (1) of § 1.453-4, that is, sales of real property in which there are no payments during the year of sale or the payments in that year do not exceed 30 percent of the selling price, the vendor may return as income from each such transaction in any taxable year that proportion of the installment payments actually received in that year which the gross profit (as described in paragraph (b) of § 1.453-1) realized or to be realized when the property is paid 115 for bears to the total contract price. In any case, the sale of each lot or parcel of a subdivided tract must be treated as a separate transaction and gain or loss computed accordingly. (See paragraph (a) of § 1.61-6.)170 An ordinary reading of these rules reveals that a taxpayer who reports income from the sale of real property on the installment method, each year reports as gain that proportion of the installment payments received in the year which the gross profit realized, or to be realized, on the sale bears to the total contract price. Thus, if a house cost $ 50,000 to build and was sold for $ 100,000, the gross profit realized (or to be realized) would be $ 50,000; assuming the sales contract provided for no downpayment in the year of sale and $ 10,000 payments in each of the succeeding 10 years, and the seller elected to return the receipts of the sale on the installment method, the seller would report as income $ 5,000 ($ 50,000/$ 100,000 X $ 10,000) in each year as payment was received; the unreported other half of the payments would be a return of basis to the seller. Petitioner's practice of excluding an arbitrary amount of notes from income each year while deducting the 116 costs attributable to such notes in the same year was completely inconsonant with the installment method. Also, petitioner has completely disregarded the requirement set forth in the last sentence of section 1.453-5(a), Income Tax Regs., supra, that each sale be treated separately.The rules for a deferred-payment sale of real property not on the installment method are set forth in section 1.453-6(a) (1) and (2), Income Tax Regs.:Sec. 1.453-6 Deferred-payment sale of real property not on installment method.(a) Value of obligations. (1) In transactions included in paragraph (b) (2) of § 1.453-4, that is, sales of real property involving deferred payments in which the payments received during the year of sale exceed 30 percent of the selling price, the obligations of the purchaser received by the vendor are to be considered as an amount realized to the extent of their fair market value in ascertaining the profit or loss from the transaction. Such obligations, however, are not considered in determining whether the payments during the year of sale exceed 30 percent of the selling price. (2) If the obligations received by the vendor have no fair market value, the payments in cash or other 117 property having a fair market value shall be applied against and reduce the basis of the property sold and, if in excess of such basis, shall be taxable to the extent of the excess. Gain or loss is realized when the obligations are disposed of or satisfied, the amount thereof being the difference between the reduced basis as provided in the preceding sentence and the amount realized therefor. Only in rare and extraordinary cases does property have no fair market value.Though petitioner claims this was the method he employed in reporting receipts from the sale of houses, petitioner's practice only vaguely resembled the deferred-payment treatment which requires the inclusion in income of the fair market value of all notes received. We agree with the conclusion of respondent's expert accounting witness that, whatever the method of accounting used by petitioners, there were 171 inconsistencies in its application and that the correction of those inconsistencies does not constitute a change of accounting method. We acknowledge that this testimony is not dispositive of the legal issue of whether or not respondent changed petitioner's method of accounting. However, general accounting principles 118 cannot be ignored in determining whether petitioner had a "method" of accounting, what it was, and whether or not it was consistently applied. We find that petitioner used the cash receipts and disbursements method of accounting which he inconsistently applied to his receipts from the sale of houses; that the inconsistent application of such method resulted in an improper reflection of income; and that respondent did not change petitioner's method of accounting for the purposes of section 446 but merely corrected certain errors in his method which were resulting in the exclusion from gross receipts of certain amounts which should have been included therein. Consequently, the provisions of section 48112119 do not apply to respondent's correction of those errors in petitioner's accounting method.Issue 2On December 1, 1955, petitioner and Gladys divided their community property pursuant to a property settlement agreement which was included in a subsequent decree of divorce dated April 16, 1956. Petitioner and Gladys disposed of certain first trust deed notes to each other pursuant to the division of community property. By amended answer filed in docket No. 81795, respondent determined the notes disposed of between petitioner and Gladys were installment obligations within the meaning of section 453(d). Since this issue is raised affirmatively by respondent, he has the burden of proof. Rule 32, Tax Court Rules of Practice; Kimbell-Diamond Milling Co., 10 T.C. 7">10 T.C. 7, 13 (1948); Hollywood Baseball Association, 42 T.C. 234">42 T.C. 234, 264 (1964), on appeal (C.A. 9, Aug. 120 31, 1964).Respondent contends that although petitioner has labeled the first trust deed notes deducted from gross receipts as "deferred contracts," the notes were, and were treated as, installment obligations within the 172 meaning of section 44 of the Internal Revenue Code of 193913121 and section 453. 14122 123 Respondent further contends the disposition of these notes between petitioner and Gladys was a taxable disposition and that thus the provisions of section 453(d) apply. 15173 Petitioner contends the 124 notes involved were not installment obligations within the meaning of either section 44 of the 1939 Code or section 453; that respondent has the burden of proof as to this issue and has not carried it; and that, if respondent has carried his burden of proof, he has determined the deficiency for the wrong year, i.e., 1955 instead of 1956. In holding for the petitioner on this issue, we find respondent has not carried his burden of proving that the first trust deed notes disposed of between petitioner and Gladys were installment obligations.As we have set forth above, petitioner's treatment of receipts from the sale of houses was consonant with neither the installment method as set forth in section 1.453-5, Income Tax Regs., nor the deferred-payment treatment not on the installment method set forth in section 1.453-6, Income Tax Regs.16 The parties have stipulated that petitioner's treatment of the receipts from the sale of houses was erroneous and petitioner should have included 125 83 percent of the face value of each first trust deed note in the computation of taxable income for the years in which such notes were received. Respondent has adjusted petitioner's taxable income for the years in question in light of this determination. Thus, respondent has adjusted petitioner's practices to fit squarely within the guidelines set forth in section 1.446-1(c)(1)(i), Income Tax Regs., supra, relating to the cash receipts and disbursements method of accounting, which require that all items of gross income be included in the year of actual or constructive receipt.There is no question that the fair market value of all the first trust deed notes should have been included in gross receipts for the purpose of computing petitioner's taxable income on the cash basis method. Section 61 and the regulations thereunder provide, in part: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:* * * * (2) Gross income derived from business; [Emphasis supplied.]SEC. 1.61-3 Gross income derived from business.(a) In general. 126 In a manufacturing, merchandising, or mining business, "gross income" means the total sales, less the cost of goods sold, plus any income from investments and from incidental or outside operations or sources. * * The cost of goods sold should be determined in accordance with the method of accounting consistently used by the taxpayer. [Emphasis supplied.]174 Section 1001 and the regulations thereunder provide, in part:SEC. 1001. DETERMINATION OF AMOUNT OF AND RECOGNITION OF GAIN OR LOSS.(a) Computation of Gain or Loss. -- The gain from the sale or other disposition of property shall be the excess of the amount realized therefrom over the adjusted basis provided in section 1011 for determining gain, and the loss shall be the excess of the adjusted basis provided in such section for determining loss over the amount realized.(b) Amount Realized. -- The amount realized from the sale or other disposition of property shall be the sum of any money received plus the fair market value of the property (other than money) received. * * [Emphasis supplied.] Sec. 1.1001-1 Computation of gain or loss.(a) General rule. Except as otherwise provided in subtitle A of the Code, the gain or loss 127 realized from the conversion of property into cash, or from the exchange of property for other property differing materially either in kind or in extent, is treated as income or as loss sustained. The amount realized from a sale or other disposition of property is the sum of any money received plus the fair market value of any property (other than money) received. The fair market value of property is a question of fact, but only in rare and extraordinary cases will property be considered to have no fair market value. * * [Emphasis supplied.]Of course, a cash basis taxpayer may report deferred payments on the installment method. Under section 44 of the Internal Revenue Code of 193917 taxpayers had the option of returning sales income on the installment basis under rules set forth in the Commissioner's regulations under such section. Section 45318 gives taxpayers the same option with the further requirement, set forth in section 1.453-1(a), Income Tax Regs., that a taxpayer must make an affirmative election. Petitioner has neither reported his receipts from the sale of houses nor elected to report such receipts on the installment method.Petitioner, 128 as we have shown above, did not employ the installment method and respondent's adjustments have completely obliterated whatever resemblance petitioner's practices bore to such method. In holding that respondent has not carried his burden of proof as to this issue, we find it unnecessary to determine whether the dispositions of notes between petitioner and Gladys were taxable or whether respondent determined the deficiency for the proper taxable year.Issue 3The third issue is whether the discount income received by petitioner should be returned as a proportion of each payment received or only after there has been a complete return of principal. This question has arisen because of the parties' stipulation that the first trust deed notes had a fair market value of 83 percent of face value.175 Petitioner contends he is entitled to a complete return of his 83-percent principal before he must report the 17-percent discount income. Respondent contends the first trust deed notes are not speculative and, therefore, petitioner must treat 17 percent of each payment as income.The parties agree that if the first trust deed notes are held not to be speculative in nature, 17 percent of each payment 129 on the notes will be discount income. Shafpa Realty Corporation, 8 B.T.A. 283">8 B.T.A. 283 (1927). Petitioner, in contending that the notes in question were speculative, cites Morton Liftin, 36 T.C. 909 (1961), affd. 317 F. 2d 234 (C.A. 4, 1963), and Phillips v. Frank, 295 F. 2d 629 (C.A. 9, 1961). Respondent cites the same cases for the proposition that the notes were not speculative.In Morton Liftin, supra, cash basis taxpayers received periodic payments in 1954, 1955, and 1956 on 84 interest-bearing second deed of trust notes which were purchased at discounts of up to 45 percent. The Commissioner determined a proportionate part of each principal payment received on each note, measured by the percentage of discount at which the note was purchased, constituted ordinary income to the taxpayer in the year of payment. Taxpayers claimed they were entitled to a complete return of the amount paid for the contracts before the discount income was to be returned. In holding for the petitioner, the Court said, in part, at page 911:After a consideration of the cited cases and also of the general statutory provisions (see May D. Hatch, supra [14 T.C. 237] at 242-243), we conclude that a rule of law 130 applicable to the instant case may be stated as follows: Where a taxpayer acquires at a discount contractual obligations calling for periodic payments of parts of the face amount of principal due, where the taxpayer's cost of such obligations is definitely ascertainable, and where there is no "doubt whether the [contracts] [will] be completely carried out" (Hatch v. Commissioner, supra [190 F. 2d 254, reversing in part May D. Hatch, supra] at 257), it is proper to allocate such payments, part to be considered as a return of cost and part to be considered as the receipt of discount income; but, conversely, where it is shown that the amount of realizable discount gain is uncertain or that there is "doubt whether the contract [will] be completely carried out," the payments should be considered as a return of cost until the full amount thereof has been recovered, and no allocation should be made as between such cost and discount income.In the instant case the petitioner, who of course has the burden of proof, has shown to our satisfaction that the amount of realizable discount income to be derived from the contractual obligations here in question was uncertain. That the notes were highly 131 speculative is evidenced by the substantial discounts (up to 45 percent) at which they were purchased, and the quality of the security which was junior to a first deed of trust (up to 60 to 80 percent of the selling price of the property). The evidence is that makers of the notes had but small equities in the properties covered by the deeds of trust because of their small cash payments to the sellers. When purchasing notes petitioner gave consideration to the length of time the loan was to run, to the holder's equity in the property, sometimes to his credit standing, and generally to the location and 176 condition of the property covered by the trust deed after what he called "an outside inspection." During the few years in question about 19 of the 84 notes were disposed of, about half of them were disposed of by payment in full while the other half were disposed of by foreclosure, the acceptance by the petitioner of a deed, or the acceptance by the petitioner of less than face for an early payoff. It was petitioner's experience that the latter half of the notes so disposed of resulted in his receiving less than the face value of the notes. [Emphasis supplied.]The Court of Appeals, 132 in affirming, said in part, at pages 234-235:The Tax Court's redetermination was based upon the fully warranted and pivotal factual finding: that, as asserted by the taxpayers, the notes were "highly speculative" and "the amount of realizable discount gain", therefore, remained uncertain until collections on the principal of the notes exceeded their cost to the taxpayers.In Phillips v. Frank, supra, cash basis taxpayers received periodic payments in 1955, 1956, and 1957 on real estate contracts or first trust deeds which they had purchased at a discount. The Commissioner determined that a percentage of each payment, in proportion to the total discount, was discount income. Taxpayer claimed he was entitled to a complete return of the amount paid for the contracts before any discount income was to be returned. The District Court found for the Commissioner. The Court of Appeals in reversing the District Court's decision said in part, at pages 633, 634:The taxpayer recognizes that when periodic payments on each contract equal the purchase price of such contract, payments received by taxpayer in each year subsequent thereto must be treated as ordinary income in the year of receipt. 133 Such is the law. Lee v. Commissioner of Internal Revenue, 7 Cir., 1941, 119 F. 2d 946. The simple question presented on this appeal is: Did the cash basis taxpayer receive during the years under review any payments of which a portion should be allocated to and considered for tax purposes as payment of a portion of the profit which the taxpayer hopes to realize? Taxpayer received for his capital invested the right to receive the unpaid balances due on such contract. What were such rights worth when purchased?There is no evidence in the record that such rights had any market value, fair or unfair, or any other value in excess of taxpayer's costs. There is no evidence in the record that taxpayer at any time could have sold such contracts at a profit. The only source from which he might reasonably expect to realize any part of his profit is from periodic payments subsequent to the return to him of his invested capital. The fact that the likelihood of realizing a profit might increase as the amount of his investment decreases from receipt of periodic payments does not convert any part of such payments into payments on the hoped for or expected profit. Clearly, the payments received 134 by taxpayer during the period under review aggregating less than his costs constitute a return of capital. A return of capital is not income. [Emphasis supplied.]Both of the above decisions were based on the fact that the obligations in question were highly speculative. In Morton Liftin, supra, it was found that the notes were speculative because they were acquired at up to 45-percent discount, were junior securities, payment was uncertain, 177 and of the notes disposed of, one-half were through foreclosure or receipt of an amount less than face. The contracts in Phillips v. Frank, supra, were of a similarly speculative nature because it was found that the contracts were difficult to sell, had no fair market value, and losses through default were experienced. Petitioner cites as support for his argument the language on page 634 of Phillips v. Frank, supra, which reads:The fact that the likelihood of realizing a profit might increase as the amount of his investment decreases from receipt of periodic payments does not convert any part of such payments into payments on the hoped for or expected profit. * * However, petitioner ignores the fact that the immediately preceding language 135 sets forth that the contracts in question had no fair market value and were difficult to sell. Petitioner himself agrees that: (1) All the first trust deed notes he received had a fair market value of 83 percent of face value; (2) no foreclosures ever occurred with respect to any of the 50 notes he received from 1947 through 1956; (3) on occasion the notes, although not seasoned, 19 were valued and accepted at face amount by independent parties (in fact, as we have set forth above, petitioner himself valued those notes which he did not exclude from gross receipts at 100 percent of face value); and (4) the value of the property securing all of the notes was always in excess of the unpaid balances on the notes.Petitioner contends the fact that the interest rate on the first trust deed notes received in 1955 and 1956 was 5 percent, while the prevailing marketplace rate of interest on similar notes in the same years was at least 6 136 percent, lends weight to his argument that the rates were speculative. It is true that the makers of the notes had only small equities in the houses because they paid only small downpayments and the notes were paid out over periods of as long as 18 years. However, we believe that petitioner's excellent experience with the notes and the apparent facility with which he was able to obtain financing from financial institutions (who accepted the identical first trust deed notes as collateral) countervail these factors. To add further weight to our decision that the notes were not speculative, we have petitioner's counsel's statement, made during his introduction of this issue at trial, that --It so happened that a good portion of these trust deed notes have been paid off in full, and, therefore, the question more or less becomes moot as far as the petitioner is concerned.We do not agree that the question is moot although counsel's admission as to the petitioner's excellent experience with the notes does emphasize their nonspeculative nature.178 We cannot find, as did the courts in Morton Liftin, supra, and Phillips v. Frank, supra, that the notes in question were speculative. The discount 137 income from the notes was 17 percent. In Darby Investment Corporation v. Commissioner, 315 F. 2d 551 (C.A. 6, 1963), affirming 37 T.C. 839">37 T.C. 839 (1962), not only did the discount involved amount to approximately 26 percent but other relevant factors indicated that the risk of recovery was more substantial than in this case. The court, in ruling for the Commissioner, very appropriately stated at page 552:The sole issue is whether the petitioner must include as income received with each monthly payment under the contracts, in addition to interest, realized discount income in proportion to the difference between the petitioner's cost and the principal balance due upon the face of such contracts at the date of their purchase. * ** * * Determination of the issue turns on the question of whether the investment in the contracts is of such a speculative nature that the purchaser, the petitioner herein, cannot be reasonably certain of ever recovering his cost. Burnet, Commissioner of Internal Revenue v. Logan, 283 U.S. 404">283 U.S. 404 * In our view, petitioner has not established a reasonable uncertainty of ever recovering his cost but rather has stipulated sufficient facts to prove that the first trust 138 deed notes were anything but speculative. Consequently, we hold that petitioner must report 17 percent of each periodic payment on all first trust deed notes received in the years in question as discount income.Decisions will be entered under Rule 50. Footnotes1. In these years, petitioners received a number of first trust deed notes, deducted the total face value of an arbitrary number of such notes from gross receipts each year and, designating these latter notes as deferred contracts, reported in income each year the total amount of payments received on them in that year.↩2. All statutory references are to the Internal Revenue Code of 1954 unless otherwise indicated.↩3. Respondent admitted that the inclusion in petitioners' 1955 taxable income of $ 147,109.09 allocable to pre-1954 first trust deed notes, and $ 35,685.73 allocable to 1954 first trust deed notes, was erroneous and reduced petitioners' taxable income by $ 182,794.82.↩4. On Dec. 1, 1955, petitioners divided their community property pursuant to a property settlement included in a decree of divorce dated Apr. 16, 1956.↩5. Pursuant to this determination, respondent increased petitioners' 1955 taxable income by $ 108,027.32.6. This adjusted deficiency was further adjusted by stipulation of the parties in docket No. 86259 as set forth in our Findings of Fact.↩7. The record is not clear as to whether this disposition was made to petitioner or to third parties.↩8. 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.(c) Permissible Methods. -- Subject to the provisions of subsections (a) and (b), a taxpayer may compute taxable income under any of the following methods of accounting -- (1) the cash receipts and disbursements method;(2) an accrual method;(3) any other method permitted by this chapter; or(4) any combination of the foregoing methods permitted under regulations prescribed by the Secretary or his delegate.↩9. Respondent admits that what is meant by a change in treatment of a material item is not completely defined by the examples in sec. 1.446-1(e) (2) (ii), Income Tax Regs. While not endeavoring to set forth precisely what constitutes a material item, respondent seems to maintain that a material item cannot be a single item out of a group of identical items but must be the entire group; that all identical items must be aggregated. Respondent does not allude to the problem of what would happen when an item is one of a kind. See Graff Chevrolet Co. v. Campbell, 343 F. 2d 568 (C.A. 5, 1965), affirming an unreported case ( N.D. Tex. 1963, 12 A.F.T.R. 2d 5907↩, 63-2U.S.T.C. par. 9789).10. Sec. 1.446-1 General rule for methods of accounting.(a) General rule. (1) Section 446(a) provides that taxable income shall be computed under the method of accounting on the basis of which a taxpayer regularly computes his income in keeping his books. * * * Except for deviations permitted or required by such special accounting treatment, 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. * * (2) * * However, no method of accounting is acceptable unless, in the opinion of the Commissioner, it clearly reflects income. A method of accounting which reflects the consistent application of generally accepted accounting principles in a particular trade or business in accordance with accepted conditions or practices in that trade or business will ordinarily be regarded as clearly reflecting income, provided all items of gross income and expense are treated consistently from year to year.* * * (b) Exceptions. (1) If the taxpayer does not regularly employ a method of accounting which clearly reflects his income, the computation of taxable income shall be made in a manner which, in the opinion of the Commissioner, does clearly reflect income. * * (c) Permissible methods -- (1) In general. * ** * * (iv) Combinations of the foregoing methods. (a) In accordance with the following rules, any combination of the foregoing methods of accounting will be permitted in connection with a trade or business if such combination clearly reflects income and is consistently used. * ** * * (2) Special rules. * (ii) No method of accounting will be regarded as clearly reflecting income unless all items of gross profit and deductions are treated with consistency from year to year. The Commissioner may authorize a taxpayer to adopt or change to a method of accounting permitted by this chapter although the method is not specifically described in the regulations in this part if, in the opinion of the Commissioner, income is clearly reflected by the use of such method. Further, the Commissioner may authorize a taxpayer to continue the use of a method of accounting consistently used by the taxpayer, even though not specifically authorized by the regulations in this part, if, in the opinion of the Commissioner, income is clearly reflected by the use of such method. See section 446(a) and paragraph (a) of this section, which require that 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 * *.[Emphasis supplied.]↩1. Although costs for 10 houses were deducted in 1955, only 8 First T.D. Notes were included in 1955 income.↩11. Although this language was set forth in a discussion of secs. 41 and 42 of the Internal Revenue Code of 1939 (sec. 41↩ was the immediate predecessor of sec. 446), it is equally applicable to the accounting provisions contained in the 1954 Code.12. SEC. 481. ADJUSTMENTS REQUIRED BY CHANGES IN METHOD OF ACCOUNTING.(a) General Rule. -- In computing the taxpayer's taxable income for any taxable year (referred to in this section as the "year of the change") -- (1) if such computation is under a method of accounting different from the method under which the taxpayer's taxable income for the preceding taxable year was computed, then(2) there shall be taken into account those adjustments which are determined to be necessary solely by reason of the change in order to prevent amounts from being duplicated or omitted, except there shall not be taken into account any adjustment in respect of any taxable year to which this section does not apply unless the adjustment is attributable to a change in the method of accounting initiated by the taxpayer.[Emphasis supplied.]↩13. SEC. 44. INSTALLMENT BASIS.(a) Dealers in Personal Property. -- Under regulations prescribed by the Commissioner with the approval of the Secretary, a person who regularly sells or otherwise disposes of personal property on the installment plan may return as income therefrom in any taxable year that proportion of the installment payments actually received in that year which the gross profit realized or to be realized when payment is completed, bears to the total contract price.(b) Sales of Realty and Casual Sales of Personality [Personalty]. -- In the case (1) of a casual sale or other casual disposition of personal property (other than property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year), for a price exceeding $ 1,000, or (2) of a sale or other disposition of real property, if in either case the initial payments do not exceed 30 per centum of the selling price (or, in case the sale or other disposition was in a taxable year beginning prior to January 1, 1934, the percentage of the selling price prescribed in the law applicable to such year), the income may, under regulations prescribed by the Commissioner with the approval of the Secretary, be returned on the basis and in the manner above prescribed in this section. As used in this section the term "initial payments" means the payments received in cash or property other than evidences of indebtedness of the purchaser during the taxable period in which the sale or other disposition is made.14. SEC. 453. INSTALLMENT METHOD.(a) Dealers in Personal Property. -- Under regulations prescribed by the Secretary or his delegate, a person who regularly sells or otherwise disposes of personal property on the installment plan may return as income therefrom in any taxable year that proportion of the installment payments actually received in that year which the gross profit, realized or to be realized when payment is completed, bears to the total contract price.(b) Sales of Realty and Casual Sales of Personality. -- (1) General Rule. -- Income from -- (A) a sale or other disposition of real property, or(B) a casual sale or other casual disposition of personal property (other than property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year) for a price exceeding $ 1,000, may (under regulations prescribed by the Secretary or his delegate) be returned on the basis and in the manner prescribed in subsection (a).(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 (whether or not such taxable year ends after [Aug. 16, 1954] the date of enactment of this title), 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.(B) In the case of a sale or other disposition during a taxable year beginning before January 1, 1954, only if the income was (by reason of section 44(b) of the Internal Revenue Code of 1939) returnable on the basis and in the manner prescribed in section 44(a)↩ of such code.15. SEC. 453. INSTALLMENT METHOD.(d) Gain or Loss on Disposition of Installment Obligations. -- (1) General Rule. -- If an installment obligation is satisfied at other than its face value or distributed, transmitted, sold, or otherwise disposed of, gain or loss shall result to the extent of the difference between the basis of the obligation and -- (A) the amount realized, in the case of satisfaction at other than face value or a sale or exchange, or(B) the fair market value of the obligation at the time of distribution, transmission, or disposition, in the case of the distribution, transmission, or disposition otherwise than by sale or exchange.Any gain or loss so resulting shall be considered as resulting from the sale or exchange of the property in respect of which the installment obligation was received.(2) Basis of obligation. -- The basis of an installment obligation shall be the excess of the face value of the obligation over an amount equal to the income which would be returnable were the obligation satisfied in full.↩16. Neither have petitioner's practices been consonant with secs. 39.44-3 and 39.44-4, Regs. 118, which were the immediate predecessors of, and substantially similar to, secs. 1.453-5 and 1.453-6, Income Tax Regs.↩17. See fn. 13, supra↩.18. See fn. 14, supra↩.19. Although the parties have not enlightened us as to the meaning of this term, we understand that a seasoned note is one upon which payments have been made over a sufficient period of time to provide the experience necessary to establish a fair market value.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4623940/	A. H. WOODS THEATRE CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.A. H. Woods Theatre Co. v. CommissionerDocket No. 11067.United States Board of Tax Appeals12 B.T.A. 827; 1928 BTA LEXIS 3453; June 25, 1928, Promulgated 3453 In November, 1916, the petitioner acquired a certain leasehold and issued its capital stock of the par value of $300,000 in payment therefor. Under the evidence, held that the leasehold at the time it was acquired by the petitioner, had a fair market value of $300,000, and that the petitioner is entitled to include said leasehold in its invested capital at $300,000, and to compute the annual allowances for the exhaustion of the leasehold on that basis. David J. Greenberg, Esq., for the petitioner. James A. O'Callaghan, Esq., for the respondent. MARQUETTE 827 This proceeding is for the redetermination of deficiencies in income and profits taxes asserted by the respondent in the amounts of $2,390.28 for the year 1920, and $10,919.42 for the year 1921. The petitioner alleges that the respondent erred: (1) In excluding from the petitioner's invested capital the amount of $300,000 which the 828 petitioner claims as the cost of a certain leasehold acquired by it in 1917; (2) in computing allowances for depreciation of the petitioner's building at the rate of 2 per cent instead of at the rate of 2 1/2 per cent; (3) in excluding from3454 the petitioner's invested capital as paid-in surplus for the year 1921 certain amounts paid in to the petitioner by its stockholders. The petitioner is a corporation organized under the laws of the State of Illinois with its principal office at Chicago. In the latter part of 1916 one A. H. Woods conceived the idea of obtaining a leasehold and erecting a theatre building at the northwest corner of Randolph Street and Dearborn Street, in the City of Chicago. That property consisted of two pieces, one of which belonged to the Borden Estate and the other to the Wells Estate. The property belonging to the Borden Estate had a frontage of 80 feet on Randolph Street and 90 feet on Dearborn Street, and the property belonging to the Wells Estate adjoined the Borden property on the north and had a frontage of 90 feet on Dearborn Street and a depth of 80 feet. Woods, through his broker, brought this property to the attention of the trustees of the Marshall Field Estate. The broker represented to the Marshall Field trustees that he had a client, a Mr. Woods, who was desirous of obtaining a location for a downtown Chicago theatre, and that he had in contemplation the acquisition of a leasehold3455 on the property at the northwest corner of Dearborn and Randolph Streets, in Chicago, at that time separately owned in two ownerships, the south half belonging to the Borden Estate and the north half to the Wells Estate. The broker represented that he could get the Borden Estate and the Wells Estate to sell these properties at a reasonable price; that Woods had his capital tied up in the operation of theatres and was seeking to finance his acquisition of the leasehold through the purchase of the fees on this property by the Marshall Field Estate with a ground lease simultaneously to be made to Woods, and that Woods would obligate himself to put a new building on the property. The terms of the offer to take the leasehold involved the payment of a rental which would yield approximately a return of 5 per cent to the Marshall Field Estate on the money that was required to be expended by the estate to acquire the fee to the properties. On that basis a three-cornered deal was entered into whereby the Field Estate agreed to acquire the two parcels of property and at the same time to make a lease of the ground to Woods. The Field Estate was not interested in this property until the proposition3456 was brought to it by the broker on behalf of Woods. In November, 1916, the Field Estate acquired the two pieces of property mentioned, paying $607,500 for the Borden property and $450,000 for the Wells property, or $1,057,500 for the two pieces, and 829 at the same time a lease was entered into between the trustees of the Field Estate and A. H. Woods, demising to Woods the two pieces of property for a term of 99 years, beginning on the first day of January, 1917, and ending on the 31st day of December, 2015. The rental reserved by this lease was $45,000 for the first year, $50,000 for the next five years, and $55,000 per year for the remaining 93 years. The lessee covenanted to construct on the leased property a first-class modern, fireproof building suitable for mercantile, hotel, theatre or office purposes, to cost not less than $400,000, and to cover substantially the whole area of the leased premises. It was further agreed that the lessee, upon the deposit of $150,000 in securities with the Field Estate, might tear down and wreck the buildings then standing on the premises. Under the sixth paragraph of the lease the lessee was required immediately to make a deposit3457 of $100,000 in cash or securities, the remaining $50,000 to be deposited before the old buildings were torn down. The amount of $100,000 was deposited by Woods at the time of the making of the lease. On December 29, 1916, the petitioner was organized under the laws of the State of Illinois with a capital stock of $500,000 divided into 5,000 shares of the par value of $100 each. On January 10, 1917, Woods assigned to the petitioner the leasehold mentioned, together with cash and securities of the value of $100,000, and the petitioner issued to him therefor 4,000 shares of its capital stock. The remainder of the capital stock of the corporation was issued for cash. A ten-story office and theatre building was erected by the petitioner on the leased property and a bond issue of $400,000 was placed on the leasehold and building to secure the repayment of a loan in that amount made to the petitioner by the American Bond & Mortgage Co. The building was constructed of steel, brick and concrete, and its foundations were sufficient to carry two additional stories. The theatre in the building had a seating capacity of 1,148. The theatre will probably become out of date in about 253458 years from the time of its construction, and due to the rapid increase in taxes and rising ground values the ten-story building probably can not be operated profitably for more than 30 years from the date of construction. The physical life of the building is at least 50 years. The leasehold mentioned had a fair market value of $300,000 when it was acquired by the petitioner. The respondent, upon audit of the petitioner's income and profits-tax returns for the years 1920 and 1921 refused to allow the petitioner to include in its invested capital any amount on account of the leasehold, and he computed the allowances for depreciation of the petitioner's building at the rate of 2 per cent instead of 2 1/2 per cent as claimed by the petitioner. 830 OPINION. MARQUETTE: The first question raised by the record in this proceeding is, what was the value at the date of acquisition, of the leasehold which the petitioner acquired from Woods in January, 1917? The petitioner contends that the leasehold in question had a value at that time of $300,000; that it issued in exchange therefor its stock of the par value of $300,000, and that it is entitled to include the leasehold in3459 its invested capital at that amount, and to compute the annual allowances for exhaustion on that basis. Upon consideration of the evidence we are of the opinion that it sustains the petitioner's contention. The transaction between Woods and the trustees of the Field Estate, whereby Woods acquired the leasehold which we are considering, was not the ordinary transaction consummated at arm's length by the owner of property desiring to lease it and a prospective lessee. The evidence shows that Woods, who desired to build a theatre in Chicago, found a suitable site consisting of two pieces of property owned by two different estates. Not being in position to finance the acquisition of the property himself, he took the matter up with the Field Estate through a broker. The Field Estate at that time was seeking longterm investments at a comparatively low rate of return. Upon the representations of the broker that the two pieces of property could be acquired at a reasonable price, and merged into a single fee and leased to Woods for a long term at a fair return on the purchase price, the Field Estate purchased the property and did lease it to Woods. One of the trustees of the Field3460 Estate testified that the rental value of the combined tracts, or parcels of property, was at least $75,000 per year and that Woods was able to obtain the leasehold for the consideration stated in the lease only on account of the exceptional circumstances surrounding the transaction. The Field Estate was in reality only financing Woods in the enterprise. Several other witnesses who were familiar with the property covered by the lease, and with other property in the vicinity, also testified that it had a rental value of from $72,000 to $75,000 per year, and that the leasehold was actually worth at least $300,000 in January, 1917. One of these witnesses offered Woods $300,000 for the lease early in the year 1917, but Woods refused to accept it. In 1923 the witness purchased the lease and the building on the property for $1,000,000, and he testified that at that time he considered the leasehold alone worth more than $400,000. We are of the opinion that the leasehold was worth at least $300,000 when it was acquired by the petitioner. 831 Leaseholds are tangible property under the Revenue Acts of 1918 and 1921. The leasehold under consideration having been actually worth3461 at least $300,000 when acquired by the petitioner, and the petitioner having issued its capital stock in the amount of $300,000 therefor, it is entitled to include the lease in its invested capital at that amount and to deduct annually an aliquot part thereof for the exhaustion of the lease. ; ; . As to the rate which should be used in computing the annual allowance for the depreciation of the petitioner's building, we are of the opinion that the evidence produced is not sufficient to warrant us in disturbing the respondent's determination. The building was well constructed of steel, concrete and brick, and therefore not subject to rapid deterioration. Owing to changes in styles of theatre construction, the theatre part of the building may become out of date in twenty years, and if the taxes on the land continue to increase, the ten-story office building may become less profitable, but it is also quite possible that the office might be made to return a higher rental and the theatre conducted at some, though reduced, profit, even though*3462 it be somewhat out of date. Moreover, the theatre might be remodeled. There is no evidence before us on either of these points. We are not informed as to the amount of income the building has so far earned, or whether it is increasing, decreasing, or remaining stationary in its ratio to taxes and operating expenses. Upon the state of the record as to this point, we think that the respondent's determination should be approved, and we so hold. No evidence was introduced by the petitioner in support of the other assignment of error. Judgment will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4623941/	Otis B. Miller and Sonya G. Miller, Petitioners v. Commissioner of Internal Revenue, RespondentMiller v. CommissionerDocket No. 791-74United States Tax Court68 T.C. 767; 1977 U.S. Tax Ct. LEXIS 62; August 29, 1977, Filed 62 Decision will be entered under Rule 155. College leased land to CDC at $ 1 per year. Immediately thereafter, under a leaseback agreement, CDC leased the land, plus buildings to be constructed thereon, back to College for 25 years. CDC then had two buildings constructed to College's specifications. A 25-year mortgage note that financed construction of the buildings was signed by CDC. The note was secured by College's interest in the land and the buildings to be constructed thereon, as well as College's payments to CDC under the leaseback agreement. College's net monthly payments under the leaseback agreement equal the sum of CDC's monthly mortgage payments plus $ 543 per month. At the end of the leaseback term, College will automatically acquire title to the buildings; no additional payments will be necessary. During the term of the leaseback, all maintenance, taxes, assessments, and insurance on the land and buildings will be paid by College. Petitioner, Dr. Miller, acquired CDC's rights under the leaseback agreement, but not CDC's obligations thereunder, for $ 49,000. The period remaining on the leaseback at the time of petitioner's purchase was approximately 23 1/2 63 years. Held: For $ 49,000 petitioner purchased CDC's right to monthly payments from College of $ 543, lasting approximately 23 1/2 years. In substance neither CDC nor petitioner made any capital investments in the newly constructed buildings or in obtaining a lease thereon. Consequently, petitioner is not entitled to deductions for depreciation or amortization. Held, further: In substance petitioner made no interest payments on the mortgage note that financed the newly constructed buildings. Petitioner is therefore not entitled to interest expense deductions. D. Michael Romano and Steven W. Phillips, for the petitioners.Richard A. Jones, for the respondent. Wiles, Judge. WILES767 Respondent determined deficiencies in petitioners' income taxes64 of $ 12,269.00 for 1971, and $ 15,075.00 768 for 1972. The issues we must decide are whether petitioner, Dr. Miller, 1 owned property interests in two buildings that entitle him to deductions for depreciation or amortization, and whether petitioner is entitled to interest expense deductions on mortgage notes that financed construction of the buildings.FINDINGS OF FACTSome of the facts have been stipulated and are found accordingly.This case involves transactions between petitioners, Coronado Development Corp., Roberts Wesleyan College, I. J. Markin & Co., Mortgage Bankers, and Erie County Savings Bank.Petitioners Otis B. and Sonya G. Miller are residents of Tucson, Ariz., where they filed their petition herein, and where Otis B. Miller actively practices medicine. The Millers timely filed their joint income tax returns for 1971 and 65 1972 with the Western Region Service Center, Ogden, Utah.Coronado Development Corp. (hereinafter CDC), an Illinois corporation, was formed in 1966 to engage in the development of real estate ventures relating to student and dormitory housing. CDC's total capitalization as of March 1967, was $ 18,000 in shareholders' equity, and $ 39,000 in 5-percent notes payable to CDC's 12 shareholders. Shortly after its formation, CDC, through its president and principal employee, Frank Aries, started advertising and contacting small colleges around the country offering to analyze the building needs of the schools and obtain financing for construction of new buildings. As described in CDC's initial contact letter, "the key" to CDC's financing package "is based on the fact that non-profit institutions are not in a position to obtain tax concessions for depreciation, but a private investor enjoys this privilege." Although CDC contacted in excess of 2,500 small colleges, only two schools engaged CDC's services.One school that engaged CDC was Roberts Wesleyan College (hereinafter College), a small school of approximately 600 students and 60 faculty members. College, located in 769 North 66 Chili, N. Y., was formed in 1870, is fully accredited, and is chartered by the New York Board of Regents. When first contacted by Aries, College was negotiating with a general contractor for the construction of a dormitory and an adjacent dining hall. Aries convinced College that CDC could arrange for the construction of better buildings at lower prices than the contractor, and therefore, on March 13, 1967, College entered into a letter agreement with CDC for the financing and construction of a dormitory and a dining hall. The March 13, 1967, letter agreement anticipated that College would lease land -- the construction site -- to CDC for a term of 35 years at an annual rental of $ 1 per year. College would continue to pay all real estate taxes and assessments on the property and would subordinate its interest in the land to a mortgage securing a construction and permanent financing loan. Included in the cost of constructing the buildings, later calculated at $ 870,000, was a 3-percent fee to CDC as compensation for its services in placing the permanent financing, and a 1-percent fee for placing the interim or short-term financing. Although the buildings to be constructed were67 technically to be in CDC's name, College had final approval on all specifications and drawings. It was further anticipated in the March 13, 1967, letter agreement that immediately upon the execution of the ground lease to CDC at $ 1 per year, CDC would lease back to College the ground as well as the buildings to be constructed thereon. This leaseback agreement was to last for 25 years with a rental of $ 7,000 per month for the first year, followed by a rental of $ 9,000 per month for the remaining 24 years. Finally, at the end of 25 years, if the ground lease and leaseback were not in default, both leases would terminate and title to the improvements on the land would automatically vest in College.In order to finance construction of the dormitory and dining hall, CDC engaged the services of I. J. Markin & Co., Mortgage Bankers (hereinafter Markin). Markin in turn contacted Erie County Savings Bank (hereinafter Bank) and offered Bank the opportunity to make an $ 870,000, 25 year, 7-percent loan to be secured by the land described in the ground lease and buildings to be constructed thereon. In its prospectus describing the offered first mortgage, Markin described in detail the68 location, student body, and history of the College, as 770 well as College's financial status. Only twice in the entire presentation, however, was CDC mentioned: first, the prospectus mentioned that as additional security for the loan, a lease between CDC and College with a minimum term of 20 years at $ 108,000 per year would be assigned and deposited with the lending bank; second, the prospectus mentioned that title to the property would be in CDC which would execute the mortgage documents.Before agreeing to lend money for construction of the buildings, Bank obtained appraisals on the proposed buildings and land. One appraisal, made April 1967, valued the land and proposed improvements at $ 200,000 and $ 1,130,000, respectively. The other appraisal valued the land at $ 65,000, and the buildings at $ 1,157,108. Additionally, Bank obtained a Dun & Bradstreet report on CDC. This report summarized CDC as a "New venture with success to be demonstrated. Financial details lacking." Bank also required a complete financial statement on College.After reviewing the relevant financial statements and the proposed lease documents, Bank's outside legal counsel wrote to Markin stating69 that Bank would make the proposed loan under the following conditions:You will note that the enclosed letter of commitment on the above referenced premises from our client Erie County Savings Bank requires that Roberts Wesleyan College Corporation join in the execution and delivery of the mortgage.In examining the indenture of lease between Coronado Development Corporation and Roberts Wesleyan College Corporation dated as of June 1, 1967, it was our opinion that paragraph numbered three therein in effect makes the tenant corporation [College] a purchaser in possession with equitable title under New York law, and we therefore advised the Bank that the tenant should sign the mortgage to subordinate this interest.One of Bank's former outside counsel and Bank's current vice president, Edward M. Zimmerman, explained at trial that the Bank's legal advisors considered this a pure fee mortgage with College's fee title encumbered by the mortgage. Since the Bank's counsel viewed College as a purchaser in possession, counsel recommended that College sign the mortgage. Zimmerman further explained that the building lease between CDC and College was an unusual lease since CDC, the landlord, 70 did not get the leasehold estate at the end of the term; rather, the entire fee vested in the tenant. 771 Because of this unusual feature in the lease, it was felt that the New York State taxing authorities might deem lease payments to be mortgage payments and therefore subject to a State mortgage tax.Zimmerman also noted that Bank viewed College, not CDC, as the ultimate source of mortgage payments. Consequently, Bank required that in case CDC defaulted in its mortgage payments, Bank could obtain the mortgage payments directly from College. For this reason Bank obtained annual financial statements only from College and not from CDC.Bank was not the only entity that viewed College as the ultimate source of the mortgage payments. On April 8, 1967, the executive, finance, and building committees of College's board of trustees adopted the following resolution:Resolved, that we accept the proposed agreement by Mr. Frank Aries of [CDC], dated the 13th day of March, 1967, obligating the College for a sum of money up to eight hundred and seventy thousand dollars ($ 870,000.00), when completed and approved by our attorney, for the construction of a dormitory building and dining-hall71 facility * As anticipated by the March 13, 1967, letter agreement, College, on June 1, 1967, leased to CDC, at an annual rental of $ 1 per year, the ground upon which the dormitory and dining hall were to be built.Immediately after signing the 35-year ground lease, CDC and College entered into a leaseback agreement in which CDC leased to College the land and the buildings to be constructed. Initial rental was $ 7,000 per month for the first year, and $ 9,000 per month for the remaining 24 years of the lease. A portion of the rental was used to pay the principal and interest of the bank loan that financed construction of the buildings; three-fourths of 1 percent per year of the principal of the loan was paid to CDC in monthly installments of $ 543; and the remaining monthly rent was returned to College after being held for 45 days in an escrow account described as a "maintenance reserve" account.College was required to pay all maintenance, repairs, insurance, utilities, and taxes relating to the buildings. In the event of an unforeseen casualty or condemnation, proceeds from insurance or condemnation awards were to be used to restore the buildings or repay the mortgage note. 72 Any remaining proceeds were to go to College.772 If, at the end of the 25-year leaseback term, College was not in default of the leaseback agreement, the ground lease was to terminate and legal title to the buildings was to pass directly to College without additional consideration. If College desired, however, CDC was willing to make a cash settlement of the entire lease agreement including the $ 543 per month payment. CDC specifically provided that College's prepayment schedule under the lease agreement was the same as CDC's prepayment schedule under the mortgage note. College at all times intended to acquire title to the buildings after the termination of the 25-year leaseback agreement. Further, College expected the useful life of the buildings to be well in excess of the 25-year leaseback.Public records of Chili, N.Y., show that College at all times owned the land as well as the buildings constructed thereon. Construction permits for the buildings were issued in College's name.For its first fiscal year, ending March 31, 1967, CDC had a net operating deficit of $ 20,721. In June 1968, CDC became a dormant, inactive corporation. Because of CDC's financial setbacks, 73 CDC, during the latter part of 1967, began looking for a purchaser of CDC's rights under the leaseback agreements. One person contacted by Aries was petitioner, Dr. Miller. One of Aries' associates explained the leaseback to Dr. Miller as follows: This letter shall advise you of the cash flow you can expect from the Roberts Wesleyan College Leaseback Agreement you are about to purchase from [CDC].1. July 1, 1969 through February 28, 1970a. Monthly rental from leaseback$ 7,000b. Deductions:1. Mortgage payment toErie County Savings Bank$ 5,075.002. Security deposit returnableto Roberts Wesleyan College1,382.006,457NET CASH FLOW PER MONTH5432. March 1, 1970 through February 28, 1994a. Monthly rental from leaseback9,000b. Deductions:1. Mortgage payment toErie County Savings Bank6,250.252. Security deposit returnableto Roberts Wesleyan College2,206.758,457NET CASH FLOW PER MONTH543773 At no time did Dr. Miller visit the College property, nor did he consider an alternative use for the property. His primary interest in buying CDC's rights in the property was for the cash flow74 of $ 543 per month for the remainder of the leaseback term, approximately 23 years. For this cash flow, Dr. Miller paid CDC $ 49,000.Before acquiring CDC's interest in the leaseback agreement, Dr. Miller insisted that he not be personally liable to Bank on the mortgage note. Bank allowed CDC to assign its rights, without its obligations, to Dr. Miller because Bank relied on the value of the real estate and the credit-worthiness of College to repay the mortgage note.Although Dr. Miller acquired only CDC's rights and was never personally liable on the bank note, he reduced his income during the years in question by the amount of interest paid to Bank on the bank loan. He also reduced his income to reflect depreciation on the College buildings. The net effect of purchasing CDC's rights was that Dr. Miller received payments or cash flow from College of $ 543 per month during 1971 and 1972, yet, as reported on his joint income tax returns, his rights generated tax losses of $ 28,920 and $ 24,631 for 1971 and 1972, respectively.Respondent, in his notice of deficiency, determined that as a result of claiming the interest expense deductions, depreciation deductions, and other adjustments75 no longer in question, petitioners had deficiencies in their income taxes for 1971 and 1972 of $ 12,269 and $ 15,075, respectively.OPINIONThe issues we must decide are whether petitioner, Dr. Miller, owned property interests that entitled him to depreciation or amortization deductions claimed in 1971 and 1972. 276 774 We must also decide whether petitioner may deduct interest payments made on a mortgage note that financed construction of two college buildings. 377 Petitioner contends that CDC sold him property interests in two buildings that were subject to a mortgage. Petitioner then leased his interest in these buildings to College. As a result of the property interest he purchased in the buildings, petitioner contends he is entitled to depreciation or amortization deductions, as well as interest deductions on the mortgage to which the property interest was subject.In contrast, respondent contends that for $ 49,000, Dr. Miller purchased the right to receive monthly payments of $ 543 for a period of approximately 23 years. 4 Respondent argues that this right entitles petitioner to amortize his $ 49,000 investment; it does not entitle him to any depreciation, amortization, or interest deductions that relate to the property.78 The conflict between petitioner and respondent centers on the substance of a financing arrangement between College and petitioner's assignor, CDC. In form, the financing 775 arrangement exists as a ground lease from College to CDC, followed by a leaseback to College of the land and two buildings to be constructed thereon. CDC's rights in the lease and leaseback agreements, without the attendant obligations, were assigned to Dr. Miller for $ 49,000. After considering all facts and legal arguments as well as the entire record before us, we conclude that in substance, Dr. Miller, for $ 49,000, simply acquired CDC's right to receive a fixed fee for services rendered -- $ 543 per month -- for a period of approximately 23 years. Consequently, petitioner may amortize his $ 49,000 investment over its lifetime; he is not, however, entitled to depreciation or interest deductions allegedly arising from the financing agreement.Generally, section 1675 provides that there shall be allowed as a depreciation deduction a reasonable allowance for the exhaustion, wear, and tear of property held for the production of income. Section 1.167(a)-4, Income Tax Regs., provides that capital expenditures79 made by a lessee for the construction of buildings on leased property are recoverable through either depreciation or amortization depending on the life of the improvements and the length of time remaining on the leasehold.As explained by the Supreme Court in Helvering v. F. & R. Lazarus & Co., 308 U.S. 252">308 U.S. 252, 254 (1939), affg. 101 F.2d 728">101 F.2d 728 (6th Cir. 1939), affg. 32 B.T.A. 633">32 B.T.A. 633 (1935), a deduction for exhaustion, wear, and tear is granted to a person who uses property in his trade or business and incurs a "loss resulting from depreciation of capital he has invested." "It was the design of the Congress to permit the taxpayer to recover, tax-free, the total cost to him of such capital assets; hence it recognized that this decrease in value -- depreciation -- was a legitimate tax deduction as business expense." Massey Motors, Inc. v. United States, 364 U.S. 92">364 U.S. 92, 96 (1960).80 The critical question therefore is whether the taxpayer made a capital investment in property. If a taxpayer has no capital investment in property, he has no right to depreciation or amortization deductions with respect to the capital asset. Fromm Laboratories, Inc. v. Commissioner, 295 F.2d 726">295 F.2d 726, 729-730 (7th Cir. 1961), affg. a Memorandum Opinion of this Court.776 Involved in this case are several documents, including a ground lease from College to CDC; a leaseback agreement from CDC to College; a mortgage note between CDC and Bank; a mortgage securing the note executed by CDC, College, and Bank; and finally, an assignment of CDC's rights to petitioner, Dr. Miller. Whether these documents and formalities indicate that CDC made a capital investment that was subsequently assigned to petitioner and on which petitioner could claim amortization or depreciation deductions, must be gleaned from all documents and the surrounding circumstances. Cf. Estate of Franklin v. Commissioner, 64 T.C. 752">64 T.C. 752, 763 (1975), affd. 544 F.2d 1045">544 F.2d 1045 (9th Cir. 1976). We think the entire record and circumstances indicate81 that College, not CDC, borrowed money and made capital investments in constructing the two college buildings. CDC, for its effort in arranging the financing of the buildings, in hiring a general contractor, and in hiring an architect, was paid a fixed fee based upon the amount of money needed to complete construction of the project. Part of this fee -- alternatively described as monthly payments of $ 543, or annual payments of three-fourths of 1 percent of the total $ 870,000 borrowed -- was to be paid CDC over the life of the bank mortgage. It was CDC's right to receive this fee that Dr. Miller purchased from CDC for $ 49,000, not the ownership or leasehold interest in two college buildings.A variety of factors, some of which we will mention, persuade us that CDC, and hence Dr. Miller, did not make a capital investment in the lease/leaseback arrangement between CDC and College.Initially, we note that in CDC's solicitation letter to College, Aries stated that "the key" to CDC's proposed financing package was based on the fact that nonprofit institutions cannot obtain tax benefits for depreciation whereas private investors can. Legitimately reducing taxes is, of course, the legal82 right of every taxpayer. Gregory v. Helvering, 293 U.S. 465">293 U.S. 465, 467 (1935). Business arrangements, however, must be closely scrutinized to insure they "have purpose, substance, or utility apart from their anticipated tax consequences." Goldstein v. Commissioner, 364 F.2d 734">364 F.2d 734, 740 (2d Cir. 1966), affg. 44 T.C. 284">44 T.C. 284 (1965).777 In a scrutiny of the leaseback, there are several factors that suggest the form of the transaction did not properly reflect its substance. CDC, which purportedly borrowed $ 870,000 from Bank had a capitalization of only $ 18,000 in shareholders' equity and $ 39,000 in loans from shareholders; Dun & Bradstreet reports indicate that CDC, at the time the loan was granted, was a new venture with success to be demonstrated; and CDC, during its first fiscal year ending March 31, 1967, immediately before the loan from Bank was granted, had a net operating deficit of $ 20,721. CDC's finances were so poor that by June 1968, 2 years after its inception, CDC became a dormant, inactive corporation. Given this poor financial record it would be surprising for Bank to seriously83 consider lending CDC $ 870,000.Bank, although technically lending money to CDC, in substance realized that the construction loan was being made to College: Markin, who placed the mortgage note with Bank, clearly and completely described College in the loan prospectus; only twice was CDC mentioned. Bank required that College secure CDC's note with College's land and its interest in the prospective buildings. Bank also required annual financial statements from College but not from CDC. Bank considered College the ultimate source of mortgage payments, and therefore insured that should CDC default on the mortgage note, Bank could obtain mortgage payments directly from College by subrogating College's "lease" payments. Further, Bank was not concerned that CDC assigned its rights to Dr. Miller, since Bank relied on College's credit-worthiness, and the value of the real estate to repay the mortgage. Finally, Bank's legal counsel described College as the "purchaser in possession."Even College viewed itself as the entity that borrowed the $ 870,000. By resolution dated April 8, 1967, the executive, finance, and building committees of College's board of trustees obligated "College for84 a sum of money up to * * * $ 870,000.00, * * * for the construction of a dormitory building and dining hall facility."Other factors indicate the substance of the financing arrangement. College leased its property to CDC for a nominal $ 1 per year. Although the ground lease was for 35 years, it automatically ended upon the termination of the 778 leaseback agreement. College's prepayment privileges under the lease were identical with CDC's prepayment privileges under the mortgage. Further, at the termination of the leaseback from CDC to College, College automatically acquired title to the buildings and land with no additional payment required. CDC's interest in the buildings it ostensibly owned terminated with the lease agreement. Finally, all duties under the lease agreement to pay taxes, assessments, insurance, etc., at no time shifted away from College. Indeed, all insurance proceeds or condemnation proceeds either went into reconstructing the buildings, paying Bank's mortgage notes, or to College. Under no circumstances did any proceeds vest in CDC.All of the above factors persuade us that the mortgage loan, used to construct the capital assets, was in substance 85 made by Bank to College. We are therefore convinced that College, not CDC, was the entity that made the capital investment. CDC merely acted as a straw corporation, holding only the barest of legal titles. 6 Because the bank loan in substance financed College's investment in a capital asset, it is College, not CDC, that was suffering a loss through "exhaustion, wear and tear" of its capital asset. Since CDC did not make any capital investment, Dr. Miller, who acquired CDC's rights is not entitled to any depreciation or amortization deductions for wear and tear or exhaustion of a capital asset. Further, since in substance the bank loan was made to College, and in substance College, not CDC or Dr. Miller, made all interest payments, petitioner is not entitled to any interest deductions for interest paid on the loan. In sum, CDC, and hence Dr. Miller, acted merely as a conduit between College and Bank. Acting as a conduit does not entitle petitioner or CDC to deductions for depreciation or amortization nor does it entitle petitioner or CDC to deductions for interest.86 779 To reflect the foregoing,Decision will be entered under Rule 155. Footnotes1. Sonya G. Miller is a party to this action solely because she filed joint income tax returns with her husband. References hereinafter to petitioner will be to Dr. Miller.↩2. On his income tax returns and in his petition, petitioner claimed he owned two buildings that were subject to a note and mortgage. He therefore argued he was entitled to depreciation deductions on the buildings and interest deductions on the note. At trial petitioner orally amended his petition, claiming in the alternative that even if he did not own the buildings he owned a lease on the buildings, the cost of which he was entitled to amortize over the term of the lease. Under his alternative argument petitioner further claims he was entitled to interest deductions on the mortgage note because the note was secured by the lease agreement. We have used the phrase "property interests" in formulating the first issue in order to encompass petitioner's two arguments that he owned either the buildings or a lease on the buildings.↩3. As a preliminary matter petitioner notes that this case centers on a question of substance versus form. The question of substance versus form, petitioner contends, was first raised as an affirmative defense in respondent's answer and therefore, respondent has the burden of proof in this case. See Rule 142(a), Tax Court Rules of Practice and Procedure. Petitioner is in error. An affirmative defense is a matter that requires special pleading other than a mere denial, such as res judicata, collateral estoppel, etc. Rule 39, Tax Court Rules of Practice and Procedure. In contrast, a substance versus form argument is an underlying legal argument that supports a party's position on a previously raised issue. See, e.g., Court Holding Co. v. Commissioner, 2 T.C. 531">2 T.C. 531 (1943), revd. 143 F.2d 823">143 F.2d 823 (5th Cir. 1944), affg. Tax Court 324 U.S. 331">324 U.S. 331↩ (1945). Respondent, in his notice of deficiency, stated that petitioner had no depreciable interest in College's buildings and further, petitioner paid no interest, was not liable on a debt for which interest was paid, and owned no property subject to a debt on which interest was paid. By doing so respondent raised issues involving depreciation deductions and interest deductions. The legal argument for disallowing these deductions, that the form of the transactions involved herein did not reflect their substance, is neither an affirmative defense requiring special pleadings nor a new matter. Consequently, the burden of proof remains on petitioners.4. Respondent throughout his briefs states that Dr. Miller paid $ 51,000 for CDC's right to the $ 543 monthly payment. This purchase price is in error. Joint Exhibits 61-BI and 65-BM clearly show that Dr. Miller paid $ 49,000 for the rights acquired.↩5. Unless otherwise indicated, all statutory references are to the Internal Revenue Code of 1954, as amended.↩6. There is even some question whether CDC had legal title under New York law. Bank's counsel clearly believe that New York State taxing authorities would consider Bank's loan a mortgage loan to College thereby subjecting College to a State mortgage tax. For purposes of this opinion, however, it is not necessary for us to determine who, under New York law, owned the two buildings. Our duty is merely to determine, for tax purposes, who made the capital investments that are subject to depreciation.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4623942/	First National Bank of McAllen v. Commissioner.First Nat'l Bank of McAllen v. CommissionerDocket No. 23926.United States Tax Court1950 Tax Ct. Memo LEXIS 259; 9 T.C.M. (CCH) 166; T.C.M. (RIA) 50051; March 6, 1950259 Salaries paid directors of a bank determined. Howard J. Stafford, Jr., Esq., Bentsen Bldg., McAllen, Tex., and Orville I. Cox, Esq., for the petitioner. J. P. Crowe, Esq., for the respondent. ARUNDELLMemorandum Opinion ARUNDELL, Judge: The Commissioner determined deficiencies in income taxes for the calendar years 1946 and 1947 in the respective amounts of $3,287.38 and $3,789.50. The basis of the respondent's determination was his disallowance of deductions covering compensation paid to petitioner's board of directors during each of the taxable years. The amount paid and sought to be deducted was at the rate of $1,200 per year for each of the directors, and the amount allowed by the Commissioner was $25 per meeting or, roughly, $300 per year for each. This case was heard in San Antonio, Texas, on January 26, 1950. [The Facts] The petitioner is at present a national bank, but during the taxable years was organized and doing business under the laws of the State of Texas, and was known during those years as the City State Bank and Trust Company, with offices in McAllen, Texas. The returns for the taxable years here involved were filed with the collector260 of internal revenue for the first district of Texas. On or about January 1, 1946, new interests acquired the ownership and control of petitioner, which interests were commonly known as the Bentsen interests. Effective with the change in ownership there was a change in the policy of operating petitioner whereby the board of directors of petitioner bank became an active board with a resultant increase in the directors' duties. This policy of having an active board of directors had been introduced in each of the banks which the Bentsen interests had acquired prior to this time. Prior to the change in ownership, the active management of petitioner was in the hands of the president of the bank who was at that time the majority stockholder thereof. During this period all loans were made by the then president of petitioner without consultation with the board of directors who merely attended a meeting once a month formally to approve the loans that had already been made. During this period petitioner suffered considerable losses from bad loans. With the assumption of control of petitioner by the Bentsen interests there was elected to membership on the board of directors of petitioner men261 of diversified interests who were outstanding men in the community. During the years 1946 and 1947, the board of directors, other than active officers of petitioner, the number of shares of stock owned by each, the number of meetings attended by each, and the amount of directors' fees paid to each, were as follows: From 1-1-46To 6-12-47Number ofRegular Directors'Shares ofMeetings AttendedDirectors'Name of DirectorStock Ownedin 1946Fees PaidWilliam Cloughley11511$1,200.00E. C. Bensten250121,200.00Owen Council60111,200.00N. E. Buescher18121,200.00H. Wiesehan100111,200.00L. M. Bentsen200101,100.00H. Etchison100121,200.00M. R. Nelson50111,200.00Total of Directors' Fees Paid$9,500.00William Cloughley17211$1,200.00E. C. Bentsen375121,200.00Owen Council9091,000.00N. E. Buescher27101,200.00H. Wiesehan150121,200.00L. M. Bentsen375101,200.00H. Etchison150101,100.00M. R. Nelson75111,200.00Total of Directors' Fees Paid$9,300.00From January 1, 1946, to June 12, 1947, there was a total of 1,000 shares262 of stock of the petitioner outstanding, and from June 12, 1947, to December 31, 1947, there was a total of 1,500 shares outstanding. Each of the directors of petitioner during the taxable years, in addition to attending regular monthly meetings of the board, was regularly called in conference regarding important loans being considered by petitioner. Before making important loans, it was the uniform practice of the officers of the bank to call on different members of the board of directors to make an inspection of the property offered as security and it was the duty of members of the board of directors to make the appraisals which would form the basis for the granting or denial of the loan. The directors were ranchers, farmers, canners, packers, and businessmen. If a loan were sought by a client of the bank who was engaged in the packing of foodstuffs, the members of the board who were directly familiar with that activity would be called on to inspect and appraise the property being offered as security, and if a farmer desired a loan on his farm, members of the board who were familiar with the value of farm lands made the inspection and appraisal of the property. Each director for263 the taxable years in question spent on an average of three or four days a month performing services for petitioner and in going from place to place for the purpose of inspecting and valuing property. The directors used their own automobiles in connection with petitioner's business and received no reimbursement for their expenses incident to the use of their own cars. The directors' fees as paid were duly authorized by formal resolution adopted by the board of directors at its first regular meeting in each of the taxable years in question. There was no relationship whatsoever between the amount paid to the directors and the stock owned by them. Those directors owning only a few shares of stock received the same fees as those owning the controlling interests. The fees paid were for all services rendered and were not merely for attendance at the board of directors' meetings. There was a substantial increase in the loans and discounts of petitioner during the taxable years in question and, after paying all expenses, including directors' fees, there was left with the petitioner a return of from 15 to 18 per cent on its capital investment during the taxable years. [Opinion] A number264 of witnesses were produced by the petitioner at the hearing who testified to the reasonableness of the compensation paid by petitioner to the members of its board of directors. No testimony was offered by the respondent that had any probative weight in support of his determination that the directors' fees as paid were unreasonable. At the conclusion of the hearing of this case, this Division of the Court held that the salaries as paid the members of the board of directors were reasonable in amount and were deductible in determining petitioner's net income for the years in question, and in its opinion from the bench stated as follows: "While the deficiencies as determined by the Commissioner come to this Court as presumptively correct, once the record is made in open Court, a decision must be reached on the testimony as it appears. "After the Bentsens came into control of the Petitioner, they inaugurated a new method of handling its business, and the changed method was in accordance with the method followed by the Bentsens in some four or five other banks that they controlled. The new method was to substantially lodge in the Board of Directors the responsibility for all substantial265 loans made by the bank, rather than leaving that responsibility with the officers of the bank. Under the new system, the Board of Directors was distinctly a working board, and the directors were constantly called upon to pass on the desirability of loans, to examine and appraise property on which loans were sought, and so forth. Now, this method was quite contrary to the old method where the directors met and did little more than approve the action theretofore taken by the officers. "The stockholders, and particularly the controlling stockholders, were of the opinion that the proposed change in procedure was highly desirable and that the amounts paid to the directors were reasonable. It's clear that the amounts paid were not in accordance with stock ownership for it appears that a stockholder owning only eighteen shares in 1946 received the same director's fee as a stockholder owning 250 shares, and that in the year 1947 a director-stockholder owning 27 shares received the same director's fees as paid to a stockholder owning 375 shares. "We also have testimony of a banker here in San Antonio, that he thought the amount paid to the directors of Petitioner was reasonable, and as266 near as I could gather from his testimony, his bank was paying to its directors a sum substantially equal to what was paid by Petitioner. Moreover, in the case of the San Antonio bank, it was using outsiders to make its appraisals, a service performed by the directors of Petitioner's bank. Now, these people are having the directors do, you might say, most of the work that other banks might use outsiders to do. And it seems to me, taking the record as it stands, and with no testimony of any government witness that these amounts are unreasonable, the Petitioner has made a prima facie case, and my opinion is that the amounts paid to the directors during the years 1946 and 1947 are a reasonable amount and deductible under the statute." Decision will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4623944/	LAURA ALLEN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Allen v. CommissionerDocket No. 19438.United States Board of Tax Appeals14 B.T.A. 723; 1928 BTA LEXIS 2938; December 13, 1928, Promulgated 2938 Where husband and wife, living together and residents of Washington, file separate returns, the husband reporting all of the community income in addition to the income on his separate property, and the wife reporting the income on her separate property, the Commissioner may not include in the wife's return one-half of the community income. United States v. Robbins,269 U.S. 315">269 U.S. 315, followed. Jay C. Allen, Esq., for the petitioner. George G. Witter, Esq., and Brice Toole, Esq., for the respondent. ARUNDELL723 The respondent has determined a deficiency of $320.59 in income tax for the year 1924, in connection with which the petitioner claims he erred in including in her taxable income one-half of community property income, and in disallowing as a deduction from gross income the sum of $525 expended in clearing certain land. 724 FINDINGS OF FACT. The petitioner and her husband are residents of Seattle, Wash. They were married April 18, 1905, and have been living together continuously since that date. At the time of their marriage, each spouse owned certain property in his or her individual capacity. 2939 On a number of occasions after their marriage the petitioner and her husband purchased property jointly. By agreement, she paid a stipulated part of the purchase price out of her separate property and her husband paid the balance out of his individual estate or out of community property, depending upon his financial condition. During, and for some time prior to, 1924 the petitioner was engaged in the real estate business in Seattle. Most of her time was devoted to the acquisition of property. The sales she made of property were usually handled through other real estate dealers. During the year 1924 the petitioner's husband was a member of the law firm of Allen and Griffith. The petitioner had no connection with or financial interest in the firm, and did not know the amount of income her husband received as a member of the copartnership. Since her marriage the petitioner has always kept the property she possessed at marriage, as well as earnings therefrom, separate and apart from community property and property possessed by her husband at marriage. In the year 1924, as well as for years prior thereto, the petitioner reported the income received on her separate property2940 and her husband returned the community property income and the income on his separate property. During the spring of 1924 heavy rains and wind storms washed out part of the bank of a creek running through a 320-acre tract of land owned by the petitioner and blew a number of trees into the creek and across roads and paths of the land. During the year the petitioner expended the sum of $525 in filling in the washout, placing sod on the filled washout, and in the removal of the trees and rubbish from the creek, roads, and paths. Some of the trees were used for posts and as props for young trees. Parts of the whole tract were purchased at various times after 1910 for the purpose of subsequently selling them in sections as part of a subdivision. On an audit of petitioner's return, the respondent increased her taxable income by one-half of the community property income under the theory that a wife filing a separate return is required to include therein, in addition to the income on her individual estate, one-half of the community property income. He disallowed the item of $525 on the ground that it was a capital expenditure. 725 OPINION. ARUNDELL: The major question2941 we have for determination is whether or not community income under the laws of the State of Washington is taxable in whole to the husband or in equal part to the husband and wife. Petitioner has filed a separate return in which she has reported the income from her own separate property and her husband has in his return reported the income from his own separate property and in addition the entire community income. While conceding the right of the husband and wife to make a joint return, it is respondent's position that the husband and wife, having elected to report their income separately, each must return one-half of the community income. The deficiency arises in part from the inclusion in the return of the wife of one-half of the community income. After a careful review of the decisions of the State of Washington, we held, in the case of , that the wife's interest in community property under the laws of the State of Washington was a present vested interest and not contingent. The statutes of that State, however, specifically place the management and control of the personal property with the husband "with a like power of disposition as2942 he has of his separate property," (sec. 6892, Stats. of Washington, Rem. and Bal. Code, § 5917) and also place with the husband the management and control of community real property, though he is prohibited from selling or encumbering it unless his wife joins with him in executing the deed or other appropriate instrument. (Sec. 6893 Stats. of Washington, Rem. and Bal. Code 5918.) While the debts contracted by the husband in the course of his regular business are prima facie conducted in the interest of the community and the community property is liable for the debts so contracted by the husband, ; ; ; , the community fund is not liable for the wife's debts contracted without the husband's consent, ; . The husband has the disposal of the fund, although there are restrictions on him in the matter of gifts, etc. The answer to the questions we have stated in the opening sentence of our opinion we believe is to be found in the Supreme2943 Court's decision of , wherein it is stated, after discussing the community property laws of the State of California: But the question before us is with regard to the power and intent of the Revenue Act of February 24, 1919, c. 18, Title II, Part II §§ 210, 211; 40 Stat. 1057, 1062. Even if we are wrong as to the law of California and assume that the wife had an interest in the community income that Congress could tax 726 if so minded, it does not follow that Congress could not tax the husband for the whole. Although restricted in the matter of gifts, etc., he alone has the disposition of the fund. He may spend it substantially as he chooses, and if he wastes it in debauchery the wife has no redress. See . His liability for his wife's support comes from a different source and exists whether there is community property or not. That he may be taxed for such a fund seems to us to need no argument. The same and further consideration lead to the conclusion that it was intended to tax him for the whole, for not only should he who has all the power bear the burden, 2944 and not only is the husband the most obvious target for the shaft, but the fund taxed, while liable to be taken for his debts, is not liable to be taken for the wife's, Civil Code, § 167, so that the remedy for her failure to pay might be hard to find. The reasons for holding him are at least as strong as those for holding trustees in the cases where they are liable under the law. § 219. See Regulations 65, Art. 341. That the excerpt just quoted is not dicta appears not only from the language itself, but it has been specifically held to be controlling in the case of ; . It is clear from the Robbins decision that it was not only within the power of Congress to tax the husband for the entire community income, but it was the intention of Congress so to do. The attempt of the respondent to tax the wife for one-half of the community income is, in our opinion, without authority of law and his action is disapproved. One minor point remains to be decided and that is whether an item of $525 should be deducted as an expense or whether it should be capitalized. While some portion of2945 the amount expended may perhaps be characterized as an expense and as such deducted, we are not satisfied that the entire amount should be so treated. In the absence of specific evidence permitting of a segregation there is no course open but to sustain the respondent. Reviewed by the Board. Judgment will be entered under Rule 50.MILLIKEN MILLIKEN, concurring in the result: I do not understand that we are called upon to decide whether the husband and wife may file separate returns of community income. The husband filed a return reporting the entire community income. The wife filed a return reporting only the income from her separate property. The decision of the majority, with a minor exception not here material, leaves the parties just as they filed their returns. I believe this proper. However, if and when a proper case arises presenting the question decided in the prevailing opinion I will then take occasion to set forth my views on that subject. LOVE agrees with the concurring opinion.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4623945/	Roy H. King and Edith Hughes King v. Commissioner.King v. CommissionerDocket Nos. 84978, 89797.United States Tax CourtT.C. Memo 1963-267; 1963 Tax Ct. Memo LEXIS 80; 22 T.C.M. (CCH) 1343; T.C.M. (RIA) 63267; September 27, 1963Roy H. King, pro se, 1500 Grant St., Wichita Falls, Tex. James F. Hart, for the respondent. DAWSONMemorandum Opinion DAWSON, Judge: Respondent determined the following deficiencies in income taxes of the petitioners and additions to tax: 81 Additions to Tax, I.R.C. 1954YearDeficiencySec. 6651(a)Sec. 6653(a)1955$10,052.61$2,513.15195613,508.17$675.41 The only issue presented 1 for decision is whether the petitioners are entitled to deductions of $1,636.20 in 1955 and $1,632.60 in 1956 for certain portions of premiums paid on life insurance policies designating a third person, who loaned money to petitioner Roy H. King, as beneficiary to the extent of any unpaid balance due on the loan. All of the facts were stipulated by the parties and are so found. Roy H. and Edith Hughes King (hereinafter called petitioners) are husband and wife and reside at 1500 Grant Street, Wichita Falls, Texas. During the calendar years 1955 and 1956, petitioners were on the cash basis of accounting and their joint Federal income tax returns for the years 1955 and 1956 were filed with the district director of internal revenue at Dallas, Texas. In the year 1946, Sid W. Richardson loaned the amount of $45,000 to Roy H. King upon the latter's note. Under the terms of the loan82 agreement Roy H. King was required to purchase policies insuring his life and listing Sid W. Richardson as the beneficiary of such policies to the extent of any unpaid balance of principal or interest on the $45,000 loan. As part of the loan agreement, all payments of principal, interest, and life insurance premiums were to be made by Richardson, and these amounts were to be deducted from an annual accounting retainer fee of $9,000 which Richardson was to pay Roy H. King. In accordance with the terms of the 1946 loan agreement, Roy H. King took out five policies with Union Central Life Insurance Company. During the years 1955 and 1956 premium payments were made on these policies by Sid W. Richardson and deducted from the annual retainer fee of Roy H. King, as follows: Amount ofPremiumPolicy Number195519561458081$ 713.60$ 712.801458082713.60712.801458083713.60712.801458084713.60712.801458085356.80356.40$3,211.20$3,207.60The cash surrender value of the five Union Central Life Insurance Company policies increased by the amounts of $1,575 in each of the years 1955 and 1956. The amounts of premiums paid during the83 years 1955 and 1956 exceeded the increases in cash surrender value of these policies by the respective amounts of $1,636.20 and $1,632.60. Petitioners contend that the amounts of $1,636.20 and $1,632.60 are allowable as deductions incurred in financing loans or, alternatively, are excludable from gross income as defined in section 61, Internal Revenue Code of 1954. 2 It is respondent's position that sections 262 and 264, and the regulations promulgated with respect thereto, preclude the petitioners from deducting any part of the life insurance premiums paid. Section 262 provides that "Except as otherwise expressly provided in this chapter, no deduction shall be allowed for personal, living, or family expenses." Section 1.262-1(b)(1), Income Tax Regs., states: Premiums paid for life insurance by the insured are not deductible. See also section 264 and the regulations thereunder. Section 264 referred to in the above cited regulation expressly denies a deduction for life insurance premiums. It reads as follows: (a) GENERAL84 RULE. - No deduction shall be allowed for - (1) Premiums paid on any life insurance policy covering the life of any officer or employee, or of any person financially interested in any trade or business carried on by the taxpayer, when the taxpayer is directly or indirectly a beneficiary under such policy. [Italics supplied.] Section 1.264-1(a), Income Tax Regs., which specifically denies a deduction for life insurance premiums that might otherwise be considered a trade or business expense, provides: When premiums are not deductible. Premiums paid by a taxpayer on a life insurance policy are not deductible from the taxpayer's gross income, even though they would otherwise be deductible as trade or business expenses, if they are paid on a life insurance policy covering the life of any officer or employee of the taxpayer, or any person (including the taxpayer) who is financially interested in any trade or business carried on by the taxpayer, when the taxpayer is directly or indirectly a beneficiary of the policy. [Italics supplied.] In Rieck v. Heiner, 25 F. 2d 453 (C.C.A. 3, 1928), certiorari denied 277 U.S. 608">277 U.S. 608 (1928), it85 was held that the taxpayer was "directly or indirectly" benefited from premium payments when life insurance policies were taken out by him on his own life and made payable to a creditor on the insistence of the creditor that it be used as collateral to secure a loan. Although the case involved section 215(d) of the Revenue Act of 1918 and section 215(a)(4) of the Revenue Act of 1921, these two sections are identical to section 264(1) of the Internal Revenue Code of 1954. In affirming the District Court's disallowance of the claimed deduction, the Court of Appeals stated: * * Though assigned to and held by the creditor and for two years used as collateral security, it was, none the less, a policy in which the taxpayer was 'directly or indirectly' a beneficiary, for if it had matured when held as collateral, and payment had been made to the creditor, it would indirectly have augmented his estate by decreasing his liabilities. See Edwin M. Klein, 31 B.T.A. 910">31 B.T.A. 910 (1934), affd. 84 F. 2d 310 (C.C.A. 7, 1936); Benjamin Barron, 14 B.T.A. 1022">14 B.T.A. 1022 (1929); and J. H. Parker, 13 B.T.A. 115">13 B.T.A. 115 (1928). We think these decisions86 control the instant case even though here the creditor, rather than the taxpayer, made the premium payments to the insurance company. Actually the payments were made by petitioner because the amounts thereof were deducted from the annual retainer fee of $9,000 which he received from Richardson. We cannot agree with petitioners that they received no economic benefit from the amounts paid. Roy H. King was required to purchase the policies on his own life as a condition of securing the loan and Richardson was beneficiary to the extent of the balance due on the loan. Thus, as we view it, the petitioners were "directly or indirectly" benefited by such premium payments within the meaning of section 264. Not only did the insurance policies enable Roy H. King to obtain the loan, but also his estate would have been relieved of the liability if he had died, since the proceeds of the policies would have liquidated the debt. Rieck v. Heiner, supra.Whether King used the proceeds of the loan for business purposes or otherwise, we hold that no part of the premium payments are deductible. Such amounts represented nondeductible personal expenditures. Therefore, we sustain the respondent's87 determination. To reflect concessions agreed to by the parties, Decisions will be entered under Rule 50. Footnotes1. All other issues have been settled by the parties and are set forth in the joint stipulation of facts filed herein.↩2. All Code references herein are to the Internal Revenue Code of 1954 unless otherwise indicated.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4623948/	HARRY HARPER WAGNER and RUTH N. WAGNER, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentWagner v. CommissionerDocket No. 260-74United States Tax CourtT.C. Memo 1978-49; 1978 Tax Ct. Memo LEXIS 470; 37 T.C.M. (CCH) 254; T.C.M. (RIA) 780049; January 31, 1978, Filed Arthur L. Berger and John S. Oyler, for the petitioners. Alan E. Cobb, for the respondent. WILBURMEMORANDUM FINDINGS OF FACT AND OPINION WILBUR, Judge: Respondent determined deficiencies in petitioners' Federal income tax and additions to tax as follows: Additions to the Tax YearDeficiencySec. 6653(b)Sec. 66541959$25,335.80$12,667.90196056,420.3628,210.18196126,577.6113,934.3919622,651.561,359.2219631,539.32769.667.83196417,427.058,713.5313.12196539,073.9919,537.00196640,874.5320,437.2719672,709.221,354.611968540.02270.01196937,100.3618,550.18197013,290.616,645.31471 The issues remaining for decision are (1) whether petitioners understated their taxable income for the years 1959 through 1966, and (2) whether, if petitioners did understate their taxable income for this period, such understatement was due to fraud. Absent a finding of fraud, assessment of a deficiency for the years 1959 through 1966 would be barred by the statute of limitations. Respondent has conceded on brief that petitioners are not liable for the deficiencies in tax or additions to tax under section 6653(b) 1 for the taxable years 1967 through 1970. FINDINGS OF FACT Some of the facts have been stipulated and are found accordingly. Petitioners Harry Harper Wagner, and Ruth N. Wagner, husband and wife, resided in Hershey, Pennsylvania, at the time their petition was filed herein. Petitioner Harry Harper Wagner filed separate individual income tax returns for the years 1959 and 1960 with the office of the Internal Revenue Service in Philadelphia, Pennsylvania. Petitioners filed joint income tax returns for the years 1961 through 1970 with the same office. 472 Petitioners' income tax returns were prepared on the cash basis with inventories. 2During the years in issue, petitioner operated a retail grocery store in Hershey, Pennsylvania. Petitioner began in the grocery business in 1938, when he joined his father in an equal partnership. Their business consisted of a meat and grocery store and a meat peddling route. After his father's death on October 17, 1946, petitioner became sole owner of the business. The meat peddling route was discontinued after 1961. Petitioner put the following earnings into Government bonds during World War II: Date IssuedDenominationNumberCostApril 1942 $5002$ 750April 1942100201,500June 1942100201,500$3,750June 19441004$ 300October 19441,0001750November 19441,00032,250$3,300Petitioner paid the following income taxes during the following years prior to 1959: YearIncome Tax Paid1946$ 199.001947762.981949347.8019501,434.741951981.2619522,347.941954345.361956378.81473 Petitioner received the following income tax refunds for the years 1948, 1957, and 1958: YearRefund of Tax and Interest1948(Unknown)1957$565.831958689.22In 1960, petitioner constructed a new store with 12,000 square feet of space, at a cost of $58,605.88, which he opened for business in May 1961. During 1961 he purchased equipment and fixtures for the new store at a total cost of $57,396.08. In addition, petitioner increased his inventory from $15,831.14 at the end of 1960 to $38,470.61 at the end of 1961, an increase of $22,639.47, making his total investment in the new store $138,641.43. When he stocked his new store with merchandise in May 1961, petitioner received $23,000 in credit from the Harrisburg Grocery Store. Petitioner paid off his credit balance of $18,183.15 by check on December 5, 1961. The new store is bigger than some supermarkets. It has three checkout counters with three cash registers and six meat scales. Nevertheless, generally only one checkout counter and one cash register were in use. The store operates more as a meat market and convenience store than as a supermarket. Petitioner's only employees in the store were474 his wife, son, and brother. On occasion, his sister and brother-in-law would help out. A considerable portion of petitioner's business was attributable to the sale of meats. As a licensed butcher, petitioner was able to buy cattle locally and slaughter them himself. 3 In addition to the sale of meat at his grocery store, petitioner peddled meat in the surrounding community. Petitioner delivered the meat to his customers in refrigerated trucks. After the opening of his new store in 1961, petitioner discontinued his meat peddling routes. He did, however, continue to make deliveries of meat through the years in issue on the basis of orders called into the store. Petitioner's records reflect substantial gasoline purchases for the years 1959 through 1966. 475 Petitioner established and maintained his own single entry bookkeeping system. Petitioner's wife handled the cash register at the store. At the end of each day, she entered the expenses paid in cash during the day from the cash register. The cash, plus the expenses paid out, represented the day's total receipts. Petitioner added the daily receipts and recorded the monthly totals in his ledger book. His business expenses were recorded in the book on a daily basis. Petitioner dealt almost entirely in cash during the years in issue. His business purchases were made largely in cash, and he accumulated his business income in cash, depositing cash not needed for current operations either at the end of the year or more frequently. When he did use checks, it was his practice to bring the cash to the bank and write a check on it. As a result of his frequent use of cash, he deposited and withdrew substantial sums of money from the bank. In addition to these transactions, it was his common practice to purchase and redeem certificates of deposit, and to a lesser extent United States Savings Bonds. Beginning in 1965, petitioner became a frequent trader in stocks. In 1964, he held476 stock costing him $5,100. By 1966, he had stocks and securities with a cost basis of $197,076.23. Despite the brisk activity in petitioner's brokerage account, he continued to conduct his stock transactions from a cash fund. When petitioner purchased stock, he did so by depositing cash in a checking account and drawing a check for the amount of the purchase. When petitioner sold stock he cashed the checks which he received in payment. Petitioner was known to carry large sums of money on his person on occasion, and had a special fondness for one thousand dollar bills. 4 Despite this apparent display of wealth, petitioner lived very frugally. He lived in a modest home, took no vacations, and apart from his plunge into the stock market, demonstrated no expensive habits. Following is a summary of petitioner's assets, liabilities and reserves, as constructed by respondent, for the period 1958 through 1970: In re: Harry H. and Ruth N. Wagner Docket No. 260-74 Assets195819591960Cash-on-Hand$ 3,500.00$ 3,500.00$ 3,500.00Cash-in-Bank 5120,525.67168,427.94184,403.29U.S. Savings Bonds -Series 'E'67,687.5052,687.5061,687.50Peceivable from StockBroker000Stock05,100.005,100.00Face Value of Coins inSafe Deposit Box803.91803.91803.91Personal Auto's4,837.806,837.8010,837.80Business Assets: Inventory5,907.4512,060.5615,831.14Depreciable Assets47,045.0751,125.7198,700.49Rental Property: 226 E. Derry Rd.6,325.006,325.006,325.00Residence: 303 E. Derry Rd.5,000.005,000.005,000.00Unidentified Asset.Expenditure000TOTAL ASSETS YEAR END263,632.40311,868.42392,189.13LiabilitiesHummelstown NationalBank000R. T. Randall andCompany000Reserve for Depreciation: Rental Property1,400.001,500.001,600.00Business Assets13,717.2117,568.9120,113.52TOTAL LIAB.& RESERVES15,117.2119,068.9121,713.52477 19611962196319641965Cash-on-Hand$ 3,500.00$ 3,500.00$ 3,500.00$ 3,500.00$ 3,500.00Cash-in-Bank190,216.86208,044.91178,806.34228,821.47271,213.85U.S. Saving Bond - Series "E"32,137.50Receivable from StockBrokerStock5,100.005,100.065,100.005,100.0030,717.13Face Value of Coins in Safe Deposit Box803.91803.91803.91803.91803.91Personal Auto's8,608.608,608.609,414.139,414.139,414.13Business Assets:Inventory38,470.6135,090.4829,148.2329,429.5052,232,78Depreciable Assets162,890.92165,131.12159,174.94159,174.94159,465.66Rental Property: 226 E. Derry Rd.6,325.006,325.006,325.006,325.006,325.00Residence: 303 E. Derry Rd.5,000.005,000.005,000.005,000.005000.00Unidentified Asset.Expenditure34,303.7434,303..7434,303.7434,303.74TOTAL ASSETS YEAR END453,053.40471,907.76401,576.29501,072.69622,976.20LiabilitiesHummelstown National BankR. T. Randall and CompanyReserve forDepreciation:Rental Property1,700.001,800.001,900.002,000.002,100.00Business Assets30,656.1642,967.6547,492.8856,267.6263,469.42TOTAL LIAB.& RESERVES32,356.1644,767.6549,392.8859,267.6265,569.42478 19661967196819691970Cash-on-Hand$ 3,500.00$ 3,500.00$ 3,500.00$ 3,500.00$ 3,500.00Cash-in-Bank194,676.54123,940.6331,171.8434,005.116,459.69U.S. Savings Bonds - Series "E"2,943.7514,006.25Receivable from StockBroker14,583.44Stock197,076.23261,427.78253,686.29361,255.36396,415.75Face Value of Coins inSafe Deposit Box803.91803.91803.91803.91803.91Personal Auto's4,000.004,000.005,890.005,890.005,890.00Business Assets:Inventory53,591.7552,947.6252,537.1658,375.0059,250.00Depreciation Assets164,498.16150,252.35150,252.35153,275.23155,201.23Rental Property:226 E. Derry Rd.Residence:303 E. Derry Rd.5,000.005,000.005,000.005,000.005,000.00Unidentified AssetExpenditure84,303.74174,849.71278,351.16278,351.16278,351.16TOTAL ASSETS YEAR END724,977.52776,722.00795,198.96900,453,75950,961.74Liabilities Hummelstown NationalBank2,078.0047,890.6427,092.0157,369.0857,369.08R. T. Randall andCompany990.00Reserve for Depreciation:Rental PropertyBusiness Assets70,263.7868,176.9974,333.0980,048.6285,490.01TOTAL LIAB. & RESERVES73,323.78116,067.62101,425.10137,417.30142,859.09479 The parties agree with the figures set forth in the summary except for the cash on hand, inventories 6 for 1965 and subsequent years, and "unidentified asset expenditures." 480 Respondent originally contended that the cash on hand was $3,500, although on brief he also argues that even if there was a substantial cash hoard, it was the same at the beginning of 1959 and 1967.Petitioner argues that he had an opening cash hoard of $124,000. 7 We find that petitioner's cash on hand at the beginning of the period here in question was no more than $3,500. Respondent contends that petitioner used the following funds for unidentified assets and/or expenditures: 8a) $11,514 petitioner received on the redemption of U.S. Savings Bonds, Series E on April 10, 1962. b) $22,789.74 petitioner received on the redemption of U.S. Savings Bonds, Series E on April 19, 1962. c) $50,000 petitioner withdrew in $1,000 dollar bills from a joint savings account, account number 1572, at the Hershey National Bank on June 4, 1963. 481 Respondent computed petitioner's understatement of income as follows: In re: Harry H. and Ruth N. Wagner Docket No. 260-74 Description1958195919601961TOTAL ASSETS:263,632.40311,868.42392,189.13453,053.40Less: Liabilities & Reservefor Depr.15,117.2119,068.9121,713.5232,356.16NET WORTH248,515.19292,799.51370,475.61420,697.24Net Worth Beginning of Year248,515.19292,799.51370,475.61Increase in Net Worth44,284.3277,676.1050,221.63ADJUSTMENTS: Additions: Income Tax Payments1,710.782,032.492,108.25Personal Inc. Premiums2,081.207,508.007,499.50Personal Expenses - Living3,000.003,000.003,000.00Personal Expenses - Other1,820.001,820.001,820.00Non-Deductible Loss -Personal Autos3,594.70Reductions: Dividend Exclusion(100.00)(100.00)(100.00)Non-Taxable Portion -Capital GainsNET ADJUSTMENTS8,511.9814,261.2917,922.45ADJUSTED GROSS INCOME AS CORRECTED62,796.3091,937.3968,144.08DEDUCTIONS: Standard or Itemized Ded.(500.00)(500.00)(1,000.00)Exceptions(1,800.00)(1,800.00)(1,800.00)TAXABLE INCOME AS CORRECTED50,496.3089,637.3965,344.08TAXABLE INCOME PER RETURN8,667.818,816.3414,358.47UNDERSTATEMENT OF TAXABLE INCOME41,828.4980,821.0550,985.61482 Description19621963196419651966TOTAL ASSETS491,987.76481,576.29531,672.69622,976.20724,977.52Less:Liabilities & Reservefor Depr. 44,767.6549,392.8858,267.6265,569.4272,222.78NET WORTH427,146.11432,183.41473,605.07687,406.78681,682.74Net Worth Beginningof Year420,97.34427,140.11432,103.41473,608.67897,406.78Increase in NetWorth6,442.075,643.2041,421.6683,001.7194,246.96ADJUSTMENTSAdditions: Income Tax Payments2,136.382,948.173,136.888,148.96Personal Ins. Premiums7,229.307,162.057,002.406,809.956,792.60Personal Expenses - Living 3,000.003,138.293,326.293,138.293,138.29Personal Expenses - Other1,620.002,422.873,240/002,340.001,604.81Non-Deductible Loss- Personal Assets2,640.451,914.13Reductions:Dividend Exlusion(100.00)(100.00)(200.00)(200.00)(200.00)Non-Taxable Portion- Capital Gains(1,007/78)(4,150.28)NET ADJUSTMENTS14,095.6015,731.2815,600.5718,793.7714,039.74ADJUSTED GROSS INCOME ASCORRECTEDDEDUCTIONS90,638,5820,774.5857,110.3399,595.48100,286.70Deductibles; Standard orItemized Ded.(1,000.00)(1,000.00)(1,000.00)(1,000.00)(1,000.00)Exceptions(1,000.00)(1,000.00)(1,000.00)(1,000.00)(1,000.00)TAXABLE INCOME AS CORRECTED19,270/5617,974.8696,798.48106,086.70TAXABLE INCOME PER RETURN8,214.6712,548.6114,394.1219,677.7228,937.52UNDERSTATEMENT OFTAXABLE INCOME9,582,883,433.9739,916.0577,117.7677,249.16483 OPINION Respondent has determined petitioner's income for the years in issue utilizing the net worth and expenditures theory. In using the net worth method, respondent first attempts to establish the taxpayer's net worth at the beginning of a given year. He then computes increases in the taxpayer's net worth in each succeeding year under examination, calculating the difference in the taxpayer's net worth at the beginning and the end of each year.To these increases certain adjustments are made including the addition of nondeductible expenditures, such as living expenses. If the total increases in net worth are substantially greater than the taxable income as reported by the taxpayer, respondent claims the excess is unreported taxable income, unless it can be traced to a nontaxable source (such as a cash hoard, gifts, inheritances, etc.). The parties agree on all of the elements entering the net worth calculation except for cash on hand, inventory for 1965 and 1966, and an item used in respondent's computations entitled "unidentified asset expenditure". At the outset, we note that any assessment for the years in issue is barred by the statute of limitations unless respondent484 can show petitioner filed a false or fraudulent return with intent to evade tax. Section 6501(c)(1). In Ross Glove Co. v. Commissioner,60 T.C. 569">60 T.C. 569, 608 (1973), we approved the following definition of fraud: The term "fraud" means actual intentional wrongdoing, and the intent required is the specific purpose to evade a tax believed to be owing. Fraud implies bad faith, intentional wrongdoing, and a sinister motive. It is never imputed or presumed and the courts will not sustain findings of fraud upon circumstances which at the most create only suspicion. * * * [Citation omitted]. Respondent has the burden of proving fraud by clear and convincing evidence. Section 7454(a); Rule 142(b) Tax Court Rules of Practice and Procedure.Beaver v. Commissioner,55 T.C. 85">55 T.C. 85, 92 (1970). The existence of fraud is a factual question which must be resolved by reference to all the evidence in the record. See Otsuki v. Commissioner,53 T.C. 96">53 T.C. 96, 105-106 (1969). In making our analysis it would be convenient to focus on two periods--1959 through 1961 and 1962 through 1966.In the earlier period, respondent confined himself to a more or less485 conventional analysis of the taxpayer's net worth, and the dispute turns on the amount of any beginning cash hoard. For the years 1962-1966, however, respondent added to petitioner's net worth a sum represented by "unidentified asset expenditures." We begin by focusing on the later years--1962-1966.The centerpiece of the respondent's case for these years is his assertion that petitioner used current income to either amass a large hoard of funds or make large nondeductible expenditures, which although not discoverable, should be included in determining his increase in net worth. Specifically, respondent contends that the following funds were used for unidentified assets and/or expenditures: a) $11,514 petitioner received on the redemption of U.S. Savings Bonds, Series E on April 10, 1962. b) $22,789.74 petitioner received on the redemption of U.S. Savings Bonds, Series E on April 19, 1962. c) $50,000 petitioner withdrew in $1,000 dollar bills from a joint savings account, account number 1572, at the Hershey National Bank on June 4, 1963. In essence, respondent argues that since he was unable to trace these funds, they must have been used in some fashion, either to acquire486 some unknown asset or to make some undiscovered and nondeductible expenditure. Respondent's case for 1962 to 1966 depends almost wholly on his use of this "unidentified asset expenditures" account. While in a particular case, this methodology may have merit, it is inappropriate in the case before us. The addition of sums to the unidentified asset expenditures category totally ignored the manner in which petitioner handled his financial affairs. Petitioner conducted his business transactions through the use of what was essentially a revolving cash fund. During the years in issue, petitioner engaged in literally thousands of transactions. Sometimes the funds from the sale of stock or the redemption of certificates of deposit were immediately reapplied to purchase other assets, sometimes they were not. Moreover, when some other asset was purchased, it was highly unlikely that the cost of that asset would correspond to the exact dollar amount of the sum previously added to the cash fund. The methodology respondent used for tracing was limited both in duration and amount. While it is not entirely clear, funds were generally not traced beyond an arbitrary cut-off period of seven487 days nor were amounts of less than $5,000 traced.The major defect inhering in this procedure is the danger of duplication. Given the short turnover period the respondent allowed (seven days), and the rather high amounts required to warrant any tracing ($5,000), this is a very significant defect and a substantial danger. For example, assume a bond was redeemed and the cash from that redemption went back into a cash fund. If nothing was purchased from the fund within seven days, or the funds were reinvested in amounts of from $5,000 to $6,000, or some combination of the two, respondent would conclude that the funds from the redemption went into an unidentified asset expenditure. Yet if stock was purchased from the fund beyond the tracing period, in amounts below the tracing criteria, or some combination of the two, respondent would also include the stock as part of the taxpayer's net worth. After careful study of the record, we believe that example is typical of what often happened here, and respondent's agent, on cross-examination, admitted some probable instances of duplication when confronted with certain specific examples. Some of these admittedly related to the years 1967488 through 1970, which respondent has now conceded. However, we feel no more comfortable with the same theory in the earlier years that respondent has discarded in the later years. Respondent noted on brief that petitioner's argument that large sums charged to the "unidentified asset expenditure" account for 1967 and 1968 were ultimately invested in the stock market and then said "based on the record in this case, this is a plausable [sic] explanation." We believe this explanation to be no less plausible for 1962 to 1966. In fact, it is even more likely that the funds designated as unidentified asset expenditures for the years 1962 through 1966, were ultimately reinvested in visible assets (e.g., stock) than the funds for the years conceded by respondent. In the 1967 through 1970 period, stock market investments increased by $134,987.97, from $261,427.78 to $396,415.75.At the same time, cash in bank went down from $194,676.54 to $46,459.69, a difference of $148,216.85, and bank loans increased from $2,070 to $57,369.08, a difference of $55,299.08, both of these representing obvious visible sources for the stock market investments. By contrast, in the 1962 through 1966 period, 489 stock market investments increased by $191,976.23, from $5,100, to $197,076.23. In the same period, cash in the bank actually increased from $190,216.86 to $194,676.54. Comparing the two periods 1962 to 1966 with 1967 to 1970, stock market investments increased by more during the 1962 through 1966 period, while uses of visible sources for the stock market investments were actually much greater in the later period than they were in the earlier period. In sum, we believe that the method used by respondent in determining petitioner's net worth was not particularly well conceived and failed to take into account the rather extraordinary nature of the individual taxpayer. We recognize that the large cash withdrawals are likely, when considered in the total circumstances of this case, to create strong suspicions of fraud. It is undisputed that petitioner withdrew $50,000 in $1,000 bills from Hershey National Bank on June 4, 1963. He told several inconsistent stories about how he used these funds, or "might" have used them, in the final analysis relying heavily on a lapse of memory. We are skeptical that he would be unable to recall what he did with such a large sum of money. In490 many other instances it was extremely difficult to tell when petitioner's testimony was truthful or mendacious. He often equivocated, sometimes he was understandably unable to reconstruct events occurring a decade and a half ago, and on other occasions we strongly suspect he deliberately fabricated his testimony, often on an adhoc basis. Nevertheless, petitioner was a suspicious man, who became increasingly distrustful of respondent's agents, which undoubtedly explains some of the equivocation.While the issue in these years is hardly free from doubt, we are ultimately persuaded that the defects in the centerpiece of respondent's case--the "unidentified asset expenditures" line of the net worth statement--prevent respondent from carrying his burden of proving fraud by clear and convincing evidence. Congress did not say that when sloppy books and records exist, or when there has been extensive use of cash, or when other circumstances creating strong suspicions of fraud exist, that the statute may be opened up. Rather, it is well-settled that fraud must be proven by "clear and convincing evidence." Rule 142(b), Tax Court Rules of Practice and Procedure; Beaver v. Commissioner,55 T.C. 85">55 T.C. 85, 92 (1970).491 Obviously, this language provides qualitative rather than quantitative criteria, and is not amenable to mathematical certainty. Necessarily, when a record is as confused as this one, encompassing in the earliest year a period that occurred nearly two decades ago, there will be some doubt and uncertainty about the conclusion reached in the light of the Congressionally-mandated criteria. This is the nature of the process, and while we believe the conclusion to be much closer than petitioner concedes, we nevertheless hold that respondent has failed to sustain his burden of proof in the years 1962 to 1966. The years 1959-1961 are an entirely different matter, since respondent's calculations do not involve a line for "unidentified asset expenditures." Standard net worth plus expenditures techniques were used for these years, and as petitioner noted on brief, in these years "the crux of the dispute is the existence of a beginning cash hoard." Or, as petitioner put it in his opening statement, "for the earlier years, the result will pretty much depend upon the Court's judgment as to the petitioner's allegation of opening cash." The petitioner claims a cash hoard of $124,000 at the492 end of calendar year 1958. Respondent contends opening cash on hand was $3,500. We find petitioner's claim preposterous and therefore sustain respondent on this point. We begin by noting that petitioner told so many inconsistent stories concerning his cash hoard over such an extended period of time that the search for the truth has proved elusive in the extreme. In 1967, petitioner initially stated that he had received a substantial inheritance from his father and gifts from his mother. Based on his father's will, which was introduced into evidence; on statements made by petitioner (and corroborated by Mrs. Wagner) regarding the circumstances and conduct of petitioner's parents; and based on petitioner's testimony on the subject, which we found wholly unreliable on this point, we do not believe that he received any money from his parents. 9493 Additionally, petitioner on several occasions also told respondent's agent that he "did not hoard money" and pretty much conceded he did not have any large cash hoard. Referring to large cash amounts he told these agents that "I would never keep money like that around." Prior to the present trial petiioner stated on several occasions that he kept on hand cash accumulated during the current year, but always deposited it at the end of the year. At one point, petitioner told respondent's agents that he deposited his receipts at years' end never retaining any more than $3,500 for bills beginning the following year. This story was corroborated by statements made by Mrs. Wagner. 10 At the trial several tin boxes were produced and a virtually incomprehensible story told concerning the sequential transfer of cash from one box to another at various periods. A good deal of the story appeared to be created from whole cloth on an adhoc basis, with emendations invented on the spot to cover weak points as they appeared. 494 The final resting place of the huge cash hoard petitioner claims (some of which filtered its way through the series of tin boxes) was some cigar boxes resting in a hope chest in petitioner's attic. It is beyond belief that petitoner laid up this treasure "where moth and rust doth corrupt and where thieves break through and steal." Not to mention the danger of fire. The record is clear that Mrs. Wagner was unaware of any large cash hoard to be removed in case of fire.11In addition to the extreme improbability that petitioner would expose such a large principal amount to loss, it is difficult to believe that he would forego the substantial interest that a safe lodging of this money with the bank would provide. As for petitioner's claimed lack of confidence in banks, we note that he made substantial use of them throughout the period in question, it being stipulated that he had as much as $271,213.85 in495 banks in 1965. It is undisputed that petitioner did on occasion carry around substantial numbers of $1,000 bills. But we suspect that as soon as this display reaped its psychological reward, petitioner reinvested the large bills in a safe place calculated to yield a reasonable return. 12 We do not, therefore believe that the mere ostentatious display of $1,000 bills on a few isolated occasions establishes a cash hoard at the beginning of 1959 in spite of the overwhelming evidence that none existed. We acknowledge that we are not entirely comfortable in reaching different conclusions with regard to the early and later years. However, the Court must decide the case on the record made, and as to the later years respondent simply failed to sustain his heavy burden of proof. Additionally, we note that petitioner discontinued his meat peddling business after 1961. 13 This loss of income and smaller than expected volume in the new store may justify this divergence, at least in part. 496 Respondent attempted to salvage all of the years through 1966 with an argument based on two items from the record relating to petitioner's alleged cash hoard. The first of these items is a scrap of paper, on which petitioner wrote down some figures, apparently arriving at $173,000 as his cash hoard sometime in 1966. The second item was the following testimony of petitioner from the trial: Well, sometimes the money went into that chest, but there -- here I was -- after '66, I started using money to -- I didn't start using that money, I believe, until '67 or '68, when I run out of money in the savings accounts, then I started buying and paying for them stocks -- around '67 or -- I'm not sure. It happened after '65 when I started playing the stock market. The slip of paper records a summary of fabrications recorded and then made available to respondent very late in the sequence of events before us. Respondent argues that assuming the cash hoard was in existence, petitioner's testimony indicates it remained intact through 1966. As recounted earlier, respondent's case for 1962-1966 suffers from deficiencies in his theory of unidentified asset expenditures as applied to this case. 497 However, we do not believe that his attempt to salvage these years by circumventing these deficiencies with an alternative theory concedes the existence of an opening cash hoard at the beginning of 1959. We reject respondent's attempt to breathe new life into the years 1962-1966 by focusing on petitioner's final prevarication regarding a cash hoard.Conversely, we do not believe that by arguing for certain consequences assuming the truth of petitioner's statement as to the use of his claimed cash hoard, respondent concedes the existence of such a hoard. Respondent's entire case was predicated on the absence of any large hoard and on this point we find his case virtually unassailable. 14 We therefore sustain respondent's determination for the years 1959-1961. 498 Decision will be entered under Rule 155. Footnotes1. All section references are to the Internal Revenue Code of 1954, as amended, unless otherwise stated.↩2. Since Ruth N. Wagner is a party to this proceeding solely by reason of filing a joint return, Harry H. Wagner will be referred to as petitioner.↩3. Petitioner's total cattle purchases per records, and petitioner's total purchases per his tax returns, were during the years 1959 through 1966, as follows: ↩Total Cattle PurchasesTotal Purchases YearPer Ledger BooksPer Tax Returns1959$34,616.41$194,886.45196033,374.24177,523.49196131,439.59224,319.51196237,582.78222,236.00196335,487.67233,107.85196435,331.48242,890.70196538,168.44254,440.23196639,668.48247,168.584. On one occasion in 1963, petitioner withdrew $50,000 in $1,000 bills from a savings account at the Hershey National Bank in Hershey, Pennsylvania.↩5. Cash in bank consists of cash on deposit in checking accounts, savings accounts and certificates of deposit.↩6. The controversy over inventories was the result of a compensating entry made by petitioner in reporting his sales in 1965. As previously noted, petitioner's wife kept a daily receipts record consisting of two columns. In the first column she recorded the amount of cash in the cash register at the end of the day. When petitioner recorded the monthly totals from his daily receipts record in his ledger book for the year 1965, he recorded only the monthly totals of the first column. Thus, he understated his cash receipts recorded in his daily receipts record by the total of the second column, $31,170.20. When computing his taxable income from his books and records for 1965, petitioner realized that his income as computed was incorrect, given the substantial cash petitioner had accumulated and had on hand at the end of the year. In trying to correct this disparity, petitioner raised his inventory for the year end by $22,793.28, thereby increasing his taxable income for the year. Petitioner's inventory has thus been inflated by this amount every year since 1965.↩7. Petitioner contends that he received $30,000 from each of his parents as a gift, that he accumulated $39,000 from yearly savings of $3,000 each and that he had $25,000 from pre-World war II accumulations, a total of $124,000.↩8. Respondent originally contended that in addition to the above, cash from the following sources were also used for unidentified assets and/or expenditures: 1967SourceCash ReceivedMay 10600 shares of Harsco Corp.$13,589.72June 12Hummelstown National Bank -54,600.00Certificate of DepositNo. 386July 17U.S. Savings Bonds, Series E6,412.50August 7Hershey National Bank SavingsAccount No. 1104013,000.00December 26U.S. Savings Bonds,Series E2,943.75TOTAL$90,545.971968Feb. 5Farmer's Bank & Trust Co.$20,000.00Certificate of DepositNo. 22609June 4200 shares of Hershey Foods6,120.87June 12200 shares of Hershey Foods6,120.87June 13400 shares of Hershey Foods12,838.72Nov. 8300 shares of Bethlehem Steel9,740.97Dec. 2600 shares of Hershey Foods19,407.32Dec. 2500 shares of Hershey Foods16,234.97Dec. 3400 shares of Hershey Foods13,037.73TOTAL$103,501.45As noted, however, respondent has now conceded the years after 1966.↩9. That is, other than small incidental gifts and possibly the $1,000 specific bequest each child was to receive under the will of petitioner's father. We note that although petitioner operated the business with his father, he was required to purchase his father's share at the latter's death. We also note that he made several statements to respondent's agents that, if not flatly contradicting the claim of substantial inheritances and/or gifts, are inconsistent with such a claim.↩10. Mrs. Wagner did not testify at the trial, but an interview she gave to respondent's agent was stipulated. One cannot read the interview without being impressed by her candor and integrity. She clearly found the notion of a large cash hoard virtually impossible to believe. However, while we find her statements consistent with our conclusion, we do not place great reliance on them, since her familarity with the business and family financial affairs was quite clearly limited, being based primarily on her role in operating the check-out counter.↩11. A picture taken the Sunday before the trial shows the chest and cigar boxes in the attic of petitioner's frame home where these huge sums were allegedly kept.We would find it easier to believe in the abominable snowman than to believe petitioner's story on this point.↩12. Indeed, throughout all of the later years, we recognized that this probably occurred.↩13. Respondent contends that petitioner conducted the meat peddling route through 1966.However, the returns before us demonstrate that the last year petitioner took a deduction for a meat peddling license was in 1961. The disappearance of this item from his return, prior to his difficulties with the Internal Revenue Service, leads us to believe petitioner's assertion that he discontinued the meat peddling route at this time.↩14. During the trial, petitioner argued that his books and records were of the garden variety expected of a small business and sufficiently accurate to preclude reconstruction of income by the net worth method. We disagree completely.Among many factors we might point to, the books improperly recorded cattle purchases and inventory was deliberately understated as a compensating error. Petitioner stated he put his interest in with his business income in the early years, and this is not true. Additionally, we do not believe the books properly reflected his income from the meat peddling route.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4623949/	EDWARD C. STRIFFLER, INC., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Edward C. Striffler, Inc. v. CommissionerDocket No. 5533.United States Board of Tax Appeals7 B.T.A. 887; 1927 BTA LEXIS 3082; July 30, 1927, Promulgated 3082 Under the facts herein the petitioner is entitled to include in its invested capital for the year 1920 the value of the good will acquired from its predecessor. William D. Harris, Esq., for the petitioner. J. Harry Byrne, Esq., for the respondent. MARQUETTE 887 This proceeding is for the redetermination of a deficiency in income and profits tax for the year 1920 in the amount of $1,707.66. The only question for decision is whether the petitioner is entitled to include in invested capital for 1920, good will of the value of $10,000 acquired from a predecessor business. 888 FINDINGS OF FACT. The petitioner is a New York corporation organized in the year 1918 for the purpose of acquiring an iron and steel hardware business owned and operated by Edward C. Striffler. Its principal office and place of business are at New York City. In or about the year 1870, the father of Edward C. Striffler founded an iron and steel hardware business in New York City. About January, 1897, Edward C. Striffler and Emil Rudolph purchased the business of Edward C. Striffler's father, paying about $40,000 for the tangible assets and $10,000 for the3083 good will thereof. In the year 1907, Edward C. Striffler purchased from Emil Rudolph his one-half interest in the business for $66,525.84, of which $5,000 was paid specifically for Rudolph's interest in the good will. On January 1, 1919, Edward C. Striffler conveyed all of the assets of the business, including good will, to the petitioner in consideration of the issuance to him by the petitioner of its capital stock, consisting of 1,250 shares of the par value of $100 each. The good will of the business at the time it was transferred to the petitioner was of the cash value of $10,000. The par value of the stock issued by the petitioner for the business of Edward C. Striffler exceeded the value of the tangible assets conveyed by more than $10,000. The respondent refused to permit the petitioner to include in invested capital for the year 1920 any amount of the good will acquired from Edward C. Striffler as hereinabove set forth. OPINION. MARQUETTE: Edward C. Striffler acquired for $10,000 the good will of the business founded and operated by his father, and he was entitled to include in the invested capital of his business on account of said good will the amount of $10,000. *3084 When he sold his business to the petitioner in 1919 the value of the good will in question was still $10,000. He received therefor stock of the par value of more than $10,000. The lowest of the three limitations on the inclusion in invested capital of intangible assets acquired for stock is in this case the value of the intangibles, to wit, $10,000, and the petitioner is not prevented from including that amount in its invested capital by section 331 of the Revenue Act of 1918, since it is not in excess of the amount at which Striffler was entitled to include it in the invested capital of his business. Judgment will be entered on 15 days' notice, under Rule 50.Considered by PHILLIPS, VAN FOSSAN, and MILLIKEN.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4623950/	Brooks Griffin and Josephine Griffin, Petitioners v. Commissioner of Internal Revenue, RespondentGriffin v. CommissionerDocket No. 3487-65United States Tax Court49 T.C. 253; 1967 U.S. Tax Ct. LEXIS 5; December 19, 19675 Decision will be entered for the Respondent. 1. On Jan. 3, 1961, petitioners conveyed by deed 1,115.96 acres of farmland in Phillips County, Ark., to Radcliffe Investment Co. in exchange for two Arkansas farm properties located in Phillips County, a farm in Missouri, and $ 5,683.60 in cash. The value of the Missouri farm at time of the exchange was $ 110,550. On July 13, 1960, during earlier negotiations with Radcliffe relating to the disposition of petitioners' farm, petitioners agreed in writing to sell the aforesaid Missouri farm to B. A. Craig for $ 110,550, the sale to take place on or before Jan. 10, 1961, but not before Jan. 2, 1961. On Jan. 3, 1961, petitioners consummated this sale for $ 110,550. Held, that the Missouri farm received in the exchange was other property held primarily for sale and did not come within the nonrecognition-of-gain provisions of sec. 1031(a), I.R.C. 1954, 1 and the entire gain of $ 86,631.92 realized by petitioners upon the disposition of their 1,115.96-acre farm must be recognized.2. Petitioners, who reported their income and claimed6 expenses on the cash basis of accounting, deducted payments of interest for the taxable year 1962 in the aggregate amount of $ 32,709.29 included in four checks dated Jan. 1, 1963. These checks were mailed on Dec. 31, 1962, and were paid and canceled by the drawee bank from January 9 through 10, 1963. Held, that petitioners are not entitled to deduct said payments of interest in the taxable year 1962. 7 E. J. Ball, for the petitioners. Robert S. Leigh, for the respondent. Turner, Judge. TURNER 254 Respondent determined income tax deficiencies against petitioners as follows:YearDeficiency1961$ 40,946.10196217,626.9858,573.08The issues for decision are as follows:(1) Whether, on January 3, 1961, the exchange by petitioners of 1,115.96 acres of farmland for cash and three smaller farms was, except as to the cash, a tax-free exchange within the meaning of 8 section 1031 of the Internal Revenue Code of 1954, and (2) whether the petitioners, who kept their books and records and made their income tax returns on the cash basis, are entitled to deduct in 1962 payments of interest made by checks dated January 1, 1963, mailed to the payee on December 31, 1962, and paid and canceled by the bank on which they were drawn in January 1963.FINDINGS OF FACTSome facts and some evidence have been stipulated by the parties and the facts so stipulated are found as stipulated.Petitioners are husband and wife residing at Ratio, Phillips County, Ark. They filed their joint United States income tax returns for the calendar years 1961 and 1962 with the district director of internal revenue, Little Rock, 9 Ark. They kept their books and made their returns on the cash basis.During the taxable years 1961 and 1962 petitioners were engaged in the business of farming in Phillips County. The principal crops were cotton and soy beans, although small amounts of rice crops were also produced and sold.Petitioner Brooks Griffin, sometimes referred to herein as Griffin or petitioner, personally operated his farms, using his own employees.255 During the taxable years involved, petitioner was also engaged in the cotton gin business at Ratio, Ark. In addition, he operated a merchandise store in a rented building at Ratio, where he maintained his office.On July 13, 1960, petitioners and Radcliffe Investment Co., an Arkansas corporation, sometimes referred to as Radcliffe, entered into a contract entitled "Agreement For Exchange of Real Estate" whereby petitioners agreed to convey by warranty deed certain farmland, sometimes called Howe land, consisting of 1,115.96 acres and located in Phillips County, in exchange for Radcliffe's agreement to convey by warranty deed to petitioners a farm property located in New Madrid County, Mo., plus $ 156,536.45 in cash to be paid to petitioners as boot10 on the exchange, the transactions to take place on or before January 10, 1961, but not prior to January 2, 1961.On the same date, July 13, 1960, petitioners entered into a contract entitled "Real Estate Sales Agreement" whereby they agreed to sell the Missouri farm property they were to receive in the above exchange to B. A. Craig for a cash consideration of $ 110,550, the sale to take place on or before January 10, 1961, but not before January 2, 1961.On December 3, 1960, petitioners and Radcliffe entered into contracts providing for the recision of the July 13, 1960, agreement for exchange of properties and the substitution of a new agreement for exchange of real estate. Under the substituted agreement, petitioners were to receive the Missouri farm property, two farm properties located in Phillips County, Ark., known as Earls Farm and Loveless Farm, and $ 5,683.60 in cash, in exchange for their Howe land. It was provided that the exchange was to take place on or before January 10, 1961, but not before January 2, 1961.Petitioners and B. A. Craig did not at any time rescind or revise their sales agreement of July 13, 1960, pursuant to which petitioners were to sell to B. A. Craig11 the Missouri farm property for $ 110,550 on or before January 10, 1961, but not before January 2, 1961. The agreement continued in full force and effect from July 13, 1960, until the property was acquired from Radcliffe on January 3, 1961, and sold to Craig on the same date.On December 1, 1960, Radcliffe entered into an agreement for the purchase of the Earls Farm property for a consideration of $ 75,000 for the purpose of using it in the prospective January 1961 exchange of properties with petitioners.On December 17, 1960. Radcliffe entered into an agreement for the purchase of the Loveless Farm property for a consideration of $ 72,000 for the purpose of using it in the prospective January 1961 exchange of properties with petitioners.On January 3, 1961, the following transactions were closed pursuant to the various agreements:256 A. By warranty deed petitioners conveyed Howe land, consisting of 1,115.96 acres of land and improvements, to Radcliffe free and clear of its prior indebtedness of $ 117,000 secured by a first mortgage on the property.B. Radcliffe closed the purchase of the Earls Farm and the Loveless Farm, conveying them by warranty deed free and clear of encumbrances12 to Griffin.C. By warranty deed Radcliffe conveyed its Missouri farm property free and clear of a prior mortgage indebtedness of $ 36,000 to Griffin.D. Radcliffe issued its check payable to the order of Griffin in the amount of $ 5,683.60 and delivered it to him.E. A settlement sheet bearing acceptance signatures of Radcliffe by E. M. Radcliffe as president and Griffin was given to these parties in connection with their exchanges of properties reflecting the following:Settlement SheetExchange of Real Estate Between:Radcliffe Investment CompanyOsceola, ArkansasandBrooks GriffinElaine, ArkansasDeed from Brooks Griffin to Radcliffe Investment Company 1115 [n1] acres of land situated in Phillips County -- value$ 265,040.50Deeds from Radcliffe Investment Company toBrooks Griffin:1. Missouri land -- value$ 110,550.002. Loveless land -- value73,806.903. Earls land -- value75,000.00Check from Radcliffe Investment Company toBrooks Griffin as boot5,683.60265,040.50265,040.50January 3, 1961Accepted:Radcliffe Investment CompanyBy E. M. RadcliffePresidentBrooks GriffinBrooks GriffinThe acreage in Howe land, as shown 13 by the exchange agreements with Radcliffe, was 1,115.96 acres.F. By warranty deed petitioners conveyed the Missouri farmland to B. A. Craig receiving therefor a consideration of $ 110,550 represented by $ 5,000 in cash received as earnest money in connection with the execution of the sales agreement on July 13, 1960, and a cash payment to petitioners on January 3, 1961, of $ 105,550.257 On January 3, 1961, immediately prior to the exchanges, petitioners' adjusted basis in the 1,115.96 acres of land and improvements known as Howe land was as follows:Cost$ 180,195.60Depreciation allowed2,560.02Basis adjusted177,635.58In disposing of the Howe land, petitioners incurred and paid selling expenses in the amount of $ 773.In the exchange of Howe land for the three farms and $ 5,683.60 cash, the parties are agreed that petitioners realized gain in the amount of $ 86,631.92. In arriving at the gain in that amount the values shown for the three farms received were the same as those shown on the settlement sheet, plus the cash payment of $ 5,683.60, reduced by the above-stated basis of $ 177,635.58 for Howe land and the expenses of sale in the amount of $ 773. 14 In reporting their income for 1961, the petitioners treated the disposition of its Howe land as an exchange of property for property of a like kind within the meaning of section 1031(a) of the Internal Revenue Code of 1954 to the extent of the three farms acquired. It computed and reported a long-term capital gain of $ 7,383.60. 2 On the sale of the Missouri land to Craig petitioners reported long-term capital gain in the amount of $ 34,235.92. In arriving at that amount he used $ 76,314.08 as his basis for the Missouri land.The respondent, 15 in his determination of deficiency, determined that the Missouri land was other property within the meaning of section 1031(b) of the Code and included it in his computation at $ 110,550, its agreed value on January 3, 1961, when it was received in exchange. With respect to the sale of the Missouri land to Craig, he used the said value of $ 110,550 as petitioners' basis and determined that no gain was realized on the sale of the land to Craig.Petitioners were indebted to the Northwestern Mutual Life Insurance Co. of Milwaukee, Wis., on four notes on which payments of both principal and interest were due on January 1, 1963. Payments were made of the principal and interest due on the said notes by checks dated January 1, 1963, and drawn on petitioners' account with the Merchants and Farmers Bank, West Helena, Ark. The details of interest, 258 principal, and total payments made by the four checks were as follows:Note No.Amount ofAmount ofTotal amount ofprincipalinterestcheck paymentF 281 617$ 4,500$ 4,860.00$ 9,360.00F 292 87012,50015,000.0027,500.00F 293 9852,0002,000.064,000.06F 294 91111,00010,849.2321,849.23Total30,00032,709.2962,709.2916 The four checks were paid and canceled by the Merchants & Farmers Bank of West Helena as follows:Check in amount of --Date of cancellation$ 27,500.00Jan. 9, 196321,849.23 Jan. 9, 19639,360.00 Jan. 10, 19634,000.06 Jan. 10, 1963On or about the first of September 1962 petitioner employed a new secretary and bookkeeper. Toward the end of the year he advised her that it was his practice to pay his outstanding bills on or before the end of the year. Sometime toward the end of December 1962 she prepared the four checks listed above in payment of the principal and interest due to the Northwestern Mutual Life Insurance Co. of Milwaukee and placed them on petitioner's desk for his signature. She dated the checks January 1, 1963, the due date of the principal and interest payments. Petitioner didn't sign the checks right away but did sign them a few days later. His secretary thereafter placed them in an envelope addressed to the insurance company and on December 31, 1962, took them to the postoffice, which was in the back of the same building in which petitioner's store and office were located, asking the postmistress to be sure to get them in the mail17 that day. The outgoing mail at the Ratio postoffice is picked up around 4:30 in the afternoon. The envelope containing the checks was delivered to the postmistress on December 31, prior to the 4:30 pickup of the mail that day.In signing the checks, petitioner did not examine them to determine the dates shown thereon.At December 31, 1962, petitioner's balance in his bank account was insufficient to clear all of his checks written and outstanding on that date. In addition to a line of credit of $ 100,000 with the bank, he had an arrangement whereunder his bank account would be credited with an amount sufficient to clear checks drawn on the account when presented for payment. One method of handling such cases was by the signing of a blank note, leaving it to the bank to fill in the amount of the loan on the date of the loan.259 On January 11, 1963, there was deposited to petitioner's account an amount of $ 30,000 representing the proceeds of a loan which was sufficient to cover payment of the checks on his account clearing the bank that day. The bank interest on the said $ 30,000 loan began to run from January 11, 1963.Through normal bank channels it would take about 1018 days for checks mailed by a party from West Helena, Ark., to Milwaukee, Wis., to get back to a bank in West Helena. Ratio, Ark., is about 30 miles from West Helena.The checks in question were deposited or cashed by the Northwestern Mutual Life Insurance Co. at the First Wisconsin National Bank of Milwaukee and the earliest legible date shown on the back of any of the checks is January 3, 1963.In their 1962 income tax return petitioners deducted the $ 32,709.29 of interest paid as shown above to Northwestern Mutual Life Insurance Co. The respondent in his determination of deficiency for 1962 disallowed the deduction so claimed.OPINIONUnder section 1031(a)3 no gain or loss is to be recognized if property held for productive use in a taxpayer's trade or business or for investment is exchanged solely for property of a like kind "to be held either for productive use in trade or business or for investment." If, however, in the exchange the property received consists not only of property permitted under section 1031(a) to be received without recognition of gain but also of other property or money, then under section 1031(b)4 the gain realized by the recipient is to be recognized19 up to the sum of the money and the fair market value of the "other property."20 The decisive question here is whether or not the Missouri farm, one of the properties received by petitioners in exchange for their Howe land, is other property within the meaning of subsection (b) as determined 260 by the respondent or is property of a like kind to be held for productive use in petitioners' trade or business or for investment within the meaning of subsection (a) as contended by petitioners.The resolution of that question in our opinion requires very little discussion and there is really no need to go beyond the words of the statute and their plain meaning. When related to the Missouri farm, it and Howe land were of a like kind in that they were farm properties. It is a fact, however, that the Missouri farm was not to be held and could not have been held for productive use in petitioners' trade or business or by them for investment. Prior to the exchange on January 3, 1961, they had a binding contract and obligation with B. A. Craig to sell the property to him for $ 110,550 no more than 8 days from their acquisition of the land, and the facts show that the sale of the Missouri farmland to Craig was actually made on the same day that they acquired it from21 Radcliffe. The decision on this issue must be for the respondent. See and compare Regals Realty Co. v. Commissioner, 127 F. 2d 931, affirming 43 B.T.A. 194">43 B.T.A. 194, and Ethel Black, 35 T.C. 90">35 T.C. 90.Section 163(a) 5 of the Code provides for the allowance as a deduction of all interest paid or accrued within the taxable year on indebtedness. Section 461(a) 6 provides that the amount of any deduction or credit shall be taken for the taxable year which is the proper year under the method of accounting used in computing taxable income. The parties have stipulated that petitioner kept his books of account and made his income tax returns on the cash basis.22 The evidence shows, and we have found as a fact, that the checks covering the interest in question, showing the Northwestern Mutual Life Insurance Co. as payee, were mailed by petitioner to the insurance company in Milwaukee, Wis., on the afternoon of December 31, 1962. It was the testimony of the president of the Merchants & Farmers Bank in West Helena, on which the checks were drawn, that a check mailed from West Helena to Milwaukee would in the ordinary course require approximately 10 days to reach the bank in West Helena for payment. There is no claim or contention that the checks could, under any circumstances, have been in fact delivered to the payee in Milwaukee on the day they were mailed. Stamps on the back of two of the checks indicate that most likely they were deposited or cashed at the First Wisconsin National Bank of Milwaukee on January 3 and that the remaining two were similarly presented a day or two 261 thereafter. In any event, two of the checks cleared the bank in West Helena and were charged to the petitioners' account therein on January 9 and the other two on January 10, 1963.The petitioner contends that the mailing of the checks on December 31 constituted23 payment of interest on that date within the meaning of the above sections of the Code. He relies on such cases as Flint v. United States, 237 F. Supp. 551">237 F. Supp. 551; Commissioner v. Bradley, 56 F. 2d 728, affirming 19 B.T.A. 49">19 B.T.A. 49; Estate of Modie J. Spiegel, 12 T.C. 524">12 T.C. 524; and Clark v. Commissioner, 253 F. 2d 745, remanding a Memorandum Opinion of this Court, for the proposition that under the facts herein the placing of the checks in the mail on December 31, 1962, constituted delivery and their subsequent payment in the succeeding year related back to that date for the purpose of the deduction claimed.Although there are variations in the facts as to the actual physical delivery of the checks and the cashing thereof, in the cases cited they do generally appear to offer some support for petitioners' contention. In one case, Witt's Estate v. Fahs, 160 F. Supp. 521">160 F. Supp. 521 (S.D. Fla. 1956), it was held that in such cases delivery of the checks is effected when mailed in a properly addressed envelope.In the 24 case at hand, however, there is another critical factor which is not present in any of the cited cases. Here, the checks, although properly drawn and mailed to the payee on December 31, 1962, were dated January 1, 1963. It is clear that the bookkeeper-secretary dated these checks January 1, 1963, because that was the date when the interest was payable on certain notes to Northwestern Mutual Life Insurance Co.; that Griffin did not instruct her as to the specific date to be placed on these checks; and that in signing the checks he did not concern himself as to the dates shown on the checks. 725 A postdated check is not a check immediately payable but is a promise to pay on the date shown. It is not a promise to pay presently and it does not mature until the day of its date, after which it is payable on demand the same as if it had not been issued until that date although it is, as in the case of a promissory note, a negotiable instrument from the time issued. Commonwealth v. Kelinson, 184 A.2d 374">184 A.2d 374262 (Pa. Super. Ct. 1962); see also Uniform Commercial Code, sec. 3-114. 826 Generally, a bank may be held liable for prematurely paying a postdated check. Montano v. Springfield Gardens National Bank, 207 Misc. 840">207 Misc. 840, 140 N.Y.S. 2d 63 (1955). It has been held that if a postdated check is presented in advance of its date the drawee bank, even though it has funds of the drawer on deposit sufficient to pay it, should not make payment, certify the check, or set aside any fund for that purpose. If the bank does pay the check or withhold money for that purpose and, by reason of its action, other checks drawn by the depositor are dishonored, the bank subjects itself to an action for damages at the instance of the depositor. Smith v. Maddox-Rucker Banking Co., 8 Ga. App. 288">8 Ga. App. 288, 68 S.E. 1092">68 S.E. 1092 (1910). Although the president of Merchants & Farmers Bank in West Helena was not sure if payment on a postdated check was prohibited by banking laws, he testified that his bank would normally turn back a postdated check even if it were dated one day after presentment.A postdated check is essentially a promissory note, and a taxpayer reporting his income on a cash basis is not entitled27 to deduct as interest paid during the taxable year the amount of a promissory note given in discharge of an interest obligation. The requirement of section 163, supra, as to payment is not satisfied by the issuance of a note promising to pay in the future. Eckert v. Burnet, 283 U.S. 140">283 U.S. 140; Hart v. Commissioner, 54 F. 2d 848. The postdated checks under review were merely a promise to pay the Northwestern Mutual Life Insurance Co. the amounts specified thereon on or after January 1, 1963, and did not constitute payment of the interest on December 31, 1962. It is obvious that the checks when mailed were subject to a very substantial restriction as to the time of payment, and that under ordinary circumstances the drawee bank would refuse to make payment on them.In L. M. Fischer, 14 T.C. 792">14 T.C. 792, the taxpayer, on the cash basis, received a check in payment of legal services rendered on December 31, 1942. He had agreed verbally with the payor that he would not deposit the check until the first of the year, and therefore it was not deposited for collection until February 10, 1943. Fischer28 sought to include the payment on the check in his 1942 taxable income, contending 263 that the payment on the check in February 1943 related back to the time the check was delivered to him. We held that the check was not income to him in 1942, because the oral condition imposed at the time of delivery of the check restricted the time when the proceeds of the check could be collected.In the instant case there is a stronger factual situation. Here, we are confronted with a restriction on the face of the checks in question imposed at the time the checks were mailed limiting the time when the proceeds of the checks might be collected. Under the circumstances, we cannot say that the interest was deductible by petitioner in 1962 within the intendment of section 163(a), supra.Decision will be entered for the Respondent. Footnotes1. Unless otherwise indicated, all references are to the Internal Revenue Code of 1954, as amended.↩2. This amount exceeds the $ 5,683.60 of cash received by $ 1,700, and the record is not clear how the amount of $ 7,383.60 was arrived at. Petitioners' counsel, in par. 2 under the heading "Conclusions of Law" which accompanied his proposed findings of fact, took note of the $ 1,700 difference between the two figures but offered no explanation. In any event, it is now his contention that the amount of recognizable capital gain is limited to the cash payment of $ 5,683.60.↩3. SEC. 1031. EXCHANGE OF PROPERTY HELD FOR PRODUCTIVE USE OR INVESTMENT.(a) Nonrecognition of Gain or Loss From Exchanges Solely in Kind. -- No gain or loss shall be recognized if property held for productive use in trade or business or for investment (not including stock in trade or other property held primarily for sale, nor stocks, bonds, notes, choses in action, certificates of trust or beneficial interest, or other securities or evidences of indebtedness or interest) is exchanged solely for property of a like kind to be held either for productive use in trade or business or for investment.↩4. SEC. 1031. EXCHANGE OF PROPERTY HELD FOR PRODUCTIVE USE OR INVESTMENT.(b) Gain From Exchanges Not Solely in Kind. -- If an exchange would be within the provisions of subsection (a), of section 1035(a), of section 1036(a), or of section 1037(a), if it were not for the fact that the property received in exchange consists not only of property permitted by such provisions to be received without the recognition of gain, but also of other property or money, then the gain, if any, to the recipient shall be recognized, but in an amount not in excess of the sum of such money and the fair market value of such other property.↩5. SEC. 163. INTEREST.(a) General Rule. -- There shall be allowed as a deduction all interest paid or accrued within the taxable year on indebtedness.↩6. SEC. 461. GENERAL RULE FOR TAXABLE YEAR OF DEDUCTION.(a) General Rule. -- The amount of any deduction or credit allowed by this subtitle shall be taken for the taxable year which is the proper taxable year under the method of accounting used in computing taxable income.↩7. Respondent, on cross-examination, asked petitioner to explain his instructions, given to his bookkeeper, relating to the checks in question (Tr. 24):Q. Now, Mr. Griffin, would you tell us again what happened in December 1962 with respect to these checks? Did you tell her to make them out prior to the end of the year and date them January 1, '63, or did you tell her to date them December 1, '62, or did you tell her not to even date them, or what?A. I didn't mention the date on them. I said, Let's pay them before the end of the year.Q. She wasn't authorized to sign checks, was she?A. No.Q. And you signed $ 60,000 worth of checks and didn't notice they were dated January 1, '63?A. That is correct.↩8. The Uniform Commercial Code, adopted by the State of Arkansas, Jan. 1, 1962, Ark. Stat. Ann. secs. 85-1-101 to 85-9-507, states as follows:85-3-114. Date -- Antedating -- Postdating. -- (1) The negotiability of an instrument is not affected by the fact that it is undated, antedated or postdated.(2) Where an instrument is antedated or postdated the time when it is payable is determined by the stated date if the instrument is payable on demand or at a fixed period after date.(3) Where the instrument or any signature thereon is dated, the date is presumed to be correct.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4623951/	ENOCH R. THOMPSON, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent.Thompson v. CommissionerDocket No. 8156-73.United States Tax CourtT.C. Memo 1975-81; 1975 Tax Ct. Memo LEXIS 291; 34 T.C.M. (CCH) 409; T.C.M. (RIA) 750081; March 27, 1975, Filed Enoch R. Thompson, pro se. Wayne M. Bach, for the respondent. BRUCE MEMORANDUM FINDINGS OF FACT AND OPINION BRUCE, Judge: Respondent determined a deficiency in petitioner's Federal income tax for the calendar year 1969 in the amount of $1,014.90. The issue for decision is whether petitioner is entitled to three dependency exemptions for his children who lived with their mother and step-father during 1969. FINDINGS OF FACT Some of the facts have been stipulated and the stipulation of facts, together with the exhibits attached thereto, are incorporated herein by reference. Petitioner Enoch R. Thompson resided at R.R. #2, Springville, Indiana at the time of the filing of the petition herein. Petitioner filed his 1969 Federal income tax return on the cash basis with either the district director of internal revenue, Indianapolis, Indiana, or the Central Service Center, 293 Covington, Kentucky. 1/ Petitioner was formerly married to Margie Gibbs. Three children were born of that marriage and their ages at the end of the year 1969 were: Michael, 14; Vickie, 12; and Gayle, 8. Petitioner and Margie Gibbs were divorced in 1964 and Margie was awarded custody of their three children. The decree of divorce was silent as to which parent would be entitled to dependency exemptions for income tax purposes. Margie married Nick Gibbs in 1965. During the year 1969, the three children resided in the home of their mother and stepfather in Henderson, Kentucky. Margie and Nick Gibbs provided no less than $8,907.57 for the support of the three minor children in 1969. Petitioner was not married during 1969. Petitioner provided no less than $3,120.00 and no more than $3,420.00 for the support of his minor children during 1969. OPINION In resolving the question of which divorced parent is entitled to claim their children as dependents under section 151, 2/ we must look to the statutory rules contained in section 152(e). That section provides294 that the custodial parent (here Margie) is, in general, entitled to the exemptions. Section 152(e)(1). There are, however, two statutory exceptions to this general rule contained in sections 152(e)(2)(A) and (e)(2)(B). Because petitioner has presented evidence pertaining to both sub-sections we shall consider each separately. Under section 152(e)(2)(A), the non-custodial parent may claim the dependency exemptions if: (a)(i) the decree of divorce or of separate maintenance, or a written agreement between the parents applicable to the taxable year beginning in such calendar year, provides that the parent not having custody shall be entitled to any deduction allowable under section 151 for such child, and (ii) such parent not having custody provides at least $600 for the support of such child during the calendar year * * * The petitioner testified that at the time of divorce the parties orally agreed that petitioner would claim the children on his income tax return. Margie could not recall such an agreement covering years subsequent to 1965. However she did recall allowing petitioner to claim295 the children for the tax year 1965 since she was unemployed at that time. Regardless of the parties' understanding at the time of divorce, a requirement of the statute has not been fulfilled since there was no "written agreement." . Therefore, petitioner is not entitled to the exemptions under this exception. Section 152(e)(2)(B) provides that the non-custodial parent may claim the exemptions if: (B)(i) the parent not having custody provides $1,200 or more for the support of such child (or if there is more than one such child, $1,200 or more for all of such children) for the calendar year, and (ii) the parent having custody of such child does not clearly establish that he provided more for the support of such child during the calendar year than the parent not having custody. Since petitioner provided amounts for support of the children in excess of $1,200.00, the burden is upon the respondent (the custodial parent not being a party to this proceeding) to establish by a clear preponderance of the evidence that the custodial parent furnished more for the support of the children than the non-custodial parent. ,296 affd. per curiam (C.A. 5, 1971). A careful examination of the evidence clearly reveals that Margie expended more for the support of the children than petitioner. Margie Gibbs testified at trial as to the amounts she expended during 1969 for the support of the three children. In support of her testimony, Margie introduced into evidence 537 cancelled checks representing expenditures in excess of $17,700.00 for such essential items as food, clothing, school expenses, medical expenses, dry cleaning and other household expenses. After adjusting these sums to reflect only the amounts expended for the support of the children, and excluding from our computations amounts expended for questionable items of support or items which we believe directly benefited only the parents, we find that Margie provided the following amounts in support of each child during 1969: Michael$3,700.64Vickie2,604.37Gayle2,602.56Total$8,907.57Petitioner paid at least $3,120.00 during 1969 for the support of the children. Even if we allowed him an additional $300.00 for gifts and other support payments, which petitioner claimed at trial but did not substantiate, *297 his expenditures for support do not exceed those clearly established by the custodial parent. We hold petitioner is not entitled to the three exemptions. Because petitioner did not allege error as to that portion of the deficiency based on his claiming "Head of Household" status, nor did petitioner present any evidence on this determination at trial, we deem that matter not in controversy. Accordingly, Decision will be entered for the respondent.Footnotes1. /↩ The record in this case is unclear as to where petitioner filed his 1969 Federal income tax return.2. /↩ All references are to the Internal Revenue Code of 1954, as amended.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4623952/	ESTATE OF NORMAN L. BELL, DECEASED, SHIRLEY BELL, INDEPENDENT EXECUTRIX, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentEstate of Bell v. CommissionerDocket No. 12692-85.United States Tax CourtT.C. Memo 1987-576; 1987 Tax Ct. Memo LEXIS 579; 54 T.C.M. (CCH) 1123; T.C.M. (RIA) 87576; November 23, 1987. 579 Donald D. DeGrasse, for the petitioner. Thomas G. Norman and David E. Whitcomb, for the respondent. WILLIAMSMEMORANDUM FINDINGS OF FACT AND OPINION WILLIAMS, Judge: The Commissioner determined a deficiency in petitioner's Federal estate tax in the amount of $ 1,194,949.31. The issue we must decide is the value for Federal estate tax purposes of shares of stock in a closely-held corporation. Our decision has turned on how poorly petitioner and respondent have carried their respective burdens of proof. Respondent's determination of a deficiency in estate tax is presumptively correct. Thus, petitioner has the burden of proving that respondent's valuation of Bell Oil stock is erroneous. Welch v. Helvering,290 U.S. 111">290 U.S. 111 (1933); Rule 142(a), Tax Court Rules of Practice and Procedure. Respondent, on the other hand, must prove the correctness of his increased deficiency claimed in his amended answer. Rule 142(a), Tax Court Rules of Practice and Procedure. Based on the record before us, we conclude that neither petitioner nor respondent580 has satisfied the burden of proof. Some of the facts have been stipulated and are so found. Norman L. Bell died on July 12, 1981 a resident of Jefferson County, Texas. Shirley Bell McBride was appointed as executrix. At the time of his death, decedent owned 16,825 shares of stock in Bell Oil of Texas, Inc. (hereinafter "Bell-Tex"), and 4,510 shares of stock in Bell Oil of Louisiana, Inc. (hereinafter "Bell-La"). No other shares of either company were outstanding. The decedent was survived by a wife and left a community estate. The shares of stock in the Bell Oil corporation were, however, decedent's separate property. During 1981, the Bell Oil companies owned and operated 21 Bell's convenience stores, including several hardware stores, in eastern Texas and western Louisiana. Some of the stores operated "washaterias," and each of the stores retailed gasoline and oil. Petitioner filed a Federal estate tax return on April 13, 1982. As reflected on Schedule B of the estate tax return, the 16,825 shares in Bell-Tex were valued at $ 452,592.50; the 4,510 shares in Bell-La were valued at $ 470,167.50. Petitioner's valuation was based on multiplying earnings by assuming581 a price/earnings ratio of 5:1. Petitioner did not offer evidence to support its use of this price-earnings multiple to value the stock or any discount for lack of marketability of the stock. While it is generally recognized that the value of stock in closely-held corporations is subject to a discount for lack of marketability, petitioner must establish (1) the value to be discounted and (2) the amount of the discount. See, e.g., Ward v. Commissioner,87 T.C. 78">87 T.C. 78 (1986); Estate of Andrews v. Commissioner,79 T.C. 938">79 T.C. 938, 953 (1982). Both points are a matter of proof. The only evidence offered by petitioner to substantiate its valuation of Bell-Tex and Bell-La was the testimony of Shirley Bell Marshall, the daughter of decedent. While she was a credible witness, the scope of her testimony was limited. The principal subject of her testimony was the effect on operations of the death of Norman L. Bell, founder and key employee. The loss of decedent's services decreased the value of the companies, and a knowledgeable individual who could assume supervisory responsibility582 over all operations had to be found and hired. Mrs. Marshall also testified that a significant number of improvements had to be made to the stores. While improvements prevented deterioration of the stores, petitioner failed to prove that the stores were dilapidated or in serious need of restoration. Further, this testimony lacked a starting point for valuation. Although we accept this testimony, petitioner's valuation of Bell-Tex at $ 452,592.50 and of Bell-La at $ 470,167.50 was asserted summarily and was not supported by the detail necessary to carry the burden of proof. Respondent valued the decedent's interest in Bell-Tex at $ 1,000,000.00 and in Bell-La at $ 900,000.00. Respondent amended his answer to claim the value of Bell-Tex was $ 2,100,000.00 and of Bell-La was $ 1,136,000.00, based on a seven volume appraisal report by James T. Johnson. Johnson was called as an expert witness to testify concerning his appraisal of the closely-held Bell Oil corporations. In his seven volume appraisal of Bell Oil, Johnson utilized four methods of valuation: (1) the capitalization of the income stream method, (2) the excess earnings method, (3) the tangible net worth metod, and (4) 583 a ratio of "value of stock to sales," a ratio concocted by Johnson that was little more than speculation masquerading as empirical analysis. A primary basis for Johnson's analysis was industry data appearing in an article by John F. Rosco, "The Annual Dollars Per Day Survey of the Small Food Store Industry." From this publication, the expert developed capitalization rates and industry ratios which he used in appraising petitioner's corporations. 1 No testimony or evidence supported the authority of the information in the Rosco article. Indeed, another article identified by petitioner reported different financial information for the same companies for the same periods. The subjects of the articles were all publicly traded companies, but no one compared this conflicting information with annual reports filed with the Securities and Exchange Commission. Moreover, no relationship was shown to exist between the performances of these companies and either Bell-Tex or Bell-La. The expert did not know the differences or similarities between these companies and the Bell Oil companies and thus did not analyze any differences or similarities in his valuation report. This lack of careful584 analysis undermines our confidence in Johnson's report and in the accuracy of the fundamental information supporting the expert's conclusions. Johnson's method for choosing a capitalization rate in both the capitalization of income stream method and the excess earnings method was arbitrary. After listing the range and mean average of ratios found in the article of doubtful authority, Johnson chose his capitalization rate of 11 percent for the capitalization of the income stream method without any explanation. In determining the capitalization rate for the excess earnings method, Johnson applied different rates of return to income assumed to be earned by three categories of assets and long-term debt 2 on the balance sheet of each corporation: (1) 12 percent for working capital (2) 12 percent for equipment and improvements, (3) 10 percent for land and 13 percent for long-term debt. He assumed, moreover, that an investor would desire a 26 percent rate of return on "good will." He chose these585 rates of return without explaining how he arrived at these rates or why the rates vary. The mean average of U.S. Treasury bonds and notes at the time was 12.33 percent according to the expert. This represents the rate of return an investor would expect on risk-free, intermediate and long-term investments generating taxable income. The expert gave no explanation for why the rates applied in his excess earnings method were lower than the U.S. Treasury bond and note rates despite the comparatively higher risk that investment in Bell companies' stock presented. The expert's arbitrary choice of rates of return was neither accurate nor realistic. The inherent flaws in Johnson's methodology are emphasized by the way in which the expert arrived at his bottom line valuation under the excess earnings586 method. For some unexplained reason the expert added the value of excess earnings, determined using unrealistic rates of return, to the value of the Bell Oil companies as determined under the expert's tangible net worth method. The expert gave no rationale for this adjustment. It would appear that this method, as employed by Johnson, results in determining a premium or penalty adjustment to tangible net worth and is not an independent valuation method. If so, no premium exists for either company and a significant penalty should be applied. It is apparent from the actual earnings of Bell-Tex and Bell-La that the corporations were earning a return on their assets that fell well below market yield. Consequently, we believe that there were no "excess" earnings. Furthermore, the rates of return applied by Johnson in the excess earnings method bore no relationship to the capitalization rate Johnson used in the capitalization of income stream method. We believe his choice of varying rates indicates a result-oriented analysis. An appropriate capitalization rate is determined by the comparable investment yield in the market not by the choice of a valuation method. Johnson made little587 effort to identify comparable investments. In the tangible net worth method the appraiser valued each asset as if sold individually. While this valuation approach is of interest we do not find it persuasive of the value of the stock in an ongoing, closely-held business. In figuring the ratio of value to sales, Johnson, relying on the industry data found in "The Annual Dollars Per Day Survey of the Small Food Industry," divided the gross sales by total stock value of each convenience food store company listed in the article. This produced a list of ratios found on Table III and IV of the expert's summary report from which Johnson somehow derived a multiplier of .20 which he applied to the gross sales of each Bell Oil company. This produced a value of $ 2,100,000.00 for Bell-Tex and $ 760,000.00 for Bell-La.3 Johnson admitted that he "eyeballed" a list of gross sales/stock ratios found in his report to arrive at his multiplier of 20 percent which he applied to the gross sales of each Bell Oil company. Not only was this unique method based on arbitrary choice (which Johnson could not articulately defend), the method itself was not reasoned. 588 Analyzing the results of the valuation methods used, Johnson concluded that the value of the Texas company was $ 2,100,000.00 and the value of the Louisiana company was $ 1,136,000.00. Aside from arbitrary and result-oriented analysis, Johnson's report had many errors. During the trial the Court found that a whole column of numbers was misplaced in the report and wrongly used by the expert. The stores owned by Bell Oil companies had to be reconsidered during the trial to determine the correct number of them. The Court also had to refigure the breakdown of gas sales and food sales for the Bell Oil corporations because of the expert's inaccuracy. Much time was used to correct the mistakes in the report. Consequently, we have no confidence in Johnson's report. We conclude, therefore, respondent has failed to carry his burden of proving the increased deficiency in the amendment to his answer. Accordingly and because of concessions, we hold that respondent's original determination of deficiency must stand. The appropriate value to be applied to the Bell Oil company stock is $ 1,000,000.00 for the Texas company and $ 900,000.00 for the Louisiana company. Decision will*589 be entered for the deficiency originally determined.Footnotes1. There are some mathematical errors in the expert's report on the tables labeled "Data on Convenience Food Stores." The expert developed some of his figures based on these errors. ↩2. Johnson never explained how long-term debt of the corporation could earn any return. We assume that he meant a return on the proceeds of the debt. Nevertheless, Johnson failed to identify how the proceeds were invested and failed to explain the difference between the return on the use of the debt proceeds and the return on the assets he chose to categorize into three groups. ↩3. Noting the expert's apparent arbitrary methods and some of the errors made by him in calculating the ratio of value to sales, the Court, while not giving any credence to the ratio, recalculated the multiplier used during trial. Applying this new multiplier (.16) to the Bell Oil companies, Johnson concluded that Bell-Tex should be valued at $ 1,680,000.00 and Bell-La should be valued at $ 608,000.00. ↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/866763/	KELLY A. CUTLER, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentCutler v. Comm'rDocket Nos. 16840-10L, 1471-11United States Tax CourtT.C. Memo 2013-119; 2013 Tax Ct. Memo LEXIS 121; 105 T.C.M. (CCH) 1704; May 6, 2013, Filed121 An appropriate order and decision will be entered in docket No. 16840-10L. Decision will be entered for petitioner in docket No. 1471-11.Michael L. Deamer, for petitioner.Inga C. Plucinski, for respondent.VASQUEZ, Judge.VASQUEZMEMORANDUM FINDINGS OF FACT AND OPINIONVASQUEZ, Judge: In these consolidated cases, petitioner seeks our review, pursuant to section 6015(e)(1), 1 of respondent's determination that she is not 119 entitled to relief from joint and several liability under section 6015(f) with respect to her Federal income tax liabilities for 2002 through 2005. She also seeks our review, pursuant to section 6330(d)(1), of respondent's determination to sustain a proposed levy action for 2005 and, in connection therewith, alleges that respondent wrongfully seized funds belonging to her children and requests that we order respondent to return the funds.FINDINGS OF FACTSome of the facts have been stipulated and are so found. The stipulation of facts, the supplemental stipulation of facts, and the accompanying exhibits are incorporated herein by this reference. Petitioner resided in Utah at the time she filed the petition.I. BackgroundPetitioner and Curtis Easton Cutler were married on May 22, 1982. They had eight children together over the course of their nearly 25-year marriage. Petitioner primarily worked as a homemaker raising and caring for the children. Mr. Cutler graduated from dental school in 1994 and the following year formed Willow Creek Dental, LLC (Willow Creek Dental).120 Willow Creek Dental elected to be taxed as an S corporation for Federal income tax purposes. 2 Mr. Cutler served as its president and was its sole shareholder. During the years in issue Willow Creek Dental operated dental practices in Sandy, Utah (Sandy dental practice), and American Fork, Utah (American Fork dental practice). Willow Creek Dental employed Mr. Cutler as its sole dentist. 3 It also employed two to three dental assistants, an office manager for each location, and a bookkeeper.Mr. Cutler disliked financial tasks, so much so that he just refused to deal with the dental practices' finances or his personal finances. That task fell upon petitioner. She had completed only one year of college, and she had no formal training in accounting or tax, but she understood that if she did not take care of the finances, the bills would be left unpaid. She used Willow Creek Dental's bank account, to which both she and Mr. Cutler had access, to pay personal and family expenses, and she assisted the bookkeeper with paying the dental practices' expenses. During the four-year period 2002-05 she wrote 23 checks drawn on 121 Willow Creek Dental's bank account totaling $58,630.68 to the IRS in partial payment of Mr. Cutler's and her individual income tax liabilities. 4 Because Mr. Cutler refused to deal with any financial matters, she also handled the preparation of their joint individual income tax return and Willow Creek Dental's corporate tax return for each of the years in issue.II. Divorce ProceedingsOn October 23, 2006, petitioner and Mr. Cutler ceased living together. Petitioner attributes the decline of the marriage to Mr. Cutler's personal problems. On April 30, 2007, petitioner filed for and was granted a divorce from Mr. Cutler by the Fourth Judicial District Court, Utah County, State of Utah (divorce court), on the grounds of irreconcilable differences. The divorce court awarded petitioner custody of the children, 5 child support of $2,179 per month, alimony of $1 per year, the Sandy dental practice and the American Fork dental practice, the marital house, two parcels of land, an insurance policy, and personal property.122 III. The Aftermath of the DivorceMr. Cutler had quit working at the dental practices and had moved to his parents' house in California. He failed to make the court-ordered child support payments. He left petitioner to fend for herself and their five minor children. Petitioner sold the American Fork dental practice and the two parcels of land to pay off the practice's outstanding loans and laboratory bills, to get the mortgage loan on her house out of foreclosure, and to pay personal and living expenses. 6Petitioner experienced severe financial difficulty after the divorce. She held onto the Sandy dental practice but struggled to keep it afloat. Neither she nor the recent dental school graduate she hired in place of Mr. Cutler knew how to run a dental practice. Her difficulties at work were compounded by having to support five minor children at home by herself. She accumulated approximately $30,000 in medical bills for the care of the children. She took out a second mortgage on her house for $40,000 and turned to her church for financial assistance. 7123 Through hard work and dedication, petitioner made great strides toward improving her financial situation. 8 With the help of a consultant, she learned how to run the Sandy dental practice. By the end of 2010 the practice was generating enough revenue so that petitioner could support herself and her children without financial assistance from her church. On July 8, 2011, she married Joao Bueno.IV. Petitioner's Current Financial SituationAs of April 17, 2012, the date of trial, petitioner was receiving a monthly salary of $1,046 and monthly distributions of profit averaging approximately $5,000 from Willow Creek Dental. This, according to petitioner, was enough to get by. Mr. Bueno was paying some household expenses, including utilities and the second mortgage. However, petitioner was not without financial woes. After an unsuccessful attempt at working out a loan modification with her bank, the first mortgage loan on petitioner's house was once again in foreclosure. She had approximately $6,000 of medical bills still outstanding. Mr. Cutler continued to shirk his child support obligations and owed petitioner approximately $95,000 in past-due child support.124 V. Request for Innocent Spouse ReliefOn September 25, 2009, the IRS received from petitioner Form 8857, Request for Innocent Spouse Relief, in which she requested relief from joint and several liability for 2002 through 2005. She listed her monthly income as $8,049 and her monthly expenses as $8,645 on the Form 8857. On November 5, 2009, Mr. Cutler submitted to the IRS a completed Form 12508, Questionnaire for Non-Requesting Spouse, objecting to petitioner's request.The IRS determined on the merits that petitioner was not entitled to relief for 2005, but it held 2002 through 2004 in suspense pending a determination regarding the timeliness of the request. 9 Petitioner appealed the 2005 determination to the IRS Office of Appeals (Appeals). On July 8, 2010, the IRS mailed petitioner a final Appeals determination letter in which it determined that petitioner was not entitled to relief for 2005. Subsequently, the IRS reevaluated petitioner's request for relief for 2002 through 2004 on the merits, and on December 17, 2010, mailed her a final determination letter denying her request for relief.125 VI. Request for a Collection Due Process HearingOn February 17, 2007, the IRS mailed petitioner Letter 1058, Notice of Intent to Levy and Notice of Your Right to a Hearing (notice of intent to levy), with respect to her unpaid Federal income tax liabilities for 2002 through 2004. Petitioner did not request a collection due process (CDP) hearing. On September 5, 2009, the IRS issued a levy to Bank of American Fork to collect the unpaid Federal income tax liabilities for 2002 through 2004. 10 Bank of American Fork remitted $3,850.24 (levied funds) to the IRS in response to the levy, which was applied to petitioner's income tax liability for 2002. 11Also on September 5, 2009, respondent mailed petitioner a notice of intent to levy with respect to her unpaid Federal income tax liability for 2005. On September 21, 2009, petitioner filed Form 12153, Request for a Collection Due Process or Equivalent Hearing (CDP hearing request), in which she requested a CDP hearing for 2002 through 2005. She raised two issues in her CDP hearing request: (1) she alleged that the levied funds belonged to her children and 126 requested their return; and (2) she requested innocent spouse relief as a defense to the proposed levy action for 2005. Respondent determined that her CDP hearing request to challenge the levy for 2002 through 2004 was untimely and that she was not entitled to innocent spouse relief for 2005. On July 8, 2010, respondent mailed petitioner a Notice of Determination Concerning Collection Actions(s) Under Section 6320 and/or 6330 sustaining the proposed levy action for 2005.OPINIONI. Innocent Spouse ReliefIn general, a spouse who files a joint Federal income tax return is jointly and severally liable for the entire tax liability. Sec. 6013(d)(3). However, a spouse may be relieved from joint and several liability under section 6015(f) if: (1) taking into account all the facts and circumstances, it would be inequitable to hold the spouse liable for any unpaid tax; and (2) relief is not available to the spouse under section 6015(b) or (c). 12 The Commissioner has published revenue procedures listing the factors the Commissioner normally considers in determining whether section 6015(f) relief should be granted. SeeRev. Proc. 2003-61, 2003-2127 C.B. 296, supersedingRev. Proc. 2000-15, 1 C.B. 447">2000-1 C.B. 447. We consider these factors in the light of the attendant facts and circumstances, but we are not bound by them. See Sriram v. Commissioner, T.C. Memo 2012-91">T.C. Memo. 2012-91.In determining whether petitioner is entitled to section 6015(f) relief we apply a de novo standard of review as well as a de novo scope of review. See Porter v. Commissioner, 132 T.C. 203">132 T.C. 203 (2009) (Porter II); Porter v. Commissioner, 130 T.C. 115">130 T.C. 115 (2008) (Porter I). Petitioner bears the burden of proving that she is entitled to relief. SeeRule 142(a); Alt v. Commissioner, 119 T.C. 306">119 T.C. 306, 311 (2002), aff'd, 101 Fed. Appx. 34">101 Fed. Appx. 34 (6th Cir. 2004).A. Threshold Conditions for Granting ReliefIn order for the Commissioner to determine that a taxpayer is eligible for section 6015(f) relief, the requesting spouse must satisfy the following threshold conditions: (1) she filed a joint return for the taxable year for which she seeks relief; (2) relief is not available to her under section 6015(b) or (c); (3) no assets were transferred between the spouses as part of a fraudulent scheme by the spouses; (4) the nonrequesting spouse did not transfer disqualified assets to her; (5) she did not file or fail to file the returns with fraudulent intent; and (6) with enumerated exceptions, the income tax liability from which she seeks relief is 128 attributable to an item of the nonrequesting spouse. 13Rev. Proc. 2003-61, sec. 4.01, 2003-2 C.B. at 297-298. Respondent has conceded that petitioner has met all of the threshold conditions. 14129 B. Circumstances Under Which Relief Is Ordinarily GrantedWhen the threshold conditions have been met, the Commissioner will ordinarily grant relief with respect to an underpayment of tax if the requesting spouse meets the requirements set forth under Rev. Proc. 2003-61, sec. 4.02, 2003-2 C.B. at 298. To qualify for relief under Rev. Proc. 2003-61, sec. 4.02, all of the following elements must be satisfied: (1) on the date of the request for relief the requesting spouse is no longer married to, or is legally separated from, the nonrequesting spouse, or has not been a member of the same household as the nonrequesting spouse at any time during the 12-month period ending on the date of the request for relief; (2) on the date the requesting spouse signed the return she had no knowledge or reason to know that the nonrequesting spouse would not pay the income tax liability; 15 and (3) the requesting spouse will suffer economic hardship if relief is not granted. 130 Petitioner credibly testified that Mr. Cutler found financial matters unpleasant and just refused to deal with them. She further credibly testified that she "knew perfectly well" that she had to take care of all the financial matters herself, including preparing the tax returns, or they "wouldn't be done". According to petitioner, Mr. Cutler complained to her that they owed tax to the IRS. On the basis of the foregoing, we find that petitioner knew or had reason to know that Mr. Cutler would not pay the tax liabilities for 2002 through 2005. Therefore, she does not qualify for relief under the safe harbor of Rev. Proc. 2003-61, sec. 4.02.C. Factors Used To Determine Whether Relief Will Be GrantedWhere, as here, a requesting spouse meets the threshold conditions but fails to qualify for relief under Rev. Proc. 2003-61, sec. 4.02, a determination to grant relief may nevertheless be made under the criteria set forth in Rev. Proc. 2003-61, sec. 4.03, 2003-2 C.B. at 298-299. Rev. Proc. 2003-61, sec. 4.03, provides a nonexclusive list of factors the Commissioner will consider in making that determination: (1) whether the requesting spouse is separated or divorced from the nonrequesting spouse (marital status factor); (2) whether the requesting spouse would suffer economic hardship if not granted relief (economic hardship factor); (3) whether, at the time he or she signed the joint return, the requesting spouse 131 knew or had reason to know that the nonrequesting spouse would not pay the income tax liability (knowledge factor); (4) whether the nonrequesting spouse has a legal obligation to pay the outstanding tax liability pursuant to a divorce decree or agreement (legal obligation factor); (5) whether the requesting spouse received a significant benefit from the unpaid income tax liability (significant benefit factor); and (6) whether the requesting spouse has made a good-faith effort to comply with the Federal income tax laws for the taxable years following the taxable year or years to which the request for relief relates (compliance factor).The Commissioner considers two other factors that, if present in a case, will weigh in favor of granting relief: (1) whether the nonrequesting spouse abused the requesting spouse (abuse factor); and (2) whether the requesting spouse was in poor mental or physical health at the time he or she signed the return or at the time he or she requested relief (mental or physical health factor). Id.sec. 4.03(2)(b), 2003-2 C.B. at 299. The absence of either factor will not weigh against granting relief. Id.In making our determination under section 6015(f), we may consider the factors set forth in Rev. Proc. 2003-61, sec. 4.03, and any other relevant factors. No single factor is determinative, and all factors shall be considered and weighed 132 appropriately. See Pullins v. Commissioner, 136 T.C. 432">136 T.C. 432, 448 (2011); Porter II, 132 T.C. at 214; Haigh v. Commissioner, T.C. Memo 2009-140">T.C. Memo. 2009-140.1. Marital StatusConsideration is given to whether the requesting spouse is separated (whether legally separated or living apart) or divorced from the nonrequesting spouse. Rev. Proc. 2003-61, sec. 4.03(2)(a)(i), 2003-2 C.B. at 298. On October 23, 2006, petitioner and Mr. Cutler ceased living together, and on April 30, 2007, they were divorced. Petitioner filed her request for relief on September 25, 2009. Accordingly, the marital status factor weighs in favor of relief.2. Economic HardshipPetitioner bears the burden of proving that she will suffer economic hardship if we do not grant her relief from joint and several liability. SeeRule 142(a); Alt v. Commissioner, 119 T.C. at 311. A requesting spouse suffers economic hardship if paying the tax liability would prevent him or her from paying his or her reasonable basic living expenses. 16Alioto v. Commissioner, 133 T.C. Memo. 2008-185; Butner v. Commissioner, T.C. Memo. 2007-136; sec. 301.6343-1(b)(4)(i), Proced. & Admin. Regs.; Rev. Proc. 2003-61, sec. 4.02(1)(c), 4.03(2)(a)(ii), 2003-2 C.B. at 298. A hypothetical hardship is insufficient to justify relief. Pullins v. Commissioner, 136 T.C. at 446. Petitioner must demonstrate that imposing joint and several liability is "'inequitable in present terms', Von Kalinowski v. Commissioner, T.C. Memo. 2001-21, and poses a present economic hardship." See id.We have "consistently looked beyond the taxable year at issue to apply subsection (f)", Hall v. Commissioner, 135 T.C. 374">135 T.C. 374, 380 (2010), and we evaluate petitioner's financial situation and prospects as of the time of trial, see Pullins v. Commissioner, 136 T.C. at 446-447.Petitioner argues that her "economic hardship in this matter is substantial." And, without question, she faced substantial economic hardship following her divorce. The first mortgage loan on her house was in foreclosure, the Sandy dental practice was on the brink of collapse, and she had to turn to her church for financial assistance. With hard work and dedication, she persevered through this 134 unusually rough time in her life. However, she remained on shaky financial ground.On her Form 8857 petitioner reported monthly income of $8,049 and monthly expenses of $8,645. We find that the expenses, which included the mortgage, utilities, food, clothing, insurance, child care, and transportation, were all reasonable basic living expenses for petitioner and her children. Petitioner testified that as of the date of trial, she received a monthly salary of $1,046 and monthly distributions of profit from Willow Creek Dental of approximately $5,000, a total of $6,046 per month. This represented a decrease of $2,003 per month from the amount she reported on Form 8857. She did not provide an accounting of her expenses as of the date of trial, but she did testify that Mr. Bueno helped pay some of the household expenses. 17Petitioner testified that during the first quarter of 2012 she was making enough money from the Sandy dental practice "to get by". Nevertheless, her stream of income from the practice was anything but certain. After a failed loan modification attempt, the first mortgage loan on her house was once again in foreclosure. She still had $6,000 of unpaid medical bills. And the financial 135 responsibility of raising her minor children rested upon her shoulders, as Mr. Cutler continued to shirk his child support obligations. On the basis of the foregoing, we find that petitioner would have difficulty in paying her reasonable basic living expenses if we do not grant her relief from joint and several liability. Thus, the economic hardship factor weighs in her favor. 183. KnowledgeFor the reasons previously discussed, petitioner knew or had reason to know that Mr. Cutler would not pay the tax liabilities for the years in issue. See supra p. 13. Accordingly, the knowledge factor weighs against relief.136 4. Legal ObligationIf the nonrequesting spouse has a legal obligation to pay the outstanding tax liabilities pursuant to a divorce decree or agreement, this factor weighs in favor of relief unless "the requesting spouse knew or had reason to know, when entering into the divorce decree or agreement, that the nonrequesting spouse would not pay the income tax liability." Rev. Proc. 2003-61, sec. 4.03(2)(a)(iv). Where the divorce decree is silent, this factor is neutral. See Drayer v. Commissioner, T.C. Memo. 2010-257; Schultz v. Commissioner, T.C. Memo. 2010-233. Here, the divorce decree did not contain any provision regarding payment of the Federal income tax liabilities. Therefore, this factor is neutral.5. Significant BenefitThis factor weighs against the requesting spouse if she received a significant benefit (beyond normal support) from the unpaid tax liabilities. Rev. Proc. 2003-61, sec. 4.03(a)(v). "A significant benefit is any benefit in excess of normal support." Sec. 1.6015-2(d), Income Tax Regs. A significant benefit may be direct or indirect. Id. "Normal" support is measured by the parties' circumstances. Estate of Krock v. Commissioner, 93 T.C. 672">93 T.C. 672, 678 (1989). Evidence of a significant benefit "may consist of transfers of property or rights to 137 property, including transfers that may be received several years" later. Sec. 1.6015-2(d), Income Tax Regs.Respondent argues that petitioner received a significant benefit from the unpaid tax liabilities because she received in the divorce the two dental practices, the marital house, and the two parcels of land. We disagree. The American Fork dental practice was losing money at the time petitioner received it. Petitioner used part of the proceeds from the sale of the American Fork dental practice to pay off the practice's outstanding debts and laboratory bills. She used the remainder of the proceeds, along with the proceeds from the sale of the two parcels of land, for normal living expenses. The Sandy dental practice would likely have lost much of its value when Mr. Cutler, its sole dentist, quit the practice and moved to California. In fact, petitioner initially struggled to even keep the Sandy dental practice afloat. Only through hard work and dedication was she able to turn it around.We find that the assets petitioner received in the divorce did not amount to a significant benefit—they were used for normal support, and even then petitioner had to turn to her church for financial assistance. In Butner v. Commissioner, T.C. Memo 2007-136">T.C. Memo. 2007-136, we stated that "we consider the lack of significant benefit by the taxpayer seeking relief from joint and several liability as a factor that favors 138 granting relief under section 6015(f)." See also Bland v. Commissioner, T.C. Memo 2011-8">T.C. Memo. 2011-8; DeMattos v. Commissioner, T.C. Memo 2010-110">T.C. Memo. 2010-110. Accordingly, this factor weighs in favor of granting relief.6. ComplianceThe inquiry under this factor is whether a taxpayer has made a good-faith effort to comply with the Federal income tax laws for the taxable years following the year or years to which the request for relief relates. Rev. Proc. 2003-61, sec. 4.03(2)(a)(vi). Petitioner's request for relief covers the years 2002 through 2005, and thus we examine her compliance for the years after 2005. As of the date of trial, other than for the years at issue petitioner had an outstanding tax liability only for 2007. However, she was late in filing her tax returns for 2006, 2007, 2008, and 2010. While we recognize that she was going through a very difficult time in her life, we cannot say, on the basis of the evidence in the record, that she made a good-faith effort to comply with the tax laws. Therefore, this factor weighs against relief.7. AbuseAbuse by the nonrequesting spouse favors relief. Rev. Proc. 2003-61, sec. 4.03(2)(b)(i). Claims of abuse require substantiation or specificity in allegations. See Knorr v. Commissioner, T.C. Memo 2004-212">T.C. Memo. 2004-212. Petitioner did not allege that 139 she was abused by Mr. Cutler. Therefore, this factor is neutral. SeeRev. Proc. 2003-61, sec. 4.03(2)(b).8. Mental or Physical HealthThere is insufficient evidence in the record to support a finding that petitioner was in poor mental or physical health during the years in issue. Petitioner's counsel stated at trial that he did not intend to present evidence on this factor, and petitioner did not argue this factor on brief. This factor is neutral.D. Notice 2012-8On January 5, 2012, the Commissioner issued Notice 2012-8, 4 I.R.B. 309">2012-4 I.R.B. 309, announcing a proposed revenue procedure updating Rev. Proc. 2003-61, supra. That proposed revenue procedure, if finalized, will revise the factors that the IRS will use to evaluate requests for equitable relief under section 6015(f). In Sriram v. Commissioner, T.C. Memo. 2012-91, slip op. at 9 n.7, we stated that we would "continue to apply the factors in Rev. Proc. 2003-61, 2 C.B. 296">2003-2 C.B. 296, in view of the fact that the proposed revenue procedure is not final and because the comment period under the notice only recently closed." See also Yosinski v. Commissioner, T.C. Memo. 2012-195 (continuing to apply Rev. Proc. 2003-61, supra); Deihl v. Commissioner, T.C. Memo. 2012-176 (same). 140 The only factor that would change under the proposed revenue procedure is the significant benefit factor. It would change from favorable to neutral, as the evidence shows that neither spouse received a significant benefit from the unpaid tax liabilities. SeeNotice 2012-8, sec. 4.03(2)(e), 2012-4 I.R.B. at 314. Because the proposed revenue procedure is not yet final and would be less favorable to petitioner, we will continue to apply Rev. Proc. 2003-61, supra.E. Balancing the FactorsThree factors weigh in favor of relief (marital status, economic hardship, and significant benefit factors), two factors weigh against relief (knowledge and compliance factors), and three factors are neutral (legal obligation, abuse, and mental or physical health factors). Therefore, on a purely numerical basis, the factors weigh in favor of granting relief. But in addition to the factors, when considering all the relevant facts and circumstances, see Pullins v. Commissioner, 136 T.C. at 448, there is a compelling reason to grant petitioner relief. When Mr. Cutler quit working at the dental practices, moved to California, and left petitioner to support herself and five minor children on her own, she worked hard to get her life back on track. We commend petitioner for her perseverance and believe that she deserves the opportunity to move forward in life without shouldering tax liabilities from her past marriage that are attributable solely to Mr. Cutler's 141 income. Consequently, we conclude that petitioner is entitled to relief from joint and several liability under section 6015(f) for 2002 through 2005.II. Collection Review and the Levied FundsNext we address petitioner's request for review of respondent's determination to proceed with the proposed levy action for 2005. In her CDP hearing request she alleged that the levied funds belonged to her children and requested their return and she requested innocent spouse relief as a defense to the proposed levy action for 2005. In her petition she requests that we order respondent to return the levied funds.A. Proposed Levy Action for 2005We have already determined that petitioner is entitled to innocent spouse relief for 2002 through 2005, the effect of which is to relieve her of personal liability for the unpaid tax with respect to those years. Thus, the issue of the proposed levy action for 2005 is moot. See Greene-Thapedi v. Commissioner, 126 T.C. 1">126 T.C. 1, 7 (2006) (finding that the proposed levy action was moot because the Commissioner's offset of the taxpayer's overpayment for a later year against her tax account for the determination year had satisfied her unpaid tax liability in full); Gerakios v. Commissioner, T.C. Memo. 2004-203 (dismissing the collection review proceeding as moot because there were no unpaid tax liabilities for the 142 determination years upon which a lien or levy could be based after the taxpayer had paid his liabilities in full); Chocallo v. Commissioner, T.C. Memo. 2004-152 (dismissing the collection review proceeding as moot because the Commissioner had acknowledged that the tax liability he had been trying to collect by levy had been improperly assessed, had refunded previously collected amounts with interest, and had agreed that there was no unpaid tax liability upon which a levy could be based). We are left to decide the matter of the levied funds. First we decide to whom they belonged.B. Ownership of the Levied FundsThe record establishes that the levied funds came from five separate bank accounts at Bank of American Fork. Petitioner testified that those accounts belonged to her children. She further testified that the funds in those accounts were earned by her children "bit by bit". We find her testimony to be credible. Her son, Cody Cutler, who was an adult at the time of trial, similarly testified that the funds in the accounts belonged to him and his siblings, some of whom were minors at the time of trial. He further testified that the funds in his account were earned from his job. We likewise find his testimony to be credible. On the basis of the foregoing, and there being no evidence to the contrary, we find that 143 petitioner did not have any ownership interest in the levied funds—they belonged to her children.C. Jurisdiction Over the Levied FundsNext we must determine whether we have jurisdiction to order respondent to return the levied funds. The Tax Court is a court of limited jurisdiction; we may exercise jurisdiction only to the extent expressly authorized by Congress. Sec. 7442; see also Neely v. Commissioner, 115 T.C. 287">115 T.C. 287, 290-291 (2000); Estate of Forgey v. Commissioner, 115 T.C. 142">115 T.C. 142, 145-146 (2000); Henry Randolph Consulting v. Commissioner, 112 T.C. 1">112 T.C. 1, 4 (1999). Our jurisdiction in these consolidated cases is predicated upon sections 6015(e)(1) and 6330(d)(1). Section 6015(e)(1) gives the Tax Court jurisdiction to determine the appropriate relief available to a taxpayer under section 6015, including credit or refund under section 6015(g). See Washington v. Commissioner, 120 T.C. 137">120 T.C. 137, 153-154 (2003); Rooks v. Commissioner, T.C. Memo. 2004-127. Section 6330(d)(1) gives the Tax Court jurisdiction "to review the determination made by the Appeals Office in connection with the section 6330 hearing." Moser v. Commissioner, T.C. Memo 2012-208">T.C. Memo. 2012-208; see also Freije v. Commissioner, 125 T.C. 14">125 T.C. 14, 25 (2005) ("Our jurisdiction under section 6330 covers the 'determination' of the Appeals officer who conducted the hearing requested under that section."). Respondent 144 argues that we do not have jurisdiction under either section to grant petitioner the relief she requests regarding the levied funds. We will examine each section in turn.1. Refund or Credit Under Section 6015(g)(1)Section 6015(g)(1) provides: "Except as provided in paragraphs (2) and (3), notwithstanding any other law or rule of law (other than section 6511, 6512(b), 7121, or 7122), credit or refund shall be allowed or made to the extent attributable to the application of this section." However, before any taxpayer may be allowed a refund or credit, there must be a determination that the taxpayer has made an overpayment. Minihan v. Commissioner, 138 T.C. 1">138 T.C. 1, 8 (2012). Section 6402(a) makes this expressly clear, stating:SEC. 6402(a). General Rule.—In the case of any overpayment, the Secretary, within the applicable period of limitations, may credit the amount of such overpayment, including any interest allowed thereon, against any liability in respect to an internal revenue tax on the part of the person who made the overpayment and shall * * refund any balance to such person. [Emphasis added.]A taxpayer makes an overpayment if he or she remits funds to the Secretary in excess of the tax for which he or she is liable. Jones v. Liberty Glass Co., 332 U.S. 524">332 U.S. 524, 531, 68 S. Ct. 229">68 S. Ct. 229, 92 L. Ed. 142">92 L. Ed. 142, 1 C.B. 102">1948-1 C.B. 102 (1947) (defining an overpayment as "any payment in excess of that which is properly due").145 Therefore, even if a taxpayer is relieved from joint and several liability for the tax due on a joint return by application of section 6015(f), the taxpayer is not entitled to a refund under section 6015(g)(1) unless the taxpayer made an overpayment—i.e., "pa[id] more than is owed, for whatever reason or no reason at all." United States v. Dalm, 494 U.S. 596">494 U.S. 596, 610 n.6, 110 S. Ct. 1361">110 S. Ct. 1361, 108 L. Ed. 2d 548">108 L. Ed. 2d 548 (1990); see Ordlock v. Commissioner, 126 T.C. 47">126 T.C. 47, 61 (2006) (holding that a taxpayer entitled to innocent spouse relief was not entitled to a refund of joint tax liabilities paid using community property assets of the marital estate), aff'd, 533 F.3d 1136">533 F.3d 1136 (9th Cir. 2008); Kaufman v. Commissioner, T.C. Memo. 2010-89 (declining section 6015 refund when funds were paid by deceased husband's estate); Rosenthal v. Commissioner, T.C. Memo. 2004-89, slip op. at 13 n.6 ("It also must be shown that the payments were not made with the joint return and were not joint payments or payments that the nonrequesting spouse made."). This conclusion is consistent with Rev. Proc. 2003-61, sec. 4.04(2), 2003-2 C.B. at 299, in which the IRS stated: "In a case involving an underpayment of income tax, a requesting spouse is eligible for a refund of separate payments that he or she made after July 22, 1998, if the requesting spouse establishes that he or she provided the funds used to make the payment for which he or she seeks a refund."146 The requirement of Rev. Proc. 2003-61, supra, that a petitioning spouse make a "separate payment" or "provide the funds" used to pay the joint tax liability in order to be entitled to a refund under section 6015(g)(1), is in accord with section 6402, which requires, inter alia, that in order to obtain a refund, a person must make an overpayment. The determination whether a petitioning spouse made a "separate payment" or provided the funds used to make a payment can sometimes be a murky task. See, e.g., Minihan v. Commissioner, 1">138 T.C. at 11-18 (turning to State law to determine the taxpayer's ownership interest in a joint bank account that the IRS levied upon). But this is not such a case. Petitioner does not argue that she had an interest in the levied funds or that they were provided by her. Quite to the contrary, she argues that the levied funds belonged to her children, and we so found. Consequently, the levied funds are not a payment that she made to the Secretary. Accordingly, we cannot order respondent to return the levied funds to petitioner as a refund or credit under section 6015(g)(1).2. Jurisdiction Under Section 6330In Greene-Thapedi v. Commissioner, 126 T.C. 1">126 T.C. 1, we held that we do not have jurisdiction under section 6330 to determine an overpayment or to order a refund or credit of tax paid in a collection review proceeding. However, we also 147 acknowledged that in collection review proceedings commenced pursuant to section 6330[t]his Court has exercised its inherent equitable powers to order the Commissioner to return to the taxpayer property that was improperly levied upon, see Chocallo v. Commissioner, T.C. Memo. 2004-152, and to require the Commissioner to provide to the taxpayer a credit with respect to property that the Commissioner had seized pursuant to a jeopardy levy but had improperly refused to sell in compliance with the taxpayer's request made pursuant to sec. 6335(f), see Zapara v. Commissioner, 124 T.C. 223">124 T.C. 223 (2005). 19Greene-Thapedi v. Commissioner, 1">126 T.C. at 9 n.13. In any event, it would be unnecessary to determine whether we have the inherent equitable powers under section 6330 to order respondent to return the levied funds (i.e., the property that was the subject of the levy for 2002 through 2004) unless petitioner properly commenced a collection review proceeding pursuant to section 6330 for 2002 through 2004. Respondent argues that petitioner did not.Respondent admits that petitioner's CDP hearing request was timely for 2005 and that she timely filed a petition with this Court requesting review of his determination to sustain the proposed levy action for 2005. Respondent argues, however, that petitioner did not timely request a CDP hearing for 2002 through 148 2004 and he did not issue a notice of determination under section 6330 for 2002 through 2004, and therefore we do not have jurisdiction under section 6330 to review the collection action for 2002 through 2004. On the other hand, petitioner argues that we have "jurisdiction to review all CDP appeals". She argues that she requested a CDP hearing within 13 days of the date of the levy to protest the seizure of the levied funds, that her request was denied, and that she timely filed a petition with this Court requesting that we order respondent to return the levied funds. We agree with respondent.Our jurisdiction under section 6330 depends upon the issuance of a valid determination letter and the filing of a timely petition for review. Seesec. 6330(d)(1); Orum v. Commissioner, 123 T.C. 1">123 T.C. 1, 8 (2004), aff'd, 412 F.3d 819">412 F.3d 819 (7th Cir. 2005); Sarrell v. Commissioner, 117 T.C. 122">117 T.C. 122, 125 (2001); Offiler v. Commissioner, 114 T.C. 492">114 T.C. 492, 498 (2000). On February 17, 2007, respondent mailed petitioner a notice of intent to levy with respect to her unpaid Federal income tax liabilities for 2002 through 2004, in which he notified her of a proposed levy action for 2002 through 2004 and her right to a hearing. However, petitioner did not request a CDP hearing within the 30-day period provided under section 6330(a)(3)(B). Consequently, the IRS proceeded with collection. On September 5, 2009, approximately 2-1/2 years later, the IRS issued a levy to Bank 149 of American Fork to collect petitioner's unpaid Federal income tax liabilities for 2002 through 2004. Respondent did not, and was not required to, give petitioner a second notice before the levy took place. Seesec. 6330(a)(1).The letter that respondent mailed to petitioner on September 5, 2009, was a notice of intent to levy with respect to petitioner's unpaid Federal income tax liability for 2005. It notified her of a proposed levy action for 2005 and her right to a hearing. It had nothing to do with the levy for 2002 through 2004 that took place the same day. On September 21, 2009, petitioner requested a CDP hearing for 2002 through 2005. Her CDP hearing request was timely for 2005 because it was made within 30 days of the notice of intent to levy for 2005. Seesec. 6330(a)(3)(B). However, it was not timely for 2002 through 2004, as it was made more than 2-1/2 years after the notice of intent to levy for 2002 through 2004. See id.Petitioner had a CDP hearing for 2005. Following the hearing, respondent issued a determination letter to petitioner sustaining the proposed levy action for 2005, and she timely petitioned this Court for review. However, the determination letter had nothing to do with the collection action for 2002 through 2004. Respondent determined that petitioner's CDP hearing request was untimely for 2002 through 2004. Petitioner did not have a CDP hearing for 2002 through 2004, 150 and respondent did not issue a determination letter to petitioner for 2002 through 2004. Therefore, we do not have jurisdiction under section 6330 to review the collection action for 2002 through 2004.3. Wrongful LevyPetitioner seems to argue the merits of a wrongful levy action on behalf of her children. 20The exclusive remedy of a third party seeking redress against the IRS for levying on his or her property to satisfy the tax liability of another is to bring a wrongful levy action under section 7426. See EC Term of Years Trust v. United States, 550 U.S. 429">550 U.S. 429, 435, 127 S. Ct. 1763">127 S. Ct. 1763, 167 L. Ed. 2d 729">167 L. Ed. 2d 729 (2007); Dahn v. United States, 127 F.3d 1249">127 F.3d 1249, 1252-1254 (10th Cir. 1997). However, the District Courts have exclusive jurisdiction to hear wrongful levy actions under section 7426. Seesec. 7426(a).D. ConclusionWe cannot order respondent to return the levied funds to petitioner (1) under section 6015(g)(1) because they did not belong to her, (2) under section 6330 because we do not have jurisdiction to review the collection action for 2002 through 2004, or (3) under section 7426 because we do not have jurisdiction to hear wrongful levy actions. Petitioner argues that her children could not pursue a *151 remedy in Federal court. While we sympathize with her children, we must apply the law as written; it is up to Congress to address questions of fairness and to make improvements to the law. Metzger Trust v. Commissioner, 76 T.C. 42">76 T.C. 42, 59-60 (1981), aff'd, 693 F.2d 459 (5th Cir. 1982).We hold that petitioner is entitled to innocent spouse relief for 2002 through 2005, that the issue of whether respondent abused his discretion by sustaining the proposed levy for 2005 is moot, and that we cannot order respondent to return the levied funds. We have considered all arguments made in reaching our decision and, to the extent not mentioned, we conclude that they are moot, irrelevant, or without merit.To reflect the foregoing,An appropriate order and decision will be entered in docket No. 16840-10L.Decision will be entered for petitioner in docket No. 1471-11.Footnotes1. Unless otherwise indicated, all section references are to the Internal Revenue Code in effect at all relevant times, and all Rule references are to the Tax Court Rules of Practice and Procedure.↩2. "S corporations are passthrough entities that generally do not pay income tax. Rather, the income and losses of S corporations are passed through to their shareholders, who must include the income or losses on their individual income tax returns." Maguire v. Commissioner, T.C. Memo. 2012-160↩.3. He worked at the two locations on alternate days of each week.↩4. The payments to the IRS were insufficient to cover the tax liabilities for any of the years in issue.↩5. Five of petitioner's children were minors at the time.↩6. The American Fork dental practice was losing money at the time.↩7. The monthly payment on the second mortgage was $440.↩8. Petitioner's compliance with the Federal income tax laws also improved somewhat, but she was still late in filing her tax returns for 2006, 2007, 2008, and 2010. As of the date of trial, other than for the years at issue she had an outstanding tax liability only for 2007.↩9. See infra↩ note 13.10. Mr. Cutler was listed as the taxpayer on the levy.↩11. The levied funds came from five separate bank accounts. Each account had petitioner's and Mr. Cutler's names on it and the name of one of their children. The children were all minors at the time the accounts were set up. We find that the funds in the accounts belonged exclusively to the children. See infra↩ pp. 25-26.12. The parties agree that petitioner is not eligible for relief under sec. 6015(b) or (c)↩.13. Rev. Proc. 2003-61, sec. 4.01, 2 C.B. 296">2003-2 C.B. 296, 297-298, also lists a seventh threshold condition: "The requesting spouse applies for relief no later than two years after the date of the Service's first collection activity after July 22, 1998, with respect to the requesting spouse." In Lantz v. Commissioner, 132 T.C. 131">132 T.C. 131 (2009), rev'd, 607 F.3d 479">607 F.3d 479 (7th Cir. 2010), we held that the two-year deadline imposed by sec. 1.6015-5(b)(1), Income Tax Regs., is an invalid interpretation of sec. 6015(f). After the U.S. Court of Appeals for the Seventh Circuit reversed Lantz, we reconsidered the matter but did not change our position. See Hall v. Commissioner, 135 T.C. 374 (2010). In Notice 2011-70, 32 I.R.B. 135">2011-32 I.R.B. 135, the IRS changed its position and will now consider requests for equitable relief under sec. 6015(f) if the period of limitation on collection of tax provided by sec. 6502 or the period of limitation on credits or refunds provided in sec. 6511↩ remains open for the tax years at issue.14. On brief respondent argues that half of the income from Willow Creek Dental for 2002 through 2005 should be attributed to petitioner and that petitioner therefore does not satisfy the threshold conditions with respect to that income. However, the parties have stipulated that petitioner has met the threshold conditions for relief. Stipulations are generally treated as "conclusive admissions". Rule 91(e). We may disregard stipulations where justice so requires if the evidence contrary to the stipulation is substantial or the stipulation is clearly contrary to the facts disclosed by the record. Cal-Maine Foods, Inc. v. Commissioner, 93 T.C. 181">93 T.C. 181, 195 (1989); see also Loftin & Woodward, Inc. v. United States, 577 F.2d 1206">577 F.2d 1206, 1232 (5th Cir. 1978); Jasionowski v. Commissioner, 66 T.C. 312">66 T.C. 312, 317-318↩ (1976). Such is not the case here. We find that the stipulation is supported by evidence in the record showing that during the years in issue Mr. Cutler was the sole dentist in the American Fork dental practice and the Sandy dental practice and the sole shareholder of Willow Creek Dental.15. In making the determination whether the requesting spouse had reason to know, consideration is given to, among other things: (1) the requesting spouse's level of education; (2) the requesting spouse's degree of involvement in the activity generating the income tax liability; (3) the requesting spouse's involvement in business and household financial matters; (4) the requesting spouse's business or financial expertise; and (5) any lavish or unusual expenditures compared with past spending levels. Rev. Proc. 2003-61↩, sec. 4.03(2)(a)(iii)(C), 2003-2 C.B. at 298.16. In determining a reasonable amount for basic living expenses, the Commissioner shall consider information provided by the taxpayer, including: (1) the taxpayer's age, employment status and history, ability to earn, number of dependents, and status as a dependent; (2) the amount reasonably necessary for food, clothing, housing, utilities, medical expenses, transportation, child support, and other necessities; (3) the cost of living in the geographical area in which the taxpayer lives; (4) the amount of property available to pay the taxpayer's expenses; (5) any extraordinary expenses, including special education expenses; and (6) any other factor that the taxpayer claims bears on economic hardship and brings to the Commissioner's attention. Sec. 301.6343-1(b)(4)(ii)↩, Proced. & Admin. Regs.17. According to petitioner, Mr. Bueno paid the utilities ($626 per month as reported on Form 8857) and the second mortgage ($440 per month).↩18. Petitioner and respondent both take the position on brief that the appropriate date to evaluate economic hardship is the date of petitioner's request for innocent spouse relief (i.e., September 25, 2009) and not the date of trial (i.e., April 17, 2012). In Pullins v. Commissioner, 136 T.C. 432">136 T.C. 432, 446-447 (2011), we stated: "When evaluating economic hardship, the Office of Appeals necessarily views the requesting spouse's financial situation as of the hearing date; but we properly consider the evidence presented at the de novo trial, see Porter I↩, and we consequently evaluate her financial situation and prospects as of that time". Nonetheless, assuming arguendo that we evaluated petitioner's financial situation as of the date of her request for innocent spouse relief, we find, for many of the same reasons, that she would suffer economic hardship if we denied her relief. Mr. Cutler was not paying child support; petitioner was raising her minor children on her own; petitioner's expenses exceeded her income by $596 per month; and petitioner's ability to continue supporting herself and her children from the Sandy dental practice was uncertain.19. Zapara was later affirmed on appeal. See Zapara v. Commissioner, 652 F.3d 1042">652 F.3d 1042 (9th Cir. 2011), aff'g124 T.C. 223">124 T.C. 223↩ (2005).20. We do not address the merits of a wrongful levy action because we do not have jurisdiction to hear such an action.↩	01-04-2023	05-06-2013
https://www.courtlistener.com/api/rest/v3/opinions/4623959/	Faigle Tool and Die Corporation, Petitioner, v. Commissioner of Internal Revenue, RespondentFaigle Tool & Die Corp. v. CommissionerDocket No. 161United States Tax Court7 T.C. 236; 1946 U.S. Tax Ct. LEXIS 138; June 27, 1946, Promulgated 138 Decision will be entered under Rule 50. Excess Profits Credit. -- Upon the facts, held (1) that petitioner was an acquiring corporation under section 740 (a) (1) (D), I. R. C., read with section 740 (b), (f), and (h), and that it is entitled to an excess profits credit under section 713 and 742, based on income. Raymond A. Fox, Esq., and Harvey H. Berger, C. P. A., for the petitioner.Thomas F. Callahan, Esq., for the respondent. Harron, Judge. HARRON 236 Respondent determined deficiencies in the income and excess profits tax liabilities of petitioner for the fiscal year ended January 31, 1941, in the respective amounts of $ 2,603.30 and $ 21,861.38. The issue relating to petitioner's income tax liability has been resolved by stipulation at the trial. The only question remaining is whether petitioner was an "acquiring corporation" under sections 740 and 742 of the Internal Revenue Code for purposes of computing its excess profits credit on the income, rather than on the invested capital, basis. On motion of respondent, consideration of petitioner's alternative claim for section 722 relief, and hearing thereon, were postponed until the question here involved is determined.Petitioner filed its returns with the collector at Detroit, Michigan.FINDINGS OF FACT.The following facts are found from the oral evidence, exhibits, and stipulation of facts. The stipulation of facts is incorporated herein by reference.The petitioner, Faigle Tool & Die Corporation, 140 is a Michigan corporation engaged in the business of manufacturing various machine tools, dies, and jigs. It keeps its books on the accrual basis and has filed its returns on the basis of a fiscal year ending January 31.In June 1931 the Faigle Tool & Die Co., hereinafter referred to as the old corporation, was organized. Karl Faigle was one of the incorporators and later became the sole shareholder. The old corporation was engaged in the manufacture of machine tools, dies, and jigs. It owned the machinery and equipment used in the manufacture of its products, but leased its plant and building. In March 1938 the old corporation decided to cease its manufacturing business.On March 1, 1938, Karl Faigle, in accordance with Michigan law, filed a certificate for the purpose of conducting a business under the assumed name of the Faigle Tool & Die Co., a sole proprietorship, hereinafter referred to as the proprietorship. The old corporation, by 237 written agreement, leased to the proprietorship for a term ending December 31, 1939, all the machinery and equipment it had used in the manufacture of its machine tools, dies, and jigs. The proprietorship obligated itself to pay 141 a rent of $ 1,000 a month to the old corporation. The old corporation also transferred to the proprietorship its month-to-month lease on the plant and building. Thereafter the old corporation engaged in no manufacturing activities. The proprietorship, in the old corporation's former plant and with the leased equipment, manufactured dies, jigs, and fixtures weighing as much as six or seven tons.On July 8, 1939, the lessor of the plant and building notified the proprietorship of the termination of its month-to-month lease and gave the proprietorship formal notice to vacate. Suitable floor space was not available elsewhere. Accordingly, on October 3, 1939, the proprietorship moved all of the machinery and equipment which it had previously been using, consisting solely of the machinery and equipment it was leasing from the old corporation, into a storage warehouse. No power lines were connected and no products were manufactured at the warehouse. However, the proprietorship retained its key personnel, consisting of an office manager, plant superintendent, tool crib man, night watchman, and repair and maintenance men who cleaned and repaired the stored equipment and machinery. These142 men were paid their regular salary by the proprietorship until the formation of petitioner. The proprietorship continued to pay the $ 1,000 per month rent on the leased machinery to the old corporation. The proprietorship, acting through Faigle, the sole proprietor, kept up its personal contacts with its customers, which included Ternstedt, Buick, Studebaker, Pontiac, and General Spring Bumper, and informed them of its plans for resuming production.In November 1939 the proprietorship purchased land and contracted for the construction of a plant thereon in accordance with its plans to resume manufacturing. Title to the land was taken in Faigle's name, individually. The proprietorship purchased additional machinery and equipment, consisting of boring mills, radical drill presses, and milling machines. The plant was completed in the latter part of January 1940. Although, by the terms of the leasing agreement between the old corporation and the proprietorship, the lease of the machinery and equipment terminated on December 31, 1939, the proprietorship thereafter continued to lease the machinery and equipment from the old corporation on a month-to-month basis. During the latter143 part of January all the machinery and equipment leased from the old corporation and stored in the warehouse and the additional machinery purchased were moved to the newly completed plant. By the early part of February 1940 the business of manufacturing machine tools, dies, and jigs was resumed.238 During November 1939 Faigle decided to form a corporation which would take over the manufacturing business of the proprietorship and would relieve him of the responsibilities of a sole proprietor. Faigle instructed his attorney to organize the new corporation. Because of the pressure of other affairs, the attorney was delayed in having the new corporation incorporated. On February 29, 1940, the articles of incorporation were filed and the charter was issued to the new corporation, petitioner herein.Around November 1939 Faigle's brother instituted suit against the proprietorship and the old corporation. Prior to a garnishment of the funds of the proprietorship, Faigle was able to withdraw $ 75,000 of proprietorship funds. Of this $ 75,000 he expended on behalf of the proprietorship, $ 5,591.83 for the machinery and equipment purchased, $ 4,000 for the land, and $ 33,771.82 for144 the construction of the plant. One thousand dollars represented the cost of land which Faigle and his wife deeded to the city of Dearborn for use as a public street.In order to release the garnishment obtained by Faigle's brother in the suit against the proprietorship and old corporation, the proprietorship deposited with the Wayne County Circuit Court a cash bond of $ 30,000. On November 19, 1940, $ 13,500 of the $ 30,000 cash bond was paid to Faigle's brother in full settlement of his claim and the remaining $ 16,500 was released by the circuit court and deposited in Faigle's personal bank account.Contemplating the formation of petitioner, the manufacture of machine tools, dies, and jigs was resumed in the early part of February 1940. After petitioner was incorporated on February 29, 1940, the proprietorship transferred to petitioner all of the properties of the proprietorship. As of January 31, 1940, the net assets of the proprietorship amounted to $ 48,053.18. Faigle transferred to petitioner an additional $ 5,028.94 which was not listed among the assets of the proprietorship on its books. Petitioner issued to Faigle, in exchange for the properties of the proprietorship145 and cash not listed among such properties, all of its authorized stock in the amount of 50,000 shares of $ 1 par value common stock and a demand note in the amount of $ 17,050.58.Petitioner began to manufacture the same products which the proprietorship previously manufactured. It used all the machinery and equipment which the proprietorship had leased from the old corporation. The business contracts of the proprietorship have continued with petitioner. Ninety per cent of the old employees of the proprietorship have been reemployed by petitioner. Faigle became the president and general manager of petitioner and devoted his full time to the business. The proprietorship ceased functioning after it transferred its properties to petitioner.239 The proprietorship transferred to petitioner:(a) The lease which the proprietorship had on a month-to-month basis after December 31, 1939, from the old corporation for all the machinery and equipment the proprietorship had ever used in the conduct of its business. Petitioner took over this lease at a rental of $ 200 per month and used all the machinery and equipment of the old corporation.(b) The business contacts, good will, and146 personnel of the proprietorship.(c) All the machinery and equipment purchased by the proprietorship in the amount of $ 5,591.83.(d) Accounts receivable control, sundry raw materials, and prepaid insurance in the respective amounts of $ 30, $ 90.63, and $ 96.14.(e) Land of the proprietorship valued at $ 4,000.(f) The plant of the proprietorship valued at $ 33,771.82.(g) Cash of the proprietorship. Petitioner received $ 23,470.16, of which $ 5,028.94 was not represented on the books of the proprietorship.(h) Liabilities of the proprietorship which petitioner assumed, consisting of accounts payable and accrued pay roll, taxes, and insurance in the total amount of $ 13,968.46.The value of the total assets which petitioner acquired was $ 67,050.58, for which petitioner issued to Faigle its common stock having a par value of $ 50,000 and a demand note for $ 17,050.58. The $ 13,968.46 of liabilities assumed, however, reduced the net amount of properties transferred to $ 53,082.12.The minutes of the board of directors of petitioner record the acquisition of these properties. At the first meeting of the board of directors, on March 9, 1940, the following motions were carried:Moved147 by Mr. Wild, seconded by Mr. Karl Faigle, that inasmuch as One Thousand Dollars ($ 1,000.00) had been paid into the Corporation by Karl Faigle, as set forth in the Articles of Incorporation, that 1,000 shares of the capital stock of the Corporation, $ 1.00 par value, be turned over to Karl Faigle. Unanimously carried.Moved by Mr. Wild, seconded by Mr. Karl Faigle, that whereas the Corporation, prior to the formal filing and acceptance of its Articles of Incorporation, had borrowed funds from Karl Faigle in order to begin operations, and that it will need to borrow more money from Karl Faigle from time to time, that the Corporation be authorized to borrow Seventy Thousand Dollars ($ 70,000.00) from Karl Faigle, it being understood that capital stock will subsequently be issued to Karl Faigle for said loans up to the total authorized capital of $ 50,000.00 on the basis of $ 1.00 par value stock for each $ 1.00 loaned by said Karl Faigle to the Corporation. Unanimously carried.At the second meeting of the board of directors, on May 28, 1940, the following motions were carried:Moved by Mr. Wild, and seconded by Mr. Karl Faigle, that240 Whereas, Karl Faigle has from time 148 to time since the Corporation started functioning advanced sums totaling $ 22,470.16 to the Corporation for use by the Corporation; andWhereas, Karl Faigle turned over and transferred to the Corporation $ 30.00 of Accounts Receivable due to him personally; andWhereas, Karl Faigle has turned over and transferred to the Corporation $ 90.63 in raw materials; andWhereas, Karl Faigle has turned over and transferred to the Corporation new machinery purchased by him within the past few months, costing said Karl Faigle $ 5,591.83; andWhereas, Karl Faigle has turned over and transferred to the Corporation prepaid fire insurance on said machinery, the unexpired value at the time of said transfer being $ 96.14; andWhereas, Karl Faigle did on November 27, 1939, purchase from B. C. Schram, Receiver for First National Bank -- Detroit, land in the City of Dearborn, Wayne County, Michigan, for $ 5,000.00, * ** * * Whereas, Karl Faigle has personally advanced $ 33,771.82 towards the cost of constructing a plant on said property, the address of said plant being 6500 Chase Road, Dearborn, Michigan; andWhereas, Karl Faigle is willing to transfer to the Corporation the land acquired by him as149 heretofore described, excepting the portion of said land heretofore conveyed to the City of Dearborn, as set forth above, for the sum of $ 4,000; and Karl Faigle is willing to transfer and convey to the Corporation all of his right, title and interest in the building erected on said land for the sum of $ 33,771.82, being the actual amount he has paid towards the cost of said building; andWhereas, all of the above sums and properties advanced and turned over to the Corporation by Karl Faigle, including the land and the building which Karl Faigle is willing to transfer and convey to the Corporation, total $ 66,050.58; andWhereas, the Corporation has 49,000 shares of unissued stock, all of which has been subscribed for by said Karl Faigle;Now, therefore, Karl Faigle, shall turn over, transfer and convey to the Corporation all of the cash; accounts receivable; raw materials; machinery; prepaid insurance; land, excepting that portion heretofore conveyed to the City of Dearborn, and the building erected on said land, to the Corporation, and the Corporation will issue to said Karl Faigle in payment thereof 49,000 shares of its $ 1.00 par value stock and the Corporation's demand note payable150 to Karl Faigle in the sum of $ 17,050.58 bearing six per cent interest. Unanimously carried.The parties have stipulated that if petitioner is entitled to compute its excess profits credit on the income basis, its base period net income is as follows:1936$ 2,342.3019372,342.301/1/38-5/31/38975.006/1/38-12/31/3828,242.36193962,714.43Petitioner acquired substantially all the properties of the Faigle Tool & Die Co., a sole proprietorship, solely in exchange for the stock and demand note of petitioner.241 OPINION.The issue in this case is whether petitioner is entitled, for excess profits tax purposes, to an excess profits credit based on income. Normally, a domestic corporation has the choice, under section 712 of the Internal Revenue Code, of computing its excess profits credit under either the income method or the invested capital method, whichever results in the lesser tax. But the availability of this choice presupposes that the corporation was in existence during the base period, usually the years 1936 to 1939, inclusive, and that it earned income from which the average base period net income, necessary for the computation of the income credit, 151 can be determined. Hence, if the corporation did not come into existence until after December 31, 1939, it must, with exceptions to be hereinafter noted, compute its excess profits credit under the invested capital method prescribed by section 714. Petitioner was incorporated in February 1940. Accordingly, respondent asserts that petitioner is restricted to the invested capital method of computing its excess profits credit.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. For present purposes, section 740 defines such an "acquiring corporation" entitled to base its excess profits credit on income as one which has acquired "substantially all the properties" 152 of a "sole proprietorship" in an exchange to which section 112 (b) (5) or 12 (c) was applicable. 1153 It is not disputed 242 that the Faigle Tool & Die Co. was a sole proprietorship. Nor is it disputed that Faigle, the sole proprietor, received in exchange for the properties of the proprietorship which were transferred to petitioner stock and a demand note of petitioner within the purview of section 112 (b) (5) and 112 (c). 2 After the exchange, Faigle owned all of petitioner's authorized stock and was in complete control of petitioner. The only reason which respondent asserts for denying petitioner the use of the excess profits credit based on income and for restricting petitioner to the excess profits credit based on invested capital, is that petitioner has not shown that it acquired "substantially all the properties" of the Faigle Tool & Die Co. The only question presented for our decision, therefore, is whether petitioner has satisfactorily made this showing.The facts in this case are somewhat unusual. The proprietorship was formed in March 1938, and for the ensuing year and a half it was actively engaged in the manufacture of machine tools, dies, and jigs. Yet, the proprietorship actually owned during that time neither the machinery and equipment which it used in the manufacture of its products, nor the building in which its plant was set up. It leased both. When its month-to-month lease on the building was terminated, it bought land and constructed its own building and plant. After petitioner was formed, the proprietorship transferred to petitioner this land, plant, and building. It also transferred to petitioner the lease on the machinery and equipment which it then was renting on a month-to-month basis from the old corporation, as well as 154 other machinery which it had purchased with proprietorship funds. Thus, petitioner has acquired all the machinery and equipment which was ever used by the proprietorship, has the same leasehold interest therein as had the proprietorship, and, in addition, has acquired the land, building, and machinery owned outright by the proprietorship. Some $ 18,000 243 of proprietorship cash was also transferred to petitioner, as well as an additional $ 5,000 which probably had its source in proprietorship funds. The accounts receivable, inventory, and prepaid insurance of the proprietorship were likewise acquired, and almost $ 14,000 of proprietorship liabilities were assumed by petitioner. The net worth of the proprietorship prior to the transfer to petitioner was $ 48,053.18, and petitioner acquired all of this, not in the form of net assets alone, but in the form of gross assets of the proprietorship, reduced by the liabilities of the proprietorship which petitioner assumed. See Milton Smith, 34 B. T. A. 702. Petitioner is engaged in exactly the same business of manufacturing machine tools, dies, and jigs as was the proprietorship. The business contacts155 and good will of the proprietorship have been acquired by petitioner. Ninety per cent of the old employees of the proprietorship have been reemployed by petitioner. Faigle, who was the sole proprietor, is now the president and general manager of petitioner, devoting his full time to the business. Had petitioner never been formed at the end of February 1940 there could be no doubt that the resumption of manufacturing would have been by the same proprietorship which was operating in 1938 and 1939. In essence, the incorporation of petitioner has not changed the former proprietorship business in any respect. It is one and the same business, with exactly the same assets.Respondent contends that petitioner did not acquire substantially all of the assets of the proprietorship. It is part of petitioner's burden of proof to show that it did, and we think petitioner has met this burden of proof. Consideration has been given to respondent's contention. However, the entire record explains satisfactorily that certain liabilities must have offset what appeared to be, during the course of the trial, free assets to respondent, with the result that the assets of the proprietorship were actually156 less than respondent argues in his brief. Respondent has seized upon one item in the record without taking into consideration other related items of evidence. For example: During the trial reference was made orally to an accounting statement which, it was said, showed that as of September 30, 1939, the proprietorship had gross assets of over $ 138,000. This was immediately prior to the date on which the proprietorship was forced to vacate its leased plant site. The gross assets of about $ 138,000 consisted chiefly of three items, cash and accounts receivable of approximately $ 105,000 and notes receivable from the old corporation of about $ 26,500. The oral reference to such gross assets, at the trial, did not extend to any description of net assets after the existing liabilities of the proprietorship. We are satisfied from the entire record that there were liabilities and that the proprietorship had to pay out certain amounts, which, of course, would reduce the liquid assets. We think respondent's argument suffers from the defect of not reconstructing 244 items of expense and liabilities from the record. It is clear that the proprietorship continued to pay $ 1,000 a157 month rent on leased machinery; that it continued to pay the regular salaries to key personnel which it retained; and that it had some accounts payable (some of which were later assumed by petitioner). Furthermore, income tax had to be paid by Faigle on the net earnings of the proprietorship, for which some reserve had to be set up, for it appears that Faigle's chief source of income was the earnings of the proprietorship, and he had to pay income tax out of distributions from the business.Respondent contends that petitioner has not shown that Faigle did not liquidate and pay to himself, personally, the cash, the notes receivable, and the accounts receivable of the proprietorship. On the contrary, the record amply demonstrates that any of these amounts not shown to have been actually transferred to petitioner were used up in the operations of the proprietorship in the interval between the shut-down of active manufacturing and the organization of petitioner. The $ 105,000 of accounts receivable and cash appears to correspond to the $ 75,000 cash which Faigle withdrew from the proprietorship bank account prior to the garnishment obtained by his brother in the suit against the old158 corporation and the proprietorship, and to the $ 30,000 cash bond which the proprietorship deposited to release the garnishment. Approximately $ 67,000 of this $ 105,000 went to petitioner in the form of fixed assets and cash, and $ 13,500 was paid to Faigle's brother in settlement of his claim. Out of the remaining $ 25,000, rent on the leased machinery, salaries to the retained key personnel, and Faigle's 1939 income tax liability had to be paid. We are satisfied that Faigle, personally, did not keep any portion of the $ 25,000 in any amount of any consequence.The third item of gross assets to which respondent's argument is directed consists of the $ 26,500 of notes receivable from the old corporation appearing on the books of the proprietorship as of September 30, 1939. Petitioner, as a matter of fact, did not acquire any notes receivable of the proprietorship. On account of this, respondent contends that a substantial asset was not transferred from the proprietorship to petitioner. There were included on the proprietorship books as of January 31, 1940, notes receivable from the old corporation, and they were listed as proprietorship assets. But it has now been explained159 by petitioner's accountant, who testified at the trial, that the notes receivable which appeared on the proprietorship books on January 31, 1940, represented an obligation of the old corporation to Faigle, personally. They were not connected with the proprietorship business. The accountant testified that, therefore, such notes receivable were not transferred to petitioner when petitioner was organized.The amount of notes receivable listed on the books on January 31, 1940, was smaller than the $ 26,500 of notes listed on the books as of 245 September 30, 1939, about which respondent argues. The crucial date for the purposes of the issue presented is January 31, 1940, the date closest to the time petitioner was organized. As has been pointed out above, the controversial item of $ 26,500 of notes was not an asset of the proprietorship even on September 30, 1939, and consequently it should not have been transferred to petitioner. If any doubt remains, and it could be said that these notes receivable were assets of the proprietorship, there is ample indication in the record that the proceeds were used to discharge proprietorship liabilities, or were transferred to petitioner160 in the form of cash or other property.We hold, therefore, that within both the spirit and the letter of section 740 of the Internal Revenue Code, petitioner acquired substantially all of the properties of the Faigle Tool & Die Co., a sole proprietorship, in an exchange to which section 112 (b) (5) or 112 (c) was applicable, and that petitioner, therefore, is entitled to compute its excess profits credit under the income method.Decision will be entered under Rule 50. Footnotes1. SEC. 740. DEFINITIONS [as added by sec. 201, Second Revenue Act of 1940; amended by sec. 8, Excess Profits Tax Amendments of 1941; and further amended by sec. 228, Revenue Act of 1942].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. * * (d) In the case of a taxpayer which is an acquiring corporation the base period shall be the four calendar years 1936 to 1939, both inclusive, except that, if the taxpayer became an acquiring corporation prior to September 1, 1940, the base period shall be the same as that applicable to its first taxable year ending in 1941. * * (f) Existence of Acquiring Corporation. -- For the purposes of section 712 (a), if any component corporation of the taxpayer was in existence before January 1, 1940, the taxpayer shall be considered to have been in existence before such date. * * (h) Sole Proprietorship. -- For the purposes of sections 740 (a) (1) (D), 740 (b) (5), and 742 (g), a business owned by a sole proprietorship shall be considered a partnership.SEC. 742. SUPPLEMENT A AVERAGE BASE PERIOD NET INCOME [as added by sec. 201, Second Revenue Act of 1940; amended by secs. 8 (d) and 15, Excess Profits Tax Amendments of 1941; and further amended by sec. 228, Revenue Act of 1942].In the case of a taxpayer which is an acquiring corporation, its average base period net income (for the purpose of the credit computed under section 713) shall be the amount computed under section 713 or the amount of its Supplement A average base period net income, whichever is the greater. * *↩2. Respondent likewise does not challenge the fact that, pursuant to section 228 (f) of the Revenue Act of 1942 and section 30.742-2 of Regulations 109, petitioner is entitled to have the amendments to Supplement A made by the Revenue Act of 1942 apply retroactively to the 1941 taxable year here involved.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4623960/	George B. Wendell, Petitioner, v. Commissioner of Internal Revenue, RespondentWendell v. CommissionerDocket No. 18093United States Tax Court12 T.C. 161; 1949 U.S. Tax Ct. LEXIS 282; February 9, 1949, Promulgated 282 Decision will be entered for the respondent. Held, salary paid to practical nurses employed to care for child, his mother having died in childbirth, the child being normal in every way and having no unusual illness, is not deductible as medical expense under section 23 (x), I. R. C.Erwin Bruce Hallett, Esq., for the petitioner.Stephen P. Cadden, Esq., for the respondent. Van Fossan, Judge. VAN FOSSAN 161 OPINION.Respondent determined a deficiency of $ 383.06 in income tax for the year 1944. The sole question is the allowability as a medical deduction of salary paid to practical nurses for care of petitioner's infant son, whose mother died in childbirth.The case arises under the following facts:Petitioner is an individual and resident of Westfield, New Jersey. He filed his income tax return for the calendar year 1944 with the collector of internal revenue for the second district of New York. Petitioner was vice president and assistant general manager of Wheatena Corporation.Petitioner's wife died in childbirth, leaving her surviving a child of her marriage to petitioner. The infant, George B. Wendell, Jr., was born April 20, 1943.During 1944 petitioner283 employed various practical nurses to care for his child, their names having been obtained from a list given petitioner by a physician. The duties of the nurse were to look after the child, having exclusive care of him, sleep in the room with him, and be with him at all times except during her time off. She did no housework. In some instances the nurse ate with the family and in other instances she did not. The cooking and general housework were done by a maid. The petitioner's household consisted of himself, the infant, his mother-in-law (who was hard of hearing), the maid, and the practical nurse.162 The child was a normal child in all respects, had no physical or mental defects and suffered no serious or particular illnesses in 1944.When the nurse was off duty, the child was cared for by petitioner or by its grandmother or by the maid. A doctor employed by petitioner for professional services to petitioner expressed the professional opinion that, in the premises, hiring a practical nurse was a reasonable and prudent provision, but not indispensable. In his tax return for 1944 petitioner listed $ 1,665.99 as medical and dental expense, including $ 1,415 spent for practical284 nurses to care for the child. Petitioner claimed a deduction of $ 832.75 under favor of section 23 (x), Internal Revenue Code. Respondent disallowed the deduction.It is axiomatic that deductions from income are a matter of legislative grace and that, to qualify, a taxpayer must demonstrate that his claimed deduction clearly comes within the legislative intent. To ascertain whether the expenditures in the present case fall within the statute, we must examine the enabling act. Section 22 (x) states the provision first in general terms, i. e., "expenses paid * * for medical care," and then by way of definition, by illustrative examples, viz., "amounts paid for the diagnosis, cure, mitigation, treatment, or prevention of disease, or for the purpose of affecting any structure or function of the body (including amounts paid for accident or health insurance)."In this case we have a normally healthy child, without physical or mental defect. The conditions surrounding the child were unusual in the fact that the mother died in childbirth. The father, solicitous for his son's welfare, consulted a doctor as to a suitable person to live with and care for the child. He might conceivably285 have hired an experienced nursemaid or a woman who had raised children of her own. He, however, elected to hire a practical nurse. Had he hired a nursemaid, the salary paid would not have been deductible as an ordinary and necessary expense, see Henry C. Smith, 40 B.T.A. 1038">40 B.T.A. 1038; affd. per curiam, 113 F.2d 114">113 F.2d 114, nor would it, under the rationale of that case, have qualified as a medical deduction. Equally so had he hired a competent woman who had raised children of her own, although conceivably she might have been equally as efficient and capable in caring for the child as a practical nurse. Does the fact that the petitioner chose to hire a practical nurse make a basal difference? We are unable so to hold.Under the facts here present, the money here paid as salary for the nurses does not qualify as being paid for the diagnosis of disease nor its cure or mitigation or treatment. It can be said to have been paid for the prevention of disease only in the same way that the provision 163 of adequate food or adequate sleep or sufficient clothing are all preventives of disease. But by no stretch of the imagination286 could we hold that in the case of a normal child such provisions were "medical care * * for * * * the prevention of disease." Had the mother lived, presumably she would have furnished the usual care for the child, it being always remembered that the son was a normal child without mental or physical defect. Absent special circumstances of illness, accident, or physical or mental defects, the care of a child is a normal, personal, and parental duty. See Mildred A. O'Connor, 6 T.C. 323">6 T.C. 323.The issue turns on the nature of the services rendered, not on the experience or qualifications or title of the person employed. If the services are of such character as to fall under one of the special examples of medical care, or are, by the doctrine of nocitur a sociis, of similar, though not specially mentioned, nature, they are deductible.The respondent does not question sums paid for doctors' services and medical supplies and health and accident insurance. He disallowed only the salary paid to the nurses. We affirm the respondent. The sum so paid can not be classified as medical expense within the intendment of the statute.Decision will be entered *287 for the respondent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4623961/	ZANDER & CIA, LTD., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Zander & Cia, Ltd. v. CommissionerDocket No. 97263.United States Board of Tax Appeals42 B.T.A. 50; 1940 BTA LEXIS 1053; June 13, 1940, Promulgated 1053 Held, profits realized by petitioner, a nonresident foreign corporation, from certain futures purchase and sale contracts entered into and liquidated for its account by a domestic broker on the New York Coffee and Sugar Exchange, were income from sources within the United States. L. G. Lemle, Esq., for the petitioner. Donald P. Moyers, Esq., for the respondent. ARUNDELL50 This proceeding is brought for redetermination of an income tax deficiency of $1,580.52 for the fiscal year ended June 30, 1934, and of a penalty of 25 percent of the tax, or $395.13, as prescribed by section 291 of the Revenue Act of 1932 for failure to file a return. The deficiency grows out of the inclusion by respondent in petitioner's income of certain profits realized from futures purchase and sale contracts entered into and liquidated on the New York Coffee and Sugar Exchange for petitioner's account. The issue presented is whether these profits were income from sources within the United States. We adopt as our findings the facts as stipulated by the parties and set forth hereinafter those which are necessary to an understanding of the issue. FINDINGS1054 OF FACT. The petitioner is a Brazilian corporation, with its principal place of business at Caixa Postal, No. 903, Santos, Brazil. During the period here involved petitioner was engaged in the coffee export business in Brazil. It maintained no place of business in the United States. During the fiscal year ended June 30, 1934, the petitioner through its agent, a domestic broker, entered into various futures purchase and sale contracts on the New York Coffee and Sugar Exchange. From the liquidation of these contracts during the year involved here, the petitioner realized a net profit of $11,494.67. The petitioner filed no income tax return for the fiscal year ended June 30, 1934. OPINION. ARUNDELL: The question presented for our decision is whether profits realized by the petitioner, a nonresident foreign corporation, from its dealings in futures contracts on the New York Coffee and Sugar Exchange were income from sources within the United States51 within the meaning of sections 119 and 231 of the Revenue Act of 1932. The petitioner offers no evidence that the transactions involved were in the nature of hedges and therefore makes no claim to offset the income1055 here involved against losses sustained by it in the business of coffee exporting. See G.C.M. 18383, 2 C.B. 244">1937-2 C.B. 244. We think it is plain that the income here in question arose within the United States. It was realized from futures purchase and sale contracts which the petitioner entered into and subsequently liquidated on the New York Coffee and Sugar Exchange. All of the transactions involved took place within this country and the income resulting therefrom clearly had its origin here. Hubert De Stuers,26 B.T.A. 201">26 B.T.A. 201; Carding Gill, Ltd.,38 B.T.A. 669">38 B.T.A. 669. See also Helvering v. Boekman, 107 Fed.(2d) 388. This conclusion is not affected by the principle that income realized on the sale of property arises at the place where title to the property passes. See Campania General v. Collector,279 U.S. 306">279 U.S. 306; Commissioner v. East Coast Oil Co., 85 Fed.(2d) 322. The holding of these cases can not be applied to income realized on contracts under which delivery, by custom, is not made of the commodities specified. See 1056 United States v. New York Coffee and Sugar Exchange, Inc.,263 U.S. 611">263 U.S. 611, 616. The petitioner argues, nevertheless, that the income here involved, wherever arising, is not taxed by the statute, which specifies in section 119(a) five categories of income to be treated as originating from sources within the United States, under none of which do the profits here in question fall. The case of Hubert De Stuers, supra, is authority for the view which we take here that no exclusive enumeration of the types of taxable income from sources within the United States was there intended and income other than that described which plainly arises within this country is to be taxed without reference to the enumeration. See also Helvering v. Suffolk Co., Ltd., 104 Fed.(2d) 505. Finally, the petitioner contends that Congress has made plain that it did not intend to tax the income here involved by the enactment of provisions in the Revenue Act of 1936 which eliminate from taxation income of the type sought to be reached here. 1 This argument has force only if it was the legislative intention that the later act should be utilized as a clarification1057 of previously enacted statutes. The pertinent congressional reports disclose that it was not the object of Congress, in the enactment of the sections of the 1936 Act on which petitioner bases its argument, to clarify existent laws, but rather to 52 accomplish "a substantial change in our present system of taxing nonresident aliens and foreign corporations." 2 The reasons which are assigned therein for the change convince us further that a clean break with existent law was contemplated: [Nonresident foreign corporations] will not be subject to the tax on capital gains, including gains from hedging transactions, as at present, it having been found impossible to effectually collect this latter tax. It is believed that this exemption from tax will result in additional revenue from transfer taxes and from the income tax in the case of persons carrying on the brokerage business. [Emphasis supplied.] *1058 The case of Union Internationale De Placements v. Hoey, 96 Fed.(2d) 591, which, in interpreting a somewhat related provision of the 1932 Act (section 211(b)) used the Revenue Act of 1936 as a guide, is cited by the petitioner in support of the argument with which we have last dealt. That case has no application here. The court there relied on the Congressional Committee reports dealing with the amendment of section 211(b), which establish that the changed phraseology of the 1936 Act was intended to clarify a phrase used in earlier statutes. 3 Contrasted with that purpose, we have pointed out above that the changed wording of section 231 in the 1936 Act was not intended to be retroactive. Accordingly, the holding of that case does not alter the conclusion which we have reached here. Decision will be entered for the respondent.Footnotes1. See Revenue Act of 1936, sec. 231(a); Regulations 94, art. 231-3(a). ↩2. See Report of Ways and Means Committee, Revenue Bill of 1936, H.R. No. 2475, 74th Cong., 2d sess. (1936), p. 9; Report of Senate Finance Committee, Revenue Bill of 1936, S.R. 2156, 74th Cong., 2d sess. (1936), p. 21. ↩3. Report of Senate Finance Committee, Revenue Bill of 1936, S.R. 2956, 74th Cong., 2d sess. (1936), p. 22. See also Union Internationale De Placements v. Hoey, supra,↩ p. 593.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4623962/	INVESTMENT RESEARCH ASSOCIATES, INC., Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentInv. Research Assocs. v. Comm'rNo. 16410-05L United States Tax Court126 T.C. 183; 2006 U.S. Tax Ct. LEXIS 7; 126 T.C. No. 7; April 18, 2006, Filed Investment Research Assocs. Ltd. v. Commissioner, T.C. Memo 1999-407">T.C. Memo 1999-407, 1999 Tax Ct. Memo LEXIS 463">1999 Tax Ct. Memo LEXIS 463 (T.C., 1999)7 R filed a Federal tax lien in Florida (Florida lien) and mailed to P a Notice of Federal Tax Lien Filing and Your Right to a Hearing Under IRC 6320 (lien notice) regarding P's unpaid taxes for 1980, 1982, 1984, 1985, 1986, 1987, 1988, 1989, and 1997 (the years in dispute). P did not submit to R a request for an administrative hearing with regard to the Florida lien. Three months later, R filed a Federal tax lien in Illinois (Illinois lien) and mailed to P a second lien notice for the years in dispute. P submitted to R's Office of Appeals a request for an administrative hearing regarding the Illinois lien. Relying on sec. 301.6320-1(b)(1) and (2), Proced. & Admin. Regs., R's Office of Appeals determined that P's request for an administrative hearing was not timely because P failed to request an administrative hearing in response to the earlier Florida lien. The Office of Appeals conducted a so-called equivalent hearing and mailed to petitioner a decision letter. P filed a petition with the Court challenging R's decision letter. 8 Held: Sec. 301.6320-1(b)(1) and (2), Proced. & Admin. Regs., is a reasonable interpretation of sec. 6320, I.R.C., and is valid and controlling in this case. Held, further, P failed to timely request an administrative hearing with regard to the Florida lien, and, therefore, the Office of Appeals was not required to conduct an administrative hearing under sec. 6320, I.R.C. Held, further, The decision letter in dispute does not constitute a notice of determination which would permit P to invoke the Court's jurisdiction under secs. 6320 and 6330, I.R.C., and this case shall be dismissed for lack of jurisdiction. Robert E. McKenzie and Kathleen M. Lach, for petitioner.Sean Robert Gannon and Kathleen C. Schlenzig, for respondent. Haines, Harry A.Harry A. Haines183 OPINIONHAINES, Judge: The question presented in this collection review case is whether the Court has jurisdiction under sections 6320 and 6330 to review the Decision Letter Concerning Equivalent Hearing (decision letter) upon which9 the petition for lien or levy action is based. 1 As discussed in detail below, we conclude that petitioner failed to timely request an administrative hearing, and, therefore, the decision letter in 184 dispute does not constitute a notice of determination which would permit petitioner to invoke this Court's jurisdiction under sections 6320 and 6330. Consequently, we are obliged to dismiss this case for lack of jurisdiction.BackgroundIn Inv. Research Associates, Ltd. v. Commissioner, T.C. Memo 1999-407">T.C. Memo 1999-407, a Memorandum Opinion filed in 28 consolidated dockets, the Court held, inter alia, that Investment Research Associates, Inc. (petitioner) was liable for deficiencies, additions to tax, and an accuracy-related penalty for the years 1980 and 1982 to 1989. 2 The Court entered decisions in petitioner's deficiency cases in September 2001. Petitioner did not appeal the Court's decisions in its deficiency cases and those decisions10 are now final. Secs. 7481(a)(1), 7483. 3 In February 2002, respondent assessed the deficiencies, additions to tax, and accuracy-related penalty described above, as well as interest.On October 28, 2002, respondent mailed to petitioner a Notice of Federal Tax Lien Filing and Your Right to a Hearing Under IRC 6320 with regard to petitioner's unpaid taxes for 1980, 1982, 1984, 1985, 1986, 1987, 1988, 1989, and 1997 (hereinafter the years in dispute). On11 October 30, 2002, respondent filed a Notice of Federal Tax Lien with the secretary of state for the State of Florida (the Florida lien) with regard to petitioner's unpaid taxes for the years in dispute. Petitioner did not submit to respondent a request for an administrative hearing with regard to the Florida lien.On February 24, 2003, respondent filed a Notice of Federal Tax Lien with the secretary of state for the State of Illinois (the Illinois lien) with regard to petitioner's unpaid taxes for the years in dispute. On February 24, 2003, respondent mailed to petitioner a Notice of Federal Tax Lien Filing and Your Right to a Hearing Under IRC 6320 with regard to petitioner's unpaid taxes for the years in dispute. On March 25, 2003, petitioner submitted to respondent's Office of 185 Appeals (Appeals Office) a request for an administrative hearing under section 6320.The Appeals Office determined that petitioner's request for an administrative hearing was not timely and conducted a so-called equivalent hearing. Sec. 301.6320-1(i), Proced. & Admin. Regs. On August 4, 2005, respondent mailed to petitioner a decision letter for the years in dispute. The decision letter12 stated in pertinent part:Your due process hearing request was not filed within the time prescribed under Section 6320 and/or 6330. However, you received a hearing equivalent to a due process hearing except that there is no right to dispute a decision by the Appeals Office in court under IRC Sections 6320 and/or 6330.The decision letter stated that the Appeals Office rejected petitioner's offer-in-compromise and that the liens were properly filed and would not be released.On September 2, 2005, petitioner filed with the Court a petition for lien or levy action challenging respondent's decision letter. Petitioner acknowledged in its petition that respondent filed the Florida lien in October 2002 and that respondent issued to petitioner a Notice of Federal Tax Lien Filing at that time. The petition states that petitioner did not submit to respondent a request for an administrative hearing after receiving notice of the Florida lien because petitioner did not own significant assets in the State of Florida.The Court issued an order in this case directing the parties to show cause why this case should not be dismissed for lack of jurisdiction. Both13 parties filed responses to the Court's order. The Court subsequently directed respondent to file a reply to petitioner's response, and respondent complied with the Court's order.DiscussionSection 6321 imposes a lien in favor of the United States on all property and rights to property of a person liable for tax when a demand for the payment of the person's taxes has been made and the person fails to pay those taxes. Such a lien arises when an assessment is made. Sec. 6322. Section 6323(a) requires the Secretary to file a notice of Federal tax lien if the lien is to be valid against any purchaser, holder of a security interest, mechanic's lienor, or judgment lien 186 creditor. Lindsay v. Commissioner, T.C. Memo 2001-285">T.C. Memo 2001-285, affd. 56 Fed. Appx. 800">56 Fed. Appx. 800 (9th Cir. 2003). Section 6323(f)(1), which addresses the place for filing a notice of Federal tax lien, provides that the Commissioner is required to file separate liens if a taxpayer owns real property in more than one State, and the Commissioner may be required to file separate liens in different counties or other governmental subdivisions within a State, as designated by the laws of that State.Sections 6320 (pertaining14 to liens) and 6330 (pertaining to levies) provide protections for taxpayers in tax collection matters. In general terms, sections 6320 and 6330 provide for notice and the right to an administrative hearing and judicial review when the Commissioner files a Federal tax lien or proposes to collect unpaid taxes by levy.A. Notice RequirementsSection 6320(a)(1) provides that "The Secretary shall notify in writing the person described in section 6321 of the filing of a notice of lien under section 6323." Section 6320(a)(2) sets forth the time and methods under which the Commissioner is required to provide the notice described in section 6320(a)(1). The flush language of section 6320(a)(2) provides that the notice required by section 6320(a)(1) is to be provided not more than 5 business days after the day of the filing of the notice of lien. Section 6320(a)(3) describes the information required to be included in the notice described in section 6320(a)(1). Section 6320(a)(3)(B) provides that the notice shall include "the right of the person to request a hearing during the 30-day period beginning on the day after the 5-day period described in paragraph (2)."B. Right to an Administrative15 HearingSection 6320(b)(1) provides that a person requesting a hearing under subsection (a)(3)(B) is entitled to a hearing in respondent's Appeals Office. Section 6320(b)(2) imposes a qualification on subsection (b)(1) by providing that "A person shall be entitled to only one hearing under this section with respect to the taxable period to which the unpaid tax specified in subsection (a)(3)(A) relates." Section 6320(c) provides that an Appeals Office hearing generally shall be conducted 187 consistent with the procedures set forth in section 6330(c), (d), and (e).C. Judicial Review and Tax Court JurisdictionWhen the Appeals Office issues a notice of determination to a taxpayer following an administrative hearing regarding a lien or levy action, sections 6320(c) (by way of cross-reference) and 6330(d)(1) provide that the taxpayer will have 30 days following the issuance of a notice of determination to file a petition for review with the Tax Court or Federal District Court, as may be appropriate. See Orum v. Commissioner, 123 T.C. 1">123 T.C. 1, 7-8 (2004), affd. 412 F.3d 819">412 F.3d 819 (7th Cir. 2005); Kennedy v. Commissioner, 116 T.C. 255">116 T.C. 255, 260 (2001).The Tax Court16 is a court of limited jurisdiction, and we may exercise our jurisdiction only to the extent authorized by Congress. Naftel v. Commissioner, 85 T.C. 527">85 T.C. 527, 529 (1985). It is well settled that the Court's jurisdiction under sections 6320 and 6330 depends upon the issuance of a valid notice of determination and the filing of a timely petition for review. Sec. 6330(d)(1); Prevo v. Commissioner, 123 T.C. 326">123 T.C. 326, 328 (2004); Orum v. Commissioner, supra.Respondent's issuance of a decision letter (as opposed to a notice of determination) is not conclusive with respect to the question of whether the Court has jurisdiction in this case.D. The Parties' Positions1. RespondentRelying on section 301.6320-1(b)(1) and (2), Proced. & Admin. Regs., respondent asserts that, because petitioner failed to submit to respondent a request for an administrative hearing in respect of the Florida lien filed in October 2002, the Appeals Office was not obliged to provide petitioner with an administrative hearing under section 6320 in response to petitioner's challenge to the Illinois lien filed in February 2003. Section 301.6320-1(b)(1), Proced. & Admin. Regs., provides17 in pertinent part that "A taxpayer is entitled to one CDP [collection due process] hearing with respect to the first filing of a NFTL (on or after January 19, 1999) for a given tax period or periods with respect to the unpaid tax shown on the NFTL if the taxpayer timely requests such a 188 hearing." Section 301.6320-1(b)(2), Q&A-B1, Proced. & Admin. Regs., states:Q-B1. Is a taxpayer entitled to a CDP hearing with respect to the filing of a NFTL for a type of tax and tax periods previously subject to a CDP Notice with respect to a NFTL filed in a different location on or after January 19, 1999?A-B1. No. Although the taxpayer will receive notice of each filing of a NFTL, under section 6320(b)(2), the taxpayer is entitled to only one CDP hearing under section 6320 for the type of tax and tax periods with respect to the first filing of a NFTL that occurs on or after January 19, 1999, with respect to that unpaid tax. Accordingly, if the taxpayer does not timely request a CDP hearing with respect to the first filing of a NFTL on or after January 19, 1999, for a given tax period or periods with respect to an unpaid tax, the taxpayer forgoes the right to a CDP hearing with Appeals18 and judicial review of the Appeals' determination with respect to the NFTL. Under such circumstances, the taxpayer may request an equivalent hearing as described in paragraph (i) of this section.Thus, respondent avers that the Court lacks jurisdiction in this case on the ground the decision letter in dispute does not constitute a notice of determination that would permit petitioner to invoke the Court's jurisdiction under sections 6320 and 6330.2. PetitionerPetitioner argues that section 301.6320-1(b)(1) and (2), Proced. & Admin. Regs., is not a reasonable interpretation of section 6320 and is invalid. Specifically, petitioner argues that, although section 6320(b)(2) expressly limits a taxpayer to one hearing for a particular taxable period, section 6320 does not contain any language requiring a taxpayer to request an administrative hearing with respect to the first notice of Federal tax lien filed by the Commissioner. As petitioner sees it, if the Commissioner files multiple liens in different States or governmental subdivisions at different times, the taxpayer may request an administrative hearing with regard to any one of those liens, so long as his or her request is made19 within the time limit imposed under section 6320(a)(3)(B). Petitioner contends that it is manifestly unreasonable to interpret section 6320 to require a taxpayer to challenge a Federal tax lien that is filed in a jurisdiction in which the taxpayer has little, if any, property. Asserting that it timely filed its request for an administrative hearing 189 with regard to the Illinois lien, petitioner maintains that the Court has jurisdiction in this case on the ground the decision letter in dispute should be considered a notice of determination consistent with the Court's holding in Craig v. Commissioner, 119 T.C. 252">119 T.C. 252 (2002).E. AnalysisSection 6320(a)(1) requires the Commissioner to give written notice to a taxpayer when a Federal tax lien is filed under section 6323. Given that section 6323(f)(1) contemplates the filing of separate liens in multiple States, or in multiple counties or other governmental subdivisions within a State, it follows that a taxpayer (like petitioner in the present case) may receive multiple lien notices under section 6320(a)(1). Although a person may receive multiple lien notices under section 6320(a)(1), section 6320(b)(2) clearly states that the20 person is entitled to only one administrative hearing under section 6320 with respect to the unpaid tax for a particular taxable period for which a lien was filed. The statute does not, however, explicitly address the narrow question presented in this case; i.e., whether a taxpayer's right to an administrative hearing in the Appeals Office and judicial review of the Appeals Office's determination is tied to the first Federal tax lien filed against the taxpayer or whether the taxpayer may defer and request an administrative hearing in respect of a later filed lien.As noted earlier, respondent relies on section 301.6320-1(b)(1) and (2), Proced. & Admin. Regs., as authority for the proposition that a taxpayer must request an administrative hearing with respect to the first Federal tax lien that is filed in respect of unpaid tax for a particular taxable period. Petitioner counters that section 301.6320-1(b)(1) and (2), Proced. & Admin. Regs., is an interpretative regulation promulgated under section 7805(a)4 that is entitled to very little deference and, in any event, the regulation is inconsistent "with the letter and the spirit of Section 6320."21 It is well settled that an interpretative Treasury Department regulation is valid if it implements a congressional mandate in a reasonable manner. See Natl. Muffler Dealers 190 Association, Inc. v. United States, 440 U.S. 472">440 U.S. 472, 476-477, 99 S. Ct. 1304">99 S. Ct. 1304, 59 L. Ed. 2d 519">59 L. Ed. 2d 519 (1979) (citing United States v. Cartwright, 411 U.S. 546">411 U.S. 546, 550, 93 S. Ct. 1713">93 S. Ct. 1713, 36 L. Ed. 2d 528">36 L. Ed. 2d 528 (1973)). An interpretative Treasury Department regulation is reasonable under Natl. Muffler Dealers Association, Inc. v. United States, supra, if it "harmonizes with the plain language of the statute, its origin, and its purpose." Id. at 477; see also United States v. Vogel Fertilizer Co., 455 U.S. 16">455 U.S. 16, 26, 102 S. Ct. 821">102 S. Ct. 821, 70 L. Ed. 2d 792">70 L. Ed. 2d 792 (1982).As previously discussed, the language of section 6320 does not address explicitly the precise point we must decide in this case. Where a statute is ambiguous or silent, we may look to the statute's legislative history to determine congressional intent. See, e.g., Burlington N. R.R. v. Oklahoma Tax Comm'n, 481 U.S. 454">481 U.S. 454, 461, 107 S. Ct. 1855">107 S. Ct. 1855, 95 L. Ed. 2d 404">95 L. Ed. 2d 404 (1987). In this case, Congress directly addressed the question at issue in the legislative history underlying section 6320. Specifically, H. Conf. Rept. 105-599, at 265, 3 C.B. 747">1998-3 C.B. 747, 1019,22 under the heading "Liens", states in pertinent part:The conference agreement generally follows the Senate amendment, except that taxpayers would have a right to a hearing after the Notice of Lien is filed. The IRS would be required to notify the taxpayer that a Notice of Lien had been filed within 5 days after filing. During the 30-day period beginning with the mailing or delivery of such notification, the taxpayer may demand a hearing before an appeals officer who has had no prior involvement with the taxpayer's case. * * * This hearing right applies only after the first Notice of Lien with regard to each tax liability is filed. [Emphasis added.]In short, the House conference report states that a taxpayer's right to an administrative hearing and judicial review under section 6320 arises only with respect to the first lien that is filed for a particular tax liability.Where, as here, Congress has directly spoken to the precise question at issue, and the intent of Congress is clear, that is the end of the matter. Inasmuch as section 301.6320-1(b)(1) and (2), Proced. & Admin. Regs., reiterates a procedural principle that was unambiguously articulated by Congress in the23 legislative history of section 6320, the regulation is valid and controlling in this case. See Walliser v. Commissioner, 72 T.C. 433">72 T.C. 433, 439 (1979) (sustaining the validity of section 1.274-2(b), Income Tax Regs., where the regulation was "squarely based on the language of the legislative history of section 274").191 F. ConclusionThere is no dispute that, although petitioner received notice of the lien that respondent filed in Florida in October 2002, petitioner did not submit to respondent a request for an administrative hearing. Consistent with section 301.6320-1(b)(1) and (2), Proced. & Admin. Regs., respondent's Appeals Office was not obliged to (and did not) provide petitioner with an administrative hearing under section 6320 when petitioner subsequently sought to challenge the Illinois lien filed in February 2003. See Prakasam v. Commissioner, T.C. Memo 2006-53">T.C. Memo 2006-53. It is well settled that respondent may not waive the statutory period in which a taxpayer must request an administrative hearing under sections 6320 and 6330. See Kennedy v. Commissioner, 116 T.C. 255">116 T.C. 255, 262 (2001). The Appeals Office conducted an equivalent*24 hearing and issued to petitioner a decision letter. The decision letter in question does not constitute a notice of determination that would permit petitioner to invoke the Court's jurisdiction under section 6320. See, e.g., id. at 263. Accordingly, we are obliged to dismiss this case for lack of jurisdiction.To reflect the foregoing,An Order of Dismissal for Lack of Jurisdiction will be entered. Footnotes1. Section references are to sections of the Internal Revenue Code, as amended.↩2. Investment Research Associates, Inc., filed petitions for redetermination with the Court at docket Nos. 43966-85, 45273-86, 30830-88, 27444-89, 25875-90, 23178-91, 19314-92, and 25976-93.↩3. In accordance with the Supreme Court's decision in Ballard v. Commissioner, 544 U.S. 40">544 U.S. 40, __, 125 S. Ct. 1270">125 S. Ct. 1270, 1285, 161 L. Ed. 2d 227 (2005), the Court's Memorandum Opinion in Inv. Research Associates, Ltd. v. Commissioner, T.C. Memo 1999-407↩, recently was deemed stricken with regard to taxpayers other than petitioner.4. Sec. 7805(a)↩ provides in pertinent part that "the Secretary shall prescribe all needful rules and regulations for the enforcement of this title".	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4623963/	NELLIE S. ALEXANDER, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Alexander v. CommissionerDocket No. 78995.United States Board of Tax Appeals36 B.T.A. 929; 1937 BTA LEXIS 638; November 23, 1937, Promulgated 638 The petitioner, a resident of Miami, Florida, created a trust whose corpus consisted of stocks and bonds, reserving the "income of said trust estate" to herself for life, with remainder to her children. In determining the distributable income of the trust the trustee, with the approval of the settlor, deducted the losses from the sale of capital assets. Held, that the petitioner, as life beneficiary of the trust, is taxable on the distributable income as so computed. R. M. Stroud, Esq., for the petitioner. Charles P. Reilly, Esq., for the respondent. SMITH 929 OPINION. SMITH: This proceeding is for the redetermination of a deficiency of $1,183.76 in petitioner's income tax for 1932. In her return for that year the petitioner reported a net income of $9,500.13, including $8,346.33 of "fiduciary income" from a trust of which she was life beneficiary. In determining the deficiency herein the respondent has increased the fiduciary income reported by the petitioner by the amount of $10,062.50, representing a loss which the trust sustained 930 on the sale of capital assets. The correctness of that adjustment, that is, whether639 the capital loss of $10,062.50 should be taken into account in computing the distributable income of the trust, is the only question in issue in this proceeding. The facts are stipulated. By a trust indenture dated December 31, 1929, the petitioner, a resident of Miami, Florida, created the "Nellie S. Alexander Trust", transferring to her husband, John Alexander, trustee, her credit balance of $325,000 with the Marathon Investment Co., a Delaware corporation, whose stock was all owned by the Alexander family. The petitioner herself owned about 20 percent of the stock. The Marathon Investment Co. held the shares of stock of a number of lumber companies with which the Alexander family had been long identified and also a substantial amount of marketable securities. The trust indenture provided in paragraph first that during the petitioner's lifetime the trustee should "pay the income of said trust estate to her in annual, semi-annual or quarterly installments as may be most convenient for the due and careful management of the said Trust." After the death of the petitioner the income of the trust was to be paid: * * * in equal shares to her four children during their lives, 640 or to the survivors of them if any child shall die without issue. If any child shall die leaving issue then the share of income which would have been payable to such child if living shall be divided equally between such issue. THIRD: Upon the deaths of said children or any of them leaving issue, the said share of income shall be paid to such issue as aforesaid for a period of twenty-one years from the date of the death of last surviving child of the party of the first part, when and whereupon the corpus of said Trust Fund shall be distributed per stirpes in equal shares to the issue of said deceased children and this Trust shall then cease. Should there be no issue of any deceased child and issue of other deceased children then the share of income which would have gone to the deceased child in his or her lifetime shall be paid to the surviving brothers and sisters and the issue of deceased child or children in equal shares by representation and not per capita. The trustee was given "unrestricted power over the income and principal of said trust fund except as above" and was authorized to invest the trust fund without regard to legal restriction. The trustee was not permitted641 to make any advance payments to the beneficiaries of either income or principal. Immediately upon the creation of the above described trust the Marathon Investment Co. transferred to the trustee out of its assets stocks and bonds of a then market value of $323,353.28 in complete satisfaction of the credit balance which the petitioner had transferred to the trustee. During the first year of its operation, 1930, the trust realized a net profit from the sale of securities of $7,566.17 which was distributed to 931 the petitioner and was reported by her as a part of her fiduciary income in her income tax return for that year. During the year 1931 the trust sustained a net loss from the sale of securities in the amount of $17,726.25. Its income interest and other sources was $17,850.83. After allowing for incidental expenses the operation of the 850.83. After allowing for incidental expenses the operation of the trust for 1931 showed a net loss of $212.07. The trust made no distribution to the petitioner in that year. During the taxable year 1932 the trust sustained a loss of $10,062.50 on the sale of bonds which it had held for more than two years and a further loss642 of $2,867 on the sale of bonds which it had held for less than two years. It received income from interest and other sources in the amount of $1,,770.10 and its incidental expenses amounted to $361.27. The trustee determined that the distributable income of the trust in 1932 was $5,267.26 computed as follows: Interest on bonds in trust fund$18,770.10Deduct:(a) Loss on bonds held more than two years$10,062.50(b) Loss on sale of bonds held less than two years2,867.00(c) Incidental expenses of Trust361.27(d) Net loss applicable to 1931212.0713,502.84Net amount actually paid to Nellie S. Alexander5,267.26Although the petitioner did not actually receive but $5,267.26 from the trust in 1932, she reported in her income tax return for that year $8,346.33, which was the amount shown as its net income by the trust in its fiduciary return for that year. In such return the trust reported the loss of $10,062.50 from the sale of bonds held for more than two years, but did not report the loss of $2,867 from the sale of bonds held for less than two years, or the $212.07 representing the net loss of the year 1931. The amounts distributed643 by the trustee to the petitioner as income from the trust, as above set forth, have been tendered by the trustee and accepted by the petitioner as being in full compliance with the terms and purposes of the trust agreement. In his deficiency notice the respondent has increased the petitioner's taxable income for 1932 by $10,062.50, on the ground that the loss from the sale of securities held for more than two years constituted a charge against the corpus of the trust and was not a proper deduction in arriving at the amount of income distributable to the petitioner as beneficiary. After the deficiency herein was asserted by the respondent the trustee and the petitioner executed an agreement in the form of an affidavit, which was submitted in evidence in this proceeding, wherein they set forth that the acts of the trustee in determining the distributable 932 income of the trust and in paying such income to the petitioner in the years 1930 to 1932, inclusive, as set forth above, and also in similarly determining the amounts of income distributable to the petitioner in 1933 and 1934, "were in strict accord with the intent of affiants in creating the above mentioned trust, 644 and in accord also with their purpose to set up and preserve intact as the principal of the trust the sum of $325,000." The agreement further provides that: This affidavit * * shall nevertheless be taken as an agreement between the said Nellie S. Alexander, as creator of the trust and beneficiary thereunder, and the said John Alexander, as trustee under said trust, in respect to the true intent of the parties in the execution of said Trust Indenture, and as an agreement between them in the settlement of the accounts between the said trustee and the said Nellie S. Alexander, as life beneficiary of said trust, for the years 1930 to 1934, inclusive. It is the respondent's position in this proceeding that under the terms of the trust agreement described above the petitioner is entitled to receive, and is therefore taxable on, all of the income derived from interest and dividends on the securities comprising the trust corpus, less the operating expenses of the trust, and that the gains or losses on the sale of capital assets should be credited or charged to corpus and not taken into account in determining distributable income. We do not so construe the trust agreement. 645 There is nothing in the wording of the agreement itself to indicate that the term "income" as used in paragraph first above refers only to dividend and interest income. In its ordinary meaning the "income" of the business is understood to include the gains from the sale or conversion of capital assets. ; . There is every indication that it was so used in the trust agreement here. In the first place, the parties themselves have construed the agreement as directing the distribution of the net income computed with the capital gains or losses taken into account and as requiring the corpus of the account to be kept intact. This harmonious construction of the trust agreement by the parties in interest is to be given great weight. See ; ; . The rule is more forceful here because the life beneficiary is the creator of the trust and is free to advise the trustee in his interpretation of the trust agreement. It was said by the646 Supreme Court in : The practical interpretation of an agreement by a party to it is always a consideration of great weight. The construction of a contract is as much 933 a part of it as anything else. There is no surer way to find out what parties meant, than to see what they have done. * * It is true, as the respondent points out, that the affidavit and agreement submitted by the parties in this proceeding manifesting their approval of the administration of the trust in prior years, as well as declaring a policy to be adhered to in the future, is not binding upon the Board in the question before us, but at the same time an agreement of this character must receive consideration in determining the intent of the parties. The trust agreement must be construed in the light not only of the intention of the settlor, but of all the attendant circumstances. It is to be noted that here the trust corpus consisted entirely of stocks and bonds. The settlor must have contemplated that in the careful management of the trust fund it would be necessary for the trustee from time to time to sell some of the securities and647 purchase others. This was provided in paragraph sixth of the agreement. It might reasonably be that the gain from this trading in securities was expected to prove a material source of income to the trust. Investment trusts of such character are not uncommon. It is to be noted, too, that the creator of the trust had four living children, who were designated as the recipients of the income of the trust after her death. It is reasonable to suppose that she intended the corpus of the trust to be kept intact for their benefit. The facts here are similar to those in , where we held that the beneficiary of a trust was taxable on the capital gain that was credited to her in the taxable year. The respondent has not called our attention to any statute or prevailing rule of law of the State of Florida, where the settlor was resident, and we have not found any, which requires the capital gains and losses to be charged to corpus and not taken into account in determining distributable income, as in the State of Pennsylvania. Cf. 648 . The respondent submits, citing , that the beneficiary of the trust is taxable on the income which she was entitled to receive and not just on what she actually received. This can not be disputed; but, aside from the construction of the trust agreement for which he contends, there is nothing to support the respondent's contention that the petitioner was entitled to receive any more income than she actually received, or, at least, than she reported in her individual tax return. The petitioner is, of course, taxable on all of the income of the trust for the taxable year 1932, including the $212.07 which the trustee withheld from her to offset the 1931 loss. She does not contend otherwise. *934 In our opinion it was error for the respondent to increase the petitioner's taxable income from the trust by the amount of $10,062.50, representing the loss to the trust on the sale of capital assets during the taxable year. Judgment of no deficiency will be entered.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4623964/	CHARLES M. WORTHLEY AND HELEN H. WORTHLEY, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentWorthley v. CommissionerDocket No. 28762-86.United States Tax CourtT.C. Memo 1988-262; 1988 Tax Ct. Memo LEXIS 288; 55 T.C.M. (CCH) 1088; T.C.M. (RIA) 88262; June 20, 1988288 Dennis L. Marvin, for the petitioners. Milton J. Carter, Jr., for the respondent. KORNERMEMORANDUM FINDINGS OF FACT AND OPINION KORNER, Judge:1 Respondent determined a deficiency in petitioners' 1982 Federal income tax and additions to tax as follows: Additions to TaxDeficiencySec. 6653(a)(1) 2Sec. 6653(a)(2)$ 16,021.80$ 801.00The issues for decision are whether petitioners are liable for tax on $ 42,751 paid for services rendered by petitioner Charles M. Worthley, and whether petitioners are liable for the additions to tax that respondent determined. Petitioners argue that the $ 42,751 is properly taxable to a corporation owned by Charles M. Worthley -- Worthley Enterprises, Inc. FINDINGS OF FACT 289 This case was submitted for decision on fully stipulated facts pursuant to Rule 122. The stipulation of facts and exhibits attached thereto are incorporated herein by this reference. 3Petitioners were residents of Florida when they filed their petition herein. They filed a joint Federal income tax return for 1982. On February 21, 1980, Mr. Per Risberg, the General Manager of Saab-Scania, a Swedish corporation, sent petitioner Charles M. Worthley ("petitioner") a letter. The letter confirmed that petitioner had been offered the position of president and chief executive officer of Saab-Totem, Inc. ("Saab-Totem"), a Saab-Scania subsidiary located in Seattle, Washington. The letter indicated that petitioner was to serve in that capacity for a minimum of two years from March 31, 1980, and that the terms of the agreement would be effective until terminated290 by one of the parties or by mutual agreement. Petitioner signified his acceptance of the terms of the letter by signing it on March 10, 1980. On February 3, 1981, Risberg wrote petitioner another letter. The letter stated that petitioner's salary for calendar year 1981 would remain at $ 60,000 a year, and confirmed that petitioner and Saab-Totem had agreed that petitioner's bonus for 1981 would be based on Saab-Totem's sales and net income. On February 13, 1981, petitioner wrote a memorandum to John Ely, the secretary of Saab-Totem. Attached to the memorandum was the first draft and a revised version of a letter agreement, and a copy of the letter that Risberg had sent to petitioner on February 21, 1980. In the memorandum, petitioner asked Ely to review the revised version of the letter agreement and, if it met with Ely's approval, to have Goeran Olofsson, a vice-president of Saab-Totem, sign it. The revised version of the letter agreement was dated December 22, 1980, and recited that petitioner had requested that Saab-Totem enter into an employment agreement with Worthley Enterprises, Inc. ("Worthley Enterprises"), a corporation owned by petitioner, to replace the agreement291 set forth in Risberg's letter to petitioner dated February 21, 1980. The revised letter agreement stated that "Saab-Totem is willing to consider [the agreement set forth in the letter dated February 21, 1980] as amended as of January 1, 1981 in accordance with [petitioner's] request on the additional condition that the Agreement with Worthley Enterprises, Inc. may be cancelled without notice or penalty by Saab-Totem for any reason whatsoever." The record does not indicate that the revised agreement was ever executed on behalf of Saab-Totem. On March 6, 1981, Ely drafted a letter to petitioner. 4 The letter stated that there were problems with petitioner's "employment by Worthley Enterprises, Inc." relating to petitioner's continued entitlement to receive benefits as an employee of Saab-Totem. It stated that "if these areas can be cleared up, I have no objection to handling this matter in the fashion you suggest." Ely attached a letter for petitioner's signature to the letter. The first paragraph of the letter for petitioner's signature stated as follows: This is to acknowledge that effective as of January 1, 1981 I have terminated my employment with Saab-Totem, Inc. and292 have become employed by Worthley Enterprises, Inc. Services I render after January 1, 1981 for Saab-Totem, Inc., if any, will be as an employee of Worthley Enterprises, Inc. providing services pursuant to Saab-Totem Inc.'s letter agreement of December 22, 1980 with that corporation. I intend and understand that after January 1, 1981 I will receive compensation for any personal services rendered to Saab-Totem Inc. solely from Worthley Enterprises, Inc. and that I will receive no compensation from Saab-Totem Inc. and will no longer have the rights of or be eligible for any of the benefits (including without limitation, insurance, medical or retirement benefits) now or hereafter provided for employees of Saab-Totem Inc. The record contains no evidence that the letter was ever signed by petitioner. On October 23, 1981, petitioner wrote to Risberg that "I find I cannot renew my contract with Saab-Scania when it expires on March 31, 1982." (Emphasis added.) On February 18, 1982, Risberg wrote to petitioner and informed him that his bonus for 1981 was $ 14,000. On April 14, 1982, petitioner wrote to293 Saab-Totem in the capacity of president of Worthley Enterprises to "confirm that Worthley Enterprises * * has since January 1, 1981 been performing executive services to Saab-Totem, Inc. ("Saab-Totem") in the capacity of an independent contractor." The board of directors of Saab-Totem met on May 25, 1982. During that meeting, Risberg noted that petitioner had requested that he not be reelected president because he did not want to work full-time and wanted to pursue personal interests. Risberg noted that petitioner "had fulfilled his two-year commitment in March" of 1982 and had stayed on at Risberg's request until a new president could be found. On April 1, 1983, Saab Systems, Inc. 5 sent a Form 1099 to respondent reporting that it had paid petitioner $ 42,751 of compensation in 1982. On May 18, 1983, it mailed respondent a 1099 labeled "CORRECTED RETURN" on which it indicated that the 1099 reporting payments to Charles M. Worthley was incorrect and reported that it had paid $ 42,160 to Worthley Enterprises. On their joint Federal income tax return for 1982, petitioners reported no wages or income294 from Saab-Totem or Saab Systems, Inc. Respondent audited that return and determined that petitioners had failed to report $ 42,751 of compensation from Saab Systems, Inc. Respondent determined further that petitioners were negligent in failing to report the compensation and were therefore subject to additions to tax provided by sections 6653(a)(1) and 6653(a)(2). OPINION DeficiencyPetitioners argue that Worthley Enterprises, rather than they themselves, is properly taxable on the compensation at issue. As respondent determined that the compensation was taxable to petitioners, petitioners bear the burden of proof. ; Rule 142(a). The principle that income is taxed to the person who earns it is basic to our system of income taxation. ; . However, as we noted in , affd. without published opinion , cert. denied , in cases involving closely held295 or one-man personal services corporations, a tension exists between the principle that income is taxed to the person who earns it and the principle that corporations are separate and distinct taxpayers from their owners. See . In deciding whether an individual rather than his corporation is taxable with respect to income earned through his performance of personal services, we have held that the relevant inquiry is which of the two parties controls the earning of the income. . In Johnson v. Commissioner, we recognized that two elements must be present before a corporation, rather than its service-performer employee, may be considered the controller of income. We articulated those two elements as follows: First, the service-performer employee must be just that -- an employee of the corporation whom the corporation has the right to direct or control in some meaningful sense. Second, there must exist between the corporation and the person or entity using the services a contract or similar indicium recognizing the corporation's controlling position. 296 [; citations omitted.] In this case, petitioner has failed to prove either of the two elements. First, there is no evidence, such as a contract or employment agreement between petitioner and Worthley Enterprises, that Worthley Enterprises had any right to control the work that petitioner performed for Saab-Totem. See , affd. per curiam . Cf. . Second even assuming, arguendo, that Worthley Enterprises had a right to control the work that petitioner performed for Saab-Totem, the record contains no evidence that Saab-Totem recognized that Worthley Enterprises controlled petitioner. In fact, the letter that Risberg sent to petitioner on February 21, 1980 recites that Saab-Totem was hiring petitioner personally for two years beginning March 31, 1980. The letter made no mention of Worthley Enterprises. When petitioner indicated his agreement with the terms of the letter by signing it on March 10, 1980, there is no indication that he signed it in other297 than his individual capacity. Although the evidence indicates that petitioner subsequently attempted to have Saab-Totem contract with Worthley Enterprises for his services, there is no evidence that Saab-Totem did so. The letter to petitioner from John Ely dated February 13, 1981, suggests that Saab-Totem had problems with petitioner's proposal, and was unwilling to agree to it unless certain matters could be resolved. There is no evidence that matters were resolved. We consider it significant that none of the correspondence subsequently sent by Saab-Totem regarding the work performed by petitioner was either addressed to or referred to Worthley Enterprises. The minutes of the Saab-Totem's May 25, 1982 board of directors' meeting refer to petitioner as having "fulfilled his two year commitment [to Saab-Totem] in March" (emphasis added), and make no reference to Worthley Enterprises. Saab Systems, Inc. did report on a corrected 1099 that it had paid the compensation at issue to Worthley Enterprises rather than petitioner. That fact alone does not, however, establish that Saab-Totem recognized by a contract or similar indicium that Worthley Enterprises controlled petitioner. 298 It may merely indicate that Saab-Totem was to report that it paid the compensation to Worthley Enterprises at petitioner's request. In these circumstances, we conclude that petitioners have failed to prove that Worthley Enterprises, rather than petitioner, controlled the income earned from Saab-Totem. We accordingly hold that petitioners have failed to prove that respondent erred in determining that the compensation at issue is properly taxable to them. 6Addition to TaxThe next issue for decision is whether petitioners are liable for the additions to tax for negligence determined by respondent. Petitioners bear the burden of proving that the additions determined by respondent in his notice of deficiency do not apply. , affg per curiam , cert. denied ; . Negligence under section 6653(a) is defined as lack of due care or failure to do that a reasonable and299 ordinarily prudent person would do under the circumstances. . Based on the record before us, including the fact that the record contains no evidence that Worthley Enterprises controlled the earning of the compensation at issue, we are unable to conclude that petitioners were not negligent in failing to report the compensation at issue. We accordingly hold that petitioners have failed to prove that they are not subject to the addition to tax for negligence. We hold further that they have failed to prove that the entire underpayment for 1982 is not attributable to negligence for purposes of the section 6653(a)(2) addition. To reflect the foregoing, Decision will be entered for the respondent.Footnotes1. By order of the Chief Judge, this case was reassigned to Judge Jules G. Korner III for opinion and decision. ↩2. All statutory references are to the Internal Revenue Code of 1954, as in effect in the year in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure, except as otherwise noted. ↩*. 50 percent of the interest attributable to an underpayment of $ 16,021.80. ↩3. After this case was submitted by the parties for decision, petitioners attempted to supplement the original stipulation. Respondent did not, however, agree to the supplemental stipulation. We accordingly did not consider the supplemental stipulation and the documents attached thereto in reaching our decision herein. ↩4. The record does not indicate whether the letter was ever mailed.↩5. Saab-Totem apparently changed its name to Saab Systems, Inc. ↩6. Petitioners do not argue that respondent improperly determined the amount↩ of such compensation.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4623965/	HERBERT M. THOMPSON, JR., Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentThompson v. CommissionerDocket No. 21674-81.United States Tax CourtT.C. Memo 1984-32; 1984 Tax Ct. Memo LEXIS 645; 47 T.C.M. (CCH) 928; T.C.M. (RIA) 84032; January 16, 1984. 645 Petitioner was an employee for part of 1976. He was self-employed, delivering mail under contract with the United States Postal Service for the remainder of 1976 and for all of 1977, 1978, and 1979. Held: (1) Petitioner failed to show that his deductible expenses for any of these years exceeded the amounts allowed by respondent. (2) Petitioner is liable for additions to tax under section 6654 (estimated tax), I.R.C. 1954, for each of these years. Herbert M. Thompson, Jr., pro se. Walter T. Thompson, for the respondent. CHABOTMEMORANDUM FINDINGS OF FACT AND OPINION CHABOT. Judge: Respondent determined deficiencies in Federal individual income taxes and additions to tax under sections 6653(b) 1 (fraud) and 6654 (estimated tax) against petitioner as follows: Additions to TaxYearDeficiency 2646 Sec. 6653(b)Sec. 66541976$1,869.48$934.74$36.3219772,427.681,213.8486.4019782,173.891,086.9569.4719792,371.311,185.6599.30At trial, respondent conceded the additions to tax under section 6653(b) for all of the years in issue. The issues for decision are as follows: (1) Whether petitioner is entitled to deductions in amounts greater than those allowed by respondent; and (2) Whether petitioner is liable for additions to tax under section 6654. 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 in the instant case was filed, petitioner resided in Oracle, Arizona. Petitioner worked for Magma Copper Company from January to May 1976, for which he was paid $4,608.33 in wages in 1976. From these wages, Magma Copper Company withheld $715.40 as Federal income taxes. On or about June 1976, petitioner began to deliver mail in Oracle as an independent contractor under a contract awarded by the United States Postal Service (hereinafter sometimes referred to as "the USPS"). For petitioner's services, the USPS paid to him the amounts set forth in table 1. Table 1YearAmount1976$6,440.25197712,887.70197811,967.15197912,944.00Petitioner 647 did not file income tax returns for any of the years in issue. Petitioner did not pay estimated taxes for any of the years in issue. Petitioner did not keep books or records of his income and expenses during or for any of the years in issue. He kept records for warranty purposes, but destroyed them when the respective warranties expired. Respondent determined in the notice of deficiency that petitioner should be allowed deductions for "automobile mileage" in the amounts set forth in table 2. Table 2YearMileage$ /MileAmount19764,410.15$66219778,820.171,49919788,820.171,49919798,820.1851,632 OPINION I. Business ExpensesThe parties agree that petitioner is taxable on his income. Respondent maintains that petitioner has to show what his business expenses were, or at least show that these expenses were more than the amounts allowed in the notice of deficiency. Petitioner maintains that the USPS merely reimbursed him for his expenses, consequently there was no profit and (except for the 1976 Magma Copper Company wages) no net income to tax. We agree with respondent. Petitioner is taxable on his business gross income (sec. 61 (a)(2)), less his trade or business deductions (sec. 62(1)), 648 including his ordinary and necessary business expenses (sec. 162). Respondent's determination as to matters of fact in the notice of deficiency "has the support of a presumption of correctness, and the petitioner has the burden of proving it to be wrong." Welch v. Helvering,290 U.S. 111">290 U.S. 111, 115 (1933); Rule 142(a), Tax Court Rules of Practice and Procedure.Petitioner has adamantly refused to present evidence to show error in respondent's determination. The parties originally stipulated to an exhibit which suggested that petitioner's deductible expenses might have exceeded the amounts allowed by respondent. The trial was delayed five days in order to give petitioner an opportunity to secure additional evidence. However, on the appointed day, petitioner (1) failed to present evidence as to additional deductions and (2) requested that the stipulated exhibit not be received, because "I don't wish that exhibit to cloud the larger issue by quibbling over a few dollars. I would like to see that exhibit stricken, even if to my detriment." The "larger issue", apparently, is petitioner's contention that he "did not receive taxable income in compensation for [his] services, but simply a 649 nontaxable reimbursement." Petitioner concedes that he did not submit expense lists, vouchers, or receipts to the USPS and that the USPS did not pay him on account of any claims for reimbursement. The contract pages stipulated into evidence indicate that fuel costs and route distances were taken into account by the USPS in setting contract rates, but that does not absolve petitioner from the obligation to present evidence that would persuade this Court that he incurred the expenses that the USPS may have assumed he incurred. Further, we do not believe that petitioner would have gone on, year after year, delivering the mail merely for reimbursement of his business expenses. Petitioner may be public-spirited, but he has shown no source of funds to cover his nondeductible personal expenses (sec. 262). 3We hold for respondent on this issue. II. Estimated Tax--Sec. 6654Petitioner has the burden of proving error in respondent's determination that additions to tax should be imposed under section 6654. Hollman v. Commissioner,38 T.C. 251">38 T.C. 251, 263 (1962). 650 Although the parties do not focus on this point, it is evident that Magma Copper Company's withholding of Federal income tax from petitioner's 1976 wages must have taken place during the first half of 1976. If it is to petitioner's advantage to do so, the addition to tax under section 6654 for 1976 is to be computed by applying section 6654(e)(2) on the basis that $373.80 was withheld from petitioner's wages by April 15, 1976, and the remainder of the withheld income tax was withheld by June 15, 1976. Apart from the foregoing modification, we hold for respondent on this issue. * * * Respondent chose to concede the fraud addition to tax. We do not know what evidence respondent would have presented if this matter had not been conceded, and so we venture no comment on this point. Respondent did not choose to assert additions to tax under section 6651(a)(1) (failure to file timely returns) or 6653(a) (negligence or willful disregard of rules and regulations). The record presented in the instand case would sustain these two additions, if they had been asserted. Petitioner must understand that it is not enough that he make a determination "in the privacy of [his] head or [his] home" 651 (as he put it at the hearing) that his deductible expenses are sufficient to leave him with no income tax liabilities. He is required to keep the books and records necessary to support his private determination. If he wishes to challenge an adverse determination by respondent, then he must be able to present evidence to support his private determination. Finally, petitioner should understand that the statute of limitations never runs (sec. 6501(c)(3)) 4 for a year as to which petitioner fails to file a return; for such a year petitioner may be forever at risk. To take account of respondent's concession as to the additions to tax under section 6653(b), and our modification as to the addition to tax under section 6654 for 1976, Decision will be entered under Rule 155.Footnotes1. Unless indicated otherwise, all chapter and section references are to chapters and sections of the Internal Revenue Code of 1954 as in effect for the years in issue. ↩2. Of these amounts, self-employment taxes under chapter 2 are as follows: 1976--$456.48, 1977--$899.68, 1978--$847.89, and 1979-$916.31. The remaining amounts are chapter 1 income taxes.3. 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.↩4. SEC. 6501. LIMITATIONS ON ASSESSMENT AND COLLECTION. * * (c) Exceptions.-- * * * (3) No return.--In the case of failure to file a return, the tax may be assessed, or a proceeding in court for the collection of such tax may be begun without assessment, at any time.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4623966/	ROGER B. FAIR AND GAIL K. FAIR, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentFair v. CommissionerDocket No. 9400-91United States Tax CourtT.C. Memo 1993-377; 1993 Tax Ct. Memo LEXIS 397; 66 T.C.M. (CCH) 460; August 23, 1993, Filed 397 Decision will be entered under Rule 155. For petitioners: Robert J. Alter and Richard J. Sapinski. For respondent: William F. Halley. COLVINCOLVINMEMORANDUM FINDINGS OF FACT AND OPINION COLVIN, Judge: Respondent determined the following deficiencies and additions to Federal income tax for petitioners: Additions To Tax Sec. Sec.Sec. YearDeficiency6653(a)(1) 16653(a)(2)6661(a)1984 $ 37,900 $ 1,8952 $ 9,475198538,0031,90029,501198633,0071,65428,269198713,01965123,255By bench opinion, we decided the fair market value of a 45-foot flybridge trawler (My Fair Lady II) transferred by bargain sale in 1984 by petitioners to Associated Marine Institutes, Inc. After concessions and the bench opinion, the sole issue is whether petitioners' deduction for the bargain sale of My Fair Lady II in 1984 (and carryovers to 1985, 1986, and 1987) should be disallowed for failure to meet the substantiation requirements398 of section 1.170A-13(b)(3), Income Tax Regs. We hold that it should not. References to petitioner are to Roger Fair. Section references are to the Internal Revenue Code in effect for the years in issue, and Rule references are to the Tax Court Rules of Practice and Procedure. FINDINGS OF FACT 1. PetitionersPetitioners were married and lived in New Jersey when they filed their petition. Petitioner was educated as a mechanical engineer and was an executive with the Accurate Screw Machine Co. during the years in issue. Petitioner wife was a teacher. 2. Petitioner's Acquisition of My Fair Lady IIDuring the late 1970s, petitioner hired the Baldwinsville Boatyard (Baldwinsville) and its owner, David Lower (Lower), to design and construct the My Fair Lady II, a 45-foot custom flybridge steel fishing trawler. The keel of the trawler was laid in February 1979. Construction of the vessel took about 1 year during which Baldwinsville built the decks, superstructure, and flybridge. Petitioner paid Baldwinsville $ 64,299.86 for the boat. Baldwinsville also installed the engines, controls, generator, and other items which petitioner bought separately. Petitioner does399 not have records of the cost of most of these items. Petitioner had records establishing a basis of at least $ 68,846.64 for the boat and the components he purchased and Baldwinsville installed. 3. Petitioner's Bargain Sale of My Fair Lady II to AMIOn July 12, 1984, petitioner sold My Fair Lady II to Associated Marine Institutes, Inc. (AMI), of Tampa, Florida, for $ 25,000. AMI is a section 501(c)(3) organization to which contributions are tax deductible. AMI used My Fair Lady II from July 1984 to August 1987 in its programs designed to teach delinquent youths individual responsibility by going on sea cruises. AMI's use of My Fair Lady II was related to its exempt purpose. On the advice of a broker at Erwin's Yacht Brokers, Ft. Lauderdale, Florida, petitioner commissioned surveys to establish the fair market value of My Fair Lady II before donating it to AMI. The appraisals were performed by marine surveyors who were unrelated to petitioners, Captain Higginson and Gerald Slakoff. Higginson valued the boat at $ 199,000 and Slakoff valued it at $ 190,000. Petitioner attached the Higginson and Slakoff appraisals to his 1984 return. Respondent conceded at trial that400 Slakoff was an expert in the valuation of similar vessels. At trial, we found that the fair market value of My Fair Lady II was $ 160,000 when it was donated to AMI. Petitioners' 1984 and 1985 individual and business returns were prepared by Alex Zalin (Zalin), a certified public accountant. Petitioner relied on Zalin's advice in determining what information to include with petitioners' 1984 return regarding the contribution of My Fair Lady II. Petitioner did not keep some records because neither Zalin nor anyone else ever told him that he needed to include with his return or maintain information about the cost basis of My Fair Lady II to obtain a charitable deduction for contributing to AMI. Petitioner had more records in 1984 and 1985 of his basis in My Fair Lady II than he did at the time of trial because he was divorced twice and sold his business in the interim. Petitioners attached the following to their 1984 return: appraisals of the boat from two qualified appraisers; a copy of the bargain sale agreement; a statement that the donee was a section 501(c)(3) exempt organization qualified to receive the charitable contribution; a deed of gift to the donee; and a copy of 401 an acknowledgement letter from the donee. Petitioners claimed a $ 169,000 charitable deduction on their 1984 return for their donation of My Fair Lady II to AMI. Petitioners carried part of the deduction to their 1985, 1986, and 1987 returns because the deduction exceeded the limitation of section 170(b)(1)(B). Respondent concedes that petitioner donated My Fair Lady II to AMI more than 5 years after petitioner acquired ownership of the boat. OPINION A taxpayer may deduct charitable contributions if, among other requirements, the contribution is verified under regulations prescribed by the Secretary. Sec. 170(a)(1). Respondent contends that petitioners have failed to satisfy the substantiation requirements of section 1.170A-13(b)(3), Income Tax Regs., because they did not maintain written records of the cost basis of My Fair Lady II. Respondent argues that these regulations are entitled to a high degree of deference because they are legislative in nature, Anderson, Clayton & Co. v. United States, 562 F.2d 972">562 F.2d 972, 976 (5th Cir. 1977), and that section 1.170A-13(b)(3), Income Tax Regs., requires that the taxpayer maintain cost basis records. Section402 1.170A-13(b)(3), Income Tax Regs., applicable for taxable years beginning after December 31, 1982, provides as follows: (3) Deductions in excess of $ 500 claimed for a charitable contribution of property other than money -- (i) In general. In addition to the information required under paragraph (b)(2)(ii) of this section, if a taxpayer makes a charitable contribution of property other than money in a taxable year beginning after December 31, 1982, and claims a deduction in excess of $ 500 in respect of the contribution of such item, the taxpayer shall maintain written records that include the following information with respect to such item of donated property, and shall state such information in his or her income tax return if required by the return form or its instructions: (A) The manner of acquisition, as, for example by purchase, gift, bequest, inheritance, or exchange, and the approximate date of acquisition of the property by the taxpayer or, if the property was created, produced, or manufactured by or for the taxpayer, the approximate date the property was substantially completed. (B) The cost or other basis, adjusted as provided by section 1016, of property, 403 other than publicly traded securities, held by the taxpayer for a period of less than 12 months (6 months for property contributed in taxable years beginning after December 31, 1982, and on or before June 6, 1988) immediately preceding the date on which the contribution was made and, when the information is available, of property, other than publicly traded securities, held for a period of 12 months or more (6 months or more for property contributed in taxable years beginning after December 31, 1982, and on or before June 6, 1988) preceding the date on which the contribution was made. (ii) Information on acquisition date or cost basis not available. If the return form or its instructions require the taxpayer to provide information on either the acquisition date of the property or the cost basis as described in paragraph (b)(3)(i)(A) and (B), respectively, of this section, and the taxpayer has reasonable cause for not being able to provide such information, the taxpayer shall attach an explanatory statement to the return. If a taxpayer has reasonable cause for not being able to provide such information, the taxpayer shall not be disallowed a charitable contribution deduction 404 under section 170 for failure to comply with paragraph (b)(3)(i)(A) and (B) of the section.Section 1.170A-13(b)(3)(i)(B), Income Tax Regs., requires, for assets held more than 6 months, that the taxpayer maintain written records of cost basis when the information is available. Respondent contends that when petitioner donated the trawler in July 1984, information about all of the costs of the trawler was available to petitioner. Petitioner does not dispute respondent's contention, but argues that he substantially complied with the regulations in filing his 1984 return. In Bond v. Commissioner, 100 T.C. 32">100 T.C. 32 (1993), we considered whether section 1.170A-13, Income Tax Regs., is mandatory or directory with respect to its statutory purpose. We said: At the outset, it is apparent that the essence of section 170 is to allow certain taxpayers a charitable deduction for contributions made to certain organizations. It is equally apparent that the reporting requirements of section 1.170A-13, Income Tax Regs., are helpful to respondent in the processing and auditing of returns on which charitable deductions are claimed. However, the reporting requirements405 do not relate to the substance or essence of whether or not a charitable contribution was actually made. We conclude, therefore, that the reporting requirements are directory and not mandatory. See Taylor v. Commissioner, supra at 1078-1079. Furthermore, our conclusion is not altered by the fact that section 170(a) states that "A charitable contribution shall be allowed as a deduction only if verified under regulations prescribed by the Secretary." See Cary v. Commissioner, 41 T.C. 214">41 T.C. 214 (1963), where we held that a similar provision in section 302(c)(2)(A)(iii), requiring the filing of an agreement to notify the Commissioner of reacquisitions of stock within a 10-year period of a redemption under section 302(b)(3) in the manner prescribed by an applicable regulation, is directory rather than mandatory. The fact that a Code provision conditions the entitlement of a tax benefit upon compliance with respondent's regulation does not mean that literal as opposed to substantial compliance is mandated. Cary v. Commissioner, supra.Bond v. Commissioner, supra at 41. Petitioners406 contend that they complied with the applicable statute and regulations. The regulations provide that they must maintain cost basis records when the information is available. Sec. 1.170A-13(b)(3)(ii), Income Tax Regs. Petitioners argue that they had reasonable cause for not providing this information because they did not retain cost basis records after their accountant advised them, based on the instructions for the 1984 return, that they were not needed. Also, petitioner had more records of his basis in My Fair Lady II in 1984 and 1985 than he did at trial because he had two divorces and sold his business in the interim. Petitioner did not retain every written record of the cost basis of the trawler. From the few receipts stipulated by the parties, a letter from Lower establishing what petitioner paid Baldwinsville for the boat, and a 1984 satisfaction of a $ 61,200 mortgage on the vessel, petitioner produced written evidence of a cost basis of approximately $ 69,000 at trial. The instructions to the 1984 Form 1040 stated that a taxpayer who claims a deduction for the donation of property worth more than $ 200, where the value was determined by appraisal, must provide information407 about the cost or other basis of the donated property if the donated property was owned less than 5 years or the deduction amount must be reduced by any amount that would have been ordinary income or long-term capital gain if the property had been sold at its fair market value (the required adjustment under section 170(e)(1)(A) or (B)). Respondent concedes that petitioner owned the boat for more than 5 years. My Fair Lady II was not property described in section 170(e)(1)(A) or (B). Thus, the instructions did not require petitioner to include cost basis information. The cost basis of the donated property is not needed to calculate petitioner's charitable contribution deduction. The amount of the charitable contribution resulting from a bargain sale is the excess of the fair market value of the property over the purchase price paid by the donee. See sec. 170(e)(1). Estate of Bullard v. Commissioner, 87 T.C. 261">87 T.C. 261, 265 (1986); Stark v. Commissioner, 86 T.C. 243">86 T.C. 243, 255-256 (1986). Fair market value is the price at which property would change hands between a willing buyer and a willing seller, neither being under any compulsion408 to buy or sell and both having a reasonable knowledge of relevant facts. United States v. Cartwright, 411 U.S. 546">411 U.S. 546, 551 (1973); Johnson v. Commissioner, 85 T.C. 469">85 T.C. 469, 476 (1985). By bench opinion, we decided that the boat was worth $ 160,000 when donated. There is no dispute that petitioner donated My Fair Lady II, that two qualified appraisers appraised the boat shortly before it was donated, and that the donee was qualified to receive a charitable contribution. Petitioners obtained two timely appraisals of the donated property before deducting the contribution. Petitioners merely failed to maintain all written records of their cost basis in the property. This information was not required to be included on petitioners' return and is irrelevant to the calculation of the amount of the charitable contribution deduction. Section 1.170A-13(b)(3)(ii), Income Tax Regs., states that where the form or its instructions requires the taxpayer to provide information about the acquisition date of the property or the cost basis as described in section 1.170A-13(b)(3)(i)(A) and (B), Income Tax Regs., and the taxpayer has reasonable409 cause for not being able to do so, the taxpayer should attach an explanatory statement to the return. Thus, even where the form or its instructions requires cost basis information, failure to maintain cost basis records is not fatal to the claim of charitable contributions if the taxpayer's grounds for not doing so are reasonable. It follows that where the return form or its instructions do not require the taxpayer to provide information on the cost basis of the donated property, a taxpayer's reasonable failure to maintain that information should not be fatal to the claimed charitable contribution. Similarly, where the regulations require that the taxpayer maintain cost basis records where the information is "available", the taxpayer's disposal of cost basis records after his accountant advised him, based on the instructions for the 1984 return, that they were not needed should not be fatal to the claimed charitable contribution. We find that petitioners had reasonable cause, as described in section 1.170A-13(b)(3)(ii), Income Tax Regs., for not maintaining this information. Accordingly, we conclude that petitioners have substantially complied with section 170(a)(1) and section410 1.170A-13(b)(3), Income Tax Regs., and are therefore entitled to a charitable deduction. The denial of a charitable deduction under these circumstances would constitute a sanction which is not warranted or justified. Bond v. Commissioner, 100 T.C. at 42; see Columbia Iron & Metal Co. v. Commissioner, 61 T.C. 5">61 T.C. 5, 10 (1973). Because we have found that petitioners substantially complied with the regulations, we need not reach their other arguments. To reflect the foregoing and concessions of the parties, Decision will be entered under Rule 155. Footnotes1. For taxable years 1986 and 1987, sec. 6653(a)(1) and (2) was renumbered sec. 6653(a)(1)(A)and (B).↩2. Fifty percent of the interest due on the entire deficiency.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4623968/	Esther B. Bishop, Petitioner, v. Commissioner of Internal Revenue, RespondentBishop v. CommissionerDocket No. 49582United States Tax Court26 T.C. 523; 1956 U.S. Tax Ct. LEXIS 166; June 12, 1956, Filed 166 Decision will be entered for the respondent. Pursuant to an adjustment authorized by section 3801, Internal Revenue Code of 1939, the respondent mailed a notice of deficiency in petitioner's income tax for the year 1943 within the 1-year limitation contained in section 3801 (c). Held, the notice was valid and timely, and the assessment and collection of the tax was suspended by section 277 of the Code until the expiration of the period prescribed therein. Laurence Sovik, Esq., for the petitioner.Paul D. Lagomarcino, Esq., for the respondent. LeMire, Judge. LEMIRE 523 OPINION.This proceeding involves a deficiency in petitioner's income tax for the167 year 1943 in the amount of $ 1,064.81, determined pursuant to section 3801 of the Internal Revenue Code of 1939.The issue is: Where a notice of deficiency mailed within 1 year, as provided in section 3801 (c), is contested, does section 277 of the 524 Code become operative to suspend the assessment and collection of the deficiency for the further period prescribed therein?The facts are either stipulated or admitted in the pleadings and are not in dispute. They may be summarized as follows:Petitioner was the wife of E. Lawton Bishop during the year 1943 and all subsequent times material herein.Petitioner and her husband filed individual tax returns for the year 1943 with the collector of internal revenue for the twenty-first district of New York.On or about April 15, 1943, petitioner received from her husband 93 shares of preferred stock of Globe Forge, Inc.In July 1943 petitioner received the amount of $ 4,557 as accumulated dividends on her 93 shares of preferred stock and reported such amount on her tax return for 1943. The respondent eliminated the amount of $ 4,557 from petitioner's income and included a like amount in the income of the husband for that year.In 168 August 1945 petitioner executed and delivered an acceptance of proposed overassessment for the taxable year 1943 in the amount of $ 1,064.81, which was refunded to her with interest.Petitioner's husband paid the income tax on the amount of $ 4,557 and brought suit in the United States District Court for the Northern District of New York to recover the amount paid. The District Court directed the exclusion from income for 1943 of the amount of $ 4,557 and entered judgment in favor of the taxpayer. Bishop v. Shaughnessy, 95 F. Supp. 759">95 F. Supp. 759. On appeal to the United States Court of Appeals for the Second Circuit the judgment was affirmed. 195 F. 2d 683. The mandate was filed in the office of the clerk on May 5, 1952. No application was made for a writ of certiorari. On May 28, 1953, the judgment was paid.On April 14, 1953, the respondent mailed a notice of deficiency to petitioner under section 272 (a) (1) of the Internal Revenue Code of 1939.Petitioner contends that section 3801 (c)1 of the Code provides a "special" statute of limitations of 1 year during which period the respondent must make the adjustment by assessing169 and collecting the tax, and that he has failed to make any assessment.The respondent contends that where the adjustment is an increase in tax liability it is to be assessed and collected as a deficiency; that 525 the mailing of the notice of deficiency170 within 1 year satisfies the provisions of section 3801 (c); and that where petitioner files a timely petition with this Court to contest the deficiency, section 277 of the Code operates to suspend the assessment and collection of the tax.Petitioner makes no claim that the notice of deficiency was not mailed within the 1 year prescribed in section 3801 (c). The argument advanced by petitioner is premised on the procedure followed by the respondent. The contention that the respondent must assess and collect the tax and that a notice of deficiency does not satisfy the provisions of section 3801 (c) is without merit and unsound.The courts have heretofore determined that in making an adjustment pursuant to the provisions of section 3801, where the result of the adjustment is an increase in tax, the respondent must proceed by way of a notice of deficiency. Ketcham v. Commissioner, 142 F.2d 996">142 F. 2d 996, affirming 2 T. C. 159, 165; cf. Eleanor B. Burton, 1198">1 T. C. 1198. Treasury Regulations 111, section 29.3801 (c)-1, also prescribe such procedure.The respondent relies on the case of Bishop v. Reichel, 127 F. Supp. 750">127 F. Supp. 750,171 affirmed per curiam 221 F. 2d 806, certiorari denied 350 U.S. 833">350 U.S. 833, and argues that we should follow it here under the doctrine of stare decisis.Except as to the parties and the amounts the facts in the Bishop case, supra, parallel the facts here presented. In each case the respondent made his adjustment under section 3801 by serving a notice of deficiency under section 272 (a) (1) of the Code.The respondent in the Bishop case, supra, mailed a notice of deficiency on April 14, 1953. The taxpayer took no action to contest the deficiency and the respondent, on September 3, 1953, more than 1 year after the determination in the case of the related taxpayer, made an assessment. The tax was paid, a claim for refund was filed, and suit was instituted in the United States District Court to recover the amount paid. The taxpayer was represented by the same counsel representing petitioner here, and there contended that the assessment made on September 3, 1953, was barred by the 1-year period prescribed by section 3801 (c) and that section 277 of the Code was not available to the respondent. The District Court held that172 section 277 of the Code was applicable and that the assessment was valid and timely. The court stated (p. 753):The Court is of the opinion that Section 277 is available here and that the assessment is valid and timely. When Congress provided that the assessment shall be made "in the same manner" as if it were a determined deficiency, it indicated that the procedures available in the case of such deficiency might be invoked. If one year of the three year period under Section 275 remains in which the assessment may be made in the case of such deficiency the provisions of Section 277 plainly apply. To apply the one year provision found in Section 526 3801 (c) rigidly and excluding the provisions of Section 277 is not "in the same manner" as it is applied in the case of a determined deficiency. It may be said that Section 3801 creates a right and that the period of limitation set up therein is a matter of substance, Sgambati v. U. S., 2 Cir., 172 F.2d 297">172 F. 2d 297, but the limitation therein is related to and dependent upon the general limitation of Section 275 which is regarded as procedural. Crampton v. D. V. Frione Co., D. C., 1 F. Supp. 989">1 F. Supp. 989.173 The instant case differs from the Bishop case, supra, in that the petitioner here contests the deficiency by timely petition to this Court, in which the bar of the statute of limitations is specifically pleaded.The decision in the Bishop case, supra, appears to us to be based on a sound and logical interpretation of the statutes in question and, therefore, is adopted by us in the instant case.We hold that the mailing of the notice of deficiency on April 14, 1953, was timely, and that the filing of a petition with this Court makes operative section 277 of the Code and suspends the making of an assessment during the period prescribed therein.Decision will be entered for the respondent. Footnotes1. SEC. 3801. MITIGATION OF EFFECT OF LIMITATION AND OTHER PROVISION IN INCOME TAX CASES(c) Method of Adjustment. -- The adjustment authorized in subsection (b) shall be made by assessing and collecting, or refunding or crediting, the amount thereof, to be ascertained as provided in subsection (d), in the same manner as if it were a deficiency determined by the Commissioner with respect to the taxpayer as to whom the error was made or an overpayment claimed by such taxpayer, as the case may be, for the taxable year with respect to which the error was made, and as if on the date of the determination specified in subsection (b) one year remained before the expiration of the periods of limitation upon assessment or filing claim for refund for such taxable year.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4623969/	APPEAL OF ENKE CITY DYE WORKS, INC.Enke City Dye Works, Inc. v. CommissionerDocket No. 976.United States Board of Tax Appeals2 B.T.A. 378; 1925 BTA LEXIS 2431; July 15, 1925, Decided Submitted June 1, 1925. 2431 L. E. Schmitt, Esq., and John G. Richardson, C.P.A., for the taxpayer. Ward Loveless, Esq., for the Commissioner. GRAUPNER 378 Before GRAUPNER, TRAMMELL, and PHILLIPS. This is an appeal from deficiencies in income and profits taxes for the calendar year 1919 and 1920, in the respective amounts of 379 $440.76 and $1,764.62, a total deficiency of $2,205.38. This deficiency is the result of elimination from invested capital of an item claimed as representing good will. The petition also alleges error on the part of the Commissioner for failure to compute tax under sections 327 and 328 of the Revenue Act of 1918. No evidence was offered in support of the claim for assessment under section 328 and this allegation of error will not be further considered. At the hearing a stipulation of facts was read into the record and oral testimony was offered on behalf of the taxpayer. FINDINGS OF FACT. 1. The taxpayer is an Oregon corporation organized March 1, 1919, with its principal office at Portland. 2. Upon incorporation the taxpayer issued $100,000 par value of capital stock divided into shares having a par value of $100 each. Of2432 the capital stock issued all but two qualifying shares were issued to Herman Enke, who was the sole proprietor of a business of the same name as that of the taxpayer in this case. 3. On April 25, 1919, the assets of the sole proprietorship were transferred to the taxpayer by a duly executed bill of sale. 4. The depreciated cost of the tangible assets turned over to the corporation was $77,014.41. To balance its asset accounts with its capital stock account the taxpayer set up on its books an item of good will in the amount of $22,985.59. This item represented good will and trade-marks which had been created through successful operation by Enke during a period of approximately thirty years. 5. In auditing the taxpayer's income-tax returns the Commissioner disallowed the amount of $22,985.59 as a part of invested capital for the years here involved. DECISION. The determination of the Commissioner is approved. OPINION. GRAUPNER: In this appeal it is clear that there was a change of ownership after March 3, 1917, and it is equally clear that an interest or control of fifty per cent or more remained in the owner of the predecessor business. The provisions of section*2433 331 of the Revenue Act of 1918 are therefore applicable, and, under this section, the taxpayer is not entitled to include the claimed item of good will in its invested capital.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4623970/	H. V. WATKINS and EUNICE W. WATKINS, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentWatkins v. CommissionerDocket No. 7230-71.United States Tax CourtT.C. Memo 1973-167; 1973 Tax Ct. Memo LEXIS 122; 32 T.C.M. (CCH) 809; T.C.M. (RIA) 73167; July 30, 1973, Filed David B. Grishman, for the petitioners. Jeffrey B. Talley, for the respondent. FAYMEMORANDUM FINDINGS OF FACT AND OPINION FAY, Judge: Respondent determined deficiencies in petitioners' Federal income tax for the taxable years 1966 and 1967 in the amounts of $2,630.71 and $4,253.07, respectively. 1The sole issue for disposition is whether the sale in 1966 of petitioner H. V. Watkins' house located at 1236 Belvoir Place, Jackson, Mississippi, constituted a transaction 2 entered into for profit for purposes of authorizing the deductibility of the resultant loss under section 165(c) (2). 2123 FINDINGS OF FACT Some of the facts have been stipulated; the stipulation of facts and the exhibits attached thereto are incorporated herein by this reference. Petitioners H. V. Watkins and Eunice W. Watkins are husband and wife who resided in Madison, Mississippi, at the time the petition was filed in the instant case. Petitioners filed their joint Federal income tax returns for the taxable years 1966 and 1967 with the director, Internal Revenue Service Center, Chamblee, Georgia. Petitioner Eunice W. Watkins is a petitioner in the instant case solely by reason of having filed joint returns with her husband, H.V.Watkins; the latter will thus hereinafter be referred to as petitioner. On May 6, 1965, petitioner received as devisee under the Last Will and Testament of Frances T. Watkins, his first wife ("Frances"), fee simple title 3 to the residence located at 1236 Belvoir Place, Jackson, Mississippi ("the residence"). Prior to May 6, 1965, petitioner had occupied the residence with Frances as his personal residence for 11 years. Petitioner 3 continued to occupy the residence from May 6, 1965, until September 5, 1965. He never rented the residence and, in fact, never124 offered the residence for rent. Prior to petitioner's inheritance of the residence his three children had been living elsewhere. Petitioner's children Bill and Vaughn, Jr. ("Vaughn") and Vaughn's wife, Mary, moved into the residence after petitioner inherited it, and Vaughn and his wife continued to occupy the residence until somethime in October. They were permitted to remain in the residence until October since their new house, which was then being constructed, was scheduled for occupancy in October. Petitioner did not ask either Bill or Vaughn to pay rent for their occupancy of the residence after May 6, 1965. Petitioner decided to marry petitioner Eunice W. Watkins in August 1965, and their marriage was solemnized on September 5, 1965. Petitioner arranged to buy another house in the latter part of August 1965, within two weeks after he decided to remarry. He listed the residence for sale in September 1965. Eunice also offered her prior residence for sale in the fall of 1965. Petitioner conclusively decided within125 the first week after Frances' death to sell the residence. He sold the residence on May 11, 1966, for $57,500 and sustained a 4 long-term capital loss of $10,363.25 on the sale of the residence. Respondent in his notice of deficiency disallowed petitioner's claimed deduction of the $10,363.25 long-term capital loss resulting from the sale of the residence. ULTIMATE FINDINGS OF FACT Petitioner's decision to sell the residence was induced by a profit motivation.The usage of the residence by petitioner and/or his children for the approximate six-month period of time subsequent to Frances' death was not sufficient to characterize the residence as petitioner's personal residence. OPINION It is clear that if petitioner had sold the residence, which had been used by petitioner and Frances as their personal residency, prior to Frances' death, the loss would not have been deductible, as the mere offering for sale of property used for personal purposes does not convert the subsequent sale of this property into a transaction entered into for profit under section 165(c) (2). See ; and .126 On the other hand, it is also clear that property acquired by inheritance has a neutral status. See ; and . Thus, the fact that petitioner may have utilized the residence as his personal residency prior to his 5 acquisition of it by inheritance does not taint the purpose for which the residence is deemed to have been held subsequent to the time of inheritance. Accordingly, we must examine petitioner's state of mind and/or conduct subsequent to Frances' death to determine if he exercised a profit motive with respect to the sale of the residence. Respondent contends that petitioner sold the residence solely for personal motives and that he lacked the requisite profit motivation required by section 165(c) (2). Respondent supports this contention by reference to the fact that petitioner and some of his children lived in the residence for four months after Frances' death; that petitioner allowed some of his children to live rent free in the residence for two additional months after petitioner had moved out; that petitioner did not offer the residence for rent; and that petitioner did127 not offer the residence for sale until after he had remarried. We are not persuaded by this contention. Petitioner testified at trial that he did not intend to make the residence his personal residency after Frances' death and that he, in fact, had decided approximately within one week after Frances' death to sell the house. This testimony was corroborated by petitioner's lawyer (who also 6 served as the administrator of Frances' estate) at the trial. Based on the testimony of these two witnesses we are persuaded that petitioner did not intend to make the residence his personal residency after decedent's death and that he had decided to sell the residence no later than one week after Frances' death. The usage of the residence by petitioner and/or some of his children during the six-month hiatus following Frances' death is not inconsistent with petitioner's conclusive intent to dispose of the residence. After having suffered a personal tragedy, it is reasonable that petitioner would take a nominal amount of time to determine how and when to dispose of the residence. If petitioner had continued to live in the residence for an unreasonably long period of time, we might128 have been inclined to conclude that petitioner's conduct indicated an intent to make the residence his personal residency. However, the four-month occupation of the residency by petitioner is not such an unreasonably long period of time. In , the taxpayer occupied the inherited residence for almost one year after the death of her husband. This Court permitted taxpayer to deduct the loss resulting from the ultimate sale of the residence and stated: 7 The fact that the petitioner lived in the residence for a short time after her husband's death while she was completing necessary arrangements for making her home elsewhere does not show an intent to make this newly acquired property her home. * * * [] Similarly, we believe that petitioner's usage of the residence for four months, during which time he had decided to sell the residence, is not sufficient to convert the residence into petitioner's personal residency for purposes of section 165(c) (2). Moreover, in this context, petitioner's decision to allow Bill, Vaughn and Vaughn's wife (sometimes hereinafter referred to collectively129 as his children) to continue to reside in the residence until the completion in October of the house being constructed by Vaughn and his wife does not alter our conclusion. His children moved into the residence shortly after Frances' death to ease petitioner's adjustment to his personal trauma. Petitioner subsequently made the requisite adjustment and moved out of the residence four months after Frances' death. The fact that petitioner permitted his children to continue occupation of the residence until October does not convert the residence into petitioner's personal residency. To the contrary, petitioner had already offered the residence for sale in September 1965. Petitioner's consent to allow his children to remain in the residence for a 8 limited period of time after the residence had been offered for sale merely reflects a response by petitioner to his children based on their having reacted to petitioner's needs during his period of crisis. If petitioner had not offered the residence for sale and had correlatively permitted his children to occupy the residence for an unreasonably long time, we might have concluded that petitioner did not have a profit motivation with130 respect to the residence. The facts, however, do not reflect this variable. The limited period of time during which his children occupied the residence subsequent to petitioner having offered it for sale does not constitute such an unreasonably long period of time. Finally, the fact that petitioner did not offer the residence for rent and did not charge rent for usage by his children is not conclusive. The fact that inherited property is not offered for rent prior to sale does not preclude a determination that the sale constituted a transaction entered into for profit. See Similarly, we believe that the failure to charge rent to his children for their usage of the residence for the short period of time after petitioner moved out should not under the circumstances of the instant case negate petitioner's profit motive concerning the residence. 9 Accordingly, we have found, and so hold, that petitioner possessed the requisite profit motivation with respect to the residence; that petitioner's sale of the residence constituted a transaction entered into for profit; and that petitioner's long-term capital loss sustained upon the sale is deductible*131 under section 165(c) (2). Decision will be entered under Rule 50. Footnotes1. Petitioners' petition has contested the correctness of only $772.70 and $1,503.93 of respondent's deficiency determinations for the respective taxable years. ↩2. All sections references are to the Internal Revenue Code of 1954. ↩3. The inference drawn from this record is that petitioner had no property interest, legal or equitable, in the residence prior to Frances' death. ↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4623971/	Mary L. Hanback v. Commissioner.Hanback v. CommissionerDocket No. 19492.United States Tax Court1950 Tax Ct. Memo LEXIS 115; 9 T.C.M. (CCH) 742; T.C.M. (RIA) 50216; August 30, 1950115 Held: All the facts show that petitioner and her husband intended to form a partnership for the present conduct of their business during the taxable years in question. Elmer B. Hodges, Esq., Bryant Bldg., Kansas City, Mo., and Clarence H. Dicus, Esq., for the petitioner. Marvin E. Hagen, Esq., for the respondent. HILL Memorandum Findings of Fact and Opinion Respondent determined deficiencies in petitioner's income tax liability as follows: YearDeficiency1944$2,167.2119452,386.09The petitioner claims an overpayment for 1945. Certain adjustments made by the respondent are not in issue. The only question before us is whether respondent erred in determining that petitioner's husband was not her partner for the purpose of conducting the business involved during the taxable years 1944 and 1945. Findings of Fact Petitioner is an individual residing at 5237 Canterbury Road, Kansas City, Kansas. She filed her income tax returns for the calendar years 1944 and 1945 with the collector of internal revenue for the district of Kansas at Wichita, Kansas. In 1937 petitioner's husband, John P. Hanback, was employed by Schooley Printing116 & Stationery Company of Kansas City, Missouri, hereinafter referred to as Schooley, as production manager. He subsequently became a salesman of printing and lithographing contracts and stationery and office supplies for Schooley. John was successful in obtaining a number of large accounts. From 1937 until 1944 he had approximately 10 accounts. The commissions from these accounts averaged around $20,000 per year. These commissions were paid to John directly by Schooley and from such commissions were withheld income and Social Security taxes. The sales of printing and lithographing contracts constituted the greatest part of John's business. His work with the accounts included making up the material to be printed, doing the art work and handling the mechanical details of each job. One of John's largest regular customers was Beta Sigma Phi, a girls' sorority which published a monthly magazine called "Torch of Beta Sigma Phi." Schooley supplied substantially all of the printing was run off on the company's presses. On or about March 1, 1944, John received a commission in the United States Navy and was ordered to active duty at Philadelphia, Pennsylvania. Before John entered117 military service he knew he was going to be stationed somewhere in the United States. He was concerned about what would happen to his business when he was in the service. He had an offer from another salesman working with Schooley to service his accounts on the basis of a 50-50 division of the commissions. John, however, did not agree to this. Instead he talked over with petitioner the proposition of their entering into a partnership arrangement whereby she would solicit and service his accounts. It was agreed that he would help her in carrying out this work from time to time. It was anticipated that this would be done by correspondence, telephone and when he came home on leave. John discussed this proposed arrangement with his clients and Schooley and it was agreeable to all of them. He took petitioner around to his customers and introduced her to them. An instrument designated "Articles of Co-Partnership" was signed by petitioner and John on or about March 1, 1944. That agreement is incorporated herein by this reference. It provided that petitioner agreed to service John's accounts as a saleswoman for Schooley. The parties agreed to become co-partners in the business of securing118 orders for stationery, printing and office supplies for Schooley under the firm name of Hanback & Hanback. The agreement provided that all gains, profits and compensation received by either of them after deducting all business expenses should be divided two-thirds to petitioner and one-third to John as long as he was in the Navy. The terms of that agreement were carried out. Petitioner and John had two daughters in 1944 about two and eight years of age, respectively. On or about March 1, 1944, Schooley employed petitioner to take over John's work. The company made substantially the same employment arrangement with petitioner as it had with John. The commission payments were made by check payable to petitioner and deposited by her in a joint bank account of petitioner and John. No partnership bank account of Hanback & Hanback existed until 1946, which year is not involved in this proceeding. Income and Social Security taxes were withheld by Schooley from her earned commissions. In her income tax return for the calendar year 1945 petitioner describes her occupation as "saleswoman". Schooley furnished the samples of printing and stationery which she displayed to customers. All stationery119 and printing were billed directly to customers by Schooley and the customers paid the company. Neither John nor the petitioner contributed any capital to the partnership. The partnership did not have any office furniture, telephone, bank account or any assets whatsoever. John was a commissioned officer in the Navy stationed at Philadelphia throughout the entire period of his service from March 1, 1944 to March 15, 1946. During this time he received two military leaves of 12 days each and one 48-hour leave. This leave time was spent calling on customers of Schooley, discussing problems connected with the business with petitioner, and visiting with his family. On many occasions during his service he called petitioner from Philadelphia concerning business problems. At other times petitioner called him seeking advice and counsel in connection with business problems. On one occasion petitioner visited Philadelphia to consult with John about business, as well as to see him for personal reasons. Sometime before July 1945 the business manager of Beta Sigma Phi which published the magazine "Torch of Beta Sigma Phi" indicated his dissatisfaction with the layout and art work. He suggested120 to petitioner that this business might be taken to another concern. Petitioner called John in Philadelphia about this matter. He obtained special leave to come home to try and save the account. John then decided to take over the details connected with printing of the magazine. In July 1945 the material of this magazine was sent to Philadelphia where it was handled through independent printers. John arranged for the services of a commercial artist to aid him in the layout and art work. After the magazine was assembled by the independent printers, it was sent back to Kansas City, Missouri, where it was run off on the presses of Schooley. He was successful in producing an issue in October which received special commendation from the customer. These efforts by John saved this account. Prior to the time petitioner entered into the co-partnership of Hanback & Hanback she had no experience in the printing business. The partnership returns of income filed for the partnership were for the fiscal years ended February 28, 1945, and February 28, 1946. During the period from March 1, 1944, to February 28, 1945 the commissions received from Schooley amounted to $9,701.66 and during the period121 from March 1, 1945, to February 28, 1946, such commissions amounted to $14,623.59. It is agreed that if it be held that a partnership existed between petitioner and her husband, as contended by petitioner, that the net income of the partnership for its fiscal year ended February 28, 1945, was $8,501. Since the partnership of Hanback & Hanback filed its return of income and kept its records on the basis of a fiscal year ending February 28 of each year, none of the income involved is includible as income of petitioner for the calendar year 1944, and for the calendar year 1945 there is includible in the income of petitioner her proportionate part of the net income of the partnership for the fiscal year ending February 28, 1945, amounting to $5,667.33 (two-thirds of $8,501). Petitioner received no income from Schooley during the years 1944 and 1945 other than her distributive share of the income of Hanback & Hanback. Petitioner and her husband, John, intended to and did enter into a bona fide partnership for the present conduct of the business in question during the partnership fiscal years ended February 28, 1945 and February 28, 1946. Opinion HILL, Judge: This case involves122 a different situation from the one usually found in the much litigated question of whether members of the same family may form a partnership recognizable for tax purposes. Here the respondent seeks to tax to petitioner during the years involved all the income from a business founded and built by her husband, John, and carried on by their joint efforts from and after March 1, 1944, through the taxable years here involved. We do not agree, in the circumstances of this case, that respondent's determination is correct. The Supreme Court in , stated that in partnership cases the basic question is "* * * whether, considering all the facts - the agreement, the conduct of the parties in execution of its provisions, their statements, the testimony of disinterested persons, the relationship of the parties, their respective abilities and capital contributions, the actual control of income and the purposes for which it is used, and any other facts throwing light on their true intent - the parties in good faith and acting with a business purpose intended to join together in the present conduct of the enterprise." (Italics supplied) All123 of the facts here point to the ultimate conclusion that petitioner and John acting in good faith and with a business purpose intended to join together as partners in the present conduct of the business in question. There was, first of all, a written agreement between the partners. The provisions of that agreement were carried out during the years before us. Moreover, it is clear that John contributed vital services during 1944 and 1945. The business manager of Beta Sigma Phi, one of the largest accounts of the business, testified that sometime around July 1945 he became dissatisfied with the way in which petitioner had been handling the work connected with the publication of the sorority's monthly magazine. This dissatisfaction was so great that he threatened to give this account to someone else. John then came home on special leave to see if he could iron out the difficulties. He was successful in doing so and after that time actively took over the details connected with the publication of the magazine. His actions saved this particular account. Altogether he made three trips to Kansas City for the purpose of discussing problems connected with the partnership business. On numerous124 other occasions John and petitioner communicated by telephone in connection with questions concerning its activities. In addition, we think, it is obvious from the evidence that John had a substantial voice in the management and control of the partnership business. It was decided by him that he should take a more active role in the publication of "The Torch." He also shared in other management decisions which came up from time to time. Indeed, we feel in view of petitioner's inexperience in a business of this type, unless John had assisted in the solution of some of the problems which arose in connection with servicing the accounts in question, that the business would not have been as successful as it was during 1944 and 1945. It is thus apparent, contrary to respondent's contention, that commissions paid by Schooley were not produced solely by the personal efforts of petitioner alone. Instead they were earned by the combined efforts of petitioner and John operating the business as partners. The cases cited by respondent are distinguishable. It follows that respondent erred in his determination. Decision will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4623972/	HAROLD LEE AND BIRTHA MAE FRANCIS, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentFrancis v. CommissionerDocket No. 42658-85.United States Tax CourtT.C. Memo 1988-30; 1988 Tax Ct. Memo LEXIS 30; 54 T.C.M. (CCH) 1607; T.C.M. (RIA) 88030; January 27, 1988. Harold Lee Francis, for the petitioners. Rebecca A. Dance, for the respondent. KORNERMEMORANDUM OPINION KORNER, Judge: By separate statutory notices of deficiency dated September 5, 1985, respondent determined deficiencies of income tax and additions to tax against petitioners as follows: ADDITION TO TAXYEARPETITIONER(S)DEFICIENCYSECTION 6653(b) 11982Harold L. Francis$ 31,477.50$ 15,738.75plus 50% ofinterest dueon $ 31,477.501983Harold L. Francis$ 24,000.40$ 12,000.20Birtha M. Francisplus 50% ofinterest dueon $ 24,000.4031 By timely petition filed herein, the petitioners placed all of the above amounts in dispute. At the time of filing their petition herein, petitioners were residents of Mulberry, Arkansas. In his answer filed herein, respondent, after denying the allegations of fact in the petition, made detailed affirmative allegations of fact in support of his determinations of unreported income by petitioners in each of the two years at issue, as well as affirmative allegations of fact supporting respondent's determination of additions to tax for fraud under section 6653(b). Upon petitioners' failure to file a reply to the affirmative allegations of respondent's answer, as required by Rule 37, respondent filed a motion with this Court, praying for an order that the undenied allegations of the answer be deemed admitted, pursuant to Rule 37(c). On April 14, 1986, the Court notified petitioner of the filing of respondent's motion, and allowed petitioner until May 5, 1986 to file an appropriate reply to the affirmative allegations of respondent's answer. No response having been received from petitioners, the Court, by orders dated May 16 and June 18, 1986, extended the time within which petitioner32 could file a reply to respondent's answer to July 17, 1986, further ordering service by regular mail as well as by the regular service of certified or registered mail. Upon petitioner's continued failure to respond, the court, by order dated July 28, 1986, ordered that "the affirmative allegations of fact set forth in paragraph 6, and the subparagraphs thereof, of respondent's answer are deemed to be admitted for the purposes of this case." By notice dated June 29, 1987, this case was set for trial at a trial session of the Court at Little rock, Arkansas, beginning on November 30, 1987. On September 25, 1987, respondent filed a motion herein for judgment on the pleadings in his favor, on the grounds that the facts deemed admitted by the Court's order of July 28, 1986, left no further material facts in dispute and presented no further justiciable issue to the Court with respect either to the deficiencies determined nor the additions to tax under section 6653(b). By order dated September 30, 1987, respondent's motion was calendared for hearing at the previously scheduled trial session of the Court at Little Rock, Arkansas, on November 30 1987. The matter was called from the calendar33 on that date, both parties were heard thereon, and the Court took respondent's motion under advisement. The case is before us in this posture. In an ordinary case, where there are no issues on which respondent has the burden of proof and must affirmatively plead, a petition which raises no justiciable issues is properly subject to a motion for judgment on the pleadings under Rule 120. See . Where, as here, however, respondent has the burden of proof on the fraud issue, section 7454; Rule 142(b), and the necessary facts are supplied by an order of the Court under Rule 37(c), such facts are established by matters outside the pleadings. In these circumstances, a motion for judgment on the pleadings is not appropriate, and we shall consider respondent's motion herein as a motion for summary judgment under rule 121. See ; compare ; . The relevant and material facts which are deemed to be established in this record, under Rule 37(c), and34 as to which there are no established contrary facts, are as follows: During the years 1982 and 1983, petitioner Harold Lee Francis 2 was self-employed as an independent truck driver. During each of those years, petitioner purchased bulk quantities of narcotics, including preludin, from Gerald F. Smith, M.D. in La Palma, California. Said narcotics were purchased with checks payable to Gerald F. Smith, M.D. or G. F. Smith, M.D., drawn on the account of the Harold F. Francis Trucking Company in Mulberry, Arkansas. The checks were written in the total amounts of $ 17,790 during the 1982 taxable year and $ 16,510 during the 1983 taxable year. Petitioner transported the narcotics purchased from Dr. Smith from California to Arkansas during 1982 and 1983 and resold those narcotics for profit to various purchasers throughout the state of Arkansas during each of the 1982 and 1983 taxable years. Petitioner received gross income from the illegal sale of narcotics35 during the 1982 and 1983 taxable years in the respective amounts of $ 106,740 and $ 98,310. During the year 1982, petitioner received monthly statements (including canceled checks) for the Harold Francis Trucking Company checking account from the Bank of Mulberry. Upon receiving each monthly statement from the Bank of Mulberry, petitioner willfully and intentionally removed and destroyed all checks written to and endorsed by Gerard F. Smith, M.D. and G. F. Smith, M.D. In destroying said checks, petitioner fraudulently destroyed business records relating to his illegal narcotics trade. During 1982, petitioner expended large amounts of cash to acquire livestock, farm equipment and improvements to a farm owned by him. These cash expenditures were made by petitioner with a portion of the proceeds received from the illegal sale of narcotics. On his 1982 Federal income tax return, petitioner intentionally omitted references to all farm expenses made during the 1982 taxable year, in an attempt to conceal large cash expenditures and income received from the illegal sale of narcotics. Petitioner attempted to conceal income received from the illegal sale of narcotics by making large36 farm expenditures solely in cash during the 1982 taxable year. Petitioner omitted all income received from the sale of narcotics as well as the costs of such narcotics from the 1982 and 1983 returns. In attempting to determine the taxable income for the 1982 and 1983 taxable years, respondent requested from petitioner records and/or information relating to income from and expenses related to the illegal sale of narcotics during 1982 and 1983. Petitioners refused to provide respondent with any records or other information relating to petitioner's illegal sale of narcotics during 1982 and 1983. All of the deficiencies in tax for 1982 and 1983 were due to petitioner's fraud with the intent to evade income tax. The factual allegations of respondent's answer respecting his determinations of deficiency in income tax for the years 1982 and 1983 have been deemed admitted. Accordingly, we conclude that there is no genuine issue of material fact with respect to the deficiency determination, and respondent is entitled to a decision respecting that determination as a matter of law. Rule 121. With respect to the additions to tax under section 6653(b), the burden of proof is on respondent37 to prove by clear and convincing evidence that an underpayment exists and that a part of the underpayment of tax is due to fraud with the intent to evade tax. Sec. 7454(a); Rule 142(b); ; . Where respondent's allegations of fraud are deemed admitted under an order pursuant to Rule 37(c), such deemed admitted facts will support respondent's burden of proof. ; ; compare . The material factual allegations in the answer with respect to fraud which have been deemed admitted clearly and convincingly establish that for the taxable years 1982 and 1983 an underpayment of tax exists and that all of the underpayment is due to fraud with intent to evade tax. Since there is no genuine issue as to any material fact present in this record, respondent is entitled to a decision as a matter of law, and summary judgment in his favor will be granted. An appropriate order and decision will be entered.38 Footnotes1. All statutory references are to the Internal Revenue Code of 1954, as in effect in the years in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure, except as otherwise noted. ↩2. When used in the singular hereafter, "petitioner" refers to petitioner Harold Lee Francis. Petitioner Birtha Mae Francis is involved herein only because she signed a joint return with petitioner for the year 1983. ↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4623973/	PAUL AUTENREITH, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. F. JULIAN AUTENREITH, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. J. HAROLD AUTENREITH, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Autenreith v. CommissionerDocket Nos. 94070, 94071, 94072.United States Board of Tax Appeals41 B.T.A. 319; 1940 BTA LEXIS 1201; February 13, 1940, Promulgated 1201 Pursuant to a partnership agreement entered into between the three petitioners and their father, the petitioners upon their father's death succeeded to his interest in the partnership business in equal shares and in consideration therefor each executed in favor of the father's widow a promissory note for one-third of the value of the father's partnership interest. The notes were to become due and payable only upon default of interest, which was to be computed at 6 percent per annum, and were to be canceled upon the mother's death. In his will the deceased father made a provision, similar to that contained in the partnership agreement, for the succession of the petitioners to his interest in the partnership business. Held, that the notes did not represent indebtedness of the petitioners, since they were to become payable only upon a contingency within the obligors' control; held, further, that the payments which petitioners made to their mother as interest on the notes were in fact annuities and are not deductible from petitioners' gross income as interest on indebtedness; held, further, that the payments are not deductible from partnership gross income in determining1202 the petitioners' distributable share of partnership income. John A. McCann, Esq., for the petitioners. Orris Bennett, Esq., for the respondent. SMITH 320 These proceedings are for the redetermination of income tax deficiencies for the years 1933, 1934, and 1935, as follows: DeficiencyPetitionerDocket No.193319341935Paul Autenreith94070$379.18$322.98$314.90F. Julian Autenreith94071243.76196.08193.38J. Harold Autenreith94072365.11288.91285.08It is alleged in each of the petitions that: (a) Respondent erroneously disallowed a deduction from gross income for each of the calendar years 1933, 1934, and 1935, respectively, in the amount of $1800.00 per year, for interest paid within each such year by the petitioner upon his indebtedness. (b) In the alternative, respondent erroneously included in, and added to, gross income, for each of the calendar years 1933, 1934, and 1935, respectively (as part of petitioner's distributive share of the income of a partnership), the sum of $1800.00 per year, which was not properly a part of such income but was, in fact, payable and distributable1203 to a person other than the petitioner. The proceedings were consolidated for hearing and were submitted on a written stipulation of facts filed at the hearing. FINDINGS OF FACT. The petitioners are brothers and are residents of Pittsburgh, Pennsylvania. Prior to March 16, 1931, they and their father, J. L. Autenreith, who died on the date mentioned, conducted a partnership business consisting of the operation of a chain of retail stores, under a partnership agreement entered into on January 10, 1929. The father, J. L. Autenreith, owned a 36/100 interest, Paul and J. Harold a 28/100 interest each, and F. Julian an 8/100 interest. The partnership agreement provided among other things that the interest of each partner was 321 to govern his interest in the profits of the partnership and his liability thereto, but was not to govern the amount of his salary for services rendered. The partnership was to be terminated only by agreement and not by the death or disability of any of the partners. The agreement further provided in paragraph 4(a) that: (a) In the event of the death of J. L. Autenreith, his interest in the partnership is to go to and be assumed by Paul Autenreith, 1204 J. Harold Autenreith, and Frank Julian Autenreith, or the survivor of them, share and share alike. Should the said J. L. Autenreith be survived by his wife, Flora Jeannette Autenreith, then before the interest of J. L. Autenreith go to and be assumed by the surviving partners, said surviving partners shall execute and deliver to the said Flora Jeannette Autenreith notes for the value of said J. L. Autenreith's interest in the partnership. Said notes are to bear interest at six percent, and shall not be payable during the life of said Flora Jeannette Autenreith, except for nonpayment of interest. At the death of Flora Jeannette Autenreith, the notes are to become null and void. The father, J. L. Autenreith, died testate March 16, 1931, survived by his wife, Flora Jeannette Autenreith, and the three sons named above. His will contained a provision similar to the above quoted provision of the partnership agreement that his interest in the partnership business should go to his sons or the survivors of them, upon the condition, however, that: * * * if my wife should survive me, my three sons shall each execute notes, payable to my wife, equal to the value of the share which they1205 receive under this will, said notes to bear six percent interest. These notes are to be given as security for the payment of interest only, for and during the life of my wife, and at her death, the notes shall become null and void. The decedent's widow elected to take under the will. After decedent's death it was determined by his widow and the petitioners that the value of decedent's interest in the partnership at the time of his death was $90,000. On April 18, 1932, each of the petitioners, in accordance with the partnership agreement and the decedent's will, signed, executed, and delivered to decedent's widow a judgment note in the principal amount of $30,000. On the same date and coincident with the execution of these notes separate written agreements were executed by each of the petitioners and their mother, stating that: WHEREAS, the said [name of petitioner] has executed a judgment note, payable to the said Flora Jeannette Autenreith, dated the 18th day of April, 1932, in the amount of Thirty Thousand Dollars ($30,000), with six percent interest, payable quarterly, the receipt of said note being hereby acknowledged. NOW, THEREFORE, it is agreed by and between1206 the parties hereto that the said Flora Jeannette Autenreith will at no time demand payment of the principal of said judgment note as long as the interest thercon is paid at interest paying periods, - and the said [name of petitioner] hereby agrees that at any time during the term of said note, or any subsequent renewal thereof, the said note 322 can be entered of record and execution had thereon for default in the payment of interest. During each of the taxable years 1933, 1934, and 1935, the petitioners' mother was paid $5,400 by checks drawn by the partnership on the partnership bank account and each of the petitioners was charged with his proportionate part thereof in his partnership drawing account. The net income of the partnership for each of the years 1933, 1934, and 1935 was in excess of $5,400 and the distributive share of such income allocated to each of the petitioners was in excess of $1,800. In their income tax returns for 1933, 1934, and 1935 each of the petitioners claimed the deduction of the $1,800 yearly payment to his mother as interest paid on an indebtedness. The claimed deductions were disallowed by the Commissioner in his deficiency notices1207 and it was further ruled that the amounts paid to the mother could not be excluded from petitioners' respective shares of distributable partnership income. OPINION. SMITH: The petitioners' first contention is that the annual payments which were made to their mother out of partnership income are deductible from their gross income as interest paid under section 23(b) of the Revenue Act of 1934. The provision of the statute is that in computing net income there shall be allowed as a deduction from gross income "all interest paid or accrued within the taxable year on indebtedness." (Emphasis supplied.) It is quite plain that the payments which the petitioners made to their mother were not interest "on indebtedness." It was clearly the intention of the partners that the principal amounts of the notes which the petitioners executed in favor of their mother should never be paid. They were to become payable only upon default of the payment of interest and in the absence of such default they were to be canceled upon the mother's death. Since their ultimate payment depended entirely upon the wishes and acts of the obligors themselves, they did not represent indebtedness of the1208 petitioners. It is axiomatic that, if the notes did not evidence an indebtedness, the so-called interest paid on them was not interest "on indebtedness" within the meaning of the statute. The payments in question were, we think, more in the nature of annuities. Looking at the decedent's will and at the preexisting partnership agreement, the terms of which in this respect are substantially the same, and at the contracts between the petitioners and their mother, each of the petitioners was obligated to pay to his mother annually an amount computed at 6 percent of the value of his one-third interest in his deceased father's interest in the partnership. 323 Unquestionably the petitioners were legally bound to amke these annual payments to their mother and it may be assumed, as the petitioners argue in their brief, that under the laws of the Commonwealth of Pennsylvania the payments were a charge upon the partnership assets, at least to the extent of the interest of the deceased father. The facts here are similar to those in 1209 , where the court held, reversing , that the devisees who took a hotel property subject to certain annuities and operated the property under a partnership agreement were taxable on the entire partnership income without deduction of the annuity payments. The devisees were said to be personally liable for the annuities, regardless of the amount of income derived from the property, and the annuities were held to be a charge against the devised property, on which the annuitants had a lien as security for the payments due them. Although the point is not raised by the parties to these proceedings, there is a question whether the petitioners here acquired their father's interest in the partnership by devise under his will or by purchase under the preexisting partnership agreement. See discussion in 68 Corpus Juris 619, where it is stated: * * it has been held by some authorities that an agreement as to the disposition of partnership assets in case of the death of a partner is of a testamentary character, and by other authorities that it is contractual only. 1210 See also ; ; ; ; ; ; . The above cited Pennsylvania cases support the general principle that a valid contract based on adequate consideration to dispose of property after death is enforceable by the surviving contracting party. If then, as appears to be the case, the petitioners acquired their interests in their father's share of the partnership assets by purchase under the partnership agreement of January 10, 1929, it must follow that the payments which the petitioners made to their mother pursuant to the partnership agreement were capital expenditures, constituting a part of the consideration paid for such assets. See ; ; ; 1211 . In , a father transferred his interest in a partnership business to his three sons in consideration of their payment to him of an annuity for life and after his death a further annuity to his widow for life. The court held that the sons were taxable on their entire shares of partnership income without deduction of the annuity payments. To the same effect is There a father and son operated a business jointly under an agreement that upon the death of either the survivor should become the owner of the business and should pay a certain amount monthly to the widow of the deceased joint owner. The court held, affirming the Board, that the payments which the son made to his mother after his afther's death, pursuant to the agreement, were not deductible in computing his net income from the business. We are of the opinion that the petitioners here are taxable on the entire amount of the income received from the partnership without either the deduction of the annuities paid to their mother as interest on indebtedness*1212 or the exclusion of the amounts from their distributable shares of partnership income. Reviewed by the Board. Decisions will be entered for the respondent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4623974/	Warren R. Clemens v. Commissioner.Clemens v. CommissionerDocket No. 5116-67.United States Tax CourtT.C. Memo 1968-124; 1968 Tax Ct. Memo LEXIS 175; 27 T.C.M. (CCH) 599; T.C.M. (RIA) 68124; June 24, 1968, Filed 175 Warren R. Clemens, pro se, 1261 1/2 Mitchell Ave., Los Angeles, Calif. Harold W. Vestermark, for the respondent. SCOTT Memorandum Findings of Fact and Opinion SCOTT, Judge: Respondent determined a deficiency in petitioner's income tax for the calendar years 1965 in the amount of $320.12. The only issue for decision is whether petitioner is entitled to deductions for dependency credit exemptions for each of his two minor children. Findings of Fact Some of the facts have been stipulated and are found accordingly. Petitioner resided at the time of the filing of the petition in this case in Los Angeles, California. He filed his individual income tax return for the calendar year 1965 with the district director of internal revenue at Los Angeles, California. Petitioner and Betty C. Clemens (now Betty C. Trombley) were married in Tucson, Arizona on June 1, 1956. Two sons, Robert Warren and Donald Thomas, were born of the marriage of petitioner and Betty C. Clemens (hereinafter referred to as Betty). In the year 1965 one of the children was 8 years old and the other was 5 years old. On July 12, 1962, petitioner and Betty entered into a property settlement agreement176 which provided in part that Betty should have the custody of the children with visitation rights provided for petitioner, that petitioner should pay to Betty $145 a month for each child for the support of that child, that he should pay alimony to Betty of $145 a month, and that petitioner should have the right to "claim the children as a tax deduction on his income tax report." The contract also provided that petitioner should maintain adequate health and medical insurance coverage for the two children. On July 18, 1962, the Superior Court of the State of California in and for the County of Orange entered an interlocutory judgment of divorce by default in the complaint of Betty against petitioner, which referred to and approved the property settlement agreement of the parties and specifically repeated the provisions of that agreement with respect to payment of alimony and support for the two children. During January, February and March of 1965 petitioner paid to Betty a total of $470 for the support of his two minor children. In March 1965 Betty moved with the two children out of the State of California and petitioner ceased making any payments towards the support of the two177 minor children. Betty brought a suit against petitioner to require him to continue the support payments to her and for recovery of the back payments which had not been made. The Court, in an order dated October 21, 1965, stated that the declaration in Betty's complaint was true and that the amount paid and the amount delinquent were as follows: Total AccruedTotal PaidTotal DelinquentAmount in ContemptChild support$3,302.50$470.00$2,732.50$2,732.50 600 The Court in its order found petitioner in contempt and sentenced him to a 3-day suspended sentence on the condition that payment of the total amount in contempt of $2,732.50 be made at the rate of $75 a month, payable at the rate of $18.75 on each of the first four Fridays of each month, commencing on Friday, November 5, 1965, and that petitioner make payment of $200 per month for and in support of the minor children of the parties, the sum to be payable at the rate of $50 on each of the first four Fridays of each month commencing on Friday, November 5, 1965, and that petitioner pay counsel fees for Betty in an amount provided in the order. In its order the Court provided for a modification178 of its prior order relating to the support of the minor children of petitioner and Betty, the modified order providing that petitioner should pay $100 per month per child for the support of the children. This order also made modifications with respect to petitioner's visitation rights with the children. On October 17, October 31, November 18, and December 17, 1965, petitioner issued checks payable to Betty C. Trombley in the amounts of $137.50 each, and on December 7, 1965, issued two checks to Betty C. Trombley in the amount of $137.50 each. Of the $825 total amount of these checks, the amount of $225 represented back support payments for the support of petitioner's minor children. Betty was not gainfully employed during the year 1965. Betty addressed a letter to respondent's counsel which was received in evidence by agreement of the parties. This letter stated: Amount contributed toward the care and support or [sic] Robert and Donnie Clemens for 1965. Rent $605.00 Food $1040.00 School Lunch $108.00 Clothing $528.00 This does not include cash for miscellaneous items such as, allowance, School supplies, Baby sitters, Church, Scouts, etc. The 8-year-old boy attended179 public school during the year 1965, and the 5-year-old boy attended public kindergarten during that year. Petitioner on his income tax return for the year 1965 claimed a deduction for dependency credit exemptions for Robert Warren and Donald Thomas. Respondent in his notice of deficiency disallowed both of the exemptions claimed by petitioner. Opinion The issue in this case is one of fact. Petitioner is entitled to the dependency credit exemption for one or both of his children for the year 1965 only if he has established that he contributed over one-half of the support of one or both of his children in that year. The burden of proof is on petitioner. However, the Court may draw reasonable inferences from the evidence in the record, and in reaching our conclusion in this case we have drawn inferences from the evidence which we consider to be reasonable. Petitioner stated at the trial that he thought he was entitled to the dependency credit exemption in 1965 for one of the children but not for both. He arrived at this conclusion from his own estimate of the cost of support of the two children in 1965 which was $375 higher than Betty's estimate of the cost of support of the180 two children without including certain miscellaneous expenses. Betty's estimate was not allocated between the two boys. However, the school lunch item stated in Betty's letter must have been for the 8-year old, since the 5-year old was only in kindergarten. Certainly, a 5-year old would not belong to the Scouts, and a reasonable assumption is that the cost of clothes for an 8-year old who was in regular public school would be greater than for a 5-year old who was attending public kindergarten. If we consider that the cost of clothing would be less for a 5-year-old than for an 8-year-old boy by $100 for the year, the result would be clothing costs of $314 for the 8-year-old child and $214 for the 5-year-old child. If the balance of the specific items listed as support costs by Betty are considered to be allocated equally to the two boys, the amount applicable to the 8-year-old boy is $1,234.50, and the amount applicable to the 5-year-old boy is $1,026.50. To these amounts must be added the miscellaneous expenses for each child which Betty did not itemize. Petitioner contends that the $225 of back support payments should be applied to back payments for 1965 and respondent contends181 that these back payments should be applied to years before 1965. It is apparent that of 601 the amount of back support payments due as of October 21, 1965, approximately $500 must be applicable to years prior to 1965 if the entire $470 which had been paid is considered as support payments for 1965 as the parties agree it should be considered. Whether the $225 should be considered to be in discharge of part of the approximately $500 of back payments for years prior to 1965 or in discharge of part of the approximately $2,200 of back support payments due for the year 1965 as of October 21, 1965, we need not decide. Considering all of the facts here present, we conclude that even if petitioner paid $1,295 support for the two boys in 1965 (or $647.50 each), he has not shown that he contributed over one-half of the support of the 8-year-old boy in 1965, and even if his total support payments for the two boys in 1965 were only $1,070 (or $535 each) the preponderance of the evidence indicates that he did contribute over one-half the support of the 5-year-old boy in 1965. Some amount for miscellaneous expenses for allowances, entertainment, and cost of toilet articles such as tooth paste182 and similar items must be added to our allocation of Betty's total itemized expenditures between the two children. If as much as $61 of such costs are allocated to the 8-year-old child petitioner has not shown that he contributed over one-half of that child's support even if we were to include the $225 in his support payments for 1965. For an 8-year old who might have belonged to the Cub Scouts in 1965 although petitioner did not think he did and might have had school supplies and church or Sunday School expenses, the amount of $61 a year for miscellaneous expenses is not unreasonable. Unless we assume over $43.50 of miscellaneous expenses for the 5-year-old child for the year 1965, the amount of $535 definitely shown to have been contributed by petitioner for his support in that year is over one-half of his support for the year. This child was in a public kindergarten. It is unlikely that he incurred any expenses for school supplies. He certainly could not have belonged to the Scouts. Since Betty did not work outside her home during 1965, we are unwilling to assume that she paid "baby sitter" fees for the 5-year old which could properly be considered support of the 5-year old. From*183 the evidence we conclude that miscellaneous expenses for the 5-year-old child in 1965 were less than $43.50. Upon consideration of all the evidence of record in this case, we conclude that for the year 1965 petitioner is entitled to the dependency credit exemption for his 5-year-old child but that he has not shown that he is entitled to the dependency credit exemption for his 8-year-old child for this year. Decision will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4623976/	Aron Alvin Holley v. Commissioner.Holley v. CommissionerDocket No. 2053-70 SC.United States Tax CourtT.C. Memo 1971-64; 1971 Tax Ct. Memo LEXIS 269; 30 T.C.M. (CCH) 274; T.C.M. (RIA) 71064; March 31, 1971, Filed. Aron Alvin Holley, pro se, 3449 Prospect, Kansas City, Mo. Wayne A. Smith, for the respondent. FORRESTER270 Memorandum Findings of Fact and Opinion FORRESTER, Judge: Respondent has determined a deficiency in petitioner's income tax of $855.38 for the calendar year 1967. The parties have reached agreement on one of the issues so that the only question left for our decision is whether petitioner is entitled to five deductions for dependency exemptions. Findings of Fact Some of the facts have been stipulated and are so found. The stipulation and the exhibits attached thereto are incorporated herein by this reference. Petitioner, an aircraft mechanic, filed an individual Federal income tax return for 1967 with the district director of internal revenue at Kansas City, Missouri. Petitioner's legal residence at the time of the filing of the petition herein was Kansas City, Missouri. On September 20, 1966, petitioner was divorced from Alexia A. Holley (hereinafter referred to as Alexia) under a decree of the Circuit Court of Jackson County, Missouri. The decree granted custody of the six children born of that marriage to Alexia and ordered petitioner to pay as support and maintenance $42 per child per month. The six children and their approximate ages in 1967 were as follows: Aron Holley19Reginald Holley17Patricia Holley14 or 15Sharon Holley11 or 12Mark Holley9Bonita Holley7271 On January 28, 1967, and October 6, 1967, petitioner paid Alexia $125 and $100, respectively, for the support of the children. Alexia gave him signed receipts for each of these payments. On his return for 1967, petitioner claimed personal exemptions for Reginald, Patricia, Sharon, Mark, and Bonita. Petitioner did not claim an exemption for his oldest son Aron because Aron was supporting himself at the time. During 1967, however, the five children for whom petitioner claimed exemptions remained in Alexia's custody. Opinion Petitioner sought to deduct $3,000 as dependency exemptions for five of his children. All five of the children were in the custody of his ex-wife during the year in question. Section 151(e) allows as deductions exemptions for each dependent (as defined in section 152) satisfying certain income, age, educational, and/or marital requirements. 1272 276 The term "dependent" includes within its meaning a taxpayer's child, compare section 151(e)(3) with section 152(a)(1) and (2), if over half of the child's support for the calendar year in which the taxpayer's taxable year begins was received from the taxpayer (or is treated under section 152 (e) as received from the taxpayer). Sec. 152(a). For taxable years ending after December 31, 1966, the general rule of section 152(e) provides in part that a child who receives over half of his support during the calendar year from his divorced parents and who is in the custody of one of the parents for the whole calendar year shall be treated (unless section 152(e)(2) applies) as receiving over half of his support during the calendar year from the parent having custody. Part of section 152 (e)(2) provides that a child of divorced parents shall be treated, in effect, as the dependent of the parent not having custody if the parent not having custody provides $1,200 or more for the support of the child (or if there is more than one such child, $1,200 or more for all of such children) for the calendar year and the parent having custody of the child does not clearly establish that he provided273 more for the support of the child during the calendar year than the parent not having custody. Thus, although the burden of proof in cases before this Court is generally upon the taxpayer, the recently enacted provisions of section 152(e) have eased somewhat the petitioner's burden of proving that he contributed over half the support for the five children he has claimed as exemptions. Unfortunately petitioner has not satisfied a condition precedent to the applicability of this salutary legislation because, as the parent not having custody of the children, he has failed to show that he spent $1,200 or more for the support of the children during 1967. Petitioner's evidence consisted primarily of his own testimony. He testified that he had paid $212.50 per month during 1967 for the support of the five children for whom he claimed exemptions. He also testified that his ex-wife, Alexia, had given him receipts for each of these payments in 1967, but that he had discarded most of the receipts since he did not think that he would have any need for them. Accordingly, he introduced three signed receipts which supported his claim that he had made cash support payments to Alexia. Two of the274 receipts (representing a total of $225) bore 1967 dates. The third receipt clearly bore the date March 21, 1969, and, therefore, has not been considered in ascertaining the amount of cash payments petitioner made to Alexia in 1967. In direct contrast to petitioner's testimony, Alexia and one of petitioner's daughters testified that petitioner had never made more than a few of the payments which he was supposed to have made. All three of the witnesses seemed as straightforward in their demeanor as they were unbending in their adherence to their particular versions of the facts. In the absence of a more persuasive showing by petitioner, we cannot say that his largely unsubstantiated testimony showed by the clear preponderance of the evidence that he paid more than $225 for the support of all five children during 1967. 277 Therefore, by failing to show that he provided at least $1,200 for the support of his children during 1967, petitioner has failed to shift the burden of proof to respondent. See , on appeal (C.A. 5, Jan. 4, 1971). As petitioner has not even attempted to prove the total amount spent for each child's support, 275 we need not now decide whether petitioner could have proceeded to show, under section 152(a) (independently of section 152 (e)), that he supplied more than half of the support for each child. The deductions for five additional personal exemptions for dependents under section 151(e) must be denied. Decision will be entered under Rule 50. Footnotes1. Unless otherwise specified all section references are to the Internal Revenue Code of 1954, as amended. SEC. 151. ALLOWANCE OF DEDUCTIONS FOR PERSONAL EXEMPTIONS. * * * (e) Additional Exemption for Dependents. - (1) In General. - An exemption of $600 for each dependent (as defined in section 152) - (A) whose gross income for the calendar year in which the taxable year of the taxpayer begins is less than $600, or (B) who is a child of the taxpayer and who (i) has not attained the age of 19 at the close of the calendar year in which the taxable year of the taxpayer begins, or (ii) is a student. * * * (3) Child Defined. - For purposes of paragraph (1) (B), the term "child" means an individual who (within the meaning of section 152) is a son, stepson, daughter, or stepdaughter of the taxpayer. * * * SEC. 152. DEPENDENT DEFINED. (a) General Definition. - For purposes of this subtitle, the term "dependent" means any of the following individuals over half of whose support, for the calendar year in which the taxable year of the taxpayer begins, was received from the taxpayer (or is treated under subsection (c) or (e) as received from the taxpayer): (1) A son or daughter of the taxpayer, or a descendant of either, (2) A stepson or stepdaughter of the taxpayer, * * * (e) Support Test in Case of Child of Divorced Parents, etc. - (1) General Rule. - If - (A) a child (as defined in section 151(e)(3) receives over half of his support during the calendar year from his parents who are divorced or legally separated under a decree of divorce or separate maintenance, or who are separated under a written separation agreement, and (B) such child is in the custody of one or both of his parents for more than one-half of the calendar year, such child shall be treated, for purposes of subsection (a), as receiving over half of his support during the calendar year from the parent having custody for a greater portion of the calendar year unless he is treated, under the provisions of paragraph (2), as having received over half of his support for such year from the other parent (referred to in this subsection as the parent not having custody). (2) Special Rule. - The child of parents described in paragraph (1) shall be treated as having received over half of his support during the calendar year from the parent not having custody if - * * * (ii) such parent not having custody provides at least $600 for the support of such child during the calendar year, or (B)(i) the parent not having custody provides $1,200 or more for the support of such child (or if there is more than one such child, $1,200 or more for all of such children) for the calendar year, and (ii) the parent having custody of such child does not clearly establish that he provided more for the support of such child during the calendar year than the parent not having custody. For purposes of this paragraph, amounts expended for the support of a child or children shall be treated as received from the parent not having custody to the extent that such parent provided amounts for such support. (3) Itemized Statement Required. - If a taxpayer claims that paragraph (2)(B) applies with respect to a child for a calendar year and the other parent claims that paragraph (2)(B) (i) is not satisfied or claims to have provided more for the support of such child during such calendar year than the taxpayer, each parent shall be entitled to receive, under regulations to be prescribed by the Secretary or his delegate, an itemized statement of the expenditures upon which the other parent's claim of support is based. * * * (5) Regulations. - The Secretary or his delegate shall prescribe such regulations as may be necessary to carry out the purposes of this subsection.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4623977/	ESTATE OF MARY PIEROTICH MLADINICH, DECEASED, PEOPLES BANK OF BILOXI, ADMINISTRATOR D.B.N., Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentEstate of Mladinich v. CommissionerDocket No. 15841-89United States Tax CourtT.C. Memo 1991-528; 1991 Tax Ct. Memo LEXIS 577; 62 T.C.M. (CCH) 1065; T.C.M. (RIA) 91528; October 24, 1991, Filed 577 Decision will be entered under Rule 155. Lauch M. Magruder, Jr. and Charles L. Brocato, for the petitioner. Linda J. Wise, for the respondent. DAWSON, Judge. DAWSONMEMORANDUM FINDINGS OF FACT AND OPINION This case was assigned to Special Trial Judge Carleton D. Powell pursuant to the provisions of section 7443A(b)(4) and Rule 180. 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: Respondent determined a deficiency of $ 774,943 in petitioner's Federal estate tax and an addition to tax of $ 193,867 pursuant to section 6651(a)(1). The issues for decision are (1) whether the so-called Richardson property is includable in decedent's gross estate; (2) whether, 578 if the Richardson property is includable in the gross estate, the property is subject to a lien in the amount of the value of the improvements located thereon; (3) whether respondent correctly determined the value of the land and improvements, and (4) whether petitioner is liable for the addition to tax under section 6651(a)(1) for failure to timely file the estate tax return. 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. Peoples Bank of Biloxi, the administrator of the estate of Mary Pierotich Mladinich, had its principal office in Biloxi, Mississippi, at the time the petition was filed in this case. Decedent, Mary Pierotich Mladinich, was born in 1907. Mary married Andrew Jake Mladinich (Jake Sr.) in 1925. They had two children: Andrew Jake Mladinich, Jr. (Jake Jr.), who was born in 1926, and John M. Mladinich (John), who was born in 1928. Jake Sr. died on March 20, 1967, and decedent died on October 8, 1983. The Richardson PropertyPrior to 1951, the Mladinich family lived on First Street in Biloxi, Mississippi. That property was titled in Jake Sr.'s579 name. Jake Sr. owned and operated a commercial fishing vessel. Decedent worked in a cannery. While fishing, Jake Sr. was at sea approximately 1 week at a time and was ashore 2 or 3 days before returning to sea. John and Jake Jr. worked in various positions in their youth, such as paper boy, bell hop, and short order cook. In 1944, decedent's brother, J.J. Pierotich, had an interest in a service station. The service station and equipment were leased from Munro Petroleum. Jake Jr. and John worked at the station on a regular basis and Jake Sr. occasionally worked at the station when he was ashore. During this period of time, Jake Jr. and John lived with their parents. The Mladinich family wanted to construct and operate a restaurant. With that in mind, Jake Jr. and John attended an auction at the U.S. Coast Guard Air Station in Biloxi, Mississippi, in the spring of 1947. The Coast Guard was closing the Air Station and was selling equipment used at the station. Jake Jr. and John purchased a walk-in cooler, stoves, dishwashers, potato peelers, sinks, stainless steel work tables, chairs, and other equipment for approximately $ 300. Jake Jr. and John paid for the equipment with580 money that the family had saved. They stored the equipment under the home on First Street and in a shed behind the house. For the next several years, the Mladinich family looked for property suitable for the restaurant. On September 1, 1950, decedent and Jake Sr. purchased the so-called Richardson property on West Beach Boulevard in Biloxi. The deed to that property read to "Jake Mladinich and Mrs. Mary P. Mladinich, his wife, as joint tenants in entirety and not as tenants in common, but to the survivor." The lot is roughly rectangular and is approximately 92 feet wide from east to west and some 1,000 feet deep from north to south. U.S. Highway 90 runs east-west and bisects the property. The portion of the property north of Highway 90 is over 800 feet deep and contained a residence that became the home of Jake Sr. and decedent. The portion south of Highway 90 fronts the Gulf of Mexico. A seawall generally runs east-west through the southern portion of the property. This seawall is approximately 140 feet south of the highway. The purchase price of the Richardson property was $ 23,000. Of this amount, $ 13,000 came from a loan from the First Bank of Biloxi that was repaid581 immediately when the First Street property was sold. Jake Sr. paid the balance of the $ 23,000. Soon after the Richardson property was purchased, John began to fill in a ravine on the property. Jake Sr., Jake Jr., John, and their acquaintances then constructed a brick building on the southern portion of the Richardson property and installed the kitchen equipment they purchased from the Coast Guard. They opened the Fiesta Restaurant and Lounge in this building in April 1951. 2 The funds for the materials used to build the Fiesta were borrowed from the suppliers and paid for from the profits of the business. During 1952 the building was enlarged and changed to a lounge called "The Fiesta Sand Bar." Jake Sr., Jake Jr., and John ran the business as a partnership under the name of Jake Mladinich and Sons. The partners in 582 Jake Mladinich and Sons never executed a written partnership agreement. In 1954 Jake Sr. and decedent acquired several more pieces of property. One parcel was the beach side of Lot 8 of the L.A. Frederick Survey adjacent to the Richardson property. Another parcel was acquired from Charles and Derinda Frazier on Pat Harrison Avenue. A third parcel, also on Pat Harrison Avenue, was acquired from Gustave and Mrs. Lou Wellbat. In 1955 the partnership constructed and began operation of the Party Store on the north side of the Highway 90 in front of the Mladinich residence. The Party Store was a retail package liquor store. Also in 1955, the partnership began operation of the Hot Stop restaurant on Pat Harrison Avenue. In 1957, the partnership began construction of the Cabana Beach Motel on the southern portion of the Richardson property between the Fiesta Lounge and the beach. It started operation of the motel in 1958. In 1959, a wing was added to the Fiesta Lounge for a restaurant named the Sirloin Room which commenced business about September 1, 1959. The restaurant was renamed the Sea 'n' Sirloin Restaurant. During the 1960s, this restaurant was moved to a new building west583 of the Fiesta and was not on the Richardson property. 3At some point in time the northernmost portion of the Richardson property was leased to the owners of the adjacent property, and tennis courts were built by the tenants. For the tax year 1951, Jake Mladinich and Sons filed a partnership tax return under the name of the Fiesta Restaurant and Lounge. The return indicates the partnership was formed on April 9, 1951, and was a "new business firt [sic] partnership return." The return listed Jake Sr., Jake Jr., and John as equal partners. The partnership filed a partnership tax return for 1952 under the name of the Fiesta Sand Bar which set forth the claimed expenses in detail. No expenses were claimed for depreciation on the building, and no land is included in the partnership assets on the balance sheet. This return584 also identified Jake Sr., Jake Jr., and John as equal partners. While the Federal information returns for the partnership and the Federal joint income tax returns of decedent and Jake Sr. for the subsequent years are not paradigms of consistency, none of the partnership returns filed from 1951 to 1956 list the Richardson property as a partnership asset. For example, the partnership and individual returns for 1953 and 1954 show rent deducted on the partnership return and rental income on the joint return of decedent and Jake Sr. On its partnership return for 1955 the partnership (using the name Jake Mladinich & Sons) reported income and expenses from the Fiesta Sand Bar, the Party Store, and the Hot Stop restaurant. No rent expenses were claimed. The depreciation schedule shows a total cost of depreciable assets of $ 38,227.82 and does not include any buildings. The balance sheet includes assets of $ 38,227.82 under the heading "Buildings and other fixed depreciable assets." No land is included in the partnership assets. The partnership again identified Jake Sr., Jake Jr., and John as equal partners. The 1956 partnership return presents a different pattern. A partnership return585 was filed using the name Fiesta Restaurant and Lounge for 1956. A rent expense of $ 3,600 was claimed and no depreciation expense was claimed. Only Jake Jr. and John are listed as partners on this return. A second partnership return using the Party Store name was also filed for 1956. A rent expense of $ 600 was claimed. The depreciation schedule provides, "All fixed assets leased." The balance sheet does not include any depreciable assets or land as assets. Decedent is listed as a partner in the partnership in addition to Jake Sr. and Jake Jr. A third partnership return using the name Hot Stop restaurant was filed for 1956. A rent expense of $ 2,800 was claimed. The depreciation schedule provides, "All fixed assets leased." The balance sheet does not include any depreciable assets or land as assets of the partnership. An individual identified as A.L Rice and John are shown as equal partners. Jake Sr. died intestate on March 20, 1967. Under Mississippi law, his estate generally passed to his wife and two sons in equal shares. Legal title to the Richardson property, however, as property owned by tenants by the entireties, passed to decedent. A Federal estate tax return586 filed for Jake Sr.'s estate reported ownership by him of one-third of the partnership of Jake Mladinich and Sons, the Party Store and a "Family residence, West Beach, Biloxi". The residence and Party Store also were included as assets of the partnership in the administration of the estate. On July 19, 1967, Jake Jr. and John quitclaimed to decedent any interest they might have acquired or later acquire from the estate of Jake Sr. in the Party Store. Decedent subsequently moved from the residence on the Richardson property to a nearby apartment complex and the house on the Richardson property was converted to a souvenir and gift shop called the Lighthouse Gift Shop. The Party Store and Lighthouse Gift Shop were rented to Ron Pierotich, a cousin. Decedent received the rents from these buildings. In 1968 construction began on the Towers Apartment Building adjacent to the Cabana Beach Apartments. In 1969, Hurricane Camille struck the Mississippi Gulf Coast. The hurricane destroyed the Party Store and damaged the Fiesta, Cabana Beach Motel, and the incomplete Towers Apartment Building. Except for the Party Store, damage to the property was repaired using financing from the Small587 Business Administration. The Small Business Administration loans were secured by deeds of trust on the Richardson property, executed by decedent, Jake Jr., John, and John's and Jake's wives. The Party Store was rebuilt either by decedent or the tenant. In 1979, Hurricane Frederic struck the Mississippi Gulf Coast. Immediately prior to Hurricane Frederic, the value of Mississippi Gulf Coast property reached a historic high. Hurricane Frederic caused a marked decline in the value of the property. By 1983 or 1984, the property reached a post-Hurricane Frederic high value. Following the death of Jake Sr., rifts developed between Jake Jr. and his brother, John. Prior to her death, decedent strongly urged her sons to break up their joint business ventures so that each could own and run a separate business. Although Jake Jr. and John agreed with their mother that the businesses should be divided, they were unable to agree upon a division of the property, and took no action. On July 8, 1983, decedent executed a warranty deed naming John as grantee of the Richardson property. She delivered the deed to John who had it recorded after her death. No gift tax return was filed. Neither588 petitioner nor respondent contends that this purported transfer was effective to remove the property from decedent's estate. The Administration of the EstateDecedent died on October 8, 1983. In her will she named Jake Jr. and John as coexecutors of her estate. The relations between Jake Jr. and John became even more strained, particularly after Jake Jr. discovered the deed from decedent to John. Finally, on May 1, 1984, Jake Jr. filed a complaint against decedent's estate and John, inter alia, to set aside the conveyance of the Richardson property to John. Because of their acrimonious relationship, John and Jake Jr. did little toward the administration of their mother's estate. They did, however, obtain an appraisal of the property. On March 8, 1985, they resigned as coexecutors and the Chancery Court of Harrison County, Mississippi, appointed Peoples Bank of Biloxi as administrator d.b.n. of the estate. After being appointed administrator of decedent's estate, Peoples Bank employed Roger Poulos to appraise the assets of the estate. Mr. Poulos' appraisal of the estate was substantially the same as the appraisal done for Jake Jr. and John. In performing its duties as589 administrator, Peoples Bank determined that the estate was required to file a Federal estate tax return. On June 26, 1986, prior to the filing of the estate tax return, Peoples Bank, Jake Jr., and John entered into an agreement that provided inter alia that: the filing of said estate tax returns as so prepared shall in no way constitute an admission by John Mladinich that he is not the fee simple title [sic] to that property known as the "Fiesta Properties," and that the filing of said estate tax return further in no way diminishes the claim of A. Jake Mladinich that stated "Fiesta Properties" are owned by the partnership of A. Jake Mladinich & Sons.The Richardson property was not included in the gross estate on the Federal estate tax return filed for decedent. The estate tax return was filed on the basis that such property was an asset of Jake Mladinich and Sons, a partnership in which decedent held a one-ninth interest. Decedent's interest was a one-third interest in the one-third interest held by Jake Sr. prior to his demise. In determining the value of decedent's interest in the partnership for inclusion in her gross estate, Peoples Bank used the portion of the Poulos590 appraisal covering real estate owned by the partnership, added the value of other partnership assets, and determined the value of decedent's interest in the partnership to be $ 258,754. The Phillips Petroleum LitigationIn 1977, the Mississippi Mineral Lease Commission (MMLC) granted oil and gas leases to Saga Petroleum U.S., Inc., on properties the MMLC asserted were public trust lands. The Cinque Bambini partnership (Cinque Bambini) and others, who held record title to the property, leased the property to Phillips Petroleum Company. When the record title owners learned of the leases, they filed suit to confirm and remove clouds from their title. The Chancery Court for Hancock County held that the lands influenced by the ebb and flow of the tide at the time of statehood were public trust lands and determined the geographic boundaries of such lands that were the subject of that proceeding. The record titleholder appealed. On May 14, 1986, the Mississippi Supreme Court affirmed the lower court holding that the State held fee simple title to the land influenced by the ebb and flow of the tide at the time of statehood. Cinque Bambini Partnership v. State, 491 So. 2d 508 (Miss. 1986).591 On February 23, 1988, the decision of the Mississippi Supreme Court was affirmed by the United States Supreme Court. Phillips Petroleum Co. v. Mississippi, 484 U.S. 469">484 U.S. 469, 98 L. Ed. 2d 877">98 L. Ed. 2d 877, 108 S. Ct. 791">108 S. Ct. 791 (1988). At the time Cinque Bambini and the other record title holders filed their suit in 1977, the State was not asserting any interest in the beach front properties. Furthermore, the State did not take any action to assert any interest in such properties until the United States Supreme Court rendered its opinion in 1988. At that time, the Secretary of State, as successor to the Land Commissioner, felt that a clear mandate had been given to marshal the State's trust lands and appointed a commission to study the problem and develop recommendations for the identification and administration of the tidelands. The Blue Ribbon Commission on Public Trust Tidelands held its first meeting on June 29, 1988, and issued its final report on January 24, 1989. The Mississippi Legislature passed legislation regarding the public trust lands on March 31, 1989. Miss. Code Ann. secs. 29-15-1 through 29-15-23 (1990). Under this legislation, tidelands developed before July 1, 1973, are not public trust property. 592 Tidelands that have not been developed or were developed after July 1, 1973, are public trust property. All of the improvements on the Richardson property that are located on filled land were constructed prior to July 1, 1973. Thus, under the public trust tidelands legislation, the Richardson property is considered to be private property. To complicate the matter, however, the Secretary of State for the State of Mississippi has filed suit against the State to have a portion of the public trust tidelands legislation set aside as unconstitutional. The Secretary of State alleges that the portion of the legislation which removes tidelands developed prior to July 1, 1973, from the public trust violates section 95 of the Mississippi Constitution. That section forbids the State to donate land which it owns or controls to private corporations or individuals. The trial court ruled that the public trust tidelands legislation does not violate section 95 of the Mississippi Constitution. Byrd v. State, Docket No. 17,879 (Chancery Ct., Harrison Co., April 18, 1990). That decision is presently on appeal to the Mississippi Supreme Court. In the statutory notice of deficiency, respondent593 determined that decedent was the fee owner of the Richardson property, that the fair market value of the property was $ 2,100,000 and that this amount is includable in decedent's gross estate. Respondent used the Poulos appraisal report in determining the value of decedent's estate. Respondent also determined that petitioner was liable for an addition to tax under section 6651(a)(1). OPINION The Richardson PropertySection 2033 provides that the value of the gross estate for Federal estate tax purposes "shall include the value of all property to the extent of the interest therein of decedent at the time of his death." In Federal estate tax controversies, State law governs the issue of "what the decedent owns for purposes of estate taxation"; Federal tax statutes "merely determine how that interest shall be taxed." Estate of Wien v. Commissioner, 441 F.2d 32">441 F.2d 32, 36 (5th Cir. 1971), revg. on another issue 51 T.C. 287">51 T.C. 287 (1968). In Aldrich v. United States, 346 F.2d 37">346 F.2d 37, 38 (5th Cir. 1965), the United States Court of Appeals for the Fifth Circuit stated: The estate tax is imposed on the transfer of the estate. The value of594 the estate is determined by including the value at the time of his death of all property of the decedent except real property situated outside of the United States. What property the decedent owned at the time of his death must be determined by state law. * * * [Fn. refs. omitted.]The property in question is located in Mississippi. Accordingly, this Court must examine applicable Mississippi law to determine what decedent owned at her death. The property in issue was conveyed in 1950 to "Jake Mladinich and Mrs. Mary P. Mladinich, his wife, as joint tenants in entirely and not as tenants in common, but to the survivor." By operation of Mississippi law, decedent would have become the sole owner of this property at the death of her husband, Jake Sr., in 1967. Petitioner concedes that record title was in decedent's name, but contends that, under Whitney v. Cotten, 53 Miss. 689 (1876) and Alexander v. Kimbro, 49 Miss. 529">49 Miss. 529 (1873), the land was the property of the partnership of Jake Mladinich and Sons. In Whitney v. Cotten, supra, the Mississippi Supreme Court held that real property purchased with funds of the partnership595 is a partnership asset. In that case, the surviving partner filed suit against the deceased partners' heirs seeking to have lands previously acquired with partnership funds sold to pay partnership debts. The Court held that real property acquired with partnership funds constituted a partnership asset even though the record title was vested in the name of only one partner. The Court stated, 53 Miss. at 691: It has been uniformly held in this State that real estate bought with partnership funds, or acquired in satisfaction of debts, constitutes assets of the firm, so far as the partners and creditors are concerned, quite as effectually as choses in action or merchandise. The mere fact of the acquisition in that mode works an equitable conversion of them into personal estate. A court of equity will not undertake to disregard the assurances of title under which they are held, but will treat the holder of the title as trustee for the purposes of the partnership: first, to pay the creditors; and, secondly, to adjust the account between the partners according to their several interests.If the Richardson property was acquired with partnership funds, then, 596 under Whitney v. Cotten, supra, it would be an asset of the partnership. The gravamen of petitioner's contention is that the funds used to purchase the property came from an alleged partnership consisting of Jake Sr., Jake Jr., and John that existed prior to the purchase of the property. The basic problem with which petitioner is confronted is that Jake Sr., Jake Jr., and John at various times have either testified or made statements under oath that stand in sharp contrast to the testimony in this record. The purchase price for the Richardson property was $ 23,000. The First Bank of Biloxi provided a loan of $ 13,000 towards the purchase price. The bank lent the money to Jake Mladinich and decedent. They repaid the bank on November 2, 1950, from the proceeds of sale of the First Street residence, which was titled in the name of Jake Sr. Thus, Jake Sr. and decedent signed the loan and repaid the bank from the sale of their residence. Accordingly, the Court finds that the bank loan does not represent partnership funds used to purchase the Richardson property. The source of the remaining $ 10,000 is in dispute. Petitioner contends that $ 5,000 came from the profits of597 the gasoline station and $ 5,000 came from a loan from Jake Sr.'s aunt, Katie Mladinich. The testimony with regard to participation in and earnings from the service station was conflicting. Whatever interest Jake Sr., Jake Jr., and John may have had in the service station, that interest was not liquidated until after the purchase of the Richardson property. Nor are we convinced the property was purchased by funds accumulated over the years from this alleged partnership. John and Jake Jr. testified that the alleged Mladinich partnership owned a one-half interest in the service station and that their uncle, J.J. Pierotich owned the other half. John testified that his father did not draw any money from the station and that he and Jake Jr. received an allowance from the station of approximately $ 5 or $ 6 per week until he became engaged and started drawing a salary of $ 40 per week. Jake Jr., on the other hand, testified that he did not receive an allowance or salary from the service station. Ron Pierotich, the son of J.J. Pierotich, testified that his father, John, and Jake Jr., received the same salary of $ 25 to $ 30 per week. Finally, Donald Munro, who testified on behalf598 of petitioner and whose family owned the service station property, stated that the station was leased to the uncle and that John and Jake Jr. worked for the uncle. Moreover, neither John nor Jake Jr. knew what, if any, profits were made on the service station. John stated that their family received half the earnings of the station. He further testified that his uncle gave their share to his mother who then deposited the money into the bank. John could not say how his uncle gave the money to his mother nor did he know the amount that was given. When questioned concerning the money that his uncle had allegedly given to his mother from the station, John replied, "You didn't stick your nose into the family affairs that deep." Further, even the testimonies of John and Jake Jr. provide no bases for concluding that any savings were accumulated from their earlier jobs or from the service station. During this period they owned a car, sail boats, and a speedboat. While both testified that when they needed money they went to their mother, who gave it to them, on this record it is impossible to determine whether they received back all or even more than they may have turned over to their599 mother. We further note that during part of the period in which the funds were allegedly accumulated, John was married. In short, the picture that is painted is that, while growing up and as young adults, the lifestyle of Jake Jr., and John was not one of total deprivation but rather one of reasonable indulgence under somewhat limited circumstances, and it is implausible that any portion of the funds used to purchase the Richardson property came from Jake Jr. and John. The evidence regarding the alleged family loan from Katie Mladinich is equally unsatisfying. Ms. Diana Kuljis, the daughter of Katie Mladinich, testified that her mother loaned the Mladinich family some amount of money at some point in time. Petitioner claims this testimony establishes the fact that Katie Mladinich lent the money to Jake Sr., John, and Jake Jr., as the partners of Jake Mladinich and Sons. We find the testimony of Ms. Kuljis to be too vague to support petitioner's position. Jake Sr., Jake Jr., and John all testified previously that Jake Sr. was the source of the funds used to purchase the Richardson property. 4 While the court in that case rejected the testimony of Jake Sr. and his sons that 600 Jake Sr. had a $ 35,000 cash hoard after the purchase of the Richardson property, it appears to this Court more likely that Jake Sr. and decedent had sufficient savings to pay the $ 10,000 balance for that property than their sons. 5 In arriving at this conclusion, we also note that decedent worked for many years, a fact which petitioner ignores. 601 In sum, we find that, consistent with prior statements and testimony, Jake Sr. and decedent were the source of the funds used to purchase the Richardson property, and, therefore, the Richardson property is not considered to be partnership property under the rule of Whitney v. Cotten, supra.Alternatively, petitioner contends that under Alexander v. Kimbro, supra, even if the Richardson property had not been purchased with partnership funds, the intentions of the parties result in the real estate's being treated as partnership property. In Alexander v. Kimbro, the surviving partner brought suit against the heirs of two deceased partners seeking to have real property owned by the three parties as tenants in common sold, and the proceeds distributed to the tenants in common. The defendants argued that the lots involved were partnership property. The Court stated, 49 Miss. at 537: Whether the appropriation of land to the uses of the partnership, without its being purchased with partnership funds, will operate to render it partnership property, will very much depend upon the intention of the parties and the evidence602 of that intention. It seems to be settled, that the mere fact that property held by the firm as tenants in common, is used in and for the partnership business, or a mere agreement to use for partnership purposes, is not of itself sufficient to convert it to partnership stock. There must be some evidence of further agreement to make it partnership property.Thus, the Richardson property would be partnership property only if the parties intended the property to be partnership property at the time it was purchased. We do not find evidence of that intent here. First, the very act of taking title in the names of Jake Sr., and decedent as tenants by the entirety indicates a clear intention that the Richardson property not be treated as partnership property. The language used in the conveyance manifests an intention to create a tenancy by the entirety, which can only be entered into by a husband and wife. See Shepherd v. Shepherd, 336 So. 2d 497">336 So. 2d 497 (Miss. 1976); Cuevas v. Cuevas, 191 So. 2d 843">191 So. 2d 843 (Miss. 1966). 6603 Petitioner contends, however, that the property was placed in the name of Jake Sr. and Mary only because Mississippi did not allow property to be put in the name of a partnership at that time. While petitioner's statement is correct, Mississippi law did allow property to be placed in the name of the individual partners as tenants in common. Therefore, if the partners did intend the land to be partnership property, they could have placed title in the individual names of the partners. We also have considered the manner in which the parties used the property. In addition to the commercial development, Jake Sr., and decedent used a portion of the property as their residence. They moved to the Richardson property after selling the First Street property, which was held in the name of Jake Sr. We find it highly unlikely that they intended their home to become a partnership asset. Next we examine how the parties treated the property for tax purposes. The returns filed by Jake Sr. and decedent and by the partnerships in the early fifties also indicate that the property belonged to the parents, not to any partnership. On the 1953 return for the Fiesta Sand Bar, the partnership claimed604 a rental expense of $ 5,000 while Jake Sr. and decedent reported rental income of $ 5,000 on their 1953 individual return. Jake Sr. and decedent did not own any property other than the Richardson property and the residence was not used for business. The Fiesta building was constructed in the early part of 1951. The correlation in the rent expense claimed and the income reported is repeated in the following year. In 1954, the Fiesta Sand Bar claimed rent expense of $ 9,100, and Jake Sr., and decedent reported rental income in the same amount. 7Finally, we have considered how the parties treated the property among themselves. Prior to her death, decedent delivered to John a warranty605 deed conveying to him the Richardson property. Petitioner contends that she did this to force Jake Jr., to the bargaining table. That may be true, but the fact that decedent thought that she had that type of leverage depended on her belief that she owned the Richardson property. In the trial in this case, John asserted that the deed from his mother did no more than convey to him his mother's one-ninth interest in the partnership. He took an entirely different position in the suit instituted by Jake Jr. as a result of the deed from decedent to John. The following exchange occurred in the deposition of John in connection with that proceeding: Q. Mr. Mladinich, why do you contend in this lawsuit that your mother owned the Fiesta property in spite of your comments today that the partnership operated those properties since 1950? A. My comment was we operated the business as a business, but my mother and father always owned the property. [Emphasis added.]This comports with our view of the situation. Petitioner refers to the Petition for Leave to Mortgage Real Property filed in Harrison County Chancery Court during the administration of the estate of Jake Sr. to demonstrate606 that the Richardson property was partnership property in the collective conscience of the Mladinich family. That sworn petition, signed by decedent, Jake Jr., and John, states that "the major part of the estate of Jake Mladinich, Sr. is an interest in real property owned by the partnership of Jake Mladinich and Sons." But at that time, as in this case, it was in their interest to take that position. The inventories filed in Jake Sr.'s estate proceeding and John's deposition in the suit against his brother were also sworn documents, and the estate tax return was signed under penalties of perjury, but each of these give differing accounts of the ownership of the property. The Chancery Court petition simply underscores the fluid nature of Jake Jr's. and John's treatment of the ownership of the Richardson property. Petitioner finally argues that respondent, in previous income tax cases, treated the Richardson property as a partnership asset in computing income by the net worth method and that such treatment is entitled to great weight. Compare Thomas v. Commissioner, 324 F.2d 798">324 F.2d 798 (5th Cir. 1963), vacating a Memorandum Opinion of this Court. In the previous tax607 cases of the Mladinich family, 8 however, ownership of the Richardson property was not litigated. The agent who investigated the case used a joint net worth computation because he could not determine which of the Mladinich family members owned the assets due to their refusal to provide such information. Furthermore, the property had no effect on the net worth computation since its value was the same at the beginning and end of each year for which income was determined. The income determined would have been the same if the agent had entirely eliminated the Richardson property, had placed the full value in one family-member's net worth statement, or had divided it among them in any manner. The agent did not have any evidence to establish who purchased the property or made the improvements. Since ownership of the Richardson property among the family members was not litigated and was not significant in the prior cases, we will not treat it as significant in this case. Based upon the foregoing, 608 we conclude that decedent owned the Richardson property on the date of her death. The Richardson Property ImprovementsPetitioner argues alternatively that, if the Court finds decedent was the owner of the Richardson property for Federal estate tax purposes, then the partnership of Jake Mladinich and Sons is the owner of the improvements upon the land. The Court agrees in part with petitioner on this issue. There appear to be no Mississippi cases which directly address the question of how to treat improvements made with partnership funds for partnership purposes on land owned by one of the partners. We look, therefore, to the law of other jurisdictions for guidance. While there appears to be a split of authority, the majority view is that partners are entitled to a lien on partnership property in the amount of improvements made with partnership funds on real property of a partner. In Grissom v. Moore, 106 Ind. 296">106 Ind. 296, 6 N.E. 629">6 N.E. 629 (1886), a partnership was formed to engage in the milling business. One partner, Martz, agreed to contribute milling machinery if the other, Grissom, would construct a mill on land owned by him and convey an undivided609 one-half interest in the lots and building to Martz. Upon Grissom's death, cross-suits were brought to quiet title in the undivided one-half interest. There was no record of any rent paid by the partnership for the use of the lots and building, nor was there any agreement as to how the improvements were to be divided upon dissolution of the partnership. After ruling that the wife's inchoate dower rights, in property seized by her husband during marriage (the lots), could not be defeated by any agreement short of a conveyance in which she was joined, the court observed, "The question still remains, did she take any interest in the improvements?" 6 N.E. at 630. The court cited the general rule that "Improvements made even on lands owned by one partner, if made with partnership funds, or for the purpose of the partnership, are to be treated as the personal property of the firm," 6 N.E. at 631, and then went on to note: As we have already seen, the inchoate right of the wife in the lots was not subject to be defeated by the agreement with Martz. Her interest attached by virtue of the seizin of her husband, and he was seized610 before the agreement was made. It was not so with respect to the improvements. * * * Since they were the contributions of the partners to the capital of the firm, they became partnership assets the same as if they had been acquired with the funds of the partnership, and are to be treated as personal property belonging to the firm. * * Similarly, in Flint v. Flint, 87 N.J. Eq. 560">87 N.J. Eq. 560, 100 A. 754">100 A. 754 (Ch.), affd. 88 N.J. Eq. 346">88 N.J. Eq. 346, 102 A. 1053">102 A. 1053 (Err. & App. 1917), a partnership was formed for the retail selling of butter, eggs, poultry, and dairy products. An office and storage building, stable, and wagon shed were erected on land owned by one of the partners for $ 9,000. The buildings were constructed with partnership funds and were used for partnership purposes. There was no agreement as to how the improvements would be divided upon dissolution. After the death of one of the partners, the surviving partner, who owned the land, paid $ 14,000 to the widow of the deceased partner for the estate's interest in the assets of the partnership, including the value of the improvements. The deceased partner's heirs at law maintained611 that the improvements were real estate and that an interest therein descended to them upon the partner's death. The court noted that the owner of the real estate had conceded that "the fact that the land was the land of one of the partners and the improvements were made with partnership funds operates to prevent the owner of the soil from asserting, as against the partnership and its representatives, the right to hold the improvements without some compensation." 100 A. at 755. It then proceeded to discuss the disposition of the improvements. The question is, What is the right of the partnership? Is it a right in the property or a right against the property? Is it a right of ownership in the property, or is it in the nature of a lien against the property for the value put into it? I think the latter. What the partnership used was money, personal property. This money was used to purchase personal property. That personal property was put upon real estate, and although its physical nature was not in any wise altered, it became, by virtue of a rule of convenience, real estate, but not I think the real estate of the partnership. By virtue of the relations612 existing between the parties a duty arose upon the part of the owner of the soil * * to account to the partnership. The right of the partnership was a right to recover from the owner of the soil, not real estate but personal property to wit, money. Such a right is a chose in action which is personal property. * * * The duty of the owner of the soil is to pay money, not to give real estate or an interest therein. [100 A. at 755-756; citation omitted.9] 613 We believe Mississippi would apply the majority rule when faced with this issue. Accordingly, the partnership is entitled to a lien against decedent's estate equal to the value of improvements constructed with the funds or through the efforts of the partnership. We must now determine which improvements were constructed with partnership funds or efforts. The home of Jake Sr. and decedent was on the Richardson property at the time they purchased the tract. It could not have been constructed with partnership funds or through partnership efforts. Accordingly, the partnership is not entitled to a lien against decedent's estate in relation to the family house. Another improvement north of Highway 90 is the building known as the Party Store. Following their father's death, John and Jake Jr. quitclaimed any interest they had in the Party Store to decedent. Furthermore, when the building was destroyed in 1969, the partnership did not rebuild the building, rather it was rebuilt either by decedent or the tenant. Thus, whatever previous interest the partnership may have claimed in that structure was released long prior to decedent's death by the partnership. The remaining improvements614 north of Highway 90 are the tennis courts. The record establishes that the partnership did not construct these improvements. Based on the foregoing, the partnership is not entitled to a lien in relation to any of the improvements north of Highway 90. The partnership, however, is entitled to a lien equal to the value of the improvements on the land south of Highway 90. It is clear that all of the improvements south of Highway 90 were built by and used by the partnership in its various businesses. The first building constructed after the purchase of the Richardson property was the building initially known as the Fiesta Restaurant and Lounge. John and various acquaintances provided the labor. Building supply contractors provided the construction material on the credit of Jake Mladinich and Sons and were repaid from the proceeds of the restaurant. The other building subsequently constructed south of Highway 90 was also built and, in the case of hurricane damage rebuilt, with partnership funds and effort. Therefore, the partnership is entitled to a lien equal to the value of the buildings on the property south of the highway. In sum, we find that Jake Sr. and decedent intended615 that they would own and have control over the Richardson property. The property provided financial security for decedent upon the death of her husband and leverage to protect their interests. We also find that the partnership did construct the improvements on the property south of Highway 90, and it is therefore entitled to a lien against the property in the amount of the value of the improvements. ValuationBoth parties submitted appraisals regarding the value of the property in issue. The situation at bar is somewhat unusual. Respondent relies upon the appraisal used by petitioner in preparing the estate tax return, while petitioner now claims that appraisal is incorrect and relies upon a more recently prepared appraisal. The appraisal used by petitioner in preparing the estate tax return and relied upon by respondent at trial was prepared in 1985 by Roger Poulos. The Poulos report was based upon personal inspections of the property by Mr. Poulos on November 16, 1981, and on November 1, 1985, and on income and expense data provided by the Mladinich family and Charles Logan, the CPA for the partnership. The appraisal relied upon by petitioner at trial was prepared in616 1990 by Joel Stevenson. In many instances the two reports do not differ widely; there are, however, certain glitches in Mr. Stevenson's report that do not appear to be present in the appraisal of Mr. Poulos. Furthermore, Mr. Stevenson did not have the actual income and expense data that were supplied to Mr. Poulos and Mr. Stevenson's inspection of the property occurred approximately 7 years after decedent's death, while Mr. Poulos's inspections were 2 years before and 2 years after her death. Accordingly, we conclude that the Poulos report is based on better information and rely upon it. 10The Court has found that decedent owned617 all of the land north of Highway 90 and the improvements thereon. Since this property is north of the seawall, it is not affected by the tidelands litigation. The Poulos report places the value of the property (i.e., land and improvements) north of Highway 90 on the date of decedent's death at $ 210,000. The Court concludes that this is the correct value of the property. Valuation of the property south of the highway may be complicated by the tidelands litigation. As discussed above, title to the tidelands has been the subject of extensive litigation. It is not necessary, however, for this Court to decide the issue or to predict the outcome of the litigation. The issue which the Court must resolve is the fair market value of the property on the date of decedent's death. Sec. 2031; sec. 20.2031-1(b), Estate Tax Regs. The tidelands litigation, therefore, affects this case only to the extent that it affected the fair market value of the subject property on the date of decedent's death. Mr. Poulos prepared his appraisal using the comparable sales method of valuation to determine the value of the land. His report included a large number of comparable sales which occurred after618 institution of the case by Cinque Bambini. His report, therefore, necessarily reflects the then-perceived effect of the tidelands litigation on the value of gulf-front property. Consequently, we need not separately discuss the effect of the litigation on the property. The Poulos report determined the value of the property (i.e., land and improvements) south of Highway 90 known as the Fiesta property to be $ 792,000 on the date of decedent's death. The report attributes $ 379,000 to the land and $ 413,000 to the value of the improvements. Accordingly, we conclude that decedent's estate includes the value of the land ($ 379,000) underlying the Fiesta property. The Poulos report further found that the Cabana Beach and Tower Apartments had a value of $ 660,000 at the date of decedent's death. The report allocates $ 187,000 to the value of the land and $ 473,000 to the value of the improvements. Accordingly, we conclude that decedent's estate includes the value of the land ($ 187,000) underlying the Cabana Beach and Tower Apartments. Decedent's estate also includes her one-ninth of the value of the improvements south of the highway as her interest in the partnership. Addition619 to Tax Under Section 6651(a)(1)By her will, decedent appointed her two sons, Jake Jr., and John, coexecutors of her estate. While they were coexecutors, they had a disharmonious relationship and did little toward the administration of decedent's estate. One duty they did perform was to obtain an appraisal of the estate from Mr. Poulos that indicated that an estate tax return was necessary. They did not, however, file an estate tax return. The coexecutors subsequently resigned and the Chancery Court of Harrison County, Mississippi, appointed Peoples Bank as administrator d.b.n. of the estate on February 8, 1985. Peoples Bank obtained a second appraisal of the estate from Mr. Poulos. This second appraisal is similar to his first appraisal and is the one respondent relied upon at trial. Based upon that appraisal, Peoples Bank filed a Federal estate tax return for decedent's estate on June 30, 1986. During 1983 an estate tax return was required to be filed if the value of the gross estate exceeded $ 275,000. Sec. 6018(a). Estate tax returns are generally due to be filed within 9 months of the date of death. Sec. 6075(a). Section 6651(a)(1) provides an addition to tax on620 returns filed after the applicable due date unless the delay is due to reasonable cause and not due to willful neglect. The addition to tax is 5 percent for the first month and for each full or partial month thereafter up to a maximum of 25 percent. Decedent died on October 8, 1983. The estate tax return was filed on June 30, 1986, almost 33 months after decedent's death. Petitioner is liable for the full addition to tax for failure to timely file unless it establishes that the failure was due to reasonable cause and did not result from willful neglect. United States v. Boyle, 469 U.S. 241">469 U.S. 241, 245, 83 L. Ed. 2d 622">83 L. Ed. 2d 622, 105 S. Ct. 687">105 S. Ct. 687 (1985). To demonstrate reasonable cause, the taxpayer filing a late return must show that he "exercised ordinary business care and prudence and was nevertheless unable to file the return within the prescribed time." Sec. 301.6651-1(c)(1), Proced. & Admin. Regs. The fiduciary of an estate has an affirmative duty to ascertain the nature of his responsibilities, and the failure to do so does not constitute ordinary business care and prudence. United States v. Boyle, 469 U.S. at 249-250; Estate of Lammerts v. Commissioner, 54 T.C. 420">54 T.C. 420, 446 (1970),*621 affd. on this issue 456 F.2d 681">456 F.2d 681 (2d Cir. 1972). Willful neglect includes a "reckless indifference" to the duties imposed. United States v. Boyle, 469 U.S. at 245. Jake Jr. and John were the executors of their mother's estate until March 8, 1985. Yet, they made no effort to file the estate tax return. They allege that they did not file an estate tax return because they believed that the value of the estate was less than $ 275,000. However, this claim has a decidedly hollow ring. They had an appraisal by Mr. Poulos that revealed the value of the estate and that an estate tax return was necessary. The failure was due to nothing less than reckless disregard of their duties caused by their animosities to each other. By failing to file a tax return within the prescribed time limitations, the coexecutors failed to exercise ordinary business care and prudence. Accordingly, we hold that petitioner is liable for the addition to tax under section 6651(a)(1). Decision will be entered under Rule 155. Footnotes1. All section references are to the Internal Revenue Code, as amended and in effect as of the date of the decedent's death. All Rule references are to the Tax Court Rules of Practice and Procedure, except as otherwise indicated.↩2. While a partnership apparently originally operated a restaurant and bar, for a more complete history of its operation, see Mladinich v. Commissioner, T.C. Memo 1969-185↩.3. Respondent included the value of the Sea 'n' Sirloin among the adjustments in the statutory notice of deficiency but has conceded that the restaurant is not includable in decedent's gross estate.↩4. See transcript of proceedings in Jake Mladinich, Sr. and Mary Mladinich v. United States, 1965 U.S. Dist. LEXIS 9351">1965 U.S. Dist. LEXIS 9351↩, Civ. No. 2694, (S.D. Miss., filed July 16, 1965).5. In Mladinich v. Commissioner, T.C. Memo 1969-185">T.C. Memo 1969-185, and Mladinich v. United States, 1965 U.S. Dist. LEXIS 9351">1965 U.S. Dist. LEXIS 9351, 18 A.F.T.R.2d (RIA) 5551, 66-1 U.S. Tax Cas. (CCH) P 9429">66-1 U.S. Tax Cas. (CCH) P9429 (S.D. Miss. 1965), vacated and remanded 371 F.2d 940">371 F.2d 940 (5th Cir. 1967), on remand 394 F.2d 147">394 F.2d 147↩ (5th Cir. 1968), cases which involved unreported income from illegal gambling operations, John and Jake Jr. testified that Jake Sr. had a cash hoard of $ 35,000 after 1950. This Court and the United States District Court rejected that testimony.6. We also note petitioner is asking this Court to extend the reasoning of Whitney v. Cotten, 53 Miss. 689 (1876) and Alexander v. Kimbro, 49 Miss. 529">49 Miss. 529 (1873). In both of those cases, record title was in the name of a partner of the partnership. In the case before us, record title was in the name of a partner and one who was not a partner at the time the property was acquired. Petitioner is thus asking this Court to divest a record titleholder from her interest as a surviving spouse in a tenancy by the entirety based upon the intent of the partners. Petitioner cites no case in which a court so stripped a widow of her interest, nor has the Court found such a case. We note that such a decision would appear to violate principles established in Carter v. Sunray Mid-Continent Oil Co., 231 Miss. 8">231 Miss. 8, 94 So. 2d 624">94 So. 2d 624 (Miss. 1957), and Wolfe v. Wolfe, 207 Miss. 480">207 Miss. 480, 42 So. 2d 438">42 So. 2d 438↩ (Miss. 1949).7. Petitioner contends that we should disregard these early tax returns because they were not prepared by knowledgeable tax professionals. But, for that very reason, these returns probably reflect the true intent of the parties during this period because in all likelihood they were based on contemporaneous statements of those concerned.↩8. See supra↩ note 5.9. See also Marston v. Marston, 277 Mass. 129">277 Mass. 129, 177 N.E. 862">177 N.E. 862, 863 (1931) ("If the buildings in question were held not to be partnership property the father would receive a larger share of the profits of the partnership than either of his partners."); Minikin v. Hendrix, 15 Cal. 2d 338">15 Cal. 2d 338, 101 P.2d 473">101 P.2d 473, 476 (1940), citing with approval Flint v. Flint, 87 N.J. Eq. 560">87 N.J. Eq. 560, 100 A. 754">100 A. 754 (Ch.), affd. 88 N.J. Eq. 346">88 N.J. Eq. 346, 102 A. 1053">102 A. 1053 (Err. & App. 1917), and Marston ("the improvements became a partnership asset and, as such, on dissolution of the partnership the non-landowning partner was entitled to his proportionate share of their value."); Wiese v. Wiese, 107 So. 2d 208">107 So. 2d 208 (Fla. App. 1958) (after agreeing with the reasoning set out in Minikin and Flint, the court awarded the non-landowning partner one-half the value of the improvements made to defendant's land); Gabrielle v. Marini, 80 R.I. 458">80 R.I. 458, 98 A.2d 363">98 A.2d 363, 366 (1953) ("Where partnership funds and credit are thus employed to improve real estate used in the partnership, the liquidating partner who owns the real estate is liable to the other partner for his share of the net enhanced value of such improvements after lawful and proper deductions are made."). But compare Knauss v. Hale, 64 Idaho 218">64 Idaho 218, 131 P.2d 292">131 P.2d 292↩ (1942), the only case which departs from the general rule enunciated above.10. We reject petitioner's claim that the Poulos appraisal is somehow less reliable than the Stevenson appraisal since the latter was subject to cross-examination and the former was not. Petitioner had the opportunity to call Mr. Poulos as a witness but chose not to do so. If petitioner felt that there are erroneous items in the Poulos report, it should have called Mr. Poulos at trial.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4623978/	Ragland Investment Company, et al., 1 Petitioners v. Commissioner of Internal Revenue, RespondentRagland Inv. Co. v. CommissionerDocket Nos. 5980-67, 5981-67, 5982-67United States Tax Court52 T.C. 867; 1969 U.S. Tax Ct. LEXIS 69; August 26, 1969, Filed 69 Decisions will be entered for the petitioners. Petitioner-corporations received 6-percent cumulative preferred stock in partial consideration for assets transferred to the issuing corporation. Held, the payments made to petitioners with respect to this stock were dividends in reality as well as in form, and consequently, petitioners are entitled to the 85-percent dividends-received deduction under sec. 243, I.R.C. 1954. Dick L. Lansden and William Waller, for the petitioners.Charles G. Barnett, for the respondent. Sterrett, Judge. Hoyt, J., dissents. Tietjens, J70 ., dissenting. Raum, Dawson, and Hoyt, JJ., agree with this dissent. Simpson, J., dissenting. Tietjens, Dawson, and Hoyt, JJ., agree with this dissent. STERRETT868 The Commissioner determined deficiencies in income taxes in these consolidated cases in the following amounts:PetitionerDocket No.Taxable year endedDeficiencyRagland Investment Co5980-6712/31/64$ 51,000.0012/31/6599,008.002 Elizabeth L. Ragland 5981-674/30/6518,873.495/1/65 to 1/31/6618,017.032 H. H. Ragland 5982-674/30/6518,873.495/1/65 to 1/31/6618,017.03Due to the concessions of the parties, the sole issue for our determination is whether payments made by Malone & Hyde with respect to certain securities denominated as 6-percent cumulative preferred stock 71 were in fact dividends or interest.FINDINGS OF FACTSome of the facts have been stipulated. The stipulations and exhibits attached thereto are incorporated herein by this reference.Petitioner, Ragland Investment Co. (hereinafter sometimes referred to as Ragland Investment), is a corporation organized under the laws of the State of Tennessee, with its principal place of business in Nashville, Tenn. Ragland Investment timely filed its corporate income tax returns for the taxable years ended December 31, 1964 and 1965, with the district director of internal revenue, Nashville, Tenn. Its legal corporate name had formerly been Ragland-Potter & Co. (hereinafter sometimes referred to as Ragland-Potter), but on May 20, 1964, the name was changed to its present denomination of Ragland Investment.Dixie Investment Co., Inc. (hereinafter sometimes referred to as Dixie), was a corporation existing under the laws of the State of Tennessee prior to its liquidation on or about January 31, 1966. Dixie's principal place of business had been Nashville, Tenn. Dixie timely filed its income tax returns for the taxable year ended April 30, 1965, and for the taxable period ended January 31, 1966, 72 with the district director of internal revenue, Nashville, Tenn. Previously, its legal corporate name had been Cooper & Martin, Inc., but on May 20, 1964, the corporate name was changed to Dixie Investment Co., Inc.869 Petitioners H. H. Ragland and Elizabeth L. Ragland (hereinafter sometimes referred to as Ragland and Elizabeth, respectively) are husband and wife who at all times pertinent hereto resided in Nashville, Tenn. All of the capital stock of Dixie, at the time of its liquidation (Jan. 31, 1966), was owned by Ragland and Elizabeth, and at the time of its dissolution, all of the assets of Dixie were distributed to the two stockholders.Malone & Hyde, Inc. (hereinafter sometimes referred to as Malone & Hyde), is a large, integrated wholesale grocery company with headquarters in Memphis, Tenn. In the fall of 1963, negotiations began which resulted in the purchase by Malone & Hyde of the assets of Ragland-Potter & Co. and six other corporations -- Cooper & Martin, Inc.; Cooper & Martin, Inc., No. 6; Cooper & Martin, Inc., No. 7; Cooper & Martin, Inc., No. 8; Cooper & Martin, Inc., No. 10; and Cooper & Martin, Inc., No. 12. During these negotiations, the sellers were73 represented principally by Ragland as he and his family were the controlling shareholders of the selling corporations (hereinafter sometimes referred to collectively as the Ragland corporations). Sam J. Moore, Jr., and Thomas W. Goodloe, both of Equitable Securities Corp., negotiated the purchase of the assets by Malone & Hyde.On April 16, 1964, Malone & Hyde entered into two contracts, one with Ragland-Potter and one with the Cooper & Martin companies, under which Malone & Hyde agreed to purchase the net assets of the Ragland corporations. Under the agreements, the consideration required from Malone & Hyde for the assets of Ragland-Potter, was $ 4 million in 6-percent cumulative preferred stock, $ 100 par value, of Malone & Hyde, with the balance of the purchase price paid by certified or official bank check or checks.The consideration required of Malone & Hyde under the agreement with Cooper & Martin companies was to be paid in part by Malone & Hyde issuing $ 1 million in 6-percent cumulative preferred stock, $ 100 par value, with the balance of the purchase price to be paid by certified or official bank check or checks.Contemporaneously with the execution of the sales agreements74 between Malone & Hyde and the Ragland corporations, the majority stockholders of Malone & Hyde executed two letter agreements, one addressed to Ragland as president of Ragland-Potter and one addressed to Robert J. Cooper, president of Cooper & Martin, Inc. Both letter agreements had been requested by Ragland in connection with the sale, and were substantially identical. In each letter, the majority stockholders of Malone & Hyde agreed that so long as any of the 6 percent cumulative preferred stock of Malone & Hyde was outstanding, they would submit to the sellers, or to their successors, detailed annual audit reports showing the net worth of Malone & Hyde, 870 and quarterly unaudited financial statements. In addition, not later than 4 years from the closing date of the contracted sale the majority shareholders agreed to take all actions within their power and authority to cause Malone & Hyde to redeem all of the 6-percent cumulative preferred stock at par value plus accrued dividends. The shareholders also agreed that they would do everything within their power and authority to prevent Malone & Hyde from incurring or assuming any obligations which would have the effect of75 reducing the consolidated surplus of Malone & Hyde and its subsidiaries below $ 5,500,000 and prevent Malone & Hyde from taking any other course of action that might prevent or tend to prevent it from redeeming the 6-percent cumulative preferred stock. The letter agreements further provided that if at any time during the 4-year period the consolidated surplus of Malone & Hyde and its subsidiaries should be reduced to an amount below $ 5,500,000, the sellers could demand in writing that the preferred stock, in whole or in part be redeemed, and that the majority stockholders signing the letter agreements would take all actions within their power and authority to cause said preferred stock to be redeemed at par value plus accrued dividends within 30 days from the date of such demand. In addition, if any transactions involving any of the majority stockholders or any proposed corporate action of Malone & Hyde would, upon the consummation thereof, reduce the aggregate ownership of the signatory majority stockholders to less than a majority, written notice would have to be given to the sellers and the sellers would have the right to demand in writing that all or part of the preferred stock76 be redeemed at par value plus accrued dividends. Also, Ragland was given the power to name two members to the board of directors of Malone & Hyde, or to any wholly owned subsidiaries of Malone & Hyde to which might be transferred the assets of Ragland-Potter or the Cooper & Martin companies, as long as Ragland or any of his corporations owned any of the 6-percent cumulative preferred stock.At the time the agreements were made, the corporate charter of Malone & Hyde did not provide for cumulative voting, so that the holders of more than 50 percent of the shares voting for the election of directors could elect all of the directors if they so chose.On April 30, 1964, the corporate charter of Malone & Hyde, Inc., was amended, among other things, to authorize issuance of $ 5 million of 6-percent cumulative preferred stock consisting of 50,000 shares with a par value of $ 100 per share. Further, the charter amendment provided as follows:(a) 6% Cumulative Preferred Stock. Such 6% Cumulative Preferred Stock (hereinafter called the Preferred Stock) shall be entitled to receive dividends at the rate of 6% per annum, cumulative, payable quarterly out of the earnings of the corporation, 77 and in preference to any dividends upon the Common Stock, 871 and no cash dividends shall be paid upon the Common Stock if the payment of dividends on the Preferred Stock shall be in arrears. Such Preferred Stock shall have no voting rights except as may be provided for in the statutes of Tennessee. In case of the liquidation or dissolution of the corporation, the holders of such Preferred Stock shall be entitled to be paid in full, both the par value of such shares and any dividends accrued but unpaid, before any amount shall be paid to the owners of the Common Stock or Class A Common Stock, both of such latter classes of stock being designated junior to the Preferred Stock. The shares of Preferred Stock shall not be subject to conversion into any other securities of the corporation. The shares of Preferred Stock are subject to call at any time, in whole or in part, upon the payment of the par value thereof and accrued dividends, but no less than 25% of the outstanding issue of such Preferred Stock at the time of such call shall be called and redeemed. Commencing at the beginning of the fifth year after date of issuance, the shareholders of such Preferred Stock shall be78 entitled to demand of the corporation the creation of an adequate Sinking Fund sufficient to retire 5% of the issue of Preferred Stock in said fifth year, and a like amount in each year thereafter. While such Preferred Stock is outstanding, the corporation will issue no other capital stock prior to or on a parity with such Preferred Stock as to earnings or assets, nor any securities convertible into such stock. While such Preferred Stock is outstanding, no cash dividends will be paid by the corporation on any stock ranking junior to said Preferred Stock as to earnings and assets, nor will any of such stock ranking junior be purchased, redeemed, or retired by the corporation, if the aggregate of such dividends and such other payments would exceed the consolidated net income of the corporation accrued after December 14, 1963, plus the net proceeds of the sale of any such stock ranking junior to said Preferred Stock. None of the foregoing provisions relating to the Preferred Stock may be modified or waived without the consent of the holders of 75% of the outstanding Preferred Stock.At the time of the trial, Ragland was ill and could not attend. The parties, however, have stipulated79 that had he been in attendance and testified, his testimony in part would have been as follows:During the Fall of 1963, negotiations began between * * [myself] and Thomas W. Goodloe, of Equitable Securities Corporation, and Sam Moore, also of Equitable Securities Corporation, acting for Malone & Hyde, Inc., a Tennessee corporation engaged in both wholesale and retail grocery business, with principal office in Memphis. Mr. Goodloe and Mr. Moore were endeavoring to arrive at an agreement under the terms of which Malone & Hyde, Inc., would acquire Ragland-Potter & Company and the various Cooper & Martin companies or their assets. These negotiations culminated in a contract dated April 16, 1964, under the terms of which Malone & Hyde, Inc., agreed to and did purchase the assets of Ragland-Potter & Company and the Cooper & Martin companies.When the negotiations began, I consulted Mr. J. Marshall Ewing, a tax consultant with offices in the American Trust Building in Nashville, Tennessee, and sought his advice as to the form the transaction should take in the event an agreement was reached, and the mechanics of handling the transaction, with a view of minimizing the tax impact of the80 sale insofar as I legally could do so. As a result of Mr. Ewing's advice it was decided to sell assets so that I would retain the corporations and so that these corporations could thereafter be operated as personal holding companies. In this way the corporations as a result of the transaction would owe a tax on the gain resulting from the sale of the assets but the stockholders would owe no personal income tax until the liquidation 872 or subsequent sale of the corporate stock. This resulted in the postponing of a substantial amount of capital gains taxes.Mr. Ewing also advised me that if Malone & Hyde, Inc., was not in a position to pay the entire sales price in cash that it would be to the advantage of the selling corporations to take preferred stock rather than a note. As I understand it, this was because of the dividend credit which the corporation would be entitled to in the case of the receipt of dividends on preferred stock, whereas there would be no such credit upon the receipt of interest. During the course of the negotiations the representatives of Malone & Hyde suggested that the selling corporations accept a note in part payment of the sale of the assets. 81 This was refused because of tax reasons. Subsequently, when the agreement was finally reached, $ 1 million of the purchase price of the assets of the Cooper & Martin stores [later Dixie] took the form of 6% preferred stock of Malone & Hyde and $ 4 million of the purchase price of the assets of Ragland-Potter was represented by 6% preferred stock of Malone & Hyde.Neither Ragland-Potter & Company nor Cooper & Martin would have entered into the transaction on the basis of the contracts of April 16, 1964, except for the fact that they would receive preferred stock in part payment of the purchase price and not a note. The sellers would have insisted on a full payment of cash for the purchase rather than accept a note in partial payment.With regard to these transactions, Ragland's intention was to receive the full purchase price for the assets of his corporations at the earliest possible date that was consistent with favorable tax consequences.The effective date of the purchase contemplated under the agreements between Malone & Hyde and the corporations controlled by Ragland was May 4, 1964. The final consideration received by Ragland-Potter for the sale of its assets to Malone & Hyde82 consisted of 40,000 shares of 6-percent cumulative preferred stock, $ 100 par value; cash of $ 3,820,713.86; and liabilities assumed by Malone & Hyde of $ 1,833,181.23. Ragland, as president of Ragland-Potter and also in his individual shareholder capacity, executed a letter representing that the preferred stock was being acquired for investment. Ragland-Potter obtained the written opinion of counsel for Malone & Hyde that the preferred stock was validly issued, and that registration thereof was not required under the Securities Act of 1933.The total consideration paid by Malone & Hyde, Inc., for the assets of the Cooper & Martin companies consisted of 10,000 shares of 6-percent cumulative preferred stock, $ 100 par value; cash of $ 934,756.75; and liabilities assumed by Malone & Hyde in the amount of $ 509,330.90. The Cooper & Martin companies, and Ragland and Cooper in their individual capacities as shareholders, executed a letter representing that the preferred stock was being acquired for investment. After the assets of the Cooper & Martin companies were sold to Malone & Hyde, Dixie Investment acquired all of the securities received by the sellers in that transaction. Dixie83 Investment obtained the written opinion of counsel for Malone & Hyde that the preferred stock was validly issued, 873 and that registration thereof was not required under the Securities Act of 1933.The board of directors of Malone & Hyde periodically passed resolutions authorizing payment of the 6-percent dividends to the holders of the preferred stock. In a letter from the secretary-treasurer of Malone & Hyde to the executive vice president of Ragland-Potter, the dividend payments enclosed therein are referred to as "Preferred Stock Dividend Checks." All of the amounts paid as dividends on the preferred stock were charged to surplus, rather than to operations, on the books of Malone & Hyde. In addition, Malone & Hyde filed Form 1099 information returns with the Internal Revenue Service reporting the amounts paid to the preferred shareholders under the heading of "Dividends and other distributions," instead of the heading entitled "Interest."During the taxable years ended December 31, 1964 and 1965, Ragland Investment received from Malone & Hyde payments totaling $ 120,000 and $ 242,666.67 (respectively), and reported them as dividends on its tax returns. Ragland Investment84 also took deductions for dividends received in the amounts of $ 102,000 and $ 206,266.67 for the taxable years 1964 and 1965.During the taxable year ended April 30, 1965, and the taxable period May 1, 1965, to January 31, 1966, Dixie Investment received payments totaling $ 45,000 and $ 45,666.67 (respectively) from Malone & Hyde. On its income tax returns, Dixie reported the receipts as dividend income and from these receipts deducted $ 38,250 and $ 38,816.67 (respectively), as amounts that represented the dividends received deduction under section 243, I.R.C. 1954.In Malone & Hyde's Federal corporation income tax returns for the taxable years ended June 27, 1964, and June 26, 1965, Malone & Hyde did not claim a Federal income tax deduction for interest paid or accrued in regard to the payments made as dividends on the 6-percent cumulative preferred stock.In Malone & Hyde's financial statements and in reports made to shareholders in addition to those filed with the Securities and Exchange Commission, Washington, D.C., the 6-percent cumulative preferred stock issued by Malone & Hyde was reported as part of that corporation's equity capital. In substance, the following represents85 the explanations that were attached to these reports:All of the 6% Preferred Stock (a total of $ 5,000,000) was issued in connection with the acquisition of the operating assets of Ragland-Potter & Company. No cash dividends may be paid on any stock that ranks junior to this Preferred Stock that will have the effect of reducing the Consolidated Retained Earnings of the Corporation below the sum of $ 3,991,720, which amount represented the Consolidated Retained Earnings of the Company at December 14, 1963.874 The Company is obligated to redeem in its entirety the Preferred Stock at par plus accrued dividends on or before May 4, 1968. Should the aggregate of the Consolidated Retained Earnings and Consolidated Paid-In Surplus fall below $ 5,500,000, the holder of the Preferred Stock can require the Company to redeem it on thirty days notice. The company has the right to redeem the stock, in whole or in part, at any time at par plus accrued dividends, provided, however, that no partial redemption shall be less than the 25% of the total Preferred Stock outstanding at the time of such redemption.In November of 1965, Malone & Hyde redeemed the 40,000 shares of 6-percent cumulative86 preferred stock issued to Ragland Investment and at the same time redeemed the 10,000 shares of stock issued to Dixie Investment. In the redemptions, Malone & Hyde purchased the stock at the par value ($ 100 per share) together with accrued dividends computed at the rate of 6 percent per annum to the date of actual redemption.On its Federal corporation income tax return for the taxable year ended June 25, 1966, Malone & Hyde claimed a deduction for interest paid for the payments made in the form of dividends on the 6-percent cumulative preferred stock. In addition, Malone & Hyde filed claims for refund for the taxable years 1964 and 1965 based upon the assertion that the amounts paid in those years in the form of dividends in respect of the 6-percent cumulative preferred stock were in fact interest.At the time of the trial herein, the question involving Malone & Hyde's right to an interest deduction for the payments in question for the taxable year 1965 was in a suspended status. For the taxable year 1964, Malone & Hyde executed a Form 870-AD in which Malone & Hyde reserved the right to file suit in the U. S. District Court for refund of taxes that Malone & Hyde claims were overpaid87 as the result of the corporation's failure to claim an interest deduction for the liability it incurred during that taxable year in regard to the dividends on the 6-percent cumulative preferred stock.At the time the 6-percent cumulative preferred stock was issued to the Ragland corporations, the officials of Malone & Hyde knew that within 4 years its majority shareholders were bound to use their best efforts to have the stock redeemed by Malone & Hyde, and so they did not consider the stock in question to be a permanent part of the equity capital of the corporation. The 6-percent cumulative preferred stock did not give the holders thereof any right to convert their stock into any other form of the equity capital of Malone & Hyde.The Commissioner determined deficiencies against petitioners herein based in part on the disallowance of the dividends-received deduction taken by Ragland Investment and Dixie. The Commissioner explained in the deficiency notices that the amounts received "represented interest income * * rather than dividends, and the dividends received [deductions] claimed by you * * * [are] not allowable."875 ULTIMATE FINDINGSThe 6-percent cumulative preferred88 stock of Malone & Hyde, Inc., represented an equity investment in Malone & Hyde and the payments made with respect to it were in fact dividends.OPINIONThis case offers for our determination the familiar issue of whether ostensible dividend payments on preferred stock are, in reality, interest on indebtedness. We are, however, presented with a slightly different twist to the usual factual pattern in that the petitioners here are contending for an equity rather than a debt classification in order to qualify for the 85-percent dividends-received deduction prescribed in section 243(a)(1), 3 I.R.C. 1954. 4 Of course this twist in no way alters the applicable legal principles.89 Accordingly, we note ab initio that the dividends received deduction, just as other tax deductions bestowed by Congress, exists solely as a matter of legislative grace. It is therefore incumbent upon the petitioners herein to show that the payments in issue are dividends in substance as well as in form. Wetterau Grocer Co. v. Commissioner, 179 F. 2d 158, 160 (C.A. 8, 1950), affirming a Memorandum Opinion of this Court; John Wanamaker Philadelphia v. Commissioner, 139 F. 2d 644, 646 (C.A. 3, 1943), affirming 1 T.C. 937">1 T.C. 937 (1943).Although the terms "dividends" and "interest," "stocks" and "bonds" are often used and once had readily discernible boundaries, the provisions of modern security instruments have blurred the traditional benchmarks that once served to distinguish equity capital from indebtedness. In addition, preferred stock by its very nature evidences some of the protective features customarily associated with a debt instrument. Commissioner v. Meridian & Thirteenth R. Co., 132 F. 2d 182, 186 (C.A. 7, 1942), reversing 44 B.T.A. 865">44 B.T.A. 865 (1941);90 Charles L. Huisking & Co., 4 T.C. 595">4 T.C. 595, 599 (1945).In charting these murky waters, the courts have mapped out numerous criteria of distinction to guide them in steering a true course. Such criteria are no more than helpful landmarks along the way. As the Supreme Court has said in considering this problem, "There is no one characteristic * * * which can be said to be decisive in the determination of whether the obligations are risk investments in the corporations 876 or debts." John Kelley Co. v. Commissioner, 326 U.S. 521">326 U.S. 521, 530 (1946).The intent of the parties in creating the relationship with the corporation is a highly significant factor in deciding these questions. Gooding Amusement Co. v. Commissioner, 236 F. 2d 159, 166 (C.A. 6, 1956), affirming 23 T.C. 408">23 T.C. 408 (1954), certiorari denied 352 U.S. 1031">352 U.S. 1031 (1957); United States v. Title Guarantee & Trust Co., 133 F. 2d 990, 993 (C.A. 6, 1943), and Commissioner v. Meridian & Thirteenth R. Co., supra at 186.91 Lacking sorcery powers to divine the parties' subjective intent, courts must always rely on the overt manifestations thereof, i.e., the parties' acts. Verifine Dairy Products Corporation of Sheboygan, 3 T.C. 269">3 T.C. 269, 276 (1944).The facts herein reveal that Malone & Hyde amended its corporate charter to authorize the issuance of the preferred stock and pursuant thereto issued preferred stock certificates to Ragland Investment and Dixie Investment. The latter two companies demanded and obtained the written opinion of counsel for Malone & Hyde that the preferred stock was validly issued. On their own behalf the two companies executed investment intent letters stating that the preferred stock was being acquired by them for investment purposes. The preferred stock dividend payments were periodically authorized by action of Malone & Hyde's board of directors, were charged to surplus on its books, and were reported under the heading of "Dividends and other distributions" on Form 1099 information returns filed by Malone & Hyde with the Internal Revenue Service.During the years in issue, the parties consistently, and without exception, referred in a multiplicity92 of documents, such as the sales agreements, letter agreements, corporate charter amendment, stock certificates, annual reports to shareholders, and various other documents filed with the Securities and Exchange Commission, to the certificates involved as "preferred stock" and the payments with respect thereto as "dividends." Throughout the period commencing with the issuance of the preferred stock and terminating with its redemption, all parties consistently treated the payments in issue as dividends on their tax returns. It was only after the preferred stock was redeemed that Malone & Hyde decided to claim a deduction for interest and to file the requisite refund claims. While the foregoing factors showing consistent treatment by the parties may not be determinative of the issue, they do, taken together, constitute highly significant evidence of an intention to create preferred stock. John Wanamaker Philadelphia v. Commissioner, supra at 646-647; Zilkha & Sons, Inc., 52 T.C. 607">52 T.C. 607 (1969).A second important indicium of preferred stock is the provision in the charter amendment that dividends on the preferred stock 93 are "payable quarterly out of the earnings of the corporation" (emphasis 877 supplied). Crawford Drug Stores v. United States, 292">220 F. 2d 292, 296 (C.A. 10, 1955); Commissioner v. Meridian & Thirteenth R. Co., supra at 187; and Kingsmill Corporation, 28 T.C. 330">28 T.C. 330, 336-337 (1957). A requirement that corporate distributions be made only out of earnings is a traditional requirement for dividend payments. In contrast, a bondholder or other creditor normally has a legally enforceable right to the payment of interest irrespective of the availability of current or accumulated earnings.Thirdly, the charter amendment provides that in the event of the liquidation or dissolution of Malone & Hyde, the preferred shareholders take priority only over the holders of the common stock, and it follows that they are not entitled to share in the assets on a parity with secured and general creditors. This element is an indispensable feature of stock under Tennessee law. 5 Furthermore, this feature is clearly characteristic of a stockholder relationship rather than the more secure position94 of a creditor. John Wanamaker Philadelphia v. Commissioner, supra at 647; 6First Mortgage Corp. v. Commissioner, 121">135 F. 2d 121, 125 (C.A. 3, 1943); Affiliated Research, Inc. v. United States, 351 F.2d 646">351 F. 2d 646, 649 (Ct. Cl. 1965).95 Finally, the preferred shareholders were represented from the outset by two members on Malone & Hyde's board of directors. The conferral of a voice in corporate management without an operative act of default with respect to the corporate instrument involved is representative of a stockholder status. Zilkha & Sons, Inc., supra; and Ernst Kern Co., 1 T.C. 249">1 T.C. 249, 271 (1942).If we include the letter agreements between the majority stockholders of Malone & Hyde and the sellers as part of the controlling documents, the stock in issue does assume some of the characteristics of a "hybrid" security. These agreements provide that the majority shareholders agree to "take all actions within their power and authority" to cause Malone & Hyde to redeem the preferred stock within 4 years from issuance. 7 Respondent urges that this, together with the other protective provisions contained in the letter agreements, amounts to a guarantee of redemption at a fixed maturity date. A fixed maturity date is, of course, a usual provision in a debt instrument.96 878 However, we note that redemption of the preferred stock is contingent upon, among other things, the availability of corporate funds for this purpose, the retention of majority control, and continued willingness to redeem on the part of the signing shareholders. The fact that the parties saw fit to include in the charter amendment a provision for the creation of a sinking fund at the beginning of the fifth year after issuance would seem to indicate tacit recognition on their part that some contingency may well prevent redemption within the initial 4-year period.Moreover, we deem it significant that the corporation, as distinguished from some of its shareholders in their individual capacities, is not obligated to redeem the preferred stock. As was said in Northern Refrigerator Line, Inc., 1 T.C. 824">1 T.C. 824, 829-830 (1943), in a similar situation wherein a third-party corporation guaranteed payment of dividends and ultimate redemption of certain preferred stock:Apparently its theory is that this contract gives to the preferred stockholders that security of payment at all events, without regard to the existence or extent of a corporate surplus97 or earnings, which is a feature of the debtor-creditor relationship. But that security of payment springs not from their relationship with petitioner, but from the contract of guaranty executed by another corporation, the holder of the common stock. It is too well settled to require much emphasis here that a contract of guaranty is an undertaking separate and distinct from the principal obligation. The debtor is not a party to the guaranty, and the guarantor is not a party to the principal obligation, and there is no privity between them. * * * The right of the preferred stockholders to demand payment from petitioner upon maturity is still dependent upon petitioner's ability to pay without impairment of its capital. The fact that the stockholders may then look to and enforce payment by another does not affect the character of their relationship with petitioner. [Emphasis added; citations omitted.]Clearly the failure to redeem here would not result in a cause of action against Malone & Hyde. In contrast, the holder of a debt instrument normally has prescribed remedies available to him upon an act of default by the debtor. Parisian, Inc. v. Commissioner, 131 F. 2d 39498 (C.A. 5, 1942), affirming a Memorandum Opinion of this Court.In any event, even assuming arguendo the existence of a fixed maturity date, that factor alone, while relevant, is not conclusive. Milwaukee & Suburban Transport Corporation v. Commissioner, 283 F. 2d 279, 282-283 (C.A. 7, 1960), affirming a Memorandum Opinion of this Court on this point, certiorari denied 368 U.S. 976">368 U.S. 976 (1962); Charles L. Huisking & Co., supra at 599.One final consideration influences our decision. Prior to engaging in this transaction, the parties entered into protracted arm's-length bargaining concerning the form the transaction should take with full awareness that a tax advantage to one would result in a concomitant tax disadvantage to the other. Of course, as respondent freely admits, the parties to the transaction were free to minimize their taxes within the framework of the law. Gregory v. Helvering, 293 U.S. 465 (1935), 879 and Kraft Foods Co. v. Commissioner, 232 F. 2d 118, 127-128 (C.A. 2, 1956), reversing 21 T.C. 513">21 T.C. 513 (1954).99 It is our view that, given a transaction where the contract is negotiated between parties with conflicting tax interests and where the resultant document sets forth duties and obligations which conform to the business or economic realities of the situation, this Court should not take upon itself the task of recasting the agreement. Rather, under such circumstances, we are inclined to leave the parties to live up to their own agreement.Therefore, having carefully weighed the foregoing factors, we conclude that the indicia of the preferred stock clearly predominate. Consequently, we hold that the petitioners are entitled to the 85-percent dividends-received deduction claimed by them for the taxable years in issue.Decisions will be entered for the petitioners. TIETJENS; SIMPSONTietjens, J., dissenting: The majority apparently is willing to accept the labels attached by the parties to the payments in question as determinative of the tax consequences -- i.e., the parties to a business transaction can determine between themselves which party the Government shall tax. This is nonsense. Even though every "i" is dotted and every "t" is crossed, this "opens questions as to the100 proper application of a taxing statute; it does not close them." Bazley v. Commissioner, 331 U.S. 737">331 U.S. 737, 741; 2554-58 Creston Corp., 40 T.C. 932">40 T.C. 932.Here the Commissioner determined that the so-called preferred dividends were not dividends but interest. Unquestionably the burden is on petitioner to prove otherwise.Despite the careful terminology used by Malone & Hyde and Ragland in the basic contract and the instruments issued ("preferred stock"), was it really "preferred stock"? Certainly the Commissioner is not bound by labels. Even Malone & Hyde had doubt about what they had done taxwise. They first treated the questioned payments as dividends, then reversed the field and claimed them as interest. Of course Ragland stuck to its guns -- we set the deal up this way deliberately (no question about it) and the Commissioner is stuck with it (anyone is privileged to minimize taxes). But how can parties to a contract bind the Commissioner, who is not a party, especially when one party to the contract is not itself sure as to the tax nature of the creature spawned by the contract?Ragland wanted to sell its assets. Malone & Hyde wanted to buy. 101 A price of $ 5 million was determined. How was payment to be made? All cash probably could have been raised. Or part cash and a note? No, Ragland's tax advisers said, part cash and preferred stock, more advantageous from a tax standpoint. Well, I want my money shortly, 880 says Ragland. O.K., the controlling stockholders of Malone & Hyde say, we will do that, and agree to use our best efforts to have the preferred stock redeemed within four years. (The stock was in fact redeemed in 18 months.) Malone & Hyde's tax advice apparently was equivocal as to the effect of the transaction. At any rate, Malone & Hyde claimed no deduction as interest for payments made to Ragland with reference to the stock until after Ragland's preferred stock was redeemed and the majority stockholders of Malone & Hyde had satisfied their obligation to Ragland. A very short time indeed in which to record a mind change, if the suspicion that a change was not in mind from the beginning.I would conclude the securities in question were merely a short-term means of financing the purchase of assets and that the characteristics of debt outweigh the characteristics of an investment in the stock of Malone102 & Hyde. The questioned payments were interest on deferred purchase price and not true dividends.Simpson, J., dissenting: I agree with Judge Tietjens' conclusion, but as the author of the opinion in Zilkha & Sons, Inc., 52 T.C. 607">52 T.C. 607 (1969), I wish to add my comments. Based on the facts of this case, I would conclude that the securities acquired by the sellers in substance more resembled a debt than stock. In selling the businesses, the sellers were willing to agree to defer part of the purchase price. However, they wanted to receive earnings on the deferred part of the purchase price, and they wanted to receive full payment within a relatively short time -- 4 years. As a result of the agreement made with the shareholders of the purchaser, the sellers were assured that they would receive the desired earnings and the desired repayment. They did not assume the risks of a shareholder. Compare Zilkha & Sons, Inc., supra.Footnotes1. Cases of the following petitioners are consolidated herewith: Elizabeth L. Ragland, docket No. 5981-67; and H. H. Ragland, docket No. 5982-67.↩2. The parties have agreed that these petitioners are transferees of the assets of Dixie Investment Co. and will be subject to transferee liability for any deficiency found herein attributable to the Dixie Investment Co., Inc.↩3. SEC. 243. DIVIDENDS RECEIVED BY CORPORATIONS.(a) General Rule. -- In the case of a corporation, there shall be allowed as a deduction an amount equal to the following percentages of the amount received as dividends from a domestic corporation which is subject to taxation under this chapter: (1) 85 percent, * ↩4. All statutory references are to the Internal Revenue Code of 1954 unless otherwise specified.↩5. Tenn. Code Ann. sec. 48-203↩. Equality of no par shares -- redemption provisions -- preference in dividends and liquidation. -- * * any class or classes of stock may be preferred as to its or their distributive share or shares of the assets of the corporation upon dissolution; but, in case of insolvency, the debts and other liabilities of the corporation shall be paid before any payment or distribution is made to the holders of any class of stock. * * *6. In John Wanamaker Philadelphia v. Commissioner↩, for example, the court said at p. 647 "the most significant characteristic of a creditor-debtor relationship -- [is] the right to share with general creditors in the assets in the event of dissolution or liquidation."7. With respect to the significance in these cases of a power to force redemption, we note the statement in 11 Fletcher, Cyclopedia Corporations, sec. 5310, that "As a rule, the stockholder's right to compel a redemption is subordinate to the rights of creditors," citing, among others, Schneider v. Mingenback, 139 F. 2d 86↩ (C.A. 10, 1943), in support of said statement.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4623980/	APPEAL OF AMERICAN TELEGRAPH & CABLE CO.American Tel. & Cable Co. v. CommissionerDocket No. 2967.United States Board of Tax Appeals2 B.T.A. 991; 1925 BTA LEXIS 2201; Decided October 26, 1925, Decided Submitted July 1, 1925. 2201 Taxpayer leased all its property for $700,000 rental, the lessee to pay the rental direct as dividends to stockholders of lessor. The lessee owned stock of the lessor and, without being obligated to do so, paid income and profits taxes for the year 1919 in the year 1920 for the account of the lessor. Taxpayer excluded from its income that portion of rental representing dividends to the lessee. Commissioner held entire amount of rental and the tax assumed and paid and the prospective tax in issue were all income of 1919. In 1923 taxpayer and lessee entered into a contract whereby all future tax payments were made obligations of the taxpayer paid by lessee and to be reimbursed by notes as payments were made from time to time. Held, that in income and profits taxes paid or to be paid on account of taxpayer were not income to it for the year 1919 and that the taxpayer was in receipt of income representing the entire amount of rent stipulated in the lease. Sanford Robinson and J. Julien Southerland, Esqs., for the taxpayer. George G. Witter and James T. Dortch, Esqs., for the Commissioner. JAMES992 Before JAMES, LITTLETON, SMITH, 2202 and TRUSSELL. This is an appeal from the determination of a deficiency in income and profits taxes for the year 1919 in the amount of $19,020.06 FINDINGS OF FACT. The American Telegraph & Cable Co. is a corporation organized under the laws of the State of New York and, during the taxable year in question, was not engaged in active business, its property and franchise having been leased to the Western Union Telegraph Co., also a corporation organized under the laws of the State of New York. On May 12, 1882, the taxpayer entered into an agreement with the Western Union Telegraph Co. for the lease, for a period of 50 years, of two certain transatlantic cables between Sennen Cove, England, and Dover Bay, Nova Scotia, and also for the lease of a certain cable thereafter to be constructed between Brazil and the United States. In consideration for such lease the telegraph company agreed, in clauses fourth, fifth, and ninth of the lease agreement, as follows: Fourth. The Telegraph Company hereby agrees to maintain, operate and renew the said two transatlantic cables, and land lines as may become necessary, at its own cost and expense, during the continuance of this agreement, 2203 and at the expiration of this agreement will deliver up to the Cable Company two transatlantic cables and the necessary appurtenances for efficiently operating the same in good working order and condition. Fifth. The Telegraph Company hereby agrees to pay for the rental of the two transatlantic cables, the land lines, equipments and other property and assets of the Cable Company as aforesaid, the yearly sum of seven hundred thousand dollars, ($700,000), in each year, in quarterly instalments of one hundred and seventy-five thousand dollars ($175,000) at the end of each quarter, to wit: On the first days of September, December, March and June, respectively, the said payments commencing on the first day of September, 1882, and that such payments shall be made directly to the Stockholders of the Cable Company, to secure which payments the Telegraph Company further agrees that its secretary shall sign a guarantee and affix the seal of the company thereto for the payment of dividends at the rate of five per cent per annum, payable quarterly as above mentioned, on the certificates of the capital stock 993 of the Cable Company, to be issued to the American Cable Construction Company, 2204 not to exceed the aggregate of fourteen millions of dollars, in payment for the two cables, in accordance with an agreement of even date herewith between those companies. Ninth. The Cable Company hereby agrees to keep up its organization as a corporation, and the Telegraph Company, on its part, agrees to pay to the Cable Company the further sum of not to exceed twenty-five hundred ($2,500) per year during the continuance of this agreement, the same to be used by the officers of the Cable Company as and for an administration fund, for the purposes of defraying the necessary expenses of maintaining the organization of the Cable Company as a corporation and the payment of the same is to be made in such manner and at such times as the officers of the Cable Company may direct. By supplemental agreement, dated November 15, 1883, that portion of the agreement of May 12, 1882, relating to the Brazilian cable was canceled. Thereafter, and in conformity with the requirements of the above-quoted paragraphs, the telegraph company operated and maintained the transatlantic cables in question, paid the operating expenses of the taxpayer corporation, and paid directly to the stockholders2205 of the cable company dividends at the rate of 5 per cent per annum upon the stock of the said cable company in an amount not exceeding $700,000. During the taxable year in question the telegraph company was the owner of 22,529 shares of the 140,000 shares issued and outstanding of the capital stock of the cable company. During that year the telegraph company paid a total amount of $587,355 dividends direct to the stockholders of the cable company. It did not pay or enter on its books any amount representing dividends upon the stock owned by itself, which dividends, had they been paid or set up on the books, would have amounted to $112,645. The telegraph company also paid the expenses of carrying on the corporate organization of the taxpayer for the year in question, in the amount of $2,112.74. At all times prior to and including the taxable year 1919, the telegraph company made Federal income-tax returns for the cable company and paid the amount of the tax shown to be due thereon. For the taxable year 1919, income was returned in the amount of $587,355 plus $2,122.74, and the said $2,112.74 was deducted as operating expenses, leaving the taxable income at the amount of the2206 dividends paid to stockholders other than the telegraph company. Upon the return so made the telegraph company paid the tax, amounting to $58,535.50, in 1920. Thereafter, the Commissioner audited the return of the taxpayer and added to income the amount of $112,645 alleged to represent a constructive receipt of rent by the taxpayer and a constructive 994 payment of dividends to the telegraph company, and also added to income the amount of $58,535.50, paid as income and profits tax as above set forth, and added to income the further amount of $19,020.06, the amount of deficiency here in question and alleged to represent a further item of income of the taxpayer on account of the prospective payment of the deficiency here in question. On October 25, 1923, at a special meeting of the board of directors of the cable company, the telegraph company advised the cable company that it had, since the enactment of the first Federal income tax law, advanced from time to time, as required, amounts necessary to pay the corporation income tax due from the cable company to the United States, without any formal arrangement for reimbursement; that they were advised by counsel that there2207 was no obligation on the part of the telegraph company, by lease or otherwise, to pay this tax; that they would not continue to pay the tax or make advances for that purpose without a formal agreement by which the company would be assured of reimbursement. The telegraph company indicated its willingness to continue to pay the taxes if assured of reimbursement, and attached to the communication an outline of a proposed agreement for that purpose. The pertinent provisions of such proposed agreement, which was at the meeting above set forth duly accepted by the directors, are set forth below: (a) Commencing with the fourth installment of the Federal income tax for the year 1922 (payable December 15, 1923), and continuing during the remainder of the term of the agreement of May 12, 1882, between The Western Union Telegraph Company and American Telegraph & Cable Company, that is until May 12, 1932, or, in the event of an earlier determination of said agreement, until such earlier determination, The Western Union Telegraph Company to lend to American Telegraph & Cable Company the funds required to meet the Federal income taxes imposed upon the taxable income of American Telegraph & Cable2208 Company in such amounts and at such times as may be required. (b) The money to be advanced by the Western Union Telegraph Company under this arrangement to bear interest from the dates the respective loans are effected, at the rate of 6 per cent per annum, compounded semi-annually. (c) The principal thus to be advanced, and the accumulated interest thereon. to be due and payable upon demand of the Western Union Telegraph Company, and to be evidenced by properly executed notes of American Telegraph & Cable Company in favor of the Western Union Telegraph Company. American Telegraph & Cable Company to agree to renew such notes, with accrued interest, as and when requested by the Western Union Telegraph Company. * * (f) The Western Union Telegraph Company to waive any claims for reimbursement from American Telegraph & Cable Company in respect to the sums already paid in Federal income taxes by the Western Union Telegraph Company on the taxable income of American Telegraph & Cable Company 995 since the Federal Income Tax Law became effective in 1913, without prejudice, however, to the validity of its claim for reimbursement in the event of the rejection of this proposition. 2209 DECISION. The deficiency should be computed in accordance with the following opinion. Final determination will be settled on consent or on 10 days' notice, under Rule 50. OPINION. JAMES: The deficiency here asserted by the Commissioner is comprised in three items of alleged additional income. The first is the item of $112,645, being the difference between the dividends paid to the stockholders of the taxpayer other than the Western Union Telegraph Co., and the $700,000 rental specified in the lease. The second is the item of $58,535.50 paid by the Western Union Telegraph Co. as income and profits tax of the taxpayer for the year 1919, which payment was made in the year 1920. The third is the item of deficiency in tax which the Commissioner has determined at $19,020.06 and includes in the alleged taxable income for 1919. Just how the Commissioner ascertained this tax by computing the tax upon the tax in this manner is not disclosed by the record, as his computations are not in evidence. As a defense to the asserted deficiency, the taxpayer asserts, first, that none of the payments stipulated in the lease between the Western Union Telegraph Co. and the taxpayer constitute2210 income to it, but that all are direct dividends assumed by the telegraph company and are neither constructively nor actually income of the taxpayer. In the second place, the taxpayer contends that even if the amount of $587,355 was income to the taxpayer, the additional amount of $112,645, being payable by the Western Union Telegraph Co. under its contract to itself, could not constitute income to the taxpayer, either actually or constructively. In the third place, the taxpayer contends that the tax items in question could not be income to the taxpayer, since the payments were not made by virtue of any contract, agreement, or other obligation, and were either a voluntary gift by the telegraph company or advances by that company, which were forgiven in 1923, and in either event could not be income in 1919. As respects the item of $19,020.06 - the deficiency here in question - we are clearly of the opinion that this amount could not be income to the taxpayer in any year. It appears from the agreement of October 25, 1923, between the companies, that all payments of income and profits taxes subsequent to that date were assumed unequivocally 996 by the taxpayer to be paid2211 out of loans from the telegraph company. If any portion of the $19,020.06 shall therefore be found to be due, the burden of its payment will not be borne by the telegraph company, but by the taxpayer, and the full amount will constitute a debt from the taxpayer to the telegraph company until paid. The item of $58,535.50 presents a more difficult question. This payment was made in ordinary course in the year 1920, apparently upon the assumption by the telegraph company at that time that it was obligated to make the payment, although both parties later concluded that no such obligation existed. The telegraph company at that time was in full possession of all the facts, and whether the payment of the amount under these circumstances was recoverable from the taxpayer is at least doubtful. It if was recoverable, the payment would not constitute income to the taxpayer, since immediately upon the payment being made, the amount became a claim against it by the telegraph company. If, on the other hand, the amount could not be recovered, there may well be a question whether such a payment was a gift in any real sense so as to exclude the amount from taxable income. 2212 . It is not necessary, however, to consider this question. The tax upon the 1919 income of this taxpayer was not due until 1920, and, of course, it was not in fact paid until 1920. . The accrual of this tax liability in 1920 and its payment in that year could not serve to increase the income of the taxpayer in 1919, whatever the effect on the income for the year 1920, as to which we express no opinion. . The record before us clearly indicates that some payment was doubtless made in the year 1919, by the Western Union Telegraph Co., on behalf of this taxpayer, on the income for the year 1918. No proof, however, was introduced by the Commissioner or the taxpayer upon this point, and the pleadings of the Commissioner are silent as to any such possible offsetting item. Such being the case, the Board has no option but to disallow that portion of the deficiency which is predicated upon the payment of $58,535.50. We come next to the consideration of that portion of the deficiency based on the addition2213 to income by the Commissioner of $112,645, alleged to have been constructively received by the taxpayer in connection with the payment of the stipulated rental and dividends under the lease of 1882. Inasmuch as under the first defense of the taxpayer this amount is merged with the larger sum of $587,355, the point there raised will be first considered. On this point - namely, that payments used to meet dividends, interest and sinking-fund charges by lessees to or for lessors are not 997 income of the lessors-- there are a number of well considered decisions by Circuit Courts of Appeals. The latest and in many respects the most significant of the decisions of the courts upon this general point is , decided by the Circuit Court of Appeals, Sixth Circuit, on May 8, 1923. In that case the terminal company was organized with a capital stock of $75,000, held in equal proportions by three railroad companies using the terminal. The terminal company, in addition, had outstanding $6,000,000 of bonds, guaranteed both as to principal and interest by the railroad companies. 2214 The railroad companies were charged so much per car for the services of the terminal company, which charge was rendered on monthly bills and included all of the cost of operation of the terminal company and the amounts estimated to be necessary for fixed charges, including interest and sinking-fund charges on bonds. It was further agreed among the railroad companies that no dividends would be declared from the operations of the terminal company, but that all surplus and net earnings should be used for additions and improvements to the property of the terminal company. Upon the argument that the terminal company was a mere conduit serving the purposes of the railroad companies, the court said: We are not impressed with the Terminal Company's contentions that it acted only as distributing agent in the collection of the interest payments from the proprietary companies. The Terminal Company owned the terminal properties subject to the payment of the mortgages thereon. The interest money was thus paid to and used by the Terminal Company for meeting charges against its own property, default in whose payment might well result in the loss of the property. Had the interest payments been2215 made by the proprietary companies directly to the bondholders or the mortgage trustee, the payments would have been none the less income of the Terminal Company. To the same effect is . The facts in this case were substantially the same as those in the Kentucky & Indiana Terminal R.R. Co. case, supra, except that interest and sinking-fund payments were made by the railroad companies to the trustee without physically passing through the hands of the terminal company or appearing on its books. This case arose under the Act of 1909, whereas the Kentucky & Indiana Terminal R.R. Co. case arose under the Acts of 1913 and 1916. No difference in principle is laid down between the cases. The third case is , also arising under the Act of 1909, identical with the holding in that of the Houston Belt case. But the taxpayer in this appeal contends that there is a difference between a case in which payments are physically made and 998 one in which the operations are not physically carried through the books and the cash does2216 not physically pass between the lessor and lessee, but is short circuited, so to speak, to ultimate beneficiaries, in the instant case to stockholders of the taxpayer in this appeal. We are unable to find any authority for this proposition; but, on the contrary, find consistent authority holding otherwise as to cases arising under both the Excise Tax Act of 1909 and the Income Tax Acts of 1913 and succeeding years. The first case on this point is . In that case, which arose under the Act of 1909, the Delaware, Lackawanna & Western Railroad Co. was lessee under a lease, the terms of which are strikingly like the lease in the instant appeal. Under that lease the lessee was required to make payments of interest on bonds and dividends on stock in a stipulated amount as rental for the use of the property of the Morris & Essex Railroad Co., these payments being, in all cases, made direct. The case was decided upon the point that the Morris & Essex Railroad Co. was not engaged in business, but the court felt itself required to decide whether the railroad company had an income in excess of $5,000 before it decided the2217 point whether that income arose from the doing of business. Upon the question of income the court held that the entire amount paid was income to the Morris & Essex Railroad Co. Next in order of time is , affirmed by the . That case arose under the Act of 1913, and was decided March 5, 1917. Here, also, the lessee paid interest on bonded indebtedness and dividends upon capital stock directly to the bondholders and stockholders, and the claim was made, as in this appeal, that this did not constitute income to the lessor corporation. Two paragraphs of the opinion by Ray, District Judge, are particularly significant in the instant appeal: It seems to me that this whole question center about the proposition: Does this lease operate to divest the plaintiff corporation of ownership of the rents to be paid before they accrue and become payable, and of which rents the sums to be paid the stockholders form a part? The legal ownership of rents for corporate property is in the corporation, notwithstanding its agreement that the lessee shall pay2218 same directly to the stockholders. It seems to me clear that all sums of money and considerations agreed to be paid for the use, possession, and occupation of the corporate property belongs to the corporation, the legal owner of such corporate property. It is by way of dividends that the stockholders are entitled to the earnings of the road or any part thereof. That the sums agreed to be paid by the lessee for the use of the lessor's property are earnings cannot be questioned. Such sums are the consideration paid for the use of the property. There are many cases holding that where dividends are actually declared to stockholders, and the stockholders are indebted to the corporation, the corporation may withhold the dividend or enough thereof to satisfy its claim. 999 If this railroad corporation owes this income tax to the government and it is compelled to pay it, and this lease, as it does by its terms, provides that the only revenues or income of the corporation is to be paid to the stockholders direct, it seems to me that by notice to the lessee and by an equity action, if necessary, provision may be made for the retention by the lessee and payment to the2219 lessor of a sufficient amount to satisfy the tax. This may not be the remedy, but there must be a way to protect the corporation. I do not think the fact that this lessor corporation has no available funds or money in its possession with which to pay the tax has anything whatever to do with the question whether or not it has a taxable income under the federal law referred to. On appeal to the Circuit Court of Appeals, Second Circuit, Ward, circuit judge, said: It is true that the rent of its road does not go into the plaintiff's treasury and that it has no means of withholding the tax from it. It is also true that the rent reserved by the lease is paid by the lessee in fixed sums to third parties. All the same, the rent is the property of the plaintiff, and remains such, though by the terms of the lease paid out to others, whose rights are derived through it. While the rent is a debt of the lessee to the lessor, it is, as between the lessor and its stockholders, the lessor's income, out of which the dividends, if any, are to be paid. The application of the rent under the lease is a mere labor-saving device, the effect being exactly the same as if it be paid to the2220 lessor and by it paid out as far as necessary to bondholders for interest, and the surplus in dividends to its stockholders. The description of the fixed sum to be paid by the lessee of 8 per cent to the lessor's stockholders as a dividend shows that the payment is made as agent of the lessor. To the same effect is . Walker, circuit judge, deciding the case in the Circuit Court of Appeals, Fifth Circuit, said: The difference between the way the rent under the lease here in question was paid and the way the same aggregate amounts would have been paid, if the lease had made the installments payable to the corporation itself, is one of method and not of substance. Where the circumstances of a corporation are such that it can and does adopt the policy of distributing among its stockholders as promptly as practicable net income accruing from the corporate business or property, an arrangement whereby its debtor, who contributes the whole or a part of this income, makes the desired distribution of it among the corporation's stockholders amounts to no more than the corporation procuring its debtor to render2221 a service for it; the net result being that the debtor, instead of remitting or paying what it owes direct to the creditor, makes the payment to others as directed by the creditor. A creditor, as truly receives payment of what is due him when, pursuant to his direction, the debtor makes payment to another, as he does when payment is made directly to himself. To the same effect is , decided by the Circuit Court of Appeals, First Circuit, December 10, 1917. This case arose partially under the 1909 Act and partially under the 1913 Act. There, also, dividends were paid upon the stock direct to the stockholders. In deciding for the Government, Dodge, circuit judge, said: 1000 The payments made to stockholders as above were made by the lessee for its use of the corporation's property, not of the stockholder's property. Though they have each an interest in said property, they have no direct interest such as makes them its owners. The property has been put into the lessee's hands by the lessor corporation, and the payments to be made by the lessee for its use have been agreed on, not between the lessee and2222 the lessor's stockholders, but between it and the lessor corporation to which the property belongs. That agreement expressly refers to and treats these payments to stockholders as part of the agreed rent for the property. Under it no stockholder could assert rights as lessor, for want of any such interest in the leased property as would have enabled him to lease it or agree upon a rent for it. No benefit to the lessee, beyond that which would result to it from the lease if all the rental payments called for were thereby made payable directly to the lessor, is secured to it by the provisions of the lease that it shall divide this part of the rent among those who may be the lessor's stockholders from time to time. Those agreements are effective only to spare the lessor the trouble and expense of making the division itself. The lessee's assumption of this trouble and expense is part of the consideration to the lessor agreed upon for the use of its property. That the lessor railroad could recover the agreed payments to its stockholders by suit in its own name is undisputed. Whether the individual stockholders have rights of action therefor in their own names is at least uncertain. 2223 If they have such rights, they are not founded upon any title of the stockholder's own, but upon that of their corporation only. We agree with the opinion of the District Court that the total of these so-called dividends was, within the meaning of the statute, "income arising or accruing" to the corporation. But the taxpayer in this appeal contends that, even though the amount of $587,355 paid as dividends to stockholders other than the Western Union Telegraph Co. may have been income to the taxpayer, nevertheless the $112,645, neither paid nor credited in any form because the lessee and the stockholder are identical, can not constitute income to the taxpayer. The quoted portions of the above opinion indicate clearly the reason this argument can not prevail. There are two steps in the proceeding. The Western Union Telegraph Co. under its lease pays and is obligated to pay rent to its lessor in the amount of $700,000 per annum. It is also obligated, on behalf of its lessor, to deliver the amount of rent so contracted to be paid to the stockholders of the lessor, acting as the lessor's agent in this regard. Because the Western Union Telegraph Co. was a stockholder, and because, 2224 therefore, no one could complain if it failed to draw a check in favor of itself in connection with the settlement of rent, it is argued that that rent could not be income to the taxpayer, but it appears at least in the Houston Belt & Terminal Ry. Co. case, supra, and the Kentucky & Indiana Terminal R.R. Co. case, supra, that the stock of the taxpayers in those cases was owned by the tenant or lessee companies; but this fact does not appear to have influenced the decision of the court. Unless the language 1001 which we have quoted from the decided cases is to be restricted, and particularly unless we are to regard the position of the telegraph company, as lessee, as merged with its position of stockholder of the lessor, we can not ignore the dual positions which it occupies, nor can we ignore the separate and distinct individualities of the taxpayer and telegraph company. The telegraph company owes and pays rent to the taxpayer. The telegraph company is the agent of the taxpayer, distributing that rent among its stockholders. These are two separate and distinct acts; and the mere fact that it does not choose to draw a check in favor of itself when it is2225 acting as the agent of the taxpayer for the distribution of dividends does not deprive the lessor in the earlier transaction of the payment of rent to the amount of $112,645. Perhaps this can be further clarified by reversing the relationship of the parties. If we assume that the telegraph company is appealing here from an assertion by the Commissioner that it might not deduct rent in the full amount of $700,000, but only rent in the amount of $587,355, the sum actually paid out, and if, also, the telegraph company were claiming, in addition to the deduction of $700,000, that the offsetting item of $112,645 was a dividend to it, and therefore exempt from taxation in1919, could the Commissioner or this Board deny the correctness of either of those positions if taken and urged by the telegraph company? We believe the answer is obvious. There is a payment of rent and there is a distribution of dividends, and the failure to enter these transactions upon the books of account or to carry them through in any physical manner can not deprive them of their essentially separate and distinct characters. The adjustments made by the Commissioner must, therefore, be approved by adding to the*2226 income of the taxpayer the difference between the rent returned by it and $700,000 The additions of $58,535.50 and $19,020.06 made by the Commissioner are disallowed and the deficiency should be recomputed accordingly.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4623981/	Lola Cunningham, Petitioner, v. Commissioner of Internal Revenue, Respondent. S. B. Ingram and Jane Ingram, Petitioners, v. Commissioner of Internal Revenue, RespondentCunningham v. CommissionerDocket Nos. 85421, 87654United States Tax Court39 T.C. 186; 1962 U.S. Tax Ct. LEXIS 47; October 22, 1962, Filed 47 Decisions will be entered for the petitioners. Held, that an amount of $ 5,000 paid by a partnership, as lessee, to its lessor in 1948 as advance rental was not reimbursed to it by its sublessee, and that such amount is deductible by the partnership from income of the taxable year 1957 when applied against the rental for that year. Richard H. Frank, Jr., Esq., for the petitioners.Robert L. Ackerson, Esq., for the respondent. Atkins, Judge. ATKINS186 The respondent determined deficiencies in income tax of petitioner Lola Cunningham and of petitioners S. B. and Jane 187 Ingram for the calendar year 1957 in the amounts of $ 495.83 and $ 1,625.02, respectively.The issue which is common to each of these consolidated cases is whether a partnership consisting of petitioners Lola Cunningham and S. B. Ingram is entitled to deduct48 in 1957, the last year of a lease, an amount of $ 5,000 paid in 1948 as advance rental and applied to rental for 1957.FINDINGS OF FACT.Some of the facts have been stipulated and are incorporated herein by this reference.Petitioner Lola Cunningham was, during the calendar year 1957, an unmarried individual residing in Nashville, Tennessee. She filed her income tax return for the calendar year 1957 with the district director of internal revenue at Nashville, Tennessee.Petitioners S. B. Ingram (hereinafter referred to as Ingram) and Jane Ingram are husband and wife residing in Anniston, Alabama. They filed their joint income tax return for the calendar year 1957 with the district director of internal revenue at Birmingham, Alabama. Jane Ingram is a party to this proceeding only because she and her husband filed a joint income tax return for the year 1957.During 1957 Lola Cunningham and Ingram were equal partners in a partnership known as the King Hotel partnership, which for that year filed an income tax return with the district director of internal revenue at Nashville. From 1947 through August 6, 1956, the partnership interests were as follows: S. B. Ingram, 50 percent; Charles49 Cunningham (then husband of petitioner Lola Cunningham), 25 percent; and Lola Cunningham, 25 percent. Lola Cunningham inherited Charles Cunningham's 25-percent interest upon his death in August of 1956, thereby making her an equal partner with Ingram.On May 24, 1948, Ingram and Charles Cunningham, on behalf of the partnership, entered into a lease contract with the King Hotel Company, lessor (sometimes hereinafter referred to as the company), whereby the partnership leased property known as the King Hotel located in Tullahoma, Tennessee, for a term of 120 months (10 years), commencing on June 1, 1948. The lease provided in pertinent part as follows:The Lessees agree to pay the Lessors for the use of said property $ 5,000.00 on the execution of this instrument, which monies are to apply to the last year's rent, except in case of destruction of the building by fire or windstorm, in that event the $ 5,000.00 is to be refunded to the Lessees. The Lessees agree and will pay in advance commencing June 1, 1948, $ 416.67 per month, and a like sum on the first day of each succeeding month during the term of the lease.The lease also contained an option whereby the lessee-partnership50 could continue the lease for an additional period of 120 months.188 The partnership paid the $ 5,000 to be applied to the last year's rent as called for in the lease and operated the hotel from June 1, 1948, through April 14, 1949, making the stated monthly rental payments to the lessor through April of 1949.On April 14, 1949, the partnership entered into an agreement to subrent the King Hotel to Emmett N. Aylor and Tressie C. Aylor (hereinafter referred to as the Aylors) for a term commencing on April 15, 1949, and extending throughout the original term of the lease between the partnership and the company.The sublease agreement provided in pertinent part as follows:The lessees agree to pay to the lessors, in advance, commencing April 15, 1949, $ 416.67 per month, and a like sum on the first day of each succeeding month during the term of this lease. * * Payments will be made to the lessors, who, in turn, guarantee and bind themselves that they will so pay their lessors said rentals, so as to keep the lessees herein in peaceful possession through the term of the lease, provided said lessees comply with all the terms, conditions and provisions of this sub-renting.As51 drafted, the sublease agreement contained the following provision, which however was crossed out prior to its execution by the parties:Any collateral or deposit made by the lessors herein (the lessees in the original lease) in no way inures to the benefit or usage of the lessees herein; nor do they have any interest therein or any claim thereon, but the same, if any, (and this is by reference to the original lease), belongs to the original lessees, Stanton B. Ingram and Charles H. Cunningham, and shall be accounted for to them exclusively by the original lessors, at such time or times as the original, or basic, lease might provide.Two memorandum agreements dated April 14, 1949, and relating to the sublease agreement, were executed by Charles Cunningham, on behalf of the partnership and the Aylors. One memorandum agreement stated that for the privilege, right, and contractual obligation of subrenting the King Hotel, the Aylors were to pay $ 15,000 to their lessors, $ 5,000 being payable in cash and the balance being evidenced by two notes. The other memorandum agreement, referring to and quoting the portion of the original lease between the company and the partnership providing52 for the advance rental of $ 5,000, stated that:It is agreed between the parties hereto that if they comply with all the terms, conditions, provisions and requirements, as set forth in the lease of subrenting between Ingram and Cunningham and Emmett N. Aylor and Mrs. Tressie C. Aylor, that when and as this $ 5,000 is subject to credit upon the rent, or returned to the original lessees (Ingram and Cunningham), that if, as aforesaid, the said Emmett N. Aylor and Mrs. Tressie C. Aylor have complied with all the terms, conditions and provisions and held the said Stanton B. Ingram and Charles H. Cunningham harmless from any claim, that they will be entitled and will receive the credit or refund in the same way and manner that the said Ingram and Cunningham would have received the same, had this subrenting not been so contracted for.189 The Aylors paid the $ 15,000 consideration for the sublease as provided in the memorandum agreement and also paid the stated monthly rental to the partnership to and through May of 1957, although on several occasions they were delinquent in their payment of rent. From May of 1949 through May of 1957, the partnership regularly paid the rental stated53 in the original lease of $ 416.67 per month to the company, without regard to receipt of rental payments from the Aylors. The original lessor, the King Hotel Company, did not give its consent to the sublease, there being no provisions in the original lease requiring such consent, and still looked to the partnership for performance of the terms, conditions, and provisions of the original lease.The partnership did not elect to continue the lease for an additional 120 months. It made no payments of rent to the company after May 6, 1957, and the $ 5,000 advance rental payment made by it in 1948 was credited on June 1, 1957, against the rent due for the last year of the original lease. Likewise, the partnership received no rental payments from the Aylors for the last year of the sublease.In its income tax return for the calendar year 1957 the partnership deducted rental expense of $ 5,000, which represented the advance rental paid in 1948 and credited against the last year's rent on June 1, 1957. The partnership's return for 1957 reflected no income for the year and showed a total loss of $ 5,580.50, which included the $ 5,000 deducted as rental expense.On their respective individual54 and joint income tax returns for 1957, Lola Cunningham and Ingram deducted the amounts of $ 2,790.22 and $ 2,790.28 as their distributive shares of the total partnership loss of $ 5,580.50.In the notice of deficiency, the respondent disallowed the deduction of $ 5,000 claimed as rental expense by the partnership on its return and determined that Lola Cunningham understated her share of partnership income by $ 2,499.97 and that Ingram understated his share of partnership income by $ 2,500.03.OPINION.The parties appear to be in agreement that the partnership as lessee continued to be liable under the terms of the original rental agreement with the King Hotel Company as lessor, and we think that this is so. There was no novation; the partnership was not required to and did not obtain the consent of the original lessor to sublease the property; the Aylors did not step into the shoes of the partnership and did not become liable for payments of rent to the original lessor; the partnership paid rent directly to its lessor without regard to receipt of rental payments from the Aylors; and the $ 5,000, which the partnership had originally paid upon the execution of the original lease, 190 55 was applied in payment of the rental for the 10th and last year of the lease.The petitioners contend, therefore, that the partnership was clearly entitled to deduct the $ 5,000 in 1957 as rental, under section 162 of the Internal Revenue Code of 1954. 1 They contend that the $ 5,000, representing advance rental paid in 1948, was not deductible at that time, but is properly deductible in the taxable year in which it is applied as rental, namely, the year 1957. The respondent agrees, and we think properly so, that the general rule is that rental paid in advance is deductible only from income of the years in which it is applied as such. Thus, for example, it has been held in a number of cases that where advance rental is paid in one year but is applicable to a number of years of a lease, the advance rental must be allocated and deducted over all the years to which it applies. Baton Coal Co. v. Commissioner, (C.A. 3) 51 F. 2d 469, certiorari denied 284 U.S. 674">284 U.S. 674, affirming 19 B.T.A. 169">19 B.T.A. 169; and Main & McKinney Bldg. Co. v. Commissioner, (C.A. 5) 113 F. 2d 81, certiorari56 denied 311 U.S. 688">311 U.S. 688, affirming a Memorandum Opinion of this Court. It follows that if the advance rental is applicable to only the last year of a lease, it is deductible only in such last year.However, the respondent contends that this general rule does not apply under the circumstances of this case. It is his position that $ 5,000 of the $ 15,000 paid to the partnership by the Aylors pursuant to the memorandum agreements entered into at the time of the execution of the sublease was to reimburse 57 the partnership for the advance rental paid by the partnership to its lessor and that therefore it is not entitled to the deduction claimed for 1957. He relies upon a number of cases 2 for the proposition that where one pays an amount as expense but is reimbursed therefor or has the right to be reimbursed therefor, no deduction is allowable. However, those cases involved facts in no way resembling those involved here. They involved expenditures made by taxpayers for others pursuant to agreements, express or implied, that they would be reimbursed. That is not true here. Accordingly, those cases are not authority for holding that under the subleasing agreements $ 5,000 of the amount paid in 1949 constitutes reimbursement to the partnership.58 191 The sublease between the partnership and the Aylors was a separate and distinct transaction from the lease between the company and the partnership. As stated above, the Aylors did not merely take over the original lease and step into the shoes of the partnership. The sublease agreement required the Aylors to pay monthly rental to the partnership of $ 416.67 and, although this amount was the same as the rental payable by the partnership to its lessor, it was not merely reimbursement but was subrental payable as such. 3Nor do we think that the substance of the transaction in 1949 amounted to the payment by the Aylors to the partnership of $ 5,000 in reimbursement of the payment which the partnership had59 made in 1948 to its lessor as advance rental. Under the original lease, credit of the $ 5,000 payment against the partnership's last year's rent was automatic unless the hotel had previously been destroyed by fire or windstorm. Although the agreement between the partnership and the Aylors was that when and as the partnership became entitled to credit of $ 5,000 upon its rental or entitled to a refund thereof, the Aylors would be entitled to the credit or refund in the same manner that the original lessee would receive the credit or refund, this provision was specifically conditioned on the Aylors' having complied with all conditions of the sublease and their having held the partnership harmless from any claim. It seems to us, therefore, that the Aylors did not merely reimburse the partnership for the $ 5,000 payment which it had made. Rather, the substance of the transaction was the payment by the Aylors of a deposit of $ 5,000 primarily as an advance payment of subrental for the last year of the sublease, but also for the purpose of securing the partnership against any claim for damage to the leased property. We attach no significance to the fact that the parties deleted60 from the sublease a paragraph stating in effect that the payment of $ 5,000 made by the partnership belonged solely to the partnership. Such deletion certainly could not alter the terms of the lease between the partnership and its lessor under which the $ 5,000 was to apply automatically in discharge of the partnership's rental obligation for 1957.We hold that the partnership was not reimbursed for the advance rental paid by it in 1948, and that it is entitled to deduct the $ 5,000 as rental paid or incurred in the taxable year 1957. It should be added that no issue has been presented as to the taxability, or time of taxability, of the amount of $ 5,000 paid to the partnership by its sublessee in 1949, and in deciding the issue here presented we are not concerned with that question.Decisions will be entered for the petitioners. Footnotes1. Section 162 of the Code provides in part as follows:(a) In General. -- There shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including -- * * *(3) rentals or other payments required to be made as a condition to the continued use or possession, for purposes of the trade or business, of property to which the taxpayer has not taken or is not taking title or in which he has no equity.↩2. Universal Oil Products Co. v. Campbell, (C.A. 7) 181 F.2d 451">181 F. 2d 451, certiorari denied 340 U.S. 850">340 U.S. 850; Glendinning, McLeish & Co. v. Commissioner, (C.A. 2) 61 F. 2d 950, affirming 24 B.T.A. 518">24 B.T.A. 518; Levy v. Commissioner, (C.A. 5) 212 F. 2d 552, affirming a Memorandum Opinion of this Court; and Estate of Elmer B. Boyd, 28 T.C. 564↩.3. On its 1957 income tax return, the partnership did not include as income any of these rental payments received by it from the Aylors in that year and did not deduct the cash payments made by it to the company in that year. We do not pass on the correctness of this treatment, since it is not in issue.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4623984/	BENNET B. BRISTOL, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Bristol v. CommissionerDocket No. 96289.United States Board of Tax Appeals42 B.T.A. 263; 1940 BTA LEXIS 1018; June 28, 1940, Promulgated 1018 Petitioner entered into an antenuptial agreement with his intended wife in which she released all rights which she might acquire by marriage in certain stock which he owned, and other statutory rights. In return for her relinquishment of those rights, petitioner transferred to her two annuities and an interest as tenant by the entirety in two parcels of real estate. Held, that such release was "adequate and full consideration in money or money's worth" under section 503 of the Revenue Act of 1932 and the transfers are not subject to gift tax. D. H. Blair, Esq., and George D. Brabson, Esq., for the petitioner. Ralph D. Smith, Esq., for the respondent. VAN FOSSAN 263 In this proceeding petitioner asks redetermination of a deficiency in gift taxes asserted against him for the year 1937 in the sum of $2,056.92. An alleged overpayment of gift tax for the year 1937 in the amount of $4,641.60 is also involved. The sole issue before the Board is whether or not certain properties transferred by petitioner to his wife upon marriage were gifts subject to gift tax. FINDINGS OF FACT. Petitioner is an individual residing in Foxboro, 1019 Massachusetts. He was born May 3, 868. Since the organization of the Foxboro Co., hereinafter referred to as the company, in 1914, petitioner has been treasurer of the company. The company is engaged in the manufacture of indicating, recording, and controlling instruments for industrial purposes. Most of its capital stock has been owned by petitioner's family since its inception. It was organized as the successor of a corporation engaged in a similar business and having the same ownership. 264 At one time substantially all the capital stock of the company was owned by petitioner's father, petitioner, and his brother. Three-fifths of the shares owned by the family were owned by the father. Petitioner and his brother each owned a fifth portion of the stock. Before the father died, he transferred title to one of his fifths of the capital stock to petitioner, another to petitioner's brother, and one to petitioner's two sisters. The voting rights to the fifth part given to the sisters were granted to petitioner and his brother, or the survivor of them. The father received the dividends on the shares formerly owned by him as long as he lived. After his death, the1020 dividends on the fifth portion transferred to the sisters were paid to them. In 1937, petitioner and his brother controlled more than 85 percent of the company's stock. The remainder of the shares was owned in small amounts by employees of the company. In August 1937 petitioner was the owner of 130,230 shares of the company's stock, which he valued at $6 a share. He owned a winter residence in Foxboro, Massachusetts, worth $15,000, and a summer residence in Falmouth, Massachusetts, valued at $19,000. He also owned certain other real estate and securities of much less value than his stock in the company. Petitioner's first wife died in 1930. Six children were born of petitioner's first marriage, all of whom were married, had families, and were living at the date of the hearing. Petitioner's only son is now assistant treasurer of the company. Petitioner's brother also has a son, who is now vice president and general manager of the company. Petitioner became engaged to marry Agnes S. Thompson. Miss Thompson was born December 18, 1884. In 1937, during the period of their engagement but before their marriage, petitioner consulted his personal attorney, who was acquainted1021 with petitioner's various properties and knew the value of his real estate holdings. It has always been the intention of petitioner and his brother to keep the control of the company within their family. With this in mind, petitioner obtained his attorney's advice concerning the effect of his intended marriage upon the family plan to retain control of the company. The attorney informed petitioner that in the event of his death, under the laws of Massachusetts, his widow would acquire a one-third interest in all his property. Petitioner's personal attorney informed him that it would be possible to transfer other property to his wife in lieu of her statutory interests. The attorney advised him that the desired result could be accomplished by a will executed by him and assented to by Agnes S. Thompson, plus a transfer of certain other property to her. Petitioner and his attorney discussed the matter with Agnes S. Thompson. 265 She agreed to accept two annuities and an interest in two pieces of real estate as tenant by the entirety in lieu of any interest which she might have otherwise acquired in the company's stock. Petitioner's attorney, accordingly, prepared a will1022 for petitioner which contained the following provisions: * * * in contemplation of marriage to the below named AGNES S. THOMPSON do make, publish and declare this my LAST WILL, * * * * * * * * * I hereby give, bequeath, devise and appoint all of my estate * * * as follows: FIRST: All my own stock in THE FOXBORO COMPANY, a corporation organized under the laws of Massachusetts, and also any other stock of said corporation over which I may at my decease have any power of appointment or disposal enabling me so to do, I hereby give, bequeath and appoint to my son REXFORD A. BRISTOL and to THE FOXBORO NATIONAL BANK OF FOXBOROUGH, of said Foxborough, jointly; but in trust, nevertheless, upon those terms and conditions of trust which are hereinafter set forth in the "FIFTH" clause of this will. SECOND: One third part of all such of the rest, residue and remainder of my estate as may remain after and exclusive of the stock of THE FOXBORO COMPANY mentioned in and to pass under the "FIRST" clause of this will I give, bequeath, devise and appoint to my intended wife, the said AGNESS THOMPSON, now of Norfolk in said County of Norfolk, absolutely and free of all trusts, as, and to be1023 taken by her as, her full share (including what might otherwise be decreed to her by way of any so-called "widow's allowance") in or to my estate. The "Fifth" clause of the will established a trust to continue during the life of the petitioner's son. Upon his death the corpus was to be distributed to the petitioner's children or their heirs. The will was executed by petitioner on August 24, 1937. Agnes S. Thompson's signature appears on each page of the will for purposes of identification. She executed an acknowledgment of the will dated August 24, 1937, which was attached to the will and reads as follows: Acknowledging that the foregoing will of BENNET B. BRISTOL has been made by him in contemplation of our intended marriage, each to the other, and that the provisions for my benefit contained in such will have been made in such contemplation, I, AGNES S. THOMPSON of Norfolk, Massachusetts, do hereby (1) consent to such will, and (2) except in the case of subdivisions (b)(c)and (d) hereof, subject to and conditioned upon the final allowance of such will, also agree with the said BENNET B. BRISTOL, and also with MARY LOUISE VINCENT, HELEN R. FULLER, REXFORD A. BRISTOL, PAULINE1024 R. WALSH, MARGARET R. CARLETON and EVELYN R. BRABSON (they being the six children of the said Bennet B. Bristol), and with each of them and with their respective heirs, executors and administrators, that I will not (a) file in any probate court any waiver of the provisions for my benefit contained in such foregoing will, (b) file in any probate court any waiver of the provisions for my benefit contained in any future will made by the said BENNET B. BRISTOL in accordance with my written consent to such future will, (c) file in any probate court any waiver of the provisions for my benefit contained in any future codicil or codicils made 266 by him in accordance with my written consent to such future codicil or codicils, (d) if the said BENEFIT B. BRISTOL die testate, except as expressly given to me or for my benefit either by such foregoing will or by any finally allowed future will or codicil made by him in accordance with my written consent, make in or to the estate of the said BENNET B. BRISTOL, upon his decease testate, either any claim other than to or for such part of said estate as may be expressly given to me for my benefit by such present foregoing will or by any such1025 future will or codicil as may be made by him in accordance with my written consent, or (e) if the said BENNET B. BRISTOL die testate, except as expressly given to me or for my benefit by any finally allowed future will or codicil, make any claim to or respecting any of the capital stock, now or then owned by the said BENNET B. BRISTOL, of THE FOXBORO COMPANY, a corporation organized under the laws of Massachusetts. The will and acknowledgment are the only written evidences of any agreement entered into between petitioner and his fiancee in contemplation of their marriage. On August 26, 1937, petitioner and Agnes S. Thompson were married. On the same day, petitioner purchased two annuities, each costing $51,983, payable to his wife for her life and terminating at her death without remainder over. On August 27, 1937, in accordance with his agreement with his wife, petitioner caused his Foxboro winter home and his Falmouth summer residence to be transferred to her and himself as tenants by the entirety. Petitioner filed a timely gift tax return on Form 709 for the year 1937, in which he reported as taxable gifts the two annuities purchased for his wife on August 26, 1937. 1026 A gift tax in the sum of $4,641.60 was assessed against and paid by petitioner on the basis of this return. In the same gift tax return, petitioner reported the transfer of the Foxboro and Falmouth real estate to himself and wife as tenants by the entirety. An addendum attached to the return, entitled "Details of Schedule A", states in part: The two foregoing conveyances of real estate, items 3 and 4, by Bennet B. Bristol as donor to himself and his wife as tenants by the entirety, are reported for the information of the Treasury Department, but the said Bennet B. Bristol Claims that such conveyances do not constitute taxable gifts, and in support of this claim refers to the decision of the Board of Tax Appeals, rendered December 28, 1937, in the case of Hart, Petitioner, v. Commissioner of Internal Revenue, 36 B.T.A. No. 176. The gift tax return further states that the "value at date of gift" of the two pieces of real estate transferred to petitioner and wife as tenants by the entirety, "namely, $8,625.00 and $10,925.00, was reached by multiplying the actual values ($15,000.00 in the case of such item 3 and $19,000.00 in the case of such item 4), of the real estate1027 to which such items refer, by the factor 0.575, thus - 3. $15,000.00 by 0.575 is$8,625.004. $19,000.00 by 0.575 is10,925.00"267 Petitioner's wife filed an information return of gifts as donee on Form 710 for the year 1937, setting forth substantially the same information contained in the gift tax return filed by petitioner. On November 29, 1938, petitioner filed a claim for refund on Form 843 of gift taxes assessed and paid in the year 1937, in the sum of $4,641.60. It was alleged in the claim that: The purchase and transfer of the two annuities aggregating in cost $103,966 by claimant to Agnes S. Thompson (Bristol), now the wife of claimant on or about August 26, 1937, upon which the $4,641.60 alleged gift tax in question was predicated, assessed and collected, was in no sense a gift by claimant to the said Agnes S. Thompson (Bristol), but was a transfer of property for adequate and full consideration pursuant to a premarital contract and agreement entered into by and between claimant and the said Agnes S. Thompson shortly prior to their marriage on August 27, 1937, to wit, the agreement by the said Agnes S. Thompson to waive, relinquish and1028 surrender any and all claim, right, title and interest she might have or acquire as the wife of claimaint [sic] in and to certain other property owned by the claimant. Claimant was married to the said Agnes S. Thompson on August 27, 1937 and the said premarital contract has been in all respects carried out and fully executed. Claimant filed a gift tax return and paid an alleged gift tax in the sum of $4,641.60 aforesaid through mistake, by reason of claimant's being erroneously misinformed as to his liability for gift tax thereon. Claimant alleges that the aforesaid transaction did not constitute a gift property, was not subject to the imposition of gift taxes, that no gift tax return was required by reason thereof, that the assessment and collection of a gift tax based thereon was erroneous and improper, and claimant accordingly claims that the amount of $4,641.60 aforesaid constituted an overpayment by him which should be refunded, and for which amount claim is hereby made, together with interest thereon from the date of payment to the date of refund. Respondent addressed a notice of deficiency to petitioner dated September 6, 1938, in which petitioner was notified1029 that the transfer of real estate to himself and wife as tenants by the entirety was a taxable gift. OPINION. VAN FOSSAN: The issue for our determination is whether or not certain properties and annuities transferred by petitioner to his wife upon marriage were gifts subject to tax. Petitioner contends that no taxable gifts were made during the taxable year, asserting that he exchanged the properties and annuities in question for his wife's in certain stock and other property and that the transaction amounted in certain stock and other property and that thetransaction amounted to a sale or exchange rather than a gift. Respondent argues that the exchange was not for "adequate and full consideration in money or money's worth" and that the properties were given to the wife. He urges that although the relinquishment of the wife's statutory interest might be sufficient consideration to support her antenuptial agreement, it was not enough to cause the 268 transfers to be excluded from the gift tax provisions of the Revenue Act of 1932 as amended (secs. 501 and 503 1). 1030 That the release of a widow's statutory rights is sufficient consideration to support an antenuptial contract in Massachusetts is clear. . The agreement between the petitioner and Agnes S. Thompson was a contract embodying such a release. However, in order to comply with the statutory requirement to exempt from gift tax, the contractual consideration must be adequate and full in money or money's worth. ; affd., ; ; affd., ; ; affd., . The difference between the parties in this case arises partly from the parallelism between certain language used in the gift tax law and that found in the estate tax law. The provision "adequate and full consideration in money or money's worth" appears in both statutes. By section 804 of the Revenue Act of 1932 the estate tax law of 1926 was amended to provide that the release of dower, or similar interests, "shall not be considered to any extent a1031 consideration in money or money's worth." The amendment so made has been held to be "declaratory of the law as it existed in the act of 1926 * * ." , affirming . See also , affirming ; , reversing . There is no comparable provision in the gift tax law. Counsel for respondent urges that, despite this omission of the quoted provision from the gift tax sections, we should construe the words "adequate and full consideration in money or money's worth" in the instant case involving gift tax the same as though we were applying the estate tax sections. We are unable to agree. The gift tax under consideration was imposed by the Revenue Act of 1932, 269 the same act that amended the 1926 Act respecting estate tax as above noted. Both the gift tax provisions and the estate tax amendment were considered in the same Congressional Committee reports. Nevertheless, the amendment was made specifically applicable1032 to the estate tax and was omitted from the gift tax provisions. The only logical conclusion in the light of such facts is that, with both taxes before it, the Congress did not intend the interpretative restriction placed around the estate tax to apply to the gift tax and that the omission thereof from the gift tax provisions was deliberate. We are of the opinion, accordingly, that the relinquishment of dower or other marital rights may, under the gift tax statute, be adequate and full consideration in money or money's worth. The adequacy of the consideration in a given case is a question of fact. The petitioner was a man 69 years of age. He became engaged to Agnes S. Thompson. He owned stock, valued at over $781,000, in a family company whose control he desired to keep in the Bristol family. To accomplish that end, he executed a will, assented to by Agnes S. Thompson, by which he bequeathed all of his own stock in the company (and also any under his control) possessed by him at the time of his death, to his son and a bank, as trustees, for the benefit of his children. He also bequeathed one-third of the residue of his estate to Agnes S. Thompson. Under the same date she1033 executed an acknowledgment, the effect of which was a waiver of her statutory rights. Upon the execution of the will and Agnes S. Thompson's assent thereto and the acknowledgment thereof, the petitioner purchased for her two annuities costing about $104,000 and caused two residence properties to be conveyed to her and himself as tenants by the entirety. The value of her right in the real estate at the time of the transfer was $19,550. Thus, Agnes S. Thompson upon marriage received property whose cost or value aggregated over $123,000 and also the right to receive one-third of the petitioner's residual estate upon his death. In exchange she relinquished her statutory rights in all of the petitioner's estate. Under the laws of Massachusetts (ch. 190, sec. 1 (2), General Laws of Massachusetts, 1932) the surviving wife of a husband dying intestate and leaving issue, takes one-third of the personal and one-third of the real property. Section 9 of chapter 191 provides that "the marriage of a person shall act as a revocation of a will made by him previous to such marriage, unless it appears from the will that it was made in contemplation thereof." By paralleling Agnes S. Thompson's1034 rights before and after the execution of the agreement in the form of a will, we find that, in the absence of the will and agreement, she would have been entitled to 270 one-third of the petitioner's Foxboro Co. stock and one-third of his remaining property (since he would have become intestate by the operation of section 9, chapter 191), while after such execution she preserved the same rights as to the remaining property but received assets worth $104,000 in lieu of her prospective rights to one-third of the stock. By applying the same method of calculation as that used by the respondent in determining the value of her rights in the real estate, we find that her prospective rights in the stock which she relinquished were worth $149,764.50. By this simple arithmetical comparison it appears that the consideration for the transfer by petitioner of the real estate to his wife as a tenant by the entirety and for the procuring of the two annuity contracts in her behalf, was full and adequate in money or money's worth. Accordingly, the respondent erred in his determination that the petitioner made a gift of an interest in real estate to his wife in the year 1937 by causing*1035 the title to the two residence properties to be conveyed to her as a tenant by the entirety. Since the value of the annuity contracts did not constitute a gift, the petitioner made an overpayment of his gift tax for the year 1937. Reviewed by the Board. Decision will be entered under Rule 50.Footnotes1. SEC. 501. IMPOSITION OF TAX. (a) for the calendar year 1932 and each calendar year thereafter a tax, computed as provided in section 502, shall be imposed upon the transfer during such calendar year by any individual, resident or nonresident, of property by gift. (b) The tax shall apply whether the transfer is in trust or otherwise, whether the gift is direct or indirect, and whether the property is real or personal, tangible or intangible; but, in the case of a nonresident not a citizen of the United States, shall apply to a transfer only if the property is situated within the United States. The tax shall not apply to a transfer made on or before the date of the enactment of this Act. SEC. 503. TRANSFER FOR LESS THAN ADEQUATE AND FULL CONSIDERATION. Where property is transferred for less than an adequate and full consideration in money or money's worth, then the amount by which the value of the property exceeded the value of the consideration shall, for the purpose of the tax imposed by this title, be deemed a gift, and shall be included in computing the amount of gifts made during the calendar year. ↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4623985/	SUNCREST LUMBER COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Suncrest Lumber Co. v. CommissionerDocket No. 33244.United States Board of Tax Appeals25 B.T.A. 375; 1932 BTA LEXIS 1534; January 26, 1932, Promulgated 1534 1. A corporation became financially involved and its bondholders instituted foreclosure proceedings for the protection of their interests. The bondholders also formed the petitioner (a corporation) for the purpose of acquiring the property, secured by the mortgage under which their bonds were issued, should it be the successful bidder at a sale under the foreclosure proceedings. At the time of the sale, the face value of the bonds outstanding was $2,755,000. The petitioner bid $1,000,000 for the property and a sale to it was confirmed on that basis. At or about that time petitioner acquired substantially all of the bonds of the old corporation through the issuance of its bonds of the same par value therefor, and the bonds so acquired were used by the petitioner in the satisfaction of the bid price for the property of the old corporation, except as to a small amount of cash required to be paid to the minority bondholders who did not become parties to the plan for the acquisition of the property. Held, that the bid price of $1,000,000 is not conclusive as to the measure of cost of the property to the petitioner, but that what occurred was an exchange of property (bonds of1535 the old corporation) for property (assets of the old corporation) and that the basis for depreciation and depletion of the assets so received was the fair market value of the assets at the time of their receipt by the petitioner. 2. Depreciation and depletion as determined by the Commissioner approved. 3. Where a corporation purchases and retires its own bonds at less than their issuing price, the excess of the issuing price over the purchase price is taxable income in the year in which such bonds are purchased and retired. United States v. Kirby Lumber Co.,284 U.S. 1">284 U.S. 1. E. S. Parker, Jr., Esq., and J. L. Elliott, C.P.A., for the petitioner. Bruce A. Low, Esq., and L. H. Rushbrook, Esq., for the respondent. SEAWELL376 This proceeding involves deficiencies in income tax as determined by the Commissioner for 1921, 1922, 1923 and 1924 in the respective amounts of $3,019.29, $35,783.73, $31,703.84 and $6,581.72. The questions involved, some of which are divided into more than one issue in the pleadings, are as follows: (1) Depreciation allowable on sawmill and equipment and depletion on timber - this question1536 relates not only to the proper cost basis which is to be used in arriving at the amounts to be returned to the petitioner through these allowances, but also to the rates to be used for depreciation purposes; (2) whether the petitioner realized taxable income through the purchase and retirement of its own bonds at less than their face value; and (3) whether the petitioner is entitled to accrue the interest on certain income bonds and have the same allowed as a deduction from gross income. No profits tax was determined by the Commissioner for 1921, though it is alleged by the Commissioner that in the event his contention with respect to the cost of assets to the petitioner is sustained a profits tax for 1921 will result. FINDINGS OF FACT. The petitioner, a Delaware corporation, with its principal office at Waynesville, North Carolina, was organized on April 26, 1918. The Champion Lumber Company, a Delaware corporation, was organized prior to 1911 and had extensive timber holdings in North Carolina. On or about April 1, 1911, it issued bonds in the face value of $3,250,000, but by or before December 20, 1916, the amount of the bonds outstanding had been reduced to a face value1537 of $2,755,000, the difference having been retired through the operation of a sinking fund. On or about April 1, 1911, and March 24, 1913, the Champion Lumber Company placed its entire assets (consisting of timber lands, together with all mills, buildings, railways, equipment, etc., then, or 377 thereafter to be built, connected with or placed on the real estate covered by a mortgage) in trust with the Provident Life & Trust Company of Philadelphia and John Way, trustees, to secure the bonds referred to in the preceding paragraph. On September 11, 1916, the Champion Lumber Company was declared a bankrupt on petition of certain creditors other than the bondholders and a receiver was appointed who continued to operate the properties until December 20, 1916. On October 1, 1916, the Champion Lumber Company defaulted on certain of its bonds and as a result on December 20, 1916, foreclosure proceedings were instituted by the trustees under the trust deed heretofore referred to. In furtherance of the foreclosure proceedings, certain of the bondholders acquired the claims of the complaining creditors in the bankruptcy proceedings in order that the assets might be sold free1538 and clear of such claims, and in the decree of foreclosure (hereinafter referred to) the following statements appear with respect to chaims against the Champion Lumber Company: That as appears by the pleadings in this case, divers bondholders for the purpose of protecting their interests and promoting the adjustment and settlement of claims asserted to have priority over the liens of the mortgages here in process of foreclosure, have joined together as a bondholders Board of Reorganization Managers and have acquired the claims and all of them asserted and preferred against the defendant Champion Lumber Company by North Carolina Mercantile Company and Carolina Supply Company, claimants herein, and now hold and own all and singular such claims: and the said bondholders Board of Reorganization Managers have consented as the owners of such claims to withdraw, and have withdrawn the claims of said North Carolina Mercantile Company and Carolina Supply Company, and this Court has dismissed the same out of this proceeding, to the end that the mortgaged property herein described may be sold free and clear of such claims and so that the proceeds of such foreclosure sale may stand discharged1539 from such claims; but without prejudice nevertheless in any other cause or in any other form to prosecute such claims against other property or against any other person as they may be advised. On September 15, 1916, a bondholders' protective committee was organized for the purpose of protecting the interests of the bondholders and most of the bondholders joined in an agreement which was entered into. The aforementioned committee engaged in various activities in furtherance of the purpose incident to its creation and subsequently, in 1916 or 1917, was succeeded by a board of reorganization managers, which continued to carry on the activities theretofore carried on by its predecessors. In the meantime the petitioner corporation was formed by bondholders of the Champion Lumber Company for the purpose of acquiring the properties of the Champion Lumber Company through the foreclosure proceedings which had been instituted and the petitioner, acting with the board 378 of reorganization managers, was authorized to bid not less than $250,000 or, in its discretion, $1,000,000 for the said properties. On August 10, 1918, the United States District Court for the Western District1540 of North Carolina entered a decree of foreclosure and ordered the property sold on September 23, 1918. Among the provisions in the decree with respect to the sale were the following: The complainants, as trustees in said mortgages or deeds of trust, and any holder or holders of bonds or coupons, secured by said mortgages or deeds of trust, or any party to this suit, or any Committee of Bondholders, or any Board of Reorganization Managers acting for and in behalf of the bondholders or any of them, or any corporation or joint stock company organized by or in the interest of the bondholders or by or in the interest of any of them, may bid and purchase at such sale. The commissioners shall seasonably file a report of all their actions, in carrying out this decree, in the office of the Clerk of this Court, at gr eensboro, North Carolina, as soon as may be after said sale. Either said commissioners or the successful bidder, or any party to this suit, may make application to the Court for confirmation of the sale, at any time after the expiration of ten days from date of filing of said commissioners' report. During said period of ten days, the Court will receive any bids for the property1541 so sold, which shall exceed the bid of the successful bidder at such sale by an amount of at least the sum of ten per cent, of the bid of such successful bidder. Any such bid, so made within such ten days, must be addressed to the said commissioners, and filed with the Clerk of this Court, at Greensboro, before the expiration of said ten days, and shall be accompanied by a deposit of One Hundred and Twenty-Five Thousand Dollars ($125,000) in the same form as the deposit hereinafter required from bidders at said sale. If any such bid is so made within said period of ten days, accompanied by such deposit, the Court may refuse to confirm the sale, and may order a resale of said property, in which case said deposit shall be held as a guaranty that at such resale a good bid shall be made of at least the amount so bid within said period of ten days, but in any such case a new offering of the mortgaged property shall be had after due legal notice. After the acceptance of any bid and the confirmation of the sale to a purchaser or purchasers, or their successors or assigns, and after application of any amount deposited at the time of bid, and after making such payment or payments in cash, 1542 on account of the purchase price, as the Court may at the time of the confirmation of such sale, or from time to time thereafter direct, the purchaser or purchasers or their assigns shall pay the entire balance of purchase price so bid, at such time or times and in such manner as the Court shall direct, but no such payment shall be required to be made until ten days after the confirmation of sale. The purchaser or purchasers, or their successors or assigns, may satisfy and make good the balance of the purchase price above the amount required to be paid in cash by the terms of this decree, or by any decree or order of this Court hereafter entered, in accordance with the provisions of this decree, by delivering to said Commissioners receivers' certificates heretofore authorized by this Court, and any of the bonds duly certified and issued under the terms of said mortgages or deeds of trust, dated April 1, 1911, and March 24, 1913, and any coupons thereto appertaining, which bonds and coupons may be entitled to participate in the proceeds of such sale in the proportions and with the priorities hereinafter defined and decreed. All bonds so delivered shall, if registered, be 379 1543 duly assigned and endorsed by the registered holders thereof and shall be accompanied by all unpaid coupons thereto respectively appertaining; such receivers' certificates, bonds and coupons, whether delivered to said Commissioners at the time of sale or subsequently, to be received at such prices or value as shall be equivalent to the sum which would be payable out of the net proceeds of such sale if made for money, to the holder or holders thereof, for his or their just share and proportion of the net proceeds and upon a due accounting and apportionment of said proceeds. If there shall be received from the sale of said property a net amount applicable to the payment of said coupons and bonds, sufficient to pay the entire amount due upon said coupons and bonds, for principal and interest, then and in that event the said coupons and bonds shall be cancelled and retained by the Commissioners, or cancelled and delivered by them to the complainants, as trustees under the mortgages or deeds of trust securing said bonds. If the entire amount necessary to pay all sums due upon said coupons and bonds in full is not realized upon a sale and applied upon the purchase price, then and in such1544 case the said commissioners shall stamp or write upon each bond the amount which is so applied, and shall so return said bonds to the purchaser or purchasers from whom the same were received. The said Commissioners shall, before accepting any bid, require the bidder to make a cash deposit of one hundred and twenty-five thousand dollars ($125,000), as a pledge that he will make good his bid, in case of its acceptance. In lieu of such cash deposit, such Commissioners may accept a check drawn to their order, as Commissioners, upon a National Bank, in good standing, and having a capital of at least one hundred thousand dollars ($100,000), and deposit has been made of a portion of the purchase price shall not be confirmed deposit has been made of a portion of the purchase price shall not be confirmed by the Court, such deposit of a portion of the purchase price shall be returned to the bidder, and the deposit of any unsuccessful bidder shall be returned to him when a bid other than that made by him shall be accepted. In case any successful bidder or purchaser shall fail to make good his bid, after confirmation by the Court of the sale to him by making the additional necessary payments1545 in consummation of his purchase, then the sums paid and deposited by such bidder or purchaser shall be held by the Commissioners and applied towards the payment of the expenses of resale, including the disbursements thereof, and towards making good any deficiency or loss, in case the property shall be sold at a less price upon such resale, and for any other purpose which the Court may direct. At the sale held on September 23, 1918, the highest bidder was the petitioner, which bid $1,000,000 for the property. Subsequently, but within ten days of the date of the sale, the Champion Fibre Company, on Ohio corporation, and in compliance with the requirements of the decree of foreclosure, offered the sum of $1,100,000 for the property, such amount (exclusive of the cash deposit of $125,000) to be paid over a period of ten years. On October 15, 1918, the court entered a decree in which the offer of the Champion Fibre Company was rejected and gave the following reasons for such action: It appearing to the Court from the written bid of said Champion Fibre Company that while it engages and appropriately obligates itself upon a resale of 380 said property to bid therefor the sum1546 of $1,100,000, it does not bid or engage or bind itself to pay said purchase price in cash, but only to pay in cash in event it should become purchaser, its aforesaid deposit of $125,000 and to pay the balance of the purchase price, to wit, $975,000 in equal annual installments of $100,000 at one, two, three, four, five, six, seven, eight, and nine years from the date of confirmation and the last installment of $75,000 ten years from date of confirmation, with interest thereon from said date of confirmation until delivery, paid at the rate of six per cent per annum semi-annually, and to be secured by a first and paramount lieu upon said property, assets and effects; and, It appearing to the Court that the prolonged extension of time involved in and stipulated for in the bid of said The Champion Fibre Company for the payment of the balance of the purchase money, notwithstanding the increased amount of the bid over that of the Suncrest Lumber Company, would not only not benefit the outstanding bondholders of the Champion Lumber Company in whose behalf and for whose protection this suit was primarily instituted and who, upon a foreclosure, are entitled to their ratable participation1547 in the proceeds of a sale in cash, but would, in fact, as affording them no additional margin of security beyond the $125,000 deposit, tend to defeat the primary object of this suit; * * At the same time the bid of the petitioner was confirmed. In December, 1918, pursuant to the court decrees in the foreclosure proceedings and the sale made thereunder, the property of the Champion Lumber Company was conveyed to the petitioner. A report of the Commissioners who conducted the aforementioned sale showed that on December 16, 1918, of the outstanding bonds of the Champion Lumber Company of the face value of $2,755,000, the petitioner had deposited with them bonds of a face value of $2,625,000, thus leaving nondepositing bondholders to the extent of $130,000. The report provided that $45,028.10 be set aside out of the cash deposit of $125,000 made by the petitioner as the pro rata portion of the purchase price which was to be paid on account of principal and interest on the bonds of the nondepositing bondholders. Certain pertinent parts of the report follow: Principal of all bonds outstanding as per report of Phil C. Cocke, Special Master$2,755,000.Principal of bonds filed with Commissioners by Suncrest Lumber Company2,625,000.Principal of non-deposited bonds130,000.Total purchase price1, 00,000.Amount paid on purchase price in cash125,000.Amount of balance of purchase price paid in bonds and coupons875,000.Amount distributable by Commissioners on 2625 bonds of the par value of $1000 each and deposited with them by the purchaser909,221.25Amount necessary to pay balance of purchase price875,000.00Amount distributable to purchaser on bonds deposited in excess of the balance due on purchase price34,221.25Amount of interest and principal distributable to non-deposited bonds of the face value of $130,000, or the equivalent of $130,000 bonds of denomination of $1000 cach at the rate of $346.37 of interest and principal per bond$45,028.101548 CASH AVAILABLE TO PAY ALL COSTS, ALLOWANCES, ETC., AND NON-DEPOSITINGBONDHOLDERS.Cash deposit on bid$125,000.00Cash in hands of The Provident Life and Trust Company of Philadelphia21,581.25Total available cash146,581.25Allowances, costs, etc., as per exhibits above67,316.37Necessary cash to pay off non-depositing bondholders45,028.10112,344.47Balance of cash returnable to Suncrest Lumber Company, Purchaser34,236.78381 Your Commissioners would further report that Suncrest Lumber Company has on its part complied with the terms of the decree of foreclosure and of the decree of confirmation entered in this cause on August 10 and October 14 respectively to the extent that such terms are now ripe for compliance with and to the extent required by the terms of said decree, to entitle it to conveyance of the property sold, and subject to the terms of said decrees, by paying the said required deposit in cash of One Hundred and Twenty Five Thousands ($125,000) Dollars, on September 23, 1918, and by delivering into the hands of your Commissioners "bonds duly certified and issued under the terms of said mortgages or deeds of trust1549 dated April 1, 1911, and March 24, 1913, and any coupons thereunto appertaining," which bonds and coupons are entitled to participate in the proceeds of such sale in the proportions and with the priorities in said decree of foreclosure specified; and that said bonds and coupons so deposited are more than sufficient to pay off the balance of the purchase price remaining over and above said deposit of One hundred and twenty-five thousand ($125,000) Dollars, when "Received at such prices or value as shall be equivalent to the sum which would be payable out of the net proceeds of such sale if made for money," as is apparent from the detailed exhibit hereinbefore set forth. Your Commissioners therefore respectfully report that pursuant to section 26 of the decree of foreclosure of August 10, 1918, and sub-division (a) thereof, they have made the detailed disbursements on account of expenses hereinbefore shown, and on account of allowances, fees, etc., as per former orders of the court fixing and allowing same, and have in hand funds adequate in amount to pay non-depositing bondholders, as is hereinbefore shown, and have in hand bonds of Champion Lumber Company adequate in amount on the1550 basis of distribution hereinbefore shown more than sufficient to pay the balance of the purchase price in full. * * * That your Commissioners have in hand for payment of interest and overdue interest, and the payment of principal of $130,000 of bonds which have not been deposited, and the holders and owners of which bonds are unknown to your Commissioners. Your Commissioners therefore ask that they be authorized 382 to pay said amount into the registry of the Court for account of the holders and owners on non-deposited bonds as may hereafter be made to appear. Your Commissioners would further report that "all claims heretofore duly filed before Phil C. Cocke, Esq., Special Master, and heretofore adjudged entitled to be a lien against the property sold in priority to the lien of the said outstanding bonds, secured by deeds of trust hereinbefore mentioned" were heretofore paid off by the Receivers in this cause, as they have ascertained and verified, and your Commissioners have found no claims of the character mentioned and falling within sub-division (b) of Section 26 of the decree of foreclosure. They accordingly recommend that they be authorized to execute, acknowledge1551 and deliver deed to the purchaser, Suncrest Lumber Company, conveying all of the property, assets, rights, franchises, moneys, effects, etc., referred to and described in said decree of foreclosure of August 10, 1918, and being the property offered and sold by your Commissioners on September 23, 1918, and of which Suncrest Lumber Company became the purchaser under its bid and under the decree of confirmation entered in this cause on October 14, 1918, and subject to all of the terms, conditions and provisions of said decree of foreclosure and said decree of confirmation, and to all of the reservations therein and thereby made; and that the Court make an order directing H. A. Cleaver and R. G. Rogers as Receivers, upon exhibition to them of the deed of your Commissioners duly executed, acknowledged and delivered, and with the joinder of Champion Lumber Company, James G. Campbell, Trustee in Bankruptcy of Champion Lumber Company, the Provident Life & Trust Company of Philadelphia, and John Way, Trustees, to turn over and surrender to said Suncrest Lumber Company all of the property, assets, and effects therein described, as of midnight on the 18th day of December, 1918, and that the accounts1552 of the said Receivers with the said property be terminated as of the same time. Later, additional bonds of the Champion Lumber Company to the extent of $39,500 were deposited with the said commissioners by the petitioner and proper adjustment was made therefor, as shown by the following paragraph from a supplemental report filed June 6, 1919: That when the report of your Commissioners of December 16, 1918, was submitted to the Court, counsel for Suncrest Lumber Company were unable to supply your Commissioners with information as to the precise and exact amount, par value, of outstanding bonds owned by Suncrest Lumber Company; and for the purposes of that report, Suncrest Lumber Company was credited simply with the minimum amount of bonds, par value, that would enable it to comply with and perform its bid for the property foreclosed; and as was shown in said report, upon deposit by said Suncrest Lumber Company of bonds, with your Commissioners, of the aggregate par value of two million, six hundred and twenty-five thousand ($2,625,000) dollars, it became entitled, as also shown by said report, to a refund, after paying all allowances and court costs and other expenses, of thirty1553 four thousand, two hundred thirty six ($34,236.78) dollars and seventy-eight cents, which was paid to it by check of your Commissioners under date of December 19th, 1918. There was also shown in said report, as distributable to nondepositing bondholders, the sum of forty five thousand no hundred and twenty eight ($45,028.10) dollars and ten cents, which your Commissioners, under the decree of December 16th, 1918, were directed to pay into the registry of the Court for the benefit and account of said non-depositing 383 bondholders. This was not done by your Commissioners at the time, however, for the reason that the representative of Suncrest Lumber Company, who delivered into the hands of your Commissioners the physical bonds heretofore mentioned as filed by said Company, expressed the opinion that Suncrest Lumber Company would shortly thereafter file with your commissioners all, or nearly all, of the remaining outstanding and non-deposited bonds; but up to this time it has filed only thirty nine thousand, five hundred ($39,500) Dollars, par value, in addition to those with which it was credited as having filed, in the report of December 16th, 1918; but has requested your1554 Commissioners to pay to it the ratable participation of said bonds, on the basis of the report of December 16th, 1918, amounting in the aggregate to thirteen thousand, six hundred and eighty one ($13,681.61) dollars and sixty one cents; and your Commissioners would respectfully recommend that they be authorized so to do. The plan of "reorganization" of the board of reorganization managers contemplated that the petitioner, in case it was the successful bidder at the sale under the foreclosure proceedings, would issue bonds, exchange these bonds for old bonds of the Champion Lumber Company, and apply these old bonds so acquired in satisfaction of the bid price for the property other than the part which would be satisfied through the payments to minority bondholders. By September 21, 1918, there had been deposited with the board bonds of the Champion Lumber Company of the face value of $2,613,000 and on the same day the board indicated its willingness to transfer the said old bonds to the petitioner on the condition that they be used in the manner indicated above. On the same day the petitioner was authorized to issue bonds in furtherance of the above purposes, and on or about October 1, 1918, such1555 bonds were issued. In the meantime, as shown above, the petitioner's bid for the property had been accepted and by the time final settlement came to be made for the property old bonds had been deposited with the board of reorganization managers in the face amount of $2,664,500. These bonds were turned over to the petitioner in exchange for its bonds, Series B-II (hereinafter described), the exchange being made on a par-for-par basis, and these old bonds of the Champion Lumber Company were applied by the petitioner in the satisfaction of the purchase price in the manner indicated in the court proceedings heretofore quoted. The bonds of the petitioner which were issued in exchange for the bonds of the Champion Lumber Company were in turn delivered to the individuals who formerly held bonds of the Champion Lumber Company. Among the authorizations provided by petitioner's charter was the following: To acquire the bonds, notes, certificates of indebtedness, due bills and other evidences of debt of any corporation and particularly of Champion Lumber Company and to sell or to pledge, or to collect and compose, or otherwise to dispose of the same. 384 The authorization of1556 the petitioner on September 21, 1918, for the issuance of bonds heretofore referred to, provided not only for bonds of Series B-II which were used in effecting the purchase of the property in question, but also for two other classes of bonds, namely, Series A and B-I. Series A bonds consisted of an issue of 500 bonds of a face value of $1,000 each, that is, a principal sum of $500,000. They bore interest at the rate of 6 per cent and had precedence over bonds of Series B, both as to appropriation of sinking fund for redemption and as a lien upon the property mortgaged. These bonds were not sold to the public, but were used as collateral for loans. None of them were outstanding during the years here in question (1921, 1922, 1923, and 1924). Bonds of Series B-I consisted of an issue of 100 bonds of a face value of $1,000 each, that is, a principal sum of $100,000, and they bore an interest rate of 6 per cent. These bonds were issued on March 31, 1919, and retired in September, 1919. They had precedence over bonds of Series B-II. Bonds of Series B-II consisted of an issue of a face value of $2,755,000, of which but $2,695,500 was actually issued. Upon the payment of the1557 other two issues mentioned above these bonds became first mortgage bonds. The trust indenture under which all of the bonds were issued provided, inter alia, as follows: The obligation to pay interest semiannually upon bonds of Series A and of Series B Class I is absolute and unqualified. But interest at the rate of six per centum per annum shall be paid semiannually upon bonds of Series B Class II, only in the event that the net income of the Company shall thereunto suffice after all fixed charges and operating expenses have been paid and after such allowances have been deducted for depreciation of its buildings and machinery and also for the depreciation (if any) of the personal property hereby mortgaged or intended so to be. And the coupons attached to the said bonds of Series B Class II, as they are issued this first day of March, 1918, shall not be construed to be a promise to pay interest except upon the conditions hereinafter imposed, but are attached to and delivered with said bonds to serve as convenient receipts for such installments of interest as may from time to time be payable thereon as hereinafter provided. At least twice each year (once in the first1558 half of its fiscal year and once in the second half) the Board of Directors shall meet and shall by resolution specifically set apart from net income as hereinbefore described such sums as may be spared therefrom to pay interest upon bonds of Series B Class II, or, if none can be spared, the board shall specifically find that the net earnings do not justify the appropriation of any moneys to such interest payment. If the sum so set apart shall be sufficient to pay a semiannual installment of interest at the rate of six per cent. per annum, it shall be so applied by the Board of Directors and the Trustees so notified, and the semiannual coupon next thereafter accruing shall be paid, detached and canceled. If the sum set apart in any six months' period is less than the amount of any semiannual 385 interest charge upon the bonds of Series B Class II such sum shall be passed to a separate account and shall be carried forward and added to the amount set apart in the next six months' period; and when the aggregate of the moneys so specifically appropriated to pay the interest of bonds of Series B Class II shall suffice to pay a semiannual installment of interest upon all the1559 bonds of Series B Class II then outstanding, the coupon by its terms next maturing shall be paid in due course, and if the moneys so set apart thereunto suffice, two or more consecutive coupons, the last of which matures on the date of the payment, may be paid at the same time. But any coupon which shall not be paid in its order shall thereupon become null and void and shall not constitute an obligation of the Company. It is made a covenant between the Company and each original holder and each person who becomes a subsequent holder of any bond or bonds of Series B Class II that the obligation to pay interest is a current obligation to pay interest out of current net earnings, and that if the net earnings as they accrue do not suffice to pay interest as it accrues the obligation to pay interest lapses. The Company shall give notice by publication at least once in a newspaper of general circulation published in the City of Chicago of its intention to pay, on presentation, the specified interest coupon or coupons. The discretion to determine what are net earnings and to fix the amount thereof is unreviewable and is hereby lodged in the Board of Directors of the Company. The subsequent1560 provisions of this mortgage giving the bondholders divers privileges in case of the default of the Company in payment of interest shall be apply to any bonds of Series B class II until the Board of Directors in the manner hereinbefore provided has specifically appropriated moneys out of net income to the payment of such interest. No interest was ever paid on the bonds of Series B-II, but on each semiannual interest date a resolution was adopted by the petitioner's board of directors to the effect that in their opinion no income was available from the operations of the preceding six months from which interest could be paid and therefore the interest coupons for such period should be declared null and void. The resolution on account of the period from April 1, 1921, to October 1, 1921, which is similar to those adopted on other occasions, follows: WHEREAS, we, the undersigned, constituting all or a majority of the Board of Directors of the Suncrest Lumber Company, having examined the monthly profit and loss statements of the company for the first eight months of the year 1921 and finding that the operations for that period, after charging depreciation and full depletion, show a1561 deficit of $52,577.48, and in view of such deficit no net earnings can be realized by the company for the six months period from April 1, to October 1, 1921, and having in view the necessity of ample reserve for operations, finds that the application of any money to the payment of interest on October 1, 1921, upon bonds of Series B, Class II, is not justified. THEREFORE BE IT RESOLVED: That the interest coupon voucher for interest on that date be declared null and void. Upon request of the Union Trust Company, Trustees, the Secretary of our company is hereby authorized and directed to send by mail on or about September 24, 1921, to each bondholder of whom he may record a printed letter reading as follows: 386 Your Board of Directors respectfully report that we have examined the profit and loss statements taken from the Company's books of account to August 31, 1921, and find that no net earnings will be realized for the six months from April 1 to October 1, 1921, in view of which, as well as the necessity for ample reserve for operations, the application of any money to the payment of interest on October 1, 1921, upon bonds of Series B, Class II, will not be justified, 1562 and the coupon voucher for interest on that date has therefore been declared null and void. In order to provide for the payment of the principal of the aforementioned bonds at or in advance of their maturity, provision was made for the creation of a sinking fund through the payment to a trustee of certain amounts as the timber on the petitioner's properties was cut. The indenture contained the following provision with respect to the administration of the sinking fund: Sinking fund, as and when paid to Union Trust Company, one of the Trustees, shall be administered as follows: It shall be used only to pay principal of the bonds hereby authorized, and the Company out of its other resources shall make adequate provision for the payment of interest; it shall be applied as rapidly and economically as possible to the payment by lot of bonds of Series A; when all the bonds of Series A have been paid it shall be applied to the payment in their numerical order of bonds of Series B, Class I; when all the bonds of Series B, Class I, bonds have been paid, one-half of such sinking fund shall be applied ratably in installments of not less than five per centum of the stipulated face thereof1563 to the payment of bonds of Series B, Class II; and the other half shall be used by the Trustee in the purchase in the open market of bonds of Series B, Class II, at the lowest price at which, after public notice, they may be offered. As a result of the operation of the foregoing sinking fund, bonds were purchased in the open market and retired and profit reported therefrom in petitioner's returns as follows: YearPar value at time of purchasePurchase priceProfit reported in tax returns1922$316,725.00$129,678.75$187,046.25192384,530.0050,172.7034,357.30192474,855.0049,558.4725,296.53When the properties of the Champion Lumber Company were transferred to the petitioner, the latter set up the depreciable and depletable assets on its books and claimed depreciation and depletion thereon on the basis of cost to the Champion Lumber Company. Depreciation was computed by the Commissioner and allowed in his deficiency notice at the rate of 10 per cent on costs as shown below for the following depreciable assets: 1921192219231924Railroad equipment$192,311.33$199,314.04$210,915.41$213,634.84Woods equipment109,686.23109,134.03109,063.53109,329.38Sawmill and equipment232,604.54233,641.16234,332.37236,104.57Planing mill46,581.1945,788.9445,138.9445,238.94Machine shop15,250.0815,250.0815,250.0815,250.08Fire and electric equipment6,704.766,704.766,704.766,704.76Furniture and fixtures6,771.286,813.786,978.786,923.78Yard 6 storage tracks6,651.636,651.636,651.636,651.63Heating plant879.25879.25879.25879.25Building and equipment86,003.1195,262.8395,170.2196,519.16Plant and equipment No. 246,359.3645,999.1055,006.4673,549.76Crestmont property11,121.58Total749,802.76765,439.60786,091.44821,907.731564 387 The total depreciation allowed by the Commissioner, claimed by the petitioner, and disallowed by the Commissioner is shown by the following schedule: Item1921192219231924Allowed by the Commissioner$75,762.13$77,571.54$80,816.51$81,569.90Claimed by the petitioner114,815.93116,342.42122,378.25122,615.22Disallowed by the Commissioner39,053.8038,770.8841,561.7441,045.32The foregoing differences (aside from certain cost adjustments not questioned by the petitioner) arise from the fact that the petitioner used a rate of 15 per cent as compared with that of 10 per cent used by the Commissioner. The plant and equipment in question had been in operation for some years prior to the time it was taken over by the petitioner on December 20, 1918, and was operated, during the years here under consideration, on what is referred to as the Sunburst tract. The operations by the petitioner on this tract continued for a period of seven years, namely, from the time it was acquired as heretofore indicated until December, 1925. At or about that time the petitioner made an exchange of land and timber with the Whitmer Parsons1565 Pulp and Lumber Company through which the petitioner secured a location for its plant at Waynesville, North Carolina. By this means a tract of timber, known as the Cataloochee tract, which was not accessible for operation at the Sunburst operation with the type of equipment then being used, now became accessible for manufacture at Waynesville. The value of the machinery which was moved from the Sunburst operation to Waynesville for use in the Cataloochee operation was approximately $200,000. The Sunburst tract and the Cataloochee tract each contained approximately 35,000 acres. Shortly after the acquisition of the 388 properties in question by the petitioner a cruise was made of the timber, from which the following approximate estimates were determined: SpeciesSunburstCataloocheeFeetFeetSpruce150,000,00060,000,000Hemlock30,000,000110,000,000Hardwood20,000,000130,000,000Total200,000,000300,000,000In addition, it was estimated that certain other parts of the Sunburst burst tract which were not available for logging at the Suncrest operation contained the following footage of timber: FeetSpruce3,000,000Hemlock13,000,000Hardwood34,000,00050,000,0001566 It was also estimated that there would originate at the mill and come out of the forest approximately 830,000 cords of by-products from the above tracts. From 1920 to 1924, inclusive, the following timber was cut from the Sunburst tract: YearSpruceHemlockHardwoodTotalCord woodFeetFeetFeetFeetCords192016,856,628341,86767,91717,266,4126,604.88192127,020,014805,255203,02628,028,2955,991.28192222,350,964899,5443,514,35426,764,8629,200.48192322,397,6102,754,7966,325,38731,477,79310,434.77192427,414,4662,445,9884,336,90034,197,3547,760.07Total116,039,6827,247,45014,447,584137,734,71639,991.48The total depletion claimed by the petitioner and allowed by the Commissioner is shown by the following schedule: YearDepletion claimedDepletion allowedDepletion disallowed1921$257,512.78$101,094.67$156,418.111922271,637.4798,277.26173,360.211923261,443.48115,389,66146,053.821924327,269,29123,570.78203,398.51OPINION. SEAWELL: The first issues presented in this proceeding relate to the depreciation1567 and depletion allowable as a deduction from gross 389 income in each of the years here involved, the contention of the petitioner being that the deductions allowed on that account in the deficiency notice are inadequate, and that of the Commissioner being that such allowances are excessive. A consideration of the contention advanced by the Commissioner will show the several questions which are here to be disposed of. As shown from our findings, the petitioner acquired certain properties from the Champion Lumber Company through foreclosure proceedings which were instituted by the bondholders of the Champion Lumber Company. The bid price by the petitioner at such sale held on September 23, 1918, was $1,000,000 and it is the Commissioner's contention that this bid price represents cost of the properties to the petitioner and would accordingly provide the starting point or base for the computation of depreciation and depletion allowances for subsequent years. Some of the argument advanced was to show that the transaction through which the properties were acquired constituted a purchase and not a reorganization, and with this position we are in accord. Whether the bondholders1568 in the Champion Lumber Company were also its stockholders and in the same proportion does not definitely appear, though it does appear that only the bondholders as such as distinguished from the stockholders participated in the acquisition of the properties. That is, the bondholders took the various steps incident to their protection, which included the organization of the petitioner for the purpose of having the properties acquired by it, and the stockholders as such were entirely eliminated. There thus came into ownership of the properties not only a new corporation, but also new interests in such corporation which were essentially different from those in the old corporation. Under such circumstances, we have no hesitancy in saying that cost of such properties to the petitioner when acquired through the foreclosure sale in 1918 rather than cost to the Champion Lumber Company must be our starting point in the determination of a depreciation and depletion allowance as well as for invested capital purposes. Cf. . A question presenting more difficulties, however, is to determine what was cost to the petitioner to be used as1569 the basis for its future depreciation and depletion. In the first place, is such cost fixed, as the Commissioner contends, by the bid price at the foreclosure sale of $1,000,000? We think not. In short, what occurred was that the Champion Lumber Company became financially involved, and on the petition of certain of its creditors (other than its bondholders) it was declared a bankrupt on September 11, 1916. At or about that time the bondholders became active in an effort to protect their interests as represented by bonds then outstanding of a face value of some $2,755,000. A bondholders' protective committee 390 was first organized, which was later succeeded by a board of reorganization managers, and through these organizations the petitioner was formed for the purpose of taking over the property of the Champion Lumber Company, should it be acquired at a foreclosure sale. In the meantime, there was a default on the bonds and the foreclosure proceedings were instituted. In due course the property was ordered sold and the petitioner, in conjunction with the board of reorganization managers, was authorized to bid $250,000, or, in its discretion, $1,000,000, for the property. 1570 Further, the charter of the petitioner contemplated the acquisition by it of the bonds of the Champion Lumber Company. In order to raise the cash deposit of $125,000 required to qualify the petitioner as a bidder at the sale, the board of reorganization managers gave a collateral note secured by bonds of the Champion Lumber Company. At the sale the highest bid and the only bid (in so far as appears from the record) was that of $1,000,000 by the petitioner. No part of the bid price in excess of the cash deposit was paid in cash, and even the part of the cash deposit which was not required to pay court and foreclosure costs and satisfy the small minority which did not join in the acquisition of the property was turned over to the petitioner. The remainder of the purchase price was satisfied by the petitioner through the issuance of its bonds for bonds of the same face value held by the bondholders of the Champion Lumber Company and the delivery of these old bonds to the court. In other words, the bid price of $1,000,000 was not satisfied through the payment of that amount, but in another manner as indicated above. We must look to what was done rather than to what might have been1571 done in order to find the correct solution to the problem, and when that is done, the answer is evident that $1,000,000 may not be considered as the conclusive measure of cost. In reaching the conclusion that the bid price of $1,000,000 may not be considered as the measure of the cost to petitioner, we are not overlooking the fact that within ten days after the sale a bid of $1,100,000 was submitted, but aside from the fact that such bid was rejected by the court and that we are not advised as to any relationship which may have existed between the bidder (Champion Fibre Comapny) and the Champion Lumber Company, the bid was not one which, if considered better than that of the petitioner, would have meant that such bidder thereby became the purchaser, but rather that the property would again be offered for sale. Under such conditions the bondholders would still have been able to take further steps for the protection of their interests by bidding, if they desired, at the subsequent sale. Besides, as indicated by the court in rejecting the higher bid, such bid gave to the bondholders no 391 additional margin of security beyond the $125,000 deposit, and therefore its acceptance1572 would have tended to defeat the primary object of the foreclosure proceedings. Nor have we disregarded the fact that all bondholders did not join in the purchase through foreclosure proceedings, but a small number elected to take their pro rata payments in cash. However, when we consider the small minority, which apparently was made up of a considerable number of small bondholders in various parts of the country, we do not think this material. We are also of the opinion that this case is easily distinguishable from that of ; affd., ; certiorari denied, on which much reliance is place by the Commissioner in substantiation of his contention that the bid of $1,000,000 is conclusive as to cost to petitioner. That case involved a situation where in 1915, after a corporation was adjudged a bankrupt, its property was sold at public action and bid in by a new corporation which had been formed. The money which was used by the new corporation in paying the purchase price was advanced by three stockholders of the old corporation, who had held 63 per cent of the stock of such1573 old corporation. In consideration for such advancement, the three old stockholders had issued to them the entire capital stock of the new corporation, In 1917 these same stockholders sold their stock, and the question presented was the basis to be used in determining the gain to them on account of the sale in 1917, the contention of the stockholders being that the gain would be represented by the difference between the March 1, 1913, value of the stock in the old corporation and the selling price of the stock of the new corporation in 1917, whereas, the Government contended that the cost of the stock sold in 1917 was the amount paid by the new corporation for the assets at the receiver's sale in 1915. The court rejected the contention of the stockholders, held that there was no reorganization through the receiver's sale and acquisition of the stock by the new corporation, and entered judgment for the Government, concluding its opinion with the following summary of its view of the situation: That the company was adjudged a bankrupt in 1915 and all stockholders lost their investment and the stock was rendered valueless; that the new corporation directly became the purchaser of1574 all the assets of the old corporation, including the leasehold; that plaintiffs financed the transaction with their private funds; that the new corporation issued its entire capital stock to the plaintiffs for the amount advanced by them in financing the transaction; that this amount was the cost of the stock to them; that subsequently the stock sold at an undisputed figure upon which they have paid an income tax. It is a hard case because plaintiffs lost a large amount of money in the Black Diamond Coal Company and were unable under the law to deduct that 392 loss from the profit made by them in the sale of the stock in the new corporation in 1917, just two years later. If the entire transaction cannot, under the authorities, he held a reorganization, there is no relief to be had. The court further said that the old stock was worthless in 1915 and that a complete loss resulted to the old stockholders at that time. On appeal the judgment was affirmed in part, on the ground that the question was improperly presented for review, but in rendering its opinion the court said: * * A judgment for defendant upon facts found can be erroneous only when judgment for plaintiff1575 is imperative. Identity and continuity of investment, before and after, are not here found as ultimate facts; the form of the transaction contradicts such continuity; and in view of the presumption that the Commissioner's computations of cost and value are correct, we cannot say that there was such a clear mistake as compels a court to overrule him. We are not here concerned with a receiver's sale where the entire investment of the party (or those whom it represented) who bid in the property had become valueless, but rather a sale under foreclosure proceedings where the party (or those whom it represented) had not lost its entire investment and where the sale was being conducted for its benefit and the remaining value of its interest in the property was in a very substantial amount. In fact, in the Petree case the entire bid price was satisfied through new money advanced for that purpose by the party (or its representatives) who had lost its original investment, whereas, in the instant case the acquisition of the property was accomplished without the advancement of additional money other than for court and foreclosure costs and a small amount paid to minority bondholders. 1576 On the whole, we are convinced that the Petree case can not be considered controlling in the case at bar. When we look to what here occurred we find that the petitioner first acquired substantially all of the bonds of the Champion Lumber Company ($2,664,500 of bonds outstanding in the amount of $2,755,000) through the issuance of its bonds therefor. After the petitioner had secured the aforementioned old bonds, these old bonds (together with the small amount of cash paid to minority bondholders) were used in satisfaction of the bid price and the property of the Champion Lumber Company was conveyed to petitioner. In other words, there was an exchange of property for property, namely, bonds of the Champion Lumber Company for the assets of the Champion Lumber Company, and gain or loss to petitioner on such transaction would be computed as the difference between the cost of the old bonds (plus the small amount of cash paid) and the fair market value of the property received in exchange (section 202 of the Revenue Act of 1918), and the starting point or cost to petitioner 393 on account of the property so acquired was its fair market value at the time of its receipt. 1577 Both the petitioner and the Commissioner introduced evidence for the purpose of showing the value of the properties in question. The greater part of the evidence on the part of the petitioner was on account of a valuation of the depletable properties and to that end its general manager, who had been with petitioner since 1919, testified in detail as to such valuation, using as a basis a cruise made by him of the properties in 1919 or 1920. Based upon the number of feet which he considered then available and a market value per thousand feet, he gave as his opinion that the depletable properties had a value at the date of acquisition of $4,272,017. He was further of the opinion that the depreciable properties had a value at the same time of some $700,000, thus making a total valuation for both classes of property of approximately $5,000,000. We have further the testimony of two witnesses for the Commissioner, one of whom testified to a fair market value of the timber properties in 1918 of $1,372,000, and the other, of $1,600,000. The book value as shown in petitioner's capital stock return for the year ended December 31, 1919, was approximately $3,900,000, but it was stated in1578 such return that "These values were inflated beyond all reason [in setting them up on the books of the petitioner] and in making the tax return were cut down to a fair value." The fair value as stated in such return was approximately $1,800,000. While we do not know the exact cost used in determining the depletion allowance as shown in the deficiency notice, it is stated in the Commissioner's brief that the cost allocated to depletable properties was $1,900,000, and from other evidence in the case as to timber cut, amount of depletion allowed and the agreement of the parties as to the rate used by the Commissioner, we are convinced that the allowance has been made approximately on the foregoing basis. The cost of depreciable property as used in the deficiency notice for 1921 in determining the depreciation allowance was approximately $750,000, thus making total costs for depletable and depreciable properties of approximately $2,650,000. We have carefully considered all evidence introduced, including not only the expert testimony and documentary evidence referred to above, but also the facts relating to the sale and the expenditures made in connection therewith, and we have reached1579 the conclusion that the costs as used by the Commissioner are fair and reasonable and they are accordingly sustained. We do not understand that there is any material disagreement between the parties as to the quantities of timber to be used in computing the depletion allowance, the issue being as to the cost of such 394 property, which has been determined as shown above, and since the depletion allowance as fixed by the Commissioner appears reasonable on the basis of the costs herein determined, the amounts as allowed by the Commissioner are approved. A further question is raised as to depreciation allowance, wherein the petitioner contends that the Commissioner based his allowance on a useful life of the sawmill plant and equipment of 10 years, instead of upon the time required to take the timber from the Sunburst tract. However, the rate claimed by the petitioner takes no account of a residual or further useful value for the property at the termination of the Sunburst operation, which was shown at approximately $200,000. The petitioner's position is that such further useful value should be disregarded in this case, because it was not known until 1925 that a location1580 could be secured at Waynesville, to which this plant could be moved for operation on the Cataloochee tract. The last named tract was owned from the beginning of the operation at Sunburst and it seems only reasonable to think that consideration would be given to some use of such of the Sunburst equipment as could ordinarily be used in the manufacture of lumber on the Cataloochee tract, which was of about the same size. At any rate, when we consider the evidence offered as to the value of the depreciable assets (the highest value being approximately $700,000 and one value being as low as $300,000) and the fact that the Commissioner allowed depreciation on the basis of a cost of approximately $750,000 at the rate of 10 per cent, without regard to any residual value, we are of the opinion that the allowance as made is ample to care for all depreciation sustained and it is accordingly affirmed. The foregoing discussion also disposes of the issue with respect to invested capital, since under the determination as made by the Commissioner invested capital would become a factor only in the event that income is increased materially through the disallowance of depreciation and depletion1581 by the use of $1,000,000 (or approximately that amount) as a cost basis for such allowance and also the use of the same amount as the starting point for invested capital purposes, but since we have rejected the bid price at the foreclosure sale of $1,000.000 as fixing cost to petitioner, we are satisfied that no finding is necessary with respect to invested capital. The next issue arises on account of the purchase by the petitioner of its own bonds at less than their face value and the retirement of the same. The difference between the price at which purchased and retired and their face value was reported by petitioner as taxable income, but it is now contended that such amount should not have been so reported and should have been excluded by the Commissioner in his determination. Since the hearing was had in this proceeding, 395 the Supreme Court decided the case of , in which it was held that where a corporation purchases and retires its own bonds at a price less than the issuing price (which was face value), the excess of such issuing price over the purchase price constitutes taxable income. See also1582 . The bonds here in question were issued at their face value for the bonds of the Champion Lumber Company, and no contention is made nor was evidence produced by the petitioner to the effect that the petitioner did not receive the full face value for its bonds when issued. In fact, the evidence produced by the petitioner was for the purpose of showing that the assets securing the bonds of the Champion Lumber Company and a value much greater than such bonds, and we have found a value for those assets approximately equal to the par value of the bonds. In view of the foregoing, we are of the opinion that the action of the Commissioner in approving the inclusion by the petitioner in taxable income of the difference between the face value of its bonds and the smaller amount at which they were purchased and retired should be sustained. The final issue presented is the contention of the petitioner that, if it is determined that it otherwise realized taxable income for the years here under consideration, such income should be reduced by allowing a deduction on account of accrued interest on Class B-II bonds. We can1583 see no merit to this position. The pertinent features of the trust indenture with respect to the payment of interest on these bonds are set forth in our findings and show clearly, in our opinion, that these bonds are income bonds upon which no interest liability attaches until the board of directors meet and "by resolution specifically set apart from net income as hereinbefore described such sums as may be spared therefrom to pay interest upon bonds of Series B Class II, or if none can be spared the Board shall specifically find that the net earnings do not justify the appropriation of any moneys to such interest payment" and "any [interest] coupon which shall not be paid in its order shall thereupon become null and void and shall not constitute an obligation of the company." The indenture further provided that "The discretion to determine what are net earnings and to fix the amount thereof is unreviewable and is hereby lodged in the Board of Directors of the Company." Not only was interest neither accrued on its books nor paid on any of the bonds during the years under consideration, but, also, at each semiannual interest date the board of directors determined that no earnings1584 were available for such purposes and declared that the interest coupons due on such dates should be considered null and void. In view of the foregoing, we fail to see how at this time it could be said 396 that liability for interest attaches on account of coupons heretofore declared null and void by the parties who acted with unreviewable discretion in regard thereto, even though it should now be determined by the Commissioner and this Board that the petitioner is taxable on income in excess of that previously determined by the petitioner's board of directors. Reviewed by the Board. Judgment will be entered for the respondent in the amounts shown in the deficiency notice.Smith concurs in the result.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4623986/	Fotocrafters Incorporated v. Commissioner.Fotocrafters, Inc. v. CommissionerDocket No. 68464.United States Tax CourtT.C. Memo 1960-254; 1960 Tax Ct. Memo LEXIS 37; 19 T.C.M. (CCH) 1401; T.C.M. (RIA) 60254; November 29, 1960Harry A. Morris, Esq., 915 Grand Ave., Kansas City, Mo., and William B. Bundschu, Esq., for the petitioner. Sylvan Siegler, Esq., for the respondent. FORRESTERMemorandum Findings of Fact and Opinion FORRESTER, Judge: Respondent determined the following deficiencies in petitioner's income tax: Fiscal Year End-Section 531ing March 31DeficiencySurtax 11954$13,318.89$1,946.56 2195511,011.504,434.7319569,812.283,563.89The issues for our determination are: (1) Whether the salaries paid to petitioner's president and principal stockholder during the years in issue are reasonable in amount and hence deductible under section 23(a)(1)(A) of the 1939 Code and section 162(a)(1) of the 1954 Code; and (2) whether petitioner is liable for an accumulated earnings tax under section 102 of the 1939 Code and section 531 of the 1954 Code because it was availed of to avoid the income tax with respect to its shareholders by permitting earnings and profits to accumulate instead of being divided40 or distributed. Findings of Fact General Some of the facts have been stipulated, are so found and are incorporated herein by this reference. Petitioner is a corporation organized under the laws of the State of Missouri on April 2, 1947. It kept its books on an accrual method of accunting and filed its Federal income tax returns on a fiscal year ending March 31. Its returns for the years in issue were filed with the now director of internal revenue at Kansas City, Missouri. Issue 1. Salaries The prime motivating force behind petitioner has always been Joseph J. Enright, Jr., hereinafter referred to as Enright. Petitioner is engaged in the business of photofinishing (printing and developing of film). Enright started in this field in 1933 doing odd jobs at nominal wages for Elko Photo Products Company (hereinafter referred to as Elko) which was then in the field of printing and developing black and white film in the Kansas City area. Enright worked his way up through the Elko organization and by 1936 had achieved the position of manager in charge of general operations of one of Elko's branches. In so doing he gained valuable experience in all phases of the photofinishing41 business and by 1942, when he enlisted in the Navy, he was earning approximately $350 per month plus expenses. In the Navy, Enright was assigned to a photographic unit in which there were several other men with extensive and varied backgrounds in the field of photography. Here he learned much about technical aspects of photography and also became adept in the use of color film processes which were employed by the Navy in its intelligence work but which were not then available to the general public. Enright was discharged from the Navy in September 1945 and the next month returned to Elko. About 1 year later when Enright was earning $500 per month, Elko decided to embark upon a retail camera venture and to leave the photofinishing field. Enright took this opportunity to leave the employ of Elko and to enter the photofinishing field for himself, using about $9,000 of his personal savings to buy the needed equipment. Katz Drug Company (hereinafter referred to as Katz), a large chain drug store whose photofinishing work had been done by Elko, offered Enright a position within its organization as photofinisher at $10,000 per year, but satisfactory terms could not be reached. Thus, 42 Enright started out for himself with Katz as a customer on an informal day-to-day basis, no contract ever existing between them, or later, between Katz and petitioner. Enright's actual operations commenced about January 1947 at which time he formed a partnership with George Reynolds, another former Elko employee. In April 1947 petitioner was formed with $500 initial capital being paid in by Enright for 500 shares of stock; then on May 1, 1947, petitioner's board of directors accepted the partnership's offer to sell its assets to petitioner in return for 8,024 shares of stock. On May 2, 1947, the transfer occurred and Enright received 7,024 shares of stock and Reynolds 1,000 shares. Enright thus became the owner of 7,523 shares of petitioner's stock with Salvatore J. Salpietro (Sal) owning 1 qualifying share. Enright had charge of general management, selling, printing, enlarging and various other duties. Reynolds' role was to train the personnel and to direct production. Enright and Reynolds agreed that each would draw $50 a week as salary plus an end-of-year bonus "which would depend on the condition of the company at that time." For the fiscal year ending March 31, 1948, Enright43 received $4,975 and Reynolds received $4,825. On March 5, 1948, Reynolds announced his desire to withdraw from petitioner altogether. On the same day petitioner's board of directors accepted Reynolds' resignation and paid him $1,000 for his stock and $2,600 additional compensation (included in the $4,825) under the terms of a previous understanding. On May 1, 1948, Enright gave his brother, James A. Enright (James) 1 share of petitioner's stock so that from that date and throughout the entire period here involved the outstanding capital stock was held as follows: NameNumber of SharesEnright7,522James1Sal17,524 Throughout the entire period here involved Enright, James and Sal have served as petitioner's three directors, Enright has been president-treasurer and Sal and James have alternated between the positions of vice president and secretary. Upon Reynolds' departure, Enright assumed all of his duties in addition to those which he had been performing. For the fiscal year ending March 31, 1949, Enright drew only $3,520, computed at $100 per month, plus a year-end bonus. For the following fiscal year the stockholders voted to increase Enright's44 annual salary to $10,000 but Enright drew only $5,000 for that year with no bonus. In January 1951 the board of directors met and voted to give all nonofficer employees a Christmas bonus commencing the following Christmas and to continue a system of merit increases for such employees. The board also initiated a bonus system designed to compensate the officers equally according to a graduated scale based on a percentage of corporate net income before taxes. This scale was not followed, for in the fiscal year ending March 31, 1951, Enright received a bonus of $4,950 (bringing his total compensation to $12,500), but Sal and James received bonuses of only $1,500 each. These bonuses were computed without reference to profits and were designed to reward the officers of the company according to the value of their services. For the fiscal years ending March 31, 1952 and 1953, the bonus plan was altered so that the three officers received equal bonuses (totaling each year 30 per cent of the net profits before taxes) in order to compensate Sal and James for their past services before Enright's past services were fully rewarded. The bonuses to each officer were: Fiscal Year EndingAmountMarch 31, 1952$4,491.11March 31, 19534,763.1545 Enright's total compensation for these 2 years was $14,971.11 and $17,783.15, respectively. Petitioner's first and (to date of trial) only dividend amounting to $1 a share was declared on December 15, 1952, and paid on December 31, 1952. During the early years of petitioner's business Enright discovered that operations could be materially improved if they could develop an inexpensive means of providing 1-day service to customers. The major obstacle had been the delay attendant upon the "make-over" problem caused by errors in exposure of the negative the first time it was processed. By 1951, Enright had perfected a device (known as a "coding device") which (1) substantially alleviated the "make-over" problem by recording the exposure actually used, and (2) printed the date of development on all prints. The first feature helped to speed up operations, reduce petitioner's operating costs and improve the quality of the prints; the second feature created an immediate customer demand and helped to increase sales volume. In September 1952, Enright described his invention in the trade's national magazine and the device thereby attracted national attention. The invention was widely46 acclaimed and was a boon to the entire industry.sometime in 1952 petitioner entered into the manufacture and sale of this device, petitioner receiving all the proceeds. In August 1953, Enright applied for a patent on the device, and the patent was granted in January 1958. The net sales, gross profit and net income of petitioner steadily increased from its inception as follows: YearEndedGrossNetMarch 31Net SalesProfitIncome1948$ 74,687.20$ 27,965.41$ 4,585.201949129,205.7146,616.3721,143.981950131,247.5451,786.8813,502.531951150,083.3166,853.5322,667.591952196,267.8294,626.6330,717.721953245,826.18106,884.1432,942.001954288,581.27124,824.8633,628.201955288,079.70129,980.1942,708.211956287,606.65121,759.5035,176.641957329,439.62198,226.2231,197.921958412,107.23176,379.1925,634.90To provide a bonus system which was more equitable in light of the substantially greater value of Enright's services (as compared to those of James and Sal), the earlier plan was revised in April 1953, and for the fiscal years ending March 31, 1954, 1955, and 1956 (the 3 years here47 in issue), the same 30 per cent of the profits was set aside for bonuses but it was divided: Enright one-half, Sal and James one-fourth each. The board at the same time raised Enright's salary to $26,000, per annum. Thus Enright's compensation for the fiscal years in issue was: TotalYearSalaryBonusCompensation1954$26,000$ 7,411.51$ 33,411.51195526,0009,022.4235,022.42195626,0007,890.2133,890.21$78,000$24,324.14$102,324.14When petitioner decided to enter the color film field in 1953, as hereinafter described, the many duties connected with such expansion devolved upon Enright. Enright's services throughout petitioner's history have been unique and his functions were more numerous and varied than those of other executives in the industry. The compensation, including bonuses, paid to Enright for each of the years in issue was reasonable in amount. Issue 2. Accumulated Earnings During 1953 it became apparent to all the firms in petitioner's industry that the antitrust section of the Department of Justice was extensively investigating the alleged monopolistic practices of Eastman Kodak Company (hereinafter called48 Eastman) in tying up all the color film processes. Everyone was aware that Eastman would soon be compelled to make these processes available to the entire industry. Enright was thus advised that he should prepare to enter the color field as soon as practicable. Katz advised Enright that it had to keep pace with its competitors and that it could not continue business relations with petitioner unless petitioner could provide color film service. Enright made inquiries and was advised by Eastman and other reliable sources in the industry that it would cost $150,000 to $200,000 to enter the color field and that losses should be expected for about the first 2 years of operations. During the years in issue the percentage of petitioner's sales volume constituting sales to Katz Drug Company, and other chain and independent drug stores (none of which was on a contract basis) was as follows: Year EndingMarch 31KatzCrownParkviewTotalOtherTotal195463.923.39.997.12.9100.0195566.519.610.096.13.9100.0195673.76.4 11.091.18.9100.0Enright advised his board49 of directors of the compelling need to enter the color field and of the danger of losing the major source of revenue if petitioner remained static. Thus, in 1953 the board decided to postpone dividends for the time being. The board recognized a need to remain in a liquid position and thus kept much capital in the form of Government bonds and certificates of deposit. On December 21, 1954, a consent decree was filed by Eastman wherein all of its color reproduction processes, equipment, technical information and data, previously protected by patents, were to be made available to persons desirous of entering into the printing of color film. The equipment needed was altogether different from that used in conventional black and white film processing and the color processing had to be conducted in air-conditioned premises. Enright had tried to place an order with Eastman for the needed equipment in November 1954 when the consent decree appeared imminent and was able to place part of his order in March 1955. Equipment began arriving January 1956 and by the end of March 1956, petitioner had been billed for over $28,000 worth of equipment for the color processing. When petitioner's need50 for entry into the color field arose it also became apparent that the then leased premises on which petitioner processed black and white film was totally inadequate and could not provide the space needed for the color operation or to develop other accounts in order not to be so reliant upon Katz. Accordingly, petitioner authorized Enright to negotiate the purchase of new quarters and Enright, starting in 1953, made several efforts to secure a building. Fifty thousand dollars was earmarked for the acquisition of new quarters. Finally, after being frustrated in its attempts to secure a new building, petitioner entered into a 1-year lease of premises on Troost Avenue in January 1956 to start the color operation on a trial basis. The color equipment was delivered to this address. Petitioner continued to conduct its black and white operations at another location. Petitioner also had to air condition and revamp the Troost Avenue building to get it ready for color processing and spent about $8,000 in so doing. This equipment could not be used when petitioner gave up these temporary quarters in 1957. Finally, in January 1957, Enright located a building in Kansas City, Kansas, suitable to51 the color processing operation and petitioner authorized its purchase for $45,000. Petitioner then formed its wholly owned subsidiary, "Rainbow Color Film Service, Inc.," organized under the laws of Kansas, to take over the color operation and abandoned its Troost Avenue premises. The subsidiary was formed with $125,000 of capital paid in by petitioner. By that time petitioner had spent over $88,000 for new plant and equipment. During the years in issue and immediately thereafter petitioner's current assets, current liabilities, working capital, operating expenses, working capital ratios, and quick assets were as follows: Fiscal YearEnding March 31,19541955195619571958Current Assets: General cash$ 43,180.07$ 71,410.98$ 56,919.11$ 30,116.79$64,037.15accountPayroll cash6,230.492,927.227,046.578,063.242,984.78accountU.S. bonds43,470.0044,230.0064,578.0066,144.000.00Cert. of deposit20,678.8820,989.0121,228.1821,682.560.00Accounts and16,116.8115,422.3412,912.3511,177.7118,634.07notes rec.Inventories5,000.985,976.794,646.985,474.325,049.28Prepaid expenses525.171,458.121,632.801,651.521,413.13Total Current$130,560.18$162,414.46$168,963.99$144,310.14$92,118.41AssetsCurrent54,856.7556,640.0672,928.9577,325.8948,357.55LiabilitiesWorking Capital$ 75,703.43$105,774.40$ 96,035.04$ 66,984.25$43,760.86Operating$187,319.94$142,435.66$156,334.97ExpensesCurrent Ratio(Current Assetsto Current2.38:12.87:12.31:11.87:11.91:1Liabilities)Quick Assets$ 68,589.01$ 95,412.27$ 82,708.69$ 51,745.17$34,263.6752 Petitioner's earned surplus and undivided profits from its inception to date of trial were: Year EndedEarned SurplusMarch 31and Undivided Profits1948$ 3,622.31194918,411.19195027,738.43195144,862.38195262,580.10195374,784.49195494,044.521955120,044.461956142,439.201957162,914.201958180,766.95At no time throughout petitioner's history were funds ever loaned to any of its shareholders. In its early years petitioner had experienced considerable difficulty in borrowing money and had for this reason embarked on a program of financing its growth internally and did no borrowing throughout the years in issue. During all the years in issue petitioner has enjoyed a good credit rating. Eastman has been petitioner's principal supplier and sold to it on open account (2 per cent 10 days, net 30 days) because of its strong credit position. On February 18, 1957, respondent notified petitioner, pursuant to section 534, Internal Revenue Code of 1954, that he proposed to issue a statutory notice of deficiency for the fiscal years ending March 31, 1954, 1955, and 1956 with respect53 to section 102, Internal Revenue Code of 1939, for the first year and section 531, Internal Revenue Code of 1954, for the second and third years. On March 14, 1957, petitioner sent respondent a sworn statement in apparent compliance with section 534(c), and described: " * * statement of grounds (together with facts sufficient to show the basis thereof) on which [petitioner] relies to establish that all or any part of its earnings and profits have not been permitted to accumulate beyond the reasonable needs of the business." Had petitioner distributed all of its net income after Federal income taxes for the fiscal years ending March 31, 1954, 1955, and 1956, it is stipulated that the individual income tax liability of Enright would have been affected as follows: Net Taxable IncomeTaxCalendarAsYearReportedAs IncreasedPaidIncreasedAdditional Tax1954$29,748.99$ 48,816.39$11,169.47$19,601.68$ 8,397.22 195531,788.3157,528.2512,277.7124,907.5012,629.79195633,258.7555,429.5413,083.1323,906.3710,823.24$94,796.05$161,774.18$36,530.31$68,415.55$31,850.2554 Petitioner was not availed of for the purpose of avoiding the income tax with respect to its shareholders by permitting earnings and profits to accumulate instead of being divided or distributed. Opinion Issue 1. Salaries Respondent contends that for each of the years in issue, reasonable compensation to Enright would have been $18,000 per year (rather than the $33,000, $35,000 and $34,000 actually paid) and that only this amount should be deductible under section 162(a)(1) 3 or its predecessor under the 1939 Code. What constitutes a reasonable salary presents, of course, a question of fact, Geiger & Peters Inc., 27 T.C. 911">27 T.C. 911 (1957), to be decided in light of all the attendant circumstances. As respondent points out a salary paid by a closely held corporation55 to its principal shareholder must be closely scrutinized lest the corporation be permitted to pay what are in substance nondeductible dividends in the guise of salaries. Wagegro Corporation, 38 B.T.A. 1225">38 B.T.A. 1225 (1938). However, we feel that the compensation arrangement here at issue survives such examination. It was within reasonable limits considering petitioner's gross and net income during those years. The evidence, emanating largely from impartial sources, is uncontradicted that Enright was the sine qua non of petitioner's success. He bore the brunt of all the executive and policy-making problems. His invention was a material factor in petitioner's continued high earnings and customer good will. The continuance of the profitable business relationship with Katz was due solely to Enright's personal contacts and reputation. The responsibility for keeping petitioner abreast of changes and advances in the industry and for early launching its entry into the color photography field as well as selling, purchasing, production, personnel and other duties described in our findings was upon him. While the estimates as to the reasonable value of Enright's services varied, no witness56 placed it at under $30,000. Enright himself placed it at $35,000. He was competent to testify in this regard, his interest in the matter merely affecting the weight to be accorded his testimony. Builders Steel Co. v. Commissioner, 179 F. 2d 377 (C.A. 8, 1950). Perhaps, we could disregard the testimony of Enright as well as that of Sal, James and the well qualified controller of petitioner on the basis that it is patently self-serving. Wagegro Corporation, supra.However, we have observed Enright's demeanor at the trial and believe his testimony to be sincere and reliable. In any event, we also have uncontradicted testimony from impartial witnesses placing a reasonable value for Enright's services at about $35,000. One such witness who so testified was Lovett, the president of Elko, (called by respondent). He had long experience in the field, kept himself informed on his competition and was familiar with petitioner's operations and with Enright's services. This clearly qualified him to express his opinion. Builders Steel Co. v. Commissioner, supra. Respondent argues that Enright's salary should certainly be no higher than that of Lovett, 57 the competitor's president. But Lovett testified that since 1946 he had been receiving a base salary of $25,000 per year and a bonus amounting to 5 per cent of net income before taxes, and that another executive of Elko, who shared management duties with Lovett, received identical compensation. Elko also had a buyer who earned $10,000 per year and relieved Lovett of the purchasing functions. Obviously, Enright's responsibilities were greater and more varied than Lovett's. Another unrelated and well qualified witness testified that Enright's value to his firm was substantially greater than the value of other executives in the industry (including Lovett) to their firms. It is certainly proper that we emphasize the greater duties of Enright as compared to those of other executives (even though they have the same titles) in the field. Geiger & Peters, Inc., supra.Respondent challenges the bonus portion of the compensation as in effect a distribution of earnings. However, it is well recognized that a bonus system based on net profits is an established, permissible and often very necessary incentive compensation device in modern American industry. William S. Gray & Co. v. United States, 35 F.2d 968">35 F. 2d 968, 974.58 It is also significant to note that petitioner's bonus system was erected prior to the years in question. This renders it less likely to be a dividend substitute. Streckfus Streamers, Inc., 19 T.C. 1">19 T.C. 1 (1952). This circumstance makes the arrangement even stronger than the one which we sustained in Geiger & Peters, Inc., supra.459 We recognize, as respondent's above cited regulations provide, that a contingent compensation arrangement may become suspect when it is not arrived at "pursuant to a free bargain." However, the mere fact that Enright was the principal and most forceful shareholder does not per se invalidate the arrangement. For that matter, in virtually all the litigated cases on this question the corporations were closely held, usually by a small family group. Here, we have credible evidence that while Enright was the dominant voice in corporate affairs, other parties participated in setting corporate policy. Furthermore, the bonus arrangement was much like that of other firms in the industry. We also feel that (contrary to respondent's contention) the record supports the conclusion that the compensation arrangement here in issue was partly designed to reward Enright for services performed in prior years and for which he had been underpaid. Compensation for services rendered in prior years but not paid (nor accrued) until the current year is deductible in the tax year when paid. Lucas v. Ox Fibre Brush Co., 281 U.S. 115">281 U.S. 115 (1930). Nor does respondent contend otherwise. Accordingly, 60 we hold from the entire record that the compensation paid to Enright during the years in issue was reasonable in amount and fully deductible. Issue 2. Accumulated Earnings Respondent maintains that petitioner was availed of for the purpose of avoiding the income tax with respect to its shareholders by permitting earnings or profits to accumulate instead of being distributed, and is accordingly liable for the surtax penalty under sections 531 and 532. 561 Under section 533(a) 6 the fact that earnings are permitted to accumulate beyond the reasonable needs of the business creates a presumption that the corporation was availed of for the proscribed purpose. We must therefore determine whether petitioner has permitted such an unreasonable accumulation of earnings and we note that at the start of the period on March 31, 1953, petitioner had earned surplus and undivided profits of (round figures) $75,000. During the 3 years in issue, petitioner added $19,000, $26,000 and $22,000. Inasmuch as we feel that petitioner has affirmatively and clearly demonstrated the reasonableness of its accumulations, we need not decide the question as to which party bears the burden of proof on this issue under section 534. Cf. Breitfeller Sales, Inc., 28 T.C. 1164">28 T.C. 1164 (1957); F. E. Watkins Motor Co., 31 T.C. 288">31 T.C. 288 (1958); R. Gsell & Co., 34 T.C. 41">34 T.C. 41 (on appeal C.A. 2). Again, we are confronted with a question which is essentially one of fact, no one factor being controlling and other cases having comparative value only. World Pub. Co. v. United States, 169 F. 2d 18662 (C.A. 10, 1948), certiorari denied 335 U.S. 911">335 U.S. 911 (1949), rehearing denied 336 U.S. 915">336 U.S. 915 (1949). Although there has been an infinite variety of factual patterns presented to the courts a generalization may nevertheless be made: The provisions of section 531 and its predecessors are penal in nature and are designed neither to harass corporate directorates nor to prevent them from retaining profits to finance a sound, good faith program of expansion. As we recently observed in F. E. Watkins Motor Co., supra, at page 300: "A capitalistic economy requires some freedom of action on the part of those engaged in it and the needs of a growing business of necessity must be determined by those engaged in its direction." See also General Smelting Co., 4 T.C. 313">4 T.C. 313 (1944); Breitfeller Sales, Inc., supra. Bearing this in mind, we consider petitioner's financial situation. There can be no doubt that petitioner was in a growth industry experiencing rapid technological change. To remain static in this field would be to invite customers to discontinue their custom. Thus, the pure need for survival compelled petitioner to enter the color63 field. Intelligent management could not have done otherwise. From reliable estimates the cost of entry into the color fields appeared to be at least $150,000 and estimates ranged upwards to $200,000. Furthermore, it appeared likely that entry into this field would be risky and might require petitioner to absorb operating losses for several years. It is also clear that petitioner had to acquire additional quarters to house the color operation and did spend $45,000 of $50,000 earmarked for this purpose. Furthermore, this building had to be air conditioned in order for the color processing to be carried on effectively. Petitioner also felt it was necessary to have a spare printing machine, costing $25,000, available to insure prompt service to customers. This does not seem unreasonable in this business, so dependent on good customer relations. Other factors considered are that petitioner at no time loaned money to its stockholders. There was a strong possibility of protracted patent litigation primarily with Eastman which had been using apparatus quite similar to the coding device on which petitioner's patent application was pending during the years in issue. A qualified local patent64 attorney testified that litigation was being considered from July 1953 until 1958 (when in February of the later year Eastman finally entered into a licensing agreement with Enright and the proposed suit was dropped) and that such litigation would cost at least $25,000. We mention these various needs of petitioner's business to show that even $200,000 would be a conservative estimate of petitioner's needs as they appeared during the period here in issue. The facts as they appeared at this crucial point of time are those against which petitioner's retention of funds must be judged. Breitfeller Sales, Inc., supra.These needs were real and immediate, final investment being postponed only because of delay by Eastman in making the needed equipment available. Similarly the danger of losing the Katz account, there being no contract with Katz, was a real threat which must be taken into account. It is significant to note that petitioner did soon form a subsidiary for the color film operations and that by March 31, 1957, petitioner's working capital ratio had declined to 1.87:1 and its net quick assets were only $51,745.17 (and by 1958 they were only $34,263.67). This sequence65 of events, viewed against the undisputed urgency of entering the color film field serves to distinguish this case from those in which the plans for investment of working funds are vague or remote or are only general ideas for the far distant future. Cf. I. A. Dress Co., 32 T.C. 93">32 T.C. 93 (1959), affd. 273 F. 2d 543 (C.A. 2, 1960), certiorari denied 362 U.S. 976">362 U.S. 976 (1960); Wellman Operating Corporation, 33 T.C. 162">33 T.C. 162 (1959); American Metal Products Corporation, 34 T.C. 89">34 T.C. 89 (on appeal C.A. 8). Respondent argues that the fact that petitioner's earned surplus steadily increased from April 1, 1954, shows that the accumulations of earnings beyond this date were unnecessary. His understanding of corporate accounting is obviously confused. For, if an increase in earned surplus, of itself, showed that an accumulation was improper we would have to condemn every corporation which financed growth through current earnings and we could justify accumulations only where a corporation suffered operating losses during the tax year. What respondent overlooks is that the employment of working funds within a business to purchase fixed assets is not66 an occasion for a charge against earned surplus. Rather, it decreases working capital. That this decrease appeared likely to and did occur here we regard as highly significant. Accordingly, we conclude from all of the facts here that petitioner did not permit earnings to accumulate beyond the reasonable needs of the business. We recognize that this holding does not automatically dispose of the case for petitioner still must carry the ultimate burden of demonstrating that it was not availed of for the purpose proscribed by section 532. Pelton Steel Casting Co., 28 T.C. 153">28 T.C. 153 (1957), affd. 152 F. 2d 278 (C.A. 7, 1958), certiorari denied 356 U.S. 958">356 U.S. 958 (1958); I. A. Dress Co., supra.Nevertheless, the fact that an accumulation of funds is reasonable in amount in terms of needs of the business as a practical matter strongly suggests the absence of the forbidden purpose. United States v. R. C. Tway Coal Sales Co., 75 F. 2d 336 (C.A. 6, 1935); Jones v. Koma, 218 F. 2d 530 (C.A. 10, 1955); and cases there cited. The problem has been simplified, as to the last 2 years here involved, by the advent of section 535(a) 67 and (c)(1). 7 Since we have found that all the earnings were retained for the reasonable needs of the business, the section 535(c)(1) credit for fiscal 1955 and 1956 would be the total taxable income for each of these years and, accordingly, the section 535(a) accumulated taxable income on which the section 531 tax is imposed would be zero as to each year. Our ultimate conclusion from the entire record is that petitioner was not availed of for the purpose of avoiding the income tax with respect to its shareholders during any of the years in issue. To give68 effect to other adjustments agreed to by the parties, Decision will be entered under Rule 50. Footnotes1. Except where otherwise noted, references are to the Internal Revenue Code of 1954. ↩2. Sec. 102, I.R.C. of 1939↩.. The Crown Drug account was lost in July 1955.↩. Not available.↩. Discrepancy is not explained.↩3. SEC. 162. TRADE OR BUSINESS EXPENSES. (a) In General. - There shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including - (1) a reasonable allowance for salaries or other compensation for personal services actually rendered; * * (Section 23(a)(1)(A) of the 1939 Code is identical in substance.)↩4. Regs. 1.162-7(a)(2) provide: (2) The form or method of fixing compensation is not decisive as to deductibility. While any form of contingent compensation invites scrutiny as a possible distribution of earnings of the enterprise, it does not follow that payments on a contingent basis are to be treated fundamentally on any basis different from that applying to compensation at a flat rate. Generally speaking, if contingent compensation is paid pursuant to a free bargain between the employer and the individual made before the services are rendered, not influenced by any consideration on the part of the employer other than that of securing on fair and advantageous terms the services of the individual, it should be allowed as a deduction even though in the actual working out of the contract it may prove to be greater than the amount which would ordinarily be paid.↩5. SEC. 531. IMPOSITION OF ACCUMULATED EARNINGS TAX. In addition to other taxes imposed by this chapter, there is hereby imposed for each taxable year on the accumulated taxable income (as defined in section 535) of every corporation described in section 532, an accumulated earnings tax * * . SEC. 532. CORPORATIONS SUBJECT TO ACCUMULATED EARNINGS TAX. (a) General Rule. - The accumulated earnings tax imposed by section 531 shall apply to 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. (Section 102(a)↩ of the 1939 Code is identical in substance.)6. Substantially identical to section 102(c)↩ of the 1939 Code.7. SEC. 535. ACCUMULATED TAXABLE INCOME. (a) Definition. - For purposes of this subtitle, the term "accumulated taxable income" means the taxable income * * * minus [a deduction not here relevant] and the accumulated earnings credit (as defined in subsection (c)). * * (c) Accumulated Earnings Credit. - (1) General Rule. - For purposes of subsection (a), in the case of a corporation other than a mere holding or investment company the accumulated earnings credit is (A) an amount equal to such part of the earnings and profits for the taxable year as are retained for the reasonable needs of the business * *↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4623987/	Clifford Emond, Jr. v. Commissioner.Emond v. CommissionerDocket No. 66326.United States Tax CourtT.C. Memo 1959-173; 1959 Tax Ct. Memo LEXIS 73; 18 T.C.M. (CCH) 753; T.C.M. (RIA) 59173; August 31, 195973 Held, petitioner is not liable under section 311(a)(1) of the Internal Revenue Code of 1939 as a transferee for any part of the unpaid income taxes of his parents for the taxable years ended February 28, 1953, and 1954. Walter L. Mims, Esq., 514 Massey Building, Birmingham, Ala., for the petitioner. Harold G. Clark, Jr., Esq., for the respondent. ARUNDELLMemorandum Findings of Fact and Opinion ARUNDELL, Judge: Respondent determined that petitioner is liable under section 311(a)(1) of the Internal Revenue Code of 1939 as a transferee of assets of Clifford Emond, Sr., or Clifford Emond, Sr., and Evelyn Catoe Emond, husband and wife, for unpaid income74 taxes for the taxable years ended February 28, 1953, and 1954 of $1,376.44 and $11,910.08, respectively, or a total of $13,286.52, plus interest as provided by law. There is no dispute as to the correctness of the tax liability of the alleged transferor or transferors. The only issue is whether petitioner is liable as transferee. In his brief the respondent makes the following concession: Respondent in the statutory notices of liability asserted transferee liability in the total amount of $13,286.52, plus interest; however, respondent now claims liability on the part of the transferee only in the amount of $5,000.00 as represented by the bank deposit of $5,000.00 by Clifford Emond, Sr. in the bank account of Clifford Emond, Jr. Findings of Fact The facts stipulated are so found. Petitioner is an individual. He was born December 7, 1925, and is the son of Clifford Emond, Sr., hereinafter sometimes referred to as Senior and Evelyn Catoe Emond, hereinafter sometimes referred to as Evelyn. Senior has been a practicing attorney in Birmingham, Alabama, for about 35 years. Petitioner joined his father as a practicing attorney in February 1950. Petitioner's parents filed joint75 income tax returns for the taxable years ended February 28, 1953, and 1954 with the district director of internal revenue at Birmingham. Petitioner's parents have agreed to the assessment of deficiencies of $1,376.44 and $1,213.37 determined against them, for the taxable years ended February 28, 1953, and 1954, respectively, and the assessments thereof were made in November 1955. For the taxable year ended February 28, 1954, Senior and his wife filed a joint income tax return disclosing a net tax liability of $18,670.52, of which $18,170.52 remains unpaid, and which amount was assessed on August 1, 1954. Only $10,696.71 of the unpaid portion was asserted as a transferee liability against petitioner. Petitioner acquired his aunt's equity in a house located at 2829 Carlyle Road in Birmingham on July 1, 1935. The occupants of the house at that time were petitioner, his parents, and his sister. About 1946 petitioner purchased a house located in Redmont Park in Birmingham and placed a mortgage on it of approximately $22,000. Petitioner's parents and sister moved from the Carlyle house to the Redmont house. Senior had an understanding with petitioner that for the use of the house76 at Redmont he would pay the monthly mortgage payments of $198.22 and taxes as they became due and the necessary upkeep of the house. On or about May 12, 1954, petitioner sold the Redmont house. On May 13, 1954, a checking account entitled "Clifford Emond, Jr., Special Account," hereinafter sometimes referred to a the special account, was opened at the First National Bank of Birmingham. Petitioner executed and delivered to the bank powers of attorney in favor of each of his parents covering their withdrawing from or depositing funds to the special account. Senior and Evelyn could use the money in petitioner's special account for any purpose they wished. The initial deposit in the special account consisted of the proceeds from the sale of the Redmont house and was made by petitioner on May 13, 1954, in the amount of $29,749.53. Subsequent to the sale of the Redmont house, petitioner built a house on the Looney Mill Road property which he had purchased from his father for $8,500 free from all encumbrances. Petitioner gave his father a check for the $8,500, which check was later certified as Certification Number 16432. Petitioner's parents and sister then moved into the new house on77 Looney Mill Road with the same understanding that in lieu of rent Senior would make the monthly payments of $115.50 on the mortgage on the new house and pay the taxes. At the time Senior sold the Looney Mill Road property to his son, there was a mortgage on the property of $1,957.91. Petitioner did not assume that mortgage. The mortgage remained the obligation of Senior. Petitioner later paid off the mortgage of $1,957.91 and in doing so he considered his father was indebted to him for the amount of the payment. From the time the special account was opened, Senior drew checks on the special account for his own benefit. Prior to November 24, 1954, Senior had made no deposit of his own funds to the special account. Between the time the special account was opened and November 24, 1954, checks were drawn on the special account either by petitioner or Senior, for the benefit of Senior, as follows: DateDrawn ByPayeeAmount6- 8-54PetitionerAudrey Palmer$1,957.918-30-54SeniorClarke & Jones236.908-30-54SeniorBerry Radio &Appliance Co.422.7011- 2-54SeniorMrs. GertrudeAdams1,170.8811- 4-54SeniorSouthern BellTelephone Co.47.97Total as of November 24, 1954$3,836.3678 The check to Audrey Palmer was for the payment of the above-mentioned mortgage on the Looney Mill Road property purchased by petitioner from his father. The check to Clarke & Jones was for a deep freeze purchased by Senior. The check to Adams for $1,170.88 was for rugs and carpeting in the new Looney Mill Road house. The rugs and carpeting were the property of Senior. On November 18, 1954, the credit balance in the special account was $234.79. Petitioner then asked his father to repay the $3,836.36 that had been paid out of the special account for the father's benefit. On November 24, 1954, Senior cashed Certified Check No. 16432 for $8,500 and on the same day made a currency deposit of $5,000 to his son's special account. By so doing, Senior considered he had paid back the $3,836.36 that had been paid out of the special account for his benefit, and that the balance of $1,163.64 would be in the account and available to him at any time he desired to draw upon it. Between December 2, 1954, and April 16, 1955, or less than 5 months from the date of the deposit of $5,000 on November 24, 1954, Senior had withdrawn from the special account for his own benefit the amount of $1,275.22, 79 or $111.58 in excess of the balance of $1,163.64. The $5,000 which Senior deposited in the special account on November 24, 1954, was the only deposit to that account made by Senior. The deposit did not constitute a gift to petitioner by Senior. As of October 31, 1954, the total assets of Senior and Evelyn were $37,646.05 and the total liabilities, including unpaid Federal tax liabilities as of that date, were $46,484.80. Senior and Evelyn were insolvent on November 24, 1954. On July 5, 1956, Robert M. Strong, an internal revenue officer, made a demand in person upon Senior to pay his outstanding tax liabilities. Senior told Strong that he was unable to pay any part of his accounts. Shortly prior to July 25, 1956, respondent mailed a written demand to both Senior and Evelyn for their unpaid taxes. On or about July 25, 1956, Senior came to Strong's office and they drew up an agreement for Senior to pay the unpaid taxes on certain terms, but to date no payments have been made. The notices of alleged transferee liability were mailed to petitioner on December 18, 1956. Opinion Respondent contends that the deposit by petitioner's father of $5,000 in currency to petitioner's80 special account at the First National Bank of Birmingham on November 24, 1954, while petitioner's parents were insolvent and indebted to the United States for unpaid income taxes and additions of over $30,000, constituted a gift from father to son, and that by reason of such alleged transfer, petitioner is liable as a transferee under section 311(a)(1) of the Internal Revenue Code of 19391 to the extent of $5,000 in respect of such unpaid taxes. The burden of proving transferee liability is upon the respondent. Section 1119(a), I.R.C. of 1939. 281 Petitioner contends that the deposit in question did not constitute a gift to him by his father and that he is not liable as transferee under section 311. The evidence clearly shows that at the time Senior deposited the $5,000 of currency in his son's special account, the father was indebted to his son in the amount of $3,836.36 and that the deposit was intended to and did serve to discharge that debt. As to the balance of $1,163.64, the evidence is also clear that both father and son considered that this balance was available to Senior at any time he desired to draw upon it. In less than 5 months from the date of the deposit, the father had drawn out all of the $1,163.64. Upon such evidence we are unable to find as an ultimate fact requested by the respondent that "The deposit of $5,000.00 on November 24, 1954, in the special bank account of Clifford Emond, Jr. by Clifford Emond, Sr. was a gift and given without consideration." We hold that the said deposit did not constitute a gift. Adolph Weil, 31 B.T.A. 899">31 B.T.A. 899, affd. 82 Fed. (2d) 561 (C.A. 5, 1936), certiorari denied, 299 U.S. 552">299 U.S. 552; R. C. Coffey, 1 T.C. 579">1 T.C. 579, affd. 141 Fed. (2d) 20482 (C.A. 5, 1944); Marguerite F. Schwarzenbach, 4 T.C. 179">4 T.C. 179; Oliver M. Kaufmann, 6 T.C. 444">6 T.C. 444; Collins v. Baxter, 231 Ala. 247">231 Ala. 247, 164 So. 61">164 So. 61. Respondent also contends that without regard to whether the deposit in question constituted a gift, petitioner is liable as a transferee under section 311, supra, by reason of a provision in the Code of Alabama, 1940, title 20, section 7, 3 relating to the rights of creditors to void conveyances made to hinder, delay, or defraud. We fail to see where this provision of the Alabama Code is*83 of any help to the respondent under the facts of this case. We have found that of the $5,000 which Senior deposited in his son's special account, $3,836.36 was to pay a debt owing petitioner by Senior of that amount. As to the balance of $1,163.64, the evidence shows that Senior withdrew all of this amount for his own benefit in less than 5 months from the date of the deposit and before the notices of transferee liability were issued. Assuming, without deciding, that while any part of the $1,163.64 remained in petitioner's special account, respondent could have obtained some possible relief against petitioner under this provision of the Alabama Code, we are of the opinion that such a possibility disappeared with the later withdrawal of such funds by Senior for his own benefit before the notices of liability were issued. At the time the notices were issued, petitioner was not a "transferee of property of a taxpayer" as that term is used in section 311(a)(1), supra. The respondent's determination herein is disapproved. Decision will be entered for the petitioner. Footnotes1. SEC. 311. TRANSFERRED ASSETS. (a) Method of Collection. - 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 chapter (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) Transferees. - 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 chapter. ↩2. SEC. 1119. PROVISIONS OF SPECIAL APPLICATION TO TRANSFEREES. (a) Burden of Proof. - In proceedings before the Board the burden of proof shall be upon the Commissioner to show that a petitioner is liable as a transferee of property of a taxpayer, but not to show that the taxpayer was liable for the tax.↩3. All instruments made to hinder, delay, or defraud persons, void as to them. - All conveyances, or assignments in writing, or otherwise, of any estate or interest in real or personal property, and every charge upon the same, made with intent to hinder, delay, or defraud creditors, purchasers, or other persons of their lawful suits, damages forfeitures, debts, or demands; and every bond, or other evidence of debt given, suit commenced, decree or judgment suffered, with the like intent, against the persons who are or may be so hindered, delayed, or defrauded, their heirs, personal representatives and assigns, are void.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4623988/	Nestor J. Decker v. Commissioner.Decker v. CommissionerDocket No. 3922.United States Tax Court1946 Tax Ct. Memo LEXIS 24; 5 T.C.M. (CCH) 1009; T.C.M. (RIA) 46278; December 2, 1946Lee E. Joslyn, Jr., Esq., and J. H. Amick, C.P.A., 809 Majestic Bldg., Detroit, Mich., for the petitioner. Melvin S. Huffaker, Esq., for the respondent. HARRON Memorandum Findings of Fact and Opinion HARRON, Judge: Respondent determined a deficiency in income tax for the year 1941 in the amount of $19,731.36. The deficiency results chiefly from increase of petitioner's share of income of a partnership from $24,200.19 to $48,675.65. Minor adjustments are not contested by petitioner. Respondent has determined that petitioner is taxable on two-thirds of the income of a partnership, and that no part of the income of the business is taxable to petitioner's wife. Petitioner contends that his wife was a bona fide member of a partnership in25 1941, and that one-third of the earnings were taxable to her. Petitioner filed his return with the collector for the district of Michigan. Findings of Fact Petitioner and his wife, Elizabeth R. Decker, are residents of Detroit, Michigan. They were married in 1920. They have five children whose ages range between 10 and 23 years. 1. During the period 1922 to 1941, petitioner was employed by a corporation, Hotchkiss Tool & Engineering Company, in various capacities, and as manager from 1925 on. The business of the corporation was the manufacture of machine tools and gauges. Petitioner's interest in the corporation became substantial. By the end of 1934 he was a stockholder, officer, and director. He received 50 percent of the net profits as part of his salary. In March 1941 he arranged to purchase all of the stock of the corporation for $60,000. The stock was issued, one-half in the name of petitioner, and one-half in the name of petitioner's wife. In connection with the issuance of stock to petitioner's wife, petitioner reported in his gift tax return for 1941 that he made her a gift of $10,000 of the stock. She purportedly assumed an obligation to pay the sellers of the stock26 $20,000 for part of the stock which was to be issued in her name. Such payment was made in 1942 out of the earnings of a partnership, as will be hereinafter set forth. In November 1941, after all the stock had been acquired, petitioner purchased all of the physical properties of the corporation, Hotchkiss Tool & Engineering Company, for $40,000. Thereafter he conducted the business of the corporation as a sole proprietorship under the same name, Hotchkiss Tool & Engineering Company. At some time in 1943 or 1944 the corporation was dissolved. It is not claimed that petitioner's wife had any interest in the above named sole proprietorship business. The issue presented does not relate to the income of either the above named corporation or sole proprietorship. During the taxable year 1941, and prior, petitioner devoted practically all of his time during regular business hours to the business of Hotchkiss Tool & Engineering Company. 2. Francis N. Decker is a brother of petitioner. In 1936 he was 24 years old. He was a machine tool operator. In 1936, petitioner and his brother discussed setting up a machine shop with specialized equipment to be used for precision boring of tools, 27 dies, and gauges. There was need in Detroit for such shop. In October 1936 petitioner ordered a Swiss jig boring machine at a cost of about $9,000, which was delivered in April 1937. On June 26, 1937, petitioner and his brother entered into a partnership agreement, agreeing to conduct a business of a machine shop under the name of "Precision Boring Co." in Detroit. A certificate of co-partnership was filed with the clerk for Wayne County, in which it was stated that the partnership was to continue for a period of 20 years. The partnership agreement provided that 75 percent of the capital was to be advanced by petitioner, and 25 percent by Francis N. Decker; that any profit, loss, or interest in the partnership was to be shared upon that basis; that the agreement could be terminated on 60 days notice from either party; and that if one party desired to dispose of his holdings or terminate the partnership, he should first offer his interest to the other partner at the then present worth or book value. Petitioner contributed $8,642.33 to the capital of the partnership, and Francis N. Decker contributed $2,000. From its organization in 1937 through 1940, the partnership, Precision28 Boring Co., conducted a business of processing materials furnished by customers in accordance with their specifications. Jobs were usually completed in a day. The business did not have or need any inventory of materials. At first the Swiss jig borer was the only machine owned, and Francis N. Decker operated the machine. Later, additional machinery was acquired and employees were hired to operate the machines. Francis N. Decker devoted all of his time to the business and was the manager. He received orders, solicited business, employed machinists, supervised all work, and, in general, handled all of the business of the partnership. He received a salary in addition to 25 percent of the profits. His salary, prior to 1941, was as high as $100 per week, plus 10 percent of profits before profits for partners under the agreement. The Hotchkiss Tool & Engineering Company was one of the customers of the Precision Boring Co. Petitioner left the daily operations of the business of Precision Boring Co. to his brother, but he consulted with his brother about the development of the business, and he made loans to the partnership amounting to an aggregate of about $20,000. He opened the books29 for the partnership. He performed all of the bookkeeping work, doing such work on Sundays or during evenings. He had authority to sign checks. Petitioner did not receive from the partnership any salary or compensation for the services he gave to the business. The net income of the partnership for the years 1937 to 1940, inclusive, was as follows: 1937$ 1,011.4919381,940.5819399,670.26194019,331.45At the end of 1940, the prospects of increased business for the partnership was evident. Additional machines were ordered, costing about $25,000, which were to be delivered in 1941. Plans were made in 1940 for building a plant at a cost of about $37,000. The new building was completed in 1941. During 1941 petitioner made further loans to the partnership to apply to the purchase of new machines and the construction of the building. As of December 31, 1940, the total assets and liabilities of the partnership amounted to $45,682.89. Assets comprised cash and accounts receivable totalling $15,356.19; and machinery, tools, and buildings totalling $30,326.70, (book figures without reserves for depreciation). The only liabilities of the partnership, other than30 reserves for depreciation of $5,565.30, were a tax due of $15.88 and salary due Francis N. Decker of $2,147.93. The net worth of the business was $37,953.78, of which $28,465.33 was the balance of petitioner's capital account, and $9,488.45 was the balance of Francis N. Decker's capital account. 3. In 1937, the oldest of petitioner's five children was 15 years old, and the youngest was 2 years old. Petitioner's wife devoted all of her time to the care of her children and home. No domestic help was employed. Petitioner's wife did all of the housework. From 1937 through 1940, petitioner's wife assisted him at home by making up the partnership bills and preparing the monthly statements, and sending out some advertising material of the partnership. She had been employed as a billing clerk prior to her marriage. She did this work on Sundays and during evenings. She made up the bills from the shop slips which petitioner brought home. Petitioner's wife performed the above services for the partnership without compensation. There is no record of the number of hours devoted to such work. After 1940, petitioner's wife did not do any of the above described work for the partnership or for31 her husband. The partnership hired someone to do this work at the firm's office at the rate of 50 cents an hour. 4. At some time in 1940, petitioner discussed with his brother his proposal that his wife become a member of the partnership. He proposed that the interest of Francis N. Decker would be increased to 33 1/3 percent, and that petitioner and his wife should each have a 33 1/3 percent interest. The proposal was acceptable to Francis N. Decker. Accordingly, on January 2, 1941, a new partnership agreement was executed, which was substantially the same as the 1937 partnership agreement, except for the provisions for rearranging the interests from 75 and 25 percent to 33 1/3 percent. The agreement was executed by petitioner, his wife, and his brother in triplicate, each retaining one copy. It was agreed that petitioner, Francis N. Decker, and Elizabeth R. Decker should each contribute 33 1/3 percent of the capital, and should share the profits and losses on the same basis. The firm name was to be the same. The partnership could be terminated on 60 days notice. In the event any partner wished to dispose of his interest, or terminate the partnership, he or she had first to offer32 such interest to the other partner or partners at the then worth or book value of the interest. The partnership agreement was prepared at petitioner's suggestion. His wife was not consulted about the terms of the agreement. Petitioner's wife did not contribute any capital originating with herself to the partnership under the 1941 agreement. No new capital was contributed to the business by anyone. Petitioner determined that the contribution of each person should be $12,000. A capital account was opened in the existing books in the name of petitioner's wife. Petitioner transferred $12,000 out of his capital account to open the capital account in his wife's name. The capital account of Francis N. Decker had a balance of $9,488.45 at the end of 1940. He had salary payable to him in the sum of $2,511.55 transferred to his capital account, after which the balance of his capital account was $12,000. Petitioner transferred $4,465.33 from his capital account to his loan account with the firm, so that, thereafter, the partnership indebtedness to him was increased by the above amount. After the transfers to his wife's capital account and to the loan account, the balance in petitioner's33 capital account was $12,000. Petitioner's attorney attempted to file with the county clerk the 1941 partnership agreement, but the clerk advised that he could not accept the new certificate of co-partnership under the Michigan law relating to partnerships, which at the time did not allow a wife to engage in business as a partner with her husband. Accordingly, the original certificate of co-partnership filed in 1937 remained of record. No bill of sale was executed by petitioner to his wife. A certificate of doing business under an assumed name was not filed. Petitioner, in his Federal gift tax return for 1941, reported a gift to his wife, among other gifts, of a one-third interest in a partnership known as "Precision Boring Co." of Detroit at a value of $12,000. No gift tax was payable under the return. 5. After the execution of the 1941 partnership agreement, and during 1941, petitioner's brother continued to conduct the business of Precision Boring Co. in exactly the same manner as before. Petitioner's wife did not perform any services in or for the business during 1941; she did not make up any bills or invoices. Petitioner's interest in and his services to the business continued34 exactly as before. He continued to loan money to the business and look after the books. Creditors and customers were not notified that petitioner's wife was a partner. No change in the authority to sign the firm's checks was made. During 1941, between 10 and 15 machine operators were employed for a total compensation of about $36,000. A billing clerk was employed at the office at the rate of 50 cents per hour. During 1941, petitioner's wife continued to devote all of her time to the care of her five children and her home without the aid of any domestic help. During 1941, petitioner's wife was informed that the old Swiss jig borer would be sold and replaced by new machinery. Petitioner and his brother at all times, and during 1941, had full control and sole authority to decide whether any earnings of the business were to be distributed to the partners, and they alone made decisions about distributing earnings or retaining them. 6. The gross receipts of the Precision Boring Co. for 1941 were $112,125.33, and net distributable income was $72,600.57, (of which the shares of the respective partners was $24,200.19). As of December 31, 1941, the gross assets of the business were35 $127,078.82, consisting of cash and accounts receivable, $31,364.64; machinery, tools, and fixtures, $34,511.98; land and buildings, $61,202.20. Liabilities of $18,478.25 included a contract payable account on property $10,058.40, and salary due F. N. Decker $8,066.74. Total capital was $108,600.57. None of the 1941 earnings was distributed to the partners, but the capital accounts of each were credited with $24,200.19, so that the balance of each account at the end of 1941 was $36,200.19. 7. During 1942, the capital account of petitioner's wife was reduced by the total amount of $28,821.50, of which $7,318.55 was used to pay the income tax reported on her separate return for 1941, and $21,506.95 was deposited in her separate savings account. On December 30, 1942, petitioner's wife withdrew $20,000 from her savings account and paid that sum to a vendor of the stock of the corporation, Hotchkiss Tool & Enginering Company. This payment related to the arrangements which petitioner had made in March 1941, and to which he referred in the 1941 gift tax return. 8. Petitioner's wife filed a separate income tax return for 1941, in which she reported total income of $24,370.63, which included36 $24,200.19 of the 1941 earnings of Precision Boring Co. In her return she gave as her occupation, "Housewife." Respondent determined that petitioner's wife was not a bona fide member of the partnership in 1941. After making adjustments in the income of the partnership, the amount added to petitioner's income as a result of the above determination was $24,475.46. 9. Petitioner has never contributed to the partnership any funds belonging to his wife, nor used any of her funds in the partnership business, or for his own purposes. 10. Petitioner's wife was not a bona fide member of the partnership, Precision Boring Co., in 1941. She did not contribute any capital originating with herself to the partnership, in 1941 or before, or render any services to the business in 1941. 11. The partnership created in 1937 and existing in 1940, consisting only of petitioner and his brother, continued in existence during 1941, and the formal admission of petitioner's wife to the partnership under the agreement of January 2, 1941, did not effect any real change in the original, existing partnership for purposes of petitioner's liability for Federal income tax upon the earnings of the business. 37 The petitioner and his brother did not intend to carry on the business in question in partnership with petitioner's wife, and they did not do so. Rather, the petitioner and his brother intended to and did continue to conduct the business in question by themselves only as a partnership. Petitioner's purported gift of an undivided interest in Precision Boring Co. in 1941 was not a valid and completed transfer of an interest in property in that no control was given over any separate and severable property in 1941. Petitioner intended that money representing such undivided interest was to remain in the business, and his wife so understood. She could not dispose of that interest freely, but had to first offer it to her husband or brother-in-law, or both. Petitioner and his brother retained complete control over the disposition of the earnings, the retention or distribution thereof. Petitioner's wife was not a bona fide partner in 1941. Opinion Respondent has determined that petitioner is taxable on income of a partnership which, in part, has been attributed to petitioner's wife. The determination has been made under section 22(a) of the Internal Revenue Code38 . Petitioner rests his contention that onethird of the 1941 income of the partnership is taxable to his wife wholly upon his alleged gift to her in January 1941 of an undivided part of his interest in the partnership which was created in 1937. It is his contention that he made a complete and absolute transfer to his wife by gift of an interest in the business which existed; that as a result of such gift his wife contributed capital to the business; and that income thereafter accruing to such interest was the income of his wife. 1 He relied upon J. D. Johnston, Jr., 3 T.C. 799">3 T.C. 799; M. W. Smith, Jr., 3 T.C. 894">3 T.C. 894; Robert P. Scherer, 3 T.C. 776">3 T.C. 776; Felix Zukaitis, 3 T.C. 814">3 T.C. 814. Petitioner also places emphasis on the nature of the business in question, arguing that the income was produced by capital, meaning machines, rather than personal services. It is believed that petitioner, under this argument, had reference to the line of cases relating to personal service businesses, alleged to be distinguishable from the business involved here, such as Mead v. Commissioner, 131 Fed. (2d) 323; Earp v. Jones, 131 Fed. (2d) 292;39 and Schroder v. Commissioner, 134 Fed. (2d) 346, although he does not refer to those cases on brief. Petitioner relied also upon Tower v. Commissioner, 148 Fed. (2d) 388, reversed, Commissioner v. Tower, 327 U.S. 280">327 U.S. 280. Respondent relied upon Burnet v. Leininger, 285 U.S. 136">285 U.S. 136.; Carl P. Munter, 5 T.C. 39">5 T.C. 39; and Camiel Thorrez, 5 T.C. 60">5 T.C. 60; aff'd., 155 Fed. (2d) 791. The facts of this case closely resemble the facts in James L. Pritchard, et al., 7 T.C. No. 144 (promulgated November 29, 1946). Here, as there, respondent recognizes for income tax purposes an existing partnership in which only petitioner and his brother were members; and he takes the position that the formal arrangements which were made on January 2, 1941, to establish a new partnership in which petitioner's wife was admitted as a partner were not effective to relieve petitioner from income tax upon40 two-thirds of the earnings of the business. Petitioner, on brief, anticipated respondent's argument that no capital was contributed to the business in question by petitioner's wife. The Supreme Court in the Tower case has stated the circumstances under which a husband and wife may become partners for tax, as for other purposes. Where the wife does not perform vital additional services and does not substantially contribute to the control and management of the business, she must at least invest in the business capital originating with herself as a prerequisite of recognition of any ownership by the wife of any part of the partnership earnings for income tax purposes. Here, the evidence is clear that petitioner's wife did not make the required investment of her own capital in the business. Rather, her alleged ownership of an interest in the partnership was brought about merely by "the simple expedient of drawing up papers" and the making of bookkeeping entries transferring part of petitioner's capital account to a new capital account in his wife's name on the books of the firm. With respect to the formal making of a gift, petitioner did even less than ordinarily is done, relying chiefly41 upon a Federal gift tax return and the bookkeeping entries as evidence of a gift. There was never any actual division of the assets of the existing firm and no time at which petitioner's wife could have exercised any independent control over her alleged interest in them. See Jacob De Korse, 5 T.C. 94">5 T.C. 94; aff'd., 158 Fed. (2d) 801 (November 18, 1946); Camiel Thorrez, supra; Fred W. Ewing, 5 T.C. 1020">5 T.C. 1020; aff'd, 157 Fed. (2d) 679 (November 15, 1946); Abe Schreiber, 6 T.C. 707">6 T.C. 707; Paul G. Greene, 7 T.C. 142">7 T.C. 142; Lowry et al. v. Commissioner, 154 Fed. (2d) 448. The Precision Boring Co. expanded its productive capacity in 1941, constructing a building and purchasing machines, and for such acquisitions new capital was needed. Indeed, the situation was such that petitioner and his brother might well have considered inviting a new partner into the firm to carry on the business in partnership as a means of procuring additional capital. Despite the situation, there was not any addition to the firm's capital as a result of the formalities of making petitioner's wife a member of the partnership. There42 is no evidence that petitioner and his wife really intended to carry on a business as a partnership. Commissioner v. Tower, supra; John Lang, 7 T.C. 6">7 T.C. 6. When consideration is given to all of the facts, the conclusion that the agreement of January 2, 1941, brought about no changes whatsoever in the conduct of the existing business and the control over the use of its earnings is inescapable. In the light of the facts, the alleged partnership relationship was unreal, with respect to petitioner and his wife. The arrangement did no more than to provide a basis for reallocating petioner's income between himself and his wife. Under the arrangement, the wife appeared to have received at the end of one year a return of $24,200 upon an alleged investment of $12,000 in a year when the firm was making substantial capital expenditures. The facts refute the contention. The question is controlled by Commissioner v. Tower, supra. Respondent's determination is sustained. Decision will be entered for the respondent. Footnotes1. The briefs in this case were submitted prior to February 25, 1946, the date of the Supreme Court decisions of Commission v. Tower, 327 U.S. 280">327 U.S. 280; and Lusthaus v. Commissioner, 327 U.S. 293">327 U.S. 293↩.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4623989/	Paul W. Adams, Petitioner v. Commissioner of Internal Revenue, Respondent; Paul W. Adams, Transferee, Petitioner v. Commissioner of Internal Revenue, RespondentAdams v. CommissionerDocket Nos. 6976-74, 6977-74, 6978-74, 6979-74, 6980-74, 6981-74United States Tax Court72 T.C. 81; 1979 U.S. Tax Ct. LEXIS 139; April 11, 1979, Filed 139 Decisions will be entered for the petitioner in docket Nos. 6976-74, 6979-74, and 6981-74.Decisions will be entered under Rule 155 in docket Nos. 6977-74, 6978-74, and 6980-74. On May 30, 1978, our findings of fact and an opinion were filed in this case (70 T.C. 373">70 T.C. 373 (1978)), which, in part, sustained respondent's determination that petitioner was subject to a 5-percent excise tax, individually and as transferee of Automatic Accounting Co., under sec. 4941(a)(1), I.R.C. 1954, for certain acts of self-dealing which occurred between a private foundation and petitioner and Automatic Accounting Co. With respect to the same acts of self-dealing, respondent also asserted deficiencies in tax under sec. 4941(b)(1). The above-noted opinion did not address petitioner's liability for such deficiencies.In our initial opinion, we further held that the transitional rule contained in sec. 53.4941(f)-1(b)(2), Foundation Excise Tax Regs., was applicable to one of the acts of self-dealing. Subsequent to the filing of the opinion, respondent has asked us to reconsider our holding that one of the acts of self-dealing fell within the scope of the transitional rule. 140 Held:1. Petitioner is not liable for the deficiencies in tax asserted by respondent under sec. 4941(b)(1).2. Upon reconsideration of the matter, the transitional rule is not applicable to any acts of self-dealing in which petitioner or Automatic Accounting Co. engaged. Adams v. Commissioner, 70 T.C. 373">70 T.C. 373 (1978), modified. Sherin V. Reynolds, for the petitioner.Thomas P. Dougherty, Jr., for the respondent. Fay, Judge. Goffe, J., concurring. Fay and Wiles, JJ., agree with this concurring opinion. Tannenwald, J., dissenting. Simpson, J., dissenting. Sterrett, Wilbur, and Chabot, JJ., agree with this dissenting opinion. Chabot, J., dissenting. 149 Simpson, Sterrett, and Wilbur, JJ., agree with this dissenting opinion. FAY82 SUPPLEMENTAL OPINIONOn May 17, 1974, respondent mailed to petitioner, Paul W. Adams, six statutory notices of deficiency in which he determined various chapter 42 excise tax deficiencies under Code section 49411 against petitioner, individually and as transferee of Automatic Accounting Co. (Automatic), a corporation wholly owned by petitioner. The asserted deficiencies arose out of several alleged "acts of self-dealing" between a private foundation and petitioner and Automatic.Subsequent to the filing of the petitions in these cases, a trial was held in Bridgeport, Conn., on October 18, 1977. Thereafter the parties submitted briefs, and on May 30, 1978, our findings of fact and an opinion were filed in which we, in part, sustained respondent's determination: (1) That several acts of self-dealing occurred between petitioner150 and Automatic and a private foundation; and (2) that petitioner was subject to the 5-percent excise tax under section 4941(a)(1) with respect to such acts. Adams v. Commissioner, 70 T.C. 373">70 T.C. 373 (1978). As yet, final decisions have not been entered in these cases.In his statutory notices, respondent further asserted a 200-percent excise tax under section 4941(b)(1) for the same acts of self-dealing. However, because of the wording of the statute under which the 200-percent tax is imposed, a serious question was raised as to the authority of this Court to enter a decision determining a section 4941(b)(1) tax liability. Thus, in our opinion of May 30, 1978, we did not decide petitioner's liability for the 200-percent excise tax under section 4941(b)(1) with respect to those acts of self-dealing for which petitioner was liable for the 5-percent excise tax under section 4941(a)(1). Instead, we requested that the parties submit briefs discussing our authority to determine a section 4941(b)(1) tax. Adams v. Commissioner, 70 T.C. 446">70 T.C. 446 (1978). In accordance with this request, supplemental original and reply briefs were received151 83 from the parties. Following from all this, our opinion herein deals primarily 2 with the question of petitioner's liability for tax under section 4941(b)(1) for those acts of self-dealing set forth in our opinion dated May 30, 1978. 3Generally speaking, section 501(a) exempts from Federal income taxation certain organizations, including private foundations as defined by section 509, which are operated for charitable 152 purposes and "no part of the net earnings of which inures to the benefit of any private shareholder or individual." Prior to 1970, compliance with this latter prohibition was insured, at least in part, by section 503 which imposed arm's-length standards of conduct on dealings between a private foundation and its founders and major contributors. Penalties for violation of these standards included the loss of the foundation's exempt status for a minimum of 1 year, and the disallowance of deductions to donors for contributions during such period. Adams v. Commissioner, 70 T.C. 373">70 T.C. 373, 379 (1978).The subjective element present in the arm's-length standard created many problems in enforcement. These problems led to its eventual elimination in 1969 and replacement with a general prohibition on any transactions between a private foundation and a "disqualified person." S. Rept. 91-552 (1969), 3 C.B. 423">1969-3 C.B. 423, 442-443. 4 The penalties for noncompliance with this general prohibition include, inter alia, a graduated series of excise taxes found in section 4941. 5 Thus, a transaction between a private foundation and a "disqualified 153 person," 6 even though entered into and conducted in accordance with arm's-length standards, is considered an "act of self-dealing" and subject to the imposition of excise taxes under section 4941. Further, under the 1969 legislation, the penalties added by section 4941 were shifted from the foundation to the disqualified person.84 Simply stated, there are two levels of sanctions contained in section 4941. Section 4941(a)(1) levies against the self-dealer a first-level excise tax equal to 5 percent of the "amount involved" with respect to each act 154 of self-dealing. This first-level tax is imposed for each year, or part thereof, beginning on the date of the self-dealing and continuing until the earlier of the date the self-dealing is corrected, or the Government sends a deficiency notice regarding the transaction. Following the imposition of the first-level tax, the self-dealer is given the opportunity to correct the act of self-dealing within the "correction period." 7 "Correction" usually entails undoing the transaction to the extent possible. Sec. 4941(e)(3). If correction of the act is not timely made, subsection (b)(1) imposes upon the self-dealer a second-level tax equal to 200 percent of the "amount involved." It is the timing of the imposition of this second-level tax which presents us with our primary problem herein.As previously mentioned, in his statutory notices, respondent has determined deficiencies against petitioner in the section 4941(b)(1) second-level tax with respect155 to those acts of self-dealing for which we, in our opinion dated May 30, 1978, held petitioner liable for the section 4941(a)(1) first-level tax. In seeking a redetermination of these asserted second-level tax liabilities, petitioner, in essence, is contending that there is no "deficiency" in the second-level tax as that term is defined in section 6211(a). For the reasons set forth below, we agree with petitioner.We begin by noting that section 7442 limits the jurisdiction of this Court to that conferred upon it by statute. Adams v. Commissioner, 70 T.C. 446">70 T.C. 446, 447 (1978). With a few exceptions pertaining to declaratory judgments 8 and refunds of certain overpayments, 9 our statutory jurisdiction consists of authority to redetermine the correct amount of a "deficiency" as determined by the Commissioner. Sec. 6214(a). The term "deficiency," as it relates to the present case, is defined in section 6211(a) to mean "the amount by which the tax imposed by * * * chapter 42" exceeds that shown on the return. (Emphasis added.) The time at which the determination of the existence of the deficiency is made is the date of the mailing of the statutory156 notice by the 85 Commissioner. Heasley v. Commissioner, 45 T.C. 448">45 T.C. 448, 456 (1966). Thus, if the Commissioner asserts a deficiency in tax and, because of the particular facts of a case or the applicable law, the tax asserted has not been imposed as of the date of the statutory notice, there is no "deficiency" as defined in section 6211(a). Put simply, in the absence of a "deficiency" the taxpayer must prevail. We must therefore decide whether on the date of the mailing of the statutory notices of deficiency in this case there existed a deficiency in tax under section 4941(b)(1) as determined by respondent.Section 4941(b)(1) provides that where a first-level tax under subsection (a)(1) is imposed on an act of self-dealing, and such act is not corrected within the "correction period," there is then imposed an additional tax. 10The term "correction period" is defined in section 4941(e)(4) to mean:the period beginning157 with the date on which the act of self-dealing occurs and ending 90 days after the date of mailing of a notice of deficiency with respect to the tax imposed by subsection (b)(1) under section 6212, extended by -- (A) any period in which a deficiency cannot be assessed under section 6213(a), * Pursuant to section 6213(a), if a petition has been filed with this Court, assessment of a deficiency cannot be made until the decision of this Court becomes final. See secs. 7481 and 7483.Under this statutory scheme, the second-level tax is not imposed, assuming no correction occurs, until the expiration of the correction period. However, 158 the correction period does not expire until the decision of this Court with respect to the second-level tax becomes final.The effect of all this may be summarized as follows: On the date of the mailing of the notice of deficiency which determines the second-level tax, our decision with respect to that tax obviously has not yet become final. Since our decision is not final, under section 4941(e)(4) the correction period has not expired. Pursuant to section 4941(b)(1), the expiration of the correction period is a prerequisite to the imposition of the 86 second-level tax. If the tax is not imposed until the correction period expires, it is clearly not imposed on the date of the mailing of the statutory notice and, therefore, there is no "deficiency" as that term is defined in section 6211(a). Because petitioner has sought this Court's redetermination of a deficiency determined by respondent, and because no deficiency exists, we are bound to enter a decision for petitioner as to the second-level tax.Respondent admits the logical inconsistency in a literal reading of the statute, i.e., that the second-level tax cannot be "imposed" until the expiration of the correction period159 which, in turn, is defined as occurring at the same time our decision with respect to such tax becomes final. However, to give effect to the "clear Congressional intent" as expressed in the legislative history, he asserts that the inconsistency should be resolved by interpreting the statute such that the second-level tax is imposed when the act of self-dealing occurs. Thus, respondent maintains, if this Court finds that an act of self-dealing occurred, we would enter a decision sustaining respondent's determination that petitioner is liable for the first- and second-level taxes. Thereafter, if petitioner corrects the act before our decision becomes final, the second-level tax would be abated. In the event that petitioner fails to timely correct, the second-level tax would then become irrevocably imposed. In support of his position, respondent argues that a literal interpretation of the statute would produce an absurd result and emasculate the deterrent effect of the self-dealing provisions.We agree with respondent that Congress intended, through the imposition of the first- and second-level taxes, to eliminate self-dealing transactions. S. Rept. 91-522 (1969), 3 C.B. 423">1969-3 C.B. 423, 442.160 We also agree with respondent that a statute should not be literally read so as to frustrate congressional intent. Unfortunately, however, while the ultimate goal of Congress may be clear, the method by which it sought to achieve its objective is anything but clear. In his brief, respondent has suggested certain procedural steps to handle the unusual problems presented by cases of this type. After carefully considering his suggestions and other alternatives, we have concluded that for us to piece together a procedure to reach the results intended by Congress in this and subsequent cases would necessitate rewriting many portions of the statute. This we decline to do.87 First of all, the statutory provisions relating to the timing of the imposition of the second-level tax are not ambiguous on their face. Subsection (b)(1) of section 4941 very clearly provides that a precondition to the imposition of the second-level tax is the failure to correct an act of self-dealing within the correction period. Subsection (e)(4) unequivocally extends the correction period until our decision becomes final. The statute most certainly does not, as respondent asserts, impose the tax161 on the date of the act of self-dealing. Moreover, the legislative history tends to refute respondent's contention. Indeed, the committee reports accompanying the statute, if anything, lend further support to our construction of these provisions. In this regard, the committee reports provide:The second-level sanction, imposed only after notice of deficiency and adequate opportunity for court review and undoing the self-dealing transaction, is intended to be sufficiently heavy to compel voluntary compliance (at least, after court review). The committee expects application of this sanction to be rare, but where the parties refuse to undo the transaction, it is expected that this sanction will be applied. [S. Rept. 91-522 (1969), 3 C.B. 423">1969-3 C.B. 423, 445; emphasis added.]Therefore, taking into account the time at which the second-level tax is imposed, together with the fact that nothing exists to indicate that the word "imposed" in section 4941(b)(1) has a meaning different than the word "imposed" used to define the word "deficiency" in section 6211(a), the conclusion that no deficiency exists is inescapable.A second statutory obstacle to the results162 desired concerns the procedure for determining the amount of the second-level tax. Pursuant to section 4941(b)(1), the second-level tax is imposed at a rate equal to 200 percent of the "amount involved." Section 4941(e)(2) defines the "amount involved" as the "greater of the amount of money and the fair market value of the other property given or * * * received" in the self-dealing transaction. This subsection also provides that, in the case of a second-level tax, the "fair market value" of the property involved shall be its highest fair market value during the correction period. Because expiration of the correction period is dependent upon a final decision of this Court, and because the appeal process may forestall the finality of our decision for years, the value of the property involved may fluctuate substantially during the correction period. Thus, the amount of the second-level tax is incapable 88 of determination until our decision becomes final. However, once that decision becomes final, by whom and through what procedure is the determination made of the highest fair market value of the property involved during the correction period? If the parties are unable to163 reach agreement on a value, is a trial held to decide the issue? If so, in which forum is the trial conducted?To circumvent these problems, respondent submits that prior to the entry of our decision with respect to the first- and second-level taxes, the "amount involved" could be stipulated by the parties at a hearing under Rule 155, Tax Court Rules of Practice and Procedure. In the unlikely event that the parties cannot agree upon an amount, a trial would be held to determine the highest fair market value of the property up to that time. Once the value of the property is so determined, a decision would be entered regarding the amount of the second-level tax. Respondent admits that this procedure would constitute a finding of the highest fair market value of the property up to the date of the entry of the decision rather than the date the correction period ended. Thus, there exists the possibility that the self-dealer might escape an increased tax liability resulting from an increase in the fair market value of the property involved between the entry of the decision and the finality of that decision; however, respondent is apparently willing to concede this "windfall" to the164 self-dealer.While we are sympathetic with respondent's plight, we simply cannot accept his proposed solution. As with the timing of the imposition of the second-level tax, Congress has made clear, through the plain words of the statute and in the legislative history, its intent regarding the amount of the second-level tax. In pertinent part, the committee reports state:For purposes of [the second-level tax], the amount involved is the highest fair market value of the property during the period within which the transaction may be undone. This provision is intended to impose all market fluctuation risks upon the self-dealer who refuses to comply and to give the foundation the benefit of the best bargain it could have made at any time during the period. [S. Rept. 91-552 (1969), 3 C.B. 423">1969-3 C.B. 423, 445.]Admittedly, the statutory formula for computing the amount of the second-level tax is impracticable; however, that fact does not negate the otherwise clear intent of Congress regarding the amount of the tax. Acceptance of respondent's approach in this 89 and all other cases would constitute nothing more than substituting his intent for that of Congress. 165 This we cannot do. 11A third serious problem with the wording of the statute involves the question of "correction" of an act of self-dealing. Section 4941(e)(3) generally defines "correction" to mean "undoing the transaction to the extent possible." If we accept respondent's postulations with regard to the timing of the imposition and determination of the166 amount of the second-level tax, what procedure is used for abatement of this tax in the event correction occurs?Similar to his suggested solution regarding the determination of the amount of the second-level tax, respondent submits that prior to the entry of a decision with respect to the first- and second-level taxes, the steps necessary to correct could be stipulated by the parties at a hearing under Rule 155, Tax Court Rules of Practice and Procedure. If the parties are unable to agree, this Court could then determine what steps would constitute correction. If the self-dealing is thus corrected prior to the finality of our decision, the assessment of the second-level tax would be abated by the respondent. See sec. 6404(a). Again, we must reject respondent's simplistic approach to the problem.Accepting respondent's proposed procedure for the moment, 12 assume that petitioner, or any other taxpayer, appeals a decision of ours that is adverse to him. Further assume our decision is subsequently affirmed by the Court of Appeals, and thereafter petitioner makes a bona fide effort to correct before our decision becomes final. At this juncture, who makes the determination of whether167 correction of the act occurred thereby abating the second-level tax? What if respondent and petitioner disagree as to whether the steps decided upon in our Rule 155 hearing have been followed? If the parties so disagree and respondent assesses and collects the second-level tax, must petitioner thereafter sue 90 for a refund in the district court or is he precluded from doing so under section 7422(g)(2) which provides:(2) Limitation on suit for refund. -- No suit may be maintained under this section for the credit or refund of any tax imposed under section 4941, * * * with respect to any act (or failure to act) giving rise to liability for tax under such sections, unless no other suit has been maintained for credit or refund of, and no petition has been filed in the Tax Court with respect to a deficiency in, any other tax imposed by such sections with respect to such act (or failure to act).In discussing this provision, the committee reports state:Refund suits for first- or second-level taxes may be brought in the Court of Claims or in a district court (but only if there has been no prior court review of the prohibited act). Also, any refund suit will be treated 168 as disposing of all issues relating to any first- or second-level tax arising out of that prohibited act. An opportunity is provided for one court review of a self-dealing transaction, but no more than one review. [S. Rept. 91-552 (1969), 3 C.B. 423">1969-3 C.B. 423, 446; emphasis added. See also sec. 7422(g)(3).]Although not conclusive, from this it would appear that petitioner would not have the opportunity of having his correction reviewed in the district court, and it is also unclear whether this Court would be able to exercise jurisdiction over the matter. As a consequence, petitioner would be unable to seek a redress of any unwarranted assessment of the second-level tax by respondent. We think it unlikely that Congress intended such a result.Another significant problem concerns the adequacy of the opportunity for judicial169 review of an act of self-dealing prior to correction. As respondent correctly observes, it is clear from the legislative history that Congress intended that court review of an act of self-dealing be available before requiring the taxpayer to correct. Respondent further notes that it would be harsh indeed to require correction of an act that may later be judicially determined not to be an act of self-dealing. Finally, respondent makes the statement, with which we agree, that Congress intended that once an act was reviewed and determined to be an "act of self-dealing," a taxpayer should be afforded sufficient time within which to correct.With this congressional intent in mind, assume as respondent contends that the first- and second-level taxes are imposed when the act of self-dealing occurs. Further assume that this Court enters a decision which finds that an act of self-dealing occurred, and that both levels of taxes are due with the second level of tax, 91 however determined, subject to abatement if correction is timely made. Assume further that the Court of Appeals affirms our decision and that petitioner thereafter applies for certiorari to the Supreme Court. Because170 he has appealed our decision to the Supreme Court, our decision is not yet final under section 7481. Petitioner is now faced with the following dilemma: If he corrects the self-dealing before the Supreme Court acts upon his petition, he may have to undergo great expense needlessly in the event the Supreme Court subsequently accepts certiorari and reverses our decision. On the other hand, if he fails to correct in anticipation of a reversal of our decision, and if the Supreme Court subsequently denies certiorari, under section 7481, on the date of such denial, the Tax Court decision becomes final and petitioner no longer has an opportunity to correct. The effect of this would be to deny petitioner the opportunity to have an act of self-dealing fully reviewed before correction must occur. Again, we think it clear, and respondent apparently agrees, Congress did not intend such a result. 13171 Thus, we are confronted, on the one hand, with a legislative history which makes clear Congress' desire to curtail transactions between disqualified persons and private foundations and, on the other hand, with a statute which on its face is replete with infirmities which act to thwart that intent. After careful consideration of the matter, we are constrained to apply the statute as written. We, therefore, hold that no deficiencies in tax under section 4941(b)(1) exist as determined by respondent. In so doing, we are not unmindful that the effect of our decision, for all intents and purposes, renders nugatory the second-level tax -- at least as to those taxpayers who file a petition in this Court. 14172 Moreover, we are cognizant of the fact that Congress has chosen this same scheme of taxation in several other Code sections. 15 Nevertheless, in our opinion, when considered in light of its intended objective, the statute at present is unworkable, and any 92 corrective modifications thereto lie within the province of Congress. 16Finally, in our initial opinion, we held that petitioner was subject to the section 4941(a)(1) first-level tax upon the sale of certain real property (referred to in our initial opinion as "property #2") to a private foundation by petitioner's wholly owned corporation. We further held that the transaction fell within the ambit of the transitional rule in section 173 53.4941(f)-1(b)(2), Foundation Excise Tax Regs., which provides as follows:(2) Special transitional rule. -- In the case of an act of self-dealing engaged in prior to July 5, 1971, section 4941(a)(1) shall not apply if --(i) The participation (as defined in section 53.4941(a)-1(a)(3)) by the disqualified person in such act is not willful and is due to reasonable cause (as defined in section 53.4941(a)-1(b)(4) and (5)),(ii) The transaction would not be a prohibited transaction if section 503(b) applied, and(iii) The act is corrected (within the meaning of section 53.4941(e)-1(c)) within a period ending July 16, 1973, extended (prior to the expiration of the original period) by any period which the Commissioner determines is reasonable and necessary (within the meaning of section 53.4941(e)-1(d)) to bring about correction of the act of self-dealing.In reaching our conclusion, we interpreted language in respondent's opening brief to the effect that the "correction period," as defined in (iii) above, had not yet expired. (See 70 T.C. at 385 n. 23.) In his supplemental brief, respondent argues that in his opening brief, albeit "not fully articulated," 174 his position was that the transitional rule did not apply to the sale of property #2 because the time for correction had expired. In essence, respondent maintains that we misinterpreted his position in his opening brief. Upon reconsideration and further review of the matter, we agree with respondent. We, therefore, hold that with respect to the act of self-dealing involving the sale of property #2, the transitional rule set forth above does not apply. Accordingly, petitioner is liable for the section 4941(a)(1) tax on such act.In view of the foregoing, our original opinion is hereby 93 modified and supplemented in accordance with our conclusions herein.Decisions will be entered for the petitioner in docket Nos. 6976-74, 6979-74, and 6981-74.Decisions will be entered under Rule 155 in docket Nos. 6977-74, 6978-74, and 6980-74. GOFFEGoffe, J., concurring: In view of the impact of our decision, I feel compelled to comment briefly upon what I believe to be the primary problem in applying the statute as written.The principal means by which Congress has chosen to eliminate transactions between private foundations and disqualified persons is through the imposition175 of the second-level tax. In this connection, the clear intent of Congress reflected in the language of section 4941(b)(1) and in the accompanying legislative history, is to condition a self-dealer's liability for the second-level tax upon his failure to undertake corrective action within the correction period. Thus, the self-dealer is not to be charged with the second-level tax provided he takes the steps necessary to undo the transaction prior to the time our decision with respect to the second-level tax becomes final. Therefore, since the underpinning of the statutory scheme is the second-level tax and because that tax is predicated upon a failure to timely correct, it is essential to determine whether any actions taken by a taxpayer to undo an act of self-dealing constitute correction within the meaning of the statute. In this regard, the statute unaccountably makes no provision for judicial review of the adequacy of corrective actions. To me, the need for review of corrective acts is necessary to insure that the statute is applied in a manner consistent with congressional intent and also to serve as a necessary protection for taxpayers. Unfortunately, however, there does176 not appear to be any legally sound and practicable solution to the problem within the present framework of the statute.To illustrate this point, assume that T, a disqualified person, engages in an act of self-dealing with a private foundation and 94 is thereby subject to the first-level and second-level taxes under section 4941. Assume further that this Court enters a decision sustaining the Commissioner's determination with respect to both levels of tax and that our decision is subsequently appealed and affirmed. Thereafter, and prior to the time our decision becomes final, assume that T makes a bona fide effort to correct the act. Because there is no provision for judicial review at this point, if the Commissioner disagrees as to whether T properly corrected, there is nothing to prevent him from assessing and collecting the tax at the moment the decision becomes final. 1 In such a case, there are no safeguards or procedures to protect a taxpayer who attempts to undertake correction. The taxpayer is, in short, at the mercy of the Commissioner and this, to me, demonstrates the most serious shortcoming of the statute.177 Neither Judge Tannenwald nor Judge Simpson in his dissenting opinion offers any satisfactory solution to this enigma, nor could they do so without redefining the term "correction period." Specifically, Judge Simpson would reserve any judgment as to what will happen when the taxpayer undertakes to correct. However, our failing to recognize at this time that no procedure exists for judicial review of correction will serve only to compound the problem at a later date. Judge Tannenwald's approach, a severance of the issue of liability of the first-level and second-level taxes, likewise will not resolve the dilemma. By statute, the correction period does not expire until our decision with respect to the second-level tax becomes final. Thus, regardless of when a decision as to the second-level tax is entered, a taxpayer has the opportunity to correct at any time prior to the decision's becoming final, and so the problems created by the lack of judicial review of correction still exist.Finally, I have serious doubts as to whether we could sever the issue of liability for the first-level and second-level taxes as Judge Tannenwald proposes. One of the requisites for the imposition of178 the second-level tax is liability for the first-level tax. Similarly, in the case of certain additions to tax, e.g., section 6653, a precondition to their imposition is the existence of a deficiency. In redetermining a deficiency and an addition to tax, we do not sever the two issues and enter a decision as to the 95 deficiency and thereafter await its outcome on appeal before deciding the issue of the addition to tax. I disagree with Judge Tannenwald wherein he concludes that the second-level tax could be severed and a decision on the first-level tax would be appealable. I see no legal justification for treating the first-level and second-level taxes differently. In the first place, the legislative history makes it clear that the proposed assessments of the first-level and second-level taxes are to be set forth in a single statutory notice of deficiency. 2 H. Rept. 91-413 (Part 2) (1969), 3 C.B. 340">1969-3 C.B. 340, 351. Second, the legislative history also expresses the desire of Congress to avoid multiple proceedings in determining liability with respect to both levels of taxes. S. Rept. 91-552 (1969), 3 C.B. 442">1969-3 C.B. 442, 446.179 Judge Tannenwald's approach runs counter to this explicit intent. Moreover, I have serious doubt whether a decision on the first-level tax would be appealable. The general rule is that the only decisions of the Tax Court which are appealable are those in which a case is dismissed for lack of jurisdiction or those in which a dollar amount of a deficiency, overpayment or a deficiency of zero, or an overpayment of zero is entered. Michael v. Commissioner, 56 F.2d 825">56 F.2d 825 (2d Cir. 1932). "That is to say, the word 'decisions' of the Tax Court has a meaning of art; it refers only to two kinds of judicial action by the Tax Court, viz, (1) 'dismissing the proceeding' pending before it, whether for lack of jurisdiction or otherwise, or (2) formally determining a deficiency, or the lack of a deficiency." Commissioner v. Smith Paper, Inc., 222 F.2d 126">222 F.2d 126, 129 (1st Cir. 1955). The only case in which an order was held not to be interlocutory but, instead, appealable is Louisville Builders Supply Co. v. Commissioner, 294 F.2d 333">294 F.2d 333 (6th Cir. 1961). In that case, the Court of Appeals reversed an order of 180 the Tax Court granting the Government's motion to take the deposition to perpetuate testimony where the taxpayer had not filed a petition in the Tax Court. Even in that case, the Court of Appeals hastened to point out, at page 339, "The Tax Court decision in the case at bar granted all the relief sought and disposed of the entire proceeding pending before it. The order entered was not interlocutory, and we consider it a decision of 96 the Tax Court subject to our review." Applying Judge Tannenwald's procedure would not dispose of all the relief sought because the taxpayer seeks a holding that he is not subject to the second-level tax.181 While I share the views expressed in the dissenting opinions that the courts should not lightly interpret a statute so as to invalidate it, I think this obligation must be weighed with the need to apply the statute which was enacted by Congress. Our function is to interpret legislation, not rewrite it.In order to implement the rationales of Judges Tannenwald and Simpson, we would be involved in rule making. But our rule-making function is limited.The function of [court] rules is to regulate the practice of the court and to facilitate the transaction of its business. This function embraces, among other things, the regulation of the forms, operation and effect of process; and the prescribing of forms, modes and times for proceedings. Most rules are merely a formulation of the previous practice of the court. Occasionally, a rule is employed to express, in convenient form, as applicable to certain classes of cases, a principle of substantive law which has been established by statute or decisions. But no rule of court can enlarge or restrict jurisdiction. Nor can a rule abrogate or modify the substantive law. * * * [Washington-Southern Co. v. Baltimore Co., 263 U.S. 629">263 U.S. 629, 635 (1924);182 emphasis added.]Clymer v. United States, 38 F.2d 581 (10th Cir. 1930); Concord Casualty & Surety Co. v. United States, 69 F.2d 78 (2d Cir. 1934); In the Matter of C.A.P., 356 A.2d 335 (D.C. Cir. 1976).The [court] rule which has been adverted to by counsel was framed to simplify and expedite practice and procedure. However expressed or however understood, it can not enlarge the scope of the statute, nor modify the conditions which are imposed upon the jurisdiction of the court. * * [The Brig Hiram, 23 Ct. Cl. 431">23 Ct. Cl. 431, 440 (1888).]This court may make rules to govern its own proceedings to the extent provided by law but it has no power to enforce a rule which changes the effect of a Federal statute. [Graf v. United States, 87 Ct. Cl. 495">87 Ct. Cl. 495, 496 (1938).]It is axiomatic that the rule-making power must conform with constitutional and statutory limitations. Consequently, rules of court, unless their validity is to be questioned, must, of necessity, be reconciled with pertinent statutes. * * * [Berkey Technical Corp. v. United States, 380 F. Supp. 786">380 F. Supp. 786, 789 (Cust. Ct. 1973).]183 There is no peculiar efficacy in a rule of court where none is authorized by statute; a rule does not make law or restrict law; it is nothing more than the order or direction of a court reduced to a convenient written form. It regulates practice; it does not confer rights. * * [William W. Gilbert v. United States, 35 Ct. Cl. 573">35 Ct. Cl. 573, 575-576 (1900).]97 I conclude from the foregoing authorities that we could not accomplish the goals recommended by Judges Tannenwald and Simpson in their dissenting opinions, which leaves no other course open but to concur with the majority. TANNENWALD; SIMPSON; CHABOTTannenwald, J., dissenting: I agree with Judge Simpson that we should construe the statutory provisions in question in a manner that carries out congressional intent, but I think there is a better method than that outlined in his dissent for dealing with the disposition of the issue of the second-level tax.The difficulty arises, as the majority points out, from the fact that the literal language of the statute provides for the imposition of a second-level tax if the act of self-dealing is not corrected, but the period during which the correction184 must be made does not end until our decision as to such tax becomes final, and the amount of such tax is determined with reference to the highest fair market value of the property involved during the correction period. Sec. 4941(b) and (e)(2) and (3). Judge Simpson would deal with this problem by entering a decision imposing the second-level tax, unless correction is made before the decision becomes final, in an amount based on the highest fair market value of the property preceding the date of decision. He would leave open the possibility that respondent could claim an increase in the amount of the second-level tax if the fair market value of the property involved increases after the entry of decision herein as to that tax but before that decision becomes final.The problem of dealing with such an increase becomes acute if the fair market value of the property increases by over 100 percent during such period. Under these circumstances, it would be more advantageous for the self-dealer to accept and pay the second-level tax than to correct the act of self-dealing. Considering the inflation that currently prevails in our economy and the period of time that might elapse if the 185 parties appeal to the Court of Appeals and perhaps also to the Supreme Court for certiorari, a possibility is presented that the intent of Congress that the foundation be given the benefit of any bargain it could 98 have made (S. Rept. 91-552 (1969), 3 C.B. 423">1969-3 C.B. 423, 442, 445), will not be fulfilled.Under Judge Simpson's approach, the responsibility for taking necessary action to carry out the intent of Congress in order to avoid this eventuality would be on respondent rather than on this Court. Obviously, in the situation described above, where the amount involved increases by over 100 percent, it is the foundation that has a real interest in seeing that correction is made. However, the foundation is not a party to the case and would seem to have no procedure available to it for seeking an increase in the penalty.To minimize these problems and at the same time to adhere as closely as possible to the literal language of the statute, I would sever the issue of liability as to the second-level tax and enter a decision as to the first-level tax only, thereby delaying the determination of the amount of the second-level tax until the decision as to the186 first-level tax becomes final. Although the question of whether such a decision would be a final decision for purposes of appeal is not for this Court to decide, I believe it appropriate to note my view of the question. In my opinion, the question can and should be resolved in favor of appealability.Section 7482(a) grants to the United States Courts of Appeals exclusive jurisdiction to review "decisions" of the Tax Court. Insofar as this case is concerned, a decision of this Court means either a dismissal of the case or a determination of a deficiency. Sec. 7459; Commissioner v. Smith Paper, 222 F.2d 126">222 F.2d 126 (1st Cir. 1955). Thus, where an issue as to a rule of law is severed but does not result in determination of a deficiency, the Court's ruling on that issue is not appealable. Michael v. Commissioner, 56 F.2d 825">56 F.2d 825 (2d Cir. 1932). On the other hand, the First Circuit has indicated that a decision as to 1 year in a case raising issues in more than 1 year might be appealable. Commissioner v. Smith Paper, supra.Cf. Wilson v. Commissioner, 42 B.T.A. 1254">42 B.T.A. 1254 (1940).187 The controversy involving two taxes in the instant case 1 is sufficiently similar to the suggestion dealing with severability for purposes of appellate jurisdiction, in cases involving a deficiency notice covering more than 1 year, to justify severance of the issue herein as to the second-level tax, particularly when 99 doing so offers the potential for better implementation of legislative intention.In Gillespie v. United States Steel Corp., 379 U.S. 148">379 U.S. 148 (1964), petitioner, as administratrix of the estate of her son, brought an action in a Federal court against the shipowner-employer of the son for damages on account of his death. She claimed a right to recover for the benefit of herself and the decedent's brother188 and sisters under the Jones Act, an Ohio wrongful death statute, and general maritime law. The District Court ruled that the Jones Act was the exclusive remedy, struck all parts of the complaint referring to the Ohio statute and general maritime law, and denied any right of recovery to the brother and sisters on the ground that they were not beneficiaries entitled to recovery under the Jones Act. The Court of Appeals determined that the District Court ruling was appealable. In discussing this issue, the Supreme Court stated that for a decision to be "final" does not "necessarily mean [that it is] the last order possible to be made in a case. Cohen v. Beneficial Industrial Loan Corp., 337 U.S. 541">337 U.S. 541, 545" and that "the requirement of finality is to be given a 'practical rather than a technical construction.'" See 379 U.S. at 152.2189 A decision as to the first-level tax will unquestionably be a final decision as to that tax. Applying the practical approach of the Supreme Court, that decision should be appealable. While Judge Simpson would also provide an expanded period of time during which a determination of fair market value upon which the second-level tax would be based might be made, my approach would enable the Court to retain the power to take whatever action might prove necessary to protect the foundation's interest, without relying on a party to take the initiative. In this connection, I recognize that, under either approach, it will not be possible to produce an ultimate decision which conforms precisely to the statutory scheme. 3100 Simpson, J., dissenting: By its decision in this case, this Court has unnecessarily invalidated nine provisions of the statutes enacted190 by the Congress in 1969, 1974, and 1978. Due respect for the acts of Congress compels me to dissent from such a conclusion.It is a cardinal principle of statutory construction that, whenever possible, the courts should interpret a statute so as to avoid invalidating it. Such proposition often arises in cases in which a statute is under constitutional attack. Chief Justice Hughes expressed the proposition when he said:The cardinal principle of statutory construction is to save and not to destroy. We have repeatedly held that as between two possible interpretations of a statute, by one of which it would be unconstitutional and by the other valid, our plain duty is to adopt that which will save the act. Even to avoid a serious doubt the rule is the same. * * [N.L.R.B. v. Jones & Laughlin Steel Corp., 301 U.S. 1">301 U.S. 1, 30 (1937).]The same doctrine was again articulated by the Supreme Court when it stated:to construe statutes so as to avoid results glaringly absurd, has long been a judicial function. Where, as here, the language is susceptible of a construction which preserves the usefulness of the section, the judicial duty rests upon this Court191 to give expression to the intendment of the law. [Armstrong Co. v. Nu-Enamel Corp., 305 U.S. 315">305 U.S. 315, 333 (1938); fn. ref. omitted.]Again, in Markham v. Cabell, 326 U.S. 404">326 U.S. 404, 409 (1945), the Supreme Court declared:The process of interpretation also misses its high function if a strict reading of a law results in the emasculation or deletion of a provision which a less literal reading would preserve.Here, we do not have a constitutional issue; yet, the majority of the Court has chosen to adopt an interpretation of the statute which nullifies and invalidates it. Such action is contrary to the repeated judicial mandates to preserve a statute wherever possible.In this case, there is absolutely no doubt as to the purpose of the Congress. In 1969, it enacted a system of rules regulating private foundations and certain persons dealing with them. To make such rules effective, it provided sanctions: Under section 4941, if a "disqualified person" engages in an act contrary to such rules (that is, an act of self-dealing), a 5-percent penalty is imposed on such person. However, Congress was interested in 101 doing more192 than merely punishing him for his act of self-dealing; it wanted to disgorge the benefit of such act and to make the foundation whole. S. Rept. 91-552 (1969), 3 C.B. 423">1969-3 C.B. 423, 445; H. Rept. 91-413 (Part 1) (1969), 3 C.B. 200">1969-3 C.B. 200, 216. To accomplish that result, it provided that if the effect of the act of self-dealing was not corrected, the person is subject to the second-level penalty of 200 percent. Obviously, no rational person would knowingly pay the second-level penalty; he would make correction of the act of self-dealing. S. Rept. 91-552 (1969), 1969-3 C.B. at 445; H. Rept. 91-413 (Part 1) (1969), 1969-3 C.B. at 213.To carry out the plan, it was provided that if the Commissioner determines that there has been an act of self-dealing, he should send to the disqualified person a notice of deficiency for the penalties. Secs. 6211(a) and 6212(a). By filing a petition with this Court, such person would then have an opportunity to seek judicial review of whether his conduct did in fact constitute an act of self-dealing. Sec. 6213(a). Within the time for filing such petition, 193 such person can decide whether he wishes to seek such judicial review or whether he is willing to pay the first-level penalty and correct the act of self-dealing. If he seeks judicial review by filing a petition with this Court, he is not then required to correct the act of self-dealing at that time; he can wait until the completion of judicial review of the underlying question of whether there has been an act of self-dealing. Sec. 4941(e)(4). If this Court decides that issue in his favor, he is relieved of paying any penalty.If this Court decides that the person has engaged in an act of self-dealing, the person then has a period in which he can decide whether to seek judicial review of the decision of this Court. Sec. 7483. If he decides to accept the decision of this Court, such decision does not become final until the expiration of the period for appeal (sec. 7481(a)(1)), and he has the same period in which to avoid the second-level penalty by correcting the act of self-dealing. If he does appeal the decision of this Court, he can postpone any attempt at correcting such act; he can await the decision of the appellate court. Sec. 4941(e)(4). If the appellate court also 194 decides the issue against him, the decision of this Court does not become final for some time (sec. 7481(a)(2)), and he has such time in which to make correction of the act of self-dealing and avoid the second-level penalty.No doubt, the statute could have been drafted so as to 102 accomplish these legislative objectives more clearly. However, as the Third Circuit stated in Berger v. Commissioner, 404 F.2d 668">404 F.2d 668, 673 (1968), affg. 48 T.C. 848">48 T.C. 848 (1967), cert. denied 395 U.S. 905">395 U.S. 905 (1969): "The statute * * * must be given a sensible reading which makes its provisions workable, a purpose which the draftsmen must be presumed to have intended. With this purpose in mind the meaning of the statute is readily ascertainable." I see no insurmountable problems arising from the language of the statutes. The majority concludes that since the second-level penalty is not unconditionally due at the time that the Commissioner issues his notice of deficiency, such penalty has not yet been imposed within the meaning of section 6211 and, therefore, cannot be the subject of a notice of deficiency. There is nothing195 to indicate that the word "imposed" was intended to mean that the penalty had become unconditionally due and owing. To the contrary, the legislative history makes it abundantly clear that such meaning was not intended. The word "imposed" appears to refer merely to the act of enacting such tax. In other words, Congress could have used the words "provided," or "established," by section 4941(b), and the effect would be the same.The majority also believes that since it will be impossible to know whether the petitioner will be required to pay the second-level penalty at the time we enter a decision, we cannot enter a final decision in the case. Again, such a result is not compelled by the law. If, after reviewing the evidence, we conclude that the petitioner has engaged in an act of self-dealing, our decision can provide that there is due the amount of the first-level penalty. The decision can also provide that there is due the amount of the second-level penalty unless the petitioner corrects the act of self-dealing before the decision becomes final. For purposes of such decision, the amount of such penalty can be based on the value of the involved property preceding the date of196 decision.There are other situations in which a deficiency determined by us may be modified by subsequent events. For example, if we decide that there is a deficiency in the personal holding company tax imposed by section 541, such deficiency may be reduced or eliminated by the subsequent payment of deficiency dividends in accordance with section 547. Similarly, if we decide there is a deficiency in the tax of a real estate investment trust, such deficiency may be modified by the subsequent payments of 103 deficiency dividends in accordance with section 860. A deficiency in the estate tax may also be reduced by subsequent credits of State death taxes. Sec. 2011(c)(1). Under Rule 156, Tax Court Rules of Practice and Procedure, there may be a further trial in an estate tax case to determine the amount of the expenses of an estate, and the deduction for such expenses may reduce the deficiency previously decided by this Court.It is true that in the personal holding company provisions, in the real estate investment trust provisions, and in the estate tax provisions, the procedures for subsequent modification of a deficiency are carefully spelled out. Yet, the statutory provisions197 and the legislative history are equally clear in indicating that a deficiency in the tax under section 4941 may be modified by subsequent events. Furthermore, the majority does not rest its conclusion on the failure to make clear the legislative purpose. The majority seems to believe that there is an inherent requirement that a decision be unconditional. These examples serve to demonstrate that there is no such requirement; nor is there such a requirement for a decision to be considered by an appellate court. See Fulman v. United States, 434 U.S. 528">434 U.S. 528 (1978); Callan v. Commissioner, 476 F.2d 509">476 F.2d 509 (9th Cir. 1973), affg. per curiam 54 T.C. 1514">54 T.C. 1514 (1970).Finally, the technique used by the Congress to induce self-dealers to restore the benefits to the foundation has also been used in many other situations. In 1969, such technique was used to induce the distribution of certain undistributed income by a private foundation (sec. 4942); the disposition of certain excess business holdings (sec. 4943); the removal of certain investments that jeopardize the charitable purposes of the foundation (sec. 4944); 198 and the correction of certain taxable expenditures by a foundation (sec. 4945). When the Employee Retirement Income Security Act of 1974 (Pub. L. 93-406), 88 Stat. 829, was enacted, Congress again made use of the same technique to bring about compliance with the minimum funding standards and adherence to the investment restrictions applicable to employee plans. Secs. 4971 and 4975. In 1978, Congress turned again to such technique to bring about the correction of acts of self-dealing in connection with black lung trusts and to encourage repayment of taxable expenditures by such trusts. Secs. 4951 and 4952. Hence, when the Court nullifies the sanctions designed to encourage correction of the acts of self-dealing under section 4941, it also nullifies 104 the sanctions used by the Congress in connection with all these other provisions. Our decision thus has widespread consequences, and those consequences we should seek to avoid.In this case, all that we have to decide at this time is whether the notice of deficiency is valid and what type of decision to enter in the case. It seems to me that we can answer them in a manner that carries out the undoubted legislative objectives. 199 At this time, we need not decide precisely what is to happen when the petitioner undertakes to correct the act of self-dealing, what action the Commissioner should take in the event the petitioner fails to attempt to correct his act, or what action may be taken by the Commissioner if he wishes to claim an increase in the penalty because of increases in the value of the property involved subsequent to the entry of the initial decision and before the time it becomes final. I am altogether confident that when those questions are faced by this or other courts, reasonable answers consistent with the legislative purpose can be worked out. See Rodgers P. Johnson Trust v. Commissioner, 71 T.C. 941">71 T.C. 941, 952 (1979), where the Court adopted a similar approach with respect to the consequences of a trust filing an agreement under section 302(c). In my judgment, it is altogether clear that we should not strike down a statute merely because we do not know precisely how it will be interpreted and applied in situations not now before us. Yet, the majority has raised doubts, and based on those doubts, concluded that the statute is unworkable.If the charge be made that200 we take liberties with the statute, it may be so. Anyone should try to make it work. And we have sought the true meaning of Congress, believing it intended to make it work. [Tenzer v. Commissioner, 285 F.2d 956">285 F.2d 956, 958 (9th Cir. 1960), revg. an unreported order of this Court.]Chabot, J., dissenting: I join in Judge Simpson's dissent. I join in so much of Judge Tannenwald's dissent as suggests an alternative way to preserve much of the statute. In addition, it should be noted that the majority have raised a further problem by effectively invalidating the scheme of section 4941. Section 4941 was enacted by section 101(b) of the Tax Reform Act of 105 1969 (83 Stat. 498). Section 101(j)(7) of that act (83 Stat. 527) removed private foundations from the application of the rules against self-dealing embodied in section 503 of the Code. Section 503 provided a different set of sanctions, including loss of exempt status for the organization participating in the self-dealing. The question then arises as to whether (because of the effective invalidation of the scheme of section 4941) section 503 again applies to private foundations. It appears201 that this question does not need to be decided in this case; however, the existence of this problem should be recognized in weighing the alternative methods of dealing with section 4941 in this case. See Lingenfelder v. Commissioner, 38 T.C. 44">38 T.C. 44, 46 (1962). Footnotes1. Unless otherwise indicated, all statutory references are to the Internal Revenue Code of 1954, as amended.↩2. A second question addressed infra↩ concerns the application of the transitional rule set forth in sec. 53.4941(f)-1(b)(2), Foundation Excise Tax Regs.3. Our findings supporting our conclusion that petitioner engaged in acts of self-dealing, and is therefore subject to a 5-percent excise tax under sec. 4941(a)(1), are set forth in Adams v. Commissioner, 70 T.C. 373">70 T.C. 373↩ (1978). Because a complete familiarity with those findings is not necessary to an understanding of the issue herein, for simplicity's sake, we have omitted any detailed reference to them.4. Unless otherwise indicated, all references to committee reports are to the pages in the Cumulative Bulletin where such reports are reprinted.↩5. See also sec. 6684 which contains a penalty in the case of repeated acts or a willful and flagrant act of self-dealing.↩6. The term "disqualified person" is defined in sec. 4946 to include, among others, substantial contributors to the foundation, as well as officers, directors, and trustees of the foundation.↩7. The meaning of the term "correction period" is discussed infra↩.8. See secs. 7428, 7476, 7477, and 7478.↩9. See sec. 6512(b).↩10. Sec. 4941(b)(1) provides as follows:(b) Additional Taxes. -- (1) On self-dealer. -- In any case in which an initial tax is imposed by subsection (a)(1) on an act of self-dealing by a disqualified person with a private foundation and the act is not corrected within the correction period, there is hereby imposed a tax equal to 200 percent of the amount involved. * * *↩11. This taxpayer "windfall" that respondent is ready to concede will in many cases be more than offset by a "windfall" in respondent's favor if we adopt his position that the second-level tax is imposed at the time of the act of self-dealing. This windfall will be in the form of interest which, if respondent's theory is pursued across the board, will run from the date of the act of self-dealing rather than from the date that this Court's decision becomes final. Sec. 6601(b)(4). If interest were to run from the earlier date, the magnitude of the penalty could be greatly increased, contrary to the imposition provision of the statute as it is presently written.↩12. But see 28 U.S.C. sec. 2201↩, which, inter alia, precludes the issuance of declaratory judgments with respect to Federal taxes.13. A taxpayer would be faced with the same dilemma if this Court rejected respondent's determinations, the Court of Appeals reversed our decision, and the taxpayer applied for certiorari.↩14. Sec. 6213(a) restricts the assessment of a deficiency in the second-level tax prior to the sending of a statutory notice. Sec. 6212(c) precludes the issuance of a second statutory notice for the same act of self-dealing. See H. Rept. 91-413 (Part 2) (1969), 3 C.B. 340">1969-3 C.B. 340, 351. Hence, while our decision that no deficiencies in the second-level tax presently exist does not prevent the imposition of such tax at a later date, secs. 6212(c) and 6213(a)↩ nullify the effect of any subsequent imposition. Stated otherwise, if petitioner fails to correct the acts of self-dealing, respondent is nevertheless barred from ever asserting and collecting the second-level tax.15. See secs. 4942, 4943, 4944, 4945, 4947, 4951, 4952, 4971, and 4975.↩16. It was not without considerable deliberation and thought that our decision herein was reached. We can certainly appreciate Congress' desire to eliminate the potential for abuse inherent in dealings with tax-exempt organizations. Also, we are not unaware of the difficulty in drafting legislation which will equitably dispose of a variety of factual settings. Regrettably, however, when considering all the potentially viable alternatives available to assist us in implementing the statute, we were consistently confronted with another statute or well-established rule of law which prevented our reaching a satisfactory resolution of the problems discussed herein.↩1. Given the uncertainty of what acts constitute correction, disputes between the Commissioner and a taxpayer are inevitable.↩2. This point differentiates Judge Tannenwald↩'s suggestion that the containment of the first-level and second-level taxes in a single notice is similar to a deficiency notice covering more than 1 taxable year. Unlike the situation of the first-level and second-level taxes, in the case of more than 1 taxable year it is perfectly proper to have a deficiency notice for each year.1. That the two taxes may be related does not preclude a holding that a decision as to the first-level tax is a final decision for purposes of determining appealability. Cf. Hudson Distributors v. Eli Lilly, 377 U.S. 386">377 U.S. 386, 389↩ n. 4 (1964).2. The Supreme Court was also not disturbed by the absence of a certification by the District Court under 28 U.S.C. 1292(b) as then in effect. See Gillespie v. United States Steel Corp., 379 U.S. 148">379 U.S. 148, 154. See also rule 54(b), Federal Rules of Civil Procedure↩, which, in any event, is not applicable to this Court.3. I use the word "precisely" because I recognize that the problem of circuity inherent in the literal language of the statute precludes its full implementation.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4623990/	Charles L. Tidwell and Corinne S. Tidwell v. Commissioner.Tidwell v. CommissionerDocket No. 71019.United States Tax CourtT.C. Memo 1961-162; 1961 Tax Ct. Memo LEXIS 194; 20 T.C.M. (CCH) 810; T.C.M. (RIA) 61162; May 31, 1961194 1. In 1953 and 1954, petitioner Charles L. Tidwell and another, both full-time executives of a milling company, purchased two unimproved, contiguous tracts of land adjacent to the village formerly owned by the company. Immediately after acquiring the second tract, they had the two tracts subdivided and had streets cut through the property and graded. The subdivided property was turned over to real estate agents for sale. In 1955, 15 lots were sold and by 1960, 38 of the 68 lots had been sold. Held, property was held by petitioner in 1955 primarily for sale to customers in the ordinary course of his trade or business and the gain from the sale of lots was ordinary income. 2. Held, petitioners failed to prove that they are entitled to deduct as expense of operating an automobile used by Charles for both business and pleasure any amount in excess of the amount Charles was reimbursed by his employer for business use of the automobile.3. The cost of digging a well and installing a water pump on rental property was a capital expenditure and not deductible as rental expense in the year 1955. Wesley M. Walker, Esq., for the petitioners. James E. Johnson, Jr., Esq., for the respondent. DRENNENMemorandum Findings of Fact and Opinion DRENNEN, Judge: Respondent determined a deficiency in petitioners' income tax for the taxable year 1955 in the amount of $1,661.67. The issues for decision are: (1) Whether the gain realized by petitioner Charles L. Tidwell (sometimes hereinafter referred to as Charles) in 1955 from the sale of lots in196 a subdivision called Kirkwood Heights is to be considered as gain from the sale of capital assets or as ordinary income; (2) whether petitioners are entitled to a deduction for an amount representing the expense of operating an automobile in 1955, in excess of reimbursement received from Charles' employer, and if so, the amount of such deduction; and (3) whether petitioners are entitled to a deduction for the cost of a well and water pump dug and installed on rental property in 1955. Findings of Fact Some of the facts have been stipulated and are found as stipulated. Petitioners were husband and wife and resided in Greenville, South Carolina, during the year 1955. They filed a joint Federal income tax return for the year 1955 with the director of internal revenue for the district of South Carolina, and reported their income on the basis of a calendar year and by the cash method of accounting, except for certain sales of lots here in controversy reported on the installment basis. During the year 1955, Charles was employed in an executive capacity as manager of Dunean Mill, located in Greenville, South Carolina, and as manager of Watts Mill, located in Laurens, South Carolina, 197 which mills were branches of J. P. Stevens & Company, Inc. (hereinafter referred to as Stevens), textile manufacturers. Charles had been employed by Stevens since 1941 and had been manager of the Dunean and Watts Mills since 1950. Charles and W. K. Stringfellow (hereinafter referred to as Stringfellow), who was also employed by Stevens in an executive capacity, purchased jointly 4.24 acres of land (hereinafter referred to as "the first tract") for $5,175 on September 21, 1953, from Stevens. On July 20, 1954, Charles and Stringfellow purchased 19.69 acres of land (hereinafter referred to as "the second tract") for $20,000 from Stevens. The first and second tracts were contiguous and were on the outskirts of Dunean Mill Village, consisting of some 574 houses originally owned by the company near the Dunean Mill, and were near other residential properties. These company houses (with two exceptions) had been sold by Stevens in 1950 to employees of the mill. The tracts were about three city-blocks from Charles' office at Dunean Mill. There had been a trend in the textile industry for companies to sell their company houses and other real estate. Stevens had sold its company houses198 pursuant to a general program directed by its management, and Charles, noting Stevens' program to sell first its company houses and then its other real estate, asked the vice president of Stevens to give him and Stringfellow (who at that time was head of the cost division for eight of Stevens' mills) first choice with respect to the first and second tracts, if Stevens decided to sell. Charles and Stringfellow were in a position to know whether particular property was for sale by Stevens. Charles and Stringfellow took title to both tracts subject to the restriction "that no mercantile establishment shall be erected, operated or maintained thereon." When they bought the first tract, they were not able to buy the second; Stevens would not sell the second tract at that time. However, while they had no assurance that Stevens would ever sell them the second tract, they hoped that Stevens would do so. Charles and Stringfellow paid cash for both tracts, each contributing one-half of the purchase price for each tract. Charles did not borrow any money to pay for his one-half interest in the first tract; he borrowed $10,000 to purchase his interest in the second tract and used as security199 for the loan property other than the real estate. Soon after acquiring the second tract, Charles and Stringfellow employed an engineering firm to make a survey of the tracts and discussed with the firm the general location of the lots on a plat to be prepared by the engineers. On August 5, 1954, the preliminary survey of the tracts was completed. Charles and Stringfellow had not tried to sell any of the property prior to the survey. On November 2, 1954, the subdivision was approved by the Greenville Planning and Zoning Commission. The approval was obtained by the engineering firm which Charles employed to plat the two tracts, and Charles did not appear before the Commission. Under date of November 19, 1954, Charles wrote Smith & Fox, realtors in Greenville, South Carolina, the following letter: Gentlemen: Mr. Stringfellow and the writer have given considerable thought as to the pricing of the various lots located in Kirkwood Heights. Realizing this piece of property is valuable, and after checking the area, we believe that the prices that we are giving you are in line and are prices that we would like to start off with. At a later date if these prices seem to be out of200 line and things do not seem to be moving as they should, we will meet with you and discuss this further. Lot #Price2$235042350623509235010205013195014152515157519220021220023225025235027$2175292200312000332050351525391750421695431600491350501275511150531400Should there be any further questions, please do not hesitate to call us. Very truly yours, /s/ Chas. L. Tidwell Chas. L. Tidwell After taking bids for cutting and grading roads into Kirkwood Heights and for digging a drainage ditch through the property, Charles and Stringfellow selected a contractor who did this work for them. When the roads were graded, Charles and Stringfellow deeded them to Greenville County which surface-treated them. On January 31, 1955, Charles and Stringfellow, as "Owners," and H. C. Smith and C. S. Fox (hereinafter referred to as Smith and Fox), as "Agents, entered into the following agreement: AGREEMENT This agreement between C. L. Tidwell and W. K. Stringfellow, hereinafter called OWNERS, and H. C. Smith and C. S. Fox, hereinafter called AGENTS, WITNESSETH: (1) That the owners201 agree to complete or have completed the subdivision of a tract of land shown on a preliminary plat of "Kirkwood Heights" made by Pickell and Pickell on August 5, 1954, including the completion of the survey and the preparation of a plat, the marking of the lot corners with stakes, the designation of the lot numbers by appropriate markers on the ground, the locating and finishing of roads, drainage ditches and pipes. (2) The agents shall have, for a period of three years from the date of this contract, the exclusive right to sell as agents or brokers as many of the lots shown on the said plat or any revision thereof as the owners may offer for sale. (3) It is agreed that the owners have reserved ten lots which have been designated by them that they may dispose of in any way they see fit. It is further agreed that the agents are authorized to sell the 24 lots marked on the plat during the year 1955; thereafter the owners will designate at the beginning of each year which lots, if any, are to be sold during each calendar year. (4) The prices and terms upon which the said lots shall be sold shall be determined by the owners from time to time. (5) The agents agree to handle all202 collections on lots sold on terms and to keep adequate records and remit to the owners at such times as may be agreed upon, without additional cost to the owners. (6) The agents agree to devote sufficient time and attention to the promotion of the subdivision, to reasonably sell said lots, and to obtain and pay for such advertising and promotion as may be reasonably necessary for the sale of said lots. (7) The agents agree to serve without compensation as members of the building committee to pass upon proposed construction in accordance with the building restrictions to be prepared. (8) The owners agree to pay to the agents a commission equivalent to ten (10%) per cent of the sales price of such lots as are sold; said commission shall be paid in full upon collection of fifty (50%) per cent of the agreed sales price, and shall constitute all compensation to the agents for all service rendered pursuant to this contract. (9) The owners agree to pay the legal fees for the preparation of deeds and the cost of the stamps thereon for all lots sold. IN WITNESS WHEREOF, we have hereunto set our hands and seals in quadruplicate this 31st day of January, A.D. 1955. OWNERS: /s/ Chas. 203 L. Tidwell (SEAL), C. L. Tidwell IN THE PRESENCE OF: /s/ W. K. Stringfellow (SEAL), W. K. Stringfellow /s/ Jo Ann Glenn /s/ Allen T. Adams AGENTS: /s/ H. C. Smith (SEAL), H. C. Smith /s/ C. S. Fox (SEAL), C. S. Fox When this agreement was signed, streets had been graded and lots had been designated. Charles and Stringfellow paid $1,963 for the plat of the tracts prepared by the engineering firm which they employed. The grading of streets and digging of drainage ditches cost Charles and Stringfellow $3,924. No other grading or excavating work was done, and no sidewalks, curbs, or gutters were built by Charles and Stringfellow. Sewage service and water for the tracts were supplied by Parker Water & Sewage District at no cost to the owners. Charles arranged for this water and sewage work. Charles and Stringfellow shared the engineering and grading costs of the tracts equally. The subdivision formed from the two tracts was called Kirkwood Heights, "Kirkwood" being Stringfellow's name. The subdivision had been named by the time Charles approached Smith and Fox. Smith and Fox handled the advertising of the lots for sale. This advertising consisted of a billboard sign204 costing about $60 and several advertisements in the newspapers, but Smith and Fox, not having much pressure from Charles and Stringfellow to sell the lots, did not "push" the sales. In 1955, 15 lots in the subdivision were sold: 7 for cash, and 8 on the installment basis. In 1956, 4 lots were sold. By March 1960, 38 lots had been sold out of a total number of 68. Charles did not handle sales of the lots except for one lot sold to a church of which Charles was a member. Otherwise, sales were made by Smith and Fox. If anyone approached Charles about buying lots, he referred him to Smith and Fox. Prices of the lots were fixed by negotiations, but final authorization for prices came from Charles. Smith and Fox checked restrictive covenants regarding the lots with Charles and Stringfellow. These restrictions pertained to the size of houses to be built on the lots. The sizes of the houses ranged from 900 to 1,200 square feet, with a few lots for duplex houses. Payments for lots sold on the installment basis were collected by Smith and Fox, as was the interest which was charged on unpaid balances. Smith and Fox made accounting for these receipts to Charles and Stringfellow. On205 their 1955 return, petitioners reported the following gain from the sale of 15 lots in Kirkwood Heights subdivision in 1955: SellingDescriptionPriceCostGainExpenseReportedLots #1, 2, 4, 10, 19, 22, & 31$15,125$3,823$11,302$1,482.55$ 9,819.45Installment Basis SalesLot #6 (10% pd.)2,3505951,755175.5010 (10% pd.)2,0505191,531153.10Lot #21 (19.09% pd.)$ 2,200$ 557$ 1,643$ 313.6526 (19.96% pd.)2,3505951,755350.3027 (19.19% pd.)2,1755511,624311.6529 (14.54% pd.)2,2005571,643238.8930 (19.52% pd.)2,1005321,568306.0733 (10% pd.)2,0505191,531153.10Total$32,600$8,248$24,352$1,482 $55$11,821.71 They reported that they were entitled to one-half of the foregoing gain or the amount of $5,910.86, which they reported as long-term capital gain. Respondent determined that the $5,910.86 gain was ordinary income. In 1955, Charles owned a 1955 Ford and 1955 Buick. He used the Buick to drive to and from his house and his office at Dunean Mill, which was only a block from his house. He also used the Buick about twice a week to drive to and from206 Watts Mill of which he was manager. The Watts Mill was about 37 miles from the Dunean Mill. He used the Buick for personal travel as well as for company business. He was entitled to 8 cents per mile from Stevens for the use of his car for company business. On their 1955 return, petitioners deducted the following as an itemized deduction: Business automobile expense1955 Buick cost $3,716 at 25 per-cent$ 929.00Gas, oil, and upkeep468.10$1,397.10Less 5,761 miles at 8 cents re-imbursed477.68Amount deducted:$ 919.42No expense of operating the Ford is included in the foregoing amounts, but the amount of $468.10 represents Charles' estimate of the total amount for upkeep of the Buick in 1955. Respondent disallowed the entire amount claimed as a deduction. Charles owned two houses about 5 miles outside of Greenville which he rented. These houses were situated beside each other and were served by a single well. In August 1955, Charles sold one house situated on the lot on which the well was located. The cost of this well was added to the basis of the property sold in computing petitioners' gain on the sale as reported on their 1955 return. After207 Charles sold the first house, he had a well dug and a water pump installed to serve the second house at a cost of $440.49, which amount petitioners deducted as a rental expense on their 1955 return. Respondent disallowed the deduction. Charles' interests in the lots in Kirkwood Heights sold in 1955 were held by him primarily for sale to customers in the ordinary course of his trade or business. Opinion The first issue is whether Charles held his one-half interest in Kirkwood Heights subdivision in 1955 primarily for sale to customers in the ordinary course of his trade or business. If he did, section 1221 of the 1954 Code would exclude his interest in the lots sold in that year from the classification of capital assets and petitioners would thereby be denied capital gains treatment on the profits realized from the sale of the 15 lots. The issue is basically factual, Dougherty v. Commissioner, 216 F. 2d 110 (C.A. 6, 1954), affirming per curiam a Memorandum Opinion of this Court; Wellesley A. Ayling, 32 T.C. 704">32 T.C. 704 (1959); Raymond Bauschard, 31 T.C. 910">31 T.C. 910 (1959), affd. 279 F. 2d 115 (C.A. 6, 1960), and our ultimate finding of fact208 that he did disposes of this issue. 1In resolving this issue, which must depend in the final analysis on the particular facts of each case, some of the principal factors given consideration by the courts have been the purposes or reason for the taxpayer's acquisition of the property and in disposing of it, the continuity of sales or sales-related activity over a period of time; the number, frequency, and substantiality of sales, and the extent to which the owner or his agents engaged in sales activities by developing or improving the property, soliciting customers, and advertising. W. T. Thrift, Sr., 15 T.C. 366">15 T.C. 366 (1950); Boomhower v. United States, 74 F. Supp. 997">74 F. Supp. 997 (N. D. Iowa 1947). However, the presence or absence of any of these factors is not controlling and the various factors may be accorded different weight according to the circumstances of the case. The basic question is - were the taxpayers in the business of subdividing and selling real estate? The taxpayer's purpose in originally acquiring the209 property is important evidence bearing on the question, although it is not conclusive. The crucial question is the reason for holding the property at the time of sale. Bauschard v. Commissioner, 279 F. 2d 115 (C.A. 6, 1960), affirming 31 T.C. 910">31 T.C. 910 (1959); Mauldin v. Commissioner, 195 F. 2d 714 (C.A. 10, 1952), affirming 16 T.C. 698">16 T.C. 698 (1951); O'Donnell Patrick, 31 T.C. 1175">31 T.C. 1175 (1959), affd. 275 F. 2d 437 (C.A. 7, 1960); and Charles E. Reithmeyer, 26 T.C. 804">26 T.C. 804 (1956). However, in this case, it seems clear that Charles intended to subdivide the tracts and sell lots when he and Stringfellow bought the properties and was carrying out that purpose when the lots were sold in 1955. We do not have the benefit of any testimony by Stringfellow, and Charles' testimony as to his reasons for buying the tracts is merely generalized and to the effect that he bought them for "investment." In the context of his entire testimony, Charles' statement is ambiguous. The facts are that Charles and Stringfellow took steps to subdivide the tracts, cut roads, have the subdivision approved by the zoning commission, obtain210 water and sewage service for their lots, and arrange with real estate agents to advertise the subdivision and to get buyers for the lots. Furthermore, these steps were taken immediately after Charles and Stringfellow bought the second tract. If by his statement that he bought the tracts for investment Charles meant that he contemplated resale at a profit, it seems obvious that he intended resale of the tracts by lots after platting and subdivision and that the profit would result from the platting and subdivision. There is no evidence that he intended to hold the property until it increased in value, or that he anticipated sale of the properties as a single tract. Cf. Wellesley A. Ayling, supra.The facts indicate the contrary. Admittedly, he did not attempt to sell the properties in a single transaction but subdivided the properties and started selling lots immediately after acquiring the second tract. Nowhere in his testimony is to be found any means by which Charles expected to realize a profit on his "investment" in the properties except in the manner in which he actually did; that is, by frequent and continuing sales of lots to the public. But even if it be conceded211 that Charles bought his interest in the tracts for investment and strictly as a passive investor, that purpose was altered by the year 1955 when the lots were sold. It is settled that a taxpayer's purpose in holding property can be different from his purpose in acquiring the property. See, e.g., Eline Realty Co., 35 T.C. 1">35 T.C. 1 (1960). The facts show beyond argument that Charles held his interest in the lots in Kirkwood Heights in 1955 primarily for sale to customers, regardless of what may have motivated his purchase of the interests in the tracts in 1953 and 1954, and we believe compel the conclusion that this constituted a trade or business in which Charles was engaged in 1955 within the meaning of section 1221(1). True, Charles borrowed $10,000 to finance the purchase of his interest in the second tract in 1954, and he testified that the reason he sold his interests in the 15 lots in 1955 was in order to repay this loan. But there is no indication in the record that he would not have begun selling lots had there been no loan to repay, or that the proceeds from the sales of Charles' interests were actually used to repay the loan, and it is admitted that the sales of lots212 continued from 1955 to 1960 when more than one-half of the lots had been sold. Furthermore, Charles did not secure the loan by a mortgage on the property, which would have created some difficulty in selling single lots. It is more consistent with Charles' testimony to conclude that the $10,000 loan financed his purchase of the tracts for the express purpose of subdivision and public sale of lots than to conclude that the loan financed a passive investment. To show that Charles was not in the business of selling his interests in the lots in 1955, petitioners argue that he did not use his office at the mill for handling sales; that he was a full-time employee of Stevens; that he devoted little time to the matters of having the tracts subdivided, having the subdivision approved by the zoning commission, getting roads graded, obtaining water and sewage service, and arriving at prices and restrictions for each lot (which matters Charles and not Smith and Fox had to decide finally); and that he personally handled negotiations for the sale of only one lot in 1955. But it is not necessary that the trade or business of selling residential lots be the taxpayer's only business, or even his213 principal one, William E. Starke, 35 T.C. 18">35 T.C. 18 (1960), or that the taxpayer conduct the real estate activities individually rather than through agents. Bauschard v. Commissioner, supra; Achong v. Commissioner, 246 F. 2d 445 (C.A. 9, 1957), affirming a Memorandum Opinion of this Court. Charles did or had done everything that was necessary to subdivide and prepare the tracts for sale as residential lots; it appears only fortuitous that no more time and effort was required in the matters of securing water and sewage service and zoning approval. The activities of the engineering firm in getting approval of the zoning commission (the extent of which activities is not detailed in the record) and of Smith and Fox in advertising the subdivision and getting customers for the lots are to be imputed to Charles and Stringfellow. These firms were the owners' agents; they were not doing these things in their own behalf as a part of their own businesses. Cf. James Lewis Caldwell McFaddin, 2 T.C. 395">2 T.C. 395 (1943), modified on other grounds 148 F. 2d 570 (C.A. 5, 1945). Based on the evidence presented, we believe Charles' interests in the214 lots sold in 1955 fall within the exclusion provided by section 1221(1) of the 1954 Code, and were not capital assets. Accordingly, petitioners' gain from such sales, the amount of which gain is not here in dispute, constituted ordinary income to them in 1955. As for the deduction which petitioners claim for operating the Buick automobile as a business car in 1955, respondent has determined that petitioners are not entitled to any deduction since Charles' expenses of operating the car on business did not exceed the amount he was reimbursed by his employer for business travel. Charles' testimony on this point is indefinite, but admits that he used the Buick for commuting and for other personal purposes in 1955 and that his estimate of the expenses of operating the Buick which appears on their 1955 return represented the total cost of operating the Buick in 1955. That is, petitioners made no attempt to allocate the total costs as between business and personal uses on their return, and they offered no such allocation at the trial. Petitioners' burden of proving that the costs of operating the car exceeded the allowable amount as determined by respondent is clear, and petitioners have215 not discharged that burden. The record contains no basis for upsetting respondent's determination and respondent is sustained on this issue. With respect to the third issue, petitioners claim a deduction in the amount of $440.49, representing the cost of digging a well and installing a water pump in 1955. Charles sold one of his rental houses in 1955 and his remaining house was without water after this sale, so he had a well dug and a water pump installed to serve the remaining house. The cost of the original well was capitalized and added to the basis of the house which was sold in 1955. Respondent has determined that the cost of the well dug in 1955 should also be considered a capital expenditure, and that no deduction for the expense is allowable in 1955. Section 263(a)(1) of the 1954 Code would disallow the deduction if the cost of the new well represented an amount paid out for permanent improvements or betterments made to increase the value of the property. Of course, a well would ordinarily be in the nature of a permanent improvement to rental property, and it and the water pump would have a useful life substantially in excess of the taxable year. See (A)-2 (A)-2 sec. 1.263 (a)-2, Income Tax Regs.216 There is no evidence here to indicate this well and water pump were anything to the contrary. The well and water pump can hardly be considered as incidental repairs and costs of maintenance. They are capital items the cost of which should be recovered through an allowance for depreciation. This issue must also be decided for respondent. 2Decision will be entered for the respondent. Footnotes1. The subdivided lots were neither inherited nor held by the taxpayer for a period of 5 years, so section 1237 of the 1954 Code does not apply.↩2. It does not appear that respondent allowed any deduction for depreciation on the well and water pump in his notice of deficiency. However, this was not assigned as error in the petition nor is there any evidence in the record regarding the date when the well and water pump were installed or regarding their useful lives.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4623991/	Carl G. Ortmayer and Hilda B. Ortmayer, Husband and Wife, Petitioners, v. Commissioner of Internal Revenue, RespondentOrtmayer v. CommissionerDocket No. 53272United States Tax Court28 T.C. 64; 1957 U.S. Tax Ct. LEXIS 220; April 17, 1957, Filed 220 Decision will be entered under Rule 50. 1. On July 2, 1948, Cunningham-Ortmayer Company issued 750 shares of $ 1-par-value common stock (having a market value of $ 350 per share) and 750 ten-year 6 per cent debentures in the face amount of $ 100 each (having a market value of $ 100 each) in a pro rata exchange for the surrender by its shareholders of the 750 outstanding $ 100-par-value shares of common stock and the payment of $ 1 with each share surrendered. Petitioners held and exchanged 748 shares of the company's 750 outstanding common stock. Of these shares, 374 had been acquired in 1945 from a deceased creditor's estate for $ 30,000 with funds which Carl G. Ortmayer borrowed from the company and in recognition of which indebtedness he executed and delivered to the company a series of promissory notes. Immediately following the exchange of stock and cash for stock and securities, in return for the company's cancellation of all outstanding indebtedness owed by petitioner ($ 95,561.52, being comprised of the aforesaid $ 30,000 plus a $ 65,561.52 balance in an account receivable-stockholder drawing account) he agreed to transfer back to the company 643 of its $ 100 debentures221 and surrender his right to $ 11,100 accrued salary and also agreed to the cancellation of a $ 20,851.76 balance shown on the company's books as capital loans (resulting from contributions made to the company's capital in the early 1930's). The company's bank did not insist upon the elimination of the stockholder's loan account or request the recapitalization. The transaction did not improve the company's financial position for credit purposes. The company had never declared or paid a taxable dividend. There was substantial earned surplus available at the time of the transactions involved. Held, the basic transaction did not constitute a recapitalization-reorganization within the meaning of section 112(g)(1)(E), I. R. C. 1939, and the pro rata distribution of the new stock and debentures to petitioners in exchange for the old stock (which old stock was then canceled) and $ 1 per share constituted a distribution essentially equivalent to a taxable dividend within the meaning of sections 22(a), 115(a), and 115(g) of the Code in the amount by which the fair market value of the debentures exceeded the cash paid. Held, further, in the transaction immediately following, the222 petitioner realized taxable income in the amount by which the indebtedness canceled by the company exceeded the aggregate amount of the debentures and accrued salary surrendered. Petitioner's advances to the company constituted capital contributions and not loans.2. In September 1942, Carl G. Ortmayer and his former wife, Emily K. Ortmayer, were divorced pursuant to a decree of absolute divorce which specified, in addition to provisions for fixed alimony and support payments for the divorced wife and children of the marriage, that petitioner was to continue to pay the premiums on certain existing insurance policies carried on his life in which his wife was to be named irrevocable beneficiary. The wife had no right to change the beneficiary or assign the policies. Her interest in the policies ceased upon her death during his lifetime, in which event the children were to be the beneficiaries. Held, the premium payments were not received by petitioner's divorced wife, directly or constructively, within the meaning of section 22(k), 1939 Code, and were properly disallowed as deductions claimed under section 23(u) of the Code. Donald P. Zedler, Esq., for the petitioners.J. Bruce Donaldson, Esq., for the respondent. Fisher, Judge. FISHER65 This proceeding involves deficiencies in income taxes determined against Carl G. and Hilda B. Ortmayer as follows:YearDeficiency1948$ 37,921.321949441.22By amended answer, respondent claims an increased deficiency for the year 1948 in the amount of $ 13,031.42. The material part of the claim is set forth in the margin. 1 The respondent, 224 in said amended answer, 66 also sets forth an alternative claim for increased deficiency in the amount of $ 450.72 for the year 1948 which it is unnecessary to set forth herein in the light of our determination.225 The issues to be decided are: (1) Does the transaction whereby the Cunningham-Ortmayer Company issued pro rata new stock and debentures in exchange for the surrender of its old stock, plus $ 1 per share so surrendered, qualify under section 112 (g) (1) (E) and (b) (3) of the 1939 Code as a nontaxable reorganization, or does all or a part of it constitute a distribution taxable as a dividend within the purview of sections 22 (a), 115 (a), and 115 (g) of the 1939 Code; (2) did the cancellation by the Cunningham-Ortmayer Company of the outstanding indebtedness owed by Carl G. Ortmayer to it, in exchange for petitioner's surrender to the company of certain of its debentures plus his cancellation of salary amounts owed him by the company, result in his realization of income measured by the excess of the canceled indebtedness over the surrendered debentures and salary; (3) were certain advances by petitioner to the company contributions to capital or loans; and (4) are the premiums paid by petitioner, Carl G. Ortmayer, on certain life insurance policies deductible as alimony under section 23 (u), 1939 Code?FINDINGS OF FACT.Some of the facts are stipulated and are incorporated herein by226 this reference.Petitioners Carl G. and Hilda B. Ortmayer are married individuals presently residing at Redlands, Colorado. During the calendar years 1948 and 1949, they resided in Milwaukee, Wisconsin. Petitioners filed timely joint Federal income tax returns for such years with the then collector of internal revenue for the district of Wisconsin.In 1924, Carl G. Ortmayer (hereinafter referred to as petitioner) and E. J. Cunningham were among those who caused the Cunningham-Ortmayer Company (hereinafter referred to as the company) to be incorporated in the State of Wisconsin. Since that time it has been engaged in the distribution and sale of road-building equipment and large construction machinery. E. J. Cunningham was the president of the company from the date of its incorporation until his death in 1941. Petitioner has been an officer of the company at all times since its incorporation. Upon the death of E. J. Cunningham in 1941, petitioner became president of the company and remained in that capacity until the year 1952. During the period from 1928 until July 2, 1948, the company had issued stock which consisted of $ 100-par-value 67 common, 750 shares of which 227 were outstanding. From 1928 until the death of E. J. Cunningham in 1941 these shares were held as follows:SharesE. J. Cunningham374Carl G. Ortmayer374Other stockholders2Total outstanding750Petitioner's basis for his 374 shares of stock was $ 18,204.During the period from January 1, 1924, until July 2, 1948, the Articles of Organization of the Company contained the following provision:In the event that the holder of any common stock without par value desires to dispose of same, he shall first offer the said stock in writing to the said corporation at the then booked value of the said stock; said offer in writing must be sufficient to give the corporation at least ten days notice of the intention of said stockholder to dispose of the said stock.During the period from January 1, 1924, to and including March 15, 1947, all certificates of common stock issued by the company contained a written notice of said restrictions as to the transfer of shares and the first offer rights of the company.Upon the death of E. J. Cunningham in 1941, his 374 shares of stock in the company passed to Ben A. Froeming (hereinafter referred to as Froeming) as a creditor. Froeming228 continued to hold said shares until his death in 1945. Froeming was, until his death, a substantial creditor of the company. Petitioner entered into an agreement with Froeming's estate to purchase the 374 shares for the sum of $ 30,000 of which $ 10,000 was to constitute a downpayment and the balance to be paid at the rate of $ 2,000 per month. Petitioner borrowed the purchase price of the stock from the company. As evidence of his borrowings, at various times during 1945 and 1946, he executed and delivered to the company 11 non-interest-bearing promissory notes (1 for $ 10,000 and 10 for $ 2,000) which were payable upon demand. The company issued its checks for each payment as it became due. The receipt signed by the executors of Froeming's estate, dated October 4, 1946, shows that the check was made payable to petitioner, who endorsed it to the order of the said executors. The remaining receipts are in substantially the following language: "Received from C. G. Ortmayer ( * * Dollars) represented by check # * * * of Cunningham-Ortmayer Company." On the books and records of the company, the transaction was recorded in an asset account as follows: "Stockholders' Loans * * * 229 $ 30,000.00." Said asset account at various times also bore the designation "Officers and Employees Notes and Accounts Receivable." Petitioner made no repayment 68 or partial repayment of this indebtedness to the company prior to July 3, 1948.No formal assignment to petitioner appears on the stock certificate formerly owned by Froeming, but the transfer of his shares to petitioner was recorded in the stock record book of the company, and a new certificate was issued in petitioner's name covering Froeming's shares together with shares previously owned by petitioner. Petitioner signed a receipt for the new certificate. A copy of a statement of assets and liabilities which was filed with the Bureau of Internal Revenue in December 1947, listing petitioner's assets and liabilities for years 1940 through 1946, clearly indicates that petitioner listed the $ 30,000 notes to the company as a liability, and included the stock acquired from the Froeming estate among his assets. As will appear infra, petitioner, in 1952, paid over to the company $ 30,000 in cash (the amount of the proceeds of the sale of 374 shares of class A stock) and transferred to the company 748 shares of class230 B stock. He did not, however, return to the company the debentures attributable to the ownership of the Froeming stock in the July 2, 1948, transaction.Petitioner bought the Froeming shares for himself, and not as trustee for the company, and he owned them at the time of the transactions of July 2, 1948.During the years 1930 to 1932, inclusive, petitioner made a succession of advances to the company, aggregating $ 68,196.62, out of his own personal assets. No promissory notes or evidence of indebtedness was given by the company for the sums advanced and no interest was payable on these sums. The minute book of the company contains a succession of stockholders' resolutions to the effect that each of said advances should constitute "Capital Loans" and that they were "to be paid * * out of future earnings when and as such funds are available." These various advances were entered on the company's accounting records as additions to Donated Surplus. On January 3, 1933, an entry was made in the company's Private Journal transferring the amount of $ 68,196.82 from the Donated Surplus account to an account entitled "Capital Stock Loans." This entry was accompanied by the following 231 explanation: "To correct Donated Surplus Account and to properly record Capital loans as authorized by the stockholders today." During the period from 1934 to 1944, inclusive, petitioner made various withdrawals from the company which were recorded on its books as accounts receivable. Periodically, the balances of such accounts receivable were charged against the Capital Stock Loans account, reducing the balance in this account to $ 20,851.76 by December 31, 1944. This balance remained the same on July 2, 1948. Petitioner testified that he understood the advances which he had made to the company were to be repaid when and if the company 69 was able and that any obligation of the company to repay was subordinate to the rights of the other corporate creditors. In the Federal income tax returns filed by the company for the years 1944 to 1948, inclusive, the advances by petitioner are shown as paid-in surplus. Petitioner, as president of the company, signed these returns.A protest was filed by the company regarding certain adjustments to its income and excess profits tax liability for the years 1943 to 1945, inclusive. A portion of this protest reads as follows:We also take232 issue with several of the adjustments which the Revenue Agent made on the company's balance sheets for the years 1939 through 1945, which resulted in a considerable reduction in the amount of the excess profits credit available to the company on the invested capital method. For 1939, and similarly for subsequent years, the agent reduced the paid in surplus by a considerable amount and made a corresponding adjustment to accounts payable. He explained in Exhibit A-1, Item (c), that the adjustment to accounts payable was "to set up accounts payable of officers which had been included in paid in surplus" and in Item (g) that the adjustment to paid in surplus was to "correct" it.As before indicated, the corporation was in poor financial condition for a considerable period. During this time its principal stockholders, primarily Mr. C. G. Ortmayer, invested additional funds in the corporation which were intended as capital contributions and not as loans. These funds were treated as part of the capital of the corporation and reflected as paid in surplus on the corporation's balance sheets. No notes were issued by the corporation to indicate that there was any indebtedness owing by it233 to Mr. Ortmayer. There was no agreement for the payment of interest and in all other respects the sums were treated as additional capital rather than as loans. On its balance sheet, which reflected the corporation's understanding of the treatment of these sums of money and the effect upon its capital structure, they were included as a capital item rather than as an account payable. Although the amounts involved were entered in the books in an account called "Capital Stock Loan Account," the designation is ambiguous and would have to be explained in the light of the taxpayer's understanding of the effect of this account upon its capital structure. The fact is that the taxpayer understood and treated this account as the equivalent of paid in surplus and not as an account payable.For the foregoing reasons, the Revenue Agent erred in adjusting the balance sheet by reducing paid in surplus and increasing accounts payable.Petitioner read this protest before he signed it as president of the company.We find as an ultimate fact that the advances in question were contributions to capital, and not loans to the company.In each of the calendar years 1946, 1947, and 1948, petitioner was234 authorized to draw a salary of $ 30,000 per annum as president of the company. At various times during said years, petitioner borrowed from the company, and such borrowings were recorded in an asset account entitled "Officers and Employees Notes and Accounts Receivable." The balances shown in said asset account fluctuated greatly during this period because of partial repayments and intermittent additional borrowing. On July 2, 1948, petitioner was indebted to 70 the company in the amount of $ 95,561.52, consisting of accounts payable of $ 65,561.52 and notes payable of $ 30,000. On that same date petitioner had accrued unpaid salary due from the company of $ 11,100.During the years 1924 to 1930, inclusive, the company earned a net profit of $ 1,434. During the period from 1931 to 1948, inclusive, the company's accrued profits and losses were as follows:YearProfitLoss1931$ 9,7571932$ 9,12819332,991193412,765193518,06619362,79319376,70019383,21519394831940$ 6,330194141,6441942$ 26,000.00194325,601.00194416,830.00194519,628.001946118,549.03194792,953.391948102,199.58In 1928, the company reorganized235 and issued a nontaxable stock dividend. During the period from 1924 to July 1948, no taxable dividend was declared or paid by the company.Because of the nature and high cost of its inventory items, the company required a substantial line of credit. The Marine National Exchange Bank of Milwaukee, Wisconsin, had for a period of years been extending it a line of credit of $ 100,000. These loans were secured by an assignment of the company's current accounts receivable. As a part of maintaining this line of credit the company periodically submitted financial statements to the bank. Upon receipt of the current statement, in the spring of 1948, the bank expressed concern that current earnings of the business were being loaned to petitioner rather than being retained to build up working capital. The bank did not request the elimination of petitioner's indebtedness to the company or suggest a recapitalization. The bank did insist that, in the future, there should be no further borrowing by officers or employees.The company consulted its accountant about the foregoing situation. Thereafter, on June 30, 1948, a special meeting of the stockholders was held, at which time it was decided236 to change the capital stock of the company from 750 shares of $ 100-par-value common (issued and outstanding) to 1,500 shares of $ 1-par-value common (authorized) and to issue long-term debentures in an amount not to exceed $ 99,000. On July 2, 1948, the stockholders surrendered to the company all of its 750 outstanding shares and these $ 100-par-value common shares were canceled by the company. In addition to surrendering this stock, the stockholders paid over to the company the sum of $ 1 with each share surrendered, or a total of $ 750. In exchange for the surrendered $ 100-par-value shares and the $ 750 paid in, the company issued, pro rata, 750 shares of $ 1-par-value common stock and 750 six per cent debentures. The debentures were 71 in the face amount of $ 100, were for a 10-year term, and were redeemable on an interest-paying date at the option of the company. One debenture was issued and delivered with each share of $ 1-par-value common stock. The following schedule shows the effect of the exchange on each stockholder of the company:Shares ofAmountShares ofNumber ofFace$ 100-parpaid over$ 1-par$ 100amountStockholdercommontocommonten-yeardebenturesstockcompanystockdebenturesreceivedsurrenderedreceivedreceivedCarl G. Ortmayer598$ 598598598$ 59,800Hilda B. Ortmayer 115015015015015,000Other stockholders2222200237 On July 2, 1948, the fair market value of each share of $ 1-par-value common stock distributed by the company was $ 350 and the fair market value of each of its debentures was $ 100.On July 2, 1948 (subsequent to the distribution of the debentures), the company canceled all the outstanding indebtedness due it from Carl G. Ortmayer ($ 95,561.52, as elsewhere described in these findings). In return, petitioner (1) surrendered his right to salary due of $ 11,100; (2) transferred to the company 643 of its outstanding $ 100 face amount debentures; and (3) agreed to the company's canceling the $ 20,851.76 balance which was credited to him in the capital loan account on the company's books as the result of the advances which he made to it during the 1930's.The interest expense created238 by the issuance of debentures in 1948 was small, being about $ 600 per annum. The transaction did not better the financial position of the company for credit purposes. The bank continued the $ 100,000 line of credit after the transaction; but subsequent to the transaction, it required the assignment of accounts receivable which were obligations of municipalities as security for the line of credit, and would not extend credit on assignment of accounts of individuals and corporations. Prior to that time, it had been its practice to accept assignment of all types of accounts receivable.On December 30, 1950, an annual meeting of the stockholders of Cunningham-Ortmayer Company was held. Pursuant to a resolution adopted at said meeting, Cunningham-Ortmayer Company issued a stock dividend. The 750 shares of $ 1 par value previously outstanding were denominated class A common and 1,500 shares of $ 100-par-value common were authorized and denominated as class B (nonvoting) common. The company distributed as a stock dividend 2 shares of class B (nonvoting) common for each share of class A 72 common owned. After this stock dividend, the stock of Cunningham-Ortmayer Company was 239 held as follows:Class AClass BStockholdercommoncommonCarl B. Ortmayer5981,196Hilda B. Ortmayer150300Other stockholders24On January 15, 1952, petitioner sold to Adams and his wife 374 shares of class A common stock for $ 30,000. Thereafter, during April 1952, petitioner turned over to the company 748 shares of its class B common stock pursuant to an offer which he had made and the company accepted. On September 29, 1952, petitioner turned over to the company an amount equal to the aforesaid class A stock sales proceeds ($ 30,000) in accordance with the April offer accepted by the company. On that same day, petitioner and his wife sold to the company all of their remaining stock and securities therein (374 shares class A common, 748 shares class B common, and 105 debentures) plus other unidentified assets for some $ 275,000.In relation to the transactions of July 2, 1948, we find the following ultimate facts:(1) The pro rata distribution on July 2, 1948, by Cunningham-Ortmayer Company of new stock and debentures in exchange for the surrender of its old stock, which old stock was thereupon canceled, was at such time and in such manner as to make240 such distribution and cancellation essentially equivalent to the distribution to petitioners of a taxable dividend to the extent of $ 74,052, representing the fair market value of the debentures distributed to them ($ 74,800) less cash in the amount of $ 748 which petitioners paid to the company as part of the transaction.(2) The cancellation on July 2, 1948, by Cunningham-Ortmayer Company of the indebtedness of Carl G. Ortmayer resulted in income to him in the amount of the excess of the indebtedness over the salary credit and the basis of the debentures surrendered by him -- viz, $ 20,161.52.In September 1942, Carl G. Ortmayer and his former wife, Emily K. Ortmayer, were divorced pursuant to a decree of absolute divorce rendered by the Circuit Court of Marinette County, Wisconsin. The decree of divorce provided fixed alimony and support payments for the divorced wife and children of the marriage. In addition, the decree specified as follows:9. That the husband shall pay the premiums on the insurance policies now carried on the life of the husband in the sum of Fifty Thousand Dollars when they become due, and the husband will not permit the policies to lapse. The husband shall241 not have the right to change the beneficiary of such policies except upon the death of the wife, in which event the surviving daughters of the parties, 73 and the issue of any deceased daughter, shall be named as beneficiaries, the issue of any deceased daughter to take per stirpes and not per capita. The husband shall execute such documents as may be necessary with the insurance companies which issued the insurance policies in order to effectuate the provisions of this paragraph.The following are the policies hereinbefore referred to: Metropolitan Life Insurance Policy No. 9396703, $ 15,000.00, Policy No. 9500556, $ 15,000.00Wisconsin National Life Insurance policy No. 96058, $ 10,000.00, Policy No. 95772, $ 10,000.00In accordance with the provisions of the aforedescribed divorce decree, Carl G. Ortmayer caused to be included in the insurance policies specified the following provision:Pursuant to the conditions of policy [number], I hereby revoke any previous designation of a beneficiary (or beneficiaries) made by me, and, in lieu thereof, as principal beneficiary (or beneficiaries) I hereby irrevocably designate my divorced wife, Emily K. Ortmayer, while living, 242 and I hereby irrevocably designate my daughters, Dorothea Marie Ortmayer, Susan Jane Ortmayer, and Mary Lou Ortmayer, or survivors or survivor, as contingent beneficiaries, to whom the net sum available at the time of the approval of the proofs of my death shall be paid if said Emily K. Ortmayer is not then living.In October 1944, Carl G. Ortmayer substituted for Metropolitan Life Insurance Company Policies Nos. 9396703 and 9500556, a Wisconsin Life Insurance Company Policy No. 116012 in the face amount of $ 30,000. Said Metropolitan Life Insurance policies were term insurance; said Wisconsin Life Insurance policy was an ordinary life insurance policy not subject to termination by the insurer. The provision set forth supra, was included in the substituted policy.The decree of divorce was not amended to permit any substitution. Emily K. Ortmayer was not apprised of, and did not consent to the foregoing substitution of the Wisconsin Life Insurance policy for the two policies written by Metropolitan Life Insurance Company before it had been accomplished by the petitioner. On September 13, 1945, her attorneys wrote a letter to petitioner which stated inter alia:We have 243 learned from the Metropolitan Life Insurance Company under date of September 5, 1945, that the two policies of insurance which you carried with such company, namely Policy No. 9-396-703 A, expired as of October 19, 1944, and Policy 9-500-556-A, expired as of December 8, 1944. It is our understanding that you were to maintain and keep in effect two $ 15,000.00 policies and not permit them to lapse. Under the circumstances it is going to be necessary for us to demand that you reinstate those policies and substitute them with policies of like value, naming Mrs. Ortmayer as beneficiary.There may be some explanation for your action in this regard, and we will be glad to hear from you.Petitioner replied to this letter to explain the circumstances underlying the substitution (viz, that he feared he would be unable to acquire 74 term insurance after age 65 and wanted to assure that $ 30,000 of life insurance would continue to be maintained pursuant to the divorce decree). Thereafter he received no further communication from his wife's attorneys in that regard. Carl G. Ortmayer has at all times maintained directly, or through his attorneys, possession of the policies of insurance. 244 No assignment of any of the policies has ever been made by Carl G. Ortmayer.Carl G. Ortmayer, during the year 1948, paid premiums on Wisconsin National Life Insurance Company Policies No. 96058 and No. 95772, and Wisconsin Life Insurance Company Policy No. 116012 in the amount of $ 2,302.80. In 1949 he paid as premiums the same amount on the same policies. At the time of said divorce, Carl G. Ortmayer was 52 years of age.OPINION.The first question which must be decided is whether the issuance by the company on July 2, 1948, of 750 shares of $ 1-par-value common stock and 750 ten-year 6 per cent debentures, in the face amount of $ 100 each, in exchange for the surrender by its stockholders of the 750 outstanding $ 100-par-value shares, and the payment of $ 1 for each share surrendered, constituted a taxable or a tax-free transaction. Petitioners contend that the transaction constituted a recapitalization-reorganization within the definition of section 112 (g) (1) (E), 1939 Code, and that the exchange of stock for stocks and debentures is nontaxable under section 112 (b) (3). Respondent has determined that the distribution of the debentures to the petitioners constituted a distribution245 essentially equivalent to a dividend taxable to the petitioners under sections 22 (a), 115 (a), and 115 (g) of the Code.We think that this case falls squarely within the ambit of Bazley v. Commissioner, 331 U.S. 737 (1947), and Adams v. Commissioner, 331 U.S. 737">331 U.S. 737 (1947); rehearing denied in both and opinion amended 332 U.S. 752">332 U.S. 752. See also Heady v. Commissioner, 162 F. 2d 699 (C. A. 7, 1947), affirming a Memorandum Opinion of this Court. The rule governing the instant situation is aptly stated by the Supreme Court in Bazley v. Commissioner, supra, at 741, as follows:Since a recapitalization within the scope of section 112 is an aspect of reorganization, nothing can be a recapitalization for this purpose unless it partakes of those characteristics of a reorganization which underlie the purpose of Congress in postponing the tax liability.No doubt there was a recapitalization of the Bazley corporation in the sense that the symbols that represented its capital were changed, so that the fiscal basis of its operations 246 would appear very differently on its books. But the form of a transaction as reflected by correct corporate accounting opens questions as to the proper application of a taxing statute; it does not close them. 75 Corporate accounting may represent that correspondence between change in the form of capital structure and essential identity in fact which is of the essence of a transaction relieved from taxation as a reorganization. What is controlling is that a new arrangement intrinsically partake of the elements of reorganization which underlie the Congressional exemption and not merely give the appearance of it to accomplish a distribution of earnings. In the case of a corporation which has undistributed earnings, the creation of new corporate obligations which are transferred to stockholders in relation to their former holdings, so as to produce, for all practical purposes, the same result as a distribution of cash earnings of equivalent value, cannot obtain tax immunity because cast in the form of a recapitalization-reorganization. * The factual situation herein is, in all material respects, identical with the fact patterns in the Bazley and Adams cases. Here, 247 as there, close corporations were involved (petitioners herein owned 748 out of 750 outstanding shares); the corporations involved issued pro rata new stock and debt obligations in exchange for the surrender of their outstanding stock; substantial earned surplus existed; and the proportionate equity ownership of the corporation remained unchanged. Moreover, in the instant case the corporation had never declared or paid any taxable dividend.Petitioners contend that the instant transaction is distinguishable from those in Bazley and Adams by reason of the existence of a valid business purpose. Petitioners argue that said transaction was initiated solely because of the demands of the bank that the company's financial position be improved if it was to continue to receive its customary $ 100,000 line of credit. The record shows that the instant transaction was preceded by discussions between various officials of the company and the bank. Following these, the company's accountant was called in to discuss the matters raised by the bank, and he devised the transaction involved. However, we are unable to understand how the transaction satisfied the demands of the bank and are248 convinced, as indicated below, that it was directed at ends other than their satisfaction. The bank was primarily concerned with the continued withdrawals from the company by petitioner and the consequent increasing amounts shown on the company's books as accounts receivable due from petitioner. The bank did not insist upon the elimination of this indebtedness or request a recapitalization. Its principal concern was that there be no additional borrowing of company funds by petitioner or other officers or employees. The series of transactions carried out by the company on July 2, 1948, in no way affected the working capital position of the company. No additional funds accrued to the corporation, except for the nominal $ 1 per share paid in, and though the financial statement no longer showed what is frequently a rather dubious asset, namely, the accounts receivable due from an officer, it also showed a radically reduced capitalization. At the trial herein, the 76 vice president of the bank, who was also the loan officer handling the company's loan account, testified that, from the bank's point of view, the transaction did not improve the financial position of the company249 for credit purposes, and that it was not constructive.The end result of the transaction, as arranged by the company's accountant, appears to have benefited only petitioner, rather than the company. Petitioner and his wife emerged with an unaffected equity in the company and with debentures having a fair market value of $ 74,800. No taxable dividends had been distributed by the company during the previous 24 years of its existence. Petitioner made immediate use of the debentures issued by the corporation by returning a portion of them to the company that same day (July 2, 1948) in exchange for the company's cancellation of a substantial indebtedness which he had accumulated by reason of withdrawals in excess of his salary. We fail to see any benefit accruing to the company from the recapitalization since it did not, and apparently was not intended to, improve its working capital position. Cf. Bona Allen, Jr., 41 B. T. A. 206 (1940).Accordingly, we hold that the company's exchange of debentures and $ 1-par-value common stock for its formerly outstanding $ 100-par-value stock does not qualify as a tax-free recapitalization within the meaning of section250 112. The transaction must be regarded, with respect to the debentures, as essentially equivalent to the distribution of a dividend, under section 115 (g), and respondent's determination that petitioners received income measured by the excess of the fair market value of the debentures received ($ 74,800) over the cash paid in ($ 748) is sustained.The second issue to be decided involves the transaction which took place between the company and petitioner immediately after their exchange of stock for stock and debentures. In return for the cancellation of all outstanding indebtedness owed by petitioner to the company, petitioner transferred 643 of the $ 100 debentures to the company, surrendered his right to $ 11,100 in salary due him, and agreed to the cancellation of the $ 20,851.76 balance shown on the company's books as capital loans (resulting from the advances which he had made to the company during the early 1930's). By amended answer, respondent claims an increased deficiency with respect to this transaction, arguing that it resulted in income from cancellation of indebtedness in the amount of $ 20,161.52, computed as follows:Indebtedness canceled$ 95,561.52Less: Debentures surrendered$ 64,300Salary due surrendered11,10075,400.0020,161.52251 77 Petitioner resists the contention of the respondent on two bases: First, petitioner maintains that his indebtedness to the company totaled $ 65,561.52 rather than $ 95,561.52. He attributes the difference of $ 30,000 to one item, namely, the notes payable which petitioner executed and delivered to the company in 1945 and 1946 when he borrowed such amount from the company to acquire 374 shares of stock from the Froeming estate. Petitioner contends that this sum did not constitute a real indebtedness. Secondly, he contends that in addition to the salary ($ 11,100) and debentures ($ 64,300 face amount) surrendered, he also canceled an indebtedness due him from the company in the amount of $ 20,851.76. It is the position of the respondent that no debt existed for the reason that said amount constituted a contribution to capital.In support of his first contention, petitioner maintains that he was acting as an agent for the company when he took the $ 30,000 and used it to purchase certain of the company's shares in the hands of the Estate of Ben A. Froeming. In support thereof, petitioner asserts that in 1952 he turned back to the company all that he had received as its fiduciary252 holder. These assertions have no support in the evidence. There is no record of any agreement existing between the company and petitioner whereby he was to purchase and hold the stock for the company. Our findings of fact demonstrate, to the contrary, that a binding debtor-creditor relationship was intended and established when the funds were loaned and the notes executed and delivered. Moreover, as our findings of fact also reveal, petitioner did not, in 1952, or at any other time return to the company "gratis" all he had received as holder of the 374 shares acquired from the Froeming estate. The 374-six per cent $ 100 face amount debentures attributable thereto received in the recapitalization on July 2, 1948, were used on that same day as part of the 643 debentures transferred back to the company in return for the agreement to cancel all of petitioner's indebtedness. Accordingly, we reject petitioner's first contention. (Cf. Woodworth v. Commissioner, 218 F. 2d 719 (C. A. 6, 1955); Lowenthal v. Commissioner, 169 F. 2d 694, 699-700 (C. A. 7, 1948); Wall v. United States, 164 F. 2d 462253 (C. A. 4, 1957)).With regard to petitioner's second contention (i. e., that he canceled an indebtedness due him from the company in the amount of $ 20,851.76), it is clear that no note or evidence of indebtedness was issued, no interest was payable, and no fixed obligation of repayment or any maturity date existed. Early minutes of the company lend some support to the view that the advances might be loans, intended to be repaid, however, only if and when there were earnings available for payment. On the other hand, book entries at one period record such 78 advances as donated surplus. In 1933, however, a "correcting" entry was made transferring the then amounts of such advances to an account called "Capital Stock Loans." If this were all the evidence before us, the solution of the problem might present difficulty. However, in a protest dated April 4, 1947 (applicable to the years 1943 to 1945, inclusive), filed on behalf of the company, but signed by petitioner as president (much of which is quoted in our findings), petitioner makes the following positive and unequivocal statements:As before indicated, the corporation was in poor financial condition for a considerable 254 period. During this time its principal stockholders, primarily Mr. C. G. Ortmayer, invested additional funds in the corporation which were intended as capital contributions and not as loans. These funds were treated as part of the capital of the corporation and reflected as paid in surplus on the corporation's balance sheets. * * * There was no agreement for the payment of interest and in all other respects the sums were treated as additional capital rather than as loans. On its balance sheet, which reflected the corporation's understanding of the treatment of these sums of money and the effect upon its capital structure, they were included as a capital item rather than as an account payable. Although the amounts involved were entered in the books in an account called "Capital Stock Loan Account," the designation is ambiguous and would have to be explained in the light of the taxpayer's understanding of the effect of this account upon its capital structure. The fact is that the taxpayer understood and treated this account as the equivalent of paid in surplus and not as an account payable. [Emphasis supplied.]Moreover, in its Federal income255 tax returns for the years 1944-1948, inclusive, filed by the company, and signed on its behalf by petitioner as president, the advances by petitioner are shown as paid-in surplus.Under the circumstances, we must agree with respondent that such advances must be treated as contributions to capital and not as loans. See R. E. Nelson, 19 T. C. 575 (1952).It follows that the excess of petitioner's indebtedness so canceled over the salary credit and basis of debentures surrendered cannot be further reduced by the existing capital contributions. That the excess so canceled (which cancellation was clearly not intended as a gift, cf. Commissioner v. Jacobson, 336 U.S. 28">336 U.S. 28) constituted taxable income (taxable dividend) to the petitioner under the circumstances before us is apparent. Secs. 22 (a) and 115, 1939 Code; Jacob M. Kaplan, 21 T. C. 134, 144-145 (1953), appeal dismissed (C. A. 2, 1954); J. Natwick, 36 B. T. A. 866 (1937).Finally, we must determine whether respondent properly disallowed certain deductions claimed by petitioner as alimony payments under 256 section 23(u), 1939 Code. All of the material facts are fully set forth in our Findings of Fact. It is our view that the question for decision herein is essentially the same as that decided in our prior holding in Beulah Weil, 22 T. C. 612 (1954), affirmed in part (relating to this 79 issue) and reversed in part (on another issue) on January 22, 1957, by the Court of Appeals for the Second Circuit sub nom. Charles S. Weil v. Commissioner, 240 F. 2d 584. Here, as in Weil, although the wife was named as irrevocable beneficiary, she had no right to change the named beneficiaries or assign the policies. Her interest in the policies ceased upon her death during his lifetime, and the children were to be named as beneficiaries in the event she predeceased the husband. Her interest in the policies was thus contingent. For the reasons and upon the authorities cited in Beulah Weil, supra, at 619-620 (affirmed as aforesaid), we are of the opinion that the sums applied by petitioner in payment of insurance premiums during the taxable years were not received by his divorced wife, directly257 or constructively, within the meaning of section 22 (k), 1939 Code, and hence were properly disallowed as deductions claimed under section 23 (u) of the Code.Decision will be entered under Rule 50. Footnotes1. By amended answer, respondent made the following claim for increased deficiencies:8. On July 2, 1948 the following transaction occurred between Carl G. Ortmayer and Cunningham-Ortmayer Company. Carl G. Ortmayer, on his part (1) surrendered his right to salary due from Cunningham-Ortmayer Company in the amount of $ 11,100.00, (2) transferred to Cunningham-Ortmayer Company 643 of the Company's debenture obligations having a face value and a fair market value of $ 100.00 each. Cunningham-Ortmayer Company, on its part cancelled outstanding indebtedness in the amount of $ 95,561.52 owing to the Company by Carl G. Ortmayer.9. In the event this Court holds that the respondent has correctly determined that the distribution of the 748 debentures by Cunningham-Ortmayer Company to the petitioners herein on July 2, 1948, was a distribution essentially equivalent to a dividend within the meaning of section 115(g) of the Internal Revenue Code of 1939, then the respondent makes claim for increased deficiency in the amount of $ 13,031.42 under section 272(e) by reason of the facts set forth in paragraph 8, supra. In particular the respondent maintains that the difference between Carl G. Ortmayer's cost basis for the salary and debentures surrendered ($ 75,400.00) and the amount of the total indebtedness cancelled by Cunningham-Ortmayer Company ($ 95,561.52) constitutes cancellation of indebtedness income taxable to petitioners within the purview of sections 22(a), 115(a) and 115(g) of the Internal Revenue Code of 1939↩.1. Petitioner had transferred to his wife, on March 15, 1947, 150 of the 374 shares which he had held since 1928. After the exchange of stock for stock and debentures by the company, on July 2, 1948, Hilda B. Ortmayer transferred to petitioner 45 of the debentures which she had received. In return, petitioner executed a promissory note in the amount of $ 4,500 and delivered it to Hilda B. Ortmayer.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4623995/	HENRY F. COCHRANE, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Cochrane v. CommissionerDocket No. 34435.United States Board of Tax Appeals23 B.T.A. 202; 1931 BTA LEXIS 1912; May 13, 1931, Promulgated 1912 1. Held that numerous expenditures made by petitioner in a professional capacity as a lawyer on behalf of his clients are not deductible as ordinary and necessary business expenses of petitioner for the year in which the expenditures were made. Held, further, that amounts paid petitioner in the following year as reimbursement for such expenditures did not constitute income to petitioner in such year and should be excluded from income reported for that year. 2. An amount paid by petitioner to reimburse another of his clients for losses sustained by such client, due to petitioner's error in representing such client in a legal capacity, held to be deductible from petitioner's gross income of the year in which the amount was paid. 3. Claimed deduction on account of taxes on real estate disallowed in absence of evidence as to the nature of the taxes. 4. Claimed deductions on account of depreciation sustained on houses disallowed for lack of evidence. 5. Claimed deductions on account of expenditures on houses disallowed in the absence of evidence as to whether they constituted payments for repairs or capital expenditures. 6. The amount of rent received1913 by petitioner from real estate held properly included in his gross income. Henry F. Cochrne, Esq., pro se. P. A. Bayer, Esq., for the respondent. MCMAHON 202 This is a proceeding for the redetermination of asserted deficiencies in income tax for the calendar years 1923 and 1924 in the respective amounts of $4,930 and $6,276.19. It is alleged that the respondent erred in: (1) Failing to allow as a deduction from gross income of 1923 an amount of $1,784.45, representing bad debts; (2) Failing to allow as a deduction from gross income of 1923 an amount of $5,000 representing other business expenses; 203 (3) Failing to allow as a deduction from gross income of 1923 an amount of $5,000 representing taxes paid; (4) Failing to allow as a deduction from gross income of 1923 an amount of $15,749.61 representing losses; (5) Failing to allow as a deduction from gross income of 1924 an amount of $3,540 representing bad debts; (6) Failing to allow as a deduction from gross income of 1924 an amount of $8,206.23 representing "loss from income from real property"; and (7) Determining that there was a profit of $9,976.74 chargeable1914 against the petitioner for the year 1924. FINDINGS OF FACT. The petitioner is an attorney engaged in the practice of law with offices at 62 William Street, New York, N.Y. He has practiced law in New York City for about 30 years. Sometime in the month of August, 1923, Mrs. Eugene W. Candidus came to the petitioner and stated that her daughter, Mrs. Gesine W. Sullivan, was unhappily married and that she wanted some steps taken to obtain a divorce. Mrs. Candidus had been a personal friend of the petitioner and his family since 1896. Petitioner had done legal work for Mrs. Candidus for about 25 years. In dealing with her it was his custom to perform any services and make any reasonable disbursements which were necessary and then receive reimbursement from her for both services and disbursements as bills were rendered by him therefor. As Mrs. Sullivan was one of her heirs, Mrs. Candidus, who was the owner of a large amount of real and personal property, told petitioner that she wanted the divorce proceedings of her daughter conducted in a thorough manner so that no disagreeable consequences would arise afterwards. Mrs. Candidus' first suggestion was to obtain a divorce in1915 the State of New York and she asked petitioner to investigate the behavior of her son-in-law. Petitioner refused to do this himself, but stated he would turn it over to others. Mrs. Candidus agreed that after the divorce was obtained she would pay the petitioner whatever expenses were involved. Accordingly, the petitioner turned the matter over to his brother-in-law, a Mr. Clark, who hired a detective agency to make an investigation. In 1923 the petitioner paid Clark and the detective agency $1,100 for the investigation. As a result of this investigation it was determined that Mrs. Sullivan could not get a divorce in New York. After Mrs. Candidus had received this report from the petitioner, she instructed him to study the laws of other States in order to find out where a divorce could be speedily obtained. Petitioner went to Rhode Island and to Philadelphia for 204 this purpose. The expense incurred by the petitioner in this study of the laws of the other States was $1,128. Later Mrs. Candidus instructed petitioner to take steps to have the divorce obtained in Nevada. Petitioner informed her that he did not know any one in Nevada, but she instructed him to go there1916 at once and get any assistance that he needed and that she would pay the expenses. Accordingly, in the early part of September, 1923, petitioner proceeded to Reno, Nev. Petitioner's railroad fare to and from Reno was $136. The trip lasted fourteen days. Petitioner estimates that other expenses brought that figure up to $200. He also estimates that he had additional expenses for meals, hotels and other expenses in an amount of $40 or $50. Petitioner employed the law firm of Norcross, Thatcher & Woodburn in Reno to assist him in obtaining the divorce. He paid them a retainer fee of $500. Mrs. Sullivan immediately went to Reno to establish a residence there. At Mrs. Candidus' instruction, petitioner purchased the railroad tickets for Mrs. Sullivan and her maid. These cost petitioner $357. About December 1, 1923, petitioner paid William Woodburn of the law firm in Reno an amount of $1,000 by check. Petitioner also sent Woodburn an amount of $25 or $30 as reimbursement for some expenditures which Woodburn had made. At the request of Mrs. Candidus, petitioner made two other trips to Reno in 1923. These trips were rather extended and on each trip the petitioner took with1917 him $1,000. Nearly all of the $1,000 was expended in each instance. The petitioner returned with about $18 on one occasion at least. A part of the money which petitioner expended while on these trips was for entertaining Mrs. Sullivan, who was in a nervous condition. Petitioner took her on trips to Carson City and Virginia City by automobile. He paid $20 for an automobile for one of these trips. Petitioner did not customarily advance or expend moneys for his clients as he did for Mrs. Candidus. On July 1, 1924, after the divorce had been granted, petitioner informed Mrs. Candidus that the expenses had been $5,000 and that his fee was $5,000. She immediately gave petitioner a check for $10,000. Petitioner reported this total amount of $10,000 as income in 1924, but did not claim any deductions therefrom on account of the incidental expenses, all of which had been paid in 1923. In computing the deficiency for the year 1923, the respondent has failed to allow the claimed deduction of $5,000 as expenses in the matter of obtaining the divorce. In 1923, petitioner rendered services for, and made disbursements on behalf of, the National Sugar Refining Company, for which1918 they, in 1924, paid him $25,000. This payment of $25,000 was for 205 services and disbursements in connection with the Van Nest litigation and for services in connection with certain income-tax refunds for the years 1919 and 1920. The petitioner returned the full amount of $25,000 as income in 1924 without deducting any disbursements. In 1923, the petitioner, in connection with the Van Nest investigation, spent $1,739.64 for railroad fares, sleeping-car accommodations, and for auditing the Van Nest books. Petitioner was not reimbursed in 1923 for any of these expenditures. In his income-tax return for the year 1923 petitioner claimed this amount as a deduction. In October, 1923, the petitioner undertook to advertise and sell at auction a number of houses for one of his clients. The houses were advertised by the petitioner as being free of encumbrances. Later, after the houses had been sold, the purchasers contended that certain leases then existing on the properties were encumbrances and the purchasers rejected the houses. The houses were resold in November, 1923, and petitioner paid $10,000 as part of the expense of the resale. If petitioner had inserted the proper1919 provisions in the advertisements the purchasers would have been precluded from rejecting jecting the houses and petitioner's client would have been protected, but as a result of petitioner's failure to properly advertise the houses his client suffered losses. Petitioner paid the $10,000 upon the ground that he had not properly protected the interests of such client. As a result of the rejection by some of the purchasers of these houses, petitioner was compelled to purchase seven of these houses for $64,500. During the year 1924, petitioner received as rent from these houses $7,018. For the year 1924, the petitioner returned his income and that of his wife in a joint return. He received $2,958.74 as rent from certain property belonging to his wife. The total rent amounting to $9,976.74 was returned as income in the joint return for 1924, but petitioner claimed depreciation in the amount of $4,344; repairs in the amount of $9,118.97, and "other expenses" in the amount of $4,720, and showed a loss from these properties of $8,206.23. The respondent, in determining the deficiency, included in income the amount of $9,976.74, representing rent, and disallowed the claimed deductions. 1920 Petitioner's wife owned a house upon which there was a mortgage of $18,000. Petitioner was guarantor on this mortgage. The property was in a dilapidated condition and city authorities threatened to tear it down. The petitioner thereupon expended, in 1923 and 1924, an amount of $6,402.92 upon this building. Of this amount $6,002.92 was expended in 1924. These payments were made by checks, the purposes of which are taken from the evidence, as follows: 1924Paid to -Object of expendituresAmountJan. 22B. LaneNot shown$300.00Feb. 8L. De NicolaFor carpentry work in repair of roof which had caved in, side of house which had cavedin, and an awning that had fallen on street. 300.0019B. R. MeseroleNot shown30.00Mar. 10B. C. Miller & SonFor jacking the house up to support the foundations 250.0021L. De NicolaFor carpentry work500.00Apr. 4J. Mentz's SonsFor plastering walls210.0012L. De NicolaFor carpentry work200.0017John TreiberNot shown120.72May 7John F. Clarkdo100.007Michael F. Farrelldo28.0015Central Metal Ceiling CoInstalling of metal ceilings in the stores in the building.260.0023L. De NicolaGeneral carpentry work300.0023Michael F. FarrellPlumbing work75.00June 4Central Metal Ceiling CoFurther cost of metal ceilings200.006Matt StockflethFor excavation in rear of building to assist plumber 150.006Michael F. FarrellFor plumbing75.0018Matt StockflethFor assisting plumber115.0018John J. HillinNot shown89.00July 8John F. ClarkExpenditures made for a number of small bills, for plumbing, gas fixtures, and repairing the upper part of the house. 11Jas. J. Holt & SonsFor work on windows and storefronts $175.0011J. Mentz's SonsNot shown17.20Sept. 11Geo. H. Brunnerdo230.00Oct. 9B. Lanedo175.0023Michael F. FarrellFor installing plumbing in the apartments 143.0023L. De NicolaFor carpentry work200.0027O. H. RiederFor putting stucco coating onoutside of the house 600.0031L. De NicolaFor carpentry work200.00Nov. 14O. H. RiederNot shown400.0021John Jos. CarrollFor consultation with the board of health with regard to the plans for work on thishouse. Total6,002.921921 206 At least a part of this house was rebuilt as a result of these expenditures. There was put over the old frame walls of the house a stucco finish. At some time the petitioner paid an amount of $7,000 representing taxes on his wife's property which were in arrears. In determining the deficiency for the year 1923 the respondent disallowed as a deduction $5,000 of the amount of $7,000 claimed in the return as taxes paid. During 1924, the petitioner paid out money upon the seven houses which he owned. This money was paid out to comply with the requirements of the Board of Health and the Tenement House Department of the Borough of Brooklyn, City of New York. The money was spent to put in condition the hallways, stairways, the plumbing, the cellar, the windows and the steps. These expenditures were made in order to keep the tenants from moving out. Part of the expenditures was for new plumbing and fixtures which had been broken. Clark, petitioner's brother-in-law, informed the petitioner that he estimated that these expenditures amounted to $3,300. In determining the deficiency in tax for 1923, the respondent disallowed as deductions bad debts in the amount of1922 $1,784.45, other expenses in the amount of $5,000, taxes paid in the amount of $5,000, and losses in the amount of $15,749.61. In determining the deficiency 207 for 1924, the respondent disallowed bad debts claimed in the amount of $3,540, and a claimed loss of $8,206.23 in the operation of real property, and added to the gross income of petitioner as rent the amount of $9,976.74. OPINION. MCMAHON: The petitioner, an attorney at law, claims that he is entitled to a deduction in the amount of $5,000 from his gross income for 1923 as ordinary and necessary business expense incurred and paid by him in obtaining a divorce for the daughter of one of his clients. In 1924 petitioner presented his bill to his client for $10,000, representing his fee of $5,000 and expenditures incurred in the amount of $5,000. In that year petitioner returned the full amount of $10,000 as income, but claimed no deductions on account of expenditures made in connection with obtaining the divorce. Section 214 of the Revenue Act of 1921 provides in part: (a) That in computing net income there shall be allowed as deductions: (1) All the ordinary and necessary expense paid or incurred during1923 the taxable year in carrying on any trade or business, including a reasonable allowance for salaries or other compensation for personal services actually rendered; traveling expenses (including the entire amount expended for meals and lodging) while away from home in the pursuit of a trade or business; * * * The evidence discloses that the petitioner, in 1923, paid $1,100 for the purpose of investigating the behavior of the party from whom his client's daughter wished to be divorced, $1,128 for investigation of divorce laws in various States, $1,525 for securing assistance of legal counsel in Reno, Nev.; $136 for his own railroad fare to and from Reno on his first trip; approximately $1,000 on each of two other trips to Reno, some of which was for automobile hire in the interests of his client's health; and $357 for railroad tickets for the daughter of his client and her maid. After due consideration of all the evidence in this proceeding upon the expenditures made in obtaining the divorce, we are of the opinion that the above amounts did not constitute ordinary and necessary expenses of petitioner's business. The petitioner testified that in dealing with Mrs. Candidus, it had1924 been his custom to perform any service and make any reasonable disbursements which were necessary and then receive reimbursement from her for both service and disbursements. Mrs. Candidus was desirous of speedily obtaining a divorce for her daughter and told petitioner to make any expenditures which were necessary and she would reimburse him after the divorce was obtained. When petitioner rendered his bill to Mrs. Candidus in 1924 he claimed $5,000 as his legal fee and $5,000 as expenses incurred in obtaining the divorce. We conclude that the amounts expended by the petitioner in obtaining this divorce constituted 208 advancements by petitioner on behalf of Mrs. Candidus for which she had agreed to reimburse him. See ; and . No part of the $5,000 claimed by the petitioner as a deduction is therefore allowable. In view of our holding above that the amounts expended by petitioner in obtaining the divorce constituted advancements by petitioner on behalf of Mrs. Candidus, it necessarily follows that when they were repaid to petitioner in 1924 they did not constitute1925 income to him. The petitioner included in his income-tax return for 1924 the full amount of $10,000 representing, according to the bill which he rendered to Mrs. Candidus, $5,000 as petitioner's fee, and $5,000 representing reimbursement of expenditures made in obtaining the divorce. It clearly appears from the evidence that the advancements made by the petitioner on behalf of his client in the divorce proceeding, and which were repaid to him in 1924, amounted to at least $5,000. While the petitioner has not, in his pleadings, or elsewhere, requested that his gross income for 1924 be reduced by eliminating the $5,000 repayment, yet, that year being before us, it is our opinion that this should be done. Upon the redetermination the amount of $5,000 will be excluded from petitioner's gross income for 1924. The petitioner also claimed in his petition that the respondent erred in failing to allow as a deduction from gross income of 1923 an amount of $15,749.61, representing losses. While we are without the benefit of a brief from the petitioner, we assume that the evidence regarding the expenditure of $1,739.64 and $10,000 is directed toward proving that allegation of error. The1926 amount of $1,739.64 was spent for railroad fares, sleeping-car accommodations, and for auditing certain books of account, and was spent in rendering services to petitioner's client, the National Sugar Refining Company. The proof did not disclose the amount paid out for any one of these purposes or give us any further detail as to these expenditures. The National Sugar Refining Company paid petitioner, in 1924, for his services and disbursements. This amount of $1,739.64 was not an ordinary and necessary expense of petitioner's business, since it represented advancements on behalf of petitioner's client. It is therefore not deductible from gross income for 1923. However, it was clearly not income in 1924 and upon the redetermination it will be excluded from income of that year. The amount of $10,000 was paid by petitioner to one of his clients upon the ground that petitioner had not properly protected the interest of such client. The facts regarding this payment are set forth in our findings of fact. We regard this expenditure as an ordinary and necessary expense 209 of petitioner's business and, therefore, deductible. On the latter point see 1927 . The petitioner alleges that the respondent erred in failing to allow as a deduction from gross income of 1923 an amount of $5,000 representing taxes paid. The evidence discloses that the petitioner, at some time, paid $7,000 taxes in arrears on his wife's property. The evidence does not show when these taxes were paid. Since it is not shown that the taxes were paid in the year 1923, no deduction can be allowed from gross income of that year on this account. Furthermore, there is no evidence to show the nature of the taxes which were paid. Taxes assessed against local benefits of a kind tending to increase the value of the property assessed do not constitute allowable deductions. Section 214(a)(3) of the Revenue Act of 1921. As far as the record shows, the taxes paid may have been of this character. The action of the respondent in disallowing the claimed deduction of $5,000 must be approved. The petitioner alleges that the respondent erred in failing to allow as a deduction from gross income of 1924 an amount of $8,206.23 representing "loss from income from real property." The petitioner arrives at this so-called1928 loss by setting off against rent received in the amount of $9,976.74, depreciation in the amount of $4,344, repairs in the amount of $9,118.97, and other expenses in the amount of $4,720. In his last assignment of error the petitioner contests the respondent's inclusion in his gross income of rent in the amount of $9,976.74. The result of these two assignments of error is simply to attack the respondent's disallowance of deductions for depreciation, repairs, and "other expenses" in the amounts noted above, since the evidence discloses that the total rent received by petitioner in 1924 from his own real estate and that of his wife and returned on their joint return for 1924 was $9,976.74. This amount of rent received must, under the specific provisions of section 213(a) of the Revenue Act of 1924, be included in petitioner's gross income. We will therefore consider whether petitioner is entitled to the claimed deductions. At the hearing petitioner contended that he sustained about $500 depreciation on each of the seven houses which he owned and that the remainder of the claimed depreciation was sustained on his wife's houses. However, no evidence was adduced as to the character1929 of the houses, as to their probable length of life, or as to the cost of some of them. In the absence of such evidence, we are not in a position to determine the amount of depreciation which was sustained. Nor is there any evidence as to the character of the "other expenses" in the amount of $4,720, claimed by the petitioner in his return. At the hearing, the petitioner testified that his 210 brother-in-law in 1924 made certain expenditures on the houses belonging to the petitioner while the petitioner was in Europe and that his brother-in-law estimated that these amounted to $3,300. In our opinion this is not sufficiently definite to allow us to fix the amount of a claimed deduction on account of repairs. Furthermore, the evidence is not specific as to the exact amount and character of the expenditures. Some of them may have been, and the evidence tends to indicate that some of them were, for replacements, alterations and improvements, which are additions to capital investment, the cost of which may not be applied against current earnings. See 1930 . Likewise, the petitioner has failed to prove his right to any deduction on account of repairs to buildings. Petitioner has introduced into evidence a list of checks which were drawn in 1924 to pay for expenditures on a house belonging to his wife. These expenditures amount to $6,002.92. Petitioner testified as to the purpose of some of these payments, but as to others he testified that he did not know the purpose. He testified that a part of this house was rebuilt as a result of these expenditures. From the evidence we can not determine what part of these expenditures were for repairs and what part were for alterations, replacements and improvements, and we are, therefore, unable to fix the amount of any deduction to which the petitioner is entitled on account thereof. The respondent's disallowance of the total claimed deductions of $8,206.23 must, therefore, be approved. There was no evidence submitted as to assignments of error numbered 1 and 5 and the respondent's determination in those respects will be sustained. Reviewed by the Board. Judgment will be entered under Rule*1931 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4623996/	Glenshaw Glass Company, Inc., Petitioner, v. Commissioner of Internal Revenue, RespondentGlenshaw Glass Co. v. CommissionerDocket No. 15986United States Tax Court13 T.C. 296; 1949 U.S. Tax Ct. LEXIS 95; September 13, 1949, Promulgated 95 Decision will be entered under Rule 50. 1. During the base period years petitioner, a glass container manufacturer, paid royalties to Hartford-Empire Co. under a contract which it had with that company. These royalty payments were allowed as deductions by the Commissioner in computing petitioner's net income for the base period years. In a subsequent year these payments were recovered by petitioner as the result of a suit based on the ground that they had been made because of a patent and injunction decree obtained by fraud by Hartford-Empire Co. Held, petitioner's payments of these royalties during the base period years were made under contract and not in settlement of any liability created by a court judgment or decree and do not come within the provisions of section 711 (b) (1) (H), I. R. C.; held, further, that $ 11,020.90 paid by petitioner to Hartford-Empire Co. pursuant to a final decree entered February 10, 1939, by the United States District Court for the Western District of Pennsylvania was a payment which falls within the provisions of section 711 (b) (1) (H), and it was abnormal to petitioner and should be disallowed to the extent of $ 9,316.39 (the amount96 allowed as a deduction by the Commissioner in 1939) as a deduction in computing petitioner's excess profits credit for the taxable years.2. Petitioner paid its executives $ 125,042.65 and $ 132,930.52 as salaries and bonuses for the taxable years ended September 30, 1943 and 1944, respectively. Held, the salaries are properly deductible as being reasonable compensation for the respective years. Max Swiren, Esq., Joseph D. Block, Esq., and Sidney B. Gambill, Esq., for the petitioner.Hobby H. McCall, Esq., for the respondent. Black, Judge. BLACK 296 This proceeding involves deficiencies in excess profits taxes in the amounts of $ 70,972.35 and $ 90,410.61 for the taxable years ended September 30, 1943 and 1944, respectively. The deficiencies are primarily due to the disallowance of certain compensation of officers for the years 1943 and 1944, which was explained in a statement attached to the deficiency notice as follows:1943The amounts claimed as deductions from gross income for the fiscal year ended September 30, 1943, and alleged to represent compensation of officers, have been adjusted as follows:OfficerClaimedAllowedDisallowedSamuel B. Meyer$ 43,347.55$ 24,000.00$ 19,347.55George W. Meyer41,347.5522,000.0019,347.55Albert C. Meyer40,347.5521,000.0019,347.55Totals$ 125,042.65$ 67,000.00$ 58,042.6597 297 1944 * * for the fiscal year ended September 30, 1944 * * :OfficerClaimedAllowedDisallowedSamuel B. Meyer$ 45,976.84$ 24,000.00$ 21,976.84George W. Meyer43,976.8422,000.0021,976.84Albert C. Meyer42,976.8421,000.0021,976.84Totals$ 132,930.52$ 67,000.00$ 65,930.52By appropriate assignments of error petitioner contests these adjustments. Other adjustments contested by petitioner were settled during this proceeding. In addition to contesting the adjustment of officers' compensation, petitioner alleges in the pleadings that certain deductions should be restored to base period income for the purpose of determining petitioner's excess profits tax credit for the taxable years involved herein.There are, therefore, two issues for us to decide: (1) Whether certain deductions should be disallowed and restored to excess profits net income for the purpose of determining petitioner's excess profits credit; and (2) whether certain sums paid petitioner's officers as compensation are allowable deductions.FINDINGS OF FACT.Generally. -- The petitioner is a Pennsylvania corporation, organized in 1900 as the successor to 98 a limited association formed in 1895. Its principal office and place of business is in Glenshaw, Pennsylvania. From the date of its incorporation to the present time petitioner has been continuously engaged in the manufacture of glass bottles and glass containers. For the taxable years here involved petitioner's tax returns were filed with the collector of internal revenue for the twenty-third district of Pennsylvania.Issue 1. -- In the base period years the following amounts were paid by petitioner to Hartford-Empire Co. (hereinafter sometimes referred to as Hartford) as royalties on glass-feeding machines, and were claimed and allowed as deductions in petitioner's returns for the years ended September 30 as indicated:1937$ 69,107.22193860,630.581939* 82,115.88194078,356.59All of the payments tabulated above with the exception of the $ 9,316.39 were made to Hartford as royalties on feeders.298 From99 1923 until 1932 petitioner used and operated only glass-feeding machines under license agreements with Hartford providing for payment of royalties upon all production from such feeders and limiting the type of containers which petitioner could produce therewith. Each license agreement contained the provision permitting its termination by petitioner upon the payment of a prescribed lump sum minimum royalty. Pursuant to the license agreements, royalties were paid by petitioner to Hartford from 1923 through the fiscal year ended September 30, 1940.In 1931 and in the forepart of 1932 the petitioner, the McKee Glass Co., George R. Haub and others formed the Shawkee Manufacturing Co. for the purpose of building and selling a new glass feeder. During 1931 and in the forepart of 1932 Haub developed and built in petitioner's plant a new feeder, known as the Shawkee feeder. Petitioner received a nonexclusive license to use the Shawkee feeder free from the payment of any royalties. In March and May, 1932, petitioner installed two Shawkee feeders, replacing two Howard (Hartford licensed) feeders. In April and May, 1933, two additional Shawkee feeders were installed in petitioner's plant. 100 The Shawkee feeder proved to be an efficient, workable feeder, equal to those covered by the Hartford licenses.On May 31, 1933, Hartford filed suit against petitioner, Shawkee, and others in the United States District Court for the Western District of Pennsylvania, entitled Hartford-Empire Co. v. Shawkee Manufacturing Co., et al., Docket No. 2791. On the basis of an earlier decision in Hartford-Empire Co. v. Hazel-Atlas Glass Co. (CCA-3), 59 Fed. (2d) 399, the complaint charged that the Shawkee feeder infringed the patent owned by Hartford. Relying on the Hazel-Atlas decision, the District Court, on June 27, 1933, entered a preliminary injunction which restrained the defendants from selling Shawkee feeders, but did not apply to the continued use of Shawkee feeders by petitioner. At the time the preliminary injunction was entered, petitioner had removed two Howard feeders and had installed four Shawkee feeders. Thereafter, upon advice of counsel, petitioner decided to proceed more slowly in outfitting its plant with Shawkee feeders and to defer termination of the Hartford license agreements pending the outcome of the litigation. 101 Relying upon its earlier decision in the Hazel-Atlas case, supra, the Court of Appeals for the Third Circuit affirmed the order for the preliminary injunction. Shawkee Mfg. Co. v. Hartford-Empire Co., 68 Fed. (2d) 726. Pursuant to the mandate of the Court of Appeals for the Third Circuit, the District Court entered an order for a permanent injunction on October 19, 1934, restraining the manufacture, sale, and use of Shawkee feeders by petitioner and others and directing 299 an accounting to Hartford. On February 10, 1939, the District Court issued the final decree, the parties having concluded the accounting by a settlement between them. Petitioner paid Hartford the sum of $ 11,020.90 in settlement of the accounting for royalties on the production of the royalty-free Shawkee feeders. Of this amount, respondent allowed $ 9,316.39. This settlement was the result of the injunction of October 19, 1934, which remained in effect by the decree of February 10, 1939.On the date of the permanent injunction, October 19, 1934, petitioner had seven royalty-free Shawkee feeders in operation and was manufacturing 65 per cent of its total production102 on these machines. It had by then dismantled five Howard (Hartford licensed) feeders. Upon the issuance of the permanent injunction the royalty-free Shawkee feeders were dismantled. In order to do business and comply with the injunction it was necessary for petitioner to reinstall, and it did reinstall, the Howard feeders and pay royalties as provided in the license agreements, which it did until December 1, 1940. Were it not for the injunction of 1934, petitioner would have continued to install royalty-free Shawkee feeders to replace the Howard feeders.After December 1940, petitioner made the decision to discontinue all further payments of feeder royalties to Hartford. This decision was the result of information disclosed in antitrust proceedings prosecuted against Hartford. Based upon documents uncovered in that case, proceedings were instituted in 1941 charging that the judgment entered in 1932 in Hartford-Empire Co. v. Hazel-Atlas Glass Co., supra, had been secured through fraud and that the Hazel-Atlas judgment was fraudulently employed to secure the permanent injunction against petitioner in 1934 in Shawkee Mfg. Co. v. Hartford-Empire Co., supra.103 Simultaneously, Hazel-Atlas Glass Co. filed its petition making the same charges of fraud in the procurement of the judgment against it. The proceedings were consolidated for hearing and the applications to vacate the judgments were denied by a divided court. On appeal, the Supreme Court of the United States in 1944 ordered both the judgment against Hazel-Atlas and the judgment against petitioner set aside upon the grounds of fraud. Hazel-Atlas Glass Co. v. Hartford-Empire Co., 322 U.S. 238">322 U.S. 238; Shawkee Manufacturing Co. v. Hartford-Empire Co., 322 U.S. 271">322 U.S. 271. The Supreme Court ordered that the fraudulently obtained judgment entered against petitioner in 1934 be annulled and set aside, that Hartford's bill of complaint be dismissed, and that petitioner be permitted to bring appropriate proceedings for restitution and damages. Such proceedings for restitution and damages were brought and culminated in a decision by the United States Court of Appeals for the Third Circuit in Hartford-Empire Co. v. Shawkee Mfg. Co., 163 Fed. (2d) 474, 300 holding (a) that petitioner would not 104 have paid the feeder royalties to Hartford but for the fraudulently induced 1934 injunction, and (b) that petitioner was entitled to restitution of such royalties. The Circuit Court of Appeals remanded the case for further proceedings in conformity with its opinion. Thereafter, in settlement of the entire matter, Hartford paid petitioner the sum of approximately $ 813,000.The payment of $ 11,020.90 by petitioner to Hartford-Empire Co. pursuant to the final decree entered February 10, 1939, by the United States District Court for the Western District of Pennsylvania was attributable to that court decree and the deduction of the payment was "abnormal" for petitioner as that term is used in section 711 (b) (1) (H) of the Internal Revenue Code. The abnormality was not a consequence of an increase in the gross income of petitioner in its base period or a decrease in the amount of some other deduction in its base period, and was not a consequence of a change at any time in the type, manner of operation, size, or condition of the business engaged in by the taxpayer. Petitioner ceased paying feeder royalties to Hartford in 1941, simultaneously with its discovery of Hartford's fraud and105 the commencement of its successful attack upon the decree. Petitioner has not paid feeder royalties to Hartford or taken deductions therefor since that time.Issue 2. -- Petitioner's executives were the three Meyer brothers, Samuel B., George W., and Albert C., who had been associated with petitioner for 42, 37, and 48 years, respectively. During the taxable years involved herein Samuel B. was president, treasurer, general manager, and sales manager; George W. was secretary, assistant treasurer, and assistant general manager in complete charge of production; and Albert C. was in charge of engineering, designing, and product improvement. These three brothers were especially well qualified to conduct the business of petitioner. From the time of their undertaking the management in 1921 the financial condition and growth of the company were outstanding in their consistency and extent. From 1928 to 1944 petitioner's growth exceeded the average of the industry. Petitioner made a net profit in every year for the 22 years ended September 30, 1944, and a dividend was paid in each year with the exception of 1934. There has been a consistent and material increase in plant and equipment, 106 all of which has been financed from earnings. The dividends for the taxable years 1943 and 1944 amounted to 22 and 24 per cent, respectively.During the taxable years and for many years prior thereto petitioner operated its plant 24 hours, 7 days a week, employing approximately 450 persons. In the taxable years the 3 executives had no assistants and as a consequence worked long hours, with but one vacation in the 301 last 10 or 15 years. These executives were instrumental in the development of the Shawkee feeder and contributed to the advancement of the art of glass container manufacturing.During the taxable years the responsibilities and duties of the petitioner's officers had materially increased, due both to large increases in production and sales and to the difficulties of wartime operations. The average net sales of the petitioner for the four years 1936-1939 amounted to $ 1,704,662.69. The net sales for the taxable year 1943 were $ 3,033,221.12, or an increase of 77 per cent, and for 1944 were $ 3,055,517.05, or an increase of 79 per cent. The average sales for the taxable years 1941 and 1942 were $ 2,558,610.57, with the taxable year 1943 and the taxable year 1944107 each registering increases of approximately 18 per cent over this average. During the war years, although procurement of orders presented relatively no problem, numerous other problems arose to engage the attention of the management. Difficulties in the allocation of orders among customers, in complying with numerous regulations, in the maintenance and replacement of equipment, in obtaining, training, and holding labor, and in obtaining allocations of scarce raw materials, all imposed additional duties and responsibilities.Being engaged in the manufacture of beverage ware, as distinguished from food containers, petitioner did not receive the advantage of Government allocations of raw materials. Moreover, in order to get the greatest amount of packaging with the least amount of raw materials, the War Production Board required the production of light weight containers. The manufacture of light weight containers required the maintenance of all operating equipment at maximum operating efficiency, highly skilled designing of mold equipment, a retraining of supervisors and labor force comparable to that required when embarking upon the manufacture of a new line of production, and, 108 in general, materially increased the duties of the executives. Resourcefulness and ingenuity were required to maintain the petitioner's operation upon the 24-hour basis necessary to efficiency. That this was done with superior ability is evidenced by the fact that the petitioner was operating at 120 per cent of its rated capacity, or at close to its absolute maximum. Moreover, the petitioner's increase in volume, unlike that of many other companies, was not entirely war induced. In 1940 petitioner was operating at 104 per cent of its rated capacity, while the industry was operating at but 68.5 per cent. During the taxable years petitioner attained a rate of production of 113 per cent and 120 per cent, respectively, of its rated capacity.On June 30, 1939, a voting trust was executed in which 3,017 shares (51 per cent of the outstanding stock) were deposited. Samuel B., George W., and Albert C. Meyer were the trustees and had the exclusive 302 power to vote the stock deposited therein. The voting trust was to terminate before 10 years only if 80 per cent of the holders of the voting trust certificates approved such action. The Meyer brothers owned or voted in the taxable109 years 1943 and 1944 over 80 per cent of the shares on deposit in the voting trust.At a meeting of petitioner's board of directors held on November 18, 1942, a salary of $ 24,000 for the taxable year 1943 was voted to Samuel B. Meyer, $ 22,000 to George W. Meyer, and $ 21,000 to Albert C. Meyer, plus, in each case, an additional sum equal to 7 1/2 per cent of the net profits of the company for the fiscal year ended September 30, 1943, after the deduction of the sum of $ 45,000 (equal to a return of 15 per cent upon the capital stock.) By subsequent action an additional sum of $ 110,000 (equal to the estimated reserve necessary to provide for royalties in the event of the loss of the Hartford-Empire litigation) was deductible from net profits prior to the computation of the 7 1/2 per cent bonus. At a meeting of the board of directors on December 1, 1943, the same compensation was voted for the taxable year 1944. In that year the deduction of the reserve for the Hartford-Empire litigation amounted to $ 100,000, rather than $ 110,000. These large reserves were never needed or used, and after the successful outcome of the Hartford-Empire litigation they were returned to earned surplus. 110 In each of the taxable years here involved an additional sum equal to 7 1/2 per cent of the net profits of the petitioner, calculated on the same basis, was divided among other employees.By virtue of the foregoing, the three named officers of the petitioner received the following compensation in the taxable years:Samuel B. MeyerGeorge W. MeyerAlbert C. Meyer1943$ 43,347.55$ 41,347.55$ 40,347.55194445,976.8443,976.8442,976.84As disclosed by the notice of deficiency, the Commissioner disallowed all deductions over and above the base salaries of $ 24,000, $ 22,000, and $ 21,000, respectively. This resulted in the disallowance of the deductions to the extent of $ 58,042.65 for the taxable year 1943 and $ 65,930.52 for the taxable year 1944.The board of directors for the taxable years herein consisted of Samuel B. Meyer, Albert C. Meyer, George W. Meyer, John A. Berner, J. Howard Beck, John W. Heinl, Jr., and Thomas A. Murphy. Heinl and Murphy were the only persons not related to the Meyer brothers or their wives who deposited their stock certificates in the voting trust, and Heinl and Murphy received the largest bonus from petitioner, with the exception111 of the Meyer brothers. The board of directors acted as an independent body in making its decisions.303 The compensation paid to the three principal executive officers in each of the taxable years bore no relation to their stockholdings and was not a distribution of dividends in any respect. For many years prior to the taxable years herein the Meyer brothers' salaries were low.The compensation paid to the three Meyer brothers, totaling $ 125,042.65 and $ 132,930.52 for the fiscal years ended September 30, 1943 and 1944, respectively, was reasonable for services actually rendered to petitioner, and petitioner's allocation of the salaries among the three executives was a proper allocation.OPINION.Issue 1. -- The question presented under this issue is whether the royalty payments during the base period years were attributable to the fraudulently induced decree and were abnormal deductions for petitioner and should, therefore, be restored to petitioner's base period income for the purpose of determining its excess profits tax credit for the taxable years herein. Petitioner contends that these royalty payments were (1) attributable to the decree and (2)were abnormal deductions112 for petitioner and therefore are within the meaning of section 711 (b) (1) (H) of the Internal Revenue Code. The pertinent provisions of the Internal Revenue Code are printed in the margin. 1113 Respondent contends that the evidence shows that the subject amounts paid to Hartford-Empire Co., with the exception of the $ 11,020.90 paid on or before the date of the court decree entered February 10, 1939, during the base period years were paid as royalties pursuant to contracts in existence prior to the decree. Respondent further contends 304 that the stipulated royalties paid to Hartford in 1937, 1938, 1939, and 1940, with the exception of the $ 11,020.90 mentioned, were not paid pursuant to any court decree and, therefore, do not fall within the provisions of section 711 (b) (1) (H) upon which petitioner relies. We think these contentions of respondent must be sustained. Petitioner concedes that the payments in question were royalties paid in accordance with the terms fixed in its contract with Hartford, but contends that if it had not been for the court injunction it would have terminated its contract with Hartford and used Shawkee feeders, for which it would have had to pay no royalties. Petitioner's contention in this respect is stated by its president in his testimony as follows:We paid royalties to Hartford during these years because we had to pay them. We 114 were under injunction by the Court that we could not use the Shawkee feeder and there weren't any other feeders that we could get that would produce bottles. So that we could continue in business we were forced to pay royalties to Hartford. That is why we paid it.Giving full faith and credit to this testimony and other similar testimony in the record, we still think it is clear that the payments here involved, with the exception of the $ 11,020.90, were paid as royalties under a contract and were not payments "attributable to any * * decree against the taxpayer" within the meaning of section 711 (b) (1) (H). The title of subparagraph (H) is "Payment of Judgments, and So Forth." These payments here involved were not made in payment of any liability under a judgment or decree. We think that in order for petitioner to prevail in its contentions it would have to make a showing that the payments in question were made in discharge of a liability imposed by a judgment or decree. Such seems to have been the intent of Congress in enacting subparagraph (H). The report of the congressional committee of conference on the Second Revenue Act of 1940 had this to say about the subject115 section of the Internal Revenue Code:(8) An additional adjustment was provided, applicable only to taxable years in the base period, to the effect that deductions attributable to any claim, award, judgment, or decree against the taxpayer, or interest thereon, would not be required to be taken into account if, in the light of the taxpayer's business, it is abnormal for the taxpayer to incur a liability of such character or, if the taxpayer normally incurs liabilities of such character, the amount of the particular liabilities of such character in the taxable year is grossly disproportionate to the average amount of liabilities of such character in each of the four previous taxable years. [1940-2 C. B. 651. Italics added.]From this, it seems to us, that Congress clearly intended for the "judgment or decree" to be in the nature of a liability.Petitioner, in urging that the payments in question should be held to be "attributable to any * * decree against the taxpayer" within the meaning of subparagraph (H), strongly relies on Hartford-Empire 305 v. Shawkee Mfg. Co., supra (163 Fed. (2d) 474). We do not116 think that case is in point here. It did not in any sense involve an interpretation of 711 (b) (1) (H). One of the main things decided in that case was that, where patent and injunction decrees were procured by fraud, royalty payments made by defendants because an injunction forced them to retain royalty contracts with plaintiff could be recovered by defendants with interest, even though an injunction bond had not been given. We have no such question here. The effect of that suit was to permit petitioner to have restitution of all the royalties that it had paid Hartford during the base period years, plus expenses which it had incurred and also damages. Petitioner had paid out those royalties during 1937, 1938, 1939, and 1940 under its contract with Hartford; it had received deductions for them in the respective years, not as payments of any judgment or decree, but as payments of royalties, which they were. The Commissioner properly allowed the deductions as royalties. The beginning of our findings of fact on issue 1 states: "In the base period years the following amounts were paid by petitioner to Hartford-Empire Co. * * * as royalties on glass-feeding machines, and were claimed117 and allowed as deductions * ." This finding is based on a stipulation of the parties. The fact that in a subsequent year it was discovered that these payments were obtained by fraud and petitioner was able to obtain restitution of the payments on that ground, it seems to us, does not alter the nature of the deductions in the years when they were claimed and allowed. It had been perfectly normal for many years for petitioner to pay royalties to Hartford. We do not think it was abnormal within the meaning of the statutes for it to pay them during the base period years here involved. It would doubtless have been abnormal, as we have already said, if they had paid these royalties in settlement of a court judgment or decree, but, as we have endeavored to point out, this was not done.What we have said above does not apply to $ 11,020.90 which it is stipulated was paid by the petitioner to Hartford pursuant to the final decree entered February 10, 1939, by the United States District Court for the Western District of Pennsylvania in proceedings in equity No. 2791, entitled Hartford-Empire Company v. Shawkee Manufacturing Company, et al., and of which amount the petitioner 118 was allowed by respondent a deduction of $ 9,316.39 for the taxable year ended September 30, 1939. It seems to us that this $ 11,020.90 payment clearly comes within the provisions of section 711 (b) (1) (H) and that the $ 9,316.39 of this amount which was allowed as a deduction by the Commissioner in 1939 should be disallowed (restored to income) in computing petitioner's excess profits credit under Rule 50. We so hold.306 Issue 2. -- The question presented under this issue is whether respondent erred in disallowing certain compensation paid by petitioner to three of its officers. Respondent contends that the amount paid the three executive officers of petitioner is not reasonable compensation for services. The applicable section of the Internal Revenue Code is printed in the margin. 2119 In a former proceeding, Glenshaw Glass Co. (unpublished memorandum opinion, Oct. 14, 1946); affirmed per curiam (CCA-3), Oct. 21, 1947; certiorari denied, 333 U.S. 842">333 U.S. 842, we held that for the year 1942 petitioner had not carried its burden of establishing that certain bonuses paid petitioner's executives were not, in fact, distributed as profits in the guise of compensation. We have before us now the tax years 1943 and 1944 in which bonuses were paid the same executives under a plan similar to the plan of 1942. However, in each of the three years separate action was taken by the board of directors establishing the bonus plan. Not only are the three bonus plans for the respective years separable, but a finding as to the reasonableness of salaries for the years 1943 and 1944 is necessarily based upon different factors, e. g., an increase in sales and profits and a heavier burden upon the executive officers. The finding made in Glenshaw Glass Co., supra, on the question of salaries for 1942 does not make res judicata the question of the reasonableness of salaries for 1943 and 1944. Commissioner v. Sunnen, 333 U.S. 591">333 U.S. 591.120 Cf. National Bank of Commerce of Seattle, 12 T. C. 717; Maud H. Bush, 10 T. C. 1110. The matter raised in this proceeding is not, in the language of the Sunnen case, supra, "identical in all respects with that decided in the first proceeding." We do not have here "the very same facts and no others." Therefore, the reasonableness of salaries for 1943 and 1944 is not res judicata and we are free to examine all the evidence in order that we may make a finding as to the reasonableness of salaries for these years.Petitioner concedes that, if the amounts disallowed by respondent were a disguised distribution of profits, they are not deductible as a business expense. Botany Worsted Mills v. United States, 278 U.S. 282">278 U.S. 282; Glenshaw Glass Co., supra. Petitioner has proved, however, to our satisfaction that the salaries paid were for services rendered and they were not a distribution of profits.307 The board of directors acted as an independent body and, though the Meyer brothers controlled 51 per cent of the stock through the voting trust, it can121 not be said that they dominated the board of directors, nor is it possible to conclude that the salaries were a distribution of profits and hence a breach of the fiduciary duty to the detriment of the remaining stockholders. A voting trustee can not legally use his power for the aggrandizement, preference, or advantage of the fiduciary to the exclusion or detriment of the cestui. Cf. Pepper v. Litton, 308 U.S. 295">308 U.S. 295. There is no evidence of a breach of this fiduciary obligation of the Meyer brothers and there is no reason to assume it.A leading management engineer in the glass industry testified that petitioner ranked with the top glass manufacturers in the country and that he regarded the salaries, plus bonuses, paid in each taxable year as reasonable. Not only were the salaries paid during these years reasonable, but there is evidence showing that in prior years the executives of petitioner were receiving an unreasonably low salary.The financial record of petitioner discloses that it has prospered since the Meyer brothers have managed it. The net worth of petitioner has increased steadily and profits have been earned in increasing amounts, 122 with a like increase of dividends to petitioner's stockholders. Perhaps some of the increase in petitioner's business is attributable to the war; however, increased business meant increased work and new problems confronted petitioner's executives, for which they are entitled to compensation. Roth Office Equipment Co. v. Gallagher, 172 Fed. (2d) 452. There is evidence showing that petitioner's salaries were comparable to those of other manufacturers in the glass industry.On the basis of all the evidence, including the work of the three executives and the record of petitioner in the glass industry, we hold that the salaries paid petitioner's three executives for the taxable years 1943 and 1944 were reasonable. Cf. Wright-Bernet, Inc. v. Commissioner, 172 Fed. (2d) 343. On this issue the Commissioner is reversed.Decision will be entered under Rule 50. Footnotes. It is stipulated that included in the $ 82,115.88 is $ 9,316.39 which represents the portion allowed by the respondent of the $ 11,020.90 paid to Hartford in 1939 pursuant to the provisions of the permanent injunction entered October 19, 1934.↩1. SEC. 711. EXCESS PROFITS NET INCOME. * * (b) Taxable Years in Base Period. --(1) General rule and adjustments. -- The excess profits net income for any taxable year subject to the Revenue Act of 1936 shall be the normal-tax net income, as defined in section 13 (a) of such Act; and for any other taxable year beginning after December 31, 1937, and before January 1, 1940, shall be the special-class net income, as defined in section 14 (a) of the applicable revenue law. In either case the following adjustments shall be made (for additional adjustments in case of certain reorganizations, see section 742 (e)): * * (H) Payment of Judgments, and So Forth. -- Deductions attributable to any claim, award, judgment, or decree against the taxpayer, or interest on any of the foregoing, if abnormal for the taxpayer, shall not be allowed, and if normal for the taxpayer, but in excess of 125 per centum of the average amount of such deductions in the four previous taxable years, shall be disallowed in an amount equal to such excess; * * (K) Rules for Application of Subparagraphs (H), (I), and (J). -- For the purposes of subparagraphs (H), (I), and (J) -- * * *(ii) Deductions shall not be disallowed under such subparagraphs unless the taxpayer establishes that the abnormality or excess is not a consequence of an increase in the gross income of the taxpayer in its base period or a decrease in the amount of some other deduction in its base period, and is not a consequence of a change at any time in the type, manner of operation, size, or condition of the business engaged in by the taxpayer.↩2. SEC. 23. DEDUCTIONS FROM GROSS INCOME.In computing net income there shall be allowed as deductions:(a) Expenses. --(1) Trade or business expenses. --(A) In General. -- All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including a reasonable allowance for salaries or other compensation for personal services actually rendered; traveling expenses (including the entire amount expended for meals and lodging) while away from home in the pursuit of a trade or business; and rentals or other payments required to be made as a condition to the continued use or possession, for purposes of the trade or business, of property to which the taxpayer has not taken or is not taking title or in which he has no equity.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4623997/	Thomas G. Russoniello, et al., 1 Petitioners, v. Commissioner of Internal Revenue, RespondentRussoniello v. CommissionerDocket Nos. 42850, 42847, 42848, 42849United States Tax Court21 T.C. 828; 1954 U.S. Tax Ct. LEXIS 286; February 26, 1954, Promulgated 286 Decisions will be entered for the respondent. Each of the four petitioners contributed equal amounts in payment of medical expenses incurred by their mother. They deducted such amounts on their respective returns as medical expenses incurred on behalf of a dependent. No additional amounts were contributed by any of them toward her support.Held, no one of the petitioners contributed more than one-half of their mother's support. She is, therefore, not a dependent of any of them, within the terms of section 25 (b) (3) of the Code; and deductions may not be taken for medical expenses paid on her behalf. Thomas G. Russoniello, pro se.Stanley W. Herzfeld, Esq., for the respondent. Rice, Judge. RICE829 These consolidated proceedings involve deficiencies in income tax asserted against the petitioners, as follows:194819491950Thomas G. Russoniello$ 203.12$ 70.06$ 83.68Andrew Russoniello0 83.1278.25John J. Russoniello185.6484.49109.05Sabin G. Russoniello0 44.000 The sole issue to be determined is whether the petitioners are entitled to deduct, pursuant to section 23 (x) of the Internal Revenue Code, amounts paid287 for the medical care of their mother.Some of the facts were stipulated.FINDINGS OF FACT.The stipulated facts are so found and are incorporated herein.The petitioners are brothers; and during the taxable years here in issue, they resided in the State of New Jersey and filed their returns with the collector of internal revenue for the fifth district of New Jersey.The petitioners' mother, the late Josephine Russoniello, suffered a cerebral hemorrhage in October 1947. She was bedridden and confined to various hospitals from that date until her death in April 1951. The total of the medical expenses incurred in caring for petitioners' mother, during 1948, 1949, and 1950, was $ 8,624.46, $ 3,922.26, and $ 3,578.76, respectively. These medical expenses were paid by P. Russoniello & Sons, Inc., a holding corporation. They were charged in equally apportioned amounts as loans by the corporation to each of the four petitioners, their brother, Michael Russoniello, and their sister, Mary Russoniello. Each of these six had equal interests in the corporation. Each petitioner's apportioned share of the medical expenses paid in this manner was, for the years 1948, 1949, and 1950, in the 288 respective amounts of $ 1,437.41, $ 653.71, and $ 596.46.OPINION.Section 23 (x) of the Internal Revenue Code provides for the deduction of medical expenses "paid during the taxable year, not compensated for by insurance or otherwise, for medical care of * * * a dependent specified in section 25 (b) (3) * * ." It is the contention of each of the petitioners that their mother was a dependent during the years in issue, and that the proportionate share of the medical expenses paid by each on her behalf is, therefore, deductible on their respective returns. However, though their mother may have been dependent on them, collectively, for her support, she does not come within the statutory definition of a dependent to which we are referred by section 23 (x). Thus section 25 (b) (3) provides that a mother may be termed a dependent if "over half of * * [her] support, 830 for the calendar year in which the taxable year of the taxpayer begins, was received from the taxpayer * ." No one of the petitioners contributed, by himself, more than half of the support of their mother. They apportioned the burden of her medical expenses equally among themselves, and no evidence was introduced289 to show that any of the petitioners had made additional contributions toward her support during the years in issue. Therefore, for the purpose of this deduction, she does not qualify as the dependent of any of them. Unfortunately, the Code makes no provision for the deduction of expenses incurred in the support of one's parent when such expenses are borne in exactly equal amounts by the children. This is true even though the entire support of the parent was received from the children.Decisions will be entered for the respondent. Footnotes1. The following proceedings have been consolidated:↩PetitionerDocket No.YearsAndrew Russoniello428471949 and 1950John J. Russoniello428481948, 1949, and 1950Sabin G. Russoniello428491949 Thomas G. Russoniello428501948, 1949, and 1950	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624000/	PACKARD THURBER, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Packard Thurber v. CommissionerDocket No. 28916.United States Board of Tax Appeals20 B.T.A. 1208; 1930 BTA LEXIS 1954; October 9, 1930, Promulgated 1954 Petitioner held not to have been an employee of a State or a political subdivision thereof and not entitled to the benefits of section 1211 of the Revenue Act of 1926. A. G. Ritter, Esq., for the petitioner. C. H. Curl, Esq., for the respondent. SEAWELL1208 The Commissioner determined deficiencies in income tax for 1922 and 1923 in the respective amounts of $1,569.65 and $1,343.89. In said years the State of California had a workmen's compensation, insurance and safety act and the petitioner was one of a number of physicians designated to treat patients sent them for medical attention by the State Industrial Accident Commission, fees for such services being paid from the State compensation insurance fund. The issue is whether or not petitioner, in the circumstances of the instant case, was an employee of the State and entitled to the benefits of section 1211 of the Revenue Act of 1926. The case is submitted on the pleadings and testimony of witnesses at the hearing. 1209 FINDINGS OF FACT. The petitioner is a practicing physician and surgeon, residing in Los Angeles, Calif.During the years in question he was designated1955 as one of eight physicians residing in Los Angeles who treated patients sent them by the State Industrial Accident Commission, the compensation for such services being paid from the State compensation insurance fund, in accordance with a schedule of fees fixed by said commission. The Industrial Accident Commission consisted of three commissioners appointed by the governor, as provided by the California statutes. Said commission administers the State compensation insurance fund. The commission possessed the power to "appoint" its attorney, an assistant to such attorney, a secretary, assistant secretaries and the manager of the compensation insurance fund, all of whom held office at the pleasure of the commission. Such manager, before entering on the duties of his office, was required to give an official bond in the sum of $50,000, which had to be approved by the commission and filed in the office of the secretary of state. The manager also had to take and subscribe an official oath. The commission also had the power to "employ" such other assistants, officers, experts, statisticians and other employees as it might deem necessary to carry out the provisions of the statute. 1956 Over the petitioner and other physicians similarly designated by said manager to render medical services as heretofore indicated, there was a medical director. The petitioner in the circumstances of his employment had no written contract or agreement with the commission nor with the manager of the compensation insurance fund. He held no commission from the State. He was simply designated as one of a number of physicians authorized by the commission and by the manager of the compensation insurance fund to treat patients sent him by the commission and receive fixed fees therefor from said fund, which fund, aside from any State appropriation that might be made to it, was obtained from contractors who were required to pay into it premiums for the protection of their employees. The petitioner took no oath of office and gave no bond. He held his employment for no definite period of time but at the pleasure of the commission or said manager. While rendering service and being paid as indicated, he was allowed to carry on his general practice of medicine, giving preference, however, to patients sent him by the commission. In 1922 petitioner's total income was $19,926.88, of which1957 $15,222.48 was received from the compensation insurance fund. 1210 In 1923 his gross income was $34,223.72, the gross income from fees from said fund being $24,653.63. If the fees received from the compensation insurance fund are taxable, the amount of the tax is not disputed. OPINION. SEAWELL: It is not contended in behalf of the petitioner that he is an officer of the State of California, but it is insisted that during the taxable years he was a State employee and the fees which he received from the State compensation insurance fund for professional services rendered patients sent him by the State Industrial Accident Commission are not taxable income. In the Revenue Act of 1926, it is provided: SEC. 1211. Any taxes imposed by the Revenue Act of 1924 or prior revenue Acts upon any individual in respect of amounts received by him as compensation for personal services as an officer or employee of any State or political subdivision thereof (except to the extent that such compensation is paid by the United States Government directly or indirectly), shall, subject to the statutory period of limitations properly applicable thereto, be abated, credited, or refunded. 1958 In the circumstances of the instant case and in view of recent decisions of this Board and decision of the Supreme Court of the United States in , reversing the , which reversed this Board in , there is no occasion for any extended discussion. The petitioner is not shown to have held any commission from the State or any written appointment by, or contract with, any officer of the State. He took no oath and gave no bond. He was simply one of a number of physicians designated by State officers to treat on a scheduled fee basis patients who might be sent him by them for such treatment. There was some supervision of his work by a medical director and the fees which were received by petitioner came from the compensation insurance fund, but such, in our opinion, did not make him an employee of the State in the sense of the statute. While giving preference in the matter of treatment to patients sent him by the State Industrial Accident Commission, his practice as physician and surgeon was not confined to them and1959 a substantial part of his income from his practice was from other or outside sources. The fact that he did certain medical work at the instance or request or upon the designation of some State officer and was paid therefor from a fund administered by such officer or officers did not make him an employee of the State or of a political subdivision thereof. 1211 On the authority of the cases cited below, we hold the petitioner is not an employee of the State of California and is not entitled to claim the benefits of section 1211 of the Revenue Act of 1926, and the action of the respondent in holding the fees received by him from said State fund taxable is approved. See ;; ; ; ; and . Judgment will be entered for the respondent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624001/	THOMASVILLE ICE & MANUFACTURING CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Thomasville Ice & Mfg. Co. v. CommissionerDocket No. 8527.United States Board of Tax Appeals9 B.T.A. 1006; 1927 BTA LEXIS 2475; December 29, 1927, Promulgated 2475 1. Evidence insufficient to show error on the part of the Commissioner in the determination of deficiencies for the fiscal years 1918 and 1919. 2. Appeal dismissed in so far as it relates to the fiscal year 1920 for want of jurisdiction. James L. Respess, C.P.A., for the petitioner. W. F. Wattles, Esq., for the respondent. ARUNDELL1006 The Commissioner determined deficiencies in income and profits taxes for the fiscal years ended October 31, 1918 and 1919, in the respective amounts of $613.80 and $1,212.93, and an overassessment of $392.03 for the fiscal year ended October 31, 1920. Petitioner questions the depreciation allowed by theCommissioner in his determination. FINDINGS OF FACT. The petitioner is a Georgia corporation with its office at Thomasville. On September 23, 1925, the respondent sent a letter to petitioner's accountants setting forth additional tax found due for the years here involved in the same amounts as the deficiencies finally determined and an overassessment for the fiscal year 1920 in the same amount as that finally determined. The schedules annexed to that letter with respect to depreciation are the2476 same as those attached to the letter of October 9, 1925, from which this appeal was taken, and are as follows: 1918Net income reported$14,345.79Deduct:Depreciation allowed$5,113.62Depreciation deducted2,500.00.2,613.62Balance11,732.17Add:Federal income tax$82.58Income understated3,531.043,613.62Net income adjusted15,345.791919Net income reported$17,343.20Add:Depreciation deducted$6,684.67Depreciation allowed5,432.661,252.01Income understated1,228.06Net income adjusted19,823.271007 On November 16, 1925, the respondent in response to an inquiry from petitioner mailed the petitioner a letter reading in part: In reply you are advised that the enclosed schedules set forth the correct depreciation and reconciliation with the reserves as shown in the adjusted balance sheets. Inasmuch as net income was arrived at through the reconciliation of surplus and the balance sheets are correct, the recomputation of depreciation will not affect your tax liability. The schedules attached to the letter contain computation of depreciation and reserves for depreciation2477 for each of the years 1918, 1919, and 1920 on delivery equipment, buildings, machinery, furniture and fixtures, and automobiles. OPINION. ARUNDELL: An overassessment having been found for the year 1920, we have no jurisdiction for that year and the proceeding with respect thereto is dismissed. . As to the years 1918 and 1919 the petitioner's complaint is that the respondent has not allowed as depreciation deductions the amounts "which he states has been allowed." The Commissioner, in his brief, concedes that the amounts set forth in the deficiency letter as depreciation allowances are not the amounts he actually allowed in computing the deficiency. He further says that the amounts actually allowed are less than those given in the deficiency letter, and on this the parties agree. The only evidence offered in this case consists of the letters from the Commissioner's office, which are referred to in 1008 the findings of fact. They do not in any respect show wherein, if at all, the Commissioner erred. No proof was offered to show the amount of depreciation to which the petitioner is entitled and until that is shown*2478 we can not say that the Commissioner erred in his determination of the amount allowable. No effort was made by the petitioner to show error on the part of the Commissioner either in the rates used or the basis to which the rates were applied. Judgment will be entered for the respondent.Considered by LANSDON, STERNHAGEN, and GREEN.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624003/	James F. Curtis, Petitioner, v. Commissioner of Internal Revenue, RespondentCurtis v. CommissionerDocket No. 104764United States Tax Court3 T.C. 648; 1944 U.S. Tax Ct. LEXIS 141; April 25, 1944, Promulgated 141 Decision will be entered under Rule 50. 1. Petitioner received notarial fees in respect of which no tax was collectible by virtue of the Public Salary Tax Act of 1939. Expenses were incurred in connection with the earning of such fees and a state income tax was paid upon similar fees received the previous year. Held, that neither the expenses nor the state income tax to the extent allocable to the earnings of these notarial fees are deductible from petitioner's gross income. Sec. 24 (a) (5), Revenue Act of 1936.2. Pursuant to a plan of reorganization approved by the court having jurisdiction of a corporation in receivership, petitioner exchanged debentures of the insolvent corporation for stock in a new corporation organized pursuant to the plan and option warrants to purchase stock in a third corporation. A gain was realized by the exchange. Held, that the gain is recognized in an amount equal to the fair market value of the option warrants. Sec. 112 (c) (1), Revenue Act of 1936, as amended by sec. 121 (d), Revenue Act of 1943.3. Petitioner was a member of a joint venture to purchase debentures of an insolvent corporation. As a result of certain sales and exchanges, 142 gains were realized. Upon the termination of the joint venture petitioner took most of his distributable share of assets, including profits, in the form of corporate stock, no prior distribution having been made. Held, that petitioner is taxable on his proportionate share of the gains realized by the joint venture to the extent that such gains are to be recognized, regardless of the method of distribution. John P. Ohl, Esq., and Robert C. Brown, Esq., for the petitioner.James C. Maddox, Esq., for the respondent. Hill, Judge. HILL 648 OPINION.This proceeding involves an income tax deficiency for 1936 in the amount of $ 93,609.21. Petitioner, an individual, filed his 1936 tax return on the cash receipts and disbursements basis with the collector for the second New York district. The proceeding presents the following questions:1. Did respondent err in disallowing the deduction of certain expenses allocable to income in respect of which no tax was paid or collectible?2. Did respondent err in disallowing the deduction of so much of the New York State income tax paid by petitioner in 1936 as was attributable to the earning of income in respect of which 143 no Federal tax was paid or collectible?3. Is the gain petitioner realized upon the exchange of securities of a corporation in receivership for stock of a new corporation and option warrants to purchase stock in a third corporation to be recognized and, if so, in what amount?649 4. Did certain transactions carried on in a joint venture of which petitioner was a member result in a recognized gain? If so, need petitioner report as income so much of his proportionate share of such gain as is represented by the distribution to him of corporate stock?Most of the facts are contained in a stipulation with attached exhibits, which we herewith adopt by reference. Such facts, together with others otherwise established, are summarized in conjunction with our disposition of each question. The questions are considered separately and in the order set forth above.Issue 1.Petitioner was a notary public for two counties in New York. He had an arrangement with the Federal Reserve Bank of New York whereby he was engaged as a notary public to protest its commercial paper and to supervise the work of eight other notaries. The other notaries were former employees of the bank and it was144 its intent that their retirement allowances be supplemented by specified amounts to be derived from notarial fees. To this end petitioner allocated among the eight notaries sufficient work to enable each to earn something in excess of the amount which the bank wished him to have. The notaries periodically turned over such excess amounts to Curtis & Belknap, a law firm of which petitioner was a partner. The notarial work not let to the other notaries petitioner did himself. Through this arrangement petitioner, in 1936, received notarial fees of $ 18,007.35 and the other notaries together received $ 13,486.98, of which $ 2,535.02 was paid over to the law firm and added to his gross income. The $ 2,535.02 was not in reimbursement of expenses.In connection with the notarial fees received by petitioner and the others, direct and indirect expenses were incurred in the respective amounts of $ 7,551.49 and $ 1,560.53, or a total of $ 9,112.02. In his tax return petitioner excluded from income his notarial fees, but nevertheless claimed the $ 9,112.02 in expenses incurred in connection with the notarial work as a deduction. Respondent disallowed the deduction as repugnant to the provisions145 of section 24 (a) (5) of the Revenue Act of 1936. This section provides in part as follows:SEC. 24. ITEMS NOT DEDUCTIBLE.(a) General Rule. -- In computing net income no deduction shall in any case be allowed in respect of -- * * (5) Any amount otherwise allowable as a deduction which is allocable to one or more classes of income * * wholly exempt from the taxes imposed by this title.Petitioner contends that section 24 (a) (5) is not applicable here for the reason that the notarial fees in question are not "wholly exempt from the taxes imposed by this title." Petitioner's argument is based 650 upon our decision in , a case involving this petitioner's notarial fees for the years 1932, 1933, and 1935, and upon the differences in language used in sections 201 and 202 of the Public Salary Tax Act of 1939. In the Curtis case, promulgated February 9, 1939, we held that , required the conclusion that notarial fees received by petitioner were not immune from Federal income tax. The Public Salary Tax Act of 1939 was approved on April 12, 146 1939, whereupon we entered an order modifying our opinion in the Curtis case and stating that Curtis has been relieved of tax by that act. The act provides in section 201 that income tax for any taxable year beginning prior to January 1, 1939, shall not be assessed to the extent attributable to compensation for personal services as an officer or an employee of a state or its subdivisions. Section 202 provides that such compensation, in certain circumstances, shall be exempt from taxation as to any taxable year beginning in 1938. These provisions were to apply only to the compensation of officers or employees of states which passed reciprocal legislation respecting state taxation of the compensation of Federal officers and employees. New York passed such legislation. (Title I of the act made the compensation of governmental officers and employees of states and their subdivisions and of the Federal Government reciprocally taxable after 1938.) Petitioner asserts that the decision in his prior case determines that his notarial fees are not tax exempt and that the effect of the Public Salary Tax Act of 1939 and our subsequent order in his case was merely to prevent the collection147 of tax on taxable income. In support thereof he directs attention to the differences in language in sections 201 and 202 of the act.We need not pause to speculate upon considerations which might have impelled Congress to vary the terminology of the cited sections of the Public Salary Tax Act. It is enough for our purposes that the act did prevent the taxation of the compensation of state officers for all years prior to 1939 under the circumstances which here exist. ; . Petitioner is not taxable upon notarial fees received in 1936. . This fact invokes section 24 (a) (5) to sustain the disallowance of expenses incident to the earning of the notarial fees, as will be presently shown.Petitioner's contention apparently is advanced on the assumption that the phrase "income wholly exempt from the taxes" is used in section 24 (a) (5) solely to denominate a special type income specifically excludable from the general definition of "gross income" by statute or on constitutional grounds. 148 However, the phrase is not to be so limited. Income tax laws are to be given a sensible interpretation. ; ; affd., , and one which will effectuate the 651 legislative intention. . The language of section 24 (a) (5), including therein the phrase in question, is susceptible of only one sensible interpretation, namely, that a taxpayer is allowed no deduction for expenditures which are allocable to income that is nontaxable for whatever reason. Moreover, this interpretation is in accord with the purpose of the provision and, hence, the legislative intent as indicated by the discussion thereof in the House of Representatives, wherein it was stated: * * This particular amendment has reference to the question of deductions from gross income. It makes very certain the text of the bill disallowing deduction of expenses incurred in the production of non-taxable income. [Cong. Rec., vol. 78, p. 3000.]Nor does this interpretation149 do violence to the wording of the section. The language of a revenue act, generally speaking, is to be given its ordinary and natural meaning. ; . The nub of petitioner's contention here concerns the meaning of the word "exempt." This is not a technical term. It is of common usage and is defined by Webster as meaning "free or released from some liability." Thus, when read in the usual sense, section 24 (a) (5) simply says, in short, that no deduction shall in any case be allowed in respect of any amount allocable to income free or released of taxes. It can not be gainsaid that petitioner's income from notarial fees was released from taxes. We reject petitioner's contention that section 24 (a) (5) is inapplicable.In his brief petitioner argues a proposition alternative to that disposed of above. It is that petitioner at least should be allowed to deduct so much of the expenses incurred as are not attributable to his own fees, i. e., as are attributable to the fees received by the other notaries. 150 No such alternative issue was presented by the pleadings and, accordingly, we are not warranted in considering it. That the proposition is positively untenable, even were it properly presented, is fully apparent on its face. A taxpayer is not allowed a deduction for expenditures made for the benefit of another. . Furthermore, the amounts ultimately received by all parties, with the possible exception of that unknown portion going to petitioner's law partners, constituted nontaxable income invoking the provisions of section 24 (a) (5) and it would matter not that it was nontaxable in the hands of someone other than petitioner.We approve respondent's disallowance of expense deductions in the amount of $ 9,112.02.Issue 2.In 1936 petitioner paid a New York State income tax of $ 4,138.50 based upon his total 1935 income, including that representing notarial 652 fees. He claimed a deduction in this amount on his 1936 Federal income tax return. Respondent disallowed the deduction to the extent of $ 1,046.21 on the ground that this sum was allocable to notarial fees and, hence, nondeductible under section 24 (a) 151 (5) of the Revenue Act of 1936.Petitioner objects to this adjustment for the same reason advanced with respect to issue 1, namely, that section 24 (a) (5) is inapplicable since notarial fees at that time did not constitute income exempt from Federal taxes. This contention is untenable, as we have pointed out in our discussion under the first issue.As an alternative contention, petitioner asserts that the full tax deduction should be allowed since the tax was paid upon 1935 income which was taxable in its entirety under New York law. This is an irrelevant fact. Section 24 (a) (5) is concerned only with deductions allocable to income nontaxable for Federal income tax purposes. It matters not that New York treats it otherwise. Nor does it matter that the tax was paid on 1935 income, not 1936. Petitioner was on the cash basis and, so far as the state tax paid in 1936 was allocable to income free of Federal taxes, it may not be deducted on the 1936 Federal tax return, regardless of the year of accrual.In his argument on brief petitioner resorts to figures designed to show that respondent's disallowance of $ 1,046.21 was based upon an erroneous method of computation. If such is152 a fact, it was incumbent upon petitioner to make a point of it by an alternative assignment of error supported by proof, and in this he failed. Respondent's determination carries with it a presumption of correctness. We think the presumption has not been overcome by evidence.We approve respondent's disallowance of New York State income tax deduction in the amount of $ 1,046.21.Issue 3.During 1935 petitioner purchased debentures of General Theatres Equipment, Inc., in the principal amount of $ 379,000 and certificates of deposit for such debentures in the principal amount of $ 321,000. The total cost of the debentures and certificates of deposit was $ 51,917.50 and $ 45,923.75, respectively. The debentures were later deposited and petitioner received therefor certificates of deposit in an equal principal amount.General Theatres Equipment, Inc., hereinafter called the old company, was a holding company owning stocks in subsidiaries and other corporations engaged in the motion picture and theatre supply business. In April 1930 it purchased 1,600,000 shares of Fox Film Corporation's class A common stock at $ 30 per share. To meet the indebtedness 653 thereby incurred153 the old company (1) issued in April 1930, $ 30,000,000 of its 10-year debentures under a trust indenture with the Chase National Bank as trustee and sold them to a syndicate for $ 27,150,000, (2) sold 617,000 shares of its own stock, (3) sold 200,000 shares of Fox Film stock to Halsey Stuart & Co., and (4) sold 240,000 shares of Fox Film stock to a syndicate which included among its members Chase National Bank's security affiliate, Chase Securities Corporation, and two directors of the old company. This syndicate resold the Fox Film stock within 10 days at a $ 4,000,000 profit. The debentures purchased by the petitioner were a part of the issue referred to above.On May 6, 1930, and again on July 7, 1930, the Chase National Bank loaned the old company $ 2,500,000 on collateral demand notes secured by Fox Film A stock. This indebtedness had been reduced to $ 4,000,000 when on October 10, 1930, the bank loaned the old company an additional $ 6,000,000, surrendered the notes for the previous loans, and received a new note for $ 10,000,000 payable April 10, 1931, together with the original and additional collateral. Later the note was further secured by the deposit of additional collateral. 154 The latter note was renewed at maturity and became payable September 28, 1931.In February 1933 Mary N. Kaplan, an old company debenture holder, commenced a representative action against the Chase National Bank individually and as trustee of the trust indenture securing the debentures. In 1934 a Supreme Court of New York held that the extension of the $ 10,000,000 note violated a covenant in the trust indenture and entered a judgment directing the Chase National Bank to hold certain of the collateral deposited to secure the note for the benefit of the debenture holders. Both parties filed notices of appeal from this judgment.Soon after the purchase of the Fox Film stock the old company became involved financially. It defaulted on interest payments on its debentures, and early in 1932 a debenture holders' committee was formed to represent the interests of the holders of debentures. The committee agreement provided for the deposit of debentures in exchange for certificates of deposit. At about the same time, as a result of a creditor's bill brought by an unsecured creditor in a Delaware court of chancery, the old company was found to be insolvent in the sense that it could not155 meet its obligations in the ordinary course of business. A receiver was appointed with power to conduct the business of the company.Also in 1932 James N. Cleary, a stockholder of Fox Film Corporation, commenced a stockholder's suit in a Supreme Court of New York to recover profits made by the syndicate upon the resale of the 654 Fox Film stock purchased from the old company and for other relief. Among the defendants in this action were the Chase National Bank, Chase Securities Corporation, and the two directors of the old company who had participated in the syndicate. The suit was dismissed in December 1934, upon motion made at the close of plaintiff's case, on the ground that no wrong to Fox Film Corporation was shown. In its opinion the court suggested that the syndicate was liable for the profits to a proper representative of the old company by virtue of participation of its directors.Prior to the dismissal of this action the Chase National Bank had entered into negotiations with the receiver and the debenture holders' committee for settlement of all claims against the bank and members of the syndicate. The proposed agreements contemplated, among other matters, that156 the bank should reduce its claim against the old company by $ 5,000,000; that the claims as reduced should be consented to by the receiver; that the receiver should release the Chase National Bank and the members of the syndicate from all claims which he or the old company might have against them; that the bank should participate in a plan of reorganization of the old company, provided the details of the plan were worked out in a manner satisfactory to it; and that, in this event, it should turn over to the reorganized company its claims and collateral security in exchange for common stock, give to the reorganized company an option to purchase at $ 15 per share approximately 325,000 shares of Fox Film stock, and lend the reorganized company money to defray reorganization expenses and provide working capital. The receiver sought the court's approval of such agreements by petition dated December 16, 1933. They were approved on November 30, 1935, the same date on which the court approved the plan of reorganization hereinafter described.A plan of reorganization of the old company, dated August 31, 1935, was promulgated November 29, 1935, declared operative March 18, 1936, and consummated157 June 3, 1936. It was approved by the debenture holders' committee, whose members constituted the reorganization committee under the plan. The plan envisaged the incorporation of a new company which would succeed to the old company's assets. It provided for the adjustment of all obligations of the old company allowed in the receivership proceeding, including the debentures and its preferred and common stock. The plan incorporated the same provisions, in modified form, contained in the agreements made with the Chase National Bank. That is to say, the bank and the syndicate were to be granted a general release of claims, the bank was to surrender its claims and collateral for stock, lend the new company $ 2,000,000 on a note convertible at its option into debentures, and deposit not to exceed 158,313 shares of preferred and 79,157 shares of common stock 655 of Twentieth Century-Fox Film Corporation with a depositary, subject to the exercise of option warrants hereinafter mentioned. (Fox Film Corporation, early in the year, had been merged into Twentieth Century Pictures, Inc., and each share of Fox Film stock had been exchanged for one-half share of preferred and one-fourth158 share of common of Twentieth Century-Fox Film Corporation.) The basis of adjustment of obligations and stocks was as follows:Secured Obligation and Debentures.For each $ 1,024.82 of indebtedness(a) 10 shares of capital stock of newrepresented therebycompany.(b) Warrants to purchase 1 3/4 units of capital stock of TwentiethCentury-Fox Film Corporation at $ 60per unit on or before October 1, 1936,and at $ 70 per unit on or beforeOctober 1, 1937.Notes and Accounts Payable.For each $ 1,024.82 of indebtedness(a) 7 1/2 shares of capital stockrepresented therebyof new company.(b) Warrants to purchase 1 1/4 units ofcapital stock of TwentiethCentury-Fox Film Corporation at $ 60per unit on or before October 1, 1936,and at $ 70 per unit on or beforeOctober 1, 1937.Preferred Stock.For each 10 sharesWarrant to purchase 1 share of capitalstock of new company on or beforeOctober 1, 1937, at $ 12 per share.Common Stock.For each 25 sharesWarrant to purchase 1 share of capitalstock of new company on or beforeOctober 1, 1937, at $ 12 per share.159 Any Twentieth Century-Fox Film stock required to fulfill the obligations under the warrants in excess of the amount deposited by the Chase National Bank was to be furnished by the new company. It did not become necessary for it to supply such stock to cover the exercise of warrants. The plan also provided that each creditor and stockholder, by assenting to the plan, thereby appointed the reorganization committee his agent to release the Chase National Bank, the members of the syndicate, and their officers and agents from all manner of claims.Pursuant to the plan General Theatres Equipment Corporation, hereinafter called the new company, was incorporated on May 20, 1936; the assets of the old company were sold at public auction under 656 order of the receivership court, purchased by the reorganization committee for $ 4,039,367.72, and conveyed to the new company; the collateral held by the Chase National Bank for the benefit of the debenture holders under the order in the Kaplan suit was sold at public auction under a supplemental judgment, purchased by the reorganization committee for $ 1,963,456.34, and conveyed to the new company; Chase National Bank foreclosed the collateral160 which it held as security for the payment of the old company's notes, bid in the collateral for $ 6,944,966.21, and deposited it with the reorganization committee, which conveyed it to the new company; the receiver, the new company, and the reorganization committee, as agent for depositing debenture holders, executed general releases of claims in favor of the Chase National Bank, its security affiliate, and each of the members of the syndicate, their officers and representatives; the Kaplan and Cleary suits were terminated; a $ 2,000,000 loan was made by the bank to the new company; and debentures, claims, and stock were exchanged for stock of the new company, stock warrants, and warrants to purchase stock of Twentieth Century-Fox Film Corporation, as set forth in the above schedule, except that no Twentieth Century-Fox Film option warrants were issued to the Chase National Bank. Nonassenting stockholders of the old company received nothing. Nonassenting debenture holders received $ 148.68 in cash for each $ 1,000 face value of debentures.The new company's authorized capital consisted of 800,000 shares of common stock. Of this number 274,935 were issued to debenture holders of161 the old company, 164,275 were issued to the Chase National Bank, 6,997 to holders of unsecured claims against the old company and, up to December 31, 1936, 79,034 were issued to the old company's stockholders upon the exercise of their warrants. Option warrants for 43,919 units of Twentieth Century-Fox Film Corporation stock were exercised. The money so received by the depositary was turned over to the Chase National Bank. The $ 2,000,000 borrowed from the Chase National Bank by the new company was evidenced by a note and agreement providing that the loan might be converted into debentures which, in turn, could be converted into stock. The loan was repaid in cash and no debentures ever were issued by the new company.During 1936 petitioner, pursuant to the plan of reorganization, relinquished his certificates of deposit for $ 700,000 principal amount of debentures and received therefor 7,000 shares of stock in the new company having a fair market value of $ 133,875, and option warrants for 1,225 units of Twentieth Century-Fox Film Corporation stock having a fair market value of $ 41,037.50. Of the certificates of deposit so surrendered, $ 296,000 principal amount having a cost162 of $ 37,321.25 had been held or represented debentures which had been 657 held for more than one year and less than two years, and there were received with respect thereto 2,960 shares of stock of the new company having a fair market value of $ 56,610 and option warrants for 518 units having a fair market value of $ 17,353. The remaining $ 404,000 principal amount of certificates of deposit surrendered, having a cost of $ 60,520, was held or represented debentures which had been held one year or less, and there were received with respect thereto 4,040 shares having a fair market value of $ 77,265 and option warrants for 707 units having a fair market value of $ 23,684.50.The question is whether, under these facts, gain realized by petitioner upon the exchange of his certificates of deposit for stocks in the new company and warrants to purchase stock in Twentieth Century-Fox Film Corporation is to be recognized and, if so, in what amount. Respondent held that it is and determined it to be $ 120,346.26. Petitioner contends that as to the receipt of the new company stock, nonrecognition provisions of the Revenue Act of 1936 apply. The option warrants, according to petitioner's163 theory, were received by petitioner as consideration for his giving up rights against the Chase National Bank and in a transaction separate from and not germane to the plan of reorganization. It follows, asserts petitioner, that their value is not presently taxable as a gain, but merely goes to reduce the cost basis of his investment. We first examine the question as it bears upon the receipt of stock in the new company.The proceeding was heard on November 18, 1943, and the original and reply briefs are devoted to the pros and cons of whether there was here a reorganization as defined by section 112 (g) (1) of the Revenue Act of 1936 and whether in any event the exchange fell within the provisions of section 112 (b) (5) of the same act. On February 25, 1944, the Revenue Act of 1943 was enacted. Section 121 thereof, entitled "Reorganization of Certain Insolvent Corporations," by subsections (a), (b), and (d), amended section 112 to include new additions and technical amendments, all of which are made retroactive by subsection (e) to include the Revenue Act of 1936. Subsequently petitioner filed a supplemental brief urging upon us the applicability of such amendments to the instant164 exchange. We agree that certain of the amendments govern the disposition of this issue and therefore we do not consider the question whether gain would be rocognized under the former provisions of the Revenue Act of 1936.Section 112 (l) of the Revenue Act of 1936, added by section 121 (b) of the Revenue Act of 1943, provides as follows:(1) Exchanges by Security Holders in Connection With Certain Corporate Reorganizations. --(1) General Rule. -- No gain or loss shall be recognized upon an exchange consisting of the relinquishment or extinguishment of stock or securities in a corporation the plan of reorganization of which is approved by the court in a proceeding 658 described in subsection (b) (10), in consideration of the acquisition solely of stock or securities in a corporation organized or made use of to effectuate such plan of reorganization.(2) Exchange occurring in taxable years beginning prior to January 1, 1943. -- If the exchange occurred in a taxable year of the person acquiring such stock or securities beginning prior to January 1, 1943, then, under regulations prescribed by the Commissioner with the approval of the Secretary, gain or loss shall be recognized165 or not recognized --(A) to the extent that it was recognized or not recognized in the final determination of the tax of such person for such taxable year, if such tax was finally determined prior to the ninetieth day after the date of the enactment of the Revenue Act of 1943; or(B) in cases to which subparagraph (A) is not applicable, to the extent that it would be recognized or not recognized under the latest treatment of such exchange by such person prior to December 15, 1943, in connection with his tax liability for such taxable year.The exchange in question took place in 1936 and, obviously, there has been no final determination of petitioner's tax for that year, as this proceeding is before us for the very purpose of a determination of such tax. In these circumstances the statute directs that no gain is to be recognized upon an exchange involving the following: (1) Relinquishment by a holder of stock or securities (2) of a corporation (3) reorganized pursuant to (4) a plan of reorganization (5) approved by a court in a proceeding described in section 112 (b) (10) (6) in consideration solely of stock or securities (7) in a corporation (8) organized to effectuate the plan of166 reorganization (9) when the holder treated the exchange as nontaxable immediately prior to December 15, 1943. Among the proceedings described in section 112 (b) (10), added by section 121 (a) of the Revenue Act of 1943, 1 is a receivership. Disregarding the receipt of the option warrants, we think it clear that the transaction under consideration includes all the elements named above. Petitioner relinquished debentures of the old company, which was being operated under the jurisdiction of a Delaware court by virtue of an equity receivership, pursuant to a plan of reorganization approved by the court on November 20, 1935, and in consideration of this relinquishment he received stock in the new company which, according to the plan, had been incorporated for the express purpose of taking over the assets of the old company. Petitioner has consistently 659 treated the gain as one not to be recognized to any extent. If the option warrants also were a part of the consideration for the relinquishment of the debentures, then it would be the existence of this fact alone which would prevent the operation of section 112 (l). However, the existence of this fact would require the recognition167 of gain realized on the exchange only to the extent of the fair market value of such warrants. Section 112 (c) (1) of the Revenue Act of 1936, as amended by section 121 (d) of the Revenue Act of 1943, provides in part:If an exchange would be * * within the provisions of subsection (1) of this section if it were not for the fact that property received in exchange consists not only of property permitted by such paragraph to be received without the recognition of gain, but also of other property * * , then the gain, if any, to the recipient shall be recognized, but in an amount not in excess of * * the fair market value of such other property.Since the only factor which here could prevent the exchange from coming within subsection (l) would be the conclusion that the option warrants constituted "other property" entering into the transaction, it is manifest that if subsection (l) did not apply, subsection (c) (1) would apply. Accordingly, we hold that the gain realized by petitioner on the exchange is nonrecognizable except to the extent above indicated. It thus becomes unnecessary to determine if other subsections of section 112 might call for the same conclusion, and we 168 have refrained from considering their application.This brings us to an examination of petitioner's contention respecting the receipt of the option warrants. If they constitute "other property" received in169 the exchange within the meaning of section 112 (c) (1), supra, then petitioner admits that such subsection requires gain to be recognized in an amount equal to the fair market value of the option warrants. However, as pointed out above, it is his position that the warrants were given in consideration of his surrender of rights against the Chase National Bank in a separate transaction not germane to the plan of reorganization and that their receipt merely reduces the cost basis of his investment. We have scrutinized the facts in all their complexness and have no trouble concluding that they do not support petitioner's position. It is true that petitioner, as well as other creditors and stockholders of the old company, did appoint the reorganization committee their agent to release the Chase National Bank from all claims whatever; that the bank was so released; and that the bank did in fact put up the Twentieth Century-Fox Film Corporation stock necessary to cover the exercise of the option warrants. However, the purpose behind petitioner's release and the bank's application of its Twentieth Century-Fox Film stock and the relationship of such acts, one to another, if any, can170 be ascertained properly only by viewing them in the setting of the whole picture. So examined, it appears beyond cavil that the release and the bank's application 660 of stock did not constitute a distinct quid pro quo, but, contrariwise, comprised only steps in an integrated plan envisaging much broader consequences. The plan of reorganization, so intricate as to require 48 pages for complete expression, was designed to resolve all matters in any way emanating from the financing of the old company as well as to provide for its obligations and stock. It provided that all participants in the reorganization should release from liability of every kind not only the Chase National Bank, but the numerous concerns and individuals who had had a part in the financing. Creditors and stockholders gave up their "rights" against these parties, whatever those rights might have been, simply by participating in the plan. Moreover, to participate in the plan they also had to relinquish their securities or stock. Debenture holders, of whom petitioner was one, by so participating received stock in the new company and warrants to purchase a specified amount of stock in Twentieth Century-Fox171 Film Corporation for a named sum. It is evident that petitioner could not have chosen to refuse the release and to merely relinquish the debentures for stock of the new company. Nor could he have given a release merely for option warrants to purchase Twentieth Century-Fox Film stock while electing to keep his debentures. Likewise the Chase National Bank, if it participated in the plan at all, was obliged to do a number of things, of which the placement of its Twentieth Century-Fox Film stock in escrow to cover the exercise of the option warrants was only one. For example, it was also contemplated that it should reduce its claim against the old company by $ 5,000,000, lend the new company $ 2,000,000, relinquish the securities, and surrender the collateral which had secured them. Thus, with respect to all performances required by this integrated plan, it was a matter of the happening of all or none, thus negativing petitioner's contention that warrants were given for rights in a transaction apart from the plan of reorganization. Other circumstances, too, rebut his contention, but we deem it unnecessary to further prolong this opinion by pointing them out.We are satisfied and172 hold that the option warrants to purchase stock in Twentieth Century-Fox Film Corporation must be termed "other property" within the meaning of section 112 (c) (1). Since the stock of the new company had a market value in excess of the cost of certificates of deposit for debentures to petitioner, the full fair market value of the warrants represents the recognized gain on the transaction. This value is stipulated to be $ 41,037.50. However, option warrants having a fair market value of $ 17,353 were received in exchange for certificates of deposit for debentures which had been held, or represented debentures which had been held, for more than one year and less than two years. The certificates of deposit constituted capital assets in the hands of petitioner, an 661 individual. Accordingly, under section 117 (a) of the Revenue Act of 1936 only 80 percent of this portion of this recognized gain is to be taken into account in computing net income. Hence, the amount to be added to petitioner's 1936 income by reason of our holding on this issue is $ 37,566.90, and respondent erred in so far as he added a greater amount.Issue 4.Petitioner's brother, Harry A. Curtis, had173 an ordinary margin account with a brokerage firm. The brothers agreed that petitioner should purchase debentures or certificates of deposit for debentures in the old company through this brokerage account, with profits or losses resulting from the purchases to be divided equally between the two. Petitioner lent solely his services and Harry solely his credit to the joint venture. From November 1935 through March 1936 certificates of deposit for debentures in the principal amount of $ 500,000 were acquired. Certificates of deposit for $ 43,000 principal amount of debentures were sold during April and June of 1936 at a profit of $ 4,736.77 and the parties are agreed that one-half thereof, or $ 2,368.38, is taxable gain to the petitioner.The remaining certificates of deposit, which cost $ 98,293.29, were exchanged for 4,570 shares of stock in the new company having a fair market value of $ 87,401.25 and option warrants for 799.75 units of Twentieth Century-Fox Film Corporation stock having a fair market value of $ 26,791.63. An option warrant for .25 unit was purchased for $ 11.88.During 1936 all shares in the new company so received were sold for $ 106,467.69. On September 12, 174 1936, the option warrants were exercised and, upon the payment of $ 48,000, the brothers received 1.600 shares of preferred and 800 shares of common stock in Twentieth Century-Fox Film Corporation. Of the cost of the stock, 71.9 percent is to be allocated to the preferred and 28.1 percent to the common. Within the year 1,000 shares of preferred and 750 shares of common were sold for $ 38,146.70 and $ 22,852.03, respectively.The brothers received $ 600 in dividends and paid out $ 1,228.27 in interest during 1936 in connection with their joint venture.No distribution was made to petitioner on account of the foregoing transactions until the joint venture was terminated. Petitioner then received as his share of the profits the remaining Twentieth Century-Fox Film stock, being 600 shares of preferred and 50 shares of common, then having the respective values of $ 22,433.94 and $ 1,465, plus $ 207.06 cash.Petitioner reported as taxable gain arising from the joint transactions stated above only the $ 207.06 cash received and, as indicated, 662 now admits to an additional taxable gain of $ 2,368.28. Respondent determined the gain to be $ 24,584.35. What is the amount which petitioner175 should have reported as income from the joint venture?Petitioner asserts that he received no taxable income from the distribution of the Twentieth Century-Fox Film stock to him upon the termination of the joint venture, and cites , and , to support this contention. But no one contends that he did. The question is whether petitioner's share of gains realized through the several sales and exchanges of the jointly held securities are taxable to him in 1936. The Crawford and Wilmot decisions most assuredly do not suggest that partners may postpone the imposition of tax on partnership profits by the simple expedient of distributing such profits in the form of property other than cash. Hence, they do not assist petitioner in avoiding tax on his portion of the gains arising from the joint transactions.When business is carried on as a partnership or a joint venture (which from the standpoint of the Federal tax laws amounts to the same thing, see section 1001 of the Revenue Act of 1936), as in other cases, the question whether176 taxable profits have been made is determined annually as a result of the operations of the year. . In 1936 petitioner and his brother made the following sales or exchanges of jointly held securities: (1) Sold certificates of deposit for $ 43,000 principal amount of the old company's debentures, (2) exchanged certificates of deposit in the principal amount of $ 457,000 for 4,570 shares of stock in the new company and option warrants to purchase 799.75 units of Twentieth Century-Fox Film stock, (3) sold the stock in the new company, (4) sold 1,000 shares of Twentieth Century-Fox Film's preferred stock, and (5) sold 750 shares of Twentieth Century-Fox Film's common stock. The profits, if any, arising from these transactions constitute income of the joint venture for the taxable year 1936 and, to the extent recognized under section 112, must be included in computing the income of each member. Secs. 182 and 183, Revenue Act of 1936. Petitioner is liable for income tax on his proportionate share of such income, regardless of the fact or manner of its distribution. ;177 ; . It thus becomes necessary to examine each of the sales or exchanges enumerated above to determine if gain arose and, if so, in what amount. We will refer to them by number.The parties have stipulated that petitioner realized a taxable gain of $ 2,368.38 from sale (1).Exchange (2) involves the same exchange as was the subject of our discussions under issue 3. For the reasons there assigned, we conclude 663 that this transaction is governed by the provisions of section 112 (c) (1) of the Revenue Act of 1936, as amended by section 121 (d) of the Revenue Act of 1943. The cost of the certificates of deposit relinquished was $ 98,293.29 and the stock of the new company and option warrants for stock in Twentieth Century-Fox Film received therefor bore the respective market values of $ 87,401.25 and $ 26,791.63, a total of $ 114,192.88. Thus, the gain from this exchange to be recognized under section 112 (c) (1) is $ 15,899.59. ; reversed on other grounds, .178 Petitioner's share of the gain is $ 7,949.79.To ascertain whether a gain was made upon sale (3), it is first necessary to determine the basis of the 4,570 shares of the new company's stock in the hands of petitioner and his brother. This requires the application of section 113 (a) (6) of the Revenue Act of 1936, which states that the basis of property acquired in an exchange described in section 112 (c) shall be the same as in the case of the property exchanged, decreased in the amount of any money received and increased in the amount of gain or decreased in the amount of loss that was recognized. Here the property exchanged, the certificates of deposit, had a basis of $ 98,293.29, their cost. The brothers received no money, but a gain of $ 15,899.59 was recognized. Therefore, the basis of the stock of the new company and the option warrants is $ 98,293.29, less zero, plus $ 15,899.59, or $ 114,192.88. Section 113 (a) (6) further provides for an allocation of the basis between property received without recognition of gain or loss (the stock) and other property received in the exchange (the option warrants). It is stated that there shall be assigned to the other property its179 fair market value which, in this instance, was $ 26,791.63. Hence, the basis of the stock was $ 87,401.25. It was sold for $ 106,467.69, a profit of $ 19,066.44, of which petitioner's share is $ 9,533.22.Petitioner and his brother purchased an option warrant for .25 unit of stock in the Twentieth Century-Fox Film Corporation for $ 11.88, to give them ownership of warrants for an even 800 units. They exercised their options and for $ 48,000 purchased 1,600 shares of preferred and 800 shares of common stock in Twentieth Century-Fox. The basis of all this stock was the basis of the warrants received in the exchange, $ 26,791.63, plus the cost of the warrant for .25 unit, $ 11.88, plus the cost of conversion, $ 48,000, or $ 74,803.51. Of this sum 71.9 percent is allocable to the 1,600 shares of preferred and 28.1 percent to the 800 shares of common stock, being the respective amounts of $ 53,783.72 and $ 21,019.79. By sale (4) the brothers sold 1,000 shares of preferred stock for $ 38,146.70, thus realizing a profit of $ 4,531.87, of which petitioner's share is $ 2,265.93. By sale (5) they sold 750 shares of the common stock for $ 22,852.03, thus realizing a profit of $ 3,145.99, 180 of 664 which petitioner's share was $ 1,573. The sum of these gains plus petitioner's half of the dividends received and less his half of the interest paid equals $ 23,376.19. We hold this to be the amount of petitioner's distributive share of income from the joint venture which is taxable to him for the taxable year in question.The proceeding will be disposed of in accordance with the foregoing opinion.Decision will be entered under Rule 50. Footnotes*. Each unit consists of two shares of preferred stock and one share of common stock.↩1. (10) Gain or loss not recognized on reorganization of corporations in certain receivership and bankruptcy proceedings. -- No gain or loss shall be recognized if property of a corporation (other than a railroad corporation as defined in section 77m of the National Bankruptcy Act, as amended) is transferred, in a taxable year of such corporation beginning after December 31, 1933, in pursuance of an order of the court having jurisdiction of such corporation -- (A) in a receivership, foreclosure, or similar proceeding, or(B) in a proceeding under section 77B or Chapter X of the National Bankruptcy Act, as amended,↩to another corporation organized or made use of to effectuate a plan of reorganization approved by the court in such proceeding, in exchange solely for stock or securities in such other corporation.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624004/	M. J. Corboy Company v. Commissioner.M. J. Corboy Co. v. CommissionerDocket No. 4685.United States Tax Court1945 Tax Ct. Memo LEXIS 216; 4 T.C.M. (CCH) 447; T.C.M. (RIA) 45141; April 30, 1945216 Harry B. Sutter, Esq., and Harry D. Orr, Jr., Esq., 1 N. LaSalle St., Chicago, Ill., for the petitioner. Ned Fischer, Esq., for the respondent. ARUNDELLMemorandum Opinion ARUNDELL, Judge: The Commissioner had determined deficiencies for the calendar year 1941, in the following amounts: Income Tax$ 3,096.61Declared Value Excess Profits Tax3,208.53Excess Profits Tax11,109.47Total$17,414.61 The return was filed with the collector of internal revenue for the first collection district of Illinois, at Chicago, Illinois. The only error assigned is respondent's action in disallowing, as a deduction, a portion of the salary paid to petitioner's president and treasurer, Leo J. Corboy. The deduction claimed was $50,400; the amount allowed was $26,500; and the amount disallowed was $23,900. [The Facts] Petitioner's business is that of contracting, plumbing, heating, and related work. It is perhaps the leading firm in its line in the Chicago area. It handles the larger projects such as office buildings, hospitals, hotels, manufacturing plants, power plants, etc. Seventy-five per cent of the installations in its line at the Chicago World's217 Fair was made by petitioner. Leo J. Corboy entered the employ of petitioner in 1911, starting in at the bottom. He learned every phase of the business and became, long prior to the taxable year, the driving force on which the success of the enterprise depended. In 1937, as well as during the taxable year 1941, Leo was the president and treasurer of petitioner. He had been receiving for some years a salary of $9,000 per annum. In 1937 he asked for an increase in his compensation in keeping with the services he was rendering. As a result of his request, an arrangement was entered into between petitioner and Leo which provided that his base salary would remain at $9,000 per annum and, in addition, he would receive a bonus to be arrived at as follows: "After the first Ten Thousand ($10,000.00) Dollars of earnings and up to Fifty Thousand ($50,000.00) Dollars of earnings, the said LEO J. CORBOY shall receive as a bonus, twenty per cent (20 per cent) of said earnings. On all earnings of Fifty Thousand ($50,000.00) Dollars and above, the said LEO J. CORBOY shall receive as a bonus, twenty-five (25) per cent of said earnings." This bonus contract was in effect during the taxable year218 and the salary paid Leo by petitioner which is in dispute was paid pursuant to this agreement. The following table gives in outline the operations of petitioner during the years 1936 to 1941, inclusive, the compensation paid to its officers, dividends declared and paid, etc.: Compen-Compen-sation ofsation ofLeo J.John A.Net Tax-TotalCorboyCorboyDividendsable IncomeOfficers'PresidentVice Presi-Declaredper IncomeCompen-anddent andandYearNet SalesTax ReturnsationTreasurerSecretaryPaid1936$ 412,669.02$ 11,654.30$19,000.00$ 9,000.00$10,000.00None1937641,426.9029,107.5823,676.6613,676.6610,000.00$25,000.001938548,895.9622,404.4524,315.4014,315.4010,000.0025,000.001939609,599.7015,258.5620,198.6210,198.6210,000.0012,500.001940621,668.6314,024.4520,659.6712,967.377,692.3012,500.0019413,200,110.77423,520.2860,400.0050,400.0010,000.0050,000.00From 1936 through 1941 petitioner had issued and outstanding 500 shares of common stock of a par value of $100 per share, and these shares were owned219 through this period as follows: Leo J. Corboy92 shares18.4%John A. Corboy188 shares37.6 Estate of M. J. Corboy220 shares44. 500 100% No other stock was outstanding. It is the practice in businesses such as that conducted by petitioner to pay its chief executive officers a salary plus a bonus. Petitioner's business depends for success primarily on management and no large amount of capital is needed in its operations. The volume of business and profits fluctuates widely through cycles in the building trade and those engaged in this type of business expect to make more money in the years of big volume to tide them over the lean years. The reason for the practice of paying a bonus is that the margin of profit is small in this highly competitive field and good management spells the difference between success and failure. Leo was the executive head of petitioner and all important matters were handled under his direction. In 1941 petitioner experienced a great increase in its volume of sales as shown by the table already set forth in this opinion, and profits increased to even a greater degree. To direct and organize this increased220 business required management of the highest order and ability which was only attainable as a result of long years of practical experience. While a considerable part of this increase in business was due to war activities, it is noteworthy that the volume of petitioner's business unrelated to the war effort during the taxable year was in excess of all of its business in the prior year, although some of its business in 1940 was, in fact, occasioned by war contracts. Leo worked during the taxable year without any real vacation, seven days a week and practically every evening, often until long past midnight. He supervised most of the estimating for the bids, ordered the material, supervised the contracts, hired labor, and made the collections for the work performed. He handled the financing for petitioner which became necessary due to its increased volume and personally guaranteed petitioner's loans at the bank. A number of the construction jobs were out of town and Leo spent much of his time away from home. The only other officer was John Corboy who was ill and away from the business for several months in 1941. He received a salary of $10,000 as vice president and secretary. Two qualified221 witnesses, who were familiar over a long period of years with petitioner's activities and Leo's part in them, testified unequivocally that the salary paid Leo in 1941 was entirely reasonable and in keeping with salaries paid other executives in similar or related businesses. No testimony bearing on the reasonableness of Leo's salary was offered by respondent. The salary paid Leo bears no close relationship to stock ownership and may not be regarded as a distribution of earnings in disguise. After fully weighing all of the evidence and hearing argument from counsel for the respondent, decision was rendered from the bench to the effect that the salary paid Leo by petitioner for the year 1941, in the sum of $50,400, was reasonable compensation within the meaning of section 23(a)(1)(A) of the Internal Revenue Code, and as such is deductible in determining petitioner's net income. Decision rendered at the conclusion of the trial is here adhered to. Decision will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624005/	ALEXIS M. HAWKINS AND ROSEMARY K. HAWKINS, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentHawkins v. CommissionerDocket No. 4779-78United States Tax CourtT.C. Memo 1982-451; 1982 Tax Ct. Memo LEXIS 295; 44 T.C.M. (CCH) 715; T.C.M. (RIA) 82451; August 4, 1982. Glen L. Norris and George F. Davison, Jr., for the petitioners. Leonard A. Hammes, for the respondent. KORNERMEMORANDUM FINDINGS OF FACT AND OPINION Korner, Judge:* Respondent determined deficiencies in petitioners' Federal income taxes of $33,488 for 1973 and $16,738 for 1974. After concessions made by the parties, the remaining issues for decision are whether petitioner is entitled to claim: (1) for the year 1973, a share of a partnership loss for the full fiscal year of the partnership, where petitioner was a member of the partnership for less than the full year, (2) an investment tax credit for 1973 on works of fine art, and (3) a $40,000 charitable contribution deduction for a mosaic table top donated in 1974 to a church.299 FINDINGS OF FACT Some of the facts have been stipulated and are so found. Alexis M. Hawkins ("petitioner") and Rosemary K. Hawkins are husband and wife, who resided in Des Moines, Iowa, at the time they filed their petition in this case. 1 Petitioners filed joint Federal income tax returns for calendar years 1973 and 1974 with the Internal Revenue Service Center at Kansas City, Missouri. I On or about June 8, 1973, seven limited partners of Americana C-G Company, Ltd. (an Iowa limited partnership) transferred their entire aggregate 13/58 interest in the partnership to Alexis M. Hawkins. 2 Petitioner paid $5,000 for each 1/58 share purchased, a total of $65,000 for his interest in the partnership. There was apparently no interim closing of the partnership books to determine the distributive shares300 of profit and loss of the retiring partners. 3 The partnership books were kept, and its tax returns prepared on the accrual basis and on the basis of a fiscal year ending July 31. Prior to acquiring his interest in the partnership, petitioner notified Americana C-G Company, Ltd. ("the partnership") that301 his interest in acquiring a share of the partnership was predicated in part upon the partnership making a timely election under section 754 of the Internal Revenue Code4 which would allow petitioner to adjust his tax basis in the partnership assets. In a letter dated January 1, 1973, the partnership, through its general partner, 5 assured petitioner that a timely election would be made under section 754, for the partnership fiscal year ending July 31, 1973. Sales of partnership interests in Americana C-G Company, Ltd. which took place prior to and during the partnership fiscal year ending July 31, 1973, were handled by the partnership on the basis that the buyer would be allocated his proportionate share of partnership loss or gain for the entire fiscal year of his purchase, and that any profits or losses would be allocated solely to the partners of record at the close of the fiscal year. This practice was not followed302 pursuant to any provision of the partnership agreement, the amendment to that agreement, nor the certificate of limited partnership submitted at trial. The record indicates, however, that the partners generally acquiesced in the practice. On his tax return for 1973, petitioner claimed an ordinary loss deduction from the partnership in the amount of $47,498. The amount of $47,498 reflects 13/58 of the loss of the partnership for the period of August 1, 1972 through July 31, 1973, after adjustments pursuant to sections 754 and 743 of the Internal Revenue Code. The accuracy of the figure has not been challenged by respondent. Such figure includes the deduction of depreciation for the full fiscal year 1973, as well as other allowable expenses. The statutory notice of deficiency allowed petitioner to deduct 14.79452% of the $47,498 loss, or $7,027. The percentage of the loss allowed by the respondent is the mathematical equivalent of 54/365 of the loss claimed by petitioner.This fraction represents the 54 days of the fiscal year ending July 31, 1973 during which petitioner was a member of the partnership. II During 1973 petitioner purchased photo equipment303 and various pieces of art work. The petitioner's records reflect the following purchases: Reece Paintings$ 6,901.00 Paintings129,879.08 African Art1,016.00 Photo Equipment325.00 Total$138,121.00 (rounded)On his 1973 tax return, petitioner claimed an investment tax credit on new property with a life of seven or more years with a cost or basis of $150,254. Petitioner's claimed investment credit included the alleged cost or basis of the items of art work and photo equipment mentioned above. It is stipulated by the parties that all of the art and photographic equipment is tangible personal property which was in existence more than three years subsequent to 1973. During tax year 1973, petitioner purchased and paid $6,901 for the following art pieces and frames created by Maynard Reece, upon which petitioner claimed an investment tax credit: a. 1948 Federal Duck Stamp Print b. 1951 Federal Duck Stamp Print c. 1959 Federal Duck Stamp Print d. 1969 Federal Duck Stamp Print e. 1971 Federal Duck Stamp Print f. 1972 Iowa State Duck Stamp Print g. 6 Solid walnut frames h. 6 duck stamps i. One Canvasbacks over ice & 304 snow (oil painting) j. One American Widgeon - late afternoon squall (oil painting) k. Pair of lithographs of bobwhite and mallard l. 2 solid walnut frames m.One Mallard plate of Limoges porcelain n. One solid walnut frame The record herein does not establish that the original use of this property commenced with petitioner's acquisition. Petitioner also claimed an investment tax credit on the following items purchased in Italy in 1973: 1.Madonna Sistina - Mosaic 2. Madonna Ansidei - Mosaic 3. Moasic Table - Romulus & Remus 4. Base for Mosaic Table - Romulus and Remus 5. Golden Cask - Mosaic 6. Modella e lo speccio (also referred to as Girl on Bed) - Cassio Oil 7. Tormento (also referred to as Boy and Girl) - Cassio Oil 8. Lady with Orange - Cassio Oil 9. Lady with Orange - Cassio Mosaic 10. Scenario oil bee eijhe (six.) - Cassio Oil 11. King Louis XIV Bronze Statue 12. Base for King Louis XIV Bronze Statue 13. Il Foro Romano - 1800 Mosaic 14. Colosseo - 1800 Mosaic 15. Piccolla Piazza S. Pietro - Mosaic 16. Temple of Sibielle - Mosaic 17. Face of Christ - Mosaic 18. Face of Christ - Oil 19.Fourteen Stations of305 the Cross - Cassio Oil 20. Mosaic Table - "Allegoria Pompeiana" The record herein does not establish the pieces as to which the original use commenced with petitioner. The cost of acquisition of these items was $129,552.15. 6 Petitioner purchased all of the art that he acquired from Italy from the Vatican, 7 except for the King Louis XIV bronze statue which was purchased during a trip to Florence, Italy. Petitioner is engaged in the practice of law and is licensed by the State of Iowa. As an ordinary and necessary part of his practice306 of law, petitioner maintained a professional office in Des Moines, Iowa during tax year 1973.The Reece and Italian pieces purchased by petitioner during 1973 were displayed in his law office, although perhaps not all were displayed all the time. Such items were used in petitioner's business. Petitioner did not offer any evidence at trial relating to the use of the African art or the photographic equipment. Petitioners did not claim on their individual tax returns a depreciation deduction on the works of art that were placed in petitioner's law office. Mosaics constituted a substantial percentage of the art petitioner purchased in Italy in 1973. Mosaics consist of thousands of small tesserae made of enamel, stone, glass, semi-precious stones, ceramic, tile or other materials. Due to the fact that mosaics do not fade or crack, many mosaics have remained in virtually the same condition for centuries. Some of the items purchased by petitioner are mosaics that have survived almost two hundred years in good condition. Pieces of art are subject to wear and tear and must be carefully restored if damaged. Humidity and temperature, among other factors, can contribute to this process307 of deterioration. In petitioner's offices where his art works were displayed, great efforts were made to control heat, cold and humidity. Petitioner went to considerable lengths to maintain his art works in the best possible condition. Petitioner's mosaics, bronze statue, and paintings were not mass produced and are considered fine art as opposed to mere "decorations." Given good conditions and care, as petitioner provided for his art works, such works can have a life of indeterminate length, especially the mosaics, which are made of very durable materials.The record herein does not establish the useful life for petitioner's art works, in excess of the three years stipulated by the parties, nor any reasonable estimated salvage value. In his statutory notice herein, respondent disallowed petitioner's claim of investment credit for the above acquisitions on the ground that these items were not property of a character subject to depreciation allowable under section 167. III On December 26, 1974, petitioner donated a mosaic table top entitled the Allegoria Pompeiana ("Allegoria") to the Roman Catholic Diocese of Des Moines, Iowa. Petitioner paid $12,500 for the Allegoria when308 he purchased it in Italy in October of 1973 from the Studio Del Mosaico della Rev. Fabbrica di S. Pietro ("Vatican Studio"). Petitioner claimed that the fair market value of this art object was $40,000 when donated and took a charitable deduction in this amount on his tax return for the year 1974. In the statutory notice of deficiency, respondent determined the fair market value of the mosaic to be $12,500. The Allegoria was a piece of fine art, 80 centimeters in diameter, and was in excellent condition at the time it was donated to the Catholic Church. The Catholic Church is a religious and educational institution, within the meaning of section 170. Prior to the donation of the Allegoria to the Catholic Church, numerous attempts were made by various individuals to value this mosaic.Petitioner contacted the prominent appraisal firm of Sotheby Parke Bernet in New York. Sotheby Parke Bernet responded, but declined to value the Allegoria because there were not adequate records of sales of this type. The valuation of this mosaic was further complicated by the closing of the Vatican Studio.This closing eliminated further offerings of Vatican mosaics to the world art market. Information309 concerning the value of the Allegoria was gathered by other individuals, but the offer of this evidence by petitioner was rejected at trial upon respondent's hearsay objections. Three witnesses testified at trial as to fair market value of the Allegoria. 7 Respondent's witness Mr. Grant placed the fair market value of the Allegoria at $12,500, based primarily upon its purchase price. Petitioner's witness Mr. Webster testified that in valuing a mosaic of this type, the replacement of such an art object would be the retail and not the auction price.It was Mr. Webster's opinion that a private gallery selling the Allegoria would have sold this art piece in December, 1974, at retail at between $25,000 and $28,000. A representative of the current owner testified that the Catholic Church placed a fair market value on this mosaic (at the time of trial herein) of approximately $34,285. 310 The fair market value of the mosaic here in question as of December 1974 was $26,500. OPINION I The Partnership Loss IssueThe first issue which we will consider involves the application of the so-called retroactive allocation prohibition contained in section 706(c)(2)(A). As indicated in our findings of fact, petitioner acquired a 13/58 interest in Americana C-G Company, Ltd. on June 8, 1973. The partnership was on a fiscal year ending July 31. Despite the fact that petitioner was a member of the partnership for only 54 days of the partnership fiscal year, he was allocated his proportionate share of losses which were generated by the partnership over the entire course of the fiscal year. 8 Thus, petitioner claimed a loss of $47,498 from the partnership on his individual return for 1973. This amount represents 13/58 of the loss incurred by the partnership for the period August 1, 1972 through July 31, 1973 after adjustments made pursuant to sections 754 and 743. 9311 In his statutory notice of deficiency, respondent allowed petitioner to claim only 14.79452% of the $47,498 loss generated by the partnership (i.e., 54/365 X $47,498). Thus, respondent allowed petitioner to claim only that proportion of his share of parthership losses which is the same ratio as the number of days during the partnership's fiscal year that he was a member of the partnership bears to the total number of days in the fiscal year. It is by now relatively clear that the provisions of subchapter K generally, and section 706(c) specifically, in conjunction with the assignment of income doctrine, do not permit a partner to deduct losses which were generated by his partnership prior to his entry to the partnership. Snell v. United States, F.2d (8th Cir., June 18, 1982). Petitioner does not quarrel with this general proposition and, in fact, concedes the correctness of our decisions, and the decision of the Second Ciruit, which so hold. Marriott v. Commissioner,73 T.C. 1129">73 T.C. 1129 (1980); Moore v. Commissioner,70 T.C. 1024">70 T.C. 1024 (1978);312 Rodman v. Commissioner, 542 F.2d 845 (2d Cir. 1976). Moreover, petitioner has conceded that all deduction items making up petitioner's share of the partnership's overall loss, otherthandepreciation, are properly to be allocated, pro rata, between petitioner and the former partners from whom he purchased his interest, under section 706(c)(2)(A). 10 Since respondent's original determination with respect to this issue is based on his contention that all items of partnership income and loss must be allocated on a pro rata basis between petitioner and the selling partner, petitioner has effectively conceded the correctness of respondent's determination with respect to this issue, except insofar as that determination is based on a reallocation of partnership depreciation deductions. 313 Thus, the only disputed issue left for us to consider is petitioner's contentions relating to the partnership - generated depreciation deduction. In this regard, petitioner proffers a two-part argument wherein he maintains that: 1. Depreciation, as a deductible partnership expense, is an annual event which accrues to the partnership only at the end of the partnership's fiscal year when the item is entered into the partnership books, rather than over the course of the entire partnership fiscal year; and 2. This being the case, the partnership's allocation to him of 13/58 of the entire annual depreciation deduction generated by the partnership over the course of the fiscal year in issue is perfectly in accord with the anti-retroactive allocation provisions of section 706(c)(2)(A); that is, since the depreciation deduction purportedly accrued to the partnership, in its entirety, only after petitioner became a member of the partnership, the allocation in issue was not "retroactive" and therefore proper under section 706(c)(2)(A). For the reasons stated herein, we reject petitioner's contentions. Section 167(a) does not by its terms state that a depreciation deduction is an314 annual event, as contended by petitioner. The closest wording supporting such an inference is found in respondent's regulations which define the depreciation allowance as that amount which is set aside for the taxable year, in accordance with a reasonably consistent plan, so that the aggregate of these amounts, plus salvage value, will equal the cost basis in the property at the end of the useful life of the depreciable property. (A)-1 Sections 1.167 (a)-1(a) and 1.167(a)-10(b), Income Tax Regs. It does not follow from this, however, that depreciation is incurred, and thus is accruable, solely at the end of the taxpayer's fiscal period. The end and purpose of it all [depreciation accounting] is to approximate and reflect the financial consequences to the taxpayer of the subtle effects of time and use on the value of his capital assets * * . [Detroit Edison Company v. Commissioner,319 U.S. 98">319 U.S. 98, 101 (1943)]. Depreciation is a fact. It reflects the diminution in the value of315 assets over time because of age, obsolescence, and wear and tear. It is an on-going process, incurred day by day, week by week, month by month, in addition to casual identifiable events. On a purely theoretical basis, it would be proper for a taxpayer to accrue depreciation on its books on a daily basis, in an amount to be determined under the depreciation method employed by the taxpayer in accordance with the provisions of section 167. As a practical matter, of course, this is not done. Rather, taxpayers will typically accrue allowable depreciation deductions on their books on a monthly, quarterly, semi-annual or annual basis, depending upon the methods employed by them in keeping their books. The time of entry of depreciation deductions on the taxpayer's books, however, is not determinative of when the depreciation is actually incurred and is therefore accruable.Making the book entry on a periodic basis rather than on a daily basis is merely a matter of bookkeeping convenience. We will not hold, as petitioner appears to urge, that depreciation deductions are properly accruable only when the taxpayer's bookkeeper finds it convenient to make the entry on the books. To the contrary, 316 we hold that depreciation is properly accruable and deductible as it is incurred. Petitioner has already acknowledged the propriety of allocating his share of the partnership's deductions (other than depreciation) for 1973 between himself and the former partners from whom he purchased his interest on a pro rata basis, acknowledging that the rule enunciated in Moore v. Commissioner,supra, and Marriott v. Commissioner,supra, is applicable here. See also section 1.706-1(c)(2), Income Tax Regs. We hold that such a pro rata allocation of depreciation deductions for the year 1973 between petitioner and the partners from whom he purchased his interest is equally appropriate and necessary. To allocate 100 percent of the depreciation allowance to petitioner would ignore economic reality, and would not "approximate and reflect the financial consequences to the [retiring partner] of the subtle effects of time and use on the value of [the partnership] capital assets." Detroit Edison Company v. Commissioner,supra.317 Although any reasonable method of making the required allocation is acceptable (see section 1.706-1 (c)(2)(ii) of the regulations), no better method than that which was used by respondent's allocation method is one specifically sanctioned by the above-cited regulation, where, as here, there is no closing of the partnership books. Finally, we note that petitioner alleges that respondent had audited the partnership returns for prior years and had not challenged the allocation method here in dispute. Even if this were true, it would make no difference here. The mere acquiescence by respondent in the treatment given by a taxpayer to certain items in prior years' returns does not prevent the respondent from attacking such treatment in later years. Union Equity Cooperative Exchange v. Commissioner,481 F.2d 812">481 F.2d 812 (10th Cir. 1973), cert. denied 414 U.S. 1028">414 U.S. 1028 (1973), affg. 58 T.C. 397">58 T.C. 397 (1972); Easter v. Commissioner,338 F.2d 968">338 F.2d 968 (4th Cir. 1964), affg. a Memorandum Opinion of this Court. On this issue, therefore, we hold318 for respondent. II The Investment Tax Credit IssueThe second issue for resolution is whether petitioner can claim a section 38 investment tax credit on fine art displayed in his law office. On his 1973 income tax return, petitioner claimed an investment tax credit on new property with a cost of $150,254 and a life of seven or more years. Respondent's notice of deficiency disallowed the investment tax credit claimed with respect to $138,121 of such property. The amount disallowed by the respondent consisted of that portion of the amount that reflected art purchases made by petitioner during 1973. 11Respondent argues that the art purchased by petitioner during 1973 did not qualify as section 38 property because it was not depreciable property as defined by section 167. 12 Petitioner disagrees, and319 asserts that he has shown that the art in question is subject to wear and tear, has a useful life, and a determinable salvage value; therefore, it is petitioner's conclusion that this art is depreciable property for purposes of the section 38 investment tax credit. Section 38 generally provides that there shall be a credit against the income tax for investments made in certain property, as defined and limited in sections 46 through 50. For the property at issue here to qualify for the section 38 investment tax credit, the property 13 must, inter alia, be 320 * * property with respect to which depreciation (or amortization in lieu of depreciation) is allowable and having a useful life (determined as of the time such property is placed in service) of three years or more. [Section 48(a)(1)] The regulations further clarify the type of depreciable property that qualifies for the section 38 investment tax credit: Property is not section 38 property unless a deduction for depreciation (or amortization in lieu of depreciation) with respect to such property is allowable to the taxpayer for the taxable year. A deduction for depreciation is allowable if the property is of a character subject to the allowance for depreciation under section 167 and the basis (or cost) of the property is recovered through a method of depreciation * * . [Section 1.48-1(b)(1), Income Tax Regs.] The applicable statutory provision concerning depreciation, controlling for purposes of the issue before us, in section 167. This provision states321 in relevant part: (A) GENERAL RULE.-- There shall be allowed as a depreciation deduction a reasonable allowance for the exhaustion, wear and tear (including a reasonable allowance for obsolescence) - (1) of property used in the trade or business, * * . The regulations that correspond to this statutory provision discuss the concept of a reasonable depreciation allowance. Section 1.167(a)-1, Income Tax Regs., states: § 1.167(a)-1. Depreciation in general.-- (a) Reasonable allowance.Section 167(a) provides that a reasonable allowance for the exhaustion, wear and tear, and obsolescence of property used in the trade or business or of property held by the taxpayer for the production of income shall be allowed as a depreciation deduction. The allowance is that amount which should be set aside for the taxable year in accordance with a reasonably consistent plan (not necessarily at a uniform rate), so that the aggregate of the amounts set aside, plus the salvage value, will, at the end of the estimated useful life of the depreciable property, equal322 the cost or other basis of the property as provided in section 167(g) and section 1.167(g)-1. An asset shall not be depreciated below a reasonable salvage value under any method of computing depreciation. * * * (b) Useful life. For the purpose of Section 167 the estimated useful life of an asset is not necessarily the useful life inherent in the asset but is the period over which the asset may reasonably be expected to be useful to the taxpayer in his trade of business or in the production of his income. This period shall be determined by reference to his experience with similar property taking into account present conditions and probable future developments. Some of the factors to be considered in determining this period are (1) wear and tear and decay or decline from natural causes, (2) the normal progress of the art, economic changes, inventions and current developments within the industry and the taxpayer's trade or business, (3) the climatic and other local conditions peculiar to the taxpayer's trade or business, and (4) the taxpayer's policy as to repairs, renewals, and replacements. 323 Salvage value is not a factor for the purpose of determining useful life. * * (c) Salvage. (1) Salvage value is the amount (determined at the time of acquisition) which is estimated will be realizable upon sale or other disposition of an asset when it is no longer useful in the taxpayer's trade or business or in the production of his income and is to be retired from service by the taxpayer.Salvage value shall not be changed at any time after the determination made at the time of acquisition merely because of changes in price levels. * * * The time at which an asset is retired from service may vary according to the policy of the taxpayer. If the taxpayer's policy is to dispose of assets which are still in good operating condition, the salvage value may represent a relatively large portion of the original basis of the asset. However, if the taxpayer customarily uses an asset until its inherent useful life has been substantially exhausted, salvage value may represent no more than the junk value. Salvage value must be taken into account in determining the depreciation deduction324 either by a reduction of the amount subject to depreciation or by a reduction in rate of depreciation, but in no event shall an asset (or an account) be depreciated below a reasonable salvage value. * * Section 1.167(a)-2, Income Tax Regs. further provides: The depreciation allowance in the case of tangible property applies only to that part of the property which is subject to wear and tear, to decay or decline from natural causes, to exhaustion, and to obsolescence * * . Finally, section 167(g) provides: (g) Basis for depreciation. - The basis on which exhaustion, wear and tear, and obsolescence are to be allowed in respect of any property shall be the adjusted basis provided in section 1011 for the purpose of determining the gain on the sale or other disposition of such property. The above-quoted sections of the Code and the regulations therefore establish that in order 325 for a deduction for depreciation to be "allowable", the following essential facts must be established: (a) The depreciable basis of the property, section 167(g). (b) The useful life of the property, whether measured by the inherent useful life of the property itself, or by its useful life in the taxpayer's trade or business. Potts, Davis & Company v. Commissioner,431 F.2d 1222">431 F.2d 1222, 1224 (9th Cir. 1970), affg. a Memorandum Opinion of this Court; John R. Thompson Company v. United States,477 F.2d 164">477 F.2d 164, 169 (7th Cir. 1973), affg. 338 F. Supp. 770">338 F. Supp. 770 (N.D. Ill. 1971); Judge v. Commissioner,T.C. Memo. 1976-283; section 1.167(a)-1(b), Income Tax Regs.(c) A reasonable estimate of salvage value, which must be less than the depreciable basis of the property, since only the difference between the depreciable basis and the salvage value is "allowable" as a depreciation deduction, section 1.167(a)-1(c), Income Tax Regs.All the above elements must be established in order to show that a deduction for depreciation is allowable. In this case, the burden of proof to326 establish these facts is upon the petitioner, Welch v. Helvering,290 U.S. 111">290 U.S. 111 (1933); Rule 142(a), Tax Court Rules of Practice and Procedure. Although we have found (albeit with some difficulty) that petitioner has met his burden of proof with respect to establishing his depreciable cost basis for the items involved herein (at least on a group basis), and we have made appropriate findings to that effect, we must hold that petitioner has failed to meet his necessary burden of proof with respect to items (b) and (c). With respect to establishing the "useful life" of the art works in issue, respondent apparently takes the position that works of fine art are simply not depreciable, because no determinable useful life can be found. Rev. Rul. 68-232, 1 C.B. 79">1968-1 C.B. 79. Whether this revenue ruling purports to lay down a flat rule, as respondent claims, that fine art is not depreciable property under any circumstances is a question we need not address. 14 Even if theoretically depreciable, it is incumbent upon petitioner to show the depreciable or useful life of the property. Petitioner herein has made no serious attempt to demonstrate the inherent useful327 life of the property, as opposed to its useful life in the petitioner's trade or business, and the evidence of record strongly indicates that this would be an impossible task. Instead, petitioner has argued that, under the specific provisions of section 1.167(a)-1(b) of the Income Tax Regs., quoted above, and the doctrine enunciated by the Supreme Court in Massey Motors Inc, v. United States,364 U.S. 92">364 U.S. 92 (1960), and Hertz Corporation v. United States,364 U.S. 122">364 U.S. 122 (1960), petitioner can establish a useful life for the art works, on the grounds that such art works are used in his trade or business of practicing law; that such art works are, therefore, useful to his trade or business only for as long as he practices law; and that such period should be determined328 by reference to the standard mortality tables giving petitioner's life expectancy. Assuming, arguendo, that petitioner's reliance on the above-cited case law is not misplaced, petitioner's proof herein is still deficient in two essential respects: (1) There is no evidence in the record, including petitioner's testimony, that petitioner intends to continue in the practice of law until he dies; and, even if we were to assume this to be the case, (2) There is no proof in this record as to petitioner's age which would permit us to use any accepted mortality tables in determining the useful life of the art objects based upon petitioner's life expectancy. 15We therefore hold that petitioner has failed to meet his necessary burden of proof to establish a useful depreciable life for the art works in question. Petitioner's failure of proof on this point has a direct impact on the third prong of petitioner's necessary proof -- that a salvage value for the depreciable property be established for the property at the end of its useful life which is less than its original cost, 329 the difference being the amount which would be allowable as depreciation. Since the allowable depreciation, plus salvage value, can in no event exceed the cost or other basis of the property under the above-quoted regulations, there is a direct linkage between the two elements.Salvage value must be determined at the time of acquisition with reference to a specific point in time, viz., the end of the property's useful life, section 1.167(a)-1(c), Income Tax Regs. In this record, there is a complete failure to establish a salvage value for the art works in any amount or at any point in time. 16As we have noted above, there is no proof in this record as to the inherent life of these art works, which would establish a point at which salvage value could be reasonably estimated. As we have further pointed out, we are unable to determine a time when salvage value is to be determined, 330 based upon the ending of the useful life of the property in petitioner's trade or business. Testifying generally, and without any reference to a particular time, both petitioner's expert witness Webster and respondent's expert witness Young testified that it would be impossible to place a salvage value on these works of art on anything but the most speculative basis. Neither witness would commit to an overall specific figure for reasonably estimated salvage value (either as a whole or on an individual basis) and significantly, petitioner has not even requested us to find a salvage value, contending only that he was able to establish that some salvage value exists. 17 While it may be conceded that in the context of the present issue, involving petitioner's right to an investment tax credit under the provisions of section 38, it may not be necessary for petitioner to prove a specific dollar figure for salvage value (as would indeed be the case if the issue were the dollar amount of the allowable depreciation deductions themselves under section 167), it is nevertheless necessary for petitioner to prove that there was a salvage value which was measurably less than the depreciable cost331 basis for the property, in order to establish that any depreciation deductions would be "allowable", as required by section 48(a)(1). We therefore hold that, petitioner having failed to carry his necessary burden of proof to show that any depreciation was allowable with respect to these art objects, respondent's determination that no section 38 credit is to be allowed on account of their acquisition must be sustained. Compare Judge v. Commissioner,supra.III The Charitable Donation IssueThe final issue for resolution is the value of the Mosaic Table, "Allegoria Pompeiana" for purposes of determining the amount of the charitable contribution (of the table top alone) made by the taxpayer to the Roman Catholic Diocese of Des Moines ("Church") in tax year 1974. Petitioner claims that at the time of the gift, the Allegoria had a fair market value of $40,000. Respondent, on the other hand, asserts that the best possible indication of the fair market value of Allegoria is the $12,500 that petitioner paid332 for the mosaic table some 14 months earlier. We approach this task with great hesitation, for the circumstances in this case are unique. The Allegoria was purchased from the Vatican Studio in October of 1973. After petitioner's purchase of this and other art pieces, the Vatican Studio closed. Prior to the time that the petitioner donated the Allegoria to the Church, the petitioner instituted an investigation to value the Allegoria for purposes of determining the amount of the charitable deduction that he should claim. In the course of this investigation, he contacted Sotheby Parke Bernet, a well-known auction firm in New York. This firm refused to place a value on the Allegoria because there were no adequate records of sales of comparable art pieces in the United States, nor anywhere else as far as could be determined. The Allegoria is in excellent condition and is a unique, rather than mass-produced, piece of art. There appears to be some confusion as to the age of the Allegoria. However, it is in evidence that it is an old piece of art that was created sometime during the early part of the 19th century. The valuation of the Allegoria is a question of fact that this333 Court must decide. McGuire v. Commissioner,44 T.C. 801">44 T.C. 801, 812 (1965). Valuation has consistently been recognized as an inherently imprecise process. Estate of David Smith v. Commissioner,57 T.C. 650">57 T.C. 650, 655 (1972), affd. 510 F.2d 479">510 F.2d 479 (2nd Cir. 1975); Morris M. Messing v. Commissioner,48 T.C. 502">48 T.C. 502, 512 (1967). It is our present task to determine the fair market value of the Allegoria as of December 26, 1974.Fair market value is defined in the regulations as: * * * the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of relevant facts * * . [Section 1.170A-1(c)(2), Income Tax Regs.] In the present case, the evidence of fair market value presented at trial consists almost wholly of opinion testimony of the parties' respective witnesses. Three witnesses testified at trial as to the fair market value of the Allegoria. Petitioner's witnesses consisted of an334 eminently qualified art expert, Mr. Donald Webster, and Roger Cloutier, a representative of the current owner of the mosaic. Respondent's witness, Mr. Wiley C. Grant, was an appraiser employed by the Internal Revenue Service.Mr. Cloutier testified that he was a member of the Finance Committee of the Roman Catholic Diocese of Des Moines, and undertook, as a part of his duties, to determine the value of the Allegoria. This witness testified that the diocese did not have a museum or display area, and his attempt to value this art object resulted from the known intention of the Church to eventually sell this mosaic. Mr. Cloutier's investigation was initiated to better advise the Church of when to dispose of the art object and for what price. Mr. Cloutier did not testify as an expert witness. After evaluating the information that he had received as a result of his inquiries and independent research, Mr. Cloutier could not establish a specific value for the Allegoria. However, it was apparent to him that the Allegoria was not an art object of a type easily to be found. Mr. Cloutier, therefore, valued this mosaic at approximately $34,285 (as of the time of trial herein in 1980). 335 Although Mr. Cloutier is not an expert, his testimony, as the representative of the owner, is permissible. Rule 701, Federal Rules of Evidence.Petitioner's second witness was Donald Webster, a nonpracticing attorney who had devoted himself exclusively to the art and antique business for the last 12 to 15 years. Mr. Webster was the co-owner of C. G. Sloan & Company, an old established firm that specializes in the auctioneering of fine arts and antiques. He was also the president of Webster Fine Art, Inc., a firm that buys and sells fine arts. It was apparent that Mr. Webster had done a great deal of appraising over the years in the course of his business. His qualifications as an expert were impressive. Besides thirty years of experience in the business, he had also advised the Internal Revenue Service on numerous occasions concerning art valuation. It was the opinion of Mr. Webster that the Allegoria was a work of fine art. He differed, however, with the $40,000 fair market value placed upon the Allegoria by petitioner. He testified that in late 1974, a high-class gallery would have been able to sell an art piece of comparable quality to the Allegoria for approximately336 $25,000 to $28,000. He also testified that atauction this piece of fine art would have probably sold for $14,000 to $15,000. It was Mr. Webster's conclusion that the retail and not the auction price should be used when determining the replacement value for this art object. Respondent's only witness on this issue was Mr. Grant. Mr. Grant's educational background in the field of art is limited to a B.A. degree in English literature, and a minor in art history. From 1975 until the time of trial, Mr. Grant has been employed as an appraiser of art work for the Internal Revenue Service.Mr. Grant placed a fair market value on the Allegoria of $12,500 for purposes of the charitable deduction taken by petitioner in 1974. When he was asked to make his appraisal, Mr. Grant testified that he was furnished with four large photographs of the Allegoria, the purchase date, the acquisition cost, and the name of the seller. 18 No other information bearing on the value of this art work was furnished to this witness. 337 The appraised value of the Allegoria, as determined by Mr. Grant, was based in part upon the catalogue price for what he considered to be comparable mosaics selling on or about the time that petitioner made his gift to the Church. Mr. Grant stated that he looked to the major auction catalogues for purposes of determining the selling price of similar mosaics. He also stated that petitioner's purchase price of the Allegoria some 15 months prior was the best indication of its current value. Respondent's witness, however, admitted at trial that he did not consult experts on mosaics when he made his appraisal, but relied almost entirely upon the comparison of the Allegoria to two mosaics found in two separate art catalogues. Both mosaics, judged by Mr. Grant to be comparable to the Allegoria, were illustrated by black and white photographs of 2 inches by 3 inches. The testimony of all three witnesses was not well supplemented at trial by documentary evidence. The two "experts" who testified at trial based their valuation of this art piece solely on photographs. 19 In determining the fair market value of any given piece of art, the sales price of comparable art is an important338 factor. Estate of David Smith v. Commissioner,57 T.C. 650">57 T.C. 650, 659 (1972). Unfortunately, none of the witnesses were able to produce sales prices of truly comparable pieces. In the present case, we do not find that two 2" X 3" black and white photographs studied by respondent's expert witness is of sufficient probative value as to be determinative of the fair market value of the Allegoria. Further, the photographs and the accompanying material found in these catalogues were not offered into evidence by the respondent. On the other hand, Mr. Webster testified that he had sold similar mosaics and, in comparison to those, his estimation of the retail (as compared to wholesale) value of the Allegoria was approximately 25 to 28 thousand dollars. Finally, the testimony of Mr. Cloutier is marginally persuasive in that it buttresses our conclusion that the Allegroia had a fair market value in 1974 substantially in excess of the $12,500 figure placed upon it by respondent. We decline to comment further on339 the sketchy evidence submitted on this issue, 20 except to note that Vatican mosaics are no longer available on the world market. This makes it more difficult to find comparables for valuation purposes, but probably also increased the value of existing pieces. Petitioner's witness Mr. Webster was the only witness with the wealth of experience necessary to offer concrete opinion evidence on this issue. Accordingly, after considering all the facts presented -- and not presented -- in this record, we have found that a willing buyer and willing seller, acting solely on the basis of the information submitted in this Court in this case, would have arrived at a sale price for the Allegoria of $26,500. Petitioner's charitable deduction should be limited to that amount. To give effect to the above, as well as concessions by the parties on other issues, Decision will be entered under Rule 155.Footnotes. This case was tried before Judge Cynthia Holcomb Hall↩ who subsequently resigned from the Court. By order of the Chief Judge, the case was reassigned to Judge Jules G. III.1. Petitioner Rosemary K. Hawkins is involved herein only because she filed a joint return with her husband, Alexis M. Hawkins for the years in issue, and will not be referred to further herein.↩2. The exact date of this transfer is not evident from the record.In his notice of deficiency, respondent calculated petitioner's partnership loss on the assumption that the transfer of the 13/58 interest in the partnership took place on June 8, 1973 and petitioner requested the Court to fine the same date. We accept it. ↩3. The fact that the accountants for Americana prepared the partnership tax return for its fiscal year 1973, and allocated all operating losses attributable to the 13/58 interest in the partnership to petitioner, indicates that there was no interim closing of the partnership books. The partnership books were not entered into evidence, and petitioner did not allege that there was such a closing. No special allocations of income, gain or loss were made to partners in the partnership returns for 1973, nor in the partnership's audited financial statement.↩4. All statutory references are to the Internal Revenue Code of 1954, as in effect during the years in issue. ↩5. Investors Service Corporation was the sole general partner in the partnership known as Americana C-G Company, Ltd.↩6. In arriving at the cost basis of the above items, we have done the best we could with an unsatisfactory record, giving consideration to all the evidence, but relying principally upon the itemization of petitioner's expenditures as contained in the parties' supplemental stipulation of facts, and screening out what appear to be expenditures of a personal nature, e.g., costs of hotels, air travel, etc. Mr. McLaughlin testified on the issue of the deed of gift executed by petitioner when he donated the Allegoria to the Catholic Church. Testimony by this witness indicated the type of inquiries he made before the execution of this deed. These inquiries included contacting Rome in order to set a value on the Allegoria. The exhibit offered in connection with this witness's testimony was not accepted into evidence upon respondent's hearsay objection. Therefore, his testimony on the value of the Allegoria will not be considered.7↩ Art was purchased from the Vatican Mosaic School, individuals in the Vatican who owned particular pieces of art, and a store in close proximity to the Vatican. Apparently, all three were affiliated with the Vatican in some manner.8. This allocation was made pursuant to a general understanding that partnership profits and losses would be allocated solely to partners of record at the close of the taxable year. We note that whether or not this understanding represented a part of the partnership agreement is not significant to our ultimate resolution of this issue. Even if it did, the allocation requirements of section 706(c)(2) take precedence over the authority given to partnership allocation agreements by sections 704(a) and 761(c). Marriott v. Commissioner,73 T.C. 1129">73 T.C. 1129 (1980); Moore v. Commissioner,70 T.C. 1024">70 T.C. 1024↩ (1978). 9. There appears to be some confusion as to what partnership losses are reflected in the $47,498 taken by petitioner on his 1973 tax return. The parties have stipulated that this amount reflects 13/58 of the loss incurred by Americana for the period of August 1, 1972, through July 31, 1973, after adjustments made pursuant to section 754 and 743 of the Internal Revenue Code↩. Except for the partnership depreciation deduction, petitioner now states (on brief) that all losses allocated to the petitioner by the partnership in fiscal year 1973 were calculated on the basis of the number of days during the tax year that he was a member of the partnership. This latter statement is inconsistent with the above stipulation, exhibits and testimonial evidence. We have found that the $47,498 figure represents the full 13/58 of the loss incurred by Americana during fiscal year 1973, including all items.10. Section 706(c)(2)(A) provides in pertinent part as follows: (2) Partner Who Retires or Sells Interest in Partnership. - (A) Disposition of entire interest. - The taxable year of a partnership shall close -- (i) With respect to a partner who sells or exchanges his entire interest in a partnership, * * *. Such partner's distributive share of items described in section 702(a) for such year shall be determined, under regulations prescribed by the Secretary, for the period ending with such sale, exchange, or liquidation.↩11. The record indicates that respondent disallowed an investment tax credit on the following: Reece Paintings, Mosaics, African art, photographic equipment, and a statue purchased by petitioner in Italy in 1973. Petitioner has apparently abandoned the issue relating to the African art and photographic equipment, and they will not be referred to further herein.↩12. Both parties at trial agreed that the issue concerning petitioner's art is a relatively narrow one, requiring the Court merely to decide whether the art used in petitioner's law office is depreciable property. In view of our holding herein, we do not have to concern ourselves with another potential problem which the parties never addressed and on which the record is inadequate, viz., whether the art works in petitioner's hands constituted "new" or "used" section 38↩ property within the meaning of sections 48(b) and (c).13. Which is tangible personal property, as the parties have stipulated, see section 48(a)(1)(A).↩14. Note that some unease was expressed on this point by the District Court in John R. Thompson Co. v. United States,338 F. Supp. 770">338 F. Supp. 770, 778, 779 (E.D. Ill. 1971), and this portion of its opinion was specifically approved by the Seventh Circuit in affirming under the facts of that case, 477 F.2d 164">477 F.2d 164, 169↩ (7th Cir. 1973).15. Compare Hampton Pontiac, Inc. v. United States,294 F. Supp. 1073">294 F. Supp. 1073↩ (D.S.C. 1969).16. In the context of this case, "salvage value" is to be read as the reasonably estimated resale value of the property at the time its useful depreciable life terminates.↩17. This difficulty may, or may not, account for the failure of petitioner to claim any depreciation deductions with respect to the property.↩18. Petitioner attempted to introduce an appraisal of $40,000 by the individual who sold the Allegoria to petitioner. This appraisal was not allowed to be introduced into evidence upon respondent's hearsay objection.↩19. Respondent's witness had, prior to trial, but after his appraisal of the Allegoria, seen this art object. Petitioner's witness had never seen this mosaic.↩20. We imply no criticism of the parties on this point. Valuing a unique piece like the Allegoria is clearly a most difficult task, and the degree of proof which we require must be tempered by the practicalities of the situation to some extent.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4669070/	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. 17-FS-376 IN RE PETITION OF A.T.J. AND L.D.J., L.M.J., APPELLANT. Appeal from the Superior Court of the District of Columbia (ADA-86-13) (Hon. Sean C. Staples, Trial Judge) (Hon. Heidi M. Pasichow, Reviewing Judge) (Argued September 20, 2017 Decided March 18, 2021) Leslie J. Susskind for appellant L.M.J., father of K.J. Pamela Soncini, Section Chief, Family Services Division, with whom Karl A. Racine, Attorney General for the District of Columbia, Todd S. Kim, Solicitor General at the time the brief was filed, and Loren L. AliKhan, Deputy Solicitor General at the time the brief was filed, were on the brief, for appellee the District of Columbia. Stephen L. Watsky for appellees A.T.J. and L.D.J. Joseph W. Jose, guardian ad litem, filed a statement in lieu of brief for K.J. supporting the brief of appellees A.T.J. and L.D.J. 2 Before BECKWITH, Associate Judge, and STEADMAN and FISHER, * Senior Judges. Opinion for the court by Senior Judge FISHER. Dissenting opinion by Associate Judge BECKWITH at page 23. FISHER, Senior Judge: The principal issue in this contested adoption case is whether the natural father, who has never met his daughter and does not seek custody of her, is entitled to the benefit of the presumption in favor of a natural parent. We hold that he is not. I. Background K.J. was born on December 14, 2006. Appellant L.M.J. is her biological father and C.J. is her biological mother. C.J. cared for K.J. by herself until 2009. Because C.J. received “little to no family support and had both suicidal and homicidal thoughts,” she voluntarily placed K.J. and her younger half-brother in foster care in October 2009. L.M.J. learned of K.J.’s existence sometime between 2010 and 2011 but has never met K.J. or played a role in her life. * Judge Fisher was an Associate Judge of the court at the time of argument. His status changed to Senior Judge on August 23, 2020. 3 Mr. and Mrs. J., the appellees, first met K.J. in 2009 when they began providing daycare services for her. In order to give K.J. and her brother a home, the J.s became licensed foster parents. K.J. began living with the J.s on January 12, 2013, and they petitioned to adopt her on April 17, 2013. C.J. and L.M.J. did not consent to the adoption and on October 1, 2014, Magistrate Judge Sean Staples began a multi-day trial on the J.s’ adoption petition. Magistrate Judge Staples heard testimony from the J.s, C.J., and K.J.’s social workers and therapists. Although present for much of the hearing and represented by counsel throughout, L.M.J., the biological father, did not testify or call any witnesses. L.M.J. did not seek custody of K.J. but instead “oppose[d] the adoption because it may jeopardize his ability to form a relationship with K.J.” C.J. testified that L.M.J. was not made aware of the possibility of paternity until sometime in 2010 or 2011 when she met L.M.J. “by chance in the community and told him he was K.J.’s father.” Prior to this chance encounter, C.J. made alternate assertions about paternity when, on October 15, 2009, during neglect proceedings, she filed an affidavit (“Biological Mother’s Affidavit Concerning Paternity”) naming another man (“A.P.”) as K.J.’s father. However, a court ordered DNA test, administered on July 2, 2013, revealed that A.P. was not K.J.’s 4 biological father. C.J. then filed a new “Biological Mother’s Affidavit Concerning Paternity” on July 26, 2013—in the same neglect proceedings—naming L.M.J. as K.J.’s father. L.M.J.’s paternity was confirmed by a DNA test administered on July 15, 2014. In the years between his chance meeting with C.J. and his eventual DNA test, L.M.J. did not make any effort to contact K.J. During the 2010 or 2011 encounter, C.J. had given L.M.J. a picture of K.J. which he kept and eventually showed to Rochelle White, K.J.’s social worker, in 2014. In late July or early August of 2014—about three years after being told he was K.J.’s father but shortly after the paternity test—L.M.J. called the foster care agency and asked to visit K.J. However, K.J. did not want to meet L.M.J. and her therapist recommended that L.M.J. write her letters in an attempt to build a relationship. During trial L.M.J.’s lawyer claimed that L.M.J. “attempted to contact the agency over the years to get information about K.J.,” but presented no evidence regarding the timing or nature of those contacts. L.M.J. had admitted to K.J.’s social worker “that he was incarcerated two separate times for at least two years between the period of time he was told that K.J. was his daughter and 2014.” 5 Testimony from the J.s and Dr. Giselle Aguilar Hass, a licensed psychologist, established that K.J. was “fully integrated” into the petitioners’ home. K.J. viewed the J.s as her parents and the J.s’ biological children as her brothers. The J.s were “steadfast advocates for [K.J.’s] care and well-being” and worked with her “medical and mental health providers to provide consistent and appropriate services” for her special needs. Magistrate Judge Staples also “credit[ed] Dr. Hass’ opinion that K.J. . . . and Mr. and Mrs. J. all love each other very much and that removal of [K.J.] from their care would have a significant negative emotional impact on [her].” At the time of trial, K.J. still did not wish to visit her biological father, L.M.J. The trial court admitted testimony from Lisa Larabee, K.J.’s therapist, in which she stated that K.J. told her multiple times that she wished to be adopted by the J.s. K.J.’s guardian ad litem “also filed his support of the proposed adoption.” On February 26, 2015, Magistrate Judge Staples issued a written Order that waived consent to the adoption because there was clear and convincing evidence that L.M.J. and C.J. were withholding their consent contrary to K.J.’s best interest. See D.C. Code § 16-304(e) (2012 Repl.). In his Findings of Fact and Conclusions of Law, Judge Staples weighed the factors listed in D.C. Code § 16-2353(b)(1-4) (2012 Repl.), which provide grounds for determining whether it is in the child’s 6 best interest to terminate the parent-child relationship. However, he made no express finding that L.M.J. and C.J. were unfit parents. A final decree of adoption was issued on November 17, 2015. L.M.J. and C.J. both filed motions for review of the magistrate judge’s order. L.M.J. argued that his fundamental rights as a parent were violated when the magistrate judge waived his consent to the adoption. He claimed he had “grasped his opportunity interests” and was “therefore entitled to a legal presumption in favor of maintaining his parental relationship with K.J.” Associate Judge Heidi M. Pasichow concluded on review that the magistrate judge did not violate L.M.J.’s constitutionally protected parental rights by waiving his consent to the adoption. She observed that “the record . . . demonstrate[d] that [L.M.J.] desire[d] to form a relationship with K.J., but that he [did] not wish to carry the responsibilities that adhere in being K.J.’s parent.” Although “the termination of [L.M.J’s] parental rights [was] a drastic remedy, the ‘wait and see’ alternative—indefinitely deferring adoption of K.J. while she cycles through the foster care system—[was] not a viable one as it is contrary to the child’s best interests.” After acknowledging the preference in adoption proceedings for a fit unwed father who has grasped his opportunity interest, Judge Pasichow determined 7 that L.M.J.’s parental rights could still be terminated if there was clear and convincing evidence that the proposed adoption was in K.J.’s best interest. 1 On December 20, 2016, she issued an Order affirming the decision of the magistrate judge. L.M.J. now appeals. The biological mother, C.J., did not file an appeal. II. Standard of Review “We review a trial court’s determination in a proceeding to terminate parental rights (TPR) and waive a natural parent’s consent to adoption for abuse of discretion.” In re S.L.G., 110 A.3d 1275, 1284 (D.C. 2015). “[O]ur task is to ensure that the trial court has exercised its discretion within the range of permissible alternatives, based on all relevant factors and no improper factor.” Id. (internal quotation marks and citation omitted). Moreover, the trial court’s decision must be “supported by substantial reasoning drawn from a firm factual foundation in the record.” In re J.C.F., 73 A.3d 1007, 1012 (D.C. 2013) (quoting 1 Judge Pasichow quoted from In re Baby Boy C, 630 A.2d 670, 682 (D.C. 1993) (Although the District of Columbia’s adoption statute incorporates “a preference for a fit unwed father who has grasped his constitutionally protected opportunity interest . . . [t]his preference may be overridden if it is shown by clear and convincing evidence that the proposed adoption is in the best interests of the child . . . for that interest is the paramount consideration.”) (alterations and omissions in original). 8 In re C.L.O., 41 A.3d 502, 510 (D.C. 2012)). We treat “the magistrate judge’s factual findings as the findings of the trial judge and review for abuse of discretion or a clear lack of evidentiary support. As to alleged errors of law, however, we review the record de novo, without deference to the judges below.” In re C.L.O., 41 A.3d at 510 (internal quotation marks and citation omitted). III. The Presumption in Favor of a Natural Parent In contested adoption cases where a parent seeks custody, we recognize a presumption that a child’s best interest is served by placing her with her natural parent, provided the parent is not proven unfit. In re S.L.G., 110 A.3d 1275, 1285 (D.C. 2015). “This presumption in favor of the natural parent is a strong one that reflects and reinforces the fundamental and constitutionally protected liberty interest that natural parents have in the care, custody, and management of their children.” Id. at 1286 (citing Troxel v. Granville, 530 U.S. 57, 65-66, 68-69 (2000)). Appellant primarily complains that the trial court did not properly apply this presumption — that it terminated his parental rights without first making a finding 9 of unfitness. 2 To support his argument that the trial court skipped a crucial step, appellant cites our decision in In re Ta.L., 149 A.3d 1060, 1081 (D.C. 2016) (en banc), where we stated “that the presumption in favor of a fit parent’s right to raise his or her children must be rebutted by a finding of parental unfitness before the trial court can make the ultimate determination to terminate a biological parent’s rights to raise his or her children.” As we will demonstrate, however, this general requirement does not mean that every natural parent automatically qualifies for the presumption (sometimes called a preference). The “mere existence of a biological link,” Lehr v. Robertson, 463 U.S. 248, 261 (1983), does not entitle a parent to the presumption. Instead, such a link presents an opportunity which the parent must grasp. Id. at 261-62; Appeal of 2 Two important decisions of this court stressing the importance of explicit or implicit findings of unfitness were issued after the magistrate judge’s findings of fact and conclusions of law were filed. See In re S.L.G., 110 A.3d 1275 (D.C. 2015) (decided March 5, 2015); In re Ta.L., 149 A.3d 1060 (D.C. 2016) (en banc) (decided December 8, 2016). 10 H.R., 581 A.2d 1141, 1160 (D.C. 1990). 3 After focusing more closely on the nature of the presumption, we hold that appellant should not benefit from it for two separate reasons: he does not seek “an actual relationship of parental responsibility,” Lehr, 463 U.S. at 260, and he failed to grasp his opportunity to be a father. A. Appellant Does Not Benefit From the Parental Presumption Because He Does Not Seek To Assume the Responsibilities of a Parent. Undergirding this preference is the recognition that a biological parent has the “right to raise” or “parent his or her child.” In re Ta.L., 149 A.3d at 1081 (emphasis added) (citing Stanley v. Illinois, 405 U.S. 645, 651 (1972)). Thus, we consistently characterize the preference as a “presumptive right to custody” or a “custodial preference,” indicating that a parent must seek actual or legal custody of 3 In Lehr, 463 U.S. at 262, the Supreme Court distinguished between the rights of a parent with a mere biological connection to the child and those of a parent linked to the child by both biology and action: The significance of the biological connection is that it offers the natural father an opportunity that no other male possesses to develop a relationship with his offspring. If he grasps that opportunity and accepts some measure of responsibility for the child’s future, he may enjoy the blessings of the parent-child relationship and make uniquely valuable contributions to the child’s development. If he fails to do so, the Federal Constitution will not automatically compel a state to listen to his opinion of where the child’s best interests lie. 11 his child in order to benefit from it. See, e.g., Appeal of H.R., 581 A.2d at 1173 (Ferren, J., concurring) (“[A]n unwed, noncustodial father who has not lost his opportunity interest has maintained a sufficient connection with his child to receive the custodial preference—the presumptive right to custody . . . .”); In re S.M., 985 A.2d 413, 417 (D.C. 2009) (describing this preference as “a custodial preference for a fit parent”). In other words, “the rights of the parents are a counterpart of the responsibilities they have assumed.” Lehr, 463 U.S. at 257. The Supreme Court vividly illustrated this principle in Quilloin v. Walcott, 434 U.S. 246 (1978), where the natural father argued that “he was entitled as a matter of due process and equal protection to an absolute veto over adoption of his child [by the husband of the child’s mother], absent a finding of his unfitness as a parent.” Id. at 253. Unlike appellant, Mr. Quilloin was not a stranger to his child; he had provided some financial support and had visited him on many occasions. Id. at 251. He “attempted to block the adoption and to secure visitation rights, but he did not seek custody or object to the child’s continuing to live with appellees.” Id. at 247. The Court recognized that “the relationship between parent and child is constitutionally protected” and “[i]t is cardinal . . . that the custody, care and 12 nurture of the child reside first in the parents . . . .” Id. at 255 (emphasis added). However, this was “not a case in which the unwed father at any time had, or sought, actual or legal custody of his child” and the result of adoption by the child’s stepfather would “give full recognition to a family unit already in existence . . . . ” Id. at 255. The Court held that the natural father’s constitutional rights were not violated by granting the adoption over his objection, based on a “best interests of the child” standard, without first finding him unfit. Id. at 254-56. Similar to the natural father in Quilloin, “[appellant] has not asked for K.J. to be placed in his care and instead opposes the adoption because it may jeopardize his ability to form a relationship with K.J.” But Quilloin teaches that this is not enough. To successfully oppose an adoption petition, a biological parent must do more than express a desire “to form a relationship” with his offspring; he must seek to shoulder “significant responsibility with respect to the daily supervision, education, protection, or care of the child.” Id. at 256. We agree with our dissenting colleague that cohabitation is not the only way to participate in raising or parenting a child, post at 34 n.14, but appellant has not even presented a plan for accepting “some measure of responsibility for the child’s future.” Lehr, 463 U.S. 13 at 262. 4 For this reason alone, he is not entitled to the presumption in favor of a fit natural parent. Thus, there was no “need for a threshold determination,” In re S.L.G., 110 A.3d at 1288, that the parental presumption had been rebutted. B. Appellant Does Not Benefit from the Presumption Because He Did Not Grasp His Opportunity Interest. The trial court “will invoke the presumption or preference in favor of a fit, unwed, noncustodial father only when the court finds that he timely grasped his constitutional ‘liberty’ interest—now commonly called his ‘opportunity interest’— protected by due process.” In re C.L.O., 41 A.3d at 511 (emphasis added; footnotes omitted); see also In re S.M., 985 A.2d at 417 n.7 (“[N]oncustodial fathers are entitled to the presumption in favor of a fit parent only after they have ‘grasped’ their ‘opportunity interest’ . . . .”) (citation omitted). A biological father who does not grasp this opportunity does not benefit from the parental presumption and therefore is not entitled to the finding of unfitness required to rebut it. See In re S.G., 581 A.2d 771, 787-88 (D.C. 1990) 4 Although appellant “asked that his grandmother and aunt, who live together, be considered as a placement option for K.J.,” “the grandmother stated she did not want to be considered as a placement” and appellant offered no alternatives. 14 (Rogers, C.J., concurring) (“[W]hat might have presented a problem had the natural father grasped his opportunity interest, namely, that the judge never made any findings regarding the father’s fitness . . . , is not present here.”). Although neither the magistrate judge nor the associate judge expressly decided whether appellant had grasped his opportunity interest, a remand is not required. “[B]ecause the question of whether [appellant] grasped his opportunity interest is a question of ultimate fact, meaning a question of law, we are empowered to answer that question by marshaling subsidiary facts found by the magistrate judge (to which we defer in the absence of clear error).” In re C.L.O., 41 A.3d at 519 (Ferren, J., concurring). Based on our case law and the facts found by the magistrate judge, we conclude as a matter of law that appellant did not grasp his opportunity interest. Appellant argues to the contrary—that he “did all he could reasonably be expected to do in order to grasp his opportunity interest.” For example, appellant claims, without offering any proof (recall that appellant did not testify), that after first being told that he was K.J.’s father (sometime in 2010 or 2011), he attempted to contact the agency to get information about her. Appellant also argues that, once a paternity test confirmed that he was K.J.’s father (in 2014), he “did all he could do under the circumstances” to assert his parental rights and meet K.J. He 15 met with K.J.’s social worker, Rochelle White, and requested visits with his daughter. After visitation was denied because K.J. did not want to meet him, appellant wrote letters to K.J., hoping to develop a relationship with her. Our cases demand much more. “[A] natural father who fails promptly to assert his opportunity interest in developing a relationship with his child may forever lose that interest.” Appeal of H.R., 581 A.2d at 1161 (Ferren, J., concurring) (discussing Lehr, 463 U.S. at 261-63 (emphasis added)). Previous statements by this court indicate that a father’s opportunity to grasp his interest could start as soon as “he learn[s] of the pregnancy and birth.” In re C.L.O., 41 A.3d at 522 & n.17 (Ferren, J., concurring) (stating father should have asserted his custodial rights “as soon as he learn[ed] of the pregnancy and birth” and knew it “might have been a possibility” the child was his). However, the record does not establish that appellant knew about C.J.’s pregnancy, and C.J. testified that she lost contact with him during the first few years of K.J.’s life. On this record we therefore do not fault appellant for failing to act as soon as K.J. was born. 16 Nevertheless, in 2010 or 2011 C.J. met appellant “by chance in the community and told him he was K.J.’s father.” During this meeting she gave appellant a picture of K.J. which he kept. Despite learning that he had a daughter, the trial court found, appellant “did not ask [C.J.] to meet or otherwise contact K.J.” Appellant also received notice of the pending adoption proceeding, which named him as K.J.’s father, on September 5, 2013. However, it was not until July 2014, after he received the results of the paternity test, that appellant first reached out to the agency and asked for information about K.J. His counsel claims that appellant called the agency multiple times between 2011 and 2014, but appellant presented no evidence of these contacts. Although appellant expressed a desire to form a relationship with K.J. after the paternity test, this three-year gap indicates that appellant did not promptly assert his opportunity interest. 5 Even if appellant reached out to the agency earlier than 2014, and even if his delay could be excused because of the initial uncertainty about the identity of K.J.’s father, we still conclude that appellant has not “done all that he could reasonably have been expected to do under the circumstances to pursue [his 5 In her opening statement during trial, appellant’s counsel indicated that appellant’s “visitation was limited by the fact that he was not biologically determined to be K.J.’s father.” However, the trial court determined “there was no evidence presented at trial of such a limitation.” 17 opportunity] interest.” Appeal of H.R., 581 A.2d at 1162-63; see also In re J.F., 615 A.2d 594, 597 (D.C. 1992) (natural father grasped his opportunity interest because he “provided a home for [his son] . . . during the first part of his life” and “continued to provide financial support” even after mother left and took the child from father’s home); In re M.N.M., 605 A.2d 921, 926-27 (D.C. 1992) (where unwed teenage mother took newborn child to the District of Columbia, placed her for adoption, and would not reveal child’s location, father timely “asserted his paternity and the right to assume the obligations of fathering” his child by “pursu[ing] the only means available to him to learn the child’s whereabouts and prevent an adoption—filing [a paternity and custody] suit” in St. Louis one week after the child’s birth). Compare In re W.D., 988 A.2d 456, 459-62, 465 (D.C. 2010) (holding that mother did not grasp her opportunity interest because she was not a “consistent [] presence in [her daughter’s] life,” did not “assist with . . . [her daughter’s] care,” and did not appear at the adoption hearing), with In re A.C., 597 A.2d 920, 927 (D.C. 1991) (although the natural father had met the child and appeared at multiple hearings, he had failed to grasp his opportunity interest because he “never seized the full panoply of interactions, characteristics and attendant responsibilities which define the parent and child relationship”) (internal quotation marks omitted). 18 The trial court found that appellant “has not played any role in [K.J.’s] life.” It also noted that appellant did “not want to care for K.J. at this time” and “argues that the adoption should not be granted because it may jeopardize his ability to form a relationship with [her].” No evidence showed that appellant had physically, emotionally, or financially cared for K.J. in any way. Indeed, at the time of the adoption trial, appellant had never even met eight-year-old K.J. and was “in the process of writing letters to introduce himself to her.” While the Supreme Court has established that a court may not terminate the rights of a biological father contesting an adoption without first giving him an opportunity to be heard, Stanley v. Illinois, 405 U.S. 645, 655 (1972), in this case, appellant has no grounds on which to complain that he suffered a due process violation. He was given notice of the trial, and attended most of it, and the court appointed counsel to represent him. Nevertheless, appellant did not testify, present witnesses, or express any desire, much less a plan, to assume his responsibilities as a parent. It is this latter failure that conclusively shows appellant’s failure to grasp his opportunity interest. We agree with appellees: “If there was ever a time to assert your interests, the adoption trial was it, but L.M.J. failed to do so.” To be sure, 19 appellant’s counsel forcefully argued that he “wants the adoption to be denied so that . . . he could work on developing a relationship with his child.” But opposing adoption (and the consequent termination of parental rights) is not the same thing as grasping the opportunity to be a parent to your child. And counsel candidly acknowledged “we don’t know where it will go[.]” See In re J.L., 884 A.2d 1072, 1078 (D.C. 2005) (“wait and see” approach strongly disfavored by public policy and federal legislation). Nor is it enough that appellant may have “had a genuine interest” in getting to know his daughter. Post at 36. Based on the facts found by the magistrate judge and the cases discussed above, we conclude as a matter of law that appellant failed to grasp his opportunity interest. 6 For this reason as well, he was not entitled to the 6 In In re D.S., 88 A.3d 678, 692 (D.C. 2014), we remanded because neither the magistrate judge nor the associate judge had fully considered the parental presumption when deciding to commit the children to the care of the Child and Family Services Agency. Id. at 697. Furthermore, the record, “with its many unanswered questions and yet-to-be-investigated facts, d[id] not demonstrate that the court could have readily made . . . findings” that the natural father had failed to grasp his opportunity interest or that he was an unfit parent. The record indicated instead that the “father had been involved in the children’s lives, that the children spent weekends with him, that they viewed themselves as having two homes,” and that the father “repeatedly requested immediate release of [the] children into his custody.” Id. at 682, 692. In contrast to appellant’s case, the record in In re D.S. demonstrated that the natural father had played a significant role in the children’s lives and clearly desired to take custody of them. 20 parental presumption or to the finding of unfitness ordinarily required to rebut it. 7 IV. Adoption Was in K.J.’s Best Interest. Finally, appellant argues that, regardless of whether he was entitled to the presumption in favor of a fit parent, the trial court still lacked “a sufficient basis on which to base the waiver of [his] consent” and abused its discretion by granting the J.s’ petition to adopt. We disagree. Although appellant had nothing more than an inchoate relationship with K.J., he received notice, a hearing, representation by counsel, and the full benefit of our statutes governing adoption and the termination of parental rights. A petition for adoption generally cannot be granted without the agreement of both parents, but consent may be waived if a parent withholds it contrary to the best interest of the child. D.C. Code § 16-304(e). “Because granting an adoption without the natural parent’s consent necessarily terminates the parent’s rights,” the 7 “Broadly speaking, . . . fitness refers to the parent’s intention and ability over time to provide for a child’s wellbeing and meet the child's needs. The question of fitness turns, in other words, on ‘whether the parent is, or within a reasonable time will be, able to care for the child in a way that does not endanger the child's welfare.’” In re S.L.G., 110 A.3d at 1286-87 (quoting In re Rashawn H., 937 A.2d 177, 191 (Md. 2007)). 21 court must weigh the termination of parental rights (“TPR”) factors listed in D.C. Code § 16-2353(b). In re Ta.L., 149 A.3d at 1072. “After careful consideration of these factors,” Magistrate Judge Staples found clear and convincing evidence that appellant was “withholding [his] consent[] to the proposed adoption contrary to the best interests” of K.J. 8 Appellant had neither met K.J. nor “played any role in her life” and did “not want to care for [her] at this time.” Conversely, the J.s provided the “only real stability” K.J. had ever known and removing K.J. from their home would “cause [her] severe emotional trauma.” Moreover, K.J. did not desire to meet appellant and wanted to be adopted by the J.s. Judge Pasichow also noted on review that, “while the termination of [L.M.J.’s] parental rights [was] a drastic remedy, the ‘wait and see’ alternative—indefinitely deferring adoption of K.J. while she cycles through the foster care system—[was] not a viable one as it is contrary to [K.J.’s] best interests.” See, e.g., In re J.L., 884 A.2d 1072, 1078 (D.C. 2005); In re L.L., 653 A.2d 873, 887-88 (D.C. 1995). 8 “Where a biological parent declines to consent to a proposed adoption, the prospective adoptive parent must ordinarily show by clear and convincing evidence that consent is being withheld contrary to the child’s best interest.” In re C.L.O., 41 A.3d at 511 (citing In re J.G., 831 A.2d 992, 999 (D.C. 2003)). 22 A court may enter a final decree of adoption when it is satisfied that the factors set out in D.C. Code § 16-309(b) (2012 Repl. & 2020 Supp.) are met. Judge Staples found that the J.s were “fit and proper people to adopt” K.J. and that K.J. was “suitable for adoption by” the J.s. The J.s “have remained a constant part of [K.J.’s life] for more than 5 years” and have “provided the only real stability for [her] in a life otherwise marked with indifferent and inconsistent care.” Judge Staples also analyzed the TPR factors and determined that adoption by the J.s was in the best interests of K.J. The J.s are “fierce advocates” for K.J.’s well-being and love her “immensely.” They also work with K.J.’s “medical and mental health providers to provide consistent and appropriate services” for her special needs. The trial court found that K.J. had “significant emotional needs” and that the J.s had the “ability to meet those needs” and were “physically and emotionally healthy and able” to care for K.J. K.J. is “fully integrated into the home of Mr. and Mrs. J.” and considers their “biological children to be [her] brothers and the J.’s parents to be [her] grandparents.” On this record we readily conclude that the Superior Court did not abuse its discretion by terminating appellant’s parental rights and granting the J.s’ adoption petition. 23 V. Conclusion Appellant was not entitled to the presumption in favor of a fit parent or to the finding of unfitness ordinarily required to rebut that presumption. There is clear and convincing evidence that the waiver of appellant’s consent and adoption by the J.s were in the best interests of K.J. Therefore, the judgment of the Superior Court is hereby. Affirmed. BECKWITH, Associate Judge, dissenting: The trial court in this case terminated L.M.J.’s parental rights with respect to his biological daughter, K.J., based solely on the statutory best-interest factors—that is, on the ground that L.M.J. was withholding his consent to the foster parents’ adoption of K.J. contrary to K.J.’s best interest. 1 It reached this conclusion without making the fitness finding to which a biological parent facing termination of rights is constitutionally 1 D.C. Code § 16-2353(b) (2012 Repl.). 24 entitled, absent exceptional circumstances. 2 The majority, while acknowledging the trial court’s failure to evaluate and rule on L.M.J.’s fitness, nonetheless affirms the termination of L.M.J.’s parental rights because, in my colleagues’ view, fit or not, L.M.J. failed to grasp the “opportunity that no other male possesses to develop a relationship with his offspring” and therefore had no such constitutionally protected interest in the first place. Ante at 10 & n.3 (quoting Lehr v. Robertson, 463 U.S. 248, 262 (1983)). The majority reaches this conclusion even though, as with fitness, the trial court did not rule on the opportunity-interest issue either and did not question that L.M.J. was fit to parent K.J. or that he had grasped that interest. Because the majority sidesteps the constitutional protection for fit parents by imposing a stringent opportunity- interest condition that was not the basis of the trial court’s ruling and that is a mismatch for the circumstances of this case, I respectfully dissent from the majority’s decision to affirm the termination of L.M.J.’s parental rights. This case raises questions about the consistent application of our doctrines that allow a court to grant an adoption over a biological parent’s objection, without 2 In re Ta.L., 149 A.3d 1060, 1081–83 (D.C. 2016) (en banc); see also In re J.B.S., 237 A.3d 131, 143 (D.C. 2020) (en banc) (stating that “parental ‘fitness,’” though not statutorily defined, “refers to the parent’s intention and ability over time to provide for a child’s wellbeing and meet the child’s needs”) (quoting In re S.L.G., 110 A.3d 1275, 1286–87 (D.C. 2015)). 25 a finding that the parent was unfit, after determining as a threshold matter that the parent had surrendered whatever liberty interest he had in raising his child. The well-known “Baby Richard” and “Baby Jessica” cases exemplify the sort of traumatic result that can occur when a presumptively fit and largely blameless biological parent who has never met his child appears late in the game seeking to scuttle or even delay an adoption, and when a court honors that parent’s right to withhold consent to that adoption. 3 The circumstances here—particularly the signs in the record that L.M.J. and the foster parents would likely allow each other to maintain or develop a relationship with K.J. regardless of the result at trial—make this case less potentially dramatic than the Baby Richard and Baby Jessica cases. But like those cases, this case underscores the tension between the imperative of 3 In these two cases, courts ultimately removed children from the adoptive parents’ care—despite persuasive arguments that adoption was in each child’s best interest—and placed them with their fit biological fathers who had previously been out of the picture. In the Interest of B.G.C., 496 N.W.2d 239, 241, 245 (Iowa 1992) (ordering a transfer of custody to the newly discovered biological father, even though the adoptive couple had custody “virtually from the time of [the child’s] birth” and had “provided exemplary care for the child”); In re Petition of Doe, 638 N.E.2d 181, 182 (Ill. 1994) (concluding that where the father had not learned of his newborn child’s existence until after adoption proceedings began, “the father had no opportunity to discharge any familial duty” and his “preemptive rights to [his] own children” could not yet be terminated on best-interest-of-the- child grounds); id. at 185 (McMorrow J., concurring) (quoting In re Petition of Doe, 627 N.E.2d 648, 653 (Ill. App. Ct. 1993)) (“[T]he only parents that [the child] has ever known are John and Jane Doe. . . . [H]e is totally unaware of the existence of his biological parents.”) (cleaned up). 26 finality for children who may have spent years in the foster-care system 4 and a biological parent’s fundamental constitutional right to have his parental rights terminated only upon a finding that he is unfit to parent his child. In re Ta.L., 149 A.3d at 1081–83; see also Santosky v. Kramer, 455 U.S. 745, 753 (1982); Stanley v. Illinois, 405 U.S. 645, 651–52 (1972). Although adoption challenges by a fit parent who has never met his child are not common, their potential for harsh-seeming consequences has nonetheless prompted a number of proposals that seek to mitigate such outcomes while still respecting biological parents’ constitutional rights to develop and maintain relationships with their children. Some states have created putative father registries by which a father’s legal rights—such as the right to notice of an impending adoption of his biological child—are conditioned on his filing a claim of possible paternity with the state’s registry. See, e.g., Lehr, 463 U.S. 248. One scholar has proposed a type of adoption that is accomplished without terminating the rights of biological parents in certain limited circumstances. See David D. Meyer, Family Ties: Solving the Constitutional Dilemma of the Faultless Father, 4 See In re M.N.M, 605 A.2d 921, 925 (D.C. 1992) (“This case presents a conflict between the powerful demand for finality in adoption proceedings reflected in D.C. Code § 16-310 and a serious apparent defect in the adoption order, namely, the failure to give notice of the pendency of the adoption proceedings to the putative natural father.”). 27 41 Ariz. L. Rev. 753, 813–22 (1999). 5 And a New York Court of Appeals judge articulated a judicious balancing approach in a case in which a blameless biological father sought to unravel a 10-month-old adoption. In an oft-cited concurrence in Robert O. v. Russell K., 604 N.E.2d 99 (N.Y. 1992), Judge Vito Titone determined that although the late-arriving biological father “had no realistic opportunity to manifest his parental commitment and, accordingly, cannot be treated as though he knowingly relinquished that opportunity,” that interest “simply cannot be accommodated without sacrificing the paramount State interest in finality.” Id. at 106–07 (Titone, J., concurring). 6 In the absence of such legislative initiatives or pointed case law, we are left to apply our law as it exists. That normally means that unless L.M.J. was found to 5 In this alternative model of adoption, “the adoptive parents would gain custody, full decision-making authority over the child, and full status as parents while the biological parent would retain a right to visit and communicate with the child but not to seek custody except under exceptional circumstances.” Id. at 822. 6 Judge Titone proposed in his concurrence that the court should have recognized that the father had a “constitutionally cognizable interest in a parental relationship with his biological child,” but weighed that interest against the state’s countervailing interest in ensuring the finality of adoptions. Id. As one scholar pointed out, “both Justice Titone and Justice Stevens [in his dissent in Caban v. Mohammed, 441 U.S. 380 (1979)] seem to suggest that the better view in some of these cases is that the rights of the biological father can be overridden, not that the biological father simply does not have protected rights.” Mark Strasser, The Often Illusory Protections of “Biology Plus:” on the Supreme Court’s Parental Rights Jurisprudence, 13 Tex. J. on C.L. & C.R. 31, 63 (2007). 28 be unfit, he had a “constitutionally cognizable interest” 7 in his relationship with K.J., and that “parent and child relationship” should not have been “completely sever[ed] and extinguishe[d]” through the termination of his parental rights. See D.C. Code § 16-2352. If there is a question as to his fitness, or if, as here, the trial court granted an adoption and terminated parental rights without first determining that the biological parent was unfit, this court should remand to allow the trial court to hold a fitness hearing. See, e.g., In re S.L.G., 110 A.3d at 1290–91. While this court has allowed for the possibility of “truly exceptional circumstances” in which a parent’s rights might be terminated without a fitness determination, see In re Ta.L., 149 A.3d at 1088, no one is suggesting this case rises to whatever level that may be, see In re S.L.G., 110 A.3d at 1291 (Newman, J., concurring) (stating that his “fertile imagination” was “not able to postulate a realistic factual situation where a ‘fit’ parent can be properly deprived of parental rights based on ‘the best interest of the child’”); see also In re J.B.S., 237 A.3d 131, 143 (D.C. 2020) (en banc). The majority here avoids giving effect to a biological parent’s right to a fitness finding by deciding that L.M.J. had no liberty interest in developing a relationship with his child to begin with. Even setting aside the fact that the trial 7 See Robert O., 604 N.E.2d at 106 (Titone, J., concurring). 29 court did not rule on opportunity-interest grounds, the doctrine has no coherent application in the circumstances of this case and amounts to an end run around the presumption in favor of a fit biological parent. 8 There is a good reason—in fact many good reasons—the trial court in this case appeared to assume that L.M.J.’s opportunity interest remained intact. 9 For four years, from the beginning of the neglect case in 2009 until after the adoption proceedings commenced in 2013, K.J.’s biological mother, C.J., had maintained 8 Professor Meyer observed that although many states have sought to facilitate adoptions by expanding concepts like abandonment and “step[ping] up their demand on unwed fathers who wish to assert parental rights,” he doubted that courts would “permit this strategy to effect an end-run around the constitutional ‘unfitness’ requirement.” Meyer, supra, at 788 (discussing those courts that “have held that the Constitution will not permit states to construct statutory schemes that effectively railroad blameless fathers out of their children’s lives”). 9 The magistrate judge, for example, contrasted L.M.J.’s situation with that of K.J.’s brother’s biological father, whose consent was not required because he had abandoned K.J.’s brother. In determining that L.M.J. and K.J.’s biological mother, C.J., had waived their consent, the court implicitly rejected any claim that L.M.J. had not grasped his opportunity interest. Put differently, the magistrate judge need not have reached the consent-waiver issue if it had concluded that L.M.J. had not grasped his opportunity interest as the majority today suggests. And on appeal from that order, the associate judge recognized the preference for “a fit unwed father who has grasped his constitutionally protected opportunity interest,” In re Baby Boy C., 630 A.2d 670, 682 (D.C. 1993), and went on to find that preference rebutted with a showing by clear and convincing evidence that the adoption was in the child’s best interest. The associate judge thus concluded— contrary to our case law—that as long as the best interest factors favored adoption, L.M.J.’s rights could properly be terminated regardless of his fitness and “regardless of any attempts he has made to ‘grasp’ his opportunity interest.” 30 through sworn affidavits and various court filings that a different man, A.P., was the girl’s biological father. Once DNA tests precluded A.P.’s paternity and confirmed that L.M.J. was K.J.’s father, L.M.J. promptly sought to be in K.J.’s life, taking every step he could to form a relationship with his daughter. He contacted the Department of Child and Family Services, requested visits with K.J., met with her social worker and therapist, wrote her letters, brought his mother and sister to team meetings with the other participants in K.J.’s case, and came forward to contest the adoption that would sever the father-daughter relationship before it ever began. He also met with Mrs. J., K.J.’s foster mother (and now adoptive mother), who compared L.M.J. favorably to K.J.’s brother’s essentially uninvolved father. In that regard, Mrs. J. testified that she made a point of talking to K.J. about her biological father because L.M.J. was “active” and Mrs. J. knew “he want[ed] to see her”: “That’s the reason I told her,” and “she wouldn’t know either” if L.M.J. “wasn’t that active or trying to see her.” Mrs. J. had also met L.M.J.’s mother and sister and approved of K.J.’s visiting with them as well as with L.M.J., stating that she was “not trying to keep [K.J.] away from her father . . . or her grandparents.” The majority nonetheless concludes that L.M.J. relinquished his parental rights by not stepping forward sooner, in 2010 or 2011—before DNA testing established his paternity—when he had a chance meeting with K.J.’s mother, C.J., 31 in which C.J. gave him a photograph of K.J. 10 Ante at 16–17. C.J.’s statement to L.M.J. that the girl in the photo might be his daughter was starkly contradicted by C.J.’s multiple sworn affidavits declaring that A.P. was the father and that no one else could be the father. 11 That declaration was still in force after the adoption petition was filed in April 2013, and C.J. testified at trial that at the time she signed the sworn affidavit, she “did believe that” A.P. was the father. In addition, this court has recognized “the limitations state action can impose on a noncustodial father once the child is placed with another family,” Appeal of H.R., 581 A.2d 1141, 1162 (D.C. 1990), and by the time L.M.J. and C.J. had run into each other, K.J. had already been in the custody of the Child and Family Services Agency (CFSA) for at least a year and was living with another foster parent. All the other participants in the previous neglect case and initial adoption 10 It is undisputed that C.J. did not inform L.M.J. prior to this point that she had given birth in 2006, and the majority notes that it does “not fault” L.M.J. “for failing to act as soon as K.J. was born.” Ante at 15. 11 The affidavit read: “My initials on the preceding line indicate I believe no one else could be the child’s father other than the person whose name appears immediately below and that I am unable to identify anyone else who could be the child’s father.” C.J.’s initials appeared on the line preceding the statement and A.P.’s name appeared on the line below the statement. In the next section, which instructed: “Complete if the biological mother is unsure about the identity of the biological father,” C.J. filled out nothing. 32 proceedings were working under the assumption that A.P. was K.J.’s father, 12 and it is reasonable to expect that any overtures on L.M.J.’s part would have encountered the same hurdles L.M.J. encountered after C.J. named him as the father but before his paternity was confirmed by DNA testing. 13 Concerns over K.J.’s own well-being also counseled against acting on speculative information that conflicted with sworn affidavits identifying someone else as her father. As K.J.’s foster mother testified, the uncertainty about K.J.’s father’s identity “was confusing to her,” and K.J.’s therapist testified that “this was a surprise to her” and “a change in . . . what she had known.” In these circumstances, the publicly controverted statement C.J. made to L.M.J. in 2010 or 2011 cannot meaningfully detract from L.M.J.’s ardent effort to maintain his parental rights once he learned C.J. formally named him as the father. 12 As the foster mother described the situation after A.P. was precluded as the father and L.M.J.’s paternity was confirmed, “dad just came in the picture” and “didn’t know he had a child.” The social worker, Rochelle White, mentioned in her testimony that she and others assumed someone else was K.J.’s father and that she did not know L.M.J. was her father until July of 2014. 13 Before his paternity was established, L.M.J. was not permitted to visit his daughter. Rochelle White, the social worker, testified that once DNA testing had confirmed the relationship, the “team” would not grant L.M.J.’s requests to visit K.J. until they received input from Ms. Dodge, the therapist. After L.M.J. met with Ms. Dodge, she approved visitation, but K.J.’s refusal to meet him led to a letter-writing plan to allow K.J. to get to know L.M.J. 33 With respect to the majority’s alternative contention that L.M.J. was disqualified from preserving his parental rights because he did not seek custody of K.J., see ante at 10–13, it is unclear, as an initial matter, whether this purported failing is a subset of the opportunity-interest doctrine or a distinct requirement. In any event, this argument rests on a mistaken factual premise and also has no legal footing, at least as the majority envisions its application to this case. As a factual matter, Rochelle White, the social worker assigned to the case, testified that L.M.J. was, in fact, “interested in having K.J. in his home or in his care” when she was asked whether he “ever express[ed] an intention of obtaining custody of his daughter.” L.M.J.’s acknowledgement that immediate removal of his daughter from her foster home would be ill-advised did not demonstrate a lack of interest in taking “some measure of responsibility for the child’s future.” Lehr, 463 U.S. at 262. It reveals instead that L.M.J. contemplated caring for K.J. and that he was realistic about the need to proceed gradually—a responsible approach given that he and K.J. did not know each other and that for the past several years her mother had formally named another man as her father. As counsel stated in closing arguments, L.M.J. had “every right to have [K.J.] placed with him,” but if the adoption were not granted her “placement [was] not going to immediately change.” In every respect, L.M.J. was acting in K.J.’s best interest. 34 As a legal matter, my colleagues’ view that L.M.J. was not entitled to the presumption favoring a biological parent because he did not seek “an actual relationship of parental responsibility” belies this court’s and the Supreme Court’s decisions, even if its factual premise were correct, which it is not. Parents who lose custody of their children as a result of neglect or abuse still retain a “fundamental liberty interest” in the care of those children. Santosky, 455 U.S. at 753. And many people enjoy parental rights, and are good parents, despite not having custody of or living with their children. 14 The phrases the majority extracts from the cases about a father’s “right to custody” and his right to “raise” or to “parent” his child do not amount to a requirement that an unwed father unequivocally request custody or involuntarily relinquish his rights as a biological parent. See Ante at 10–13. In circumstances in which the unwed father’s “opportunity . . . to shoulder the responsibility of parenthood may disappear before he has a chance to grasp it, no matter how willing he is to do so,” the better approach is to “acknowledge[] that in some instances the Constitution protects an 14 Cohabitation is of course not the only way to “raise” or “parent” a child, and the majority’s reliance upon cohabitation as a significant measure of “parental responsibility” casts into doubt the rights of unwed fathers in a range of common family arrangements—a military parent stationed abroad, a parent whose profession requires near-constant travel, separated biological parents living in different states, and so on. 35 unwed father’s opportunity to develop a relationship” with his child, whether or not that opportunity will lead to a custodial arrangement. See Robert O., 604 N.E.2d at 102. And finally, as to Quilloin v. Walcott, 434 U.S. 246 (1978), the case the majority most relies on in this regard, the Supreme Court held that due process was not implicated where the father had had eleven years to demonstrate his commitment to “significant responsibility with respect to the daily supervision, education, protection, or care of the child,” id. at 249, 256, and where he was challenging the child’s adoption into “a family unit already in existence” that included the child’s biological mother, id. at 255. Here, the people who sought to adopt K.J. were unrelated by birth and had been K.J.’s foster parents for just three months when they filed the adoption petition. L.M.J.’s paternity was confirmed after that petition was filed, and this presumptively fit biological father did everything he could reasonably do to protect his parental rights, including presenting a timely challenge to the J.s’ adoption of his daughter. Quilloin is in a wholly different category of cases and does not authorize the court’s termination of L.M.J.’s parental rights. As Judge Titone proposed in Robert O., we should decline to decide this 36 appeal based upon an exaggerated and unfair portrayal of L.M.J.’s purported failings as a father. We should not demonize someone who so plainly had a genuine interest in knowing his daughter and preserving their relationship. And while there might be cases, like Robert O. itself, where the challenge to the adoption comes so late that the rights of a blameless father must yield to the interest in finality, this is not such a case. Unlike in Robert O., where the biological father was challenging an adoption that had been final for almost a year, here the finality calculus favors L.M.J. He responded promptly to the notice of the adoption proceedings, which he received after a DNA test showed that A.P. was not K.J.’s father. That order indicated that he had “the right to seek custody of the child or to challenge the adoption,” and he accordingly took steps to oppose the adoption. Further, though K.J. had known her foster parents for years, she had lived with them for only a short time when they petitioned for adoption. That Mrs. J., K.J.’s foster mother, told K.J. that her father wanted to be in her life and encouraged K.J. to get to know him tends to support L.M.J.’s contention that it was not too late for him to become a parent to K.J. Because this is not a case where the urgency to finalize the adoption justifies terminating L.M.J.’s rights without determining that he was unfit and without giving him time to develop a relationship with his daughter, I would reverse the trial court’s order.	01-04-2023	03-18-2021
https://www.courtlistener.com/api/rest/v3/opinions/4624096/	D. & N. Auto Parts Company, Petitioner, v. Commissioner of Internal Revenue, RespondentD. & N. Auto Parts Co. v. CommissionerDocket No. 11445United States Tax Court8 T.C. 1192; 1947 U.S. Tax Ct. LEXIS 181; June 18, 1947, Promulgated 181 Decision will be entered under Rule 50. Petitioner succeeded in 1940 to a partnership as "component corporation" under section 740 (b) (5), Internal Revenue Code. Computation of base period net income, involved in determining excess profits tax credit, included calculation of reasonable compensation to the former partners. Held, that the amounts determined by the Commissioner were reasonable, that amounts allowable for computation of "earned income credit" under section 25 (a), Internal Revenue Code, do not control, and that the validity of the deficiencies and the burden of proof are not affected by determination by the Commissioner of the computation as a lump sum rather than for each partner. Nelson E. Taylor, Esq., for the petitioner.D. Louis Bergeron, Esq., for the respondent. Disney, Judge. DISNEY1193 This case involves declared value excess profits tax and excess profits tax for the fiscal years ending April 30, 1943 and 1944. Deficiencies were determined as follows:DeclaredTaxable year ended --value excessExcess profitsprofits taxtaxApril 30, 1943$ 96.54$ 11,722.92April 30, 194414.974,548.98The only question presented is as to the proper amount of certain salaries for officers in base period years, for the purpose of determining excess profits credit for the taxable years.FINDINGS OF FACT.The petitioner is a corporation, 183 organized May 1, 1940, under the laws of Mississippi, with its principal office at Greenwood, Mississippi. The returns for the fiscal years herein involved were filed with the collector for the district of Mississippi. (The petitioner's fiscal year ended on April 30. Hereinafter we refer to the year in which it ended as the fiscal year). Of petitioner's common stock of $ 100,000 par value, W. P. Manscoe and Louis Post each owned 49.5 per cent. Louis Post has at all times been president, and W. P. Manscoe was vice president until his decease about August 13, 1940. After his death his widow became the owner of his stock in the petitioner corporation. The corporation was the outgrowth of a partnership which had existed on an equal basis between Post and Manscoe since about 1917 and bore the same name as the petitioner corporation. Both partnership and corporation were engaged in the business of wholesale dealers in automotive parts and equipment. The principal reason for transferring the business from partnership to corporation was the incurable illness of Manscoe, from which he died soon afterward.Manscoe, in the fiscal year ended April 30, 1938, was actively in complete charge184 of the maintenance and service department of the business, including an equipment and sales department and installation of electric power plants and water pumps. In 1936 he fainted during an automotive show, and in May 1937 he had a heart attack. He was sick in 1938, but later for a while seemed better. He was a large man and hard working. His doctors found it hard to get cooperation from him. By the latter part of 1938 and early part of 1939 he was unable to put in full days at the place of business. His condition in 1939 was about the same as in 1938. Eventually, at some time undisclosed, his department, the service, shops, delco lights, had to close down. No one else could do his work except Post. He was incapacitated for a year before his death and was given blood 1194 transfusions two or three times during the latter part of 1939 and in 1940. About a year before his death he was diagnosed as having Hodgkin's disease, which is a wasting, malignant, incurable disease. It is not known how long it takes that disease to develop. After the corporation was formed May 1, 1940, he had no specific duties, for he was too ill for any specific position. He died at home. 185 The gross sales of the partnership, by fiscal years each ended April 30, were approximately as follows: 1937, $ 328,000; 1938, $ 298,000; 1939, $ 268,000; 1940, $ 300,000. For the same years net income reported was: 1937, $ 36,993.12; 1938, $ 22,226.71; 1939, $ 19,591.85; 1940, $ 28,631.31. The two partners drew no salaries, but each had a drawing account from which he drew $ 5,200 per year. For the corporation's fiscal year beginning May 1, 1940, for the period ended with his death Manscoe received $ 1,500 salary. During the fiscal year 1939 the partnership added a new store at Clarksdale, Mississippi, to the three already operated at Greenwood, Tupelo, and Cleveland, Mississippi. After May 1, 1940, a fifth store was started at Grenada, Mississippi.For the fiscal year 1937 each partner received $ 18,496.56, and Post claimed "earned income" credit upon 20 per cent, or $ 3,699.32. Each year thereafter each partner claimed "earned income" credit upon $ 3,000.For the fiscal year 1941 the petitioner filed, on July 15, 1941, an income tax and corporation excess profits tax return. The income tax return deducted officers' salaries of $ 6,700 as $ 5,200 for Post, $ 1,500 for Manscoe. 186 In computing excess profits tax credit the partners' salaries of $ 10,400 were shown for each year in the base period of four fiscal years, 1937, 1938, 1939, and 1940. Excess profits net income reported was $ 10,618.76, with excess profits credit of $ 13,684.12. The return, therefore, showed no excess profits tax due. The petitioner also filed, on July 6, 1942, its corporation income and excess profits tax return for the fiscal year 1942. Executive salaries of $ 12,100 were deducted on the income tax return. In computing excess profits tax credit partners' salaries of $ 10,400 were shown for each of the base period years, 1937-1940. Excess profits net income was shown as $ 20,776.78; and specific exemption, excess profits credit, and excess profits credit carry-over totaled $ 23,642.53. Therefore, no excess profits tax was shown due.On July 14, 1943, the petitioner filed its income and excess profits tax return for the fiscal year 1943. The income tax return deducted "administrative (L. Post)" $ 12,000. In computing excess profits credit partners' salaries in the base period were shown as $ 7,750.98 for the fiscal year 1937 and $ 6,000 for each of the remaining base period187 years. An excess profits tax of $ 3,735.92 was reported, by 1195 using unused excess profits credit of $ 7,639.28 from the fiscal years ended 1941 (computed by using partners' salaries of $ 7,750.98 for first base period year and $ 6,000 thereafter) and $ 21,274.20 excess profits credit for the current year. Excess profits net income reported was $ 38,014.50.On November 1, 1943, petitioner filed amended excess profits tax returns for the fiscal years 1941 and 1942, amending in each the computation of excess profits tax credit by using partners' salaries of $ 7,750.98 for the fiscal year 1937 and $ 6,000 per year for the remaining base period years, and arriving, for the fiscal year 1941, at an unused credit of $ 7,639.28 and no excess profits tax payable, and for the fiscal year 1942 arriving at a credit of $ 12,120.05 and no excess profits tax due.On July 13, 1944, petitioner filed its income and excess profits tax return for the fiscal year 1944. The income tax return deducted "administration (L. Post)" $ 12,125. Computation of excess profits tax credit was on the basis of partners' salaries in the base period, being $ 7,750.98 in the fiscal year 1937 and $ 6,000 in 188 the remaining base period years, resulting in excess profits tax due of $ 13,761.45 (as corrected, $ 13,750.76); excess profits net income reported was $ 42,940.64.The petitioner's tax returns for the taxable years and for a long time prior thereto were prepared by a certified public accountant upon whom it depended and in whom it had confidence.Executive salaries allotted by the Commissioner for the base period years compare with net earnings (before salaries considered) as follows: 1937, 28.32; 1938, 45.57; 1939, 54.74; 1940, 38.32. Average for the four years was 39.36 per cent. For the taxable years 1943 and 1944 the percentage was 22.73 and 21.53.The reasonable annual compensation for the partners in each base period year was $ 10,400.OPINION.The only question we have here is whether the Commissioner erred in computing excess profits tax for the taxable years by considering $ 10,400 per year the reasonable compensation of the partners during the base period years, in determining excess profits tax credit. The parties do not disagree as to the facts that the previous partnership was a component corporation within the meaning of section 740 (b) (1) (5), Internal Revenue Code, 189 and that computations are required under section 742 (g), Internal Revenue Code, as if the partnership were a corporation; and both rely upon Regulations 112, section 35.742-1 (b) (2), providing in pertinent part that among the adjustments necessary in computing excess profits net income or deficit are: "A reasonable deduction for salary or compensation to 1196 each partner or the sole proprietor for personal services actually rendered shall be allowed."The partners actually received $ 5,200 each in the taxable years by way of a drawing account, before division of partnership profits. The Commissioner used $ 10,400 in computing the excess profits tax credit. The petitioner, in its original excess profits tax returns for the fiscal years 1941 and 1942, also used $ 10,400, but after filing its return for 1943, on November 1, 1943, it filed amended returns for 1941 and 1942, using $ 6,000 for each of the last three base period years and $ 7,550.98 for the first base period year. These figures it had used in its excess profits tax return for 1943. The Commissioner determined deficiencies according to the difference in the figures used by him and petitioner.We first consider190 the petitioner's contention that the figures used by it are proper because they are the proper figures for "earned income" upon which "earned income credit" was based under the provision of section 25, Revenue Act of 1936, 1 and as applied to partners by sections 184 and 185, Revenue Act of 1936. The contention is, in short, that, since under section 25 (a) (4) 20 per cent of net profits shall be considered earned income when the taxpayer is engaged in a business where, as here, both personal services and capital are material income producing factors, and since such 20 per cent was $ 7,550.98 for 1937 and $ 6,000 for the remaining base period years (total for the two partners) that figure must be used in computing excess profits tax. To this the respondent replies that "earned income credit" under section 25 is not the criterion; that the section is a relief section, in the nature of an additional exemption for normal tax computation, to be used solely for that purpose. In our opinion the respondent's view is correct. Section 25 (a) is headed "Credits for Normal Tax Only" and states specifically "There shall be allowed for the purpose of the normal tax, but not for the surtax, 191 the following credits against the net income: * * " In subsection 4 it defines "Earned income" "For the purposes of this section." In the light of such provisions we think we may not, for the purpose of another portion of the statute, involving excess profits tax, limit the range of 1197 inquiry as to what is a reasonable deduction for salary or compensation merely to a computation of earned income under section 25, where clearly the matter is one of an exemption in the form of a credit. The fact that "earned net income" is arbitrarily set as not less than $ 3,000, or more than $ 14,000 indicates that the concept does not in general govern the question of fact as to what is reasonable compensation, which might be actually above or below that range. Obviously, under section 23 (a) (1) a salary under $ 3,000 or over $ 14,000 might be a reasonable deduction. The respondent's contention on the point is sustained.192 The petitioner contends also that the determination of deficiency is invalidated because it is based upon the allotment of executive salaries in the lump sum of $ 10,400 instead of separately to each partner, under the language of the regulation providing for adjustment by allowance of "a reasonable deduction for salary or compensation to each partner * ." Petitioner cites Shield Co., 2 T. C. 763, and L. Schepp Co., 25 B. T. A. 419, as authority that salaries should be separately considered as to reasonableness. However, even assuming that in this matter of excess profits tax and computation of excess profits tax credit the same considerations apply as in the case of section 23 in regard to reasonable salaries thereunder, Miller Mfg. Co., v. Commissioner, 149 Fed. (2d) 421, is against petitioner's view; for there, though agreeing that proper procedure is for the Commissioner and Tax Court to find definitely what is reasonable compensation for each officer, rather than in an aggregate lump sum, the Circuit Court nevertheless holds that such lump sum determination does not rob the Commissioner's193 finding of presumption of correctness or relieve petitioner of the burden of proof. The court refused to remand for specific findings as to each officer. We are therefore of the view that the burden of proof and validity of the determination of deficiency are not affected by the form of determination of reasonableness of compensation, in a lump sum.We come then to the factual question as to whether the Commissioner erred, in computing excess profits tax credit, by allowing deduction in the base period years of $ 10,400 each year for partners' salaries or compensation. The petitioner thought those figures were reasonable when it filed its excess profits tax returns for the fiscal years 1941 and 1942, but it now says that it erred in so considering. It used the lower figures ($ 7,550.98 for the first base period year and $ 6,000 thereafter) when it came to file its excess profits tax return for the fiscal year 1943, the first to show a tax due. This is clearly a case of "blowing hot and cold" as affected by tax results. It was not until after the filing of the 1943 return that those for 1941 and 1942 were amended to use the lower figures. The attitude taken at an 1198 194 earlier date, without monetary reason to do so, must logically be considered with the other evidence in deciding what is the reasonable figure for salaries, for the treatment and interpretation by parties are always pertinent in ascertaining intent. After the partners had for four years drawn $ 5,200 each per year on a drawing account, and after the petitioner corporation had for two years computed base period net income by using those figures as reasonable compensation, a lowering of those figures to secure better tax results must be scrutinized with care. That fact, however, does not alone control; the control lies in all of the pertinent facts. These we have carefully examined. The petitioner urges, in effect, that Manscoe was not reasonably worth $ 5,200 per year because of the condition of his health, especially after the fiscal year 1937. He died in August 1940.The evidence is indefinite in some respects. It is apparent that he did work even contrary to his doctor's ideas, and evidence that he was incapacitated from carrying on his work does not appear earlier than the last year before his death. Yet his physician testified that his condition was about the same in 1939195 as in 1938, so that it does not affirmatively appear that he could not substantially carry on, even as late as 1939. Only after the latter part of 1938, or early in 1939, was he unable to "put in full days," and whether that means all or only a part of the time is not clear. The partnership permitted him to draw $ 5,200, and the corporation even later considered it reasonable. We find ourselves unable to say that he was not reasonably worth that amount, even though he may not have put in very full time, or even not much time, toward the last. He apparently was a valuable man, and his contribution, even despite illness, may have been worthy of his hire. The argument that because of his condition earnings decreased does not seem to be borne out by the record, for, though earnings decreased from about $ 37,000 for the fiscal year 1937 to about $ 22,000 in 1938, there is very little to indicate any lessening of Manscoe's efforts or value so early as that time, and though profits then, for 1939, went down to about $ 19,600, they again rose to about $ 28,600 for the fiscal year ended April 1940 -- just at the time when Manscoe, under the evidence, was becoming incapacitated, and shortly196 before his death. It seems rather clear from all this that Manscoe's physical condition did not greatly affect the profits of the partnership; from which it follows, we think, that his reasonable worth to the partnership was not greatly affected.The petitioner points out however, that the salaries used by the Commissioner in computing the excess profits tax credit upon base period income represent a much greater percentage of net profits than did executive salaries in later fiscal years, 1943 and 1944, approximately 39 per cent as against 22 per cent; and the point is not devoid 1199 of force. But much of that force is dissipated by the fact that Post was the only executive whose salary is considered for 1943 and 1944, drawing $ 12,000 and $ 12,125, respectively (not greatly more than previously paid both Post and Manscoe in the partnership base years), whereas excess profits net income advanced for 1943 to $ 38,014.50 and for 1944 to $ 42,940.64. It seems obvious that Post carried on, for a comparatively small advance in salary, instead of the two former executives, so that of course the ratio of executive salary actually paid, to higher earnings, is lower. But we are 197 not convinced thereby that the $ 10,400 compensation paid in the base period years was excessive and not reasonable. The petitioner for about three years after the close of the partnership continued to regard the base period compensation as reasonable, and it changed that view only with prospective change in tax results. We think the Commissioner is not shown to have erred in his determination, and that the compensation paid the partners in the base period was reasonable.Decision will be entered under Rule 50. Footnotes1. SEC. 25. CREDITS OF INDIVIDUAL AGAINST NET INCOME.(a) Credits for Normal Tax Only. -- There shall be allowed for the purpose of the normal tax, but not for the surtax, the following credits against the net income:* * * (3) Earned income credit. -- 10 per centum of the amount of the earned net income, but not in excess of 10 per centum of the amount of the net income.(4) Earned income definitions. -- For the purposes of this section --(A) "Earned income" means wages, salaries, professional fees, and other amounts received as compensation for personal services actually rendered * *. In the case of a taxpayer engaged in a trade or business in which both personal services and capital are material income producing factors, a reasonable allowance as compensation for the personal services actually rendered by the taxpayer, not in excess of 20 per centum of his share of the net profits of such trade or business, shall be considered as earned income.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624097/	Dr. P. Phillips and Sons, Inc., Petitioner, v. Commissioner of Internal Revenue, RespondentDr. P. Phillips & Son, Inc. v. CommissionerDocket No. 24505United States Tax Court20 T.C. 435; 1953 U.S. Tax Ct. LEXIS 147; May 25, 1953, Promulgated 147 Decision will be entered for the respondent. Petitioner, a Florida, citrus fruit producer, realized income, abnormal in amount, in the taxable year from the sale of its citrus crop. It claimed relief from excess profits tax under section 721 (a) (2) (C) of the Internal Revenue Code upon the ground that it had a separate class of income which resulted from the development of tangible property, or, that the income from its citrus operations constituted a class of income under the general provisions of section 721 (a) (2). Respondent denied petitioner relief under section 721.Held, assuming that petitioner had a class of income, which was abnormal in amount, the abnormality resulted from a general improvement in business conditions, so that all of the net abnormal income is attributable to the taxable year and no part thereof is attributable to the previous years. George E. H. Goodner, Esq., and Dewey R. Roark, Jr., Esq., for the petitioner. Newman A. Townsend, Esq., for the respondent. Rice, Judge. RICE436 This proceeding involves petitioner's excess profits tax for the taxable year ended June 30, 1943. Petitioner filed a claim for refund of "$ 119,934.98, or149 such greater amount as may be refundable," under section 721 of the Internal Revenue Code. Upon notice of respondent's disallowance of its claim, petitioner appealed under section 732 of the Code.Subsequent to the hearing, the parties stipulated that no issue relating to petitioner's post-war credit or refund, as provided for in sections 780 and 781 of the Code, is involved herein.The sole issue remaining is whether petitioner had net abnormal income for the taxable year resulting from the development of tangible property (citrus trees) within the meaning of section 721 (a), which is attributable to previous taxable years as provided in section 721 (b) of the Code.FINDINGS OF FACT.Petitioner, a Florida corporation formed in 1922, is engaged primarily in the production of citrus fruit. Its principal place of business is located at Orlando, Florida.For the taxable year ended June 30, 1943, petitioner filed its income and excess profits tax returns with the collector of internal revenue for the district of Florida. Petitioner maintained its records and reports for tax purposes on the basis of the fiscal year ending June 30. Its books were kept on the accrual method of accounting. 150 On or before September 15, 1943, petitioner filed its income and excess profits tax returns for the taxable year ended June 30, 1943. On or about June 7, 1945, petitioner filed amended returns for such taxable year. Petitioner's excess profits tax was assessed on the basis of the original return as filed and paid in the amount of $ 301,922.01. In a letter of May 16, 1949, the respondent asserted a deficiency in petitioner's excess profits tax of $ 10,793.34 for the taxable year ended 437 June 30, 1943. Thereafter, petitioner paid $ 1,934.31 of this deficiency and was credited with $ 1,079.34, the amount of its post-war credit due to this assessment and was credited with other amounts which had been paid on the basis of the amended returns. The total excess profits tax assessed and either paid or credited was $ 312,715.35.For the fiscal years ended June 30, 1939 to 1943, inclusive, petitioner reported the following net income (or loss) as computed for normal tax purposes:Fiscal year endedNet incomeJune 30or (loss)1939($ 25.16)1940(32,273.21)19413,636.16 1942124,006.43 1943170,067.89 Petitioner derived its income from two sources, receipts151 from the sale of citrus fruit output, and rental and investment income. More than 90 per cent of petitioner's total income for the taxable years 1940 to 1943, inclusive, and almost 90 per cent for the taxable year 1939, resulted from the growing of citrus fruit (oranges, grapefruit, and tangerines), and from the sale thereof. Petitioner's citrus crop was sold to affiliated companies.At the time of its organization, petitioner acquired a number of citrus groves, and its citrus acreage has increased from time to time since then. The number of trees for any acre has not varied appreciably from year to year. Very few trees have died and these were promptly replaced.For the fiscal years ended June 30, 1936 through 1943, petitioner's output of citrus fruit from approximately the same acreage and number of trees was as follows:Boxes of citrusFiscal yearNo. of acresNo. of treesfruit produced19362379.0164,979376,436.019372445.0169,616421,441.019382558.5177,268453,605.019392558.5177,268553,755.519402558.5177,268537,346.019412558.5177,268639,885.019422558.5177,268582,780.519432558.5177,268742,769.5A young152 citrus tree reaches the bearing stage at about its fifth or sixth year. Thereafter its output of fruit increases ratably until the tree reaches maturity sometime between its fifteenth and twentieth year. After maturity is attained, a tree's production remains relatively constant for 25 or 30 years. The bearing life of the trees in petitioner's groves was about 40 to 50 years.The age distribution of petitioner's citrus trees, by acres, for the fiscal years ended June 30, 1937 and 1943, was as follows: 438 Acres of Citrus Trees by Age Groups5 years11-1516-2021 yearsTotalFiscal Yearand under6-10 yearsyearsyearsand overacreage1937523.6652.2751.9190.2217.4 2335.3194396.3179.2949.7786.7546.62558.5The increase in total acreage between 1937 and 1943 apparently represented plantings of 156.2 acres and the acquisition of 67 acres of mature citrus trees.Citrus trees require expert care and supervision. The soil has to be properly fertilized to stimulate the normal growth of young trees and to insure the153 quality of the fruit and the productivity of mature trees. The trees have to be protected from various insect pests by spraying and dusting, the materials and treatment used varying with the type of insect pest. The trees have to be protected, to the extent possible, from damage resulting from drought, hail and windstorms, and frost or freeze. The trees have to be pruned by topping or hedging; and cover crops, planted in May or June, have to be worked into the soil in September or October. The matured and growing trees in petitioner's groves in the taxable year were the result of years of careful planning, cultivation, and supervision.Petitioner's trees were fertilized twice a year, once in or about May when the cover crops were planted, and again in or about November after the cover crops were turned into the soil. The amount of fertilizer used depended upon the condition of the trees, but when young growth had been damaged by a frost or freeze a smaller amount was used. A young growing tree required a slightly larger amount each year until it matured, after which, the amount of fertilizer used remained fairly constant. In or about 1939, petitioner began using a better grade154 of fertilizer which included rare mineral elements, the benefits of which extended over a period of years. The addition of these elements to citrus fertilizers grew out of governmental and other research programs. By using this improved citrus fertilizer, petitioner expected to increase the quality and the quantity of its citrus output beginning 3 or 4 years in the future. Petitioner continued using the improved fertilizer in 1943 and thereafter.During the taxable year ended June 30, 1943, petitioner realized a greater output of citrus fruit than in any preceding year. Its increased production in the taxable year came from the same acreage and the same number of trees that petitioner had operated for the five preceding fiscal years. A large part of this increased production was due to the development and maturation of young citrus trees over 439 a period of years. Favorable weather conditions and the absence of storms, freezes, and drought were important contributing factors to petitioner's record production. Citrus production in Florida and in the United States for the crop season of 1942-1943 broke all records.Petitioner's gross receipts from sales of citrus fruit155 for the taxable year 1943 were $ 1,139,282.34, which included $ 10,963.51 of miscellaneous citrus income. The cost of sales was $ 491,648.58, which gave petitioner a gross income from citrus operations for the taxable year of $ 647,633.76.For the four preceding taxable years petitioner's gross income from citrus operations was as follows:Fiscal year endedJune 30Gross income1939$ 44,058.22194022,537.74194134,115.041942179,552.50Total$ 280,263.50The average gross income for this period was $ 70,065.88, and 125 per cent of that average was $ 87,582.35. The excess of petitioner's gross income for the taxable year ($ 647,633.76) over 125 per cent of its average gross income for the four preceding taxable years ($ 87,582.35) was $ 560,051.41.Petitioner's expenses for the taxable year chargeable or allocated to its citrus operations totaled $ 601,464.62. Expenses not clearly chargeable to citrus operations were allocated thereto in the ratio which citrus income bore to all income.For the taxable year 1943 petitioner's administrative and overhead costs, as adjusted, were $ 109,816.04. Such costs were not included in petitioner's cost of sales ($ 156 491,648.58), although they constituted a part of the expenses for citrus grove operations. The proportionate part of such costs which is allocable to gross income from citrus grove operations in excess of 125 per cent of the average gross income of the proceding 4 years ($ 560,051.41) was $ 96,638. The "net abnormal income" of the petitioner for the taxable year 1943 was $ 463,413.41 ($ 560,051.41 minus $ 96,638).Petitioner could not, to any substantial degree, control the size of its citrus crop in the taxable year or in any other taxable year. It followed its normal practices in 1943 and made no effort to force a higher yield from its groves. Any attempt to force an increased yield of fruit in one year would probably result in fruit of low quality for that year and would cause a "die-back" or decline in yield for following years. The increase in production in 1943 was due to the care the 440 trees had received, the growth the trees had attained, and the favorable weather conditions that prevailed.In harvesting its citrus crops, petitioner picked substantially all the fruit on its trees except tangerines. In certain years due to climatic or other conditions beyond its157 control, the quality of part of its tangerine crop would be such that it would not be worth picking. In the taxable year petitioner picked and disposed of 206,750 1/2 boxes of tangerines, which was 98,930 boxes more than the previous fiscal year, and represented about 61.8 per cent of petitioner's increased yield for the taxable year over the fiscal year 1942.Petitioner purchased no citrus fruit for resale in the taxable year 1943. The number of boxes of citrus fruit picked and sold during the taxable year 1943 exceeded the previous year by 159,989 boxes, i. e., 742,769 1/2 minus 582,780 1/2.The average prices per box that petitioner received for its citrus crops during the fiscal years ended June 30, 1937, through 1943, were as follows:OrangesFiscal YearGrapefruitTangerinesEarly &Valenciasmidseason1937$ 1.00$ 1.00$ 0.65$ 0.501938.60.60.52.701939.64.83.37.531940.61.89.54.901941.641.14.46.511942.781.17.641.2219431.642.151.071.251939-1942 Average$ 0.67$ 1.01$ 0.50$ 0.79The season's average on-tree prices for Florida oranges, grapefruit, and tangerines for the fiscal years158 ending June 30, 1937, through 1943, were as follows:OrangesFiscal yearGrapefruitTangerinesEarly &Valenciasmidseason1937$ 1.13$ 1.92$ 0.511938.75.58.591939.44.82.221940.46.62.421941.64.98.33$ 0.641942.901.35* .541.3419431.472.02.921.18Petitioner's citrus fruit sales for the four fiscal years preceding and for the taxable year were as follows: 441 Fiscal years ended June 30No. boxesPer boxSales amountaverage1939Oranges, early & midseason225,127 1/2.64$ 143,123.64Oranges, Valencias72,006 .8359,802.10Grapefruit104,733 .3739,111.22Tangerines151,889 .5380,938.85Totals553,755 1/2322,975.811940Oranges, early & midseason264,628 .61$ 161,348.70Oranges, Valencias80,861 .8972,077.98Grapefruit64,181 .5434,594.26Tangerines127,676 .90114,908.40Totals537,346 $ 382,929.341941Oranges, early & midseason255,936 .64$ 162,762.42Oranges, Valencias96,671 1.14110,468.66Grapefruit140,539 .4664,814.08Tangerines146,739 .5174,642.50Totals639,885 $ 412,687.661942Oranges, early & midseason290,554 1/2.78$ 226,862.56Oranges, Valencias80,083 1/21.1794,045.77Grapefruit104,322 .6466,980.40Tangerines107,820 1/21.22131,541.01Totals582,780 1/2$ 519,429.741943Oranges, early & midseason307,419 1.64$ 505,480.90Oranges, Valencias111,432 2.15239,478.80Grapefruit117,168 1.07124,821.63Tangerines206,750 1/21.25258,437.50Totals742,769 1/2$ 1,128,318.83159 Petitioner's production, operating costs, cost per box, and selling price per box for the fiscal years 1939 to 1943, inclusive, were as follows:No. of boxesOperatingPer boxPer box sellingFiscal years ended June 30producedcostscostprice1939553,755 1/2$ 362,026.68$ 0.654$ 0.5831940537,346 439,344.09.818.7121941639,885 458,771.51.717.6451942582,780 1/2428,736.96.736.8911943742,769 1/2601,464.62.8101.519Petitioner picked its citrus fruits and delivered them to the packing house platform with the result that its selling prices, quoted in the above tables, are different from the season's average "on tree" prices for Florida oranges, grapefruit, and tangerines.A number of factors affected the prices that petitioner received for its citrus fruit. Included therein were: the efforts made by one of petitioner's affiliates in prior years to build up the Dr. Phillips brand; the general condition of prosperity existing throughout the United States; the size of the citrus crops in Florida, Texas, and California; the amount of competing fruits such as apples, pears, and some vegetables; the government purchases for160 the armed services, 442 lend-lease, and other related activities; the quality of its crop; and wartime economic conditions.The government's purchases of canned citrus products and the total United States pack of such citrus products (in thousands of cases of 24 No. 2 cans) for specified seasons were as follows:SeasonTotal U. S.Total Gov't.packpurchases1940-4126,6552,7041941-4224,6034,0591942-4331,10212,320Petitioner's increased production in the taxable year was due to a combination of circumstances including favorable weather conditions, the maturation of the trees in its groves, and the care, cultivation, and fertilization of the groves. The increased income realized by petitioner in the taxable year resulted primarily from increased prices attributable to wartime conditions and the large increase in production. No part of the net abnormal income realized by petitioner in the taxable year was attributable to prior years.OPINION.Petitioner contends that it qualifiies for relief from excess profits tax for the taxable year 1943 under the provisions of section 721 of the Internal Revenue Code. That section deals with abnormalities in161 income in an excess profits tax period. It defines the terms used, the separate classes of income, and provides for computing "the amount of net abnormal income" that shall be attributed to other years, thereby reducing the excess profits tax for the taxable year. We have held that it was enacted by Congress to prevent the unfair application of the excess profits tax in abnormal cases, 1 and that it imposes both affirmative and negative burdens of proof upon a taxpayer attempting to qualify thereunder. 2 The pertinent provisions of the section are set forth in the margin. 3162 443 Petitioner claims that in 1943 its gross income included a class of income that was abnormal in amount, was a separate class of income as described in subparagraph 721 (a) (2) (C), and that it had "net abnormal income" in the amount of $ 463,413.41, a portion of which is attributable to previous years under section 721 (b) and respondent's regulations with respect thereto. If it had no 721 (a) (2) (C) class income, petitioner claims, in the alternative, that such income should be classified under the general provisions of 721 (a) (2).Respondent contends that the growing of citrus crops is not a "development of tangible property" which entitles petitioner to classify its income from citrus operations as 721 (a) (2) (C) income. He maintains that the separate class of income provided for by this subparagraph was intended for the mining industry, corporations that develop new processes, and similar enterpreneur activities. But, he says, even if the cultivation of citrus trees is within the ambit of the section, petitioner fails to qualify for the reason that all of its claimed abnormal income was due to increased prices, increased demand, government buying for lend-lease163 and for the armed forces, and other factors.In claiming that it has a separate class of income under 721 (a) (2) (C), petitioner specifically limits its claim to income resulting from the "development of tangible property." No claim is made that it had income resulting from exploration, discovery, prospecting, research, patents, formulae, or processes. It argues that citrus trees are "tangible property" and that the promotion of their growth by proper cultivation is "development" for the reason that the term "to develop" means literally "to promote the growth of." 4164 Income resulting from increased productivity of maturing citrus trees, says petitioner, is "income resulting from the development of tangible property," and the application of materials and labor to the cultivation 444 of young citrus trees, the fertilization and irrigation of the soil, the planting of cover crops, and the spraying, dusting, and pruning of its citrus trees are as much developmental activities as activities designed to facilitate the removal of oil from wells 5 or coal from mines. 6Petitioner's alternative contention is based upon the amendments to section 721 of the Code by section 5 of the Excess Profits Tax Amendments of 1941, which provided that "classification of income of any class not described in subparagraphs (A) to (F), inclusive, shall be subject to regulations prescribed by the Commissioner with the approval of the Secretary." 7 It claims that this amendment broadened the scope of section 721 to include any classification of income under appropriate Treasury Regulations, and cites in support thereof a decision of this Court, 8 which held that royalty income was different in character and had no qualities or attributes in common with any other type of income derived from petitioner's operations as a manufacturer of hosiery, and, therefore, was a "class of income" within the meaning of 721 (a) (2). It submits that, if denied 721 (a) (2) (C) classification, it had a class of income under the general165 unlettered provisions of 721 (a) (2) because it derived abnormal income from its citrus operations in the taxable year which is attributable to prior years. Except for this one reference to its alternative contention, which appears in a footnote, petitioner's original and reply brief seek to establish its right to relief under 721 (a) (2) (C).We find it unnecessary to decide the questions raised by petitioner's arguments because even if we assume, as we did in Primas Groves, Inc., 9 and Graves Brothers Co., 10 that petitioner's citrus income constituted a separate or any class of income for the base period and the taxable year, which under the statutory formula is abnormal in amount and which, when reduced pro rata by direct costs or expenses, results in net abnormal income, we are, nevertheless, convinced that petitioner has failed to prove that any part of such net abnormal166 income is attributable to prior years so as to entitle it to relief.Our findings show that petitioner's net abnormal income, computed under the statutory formula was $ 463,413.41, and we do not understand that respondent objects to the correctness of this computation. In adjusting this amount to give effect to wartime conditions, petitioner concedes that increased prices in the taxable year gave rise to a substantial part of its net abnormal income for 1943, namely, $ 228,773.71; 445 but it contends that such amount reflected all other wartime factors, so that any further adjustments for factors such as low operating costs, increased demand including government purchases, and decreased competition, as specified in respondent's regulations, 11 are inapplicable, unnecessary, and unreasonable in the circumstances of this case.167 We cannot agree that petitioner's adjustment for price increases on the sale of its citrus fruit adequately measures the entire improvement in business conditions in the taxable year, nor can we agree that its adjustment for price increases adequately measures the actual increase in prices that petitioner received for its citrus fruit in the taxable year. In determining its price increase adjustment, petitioner made up an index using Florida on-the-tree orange and grapefruit prices for the years 1935-36 through 1939-40 as a base of 100. In arriving at the base price, it assigned the average price of oranges during the period a weight of four, and grapefruit a weight of one. On this index, prices for the taxable year had increased 97.5 per cent over the average prices of the base period. Petitioner then computed the amount of net abnormal income attributable to price increases in the excess profits tax year of 1943 to be $ 228,773.71. 12168 The petitioner's position is reflected by its contention that "an adjustment for price rises cannot, under the regulation, exceed net abnormal income, since the 'items of net abnormal income' cannot exceed total net abnormal income." Petitioner would read respondent's Regulations, section 35.721-3, supra, to mean that in no instance could higher prices in the taxable year create all of the net abnormal income so that no part thereof could be attributed to prior years. But this case illustrates how improvement in business conditions generally, including higher prices, can result in net abnormal income in an excess 446 profits tax year, all of which is attributable to the taxable year and none of which can be attributed to previous taxable years. Our findings show that for the first three of the four previous taxable years petitioner's average annual cost per box of citrus fruit exceeded its average annual selling price per box, and that only in the taxable year 1942 did its average selling price per box exceed its average cost per box. It is not surprising, therefore, to find that the average cost per box for the four previous years exceeded the average selling price per169 box for such years by 2.3 cents per box. It also appears that petitioner's average selling price per box for the taxable year exceeded its average cost per box by 70.9 cents, and exceeded the average cost per box for the four preceding taxable years by 78.8 cents per box. If these price differentials are applied to the boxes of fruit sold by petitioner in the taxable year, it is at once apparent that no part of the net abnormal income is attributable to any previous taxable year and that all of it is attributable to the excess profits tax year 1943. This is true even though adjustment is made for the increased cost per box of citrus fruit in the taxable year.Thus, even assuming petitioner had a separate class of income under 721 (a) (2) (C), or a class of income under 721 (a) (2) generally, we are of the opinion that it is not entitled to relief under section 721. In so holding we have weighed the various factors set forth in our findings which affected citrus fruit prices, including the heavy demand for fresh and processed citrus fruit during the taxable year, and the effect that high prices had on the amount of fruit picked by the petitioner. Actually petitioner realized large170 profits in the taxable year because good weather conditions produced a record crop which petitioner sold at high prices due to a war inflated economy. The excess profits which resulted from such external changes in business conditions were the profits which Congress intended to tax. Soabar Co., supra.13Reviewed by the Special Division.Decision will be entered for the respondent. Footnotes. Trial counsel for petitioner withdrew after the hearing of this proceeding, and briefs were subsequently submitted on behalf of petitioner by Carolyn E. Agger, Esq., and Walter J. Rockler, Esq↩.. The discrepancy between the 1937 total acreage in this table and the previous table is unexplained.↩. No season's average figure given; range of on-tree prices for all grapefruit was $ 0.73 high and $ 0.54 low.↩1. Soabar Co., 7 T.C. 89">7 T. C. 89, 96↩ (1946).2. Eitel-McCullough, Inc., 9 T. C. 1132, 1146↩ (1947).3. 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, or, * (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; * * All the income which is classifiable in more than one of such subparagraphs shall be classified under the one which the taxpayer irrevocably elects. The classification of income of any class not described in subparagraphs (A) to (F), inclusive, shall be subject to regulations prescribed by the Commissioner with the approval of the Secretary.(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.(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. * ↩4. Webster's New International Dictionary, Second Edition.↩5. Southwestern Oil & Gas Co., 6 T. C. 1124↩ (1946).6. Morrisdale Coal Mining Co., 13 T. C. 448↩ (1949).7. Section 721 (a) (2), footnote 3, supra↩.8. W. B. Davis & Son, Inc., 5 T. C. 1195, 1207↩ (1945).9. Primas Groves, Inc., 15 T. C. 396↩ (1950).10. Graves Brothers Co., 17 T. C. 1499↩ (1952).11. Regs. 112, Sec. 35.721-3 Amount Attributable to Other Years. * * *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 percent 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.↩12. Petitioner's contention is stated as follows: "Mathematically stated, abnormal income for the year ended in 1943 attributable to the price rise is determined as follows: 197.5/100 equals $ 463,413.41/x. 'x' is the amount of income which is not↩ attributable to the price rise. 'x' is $ 234,639.70. $ 463,413.41 less $ 234,639.70 equals $ 228,773.71, the amount of income attributable to the price rise."13. Footnote 1, supra↩.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624098/	Calhoun Academy, Petitioner v. Commissioner of Internal Revenue, RespondentCalhoun Academy v. CommissionerDocket No. 6595-88XUnited States Tax Court94 T.C. 284; 1990 U.S. Tax Ct. LEXIS 15; 94 T.C. No. 17; March 1, 1990March 1, 1990, Filed Decision will be entered for the respondent. P, a private school, sought a declaratory judgment that it is exempt from tax under sec. 501(c)(3) of the Code. P maintains that it has the racially nondiscriminatory policy toward students required by Bob Jones University v. United States, 461 U.S. 574">461 U.S. 574 (1983). Held, P must satisfy its burden of proof by a preponderance of the evidence. Federation Pharmacy Services v. Commissioner, 72 T.C. 687">72 T.C. 687, 691 (1979), affd. 625 F.2d 804">625 F.2d 804 (8th Cir. 1980). Held, further, P has failed to show that it operates in good faith in accordance with a nondiscriminatory policy toward black students and thus P does not qualify as exempt under sec. 501(c)(3). Mark W. Nickerson17 and David E. Spalten, for the petitioner.George J. Blaine, for the respondent. Nims, Chief Judge. NIMS285 OPINIONRespondent determined that petitioner does not qualify for exemption from Federal income tax under section 501(c)(3). (Unless otherwise indicated, all section references are to the Internal Revenue Code and all Rule references are to the Tax Court Rules of Practice and Procedure.) Petitioner challenges respondent's determination by invoking the jurisdiction of this Court for a declaratory judgment pursuant to section 7428. The issue for decision is whether petitioner has a racially nondiscriminatory policy as to students.This case was submitted for decision under Rules 122 and 217 on the basis of a stipulated administrative record, which is incorporated herein by reference. The facts as represented in the administrative record are assumed to be true for the purposes of this proceeding. Rule 217(b)(1).Petitioner, The Calhoun Academy, with its principal office located in St. Matthews, Calhoun County, South Carolina, was organized as a nonprofit corporation in South Carolina on December 30, 1969. Petitioner's certificate of incorporation of that18 date states its purpose as --exclusively educational; to promote, own, and operate a system of independent schools and to possess and have all powers and privileges necessary and proper for the attainment of its aims. In the event of dissolution, the residual assets of this organization will be turned over to another organization which is exempt from Federal Income Tax as an organization described in 501(c)(3) of the Internal Revenue Code of 1954, or the corresponding provision of a prior or future Internal Revenue Code, or to the Federal, State or local Government.286 During 1969 and 1970, the public schools in Calhoun County were subjected to court-supervised desegregation plans.Since the 1970-71 school year, petitioner has operated an independent private school in Calhoun County for grades 1 through 12. The school also now has a kindergarten class. Because petitioner and its school are in effect the same, and there is no need to distinguish between the two, we refer to both as petitioner hereinafter.In its first school year, 1970-71, petitioner had 235 students enrolled. During the 1985-86 and 1986-87 school years, petitioner employed approximately 30 teachers19 and staff and had approximately 420 students. For the 9 school years concluding with 1986-87, the size of the 12th grade graduating class ranged from 24 to 36 students.Petitioner distributes admission application forms only upon request and specific students or types of students are not recruited. Admission is available to those students scoring at or above the 50th percentile on the Stanford Standard Achievement Test for the grade level applied for, provided that tuition and other fees will be paid in full. For the 1986-87 school year, petitioner charged tuition for nonkindergarten students of $ 1,200, supplemented by a building fund fee of $ 200 to $ 500, depending on the student's grade. Tuition for kindergarten students varied from $ 350 to $ 810, depending on age and selected attendance option. Tuition charges for the following school year, 1987-88, were $ 1,300 for nonkindergarten students, again supplemented by a building fund fee, and a maximum of $ 600 for kindergarten students. Because of a lack of its own funds, petitioner has never granted a scholarship or reduced tuition payments for any student.Petitioner's students select either a general or more rigorous college20 preparatory program. Since the beginning of operations in 1970, nearly 80 percent of petitioner's graduates have moved on to some form of postsecondary education. Of the graduating class of 1986, 19 out of 19 students in the college preparatory program entered college and 12 out of 17 students in the general program went on to technical schools or colleges. Of the graduating class of 1985, 17 out of 18 students in the college preparatory 287 program entered college and 13 out of 15 students in the general program went on to technical schools or colleges. In the public schools of the Calhoun school district, within which petitioner is physically located, only 49 students out of a 1985 graduating class of 130 entered junior or senior colleges or technical education centers with degree programs.For its fiscal year ended June 30, 1986, petitioner had a deficit in retained earnings of over $ 300,000. The $ 211,000 deficit in its unrestricted fund balance nearly tripled the deficit balance from 5 years before. From July 1, 1982, through December 31, 1985, petitioner received only one private donation, in the amount of $ 4,000. Potential donors have sometimes declined to make21 contributions upon learning that the contributions would not be deductible for Federal income or estate tax purposes.Since opening its doors in 1970, petitioner has never had a black student enrolled. A black student has in fact never applied for admission. On two occasions, however, both during the 1984-85 school year, petitioner provided an application form to a black parent. Petitioner has also never had, or received an employment application from, a black teacher. Petitioner does not actively recruit teachers because of a lack of available funds for advertising and travel expense reimbursement. Petitioner does, however, inquire about possible applicants through student placement offices at various colleges.Prior to 1982, petitioner had no minority students, black or otherwise, and no minority teachers. (As used herein, "minority" has its commonly understood meaning in the racial context, namely "other than Caucasian." We recognize, however, that the whites in Calhoun County, who total less than half of the population, are statistically a minority group relative to the total population of the county.) Since 1982 petitioner has had at least one "American-Oriental" student, 22 but no representatives of other minorities. During the 1986-87 school year, petitioner had two American-Oriental students and two more were accepted for admission for the following school year. In 1983 petitioner hired its first and only minority teacher, who is of "Japanese-American" descent.288 Petitioner's students sometimes engage in school-sponsored activities that directly or indirectly involve black students and adults. For example, classes sometimes travel to South Carolina State College, a predominantly black college in neighboring Orangeburg, South Carolina, to visit the planetarium or attend theatrical performances. In addition, petitioner's basketball and football teams have occasionally competed with teams, specifically East Cooper Academy and St. Angela, "having black athletes." During the 1985 season, petitioner's football team competed against these two schools and eight others prior to the playoffs. The East Cooper Academy basketball team had one black member when it played in petitioner's recent Christmas tournament.Petitioner and its students also participate in some educational and vocational programs that directly involve blacks. Petitioner's students23 are eligible for federally funded testing and remedial programs offered through the public school system and, in this regard, have attended classes at Guinyard Middle School, the majority of whose students are black. Further, for several years petitioner has sponsored a program called "Operation Get-Smart," which is promoted by the South Carolina Department of Corrections. Inmates in this program, most of whom are black, visit schools to encourage students to stay in school and out of trouble. The inmates lead small discussion groups and sometimes eat with the students. Finally, members of the Armed Forces visit petitioner to recruit or to administer aptitude tests. Many of these Armed Forces representatives are black.In addition to the occasional interaction of its students with blacks, petitioner's facilities are sometimes used for programs sponsored by the Calhoun County Arts Commission, with "a racial mix among performers."Petitioner never publicly announced a racially nondiscriminatory policy toward students prior to November of 1985. As certified by the secretary of state of South Carolina on November 27, 1985, petitioner's charter was formally amended as follows:24 RESOLVED, that The Calhoun Academy, Inc, shall admit students of any race, color, national or ethnic origin to all the rights, privileges, programs and activities generally accorded or made available to students 289 at the school. It shall not discriminate on the basis of race, color, national and ethnic origin in administration of its educational policies, admissions policies, scholarship and loan programs, and athletic and other school administered programs.A few weeks earlier, petitioner had announced what was to become the substance of its charter amendment. On November 11, 1985, a "Notice of Nondiscriminatory Policy as to Students" appeared in the Times and Democrat, a newspaper published in Orangeburg, South Carolina. After a nondiscriminatory statement nearly identical to that in the charter amendment, the notice added this sentence: "The above statement of our racially nondiscriminatory policy as to students will be included in all brochures and catalogs hereafter used."Periodic report cards issued to students contain a statement of nondiscriminatory policy, as do all application forms, student handbooks, and newspaper advertisements printed since November of 1985, 25 though not in as much detail as the original published announcement. Except for newspaper advertisements, petitioner disseminates information only upon request. Therefore, the newspaper advertisements are the only means by which petitioner affirmatively communicates its statement of nondiscriminatory policy to the general public or to specific groups.In the May 15, 1986, edition of the Calhoun Times, a local weekly newspaper read by all racial segments of the community, petitioner announced that it was accepting applications for the upcoming school year. A statement in relatively fine print at the bottom of the notice read: "Calhoun Academy Has A Non-Discriminatory Policy In Regard To Race, Creed, Color or National Origin."To announce an open house for prospective students and their parents in April of 1987, petitioner published advertisements in both the Times and Democrat and the Calhoun Times. Petitioner included a statement that "Calhoun Academy admits students of any race, color and national or ethnic origin." Because of the format and brevity of the three substantially identical advertisements, and the relatively large print size of the nondiscrimination statement, a reader26 interested in the subject matter of the advertisements would have been unlikely to overlook the statement. 290 The similar statement that appears in petitioner's applications for admission and student handbooks is not so conspicuous.Despite its limited employment and enrollment experience with minorities, petitioner has never been a party to any litigation involving a claim of racial discrimination.The population of Calhoun County, as of July 1, 1985, was approximately 12,300, with "nonwhites" constituting about 52 percent of that number. Almost all of the nonwhites are blacks, with other groups contributing only insignificantly to the 52-percent total. During the 1985-86 school year, 303 white students and 1,724 nonwhite students, including kindergarteners, were enrolled in the public schools of the Calhoun school district, the 11th highest percentage of nonwhites among the 92 school districts in South Carolina. Private school students at this time, numbering nearly 450, were 18 percent of total students in Calhoun County. Only one of the 45 other counties in South Carolina had a higher percentage of private school students.As of 1980, 100 percent of the population 27 in the Calhoun school district was classified as rural, compared to the median South Carolina school district having a split of 69 percent rural, 31 percent urban. The 1979 median household income in the Calhoun school district was $ 12,527 and 17.3 percent of families living there in 1980 were considered to be living below the 1979 poverty level. According to petitioner --In the economic area served by Calhoun Academy there are few professional people among minority groups. * * Most members of minority groups are blue collar workers and the few white collar jobs are primarily in public education. The children of these professional people attend the schools in which their parents teach and administer. * * The Calhoun school district had operating expenditures per pupil for the 1985-86 school year of nearly $ 3,400, ranking fourth in the State. Operating expenditures consist of general administration, instructional services, plant operations and maintenance, and auxiliary services. The increase from the corresponding amount for the 1975-76 school year was nearly $ 2,500, an increase over that time period surpassed by only one school district in the State.291 Teachers28 in the public schools of the Calhoun school district are generally paid considerably more than petitioner's teachers. As of October 1, 1986, the highest of petitioner's teacher salaries was $ 13,455, with an average of $ 11,500. The average for Calhoun school district teachers in the 1985-86 school year was $ 20,686.The Calhoun school district also has a high school building, financed with $ 4,750,000 of school building bonds in 1982, that is much newer than petitioner's three main buildings. Petitioner constructed its current facilities several years prior to 1982 at a total cost of approximately $ 485,000.On June 17, 1986, petitioner filed an application with respondent, requesting an exemption from Federal income tax as an organization described in section 501(c)(3). Petitioner's board of directors had authorized this step 2 weeks earlier in the hope that a favorable ruling, entailing tax-deductible charitable contributions for donors, would encourage contributions.After requesting and receiving detailed information concerning petitioner's race-related policies and practices, the Internal Revenue Service (Service) national office tentatively denied petitioner's application29 by letter dated April 21, 1987. The letter emphasized petitioner's formation at the time of enforced desegregation in the local public schools, its total absence of black students despite a sizable local black population, and its failure to adopt and publicly announce a racially nondiscriminatory policy until 1985. According to the letter, petitioner had not overcome this cumulative inference of racial discrimination:A private school with a history of racial discrimination must provide clear and convincing evidence that it no longer discriminates on the basis of race. Furthermore, such a school must provide persuasive evidence that the absence of black enrollment is not attributable to a continuation of the school's past policies. Mere adoption and publication of a policy of racial nondiscrimination is insufficient for such a school to demonstrate that it is operating in a bona fide nondiscriminatory manner in accordance with Rev. Proc. 75-50. For these reasons, although your organization adopted and published a nondiscriminatory policy, your school must provide evidence of further objective acts which overcome your history of discrimination. 30 * * *292 Your organization has not demonstrated by sufficient objective evidence that its adoption and communication of the nondiscriminatory policy was done in good faith. In fact, the information suggests that adoption and publication of the nondiscriminatory policy was done solely to obtain tax exemption, without a sincere intention to communicate the openness of the school to all members of the community. In considering all the facts and circumstances of your organization's formation, background, and present operations, we conclude that you have provided insufficient evidence of activities which could overcome your history of racial discrimination. Accordingly, your organization has failed to meet its burden of establishing the existence of a bona fide nondiscriminatory policy. [Emphasis in original.]This letter also stated that petitioner could protest the adverse ruling in writing and, if so requested in petitioner's protest letter, have a conference with respondent's representatives. Petitioner timely filed its protest by letter dated June 30, 1987. Included with the protest letter were various affidavits and other supporting documentation. 31 The protest letter requested a conference.At the conference, which was held on August 25, 1987, petitioner was represented by its attorney and members of its board of directors. Petitioner's representatives supplied respondent's representatives with a copy of the Calhoun Times, dated August 20, 1987, which included an article about petitioner. The article stated that petitioner "is open to students of any race, color, and national or ethnic origin." Respondent's representatives stated that petitioner had not made sufficient contacts with the black community, suggesting that petitioner could correspond directly with local black leaders regarding petitioner's nondiscriminatory policy, contact placement offices of predominantly black colleges about teaching positions, and offer reduced tuition for black students.By letter dated November 5, 1987, one of petitioner's directors informed respondent of petitioner's rejection of the reduced tuition suggestion, stating that "such a policy represents an affirmative action requiring an unequal treatment of our students." The other two suggestions had been discussed, according to this letter, but "No final decision has been made because the32 chairman of the Board has been unavailable due to an extended vacation." This letter also expressed disappointment that one of respondent's representatives 293 had informed counsel for petitioner that tax-exempt status would be denied regardless of contacts with the black community. Petitioner never informed respondent of its decisions, if any, on the two pending suggestions.Respondent's final adverse ruling letter, dated February 26, 1988, stated in part:you have not demonstrated conclusively that you have in good faith operated in a racially nondiscriminatory manner, as required by Rev. Proc. 75-50, 2 C.B. 587">1975-2 C.B. 587.* * * More than ninety days have passed since the conference [of August 25, 1987], and you have failed to submit any additional evidence demonstrating good faith racially nondiscriminatory operation. We have carefully considered your letter of November 5, 1987, and continue to conclude that our adverse ruling letter of April 21, 1987, is correct.We would be pleased to entertain a future application when you have sufficiently changed your activities to demonstrate bona fide nondiscriminatory operation. Both the33 courts and the Service have noted certain types of objective actions indicative of nondiscriminatory policies in operation. Such factors include, but are not limited to, active and vigorous recruitment of minority students and teachers, financial assistance to minority students, and effective communication of the nondiscriminatory policy to the minority population, including publication and actual contact with the community. Again, additional actions must be taken by the school in order to overcome its history of discrimination.Section 501(a) generally exempts from Federal income taxation those organizations described in section 501(c), which lists corporations "organized and operated exclusively for religious, charitable, * * * or educational purposes." Sec. 501(c)(3). Contributions to such organizations are generally deductible to donors. Sec. 170(a) and (c)(2). Petitioner seeks a determination that it qualifies under section 501(c)(3) and the sole issue is whether petitioner has a racially nondiscriminatory policy as to students.Rev. Rul. 71-447, 2 C.B. 230">1971-2 C.B. 230, formalized a Service position, first announced in 1970, about the effect34 of private school racial discrimination policies on tax-exempt status. The revenue ruling concludes that:a school not having a racially nondiscriminatory policy as to students is not "charitable" within the common law concepts reflected in sections 170 and 501(c)(3) of the Code and in other relevant Federal statutes and accordingly does not qualify as an organization exempt from Federal income tax. [1971-2 C.B. at 231.]294 In Bob Jones University v. United States, 461 U.S. 574">461 U.S. 574 (1983), the Supreme Court approved the Service view expressed in Rev. Rul. 71-447 and held that racially discriminatory private schools do not qualify for exemption under section 501(c)(3). Drawing upon the common law of charitable trusts for standards, the Supreme Court determined that racially discriminatory private schools violate fundamental public policy and cannot be viewed as conferring a benefit on the public. 461 U.S. at 595, 596 n. 21.Rev. Proc. 75-50, 2 C.B. 587">1975-2 C.B. 587, describes detailed guidelines and 35 recordkeeping requirements to be used in determining whether a private school that applies for a section 501(c)(3) exemption has a racially nondiscriminatory policy. The burden placed upon applicants is broadly stated as follows:A school must show affirmatively both that it has adopted a racially nondiscriminatory policy as to students that is made known to the general public and that since the adoption of that policy it has operated in a bona fide manner in accordance therewith. [1975-2 C.B. at 587.]Subject to limited exceptions, Rev. Proc. 75-50 specifically requires, among other things: (1) A statement in the governing instrument of the school that it has a racially nondiscriminatory policy as to students; (2) a similar statement in school brochures, catalogs, and written advertising; (3) publicizing of the policy, through print or broadcast media, to all racial segments of the community served by the school; (4) an annual certification that the school is in conformance with relevant parts of the revenue procedure; and (5) retention of specified records for a minimum of 3 years.Petitioner 36 maintains that it has complied in all material respects with the requirements of Rev. Proc. 75-50. Respondent disagrees, as is apparent from the statement in his final adverse ruling letter of February 26, 1988, that "you have not demonstrated conclusively that you have in good faith operated in a racially nondiscriminatory manner, as required by Rev. Proc. 75-50, 2 C.B. 587">1975-2 C.B. 587."We need not address the degree of petitioner's compliance with Rev. Proc. 75-50. As this Court has noted, revenue procedures are merely guidelines "representing the position 295 of the Service and not substantive law." Virginia Education Fund v. Commissioner, 85 T.C. 743">85 T.C. 743, 751 (1985), affd. per curiam 799 F.2d 903">799 F.2d 903 (4th Cir. 1986). The revenue procedure has also been characterized as a Service litigating position that does not bear upon a substantive interpretation of the section 501(c)(3) prerequisites. Prince Edward Sch. Foundation v. United States, 478 F. Supp. 107">478 F. Supp. 107, 111-112 (D.D.C. 1979),37 affd. without published opinion (D.C. Cir. 1980), cert. denied 450 U.S. 944">450 U.S. 944 (1981).The parties agree that the burden of proof in this proceeding rests with petitioner under Rule 217(c)(2). There appears to be some confusion, however, as to what the burden-of-proof standard is. We have previously defined the burden applicable to sections 7428 and 501(c)(3) as proof by a preponderance of the evidence. Federation Pharmacy Services v. Commissioner, 72 T.C. 687">72 T.C. 687, 691 (1979), affd. 625 F.2d 804">625 F.2d 804 (8th Cir. 1980). This contrasts with the higher "clear and convincing evidence" standard applicable, for instance, in fraud cases under section 7454(a) and Rule 142(b).Respondent on brief disavows the applicability of a heightened standard in this case. Nonetheless, respondent's letter to petitioner of April 21, 1987, expressly states: "A private school with a history of racial discrimination must provide clear and convincing evidence that it no longer discriminates on the basis of race." (Emphasis in original.) This sentence standing alone speaks of an abstract private school, with no direct reference to38 petitioner. From the context, however, there is little doubt that the sentence is meant to apply specifically to petitioner. In this regard, we note that the next paragraph of the letter, clearly addressing petitioner, refers to "your history of racial discrimination." (Emphasis in original.) See also General Counsel's Memorandum 39525 (July 1, 1986) ("Private schools seeking recognition of exempt status bear the burden of affirmatively establishing bona fide operation consistent with a policy of nondiscrimination by clear and convincing evidence."); General Counsel's Memorandum 39524 (July 1, 1986); General Counsel's Memorandum 39754 (September 8, 1988).296 "Clear and convincing" language has sometimes appeared in cases, of other courts, that involve private schools and racial discrimination issues. In Norwood v. Harrison, 382 F. Supp. 921">382 F. Supp. 921 (N.D. Miss. 1974), the court addressed itself to private schools wanting to borrow textbooks owned by the State of Mississippi. To respect constitutional constraints, the court sought to disqualify those schools that racially discriminated. The court focused on private schools, formed or expanded at39 the time of public school desegregation, that had a continuing absence of black students and teachers. These private schools bore a presumption of racial discrimination that could be rebutted only by evidence that would "clearly and convincingly reveal objective acts and declarations establishing that the absence of blacks was not proximately caused by such school's policies and practices." 382 F. Supp. at 926.The court in Brumfield v. Dodd, 425 F. Supp. 528">425 F. Supp. 528 (E.D. La. 1976), considered a similar constitutional issue for private schools seeking assistance from the State of Louisiana in the form of textbooks, classroom materials, and transportation financing. The court quoted extensively from Norwood v. Harrison, supra, and expressly relied on the burden-of-proof analysis therein. Brumfield v. Dodd, 425 F. Supp. at 531-532.Similar principles have been applied to section 501(c)(3). In Green v. Miller, an unreported case ( D.D.C. 1980, 45 AFTR 2d 80-1566, 80-1 USTC par. 9401), the court supple mented and modified an 40 outstanding permanent injunction relating to the tax-exempt status of Mississippi private schools. For a school bearing an inference of racial discrimination, the inference "may be overcome by evidence which clearly and convincingly reveals objective acts and declarations establishing that such is not proximately caused by such school's policies and practices." 45 AFTR 2d at 80-1567, 80-1 USTC at 84,089.We are not compelled to reconcile the "clear and convincing" language of these cases with the standard we find applicable here, a preponderance of the evidence, because these cases arose under neither section 7428 nor Rule 217. Indeed, Norwood v. Harrison, supra, and Brumfield v. Dodd, supra, address constitutional issues that are not before us 297 in the instant case. Although Green v. Miller, supra, relates directly to section 501(c)(3), the focus of the injunction is at the administrative level, specifically the Service determination of tax-exempt status, rather than the judicial review stage.We note further that the effects of the two formulations may be practically41 equivalent because of the differing points at which unfavorable inferences enter into the analysis. The "clear and convincing" standard, as described in these cases, applies on rebuttal only after an inference of racial discrimination has taken hold. The "preponderance of the evidence" standard, in contrast, begins with a clean evidentiary slate. A taxpayer faced with an unfavorable evidentiary inference at the outset plainly bears a heavier burden from that point forward, however articulated, than a taxpayer with no such unfavorable inference yet established.Concerning what petitioner must prove, its burden in this proceeding, in broad terms, is to establish that it has a racially nondiscriminatory policy as to students. Bob Jones University v. United States, supra. More precisely, petitioner must show that it has adopted a racially nondiscriminatory policy as to students and operates in good faith in accordance with that policy. See Virginia Education Fund v. Commissioner, 85 T.C. at 748. If adoption of the policy is defined to mean adoption in substance rather than merely in form, then the adoption and operation42 elements are largely redundant. Adoption in form also does not reasonably stand as a separate element, instead serving most appropriately as a fact that contributes to an inference of good faith operation in a racially nondiscriminatory manner. Therefore, to have a separate and meaningful existence, the adoption element must be something more than adoption in form, yet something less than adoption in substance. Specifically, we define the adoption element to require more than mere adoption in form on the books of the organization. The adoption element requires adoption of a nondiscriminatory policy in form on the books of the organization, coupled with appropriate publicity and notification to the various relevant groups in the community so that adoption of the policy is known publicly.298 Having a racially nondiscriminatory policy as to students, which bears a definition implicitly approved by the Supreme Court in Bob Jones University v. United States, supra, means that:the school admits the students of any race to all the rights, privileges, programs, and activities generally accorded or made available to students at that school and that43 the school does not discriminate on the basis of race in administration of its educational policies, admissions policies, scholarship and loan programs, and athletic and other school-administered programs. [Rev. Rul. 71-447, 1971-2 C.B. at 230.]With respect to the adoption of a racially nondiscriminatory policy, as we have defined it above, we find that petitioner has met its burden of proof. During November of 1985, petitioner published a "Notice of Nondiscriminatory Policy as to Students" in a local newspaper. Printed materials designed to be seen by the general public, including all application forms and newspaper advertisements since that time, make reference to the nondiscriminatory policy. In at least some of the advertisements, the nondiscriminatory policy statement is prominent enough that it would not be easily overlooked by readers. Significantly, at least one of the local newspapers that sometimes carries petitioner's advertisements, the Calhoun Times, is read by all racial segments of the community served by petitioner. Finally, the population of the surrounding community is small enough (with only 12,000 people in Calhoun44 County) and petitioner is large enough (having nearly 20 percent of all students within the boundaries of the Calhoun school district) that the stated nondiscriminatory policy could not be unknown to any racial group in the community.Whether or not petitioner operates in good faith in accordance with its stated policy is a more complicated question. Respondent argues that three factors taken together establish an inference that petitioner discriminates on the basis of race. The first is that petitioner incorporated and began operations at a time when the public schools in Calhoun County were subjected to court-supervised desegregation plans. See Whittenberg v. Greenville County School District, 298 F. Supp. 784">298 F. Supp. 784 (D.S.C. 1969). The formation or expansion of a private school at a time of desegregation in 299 nearby public schools is widely regarded by the courts as a material consideration in the racial discrimination analysis. E.g., Virginia Education Fund v. Commissioner, 85 T.C. at 748; Prince Edward Sch. Foundation v. United States, 478 F. Supp. at 112; Brumfield v. Dodd, 425 F. Supp. at 531;45 Norwood v. Harrison, 382 F. Supp. at 924-925; Green v. Connally, 330 F. Supp. 1150">330 F. Supp. 1150, 1173-1174 (D.D.C. 1971), affd. per curiam sub nom. Coit v. Green, 404 U.S. 997">404 U.S. 997 (1971). The specific inference here is that petitioner was established to provide an alternative for white students who preferred, or whose parents preferred, a school without black students in attendance.The second major factor that arguably contributes to an inference of racial discrimination is that, despite a local population that is approximately 50-percent black, petitioner has never had a black student enrolled. Petitioner counters that a black student has never applied and thus never been denied admission. The record accordingly lacks direct evidence for either party concerning whether petitioner discriminates against black students when considering application forms. Obviously, the record also lacks direct evidence of discrimination against black students, or lack thereof, after admission. This apparent stalemate, however, does not relieve petitioner of its burden -- as a prerequisite to gaining tax-exempt status -- 46 "to establish that its policy is to admit black students on the same basis as those of other races." Prince Edward Sch. Foundation v. United States, 478 F. Supp. at 112.The third factor applicable in the instant case is that petitioner did not publicize a racially nondiscriminatory policy or amend its charter until 1985, shortly before applying to respondent for tax-exempt status. One possible inference is that petitioner has never had a racially nondiscriminatory policy and began disingenuously to publicize one to acquire tax-exempt status. A second possible inference is that petitioner did not have a racially nondiscriminatory policy before 1985, but in good faith embraced one, again to acquire tax-exempt status. Petitioner contends that it has always had a policy of racial nondiscrimination and therefore rejects both of these possible inferences.300 Clearly, if we were to find that petitioner publicized a nonexistent policy to attain tax-exempt status, petitioner could not prevail here. However, if we were to find that petitioner in good faith first implemented the policy in 1985 in order to become tax-exempt, this would not preclude a47 favorable determination for petitioner. Section 508(a) ensures that petitioner's tax-exempt status under section 501(c)(3) would not be retroactive to any period of racial discrimination. Moreover, we have acknowledged the right of an organization to show that it has mended its ways. Virginia Education Fund v. Commissioner, 85 T.C. at 748. See also Prince Edward Sch. Foundation v. United States, 478 F. Supp. at 112, 450 U.S. at 946 (Rehnquist, J., dissenting from denial of cert.).As already noted, petitioner has no direct evidence that it operates in accordance with a racially nondiscriminatory policy as to black students, at least from the application evaluation stage forward. Consequently, from petitioner's indirect evidence we must be able to draw the inference that petitioner would operate in a nondiscriminatory manner when considering the application of a black child or when administering school policies for an already enrolled black student.Petitioner points out that it has provided to a black parent, on the only two occasions requested, an application for admission. We note, however, that the application distribution48 stage of the admissions process is not the time when discrimination would necessarily manifest itself. Indeed, distributing application forms on request to members of a disfavored group is a harmless, empty gesture for a discriminatory school if the school feels confident that a completed application will not be submitted. A school reaches a meaningful decision point only when faced with a submitted application. Petitioner's "by request only" distribution policy ensures a lack of widespread distribution. Because of the small number involved here, we attach little weight to petitioner's distribution of application forms to two black parents.Petitioner places great emphasis on its teacher and students of Oriental descent, labeling this evidence "perhaps the most telling." Petitioner has hired and continued 301 to employ a Japanese-American teacher, who has been subjected to no discriminatory practices since his hiring. Petitioner has also admitted some American-Oriental students. Nonetheless, that petitioner does not discriminate against those of Oriental descent, which we assume to be true for present purposes, implies nothing about petitioner's policy toward blacks. 49 Petitioner concedes that the largest nonwhite racial group in the local community is the black population. Petitioner's argument that American-Orientals are "more of a minority than blacks," while certainly true for Calhoun County, is totally without significance here. We decline to embrace the notion, grounded in an erroneous application of a fortiori logic, that acceptance of a given minority group implies acceptance of all larger minority groups.In addition to the two application forms provided to black parents, petitioner relies on its interaction with blacks in other schools and the surrounding community to prove that it follows its stated nondiscriminatory policy.In today's world, interaction with persons of another race in interscholastic and community activities is unavoidable by all but the most reclusive or isolated groups. Petitioner's burden is not met by showing that it interacts with outsiders. The relevant criteria deal with restrictions on those who may become insiders, i.e., students at the school.Petitioner seeks to explain its total absence of black students on two principal grounds, economics and the quality of the local public schools.Petitioner asserts50 that Calhoun County families, "both black and white," typically cannot afford petitioner's fees. Statistics in the record, without a breakdown by race, confirm that petitioner's fees would cause a financial hardship to most families, even with only one child enrolled. This does not explain, of course, how the parents of over 400 white students are able to afford petitioner's private schooling every year. Petitioner addresses this point by representing that local blacks generally are economically disadvantaged relative to whites. Petitioner admits, however, that there are some professional people among the local black population:302 In the economic area served by Calhoun Academy there are few professional people among minority groups. * * * Most members of minority groups are blue collar workers and the few white collar jobs are primarily in public education. The children of these professional people attend the schools in which their parents teach and administer. * * * [Emphasis added.]Thus, economics alone cannot explain the total absence of black applicants over a span of 17 school years, or even over the 2 school years since petitioner's announcement51 of a racially nondiscriminatory policy.Petitioner's other principal justification for a lack of black students is that the quality of the local public schools is in some respects superior to that of petitioner. Statistics in the record show that the local public schools have better paid teachers and significantly higher expenditures per pupil. In addition, a new public high school was constructed recently. These would certainly be meaningful explanatory facts if petitioner's hallways and classrooms were empty. Unexplained, however, is why over 400 white students annually forgo the quality education in the public schools.Petitioner suggests that it prepares students better for college and other postsecondary education, and states that "it is likely that at least some parents (both black and white) have not sent their children to * * [petitioner] because they knew that their children were unlikely to go on to college." This assertion is speculative and does not explain the total absence of black students at petitioner's school.On brief, petitioner suggests another reason for its success in attracting local students:It is likely that Petitioner's strict rules and procedures52 provide a better regimen for learning than in the public schools. Certainly the parents of children enrolled at Petitioner send their children there to be inculcated with the fundamental values of discipline, hard work and respect for others, in addition to learning their "ABCs." * * It is Petitioner's approach to teaching young children that permits Petitioner to continue to attract students year after year.If meant to explain the absence of black students, this explanation exhibits the same deficiencies as petitioner's statement about its superior college preparation. This "better regimen for learning" undercuts petitioner's more 303 central argument about the relatively high quality of the local public schools. Further, there is nothing in the record to suggest that "strict rules and procedures" appeal more to the local white students and their parents than the local blacks.In sum, at least some of the black parents in the local community have the financial resources to send their children to petitioner and at least some of the public school black students go on to higher education. Combining these two facts suggests that petitioner, if it truly has a racially nondiscriminatory53 policy, should have received some applications from black students after November of 1985.Respondent's representatives, at the conference with petitioner's representatives on August 25, 1987, suggested that petitioner correspond directly with black community leaders about a nondiscriminatory policy, contact placement offices of black colleges about available teaching positions, and reduce tuition for some black students. By letter dated November 5, 1987, one of petitioner's board members stated that petitioner would not offer a tuition reduction plan for black students. The letter also stated that the other two suggestions had been discussed, but that a final decision on those had not yet been made. Petitioner did not inform respondent of a final decision on these two items, one way or the other, prior to respondent's final adverse ruling letter dated February 26, 1988.In our view, a private school generally may meet its burden of proof under section 501(c)(3) without establishing that it took affirmative steps on its own initiative to attract students and teachers of underrepresented races. Rev. Rul. 71-447, 2 C.B. 230">1971-2 C.B. 230, holds that54 a private school generally not having a racially nondiscriminatory policy as to students cannot be exempt from tax under section 501(c)(3). The definition of the key phrase, "racially nondiscriminatory policy as to students," is as follows:the school admits the students of any race to all the rights, privileges, programs, and activities generally accorded or made available to students at that school and * * the school does not discriminate on the basis of race in administration of its educational policies, admissions policies, scholarship and loan programs, and athletic and other school-administered programs. [1971-2 C.B. at 230. Emphasis added.]304 This definition on its face forbids negative racial practices rather than demands positive ones. Standing alone, therefore, this definition cannot reasonably be read to require the activities suggested by respondent's representatives.The Supreme Court has expressed its approval of the rationale in Rev. Rul. 71-447 without attempting to extend it. Bob Jones University v. United States, 461 U.S. at 595, 601-602.55 Granted, the facts before the Supreme Court did not raise an affirmative action issue because both subject schools discriminated within the Rev. Rul. 71-447 definition. 461 U.S. at 605. The Supreme Court emphasized, however, that an institution should be deemed not charitable under its analysis only when there can be "no doubt" that the activity involved is contrary to a fundamental public policy. 461 U.S. at 592, 598. Declining to take affirmative steps to seek out black students and teachers does not fall within this standard. See Farber, "Statutory Interpretation, Legislative Inaction, and Civil Rights," 87 Mich. L. Rev. 2">87 Mich. L. Rev. 2, 17 (1988):There is much dispute in our society about how the norm of racial equality should be applied in connection with issues such as affirmative action. But the core equality norm -- that intentional discrimination against racial minorities is impermissible -- is surely not in dispute. [Fn. refs. omitted].A conclusion that a private school generally is not required to take the specific affirmative acts suggested by respondent, 56 however, does not equate with a conclusion that petitioner on the record in the instant case has satisfied its burden of proving that its operations qualify for tax-exempt status. Petitioner's evidence, in summary, is that it adopted a formal statement of nondiscrimination and did not insulate itself from interaction with black outsiders. This evidence is insufficient to preponderate in favor of a finding that it operated in a racially nondiscriminatory manner. The absence of either a single black student in the school or a plausible explanation of inability to attract black students permits an inference of discrimination, particularly in view of petitioner's history. In order to prevail, petitioner must have done something to overcome the unfavorable inferences that may be drawn from the record in the instant case. Petitioner's taking of affirmative steps of some sort 305 (not necessarily those suggested by respondent's representatives) might have been appropriate to overcome the effect of the evidence in the record that is unfavorable to this petitioner.From the record before us, it appears that white students and their parents gravitate to petitioner at least in part57 because of a historical absence of black students: petitioner admits that the local public schools are superior in material respects, yet considerably less expensive. Petitioner's survival would thus depend to some extent on perpetuating its history. Overt racial discrimination, however, would clearly preclude section 501(c)(3) tax-exempt status and the corresponding financial benefits. Bob Jones University v. United States, supra.See also Runyon v. McCrary, 427 U.S. 160">427 U.S. 160 (1976). A private school with similar pressures could attempt to satisfy everyone by having an abstract nondiscriminatory policy, but with no significant efforts to attract blacks. If local blacks show little interest in attending the school, an intermediate result of the school's strategy would be little or no evidence of the policy in action. The ultimate result in this type of proceeding, and the danger for a school steering this balancing course, could very well be that the school fails in its burden of proof.After a comprehensive review of the administrative record, we find that petitioner has not carried its burden to show that it operates 58 in good faith in accordance with a racially nondiscriminatory policy as to students. In other words, we cannot conclude that nondiscrimination in petitioner's operations is more likely than discrimination, and thus the preponderance of the evidence standard has not been satisfied. Accordingly, petitioner has not shown that respondent was erroneous in denying petitioner tax-exempt status under section 501(c)(3).Decision will be entered for the respondent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624100/	MAURICE M. DILLON, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentDillon v. CommissionerDocket No. 15461-79.United States Tax CourtT.C. Memo 1981-583; 1981 Tax Ct. Memo LEXIS 160; 42 T.C.M. (CCH) 1364; T.C.M. (RIA) 81583; October 6, 1981. Maurice Malcolm Dillon, pro se. William P. Hardeman, for the respondent. DAWSONMEMORANDUM FINDINGS OF FACT AND OPINION DAWSON, Judge: Respondent determined the following deficiencies in petitioner's Federal income taxes and additions to tax: Additions to TaxYearDeficiencySec. 6651(a)Sec. 6653(a)Sec. 6654 11972$ 1,573.15$ 217.86$ 78.6619731,298.68321.2364.93$ 14.01163 Some concessions have been made by the parties and will be given effect in the Rule 155 computations. The issues remaining for decision are: (1) whether the assessment of taxes for both years is barred by the statute of limitations; (2) whether petitioner had net losses or income from California rental property for the years 1972 and 1973 and the amounts thereof; (3) whether petitioner should be allowed claimed capital losses for 1972 and 1973 or a capital gain of $2,275 for 1972 and a capital loss for 1973 of $ 1,000 as determined by respondent; (4) whether petitioner is entitled to deductions for both years in excess of the amounts allowed by respondent; (5) whether petitioner is entitled to a deduction under section 165(a) for a loss allegedly incurred in his trade or business; (6) whether petitioner is entitled to dependency exemption deductions for his two minor daughters, who were in the custody of his former wife; and (7) whether petitioner is liable for the additions to tax under sections 6651(a), 6653(a) and 6654. There164 are various subsidiary issues which are presented with respect to the major issues stated above. To facilitate the disposition of the case the Court will amalgamate its findings of fact and discussion of the legal issues. Some facts have been stipulated and are so found. Maurice Malcolm Dillon (petitioner) was a legal resident of Albuquerque, New Mexico, when he filed his petiton in this case. For each of the taxable years 1972 and 1973 he timely mailed to the Internal Revenue Service Center at Austin, Texas, a Form 1040, which states his name and address but contains no information or data pertaining to his Federal income taxes. Written across the face of the Form 1040 is a statement that petitioner protests "this form and the income tax law because they are in violation of my individual and constitutional rights." Attached to each Form 1040 is a letter of explanation signed by the petitioner. Respondent did not treat the Form 1040 as a Federal income tax return for either year. Petitioner was subsequently indicted and convicted for willfully failing to file income tax returns for 1972 and 1973 in violation of section 7203. The judgment of conviction was affirmed in165 United States v. Dillon, 566 F.2d 702">566 F.2d 702 (10th Cir. 1977), cert. denied 435 U.S. 971">435 U.S. 971 (1978). After an audit of the years 1972 and 1973, in which the petitioner cooperated by providing information, respondent sent the petitioner a notice of deficiency dated August 6, 1979, which specified the following adjustments to income: 19721973Wages$ 11,835.35 $ 11,035.16 Interest Income165.44 424.08 Rental Income or Loss(419.37)75.00 Capital Gains and Losses2,275.90 (1,000.00)Itemized Deductions(3,897.97)(1,858.41)Personal Exemptions(1,500.00)(1,500.00)The parties agree that the amounts received by petitioner as wages and interest income are correct. 1. Statute of LimitationsPetitioner alleged in his petition and contends on brief that the period for assessing taxes for the years 1972 and 1973 is barred by the statute of limitations because there have been "no charges of fraud, tax evasion or criminal intent" against him. Respondent affirmatively alleged in his answer that the period of limitations for assessment has not expired because no returns were filed for those years. We agree166 with the respondent. Since each Form 1040 mailed to the Austin Service Center reported no gross income deductions or other information it does not constitute a "return" within the meaning of sections 6011(a) and 6012. United States v. Porth, 426 F.2d 519">426 F.2d 519 (10th Cir. 1970), cert. denied 400 U.S. 824">400 U.S. 824 (1970); Cupp v. Commissioner, 65 T.C. 68">65 T.C. 68, 79-80 (1975), affd. without published opinion 559 F.2d 1207">559 F.2d 1207 (3d Cir. 1977). Where no return is filed the Commissioner may make an assessment at any time under the provisions of section 6501(c)(3). 2. Rental Income or LossThere is some disagreement regarding this adjustment. Respondent determined in his notice of deficiency that the petitioner had $ 840 in gross rental income for 1972, $ 592.37 in expenses and $ 667 in depreciation. Based upon a statement received from his lawyer, petitioner had advanced $ 100 of his own funds to his lawyer to bring an eviction action against his tenant. Therefore, his loss for 1972 was $ 519.37 instead of $ 419.37 on the rental house located in167 Gardena, California. Petitioner asserts that he is not required to claim the depreciation allowance on the house for eight months in 1972. We disagree. He is required to recognize that allowable depreciation is applicable to reduce basis during the years the capital asset was devoted to the production of income. He cannot elect to apply or not to apply the depreciation figure in a way that will be of most benefit to him. P. Dougherty Co. v. Commissioner, 159 F.2d 269">159 F.2d 269 (4th Cir. 1946); Kittredge v. Commissioner, 88 F.2d 632 (2d Cir. 1937). It is a settled principle that depreciation allowable for one year cannot be postponed or taken in a later year. Thus, a failure to deduct allowable depreciation may result in the loss of the deduction even though the basis for gain or loss is still reduced by the allowable depreciation. Petitioner admitted having gross rental income in 1973 of $ 75 for rent received on a vacant lot. He testified that he allowed the renter to obtain water from his property and he claimed an expense of $ 15 for furnishing the168 water. Based upon these two figures, he claimed net rental income of $ 60. Respondent determined that petitioner had rental income of $ 75 in 1973. We accept the petitioner's testimony as to the water expense and hold that his net rental income was $ 60 in 1973. 3. Capital Gains and LossesFor the year 1972 respondent determined that the petitioner realized a net long term capital gain of $ 4,551.81, subject to the deduction provided by section 1202, as follows: Gain on sale of lots$ 4,597.00 Loss on sale of rent house(45.19)Net gain$ 4,551.81 Section 1202 deduction(2,275.91)Taxable gain$ 2,275.90 Petitioner alleged in his petition that he had a capital loss of $ 5,063.45 for 1972. A. Sale of Albuquerque Vacant LotsOn October 20, 1971, petitioner purchased a house on 3.9 acres of land located at 6305 Camino Ocho, S.W., Albuquerque, New Mexico. On August 30, 1972, and September 12, 1972, the petitioner contracted to sell two portions of the vacant land. The provisions in the real estate contracts included terms of monthly installment payments, but no deeds were transferred to the purchaser, and one of the options open169 to petitioner, as the owner/seller, was to consider the payments as rental payments if the purchaser defaulted on any payment for more than 30 days. When the petitioner sold the lots, severing them from his home, he believed he would have to recognize no profit until he received the proceeds in excess of basis in the entire property, his home included. Since he did not receive full payment for the property in the year of sale (1972), part of his position would find credence in recognition of income due to a sale on the installment method. But the petitioner is not entitled to the benefit of the installment method because that method refers to the manner that sales are "returned." Section 453. Consequently, it is an election and it must be made on a return. Petitioner filed no return for 1972; therefore, he must recognize the gain in 1972 in accordance with the contracts. Respondent allocated petitioner's basis to the lots and to the retained property on a ratio basis compared to valuations in the county property tax records, and then determined petitioner's gain as stated in the contracts170 furnished by petitioner. By this method the respondent determined that petitioner had a gain on the lots of $ 4,597. We think this determination is correct. 2B. Sale of Gardena Rental HousePetitioner purchased a house in Gardena, California, on July 13, 1965, for the total price, including closing costs, of $ 25,677.82. He converted this house to rental property in 1970. He sold the house on August 23, 1972, for $ 28,000. Respondent calculated depreciation on the house while rental property as follows: Costs$ 25,678.00Land Allocation5,678.00Depreciable Amount20,000.00./. 20 year life =$ 1,000.00 per year1970 (used 3 months)$ 250.001971 (used 12 months)1,000.001972 (used 8 months)667.00Total$ 1,917.00Petitioner was allowed depreciation of $ 667 in the calculation of his rental loss for 1972. Petitioner's basis in the house at the time of sale was $ 25,667.82 minus $ 1,917, or $ 23,760.82. The expenses of sale were as follows: Commission$ 1,680.00Forwarding Fee25.00Prepayment418.51Late Charge4.88Discount Points (4)1,064.00Prepayment83.68Forwarding Fee25.00Termite Inspection Fee125.00Title Policy181.50Internal Revenue Stamps30.80Recording Documents6.00Reconveyance Fee40.00Title Company's Subescrow Fee5.00Escrow Fee110.00Drawing Documents10.00Service Charge20.00Repairs355.00Credit to Buyer100.00Total Expenses$ 4,284.37171 The amount realized from the sale of the property was $ 28,000 minus $ 4,284.37, or $ 23,715.63. Therefore, respondent determined that petitioner had a loss on the sale as follows: Amount Realized on Sale$ 23,715.63 Basis23,760.82 Net Long-Term Capital Loss(45.19)Petitioner calculated the expenses of sale by taking the sales price and subtracting the loan balance and the proceeds that he received. He then applied his figure for expenses to the sales price of the house and applied it again to increase the basis, thus resulting in a double benefit. Petitioner also added to the basis his costs of borrowing money against the equity in the house. However, borrowing money on the equity has nothing to do with petitioner's purchase of the house, and therefore it could not increase the basis. It would appear that if a fee were connected with the second lien, it would be money borrowed from the loan company. If it were a loan for the purchase price, it would appear that the loan company would require it to be part of the purchase money mortgage. The fees in relation to either the second or third loan did not increase petitioner's basis in the property. 172 Accordingly, we hold that that the petitioner had a loss on the sale of the rental house only to the extent of $ 45.19. C. Bed Debt Loss for 1973In his notice of deficiency respondent determined that petitioner incurred a loss of $ 2,903 from a nonbusiness bad debt which was treated as a short-term capital loss subject to a maximum capital loss deduction of $ 1,000. Petitioner alleged in his petition that he had a capital loss of $ 2,903 resulting from the nonpayment of a secured promissory note for the amount owed to petitioner. We sustain respondent with respect to this adjustment. Petitioner acknowledged at the trial that this was a nonbusiness bad debt and that only a $ 1,000 capital loss should be allowed for 1973. Petitioner stated in his opening brief that he has filed amended tax returns for 1974 and 1975 claiming capital loss carryovers. 4. Itemized DeductionsIn his notice of deficiency respondent allowed petitioner the following itemized deductions: 19721973Interest$ 1,560.88$ 382.44Taxes1,819.73901.89Contributions124.00154.32Miscellaneous393.36419.76Total$ 3,897.97$ 1,858.41Petitioner173 alleged in his petition that he should be allowed itemized deductions of $ 4,654.09 for 1972 and $ 4,030.34 for 1973. Based on the documentary evidence submitted, the petitioner has substantiated and is entitled to the following itemized deductions for the years in issue: 19721973Interest$ 1,560.88$ 700.12Taxes1,819.73992.66Contributions124.00148.32Miscellaneous393.36419.76Total$ 3,897.97$ 2,260.86In addition to the above deductions, the petitioner paid legal fees and court costs in total amounts of $ 626 for 1972 and $ 1,749.37 for 1973 in his efforts as a "Citizen Attorney General" to have portions of the New Mexico primary election laws and the legislative procedure of "stopping the clock" declared unconstitutional. Petitioner, who was an unsuccessful candidate for the Democratic nomination for the United States Senate in New Mexico, apparently succeeded in his efforts to have such laws invalidated it part. Petitioner argues that his Court actions in 1972 and 1973 were "for the benefit of the state [New Mexico] and for public purposes," and therefore his litigation expenses should be allowed as deductions under sections174 170(a)(1) and 170(c)(1). 3 Respondent takes the position that the payments made by the petitioner were not gifts either to or for the benefit of the State of Mexico or the United States. Under Section 170 a showing175 that a claimed contribution has benefited a qualified donee is clearly a prerequisite to deductibility. See Tate v. Commissioner, 59 T.C. 543">59 T.C. 543, 550-551 (1973). Nothing in this record shows that the petitioner's legal actions were brought with the consent of the State of New Mexico or the United States or for their benefit. Petitioner has failed to meet his burden of proof. Our prior opinions in Doty v. Commissioner, 62 T.C. 587">62 T.C. 587, 590-593 (1974), and Markham v. Commissioner, 39 B.T.A. 465">39 B.T.A. 465, 471-472 (1939), are controlling with respect to this issue, and we decide it for the respondent. Cf. Southern Pacific Transportation Co. v. Commissioner, 75 T.C. 497">75 T.C. 497, 600-605 (1980). 5. Claimed Business LossPetitioner has alleged that he sustained a loss of $ 1,567.16 in 1972 in connection with an earthmoving business he had with his brother, R. K. Dillon. In 1971 petitioner's brother operated a dirt contracting business in Las Vegas, New Mexico, under the name of R. K. Dillon, Contractor. In May 1971 he moved the business to Albuquerque. He and petitioner planned to go into business together, but their plans176 did not work out. Petitioner borrowed $ 4,000 to invest in the business. He loaned his brother money by making payments on equipment, namely, $ 2,893 to Rust Tractor Company and $ 371.07 to Rain for Rent. No notes or agreements were signed with respect to these loans. Petitioner worked for his brother from June through August 1971. He was paid no salary and he provided his personal automobile for use in the business without any reimbursement. During 1971, R. K. Dillon repaid petitioner $ 1,850 on the loans. In 1972 he gave petitioner some additional small cash payments. After he inherited money from his mother's estate in May 1972, R. K. Dillon made another cash payment to petitioner which they agreed "would about pay him back." We hold on these facts that the petitioner should not be allowed a loss deduction under section 165 because (1) he has failed to prove that there was a partnership existing between him and his brother and (2) the evidence shows that he simply loaned money to his brother, cosigned a note with him, and was later repaid the amount he loaned. The testimony of R. K. Dillon supports this conclusion. 6. Dependency DeductionsIn addition to177 the two dependency exemptions for himself and his son, which were allowed by respondent in the notice of deficiency, petitioner claims dependency exemption deductions for his two minor daughters, Trina and Micki, who were in the custody of his former wife, during 1972 and 1973. Petitioner and his former wife were the joint owners of a house located on Spinning Avenue in Gardena, California. His daughters resided there while living with their mother. Petitioner made the total monthly house payments, although the property settlement and divorce decree required him to pay only half. The other half was paid in lieu of child support. Petitioner made total house payments of $ 2,022 in 1972 and $ 2,016 in 1973. Since he is entitled to treat one-half of the house payments as support for his daughters, he should be credited with $ 1,011 in 1972 and $ 1,088 towards their support. In addition, petitioner paid the amounts of $ 519 in 1972 and $ 650 in 1973 as living expenses for his daughters. These amounts did not include the expenses for his daughters when they resided with him in Albuquerque. The total amounts paid for their support were at least $ 1,530 in 1972 and $ 1,658 in 1973. 178 Petitioner claims the two exemptions under the provisions of section 152(e)(2)(B), which was in effect prior to October 5, 1976. It stated that if the parent not having custody provides $ 1,200 or more for the support of such children for the calendar year, and the parent having custody does not clearly establish that he or she provided more for the support of the children than the parent not having custody, then the children will be treated as having received over half of their support during the calendar year from the noncustodial parent. Respondent concedes that it is not clearly established that the petitioner's former wife provided more support for his two daughters than he did. Accordingly, in view of our findings that the petitioner, as the noncustodial parent, provided more than $ 1,200 for the support of his daughters in 1972 and 1973, it follows that under section 152(e)(2)(B) the petitioner is entitled to the dependency exemption deductions for both daughters for both years. We so hold. 7. Additions to TaxA. Section 6651(a)Petitioner did not file, and he179 has never filed, valid Federal income tax returns for 1972 and 1973. Prior to filing the "protest" Forms 1040 for such years, he had a history of filing valid Federal income tax returns. He also filed a valid and complete return for 1976. Therefore, he knew how to make a valid return. Indeed, the forms he filed show that he clearly intended not to file valid tax returns for those years because he wanted to challenge the constitutionality of the Federal income tax laws. Petitioner has offered no evidence to show that his failure to file valid income tax returns was due to reasonable cause, as required by section 6651(a). Hatfield v. Commissioner, 68 T.C. 895">68 T.C. 895, 898-899 (1977). Petitioner contends that he should not be liable for the additions to tax for failure to file timely income tax returns since he was convicted for the same omissions on criminal charges under section 7203. He argues that the civil "penalty" offends the double jeopardy clause of the Constitution of the United States. Double jeopardy is precluded by the Fifth Amendment whether the verdict is acquittal180 or conviction, but the double jeopardy clause does not preclude the imposition of both a criminal and a civil sanction with respect to the same act or omission. Helvering v. Mitchell, 303 U.S. 391">303 U.S. 391, 404-405 (1938). Congress intended to permit the imposition of civil penalties in addition to punishment in criminal proceedings. See Hanby v. Commissioner, 67 F.2d 125">67 F.2d 125, 130 (4th Cir. 1933). The remedial, rather than punitive, character of sanctions imposing additions to a tax is clear. They are provided primarily as a safeguard for the protection of the revenue and to reimburse the Government for the heavy expense of investigation and the loss resulting from the taxpayer's actions. Helvering v. Mitchell, supra at 401. Thus there is no merit to petitioner's double jeopardy argument. Accordingly, we sustain respondent's determination with respect to the section 6651(a) additions to tax. B. Section 6653(a)Petitioner had adequate records of his income and deductions which he showed to the revenue agents during the joint investigation181 and offered in evidence at the trial of this case. He could have used such information in preparing and filing valid Federal income tax returns for 1972 and 1973. His failure to do so was due to negligence or intentional disregard of rules and regulations. Hatfield v. Commissioner, supra at 898-899. Therefore, the respondent's imposition of the additions to tax under section 6653(a) is upheld. C. Section 6654In his notice of deficiency respondent determined that the petitioner is liable for the addition to tax under section 6654 for the year 1973 for failure to make timely estimated tax payments. Petitioner has failed to carry his burden of proof on this issue. Therefore, we sustain respondent's determination. 8. Constitutional ArgumentsAt different times, in his documents, pleadings and briefs, the petitioner has asserted an array of constitutional arguments, all of which lack merit. Petitioner's constitutional challenge to the Federal income tax must be rejected. The constitutionality of the Federal income tax laws passed since the enactment of the Sixteenth Amendment has been upheld judicially on too many occasions for us presently182 to rethink the underlying validity thereof. See, e.g., Brushaber v. Union Pac. R.R. Co., 240 U.S. 1">240 U.S. 1 (1916); Stanton v. Baltic Mining Co., 240 U.S. 103">240 U.S. 103 (1916); Cupp v. Commissioner, 65 T.C. 68">65 T.C. 68 (1975), affd. 559 F.2d 1207">559 F.2d 1207 (3d Cir. 1977). Furthermore, the Sixteenth Amendment was enacted in response to the Supreme Court's decision in Pollock v. Farmers' Loan & Trust Co., 157 U.S. 429">157 U.S. 429 (1895), which held unconstitutional the income tax of 1894 as a direct tax without apportionment. The "whole purpose" of the Sixteenth Amendment, as stated by the Supreme Court in Brushaber v. Union Pac. R.R. Co., supra at 18 was "to relieve all income taxes when imposed from apportionment from a consideration of the source whence the income was derived." It is also clear that the petitioner's Fifth Amendment rights have not been violated. The Fifth Amendment does not excuse any individual from reporting his income and filing an income tax return. United States v. Sullivan, 274 U.S. 259">274 U.S. 259 (1927);*183 United States v. Porth, 426 F.2d 519">426 F.2d 519 (10th Cir. 1970), cert. denied 400 U.S. 824">400 U.S. 824 (1970). Petitioner's First Amendment arguments must also be rejected. Greenberg v. Commissioner, 73 T.C. 806">73 T.C. 806, 810-811 (1980); Muste v. Commissioner, 35 T.C. 913 (1961). To reflect concessions and our conclusions on the disputed issues, Decision will be entered under Rule 155. Footnotes1. All section references are to the Internal Revenue Code of 1954, as amended and in effect during the years at issue, unless otherwise indicated.↩2. Petitioner has a gain for the year 1972 to the extent that the amount received by him in that year exceeded his adjusted basis in the property.↩3. SEC. 170. CHARITABLE, ETC., CONTRIBUTIONS AND GIFTS. (a) Allowance of Deduction.-- (1) General rule.--There shall be allowed as a deduction any charitable contribution (as defined in subsection (c)) payment of which is made within the taxable year. A charitable contribution shall be allowable as a deduction only if verified under regulations prescribed by the Secretary or his delegate. (c) Charitable Contribution Defined.--For purposes of this section, the term "charitable contribution" means a contribution or gift to or for the use of-- (1) A State, a possession of the United States, or any political subdivision of any of the foregoing, or the United States or the District of Columbia, but only if the contribution or gift is made for exclusively public purposes.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624105/	Frank Nelson, Jr., and Lee Etta Nelson v. Commissioner.Nelson v. CommissionerDocket No. 62593.United States Tax CourtT.C. Memo 1958-179; 1958 Tax Ct. Memo LEXIS 45; 17 T.C.M. (CCH) 888; T.C.M. (RIA) 58179; September 29, 195845 1. Held: (1) that petitioner's direct advances to Southwest Land Improvement Company, Inc., of which he was sole stockholder, constituted contributions to its capital and became worthless in 1949, and (2) that the payments by petitioner, less the assets received upon dissolution, to third parties on behalf of Southwest constituted guaranty payments and were deductible in 1949 as bad debts under section 23(k), Internal Revenue Code of 1939. Putnam v. Commissioner, 352 U.S. 82">352 U.S. 82 (1956). Held, further, that the bad debts were nonbusiness bad debts under section 23(k)(4) of the 1939 Code. 2. Petitioner was also the sole shareholder of the Frank Nelson Realty Company, Inc., a real estate and insurance company whose largest account was Southwest. Realty, after 5 years of losing operations, was dissolved in 1950. Petitioner, besides his $2,000 original capital contribution, had advanced about $32,000 to Realty by the end of 1950. Held, that the advances to Realty were contributions to capital; held, further, that the original contribution of $2,000 plus the net advances as of December 31, 1949, became worthless in 1949 and the balance became worthless in 1950. Lee C. Bradley, Jr., Esq., 46 Comer Building, Birmingham, Ala., and John N. Wrinkle, Esq., for the petitioners. Frederick T. Carney, Esq., for the respondent. BLACK Memorandum Findings of Fact and Opinion The respondent determined deficiencies in income tax for the years 1949 and 1950 in the amounts of $22,107.30 and $5,286.04, 1 respectively. The deficiency for each year is due to several adjustments only one of which (for each year) is in issue. The adjustment in issue (for each year) is the disallowance of losses in two wholly owned corporations as business bad debts under section 23(k)(1), Internal Revenue Code of 1939, 2 and the determination that those losses represent losses of capital contributions under section 23(g), or, in the alternative, that they represent nonbusiness bad debts under section 23(k)(4). The amounts of the losses are also in issue. Findings of Fact A stipulation of facts has been filed; it is incorporated herein by this reference. Frank Nelson, Jr., hereinafter 47 referred to as petitioner or Nelson, and Lee Etta Nelson are husband and wife residing at Birmingham, Alabama. They filed joint individual Federal income tax returns for the calendar years 1949 and 1950, on the cash basis, with the Collector of Internal Revenue for the District of Alabama. Southwest Land Improvement Company, Inc., hereinafter referred to as Southwest, was incorporated under the laws of the State of Alabama on May 15, 1945. The paid-in capital was $2,000 represented by 200 shares of $100 par value stock. Of these shares, 197 were issued to Nelson. The remaining 3 shares were issued to members of his family but were acquired by Nelson on December 18, 1945. He thereafter remained the owner of the entire 200 shares until the dissolution of Southwest. The Frank Nelson Realty Company, Inc., hereinafter referred to as Realty, was incorporated under the laws of the State of Alabama on February 19, 1946, for the purpose of engaging in the general real estate and insurance business. The authorized capital stock was divided into 200 shares of $10 par value stock. Of these shares, 160 were issued to Nelson. The remaining 40 shares were issued to Robert W. Holmquist, who acted 48 as manager of Realty, and William P. Robertson. They immediately endorsed the 40 shares issued to them and delivered them to Nelson, who thereafter owned all of the stock of Realty. Nelson, his mother Olive L. Nelson, and his sister Margaret Nelson DeBardeleben, hereinafter referred to as Margaret, beneficially owned all of the stock of The Frank Nelson Estate, Inc., hereinafter referred to as Estate. Estate owned all of the stock of both the Frank Nelson Building, Inc., hereinafter referred to as Building and the Nelson Realty Co., Inc., hereinafter referred to as Nelson Realty. Southwest had as its principal purpose the development of a real estate subdivision, Idlewild Hills, consisting of about 100 lots. It sold lots to the public generally and contracted to build houses for war Veterans exclusively, under the benefits of the priority regulations affecting building materials existing in favor of war Veterans at that time. In 1945 or 1946, Southwest started construction of 25 houses in Idlewild Hills. Funds were obtained by a construction loan from Investors Syndicate, hereinafter referred to as Investors, which was secured by a mortgage on the Southwest real estate and which Nelson 49 guaranteed, and by deposits of war Veterans. Nelson also constantly advanced funds to Southwest. His first advance in the amount of $6,000 was made shortly after Southwest was organized. Southwest did not give Nelson any notes evidencing the advances and no provision for interest was made. On its books Southwest recorded these advances from Nelson as accounts payable. Although Southwest held itself out as a corporation Nelson authorized employees of Southwest, in the event of questions over Southwest's credit, to state that Nelson was behind Southwest and would make good any of its obligations. In addition to his endorsement of the Investors note, supra, Nelson acknowledged his liability for Southwest's other debts. In the latter part of 1946, Southwest encountered financial difficulties, which were due in part to poor weather which hampered construction work, unexpected rock deposits, and a shortage of materials. From that time on Southwest was never in sound financial condition. On November 8, 1946, Edward Rigel filed a suit against Nelson, Southwest, Investors, Holmquist, 50 and others alleging that he (Riegel) had deposited money with Southwest for the purchase of a lot and the construction of a house thereon and that the deposit had been used in a wrongful manner. He also alleged that he was led to believe that Nelson was doing business as an individual rather than as a corporation and that Southwest was merely Nelson's trade name. He asked, inter alia, that a receiver be appointed to manage Southwest and that a personal decree be entered against Nelson and the other defendants. On November 19, 1946, a petition was filed by a group of Southwest's creditors, praying that proceedings against Southwest be had under Chapter X of the Bankruptcy Act. A special master was appointed and on March 19, 1947, he submitted a report which recommended that the petition be approved. The balance sheet of Southwest at December 31, 1946, showed the following: AssetsCash$ 27.82Accounts Receivable11,350.50Houses Unsold194,925.05Inventory - bldg. material & sup-plies12,911.35Lots Unsold83,254.08Other6,928.19$309,396.99LiabilitiesMiscellaneous$ 7,020.09Accounts payable68,628.51Deposits to be Refunded (Vet-erans)95,307.00Notes Payable4,000.00Mortgages Payable - Investors86,261.50Reserve for Improvements35,273.01Due Stockholders - Paid-in Surplus (contrib-uted by Nelson)$30,053.81Capital Stock2,000.00Surplus 12/31/45208.71$32,262.52Less Deficit - 194619,355.6412,906.88$309,396.9951 About the beginning of 1947, Nelson made certain calculations relative to the subdivision which can be summarized as follows: Cost to complete project$489,065Proceeds from sale of 25 houses at$15,000375,000Net cash deficit on operations (offsetby ownership of 50 lots)$114,065 After making the calculation, Nelson felt that by completing the project there was a chance that he would come out even, but that if he abandoned the project his loss would be greater than that shown in the above calculation. He felt that if he did not lose too much money by going ahead, and by keeping a good reputation for meeting his obligations, he could proceed to build on the remaining lots in Idlewild Hills and start other subdivisions which would be profitable. Nelson decided that about $421,000 would be needed to complete the project. However, as shown by the balance sheet at December 31, 1946, Southwest did not have any substantial liquid resources and its properties were already mortgaged. Nelson did not have any substantial cash resources but he did own a valuable interest in Estate. After considerable efforts to obtain financing for Southwest from various sources Nelson finally induced his mother and 52 sister to allow the real properties owned or controlled by Estate to be mortgaged on behalf of Southwest. On May 14, 1947, a loan in the principal amount of $421,260.73, with interest at the rate of 5 per cent per annum, was secured from Investors. The note was due and payable on demand after May 14, 1948, and prior to May 14, 1949, and without demand on May 14, 1949. Nelson, Southwest, Building, Estate, and Nelson Realty were jointly and severally liable on the note evidencing the loan. The loan was secured by a mortgage on Idlewild Hills, and by junior mortgages on real property owned by Building, Estate, and Nelson Realty. The agreement pursuant to which the loan was made provided that the principal sum shall be advanced by Investors to enable the borrowers to complete the Idlewild Hills project, i.e., to complete the construction of the houses, to pay outstanding bills for labor and material, etc., refund any deposit of earnest money, pay and satisfy the prior mortgages held on 29 lots by Investors, and pay all costs and expenses incident to litigation pending against Southwest. Certain provisions dealt with permanent mortgages on the houses and proceeds from the sale of the houses. 53 Southwest recorded the loan as a mortgage payable to Investors. The proceeds of the loan were applied or disbursed in accordance with the loan agreement and the houses were completed. On November 25, 1947, the petition in bankruptcy against Southwest was dismissed. The houses, however, could not be immediately sold at a price which Nelson regarded as fair. Nelson, despite continued pressure from Investors and his mother and sister, refused to sell them at deflated prices. Southwest did not sell any houses in 1947. Its income tax return for 1947 showed gross profit (from rents) in the amount of $300, expenses of $3,583.41, and a resulting net loss of $3,283.41. The balance sheet of Southwest at December 31, 1947, showed the following: Assets:Cash$ 6,758.70Accounts Receivable11,050.50Cost of Lots Unsold125,157.29Cost of Houses Unsold305,756.85Inventory - Building Material &Supplies1,233.60Other10,239.13Total Assets$460,196.07Liabilities: Miscellaneous$ 5,051.99Reserve for Improvements35,273.01Commissions Payable9,790.00Mortgages Payable400,771.33Due Stockholders - Paid-in Surplus$29,740.08Capital Stock2,000.00Surplus, 12/31/45208.71$31,948.79Less: 1946 Deficit toSurplus19,355.64$12,593.15Less: 1947 Deficit toSurplus3,283.419,309.74$460,196.0754 In 1948, Investors demanded payment. On May 14, 1948, an agreement was entered into between the parties to the Investors loan whereby Investors agreed 3 to subordinate its mortgage on the real estate of Building to a mortgage to be given by Building to Connecticut General Life Insurance Company, hereinafter referred to as Connecticut. On June 30, 1948, Building obtained a loan in the principal amount of $125,000, bearing interest at the rate of 4 per cent per annum, from Connecticut and secured the same by a mortgage on its real property. The note was due in monthly installments of $882.50 beginning July 10, 1948, and the balance on June 10, 1964. The net proceeds of the loan, in the amount of $122,729.40, were paid by Connecticut to Investors to be applied on the Investors loan. Building paid $2,400.85 as expenses of procuring the loan. Shortly before the loan was obtained Building, on its books, charged $125,130.25 ($122,729.40 plus $2,400.85) to accounts receivable - Southwest. When the loan was procured it credited the Southwest account for the amount charged and charged $125,526.99 to accounts receivable - Nelson. 4 Southwest, on its books, charged $15,680.59 of the $122,729.40 55 paid to Investors to interest and the balance to the principal of the Investors loan. Southwest originally credited $125,526.99 to accounts payable - Building. However, by journal entry dated October 30, 1948, it (Southwest) transferred the credit to accounts payable - Nelson and explained the entry as follows: "to correct error of June 30, 1948 and transfer indebtedness to Frank Nelson, Jr. instead of Frank Nelson Building, Inc." By a journal entry dated the same day (October 30, 1948) Southwest credited Nelson with sums originally credited to Building for interest payments made by Building to Connecticut. Subsequently, interest paid by Building to Connecticut from October through July 1949 was credited by Southwest to Nelson. The net effect of the above entries concerning the Connecticut loan (and the interest and expense connected therewith) on the books of Building and Southwest was to treat Building as being the 56 debtor of Connecticut, Nelson as being the debtor of Building, and Southwest as being the debtor of Nelson. During 1948, Southwest sold one house and lot at a loss and on its return for 1948 reported a net loss of $39,454.76. On its return it deducted interest in the amount of $30,390.28, which included: Investors (portion of the $122,729.40proceeds of Connecticut loan paidto Investors which Southwestcharged to interest)$15,680.59Accrued, but unpaid, interest on In-vestors loan$11,779.59Interest accrued on Connecticut loanwhich apparently was paid by Build-ing and which Southwest owedNelson and which Nelson in turnowed Building2,865.49$30,325.67 At December 31, 1948, the book cost of the houses was $348,781.66 (some $57,000 had been expended in 1948) and the book cost of the lots was $91,972.90. Investors continued to apply pressure on Nelson to repay the loans. William P. Engel of Engel Realty Co. was prevailied upon to assist Nelson in securing a loan through the Bank for Savings and Trust (hereinafter referred to as the Bank) of Birmingham, Alabama, and the Reconstruction Finance Corporation (hereinafter referred to as R.F.C.). Nelson, Southwest, Building, Estate, and Nelson Realty, 57 by a letter dated May 5, 1949, made an application to Engel for a loan of a sum not less than $300,000 and not more than $325,000. The prospective borrowers agreed to mortgage certain properties and to apply the proceeds of the sale of the Southwest houses and lots to the repayment of the loan. They also agreed that: "9. In addition to the matters and things herein provided for, and conditioned upon your ability to obtain said loan, we shall turn over to you for handling, all of the properties belonging to and owned by the Southwest Land Improvement Company aforedescribed; you are to manage said property, have general charge of the same, and have the right to employ agents to sell the same, or sell the same through your own agency, pay regular agent's commission to yourself or to others for the sale of the same, make whatever repairs that may be necessary, insure said property from time to time, and, in fact, do every, any and all things that you may deem necessary in and about the handling of said property, having for its purpose the sale of the same as expeditiously as possible. "10. In consideration of the services that you are to render in the handling of the property of the Southwest 58 Land Improvement Company in the manner herein described, we are to pay you the sum of Fifteen Thousand Dollars ($15,000.00), which sum will be paid to you in cash upon the closing of the loan herein provided for. "11. We shall have the right to cancel and terminate your handling of said property at any time we wish, but in the event we do so, you shall not be required to refund to us any of the consideration to be paid to you. "12. Your services in and about the handling of the said property of Southwest Land Improvement Company shall continue until all of the same has been sold, or until we have dispensed with your services as in the manner herein provided. "13. The $15,000.00 to be paid to you for supervision of the Southwest Land Improvement Company property shall be exclusive of the payments that might be made to you or other agents for the sale of the property, based upon the regular real estate commission provided for by the Real Estate Board of the City of Birmingham." Southwest did not need to have Engel manage its properties but agreed to the above-quoted conditions in order to obtain the loan. The R.F.C., by a letter dated May 12, 1949, approved the application for a loan 59 in the amount of $325,000 (the outstanding balance never to exceed $300,000) subject, inter alia, to the following conditions: (1) that Engel unconditionally guarantee the last $100,000 of the loan; (2) that $291,000 of the proceeds be used to retire the Investors loan and the remaining $34,000 of the proceeds be used as working capital to rehabilitate the premises (Southwest's houses) for sale; and (3) during the life of the loan no dividends, bonuses, or commissions be paid to the borrower's officers, directors, or shareholders without the prior written consent of the lenders. An amendatory letter of approval dated May 16, 1949, stated that Nelson would not be required to sign the note as a joint maker but that he would be required to sign as an unconditional guarantor. On June 9, 1949, a loan in the amount of $325,000 was secured from the Bank and the R.F.C., the R.F.C. participating to the extent of 60 per cent. The note evidencing the loan (dated May 31, 1949) provided for interest at the rate of 6 per cent per annum on 40 per cent of the principal (Bank's share) and 4 per cent per annum on 60 per cent of the principal (R.F. C.'s share) and was signed by Southwest, Building, Estate, 60 Nelson Realty, and Nelson. Interest payments were to be monthly, commencing 30 days after execution, and principal payments in the amount of $600 were to be monthly, commencing 60 days after date. It was secured by a mortgage on all of the real property of Southwest and by junior mortgages of Building, Estate, and Nelson Realty. Of the net proceeds of the loan in the amount of $297,229.45, $274,458.66 was applied to payment of the remaining principal on indebtedness to Investors; 561 $15,270.79 was paid to Bainbridge & Mims, attorneys, for services performed by them in connection with the securing of the Investors loan in 1947; and the remaining $7,500 was advanced to Southwest. On August 18, 1949, after the balance of the Bank loan had been reduced to some extent, Bank advanced an additional $5,000 on the some note. The $12,500 advanced directly to Southwest was used to place the houses (which had been lying idle for over a year) in salable condition. Nelson paid $631.25 in 1949 for title insurance expense in connection with the Bank loan. On June 9, 1949, concurrently with the execution of the note to Bank, an instrument addressed to Estate, Building, and Nelson Realty was executed by Southwest and Nelson. The instrument stated that Southwest and Nelson, "its [Southwest's] organizer, the equitable owner of all of its stock and guarantor of its obligation" desire to induce the addressees to join in the execution of the note and mortgage to Bank. As an inducement to, and as consideration for, this action Southwest and Nelson stipulated and agreed, inter alia, that: (1) the proceeds of the Bank loan will be used to discharge the indebtedness of Southwest, for which it (Southwest and Nelson) and the addressees are liable, to Investors; (2) Southwest is the primary obligor on the indebtedness to Investors and it (Southwest) shall remain the primary obligor on the Bank loan; (3) the addressees, as between the parties hereto, become liable to Investors and will become liable to 62 Bank only as accommodation to Southwest and Nelson; (4) Nelson, in order to induce the addressees to become liable to Investors and Bank, promised and now promises to unconditionally guarantee that if they are forced to pay any part of either indebtedness he will make them whole and hold them harmless from liability; (5) as between the parties the assets of Southwest and Nelson, in the order named, shall be exhausted before any of the assets of the addressees are subjected to satisfaction of the indebtedness; (6) Nelson, as unconditional guarantor of the primary obligor, Southwest, shall be given no notice or demand of payments required or made by the addressees; (7) the addressees shall not be required to exhaust their remedies against Southwest before calling upon Nelson for satisfaction of the indebtedness; and (8) Nelson, upon demand of any of the addressees or Margaret, which demand shall not be made prior to default of a payment to Bank, shall transfer and assign to Southwest his full legal and equitable title to all stock owned by him in any of the addressees, and further that for purposes of clarification, Margaret now holds the stock of Nelson in Southwest not only for the 63 purpose of securing the indebtedness of Nelson to Margaret but also for the purpose of protecting and securing the addressees. Finally, the instrument recited that any prior agreements are still in full force. Pursuant to an agreement dated August 27, 1949, Building and Nelson Realty were merged into Estate in 1949, and Estate, in consideration of the surrender by Nelson of his stock therein (in Estate) agreed, inter alia: (1) to pay principal, interest and other expenses on the obligation to Connecticut, which were ascertained to total $130,821.04 ($130,024.05 plus $796.99), of which $5,682.94 represented interest accumulated on the $125,000 principal by August 27, 1949; (2) to pay the said $107,106.02 664 of the principal amount of the said $300,000 debt to the Bank and R.F.C.; (3) to pay a debt of $15,000 owed by Southwest to Engel; and (4) to pay rent to Building owing by Realty. The agreement was executed in strict conformity with the aforesaid June 9, 1949, instrument and operated, ultimately, to discharge all obligations due thereunder by Nelson. Paragraph 3(b)(ii) of the agreement of August 27, 1949, provided as follows: "(ii) The indebtedness shown on said books of account as owing to the Estate Company, to the Building Company, or to the Realty Company by Southwest, and by Tucker & Prince, and by Frank Nelson Realty Company, have been treated as owing by, and have been charged to Mr. Nelson. For purposes of this paragraph (b), the indebtedness of Tucker & Prince and that of Frank Nelson Realty Company includes only the balance on said books of account as of July 31, 1949. Southwest recognizes that it is the principal obligor with respect to the indebtedness so shown as owing by it and by Tucker & Prince, and accordingly promises to pay to Mr. Nelson, on demand, the aggregate amount of the said indebtedness." As of August 31, 1949, Realty owed Building the sum of $4,452 as rent for the office space occupied by Realty since 1947. The amount of such rent owing at July 31, 1949, is not in the record, but the $4,452 was the amount charged to Nelson under the agreement. The law firm of Tucker & Prince performed services for Nelson and Southwest in connection with the loans from Investors, Connecticut, and Bank. Tucker 65 & Prince owed rent to Building. Building reduced the rent due from Tucker & Prince by $2,308 and charged that amount to Nelson on May 30, 1949. Nelson paid the amount to Building by a charge to his account under Paragraph 3(b)(ii) of the August 27, 1949, agreement. The law firm of Leader, Tenenbaum & Perrine rendered services to Estate, Building, and Nelson Realty in connection with the Bank loan. Building paid that firm $1,020. This amount was charged to Nelson under Paragraph 3(b)(ii) of the August 27, 1949, agreement. The amounts paid by Nelson (charged to him in computing his proceeds on his sale of the stock of Estate) under the August 27, 1949, agreement are as follows: Connecticut loan$130,821.04 1Bank loan107,106.02Management fee to Engel pursuantto Bank loan agreement15,000.00Legal fee to Tucker & Prince2,308.00Legal fee to Leader, Tenenbaum &Perrine1,020.00Realty rent to building$4,452.00 66 At the time of the June 9, 1949, and August 27, 1949, agreements there was no reasonable prospect that Southwest would be able to reimburse Nelson, immediately or in the reasonably foreseeable future, for a substantial part of Nelson's advances to or on behalf of Southwest. By the end of 1949, all of the assets of Southwest had been disposed of except personal property with a basis of $5,075.64 and lots of real estate with a book value of $60,029.66. At the end of 1949, the books showed that, in addition to the $2,000 paid in by Nelson for capital stock, he had advanced the net amount of $72,600.57 to Southwest, $30,053.81 of which has been stipulated to be a contribution to capital. Included in the $72,600.57 are the $2,308 legal fee to Tucker & Prince and $796.99 of the $130,821.04 representing the Connecticut transactions. ** The books also showed (at the end of 1949) that Southwest owed Realty $26,501.28. The 67 following entries appear on Southwest's books under date of December 28 (presumably 1949): DR.CR.Dec. 28Frank Nelson Realty Company, Inc.$26,501.28Frank Nelson, Jr.$26,501.28To give effect to the fact that monies advanced byFrank Nelson Realty Company, Inc. to Southwest LandImprovement Company were received by the formerfrom Frank Nelson, Jr. for use in making such ad-vances, to serve his convenience and that said FrankNelson Realty Company, Inc. acted, in effect, as agentfor said Frank Nelson, Jr. to acknowledge FrankNelson, Jr.'s actual beneficial ownership of the indebt-edness from Southwest Land Improvement Companyarising out of the transaction and to give effect to hisobligation to save said Frank Nelson Realty Company,Inc. harmless with respect thereto.Dec. 28Security Savings Bk. - Note Pay67.1228City of Birmingham - Improvement Assmt.263.12Frank Nelson, Jr.330.24Liabilities assumed.The record does not show whether the $330.24 transferred by the above entry to accounts payable - Nelson is included in the $72,600.57 which the books showed that Southwest owed Nelson. The profit and loss statement of Southwest for 1949 showed the following: Sales of houses 168 $238,357.93Cost of houses sold403,366.46Loss on houses sold$165,008.53Expenses: 2 Attorney fees $ 17,578.793 Interest paid 14,356.42Repairs and mainte-nance7,592.36Unemployment tax$ 34.82Rent and lights28.93Telephone and tele-graph13.56Commissions687.50Water28.30Taxes274.66Sundry taxes andlicenses39.09Insurance157.05Professional services428.31General expense3.63Mortgage expense75.95Machinery & equip-ment charged off234.70Organization expensecharged off506.31Insurance - prepaid ac-count charged off2,080.86Mortgage expense de-ferred charged4 off 2,340.82Electric poles83.00Water taps365.00Miscellaneous adjust-ments.72Loss on lots trans-ferred in part pay-ment of indebted-5 ness 35,029.6681,940.44$246,948.97Adjustments69.24Loss - 1949$246,879.73 An agreement regarding the dissolution of Southwest dated December 28, 1949, and signed by Nelson, Holmquist, and John S. Tucker, Jr., provided: (1) that Nelson, Holmquist, and Tucker, constituting all of the shareholders of Southwest, agreed unanimously that Southwest should forthwith dissolve under the provisions of Alabama69 law; (2) that Nelson, Holmquist, and Tucker agree that Nelson is a creditor of Southwest and the beneficial owner of all of its stock and is entitled to all of the property of Southwest subject to the payment of debts, including his own; (3) that in order to induce Holmquist and Tucker to sign this instrument, Nelson agrees to execute all instruments which may be required to conform to contracts made by Southwest prior to dissolution and to execute any other instruments needed to conform to obligations imposed by the August 27, 1949, agreement or any other agreements; (4) that the only creditors of Southwest are Bank, Nelson, Holmquist, and Realty; that the indebtedness to Bank is to be discharged by Estate in consideration of payments by Nelson but Southwest is not relieved of its obligation to Nelson; that Nelson agrees to pay Holmquist's indebtedness; that Nelson agrees to pay the Realty indebtedness; that Nelson agrees to hold Holmquist and Tucker harmless for any of Southwest's debts they may be required to pay; and further that Nelson represents that he is a creditor of Realty in an amount in excess of the indebtedness of Southwest to Realty and that he supplied Realty with the 70 funds which the books of account show that Southwest owes Realty; that in reality Realty acted as Nelson's agent; that Nelson will cause Realty to credit Southwest for the amount owed and that Southwest will then be indebted to Nelson for a like amount. Southwest was dissolved on December 28, 1949. Upon dissolution Nelson received the remaining assets consisting of real estate (lots) with a book value of $60,029.66, 771 and personal property with a book value of $5,075.64. The personal property consisted of utility deposits in the amount of about $4,300, mortgages and notes receivable , and a small amount of cash. Nelson personally collected about $3,500 in utility deposits. The utility companies informed him that the $3,500 would be the extent of his refund. The fair market value of the deposits received by Nelson upon the dissolution of Southwest was $4,300. As stated previously, Realty was formed for the purpose of engaging in the general real estate and insurance business. Nelson contemplated that it would sell the properties developed by Southwest and also engage in the general building business. A major portion of the business transactions of Realty consisted of its participation in the sale of lots and houses and insurance thereon for Southwest. Holmquist was in general charge of the Realty operations. Nelson authorized Holmquist to pledge his (Nelson's) credit if any question arose over the credit standing of Realty. Realty, whose financial success was dependent to a great extent on Southwest's financial success, was not in sound financial condition after the latter part of 1946, when Southwest encountered financial difficulties. By the end of 1946, Southwest owed Realty $12,064.86, which amount included $10,000 for selling commissions and $1,387.06 for insurance premiums. While Southwest was having financial difficulties in 1946-1948 and because of its involvement in the bankruptcy proceedings, it ceased some of 72 its activities. Nelson advanced certain funds to Realty, which Realty expended on the Idlewild Hills project of Southwest. Realty recorded these amounts by crediting accounts payable - Nelson and debiting accounts receivable - Southwest. Southwest recorded the amounts as accounts payable - Realty. As of December 31, 1949, the books of Realty showed that Southwest owed it $26,501.28 and $672.07. Realty's books also showed a liability to Nelson in excess of these amounts due from Southwest. Under date of December 31, 1949, Realty made the following entries on its books: DR.CR.Dec. 31Frank Nelson, Jr.$26,501.28Southwest Land Improvement Company$26,501.28To transfer receivable from S.W.L. to Frank Nel-son, Jr.Dec. 31Frank Nelson, Jr.672.07Southwest Land Improvement Company672.07To clear out Southwest Land Improvement Companyaccount and transfer charge to Frank Nelson, Jr. The balance sheet of Realty at December 31 of the following years is as follows: ASSETS19461947194819491950Cash in Bank$ 5.95($ 394.94)$ 14.63$ 362.32Accts. Rec. Ins.37.50603.35Furniture & Fixtures199.24199.24199.24571.33Organization Expenses106.23106.23106.23106.23Southwest Land Imp. Co.10,699.5811,624.6321,936.12Southwest Ins. Acct.1,387.06Temporary Assets291.2120.00Employees Accts.110.801,540.46$12,726.77$11,645.96$23,796.68$ 1,663.230LIABILITIESFrank Nelson, Jr.$ 1,885.00$ 8,254.64$22,623.23$ 5,853.10$29,992.03Withholding Tax116.90136.80Social Security Tax103.46234.38147.48Commissions Payable8,894.477,217.342,681.89Earnest Money3,500.002,826.53Unearned Premiums506.66Accts. Payable500.004,089.215,794.75Frank Nelson Bldg. Inc.Rent3,534.004,914.00Capital Stock2,000.002,000.002,000.002,000.002,000.00Surplus (Deficit)(773.06)(9,560.40)(11,638.31)(20,009.43)(31,992.03)$12,726.77$11,645.96$23,796.68$ 1,663.230Realty 73 showed losses on operations as follows: YearLoss1946$ 773.0619478,787.341948(Not Shown)19496,260.71195011,982.60Realty was dissolved on December 28, 1950. From the date of its incorporation through December 28, 1950, it showed an operating loss of $32,252.31. 8During the period 1946-1949, nelson devoted all of his time to the affairs of Southwest, Realty, Estate, Building, and Nelson Realty. He served as president of all these corporations and received salaries from some of them. In a letter dated May 13, 1955, to the Internal Revenue Service, Birmingham, Alabama, in connection with his 1949 and 1950 income taxes, Nelson stated, inter alia, as follows: "In the early part of 1949, Investors Syndicate was threatening to foreclose all the mortgages given to it by Southwest Land Improvement Company, and by Frank Nelson Building, Inc., Frank Nelson Estate, Inc., and Nelson Realty Company, Inc. (hereinafter referred to as the 'three companies'). 74 In order to forestall foreclosure by Investors Syndicate and the substantial loss which is necessarily incurred thereon, a loan was obtained from the Bank for Savings & Trusts. Reconstruction Finance Corporation took a sixty per cent (60%) deferred participation therein. The terms of the loan were set forth in detail in a letter dated May 5, 1949, and addressed to William P. Engel by Frank Nelson, Jr., Southwest Land Improvement Company and the three companies. * * "When Southwest Land Improvement Company first began its operations, it obtained a number of construction loans from Investors Syndicate. They were secured by a mortgage on all of Southwest's properties. I signed each of the notes and thus became guarantor of the obligations. Later on, the construction loans were consolidated into a $421,000 loan which was secured by mortgages on all the properties of Southwest and the three companies. I also signed that note. Southwest would have been unable to obtain the $421,000 loan from Investors Syndicate on the security of its properties even with my personal endorsement. "There was always a definite and specific understanding that Southwest was the principal debtor and that I was 75 the first surety against whom recourse might be had in the event Southwest could not meet its obligations. This was not put into writing until the execution of the letter agreement dated June 9, 1949, written by me and Southwest to the three companies. While the oral understanding between my mother, my sister and me was probably not phrased in as technical terms as those of the letter agreement, we were being consistently advised by counsel and there was never any doubt but that I was to be the principal surety for the obligations of Southwest. Possibly my obligations would have to be determined under the general law relating to suretyships rather than the terms of the oral agreement. I have been informed by counsel that an agreement between sureties relating to contribution need not be in writing. * * "Although I cannot be certain of the price which would have been paid at a foreclosure sale, it is my opinion that Southwest would have received a credit of approximately $100,000 on the Investors Syndicate's indebtedness, if there had been a foreclosure. In the final analysis, Southwest realized approximately $190,000, net, on sales of improved property made by it, and, on liquidation 76 of Southwest, the Revenue Agent's report assigned the value of $43,000 to the properties which were transferred to me. Thus, Southwest and I ultimately received approximately $233,000 in cash and property values instead of the $100,000 which might have been realized on a foreclosure sale. It is obvious that one object of the loan was to reduce anticipated losses." Nelson, on his return for 1949, reported on Schedule D long-term capital gains and losses (no short-term transactions were reported) as follows: Stock of EstateSales price$729,423.34Less basis330,542.82Gain$398,880.52Less - Stock of Southwest2,000.00Net Gain (one-half to gross income)$396,880.52Nelson, on his 1949 return, claimed an ordinary deduction for a bad debt in the amount of $306,486.52 on the Southwest venture computed as follows: Bad Debt - Southwest Land Improve-ment CompanyLoans - total$336,562.16ReceivedLots - which cost$60,029.66 - Value$25,000.00Other Assets - at bookvalue (which is prob-ably an overstatementof value)5,075.6430,075.64Balance - Uncollectible$306,486.52The respondent reduced the capital gain realized by petitioner on the disposition of the stock of Estate from $398,880.52 to $329,718.83. (Petitioner 77 does not object to that adjustment.) Respondent disallowed the bad debt deduction of $306,486.52. He computed Nelson's loss on the Southwest venture as follows: 9The respondent treated the loss as a capital loss and computed the petitioner's capital gains as follows: Long-term capital gain on sale ofstock of Frank Nelson Estate,Inc., Exhibit B$329,718.83Long-term capital loss on stock ofSouthwest Land ImprovementCompany, Inc., Exhibit A283,605.00Net long-term capital gain$ 46,113.83 The respondent explained his treatment of the loss on the Southwest venture as follows: "(b) 78 It is determined that the deduction claimed by you in your return for the taxable year ended December 31, 1949 in the amount of $306,486.52 and described therein as a bad debt due from Southwest Land Improvement Company, Inc., is not an allowable deduction under provisions of the Internal Revenue Code of 1939. "It is further determined that advances by you to Southwest Land Improvement Company, Inc., and amounts paid by you and designated for the account of that corporation, as shown by Exhibit A, constituted contributions to the capital of Southwest Land Improvement Company, Inc., and failure to recover such amounts resulted in capital losses, deductible only to the extent provided in sections 117(b) and (d) and 23(g) of the Internal Revenue Code of 1939; in the alternative, if it is finally determined that failure to recover advances made by you to Southwest Land Improvement Company, Inc., and amounts paid by you and designated for the account of that corporation resulted in bad debts, then it is held that such bad debts were nonbusiness bad debts under section 23(k) (4) of the Internal Revenue Code of 1939, limited in deductibility to the extent provided in sections 117(d) and 23(g) of the Internal Revenue Code of 1939." 79 Nelson, on his 1950 return, claimed an ordinary deduction for a bad debt in the amount of $46,035.11. A schedule attached to the return explaining the "bad debt" showed the following: Payments for Frank Nelson Realty Co. [list of 25 items with payeesand dates ranging from 6/16/50 to 11/20/50]$16,043.08Advances to Frank Nelson Realty Co. - prior to its dissolutionPer Balance Sheet supplied by Gilmer$29,992.03AssetsLiabilitiesFrank Nelson, Jr.$29,992.03CapitalCapital Stock$ 2,000.00Deficit(31,992.03)(29,992.03)29,992.03Total$46,035.11property at $25,000 while re-spondent valued it at $38,050.)$ 13,050.00Amount shown on Southwest'sbooks as owing to Realty, whichwas transferred by Southwest'sentry dated December 28, 1949,to accounts payable - Nelson26,501.28Amounts shown on Southwest'sbooks as owing to third par-ties, which were transferred bySouthwest's entry dated Decem-ber 28, 1949, to accounts pay-able - Nelson$ 330.24$ 39,881.52Respondent increased claimed lossas follows: Amount due to Engel by South-west15,000.00Difference in amount claimed perreturn and amount allowed perdeficiency notice$ 24,881.52Basis: Original investment$ 2,000.00Mortgage - Connecticut GeneralLife Insurance Company, plusaccrued interest130,024.05Net advances by Frank Nelson72,600.57Mortgage - Bank for Savings107,106.02Debt due William P. Engel as-sumed by Frank Nelson Es-tate, Inc.15,000.00Total$326,730.64Less: Assets received from South-west Land Improvement Com-pany, Inc.: Lots sold in 1950$22,300.00Lots sold in 19515,750.00Estimated value -Remaining lots10,000.00Other assets5,075.64$ 43,125.64Long-term capital loss$283,605.0080 The respondent, in his notice of deficiency, disallowed the deduction of the above-mentioned bad debt. He adjusted the amount claimed as follows: Losses claimed on advances toFrank Nelson Realty Com-pany, Inc.$46,035.11Less: Duplicate deductions13,782.80Corrected loss$32,252.31 He explained the disallowance in terms similar to the explanation given respecting the disallowance of the business bad debt claim for 1949. (The petitioner concedes the correctness of the adjustment in amount.) Opinion BLACK, Judge: The petitioner was the sole owner of the stock of both Southwest and Realty. On his 1949 return he claimed an ordinary deduction for business bad debts due from Southwest in the amount of $306,486.52 and a capital loss for worthless stock of Southwest in the amount of $2,000. On his 1950 return he claimed an ordinary deduction for business bad debts due from Realty in the amount of $46,035.11. The respondent disallowed the ordinary deductions for bad debts in both 1949 and 1950 and determined the petitioner suffered capital losses from worthless stock (capital contributions) in the amounts of $283,605 for 1949 and $32,252.31 for 1950. In the alternative, the respondent determined 81 that if the losses are not from worthless stock they are nonbusiness bad debts. The issues involved require a determination of the amount and the nature of certain advances made directly and indirectly to Southwest and Realty by the petitioner directly or by third parties on the strength of his (petitioner's) guaranty. Because of the complexity of the factual situation, we will first summarize the pertinent facts and then discuss what we believe to be the several items comprising the petitioner's losses and the nature thereof for each of the years involved. Summary of Facts Southwest, with paid-in capital of $2,000, was formed in 1945 to develop a 100-lot subdivision which it owned. Realty, also with $2,000 paid-in capital, was formed in 1946 to engage in the general real estate and insurance business and it was contemplated that the Southwest account would represent a major portion of its business. Shortly after it was formed, Southwest began construction of 25 houses which were financed by a construction loan from Investors, secured by a mortgage on the lots and by Nelson's guaranty, and by deposits of purchasers. In addition, Nelson continually advanced funds to Southwest and allowed 82 its and Realty's employees to pledge his personal credit in the event of any question over the credit of either corporation. In the latter part of 1946, after construction of the 25 houses was substantially under way, Southwest encountered financial difficulties which were due in part to unexpected construction problems and weather conditions. A group of creditors filed a petition in bankruptcy against Southwest. Southwest did not have the resources to complete construction or to pay the creditors. Petitioner carefully studied the situation and determined that if the project were abandoned his loss would be greater than if he secured a loan and completed the project. In the latter case he felt that he might break even and could maintain a credit reputation and, therefore, could build on other lots and develop other subdivisions at a profit. He did not have any substantial cash resources but did own a valuable stock interest in Estate, which, inter alia, owned valuable real estate and, in addition, owned all of the stock of Building and Nelson Realty, both of which had valuable real estate holdings. He finally induced his mother and sister, who owned the balance of the stock interests 83 in Estate, to allow the properties of Estate and its subsidiaries to be mortgaged on behalf of Southwest. In May 1947, a loan of about $421,000 was procured from Investors. It was secured by a mortgage on the Southwest property and by junior mortgages on the property of Estate, Building, and Nelson Realty. The note was signed jointly and severally by Nelson, Southwest, Estate, Building, and Nelson Realty and was due and payable on demand after May 19, 1948, and prior to May 19, 1949. Southwest treated the loan as a mortgage payable to Investors. The proceeds were used to pay the construction loan, to refund deposits, to pay creditors, and to complete the 25 houses. The bankruptcy petition was dismissed and the houses were completed. However, they could not be sold for a price that Nelson regarded as fair. In May 1948, Investors sought repayment. Southwest, not having sold the houses, did not have the funds with which to respond. Building obtained a loan of $125,000 from Connecticut, the proceeds of which were paid to Investors to apply on the $421,000 loan. Building treated Nelson as being its debtor for the amount of the Connecticut loan and Southwest, because of the partial payment 84 reduced the amount (both principal and interest) which it owed Investors and treated Nelson as its creditor for that amount. Investors and Nelson's mother and sister continued to apply pressure on Nelson to have the houses sold and the loan repaid but only one house and lot was sold in 1948. With the Investors loan becoming due on May 19, 1949, Nelson sought other means of financing for Southwest. He and the other obligors of the Investors loan applied to Engel, who was in the real estate business, for a loan of from $300,000 to $325,000 to pay off Investors and use a small portion of the proceeds to rehabilitate the houses for sale since they had been lying idle since completion in 1947. If Engel could obtain the loan they agreed to pay him $15,000 to manage the properties, which amount was in addition to any broker's commission he might earn on the sale of the houses and lots. It was contemplated that the houses and lots would be sold and the loan paid off in a short time. Engel arranged a loan with Bank and the R.F.C. in June 1949. The loan was secured by a mortgage on the real property of Southwest and by junior mortgages on the real property of Estate, Building, and Nelson Realty. 85 The note was signed by Southwest, Estate, Building, Nelson Realty, and Nelson. Nelson was an unconditional guarantor and Engel guaranteed the last $100,000 of the loan. The proceeds were used to pay the balance of the Investors loan, some attorneys' fees incurred in connection with the obtaining of the Investors loan, and for rehabilitating the houses for sale. Concurrently with the obtaining of the Bank loan, Southwest and Nelson executed an instrument addressed to Estate, Building, and Nelson Realty which reduced to writing the existing relationship between the parties. The instrument provided that Estate, Building, and Nelson Realty merely acted as accommodation endorsers for Southwest and Nelson; that Southwest was the primary obligor; and that Nelson was the unconditional guarantor of Southwest's obligations. The houses and some of the lots were sold and the proceeds applied to the Bank loan. Nelson, responding as unconditional guarantor of Southwest's obligations, entered into an agreement dated August 27, 1949. Under the agreement Building and Nelson Realty were merged into Estate, and Estate, in consideration of Nelson's surrendering his stock in Estate, agreed, inter alia, 86 ( 1) to pay the principal, interest, and expenses on the Connecticut loan which aggregated $130,821.04; (2) to pay the balance of $107,106.02 on the Bank loan; (3) to pay $15,000 owed to Engel by Southwest; (4) to pay the rent owed to Building by Realty; and (5) to pay the other amount owing by Southwest and Realty to Estate, Building, and Nelson Realty. Southwest was dissolved at the end of 1949 and its remaining assets, real property (lots) with a book value of $60,029.66 and personal property with a book value of $5,075.64, were received by Nelson. At the time of dissolution, Southwest's books showed that Nelson had advanced $72,600.57 to it, for which he did not receive notes, securities, or any evidence of indebtedness. The books also showed that Southwest owed Realty $26,501.28. Realty, which relied heavily on the Southwest account, never operated at a profit. At the end of 1946, Southwest owed it about $12,000 for commissions and insurance premiums. When the bankruptcy petition was pending against Southwest, Nelson would advance funds to Realty which Realty would expend on the Southwest project. Realty treated Nelson as its creditor and Southwest as its debtor and Southwest 87 treated Realty as its creditor. At the end of 1949, in conjunction with the entries made on Southwest's books, Realty debited Nelson with the amounts ($26,501.28 plus $672.09) that its books showed that Southwest owed it (Realty) and credited Southwest with the same amounts. Realty was dissolved at the end of 1950 and the only account left on its books was an account payable to Nelson in the amount of $29,992.03. As far as Nelson's losses in the Southwest venture are concerned, two events in 1949 are significant. They are: (1) The agreement of August 27, 1949, whereby Nelson surrendered his stock in Estate and in consideration therefor Estate agreed to pay certain liabilities of Southwest 1088 and (2) the dissolution of Southwest at the end of 1949. Payments under the August 27, 1949, Agreement Under the August 27, 1949, agreement Nelson, as the unconditional guarantor of Southwest's obligations, paid $130,821.04, $107,106.02, $15,000, and certain other smaller amounts. The $130.821.04 represented the amount which Building borrowed from Connecticut plus the interest and expenses connected therewith, 1189 all of which was charged to Nelson on Building's books. Building, as an obligor of the $421,000 Investors loan, obtained the Connecticut loan in 1948 and had used the proceeds to pay Investors, in response to Investors demand for payment. The written instrument of June 1949 which spelled out the previous unwritten agreement between Estate, Building, Nelson Realty, Southwest, and Nelson, inter se, stated that Building was a mere accommodation on the Investors loan for Southwest and Nelson and that Nelson was the unconditional guarantor of Southwest, the primary obligor. Therefore, when Building paid Investors it had a right of reimbursement from either Southwest or Nelson for the amount which it paid plus any reasonable expenses connected with making the payment. When Southwest could not reimburse Building, Nelson paid Building. Nelson, of course, then had a right of reimbursement against Southwest. Under these circumstances Nelson's loss arising from the fact that Southwest could not reimburse him is a bad debt loss. 90 Putnam v. Commissioner, 352 U.S. 82">352 U.S. 82 (1956). The fact that part of the $130,821.04 represented interest paid by Building on the loan does not require a different holding as to that part. The principal obligor is required to reimburse the guarantor for the amounts paid by the guarantor, including principal, interest, and expenses. 12 When the principal is unable to reimburse the guarantor the guarantor holds a worthless debt even though some portion of the amount he paid was for interest. In Putnam v. Commissioner, supra, the facts were identical. The guarantor had paid $9,005.21, representing principal of $8,500 and interest of $505.21. The Court treated the entire amount as a bad debt when the principal obligor was unable to reimburse the guarantor. 13 We do also. This holding disposes of the Commissioner's determination that the $130,821.04 represents a contribution to capital and 91 the petitioner's contention that if it does represent a contribution to capital it logically follows that he borrowed the money originally and then contributed it to Southwest's capital and, therefore, he is entitled to deductions for all interest and expenses connected therewith. Neither the Commissioner's determination nor the petitioner's contention comports with the facts as we see them. In order to accept the Commissioner's view, we would not have to find that petitioner borrowed the money from Investors and then advanced it to Southwest as petitioner contends. But it seems that we would have to find that when Nelson guaranteed the Investors loan he did not expect reimbursement from Southwest in the event he was required to respond on his guaranty. Hoyt v. Commissioner, 145 Fed. (2d) 634 (C.A. 2, 1944). Cf. W. F. Young, Inc. v. Commissioner, 120 Fed. (2d) 159, 165 (C.A. 1, 1941). We can make no such finding in view of the fact that Nelson, if he expected any loss at all, anticipated that it would be offset by the undeveloped lots remaining in Southwest's hands. The next amount paid by Nelson under the August 27, 1949, agreement was $107,106.02. This represented the principal 92 remaining on the Bank loan after the proceeds of the sale of the houses and lots had been applied to it. This payment by Nelson must also be regarded as a guarantor's payment which gave rise to a right of reimbursement from Southwest. Putnam v. Commissioner, supra. Of course, it might be argued that in 1949 when he signed the Bank note as unconditional guarantor he knew that Southwest would incur a substantial loss and that if he was forced to respond on his guaranty he would not be reimbursed in full by Southwest. We think, however, that the Bank loan must be regarded as the refinancing of the debt created by the Investors loan and that his intent should relate back to 1947 when he guaranteed the Investors loan. The third amount paid by Nelson under the August 27, 1949, agreement was $15,000 which represents Engel's fee due him pursuant to the loan application of May 5, 1949, made by Southwest, Nelson, Estate, Building, and Nelson Realty. The loan application provided that, if Engel obtained the loan, all of the properties of Southwest would be turned over to Engel for handling, management, and sale and that $15,000 would be paid Engel in consideration for such services. This amount 93 was exclusive of any commission earned by Engel on the sale of the properties. The loan could not have been secured without the agreement to pay Engel the $15,000. Southwest did not need to have Engel manage its properties but agreed to that condition in order to obtain the loan. Regardless of whether the fee is considered to be a fee for obtaining the loan or a fee for management services, we think it was an expense of Southwest since either or both services were for the benefit of Southwest. Being Southwest's expense it would be deductible by it. Nelson, by signing the application, became liable to Engel and under the June 9 instrument executed by Southwest and Nelson, Nelson's status was that of unconditional guarantor of Southwest's liabilities, including the liability to Engel. In these circumstances, we think the amount must be treated in the same manner as the other guaranty payments of Nelson which were discussed previously. Putnam v. Commissioner, supra. There appear to be two other items which Nelson paid as Southwest's guarantor under the August 27, 1949, agreement. One was a legal fee of $2,308 which Building paid to Tucker & Prince (by reducing the rent due from Tucker 94 & Prince to Building) for services performed by Tucker & Prince for Nelson and Southwest in connection with the Investors, Connecticut, and Bank loans. The other was a legal fee of $1,020 which Building paid to Leader, Tenenbaum & Perrine for services performed for Estate, Building, and Nelson Realty in connection with the Bank loan. Investors, Building, and Nelson Realty were acting as mere accommodation for Nelson and Southwest and Nelson was only a guarantor for Southwest, the principal obligor. Southwest was the party which benefited from the loans and it, of course, was required to reimburse Building, which originally paid both fees. Since Nelson, as guarantor, reimbursed Building, Southwest would be obligated to reimburse Nelson. This fact was, of course, recognized by Southwest as to the $2,308 when it deducted this amount on its 1949 return as legal expenses. Although the record is not clear, Southwest, when it recorded the legal fees as expenses, must have credited accounts payable - Nelson with the $2,308. We, therefore, assume that the amount of $2,308 is included in the $72,600.57 (which will be discussed hereafter) which Southwest's books showed that it owed Nelson at 95 December 31, 1949. The $1,020 does not appear to have been recorded on Southwest's books. However, regardless of how these amounts were treated on Southwest's books, we think that being guaranty payments they should be accorded the same treatment as the other items previously discussed. To summarize, under the August 27, 1949, agreement Nelson, as the unconditional guarantor of Southwest's obligations, paid the following: $130,821.04107,106.0215,000.002,308.001,020.00Total$256,255.06Nelson's payment of this amount gave rise to a debt running from Southwest to him, by way of subrogation. Putnam v. Commissioner, supra. There is no question but that the debt became bad in 1949 but, since he received the remaining property of Southwest upon dissolution, the question of the amount of the debt which became worthless remains. There is also the question of whether the debt which became worthless was a business or nonbusiness bad debt. But before taking up these questions, we will discuss the other advances directly or indirectly to Southwest by Nelson. Other Advances to Southwest Direct Advances to Southwest by Nelson. As stated previously, the authorized paidin capital of Southwest was 96 $2,000. This amount, of course, was patently inadequate to finance the operation of Southwest. The operation was financed by a construction loan from Investors, which was secured by a mortgage on the Southwest properties and guaranteed by Nelson, and by deposits of purchasers. In addition, Nelson continually advanced funds to Southwest. His first advance was in the amount of $6,000 and was made a few days after Southwest was organized. By the end of 1947 such advances totaled $30,053.81. These amounts were treated as accounts payable - Nelson on the books of Southwest. There were no notes or other evidence of indebtedness representing the advances and no security was given therefor. At the end of 1949, when Southwest was dissolved, the balance account payable - Nelson account was $72,600.57. The respondent treated the entire $72,600.57 as a capital contribution. Petitioner concedes that the amount advanced as of December 31, 1946, viz, $30,053.81, 14 constitutes a contribution to capital. And from the evidence in the record, we must hold that the entire $72,600.57, less the [amounts] of $2,308 and $796.99 previously discussed and held to be a debt and included in the $72,600.57 ** 97 represents a contribution to capital. We reach this conclusion after considering the many factors which are relevant in the determination of this question. Of these factors, the only one tending to support a finding of debt is the manner in which the advances were treated on the books, i.e., as accounts payable. On the other hand, the advances were shown on the balance sheets as paid-in capital. 15 The $2,000 original paid-in capital 98 was not adequate to conduct the business of Southwest. The advances were not represented by any notes or other evidences of indebtedness. There was no provision for interest nor were the advances secured. In short, none of the normal creditor precautions were taken by the petitioner in making these advances. Under these circumstances, we cannot say that at the time these advances were made there was a reasonable expectation of repayment. It seems to us that these amounts were intended to be placed at the risk of the business. Further, these advances were not treated by Southwest on a parity with the debts of disinterested third parties but were completely subordinated. In these circumstances, we are unable to find that when Nelson advanced these funds to Southwest there was an intention to create a debt. We hold that these advances were 99 contributions to Southwest's capital. See Sam Schnitzer, 13 T.C. 43">13 T.C. 43, affd. 183 Fed. (2d) 70, certiorari denied 340 U.S. 911">340 U.S. 911, where we said: "Bookkeeping, form, and the parties' expressions of intent or character, the expectation of repayment, the relation of advances to stockholdings, and the adequacy of the corporate capital previously invested are among circumstances properly to be considered, for the parties' formal designations of the advances are not conclusive, * * but must yield to 'facts which even indirectly may give rise to inferences contradicting' them. * * " See also Mattiessen v. Commissioner, 194 Fed. (2d) 659, affirming 16 T.C. 781">16 T.C. 781. Amounts due Realty by Southwest. At the end of 1949, Southwest owed Realty $27,173.35 ($26,501.28 plus $672.07). 16 Nelson's advances to Realty exceeded that amount. At Nelson's direction, book entries were made as follows: (1) On Realty's books - Realty charged the Southwest account receivable against the account payable to Nelson and (2) on Southwest's books - Southwest charged the Realty account payable and credited Nelson - account payable for the same amount. The effect of the entries is to treat Nelson as paying Realty on 100 behalf of Southwest and to treat Southwest as being the debtor of Nelson for the amount paid. Respondent has refused to recognize these entries and contends that Southwest owed Nelson no such amount at the end of 1949. 17 We think this refusal is erroneous. It is clear that Southwest owed Realty the $27,173.35. The record shows that the amount due Realty included amounts due for commissions, insurance premiums, and expenditures by Realty on Southwest's behalf. Although Nelson did not specifically guarantee Southwest's debts to Realty, his general guaranty certainly covered the debt in question. It is true that Nelson controlled both Southwest and Realty and could have refrained from having the book entries made. But, as we see it, the basis of Southwest's debt to Nelson does not come about merely by virtue of book 101 entries but by virtue of the fact that Southwest actually owed Realty the money and because Nelson was the guarantor of Southwest's debts. To summarize again, at the end of 1949 when Southwest was dissolved, the status of the accounts between Southwest and Nelson was as follows: Debts arising under the 8/27/47agreement$256,255.06Other Debts27,173.35Total Debts$283,428.41Capital ContributionsOriginal paid-in capital$ 2,000.00Subsequent advancesper books$72,600.57Less amountsincluded indebts above$2,308.00796.993,104.9969,495.58Total$71,495.58 Property Received Upon Dissolution of Southwest When Southwest was dissolved at the end of 1949, it distributed to Nelson its remaining property consisting of real property with a basis of $60,029.66 and personal property with a basis of $5,075.64. Although Nelson valued the real property at $25,000 on his return he does not contest the Commissioner's determination that the real property had a value of $38,050. Concerning the personal property, the petitioner valued it in his return at $5,075.64, the book value, and the Commissioner in his 102 determination valued it at the same amount. The petitioner now contends that the value of the personal property did not exceed $3,500. The record, although somewhat vague on this point, shows that personal property consisted of deposits with utility companies of about $4,300, a small amount of cash, and certain mortgages and notes receivable. Petitioner testified that he only collected $3,500 of the deposits and that the utility companies informed him that was all he would receive. Petitioner also testified that he did not recall collecting any receivables but that Holmquist may have collected them on his behalf. Giving effect to the fact that all of the deposits were not realized, we have found as a fact that the fair market value of the personal property received by Nelson upon the dissolution of Southwest was $4,300. The fair market value of the total property received by Nelson at the end of 1949 upon the dissolution of Southwest was, therefore, $42,350 ($85,050 plus $4,300). This amount must be applied against the total debt of $283,428.41, supra, owed Nelson by Southwest. This would leave a debt of $241,078.41 ($283,428.41 minus $42,350) which became worthless in 1949, and of 103 which petitioner has never made any recovery. Realty, like Southwest, had an authorized paid-in capital of $2,000. Realty's business, general insurance and real estate, did not require a large investment but relied largely on personal services. Nelson, however, allowed Realty's employees to state that he (Nelson) was behind Realty if any question over Realty's credit arose. Nelson also advanced funds to Realty at various times. These advances were recorded as accounts payable on Realty's books. The balance in this account on Realty's books at the end of the following years is as follows: YearAmount1946$ 1,885.0019478,254.64194822,623.2319495,853.10195029,992.03The balance shown at the end of 1949 is the balance after the amount owing Realty by Southwest ($27,173.35) had been charged to Nelson's account. In addition to the $29,992.03 which Realty's books showed that Nelson had advanced by the end of 1950, Nelson advanced an additional $2,260.28 to pay certain debts of Realty in 1950, which were not recorded on its books. The total advances exclusive of the $2,000 original capital was $32,252.31 ($29,992.03 plus $2,260.28). As with the $69,495.58 * advanced directly to Southwest by Nelson, 104 very little evidence has been introduced regarding the direct advances to Realty. We do not know the time, the manner, or any of the circumstances regarding these advances. It appears that the advances were not represented by notes or other evidences of indebtedness, that no provisions for interest were made, and that the advances were not secured. These advances were completely subordinated to the liabilities to other creditors. None of the normal creditor precautions were taken by Nelson in advancing these funds. It seems to us that the advances were placed at the risk of the business and that there was no reasonable expectation of repayment. This latter fact is made evident by the fact that a substantial portion of the advances was made after Realty lost its largest account - Southwest. Under these circumstances, we are unable to make a finding that when Nelson advanced these funds there was an intention to create a debt. We think the petitioner's proof has fallen short of establishing that these amounts represented debts rather than capital contributions as the Commissioner has 105 determined. There is still the further question of the year of the loss. With the dissolution of Southwest at the end of 1949 Realty lost its largest account. It was insolvent at the time. Although the record does not show the extent of Realty's other business, indications are that it was not extensive. Under these circumstances, we think that Nelson's advances to Realty at the end of 1949 can be considered worthless at that time. The advances as of that date consisted of $2,000 original capital contribution and the subsequent advances of $5,853.10 which we have also held to be a contribution to capital. In addition, Nelson, in 1949, paid Realty's rent to Building in the amount of $4,452. This amount is included in the total advances at the end of 1950, but the entries were not made to include it in the advances at the end of 1949. However, since the amount was paid in 1949, we will treat it as being included in the advances at the end of 1949. The balance of petitioner's loss, $21,947.21 ($32,252.31 minus $5,853.10 minus $4,452 ) we hold is deductible in 106 1950. Business or Nonbusiness Bad Debt As stated previously, the question of whether the $241,078.41 indebtedness due from Southwest to petitioner represents a business or a nonbusiness bad debt remains. Section 23(k)(1) allows a deduction in full for business bad debts while a nonbusiness bad debt, which is defined as "a debt other than a debt * * * the loss from the worthlessness of which is incurred in the taxpayer's trade or business," is deductible as a short-term capital loss under section 23(k)(4). Petitioner apparently recognizes the usual rule that loans to a corporation by a shareholder or officer constitute nonbusiness bad debts. Se Wheeler v. Commissioner, 241 Fed. (2d) 883, 884 (C.A. 2, 1957). Petitioner, however, seeks to bring himself within the rule of the so-called "promoter" cases arguing that "he was so extensively engaged in the operation and direction of Southwest Land and the Realty Company, from the time those corporations were organized, that his activities constituted the conduct of a business." Petitioner misconceives the nature of his activities. He 107 was not continually seeking out business opportunities. See Giblin v. Commissioner, 227 Fed. (2d) 692 (C.A. 5, 1956). He was not in the business of promoting and financing corporations - he was merely an investor in and an officer of Southwest and Realty. He devoted his full time to being an officer of these corporations and the other corporations in which he held investments. His advances and guarantees were not made in order to further any independent promoting business; they were made for the purpose of assisting the corporations in their respective businesses. Wheeler v. Commissioner, supra.Cf. Holtz v. Commissioner, 256 Fed. (2d) 865 (C.A. 9, 1958), June 12, 1958. Petitioner also contends that he was engaged in a joint venture with Southwest. There are, however, no facts in the record upon which we could base such a finding. Also, the record does not show that petitioner was engaged in any other business, such as the guaranty or money lending business, to which the bad debt loss would be proximately related. Accordingly, we uphold the Commissioner's contention regarding the nature of the bad debt. We hold it was a nonbusiness bad debt. The petitioner has made a variety of 108 claims, some of which are in the alternative, regarding the various items involved. Since all of them have not been discussed in connection with our holdings on the various issues, we will discuss them separately hereafter. (1) Petitioner contends that if, as the Commissioner originally determined, the losses on account of the loans from Investors, Connecticut, and Bank were losses of capital contributions then it logically follows that petitioner borrowed the money and contributed it to Southwest's capital and that he is, therefore, entitled to deductions for all of the interest and expenses connected with those loans. As we stated previously, we do not think the conclusion urged by petitioner necessarily follows from the Commissioner's determination. Hoyt v. Commissioner, supra. In any event, since we have not upheld the Commissioner's determination in this respect, the point is irrelevant. (2) Employing reasoning similar to that in Point (1), the petitioner urges that petitioner borrowed a portion of total loans from Investors, Connecticut, and Bank (the portion which he was forced to pay) and is entitled to a deduction for a proportionate part of the interest and expenses. Like 109 Point (1), this contention is not sound and is also irrelevant in view of our holding. The petitioner in his reply brief has also recognized the weakness of the argument. (3) Petitioner contends that the total loss sustained by him in 1949 with respect to Southwest is understated in the notice of deficiency by the following amounts: (a) Overstatement of fair marketvalue of personal property re-ceived upon dissolution of South-west ($5,075.64 minus $3,500)$ 1,575.64(b) Title insurance premiums paid byNelson in connection with Bankloan631.25(c) Legal fee paid by Building andcharged to Nelson1,020.00(d) Amounts owing by Southwest toRealty at 12/31/4927,173.35 Items (a), (c), and (d) have been discussed previously. Concerning Item (b), we think that the $631.25 should be added to the bad debt losses of 1949. It has been stipulated that petitioner paid this amount but no mention was made concerning whether Southwest had recognized its liability to Nelson for making the payment. However, after examining Southwest's profit and loss statement for 1949, it does not appear that Southwest charged the amount as an expense on its books. Therefore, it is in all probability not included in the $72,600.57 110 representing Nelson's advances to Southwest. In these circumstances, we think this amount should be treated as an additional nonbusiness bad debt loss on the theory that it was Southwest's obligation (because it was the primary obligor of the Bank loan) and that when it could not reimburse Nelson he suffered a loss. (4) Petitioner contends that the loss sustained by him with respect to Realty was understated in the notice of deficiency and the amounts paid by him as of December 31, 1949, were losses sustained by him not later than 1949. The amounts are as follows: (a) Amount due Realty by Southwest(alternative if entries not giveneffect)$27,173.35(b) Net advance by Nelson as of12/31/495,853.10(c) Original paid-in capital2,000.00(d) Rent due Building by Realty asof 8/31/494,452.00 There is no need to discuss Item (a) since we have allowed Nelson a loss in Southwest to that extent. Nor is there need to discuss Items (b), (c), and (d), since we have allowed those amounts as 1949 losses. *111 (5) Petitioner contends that he is entitled to an ordinary deduction in 1949 in the amount of $9,617.99, representing net advances to ($5,165.99), and payment for ($4,452, rent), Realty in that year. Regarding the former amount, the petitioner computes it by taking the advances as of December 31, 1949 ($5,853.10), and deducting therefrom $687.11 representing the advances as of December 31, 1948 ($22,623.23), less the amount due from Southwest at December 31, 1948 ($21,936.12). The basis of this contention is the disregarding of Realty as a taxable entity after December 31, 1948. Although we know that Realty was insolvent 18 at that date and that it sustained a loss in 1949, we do not think this would justify us in disregarding its corporate entity. Petitioner's contention in this respect is not sustained. (6) Petitioner contends that he had, by no later than December 31, 1949, become personally liable for business transacted in 112 the name of Realty; that thereafter it (Realty) should not be treated as a separate entity for tax purposes; and that payment by him in 1950 in the sum of at least $21,947.21 should be allowed as a deduction against ordinary income for that year. What we said in regard to Point (5) is equally applicable here. The fact that Nelson may have advanced funds to Realty does not require us to disregard Realty as a taxable entity. If Nelson regarded himself as responsible for Realty's debts and made good those debts it was because Realty was not adequately capitalized. But the facts remain that Realty was incorporated, did business as a corporation, and was treated by the petitioner, its sole shareholder, as a separate entity. In these circumstances, there is no basis upon which we could or should disregard its corporate existence. (7) Petitioner contends that Southwest should not be treated for tax purposes as a separate entity after May 14, 1947, or at least June 9, 1949, but should be treated as his nominee or agent to liquidate a business enterprise conducted in the name of Southwest. As with Realty, there is no basis in the record for disregarding the existence of Southwest. The parties 113 themselves did not disregard Southwest. There was no plan to dissolve Southwest until late in 1949. There was no indication that it would be dissolved until it actually happened. After the 25 houses were sold, Southwest still held a considerable number of lots which it could have built upon. Southwest was not a sham corporation. It held real estate, developed it, borrowed money, and sold the houses. These activities constitute a business, even though the business was unsuccessful. The fact that Southwest would have been bankrupt in 1947 were it not for Nelson's part in procuring the Investors loan does not change the result. He was acting to protect his own investment in Southwest. After that time, Nelson continued to recognize Southwest's separate existence. The fact that Southwest had no credit standing and had to rely upon Nelson's guarantees only tends to show that Southwest was inadequately capitalized from the start. Discussion of petitioner's Points (8), (9), and (10) dealing with business bad debts, nonbusiness bad debts, and method of accounting are unnecessary in view of our previous discussion. In his reply brief, petitioner raises several additional points contending that 114 he is entitled to deductions under section 23(b) (interest); 23(a)(1) (ordinary and necessary business expenses); 23(a)(2) (ordinary and necessary nonbusiness expenses for collection of income); 23(e)(2) (loss on transaction entered into for profit) for amounts which he paid, or caused to be paid, or were paid out of the proceeds of the sale of his property or which he bore the economic burden of. Many of the items claimed as deductions under these sections were not paid by Nelson but were paid by Southwest and Realty. The fact that Nelson, as sole stockholder of Southwest and Realty, bore the ultimate burden of expenses and losses has already been discussed and decided in this Opinion. The amounts which Nelson advanced directly to Southwest and Realty do not fall within any of the above categories - they have all been held to be capital contributions. The only other payments by Nelson which resulted in losses were the payments under the August 27, 1949, agreement. We have previously discussed the facts concerning each item under that agreement and have held the payments representing Southwest were guaranty payments which resulted in bad debt losses when Southwest, the primary obligor, 115 was not able to reimburse Nelson, the guarantor. Decision will be entered under Rule 50. Footnotes1. For the year 1950 income taxes withheld in the amount of $2,494.20 reduce the amount due under the deficiency notice to $2,791.84 ($5,286.04 minus $2,494.20).↩2. All section references are to the Internal Revenue Code of 1939, as amended.↩. Last sentence added by an official order of the Tax Court, dated November 21, 1958 and signed by Judge Black.↩3. It was also agreed that the interest rate on the Investors loan should be increased from 5 per cent to 6 per cent commencing May 14, 1948. ↩4. The discrepancy between the amount originally charged to Southwest and the amount subsequently charged to Nelson is unexplained.↩5. This finding is in accord with #13 of the stipulation. However, #20 of the stipulation provides $11,779.59, representing interest accrued but unpaid at December 31, 1948, on the Investors loan, was paid out of the proceeds of the Bank loan. Petitioner, in his reply brief, concedes that #13 is correct and that this interest was paid from the proceeds of the sale of Southwest property in 1949.6. The balance of the Bank loan was reduced to $107,106.02 by November 30, 1949, by application of the proceeds from the sale of houses and lots.. Last part of sentence, which is after the word "record", was added by an official order of the Tax Court, dated November 21, 1958 and signed by Judge Black.↩1. Includes interest of $5,682.94.↩. Changed by an official order of the Tax Court, dated November 21, 1958 and signed by Judge Black. Originally read "Rent owed by Realty (not shown by record). . This paragraph was added by an official order of the Tax Court, dated November 21, 1958 and signed by Judge Black.↩. Sentence added by an official order of the Tax Court, dated November 21, 1958 and signed by Judge Black.↩1. Net after deducting $10,258.75 for sales commissions paid to Engel. 2. This amount consists of $15,270.79 paid to Bainbridge & Mims out of proceeds of Bank loan for services performed by that firm in connection with loan from Investors and $2,308 for services rendered by Tucker & Prince to Nelson and Southwest in connection with the loans from Investors, Connecticut and Bank. Building charged Nelson for $2,308 which Tucker & Prince owed to Building for rent. ↩3. This amount includes interest of $11,471.28 on the Investors and Bank loan and interest of $2,817.45 on the Connecticut loan. ↩4. The amount represents a portion of the $2,400.85 expense paid by Building in 1948 in connection with the Connecticut loan. ↩5. Difference between book value ($60,029.66) of remaining lots and the amount that Nelson deemed they were worth ($25,000) when he received them upon dissolution, infra.↩7. The parties have stipulated that the book value was $60,029.66. However, it appears that $35,029.66 of that amount was written off in 1949 by Southwest as a loss, thereby leaving a book value of $25,000 which is equal to the amount that Nelson used as fair market value when he received the lots upon dissolution. a1 Word changed by an official order of the Tax Court, dated November 21, 1958 and signed by Judge Black. Originally read "accruable".8. As can be seen the operating loss of $32,252.31 (exclusive of the $2,000 capital stock) differs from the $31,992.03 shown on the balance sheet. The discrepancy is unexplained. The former amount which was stipulated will be treated as the actual loss.↩9. As can be seen the petitioner claimed a loss on the Southwest venture in the amount of $308,486.52 (business bad debt of $306,486.52 plus capital loss of $2,000). Since the respondent computed the loss to be $283,605 there is a difference of $24,881.52 ($308,486.52 minus $283,605). This difference is not entirely explained. However, from certain allegations in the original petition (which were denied by respondent, apparently as a matter of course) the difference appears to result from the following: Respondent reduced claimed loss as follows: Increase in value of real property received (petitioner valued real↩10. The record does not show the amount that the proceeds of Nelson's sale of the Estate stock were reduced by because of the assumption by Estate of the various liabilities of Southwest and Realty. Nelson's "payment" is, of course, only equal to the amount of such reduction. We assume, as both parties apparently do, that the proceeds were reduced by the full amount of each liability assumed. For convenience we will, therefore, refer to the various liabilities assumed by Estate as being "paid" by Nelson.11. The stipulation (#16) reads: "(1) to pay principal, interest and other expenses on the obligation to Connecticut General Life Insurance Company, which were ascertained to total $130,024.05 plus $796.99." There is no evidence that Building owed Connecticut that amount. If the terms of the note evidencing the Connecticut loan were followed, and we must assume that they were, the amount Building owed Connecticut at August 27, 1949, was substantially less than the $130,821.04 ($130,024.05 plus $796.99) because of the installment payments. We regard the $130,821.04 as the amount which was charged on Building's books to Nelson because of the amount it borrowed from Connecticut together with the interest and expenses on the loan. Petitioner apparently is of the same view.12. See Restatement of Security, sec. 104↩; Code of Alabama (1940) Title 9, sec. 81. 13. It does not appear that any question of separate treatment for principal and interest was raised. However, if the Court thought the two should have received separate treatment it could have raised the point, sua sponte.↩14. The parties have stipulated that the $30,053.81 advances as of December 31, 1947, as a part of the $72,600.57, the balance at December 31, 1949. The balance sheet at December 31, 1947, shows that the advances by Nelson were reduced to $29,740.08 as of that date. Therefore, there must have been a repayment during the year and the entire $30,053.81 could not be included in the $72,600.57. However, in view of the stipulation we will treat the amount of $30,053.81 as a contribution to capital. a1 The words "and $796.99" added by an official order of the Tax Court, dated November 21, 1958 and signed by Judge Black. a2 The words "and included in the $72,600.57" added by an official order of the Tax Court, dated November 21, 1958 and signed by Judge Black.↩15. Although the advances were treated on the books as accounts payable they were shown on the balance sheets of December 31, 1946, and December 31, 1947, as paid-in capital. The balance sheets for December 31, 1948, and December 28, 1949, were not introduced in evidence, but there is no reason to believe that they were shown in any different manner.↩16. Realty's books showed that Southwest owed it $26,501.28 plus $672.07 while Southwest's books showed that it (Southwest) owed Realty $26,501.28. The discrepancy is unexplained. Both parties apparently treat the Realty books as correctly reflecting the account between Southwest and Realty. We do also.↩17. Respondent also denies that Realty continued to owe Nelson the $27,173.35.↩. Table changed by an official order of the Tax Court, dated November 21, 1958 and signed by Judge Black.↩. Figure changed by official order of the Tax Court, dated November 21, 1958 and signed by Judge Black.↩. Last three sentences were added by an official order of the Tax Court, dated November 21, 1958 and signed by Judge Black.↩*. Figures changed by official order of the Tax Court, dated November 21, 1958 and signed by Judge Black.↩. Amended by an official order of the Tax Court, dated November 21, 1958 and signed by Judge Black. The amendment changed the last sentence of the preceding paragraph and deleted the paragraph immediately following.18. Petitioner argues that Realty was without assets of substantial value at December 31, 1948. However, it appears to us that the fact is insignificant since Realty was in a business where substantial assets are not required for successful operation.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624109/	MARK IV PICTURES, INC., ET AL., 1 Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent Mark IV Pictures, Inc. v. CommissionerDocket Nos. 7447-87, 7448-87, 7449-87United States Tax CourtT.C. Memo 1990-571; 1990 Tax Ct. Memo LEXIS 643; 60 T.C.M. (CCH) 1171; T.C.M. (RIA) 90571; October 31, 1990, Filed 643 Decisions will be entered under Rule 155. Ronald L. Sutphin and Mark W. Beerman, for the petitioners. Alan M. Jacobson and James E. Cannon, for the respondent. PARR, Judge. PARRMEMORANDUM FINDINGS OF FACT AND OPINION Respondent determined that petitioners in these consolidated cases were liable for the following Federal income tax deficiencies: Petitioners Year EndedDeficiencyMark IV Pictures, Inc.January 31, 1979$ 5,402January 31, 1980114,932January 31, 1981170,051January 31, 198251,849Russell S. Doughten, Jr.and Gertrude S. DoughtenDecember 31, 1981180,015Heartland Productions, Inc.January 31, 198242,690The threshold issue we must decide is whether petitioners (except Gertrude S. Doughten) contributed property, services, or some combination of both in exchange for general partnership interests in certain limited partnerships. If we conclude that any services were contributed, we must then decide: (1) Whether the general partnership interests received by petitioners were capital interests; (2) whether such interests had determinable market values; and (3) whether section 83 applies and operates to preclude income recognition by petitioners. FINDINGS OF FACT The parties stipulated 644 certain matters, including facts and exhibits, which are treated as conclusive admissions in this case. See Rule 91(e). 2 We incorporate all stipulated matters herein to the extent we do not discuss them. Russell S. Doughten, Jr. (Doughten) and Gertrude S. Doughten resided in Carlisle, Iowa, and the businesses of Mark IV Pictures, Inc. (Mark IV) and Heartland Productions, Inc. (Heartland) were principally placed in Des Moines, Iowa, when their respective petitions were filed with the Court. Mark IV and Heartland were incorporated under Iowa law in 1972 and 1965, respectively. Both corporations were involved in the business of producing and distributing motion pictures. During the years in issue, Doughten and Donald W. Thompson (Thompson) each owned one-half of Mark IV's stock. Doughten also owned stock in Heartland, which was a public corporation. Doughten was president of Mark IV and Heartland, and Thompson was vice-president of Mark IV. The following limited partnerships 645 were formed under Iowa law for the purpose of producing, distributing, and exhibiting motion pictures with religious themes: Date PartnershipMotion PicturePartnership FormedTitle Police Co.Aug. 20, 1979Heaven's HeroesImage of the Beast Co.Sept. 3, 1980Image of the BeastObedience Co.Aug. 3, 1981Home SafeBrother Enemy Co.June 1, 1981Brother EnemyFace in the Mirror Co.Oct. 10, 1981Face in the MirrorMark IV was a 50-percent general partner of Police Company, Image of the Beast Company, and Obedience Company. Heartland and Doughten were general partners of Brother Enemy Company and Face in the Mirror Company. Heartland owned 24.5 percent and Doughten owned 25.5 percent of the total general partnership interests in each partnership. Mark IV, Heartland, and Doughten (the general partners) performed similar services and functions for their respective limited partnerships, including funding and forming the partnerships, producing the motion pictures, and releasing and distributing the films. Doughten served as co-writer and executive producer for Mark IV, and as writer, producer, and director for Heartland. Thompson served as writer, producer, and director of motion pictures for Mark IV. 646 Mark IV paid salaries to Doughten and Thompson for their services, and Heartland compensated Doughten for his services. The general partners developed or otherwise obtained rights to the original story ideas and prepared the scripts for each motion picture before any of the limited partnerships were formed. Doughten and Thompson created the original story ideas for "Image of the Beast" and "Home Safe" on behalf of Mark IV. Doughten created, with the assistance of his employees, the original story ideas for "Brother Enemy" and "Face in the Mirror" for himself and on behalf of Heartland. On June 1, 1979, Mark IV licensed the story rights to "Heaven's Heroes" for an initial payment of $ 1,000, and a royalty equal to 5 percent of Mark IV's net profits as general partner of Police Company, beginning with the first quarterly report after release of the picture. Doughten and Thompson prepared, with the assistance of employees, all scripts for all three Mark IV productions. Doughten, with the assistance of employees, prepared the scripts for the two Heartland/Doughten productions. Each partnership raised funds to pay for the anticipated costs of making their motion pictures by issuing 647 limited partnership units to investors for cash. Total contributions from limited and general partners 3 were as follows: PartnershipTotal ContributionsPolice Co.$ 200,000 Image of the Beast Co.360,000Obedience Co.285,000Brother Enemy Co.266,500Face in the Mirror Co.325,000A number of transactions took place between the general partners and each of their limited 648 partnerships. The terms of each of the transactions were not arrived at through arm's-length negotiating, but simply represented what the general partners believed was fair and reasonable. First, the general partners assigned their film rights to their respective limited partnerships. The value of each original story idea and script was never expressed or determined by the general partners in a specific dollar amount. However, the offering circulars of the partnerships state that general partnership interests (50 percent) were issued to the general partners in exchange for the assignment of film rights. Second, the limited partnerships paid the general partners for producing the motion pictures. However, there was no written contract between the general partners and their limited partnerships governing the production of the motion pictures. The amounts paid by the limited partnerships were based upon what the general partners believed was a reasonable charge for the productions. The amounts paid included reimbursement for costs incurred by the general partners in making the films (referred to as pre-production, production, and post-production expenses), and also additional production 649 fees, as follows: Reimbursement Pre-Post-ProductionPartnershipproductionProductionproductionFeePolice Co.$ 11,099.84$ 123,654.14$ 39,054.51 $ 45,000.00Image of theBeast Co.19,779.80301,469.1264,916.6645,000.00Obedience Co.22,480.44193,246.1122,870.9650,000.00Brother Enemy Co.31,832.46158,995.4619,505.9052,000.00Face in theMirror Co.35,849.44152,245.3924,871.1252,000.00Third, the limited partnerships paid their general partners for exhibiting and distributing the motion pictures. Each limited partnership agreed to pay the general partners 25 percent of any amounts received by the limited partnership from the distribution or exhibition of their motion picture through film libraries. Film libraries are privately-owned businesses that exhibit and distribute spiritual motion pictures. In distributing a motion picture, a film library would rent it to a customer for an agreed amount. In exhibiting a motion picture, a film library would actually show the picture generally for an admission price per viewer. Finally, the offering circulars for Obedience Company, Brother Enemy Company, and Face in the Mirror Company state that their general partners would be paid one percent of gross income 650 of the partnership in return for administrative and related services. It is unclear why the offering circulars for Police Company and Image of the Beast Company do not also provide for the one-percent payment, since the general partners were also to provide administrative and related services for those entities. The general partners contributed no goodwill to their respective partnerships, and were allowed to compete with the partnerships by producing, distributing, and exhibiting motion pictures with religious themes. The Articles of Limited Partnership (Articles) for each of the limited partnerships describe the nature of their general partnership interests (with variation only as plural and singular use of the term general partner and the number of limited partnership units sold in each) as follows: 2.3 Capital Units. The Partnership capital shall consist of (1) * * * units, and (2) the General Partner's interest. * * * The Partnership shall be allocated between the capital units and the General Partner's interest according to the definition of the General Partner's Interest as set forth in Article 2.4; that portion of the Partnership capital allocated to the capital units shall 651 be further allocated among the capital units on a pro rata basis. * * 2.4 General Partner's Interest. * * * [In general,] the General Partner's interest shall participate in profits and losses to the extent of Fifty Percent (50%) thereof. The General Partner's Interest shall be entitled to receive Fifty Percent (50%) of the liquidation proceeds of the Partnership in the event of its liquidation. * * * 9.2 Liquidation and Distribution. Upon termination of the Partnership, the assets of the Partnership shall be liquidated as promptly as possible. The proceeds of the liquidation shall be distributed, as realized, in the payment of liabilities of the Partnership in the order provided in Section 545.42 of the 1979 Code of Iowa, as amended. The General Partner shall have the right to wind up and liquidate the Partnership by selling the Partnership assets, and after satisfying or paying all of the Partnership debts and liabilities, distributing the remainder of the net proceeds therefrom to each Partner in the proportion to which said Partner is entitled to share in Partnership income.The general partners reported their assignment of film rights to the partnerships as nontaxable contributions 652 of property in exchange for general partnership interests. In his notices of deficiency, respondent determined that the general partnership interests received by the general partners were capital interests representing additional compensation for services rendered to the partnerships. OPINION I. What did the general partners contribute?The threshold issue we must decide is whether the general partners contributed property, services, or some combination of both in exchange for general partnership interests in certain limited partnerships. Section 721(a) provides that no gain or loss is recognized to a partnership, or to any of its partners in the case of a contribution of property to the partnership in exchange for an interest in the partnership. The nonrecognition treatment provided by section 721(a) does not apply to the contribution of services. Diamond v. Commissioner, 56 T.C. 530">56 T.C. 530, 544-545 (1971), affd. 492 F.2d 286">492 F.2d 286 (7th Cir. 1974); sec. 1.721-1(b)(1), Income Tax Regs.Petitioners argue that the general partners assigned film rights and goodwill to their respective limited partnerships in exchange for general partnership interests. Respondent argues that no goodwill was transferred 653 to the partnerships, and that the general partners received their partnership interests in exchange for services performed for the limited partnerships and not in exchange for the contribution of film rights. The nonrecognition treatment provided by section 721 only applies to the extent that property is contributed in exchange for a partnership interest. United States v. Stafford, 727 F.2d 1043">727 F.2d 1043, 1055 (11th Cir. 1984); sec. 1.721-1(b)(1), Income Tax Regs. The determination of whether a taxpayer contributed property, services, or some combination of both in exchange for a partnership interest is a question of fact. United States v. Stafford, supra at 1054; United States v. Frazell, 335 F.2d 487">335 F.2d 487, 490-491 (5th Cir. 1964).See James v. Commissioner, 53 T.C. 63">53 T.C. 63, 69 (1969).A taxpayer bears the burden of proving that property was actually contributed to a partnership and the value of such property at the time of contribution. United States v. Stafford, supra at 1054-1055; United States v. Frazell, supra.See Rule 142(a). We first consider whether the general partners actually transferred goodwill to their partnerships. Although goodwill is an unenforceable right, it may be considered property 654 for purposes of section 721. See United States v. Stafford, supra at 1052.If goodwill is associated with a going business that is transferred to a partnership, there should be no question about the applicability of section 721. Furthermore, even if goodwill is associated with an individual who will remain active in the transferred business, an effective contribution of goodwill may be made. * * If goodwill is personal to the transferor-partner, however, great care should be taken to assure that the goodwill is effectively transferred to the partnership, rather than the mere right to use the goodwill so long as the transferor remains a partner. At a minimum, the transfer should be supported by a covenant not to compete.W. McKee, W. Nelson & R. Whitmire, Federal Taxation of Partnerships and Partners, Vol. 1, par. 4.02[1], p. 4-8 n. 18 (1977). (Emphasis added.) See secs. 1.721-1(a) and 1.707-1(a), Income Tax Regs. (distinguishing between contributing property and allowing a partnership to use property.) The record contains no credible evidence in support of petitioners' claim that the general partners transferred goodwill to their partnerships. Each of the limited partnerships 655 prepared offering circulars to disclose all material information to potential investors. The offering circulars expressly allow the general partners to compete with their partnerships in the production of motion pictures with religious themes. While the offering circulars refer to the contribution of film rights by the general partners, there is no reference to the contribution of goodwill. At best, it could be said that the limited partnerships merely used the goodwill of its general partners. Furthermore, even if we were to accept as fact that the general partners contributed goodwill, petitioners have offered no proof of its value. We next consider whether the general partners received their partnership interests in exchange for film rights, services, or some combination of both. The parties do not dispute that the film rights transferred to the partnerships are "property" for purposes of section 721.4 Instead, the dispute lies in whether petitioners have established the value of the film rights transferred to the partnerships. For complete nonrecognition treatment to apply, the value of contributed film rights must be worth at least the value of the general partnership interests 656 received in exchange. See United States v. Stafford, supra.As has been often repeated, fair market value is "the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of relevant facts." Sec. 1.170A-1(c)(2), Income Tax Regs. Like other forms of intellectual property, however, film rights are difficult to value in absolute dollars: it has long been realized that each individual intellectual property is unique from all other properties 657 so that the usual methods of determining fair market value, for example, comparison to transactions involving similar properties, etc., are inapplicable. It is no doubt in recognition of this inherent difficulty in valuing intellectual properties that the great majority of intellectual property transactions essentially avoid the valuation problem by setting the price in the form of a royalty based on use of the property by the transferee. * * Petry, Taxation of Intellectual Property, sec. 6.18[1], p. 6-115 (1988) (reference omitted).)At trial, Doughten was unable to place an absolute dollar value upon the film rights transferred to the partnerships. Nevertheless, we think that his inability to do so is quite understandable. The uniqueness of the film rights made their fair market value at the time of contribution speculative. The valuation problem was avoided by exchanging the film rights for general partnership interests. Although the difficulty in valuing the film rights is understandable, petitioners still bear the burden of proving that the film rights were contributed in exchange for the general partnership interests. The parties have addressed this issue by focusing on 658 whether the general partners were fully compensated (by means other than the partnership interests) for services rendered to the limited partnerships. If petitioners can prove that they were paid for all services rendered to the partnerships, then they have also proven in effect that the film rights were exchanged for the general partnership interests. The fatal stumbling block for petitioners in meeting their burden of proof is that the reimbursements and fees they received for producing the motion pictures were based upon transactions that they admit were not made at arm's length. There was no written contract between petitioners and their limited partnerships governing the production of the motion pictures. The amounts paid by the limited partnerships were simply based upon what petitioners believed was a reasonable charge for the productions. Accordingly, we cannot conclude that petitioners were fully compensated for all services performed for the limited partnerships. We realize that film rights had some value, but it is petitioners' burden to establish that unknown. Petitioners have left the Court without any basis to ascribe a value to the film rights. Accordingly, we uphold 659 respondent's determination that the general partnership interests were received entirely in exchange for services. II. Were the general partnership interests capital or mere profits interests?We must next decide whether the general partnership interests were capital interests or mere profits interests. Although section 704(e) does not directly apply to this case, the regulations issued thereunder provide helpful definitions of capital and profits interests: [A] capital interest in a partnership means an interest in the assets of the partnership, which is distributable to the owner of the capital interest upon his withdrawal or upon liquidation of the partnership. The mere right to participate in the earnings and profits of a partnership is not a capital interest in the partnership.Sec. 1.704-1(e)(1)(v), Income Tax Regs. The pertinent regulation issued under section 721 provides: Normally, under local law, each partner is entitled to be repaid his contributions of money or other property to the partnership (at the value placed upon such property by the partnership at the time of contribution) whether made at formation of the partnership or subsequent thereto. To the extent that any 660 of the partners gives up any part of his right to be repaid his contributions (as distinguished from a share in partnership profits) in favor of another partner as compensation for services (or in satisfaction of an obligation), section 721 does not apply. The value of an interest in such partnership capital so transferred to a partner as compensation for services constitutes income to the partner under section 61. * Sec. 1.721-1(b)(1), Income Tax Regs. The approach suggested by these two regulations has been summarized as follows: a capital interest is defined as any interest which would entitle the holder to receive a share of partnership assets upon a hypothetical winding up and liquidation of the partnership immediately following acquisition of the interest, while a profits interest is any interest which would not entitle the holder to receive assets on an immediate liquidation, but does give the holder the right to share in future partnership profits or earnings.W. McKee, W. Nelson & R. Whitmire, Federal Taxation of Partnerships and Partners, supra at par. 5.05[1], p. 5-22. See St. John v. United States, 84-1 USTC par. 9158, 53 AFTR2d 84-718 (C.D. Ill. 1983). Petitioners 661 argue that because the partnerships were required under their Articles and Iowa law to repay the limited partners their capital contributions before making any payments to the general partners upon liquidation, they did not receive capital interests in the limited partnerships. Respondent, on the other hand, contends that the limited partners gave up part of their right to be repaid their contributions in favor of the general partners, that the capital interests were compensation for services, and that the amount of compensation equals the fair market values of the interest in capital transferred at the time the transfers were made for services. Paragraph 2.4 of the Articles states that the general partners "shall be entitled to receive Fifty Percent (50%) of the liquidation proceeds of the Partnership in the event of liquidation." Paragraph 9.2 of the Articles requires the liquidation proceeds to be distributed in accordance with the order provided in section 545.42 5 of the Iowa Code Ann. (West 1950) and, thereafter, between the partners in proportion to the shares of partnership income. Section 545.42 of the Iowa Code provides that the limited partners must be repaid their capital 662 contributions before the general partners. Deciding whether a partner's interest in a partnership is a capital interest, rather than a mere profits interest, turns on whether that partner has the "right to receive" a share of the partnership's assets upon a hypothetical winding up and liquidation immediately following acquisition of the interest, rather than the mere right to share in future partnership earnings or profits. Here, a fair 663 reading of paragraphs 2.4 and 9.2 of the Articles indicates that the general partners had the right to receive a specified share of the partnerships' liquidation proceeds (assets). Thus, even if no partnership proceeds remained to be distributed to the general partners after distributing the liquidating proceeds in accordance with section 545.42, they nevertheless had the right to receive a share of the partnerships' assets. Based on the foregoing, we conclude that the general partners received a capital interest in their respective limited partnerships. See sec. 1.721-1(b)(1), Income Tax Regs.III. Do the capital interests have determinable market values?The final issue for decision is whether the capital interests have determinable market values. When a taxpayer contributes services in exchange for a partnership interest, the taxpayer may be required to include the fair market value of the interest in gross income upon receipt. Diamond v. Commissioner, 56 T.C. 530">56 T.C. 530, 545 (1971), affd. 492 F.2d 286">492 F.2d 286 (7th Cir. 1974); Campbell v. Commissioner, T.C. Memo. 1990-162.Section 1.721-1(b)(1), Income Tax Regs., provides that the amount of income included under section 61 "is the fair market 664 value of the interest in capital so transferred * * at the time the transfer is made for past services." Petitioners contend that the capital interests do not have any determinable market value. Alternatively, they argue that if the section 1.721-1(b)(1), Income Tax Regs., method applies, respondent erred in computing the total value of the capital interests. Petitioners also content that section 83 precludes inclusion of the value of the interests in their income for the years in issue because there existed a substantial risk of forfeiture. Respondent contends that the value of petitioners' respective capital interests is determinable under section 1.721-1(b)(1), Income Tax Regs. Accordingly, respondent calculates the value of petitioners' capital interests by adding together (1) the total capital contributions made by the limited partners, and (2) the value of the film rights transferred by petitioners, and multiplying that amount by each general partner's ownership percentage. Respondent does not assign any value to the film rights and therefore, arrives at the following values: Limited Value of OwnershipPartnersCapitalGeneral PartnerPartnershipPercentageContribution *665 Interest Mark IVPolice Co.50%$ 200,000$ 100,000Mark IVImage of the Beast Co.50%360,000180,000Mark IVObedience Co.50%285,000142,500$ 422,500HeartlandBrother Enemy Co.24.5%266,50065,293HeartlandFace in the Mirror Co.24.5%325,00071,785$ 137,078DoughtonBrother Enemy Co.25.5%266,50067,957DoughtonFace in the Mirror Co.25.5%325,00074,715$ 142,672 We agree with respondent that the value of the capital interests is determinable, that section 1.721-1(b)(1), Income Tax Regs., applies, and that section 83 does not serve to preclude income recognition for the years in issue. However, we agree with petitioners that respondent erred in calculating the value of petitioners' capital interests. Section 83Under section 83 if property is received "in connection with the performance of services," the person performing the services receives ordinary income in an amount equal to the excess of the fair market value of the interest over the amount, if any, paid for the property, at the earlier of the first time the property becomes (1) freely transferable, or (2) not subject to a substantial risk of forfeiture. Although petitioners were to perform substantial services in the future, the transfer of their capital interest was not conditioned upon their future performance of services. At the time the partnerships were formed, the capital interests vested in petitioners. See sec. 83(c)(1), secs. 1.83-3(b), (c)(1), Income Tax Regs.Accordingly, we conclude that petitioners' general 666 partner interests were freely transferable and not subject to substantial risk of forfeiture. Value of capital interestsPetitioners received their capital interests in the partnerships in the year the partnerships were formed. However, not all the limited partnership units were sold in the year of formation. Accordingly, after reviewing all the evidence we find that the limited partnership units were sold as follows: PartnershipYear units sold Amount Fiscal yearAmount Police Co.1979$ 37,0001/31/80$ 48,0001980163,0001/31/81152,000Image of the Beast Co.1980$ 281,5001/31/81$ 360,000198178,500Obedience Co.1981$ 17,0001/31/82$ 25,0001982195,0001/31/83187,000198373,0001/31/8473,000Brother Enemy Co.1981$ 266,5001/31/82$ 266,500Face in the Mirror Co.1981$ 3,0001/31/82$ 3,0001982306,0001/31/83309,000198316,0001/31/8413,000Thus, petitioners' service income for each of their taxable year(s) in issue must be calculated by considering the year the limited partnership interests were actually sold. Moreover, consideration must be given to the contributions the general partners made in acquiring their limited partnership interest. Based on the foregoing we conclude that petitioners had the following 667 service income for the years in issue: General PartnerPartnershipTaxable yearIncomeMark IVPolice Co.1/31/80$ 24,000Police Co.1/31/8165,000Image1/31/81$ 121,750Obedience Co.1/31/8212,500DoughtenBrother Enemy12/31/81$ 48,450Face in the Mirror12/31/81765Heartland Co.Brother Enemy1/31/82$ 65,292Face in the Mirror1/31/82735To reflect the foregoing and concessions, Decisions will be entered under Rule 155. Footnotes1. The following cases were consolidated for trial, briefing, and opinion: Russell S. Doughton, Jr. and Gertrude S. Doughton, docket No. 7748-87; and Heartland Productions, Inc., docket No. 7449-87.↩2. All Rule references are to the Tax Court Rules of Practice and Procedure. Unless otherwise indicated, all section references are to the Internal Revenue Code, as amended and in effect for the years in issue.↩3. Mark IV purchased limited partnership units as follows: Police Co.- $ 22,000 or 11.00% This represents the percentage of the limited partnership units sold, not the percentage of the partnership. The offering circular provided: Any units which may be purchased by the General Partner as a part of this offering or any units purchased by the General Partner from Limited Partners, as permitted by the Articles, shall be treated for all purposes as are the units held by the Limited Partners, and shall not be subordinated to the interest of the other Limited Partners. by 1/31/81Image of the Beast Co.- $ 116,500 or 32.36% * by 1/31/81Obedience Co.- 148,000 or 69.80% * by 1/31/83Doughten purchased limited partnership units as follows: ↩Brother Enemy Co.- $ 76,500 or 28.70%* in 1981Face in the Mirror Co.- 43,000 or 13.03%* in 19824. Respondent points out that Doughton actually assigned the film rights and scripts to "Brother Enemy" and "Face in the Mirror" to Brother Enemy Company and Face in the Mirror Company, respectively. Respondent takes this to mean that Heartland never possessed any ownership interest in the film rights and scripts, and thus did not transfer any property to the partnerships. We disagree. The film rights and scripts to "Brother Enemy" and "Face in the Mirror" were owned jointly by Doughton and Heartland. While Doughton actually assigned the film rights and scripts, he did so on his own behalf and↩ on behalf of Heartland as its agent.5. Section 545.42 of the Iowa Code Ann. (West 1950), repealed in 1982, provides: In settling accounts after dissolution the liabilities of the partnership shall be entitled to payment in the following order: 1. Those to creditors, in the order of priority as provided by law, except those to limited partners on account of their contributions, and to general partners. 2. Those to limited partners in respect to their share of the profits and other compensation by way of income on their contributions. 3. Those to limited partners in respect to the capital of their contributions. 4. Those to general partners other than for capital and profits. 5. Those to general partners in respect to profits. 6. Those to general partners in respect to capital.↩*. Includes amounts paid by petitioners to purchase limited partnership units.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4653920/	IN THE SUPREME COURT OF PENNSYLVANIA EASTERN DISTRICT COMMONWEALTH OF PENNSYLVANIA, : No. 262 EAL 2020 : Respondent : : Petition for Allowance of Appeal : from the Order of the Superior Court v. : : : SHAWN JACKSON, : : Petitioner : COMMONWEALTH OF PENNSYLVANIA, : No. 263 EAL 2020 : Respondent : : Petition for Allowance of Appeal : from the Order of the Superior Court v. : : : SHAWN JACKSON, : : Petitioner : ORDER PER CURIAM AND NOW, this 20th day of January, 2021, the Petition for Allowance of Appeal is DENIED.	01-04-2023	01-22-2021
https://www.courtlistener.com/api/rest/v3/opinions/4624053/	Jonathan M. Kagan v. Commissioner.Kagan v. CommissionerDocket No. 2069-67.United States Tax CourtT.C. Memo 1969-118; 1969 Tax Ct. Memo LEXIS 177; 28 T.C.M. (CCH) 617; T.C.M. (RIA) 69118; June 16, 1969, Filed 177 Held, payments received by petitioner from St. Luke's Hospital Center during the taxable year 1965 represented taxable compensation for services rendered and do not fall within the exclusionary provisions of section 117(a) dealing with scholarship and fellowship grants. Wallace Musoff, for the respondent. HOYTMemorandum Findings of Fact and Opinion HOYT, Judge: Respondent determined a deficiency in petitioner's income tax for 1965 in the amount178 of $244. The sole issue presented for our decision is whether certain payments, in the total amount of $2,325.54, received by petitioner during 1965 while a medical trainee at St. Luke's Hospital Center, New York, New York, represented a 618 scholarship or fellowship grant so as to result in the exclusion of such payments under section 117(a) 1 from petitioner's income. Findings of Fact All of the facts have been stipulated. The stipulation of facts, together with the related exhibits, are incorporated herein by this reference. Jonathan M. Kagan, hereinafter referred to as "petitioner," resided in Mt. Vernon, New York, at the time the petition herein was filed. He filed his individual tax return for the taxable year 1965 with the district director of internal revenue for the Manhattan District, New York. At some time in either late 1963 or early 1964, petitioner was admitted to the Master of Science program in New York University's Department of Biology. The Master of Science degree at New York University requires 30 points of formal course work plus a thesis based on experimental work179 on an approved research problem. The candidate must have a sponsor who will arrange his program of study and supervise the research. During the 1964-1965 school year, petitioner completed two courses, General Biochemistry and Biological Problems, each counting 6 points. Petitioner was also registered for an undergraduate course in mathematics. During the taxable year 1965, St. Luke's Hospital Center, New York, New York, paid petitioner $2,325.54 for his participation in research work as a medical trainee. The hospital withheld Federal income tax from each of the payments to petitioner. The amounts paid to petitioner were computed on an hourly basis. According to a letter from Robert G. Campbell, M.D., of St. Luke's Hospital Center's Department of Medicine, stipulated into evidence by the parties, none of the amounts paid to petitioner constituted either a scholarship or fellowship grant for educational purposes, but, instead, represented compensation paid on an hourly basis for services rendered to the hospital. On Form W-2 furnished to petitioner by the Hospital Center for 1965 and attached to petitioner's income tax return for that year, wages of $2,325.54 subject to withholding180 are shown and Federal income tax withheld of $256.73 was reported. In November of 1965, Robert B. Zurier and two other doctors of the Department of Medicine of St. Luke's Hospital Center published an article entitled "Effect of Medium Chain Triglyceride On Cholestyramine-Induced Steatorrhea In Man." Petitioner participated in technical assistance in connection with the research that formed the basis for that article. In his income tax return for the taxable year 1965, petitioner excluded the $2,325.54 paid to him by St. Luke's Hospital Center with the explanation that such amounts were paid under scholarship and fellowship grants. In his notice of deficiency to petitioner with respect to the taxable year 1965, respondent determined that the amounts paid by St. Luke's Hospital Center to petitioner were not excludable from his income. Ultimate Findings of Fact The amounts received by petitioner from St. Luke's Hospital Center during the taxable year 1965 represented compensation for services rendered to such hospital and did not, in any part, constitute payments under a scholarship or fellowship grant. Opinion The sole issue presented for our decision is whether the payments181 received by petitioner during 1965, while a medical trainee at St. Luke's Hospital Center, represented a scholarship or fellowship grant under the exclusionary provisions of section 117(a), or compensation for services rendered to the hospital, taxable under section 61(a)(1). Section 117(a) provides, in pertinent part, as follows: SEC. 117. SCHOLARSHIPS AND FELLOWSHIP GRANTS. (a) General Rule. - In the case of an individual, gross income does not include - (1) any amount received - (A) as a scholarship at an educational institution (as defined in section 151(e) (4)), or (B) as a fellowship grant, * * A payment will be considered to be a scholarship or fellowship grant for the purpose of section 117(a) if the primary purpose of the studies or research is to further the education and training of the recipient in his 619 individual capacity. Section 1.117-4(c) of the Income Tax Regs.; Aloysius J. Proskey, 51 T.C. 918">51 T.C. 918 (1969). If, however, a payment represents compensation for employment services rendered or for services which are subject to the supervision of the grantor, it is not excludable as a scholarship or fellowship grant. 182 Id. It is petitioner's burden to show that the payments in question come within the exclusionary provisions of section 117(a). Before the exclusion applies there must be a determination that the payment in question has the normal characteristics of a scholarship grant. Elmer L. Reese, Jr., 45 T.C. 407">45 T.C. 407, affirmed per curiam 373 F. 2d 742 (C.A. 4, 1967). His only contentions with respect to the characterization of these payments are found in his petition for redetermination of the deficiency determined by respondent, which are denied by respondent's answer. In essence, petitioner contends that the amounts paid to him qualify as scholarship or fellowship grants because he, as a medical trainee assisting in laboratory research work, was not performing any significant services for the hospital as a condition to receiving such amounts. These allegations are not supported by any evidence of record. Petitioner has failed to supply us with any facts to sustain his contentions that the payments in question were excludable under section 117(a). On the contrary, the few facts that are of record point quite clearly to the conclusion that the amounts received by petitioner183 represented taxable compensation for services rendered to St. Luke's Hospital Center by petitioner in 1965. The payments were computed on an hourly basis. This is hardly indicative of a scholarship or fellowship grant-type payment, but, to the contrary, is highly characteristic of compensation for services rendered. We also note that the payments by the hospital were treated as being subject to Federal withholding tax, and were reported as wages paid for services rendered. Robert G. Campbell, M.D., of the Department of Medicine of St. Luke's Hospital Center states in no uncertain terms in a written statement stipulated by the parties that none of the amounts paid to petitioner constituted either a scholarship or fellowship grant for educational purposes, and that such amounts represented compensation paid on an hourly basis for services rendered to the hospital. As such, the payments were not entitled to exclusionary treatment under Treasury Regulations section 1.117-4(c) recently upheld by the Supreme Court as a valid interpretation of section 117. Bingler v. Johnson, 394 U.S. 741">394 U.S. 741 (April 23, 1969). On the record presented we hold that the*184 amounts in question represented taxable compensation paid to petitioner for services rendered in 1965. Petitioner has utterly failed to establish that he held or was awarded a scholarship or fellowship grant in 1965 or that the disputed payments qualify for the exclusionary treatment provided for by section 117(a). Decision will be entered for the respondent. Footnotes1. All section 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/4624007/	Davidson-Boutell Company v. Commissioner.Davidson-Boutell Co. v. CommissionerDocket No. 111958.United States Tax Court1943 Tax Ct. Memo LEXIS 198; 2 T.C.M. (CCH) 449; T.C.M. (RIA) 43342; July 13, 1943198 Petitioner's promise in a trust indenture to set aside, on or before a date after the close of the taxable year, a stated amount of its earnings for such taxable year, held not to constitute an irrevocable setting aside of funds to retire indebtedness, within the purview of section 27(a)(4) of the Internal Revenue Code and Regulations 103, section 19.27(a)-3(b). Denver A. Busby, C.P.A., 120 S. La Salle St., Chicago, Ill., for the petitioner. George E. Gibson, Esq., for the respondent. ARUNDELLMemorandum Opinion ARUNDELL, Judge: The respondent determined a deficiency in income tax for the fiscal year ended August 31, 1940 in the amount of $575, and by amended answer claimed an increased deficiency in alternative amounts. The deficiency resulted from the disallowance in part of a dividends paid credit. The facts have been agreed to by the parties and we are asked to decide the legal question presented. In order to understand that question a brief summary of the pertinent facts will be necessary. [The Facts] The petitioner is a corporation organized under the laws of Delaware and with its principal place of business in Kansas City, Missouri. It kept its books on the accrual199 basis of accounting and filed its income tax returns on the same basis. Its return for the fiscal year ended August 31, 1940 was filed with the Collector of Internal Revenue for the sixth district of Missouri. During the taxable year petitioner had bonds outstanding under a trust indenture dated December 1, 1936, which required it to pay to the sinking fund trustee a fixed amount of $30,000 on or before the 15th day of November of each year and a further sum out of its net earnings, if any, but not otherwise, as follows: November 15, 1938$10,000November 15, 193920,000November 15, 194030,000November 15, 1941 to andincluding November 15,194530,000 for each year The net earnings of petitioner for the fiscal year ended August 31, 1940 were sufficient in amount to require it to pay to the trustee the sum of $30,000 out of its earnings in addition to the fixed amount of $30,000. During petitioner's fiscal year ended August 31, 1939, it paid to the trustee $40,000 in settlement of its fixed and contingent liability required to be paid on or before November 15, 1938, and also $50,000 which was not required to be paid until November 15, 1939. The next payment to the200 trustee was made on April 25, 1940, which fell within the taxable year, in the amount of $30,000, being a part of the payment required to be made on November 15, 1940. On October 24, 1940, after the close of the taxable year, petitioner paid to the trustee an additional $30,000, thus completing the payment required to be made on or before November 15, 1940. On April 27, 1939, petitioner purchased one of its bonds having a face value of $1,000, and on September 1, 1939, this bond was held as an asset in petitioner's treasury. During the fiscal year ended August 31, 1940, petitioner purchased six bonds, each having a face value of $1,000. These bonds in the face amount of $7,000 were all held as assets in petitioner's treasury on August 31, 1940. On October 20, 1941, these seven bonds were turned over to the trustee as part payment pursuant to the obligation of the indenture. The respondent allowed as a dividends paid credit $37,000, made up of the $30,000 cash paid to the sinking fund trustee on April 25, 1940 and $7,000 covering bonds purchased for retirement. Respondent now contends that he erred in allowing as a credit the one $1,000 bond purchased during the fiscal year ended201 August 31, 1939 and that proper credit should be $36,000. The petitioner asks for a credit in the amount of $60,000. [Opinion] The controlling statute is section 27(a)(4) of the Internal Revenue Code. 1 This section has been implemented by the Commissioner's Regulations 103, section 19.27(a)-3. So far as material here the Regulations reads as follows: (b) Amounts used or irrevocably set aside. - The credit is allowable, in any taxable year, only for amounts used or irrevocably set aside in that year. The use or irrevocable setting aside must be to effect the extinguishment or discharge of indebtedness. The issuance of a renewal obligation will, therefore, not result in an allowable credit. If amounts are set aside in one year, no credit is allowable for such amounts for a later year in which actually paid. As long as all other conditions are satisfied, the aggregate amount allowable as a credit for any taxable year includes all amounts (from whatever source) used and, as well, all amounts (from whatever source) irrevocably set aside, irrespective of whether in cash or other medium. Double credits are not permitted. 202 The sole question is what sum or sums were paid or irrevocably set aside within the taxable year ended August 31, 1940. While admitting that no greater sum than that conceded as a credit by the respondent was, in fact, paid or set aside on the books of the company, petitioner argues that the indenture of trust by its terms served to irrevocably set aside the full sum required to be paid out of the earnings, to wit, $30,000, and as this sum was thereafter paid to the trustee the credit must be allowed. We cannot agree with this reasoning. The fact that a contract calls for payment of an indebtedness at a certain time does not mean that the indebtedness is paid at that time, nor may it be said that a sum to pay the indebtedness when due has been irrevocably set aside simply because the contract required that such action be taken. Only so much as was actually paid or set aside within the taxable year may be allowed as a credit and that sum did not exceed $36,000. See L. O. Koven & Brother, Inc., 47 B.T.A. 467">47 B.T.A. 467, affd. per curiam January 11, 1943; Securities Co. of New Jersey, 45 B.T.A. 1048">45 B.T.A. 1048. The conclusion herein reached203 limits the credit to $36,000 and makes unnecessary a consideration of respondent's alternative issue that no credit should be allowed for the bonds purchased within the taxable year for retirement. Decision will be entered under Rule 50. Footnotes1. Amounts used or irrevocably set aside to pay or to retire indebtedness of any kind, if such amounts are reasonable with respect to the size and terms of such indebtedness. As used in this paragraph the term "indebtedness" means only an indebtedness of the corporation existing at the close of business on December 31, 1937, and evidenced by a bond, note, debenture, certificate of indebtedness, mortgage, or deed of trust, issued by the corporation and in existence at the close of business on December 31, 1937, or by a bill of exchange accepted by the corporation prior to, and in existence at the close of business on such date. Where the indebtedness is for a principal sum, with interest, no credit shall be allowed under this paragraph for amounts used or set aside to pay such interest. A renewal (however evidenced) of an indebtedness shall be considered an indebtedness.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624008/	ALICE CHRISTINE BEARDEN and HOWELL CARL BEARDEN, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentBearden v. CommissionerDocket No. 3818-80United States Tax CourtT.C. Memo 1981-161; 1981 Tax Ct. Memo LEXIS 582; 41 T.C.M. (CCH) 1225; T.C.M. (RIA) 81161; April 6, 1981. 582 Howell Carl Bearden, pro se. William Miller, for the respondent. HALL MEMORANDUM FINDINGS OF FACT AND OPINION HALL, Judge: Respondent determined a $ 539 deficiency in petitioners' 1976 income tax, the entire amount of which is in dispute. The issues for decision are (1) whether petitioners incurred travel, meals and lodging expenses in excess of the amounts allowed by respondent; and (2) whether petitioners paid home mortgage interest in excess of the amount allowed by respondent. FINDINGS OF FACT Some of the facts have been stipulated and are found accordingly. Howell Carl Bearden and Alice Christine Bearden resided in Vancouver, Washington, at the time they filed their petition in this case. On their 1976 joint income tax return petitioners claimed travel, meals and lodging expenses of $ 3,951 and an itemized expense for home mortgage interest of $ 1,849.27. In his deficiency notice respondent disallowed $ 677 of petitioners' claimed travel, meals and lodging expenses and the entire home mortgage interest expense. OPINION Both issues in this case are merely questions of substantiation. Petitioners failed to produce any evidence establishing583 their entitlement to the disallowed deductions. These issues are factual and the burden of proof is on petitioners. Welch v. Helvering, 290 U.S. 111">290 U.S. 111 (1933); Rule 142(a), Tax Court Rules of Practice and Procedure. Because petitioners did not present any evidence which would support any of the disallowed deductions, we find for respondent. 1Decision will be entered for the respondent. Footnotes1. Petitioner chose instead to rely on a claim for a trial by jury and a request for a sworn affidavit signed by one of respondent's agents specifically stating "That $ 539.00 is the exact and correct amount certain which is due and owing to the Internal Revenue Service by Alice C. & Howell C. Bearden for the taxable year(s) of 1976." It is well established that once a taxpayer files a petition in this Court he waives his right to a trial by jury. Swanson v. Commissioner, 65 T.C. 1180 (1976); Cupp. v. Commissioner, 65 T.C. 68 (1975), affd. 559 F. 2d 1207↩ (3rd Cir. 1977). Furthermore, petitioner refers us to no authority, nor are we aware of any, requiring respondent to sign the requested affidavit.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624009/	RICHARD J. AND BARBARA A. DOUGHERTY, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentDougherty v. CommissionerDocket No. 27320-92United States Tax CourtT.C. Memo 1994-597; 1994 Tax Ct. Memo LEXIS 604; 68 T.C.M. (CCH) 1347; December 6, 1994, Filed 604 Decision will be entered under Rule 155. Richard J. and Barbara A. Dougherty, pro sese. For respondent: Douglas A. Fendrick. ARMENARMENMEMORANDUM OPINION ARMEN, Special Trial Judge: This case was assigned pursuant to the provisions of section 7443A(b)(3) and Rules 180, 181, and 182. 1Respondent determined deficiencies in petitioners' Federal income taxes for the taxable years 1988 and 1989, as well as additions to tax and a penalty, as follows: Additions to Tax and PenaltyYearDeficiencySec. 6651(a)(1)Sec. 6653(a)(1)Sec. 6662(a)1988$ 2,242$ 109$ 112--19894,476----$ 895The issues for decision are as follows: (1) Whether petitioner Richard Dougherty (petitioner) is entitled to deduct on Schedule C various chiropractor expenses for 1988 and 1989; (2) whether 605 petitioner is entitled to deduct on Schedule C any real estate and mortgage broker expenses for 1988 and various real estate and mortgage broker expenses for 1989; (3) whether petitioner Barbara Dougherty (Mrs. Dougherty) is entitled to deduct on Schedule C any stocktrader expenses for 1988 and 1989; (4) whether petitioners are entitled to deduct on Schedule E any rental expenses relating to their houseboat for 1988 and various Schedule E rental expenses relating to their houseboat for 1989; (5) whether petitioners are entitled to deduct on Schedule E certain rental expenses relating to two parking lots located in Philadelphia for 1988 and 1989; (6) whether petitioners are entitled to deduct on Schedule E certain rental expenses relating to property located at 1921 Mount Vernon Road in Philadelphia for 1989; (7) whether the losses incurred by petitioners in respect of Andcove, Inc., for 1988 and 1989 are passive losses such that their deduction is limited by the passive activity loss provisions of section 469; (8) whether petitioners are liable for an addition to tax for late filing under section 6651(a)(1) for 1988; (9) whether petitioners are liable for an addition to tax 606 for negligence under section 6653(a)(1) for 1988; and (10) whether petitioners are liable for an accuracy-related penalty for negligence under section 6662(a) for 1989. Whether petitioners are liable for self-employment tax is a derivative issue, the resolution of which depends on our disposition of certain of the foregoing issues. In addition, we note that in disallowing certain deductions claimed by petitioners on Schedules C and E, respondent allowed such deductions on Schedule A instead. 2For simplicity and clarity, we will first set forth the relevant background facts and general legal principles; we will then combine additional findings of fact and opinion for each issue. Background FactsSome of the facts have been stipulated, and they are so found. Petitioners resided in Somers Point, New Jersey, at the time their petition was filed with the Court. Petitioner was a chiropractor until 1987, when he retired. 607 He resumed his business as a chiropractor in 1988, when he began seeing patients again. Mrs. Dougherty has primarily been a housewife since she and petitioner wed. During 1988 and 1989, Mrs. Dougherty was active as an investor, devoting significant amounts of time and energy to the activity, which she conducted from a large hallway in petitioners' home in Somers Point (the Somers Point home). Mrs. Dougherty traded stocks only on behalf of herself and her immediate family. On their 1988 and 1989 Federal income tax returns, petitioners reported 16 and 46 stock trades, respectively. In addition to a computer and a desk, Mrs. Dougherty kept cookbooks and art supplies in the hallway, which also served as a den. Petitioners purchased a house at 1921 Mount Vernon Road (the Mount Vernon Road property) in Philadelphia in 1985, for $ 90,000, and used it as their principal residence from 1985 until 1988. Prior to the years in issue, petitioners used part of the house to operate a "bed & breakfast". Petitioners purchased the Somers Point home in March 1988 as their principal residence. From April to September 1988 petitioner saw chiropractic patients at the Mount Vernon Road property. 608 In 1989, the Mount Vernon Road property was rented to an unrelated third party from August through December. During the years in issue, petitioners also owned a houseboat (the houseboat), purchased in 1983. Petitioners rented the houseboat to third parties, but would occasionally stay on the houseboat when it was not rented. In early 1988, petitioners stayed on the houseboat for part of the time that they were making the transition from Philadelphia to the Somers Point home. On at least 32 days between January and March 1988, petitioners made personal telephone calls from the houseboat. Petitioners rented the houseboat to a third party from April 1 through June 30, 1988, for $ 750 per month, a total of $ 2,250 for the 91-day rental period (approximately $ 24.73 a day). Petitioners received $ 5,450 as rental income from the houseboat in 1988. In 1989, petitioners sold two parking lots located at 2010 and 2012 Fairmont Avenue in Philadelphia (the parking lots) for $ 35,000. The parking lots had been purchased in 1986 for $ 45,900. Petitioners' 1988 Federal income tax return, due on October 16, 1989, was filed on November 13, 1989. General Legal PrinciplesWe begin 609 by noting that, as a general rule, the Commissioner's determinations are presumed correct, and the taxpayer bears the burden of proving that those determinations are erroneous. Rule 142(a); Welch v. Helvering, 290 U.S 111, 115 (1933). Moreover, deductions are a matter of legislative grace, and the taxpayer bears the burden of proving that he or she is entitled to any deduction claimed. Rule 142(a); New Colonial Ice Co. v. Helvering, 292 U.S. 435">292 U.S. 435, 440 (1934); Welch v. Helvering, supra.This includes the burden of substantiation. Hradesky v. Commissioner, 65 T.C. 87">65 T.C. 87, 90 (1975), affd. per curiam 540 F.2d 821">540 F.2d 821 (5th Cir. 1976). If the record provides sufficient evidence that a taxpayer has incurred a deductible expense, but the taxpayer is unable to adequately substantiate the amount of the deduction to which he or she is otherwise entitled, the Court may, under certain circumstances, estimate the amount of such expense and allow the deduction to that extent. Cohan v. Commissioner, 39 F.2d 540">39 F.2d 540, 543-544 (2d Cir. 1930).610 However, in order for the Court to estimate the amount of an expense, we must have some basis upon which an estimate may be made. Vanicek v. Commissioner, 85 T.C. 731">85 T.C. 731, 743 (1985). Without such a basis, any allowance would amount to unguided largesse. Williams v. United States, 245 F.2d 559">245 F.2d 559, 560 (5th Cir. 1957). Petitioner's Schedule C Chiropractor ExpensesPetitioners claimed deductions, inter alia, for depreciation, insurance, and employee plan expenses in connection with petitioner's business as a chiropractor. Sections 167 and 168 provide that a depreciation deduction shall be allowed to reflect the exhaustion, wear, and tear of property used either in a trade or business or held for the production of income. Respondent determined that petitioners were entitled to depreciate the Mount Vernon Road property for 9 months of 1988 and the first 5 months of 1989. 3 Although testimony offered by petitioners at trial indicated that petitioner used the Mount Vernon Road property for his chiropractic practice for 6 months in 1988 and did not use it for his chiropractic practice in 1989, respondent has not revised611 her determination. Petitioners' testimony at trial also revealed that petitioners had been depreciating the Mount Vernon Road property using its fair market value as their basis. However, as applicable herein, sections 168(d)(1) and 1012 require the use of petitioners' cost for purposes of depreciation. Moreover, land is not depreciable. E.g., Liddle v. Commissioner, 103 T.C. 285">103 T.C. 285 (1994). Because petitioners failed to present any persuasive evidence to counter respondent's determination of allowable depreciation, petitioners did not satisfy their burden of proof, and respondent's determination is sustained. Regarding the deduction claimed for insurance expense on petitioners' Schedule C for 1988, respondent determined that petitioners were entitled to deduct $ 763 of the amount claimed and 612 disallowed the balance. Section 162(a) provides that a deduction will be permitted for any ordinary and necessary expense paid during the taxable year in carrying on any trade or business. Moreover, section 162(1) specifically provides that an individual who is self-employed may deduct an amount up to 25 percent of the amount paid during the taxable year for insurance which constitutes medical care for the taxpayer, his spouse, and his dependents, as long as the amount of such deduction is less than the amount of the taxpayer's earned income derived from the trade or business with respect to which the plan providing the medical care coverage is established. Moreover, section 262(a) precludes deductions for personal, living, and family expenses. Cf. sec. 264(a)(1). Petitioners failed to present persuasive evidence at trial that the insurance expense disallowed by respondent on the Schedule C for 1988 was an ordinary and necessary business expense within the meaning of section 162(a). Accordingly, respondent's determination is sustained. Finally, no persuasive evidence was adduced at trial to substantiate the deduction claimed by petitioner for employee plan expenses under section613 162(a) for each of the years in issue. Consequently, we sustain respondent's disallowance of these deductions. Petitioner's Schedule C Real Estate and Mortgage Broker ExpensesPetitioners claimed deductions on Schedule C for 1988 and 1989 for expenses relating to what was identified as petitioner's business as a mortgage representative and real estate salesman. For 1988, respondent determined that petitioners were not entitled to these deductions on the ground that they had not established that any amounts were expended for such a business activity. For 1989, respondent disallowed certain deductions on the ground that they had not been substantiated. At trial, petitioners presented no evidence to support the claim that petitioner was engaged in the trade or business of being a mortgage representative or real estate salesman in 1988. Petitioners also failed to substantiate the specific deductions that respondent disallowed for 1989. Accordingly, we sustain respondent's determination for both years. Mrs. Dougherty's Schedule C Stocktrader ExpensesPetitioners claimed deductions on Schedule C for 1988 and 1989 for expenses relating to what was identified as Mrs. 614 Dougherty's trade or business as a stocktrader. Respondent determined that petitioners were not entitled to these deductions, principally because Mrs. Dougherty was an investor. Only by proving that Mrs. Dougherty was engaged in the trade or business of being a stocktrader and by substantiating her expenses would petitioners be entitled to the deductions as claimed. Whether Mrs. Dougherty was engaged in the trade or business of being a stockbroker is a question of fact. Higgins v. Commissioner, 312 U.S. 212">312 U.S. 212, 217 (1941). "Management of securities investments, whatever the extent and scope of such activity, is seen as the work of a mere investor, 'not the trade or business of a trader.'" Mayer v. Commissioner, T.C. Memo. 1994-209 (quoting Estate of Yaeger v. Commissioner, 889 F.2d 29">889 F.2d 29, 34 (2d Cir. 1989), affg. in part, revg. in part, and remanding T.C. Memo. 1988-264)). Rather, an investor's expenses are only deductible under section 212 as incurred in the production of income. Whipple v. Commissioner, 373 U.S. 193">373 U.S. 193, 200 (1963); 615 United States v. Gilmore, 372 U.S. 39">372 U.S. 39, 45 (1963). A two-part test (the two-part test) has been developed for determining whether a taxpayer who manages her own investments is a trader or an investor. Mayer v. Commissioner, supra. Thus, a taxpayer's activity will be considered that of a trader only if: (1) The taxpayer's trading is substantial, and (2) the taxpayer seeks to profit from daily or short-term swings in the securities market. Id.; see also Paoli v. Commissioner, T.C. Memo. 1991-351 (where 125 of 326 sales of stock made during the taxable year were during a 1-month period, taxpayers were investors not traders). Although Mrs. Dougherty testified that she spoke with her broker at Merrill Lynch on an almost daily basis, the evidence at trial does not support a finding that Mrs. Dougherty's trading activities satisfied the two-part test. Specifically, on their 1988 and 1989 Federal income tax returns, petitioners reported only 16 and 46 stock trades, respectively. This does not rise to the level of substantial trading contemplated by the two-part test. As previously noted, 616 an investor's expenses may be deductible as having been incurred in the production of income. Sec. 212. 4 Petitioners claimed certain deductions relating to Mrs. Dougherty's use of the Somers Point home to conduct her investment activities. However, because we have held that Mrs. Dougherty was not engaged in a trade or business with respect to her investment activities, petitioners are not entitled to any investment-related deductions for Mrs. Dougherty's use of the Somers Point home for investment activities. Sec. 280A. 5Petitioners presented no documentary evidence to substantiate the amount of any other expense incurred by Mrs. Dougherty as an investor. However, 617 on the basis of the testimony adduced at trial, we hold that during 1988 and 1989 petitioners incurred expenses of $ 12 and $ 15, respectively, with regard to Mrs. Dougherty's investment activity. Cohan v. Commissioner, 39 F.2d 540">39 F.2d 540, 543-544 (2d Cir. 1930). Petitioners' Schedule E Houseboat Rental ExpensesPetitioners claimed a loss for 1988 relating to their rental of the houseboat during that year. Respondent determined that petitioners were not entitled to deduct this loss because they used the houseboat as a residence during 1988. As a general rule, when a dwelling unit is used by the taxpayer as a residence during the taxable year, no deductions otherwise allowable under chapter 1 of the Internal Revenue Code are permitted with respect to the use of that dwelling unit. Sec. 280A(a). There are, however, certain exceptions to this general rule. One exception permits deductions for expenses related to certain rental property. Sec. 280A(c)(3). Nevertheless, section 280A(c)(5) limits deductions related to rental property "where the dwelling unit is used by the taxpayer during the taxable year as a residence". For practical purposes, in618 this case, if petitioners used the houseboat as a residence during the 1988 taxable year, then respondent's determination must be sustained. We must therefore decide whether petitioners used the houseboat as a residence during 1988. In order to decide this matter we must turn to section 280A(d). Section 280A(d) defines what constitutes use as a residence. In relevant part, section 280A(d) provides as follows: SEC. 280A(d). Use as a Residence. -- (1) In General. -- For purposes of this section, a taxpayer uses a dwelling unit during the taxable year as a residence if he uses such unit (or portion thereof) for personal purposes for a number of days which exceeds the greater of -- (A) 14 days, or (B) 10 percent of the number of days during such year for which such unit is rented at a fair rental.For purposes of subparagraph (B), a unit shall not be treated as rented at a fair rental for any day for which it is used for personal purposes. (2) Personal use of unit. -- For purposes of this section, the taxpayer shall be deemed to have used a dwelling unit for personal purposes for a day if, for any part of such day, the unit is used -- (A) for personal purposes619 by the taxpayer or any other person who has an interest in such unit, or by any member of the family (as defined in section 267(c)(4)) of the taxpayer or such other person; * * * (C) by any individual * * * unless for such day the dwelling unit is rented for a rental which, under the facts and circumstances, is fair rental.Assuming that the houseboat was rented at a fair rental for 220 days of the year, 6 petitioners would need to prove that they used the houseboat for personal use fewer than 23 days during the 1988 taxable year. Sec. 280A(d)(2)(A). The statutory definition of personal use is rather broad, insofar as it includes the use of a dwelling unit "for any part of such day" on which the unit is used by the taxpayers for personal use. Petitioners acknowledged at trial, and telephone records confirm, that petitioners made personal telephone calls from the houseboat on at least 32 different days620 during 1988. Moreover, petitioners stayed on the houseboat in early 1988 for part of the time that they were making the transition from their former home in Philadelphia to their new home in Somers Point. Clearly such use would have constituted personal use. Accordingly, we hold that petitioners used the houseboat as a residence for more than 10 percent of the number of days for which the house was rented at a fair rental. See sec. 280A(d)(1)(B). In view of the foregoing, we sustain respondent's determination with respect to the Schedule E loss for 1988. For 1989, respondent determined that petitioners were not entitled to certain of the deductions that petitioners claimed on their Schedule E with respect to the houseboat. Petitioners presented no persuasive evidence at trial to substantiate the deductions which were disallowed. Consequently, we sustain respondent's determination. Petitioners' Schedule E Rental Expenses for Parking LotsRespondent determined that petitioners were not entitled to certain deductions claimed on Schedule E for 1988 and 1989 with respect to the parking lots. On brief, respondent conceded, on the basis of a real estate tax bill, that petitioners621 are entitled to an additional deduction of $ 970 for 1988. Because that bill is actually for $ 970.91, we hold that petitioners are entitled to an additional deduction of $ 1. Petitioners presented no persuasive evidence to substantiate the other expenses disallowed by respondent. Accordingly, with the exception just noted, we sustain respondent's determination. Petitioners' Schedule E Mount Vernon Road Property Rental ExpenseFor 1989, petitioners deducted various expenses relating to the rental of the Mount Vernon Road property. Respondent determined, inter alia, that petitioners overstated their deduction for depreciation and that petitioners were obliged to capitalize, rather than deduct, the cost of a skylight replacement. Petitioners appear to have claimed depreciation based on the fair market value of the Mount Vernon Road property, rather than based on its cost, less the cost allocable to the land. Moreover, petitioners appear to have claimed depreciation for a full 12 months. Respondent determined that petitioners were entitled to deduct depreciation based on petitioners' cost, less the cost allocable to the land. Respondent also determined that petitioners622 were entitled to deduct depreciation for those months that the property was used as a rental property for the production of income. Secs. 167(a)(2), 168(c)(1)(B), 1012. Petitioners failed to introduce persuasive evidence that respondent erred in either her approach or computation. Accordingly, we sustain respondent's determination. Also for 1989, petitioners deducted $ 5,150 as repair expense. Respondent determined that this amount must be capitalized pursuant to section 263 and then depreciated. Section 263 relates to capital expenditures and provides in relevant part as follows: 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. * Petitioners failed to introduce persuasive evidence that the skylight was anything other than a capital improvement. We therefore sustain respondent's determination. The Andcove LossesFor 1988 and 1989, petitioners deducted losses of $ 11,063 and $ 15,363, respectively, relating to their investment in Andcove, Inc. (Andcove), an S corporation. 623 Andcove owned the marina (the marina) where petitioners docked their houseboat during the years in issue. On Schedule E for 1988 and 1989, petitioners characterized their Andcove losses as nonpassive losses. Respondent determined that the losses were passive losses and therefore subject to the limitations on the deductibility of passive activity losses set forth in section 469. Section 469(c)(1) defines a passive activity as any activity "(A) which involves the conduct of any trade or business, and (B) in which the taxpayer does not materially participate." Material participation requires that the taxpayer be "involved in the operations of the activity on a basis which is -- (A) regular, (B) continuous, and (C) substantial." Sec. 469(h)(1). Rules as to what level of participation is required to satisfy the material participation standard are set forth in section 1.469-5T, Temporary Income Tax Regs., 53 Fed. Reg. 5725 (Feb. 25, 1988). Petitioner's testimony that as a one-twentieth owner of Andcove, as a houseboat owner, and as a 99-year leaseholder of a slip in the marina, he was "pretty doggone active" is insufficient to prove that petitioners materially624 participated in Andcove's trade or business. 7 Moreover, other evidence in the record contradicts petitioners' contention that they materially participated. Specifically, the Schedule K-1 (Form 1120S) sent to petitioners by Andcove for 1989 specifically states that "Loss * * is from a passive activity." The Schedule K-1 goes on to advise petitioners that "You should file Form 8582 'Passive Activity Loss Limitations' with your 1989 tax return." Based upon the evidence at trial, we sustain respondent's determination. Section 6651(a)(1) Addition to Tax for Late Filing for 1988The addition to tax under section 6651(a)(1) is imposed on a taxpayer who fails to file an income tax return in a timely fashion, unless the taxpayer's failure is due to reasonable cause and not willful neglect. Petitioners' income tax return for 1988 was due on October 16, 1989. Secs. 6072(a), 6081(a), 7503. However, petitioners' return was filed625 on November 13, 1989. Petitioners offered no explanation which would suggest that they had reasonable cause to file late. Accordingly, we hold that petitioners are liable for the addition to tax under section 6651(a)(1). Section 6653(a)(1) Addition to Tax for Negligence for 1988Respondent also determined that petitioners are liable for an addition to tax for negligence under section 6653(a)(1) for 1988. Under section 6653(a)(1), an addition to tax is imposed if any part of the underpayment is due to negligence or disregard of rules or regulations. "Negligence" includes any failure to make a reasonable attempt to comply with the provisions of the Internal Revenue Code, and the term "disregard" includes any careless, reckless, or intentional disregard. Sec. 6653(a)(3); see Neely v. Commissioner, 85 T.C. 934">85 T.C. 934, 947 (1985). Respondent's determination of the addition to tax for negligence is presumptively correct, and petitioners bear the burden of proving otherwise. Rule 142(a); Luman v. Commissioner, 79 T.C. 846">79 T.C. 846, 860-861 (1982); Bixby v. Commissioner, 58 T.C. 757">58 T.C. 757, 791 (1972). Petitioners626 did not address the issue of negligence at trial and therefore failed to carry their burden of proof. Moreover, based on the record in this case, there is ample evidence that petitioners were, at a minimum, negligent with respect to the entire underpayment for 1988. Indeed, petitioner testified that You always submit a different statement to the bank as far as your net worth, and the IRS * * * because you want the bank to think you've got more money than you have, and you want the IRS to think you have less money than you have.We think petitioner's statement reflects petitioners' "disregard" of the rules and regulations. Sec. 6653(a)(3); see Neely v. Commissioner, supra.Respondent is sustained on this issue. Section 6662(a) Accuracy-related Penalty for Negligence for 1989The final issue for decision is whether petitioners are liable for the accuracy-related penalty for negligence under section 6662(a) for 1989. The penalty under section 6662(a) is similar to the addition to tax for negligence under section 6653(a)(1). Section 6662(a) and (b)(1) provides that if any portion of an underpayment of tax is attributable to negligence*627 or disregard of rules or regulations, then there shall be added to the tax an amount equal to 20 percent of the amount of the underpayment which is so attributable. The term "negligence" includes any failure to make a reasonable attempt to comply with the statute, and the term "disregard" includes any careless, reckless, or intentional disregard. Sec. 6662(c). Petitioners have the burden of proving that respondent's determination of the penalty is in error. Rule 142(a); Welch v. Helvering, 290 U.S. 111">290 U.S. 111, 115 (1933). Petitioners did not address the penalty for negligence at trial and therefore failed to carry their burden of proof. In any event, as noted above, there is ample evidence that petitioners were negligent with respect to the entire underpayment for 1989. Respondent is therefore sustained on this issue. ConclusionTo give effect to our resolution of the disputed issues, as well as the parties' concessions, Decision will be entered under Rule 155. Footnotes1. Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for the taxable years in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.↩2. Any adjustments to reflect the Court's opinion must be made in a Rule 155 computation.↩3. Respondent determined that petitioners were entitled to deduct depreciation on Schedule E for those months of 1989 that the Mount Vernon Road property was held for the production of income.↩4. Deductions related to income-producing activities are subject to the 2-percent floor set forth in section 67(a).↩5. We note that respondent determined that petitioners were entitled to deductions for mortgage interest and real estate taxes paid during 1988 and 1989 as Schedule A deductions rather than as Schedule C deductions, as claimed.↩6. We base this figure on rental income of $ 5,450 with an average per diem rental charge of $ 24.73.↩7. Petitioners do not contest the computational dimension of respondent's determination.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624010/	M. STACEY PALMER, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentPalmer v. CommissionerDocket No. 13279-83.United States Tax CourtT.C. Memo 1987-106; 1987 Tax Ct. Memo LEXIS 102; 53 T.C.M. (CCH) 229; T.C.M. (RIA) 87106; February 23, 1987. 102 P filed a Chapter 7 petition in bankruptcy. One of the assets included in the bankruptcy proceedings was a parcel of rental property owned by P and her then-husband (W). P and W paid the trustee in bankruptcy $9,000 in exchange for title to the property. Held, the exchange of $9,000 to the trustee in bankruptcy for title was a sale and therefore a nondeductible capital expenditure. Section 263, I.R.C. 1954. Held further, P is not entitled to a "sweat equity" deduction. Held further, P may not compute her depreciation deduction for the property according to her pre-bankruptcy basis. M. 103 Stacey Palmer, pro se. Gilbert T. Gembacz, for the respondent. NIMSMEMORANDUM FINDINGS OF FACT AND OPINION NIMS, Judge: Respondent determined a deficiency in petitioner's income tax for the 1980 taxable year in the amount of $8,510. After concessions, the issues for decision in this case are: (1) whether petitioner is entitled to a deduction for a "repossession expense" or "cost of clearing title" for her purchase of real property from the trustee of the bankruptcy estate; (2) whether the purchase price of the property from the bankruptcy estate constitutes petitioner's basis in the property for purposes of depreciation; and (3) whether petitioner is entitled to a "sweat equity" deduction. FINDINGS OF FACT The facts in this case have been stipulated in full. The stipulation of facts and attached exhibits are incorporated herein by this reference. Petitioner was a resident of El Segundo, California, at the time the petition in this case was filed. In 1980 petitioner and William T. Palmer (hereinafter referred to as William), her husband at the time of the bankruptcy proceedings, filed a Chapter 7 petition in bankruptcy. One of their assets included104 in the bankruptcy proceedings was a parcel of rental property owned by petitioner and William and located in El Segundo, California. Pursuant to an order by the bankruptcy court, the El Segundo property was offered for sale by the trustee in bankruptcy. The only bid received was $9,000, offered by petitioner and William. The property was transferred to them by the bankruptcy trustee via quit claim deed. OPINION The "Repossession Expense" and Depreciation DeductionsOn her 1980 income tax return, petitioner deducted the $9,000 paid to the trustee for the El Segundo property as a "repossession expense." Petitioner also deducted $667 for depreciation of the El Segundo property, based upon her pre-bankruptcy basis in that property. Petitioner contends that the exchange of $9,000 to the trustee in bankruptcy for repossession of the property did not constitute a sale. Petitioner misunderstands the effect of the bankruptcy proceeding on the property in question. The commencement of a bankruptcy proceeding creates an estate comprised of all the debtor's property. All the debtor's interests in property, legal or equitable, become part of the bankruptcy estate. 11 U.S.C. sec. 541105 (1978). Once the estate is created, no interests in property of the estate remain in the debtor. See Notes of Committee on the Judiciary, S. Rept. 95-989 (1978). Instead, title to the debtor's property vests in the estate. See 4 W. Collier, Collier on Bankruptcy, par. 541.01 (15th ed. 1986). Although title vests in the estate rather than the trustee, the trustee is given full authority to represent the estate and dispose of all property comprising the estate. 11 U.S.C. secs. 323(a) and 363(b) (1978). When petitioner and William filed their bankruptcy petition, title to the El Segundo property vested in the bankruptcy estate. All their prior interest in the property was extinguished by the bankruptcy proceeding. The property was then sold to them for $9,000. The $9,000 invested in the El Segundo property was a capital expenditure and therefore nondeductible under section 263. 1Section 1.263(a)-1(a), Income Tax Regs.In her brief, petitioner explains106 that she mislabeled the $9,000 expense as a "repossession expense" and requests this Court to view it as a "cost of clearing title." Either label is a mischaracterization. The payment to the bankruptcy trustee was neither a repossession expense nor a cost of clearing title, but the cost of acquiring title and therefore, nondeductible. Petitioner also miscalculated her basis in the El Segundo property for the purpose of the depreciation deduction on her 1980 income tax return. As a result of the bankruptcy petition, title to the property passed to the estate. Petitioner and William then paid $9,000 for the property. Accordingly, their basis in the property is $9,000, the amount they paid. Section 1012. The "Sweat Equity" DeductionPetitioner maintains that she was entitled to a "sweat equity" deduction in 1980 for the labor she had invested in a hydroponic greenhouse operation that ceased doing business for lack of funds in 1980. Petitioner discusses this concept in her trial memorandum and contends that personal efforts contributed to a business should be recognized and assigned a monetary value in computing a loss basis in property. This item was not claimed on petitioner's107 return for the 1980 taxable year, and the concept itself is not supported by any provisions of the Internal Revenue Code. It is well settled that tax credits and deductions are matters of legislative grace. Deputy v. Dupont,308 U.S. 488">308 U.S. 488, 493 (1940); New Colonial Ice Co. v. Helvering,292 U.S. 435">292 U.S. 435, 440 (1934); Hokanson v. Commissioner,730 F.2d 1245">730 F.2d 1245, 1250 (9th Cir. 1984); Rickard v. Commissioner, 88 T.C. (filed January 21, 1987) (slip opinion at 14). Accordingly, petitioner may not claim a "sweat equity" deduction. Decision will be entered under Rule 155.Footnotes1. Unless otherwise indicated, all section references are to the Internal Revenue Code in effect during the years in issue. All Rule references are to the Tax Court Rules of Practice and Procedure.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624012/	WAYNE BODY CORPORATION, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Wayne Body Corp. v. CommissionerDocket No. 35896.United States Board of Tax Appeals24 B.T.A. 524; 1931 BTA LEXIS 1630; October 28, 1931, Promulgated 1630 George E. H. Goodner, Esq., for the petitioner. J. E. Mather, Esq., and J. A. Lyons, Esq., for the respondent. BLACK 524 OPINION. BLACK: Findings of fact and opinion were promulgated in this proceeding February 27, 1931, and therein it was found that petitioner had received from the transferor corporation property of a greater net value than the amount of the taxes involved in the proceeding and in the opinion it was found that petitioner was a transferee of the transferor corporation which owed the tax and was liable for the taxes due by said transferor corporation for the year 1917. The opinion directed that decision should be entered under Rule 50 of the Board's rules of practice. On April 21, 1931, petitioner filed a proposed settlement under Rule 50, in which computation it was determined that the amount of the deficiency owed by the transferor corporation (American Auto Trimming Company) for the year 1917 was $14,955.65, and that the liability of petitioner as transferee was for the same amount. This proposed settlement under Rule 50 was set down for hearing May 13, 1931, at which time counsel for respondent gave notice that he had1631 no objection to the computation filed by petitioner. Whereupon, May 15, 1931, the Board entered decision that the liability of petitioner 525 as the transferee of the American Auto Trimming Company of Detroit, Mich., was $14,955.65. No mention was made of interest. Thereafter, on May 22, 1931, respondent filed motion to amend the order of final determination made by the Boary May 15, 1931, so that the liability of petitioner as transferee would be determined to be $14,955.85 plus interest from February 26, 1926. Respondent's said motion was set down for argument June 10, 1931, and on said date counsel for respondent and counsel for petitioner appeared and presented their arguments and submitted authorities in support of their respective contentions. The deficiency notice addressed to petitioner December 29, 1927, reads in part as follows: As provided in Section 280 of the Revenue Act of 1926, there is proposed for assessment against you, the amount of $66,332.05 constituting your liability as a transferee of the assets of the American Auto Trimming Company (whose name was subsequently changed to the Gotfredson Corporation) of Detroit, Michigan, for income and profits1632 taxes in the amount of $66,332.05 due from the American Auto Trimming Company for the years 1917, 1920 and 1924 as shown in the attached statement. Then on the statement attached to the deficiency notice, after giving the amounts of the respective deficiencies claimed against the American Auto Trimming Company for 1917, 1920, and 1924, the statement concludes: Section 280 of the Revenue Act of 1926 provides for the assessment, collection and payment of 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. The records of this office indicate that the American Auto Trimming Company was dissolved on or about August 1925 and the assets finally transferred to you. The amended answer filed by respondent at the hearing, December 3, 1929, contains the following paragraph: Further answering said petition, respondent alleges that on or about December 31, 1924, the petitioner caused to be transferred to it all of the property and assets of the American Auto1633 Trimming Company of Detroit, Michigan, without paying any consideration therefor which said assets were of a net value in excess of the taxes involved in this proceeding with interest allowed by law. [Italics supplied.] The motion of respondent and the argument of counsel thereon raise two questions: (1) Does the Board have any power or jurisdiction to make any order relative to interest in these transferee proceedings? (2) If question (1) be answered in the affirmative, was the deficiency notice sent out by respondent to petitioner, coupled with the affirmative allegations made by respondent in his amended answer, sufficient pleadings upon which the Board may determine 526 that petitioner is liable for interest? We think both questions must be answered in the affirmative. In , we said: While the court seem to hold divergent views as to when interest begins to run against stockholders who are liable to creditors of a corporation, we are impressed with the decision in 1634 , as being a fair and equitable rule to be applied in transferee cases. That decision, where the tax liability was greatly in excess of the amount received by the transferees in distribution, holds the transferees liable to the full extent of the amounts received by them with interest from "the fair average date of receiving" the sums distributed. Cf. . That method of computation represents the maximum liability of the transferees and applies where the tax and interest imposed on the corporate transferor is greater than the amount received in distribution, plus interest from that date. Where the tax and interest thereon is less than the amount distributed to any one transferee, then the liability of such transferee would be limited to the amount of tax and interest thereon. Accordingly, it is held in these cases that the amount the respondent may assess in each case is the amount of taxes owing by the Masontown Coal Co., plus interest at the rate of 6 per cent per annum from February 26, 1926; provided, however, that the liability of any one of the petitioners1635 shall not exceed the amount received by him in distribution, plus interest at 6 per cent per annum (the legal rate in Pennsylvania) from the date of distribution. In other words, the maximum amount assessable against any one of the petitioners is the lower amount of either (1) the tax plus interest from February 26, 1926, to date of assessment, or (2) the amount received in distribution, plus interest from the date thereof, viz., August 15, 1920, to date of assessment. In these cases, the amount of tax being less than the amount received in distribution, and February 26, 1926, being a later date than that of the distribution, the amount assessable is $4,268.39, plus interest from February 26, 1926. An order will be entered accordingly in each of the proceedings. This decision was followed in ; ; . Section 283(d), Revenue Act of 1926, is as follows: In the case of any assessment made after the enactment of this Act in respect of a tax imposed by any Act of Congress prior to November 23, 1921, interest upon the tax proposed to1636 be assessed shall be assessed at the same time as such tax, shall be paid upon notice and demand from the collector, and shall be collected as part of such tax, at the rate of 6 per centump per annum, from the date of the enactment of this Act to the date such tax is assessed, or, in the case of a waiver under subidivision (d) of section 274, to the thirtieth day after the filing of such waiver or to the date the deficiency is assessed whichever is the earlier. It should be observed that this section makes the interest provided for a part of the tax and requires that it shall be so collected. Section 280 provides: SEC. 280. (a) The amounts of the following liabilities shall, except as hereinafter in this section provided, be assessed, collected, and paid in the same 527 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 transferee1637 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. This section includes interest as part of the liability for which the transferee may be held to be liable and it would seem that, in fixing the amount of the liability in any given case, the Board must of necessity consider interest, as provided by law. In , p. 702, the Board held that a penalty was an addition to the tax and that under section 280(a)(1) the transferee was liable therefor. The Board there said: The one unique attack upon the constitutionality of section 280 relates only to the 1925 period and is pleaded in each case as follows: The determination of the tax contained in the said deficiency letter aforesaid is based upon the following errors, to wit: * * * (4) That, should this Honorable Board hold that the said section of the said Revenue Act is constitutional and that the said Commissioner did not err in relying upon said section, then petitioner alleges that, although1638 said section 280 of the Revenue Act of 1926 may authorize the imposition and assessment of tax (due by a transferor) directly against the transferee of its assets, said section of the Act does not and can not authorize the imposition and assessment of a penalty for delinquency in filing a return; and that if said section did or does authorize the assessment of a penalty against a transferee, that then, and in that case, the said section of said act is unconstitutional, null and void. Section 280(a)(1) of the Revenue Act of 1926 specifically authorizes the inclusion of "interest, additional amounts, and additions to the tax" in the amount which may be assessed against and collected from a transferee. A penalty is an addition to the tax. . Section 3176, Revised Statutes as amended by section 1003, Revenue Act of 1924. A contention respecting the constitutionality of section 280 so far as it authorizes the assertion of a liability of a transferee for penalties imposed upon his transferor, might therefore, be disposed of upon authority of 1639 , since such a contention is an attack upon a substantive provision of the said section 280. * * * It seems equally clear that interest is likewise included with the tax as a liability for which the transferee may be held to be liable. But counsel for petitioner urges that the deficiency notice mailed to petitioner, coupled with the affirmative allegations made in respondent's amended answer, were not sufficient to put petitioner on notice that claim was being made against it for interest and that if it was the purpose of respondent to seek to hold petitioner liable for interest on the $14,955.65 from February 26, 1926, respondent should have asked 528 at the hearing that the deficiency be increased so as to include interest. Petitioner cites in support of his contention, section 274(e) of the Revenue Act of 1926, which reads: The Board shall have jurisdiction to redetermine the correct amount of the deficiency even if the amount so redetermined is greater than the amount of the deficiency, notice of which has been mailed to the taxpayer, and to determine whether any penalty, additional amount of addition to the tax should be assessed, 1640 if claim therefor is asserted by the Commissioner at or before the hearing or a rehearing. [Italics supplied.] We think the statements of respondent in the deficiency notice mailed to petitioner, from which the appeal was taken, coupled with the affirmative allegations contained in respondent's amended answer filed December 3, 1929, were sufficient notice to petitioner that respondent was claiming against petitioner liability for the taxes due by the transferor corporation and interest thereon as provided by law. This interest we hold dates from February 26, 1926, because it is so provided by section 283(d) of the Revenue Act of 1926, and petitioner having received assets as a transferee of a greater value than the tax plus interest from February 26, 1926, it is liable therefor. Complying with the views herein expressed, an order will be entered granting respondent's said motion and our order of final determination, dated May 15, 1931, will be modified so as to include interest on $14,955.65 from February 26, 1926, at the rate of 6 per cent per annum. Reviewed by the Board.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624013/	YONG GIL HYON and SOON JA HYON, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentHyon v. CommissionerDocket Nos. 17046-82, 34760-84.United States Tax CourtT.C. Memo 1987-218; 1987 Tax Ct. Memo LEXIS 220; 53 T.C.M. (CCH) 700; T.C.M. (RIA) 87218; April 29, 1987. William J. Hagan, for the petitioners. John A. Guarnieri and Dermot Kennedy, for the respondent. SHIELDSMEMORANDUM FINDINGS OF FACT AND OPINION SHIELDS, Judge: Respondent determined the following deficiencies in and additions to petitioners' Federal income taxes: Additions to TaxYearDeficiencySec. 6653(a) 1Sec. 6651(a)(1)1978$50,827.13$2,578.96$4,987.911979157,098.007,854.00221 After concessions, the issues for decision are (1) whether petitioners had unreported income in the amounts determined by respondent; (2) whether petitioners are liable for the addition to tax under section 6653(a) for negligence or the intentional disregard of rules and regulations; 2 and (3) whether petitioner Soon Ja Hyon qualifies as an innocent spouse under section 6013(e). FINDINGS OF FACTSome of the facts have been stipulated and are so found. The stipulation of facts and exhibits attached thereto are incorporated herein by reference. Petitioners, Yong Gil Hyon and Soon Ja Hyon, were husband and wife during the years at issue and resided in Philadelphia. They resided in Havertown, Pennsylvania at the time they filed their petition. In 1975 petitioners, who are both natives of Korea, moved to the United States. They first lived222 in Ohio and then moved to Philadelphia, where Mr. Hyon took a job with a meat packing company. A short time later, he left the packing company and became one of Philadelphia's many street vendors. He first sold fruit, but by January 1976 he was selling only umbrellas and handbags, which he obtained during weekly trips to New York City. In February 1977, Mr. Hyon opened a store under the name of "Hyon's Wigs" in Upper Darby, which is near Philadelphia (the "wig store"). His wife began to sell wigs at retail from the front of this store, and he continued to sell umbrellas and handbags at wholesale from the back of the store. In 1978, he moved the umbrella and handbag wholesale business to a building in Philadelphia, which he thereafter called "Han Mi Views and Company" (the "umbrella store"). Both stores were operated by petitioners during 1978 and 1979. Petitioners filed joint income returns for 1978 and 1979. On the 1978 return, they reported an adjusted gross income of $9,827.00, including a net profit of $3,047.71 from the umbrella store and $6,236.37 from the wig store. According to the 1978 return, the umbrella store had gross receipts of $361,271.10 and cost of goods223 sold of $316,843.39, and the wig store had gross receipts of $69,211.42 and cost of goods sold of $38,504.05. On the 1979 return, petitioners reported an adjusted gross income of $18,548.00 including a net profit of $10,946.00 from the umbrella store and $7,636.00 from the wig store. According to the 1979 return, the umbrella store had gross receipts of $401,066.00 and cost of goods sold of $355,023.00, and the wig store had gross receipts of $65,481.00 and cost of goods sold of $37,982.00. Petitioners' 1978 return was audited by Elizabeth Hall, an agent for respondent. She began her examination by requesting that petitioners produce the books and records of the two stores. Upon being informed that no permanent books or records had been maintained for the businesses and that the 1978 return had been prepared from notations made by petitioners on a few pieces of paper which were no longer available, the agent reconstructed petitioners' income from the increase in their bank accounts as reflected on bank statements and identified or admitted expenditures for nondeductible items including personal living expenses as estimated by petitioners. In this manner respondent determined224 that petitioners had unreported taxable income for 1978 in the amount of $102,342.85. Respondent's computation is as follows: Funds accumulated, spent or applied to nondeductible items: 1) Cash in banks -- increase (1/1/78 to 12/31/78)$ 2,021.392) Cash on hand -- increase (1/1/78 to 12/31/78)3,212.673) Inventories -- increase (1/1/78 to 12/31/78)89,000.004) Assets purchased in 197818,617.005) Living expenses of 197811,355.006) Estimated Tax Payment in 1978722.00$124,828.06Less nontaxable sources of funds: 1) Depreciation reserve$ 7,380.002) Tax refund878.003) Loan1,400.00$ 9,658.00Corrected adjusted gross income$115,170.06Less adjusted gross income per return9,827.21Less personal exemptions3,000.00Unreported taxable income$102,342.85Petitioners' 1979 return was audited by Edward Ramer, another agent for respondent. When petitioners failed to appear at a conference arranged by Ramer, he proceeded to reconstruct their gross business receipts from their reported cost of goods sold by using an average gross profit percentage 3 of 47 percent, the average percentage in 1979 for retail businesses225 with annual sales of between one and two million dollars. 4 The gross receipts determined in this manner were then increased by Ramer by three percent because he concluded that petitioners would have less overhead than an established store with such sales. However, in making his computations, Ramer mistakenly used the profit percentage for retail businesses for both of petitioners' stores even though the umbrella store was clearly identified as a wholesale business on both the 1978 and 1979 returns. With the above computations respondent's agent determined that petitioners had unreported income in 1979 of $319,463.00. During 1978 and 1979, Mrs. Hyon was generally familiar with the operation of both stores, and she and her husband lived on the income generated by them. She was also generally aware of the profits being made from the stores. OPINION Computation of Unreported IncomeSince petitioners failed to maintain or produce any books226 or records, respondent was authorized by section 446 to compute their income by any method which in his opinion clearly reflected such income. ; . Furthermore in such a case respondent has great latitude in adopting a method for reconstructing the income, , and his method of reconstruction need only be reasonable in the light of all surrounding circumstances., . However, respondent's determination can be adjusted if warranted by the circumstances or if the method is found to be inadequate in some respect. . Petitioners have the burden of proving that the method used and the determination made by respondent in this case is erroneous. ; Rule 142(a). With respect to 1978, respondent used the cash expenditures method, to determine petitioners' income. This method is well recognized as a permissible method of reconstructing227 income in cases of this nature. See, e.g., , affd. in part, revd. in part . Furthermore, we are satisfied that respondent properly used the method, and in the absence of any proof by petitioners which tends to cast doubt upon his calculations, we conclude that respondent's determination with respect to 1978 is correct and should be sustained. However, with respect to 1979, we have found that respondent's agent mistakenly used a retail profit percentage to compute the gross receipts of petitioners' wholesale umbrella store. Nevertheless, from the entire record before us, we are satisfied that petitioners had unreported income in 1979 from their umbrella business for the following reasons. First, as we have previously found, petitioners had unreported income of $102,342.85 in 1978, which apparently occurred with respect to the receipts from the umbrella business because the reported receipts from the wig business in 1978 were substantially in line with gross profit percentage used by respondent. In fact, percentage-wise, the reported receipts from the wig business for both228 1978 and 1979 appear to be substantially in line with respondent's determination (a gross profit percentage of 40 to 45 percent by petitioners as compared to respondent's 50 percent). By adding the unreported income which we have found for 1978 to the gross receipts reported in 1978 by petitioners for the umbrella store ($102,342.85 plus $361,271.10) it appears the corrected gross receipts for that year would be $463,613.95. By using the corrected gross receipts of $463,613.95, for 1978 as thus determined and cost of goods sold of $316,843.39 as reported by petitioners for 1978, the gross profit percentage of the umbrella store for 1978 is about 32 percent ($463,613.95 minus $316,843.39 divided by $463,613.95). If the same percentage is applied to 1979, and on the record before us we can see no logical reason not to do so, it appears that the umbrella store had gross receipts in 1979 of $522,093. 5 Since petitioners reported gross receipts of $401,066, their unreported income for 1979 was $121,027 instead of the $319,463 determined by respondent, and respondent's calculations should be adjusted accordingly. 229 Addition to Tax for NegligencePetitioners have the burden of proof on this issue. ; Rule 142(a). However, they presented no proof which tended to show that their underpayments are not due to negligence or the intentional disregard of rules or regulations. It is assumed, therefore, that they have abandoned the issue, and consequently the assertion of the addition to tax is sustained with respect to both 1978 and 1979. Relief as Innocent SpouseTo qualify for relief as an innocent spouse under section 6013(e) Mrs. Hyon has the burden of proving that (1) a joint return for each of the years 1978 and 1979 was made on which there was a substantial understatement of tax attributable to grossly erroneous items of Mr. Hyon; (2) in signing the returns, she did not know and had no reason to know of such substantial understatements; and (3) taking into account all facts and circumstances, it is inequitable to hold her liable for the tax attributable to the substantial understatements. While we have found that a substantial omission of income in each year occurred with respect to the umbrella store for which Mr. Hyon230 was primarily responsible, we have also found that Mrs. Hyon was generally familiar with the operation and the profits of both stores and consequently could have determined that receipts from the umbrella store were omitted from the returns. See . Furthermore, we have found that both she and her husband used the receipts of both stores for personal living expenses. Therefore, we are unable to conclude that she did not know, or had no reason to know, of the substantial understatement or that she is entitled to the relief provided by section 6013(e) on the ground that it would be inequitable to hold her liable for the deficiencies. . Decisions 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, unless otherwise indicated. All rule references are to the Tax Court Rules of Practice and Procedure unless otherwise provided.↩2. The addition to tax under section 6651(a)(1) was conceded by respondent.↩3. For our purposes, "gross profit percentage" is gross receipts minus cost of goods sold, divided by gross receipts. ↩4. The source of the percentage used by Ramer was an annual publication by National Cash Register Corporation.↩5. The gross receipts for 1979 are computed by assuming that if X equals gross receipts; and cost of goods sold equals 355,023; and the gross profit equals 32 percent of X, then: X -.32X = 355,023; .68X = 355,023; and X = 522,093↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624014/	NATIONAL BANK OF COMMERCE OF SAN ANTONIO, TEXAS, PETITIONER v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.National Bank of Commerce v. CommissionerDocket No. 93164.United States Board of Tax Appeals40 B.T.A. 471; 1939 BTA LEXIS 848; August 18, 1939, Promulgated 848 Petitioner bank, engaged in the general banking business, made loans to an estate secured by property of the estate and in 1931 received the property in trust, under an agreement to look only to the property for payment of the amount then due and any advancements thereafter made, with general powers of control and disposition. In 1935 the property had so depreciated in value that the aggregate of the loans made was greatly in excess of the fair market value of the property and the owner of the property, without consideration, conveyed her interest to the bank. Held, the difference between the fair market value of the property and the aggregate of the bank's loans secured by the property was deductible in 1935 as a bad debt, and the bank's loss is not a capital loss limited by the provisions of section 117(d) of the Revenue Act of 1934. Robert S. Durno, Esq., for the petitioner. R. P. Hertzog, Esq., and F. B. Schlosser, Esq., for the respondent. ARNOLD 471 This proceeding involves a deficiency of $3,797.76 in income tax for 1935. The deficiency results entirely from respondent's disallowance of a deduction claimed as a bad debt in849 the amount of $30,701.04. The respondent determined that the $30,701.04 item represented a capital net loss, the deduction for which is limited to $2,000 in accordance with the provisions of section 117(d) of the Revenue Act of 1934. By its appeal this petitioner challenges respondent's determination and claims the right to the deduction either as a bad debt or as an ordinary loss. The parties are agreed as to certain facts, which were set forth in a written stipulation filed at the hearing. FINDINGS OF FACT. The petitioner is a national bank, incorporated under the national banking laws of the United States, with its principal office and place of business in San Antonio, Bexar County, Texas. It is engaged in the general banking business for profit, receiving deposits, making loans, and conducting a trust department. It made the several loans 472 and advancements of money involved herein in the due course of its business and for profit. In November 1930 the petitioner loaned $38,000 to the trustees of the estate of Van A. Webster, deceased. The loan was evidenced by three notes, two for $10,000 each and one for $18,000, and was secured by a deed of trust on850 certain warehouse properties. From time to time thereafter this indebtedness was renewed, extended, and enlarged by the petitioner as hereinafter more fully set forth. At all times material hereto the widow of Van A. Webster, who had remarried, was a resident of California. In an effort to adjust and settle the affairs of the estate of Van A. Webster, deceased, the petitioner agreed with the widow, Marie Carter Sturges, that if she could get title to the property of the estate, petitioner would take over the property and act as trustee in the management thereof. At some time undisclosed by the record, but prior to June 2, 1931, title to the property was vested in Marie Carter Sturges by a judgment of a Federal court. By deed dated June 2, 1931, Marie Carter Sturges and her husband, conveyed and transferred to the petitioner, as trustee, the properties therein described, all lying and being situate in Bexar County, Texas. The conveyance was primarily for the purpose of better securing all indebtedness of the trust estate to petitioner, and it was provided in the said deed that the petitioner, as trustee, should have the right to sell and dispose of all properties conveyed851 and to mortgage and encumber all or any part of the properties upon such terms, provisions, and conditions as the petitioner should deem advisable, but that petitioner should not be liable or bound for any indebtedness incurred, and that the property "only shall be bound and obligated for such indebtedness or indebtednesses as may be secured thereby." The parties have stipulated that: * * * The full terms of the Trust were not set forth in said deed, and that it was under, through and by virtue of said deed that the National Bank of Commerce of San Antonio acted AS TRUSTEE in borrowing money from the National Bank of Commerce of San Antonio, and in the carrying on of said transactions and borrowing money, ALL - except overdrafts - being evidenced by notes signed Trust Account No. 20 Marie Carter Sturges, by S. A. Chapman, Assistant Trust Officer, the Trust Account being carried on the Bank's books, in Trust Department, under the name and style of "Trust Account No. 20, Marie Carter Sturges". On December 17, 1932, the existing indebtedness of the trust estate amounted to $39,052.21. On that day the petitioner loaned the trust estate an additional $12,486.32, making a total of852 $51,538.53, of which $138.53 was repaid. Thereafter further advances were made by petitioner on June 15, 1933, June 25, 1934, and July 2, 1934, which advances, together with those previously made and renewed from time to time, aggregated $58,500. The various notes representing the aggregate 473 indebtedness were merged in one note dated July 2, 1934, and maturing January 3, 1935. By a note dated November 2, 1934, the $58,500 note and indebtedness was renewed and extended to May 2, 1935. On December 15, 1934, the petitioner made an additional loan and advancement to the trust estate, which was evidenced by a note of even date, maturing January 3, 1935, for $5,895.85. This note was renewed and extended by a note in like amount dated January 3, 1935, due May 2, 1935. On January 26, 1935, the petitioner, under instructions and directions of a national bank examiner, charged off this $5,895.85 note to profit and loss. The property securing the indebtedness to the petitioner having depreciated in value, Marie Carter Sturges, who was the owner thereof, subject to the rights of petitioner, offered to convey, release, and relinquish to the petitioner all of her right, title, 853 interest, and claim in and to the property held in trust, in satisfaction and settlement of all the indebtedness of trust account No. 20 and the trust estate. Under date of May 18, 1935, Marie Carter Sturges, together with her husband, executed a deed conveying her interest in accordance with her offer. The petitioner accepted the conveyance on May 28, 1935, and acquired thereby all outstanding interest in all the properties that had previously been conveyed to it, as trustee, except two leasehold interests which had terminated prior to May 28, 1935. At the time of the delivery to and acceptance by petitioner of the deed of May 18, 1935, it was carrying an indebtedness upon its books against the trust estate in the amount of $62,305.19, consisting of the note of November 2, 1934, for $58,500, an overdraft of $3,131.69, and expenses of $673.50. Upon acceptance of the deed of May 28, 1935, the petitioner credited its real estate account with $37,500, which was the fair market value of the properties acquired, and charged off $24,805.19 to profit and loss. The notes for $5,895.85 and $58,500 were marked "CANCELLED" but were retained by and are still in petitioner's possession. 854 The trust estate and "Trust Account No. 20, Marie Carter Sturges", were insolvent on May 28, 1935. At no time was Marie Carter Sturges or her husband personally liable for the indebtedness. OPINION. ARNOLD: This proceeding requires a classification of the loss sustained by the petitioner in connection with the making of loans over a period of years. During the taxable year the petitioner took over the property securing the total loans at a time when the agreed value of the property was $30,701.04 less than the indebtedness secured thereby. The respondent contends that the petitioner had a capital 474 net loss, and is limited by section 117(d) of the Revenue Act of 1934 to a deduction of $2,000. The petitioner contends that the $30,701.04 is deductible either as (1) a bad debt, or (2) an ordinary loss. It has been stipulated that the loans were made by petitioner in the ordinary course of its banking business and that the loans were made for profit. The facts here distinguish this proceeding from the decided cases involving the purchase or sale of real estate and the giving or taking back of a mortgage or deed of trust to secure the unpaid balance. See 855 ; affirmed by the Ninth Circuit in , which involved a purchase of real property, and the subsequent conveyance of the property back to the vendor in consideration of release from liability and the cancellation and surrender of the note for the unpaid balance; and , on appeal to the Second Circuit, which involved the sale of real property for cash and notes secured by a mortgage, and upon default the reacquisition of the real property at a value less than the amount of the notes. The debtor of the petitioner was successively the estate of Van A. Webster, deceased, and the trust estate created by the deed of June 2, 1931. The notes renewed after June 2, 1931, were executed by a trust officer of the petitioner, who was acting for and in behalf of the petitioner bank in its fiduciary capacity. In other words the bank in its own right was lending money to itself in its capacity as trustee, and the petitioner bank had agreed that it would look only to the property securing the indebtedness for recovery of the sums loaned. Marie Carter856 Sturges was not personally liable for the payment of the amount due petitioner. It was not her indebtedness. She neither executed the notes nor did she make herself personally responsible in any way for the payment thereof. The deed, dated May 18, 1935, indicates that the petitioner had advanced from time to time after June 2, 1931, further and additional sums to the trust estate for the upkeep, maintenance, and payment of taxes upon the real property securing the total indebtedness. The deed was executed to the petitioner in its own right "in payment and full satisfaction of all the said indebtedness" owing petitioner, "and in satisfaction, release and settlement of all obligations, duties and liabilities agreed to be performed and/or assumed by" petitioner, as trustee. At the time Marie Carter Sturges executed the deed of May 18, 1935, to the petitioner and at the time petitioner accepted the conveyance, the trust estate was insolvent, and her rights therein, which were subject to petitioner's rights, were of no value whatsoever. In so far as Marie Carter Sturges was concerned, therefore, she parted with nothing of value by her last conveyance, and was relieved of no obligation857 thereby. 475 In our opinion this proceeding is governed by the same principle as that applied in ; , and . The interest of Marie Carter Sturges in the property securing the notes was conveyed to the petitioner in settlement and satisfaction of the indebtedness of the trust estate. To the extent that the security failed to extinguish the indebtedness the loans of the petitioner represented worthless debts. Since there is no question about the charge-off of the remainder of the debts in the taxable year, the deduction claimed should have been allowed. Some of the decided cases have held that the compromise of notes for less than their face value results in an ordinary loss. ; , affirming ; ; 858 . Much of the language used in these decisions would be applicable here if we should rest our decision upon a determination that an ordinary loss as distinguished from a capital loss resulted. But we prefer to rest our decision upon the classification of this deduction as a bad debt. For the foregoing reasons it is our opinion that no sale or exchange within the meaning of section 117 occurred, and the deduction claimed should be allowed as a bad debt ascertained to be worthless and charged off in the taxable year. Decision will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624017/	JAMES B. SMITH and JEAN T. SMITH, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentSmith v. CommissionerDocket No. 3952-78.United States Tax CourtT.C. Memo 1985-167; 1985 Tax Ct. Memo LEXIS 465; 49 T.C.M. (CCH) 1144; T.C.M. (RIA) 85167; April 3, 1985. James B. Smith, pro se. Ronald J. Gardner, for the respondent. GOFFEMEMORANDUM FINDINGS OF FACT AND OPINION GOFFE, Judge: The commissioner determined deficiencies in petitioners' Federal income tax for the taxable years and466 additions to tax under section 6653(b) 1 in separate statutory notices of deficiencies, as follows: James B. SmithTaxable YearDeficiencySec. 6653(b)1971$621.81$466.0019721,151.64630.5019731,335.08774.50Jean T. SmithTaxable YearDeficiencySec. 6653(b)1971$110.00$99.501972231.00115.501973120.0060.00The issues for decision are: (1) whether petitioners earned income during the taxable years 1971, 1972, and 1973 in the amounts set forth in their separate notices of deficiency; (2) whether petitioners are liable for the additions to tax under section 6653(b) for fraud; and (3) whether petitioners are liable for damages under section 6673. FINDINGS OF FACT Some of the facts have been stipulated. The stipulation of facts and accompanying exhibits are so found and incorporated herein by reference. James B. Smith and Jean T. Smith (Mr. Smith or Mrs. Smith or, collectively, petitioners) were467 residents of the State of Idaho at the time the petition in this case was filed. Petitioners filed Federal income tax returns for the taxable years 1969 and 1970. Petitioners did not file Federal income tax returns for the taxable years at issue: 1971, 1972, and 1973. Mr. and Mrs. Smith each filed a Form W-4, Employee's Withholding Exemption Certificate, dated May 26, 1971, claiming 10 exemptions for dependents. Petitioners were entitled to claim no more than two exemptions during the taxable years at issue. Mr. Smith was convicted on August 31, 1972, of filing a false Form W-4, Employee's Withholding Exemption Certificate, in violation of section 7205. Mrs. Smith was convicted on June 18, 1974, of filing a false Form W-4, Employee's Withholding Exemption Certificate, in violation of section 7205. Petitioners were both convicted on June 8, 1976, of willfully failing to file income tax returns for the taxable years 1971, 1972, and 1973 (the taxable years at issue in this case), a violation of section 7203. Mr. Smith was employed by Carpenter Paper Co. during the taxable years at issue, and received compensation in the amounts of $6,502.08, $8,265.14, and $9,411.92 for the468 taxable years 1971, 1972, and 1973, respectively. Mrs. Smith was employed by Swiss Boy during the taxable years at issue, and received compensation in the amounts of $2,316.05, $2,688.45, and $1,872.19 for the taxable years 1971, 1972, and 1973, respectively. On January 30, 1978, petitioners each received a statutory notice of deficiency for the taxable years 1971, 1972, and 1973. The Commissioner determined that each of the petitioners failed to report the income received for each of the three taxable years, that each petitioner underpaid their Federal income tax, and that the underpayments were due to fraud. OPINION The Commissioner's determination in his statutory notice of deficiency is presumptively correct, and petitioners have the burden of disproving each individual adjustment. Welch v. Helvering,290 U.S. 111">290 U.S. 111 (1933); Rule 142(a). Petitioners earned income during each of the taxable years at issue, and presented no evidence in support of any deductions or credits against that income. The Commissioner's determination of deficiencies is sustained. Rule 142(a). The next issue for decision is whether petitioners are liable for the additions to tax469 under section 6653(b) for fraud. The burden of proving fraud is on respondent, and he must do so by clear and convincing evidence. Sec. 7454(a); Rule 142(b); Stone v. Commissioner,56 T.C. 213">56 T.C. 213, 220 (1971). This burden is met if it is shown that the taxpayer intended to evade taxes known to be owing by conduct intended to conceal, mislead, or otherwise prevent the collection of taxes, and that there is an underpayment of tax. Stoltzfus v. United States,398 F.2d 1002">398 F.2d 1002, 1004 (3d Cir. 1968), cert. denied 393 U.S. 1020">393 U.S. 1020 (1969); Rowlee v. Commissioner,80 T.C. 1111">80 T.C. 1111, 1123 (1983); Acker v. Commissioner,26 T.C. 107">26 T.C. 107, 112 (1956). When fraud is determined, as in the instant case, for more than one taxable year, respondent must show that some part of an underpayment was due to fraud for each taxable year for the corresponding addition to tax to be upheld. Professional Services v. Comissioner,79 T.C. 888">79 T.C. 888, 930 (1982); Nicholas v. Commissioner,70 T.C. 1057">70 T.C. 1057, 1065 (1978); Otsuki v. Commissioner,53 T.C. 96">53 T.C. 96, 105 (1969). The existence of fraud is a question of fact470 to be resolved upon consideration of the entire record. Rowlee v. Commissioner,supra at 1123; Gajewski v. Commissioner,67 T.C. 181">67 T.C. 181, 199 (1976), affd. without published opinion 578 F.2d 1383">578 F.2d 1383 (8th Cir. 1978). Fraud will never be presumed. Beaver v. Commissioner,55 T.C. 85">55 T.C. 85, 92 (1970). Fraud may, however, be proved by circumstantial evidence because direct proof of the taxpayer's intent is rarely available. Stephenson v. Commissioner,79 T.C. 995">79 T.C. 995, 1005-1006 (1982), affd. 748 F.2d 331">748 F.2d 331 (6th Cir. 1984); Gajewski v. Commissioner,supra at 200. The taxpayer's entire course of conduct may establish the requisite fraudulent intent. Spies v. United States,317 U.S. 492">317 U.S. 492 (1943); Gajewski v. Commissioner,supra at 200; Stone v. Commissioner,supra at 223-224. Respondent has affirmatively shown numerous indicia of fraud. Petitioners did not file Federal income tax returns for the taxable years 1971, 1972, and 1973. While the failure to file tax returns, even over an extended period of time, does not per se establish471 fraud, Grosshandler v. Commissioner,75 T.C. 1">75 T.C. 1, 19 (1980), the failure to file returns is persuasive circumstantial evidence of fraud. Marsellus v. Commissioner,544 F.2d 883">544 F.2d 883, 885 (5th Cir. 1977); Stoltzfus v. United States,supra at 1005. Further, when petitioners' failure to file returns for these taxable years is viewed in light of their previous filing of Federal income tax returns for the taxable years 1969 and 1970, petitioners' inaction weighs heavily against them. Further, with regard to the taxable years at issue, petitioners are collaterally estopped by their criminal convictions under section 7203 from denying that they willfully failed to file returns for the taxable years 1971, 1972, and 1973. Castillo v. Commissioner, 84 T.C. (Mar. 13, 1985). See Tomlinson v. Lefkowitz,334 F.2d 262">334 F.2d 262, 266 (5th Cir. 1964); Strachan v. Commissioner,48 T.C. 335">48 T.C. 335, 339 (1967); Amos v. Commissioner,43 T.C. 50">43 T.C. 50, 56 (1964), affd. 360 F.2d 358">360 F.2d 358 (4th Cir. 1965). Petitioners also filed false W-4 Forms to reduce or stop the withholding of Federal income taxes from472 their wages during the taxable years at issue. Such activities are indicative of an attempt to evade the payment of income taxes. Rowlee v. Commissioner,supra at 1125; Habersham-Bey v. Commissioner,78 T.C. 304">78 T.C. 304, 313-314 (1982). Where a taxpayer's failure to file is predicated on totally frivolous arguments, and where respondent has shown substantial amounts of unreported income on which withholding has been reduced or prevented by the submission of false W-4 certificates, we have repeatedly held that fraud has been established by clear and convincing evidence justifying the addition to tax under section 6653(b). See, e.g., Rowlee v. Commissioner,supra at 1123-1126; see also Hebrank v. Commissioner,81 T.C. 640">81 T.C. 640 (1983); Stephenson v. Commissioner,79 T.C. at 1007; Habersham-Bey v. Commissioner,supra at 313-314. We reach the same conclusion in this case. Accordingly, the Commissioner's determination that petitioners are liable for the additions to tax under section 6653(b) is sustained. In closing, petitioners' rationale for the nonpayment of Federal income tax473 for the taxable years at issue is based upon nothing more than the usual, frivolous "protester" arguments. Petitioners continued to assert variations on this theme, in their pleadings and at trial, by claiming the right to a trial by jury, and contesting the jurisdiction of the Tax Court under Article III of the Constitution, despite an earlier opinion in this case holding for respondent on a motion for partial summary judgment on all such arguments then before the Court. 2 These arguments have been rejected repeatedly, and do not merit discussion here. McCoy v. Commissioner,696 F.2d 1234">696 F.2d 1234 (9th Cir. 1983), affg. 76 T.C. 1027">76 T.C. 1027 (1981); Edwards v. Commissioner,680 F.2d 1268">680 F.2d 1268 (9th Cir. 1982); Rowlee v. Commissioner,supra at 1114; Swanson v. Commissioner,65 T.C. 1180">65 T.C. 1180 (1976). Cases based upon such contentions are burdensome both on this Court and to society as a whole. Abrams v. Commissioner,82 T.C. 403">82 T.C. 403 (1984). The time spent on this case has delayed other cases of merit. On respondent's motion, and finding petitioners' *474 positions to be frivolous and groundless, we award damages under section 6673 3 of $2,500 against Mr. Smith and $2,500 against Mrs. Smith. An appropriate order and decision will be entered.Footnotes1. All section references are to the Internal Revenue Code of 1954, as amended and in effect for the relevant years, and all rule references are to this Court's Rules of Practice and Procedure.↩2. Smith v. Commissioner,T.C. Memo. 1979-51↩.3. SEC. 6673 DAMAGES ASSESSABLE FOR INSTITUTING PROCEEDINGS BEFORE THE TAX COURT PRIMARILY FOR DELAY, ETC. Whenever it appears to the Tax Court that proceedings before it have been instituted or maintained by the taxpayer primarily for delay or that the taxpayer's position in such proceedings is frivolous or groundless, damages in an amount not in excess of $5,000 shall be awarded to the United States by the Tax Court in its decision. Damages so awarded shall be assessed at the same time as the deficiency and shall be paid upon notice and demand from the Secretary and shall be collected as part of the tax.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624019/	TERRY A. OLSON, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentOlson v. CommissionerDocket No. 34855-86.United States Tax CourtT.C. Memo 1987-543; 1987 Tax Ct. Memo LEXIS 535; 54 T.C.M. (CCH) 969; T.C.M. (RIA) 87543; October 26, 1987. Terry A. Olson, pro se. John C. Schmittdiel, for the respondent. FEATHERSTONMEMORANDUM FINDINGS OF FACT AND OPINION FEATHERSTON, Judge: This case was assigned pursuant to the provisions of section 7456(d) (redesignated as section 7443A(b) of the Tax Reform Act of 1986, Pub. L. 99-514, section 1556, 100 Stat. 2755) of the Code 1 and Rule 180 et seq. The Court agrees with and adopts the opinion of the Special Trial Judge, which is set forth below. OPINION OF THE SPECIAL TRIAL JUDGE COUVILLION, Special Trial Judge: Respondent determined the following deficiencies and additions to petitioner's Federal income taxes: 538 Additions to TaxSectionSectionSectionSectionSectionYearDeficiency6651(a)(1)6653(a)(1)6653(a)(2)665466611982$ 6,620.00$ 828.00$ 331.00$ 242.00$ 662.001983$ 6,917.00$ 1,719.00$ 346.00$ 419.00$ 692.001984$ 7,271.00$ 1,817.00$ 384.00$ 457.00$ 727.00After concessions by the parties, the issues for decision are: (1) Whether wages and interest received by petitioner constituted taxable income for the years at issue; (2) whether petitioner was entitled to joint filing status for the years at issue; and (3) whether petitioner is liable for the additions to tax. FINDINGS OF FACT Some of the facts have been stipulated and are found accordingly. The stipulation of facts and attached exhibits are incorporated herein by this reference. Petitioner was a resident of Minneapolis, Minnesota, at the time the petition was filed. During the years in question, petitioner was married to Judith D. Olson (Judith). 539 During these years, petitioner was employed as a bus driver by the Minneapolis Metropolitan Transit Commission (MTC), from which he earned wages of $ 24,180, $ 25,566, and $ 28,483, for 1982, 1983, and 1984, respectively. Petitioner also received $ 21 interest income from Midwest Federal Savings in 1982 and $ 22 interest income from the MTC Credit Union in 1983. Petitioner failed to file income tax returns for 1982, 1983, and 1984. However, he conceded at trial that he filed income tax returns for 1979, 1980, and 1981. Petitioner's wife, Judith, filed timely 1982, 1983, and 1984 income tax returns on which she elected a filing status of "married individual filing separately." Respondent determined that petitioner's wages and interest constituted taxable income and determined the deficiencies in tax and additions to tax based on petitioner's receipt of such income. OPINION Respondent's determination in the notice of deficiency is presumptively correct, and petitioner bears the burden of proving otherwise by a preponderance of the evidence. Welch v. Helvering,290 U.S. 111">290 U.S. 111, 115 (1933); Rule 142(a). With respect to the wages and interest received by540 petitioner, it is well settled that section 61 encompasses all realized accessions to wealth, Commissioner v. Glenshaw Glass Co.,348 U.S. 426">348 U.S. 426 (1955), including wages and interest. Section 61(a)(1) and (4). Income is defined under the Sixteenth Amendment as "gain derived from capital, from labor, or from both combined." Eisner v. Macomber,252 U.S. 189">252 U.S. 189, 207 (1920). See United States v. Buras,633 F.2d 1356">633 F.2d 1356, 1361 (9th Cir. 1980), where the court said "'the earnings of the human brain and hand when unaided by capital' are commonly treated as income" and "the Sixteenth Amendment is broad enough to grant Congress the power to collect an income tax regardless of the source of the taxpayer's income." (Citations omitted.) Accordingly, petitioner's contention that wages and interest income are not includable in gross income is without merit. We sustain respondent's determination that petitioner was taxable on the wages and interest he earned for the years in question. With respect to petitioner's assertion that he is entitled to use the tax rates applicable to married individuals filing joint returns, section 1(a) provides that such541 rates apply to the taxable income of "every married individual * * * who makes a single return jointly with his spouse under section 6013." Thus a joint return must be filed in order to validly elect joint return status. Thompson v. Commissioner,78 T.C. 558">78 T.C. 558, 561 (1982). See McGarvey v. Commissioner,T.C. Memo 1987-521">T.C. Memo. 1987-521. See also Jenny v. Commissioner,T.C. Memo. 1983-1. Cf. Phillips v. Commissioner,86 T.C. 433">86 T.C. 433, 441 n.7 (1986). In this case, petitioner filed no income tax returns for 1982, 1983, and 1984. His wife, however, filed timely returns for each of these years, on which she elected the filing status of married individual filing separately. Moreover, section 6013(b)(2)(C) prohibits the filing of a joint return after the filing of a separate return where "after there has been mailed to either spouse, with respect to such taxable year, a notice of deficiency under section 6212, if the spouse, as to such notice, files a petition with the Tax Court within the time prescribed in section 6213." Since respondent issued a notice of deficiency to petitioner, and a petition was filed with this Court, petitioner's542 wife, Judith, is prohibited from changing her filing status from married filing separately to married filing jointly. It follows, therefore, that, if Judith is precluded from changing her filing status for the years in question, petitioner is precluded from making the joint election with her for the years in question. Accordingly, petitioner's taxable income must be taxed in accordance with the rates applicable to married persons filing separately. Additions to tax under section 6654, for the underpayment of estimated taxes, are mandatory unless the taxpayer can demonstrate that he fits within one of the computational exceptions. Grosshandler v. Commissioner,75 T.C. 1">75 T.C. 1, 20-21 (1980). Since petitioner failed to show that any exception applies, this addition to tax is sustained. Petitioner also bears the burden of proof with respect to the addition under section 6651(a)(1) for the failure to timely file tax returns. Petitioner did not file returns for the taxable years 1982, 1983, and 1984. He produced no evidence to show that his failure to file was due to reasonable cause and not willful neglect. Accordingly, we sustain respondent's determination of543 the addition to tax under section 6651(a)(1) for the years in question. Likewise, petitioner has not met his burden of proof with respect to additions to tax under sections 6653(a)(1) and 6653(a)(2). See Bixby v. Commissioners,58 T.C. 757">58 T.C. 757 (1972); Enoch v. Commissioner,57 T.C. 781">57 T.C. 781, 802 (1972). The addition to tax under section 6653(a)(1) applies if any part of an underpayment of tax is due to negligence or intentional disregard of rules or regulations. Section 6653(a)(2) applies to that portion of the underpayment attributable to negligence or intentional disregard of the rules or regulations. The determination of whether negligent or international disregard of rules and regulations has occurred depends on an analysis of the facts and circumstances that take into account the standard of conduct that can be reasonably expected of the taxpayer. Based on the record before us, petitioner has not met his burden of proving that he acted reasonably in failing to report the wages and interest income he earned during 1982, 1983, and 1984. Wages and interest income are included in gross income. Section 61(a)(1) and (4). Petitioner acknowledged receipt544 of such income. Petitioner also acknowledged that he previously filed income tax returns for 1979, 1980, and 1981. He, therefore, knew or is held to have known that he was required to file income tax returns and report his income for the years in question. Accordingly, we sustain respondent's determination of the additions to tax under section 6653(a)(1) and (2). Section 6661(a) provides that, in the event of a substantial understatement of income tax for any taxable year, there shall be added to the tax an amount equal to 10 percent of any underpayment attributable to such understatement. Section 6661(b) states that "a substantial underpayment" exists if the amount of the understatement of income tax for the year exceeds the greater of (1) 10 percent of the tax required to be shown on the return, or (2) $ 5,000. In this case, there was a substantial understatement of income tax for 1982, 1983, and 1984. Petitioner did not file any returns for those years. It follows that the section 6661(a) addition to tax applies. Respondent, therefore, is sustained on this determined. 2545 Decision will be entered under Rule 155.Footnotes1. Unless otherwise indicated, all section references are to the Internal Revenue Code of 1954, as amended and in effect during the years at issue. All Rule references are to the Tax Court Rules of Practice and Procedure. ↩. 50 percent of the interest due on $ 3,313.00. ↩. 50 percent of the interest due on $ 6,877.00. ↩**. 50 percent of the interest due on $ 7,269.00. ↩2. As of the date the notice of deficiency in which respondent determined the section 6651(a) additions to tax against petitioner was issued, the section 6661(a) addition to tax was equal to 10 percent of the underpayment attributable to a substantial understatement. Section 6661(a) has twice been amended since then. The Tax Reform Act of 1986, Pub. L. 99-514, section 1504(a), 100 Stat. 2085, 2743, increased the section 6661(a) addition to tax to 20 percent of the underpayment attributable to a substantial understatement for returns the due date of which, determined without regard to extensions, is after December 31, 1986. The Omnibus Reconciliation Act of 1986, Pub. L. 99-509, section 8002(a), 100 Stat. 1874, 1951, increased the section 6661(a) addition to tax to 25 percent of the underpayment attributable to a substantial understatement for additions to tax assessed after October 21, 1986. Respondent has not amended his answer to seek an increase to the section 6661(a) addition to tax over the amount determined in the notice of deficiency. Accordingly, we express no opinion at this time as to the effect of either of the above-referenced Acts on section 6661(a). We merely sustain respondent's determination of section 6661(a) attributable to the substantial understatement. ↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624021/	Doyle Hosiery Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent. John J. Doyle, Petitioner, v. Commissioner of Internal Revenue, RespondentDoyle Hosiery Corp. v. CommissionerDocket Nos. 22047, 22375United States Tax Court17 T.C. 641; 1951 U.S. Tax Ct. LEXIS 59; October 10, 1951, Promulgated 59 Decision in each proceeding will be entered under Rule 50. Capital Gain -- Sale of Corporate Assets. -- Where there was a genuine liquidation of the petitioner corporation followed by a sale negotiated and consummated wholly by the stockholders, the capital gain realized may not be imputed to the corporation. United States v. Cumberland Public Service Co., 338 U.S. 451">338 U.S. 451, followed; Commissioner v. Court Holding Co., 324 U.S. 331">324 U.S. 331, distinguished. David H. W. Dohan, Esq., and George P. Orr, Esq., for the petitioners.William H. Best, Jr.,60 Esq., for the respondent. Tietjens, Judge. Turner, J., dissenting. Kern, Disney, Opper, and Raum, JJ., agree with this dissent. TIETJENS641 Respondent has determined against Doyle Hosiery Corporation, Docket No. 22047, deficiencies in the amounts of $ 48,841.32 income tax, $ 4,318.55 declared value excess-profits tax, and $ 2,869.71 excess profits tax, for the taxable year beginning January 1, 1945, and ending June 30, 1945. Respondent has determined against John J. Doyle, Docket No. 22375, a deficiency of $ 1,006.16 income tax for the calendar year 1945.The primary issue is whether respondent erred in determining that a sale of certain land, buildings, and machinery was made by the Doyle Hosiery Corporation with a resulting capital gain of $ 201,478.96 to it during the taxable year January 1 to June 30, 1945, instead of a sale made by the former stockholders of that corporation following a distribution in liquidation. If respondent is sustained on the primary issue, an alternative issue is presented as to whether respondent erred in failing to allow the petitioner corporation an additional deduction for Pennsylvania net income tax based on the added capital61 gain.In the proceeding of John J. Doyle the issue presented involves the amount of capital gain realized by petitioner during 1945 and is dependent upon the decision on the primary issue.In both proceedings, certain adjustments made by respondent are not in controversy.These proceedings were submitted upon testimony, documentary evidence, and a stipulation of facts embracing numerous exhibits.FINDINGS OF FACT.The stipulated facts are so found.The petitioner Doyle Hosiery Corporation (sometimes hereinafter referred to as Hosiery) was a Delaware corporation having its principal 642 office and place of business in Doylestown, Bucks County, Pennsylvania. Its present address in c/o John J. Doyle, 2200 Belvedere Avenue, Charlotte, North Carolina. On June 18, 1945, Doyle Hosiery Corporation was liquidated and on July 12, 1945, it was issued a certificate of dissolution by the Secretary of State of Delaware. By decree of the Court of Chancery in and for New Castle County, State of Delaware, dated February 28, 1949, John J. Doyle, Lestha S. Doyle, and Margaret M. Doyle were appointed trustees of Doyle Hosiery Corporation, a dissolved corporation, with power to prosecute 62 or defend the corporation in its name or otherwise.The petitioner John J. Doyle is an individual who resided at New Britain, Bucks County, Pennsylvania, during 1945 and now resides at Charlotte, North Carolina.Hosiery's income, declared value excess-profits and excess profits tax returns for the taxable year January 1 to June 30, 1945, and, also, John J. Doyle's individual income tax return for the taxable year 1945 were filed with the collector of internal revenue for the first collection district of Pennsylvania at Philadelphia.At all times material herein, John J. Doyle, his wife, Lestha S. Doyle, and their daughter, Margaret M. Doyle, constituted the entire board of directors and owned all of the outstanding shares of stock of Doyle Hosiery Corporation, as follows:PreferredCommonJohn J. Doyle, President and treasurer1003900Lestha S. Doyle, Secretary050Margaret M. Doyle, Vice president050Total1004000Prior to the liquidation and dissolution of Hosiery, as more particularly hereinafter set out, it was engaged in the business of manufacturing ladies full-fashioned hosiery of 45 and 51 gauge and 150 to 50 denier, including nylon and rayon. 63 Its plant consisted of a concrete brick veneer mill building and the ground on which situated. Its hosiery machinery consisted of fifteen 45-gauge Reading knitting machines ranging from 24, 26, 28, and 30 sections each, 11 Sotco Steady Dial looping machines ranging from 26, 28, and 30 point each, 23 Union Special new and old style seaming machines, together with various related equipment. In addition it leased two 32-section 51-gauge Karl Lieberknecht hosiery knitting machines owned by John J. Doyle, individually.John J. Doyle worked as a hosiery knitter for 12 years before he became a manufacturer more than 15 years ago. In 1939, on advice of its largest customer, Hosiery contracted to purchase two 51-gauge knitting machines, but its source of credit objected to the transaction. 643 Thereupon, Doyle purchased the machines individually in the latter part of 1939 and leased them to Hosiery at an annual rental of $ 9,600, the amount of his installment payments thereon. Subsequently, the Bureau of Internal Revenue questioned the propriety of Hosiery's deducting the full amount of that rental. In April or May 1945 and solely in an effort to justify the claimed rental by 64 establishing the value of the machines, Doyle let it be known in the hosiery industry that his 51-gauge knitting machines were available for lease.Early in May 1945, Joseph Haines, Jr., a broker of hosiery machinery and hosiery businesses, inquired of Doyle whether Hosiery's plant was for sale. At that time Doyle had not considered selling the business, but gave Haines permission to show the plant to interested parties. Haines brought a group of prospective purchasers to inspect the plant and upon inquiry Doyle indicated he would sell the Hosiery stock and the two 51-gauge machines for $ 500,000, which offer was not accepted. In the latter part of May, Haines introduced representatives of the Miller Hosiery Co., Inc. (hereinafter referred to as Miller), as a prospective purchaser and while no definite offer was made by either party, Doyle again suggested a price of $ 500,000 for the Hosiery stock and the 51-gauge machines. At that time Doyle had not decided to sell, but felt that he might if offered a good price. Accordingly, on June 7, he sought the advice of his attorney as to the proper way to handle the transaction and also as to the tax consequences, if a sale were made, 65 and he was advised to sell the Hosiery stock and his two knitting machines.Acting on his attorney's advice, Doyle communicated to Miller his willingness to sell the Hosiery stock and two knitting machines if the price could be agreed upon, but Miller replied that it was only interested in acquiring some, but not all, of Hosiery's assets. Upon consultation with his attorney and being advised to liquidate Hosiery, Doyle indicated to Miller that he would sell the assets after he was in a position to do so. On June 9, the officers and company counsel of Miller met and decided that acquisition of the Hosiery plant and equipment would be advantageous and instructed the company counsel to proceed in negotiating a purchase agreement with Doyle, his wife, and daughter. At that time there was no commitment by either party to buy or sell. On June 12, counsel for Miller and counsel for the Doyles discussed the form and terms of the proposed transaction and sometime between Saturday, June 16, and Monday, June 18, they completed a draft of the proposed agreement. However, that draft was changed in some respects just before it was executed by the parties thereto.At a special meeting of the66 board of directors of Hosiery, consisting of Doyle, Lestha, and Margaret, held at 1 p. m. on June 18, a 644 resolution was unanimously adopted authorizing dissolution of the corporation. Thereupon and in complete liquidation of Hosiery, its assets were conveyed to Doyle, his wife, and daughter by deed and bill of sale, except that Hosiery temporarily retained accounts receivable and certain cash and government bonds to meet existing corporate obligations, and all of Hosiery's outstanding shares of stock were surrendered and cancelled.Subsequent to the transactions related in the next preceding paragraph and during the afternoon of June 18, Doyle, his wife, and daughter, as individuals, signed an agreement with Miller whereby they agreed to sell to the latter certain land, buildings, machinery, equipment, mill supplies, and raw materials formerly owned by Hosiery and also the two knitting machines at all times owned by Doyle. The sale did not include finished merchandise on hand or the trade name "Doyle" or the right to use the name "Doyle Hosiery Corporation." As of June 18 the purchaser commenced operating the plant as the owner thereof.The agreed purchase price was $ 410,000, 67 of which $ 50,000 was paid upon the signing of the agreement and the balance was deposited in escrow with the Land Title Bank and Trust Company of Philadelphia. The $ 50,000 payment on June 18 was made by a certified check, dated June 16, payable to John J. Doyle and was delivered to the latter subject to Miller's inspection of the inventory. Doyle deposited the check in his personal bank account and at the time was authorized by Lestha and Margaret to receive their shares of the proceeds for and on their behalf.By agreement dated July 3, 1945, Miller assigned all its rights, title, and interest in the agreement of sale dated June 18, 1945, to the M. H. Hosiery Co., Inc. Final settlement under the June 18 agreement was made on July 3, 1945, at the Land Title Bank and Trust Company, at which time Doyle, his wife, and daughter conveyed by deed and bill of sale to the M. H. Hosiery Co., Inc., all the assets made subject to the agreed sale. At the same time Doyle was paid the net proceeds of the sale amounting to $ 344,636.26 which he deposited in his personal bank account for and on behalf of himself, his wife, and daughter.In connection with the July 3 settlement and out of the68 proceeds of the sale a $ 3,000 mortgage on the real estate transferred was paid off and, also, a $ 15,000 commission was paid to the broker Haines pursuant to agreement between him and Doyle, individually.Doyle's attorney billed him individually and he paid out of his own funds the fee for legal services in connection with the sale.Prior to the adoption of the resolution to dissolve the Doyle Hosiery Corporation and the distribution of its assets to its stockholders, in 645 liquidation, on June 18, 1945, that corporation did not consider, authorize, negotiate, or enter into any agreement for a sale of its assets. The sale of properties here in question was negotiated by Doyle for and on behalf of himself, his wife, and his daughter, on the basis of making a sale when in a position to do so, as individuals; no binding agreement of sale was entered into by those individuals until after the liquidating distribution by Hosiery; and the purchaser dealt with and paid the proceeds of the sale to the three Doyles as the individual owners of the properties transferred.On its returns for the taxable year, January 1 to June 30, 1945, Doyle Hosiery Corporation did not report any gain69 derived from the above described transaction, but, on his individual 1945 income tax return, John J. Doyle reported a capital net gain of $ 206,749.95 derived therefrom. With respect to the Doyle Hosiery Corporation's tax liability for the taxable year, January 1 to June 30, 1945, respondent determined that the corporation made a sale of land, buildings, and machinery resulting in additional income consisting of a capital gain of $ 201,478.96. With respect to John J. Doyle's individual 1945 income tax liability, respondent increased the reported capital gain by $ 933.07 resulting from his determination of the amount of gain realized from liquidation of the Doyle Hosiery Corporation stock and from a sale of two knitting machines.OPINION.Briefly stated, the respondent argues that the whole transaction shows a sale by the corporation with its stockholders acting merely as a conduit through which passed title to the properties transferred and that thus the case is controlled by Commissioner v. Court Holding Co., 324 U.S. 331">324 U.S. 331. On the other hand, petitioners argue that the facts herein clearly distinguish the instant case from Court Holding Co., supra,70 and bring it within the ambit of United States v. Cumberland Public Service Co., 338 U.S. 451">338 U.S. 451. We agree with petitioners.In Court Holding Co., supra, the corporation conducted negotiations resulting in an oral agreement as to the terms and conditions of the sale of its sole asset, an apartment house, and received a payment on account from the purchaser; the sale was not consummated in the name of the corporation because of the tax consequences to it; instead, the sale was held in abeyance until the corporation declared a liquidating dividend, whereupon its former stockholders, as individual vendors, made the sale on substantially the same terms and conditions previously agreed upon by the corporation and the prior payment to the corporation was applied in part payment of the purchase price. The Supreme Court concluded that despite the conflicting evidence 646 the record supported the findings and conclusion of the Tax Court that the transfers of legal title were mere formalities, that the whole transaction showed a sale by the corporation rather than by the stockholders, and that the gain derived was attributable71 to the corporation under section 22 (a), Internal Revenue Code. On the facts, that case is clearly distinguished from the instant case.In Cumberland Public Service Co., supra, the taxpayer corporation at no time planned to make the sale itself; the stockholders first offered to sell the corporate stock which was refused by the prospective purchaser; the stockholders then offered to acquire certain corporate assets and thereafter sell, which offer was accepted by the prospective purchaser; there was a distribution in liquidation of the corporation; and there followed a sale of properties consummated by the stockholders rather than by the corporation. In holding that the corporation realized no gain under that state of facts, the Supreme Court discussed the Court Holding Co. case, supra, and said, inter alia, that the language therein as to the incidence of taxation being dependent upon the substance of a transaction regardless of mere form by using the shareholders as a conduit through which to pass title, "does not mean that a corporation can be taxed even when the sale has been made by its stockholders following a genuine liquidation 72 and dissolution."The Cumberland Public Service Co. case holds that the issue there presented was one of fact to be determined from the evidence of record. In the instant case the record clearly establishes, and we have found as facts, that prior to its liquidation the petitioner corporation did not consider, authorize, negotiate, or enter into any agreement for a sale of its assets and, further, that although some of the negotiations by the stockholders preceded liquidation, the sale of the properties involved was made by the corporation's former stockholders as the individual owners thereof following liquidation. Accordingly, the decision in the Cumberland Public Service Co. case is controlling here. Cf. West Coast Securities Co., 14 T.C. 947">14 T. C. 947; and Frank E. Gilman, 14 T.C. 833">14 T. C. 833.We conclude that respondent erred with respect to the primary issue involved herein. This conclusion disposes of both of these consolidated proceedings.Decision in each proceeding will be entered under Rule 50. TURNER Turner, J., dissenting: In my opinion the evidentiary facts, or, as termed by the Supreme Court in United States v. Cumberland Public Service Co., supra,73 the subsidiary facts show that the sale was made by petitioner and all that was done by the stockholders in their individual 647 capacities was to indulge in carefully clocked ritualistic formalities. The Supreme Court decision in the above case lays down no new rule, but adheres to what had already been said in Commissioner v. Court Holding Co., supra, namely, that the question to be determined was one of fact. It supplies no formula for transforming ritual into reality by a lip service recitation of fundamental principles.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624022/	RAYMOND W. HODGE, ET AL., 1 Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent. Hodge v. CommissionerDOCKET Nos. 509-71, 510-71, 511-71, 512-71, 513-71.United States Tax CourtT.C. Memo 1973-64; 1973 Tax Ct. Memo LEXIS 220; 32 T.C.M. (CCH) 277; T.C.M. (RIA) 73064; March 22, 1973, Filed Hal F. Rachal, pro se. in Docket No. 513-71 Hal F. Rachal, Jr., for the petitioners. W. John Howard, for the respondent. SCOTT MEMORANDUM FINDINGS OF FACT AND OPINIONSCOTT, Judge: Respondent determined deficiencies in the Federal income taxes of petitioners Raymond W. and Josephine 2 B. Hodge in the amounts of $3,890.08 and $2,021.06 for the calendar years 1965 and 1966, respectively, and a deficiency in the Federal income tax of petitioner Raymond W. Hodge in the amount of $5,112.81 for the calendar year 1967. Respondent determined deficiencies in the221 Federal income taxes of petitioners Calvin W. and Caroline W. White for the calendar years and in the amounts as follows: 1965$3,702.0219662,937.3419673,785.69Respondent determined deficiencies in the Federal income taxes of petitioners Norman F. and Alyene E. Hoffman for the calendar years and in the amounts as follows: 1965$3,769.5919662,558.1519672,606.92Respondent determined deficiences in the Federal income taxes of petitioners Hal F. and Virginia M. Rachal for the calendar years and in the amounts as follows: 1965$5,464.7019665,105.7219672,383.13The cases of the above designated petitioners were consolidated for trial and opinion upon the joint motion of the parties. 3 The issues for decision are: (1) Whether a small business corporation of which petitioners are stockholders properly accrued in the year of issuance to purchasers of aircraft the full amount of documents entitled, "Mooney Bond" and "Mooney Premium Coupon," each of which documents contained a promise to pay to the bearer or registered holder the face amount thereof when the aircraft with respect to which it was issued222 was permanently removed from service. (2) Whether a payment made to each petitioner in 1966 by the manufacturer of aircraft sold by a small business corporation of which petitioners were stockholders, based on the number of aircraft which had been sold by the corporation, was a nontaxable gift or taxable income to petitioners. FINDINGS OF FACTSome of the facts have been stipulated and are found accordingly. Petitioners Raymond W. Hodge and Josephine B. Hodge filed joint income tax returns for the taxable years 1965 and 1966 with the district director of internal revenue, Dallas, Texas. Petitioner Raymond W. Hodge (hereinafter called Hodge) filed an individual income tax return as a single person for the taxable year 1967 with the district director of internal revenue, Dallas, Texas. 4 At the time of the filing of the petition herein, Hodge resided in Midland, Texas and Josephine B. Hodge resided in Cannon City, Colorado. Petitioners Calvin W. White and Caroline W. White filed joint income tax returns for the taxable years 1965, 1966, and 1967 with the district director of internal revenue, Dallas, Texas. At the time of the filing of the petition herein, Calvin W. 223 White (hereinafter referred to as White), and Caroline W. White resided in Midland, Texas. Petitioners Norman F. Hoffman and Alyene E. Hoffman filed joint income tax returns for the taxable years 1965, 1966, and 1967 with the district director of internal revenue, Dallas, Texas. At the time of the filing of their petition herein, Norman F. Hoffman (hereinafter called Hoffman) and Alyene E. Hoffman resided in Alexandria, Virginia. Petitioners Hal F. Rachal and Virginia M. Rachal filed joint income tax returns for the taxable years 1965, 1966, and 1967 with the district director of internal revenue, Dallas, Texas. At the time of the filing of their petition herein, Hal F. Rachal (hereinafter referred to as Rachal), and Virginia M. Rachal resided in Midland, Texas. 5 (1) Bond Warranty Expense IssueDuring the years in issue petitioners Hodge, White, Hoffman, and Rachal owned all of the outstanding capital stock of West Texas Flying Service, Inc., which changed its name on April 13, 1966, to Mooney Southwest, Inc. (hereinafter called Mooney Southwest). Mooney Southwest had properly elected for the years here in issue to be subject to the provisions of subchapter "S", I. 224 R.C. 1954. 2Mooney Southwest was in the business of selling executive aircraft primarily as a distributor of Mooney Aircraft, Inc. (hereinafter called Mooney Aircraft). Mooney Southwest, upon its incorporation in 1959, kept its books, as had its predecessor partnership since 1947, on a cash basis of accounting. In auditing Mooney Southwest's returns for 1962 and 1963, respondent's agent proposed to change Mooney Southwest's method of accounting from the cash to an accrual basis. Mooney Southwest accepted this adjustment and placed its books for 1962 and 1963 on an accrual basis, and thereafter, including the years here in issue, kept its books and filed its subchapter "S" returns on an accrual basis. During the years in issue Rachal was president and chairman of the board of Mooney Aircraft and Hoffman was a substantial shareholder in Mooney Aircraft and served as its vice president of sales. 6 During the years in issue the four shareholders of Mooney Southwest served that corporation in the following capacities: Hal F. Rachal Chairman of the Board Norman F. Hoffman President Calvin W. White Vice President225 Raymond W. Hodge Secretary Each shareholder of Mooney Southwest held 4,950 shares of capital stock. Mooney Southwest issued a document captioned, "Mooney Bond" with each aircraft sold. Each "Mooney Bond" promised to pay the bearer a specified sum, usually $3,000 when the aircraft with respect to which it was issued was permanently retired from service. 3 It was Mooney Southwest's consistent practice to issue a "Mooney Bond" at the time of each sale and the "Mooney Bond" was referred to on the face of the sales invoice. Mooney Southwest with each aircraft it purchased from Mooney Aircraft received a "Mooney Bond" of that company in the face amount of $1,000, which Mooney Aircraft issued on each aircraft sold to a distributor. The "Mooney Bonds" issued by Mooney Aircraft contained the unconditional promise of that company to pay the bearer the face amount when the corresponding aircraft was permanently retired from service. "Mooney Bonds" issued by Mooney Aircraft which were 7 received by Mooney Southwest were passed on by Mooney Southwest to the purchasers of the corresponding aircraft, which resulted in the purchases from Mooney Southwest of aircraft manufactured by226 Mooney Aircraft receiving two "Mooney Bonds" with a total face amount of $4,000. The question of whether the face amount of the documents captioned, "Mooney Bond" issued by Mooney Aircraft with the sale of aircraft to distributors was properly accrued as an expense in the year the bonds were issued was the subject of a refund suit by Mooney Aircraft in the United States District Court for the Western District of Texas. An unpublished summary judgment for the United States in that case was affirmed by the United States Court of Appeals for the Fifth Circuit in Mooney Aircraft, Inc. v. United States, officially reported at 420 F. 2d 400 (1969). Soon after October 31, 1965, all outstanding "Mooney Bonds" of Mooney Southwest were replaced with "Mooney Premium Coupons" in registered form. 227 The oustanding "Mooney Bonds" were traced to the holders who were persuaded to send them to Mooney Aircraft together with a form, "Application for Registration of Mooney Premium Coupon," which set forth the relevant data as to the holder and as to the history of each respective "Mooney Bond" which was replaced by a "Mooney Premium Coupon." 8 The changeover from "Mooney Bonds" to "Mooney Premium Coupons" was made in order that Mooney Southwest might have some more complete information as to the identity and location of the holders of the documents and to provide such holders with greater security in the form of registered coupons rather than bearer bonds. Mooney Southwest first began issuing "Mooney Bonds" in 1960. At the time of the trial the only aircraft sold by Mooney Southwest which had been permanently retired from service were aircraft which had been accidentally destroyed either in a crash or by some ground disaster such as a hurricane. There are no statistics on the average length of time aircraft of the type sold by Mooney Southwest remain in service. Some similar aircraft have remained in service for 30 years and longer. On its return for 1965, Mooney Southwest228 claimed an accrual deduction in the amount of $93,000 as a bond warranty expense. This claimed deduction was calculated on the basis of "Mooney Bonds" and/or "Mooney Premium Coupons" issued on the 31 aircraft sold during the year 1965 at the rate of $3,000 per aircraft. During 1965 Mooney Southwest paid off three of the bonds or coupons for a total amount of $9,000. On its return for 1966, Mooney Southwest claimed an accrual deduction in the amount of $132,000 as a bond warranty expense. This claimed deduction was calculated on the basis of bonds and/or coupons issued on 35 aircraft sold during the year 1966 at the 9 rate of $3,000 per aircraft on 34 aircraft and $30,000 on one aircraft. 4 During 1966 Mooney Southwest paid off two of the bonds or coupons in the total amount of $6,000. On its return for 1967 Mooney Southwest claimed an accrual deduction in the amount of $90,000 as a bond warranty expense. This claimed deduction was calculated on the basis of bonds or coupons issued on 29 aircraft sold during 1967 at the rate of $3,000 per aircraft on 28 aircraft229 and $6,000 on one aircraft. During the year 1967 Mooney Southwest paid off one of the bonds of coupons in the amount of $3,000. Respondent in his notice of deficiency increased each petitioner's income as reported by increases in the income of Mooney Southwest as reported on its subchapter "S" returns with the following explanation: It is determined that the amount of $93,000.00 claimed as a deduction for accrued Bond Warranty expense in 1965; the amount of $132,000.00 claimed as a deduction for Accrued Premium Coupon expense in 1966; and the amount of $90,000.00 claimed as a deduction for Accrued Premium Coupon expense in 1967 are not allowable because it has not been established that your accounting method for accruing estimated future expenses clearly reflects income. It is further determined that you paid $9,000.00 in 1965 for Bond Warranty expense; $6,000.00 in 1966 for Premium Coupon expense; and $3,000.00 in 1967 for Premium Coupon expenses. Accordingly, taxable income is increased $84,000.00 in 1965; $126,000.00 in 1966; and $87,000.00 in 1967. 10 (2) Bonus Payments IssueIn the fall of 1966, by decision of its board of directors, Mooney Aircraft paid a bonus230 by checks to each of its distributors based on the number of aircraft purchased by each distributor during the model year 1966, as follows: If a distributor purchased 5 or less, he received no bonus; if a distributor purchased 8 or more, he received a bonus equal to 1 percent of the net billing on aircraft Nos. 6, 7 and 8; if a distributor purchased 9 aircraft, he received a total of 1 percent on the net billing on each of the 9; if a distributor purchased as many as 10 but no more than 17, he received a total of 1 percent on each of the first 9 and a total of 2 percent of the net billing of Nos. 10 through 17; and if a distributor purchased 18 or more, he received a total of 2 percent of the net billing on all aircraft purchased. The action of the board of director in authorizing the payment was taken in September of 1966 following the close of the model year and was announced to the distributors at the annual sales meeting when the 1967 models were introduced. In 1966, Mooney Aircraft disbursed the total sum of $184,417.80 to its distributors as bonuses. Mooney Aircraft did not claim these bonus expenditures as a deductible expense in 1966. There were no bonuses distributed231 by Mooney Aircraft to its distributors in any year other than 1966. However, commencing with model year 1967 a modified discount procedure was adopted whereby distributors would be credited with discounts on a progressive scale which escalated with the number of aircraft purchased. 11 Mooney Aircraft made a direct payment by checks in the amount of $2,785.03 to each of the petitioners who were shareholders of Mooney Southwest, for a total bonus payment of $11,140.12. None of the four shareholders of Mooney Southwest reported the bonus payments to him as taxable income on his income tax return for the taxable year 1966. Respondent in his notice of deficiency to each petitioner increased the reported income for 1966 by $2,785 with the explanation that the amount was "taxable income rather than a gift because it was for services rendered." OPINION(a) Bond Warranty Expense IssueRespondent takes the position that his disallowance of the deductions claimed by Mooney Southwest for bond warranty and premium coupon expense was necessary in order to clearly reflect the income of that corporation and therefore he should be sustained in his recomputation of its income under section232 446(b). 5 12 Petitioners contend that the liability of Mooney Southwest under the bonds and premium coupons is a fixed liability, the amount of which is properly accruable and deductible when the bonds are issued. It is therefore necessary to determine whether under the provisions of section 446(b), respondent had a reasonable basis for disallowing deductions claimed by Mooney Southwest for bond warranty expense and premium coupon expense in order to clearly reflect that corporation's income. The United States Court of Appeals for the Fifth Circuit considered the same issue presented by petitioners herein in Mooney Aircraft, Inc. v. United States, 420 F. 2d 400233 (C.A. 5, 1969) and sustained respondent's disallowance of a deduction by that corporation of accrued bond warranty expense for "Mooney Bonds" issued by that company. At the trial of this case, counsel for petitioners stated that petitioners contended that the Mooney Aircraft, Inc. case was distinguisable from the instant case on two grounds. The first claimed distinction was that the Court in the Mooney Aircraft, Inc. case did not consider the fact that under the escheat law of Texas [Texas Rev. Civ. St. Ann. Art. 3272 A (1968)] the issuer of the "Mooney Bond" would be obligated to pay the amount of the bond to the State of Texas 7 years after the aircraft with respect to which it was issued went out of service if prior to that time no claim for payment had been 13 made by the owner of the bond. The second claimed distinction was that Mooney Southwest had changed from the cash to an accrual method of accounting as a result of an investigation of its returns for 1962 and 1963 by an Internal Revenue agent. On brief petitioners make no contention that the Mooney Aircraft, Inc. case is distinguishable from the instant case on either of these grounds. Apparently petitioners234 have abandoned these contentions. In any event the case of Mooney Aircraft, Inc. v. United States, supra, is not distinguishable from the instant case on either of these grounds. In Mooney Aircraft, Inc. v. United States, supra, at 406, the Court stated: There is no contingency in this case as to the fact of liability itself; the only contingency relates to when the liability will arise. [Footnote omitted.] To be sure, technically, the liability is "created" by the event of the retirement of a particular plane; if a plane lasted forever there would be no liability. * * * But here there is no doubt at all that the liability will occur since airplanes, like human beings, regrettably must cease to function. [Footnote omitted.] It is clear from this statement that the Fifth Circuit in Mooney Aircraft, Inc., supra, considered that the "Mooney Bonds" would at some point in time become payable. The Court further stated at 409-410: The most salient feature in this case is the fact that many or possibly most of the expenses which taxpayer wishes to presently deduct will not actually be paid for 15, 20 or even 30 years (the taxpayer has235 not attempted to deny this). * * In this case, however, the related expenditure is so distant from the time the 14 money is received as to completely attenuate any relationship between the two. * * * We therefore find no difficulty in concluding that the Commissioner had a reasonable basis for disallowing the deduction as not clearly reflecting income. This statement likewise shows that the Court considered that at some time payment would be due on the "Mooney Bonds." After the investigation of its returns for 1962 and 1963, Mooney Southwest accepted the proposed adjustment by the Internal Revenue agent placing it on an accrual basis of accounting and during the years here in issue this was its accounting method just as it was the method of Mooney Aircraft, the taxpayer involved in the Fifth Circuit case. Petitioners' primary argument on brief is that the decision of the Fifth Circuit is legally incorrect. Petitioners state on brief that the Mooney Aircraft, Inc. case is "partially" distinguishable from the instant case because Mooney Aircraft was a bankrupt corporation while Mooney Southwest is not. This purported distinction is not borne out by the facts in the236 Mooney Aircraft, Inc. case. At no point does the Court state that Mooney Aircraft was bankrupt. The Court, in discussing the basis for its conclusion that the length of time before payment of the bonds would become due created doubt as to whether payment would ever actually be made, stated at 410: if one day it became insolvent the expense might never be paid, yet the money would have been used as tax-free income. We repeat that because of the inordinate 15 length of time involved in this case the Commissioner was clearly within his discretion in disallowing deduction of the "Mooney Bonds" as a current expense. This statement shows affirmatively that Mooney Aircraft was not bankrupt at the time of the decision by the Fifth Circuit. In our view there is no distinction between the instant case and the Fifth Circuit case in Mooney Aircraft, Inc. v. United States, supra. Therefore, under our holding in Jack E. Golsen, 54 T.C. 742">54 T.C. 742 (1970), affd. 445 F. 2d 985 (C.A. 10, 1971), certiorari denied 404 U.S. 940">404 U.S. 940 (1971), we must follow the decision of the Fifth Circuit as to all petitioners, with the possible exception of Norman237 F. and Alyene E. Hoffman and Josephine B. Hodge, since it is clear that an appeal by any of the other petitioners would lie to the Fifth Circuit. Both parties at the trial and on brief assume that an appeal in this case would lie only to the Fifth Circuit. However, the parties stipulated that "Petitioners Norman F. Hoffman and Alyene E. Hoffman, husband and wife, resided at * * * Alexandria, Virginia * * * at the time they filed their petition in Docket No. 512-71." If this stipulation was intended to mean that the Hoffman's legal residence was in Virginia at the time their petition was filed, it would appear that an appeal in their case would lie to the Court of Appeals for the Fourth Circuit. 16 The stipulated facts also show that petitioner Josephine B. Hodge resided in Cannon City, Colorado at the time her joint petition with Raymond W. Hodge was filed. The record indicates that during the years 1965 and 1966 Josephine B. Hodge and Raymond W. Hodge were husband and wife residing in Texas, a community property State. Under these circumstances it would appear that an appeal in the case to which both Raymond W. Hodge and Josephine B. Hodge are parties might lie either238 to the Fifth or the Tenth Circuit. We have found no direct authority on this point. However, see Lamb v. Commissioner, 374 F. 2d 256 (C.A. 2, 1967). In any event, we agree with the conclusion reached by the Fifth Circuit in the Mooney Aircraft, Inc. case. In that case the Appeals Court quoted and approved the interpretation we gave to the cases of American Automobile Assn. v. United States, 367 U.S. 687">367 U.S. 687 (1961), and Schlude v. Commissioner, 372 U.S. 128">372 U.S. 128 (1963), in Simplified Tax Records, Inc., 41 T.C. 75">41 T.C. 75, 81 (1963). After agreeing with our conclusion that those Supreme Court cases "stand for the principle that, absent statutory sanction for it, unless the taxpayer can show that the Commissioner clearly abused his discretion in disallowing deferral of prepaid income or accrual of estimated future expenses, this exercise of the Commissioner's discretion will not be disturbed by the Court," the Appeals Court stated the question in the Mooney Aircraft, Inc. case to be "Was there reasonable basis for the 17 Commissioner's action" in disallowing the taxpayer's claimed deduction for accrued expenses in the face amounts of the239 "Mooney Bonds" it had issued in each year. The Court concluded that because of the 15, 20, or even 30 years before the bonds would be paid with the attendant possibility that the taxpayer would become insolvent prior to the date payment was due and never pay the bonds, the action of the Commissioner in disallowing the deduction was clearly reasonable. The facts here show that in a period of 12 years Mooney Southwest has never paid one of its "Mooney Bonds" or premium coupons except with respect to aircraft destroyed in an air crash or ground accident. Obviously, whether such an accident will occur is uncertain. This case involves the same aircraft involved in the Mooney Aircraft, Inc. case. Here, as in that case, the petitioners do not deny that "many or possibly most" of the "Mooney Bonds" and premium coupons will not actually be paid for "15, 20 or even 30 years" and the president of Mooney Southwest testified that in some cases it could be as much as 50 years before an aircraft with respect to which a bond or coupon was issued was retired. In view of this extended period of time before payment of the bonds or coupons and the possibility that during the intervening years Mooney240 Southwest could become insolvent and never pay the bonds, we conclude that respondent in this case did not abuse his discretion in 18 disallowing the deduction claimed by Mooney Southwest for bond or coupon expense consisting of the face amount of the "Mooney Bonds" or "Mooney Premium Coupons" issued. We sustain respondent's disallowance of this deduction claimed by Mooney Southwest. We conclude that the accruals set up and deductions claimed by Mooney Southwest for bond warranty and premium coupon expenses do not clearly reflect income.Therefore, respondent properly exercised his discretion in disallowing the deductions claimed and recomputing the income of Mooney Southwest. (b) Bonus Payments IssueThe second issue is whether the direct payment made by Mooney Aircraft to petitioners in the amount of $2,785.03 each, a total amount of $11,140.12, as a bonus payment constituted taxable income to petitioners, or a nontaxable gift to be excluded from gross income under section 102. This issue is factual and of course the burden of proof is on petitioners to introduce facts to establish the existence of a gift. Paul V. Hornung, 47 T.C. 428">47 T.C. 428, 438-439 (1967). In241 Commissioner v. Duberstein, 363 U.S. 278">363 U.S. 278, 286 (1960), the Supreme Court concluded that whether a transfer was a "gift" turned primarily on the "intention" or dominant motive of the transferor in making the transfer. In DeJong v. Commissioner, 309 F. 2d 373, 379 (C.A. 9, 1962), affirming 36 T.C. 896">36 T.C. 896 (1961), the Court analyzed the holding of the Supreme Court in Duberstein as follows: 19 The value of a gift may be excluded from gross income only if the gift proceeds from a "detached and disinterested generosity" or "out of affection, admiration, charity or like impulses" and must be included if the claimed gift proceeds primarily from "the constraining force of any moral or legal duty" or from "the incentive of anticipated benefit of an economic nature." * * * Petitioners herein have failed to demonstrate that the bonus payments made by Mooney Aircraft were motivated out of "detached or disinterested generosity" or "out of affection, admiration, or charity like impulses." Cf. Thomas L. Johnson, 48 T.C. 636">48 T.C. 636 (1967). The record shows that the amounts of the bonus payments received by the various distributors of Mooney Aircraft242 were directly related to the number of aircraft sold through the respective distributorships. The amount of bonus payment received by any distributor was computed on the basis of the number of aircraft purchased and the net billing to the distributor. Neither the fact that Mooney Aircraft paid the bonuses without being under any legal or moral obligation to make such payments nor the fact that the bonus payments were isolated to the one occasion here in issue is controlling as to the nature of the transfer. The fact that Mooney Aircraft did not seek a deduction for the bonus payment is only one fact to be considered in determining the "intention" in making the payment. Any weight to be given to this fact is weakened by petitioners' failure to show that taking a deduction for these payments would have in fact reduced the income tax paid by 20 Mooney Aircraft in 1966 in the light of its other deductions or carryovers from other years. While payment of the bonuses was isolated to one instance, the record reflects that a modified discount procedure was adopted in subsequent years which granted discounts on a progressive scale that escalated with the number of aircraft purchased. 243 The clear effect of the payments was as an "incentive of anticipated benefit of an economic nature." See Commission v. Duberstein, supra. We therefore conclude that the payment of $2,785.03 received by each petitioner constituted taxable income to him in 1966, the year the payment was received. Decisions will be entered for respondent. Footnotes1. Cases of the following petitioners are consolidated herewith: Raymond W. Hodge and Josephine B. Hodge, docket No. 510-71; Calvin W. White and Caroline W. White, docket No. 511-71; Norman F. Hoffman and Alyene E. Hoffman, docket No. 512-71; and Hal F. Rachal and Virginia M. Rachal, docket No. 513-71. ↩2. All references are to the Internal Revenue Code of 1954. ↩3. All private aircraft in the United States are required to be registered currently with the Federal Aviation Administration, which publishes an annual report listing every aircraft in service in the country, which report is available to Mooney Southwest. Comparable registration requirements and reports are available in other countries in which the corporation sells aircraft. ↩4. This aircraft was a multi-engine plane which had been manufactured by a company other than Mooney Aircraft. ↩5. 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. ↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624031/	RICHARD A. LANGSETH, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentLangseth v. CommissionerDocket No. 19421-82United States Tax CourtT.C. Memo 1983-576; 1983 Tax Ct. Memo LEXIS 213; 46 T.C.M. (CCH) 1420; T.C.M. (RIA) 83576; September 19, 1983. Richard A. Langseth, pro se. Cruz Saavedra and Ronald M. Rosen, for the respondent. COHENMEMORANDUM FINDINGS OF FACT AND OPINION COHEN, Judge: This case exemplifies the self-imposed predicament in which numerous taxpayers have placed themselves in recent years. Unreasonable reliance on bad advice has resulted in determination of maximum tax liability, additions to tax, and liability for substantial214 interest. Mr. Langseth has narrowly escaped a damage award against him for instituting a frivolous or groundless action, which, in future cases, may be imposed in an amount up to $5,000 under section 6673. 1Respondent determined deficiencies in and additions to Mr. Langseth's income taxes as follows: YearDeficiency inAdditions to TaxEndedIncome TaxSec. 6651(a)Sec. 6653(a)Sec. 6654(a)1979$5,055.22$1,263.80$252.76$212.3119804,927.721,231.93246.39315.37Respondent's determination assumed single filing status; one exemption (no dependency exemptions); and no itemized deductions in excess of the statutory "zero bracket" amount. It is uncontroverted that Mr. Langseth did not file tax returns for either of the years in issue. At the time he filed his petition herein, Mr. Langseth was a resident of Costa Mesa, California. In that petition, he alleged, among other things, that he was not required to file a return or pay tax for 1979 or 1980; that he "did not215 volunteer to self-assess himself for these years"; and that he did not have "gain" or "profit" in any taxable amount. He demanded a jury trial, which was denied. After the answer was filed, he moved for summary judgment on the ground that the answer did not conform to Rule 36(b); 2 this motion was denied. Thereafter, he filed a "Motion For More Definite Statement," which was similarly denied. The Court takes judicial notice of the fact that all of these filings by Mr. Langseth were virtually identical to petitions and motions filed by numerous other petitioners in the Southern California area. 3 Mr. Langseth's case and many others involving the identical filings by other petitioners were set for trial in Los Angeles, California, on July 11, 1983. Shortly prior to the call of the calendar on July 11, 1983, Mr. Langseth and others delivered to the trial clerk documents entitled "Notice Of Decision." In these virtually identical documents, the petitioners stated that they had improperly been denied a jury trial; that their motions had been216 denied; that the Court's jurisdiction could be invoked only by "taxpayers" and that they were not taxpayers; that "THEREFORE, this action was commenced in error"; and that the action "is hereby dismissed." When Court convened, the Court advised the assembled parties that the "Notice Of Decision" documents contained many errors of law and that the effect would be that the petitioners were requesting that their cases be dismissed. The Court stated that if a case were dismissed, decision would be entered against the petitioner in the full amount of the deficiency and that any such petitioner would be foregoing any claims he or she had to dependency exemptions or itemized deductions such as mortgage interest. The Court further stated that if any petitioner wanted an opportunity to meet with respondent's counsel to discuss dependency exemptions or itemized deductions or anything else relating to the merits of the case, such petitioner's case would be set for trial later in the week to provide time for such a meeting. 217 When Mr. Langseth's case was called, he requested additional time to meet with respondent, and his case was set for trial at 9:00 a.m. on Thursday, July 14, 1983. On July 14, 1983, the parties reported that Mr. Langseth had met with representatives of respondent and had substantiated certain deductions for the year 1979 so that respondent was agreeable to reducing the amount of deficiency for that year. The meeting was terminated, however, when Mr. Langseth delivered to respondent's counsel a copy of the "Notice of Decision," and indicated that he did not wish to settle his case unless it was determined that he had no tax liability whatsoever. When the trial commenced, Mr. Langseth renewed his contention that he had no tax liability and declined to either meet further with respondent's counsel or to offer into evidence documents in his possession relating to itemized deductions for 1980. As to his advisor on how he was proceeding, Mr. Langseth identified "YHPA" and stated: "YHPA is Your Heritage Protection Association. It is a, quote, tax-protest group." He then filed the "Notice Of Decision," thereby indicating his consent to dismissal of this case. He did this despite the218 Court's admonition that he bore the burden of proving his entitlement to deductions and despite the Court's offer to consider his evidence in regard to his right to additional deductions. A notice of deficiency is ordinarily presumed correct, and the taxpayer has the burden of proving that respondent's determination of his taxable income is erroneous. ; Rule 142(a). Petitioner here has been more than adequately warned of the consequences of his failure to present evidence. He has been clearly advised that his legal arguments are frivolous. See ; ; , affg. ; , affg. per curiam an unreported decision of this Court; . He has nevertheless refused to prosecute his case or to offer evidence in regard to it. Rules 123(b) and 149(b), provide: RULE219 123. DEFAULT AND DISMISSAL * * * (b) Dismissal: For failure of a petitioner properly to prosecute or to comply with these Rules or any order of the Court or for other cause which the Court deems sufficient, the Court may dismiss a case at any time and enter a decision against the petitioner. The Court may, for similar reasons, decide against any party any issue as to which he has the burden of proof; and such decision shall be treated as a dismissal for purposes of paragraphs (c) and (d) of this Rule. * * * RULE 149. FAILURE TO APPEAR OR TO ADDUCE EVIDENCE * * * (b) Failure of Proof: Failure to produce evidence, in support of an issue of fact as to which a party has the burden of proof and which has not been conceded by his adversary, may be ground for dismissal or for determination of the affected issue against that party. * * * The petition is dismissed for petitioner's failure to properly prosecute or to present evidence pursuant to Rules 123 and 149. In the interest of justice, however, respondent has requested that decision be entered in the reduced deficiency for 1979 of $2,925, based upon substantiation of certain deductions during the meeting between*220 Mr. Langseth and respondent's agent. Respondent has further conceded that additions to tax for that year should be reduced to $8.97 under section 6653(a) and $44.87 under section 6651(a) and to zero under section 6654(a). As to 1979, therefore, decision will be entered in the reduced amount requested by respondent. As to 1980, decision will be entered in the full amount set forth in the notice of deficiency. 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 and in effect during the years in issue.↩2. Unless otherwise indicated, any reference to "Rules" shall be deemed to refer to the Tax Court Rules of Practice and Procedure.↩3. E.g., Larry McBride, docket No. 18963-82; Roxie B. Hamner, docket No. 19558-82; Benjamin Harrison Sublett, docket No. 19629-82; Malette L. Kline, docket No. 19669-82; Larry Simms Vaughn, Docket No. 19782-82; Anthony V. Grubaugh, docket No. 19843-82; Stafford Lee Ross, docket No. 19834-82.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624034/	Ann Greene v. Commissioner. Charles T. Greene v. Commissioner.Greene v. CommissionerDocket Nos. 43256, 43257.United States Tax CourtT.C. Memo 1954-193; 1954 Tax Ct. Memo LEXIS 52; 13 T.C.M. (CCH) 1036; T.C.M. (RIA) 54299; November 17, 1954, Filed Robert R. Blasi, Esq., for the petitioners. Thomas C. Cravens, Esq., for the respondent. WITHEYMemorandum Findings of Fact and Opinion WITHEY, Judge: The respondent determined deficiencies in the petitioners' income tax as follows: 194619471948Ann Greene$13,619.87$ 8,992.67$460.00Charles T. Greene23,568.6320,332.79705.26The issues presented by the pleadings are the corectness of the respondent's action (1) in disallowing deductions taken by petitioners for53 1948 as business bad debts, and (2) in failing to allow an operating loss occurring in 1948 arising from such business bad debts to be carried back to 1946 and 1947. Findings of Fact Some of the facts have been stipulated and are found accordingly. Petitioners are residents of Chicago, Illinois, and filed their individual tax returns for the taxable years in controversy with the collector of internal revenue for the first district of Illinois. Charles T. Greene, hereinafter referred to as petitioner, and Ann Greene are husband and wife. In 1930 the petitioner went into the business of processing fruits and fruit juices as a sole proprietor, trading as Standard Fruit Products Company. Prior to entering this business, petitioner had been a sales representative of various canners and fruit processors in the Chicago area. In 1934 the petitioner discontinued operating as a sole proprietorship. Thereafter the business was conducted by a corporation, the name of which was Standard Fruit Products Company, Incorporated. The corporation continued in business until it was dissolved on June 30, 1943. On the latter date the petitioners and Esther Boyle entered into a partnership which54 operated under the name of Standard Fruit Processing Company. All the assets of the corporation were transferred to the partnership, subject to the assumption by the partnership of all of the corporation's liabilities. The petitioner owned a 45 per cent interest in the partnership, his wife owned a 40 per cent interest, and Esther Boyle owned the remaining 15 per cent interest. On August 28, 1944, Esther Boyle assigned her 15 per cent interest in the partnership to the petitioner. Thereafter, the petitioner held a 60 per cent interest, and his wife held a 40 per cent interest in the partnership which continued business under the name of Standard Fruit Processing Company, sometimes hereinafter referred to as the partnership. The balance sheet of the partnership as reflected by its books and records as of March 31, 1947, was as follows: ASSETSCurrent assets: Cash on hand and in banks$ 9,639.51Receivables -Customers' accounts$ 24,771.44Less reserve for bad debts600.00$ 24,171.44Personal loan3,700.0027,871.44Inventories -Raw materials -In licensed warehouse -Pledged as security for bankloans (Contra)$146,950.00On hand - Unpledged28,735.50$175,685.50Work in process4,522.00Finished goods7,731.99187,939.49Total current assets$225,450.44Fixed assets: CostDepreciationBook ValueMachinery and equipment$38,067.21$ 11,100.90$ 26,966.31Automobiles2,330.181,356.12974.06Furniture and fixtures1,278.97166.251,112.72$41,676.36$ 12,623.27$ 29,053.09Leasehold improvements (Cost)$233,736.28Less reserve for amortization17,092.40$216,643.88245,696.97Deferred charges: Unexpired insurance$ 13,862.27Prepaid loan expense1,579.4215,441.69$486,589.10LIABILITIESCurrent liabilities: Notes payable -Bank loans secured by warehouse receipts covering rawmaterials (Contra) -Due April 16, 1947$ 22,750.00Due April 28, 194737,625.00Due May 19, 194713,000.00Bank loan - Unsecured - Due April 28, 19476,565.73$ 79,940.73Accounts payable - Trade76,835.20Accruals -Taxes -Personal property$ 1,307.90Payroll502.43Withholding586.10Salaries and wages2,521.554,917.98Total current liabilities$161,693.91Long term liabilities: Personal loan from Charles T. Greene55,768.43Total liabilities$217,462.34PARTNERS' CAPITALBalance, June 30, 1946$173,890.72Net income for the nine months ended March 31, 194755,351.57Additional investment during year39,884.47Total269,126.76$486,589.1055 In the early part of 1947 the petitioners decided that the partnership should transfer its business and assets to a corporation to be organized. This change in business form was recommended by Maurice Cohn, president of the Liberty National Bank of Chicago, which financed the loans needed in the partnership business. Cohn insisted that the corporation have a capital of at least $100,000. On April 12, 1947, an Illinois corporation was organized under the name of Standard Fruit Processing Company, Inc., hereinafter referred to as the corporation, for the purpose of carrying on a food processing business. The corporation had an authorized capital of $100,000, represented by 5,000 shares of common stock with a par value of $20 per share. Upon organization, the corporation purchased the partnership assets at their book value, less the amount of the partnership's liabilities which it assumed. The terms of purchase provided that the purchase price be paid by the issuance by the corporation of $100,000 par value of its capital stock and the remainder, $169,126.76, be paid in cash by the corporation if and when its profits should be sufficient for that purpose. While the corporation had56 an authorized capital stock of $100,000, it never issued any stock for the partnership assets or for any other purpose. The portion of the purchase price in excess of $100,000, or $169,126.76, was carried on the books of the corporation as a long-term liability in an account designated "Due to stockholders." The account had no fixed date of payment. No interest was ever paid on it, and no part of the amount thereof was ever paid. So far as disclosed, no note or other instrument was given with respect to the account, and the corporate minute books contain no reference to a liability of $169,126.76 having been incurred at any time by the corporation. The corporation did its regular banking business with the Liberty National Bank of Chicago. From time to time it negotiated commercial loans from the bank to carry on the business. Soon after the organization of the corporation in April 1947, the company applied to the bank for a loan. In order to obtain the loan, the petitioners were required to execute a Subordination Agreement whereby they subordinated their rights respecting the account "Due to stockholders" to any and all rights of the bank arising out of any loans made to the company. 57 The first paragraph of the Subordination Agreement, which was dated June 2, 1947, recited: "You are hereby advised that Standard Fruit Processing Company of Chicago, Illinois, a corporation, is now indebted to the undersigned, Charles T. Greene, in the sum of $101,476.06 and to the undersigned Ann Greene in the sum of $67,650.70. Neither of the undersigned holds any security for the payment of this indebtedness." The amounts recited in the agreement as owing to the petitioners are in the same ratios of the above mentioned $169,126.76 as were their respective interests in the partnership, namely, 60 per cent and 40 per cent. Concurrently with the execution of the Subordination Agreement, petitioner was required by the bank to make an assignment to the bank, as trustee, of his beneficial interest in a trust which held title to the industrial building at 2600 West 19th Street, Chicago, in which the corporation's business was operated. The building which had been occupied by the partnership had been purchased by petitioners and title thereto had been taken by Liberty National Bank of Chicago under a trust agreement, dated March 5, 1945, in which petitioner was named the primary beneficiary. 58 The property was encumbered by a deed of trust running to the Chicago City Bank and Trust Company, dated September 1, 1945, securing a note in the amount of $70,000. The partnership was lessee of the building under a 10-year lease, beginning October 1, 1945, and ending September 30, 1955, at a rental of $1,000 per month. The trustee under the trust agreement of March 5, 1945, merely held title to the building; it did not collect any rents or manage the property. Petitioners managed the property during the existence of the trust and each of them reported on his Federal income tax return one-half of the rental income and deducted one-half of depreciation and expense (taxes and interest) for the years 1946 through 1950. As lessee, the partnership made leasehold improvements costing $233,736.28 as of March 31, 1947, which it amortized over a period of 20 years. In assuming all of the partnership liabilities, the corporation also assumed the lease the partnership had on the building. The corporation's books and records reflect additional improvements made by it to the building in 1947 and 1948. The corporation amortized over a 20-year period the leasehold improvements made by it and took59 deductions therefor on its income tax returns until the building was sold in 1950. Neither petitioner, as an individual, ever made any of such improvements. In 1947 the corporation purchased at a cost of approximately $140,000 approximately one million pounds of fresh cherries for processing into maraschino cherries. After the cherries were bought from the growers, they were put through a preliminary process known as "brining." The cherries were brined in a warehouse at Donald, Washington, by an employee of the corporation named Kirk Fredericks. Fredericks was a trusted and key employee of the corporation who had the required knowledge of chemistry and fruit technology necessary to carry out the brining process. He became personally interested in a tomato packing business and delegated his duties as an employee of the corporation to a man who knew little or nothing about the brining process, with the result that the entire stock of cherries bought for processing in 1948 was either partially or totally destroyed. The infidelity of Fredericks resulted in a loss to the corporation of approximately 3,700 barrels of brined cherries with an approximate value of $125,000. The damage to60 the fruit was first discovered when the inital shipments of cherries were received at the Chicago finishing plant. Instead of being firm and plump, the cherries were in a soft and deteriorated condition which made them unsuitable and would have caused them to disintegrate if subjected to further processing. Current orders were filled from hold-over stocks on hand from previous years and all remaining unfilled orders were immediately cancelled. Except for some salvaged cherries that were sold to another cherry processor in Chicago, the entire mass of spoiled cherries was dumped to save storage charges. In an effort to keep the business going, an attempt was made to purchase brined cherries on the open market or from competitors. This met with little success. As a last resort, the corporation attempted to shift its operation to the processing and packaging of other food products, such as olives and mayonnaise dressing, but this did not prove successful. The corporation ceased active operation in the latter part of the calendar year 1948. It subleased the building it was occupying and received a rental of $12,760 for the fiscal year ended June 30, 1949, and $12,441.52 for the fiscal61 year ended June 30, 1950. The corporation commenced liquidation in 1949 by selling some of its machinery and equipment. During that year it paid salaries to both petitioners and also purchased an automobile. On March 1, 1950, the property occupied by the corporation was sold. In reporting the sale of the land, building and leasehold improvements, the petitioners and the corporation prorated the sales price according to the adjusted basis of the respective assets they each owned and each party reported a capital loss on the sale. The balance sheet of the corporation as reflected by its books and records as of December 31, 1948, was as follows: ASSETSCurrent assets: Cash on hand and in banks$ 478.50Accounts and loans receivable$ 3,739.54Less - Reserve for bad debts600.003,139.54Inventories12,905.00Total current assets$ 16,523.04Fixed assets: Machinery and equipment$ 70,364.69Leasehold improvements262,896.74Less - Reserve for depreciation62,591.11270,670.32Deferred charges: Unexpired insurance$ 13,463.95Prepaid loan expense1,344.4314,808.38$302,001.74LIABILITIESCurrent liabilities: Notes and accounts payable -Notes$ 15,400.00Accounts93,470.00$108,870.00Accrued liabilities -Taxes$ 1,522.73Salaries and wages5,443.836,966.56Total current liabilities$115,836.56Long-term liabilities: Personal loans from Chas. T. Greene$ 52,644.36Due to stockholders169,126.76221,771.12$337,607.68NET WORTHCapital stock$100,000.00Surplus (Deficit) -Balance, June 30, 1948($106,467.20)Loss for the six months ended Decem-ber 31, 1948(29,138.74)135,605.9435,605.94$302,001.7462 In his individual Federal income tax return for 1948, the petitioner claimed a deduction in the amount of $155,407.09 for a loss on funds advanced to Standard Fruit Processing Company. The respondent disallowed the deduction in its entirety. On her individual Federal income tax return for 1948, Ann Greene claimed a deduction in the amount of $66,364.03 for a loss of funds advanced to Standard Fruit Processing Company. The respondent also disallowed this deduction in its entirety. Opinion In April 1947 the petitioners organized a corporation to take over the assets and business of a partnership in which they were the sole partners. The corporation purchased the partnership assets for $269,126.76, payable $100,000 in stock of the corporation and the remainder, $169,126.76, in cash if and when the corporation's profits should be sufficient for that purpose. No stock was ever issued by the corporation, and on its books the $169,126.76 was recorded in an account designated "Due to stockholders." No payment was ever made on the account. The petitioners contend that the transaction created a debtor-creditor relationship between them and the corporation became indebted to them in63 the amount of $169,126.76; that the debt of $169,126.76 became worthless and uncollectible in 1948 and, therefore, is deductible under the provisions of section 23(k)(1) of the Internal Revenue Code of 1939. 1 Alternatively, the petitioners contend that they are entitled to deduct the amount as a loss sustained in a trade or business under section 23(e)(1). 2 Although petitioners' briefs and the pleadings are not clear on the point, we assume their position to be that the $169,126.76 open account "Due to stockholders" represents a debt characterized variously as an advance to the corporation or the deferred payment of purchase price money on the sale of partnership assets. They further contend that this debt resulted in an operating loss which may be carried back to 1946 and 1947. 64 Respondent contends that no debt was created in the transaction and that the $169,126.76 was a contribution to the capital of the corporation. Further, respondent contends that if the Court should find a debt was created, then it was a non-business bad debt. 2 Lastly, respondent contends that the burden of proof was on the petitioners to establish that the debt was worthless on December 31, 1948, if it was a nonbusiness bad debt, or, if it was a business bad debt, they must show the extent or partial worthlessness, and since they have failed to sustain this burden no amount is deductible. We will consider first the issue of whether or not the alleged debt was worthless on December 31, 1948. The record is lacking in evidence as to the market value on December 31, 1948, of the assets shown on the corporation's balance sheet as of that date, or what amount reasonably could have been expected to have been realized on their liquidation. The balance sheet, which was stipulated by the parties, shows liabilities in excess of assets in the amount of $35,605.94 on December 31, 1948. This fact alone does not establish the worthlessness of a debt. Higginbotham-Bailey-Logan Co., 8 B.T.A. 566">8 B.T.A. 566, 580.65 The balance sheet shows that the corporation had current assets totaling $16,523.04, machinery and equipment of $70,364.69, other assets of $14,808.38, and leasehold improvements of $262,896.74, or total assets after depreciation of $302,001.74. In the absence of evidence on the matter, we are unable to determine what relationship these book values bore to market values. So far as shown, they well might have been market values on December 31, 1948. The petitioners argue on brief that the leasehold improvements on the corporate balance sheet were of no value to the corporation. This position disregards events indicating otherwise which subsequently transpired. First, the lease was not cancelled on December 31, 1948, as the corporation, which had to pay a rent of $12,000 a year, subleased the building and improvements for a rental at the rate of approximately $13,000 a year in the fiscal years ended June 30, 1949 and June 30, 1950. Therefore, it would appear that the improvements had value to the corporation on December 31, 1948. Secondly, the lease still had five years to run when the building was sold in 1950, and it is unlikely that a lessee would relinquish its rights in improvements66 in which it had invested over $250,000 and from which it was receiving a net profit in rentals each fiscal year and receive nothing in exchange. Further, the corporation's action in claiming amortization deductions of the leasehold improvements on its income tax returns filed after December 31, 1948, indicates that the leasehold improvements were regarded as continuing to have value. The record further shows that no effort to liquidate any of the fixed assets had been undertaken by the corporation on December 31, 1948. Therefore, at that date it would be impossible to say, as petitioners have argued, that no amount would be recoverable on the alleged debt. We conclude that petitioners have not sustained their burden of showing the partial or complete worthlessness of the alleged debt as of December 31, 1948. The foregoing conclusion dispenses with the necessity of deciding the issue of the character of the open account "Due to stockholders" and the issue of net operating loss carrybacks. Decision will be entered for the respondent. Footnotes1. SEC. 23. DEDUCTIONS FROM GROSS INCOME. In computing net income there shall be allowed as deductions: * * (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. This paragraph shall not apply in the case of a taxpayer, other than a bank, as defined in section 104, with respect to a debt evidenced by a security as defined in paragraph (3) of this subsection. This paragraph shall not apply in the case of a taxpayer, other than a corporation, with respect to a non-business debt, as defined in paragraph (4) of this subsection. ↩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; * (k) Bad Debts. - * *(4) Non-business Debts. - In the case of a taxpayer, other than a corporation, if a non-business debt becomes worthless within the taxable year, the loss resulting therefrom shall be considered a loss from the sale or exchange, during the taxable year, of a capital asset held for not more than 6 months. The term "non-business debt" means a debt other than a debt evidenced by a security as defined in paragraph (3) and other than a debt the loss from the worthlessness of which is incurred in the taxpayer's trade or business.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624035/	FX Systems Corporation, Petitioner v. Commissioner of Internal Revenue, RespondentFX Systems Corp. v. CommissionerDocket No. 2832-79United States Tax Court79 T.C. 957; 1982 U.S. Tax Ct. LEXIS 10; 79 T.C. No. 59; December 1, 1982, Filed 10 Decision will be entered under Rule 155. Petitioner purchased certain assets for $ 200,000 in cash, a promissory note of $ 28,000, 500 shares of its series A preferred stock, and 500 shares of its series B preferred stock. Petitioner claimed a cost basis in the purchased assets in an amount equal to the fair market value thereof. Respondent, however, determined that petitioner's preferred stock could not be valued by reference to the value of the assets purchased. Held, under the facts of the instant case, it cannot be presumed that the fair market value of the assets petitioner purchased is equal to the value of the consideration it paid therefor. Held, further, respondent's determination of the value of petitioner's preferred stock and its cost basis in the assets is sustained. Thomas E. Tyre, for the petitioner.Gerald A. Thorpe, for the respondent. Hamblen, Judge. HAMBLEN958 OPINIONRespondent determined the following deficiencies in petitioner's Federal income taxes:TYE Mar. 31 --Deficiencies1973$ 129,929197465,09519758,646After 11 concessions, the sole issue for decision is the amount of petitioner's cost basis in certain assets that it purchased from Ferroxcube Corp.All of the facts have been stipulated and are found accordingly.Petitioner FX Systems Corp. is a Delaware corporation with its principal office in Kingston, N.Y. For the taxable years ended March 31, 1973, 1974, and 1975, petitioner timely filed its Federal corporate income tax returns with the Internal Revenue Service Center, Andover, Mass.In June 1972, petitioner was organized in order to acquire certain assets of the Memory Systems Division of Ferroxcube Corp. (hereinafter Ferroxcube), a subsidiary of North American Phillips Corp. (hereinafter NAPCO). The principal business of Ferroxcube's Memory Systems Division was the manufacture and sale of memory systems for computers. During 1971, the management of Ferroxcube and NAPCO decided to sell the Memory Systems Division because, in their opinion and according to their financial records, it was not a profitable operation. They also decided that if they were unable to find a buyer for all of the assets of Ferroxcube's Memory Systems Division those assets would be scrapped for salvage value. 12 As of December 31, 1971, Ferroxcube's Memory Systems Division was not accepting new orders, but was simply filling existing orders and servicing equipment under its warranty agreements.When Ferroxcube was unable to find a buyer for its Memory Systems Division, four key management employees of the Memory Systems Division decided to form a corporation to 959 purchase the division's assets. Consequently, on June 28, 1972, they incorporated petitioner. Petitioner's authorized capital stock consisted of 700,000 shares of voting common stock, 15,000 shares of nonvoting series A preferred stock, and 15,000 shares of nonvoting series B preferred stock.Petitioner's common stock is entitled to one vote per share. Its series A preferred stock is nonvoting, is entitled to an $ 8 cumulative annual dividend commencing on January 1, 1974, and has a redemption price of $ 100 per share. Such stock is redeemable by the corporation at any time, but is only redeemable by the holder thereof from the proceeds of any public offering of common stock or securities convertible into common stock. Petitioner's series B preferred stock is nonvoting and is entitled to a $ 5 cumulative annual dividend commencing 13 on January 1, 1974. The series B preferred stock is junior to the series A preferred stock and has a redemption price of $ 100 per share until December 31, 1973, and redemption price of $ 150 per share thereafter. Each share of series B preferred stock is convertible into at least 45 shares of common stock, and, upon conversion, the holder may be entitled to more than 45 shares of common stock if certain antidilution provisions are applicable. While the corporation may redeem the series B preferred stock at any time after it has redeemed the series A preferred stock, the holder of the series B preferred stock is entitled to exercise his option to convert such stock into common stock after receiving notice of the redemption. The series B preferred stock is only redeemable by the holder thereof from the proceeds of the second or subsequent public offering of common stock or securities convertible into common stock.Pursuant to a "Purchase and Sale Agreement" dated June 28, 1972 (hereinafter the purchase agreement), petitioner agreed to purchase, and Ferroxcube agreed to sell, the bulk of the assets of Ferroxcube's Memory Systems Division. With respect to the price payable for those 14 assets, the purchase agreement provides as follows:2.01 Tht [sic] Total Purchase Price for the sale of all the assets referred to in Paragraph 1.01 and 1.02 above shall be Two Hundred Thousand Dollars ($ 200,000) plus the preferred stock as defined in Section 8.02(b) and (c).2.02 If on the date of closing, the amount of inventory to be transferred to Buyer hereunder, valued on the basis of Seller's gross book cost is found to be 960 greater than One Million, Two Hundred and Seventy-Seven Thousand Dollars ($ 1,277,000), less:(i) cancellation, material and charges incurred prior to May 1, 1972;(ii) inventory not being transferred pursuant to paragraph 1.03 (v); and(iii) the value of two Add-on Memories being retained by Seller,the total purchase price will be increased correspondingly. * * 8.02 At the Closing, Buyer shall in payment of the Purchase Price transfer to Seller as follows:(a) Buyer will deliver to Seller a certified check in good New York funds in the amount of Two Hundred Thousand Dollars ($ 200,000).(b) Five hundred (500) shares of the Buyer's "Series A" 8% preferred stock, $ 1.00 par value, which when issued and outstanding shall constitute validly issued and outstanding 15 shares, fully paid and non-assessable. Said cumulative Series A stock will accrue dividends commencing on January 1, 1974, said dividends payable quarterly thereafter. Series A preferred stock shall have a redemption or liquidation value of $ 50,000, and shall be redeemed from the proceeds of any subsequent public offering of stock or securities convertible into stock of Buyer, and may be purchased or retired at any time by the Buyer. Said Series A stock will be the senior equity security of the Seller, and has preference upon liquidation over all other classes of stock.(c) Five hundred shares of the Buyer's "Series B" 5% convertible preferred stock, $ 1.00 par value, which when issued and outstanding shall constitute validly issued and outstanding shares fully paid and non-assessable. Said cumulative "Series B" stock will accrue payable quarterly. Series B preferred stock shall have a liquidation and redemption value of $ 50,000, until December 31, 1973 after which time the aggregate liquidation and redemption will increase to $ 75,000; shall be junior to Series A preferred stock, and shall share in liquidation Pari Passu with other classes of preferred stock. Series B stock may 16 be redeemed by Buyer subject to the following conditions:1. All Series A preferred Stock of Buyer owned by Seller has been redeemed in full, and2. Thirty (30) day written notice of intention to redeem has been given to holder during which thirty (30) day period the holder shall have an absolute right to convert into fully paid and non-assessable shares of common stock of Buyer.At the option of the holder, Series B stock shall be redeemable from the proceeds of any public offering (subsequent to the first public offering) of stock or securities convertible into stock of buyer, at which time the conversion right will terminate.Series B shall be convertible at any time into 20,000 shares of common stock, one (1) cent par value, or in the case of an adjustment of the number of shares pursuant to Paragraph 8.03, then at the number as last adjusted and in effect.(d) Within three days after the determination of the Excess Inventory Value (if any), Buyer will deliver to Seller a six month non-interest bearing 961 Note dated the Closing Date in substantially the form as Exhibit A attached hereto; and in a principal amount equal to the amount of the Excess Inventory Value as determined under paragraph 17 2.02.In addition, the purchase agreement provides that as long as any of the preferred stock held by Ferroxcube remains outstanding, petitioner may not declare any dividends on its common stock or distribute any property to the holders of such stock unless all of the dividends on the preferred stock are paid and, after the dividend or distribution with respect to the common stock, petitioner's assets exceed its liabilities by a specified amount.On August 26, 1972, petitioner consummated its purchase of the assets of Ferroxcube's Memory Systems Division. At that time, petitioner paid Ferroxcube $ 200,000 in cash, executed a promissory note in the amount of $ 28,000 to cover the value of excess inventory as provided in section 2.02 of the purchase agreement, and issued to Ferroxcube 500 shares of series A preferred stock and 500 shares of series B preferred stock.At the time it purchased the assets of Ferroxcube's Memory Systems Division, petitioner engaged Marshall & Stevens, Inc., a firm of recognized valuation engineers and appraisers, to determine the fair market value of those assets. According to the report submitted by Marshall & Stevens, Inc., the fair market value of such 18 assets as of August 19, 1972, was as follows: 1(a) Inventory$ 475,000(b) Machinery, equipment,furniture and fixtures$ 417,080Less: Setup costs20,000397,080Total872,080 At the time of the sale, 345,000 shares of petitioner's common stock had already been sold and another 40,000 shares had been subscribed. Petitioner's stock has never been publicly traded on any market. As of March 31, 1975, none of the series A or B preferred stock issued by petitioner to 962 Ferroxcube had been redeemed or converted into common stock.On its income tax returns for the taxable years ended March 31, 1973, 1974, and 1975, petitioner used the fair market value of the inventory purchased from Ferroxcube (i.e., $ 475,000) as its basis for determining its cost of goods sold. Petitioner also used the fair market value of the machinery, equipment, and furniture and fixtures that it purchased from Ferroxcube (i.e., $ 397,080) as its basis for depreciation purposes on those returns. In the notice of deficiency, respondent determined that petitioner was not entitled to 19 use the fair market value of such assets as its cost basis therefor. Respondent found that the value of the series A and series B preferred stock issued to Ferroxcube was equal to the total redemption price therefor, $ 50,000 each, and, therefore, he determined that the purchase price of the assets and petitioner's cost basis therein was only $ 328,000, allocated among the assets as follows: 2Inventory$ 174,268Machinery, equipment,furniture, and fixtures145,632"Going Concern" value3 8,100We must determine whether petitioner's cost basis in the assets that it purchased from Ferroxcube is equal to the fair market value of those assets.Petitioner maintains that the value of the preferred stock issued to Ferroxcube is not ascertainable. Consequently, petitioner argues that in determining the cost of the assets it purchased from Ferroxcube, the value of the preferred stock, cash, and promissory note that it gave to Ferroxcube 20 should be presumed to be equal to the value of the assets that it received in exchange therefor. Respondent, on the other hand, contends that it is inappropriate to apply such a presumption to the instant case. According to respondent, Ferroxcube was not in a position to bargain for property of equal value because petitioner was the only party interested in buying the assets of 963 Ferroxcube's Memory Systems Division. Furthermore, respondent maintains that the preferred stock issued to Ferroxcube did have an ascertainable value equal to the redemption price of such stock. For the reasons set forth below, we hold for respondent.Generally, the cost basis of property purchased with other property is the fair market value of the property received in the exchange. Philadelphia Park Amusement Co. v. United States, 130 Ct. Cl. 166">130 Ct. Cl. 166, 126 F. Supp. 184">126 F. Supp. 184 (1954); Williams v. Commissioner, 37 T.C. 1099">37 T.C. 1099 (1962). On the other hand, where a corporation acquires property in exchange for its own stock, the cost basis of such property is the value of the stock given up in the exchange. 4Simmonds Precision Products, Inc. v. Commissioner, 75 T.C. 103 (1980); Pittsburgh Terminal Corp. v. Commissioner, 60 T.C. 80">60 T.C. 80 (1973), 21 affd. per order 500 F.2d 1400">500 F.2d 1400 (3d Cir. 1974). Nevertheless, where stock is exchanged for property pursuant to an arm's-length transaction, the courts have, in certain instances, presumed that the value of such stock equaled the value of the property received in exchange therefor. See Pittsburgh Terminal Corp. v. Commissioner, supra; Moore-McCormack Lines, Inc. v. Commissioner, 44 T.C. 745 (1965). See also Philadelphia Park Amusement Co. v. United States, supra.This is sometimes referred to as the barter-equation method of valuation.Relying on Pittsburgh Terminal Corp. v. Commissioner, supra, petitioner insists that we apply the barter-equation method of valuation and determine the value of the preferred stock issued to Ferroxcube and correspondingly its cost basis in the assets it received from Ferroxcube by reference to the value of those assets. In Pittsburgh Terminal Corp., a newly formed corporation 22 received virtually all of its assets in exchange for all but an insignificant portion of its stock. To ascertain the corporation's basis in the property received, this Court determined the value of such stock by reference to the fair market value of the property stating:While it may be true that the stock of a going concern can be valued 964 independently of the assets which are acquired with such stock, we think that it is nonsensical to try to look at the value of the stock separately from that of the property where, as here, all of the stock of a corporation which has never conducted any business is exchanged for property which will become all of the assets of such corporation. Any evaluation of the stock of the corporation will necessarily be based upon the income which can be expected from the property.Regardless of the precise rule of valuation that we were attempting to apply, we have always followed the evidence of value on either side of the transaction which we considered to be the most reliable. * * [60 T.C. at 88; emphasis added.]On the basis of the record before us, we find that Pittsburgh Terminal Corp. is distinguishable. First, in Pittsburgh Terminal Corp., all but 23 an insignificant portion of the corporation's stock was given as consideration for the property, and such property thereafter represented all of the corporation's assets. Therefore, the value of the corporation's stock necessarily reflected the value of the underlying corporate assets. Second, and more importantly, we do not think that the fair market value of the property that petitioner received from Ferroxcube constitutes reliable evidence of the value of the preferred shares that petitioner issued to Ferroxcube. In Pittsburgh Terminal Corp., we emphasized that we have always followed reliable evidence of value on either side of the transaction, and therein we found that the value of the property received in exchange for the corporation's stock represented reliable evidence of the value of such stock. Obviously, we reached this conclusion because it is normally presumed that properties exchanged in an arm's-length transaction will be equal in value. In the instant case, however, respondent has challenged this presumption and the record supports his position.During 1971, Ferroxcube and NAPCO, its parent, decided to sell Ferroxcube's Memory Systems Division because they believed 24 it was an unprofitable operation. If, however, they were unable to sell the Memory Systems Division, they had decided to scrap its assets for salvage value. After Ferroxcube had been unable to find a buyer, four key management employees of the Memory Systems Division formed petitioner to purchase the division's assets. Consequently, it appears that 965 petitioner was the only party interested in purchasing the Memory Systems Division, 5 leaving Ferroxcube with the choice of selling the division to petitioner or scrapping its assets for salvage value. Since petitioner had been organized by four employees of the Memory Systems Division who must have known the options that Ferroxcube faced, it is clear that Ferroxcube was placed at a distinct disadvantage in negotiating a sale to petitioner. Under these circumstances, we cannot find that petitioner and Ferroxcube were dealing at arm's length in the ordinary sense of that term. See C. G. Meaker Co. v. Commissioner, 1348">16 T.C. 1348 (1951). Fair market value has been defined as the price at which property would be sold by a knowledgeable seller to a knowledgeable buyer with neither party under any compulsion to act. Pittsburgh Terminal Corp. v. Commissioner, supra at 88. 25 We believe, in light of the lack of any evidence to the contrary, that respondent acted reasonably in assuming that Ferroxcube found itself forced to sell the Memory Systems Division's assets to petitioner at a price below their fair market value rather than scrapping those assets for salvage value. 6 Furthermore, the record indicates that the preferred stock that petitioner issued to Ferroxcube was worth nowhere near the amount that petitioner would have us find. The series A and series B preferred stock issued to Ferroxcube were redeemable by petitioner for a total price of $ 100,000. To accept petitioner's position, we would have to find that such preferred stock had a value of $ 652,180. 7 We find it difficult to believe 26 that stock worth $ 652,180 would be redeemable for only $ 100,000. Although petitioner maintains that the conversion privilege that accompanied the series B preferred stock was of considerable value, the record clearly shows that the 966 conversion privilege could not account for this discrepancy. At the time of sale, 345,000 shares of petitioner's common stock were outstanding and another 40,000 had been subscribed, while the series B preferred stock issued to Ferroxcube was only convertible into 22,500 shares of common stock. Moreover, if anything, the record indicates that at the time of the sale 22,500 shares of petitioner's common stock were worth considerably less than the $ 50,000 redemption price of the series B preferred stock issued to Ferroxcube.Petitioner contends that Pittsburgh Terminal Corp. is not distinguishable from the instant case because as long as the preferred stock issued to Ferroxcube is outstanding, 27 the restrictions placed upon petitioner's common stock under the purchase agreement render such stock valueless, and, therefore, for all practical purposes the preferred stock was petitioner's only outstanding stock. This argument is untenable. Regardless of the restrictions, petitioner's common stock was the only stock that had the right to vote. While the purchase agreement restricted the payment of dividends or the distribution of property to the common stockholders, it did not totally prohibit such distributions but simply set forth conditions that had to be satisfied prior thereto. Moreover, the fact remains that petitioner, who was controlled by the shareholders of its common stock, had the right to redeem all of the preferred stock issued to Ferroxcube for only $ 100,000.Finally, petitioner argues that it negotiated a purchase of the assets of Ferroxcube's Memory Systems Division at the book value of those assets to Ferroxcube, but used the appraised fair market value of those assets as the cost basis therefor even though that amount was substantially less than the negotiated purchase price, that is, the book value. Therefore, petitioner insists that the cost of the assets 28 that it purchased is at least equal to the fair market value of those assets. We, however, are unable to find anything in the record that establishes that the parties negotiated a sale at book value. Significantly, petitioner failed to produce any evidence whatsoever with respect to the negotiations. Nor did petitioner present any evidence that would indicate what Ferroxcube believed the preferred stock was worth or what value Ferroxcube assigned to the preferred stock for tax purposes. Indeed, 967 there is absolutely no evidence in the record with respect to Ferroxcube's treatment of this transaction.In conclusion, under the circumstances presented herein we are not required to use the barter-equation method of valuation to value the preferred stock that petitioner issued to Ferroxcube. In Seas Shipping Co. v. Commissioner, 371 F.2d 528">371 F.2d 528, 529 (2d Cir. 1967), affg. a Memorandum Opinion of this Court, the Court of Appeals stated as follows:There are obvious dangers in evaluating the consideration involved in one side of a barter by determining the worth of the consideration of the other side. In the first place, the two sides of the barter may, for various reasons, not be equal in 29 value. * * * [Emphasis added.]On the basis of the record, we must conclude that this is such a case. See C. G. Meaker & Co. v. Commissioner, supra.Although petitioner has asserted that the value of the preferred stock is not ascertainable, respondent has valued such stock and petitioner has not offered any evidence to rebut that valuation aside from the use of the barter-equation method. Since we have rejected the use of this method of valuation in the instant case, we find that petitioner has failed to meet its burden of proof and sustain respondent's determination. See Rule 142(a), Tax Court Rules of Practice and Procedure. We have considered all of petitioner's other arguments and found them unpersuasive.To reflect the foregoing,Decision will be entered under Rule 155. Footnotes*. This case was submitted fully stipulated to Judge Sheldon V. Ekman, who died on Jan. 18, 1982. It was reassigned to Judge Lapsley W. Hamblen, Jr., for disposition by order of the Chief Judge.↩1. Respondent has conceded that the assets had a fair market value equal to that determined pursuant to the appraisal by Marshall & Stevens, Inc.↩2. The purchase price was apportioned among the assets according to their relative fair market value as determined pursuant to the appraisal by Marshall & Stevens, Inc.↩3. Petitioner has conceded that the going-concern value of assets it purchased from Ferroxcube was $ 8,100.↩4. Such a transaction is treated differently because under sec. 1032, I.R.C. 1954, a corporation does not realize any gain or loss when it purchases property with its own stock. See Pittsburgh Terminal Corp. v. Commissioner, 60 T.C. 80">60 T.C. 80, 87-88↩ (1973), affd. per order (3d Cir. 1974).5. Unfortunately, the record does not indicate why Ferroxcube was unable to find another buyer.↩6. On brief, petitioner has attempted to equate the term salvage value as used in the stipulation of facts with the fair market value of the assets received from Ferroxcube, arguing that the sale Ferroxcube made to petitioner constituted a disposition of those assets for their salvage value. Not only is this argument farfetched, but it is wholly unsupported by the record.↩7. This figure represents the difference between the consideration paid by petitioner attributable to the cash and promissory note ($ 228,000) and the fair market value of the assets received by petitioner, including the going-concern value of those assets ($ 880,180).↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624038/	Sidney Stark and Sadie Stark, Petitioners, v. Commissioner of Internal Revenue, RespondentStark v. CommissionerDocket No. 57701United States Tax Court29 T.C. 122; 1957 U.S. Tax Ct. LEXIS 52; October 28, 1957, Filed 52 Decision will be entered under Rule 50. Petitioner Sidney Stark, in the taxable years 1948 and 1949, was the principal stockholder of Penn Overall Supply Company, Inc., and in such years he received distributions from such corporation, none of which he reported as taxable income. The corporation, in March 1957, filed a stipulation with the Tax Court agreeing to certain deficiencies for 1946 to 1949, inclusive, and certain additions to the tax under section 293 (b), I. R. C. 1939. Decision has been entered in 1957 determining these deficiencies and additions to tax in accordance with the agreement of the parties. Held, in determining the amount of earnings and profits of Penn Overall Supply Company, Inc., available for distribution to petitioner as dividends in the respective taxable years when such distributions were made to him, the interest due by Penn Overall on such deficiencies is to be accrued ratably by it in each year as it became due. Sidney B. Gambill, Esq., for the petitioners.George J. Rabil, Esq., for the respondent. Black, Judge. BLACK 122 OPINION.The Commissioner has determined deficiencies and additions to the tax for fraud, as follows: 53 DeficienciesAdditions to theYearintax, sec. 293(b),income taxI. R. C. 19391948$ 67,382.96$ 33,691.48194984,878.3842,439.19The deficiency for 1948 is due principally to one adjustment. That adjustment is "(a) Dividends $ 109,875.53." The deficiency notice explains that adjustment as follows:(a) It is determined that the amount of $ 109,875.53, as detailed in the following, represents checks and/or cash diverted to the personal use of the taxpayer and fully taxable as dividend income: [Here follows a statement of checks and cash which were the property of Penn Overall Supply Company, Inc., which were paid to Sidney Stark and which aggregate $ 109,875.53 in the year 1948.]The deficiency for 1949 is due mainly to a similar adjustment as above, viz, "(a) Dividends $ 134,687.94." The deficiency notice explains the adjustment in the same manner as the similar adjustment for 1948 was explained.The assignment of error as to 1948 is as follows:(a) The respondent erred in determining that $ 109,875.53 received by the petitioner, Sidney Stark, as a dividend from Penn Overall Supply Company constituted taxable income.123 A similar assignment of 54 error, except as to amount, is made for the year 1949.Respondent in an amended answer asks for increased deficiencies in income tax for the taxable years 1948 and 1949 in the respective amounts of $ 6,997.56 and $ 8,238.28, and for increased additions to the tax under section 293 (b) of the 1939 Code for the taxable years 1948 and 1949 in the respective amounts of $ 3,498.78 and $ 4,119.14.All the facts have been stipulated and the stipulation of facts is incorporated by reference.The following is a summary of the facts deemed to be necessary for a decision of the issues which we have here to decide.The petitioners are husband and wife having an office in Pittsburgh, Pennsylvania. They filed timely joint Federal income tax returns for the calendar years 1948 and 1949 with the collector of internal revenue for the twenty-third collection district of Pennsylvania. They kept their books and filed their tax returns on the cash receipts and disbursements method and on a calendar year basis.Penn Overall Supply Company, Inc. (hereinafter sometimes referred to as Penn Overall), was incorporated under the laws of the Commonwealth of Pennsylvania in 1931. Since its incorporation it has55 conducted an industrial laundry business in Pittsburgh and surrounding territory. Its business has consisted principally of cleaning and supplying overalls, coveralls, towels, and wiping cloths. Penn Overall, for all periods material hereto, kept its books and filed its Federal income tax returns on a calendar year basis and on an accrual method of accounting.In April 1940, Sidney Stark, hereinafter sometimes referred to as petitioner or Sidney, one of the petitioners herein, became a shareholder of Penn Overall and at that time was elected vice president and treasurer. The outstanding stock of Penn Overall, after Sidney's acquisition, was owned by him, Sam Kalb, and American Coat & Apron Supply Company, a corporation, each owning approximately one-third.During the year 1947, Sidney purchased all of the outstanding stock of Sam Kalb; and Sidney's sons, William Stark and J. Karl Stark, purchased all of the Penn Overall stock owned by American Coat & Apron Supply Company.The stockholdings in Penn Overall remained in effect from January 30, 1947, through the taxable year ended December 31, 1949. Immediately after January 30, 1947, Sidney was elected president; William Stark, Sidney's56 son, was elected vice president; and J. Karl Stark, also Sidney's son, was elected secretary and treasurer. Those individuals were also elected directors of the corporation and have since comprised the corporation's board of directors. During the 124 taxable years 1948 and 1949, Sidney controlled the activities of Penn Overall.In the case of Penn Overall Supply Company, Inc., Docket No. 57696, the parties, simultaneously with the filing of the stipulation of facts in the present proceeding, filed with the Court a stipulation of settlement setting forth the following deficiencies and additions to the tax, as follows:DeficienciesAdditions to theYearintax, sec. 293(b),income taxI. R. C. 19391946$ 6,250.60$ 3,125.30194728,319.5917,018.87194817,618.9137,158.53194912,934.086,467.04The deficiencies and additions to tax shown in the foregoing stipulation arose largely by reason of diversions of income of Penn Overall to Sidney. The Tax Court entered its decision in accordance with the stipulation of the parties, March 29, 1957.The following schedules show the amounts of unreported income of Penn Overall for the calendar years57 1948 and 1949, which were diverted to Sidney and George Kalb, determined on the accrual method of accounting, and the amounts of unreported income received by Sidney from Penn Overall for his use and benefit, determined on the cash receipts and disbursements method of accounting:Unreported Income of Penn Overall on Accrual Method of AccountingYearAmount1948$ 159,363.86194981,685.48Amount of Diverted Corporate Income Received by Sidney Stark, Computedon the Cash Receipts and Disbursements Method of AccountingYearAmount1948$ 122,275.531949147,310.44Of the unreported distributions of $ 122,275.53 in 1948, $ 35,286.63 pertained to funds diverted from Penn Overall during 1947 and it is agreed that such funds are fully taxable. The remainder of the funds, namely, $ 86,988.90, pertained to funds diverted from Penn Overall during 1948.Of the unreported distributions of $ 147,310.44 in 1949, $ 3,500 pertained to funds diverted from Penn Overall during 1947 and it is agreed that this amount is fully taxable; $ 65,624.96 pertained to funds diverted from Penn Overall during 1948; and $ 78,185.48 pertained to funds diverted from Penn58 Overall during 1949.The accumulated earnings of Penn Overall at the beginning of 1946 (accumulated since March 1913) and the earnings of the corporation 125 for the calendar years 1946, 1947, 1948, and 1949, without regard to any deductions for additions to tax or interest on deficiencies stipulated in the case of Penn Overall and upon which decision (regarding such deficiencies and additions to tax) has already been entered, were as follows:19461947Accumulated earnings at Jan. 1, 1946$ 29,800.51 Corrected taxable net income for year31,719.09 $ 99,533.29 Less:Corrected Federal income tax8,851.55 37,546.40 Life insurance premiums on lives of officers3,564.50 3,037.50 Capital gains adjustment384.79 Disallowed advertising expenses484.00 453.00 Disallowed selling expenses1,297.00 450.00 Unallowable contributions1,821.27 Disallowed automobile expense1,725.21 Balance, current year's earnings15,315.98 56,321.18 Less:Regular dividends paid4,410.00 4,310.00 Corporate income diverted to shareholders19,660.43 61,469.88 Balance -- without regard to beginningearned surplus(8,754.45)(9,458.70)59 19481949Accumulated earnings at Jan. 1, 1946Corrected taxable net income for year$ 208,387.62 $ 156,611.62Less:Corrected Federal income tax79,187.30 59,396.02Life insurance premiums on lives of officers3,007.00 3,404.00Capital gains adjustmentDisallowed advertising expenses492.70 895.08Disallowed selling expenses1,100.00 1,210.00Unallowable contributionsDisallowed automobile expense3,738.27 3,265.63Balance, current year's earnings120,862.35 88,440.89Less:Regular dividends paid6,565.00 6,315.00Corporate income diverted to shareholders159,363.86 81,685.48Balance -- without regard to beginningearned surplus(45,066.51)440.41A part of the deficiency in income taxes due from the petitioners for each of the taxable years ended December 31, 1948 and 1949, was due to fraud with intent to evade and defeat tax on the part of Sidney, one of the petitioners. There was no fraud or intent to evade and defeat tax on the part of Sadie Stark, the other petitioner. However, it is agreed that both petitioners are jointly and severally liable for the payment of any deficiencies and additions to tax which60 may be due and owing.Sidney's stock had a cost to him in excess of $ 125,000.Penn Overall's original returns for the taxable years 1946, 1947, 1948, and 1949 were filed on March 15, 1947, 1948, 1949, and June 15, 1950, respectively (the 1949 return having been filed pursuant to an extension).Some more or less minor issues raised by the pleadings have been settled by the stipulation of the parties. The settlement of these adjustments will be given effect under Rule 50.Petitioner Sidney Stark, a shareholder of Penn Overall, diverted funds of Penn Overall in 1948 and 1949. The funds diverted constitute distributions from Penn Overall to Sidney. These distributions are dividends and taxable as ordinary income to the extent of the earnings and profits of Penn Overall. This much Sidney concedes. The problem here involves a determination of the earnings and profits of Penn Overall. The parties have stipulated the amounts representing Penn Overall's accumulated earnings and profits at January 1, 1946, 126 and its current earnings and profits without regard to deductions for additions to the tax for fraud or interest on deficiencies for the years 1946 to 1949, inclusive.At61 the time of the hearing of this proceeding two issues remained unsettled after the filing of the stipulation. Those two issues were:(1) Should additions to tax for fraud from the time fraudulent corporate returns are filed be accrued as deductions in computing the corporation's accumulated and current earnings for the purpose of determining the portions of distributions to a shareholder which are returns of capital and which are taxable as ordinary dividends?(2) Whether, in determining the amounts of corporate earnings and profits available for dividends in any taxable year, interest on deficiencies determined in 1957 but for prior taxable years 1946 to 1949, inclusive, should be annually accrued even though these deficiencies are litigated subsequent to the ends of the taxable years involved, as petitioners contend, or whether none of the interest on such deficiencies can be accrued against earnings and profits until the litigation is finally determined, as the Commissioner contends?Issue 1 named above was decided by us in favor of the contentions now being made by the petitioners in Estate of Esther M. Stein, 25 T. C. 940, on appeal (C. A. 2). 62 The Commissioner acquiesced in that decision insofar as the accrual of additions to tax for fraud were involved. See Rev. Rul. 57-332, 1957-2 C. B. 231. The Commissioner in his brief now concedes that he erred as to the time of accrual of the additions to tax under section 293 (b), I. R. C. 1939. Following this concession by respondent and our decision in the Stein case, supra, issue 1 is decided in favor of petitioners.This leaves for our decision issue 2. Both parties state that this issue is one of first impression. Respondent cites several cases in which it has been held that interest owing by a taxpayer, who has been contesting his liability for deficiencies for tax, can only be accrued as income tax deductions in the year when the litigation or contest has been concluded and that the taxpayer cannot relate the deductions back to other years. Respondent cites in support of his contention such cases as H. E. Harman Coal Corporation, 16 T. C. 787, and Lehigh Valley Railroad Co., 12 T.C. 977">12 T. C. 977. These cases do support respondent's contention as to the accrual of interest63 on contested deficiencies when it comes to taking the interest as a deduction in determining net taxable income. But that is not the question we have here to decide. If we had Penn Overall before us claiming a deduction for income tax purposes of interest on the deficiencies which have been determined by us in our decision entered March 29, 1957, we would undoubtedly hold under the two above-cited cases and others 127 of like import that all the interest on such deficiencies accrued in 1957. However, that is not the question which we have before us.The question that we have to decide is when the interest on these deficiencies should be accrued for the purpose of computing the accumulated and current earnings and profits of Penn Overall for the purpose of determining what portion of conceded distributions to petitioner Sidney Stark is out of earnings and what portion is out of capital. That, of course, is an entirely different question from the question as to what year the interest would be accruable for the purpose of determining the taxable net income of the corporation. Petitioners earnestly contend that the interest on these deficiencies for the purpose of determining64 net profits available for distribution accrues ratably in each year and should be so treated by the Commissioner. On the other hand, as we have already stated, respondent contends that for the purpose stated the year of accrual for the entire amount of interest due on such deficiencies should be 1957, the year when our decision was entered which definitely determined the amounts of deficiencies against Penn Overall for 1946 to 1949, inclusive.We think our decision in Estate of Esther M. Stein, supra, throws light on what our decision on the issue should be. In that case we said (25 T. C. at 966):Here, * * it is important to calculate earnings and profits which "show the true financial status of an accrual basis taxpayer" in order that distributions which actually impair capital will not be taxed as dividends. To accomplish this the accrual basis taxpayer's true tax liability must be considered, whether or not such taxpayer is aware of, or agrees to, such liability.* * * clearly earnings and profits will only "show the true financial status of an accrual basis taxpayer" where additions to the tax (such as that for 65 fraud) for which the taxpayer is actually liable at the time of the computation (though the taxpayer does not concede liability) are also reflected in the computation. * We must next determine when an accrual basis taxpayer's liability for a fraud addition first arises, since that is the time it "accrues" (whether or not contested) for purposes of computing earnings and profits. We think such liability arises when all the events determining it have occurred, [citing cases]. * Here, we must determine when the liability for interest arises. The liability for the total amount of interest on the deficiency, unlike the additions for fraud, does not arise at a particular point of time. Interest on indebtedness means compensation for the use or forbearance of money. See Deputy v. duPont, 308 U.S. 488">308 U.S. 488, 498 (1940). It accumulates (at a certain rate, here 6 per cent per annum) over the period of use or forbearance of the money. "To a taxpayer on the accrual basis interest accrues ratably and the date of payment is immaterial." J. B. Jemison, 18 B. T. A. 399, 404 (1929).128 Applied to the facts here involved, 66 Penn Overall, in computing its earnings and profits, should deduct at the end of each year the interest accumulated and accrued during that year. For example, there is a deficiency in Penn Overall's 1946 tax which became due in 1947. In computing the earnings and profits at the end of 1947, it, being on an accrual basis, must deduct the interest accrued from the due date of the tax until the end of the year. In computing the earnings and profits at the end of 1948, it would deduct the interest accrued from the beginning of the year until the end of the year, etc. Such, as we understand it, is petitioner's argument and we agree with it.As we have stated, we understand that the petitioner is contending that the interest should be ratably accrued and not that it should be accrued in one lump sum in the year for which the deficiency is imposed. Any contention based on the latter is answered by what we said in Stein, supra, when, commenting on the taxpayer's contention that the addition to the tax for fraud should be accrued in the same year as the deficiency, rather than the year in which the fraudulent act was committed, viz, the year in which the67 fraudulent return was filed, we said (25 T. C. at 967): "Since the fraudulent act is not committed until the return is filed, approving petitioners' contention would result in accrual of the fraud addition retroactively (to the end of the preceding year). That, we think, cannot be done."The respondent argues that a double deduction from earnings and profits will result if a deduction in computing earnings and profits is allowed prior to the deduction in computing net income, which, in the instant case, would be 1957. We disagree. It has been recognized that earnings and profits in the tax sense do not necessarily correspond to taxable income nor do they necessarily follow corporate accounting concepts. See Commissioner v. Wheeler, 324 U.S. 542">324 U.S. 542, 546 (1945).In line with what we have said above, our holding on this issue as to when interest should be accrued on the deficiencies of Penn Overall for 1946 to 1949, inclusive, for the purpose of determining earnings and profits of Penn Overall available for dividend distribution to its stockholders, including petitioner, is that the interest should be accrued ratably each*68 year as it became due. The date of Penn Overall's actual accrual of the interest for purposes of determining net taxable income, following our decision of March 29, 1957, in our judgment, has nothing to do with the issue we have here. It is immaterial.Decision will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624041/	Dr. P. Phillips Canning Company, Petitioner, v. Commissioner of Internal Revenue, RespondentDr. P. Phillips Canning Co. v. CommissionerDocket Nos. 7676, 27699United States Tax Court17 T.C. 1222; 1952 U.S. Tax Ct. LEXIS 287; January 24, 1952, Promulgated 287 Decisions will be entered for the respondent. 1. Excess Profits Tax -- Relief under Section 722 -- Section 722 (b) (1) -- Interruption of Normal Operation -- Future Delivery Contracts. -- A canner of citrus products which entered into contracts calling for the future delivery of its products for a stated price and permitting the buyers to cancel in the event they could obtain, before the contract time of delivery, the same product elsewhere at a lower price which the petitioner then failed to meet, does not qualify for relief under section 722 where the market declined, the taxpayer failed to meet the competitive price, and the buyers refused delivery after which the taxpayer sold at a loss, inasmuch as the contracts did not interrupt or diminish the taxpayer's production, output or operation within the meaning of section 722 (b) (1).2. Excess Profits Tax -- Relief under Section 722 -- Section 722 (b) (2) -- Temporary Economic Circumstances -- Future Delivery Contracts. -- Nor does the taxpayer under those conditions qualify for relief under section 722 (b) (2) inasmuch as the contracts were not temporary economic circumstances within the meaning of section 722 (b) (2).3. 288 Excess Profits Tax -- Relief under Section 722 -- Constructive Average Base Period Net Income -- Post-December 31, 1939, Events. -- The taxpayer gains no relief under section 722 in connection with its citrus oil business where the only evidence on which to base constructive average base period net income relates to events and conditions occurring after December 31, 1939.4. Excess Profits Tax -- Relief under Section 722 -- Constructive Average Base Period Net Income. -- The taxpayer is denied relief under section 722 (a) based upon section 722 (b) (4) since the only evidence of the earnings of its dairy feed business pertains to gross profits which does not show what would be a fair and just amount representing normal net earnings; since it has not shown constructive income for the first year of its base period, during which it was not in existence, in excess of the amount allowed by the Commissioner under section 713 (d) (2) (A); and since its reconstruction for another year would eliminate an alleged loss, for which elimination no authority appears. George E. H. Goodner, Esq., and Dewey R. Roark, Jr., Esq., for the petitioner.Roy A. Wentz, Esq., for the respondent. Murdock, Judge. MURDOCK 1223 The Commissioner denied applications for relief under section 722 for the fiscal years ended June 30, 1941, 1942, 1943, and 1944 and the only issue for decision is whether he erred in so doing.FINDINGS OF FACT.The petitioner was incorporated under the laws of Delaware on September 20, 1937, to engage in the business of canning citrus fruits. It kept its books and filed its returns on an accural basis and by fiscal years ending June 30. The petitioner took over the business, equipment, and assets of the canning division of Dr. P. Phillips Company. It began business on October 1, 1937. The manager of the canning division became vice president and manager of the petitioner.The canning methods used by Dr. P. Phillips Company originally discarded as waste the fruit peelings, the seeds and the 290 rag or membranes that had separated the inside segments of the fruit. Disposition of the waste material was expensive. Processes were eventually 1224 developed whereby citrus oils were extracted from the peelings and the waste was converted into dairy feed.The first United States production of dairy feed from citrus pulp occurred about 1937 and involved drying the pulp over an open fire. Dr. P. Phillips Company in about 1936 or 1937 experimented with a steam drying process which rendered the feed more palatable than the open fire method. The petitioner continued the experiment and became, in the fiscal year ended June 30, 1938, the first commercial producer of steam-dried feed. It thereafter had a ready market for all of the feed that it could produce.The petitioner processed its own citrus pulp residue and in addition purchased pulp elsewhere in the fiscal year 1939. It had to haul the purchased pulp a long distance to its own plant and as a result lost money on that part of its business.The petitioner's production of citrus oils from fruit peelings stemmed from the belief that it could compete successfully with oil imports. Some initial difficulties were encountered291 in competing against imported oils but those were overcome. There was some oil in inventory on June 30, 1938, and minor sales may have been made prior to December 31, 1939. The petitioner started processing and selling the oil commercially at sometime during the fiscal year ended June 30, 1940. No profit was realized on oils prior to June 30, 1940, but eventually the business was successful.Dr. P. Phillips Company sold its canned fruit as produced, making delivery within fifteen to thirty days of a sale. It did not maintain a great deal of inventory. The petitioner entered into contracts in the fall of 1937 to sell 480,000 cases of citrus products, which was all or most of its pack for the fiscal year 1938. The contracts were made in advance of actual canning and called for delivery of one-third when the canning occurred, one-third by April 1, 1938, and the remaining one-third by June 1, 1938. The contracts further provided that if the buyer was able to purchase the same product, before the contract date of any shipment, at a lower net cost than the contract cost, then the petitioner would have to meet the lowered cost or permit the buyer to cancel that part of the contract. 292 Those were the only contracts of that type that the petitioner ever made. The market declined and the customers refused to take delivery at the contract prices of all but 48,000 cases. The balance was sold at a loss.The net income or (loss) of the petitioner for each of its taxable years during the base period was as follows:Fiscal yearNetEnded June 30Income10/1/37-6/30/38$ 4,855.59 1939(43,181.12)194074,702.06 1225 The excess profits credits allowed by the Commissioner were as follows:Fiscal yearExcess profitsEnded June 30credit allowed1941$ 20,419.91194223,542.85194329,572.08194439,163.46The credits for 1941, 1942, and 1943 were based upon the actual income or loss of the taxpayer for its fiscal years 1938, 1939, and 1940, and $ 17,643.41, computed under section 713 (d) (2), for the fiscal year 1937, during which the taxpayer was not in existence. The credit for 1944 was based upon invested capital.The applications for relief for all years made claims under subsections (1), (2), (3) (B), and (4) of section 722 (b).The reasons given in substantiation of the claims for 1941 and 1942 included the alleged293 loss under the contracts for the future delivery of 480,000 cases of canned fruit, and the development of a feed product from citrus pulp waste material. No reference was made in those claims to the development of a citrus oil product. No claim was made that the petitioner qualified for the application of the "push-back" rule.The reasons given in the claims for 1943 and 1944 were the same as those given for the earlier years and in addition the development of citrus oil products during the base period and the use of the "push-back" rule.The Commissioner denied all of the applications for relief from excess profits taxes.The stipulation of facts and the attached exhibits are incorporated herein by this reference.OPINION.One of the arguments which the petitioner makes to support its claims for relief is that it suffered losses in 1938 and 1939 and failed to realize profits in its fiscal year 1938, the first year of its existence, as a result of entering into contracts for the future delivery of 480,000 cases of citrus products. Apparently all or the larger part of its total production for that year was covered by the contracts. One-third of each order was to be delivered as294 soon as the product had been canned, another one-third was to be delivered on April 1, 1938, and the remaining one-third was to be delivered on June 1, 1938. It says that it expected to make 15 cents a case, or $ 72,000, under those contracts if the contract price had been paid. However, the contracts further provided, in effect, that if market prices had declined at the date of any delivery under the contract, the purchaser could cancel 1226 that portion of the contract unless the petitioner met the then current market price. Prices declined and the purchasers took at the contract prices only 10 per cent of the goods contracted for. The petitioner then had to sell the remaining goods as best it could and it sustained losses, the exact amount of which is not known. The petitioner contends that section 722 (b) (1) or (b) (2) applies.The Court finds no merit in the petitioner's arguments based upon these contracts. The contracts may have been bad bargains but there is no showing of how the petitioner could have avoided losses on the falling market which existed or what the result of its operations might have been had it had no such contracts. The petitioner does not contend295 that the decline in market prices depressed business within the meaning of section 722 (b) (2). The contracts were not "temporary economic circumstances." They had no effect upon production or output. They did not interrupt or diminish the normal operation of the business. Not every unusual event qualifies a taxpayer for relief under section 722 but only those described in (b). The petitioner describes the loss as "abnormal." The statute provides for an adjustment for abnormal deductions in section 711 (b) (1) (J), but such adjustments do not come within the relief granted by section 722, which is the only issue before the Court at this time. The petitioner has not demonstrated that it qualifies for relief under section 722 (b) (1) or (2) stemming from these contracts.The petitioner contends that it qualifies for relief under section 722 (b) (4) because it changed the character of its business during the base period and the average base period net income does not reflect the normal operation for the entire base period. 1 It began to use waste materials during the base period, first to make a dairy feed, and, near the close of the period, to make citrus oils. Formerly, disposition296 of those waste materials was an expensive step in the canning business. That expense was eliminated and some gross profits resulted from the sale of the new by-products. The operation after the two changes were made was, first, the processing of the fruit to obtain the sections and juice for canning, next, the processing of the peelings to obtain the citrus oils and, finally, the peelings, seeds and rag were chopped and steam-dried to produce the dairy feed. Commercial sales of dairy feed were made by the petitioner in its fiscal year 1938 and subsequent years. Its first commercial sales of citrus oil were made in its fiscal year 1940. The petitioner argues that the manufacture and sale of these two by-products represented a change in the operation of 1227 its business or a difference in the products furnished within the meaning of section 722 (b) (4).297 Assuming, for the purpose of discussion, that the petitioner has qualified for relief under section 722 (b) (4) as it contends, the next question is whether it has shown what would be a fair and just amount representing normal earnings, taking the change into consideration, to be used as constructive average base period net income. It argues that the annual profits from each by-product would have amounted to $ 10,000, but the competent evidence does not support that contention. No sales of citrus oil prior to January 1, 1940, have been shown. The only evidence of probable earnings from the sale of the oil is the testimony of a witness who based his estimate on sales made after December 31, 1939. There is an express provision in section 722 (a) that no regard shall be had to such events in determining constructive average base period net income. The Court is without competent evidence on which to base an estimate of the possible effect of the oil sales on constructive average base period net income.There were normal sales of the dairy feed during the fiscal years 1938, 1939, and 1940, prior to December 31, 1939. This part of the business, apparently reached its normal earning298 level in 1938. The only adjustments to base period net income which the taxpayer seeks in this connection is to add $ 10,000 to 1937 income and $ 8,000 to 1939 income. Its only basis for such adjustments is the testimony of a witness who said that the "gross" profits from the feed sales had amounted to about $ 10,000 in 1938 and probably would have amounted to $ 10,000 in 1939 had the petitioner not adopted the unprofitable practice of buying waste from another canner and hauling it at considerable expense to the petitioner's plant. The record does not show the net earnings from the feed business for any year. The Court could certainly not conclude that the net earnings from feed would be $ 10,000 from the testimony that such sales had resulted in gross income of that amount. Furthermore, the adjustment which the petitioner seeks for 1937 is obviously incorrect. The petitioner was not in existence during that year and had no income. Instead, the Commissioner has computed a purely statutory amount to represent income for that year. The amount is not based upon and is not affected by income and is larger than the $ 10,000 which the petitioner seeks. It is not suggested that299 there is authority for combining the two. The claimed adustment for 1939 is merely the elimination of an alleged loss resulting from the petitioner's attempt to process the waste of another company. The actual amount of the alleged loss is not shown. Here again, it must be pointed out that the relief here claimed under section 722 (b) (4) does not include the elimination of abnormal deductions which might come under section 711 (b) (1) (J).1228 It is not necessary to decide whether the changes represented changes in the business within the meaning of section 722 (b) (4), the extent to which the contentions now made under the section are within the claims filed, or to what extent the "push-back" rule might be applicable to the oil sales, since it appears that no relief would result in any event.Decisions will be entered for the respondent. Footnotes1. The petitioner does not claim that it qualifies for relief under section 722 (b) (4) because it began business during the base period. The Commissioner has computed constructive income for the part of the base period during which the petitioner was not in existence. The amount which he has computed is not based upon income but upon the daily invested capital for the first day of the taxpayer's first taxable year beginning after December 31, 1939, in accordance with section 713 (d) (2) (A).↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624042/	MARCEL L. MALGOIRE AND MARGUERITE C. MALGOIRE, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent GEORGE J. COCORES AND MARCIA COCORES, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentMalgoire v. CommissionerDocket Nos. 4688-75, 5477-75.United States Tax CourtT.C. Memo 1978-29; 1978 Tax Ct. Memo LEXIS 485; 37 T.C.M. (CCH) 175; T.C.M. (RIA) 780029; January 24, 1978, Filed 485 A liquor store business was sold for $90,000. In the sales agreement, among other things, $20,000 was allocated to a covenant not to compete and $10,000 to goodwill. Held, seller has failed to show by strong proof that the assignment of consideration to the covenant by the agreement lacked economic reality or that it would have been unreasonable for the purchaser to have required the covenant. Thus, purchaser is entitled to amortize the cost of the covenant and the seller has ordinary income on its sale. Donald G. Daiker and Alan K. Farber for the petitioners. Rebecca T. Hill, for the respondent. IRWINMEMORANDUM FINDINGS OF FACT AND OPINION IRWIN, Judge: In these consolidated proceedings respondent determined deficiencies in petitioners' income taxes for the calendar year 1972, as follows: Docket No.PetitionerDeficiency4688-75Marcel L. Malgoire and Marguerite$4,144C. Malgoire5477-75George J. Cocores and Marcia474CocoresThe only issue presented for our consideration is whether $20,000 of the $90,000 sales price of a business sold by Marcel L. Malogoire (hereafter Malgoire) to George J. Cocores486 (hereafter Cocores) in 1972 was paid for a covenant not to compete, as recited in the written sales agreement, or was paid for goodwill. Malgoire reported the amounts he received as capital gain while Cocores claimed the $20,000 (amortized over five years) as deductions against ordinary income as payments for a covenant not to compete. Respondent, taking an inconsistent position in order to protect the revenue, determined that the $20,000 was taxable as ordinary income to the seller Malgoire, and also that it was not deductible by the buyer, Cocores. Respondent takes the position here that the covenant not to compete is valid. FINDINGS OF FACT Some of the facts have been stipulated. The stipulation of facts together with the exhibits attached thereto are incorporated herein by this reference. Petitioners Marcel L. Malgoire and Marguerite C. Malgoire, husband and wife, were legal residents of Woodside, Calif., at the time their petition herein was filed. They filed a joint income tax return for the taxable year 1972 with the District Director of Internal Revenue, San Francisco, Calif.Petitioners George J. Cocores and Marcia Corcores, husband and wife, were legal residents487 of Redwood City, Calif., at the time their petition herein was filed. They filed a joint income tax return for the taxable year 1972 with the District Director of Internal Revenue, San Francisco, Calif.Prior to 1963, Malgoire worked for the Government, until a heart attack forced him from his position. At that time, he decided to open a small business. Some friends told him of a liquor store, the Brown Jug, for sale in Woodside, Calif., which he then bought for approximately $39,237 plus $6,800 for the store's inventory. At the time of purchase, the Brown Jug had gross sales of about $80,000 to $90,000. The business was run as a mom and pop store. Woodside was a small, residential community which discouraged further commercial development. Malgoire built substantial goodwill in the store due to the type of service he rendered as well as to the length of time he had been in the business. Indeed, developing good personal relationships with the customers and providing them with excellent service was a major factor in the business increasing its annual gross sales to approximately $230,000 at the time of sale. In 1971, Malgoire, then 57 years old, decided to sell the store488 due to family pressures (his children were no longer willing to help in the store and his wife wanted to retire) and health reasons. Cocores was told that Malgoire and his wife wanted to retire but was unaware of Malgoire's health problems. On August 8, 1972, Malgoire and Cocores entered into a sales agreement for the sale for $90,000 of the Brown Jug. The agreement allocated the price as follows: (a) stock-in-trade (estimate) - $20,000; (b) fixtures and equipment - $8,000; (c) trade name and goodwill - $10,000; (d) alcoholic beverage license - $32,000; (e) covenant not to compete - $20,000. Negotiations were begun in July 1972 between Malgoire and Cocores for the sale of the Brown Jug and were conducted over a series of three or four meetings and several letters and phone calls were exchanged between the two. After agreeing on a purchase price of $90,000 (but before any allocation of the price to any assets other than inventory), Malgoire and Cocores decided to hire an attorney to handle the transaction for them and to split his fee equally. They agreed to hire Harold Francis, an attorney recommended to Cocores by friengo, rather than Malogire's attorney because of the low fee489 charged by Francis. Malgoire's attorney told Malgoire that it was all right for Francis to represent him and Cocores. At the first meeting Cocores and Malgoire had with Francis, a fee was agreed upon and Francis stated he would begin obtaining the necessary documents from the Alcohol Beverage Board. The testimony is conflicting as to whether some of the $70,000 purchase price ($90,000 less $20,000 inventory) was allocated among the license, fixtures, and goodwill prior to this first meeting, but at or prior to the second meeting, both parties agreed that $8,000 was to be allocated to the fixtures and $32,000 to the license, leaving $30,000 to be allocated to goodwill. Not until the second meeting with Francis was a covenant not to compete brought up by Cocores. Beginning with an allocation of $5,000 for a time span of two years, and a request by Cocores that it last for eight years, the parties finally agreed to allocate $20,000 to the covenant, which was to run for five years. The remaining $10,000 was then allocated to goodwill. Cocores requested the covenant because he felt he needed protection from competition by Malgoire, not wanting to rely solely on Malgoire's statements490 that he wanted to retire. Cocores was well aware of the tax consequences of the covenant prior to raising it as an issue. Although the tax consequences were explained to Malgoire, and Francis suggested Malgoire might wish to see a tax attorney or C.P.A., Malgoire never understood that he would pay tax at ordinary income rates as opposed to capital gain rates. Both parties, of course, knew the legal (non-tax) consequences of the covenant. OPINION The issue for our decision is whether the $20,000 allocated to a covenant not to compete in the contract of sale between Malgoire and Cocores should be upheld, as claimed by the purchaser and respondent, or should be allocated instead to goodwill, as claimed by the seller. It has long been held that when the parties to a transaction such as the one here have specifically entered into an agreement not to compete and have therein stated the consideration therefor, strong proof must be adduced by them to overcome that declaration. , affg. ; ; .491 It is without dispute that Malgoire agreed to Cocores' request for the covenant not to compete. However, Malgoire claims that the covenant had no independent significance or economic reality. Although Cocores and Amlgoire agreed to an overall purchase price of $90,000 (including inventory) prior to any mention of a covenant not to compete, such an allocation may nonetheless be effective. ; ; . The question is properly whether the parties intended to allocate a portion of the purchase price to such covenant at the time they executed the formal sales agreement. , quoting , and . We do not believe that the agreement not to compete lacked economic reality. Although Malgoire, at age 57, told Cocores he intended to retire (and in fact did so), in view of the importance of personal service to the492 business and Malgoire's outstanding reputation in the community, and the fact that Malgoire's personal efforts contributed significantly to the growth of his business, we cannot conclude that it would have been unreasonable for Cocores to have required an agreement not to compete. Cf. , affg. ; ; Malgoire, with the advice of counsel, agreed to the inclusion of the covenant not to compete in the sales agreement. Although Malgoire never understood the tax consequences of the allocation, this is not determinative because there was no misunderstanding as to the legal effect and substance of the covenant. . Additionally, at the time the covenant was first proposed, the parties did in fact negotiate its terms. Malgoire argues in the alternative that if we determine that the covenant has economic reality, that the amount allocated not exceed $5,000. While we maintain some doubt as to whether the covenant was worth*493 $20,000 and good-will only $10,000, we do not believe we can overturn the allocation for the same reasons we sustained the validity of the covenant. Moreover, no evidence was introduced from which we could make an allocation other than that to which the parties agreed. Respondent's argument that we should apply the test set out in , cert. denied , revg. (that a "party can challenge the tax consequences of his agreement as construed by the Commissioner only by adducing proof which in an action between the parties to the agreement would be admissible to alter that construction or to show its unenforceability because of mistake, undue influence, fraud, duress, etc.") is moot in view of our holding for respondent on the grounds described above, and we need not reach it. Decision will be entered for the respondent in Docket No. 4688-75. Decision will be entered for the petitioners in Docket No. 5477-75.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624043/	MARY MILLER BRAXTON, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Braxton v. CommissionerDocket No. 45436.United States Board of Tax Appeals22 B.T.A. 128; 1931 BTA LEXIS 2167; February 12, 1931, Promulgated 2167 A corporate dividend declared and payable in 1927, check for which was mailed in 1927 and received by the stockholder in 1928, held within stockholder's gross income of 1927. Commissioner v. Bingham, 35 Fed.(2d) 503, followed. Cecil Q. Adams,20 B.T.A. 243">20 B.T.A. 243, distinguished. Millard T. Charlton, Esq., for the petitioner. Eugene Harpole, Esq., for the respondent. STERNHAGEN 129 OPINION. STERNHAGEN: The respondent determined a deficiency of $211.15 in petitioner's income tax for 1927, by adding to her income for that year $2,191.62 in corporate dividends declared and payable in 1927 and received by petitioner in 1928. The facts are submitted in the following stipulation: 1. The taxpayer is Mrs. Mary Miller Braxton, an individual, residing at "Eastwood," East Main Street, Staunton, Virginia. 2. The petitioner keeps her accounts and reports her income on a cash receipts and disbursements basis. 3. In the determination of the deficiency of $211.15 for the taxable year 1927, the Commissioner has increased the taxable income reported by the petitioner by the amount of $2,191.62 which is alleged2168 to be the amount of an understatement of dividends received during the year 1927. 4. The amount of the dividends alleged by the Commissioner to be understated consists of two dividends received from the Dunedin Coal Company, Staunton, Virginia, in the amount of $300 and $50, respectively, and of a dividend in the amount of $1,841.62 received from the Erskine Company, Inc., Staunton, Virginia. 5. The dividend in the amount of $300 from the Dunedin Coal Company was received by the petitioner during the taxable year 1927 and was not reported as taxable income for that year. 6. Dividend check in the amount of $50 was drawn to the order of the petitioner by the Dunedin Coal Company, dated December 31, 1927, and mailed to her upon that date. 7. The dividend check of the Dunedin Coal Company in the amount of $50, dated December 31, 1927, was received in due course of the mail by the petitioner on January 2, 1928, and was not reported as taxable income for the year 1927. 8. Dividend check in the amount of $1,841.62 was drawn to the order of the petitioner by the Erskine Company, Inc., dated December 31, 1927, and mailed to her upon that date. 9. The dividend check of2169 the Erskine Company, Inc., in the amount of $1,841.62, dated December 31, 1927, was received in due course of the mail by the petitioner on January 2, 1928, and was not reported as taxable income for the year 1927. It also appears from the pleadings that respondent's determination was based upon his finding that "these dividends were declared by the corporation to be payable in the year 1927." Thus the question is whether a corporate dividend declared and payable in 1927, but received by the stockholder in 1928, is taxable to the stockholder in 1927. The Revenue Act of 1926 governs. Unlike the Revenue Act of 1921, the 1926 Act contains no specific reference to dividends declared and payable in one year and actually received in another. But the history of the 1926 Act in this respect illuminates the interpretation which its general language requires. 130 Before the 1921 Act, it was an open question whether the Government was warranted in treating such dividends as constructively received on the day they became payable, notwithstanding the stockholder used the actual receipts method of computing his income and actually received the dividend check in the later year. 2170 The Revenue Act of 1921 expressly provided in section 201(e) that such a dividend was taxable to the stockholder when unqualifiedly subject to his demand. Whatever doubt may have existed as to the scope of this specific provision - cf. , reversing - was deliberately removed by Congress in the later act of 1924 and subsequent statutes, which have remained similar. It is unmistakable from the legislative reports that Congress intended, by the general language used, to include such dividends in the stockholders' gross incomes of the year payable. The Treasury Department's statement of changes proposed in 1924 to be made in the 1921 Act, contains the following: Subdivision (e) [of section 201] of the present law [1921 Act] is omitted in the draft [1924 Act]. This subdivision provided that a dividend should be included in the gross income of the stockholder as of the date when the cash was unqualifiedly made subject to his demands. This provision is only a specific instance of the general rule uniformly applied by the Department, as, for example, in the case of coupons on bonds; The2171 Ways and Means Committee Report of the House says: Subdivision (e) [section 201) of the present law is omitted in this bill but is covered by a general provision in section 213(a) of the bill. * * It is provided in section 213(a) that items of gross income shall be considered to be received in the taxable year in which they are unqualifiedly made subject to the demands of the taxpayer. This is a general provision which corresponds to the narrow provision of section 201(e) of the existing law and merely states in the statute the rule which would be followed without an express statutory provision. The Finance Committee Report of the Senate repeats the statement as to the omission of section 201(e) and says as to section 213(a): A new sentence has been added to the definition of gross income, providing that items of gross income shall be considered to be received in the taxable year in which they are unqualifiedly made subject to the taxpayer's demand. This is a statutory enactment of the rule followed by the department, as well as a more general application of a similar provision in section 201(e) of the existing law. The bill was changed by striking this sentence and2172 the report of the Conference Committee contains the following: Amendment No. 43: The House bill provided that items of gross income should be considered to be received in the taxable year in which they are unqualifiedly made subject to the demands of the taxpayer. This provision was designed to require dividends, bond interests, and salaries such as drawing 131 accounts, to be included in income when subject to demand by the taxpayer even though not actually received in cash by him. Since this is the rule which is and should be followed in such cases in the absence of a statutory provision, the Senate Amendment strikes out the provision; and the House recedes. From these reports and the various stages of the bill, it is clear that the legislative intent was that gross income should continue to include the items covered by section 201(e) of the 1921 Act, and that the general language of the statute was sufficient to express this intent. We think the language of the 1924 and 1926 Acts is entirely susceptible of this construction, or, to put it contrariwise, we think that the language used does not clearly exclude such items from gross income, and hence that the actual2173 intention may properly be effectuated by the application of the general language to dividends, when subject to demand. These dividends were payable in 1927, and, as held generally in the Bingham case, supra, were, therefore, in the absence of evidence to the contrary, receivable by the stockholder on mere demand and hence constructively received. , contained an important difference - the dividend was only payable by a check to be mailed December 31, and hence the stockholder had no right to demand payment otherwise before receipt by mail. Reviewed by the Board. Judgment will be entered for the respondent.BLACKBLACK, concurring: I concur in the result reached in the majority opinion, but I do not agree to the statement in the opinion wherein it is said: , contained an important defference - the dividend was only payable by a check to be mailed December 31, and hence the stockholder had no right to demand payment otherwise before receipt by mail. In my judgment there is no difference of substance between the facts in the 2174 , proceeding and the facts in the instant case. I think , is in conflict with ; certiorari denied by United States Supreme Court, March 12, 1930, and the following cases since then decided by this Board: , and . For the reason that I think , is in conflict with the above decisions, I think it should be definitely overruled by this Board. LANSDON, LOVE, and PHILLIPS dissent. MURDOCK LANSDON, LOVE, and PHILLIPS dissent. MURDOCK, dissenting: Although I agree that the case of Cecil Q. Adams,20 B.T.A. 243">20 B.T.A. 243, is not in point, I dissent for reasons set forth in Robert W. Bingham,8 B.T.A. 603">8 B.T.A. 603.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624044/	APPEAL OF WALTER L. HOPKINS.Hopkins v. CommissionerDocket No. 1476.United States Board of Tax Appeals2 B.T.A. 549; 1925 BTA LEXIS 2385; September 8, 1925, Decided Submitted April 27, 1925. 2385 Salary credited to the taxpayer on the books of the corporation in the year 1920, but not available for his use, is not taxable to him for that year. C. J. McGuire, Esq., and H. A. Tufel, Esq., for the taxpayer. J. Harry Byrne, Esq., for the Commissioner. MORRIS549 Before IVINS, MARQUETTE, and MORRIS. This appeal is from a determination of a deficiency of $11,016.24 in income taxes for the year 1920, an overassessment for $2,211.95 having been found for the year 1921. From the oral and documentary evidence presented at the hearing the Board makes the following 550 FINDINGS OF FACT. The taxpayer, during the year 1920, was secretary of the Wynkoop, Hallenbeck, Crawford Co., hereinafter referred to as the corporation. He received a fixed annual salary and, in addition, by an agreement entered into in 1915, extra compensation on a sliding scale based on the net profits of the corporation. The minutes of the special meeting of the board of directors of the corporation, held December 17, 1920, in which the salaries of officers were fixed for that year, read in part as follows: Additional compensation under prior agreements2386 between the corporation and the following persons, based on percentages of profits in the business for the period from May 31, 1919, to May 31, 1920, amounting to $299,183.09, computed by Mr. U. L. Leonhauser, adopting the same method as used in the report of Messrs. Lybrand Ross Bros. & Montgomery for the period ending May 31, 1919, was authorized to be distributed as compensation in addition to salaries previously fixed, as follows: Mr. John C. Morrison, 10 per cent$29,918.31Mr. Walter L. Hopkins, 15 per cent44,877.46Mr. Samuel Graydon, 10 per cent29,918.31Mr. John J. Hallenbeck as in previous year, 35 per cent104,714.08209,428.16On motion duly made and carried it was resolved that 33 1/3 per cent of the net profits of the business for the period from May 31, 1920, to December 31, 1920, computed by adopting the same method as the report of Messrs. Lybrand Ross Bros. & Montgomery, for the period ending May 31, 1919, shall be distributed as further compensation as follows: Mr. John J. Hallenbeck, 17 per cent of the whole profits$23,434.01Mr. John C. Morrison, 7.46 per cent of the whole profits10,283.39Mr. Walter L. Hopkins, 4.43 per cent of the whole profits6,106.63Mr. Samuel Graydon, 4.43 per cent of the whole profits6,106.62Total, 33.32 per cent of the whole profits45,930.652387 It was also resolved that 33 1/3 per cent of said net profits be applied to the retirement of the debt of this corporation to the estate of Harry C. Hallenbeck, deceased, and the balance of said profits be held for a working surplus or to be used in such manner as the board of directors may from time to time decide. On motion duly made and seconded, it was resolved that the salaries of the officers of the corporation shall be as follows: Mr. John J. Hallenbeck$25,000Mr. John C. Morrison15,000Mr. Walter L. Hopkins12,000Mr. Samuel Graydon12,000which shall be retroactive to the 1st day of January, 1920. It was orally agreed between the taxpayer and the three other officers of the corporation who had similar agreements with respect to extra compensation that such compensation for 1920 would be drawn only as funds were actually available therefor, and only with 551 the mutual consent of all four. May 2, 1921, a resolution to that effect was passed by the board of directors. Of the total authorized salary for the year 1920 of $62,984.09 the taxpayer received in cash during that year $22,099.93. The corporation credited the taxpayer on its2388 books of account with $62,984.09 for 1920 and deducted the amount so credited from its gross income for such year in making its tax return. The total amount due officers as of December 31, 1920, for compensation was $281,671.81. The cash balance of the company at that time was $18,805.98. On June 30, 1921, the corporation was in debt to the estate of H. C. Hallenbeck in the amount of $276,837.23, for which there was a chattel mortgage on the plant assets, and to the officers for salaries in the amount of $262,828.35. In order to place the corporation in a position where it could borrow money, the estate and the officers agreed to reduce their claims by the acceptance of $400,000 7 per cent cumulative preferred stock, par value $100, of which the estate took $275,000, and the four officers $125,000, of which the taxpayer received $30,000. In addition thereto he received $17,358.88 in cash of the amount credited to his account as of December 31, 1920. The taxpayer still holds all the stock so accepted by him, except 100 shares which he sold in 1923 to John J. Hallenbeck for $25 a share. No dividends have ever been paid on the stock. The taxpayer's books were kept and his returns2389 filed on a cash receipts and disbursements basis, while the corporation books and its returns were on the accrual basis. In his return for the year 1920 the taxpayer included the cash actually received, while the Commissioner determined that the amount credited to him by the corporation as salary for the year 1920, in excess of the amount actually paid, was constructively received, and included it in his income for that year, resulting in the deficiency hereinabove set forth, from which this appeal is taken. DECISION. The deficiency should be computed in accordance with the following opinion. Final determination will be settled on consent or on 10 days' notice, under Rule 50. OPINION. MORRIS: The sole question involved in this appeal is whether compensation earned by and credited to the taxpayer on the books of the corporation in 1920 was constructively received and therefore taxable to him for that year. That credits to officers and employees on the books of a corporation for undrawn salary balances do not necessarily subject them to tax thereon is well settled by the decisions of this Board. 2390 ; Appeal of552 ; ; ; ; . In view of the agreement between the officers of the corporation that the extra compensation for 1920 would be drawn only as funds were actually available therefor and that as against the credits to officers for salary as of December 31, 1920, of $281,671.81 the corporation had a cash balance of only $18,805.98, we are of the opinion that the undrawn salary balances were not available for their use and therefore not constructively received in the year 1920. ARUNDELL not participating.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624045/	Parker Oil Company, Inc., Petitioner v. Commissioner of Internal Revenue, RespondentParker Oil Co. v. CommissionerDocket No. 4907-69United States Tax Court58 T.C. 985; 1972 U.S. Tax Ct. LEXIS 57; September 21, 1972, Filed 57 Decision will be entered for the petitioner. Stockholders of petitioners settled a lawsuit involving ownership of 5 shares of stock of petitioner by providing for the transfer back to the former owner of the disputed shares, by granting an irrevocable proxy to unrelated parties to vote such shares, by providing for the voting power in the election of directors by the stockholders and proxy holders until dissolution of the corporation, and by providing for the voting power of the directors until dissolution of the corporation. Respondent determined that the net effect of such agreements and execution of the proxy created a second class of stock under sec. 1371(a) (4), I.R.C. 1954, which terminated petitioner's election to be taxed as a small business corporation under the provisions of subch. S of the Internal Revenue Code. Held, the stockholder agreement and proxy do not create a second class of stock. Held, further, under such circumstances sec. 1.1371-1 (g), Income Tax Regs., and Rev. Rul. 63-226, 2 C.B. 341">1963-2 C.B. 341, are invalid to the extent that they hold a second class of stock is created unless all of the shares outstanding58 are identical as to all voting rights. Henry B. Steagall II, for the petitioner.Henry C. Stockell, Jr., and J. Leon Fetezer, for the respondent. Goffe, Judge. Featherston, J., concurring. Drennen, Dawson, Tannenwald, and Quealy, JJ., agree with this concurring opinion. Raum, J., dissenting. Simpson and Sterrett, JJ., agree with this dissent. Sterrett, J., dissenting. Simpson, J., agrees with this dissent. GOFFE985 Respondent determined a deficiency in petitioner's Federal income tax for the taxable year ending June 30, 1967, in the amount of $ 56,985.10.The sole issue for decision is whether the election of Parker Oil Co. to be taxed as a small business corporation under the provisions of section 1372 (e)(3) 1 terminated in 1966 for failure to comply with the requirement of section 1371 (a)(4) that the corporation have only one class of stock.60 This will require us to decide whether 5 shares of stock of the petitioner covered by an agreement among the stockholders and the corporation which provided for an irrevocable proxy, for disproportionate voting for the election of directors, and for disproportionate voting 986 by the directors, constitutes a second class of stock thereby terminating petitioner's election to be taxed under the provisions of subchapter S.FINDING OF FACTSAll of the facts have been stipulated. The stipulation of facts and the exhibits attached thereto are incorporated herein and adopted as our findings.Parker Oil Co., Inc. (sometimes hereinafter referred to as Parker Oil), is a corporation organized under the laws of Alabama. For all times material herein the joint venture of Fuel Services, Inc., and Parker Oil engaged in the business of refueling aircraft under a contract with the U.S. Government. At the time of filing its petition herein, the principal place of business of Parker Oil was Ozark, Ala. In reporting its income Parker Oil utilized a fiscal year which ended on June 30 and for the taxable year ended June 30, 1967, it filed a U.S. small business corporation return with the district61 director of internal revenue, Birmingham, Ala. A valid election to be taxed as a small business corporation pursuant to section 1372 had been filed by Parker Oil on June 1, 1959.At the time of incorporation 100 shares of stock were issued as follows:SharesWilmer Parker40Annie Laura Parker (wife of Wilmer Parker)10Don W. Parker50The total number of shares issued represented a single class of voting common stock.On May 24, 1961, Don W. Parker signed an instrument which purported to "sell, assign and transfer" to Annie Laura Parker 5 shares of the 50 shares owned by him. The instrument appointed Wilmer Parker, president of Parker Oil, as agent to transfer the 5 shares of stock on the books of the corporation to Annie Laura Parker. The transfer of the 5 shares adjusted the stock ownership of the outstanding shares as follows:SharesWilmer Parker40Annie Laura Parker15Don W. Parker45On October 4, 1966, Don W. Parker sued Wilmer Parker, Annie Laura Parker, Henry B. Steagall II (an officer of the corporation but not a shareholder), and Parker Oil in the Circuit Court of Coffee County, Ala., Enterprise Division in Equity, seeking, among other62 relief, to have the 5 shares of stock previously transferred to Annie Laura Parker transferred back to him.Such litigation was settled by the parties and embodied in a written 987 agreement dated December 30, 1966, which provided (insofar as material herein) as follows:1. Conveyance of 5 shares of the stock of Parker Oil from Annie Laura Parker to Don W. Parker;2. Execution by Don W. Parker of an irrevocable proxy covering 5 shares of stock naming M. N. Brown and Ben B. Henderson, jointly or the survivor of them, as the holders of the proxy. It granted to Brown and Henderson the power to vote the 5 shares at any meeting of the stockholders of Parker Oil from the date of the settlement agreement until final dissolution of Parker Oil. The right to vote granted by the proxy was as complete as the power would be in Don W. Parker if present to vote but could be exercised only upon the joint concurrence of Brown and Henderson. By a later agreement of the parties, Henderson was dropped from the proxy and M. N. Brown became the sole holder of the proxy. The stock certificate for the 5 shares transferred from Annie Laura Parker to Don W. Parker was to bear a legend that such shares63 were subject to the irrevocable proxy to Henderson and Brown. This legend was for the purpose of making the proxy apply to anyone who might own the 5 shares after Don W. Parker.3. The directors elected were Wilmer Parker, Annie Laura Parker, Don W. Parker, Ben B. Henderson, and M. N. Brown. Henderson and Brown were given collectively one vote as a director if concurred in by both, and the remaining three votes or directors were given one each to directors selected by Wilmer Parker, Annie Laura Parker, and Don W. Parker, four votes being the maximum permitted so long as Parker Oil remained in corporate existence. Three votes were to constitute a quorum and a majority of those voting was required for corporate action. The voting power of Wilmer Parker, Annie Laura Parker, and Don W. Parker in the selection of directors was binding upon their successors in interest.4. No officers' salaries were to be paid by Parker Oil after the date of the settlement agreement and only routine daily activities of the business of the corporation were to be conducted thereafter; matters such as execution of contracts and loans were to require approval of the board of directors. All parties agreed64 to use their best efforts to continue in effect the contract of the U.S. Government with petitioner and Fuel Services, Inc., as joint venturers. Upon termination of the contract, Parker Oil was to be dissolved and liquidated unless the board of directors unanimously voted to extend the corporate existence for 1 year following termination of the contract.The settlement agreement was carried out by the parties, i.e., Annie Laura Parker conveyed 5 shares to Don W. Parker; Don W. Parker 988 executed the irrevocable proxy covering the 5 shares in favor of M. N. Brown and Ben B. Henderson and the stock certificate for the 5 shares covered by the proxy bore the legend that the shares were subject to the settlement agreement.The settlement agreement did not provide for amendment to the articles of incorporation to reflect any portions of the settlement agreement. The articles of incorporation provide that there shall be only one class of stock.After giving effect to the agreement the outstanding shares of Parker Oil were owned as they were at the time of incorporation, i.e. --SharesWilmer Parker40Annie Laura Parker10Don W. Parker50The voting power as stockholders65 of the corporation, after giving effect to the agreement (as amended to delete Ben. B. Henderson as a party), was as follows:VotesWilma Parker40Annie Laura Parker10Don W. Parker45M. N. Brown5The voting power of the directors, giving effect to their method of selection as provided in the agreement, was as follows:VotesWilmer Parker's and Annie Laura Parker's directors2Don W. Parker's director1M. N. Brown's director1The respondent, in his statutory notice of deficiency, determined that petitioner ceased to be a small business corporation as defined in section 1371(a) during the taxable year ended June 30, 1967, because it had more than one class of stock and its election to be taxed under the provisions of section 1372(a) was terminated by reason of the operation of section 1372(e)(3)(B).OPINIONThe sole issue to be decided is whether petitioner ceased to be taxable under the provisions of subchapter S of the Internal Revenue Code by reason of creation of a second class of stock. Section 1371 of the Code defines a corporation which may elect to have its income taxed to its shareholders under the provisions of subchapter S as a "small66 business corporation." One requirement under the definition is that the corporation have only one class of stock (sec. 1371(a)(4)). If the corporation ceases to come within the definition of section 1371, its election to be 989 taxed under the provisions of subchapter S terminates for the taxable year during which the corporation ceased to fall within the requirements of the definition of "small business corporation" (sec. 1372 (e)(3)).Respondent contends that Parker Oil ceased to be a "small business corporation" for the taxable year ended June 30, 1967, because during that taxable year it had more than one class of stock. No such second class of stock was created by the articles of incorporation such as was the case in Pollack v. Commissioner, 392 F. 2d 409 (C.A.5, 1968), affirming 47 T.C. 92">47 T.C. 92 (1966). Nor does this issue turn on whether debt of the corporation is in substance equity such as was involved in W. C. Gamman, 46 T.C. 1">46 T.C. 1 (1966). The instant case instead is one of substance versus form, the respondent contending that the settlement agreement and irrevocable proxy granted 67 by Don W. Parker in substance created a second class of stock. In form there can be no second class of stock because it is expressly forbidden by the terms of the articles of incorporation.Respondent relies upon section 1.1371-1 (g), Income Tax Regs., upon Rev. Rul. 63-226, 2 C.B. 341">1963-2 C.B. 341, and upon the Pollack case.Section 1.1371-1(g), Income Tax Regs., provides in part:(g) Classes of stock. A corporation having more than one class of stock does not qualify as a small business corporation. * * If the outstanding shares of stock of the corporation are not identical with respect to the rights and interest which they convey in the control, profits, and assets of the corporation, then the corporation is considered to have more than one class of stock. Thus, a difference as to voting rights, dividend rights, or liquidation preferences of outstanding stock will disqualify a corporation. However, if two or more groups of shares are identical in every respect except that each group has the right to elect members of the board of directors in a number proportionate to the number of shares in each group, they are considered one class68 of stock. Obligations which purport to represent debt but which actually represent equity capital will generally constitute a second class of stock.Rev. Rul. 63-226, 2 C.B. 341">1963-2 C.B. 341, holds in part:Furthermore, in the event that the outstanding stock of a corporation is subject to any other type of voting control device or arrangement, such as a pooling or voting agreement or a charter provision granting certain shares a veto power or the like, which has the effect of modifying the voting rights of part of the stock so that particular shares possess disproportionate voting power as compared to the dividend rights or liquidation rights of those shares and as compared to the voting, dividend and liquidation rights of the other shares of stock of the corporation outstanding, the corporation will be deemed to have more than one class of stock. Accordingly, the corporation does not qualify as a small business corporation.The portions of the regulations and revenue ruling quoted above are apparently based upon the legislative history reflecting congressional intent in the enactment of subchapter S. We have had occasion 990 to express69 our views on such congressional intent in other opinions. See W. C. Gamman, supra at 7-8, 13, and James L. Stinnett, Jr., 54 T.C. 221">54 T.C. 221, 230-232, 235-236 (1970), on appeal (C.A. 9, Sept. 23, 1970). No useful purpose could be served by repeating such analysis here.Our views on the congressional intent as to the second class of stock requirement in the definition of a subchapter S corporation is shared by other courts. See A. & N. Furniture & Appliance Co. v. United States, 271 F. Supp. 40">271 F. Supp. 40 (S.D. Ohio 1967), and Portage Plastics Co. v. United States, 301 F. Supp. 684">301 F. Supp. 684 (W.D. Wis. 1969), reversed on other grounds 470 F. 2d 308 (C.A. 1972). Suffice it to say, we feel there is no congressional intent to deprive the taxpayer of subchapter S benefits under the facts of the instant case. We conclude that the overriding purpose of the requirement that only one class of stock exist in a corporation qualifying under subchapter S is to avoid complexities in taxing income to shareholders with different preferences as to the distribution 70 of profits.The all-inclusive language of the regulations and revenue ruling quoted above is too broad in light of the congressional intent. When such language is applied to the facts in this case, we believe the intent of Congress is being thwarted. The alteration of voting power brought about by the settlement agreement among Parker Oil and its stockholders and the irrevocable proxy could not conceivably alter the reporting of the relative shares of the profits of the corporation by its stockholders. It created no complication as to the reporting of income by the stockholders. The shifting of voting power for 5 shares from Don W. Parker to M. N. Brown could not affect the distribution of earnings in any manner.The provisions of subchapter S were devised for small businesses. Many such corporations are family owned and differences of opinion as to management policies sometimes develop. Settlement of such differences can often be resolved by agreement of the shareholders. We conclude that is what happened here. Surely such a practical solution to discord within the corporation should not result in termination of subchapter S status by reason of a technical interpretation of71 the one class of stock provision where there is no reason for imposing a prohibition on the bare shift of voting power. We, therefore, hold that under such circumstances section 1.1371-1(g), Income Tax Regs., and Rev. Rul. 63-226, supra, are invalid to the extent that they hold a second class of stock is created unless all of the shares outstanding are identical as to all voting rights.A proxy is a widely used corporate tool. It has a very practical purpose even in a small, closely held corporation. Under the law of Alabama (the State of incorporation and principal place of business 991 of petitioner) voting is permitted by proxy. See Ala. Code tit. 10, sec. 21 (53) (Supp. 1969). Petitioner argues that the Alabama law does not permit a proxy to be irrevocable. We find it unnecessary in deciding this case to interpret the Alabama law because we conclude that no second class of stock was created regardless of the irrevocability of the proxy.Respondent relies upon the Pollack case. Pollack is distinguishable. It is an extreme case where an amendment to the articles of incorporation prior to the issuance of any stock72 established four classes of stock which set up voting power not proportionate to the number of shares in each class. The purpose of creating such classes was found to be occasioned by equal investment of capital by the organizers of the corporation but unequal ownership of shares. In that case there was in form more than one class of stock. The opinion was based upon the fact that the stockholders created more than one class of stock in the amended articles of incorporation thus coming within the specific terms of the statute and petitioners therein apparently did not argue that the treasury regulations failed to reflect congressional intent.We conclude, therefore, that no second class of stock was created during petitioner's taxable year ended June 30, 1967.Decision will be entered for the petitioner. FEATHERSTONFeatherston, J., concurring: I agree with the Court's conclusion that the settlement and proxy agreements of December 30, 1966, as amended, did not cause a termination of Parker Oil's subchapter S election. I also agree that Rev. Rul. 63-226, 2 C.B. 341">1963-2 C.B. 341, goes beyond the statute, but I think these results can be73 reached without declaring section 1.1371-1 (g), Income Tax Regs., invalid in any respect. Rather, I think the regulation should be so interpreted as not to apply to the facts of this case.The provision in section 1371(a)(4), limiting subchapter S eligibility to corporations not having "more than one class of stock," in my view, is addressed to the nature and character of the stock as such. The same is true with respect to section 1.1371-1(g) of the regulations which states that "a difference as to voting rights * * * will disqualify a corporation." Notwithstanding Rev. Rul. 63-226, I do not think either of these provisions refers to a proxy, an agreement whereby a shareholder authorizes someone else to vote his stock. See Bittker & Eustice, Federal Income Taxation of Corporations and Shareholders, ch. 6, p. 7 (3d ed. 1971). Such an agreement does not affect the voting rights conferred by the stock; it merely specifies who will exercise those rights.992 In the instant case, the certificate of incorporation expressly provides that "There shall be but one class of stock." Neither the December 30, 1966, settlement agreement nor the74 proxy agreement purports to alter this provision. Indeed, as I read the applicable Alabama statute (Ala. Code tit. 10, sec. 21(32) (Supp. 1969)) neither instrument could have done so; that statute contemplates that the voting rights of stock are to be defined in the certificate of incorporation and contains no suggestion that they may be defined in any other way.Insofar as here pertinent, the settlement and proxy agreements, as amended by the agreement of March 2, 1967, merely authorized M. N. Brown to vote the 5 shares which Annie Laura Parker conveyed to Don W. Parker in settlement of the dispute. It is true that the proxy was described as irrevocable and was endorsed on the stock certificate, but that endorsement did not affect the nature and character of the voting rights conferred by the stock -- it merely designated a person to exercise those rights. It is also true that the corporation was nominally a party to the settlement agreement, but that agreement called for no formal corporate action with respect to the voting rights of the 5 shares. It was an agreement between the shareholders as such. Significantly, when the proxy agreement was modified on March 2, 1967, to 75 eliminate Henderson's proxy rights, the corporation was not even a party to the amendment, and the amendment was not endorsed on the certificate. This suggests that the proxy was irrevocable only in the sense that it was to remain in effect as long as the shareholders as such so agreed. Moreover, under the settlement agreement, the 50 shares of stock owned by Wilmer and Annie Laura Parker were to elect two directors and the other 50 shares were to elect two directors; the only effect of the settlement agreement, signed by all the shareholders, in this respect was to designate M. N. Brown as one of the directors to be elected by Don W. Parker's 50 shares. I do not think these facts fall within either the statute or the regulation here in controversy.In applying the regulation on voting rights, it is important that eligibility for subchapter S treatment is limited to closely held corporations, i.e., corporations with 10 or less shareholders. In a real sense, closely held corporations are "essentially partnerships." As between themselves, their stockholders frequently operate the corporate business as if they were partners, working out various kinds of arrangements for managing corporate76 affairs. These arrangements may include, for example, agreements providing that each shareholder will vote for the other as a director, or that each will have a veto power as to the election of directors, or that shares of two or more shareholders 993 will be pooled or voted together. These agreements are particularly useful in situations like the one in the instant case where misunderstandings which have arisen between the shareholders can be resolved only by advance arrangements as to how the directors are to be selected and how the stock will be voted.State laws have recognized the need for special arrangements between the shareholders of closely held corporations. 1 The New York statute, for example, provides that shareholders may agree in writing that "in exercising any voting rights, the shares held by them shall be voted as therein provided, or as they may agree, or as determined in accordance with a procedure agreed upon by them." N.Y. Bus. Corp. sec. 620(a) (1963). I see no reason why such practical arrangements between shareholders should disqualify a corporation for subchapter S treatment. See Note, "Stockholder Agreements and Subchapter S Corporations," 19 Tax L. Rev. 398">19 Tax L. Rev. 398 (1964).77 As pointed out by the Court, the only real justification for the "one class of stock" requirement of section 1371(a)(4) is to facilitate the pass-through of dividends and liquidating distributions. None of the legislative materials that I have found gives any substantive clue as to why the voting rights provision was incorporated in the regulation or how differences in voting rights would complicate the administration of subchapter S. In these circumstances, I think the regulation should be narrowly construed.I would limit the applicability of the regulation to situations where the differences in voting rights are defined in the manner prescribed by the applicable State law; this is all the court did in Pollack v. Commissioner, 392 F. 2d 409 (C.A. 5, 1968). 78 I do not think the disputed regulation applies to a proxy agreement even though it is intended to remain in effect until the shareholders change their minds. RAUM; STERRETTRaum, J., dissenting: This case is not fairly distinguishable from Samuel Pollack, 47 T.C. 92">47 T.C. 92, which was affirmed by the Fifth Circuit, 392 F.2d 409">392 F. 2d 409. This case, too, arises in the Fifth Circuit. There, as here, there was involved the application of Income Tax Regs. section 1.1371-1(g), which implements and construes the statutory provision that a subchapter S corporation may not have more than one class of stock, and which provides that "a difference as to voting rights * * will disqualify a corporation." In Pollack, the only difference 994 in voting rights related to the weight to be given the shares in the election of directors; in all other respects, both as to voting generally and in every other manner, the various shares were identical. Indeed, even the limited restriction with respect to the election of directors did not appear on the certificates, nor were such certificates otherwise identified as being of different "classes," although79 the shares were described as being of different classes in the amended articles of association.In the present case, the restriction relating to the voting of the 5 shares in question was of a more drastic character than in Pollack. Here, the owner of these shares was irrevocably deprived of the right to vote his shares in any manner, a legend setting forth that disability appeared on the certificate of stock itself, and any purchaser or transferee of those shares could acquire them only subject to that restriction. The situation is entirely different from an ordinary proxy; here, the shares themselves were burdened with a permanent disability that persisted throughout their existence, regardless of who any subsequent owner might be. These 5 shares were certainly different in respect of voting rights from the remaining shares of the corporation. While it is true they were not described as being of a different class, the label should be a matter of no consequence. Cf. Portage Plastics Co. v. United States, 308">370 F. 2d 308 (C.A. 7), reversing 301 F. Supp. 684">301 F. Supp. 684, where an equity interest in a corporation was held to represent80 a different class of stock, notwithstanding that it wasn't even formally labeled as stock at all.Even if the matter were in doubt, the applicable provisions of the regulations quoted above require that the shares in question be treated as being of a different class. The prevailing opinion cavalierly brushes these regulations aside by treating them as invalid, contrary to the well-established principle that "Treasury regulations must be sustained unless unreasonable and plainly inconsistent with the revenue statutes and that they constitute contemporaneous constructions by those charged with the administration of these statutes which should not be overruled except for weighty reasons." Commissioner v. South Texas Co., 333 U.S. 496">333 U.S. 496, 501. See also Bingler v. Johnson, 394 U.S. 741">394 U.S. 741, 749-750; Fawcus Machine Co. v. United States, 282 U.S. 375">282 U.S. 375, 378; Boske v. Comingore, 177 U.S. 459">177 U.S. 459, 470; Brewster v. Gage, 280 U.S. 327">280 U.S. 327, 336; Textile Mills Corp. v. Commissioner, 314 U.S. 326">314 U.S. 326, 336-339;81 Colgate Co. v. United States, 320 U.S. 422">320 U.S. 422, 426. This rule is fully recognized and followed in the Fifth Circuit. See, e.g., Group Life & Health Insurance Co. v. United States, 434 F.2d 115">434 F. 2d 115, 120; Miami Beach First National Bank v. United States, 443 F. 2d 116, 120. Moreover, the very regulations here in question were applied both by this 995 Court and the Fifth Circuit in Pollack. I can find no warrant in the language of the statute or its legislative history 1 for dealing a lethal blow to these regulations. I would sustain the Commissioner's determination.82 Sterrett, J., dissenting: I have already indicated my agreement with the view set forth in Judge Raum's cogent dissent, but I would like to add the following comments of my own.Section 1371(a)(4) explicitly limits the benefits of subchapter S to those corporations which do not "have more than one class of stock." The thrust of the majority's opinion seems to be, as indicated for example by the basis upon which it distinguishes the instant case from Pollack v. Commissioner, 392 F. 2d 409 (C.A. 5, 1968), that the pivotal factor in its conclusion is the fact that the action in issue was taken by the shareholders as differentiated from action by the corporation. Such a conclusion will no doubt now be cited as a precedent for permitting shareholders to do indirectly what they cannot do directly. Through the simple expedient of making a unanimous irrevocable agreement among themselves, the shareholders 1 can affix the rights of a stock issue as effectively as can be done by official corporate action. We have present here a case where 5 shares of stock were stripped permanently of their voting rights. These 5 shares have something less than the83 other 95 outstanding shares. From a substantive point of view they can reasonably be analogized to an issue of nonvoting common.Further, if the shareholders may privately rearrange voting rights, what is to prevent them from rearranging the interests in the assets upon liquidation or providing for the payment of some prescribed amount to one particular shareholder, or group of shareholders, to the exclusion of others? Such an arrangement could easily be required as an inducement to secure the participation of some particularly valuable individual. Would not such an arrangement as readily thwart the 996 purpose of Congress, as found by the majority, "to avoid complexities in taxing income to shareholders with different preferences as to the distribution of profits" as would the direct issuance of differing stock interests by the corporation? The answer must be in the affirmative.If obeisance to the idiom "hard cases make bad law" is necessary, so be84 it, but let us not add to the cases which caused its birth. Footnotes1. All statutory references are to the Internal Revenue Code of 1954, as amended, unless otherwise indicated.↩1. N.Y. Bus. Corp. sec. 620(a) (1963); Conn. Gen. Stat. Ann. sec. 33-339 (1958); S.C. Code Ann. sec. 12-16.15 (Supp. 1971); Tex. Bus. Corp. Act art. 2.30↩ B (Supp. 1972); Model Business Corporation Act Ann. 2d sec. 34 (1971).1. Indeed, the legislative history is at best murky. In S. Rept. No. 1622, 83d Cong., 2d Sess. (1954), the Senate Finance Committee commented upon similar statutory provisions for the 1954 Code which were not then adopted, saying (p. 453): No class of stock may be preferred over another as to either dividends, distributions, or voting rights↩. If this requirement were not made, undistributed current earnings could not be taxed to the shareholders without great complications. * * [Emphasis supplied.]While the second sentence may be a non sequitur from that portion of the first sentence relating to voting rights, it nevertheless appears that the Committee did regard a difference in voting rights as a basis for classifying stock differently. From petitioner's point of view, the most that can be said of the legislative history is that it is inconclusive, but it is in precisely such circumstances that an applicable regulation should be sustained.1. Under sec. 1371(a)(1)↩ this number can never exceed 10.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624047/	SOUTHWESTERN ICE & COLD STORAGE COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Southwestern Ice & Cold Storage Co. v. CommissionerDocket No. 41183.United States Board of Tax Appeals27 B.T.A. 190; 1932 BTA LEXIS 1106; November 30, 1932, Promulgated 1106 Where the petitioner on September 30, 1926, sold all of the capital stock of an affiliated company, held, that the transaction was a taxable one upon which the petitioner had a taxable profit measured by the difference between the cost to it of the stock and its selling price, without consideration of the earnings of the subsidiary company reported in the consolidated return filed by the petitioner for the period of 1926 prior to the sale. Remington Rand, Inc. v. Commissioner, 33 Fed.(2d) 77, followed. George G. Witter, Esq., for the petitioner. J. M. Leinenkugel, Esq., for the respondent. SMITH190 OPINION. SMITH: The respondent has determined deficiencies in the petitioner's income tax for the period January 1, to September 30, 1926, in the amount of $17,309.86, and for the period October 1 to December 31, 1926, in the amount of $5,769.96. The petitioner on September 30, 1926, sold to an outside interest all of the capital stock of an affiliated company. The respondent computed the petitioner's profit on the sale at the difference between the cost of the stock to the petitioner in 1924 and the selling price1107 and has allocated nine-twelfths of the profit so computed to the period January 1 to September 30, 1926, for which period the petitioner filed with its affiliated company a consolidated return, and three-twelfths to the period October 1 to December 31, 1926, for which 191 the petitioner filed a separate return. The petitioner contends (1) that it derived no taxable profit from the sale of the stock of its affiliated company; and (2) that the taxable profit, if any, as determined by the respondent should be reduced by the amount of the accumulated earnings of the affiliated company for the period January 1 to September 30, 1926, which were reported in the consolidated return filed for that period and taxed to the affiliated group. The material facts are stipulated and are as follows: Petitioner was incorporated under the laws of the State of Arizona on or about January 9, 1924. The Yuma Utilities Company was incorporated under the laws of the State of Arizona on or about January 9, 1924. The total issued capital stock of said Yuma Utilities Company from January 9, 1924 and until September 30, 1926, inclusive, consisted of 1,250 shares of Preferred stock of $100.001108 par value and 500 shares of Common stock of no par value. From January 9, 1924 and until September 30, 1926, inclusive, all of the outstanding with the exception of one share of common stock. Petitioner owned on January with the exception of one share of common stock. Petitioner owned on January 1, 1926, and continuously from that date until September 30, 1926, 1,250 shares of Preferred and 499 shares of Common stock of the Yuma Utilities Company out of an outstanding stock issue of 1,250 shares of Preferred and 500 shares of Common. Petitioner paid in 1924 in cash or equivalent the amount of $96,250.58 for the 1,250 shares of Preferred and 499 shares of Common stock of the Yuma Utilities Company. During the month of September, 1926, petitioner entered into negotiations with the Sierras Construction Company, a Wyoming corporation, for the sale of its entire stockholdings in the Yuma Utilities Company, and on September 30, 1926, completed the sale to the Sierras Construction Company of all of the said stock owned by it. Petitioner realized in cash or equivalent on September 30, 1926, on account of the sale of the Yuma Utilities Company the amount of $267,726.65. Petitioner1109 expended in 1926, during the period January 1st, to September 30, 1926, on account of selling expenses and cost of replacing transformers in connection with the sale of this stock the sum of $2,068.36. Petitioner and the Yuma Utilities Company filed separate income tax returns for the years 1924 and 1925. For the year 1926 the new interests who had purchased the stock of Yuma Utilities Company from the petitioner filed original and amended separate returns of its income covering the period January 1, 1926 to September 30, 1926. On or about June 17, 1927 the petitioner filed a consolidated income tax return within the period allowed by law as extended by the Collector of Internal Revenue at Phoenix, Arizona. In this return there was included the income of the petitioner for the calendar year 1926 and the income of the Yuma Utilities Company for the period January 1st to September 30, 1926. Treasury Department Form No. 1122, being Information Return of Subsidiary Corporation, was filled out and filed by the Yuma Utilities Company at the same time of filing the consolidated return noted above. 192 The total tax as shown by the consolidated return was $11,922.72. Of1110 this sum $2,989.07 was agreed upon by petitioner and the Yuma Utilities Company as being the part assessable to the Yuma Utilities Company, and $8,933.65 assessable to the Southwestern Ice & Cold Storage Company. There was not included as taxable income on the consolidated return filed by petitioner and the Yuma Utilities Company any gain that may have been realized from the sale by petitioner of its holdings of stock of the Yuma Utilities Company on September 30, 1926. Nor was there claimed as a deduction from gross income on the said consolidated return filed the selling expenses and cost of replacing transformers in the aggregate amount of $2,068.36. A statement was attached to the consolidated return wherein the sale of the stock of the Yuma Utilities Company was disclosed and in which statement it was stated that the difference between the cost and the sales price thereof was not being included in taxable income on the grounds that the sale was in fact the sale of the capital stock of the affiliated or consolidated entity upon which sale no taxable gain or loss could be realized. The book profit was shown as an addition to surplus on line 9(a) of Schedule L of the consolidated1111 tax return, in the amount of $86,337.50. The Commissioner of Internal Revenue has included in the taxable net income of the consolidated entity allocable to the petitioner the sum of $169,407.71, as taxable profit on the sale of the said stock of the Yuma Utilities Company. Nine-twelfths of this profit, or $127,055.79, was included by the Commissioner of Internal Revenue in petitioner's net income for the period January 1st to September 30, 1926, and three-twelfths thereof, or $42,351.93, was included by the Commissioner in petitioner's net income for the period October 1, 1926, to December 31, 1926, and the deficiencies in tax asserted by the Commissioner are almost entirely due to these additions to taxable income. The Yuma Utilities Company on September 30, 1926 had an earned surplus balance of $54,928.87. Of this amount $24,172.56 represented earnings of the Yuma Utilities Company from January 1, 1926 to September 30, 1926 and had been reported in the consolidated income tax return filed by this petitioner and the Yuma Utilities Company and a federal income tax paid thereon by the affiliated group. The balance of said surplus is the earnings of the Yuma Utilities Company1112 during 1924 and 1925 during which years all of its outstanding stock as aforesaid was owned by this petitioner. For the years 1924 and 1925, however, Yuma Utilities Company filed separate returns and paid a tax on its said earnings for the years 1924 and 1925. The facts in this proceeding are indistinguishable from those in , in respect of both of the issues raised. In that case the court held, reversing the Board (), that, where the sale of the stock of the affiliated company terminated the affiliation, the sale was not an intercompany transaction, but occurred outside of the period of affiliation and resulted in a taxable profit to the seller, measured by the difference between the cost of the stock and the selling price. The court there said: Concededly a gain of $15,000 was realized, unless the parent company may take into account as additional cost of the stock the subsidiary's accumulated 193 earnings of $28,454.35. It is argued that the parent company could have had its subsidiary declare its net profits as dividends, without subjecting1113 the parent company to any tax, by reason of section 234(a)(6), Revenue Act of 1918, and that it could then have invested such dividends in the business of the subsidiary, in which event they would be treated as an addition to the price paid for the stock. Regulation 45, art. 543. In other words, we are urged to hold that the accumulation of earnings by the subsidiary was a constructive receipt of dividends and reinvestment of them by the parent company. But the same argument could be made with equal force in respect to an individual or corporate owner of stock sufficient in amount to control the board of directors of the subsidiary, yet insufficient to result in affiliation. Tax liabilities must be determined by what in fact was done. See . The fact is that no declaration of dividends and no reinvestment of them has occurred in either case, and it would seem unreasonable to accept the theory of constructive receipt and investment in the one case, but not in the other. Where affiliation is absent, no one doubts that the theory would be rejected; to accept it would contradict the theory of1114 . Again, it is urged that a failure to treat the accumulated earnings as an addition to the cost of the stock will produce the inequitable result of double taxation, because the earnings have already been taxed as income of the affiliated group. But double taxation of this character will exist, though there be no affiliation between the owner of the stock and the corporation which issued it, and is, as pointed out in , the ordinary incident of a profitable sale of stock. We hold, therefore, that the sale resulted in taxable gain of $15,000. The Board has followed the Remington Rand case in the following cases: ; ; ; ; ; and 1115 . See also ; ; affd., ; ; Charles Ilfeld Co. v. Hernandez (U.S. Dist. Ct., for Dist. of New Mexico, Aug. 19, 1932). In , the District Court for the Southern District of New York, upon authority of the Remington Rand case, held that the deductible loss resulting from the sale of the stock of an affiliated company is the difference between the cost of the stock and the selling price, without any allowance for the operating loss of the affiliated company which had been allowed as a deduction in the consolidated returns previously filed by the affiliated group. The court considered the question there as the direct converse of that in the Remington Rand case. In 1116 ; affd., , we held, however, that in computing the deductible loss sustained by the taxpayer upon 194 liquidation and merger of a subsidiary company on June 10, 1922, allowance should be made for the operating loss of the subsidiary company for the period of affiliation from January 1 to June 10, 1922, which loss was reported in the consolidated return filed by the companies for that period and allowed as a deduction in computing the consolidated income. See also , following The petitioner argues that the situation here is the direct converse of that in the Riggs Nat. Bank case; that if the loss resulting from liquidation (or sale), must be reduced by the amount of the operating loss of the subsidiary, which was deducted in the consolidated return filed for the period of affiliation prior to the sale, then also the gain, if any, upon the sale should be reduced by the amount of the operating gain of the subsidiary which likewise was reported in the consolidated return filed for the period of affiliation1117 preceding the sale. We are of opinion that the argument is not sound. For, while the statute governing the filing of consolidated returns permits the loss of a subsidiary company to be applied against the taxable gain of the parent company, or vice versa, it does not impose any liability on the one company for the tax on the income of the other. It does not follow, from the fact that the net income of one member of an affiliated group may be reduced by the operating loss of another member of the group, that the net income of one member may be reduced by the net income of another member which itself pays tax upon its net income. In other words, the operating gain of the Yuma Utilities Company for the period January 9 to September 30, 1926, was its separate income, for which it would have been separately liable to pay the tax; while if, instead of a gain, the subsidiary had sustained an operating loss, the petitioner would have been allowed to reduce its own taxable gain by the amount thereof, as was the situation in the Riggs Nat. Bank case. Obviously, too, the petitioner's reasoning leads us to a result directly contrary to that reached by the court in the Remington1118 Rand case upon identical facts. For reasons fully expressed by the court in the Remington Rand case, and upon authority of that and the other cited cases, we hold that the petitioner's taxable profit on the sale of the stock of its affiliated company was the difference between the cost, $96,250.58, and the selling price, $267,726.65, less the expenses of $2,068.36 incident to the sale. Judgment will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624049/	Edward C. Victorson and Anne Victorson v. Commissioner. Graham, Ross & Co., Inc. v. Commissioner.Victorson v. CommissionerDocket Nos. 83595, 83596.United States Tax CourtT.C. Memo 1962-231; 1962 Tax Ct. Memo LEXIS 77; 21 T.C.M. (CCH) 1238; T.C.M. (RIA) 62231; October 1, 1962Martin M. Lore, Esq., 107 William St., New York, N. Y., for the petitioners. Theodore E. Davis, Esq., and Leon M. Kerry, Esq., for the respondent. RAUMMemorandum Findings of Fact and Opinion In these consolidated cases, the Commissioner determined deficiencies in income tax and additions to tax as follows: Docket No. 83595, Edward C. Victorsonand Anne VictorsonYearDeficiency1954$ 4,461.64195523,758.54195615,170.97Docket No. 83596, Graham, Ross & Co., Inc.Addition to TaxYear EndedDeficiencySection 6653(b)April 30, 1955$22,775.04$11,387.52April 30, 195674,652.8737,326.44April 30, 195752,553.1478 By amendment to his answer in Docket No. 83596, the Commissioner affirmatively alleged that the $127,350 in additional income which the deficiency notice had determined was realized by the corporate petitioner in either its fiscal year ended April 30, 1956 or 1957, was, in the alternative, realized by the corporate petitioner in its fiscal year ended April 30, 1955. After certain concessions by petitioners, the issues remaining for decision are: (1) whether payments to Miriam Ross Victorson in 1954 and 1955 by Graham, Ross & Co. constituted dividends to its sole stockholder, Edward C. Victorson; (2) and (3) whether the exercise of certain options to purchase stock in each of two corporations in 1955 resulted in taxable income; if it did, when and in what amounts did it constitute such income; and, in the case of Edward C. Victorson, whether such income constituted a dividend from Graham, Ross & Co.; (4) whether Graham, Ross & Co. is entitled to deductions for business expenses for the taxable years in issue in excess of those allowed by the Commissioner; and (5) whether the failure of Graham, Ross & Co. to file corporate income tax returns for its fiscal years ended April 30, 1955 and79 1956 and the resulting underpayment of taxes was due either to fraud or, in the alternative, to willful neglect without reasonable cause. Findings of Fact The facts stipulated by the parties are incorporated herein by this reference. Edward C. and Anne Victorson, husband and wife residing at 2575 Jerome Avenue, Bronx, New York, filed joint income tax returns for the taxable years 1954, 1955, and 1956 with the district director of internal revenue for the Upper Manhattan district of New York. Anne is a party hereto solely because joint returns were filed. Edward will be referred to hereinafter as Victorson. Graham, Ross & Co., Inc., a New York corporation with offices at 141 Broadway, New York, New York, filed its corporate income tax return for the fiscal year ended April 30, 1957, with the district director of internal revenue for the Lower Manhattan district of New York. The corporation, hereinafter referred to as Graham Ross, did not file corporate income tax returns for the fiscal years ended April 30, 1955 and 1956. During the taxable years in issue, Graham Ross was engaged in the stock brokerage and underwriting business as an over-the-counter house. 1. In January80 1954, the authorized capital stock of Graham Ross consisted of 300 shares of preferred stock, all of one class and without par value, and 200 shares of common stock, also all of one class and without par value. At that time, the company had issued an outstanding 200 shares of preferred stock and 100 shares of common stock. Victorson became a salesman for Graham Ross in 1948, at which time all of the issued and outstanding stock of Graham Ross was owned by Victorson's brother who actively ran the business. Thereafter, Victorson became the manager of the sales force of Graham Ross. Victorson's brother died in September 1953, and left all of the issued and outstanding stock of Graham Ross to his wife, Miriam Ross Victorson. Under the terms of an agreement dated January 27, 1954, between Victorson as "buyer", Miriam Ross Victorson as "seller", and Graham Ross, Victorson agreed to purchase all of the issued and outstanding stock of Graham Ross from Miriam Ross Victorson for a total price of $30,500, payable by Victorson to Miriam Ross Victorson in specified installments from the date of the agreement until July 1, 1955. The agreement provided among other things that Victorson would81 sign a series of nonnegotiable promissory notes to evidence the payments required thereunder and such notes would contain an acceleration clause in the even of a default for ten days after notice given by the seller, that the buyer pledged all of the stock purchased as collateral for his obligations thereunder, and that simultaneously with the execution of the agreement the seller would resign as an officer and director of Graham Ross and the buyer would be elected president, treasurer, and a director of the company. The agreement further specifically provided that any amounts received by Victorson from Graham Ross in respect of the stock purchased and pledged "whether as dividends, redemption price, or otherwise" would be paid over to the seller, Miriam Ross Victorson, to the extent of the unpaid balance of the purchase price and would be applied against succeeding installments due on the purchase price. On January 27, 1954, simultaneously with the signing of the foregoing agreement, Miriam Ross Victorson resigned as an officer and director of Graham Ross and Victorson was elected president, treasurer, and a director. At all times thereafter during years 1954 through 1957, Victorson82 was the sole stockholder, president, treasurer, and a director of Graham Ross, was the only officer who was active in the control and management of the corporation, and was personally in full charge of all phases of the corporation's activities. All other officers and directors of Graham Ross were only nominal and served in name only. During the year 1954, Graham Ross paid a total amount of $13,500 to Miriam Ross Victorson in partial payment for the stock purchased from her by Victorson under the agreement of January 27, 1954. Total payments in the amount of $6,500 were made by Graham Ross to Miriam Ross Victorson during the year 1955 for the same purpose. All such payments by the corporation were made in connection with the acquisition by Graham Ross of shares of its preferred stock from Victorson which it held thereafter as treasury stock. Pursuant to the terms of the agreement of January 27, 1954, payment for such preferred stock was made directly to Miriam Ross Victorson in discharge of Victorson's obligation under the stock-purchase agreement. The Commissioner determined that the payment by Graham Ross to Miriam Ross Victorson of $13,500 in 1954 and $6,500 in 1955 constituted83 dividends in like amounts to Victorson in these years. Such payments, in discharge of Victorson's obligation to Miriam Ross Victorson and resulting in the redemption by Graham Ross of preferred stock owned by Victorson which he had purchased from Miriam Ross Victorson, were in fact essentially equivalent to dividends to Victorson. 2. Under date of September 21, 1954, Graham Ross entered into an underwriting agreement with Hosid Products Corp. (subsequently known as Glamur Products, Inc.) and the president and principal shareholder thereof, Jack Hosid, individually, whereby Hosid Products Corp. proposed to issue 600,000 shares of its common stock at the public offering price of 50 cents per share and to employ Graham Ross as the exclusive underwriter therefor. Hosid Products Corp., among other things, agreed to amend its certificate to effect the change of its corporate name to one which contained the name "Glamur", the trademarked name of the upholstery and rug cleaning product which it manufactured and distributed. As compensation to Graham Ross for the underwriting, a commision of 12 1/2 cents per share with respect to all shares sold was provided. An added 12 1/2 cents per share84 until a total of $20,000 had been paid was provided to cover the costs and expenses to Graham Ross incident to the public offer. In a separate section of the agreement entitled "Underwriter's Additional Compensation", it was provided that in order to induce Graham Ross to enter into the underwriting, Jack Hosid individually agreed to sell to Graham Ross or its nominees for one mill ($.001) per share one share for every six shares publicly sold up to 100,000 shares, and if all of the publicly offered stock was sold by Graham Ross, Hosid additionally agreed to sell a separate block of 50,000 shares to Victorson at one mill ($.001) per share. It was noted that none of the aforesaid 150,000 shares of stock was then being qualified or registered under the Securities Act of 1933, and it was agreed that the shares thus purchased would be held by the purchaser or nominees of the purchaser for a period of 12 months from the effective date of the notification to the Securities and Exchange Commission of the public offering, and that thereafter Hosid Products Corp. agreed at its expense to qualify such stock for public sale under the Securities Act of 1933. In October, 1954, Hosid Products85 Corp. changed its corporate name to Glamur Products, Inc. In connection with the underwriting of the public offering of Glamur Products stock, Victorson arranged for Glamur Products to obtain a loan in the amount of $10,000. Victorson was of the opinion that Glamur Products did not have sufficient money in the bank (only about $12,000) to make its stock marketable. He thought that if Glamur Products could show a larger cash balance on the balance sheet in the prospectus, even though there was an offsetting liability, its stock would be more attractive to some potential buyers. As a result, Victorson arranged for three persons to lend Glamur Products a total of $10,000 for a period of three months. These three individuals were Kurt Blatt, a customer of Graham Ross, who put up $5,000, and George Weiss, another Graham Ross customer, and Bessie Dale, Victorson's secretary, each of whom put up $2,500. The loan agreement, dated October 21, 1954, provided that the loan was to be repaid from the first proceeds of the planned underwriting. The lenders were to receive no interest as such for the loan, but Jack Hosid as an individual signer of the loan agreement agreed that he would sell86 the equivalent of 10,000 shares of Glamur Products stock to the lenders or their nominees, 5,000 shares to Kurt Blatt and 2,500 shares each to George Weiss and Bessie Dale, for an aggregate price of $10. The lenders agreed that they would purchase such stock for investment and would not acquire it with a view to public distribution. On October 27, 1954, Glamur Products filed a Notification, Form 1-A, with the Securities and Exchange Commission (hereinafter referred to as the S.E.C.) with regard to the public offering of 600,000 shares of its stock, pursuant to Regulation A of the general rules and regulations of the Securities Act of 1933, as amended, and the Offering Circular was filed therewith. In regard to the option granted by Jack Hosid to Graham Ross to purchase 100,000 shares of his Glamur Products stock and to Victorson to purchase 50,000 shares of such stock, both the Notification and the Offering Circular stated that Glamur Products agreed after 13 months (instead of 12 months as provided in the underwriting agreement) to qualify such stock for public sale under the Securities Act of 1933, as amended, or to include such stock in any registration statement which might be87 filed prior to the expiration of the 13-month period. The Offering Circular, as finally published and distributed, was dated November 12, 1954. Graham Ross first sold Glamur Products stock to the public on November 18, 1954, and the offering was successfully completed on February 1, 1955. On May 23, 1955, Graham Ross exercised its option pursuant to the terms of the underwriting agreement of September 21, 1954, to purchase 100,000 shares of Glamur Products stock from Jack Hosid at one mill ($.001) per share. On the same day, Victorson exercised his option under the same agreement to purchase 50,000 shares of Glamur Products stock from Jack Hosid at the same price. Graham Ross paid $150 to Hosid for its 100,000 shares plus Victorson's 50,000 shares. A correcting entry in the ledger of Graham Ross as of September 19, 1956, reflects that 50,000 shares were in fact purchased by Victorson on May 23, 1955, and only 100,000 shares were purchased by the corporation Of the 100,000 shares acquired by Graham Ross, it is stipulated that 46,498 were transferred to its salesmen and other employees. This stock was so transferred as a bonus for participation in the successful underwriting. 88 All of the 150,000 shares purchased by Graham Ross and Victorson pursuant to options granted by Jack Hosid were restricted from public sale for a period of at least 12 months from the effective date of the Notification by the underwriting agreement of September 21, 1954. The Notification and the Offering Circular indicated that such restriction was for a period of 13 months from the effective date of the Notification, unless included in any registration statement which might be filed by Glamur Products prior to the expiration of the 13-month period. Such restriction did not apply to the private sale of the option stock prior to the expiration of the 12 or 13 month period. Late in 1955 Graham Ross and Victorson requested that Glamur Products qualify the option stock for public sale as Glamur Products had agreed it would do in the underwriting agreement of September 21, 1954. Up to $50,000 worth of such stock could be so qualified by a letter of notification to the S.E.C.; qualification of more than $50,000 worth of such stock would require full registration and publication of a prospectus. After a delay, Glamur Products filed a Notification, Form 1-A, with the S.E.C. on August 9, 1956, to89 qualify $50,000 worth of the option stock for public sale. Pursuant to such Notification, Graham Ross sold 23,200 shares of its option stock for a net amount of $18,087.25 and Victorson on September 24, 1956, sold 40,000 shares of his option stock for a net amount of $23,264.55. Thus, a total of 63,200 shares of the option stock were sold for an aggregate net amount of $41,351.80. The remaining shares that had been qualified for sale by the Notification were placed back into the restricted account. To the date of trial herein, no further sales were made of the option stock held by Graham Ross and Victorson. During the year 1955 at least 18 brokers including Graham Ross were quoting bid and asked prices or either for Glamur Products stock. There were quoted bid prices in 1955 ranging from a low of 50 cents to a high of 80 cents and asked prices ranging from a low of 65 cents to a high of 90 cents. In May of 1955 Graham Ross as a broker traded a total of 21,150 shares of registered Glamur Products stock, with purchases ranging from 75 cents to 93 3/4 cents and sales ranging from 89 cents to 93 3/4 cents. Additional shares of the same stock, in undisclosed amounts, were traded during90 the same month through other brokers. In Exhibit A to the Notification, Form 1-A, sent by Glamur Products to the S.E.C. on August 9, 1956, to qualify $50,000 worth of the option stock for public sale, it was stated that the market price of Glamur Products stock on August 8, 1956, was 55 cents bid and 65 cents asked. Graham Ross and Victorson sold a total of 63,200 shares of Glamur Products stock in August and September of 1956 pursuant to such Notification at an average price of about 65 cents per share. Thereafter, the price of Glamur Products stock remained at about the same level for two or three months. Toward the close of 1956 and during 1957, the market price of Glamur Products stock declined. The Commissioner determined that Graham Ross realized additional income in the amount of $127,350 by the "bargain purchase of option stock" by Glamur Products in either the fiscal year ending April 30, 1956 or 1957. By amendment to his answer, the Commissioner alleged in the alternative that such amount was realized by Graham Ross in its fiscal year ended April 30, 1955. The Commissioner determined that Victorson realized additional income in the amount of $42,500 by the "bargain purchase91 of option stock" of Glamur Products in either the taxable year 1955 or 1956. The fair market value of the Glamur Products stock purchased by Graham Ross and Victorson on May 23, 1955, was 50 cents per share. 3. Graham Ross acted as underwriter in the distribution of 150,00 shares of common stock of Wilson Organic Chemicals, Inc., in 1952 at an offering price of two dollars per share. In connection with this underwriting and as part of its compensation therefor, Graham Ross received an option to purchase 7,500 shares of Wilson Roganic Chemicals common stock at 25 cents per share. On March 8, 1955, Graham Ross exercised this option. Of the 7,500 shares thus acquired by Graham Ross, 400 shares were transferred to Michael Scherzer, its accountant at the time, in addition to his regular salary, for services rendered by him. During the period from January through September of 1955, at least 11 brokers including Graham Ross were quoting bid and asked prices or either for Wilson Organic Chemicals common stock. From January 18, 1955 through March 31, 1955, the over-the-counter bid and asked quotations on such stock ranged between 7/8 and 1 1/8 bid and between 1 and 1 1/2 asked. On both92 February 28, 1955 and March 29, 1955, the over-the-counter quotations on Wilson Organic Chemicals common stock were 1 bid and 1 3/8 asked. The Commissioner determined that Graham Ross realized additional income in the amount of $6,562.50 as the result of the "bargain purchase" of 7,500 shares of Wilson Organic Chemicals common stock on March 8, 1955. The fair market value of the Wilson Organic Chemicals common stock purchased by Graham Ross on March 8, 1955 was $1.125 per share. 4. Victorson was born on September 21, 1912. He completed three and one-half years of high school but did not finish high school and did not attend college. Before becoming a salesman for Graham Ross in 1948, his working experience had included work for a shipyard company, work as a salesman for some drug companies, and for a short time he engaged in the business of buying and selling drug sundries. Before his brother's death in 1953, Victorson managed the Graham Ross sales force. Victorson took over complete charge of Graham Ross in January 1954. At that time the corporation had about 20 employees, including 10 salesmen. At the start Victorson found it necessary to work evenings and weekends to get93 his many new administrative duties completed and to acquire contacts so that profitable underwritings might be given to Graham Ross. He was a good golfer and found that he was able to meet potential clients and customers while playing golf on weekends. He continued to train and supervise the sales force and on occasion would assist salesmen in dealing with customers. In the beginning Victorson split commissions with some salesmen, but later Victorson had any share of a commission to which he might be entitled go back into the trading account of Graham Ross. In his income tax returns for the years 1954, 1955 and 1956, Victorson reported compensation from Graham Ross in the total amounts of $8,730, $11,019, and $6,260, respectively. No dividends were reported from Graham Ross in any of these years. Under the agreement of January 27, 1954, by which Victorson purchased all of the issued and outstanding stock of Graham Ross from Miriam Ross Victorson, Victorson among other things agreed that so long as he remained obligated thereunder for a portion of the purchase price his salary from Graham Ross would not be increased beyond the amount of $10,000 per annum and, in addition, that any94 amounts he received in respect of the stock purchased, whether in the form of dividends, by redemption, or otherwise, would be paid over to Miriam Ross Victorson to be applied against his remaining obligation to her. Victorson's obligation under the agreement was fully discharged in July of 1955. The Commissioner determined that income realized by Victorson in 1954 and 1955 as a result of payments made by Graham Ross in discharge of Victorson's obligation to Miriam Ross Victorson constituted dividends to Victorson in such years and not additional compensation deductible by Graham Ross. Similarly, the Commissioner determined that income realized by Victorson as a result of the receipt of 50,000 shares of Glamur Products stock constituted a dividend to Victorson from Graham Ross and not additional compensation from Graham Ross. The Commissioner allowed no deduction to Graham Ross for the value of the 46,498 shares of Glamur Products stock which Graham Ross had transferred to its salesmen and other employees as a bonus for participation in the successful Glamur Products underwriting. The Commissioner allowed no deduction to Graham Ross for the value of the 400 shares of Wilson Organic95 Chemicals stock which Graham Ross had transferred to its then accountant, Michael Scherzer, in addition to his regular salary. 5. Graham Ross filed corporate income tax returns for its fiscal years ended April 30, 1954 and April 30, 1957, both of which were signed by Victorson as president. No returns were filed by Graham Ross for its fiscal years ended April 30, 1955 and 1956. Graham Ross did file a request, dated June 29, 1955, and signed by Victorson as president, for an extension of time in which to file its return for its fiscal year ended April 30, 1955, but no return was in fact filed for that fiscal year or the following fiscal year. When Victorson became president of Graham Ross in January of 1954, the corporation had in its employ an acountant, Michael Scherzer (now deceased), who was paid $200 per month to do the firm's accounting work, furnish financial statements, and file necessary regulatory and tax reports and forms. Victorson retained Scherzer and relied on him to keep him informed of the financial condition of Graham Ross by monthly financial statements and to prepare and file all necessary reports with the S.E.C., the Internal Revenue Service, and other regulatory96 and taxing authorities. During the early part of 1956, Scherzer stopped supplying Victorson with monthly financial statements in spite of Victorson's repeated requests therefor. Finally, after four or five months had gone by without Victorson having received such statements, Victorson went to his attorney for advice. His attorney recommended that Graham Ross hire a new accountant, Ernest Baker (now deceased), who had some experience in the securities business. Victorson hired Baker sometime in July or August of 1956. Baker immediately set to work to put Graham Ross' books in order. Baker determined that Graham Ross had failed to file income tax returns for its fiscal years ended April 30, 1955 and 1956, and attempted to collect the necessary information to file such returns. Victorson was aware of his responsibility as president of Graham Ross to see that corporate income tax returns were filed for Graham Ross in 1955 and 1956. Victorson was currently aware of the financial position and earnings of Graham Ross throughout 1955. During part of 1956, due to the failure of the accountant Scherzer to furnish him with financial statements each month, Victorson was not kept current97 on the corporation's earnings and general financial position. Victorson was the only officer or employee of Graham Ross authorized to sign corporate checks with his signature alone appearing thereon. Three employees of Graham Ross (the cashier, Victorson's secretary Bessie Dale, and Miriam Ross Victorson) were authorized to sign corporate checks in amounts up to $1,000 if two of the three signed such checks. Michael Scherzer, the accountant, did not have authority to sign corporate checks. In the case of taxes owed by Graham Ross, Scherzer would normally make out the check for the amount payable by Graham Ross and bring it to Victorson for the latter's signature. Neither Michael Scherzer nor his successor Ernest Baker was an officer of Graham Ross. Neither was a certified public accountant. Graham Ross did not issue any check for or otherwise make payment of Federal income taxes due for its fiscal years ended April 30, 1955 and 1956. The Commissioner determined that the failure of Graham Ross to file income tax returns and the resulting underpayment of its taxes for its fiscal years ended April 30, 1955 and 1956 was due to fraud and that Graham Ross was thereby liable for a98 50 percent addition to the tax for such years under Section 6653(b) of the 1954 Code. In the alternative, the Commissioner determined that such failure was not due to reasonable cause but was due to willful neglect and that Graham Ross was thereby liable for a 25 percent addition to the tax for its fiscal years ended April 30, 1955 and 1956 pursuant to Section 6651 of the 1954 Code. Deficiencies in income tax of Graham Ross for its fiscal years ended April 30, 1955 and 1956 are not due in whole or in part to fraud. The failure of Graham Ross to file its income tax returns for its fiscal years ended April 30, 1955 and 1956 was not due to reasonable cause but was due to willful neglect. Opinion RAUM, Judge: 1. By an agreement dated January 27, 1954, Victorson purchased all of the issued and outstanding stock of Graham Ross from Miriam Ross Victorson, the widow of Victorson's deceased brother. Payment for the stock was provided in installments starting from the purchase date and continuing to July of 1955. Thereafter from time to time during 1954 and 1955, Victorson caused Graham Ross to redeem all of the preferred stock he had purchased and to pay the redemption price thereof99 directly to Miriam Ross Victorson in discharge of part of Victorson's obligation to her under the stock-purchase agreement. The Commissioner has determined that such payments by Graham Ross, amounting to $13,500 in 1954 and $6,500 in 1955, constituted dividends to Victorson. We think that this determination is correct. We have made an ultimate finding that in the circumstances the redemptions in question were essentially equivalent to the distribution of dividends to Victorson. Section 302(b)(1), Internal Revenue Code of 1954. In effect, Victorson as sole shareholder of Graham Ross used corporate surplus to assist him in discharging his personal obligation to Miriam Ross Victorson under the stock-purchase agreement. In the absence of a redemption, there is no question that such use of corporate funds for Victorson's benefit would constitute a dividend to Victorson. Cf. Louis Greenspon, 23 T.C. 138">23 T.C. 138, 151, affirmed on this point but reversed on other grounds 229 F. 2d 947 (C.A. 8); Alex Silverman, 28 T.C. 1061">28 T.C. 1061, affirmed 253 F. 2d 849100 (C.A. 8). We think that the redemption of Victorson's preferred stock in no way changes the result. He remained the sole stockholder after the redemptions in question. No corporate purpose for the acquisition of the preferred stock as treasury stock has been suggested. The redemptions represent merely a use of corporate funds to satisfy Victorson's personal obligation, without altering Victorson's relationship to Graham Ross in the slightest. As such, the redemptions were essentially equivalent to dividends to Victorson. Wall v. United States, 164 F. 2d 462 (C.A. 4); Aloysius McGinty, 38 T.C. ; cf. Ferro v. Commissioner, 242 F. 2d 838 (C.A. 3), affirming a Memorandum Opinion of this Court; Schalk Chemical Co., 32 T.C. 879">32 T.C. 879, affirmed 304 F. 2d 48 (C.A. 9). Revenue Ruling 59-286, 2 C.B. 103">1959-2 C.B. 103, relied upon by petitioners, is not to the contrary. In the situation outlined in the ruling two brothers each owned 50 percent of the stock of a corporation, subject to an agreement providing that upon the death of either of them the survivor would either purchase the stock of the decedent or vote his stock for liquidation101 of the corporation. One brother died and the corporation redeemed all of the shares held by the estate at fair market value for corporate business reasons. The ruling held that the redemption did not constitute a payment of a constructive dividend to the remaining shareholder. In the present case, Victorson was not a remaining shareholder but was the only shareholder at the time of the redemptions, the shares redeemed had been acquired by Victorson by creating an obligation which the redemptions partially discharged, and no corporate business reasons were here present for the redemptions. Thus, the factual picture here is quite different. It is significant that the cited ruling expressly distinguishes the Wall case, supra, which is virtually indistinguishable from the instant case. Similarly, the facts in John Decker, 32 T.C. 326">32 T.C. 326, affirmed 286 F. 2d 427 (C.A. 6), cited by petitioner, are distinguishable from the present case and from Wall for the reasons stated in Decker (32 T.C. at p. 333) distinguishing Wall. 2. The second issue involves options to purchase stock of Glamur Products, Inc. held by Graham Ross and Victorson in connection102 with the underwriting of Glamur Products stock by Graham Ross. Under the terms of the underwriting agreement, if Graham Ross was successful in selling all of the 600,000 shares of Glamur Products stock subject to the underwriting, the president and principal stockholder of Glamur Products, Jack Hosid, individually agreed to sell 100,000 shares of his Glamur Products stock to Graham Ross or its nominees and 50,000 shares to Victorson at the price of one mill per share. Such option stock was not to be subject to public sale by the grantees of the options for a period of at least 12 months after the effective date of the notification of the underwriting to the S.E.C. (unless Glamur Products filed a registration statement in the interim), and after this period Glamur Products agreed to qualify the option stock for public sale. Private sale of the option stock during the specified 12-month period was not prohibited by the terms of the options. Graham Ross successfully completed the underwriting on February 1, 1955. On May 23, 1955, Graham Ross and Victorson exercised their options to purchase an aggregate of 150,000 shares of Glamur Products stock from Jack Hosid for a total price of $150. 103 Of the 100,000 shares acquired by Graham Ross, 46,498 were transferred to its salesmen and other employees as a bonus for participation in the successful underwriting. The Commissioner determined that Graham Ross realized income in the amount of $127,350 by the bargain purchase of 150,000 shares of Glamur Products stock on May 23, 1955. In the alternative, he maintains that such income was realized by Graham Ross on February 1, 1955, when the underwriting was completed and it became entitled to the option stock, or in November of 1955 when the restraint against public sale presumably expired, or in August of 1956 when a portion of the option stock purchased was qualified for public sale. The Commissioner determined that Victorson realized $42,500 in additional income by the purchase of the Glamur Products option stock, and at the trial and on brief the Commissioner maintains that such income constituted a dividend to Victorson from Graham Ross. The compensatory nature of these options is not in issue. Nor do petitioners deny that the exercise of such compensatory options results in ordinary104 income to the optionees to the extent that the fair market value of the stock purchased exceeds the option price paid for such stock. 1 Cf. Commissioner v. LoBue, 351 U.S. 243">351 U.S. 243; Wanda V. Van Dusen, 8 T.C. 388">8 T.C. 388, affirmed 166 F. 2d 647 (C.A. 9); William S. Thornhill, 37 T.C. 988">37 T.C. 988; Rev. Rul. 62-49, 1 C.B. 13">1962-1 C.B. 13. The matters in controversy with regard to these options are whether the Glamur Products stock had an ascertainable fair market value on the date the options were exercised or at any other time pertinent herein, whether the Commissioner properly determined that the date these particular options were exercised is the time that Graham Ross and Victorson realized income on the option stock, whether Graham Ross is chargeable with income in respect to the 50,000 shares of option stock which Victorson purchased and the 46,498 shares of such stock which Graham Ross had transferred to its salesmen and employees, and whether income attributable to Victorson as a result of the option stock which he purchased constituted a dividend to him from Graham Ross. 105 We consider first the point in time at which Graham Ross and Victorson realized income on the option stock. We think that the date the options were exercised, May 23, 1955, is the proper time. It was on that date that Graham Ross and Victorson elected to purchase the stock under the terms of the options and to receive thereby both the immediate and the anticipated benefits which were included in the bargain purchase of this stock. Thus, in accordance with the cases cited above, we hold that the date of exercise or election is an appropriate time for the inclusion of income with respect to such stock options. Petitioners maintain that February 1, 1955, is a more significant date, because it was then that Graham Ross successfully completed the underwriting and became entitled with Victorson to purchase the option stock. If the option stock had been given to Graham Ross and Victorson rather than purchased by them, we could agree that the date of qualification was more significant than the date of exercise of the options. But these were options to purchase, albeit for a small amount, and in106 the circumstances we think it would not be proper to say that Graham Ross or Victorson realized any income with respect to the option stock until the date they in fact made the investment required under the options. We turn next to the question of the fair market value of the option stock. Petitioners argue that the restrictions contained in the options against the public sale of this stock, together with the alleged highly speculative nature of Glamur Products stock, make it impossible to ascertain its fair market value on the day the options were exercised. We have set forth in the findings the restrictions on sale which were applicable to the option stock. The options provided that in effect such stock would not be sold to the public for at least 12 or 13 months 2 after the effective date of the notification of the underwriting to the S.E.C. After that time, Glamur Products agreed to qualify the option stock for public sale. When the options were exercised on May 23, 1955, this restriction on public sale still had some six months to run. However, the restriction on public sale of the option stock did not prevent private sale in the interim. Thus, at any time after the exercise107 of the options, Graham Ross and Victorson could have sold their option stock in one or more private sales without violating the terms of the options. In these circumstances, we think that the restrictions on the sale of the option stock, limited as they were in scope and in time, did not prevent such stock from having a fair market value, although such restrictions did have the effect of depressing the fair market value of the option stock as compared to the fair market value of unrestricted, registered Glamur Products stock. Cf. Edith G. Goldwasser, 47 B.T.A. 445">47 B.T.A. 445, 457, affirmed per curiam 142 F. 2d 556 (C.A. 2), certiorari denied, 323 U.S. 765">323 U.S. 765; cf. also Thomas D. Conroy, T.C. Memo. 1958-6, where the facts are closer to those in the present case, and where the Goldwasser case was followed. On the basis of all the evidence of record, we have made a finding that the fair market value of the option stock on May 23, 1955, was 50 cents per share. 3108 Cases relied upon by petitioner, such as Helvering v. Tex-Penn Oil Co., 300 U.S. 481">300 U.S. 481; United States v. State Street Trust Co., 124 F. 2d 948 (C.A. 1); Schuh Trading Co. v. Commissioner, 95 F. 2d 404, 411-412 (C.A. 7); and Harold H. Kuchman, 18 T.C. 154">18 T.C. 154, are distinguishable because the evidence therein was such that the restrictions placed upon the stock involved were thought to make sale thereof impossible. Having decided that the option stock had a fair market value when the options were exercised and the amount of that value, we consider next the number of shares attributable to Graham Ross for purposes of determining the amount of income it realized from receipt of the option stock. The Commissioner determined that Graham Ross is chargeable with both the 100,000 shares which it purchased and the 50,000 shares which were on option to Victorson. In this we think he erred. Although the matter may not be completely free from doubt, these two blocks of stock were dealt with separately and upon a different basis. We are reasonably satisfied that Hosid's undertaking to sell the 50,000 shares to Victorson as an individual contemplated109 compensation to him for his own efforts in helping to bring the public offering to a successful conclusion. Accordingly, the profit growing out of these 50,000 shares must be attributed directly to Victorson; it is not chargeable to Graham Ross. That profit was thus not derived by him through Graham Ross and was therefore neither a dividend nor a deductible expense as to it. As to the 100,000 shares of option stock acquired by Graham Ross, 46,498 shares were transferred to salesmen and employees of Graham Ross as bonuses for their work in the successful underwriting. Theoretically, of course, the gross profit with respect to the entire 100,000 shares was allocable to Graham Ross which, in turn, was entitled to a deduction in respect of the 46,498 bonus shares. In substance, however, as contended by it, Graham Ross must be charged with the net profit allocable to the 53,502 remaining shares. The net result is the same. 3. The option to purchase 7,500 shares of Wilson Organic Chemicals, Inc., exercised by Graham Ross on March 8, 1955, raises some of the same questions previously discussed in relation to the Glamur Products options. In the pleadings herein, Graham Ross claimed that110 sale of the Wilson Organic Chemicals option stock was restricted for at least 13 months when it received such stock and that such stock had no reasonably ascertainable fair market value as a result. However, no convincing evidence of any such sale restrictions in relation to the Wilson Organic Chemicals stock was offered at trial. We have made a finding that such stock had a fair market value of $1.125 per share on March 8, 1955. We hold that the Commissioner correctly determined that Graham Ross realized income on March 8, 1955, when it exercised the option to purchase 7,500 shares of Wilson Organic Chemicals stock, to the extent of the difference between the option price of 25 cents per share and the fair market value per share. However, it is entitled to deduct the value of 400 shares which it in turn transferred to Michael Scherzer for services rendered. 4. In its petition filed with this Court, Graham Ross claimed that the Commissioner erred in failing to allow it larger total business expense deductions in each of the taxable years in issue. However, at the trial Graham Ross presented no evidence with regard to its business expenses, except some general testimony in relation111 to Victorson's services and other testimony directed to the reason the corporation transferred certain option stock to its employees. We have already ruled that the transfers of the shares of option stock (both Glamur and Wilson Organic) are deductible, and our holding that Victorson's acquisition of his 50,000 shares of Glamur stock should not be traced through Graham Ross makes moot the question whether such shares should be treated as compensation to him by Graham Ross. And our holding above that Victorson realized dividend income by the redemption of his Graham Ross preferred stock in 1955 and 1956 disposes of the claim of Graham Ross that such transactions constituted additional compensation to Victorson which are deductible by Graham Ross. There remains nevertheless Graham Ross's claim that it is entitled to further deductions on account of Victorson's services. However, it has presented no convincing evidence that it paid any other amounts to Victorson which were compensation to Victorson and which were not allowed by the Commissioner. Graham Ross has failed to prove that it is entitled to any business expense deductions, apart from those approved herein, in excess of those112 allowed by the Commissioner during the taxable years in issue. 5. Graham Ross failed to file corporate income tax returns for its taxable years ended April 30, 1955 and 1956. The Commissioner determined that the resulting underpayment of its taxes was due to fraud, making Graham Ross subject to an addition to the tax of 50 percent for these two years under Section 6653(b) of the 1954 Code. In the alternative, the Commissioner contends that such failure was due to willful neglect and not due to reasonable cause, making the corporation subject to an addition to the tax of 25 percent for the two years in question under Section 6651(a). On the issue of fraud, the Commissioner has the burden of proof. Upon consideration of the entire record, we think he failed to prove by clear and convincing evidence that the failure of Graham Ross to file returns for its fiscal years ended April 30, 1955 and 1956 was due to fraud. While the failure to file in and of itself was some evidence of fraud, we cannot find that fraud has been proved by the necessary clear and convincing evidence in the context of113 the record before us. However, we have made a finding on the evidence that the failures to file were due to willful neglect and not to reasonable cause. Thus, we uphold the 25 percent addition to the tax for the years ended April 30, 1955 and 1956. Neither Victorson's inexperience in running a business nor his reliance on the accountant Scherzer to file the required tax returns is, as claimed by Graham Ross, reasonable cause for its failure to file. Victorson admitted that he was aware of his responsibility as president of the corporation to see that income tax returns were filed. Delegation of this responsibility to an accountant, particularly one who is not a certified public accountant, cannot furnish either Victorson or Graham Ross with a reasonable cause for a failure to file corporate income tax returns. This is not a case of reliance upon the advice of an expert that it was not necessary for the corporation to file returns. Cf. Haywood Lumber & Mining Co. v. Commissioner, 178 F. 2d 769 (C.A. 2), modifying 12 T.C. 735">12 T.C. 735. This is a case of knowing of the statutory*114 requirements and failing to see that they were in fact carried out. 4 In the circumstances, we think it clear that the failure of Graham Ross to file the returns in question was due to willful neglect and was not due to reasonable cause. Decisions will be entered under Rule 50. Footnotes1. On brief petitioners suggest that a different rule may apply in the present case to an underwriter which receives a stock option as part of its compensation for services rendered than in the more usual case of an employee receiving such an option. However, petitioners do not suggest what this different rule should be nor why it should be different. Given the same options in both situations, we know of no reason why an independent contractor should be treated differently from an employee with regard to the realization of income upon the exercise of a compensatory stock option. See Rev. Rul. 62-49↩, 1962-1 C.B. -.2. As noted in the findings, although the underwriting agreement set a 12-month restriction on public sale, the notification to the S.E.C. and the offering circular referred to it as a 13-month restriction. The reason for this change is not explained in the record. ↩3. It should be noted that in making this valuation we are not dealing with the value of a single block of 150,000 shares. In the first place, as more fully pointed out hereinafter, there were originally two separate blocks, in the amounts of 100,000 shares and 50,000 shares, owned by Graham Ross and Victorson, respectively. In the second place, the valuation of only 53,502 shares out of Graham Ross's 100,000 shares is involved as to it, since it gave 46,498 shares to salesmen and employees as a bonus. And in the third place, it must be remembered that the corporation's 53,502 shares and Victorson's 50,000 shares could each be the subject of more than a single private sale. Nevertheless, we are cognizant that such sales could probably have been made only in larger blocks than are customarily sold in public sales, and we have taken this blockage factor into account in making our finding as to value.↩4. Although there is a vague suggestion in the testimony of Victorson that Scherzer's failure to file income tax returns for Graham Ross and his failure to supply Victorson with financial statements both may have been part of some deliberate conspiracy to injure Victorson and the corporation, we can make no finding in this regard on the basis of the evidence presented. Scherzer was deceased at the time of trial, and Victorson's assertions concerning the alleged conspiracy were not at all clear. Therefore, we do not decide the question whether tortious conduct on the part of an employee which is directly related to a failure to file a return may constitute reasonable cause for such failure under the statute.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4669072/	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 Nos. 18-CV-534, 19-CV-642, & 19-CV-643 EHAB ANWAR ASAL ET AL., APPELLANTS, v. FAYEZ F. MINA, AS ADMINISTRATOR AND LEGAL REPRESENTATIVE OF THE ESTATE OF GEORGE FAYEZ MINA, APPELLEE. Appeals from the Superior Court of the District of Columbia (CAB-9125-15) (Hon. William M. Jackson, Trial Judge) (Argued January 7, 2020 Decided March 18, 2021) Patricia Lambert, with whom Brian Cathel and Emily Devan were on the brief, for appellants Ehab Asal and Hala Asal. Laura Basem Jacobs for appellant Nationwide Property & Casualty Insurance Co. Peter Scherr, with whom Scott Futrovsky was on the brief, for appellee. Before BLACKBURNE-RIGSBY, Chief Judge, THOMPSON, Associate Judge, and RUIZ, Senior Judge. Opinion by Associate Judge THOMPSON, dissenting in part, at page 50. BLACKBURNE-RIGSBY, Chief Judge: In this appeal, we address the rights and respective duties of drivers and pedestrians when crossing at unsignalized 2 crosswalks. It arises from a jury verdict finding Ehab and Hala Asal liable for the death of George F. Mina after he was struck by the Asals’ vehicle. The Asals appeal the trial court’s directed verdict on the issues of negligence and contributory negligence in favor of Mr. Mina’s estate, as well as its decision to leave undisturbed the jury’s $275,000 non-economic damages award on the survival action. Nationwide Property & Casualty Insurance Co. (“Nationwide”), the Asals’ auto insurer, appeals the trial court’s ruling that Mr. Mina’s estate is entitled to garnish the benefits of the Asals’ insurance policy. Finding no error, we affirm. I. Background In June 2015, driver Ehab Asal struck and killed pedestrian George F. Mina. Mr. Mina’s father, Fayez Mina, acting as the personal representative of Mr. Mina’s estate (the “Estate”), filed a complaint against Mr. Asal and his wife, Hala Asal, alleging, in relevant part, claims under the District of Columbia’s Survival Act, D.C. Code § 12-101 (2012 Repl.), and Wrongful Death Act, D.C. Code § 16-2701 (2012 Repl.). 1 A one-day jury trial was held on November 15, 2017, which established largely undisputed facts, as the collision was caught on video camera. 1 At the time of the collision, Mr. Asal was driving a car owned by his wife, Ms. Asal. The Estate named Ms. Asal as a defendant because she owned the car, not because of her involvement in the collision. 3 A. Factual Background The following facts are derived from the trial testimony, which was corroborated by the surveillance footage viewed by the trial court and the jury. On June 10, 2015, at approximately 5:06 p.m., Mr. Mina waited in the bus lane inside the crosswalk on the southeast corner of Wisconsin Avenue and Veazey Street NW to cross Wisconsin Avenue. Wisconsin Avenue is a busy, six-lane roadway with three northbound and three southbound lanes of traffic. At Veazey Street, an unsignalized crosswalk divides Wisconsin Avenue, with several pedestrian crossing signs facing drivers in both directions – including a sign in the middle of Wisconsin Avenue; the intersection does not have a stop sign. Emma Rigney, who was driving a red SUV northbound in the middle lane on Wisconsin Avenue, testified that she stopped just before the crosswalk to let Mr. Mina cross. The two made eye contact, Mr. Mina smiled and waved, and he proceeded to cross. While walking past Ms. Rigney’s stopped car, Mr. Mina turned his head and attention away from the oncoming northbound lanes (the direction of Ms. Rigney’s car) and toward the opposite, southbound lanes to observe oncoming traffic. He then turned his attention back, to observe the innermost northbound lane. At that time, Mr. Asal’s vehicle, which was proceeding in that lane, collided with Mr. Mina. Mr. Mina’s body hit the 4 side of Mr. Asal’s car, his head hit the windshield, and he was thrown five to six feet onto the pavement, where he lost consciousness. Mr. Asal testified that he knew the area well because he passed through it every day driving to his job at a restaurant located approximately four blocks from the intersection. He was also aware of the crosswalk at that location and that it was marked by several pedestrian warning signs facing his direction. Approaching Veazey Street at the time of the collision, Mr. Asal was driving northbound in the left, innermost northbound lane of Wisconsin Avenue at approximately twenty to thirty miles per hour. Mr. Asal observed Ms. Rigney’s car (in the middle northbound lane) slow down as it approached the crosswalk, but testified that he did not see her car stop. 2 The car immediately in front of Mr. Asal in his lane and an oncoming southbound car both drove through the intersection without stopping. Mr. Asal testified that he did not see a pedestrian in the crosswalk, and he did not slow down or stop at the crosswalk. Mr. Asal testified that he did not see Mr. Mina until the collision, when Mr. Mina struck his windshield. 2 Mr. Asal testified that, in his experience, cars that were slowing down as they approached the intersection were generally turning, not stopping. On cross- examination, however, Mr. Asal confirmed that there was no street sign that authorized a car to turn right from the middle lane and that he did not observe Ms. Rigney with her right turn signal on at the time. 5 Dr. John Davitt, a medical resident at Washington Hospital Center, testified that he was sitting at a restaurant adjacent to the crosswalk when he heard the collision and saw Mr. Mina being tossed from Mr. Asal’s car onto the pavement. Dr. Davitt immediately went to the crosswalk, where he found Mr. Mina bleeding, unconscious, and unarousable, though breathing and with a pulse. Dr. Davitt stabilized Mr. Mina’s head and neck while waiting for an ambulance to arrive. An ambulance transported Mr. Mina to the George Washington University Hospital emergency room. Dr. Babak Sarani, Mr. Mina’s treating physician and the Estate’s expert witness, testified that Mr. Mina was “radioed [in] as being unconscious” and confirmed that he was “in a very deep state of coma” upon his arrival at the emergency room. Dr. Sarani rated Mr. Mina a three on the Glasgow coma scale, the lowest score, indicative of “a deeply comatose person.” 3 Dr. Sarani testified regarding the extent of Mr. Mina’s injuries and the 3 Dr. Sarani explained that the Glasgow coma scale “is a means of measuring someone’s degree of coma” – “how awake are you versus how . . . deep a coma are you in.” The score ranges from three to fifteen, with the lowest score, representing a deeply comatose person, being a three. See also Clements v. United States, 669 A.2d 1271, 1274 (D.C. 1995) (describing the Glasgow Coma Scale as a “measurement of [the] degree of alertness” that “rat[es] a person between a high of 15 and a low of 3”). 6 medical procedures and therapies he underwent following his arrival at the hospital. 4 Mr. Mina died on June 16, 2015, six days after the collision. Dr. Sarani testified that Mr. Mina was unconscious from the moment he arrived at the hospital until he died. B. Judgment in Favor of the Estate At the close of evidence, the trial court granted the Estate’s motion for a directed verdict on the issues of Mr. Asal’s negligence and Mr. Mina’s contributory negligence. As to negligence, the trial court ruled that Mr. Asal – knowing there was a pedestrian warning sign and seeing Ms. Rigney’s car slow down (if not stop) – had a duty to stop and did not. As to contributory negligence, the trial court ruled that, once Ms. Rigney’s vehicle stopped to allow Mr. Mina to cross, Mr. Mina did not have a continuing obligation to expect wrongful conduct by other vehicles, i.e., that they would drive through the intersection while he was using the crosswalk. Thus, the only issue remaining for the jury was non-economic compensatory 4 Over defense objection, Dr. Sarani testified that Mr. Mina underwent several emergency surgeries, in which surgeons removed portions of Mr. Mina’s skull to extract a blood clot and alleviate pressure in the brain. While those procedures were initially successful, Mr. Mina’s brain began to experience internal bleeding and increasing internal pressure. Because surgery was no longer an option, doctors treated Mr. Mina by medicating him with sedatives, and then cooling his body by circulating ice-cold water into his veins and rewarming his body. Mr. Mina’s body ultimately went into multiple organ failure. 7 damages, e.g., for pain and suffering. The jury awarded the Estate a total of $801,779.30 in damages, including an award of $275,000 in non-economic damages in the survival action. The trial court entered judgment that same day, November 15, 2017. Following the entry of judgment, the Asals, on December 12, 2017, moved for a new trial, arguing that the trial court erred in not submitting the issue of contributory negligence to the jury, or, in the alternative, for remittitur of the non- economic damages award because the $275,000 award was not supported by the evidence. The Asals also filed a motion to stay the execution of judgment pending a decision on the motion for a new trial. The Estate opposed and responded with a cross-motion, requesting as a condition for a stay that the Asals post adequate security through a bond, pursuant to Super. Ct. Civ. R. 62. On May 3, 2018, the trial court entered separate orders that, in relevant part, (1) denied the Asals’ motion for a new trial, and (2) granted the Estate’s cross-motion, requiring that the Asals post a $808,226.00 bond as adequate security for a stay by June 4, 2018. 5 The Asals timely appealed those orders. 6 5 The $808,226.00 amount comprised the $801,779.30 judgment, plus previously-awarded sanctions of $6,446.70. 6 This court denied the Asals’ emergency motion to stay the execution of judgment. 8 C. Nationwide’s Dispute Regarding the Asals’ Insurance Policy The Asals maintained a Personal Auto Policy with Nationwide (the “Policy”). Nationwide delivered the Policy to the Asals in Virginia for a vehicle they owned in Virginia. The relevant parts of that Policy provided as follows. Pursuant to Part B (“Liability Coverage”), Nationwide agreed to “pay damages for bodily injury . . . for which any insured becomes legally responsible because of an auto accident” up to an applicable limit of $200,000, all defense costs incurred in settling or defending any claim or suit, and “[p]remiums on appeal bonds and bonds to release attachments in any suit” that Nationwide defends. Pursuant to Part E (“Duties After an Accident or Loss”), Nationwide may deny Liability Coverage under Part B “if failure to comply with the following duties is prejudicial to us,” including the duty to “[c]ooperate with [Nationwide] in the investigation, settlement, or defense of any claim or suit.” Part F provided: No legal action may be brought against us [Nationwide] until there has been full compliance with all the terms of this policy. In addition, under Part B, no legal action may be brought against us until: 1. We agree in writing that the insured has an obligation to pay; or 9 2. The amount of that obligation has been finally determined by judgment after trial. If that judgment is returned unsatisfied, legal action may then be maintained against us for the amount of the obligation that does not exceed the limits of applicable coverage under this policy. Pursuant to the Policy, Nationwide paid all of the Asals’ defense and appeal costs in this matter. On June 7, 2018, the Asals filed a motion to clarify the trial court’s order of May 3, 2018, which required them to post a $808,226.00 bond by June 4, 2018. In their motion, the Asals asserted that Nationwide “indicated that it will not provide collateral for a bond in an amount over $200,000, which is the limit of the applicable insurance policy.” Without providing any justification, the trial court declined to clarify its prior order. Neither the Asals nor Nationwide posted the required bond or paid any of the judgment. Therefore, on September 18, 2018, the Estate filed a writ of attachment against Nationwide in an effort to seize the proceeds of the Asals’ insurance policy, and served interrogatories on Nationwide. Nationwide answered the interrogatories attached to the writ, denying that it possessed any property belonging to the Asals. Thereafter, the Estate filed a motion for judgment of condemnation against the Asals and Nationwide, asserting that the Estate, as the prevailing party in the underlying 10 suit, became a judgment creditor under the Policy and therefore subrogated to the Asals’ right of indemnification, which required Nationwide to remit the $200,000 Policy limit to the Estate. In opposition, Nationwide asserted that (1) the benefits of the Policy were not the property of the Asals and therefore not obtainable through a writ of attachment; and (2) Nationwide had no obligation to pay any amount until after the conclusion of the appeals process because, under the cooperation clause in Part E of the Policy, determining the insured’s compliance with the obligation to cooperate can “be made only after the conclusion of the litigation process, including the appeal and further trial.” After a January 18, 2019, hearing, the trial court granted the Estate’s motion and entered a judgment of condemnation against the Asals and Nationwide for $200,000. In granting the motion, the trial court, finding no controlling law in the District, relied on Peninsula Ins. Co. v. Houser, 238 A.2d 95, 97 (Md. 1968), which holds that a judgment creditor is entitled to the same financial and legal rights as the judgment debtor under an automobile liability insurance policy. Therefore, the trial court ruled that the Estate was entitled to collect on and garnish the Asals’ Policy up to its limit at the time of the November 15, 2017, judgment because, on that date, “the Asal’s [sic] status changed from Defendants to judgment debtors and 11 Nationwide from interested party to garnishee.” Both Nationwide and the Asals appeal from that order. 7 II. Negligence The trial court did not err in its decision to direct a verdict as to Mr. Asal’s negligence. The Asals contend that the trial court should have allowed the issue of negligence to go to the jury because there was some evidence that Mr. Asal’s failure to stop at the crosswalk, as required by D.C. Code § 50-2201.28(a-1) (2014 Repl.), was “excusable,” thereby defeating a finding of negligence per se and that the jury should have had the opportunity to weigh Mr. Asal’s reasons for failing to stop. 8 In reviewing the grant of a directed verdict, we use the same test applied by the trial court, viewing the evidence in the light most favorable to the non-moving 7 Although the Asals’ appeal was docketed in this court as case No. 19-CV- 642, no parties filed any briefs or documents under that case number. Nationwide’s appeal, No. 19-CV-643, was fully briefed before this court, and we decide the merits of the issues in both appeals as presented in those briefs. 8 D.C. Code § 50-2201.28(a-1) provides that “[w]henever a vehicle is stopped at a marked crosswalk at an unsignalized intersection, a vehicle approaching the crosswalk in an adjacent lane or from behind the stopped vehicle shall stop and give the right-of-way to ensure the safety of pedestrians and bicyclists before passing the stopped vehicle.” 12 party and drawing all inferences in its favor. See Nicola v. Wash. Times Corp., 947 A.2d 1164, 1170 (D.C. 2008); Wilson v. Wash. Metro. Area Transit Auth., 912 A.2d 1186, 1188 (D.C. 2006); Abebe v. Benitez, 667 A.2d 834, 836 (D.C. 1995) (per curiam). “As long as there is some evidence from which jurors could find that the party has met its burden, a trial judge must not grant a directed verdict.” Abebe, 667 A.2d at 836. Thus, a trial court presiding over a jury trial may direct a verdict against a party only if it “has been fully heard on an issue, and there is no legally sufficient evidentiary basis for a reasonable jury to find for” that party. Evans-Reid v. District of Columbia, 930 A.2d 930, 936 (D.C. 2007). “This court considers de novo whether the evidence was sufficient to go to the jury.” Wilson, 912 A.2d at 1188 (emphasis omitted). Where a person’s violation of a statute proximately causes an injury that the statute was designed to prevent, “there is a rebuttable presumption of negligence on the part of the violator,” i.e., negligence per se. Robinson v. District of Columbia, 580 A.2d 1255, 1256 (D.C. 1990). If the violator demonstrates that he or she did “everything a reasonably prudent person would have done to comply with the law,” then the statutory violation merely constitutes evidence of negligence. Id. Here, the trial court ruled that Mr. Asal was negligent when he failed to stop for Mr. Mina, “not merely from violation of the statute, but from the facts that have been introduced 13 thus far,” i.e., finding liability as to both negligence per se and negligence. Thus, while Mr. Asal contends that the jury should have been permitted to consider his reasons for failing to stop and thereby evaluate whether his conduct was negligent, it is clear that the trial court evaluated Mr. Asal’s reasons for failing to stop and nevertheless determined that he was negligent as a matter of law. Thus, the trial court directed a verdict as to both negligence and negligence per se. On appeal, the Asals argue that Mr. Asal did not comply with D.C. Code § 50-2201.28 because he thought Ms. Rigney was “merely turning,” based on “what he observed and his experience driving regularly in the area.” However, they advance no explanation as to why Mr. Asal’s reasons for failing to stop demonstrate that he “did everything a reasonably prudent person would have done to comply with the law.” Robinson, 580 A.2d at 1256. Mr. Asal testified that he believed Ms. Rigney was going to make a right turn despite his testimony that she was in the center lane of traffic, that there was no street sign that authorized her to turn right from the middle lane, and that he did not observe her as having her right turn signal on. Thus, all that is left is what the Asals argue is Mr. Asal’s “experience.” See supra note 2. However, the record provides no evidence that Mr. Asal regularly observed vehicles making right turns from the middle lane of traffic or that it was the regular practice at that intersection; he only testified that the right lane is a “bus 14 stop.” 9 On this record, there is no legally sufficient evidentiary basis for a jury to conclude that Mr. Asal’s reasons for failing to stop excused his violation of D.C. Code § 50-2201.28, such that the issue of negligence should have gone to the jury. See Evans-Reid, 930 A.2d at 936. Therefore, we find no error in the directed verdict on Mr. Asal’s negligence. III. Contributory Negligence The Asals argue that the trial court erred in directing a verdict for the Estate on the issue of contributory negligence, rather than submitting the issue to the jury. We find no such error. For the reasons explained below, we hold that a pedestrian has a duty to exercise reasonable care for the protection of his or her own safety, even when he or she has the right-of-way at an unsignalized intersection or crosswalk. We conclude that the evidence, viewed in the light most favorable to the Asals and drawing all inferences in their favor, was insufficient to support any finding by a reasonable jury that Mr. Mina was contributorily negligent, i.e., that he 9 Mr. Asal testified that, at the time of the collision, there were no cars parked along the right-hand side of the street. The video footage corroborates that the right lane was empty of cars, and it also shows that there was no bus coming to or at that bus stop in the twenty-five seconds preceding his collision with Mr. Mina. 15 engaged in conduct that was unreasonable under the circumstances. Therefore, the trial court properly directed a verdict in favor of the Estate on that issue. 10 A. A Pedestrian’s Duty of Reasonable Care Having considered the principles of contributory negligence, our jurisprudence in pedestrian-vehicle collision cases, and the relevant statutory and regulatory framework, we clarify that in all circumstances a pedestrian has a “duty to exercise reasonable care for the protection of his or her own safety.” Lyons v. Barrazotto, 667 A.2d 314, 322 (D.C. 1995); see also Standardized Civil Jury Instructions for the District of Columbia, No. 7.13 (2020 Rev. Edition) (“Before attempting to cross a street, it is a pedestrian’s duty to make reasonable observations to learn the traffic conditions confronting him or her, and try to make a sensible 10 We are not persuaded by the Estate’s argument that the Asals waived a contributory negligence defense. The Asals asserted contributory negligence as an affirmative defense in their Answer, raised the defense during the deposition of Mr. Asal, and addressed it in the Joint Pre-Trial Statement by requesting a jury instruction for “Contributory Negligence Defined” and proposing a verdict sheet with a contributory negligence instruction. Because the Estate was sufficiently on notice of the defense, we conclude that it was not waived. Cf. Word v. Ham, 495 A.2d 748, 751 (D.C. 1985) (per curiam) (“Appellees were put on notice of the defense by appellants’ opposition to their motion for summary judgment and had the opportunity to respond, and thus cannot claim to have been prejudiced by appellants’ failure to plead this defense in their answer or counterclaim.”). 16 decision whether it is reasonably safe to attempt the crossing.”). Here, we hold that a pedestrian has a duty to exercise reasonable care when crossing at an unsignalized intersection or crosswalk, even when he or she has the right-of-way. Thus, contributory negligence plays a role in determining liability in negligence cases involving pedestrians, even when the pedestrian has the right-of-way. We reject the Estate’s argument that a pedestrian, once legally crossing within the crosswalk, has “no duty to continually observe for traffic which was legally required to stop in advance of the crosswalk.” i. Contributory Negligence Principles In the District, a plaintiff in a negligence action generally cannot recover when he or she is found to have been contributorily negligent. See Civic v. Signature Collision Ctrs., LLC, 221 A.3d 528, 530 (D.C. 2019). 11 Contributory negligence evaluates “the objective reasonableness of the plaintiff’s conduct,” determining whether “the plaintiff’s behavior in encountering the risk [created by the defendant’s 11 The District remains one of the few jurisdictions that generally retains a pure contributory negligence defense. See, e.g., Jarrett v. Woodward Bros., Inc., 751 A.2d 972, 985 & n.20 (D.C. 2000) (noting that the District is different from the “great majority of jurisdictions,” most of which “have some sort of comparative negligence regime”). But see infra note 12. Even a contributorily negligent plaintiff may recover if the defendant had the “last clear chance” to avoid the injury. District of Columbia v. Huysman, 650 A.2d 1323, 1326 (D.C. 1994). 17 breach of duty] departed from the standard of care that is to be expected of the reasonable person in the plaintiff’s position.” Sinai v. Polinger Co., 498 A.2d 520, 524 (D.C. 1985). “As a general proposition, a plaintiff is not bound to anticipate negligent conduct on the part of others. Rather, he may assume that others will fulfill their duties.” Stager v. Schneider, 494 A.2d 1307, 1311 (D.C. 1985) (citation omitted). ii. Relevant Jurisprudence This court has not had occasion to consider a pedestrian’s duty when crossing the street in the case of a pedestrian-vehicle collision. Our predecessor courts, however, provide sufficient guidance from which we can discern relevant principles. Griffith v. Slaybaugh, 29 F.2d 437 (D.C. Cir. 1928), is one of the earliest relevant decisions and dealt with a signalized crosswalk. In Griffith, two pedestrians, “walking rapidly,” began crossing when the signal was green, thus authorizing their passage; as they crossed, the light changed to red, and a car traveling perpendicular through the intersection struck them. Id. at 437-38. The court affirmed a judgment in favor of the pedestrians. Id. at 439. After reviewing 18 the relevant traffic regulations, the court identified the following as a “clear expression of the law”: [O]ne entering the street intersection under the direction of the traffic officer has the right of way and this right of way continues until he reaches the other side of the street, and the fact that the semaphore was changed, giving the traffic in the other direction notice to proceed, does not give them the right of way over the one first entering the street crossing, and the one first entering has the right to presume that he can pass over in safety and is not required to exercise continuous and extra observation to avoid vehicles using such street. Id. at 438 (quoting Riddel v. Lyon, 213 P. 487, 489 (Wash. 1923)). As the court noted, the pedestrian in a crosswalk always has the right of way, except where there is a traffic signal, in which case the pedestrian has “the right of way along with other traffic moving in observance with the traffic signals.” Id. Under the facts of Griffith, where plaintiffs had a green light when they began to cross the street, the court noted that “[c]learly there was no contributory negligence on the part of the plaintiffs, since they were where they had a right to be and were diligently using their best efforts to clear the street.” Id. Thereafter, in American Ice Co. v. Moorehead, 66 F.2d 792, 793-94 (D.C. Cir. 1933), the court affirmed a verdict in favor of a pedestrian in a pedestrian-vehicle collision. The pedestrian was crossing at an unsignalized crosswalk when a truck 19 struck her. Id. at 792-93. The court noted that, because the applicable traffic regulation gave the pedestrian the right-of-way while in the crosswalk, she “had the right . . . to assume that the driver . . . would exercise reasonable care to look out for and avoid injuring a pedestrian attempting to cross the street.” Id. at 793. It held that there was no error in the trial court giving a contributory negligence instruction because there was “some conflict” as to whether the pedestrian, who was walking with her husband, was within the lines demarcating the crosswalk. Id. at 793-94. The contributory negligence instruction informed the jury that they were to determine the pedestrian’s “omission to do anything which a reasonable person, guided by those ordinary considerations which regulate human conduct, would do in the circumstances.” Id. The jury concluded that the pedestrians were in the crosswalk – “were where they had a right to be” – and thus the “danger arose only as a result of the negligent conduct of [the] driver.” Id. at 793. Relatedly, in Miller v. Clark, 109 F.2d 677, 677-78 (D.C. Cir. 1940), the court affirmed the trial court’s denial of a driver’s motion for a directed verdict on the issue of a pedestrian’s contributory negligence. The pedestrian in Miller looked both ways as she entered a crosswalk, “saw her way clear,” began crossing the street, and was hit by a truck. Id. at 677. The court concluded that the “evidence support[ed], if . . . not require[d], the inference that [the pedestrian] was free from contributory 20 negligence.” Id. The court noted that it may have been “possible, notwithstanding [the driver’s] negligence, [that] the greatest of care on [the pedestrian’s] part might have prevented the accident; but she was, of course, required to use only reasonable care.” Id. at 677-78. It elaborated that “reasonable care did not necessarily require [the pedestrian], before or after entering the crosswalk, to look again up [the street] on the chance that a negligent driver might approach swiftly and without warning from around the corner.” Id. at 678. Finally, in Long v. Mercer, the court affirmed the trial court’s denial of a driver’s motions for directed verdicts as to a pedestrian’s contributory negligence. 125 A.2d 685, 687 (D.C. 1956). The pedestrian began crossing the street while the traffic light controlling her passage was green. Id. at 686. While the pedestrian was still crossing, the light changed to red; although several cars waited to allow the pedestrian to complete passage, the defendant-cab driver did not and struck the pedestrian. Id. The driver argued that the pedestrian “failed to exercise reasonable care for her own safety after the light had changed to red against her,” urging that she “had a duty under the circumstances to look to her right and to do so observantly and with effect; that is to see what was there to be seen.” Id. The court noted that it was “a reasonable inference” under the facts of the case – approaching nightfall, crowded traffic, the pedestrian’s need to watch her footing, and the conduct of other 21 cars that had stopped – that the pedestrian “became aware of defendants’ taxicab as soon as could be expected of any reasonably prudent person.” Id. at 687. Even though the pedestrian had the right-of-way, “watchfulness in several directions was required of plaintiff for her own safety.” Id. However, “the fact that she did not see the taxicab although it ‘was there to be seen’ does not . . . indicate contributory negligence as a matter of law.” Id. These cases establish that pedestrians always have a duty to use reasonable care for the protection of their own safety and that of others, even when they have the right-of-way while using a crosswalk. That right-of-way, however, is determined by the applicable statutes and regulations governing pedestrian and driver conduct, and it further informs whether conduct in a particular case is reasonable. Thus, we must review that legal framework before espousing general principles (see infra Section II.A.iii) and before applying it to the facts of this case (see infra Section II.B). iii. Statutory and Regulatory Framework The District’s statutory and regulatory framework establishes a pedestrian’s right-of-way in certain circumstances, and we discuss the framework that is 22 applicable to unsignalized intersections and crosswalks. The only statutory provision is D.C. Code § 50-2201.28 (“Right-of-way at crosswalks”), which, in relevant part, reads: (a) The driver of a vehicle shall stop and remain stopped to allow a pedestrian to cross the roadway within any marked crosswalk, or unmarked crosswalk at an intersection, when the pedestrian is upon the lane, or within one lane approaching the lane, on which the vehicle is traveling or onto which it is turning. (a-1) Whenever a vehicle is stopped at a marked crosswalk at an unsignalized intersection, a vehicle approaching the crosswalk in an adjacent lane or from behind the stopped vehicle shall stop and give the right-of-way to ensure the safety of pedestrians and bicyclists before passing the stopped vehicle. Applicable regulations reinforce the statutory right-of-way of a pedestrian in an unsignalized crosswalk. For example, 18 DCMR § 2208.12 (2020) requires vehicles to “give the right-of-way to a pedestrian” within marked or unmarked crosswalks at intersections without traffic-controlled signals; § 2208.4 and 2208.6 require vehicles at stop and yield signs to “yield the right-of-way to pedestrians”; and § 2221.5 (2020) partially reiterates the requirements of subsection (a-1) of the statute. This framework identifies a pedestrian’s right-of-way in terms of the driver conduct 23 required, yielding so the pedestrian can cross safely. 12 As the Griffith court explained, a pedestrian crossing in an unsignalized crosswalk always has the right of way because he or she lacks the additional protections offered by traffic signals and is therefore more exposed to the “dangers attending [the use of automobiles] upon the public highway.” 29 F.2d at 439. One of the few regulatory provisions directed at pedestrian conduct, rather than driver conduct, is 18 DCMR § 2303.2 (2020), which states that a pedestrian may not “suddenly leave a curb . . . or other designated place of safety and walk or turn into the path of a vehicle which is so close that it impossible for the driver to yield” – thereby prohibiting a pedestrian from engaging in conduct that contravenes his or her “responsibility to exercise due care for his [or her] own safety.” Garcia v. Bynum, 635 F. Supp. 745, 747 (D.D.C. 1986) (granting defendant-driver’s motion notwithstanding the verdict in pedestrian-vehicle collision case where plaintiff- pedestrian “walked out from between two unmarked cars in the middle of the block,” “in a relatively darkened area,” “knowing that a car was approaching a yellow light 12 The District’s statute and regulations governing conduct at signalized intersections similarly regulate a driver’s conduct. See D.C. Code § 50-2201.28(b) (requiring a driver to “give[] the right-of-way” to a “pedestrian who has begun crossing on the ‘WALK’ signal . . . to continue to the opposite sidewalk or safety island, whichever is nearest”); 18 DCMR § 2208.11 (same); 18 DCMR § 2302.2 (2020) (“Pedestrians facing a ‘WALK’ signal may proceed . . . and shall be given the right-of-way by the drivers of all vehicles.”). 24 not far from him”), aff’d 816 F.2d 791 (D.C. Cir. 1987). Garcia did not involve a crosswalk, however, so the obligations on the driver that are incident to the pedestrian’s right of way did not come into play in evaluating the reasonableness of the pedestrian’s conduct. See id. iv. Legal Standard In light of the above authorities, we hold that pedestrians crossing at an unsignalized intersection or using a crosswalk always have a duty to use reasonable care for the protection of their own safety and that of others, even when they have the right-of-way. We find no support for the argument advanced by the Estate that a pedestrian with the right-of-way has no continuing duty to act reasonably and, therefore, cannot be barred from recovery as a result of his or her contributory negligence. Rather, the case law and the statutory and regulatory scheme establish that a pedestrian’s negligent conduct, even when he or she has the right-of-way, may bar his or her recovery for a driver’s negligence. 13 13 Further informing our holding is the recently-passed Motor Vehicle Collision Recovery Act of 2016, D.C. Law 21-167, § 3, 63 D.C. Reg. 12592 (2016), enacted after the events herein, which limits the application of contributory negligence to pedestrians involved in pedestrian-vehicle collisions to cases in which the pedestrian’s “negligence is . . . [g]reater than the aggregated total amount of negligence of all of the defendants that proximately caused” the pedestrian’s injuries. 25 The case law affirms that pedestrians always have a duty to act reasonably, even when they have the right-of-way. See, e.g., Long, 125 A.2d at 687 (noting that “watchfulness in several directions was required of [pedestrian] for her own safety,” despite her right-of-way). A pedestrian’s duty, however, is only to act reasonably under the circumstances. A pedestrian need not exercise the “greatest of care,” Miller, 109 F.2d at 678, or “continuous and extra observation to avoid vehicles,” Griffith, 29 F.2d at 439, even if such prudent conduct may have avoided a collision altogether. Moreover, to act reasonably, a pedestrian need not anticipate or act in such a way that assumes wrongful conduct of others. To the contrary, a pedestrian may rely on his or her reasonable expectations of lawful conduct by others. See Stager, 494 A.2d at 1311 (“[A] plaintiff is not bound to anticipate negligent conduct on the part of others. Rather, he may assume that others will fulfill their duties.”); Griffith, 29 F.2d at 438 (noting that a pedestrian with the right-of-way has a “right to presume that he can pass over in safety”). D.C. Code § 50-2204.52(a) (2012 Repl. & 2020 Supp.). The statute acknowledges that a pedestrian’s contributory negligence, regardless of right-of-way, can bar his or her recovery in a pedestrian-vehicle collision when the pedestrian’s negligence is greater than that of the driver. 26 The facts of a particular case determine whether a pedestrian’s conduct may give rise to a contributory negligence instruction. On the one hand, evidence that a pedestrian did not see a vehicle “although it was there to be seen” does not, alone, establish an inference of contributory negligence. Long, 125 A.2d at 687 (internal quotation marks omitted). 14 For example, a contributory negligence instruction is not warranted when a pedestrian, after looking both ways to cross the street, does not again look up the street “on the chance that a negligent driver might approach swiftly and without warning from around the corner.” Miller, 109 F.2d at 678. On the other hand, a pedestrian’s conduct that deviates from what is reasonable or does not conform to his or her right-of-way may support an instruction of contributory negligence. See, e.g., Moorehead, 66 F.2d at 793-94 (noting “some conflict” as to whether pedestrian was within the lines demarcating the crosswalk and concluding that there was no error in the trial court’s contributory negligence instruction). Whether conduct is reasonable is, of course, informed by whether a pedestrian has the right-of-way and, as a consequence, the conduct he or she reasonably 14 A contrary rule would be antithetical to the fault-based principles of contributory negligence because it would exonerate the driver in virtually every case as, save few exceptions, whenever there is a collision with a car, the vehicle will logically be there to be seen. Contributory negligence is not determined by whether the pedestrian was physically able to see the vehicle, but whether the pedestrian should be faulted for not adverting the danger it presented and acting to prevent it. 27 assumes of surrounding drivers. The District’s statutory and regulatory framework delineates a pedestrian’s right-of-way indirectly by affirmatively regulating driver conduct. See, e.g., D.C. Code § 50-2201.28(a) and (a-1) (requiring that drivers “shall stop” at intersections and give pedestrians the right-of-way in certain circumstances); 18 DCMR §§ 2208.4, 2208.6, 2221.5 (same). Therefore, a pedestrian acts reasonably when he or she engages in conduct that comports with these statutorily- and regulatorily-required driver obligations. While such a right- of-way may inform a pedestrian’s conduct in certain circumstances, it does not absolve the pedestrian of his or her continuing obligation to act reasonably. A right- of-way does not excuse negligent conduct. Cf. Capital Trans. Co. v. Smallwood, 162 F.2d 14, 15 (D.C. Cir. 1947) (“Possession of the technical right[-of-way] to precedence does not justify negligent insistence upon it.”). 15 15 The relevant standard civil jury instruction adequately conveys the above- outlined principles: Before attempting to cross a street, it is a pedestrian’s duty to make reasonable observations to learn the traffic conditions confronting him or her, and try to make a sensible decision whether it is reasonably safe to attempt the crossing. [The law does not regulate the specific observations he or she should make, and what he or she should do for his or her own safety, while crossing the street. The law does, however, place upon the pedestrian the continuing duty to exercise ordinary care to avoid an accident.] 28 In sum, we hold that a pedestrian has a duty to act reasonably, even when he or she has the right-of-way while crossing at an unsignalized intersection or while using a crosswalk. A pedestrian must exercise reasonable care, and a contributory negligence instruction is not warranted merely because a pedestrian did not use the greatest of care. Rather, a pedestrian acts reasonably when his or her conduct comports with the statutory and regulatory right-of-way obligations required of both pedestrians and drivers. If a pedestrian’s conduct comports with such obligations, a contributory negligence instruction will usually not be warranted. However, because a right-of-way does not excuse the obligation to act with reasonable care under the circumstances, a contributory negligence instruction may be justified when conduct could be found to deviate from what was reasonable, taking account of all the facts, including expectations based on the parties’ right-of-way obligations. B. Mr. Mina was not contributorily negligent. The Asals argue that Mr. Mina’s conduct raised a factual issue concerning whether he was contributorily negligent. Reviewing the evidence in the light most Standardized Civil Jury Instructions, No. 7.13 (“Pedestrian’s Duty When Crossing Streets”). 29 favorable to the Asals, we conclude that there was no legally sufficient evidentiary basis for a reasonable jury to find that Mr. Mina’s conduct did not meet the applicable standard of care. See Evans-Reid, 930 A.2d at 936. We thus affirm the trial court’s decision to direct a verdict on the issue of contributory negligence. Typically, negligence and contributory negligence are questions of fact for the jury. Washington v. A&H Garcias Trash Hauling Co., 584 A.2d 544, 545 (D.C. 1990). However, in the exceptional case, the evidence may be “so clear and unambiguous that contributory negligence should be found as a matter of law.” Id. at 547. The converse also holds, i.e., that the evidence may be so clear that contributory negligence should be negated as a matter of law. When there is “but one reasonable inference which may be drawn from undisputed facts,” negligence and contributory negligence “pass from the realm of fact to one of law.” Aqui v. Isaac, 342 A.2d 370, 372 (D.C. 1975) (per curiam). The Asals argue that while crossing the street, Mr. Mina “failed to maintain a proper lookout” because, after making eye contact with Ms. Rigney, he turned his head away from the northbound traffic (i.e., the direction from which Mr. Asal was coming) and toward the southbound traffic, and he therefore “failed to observe oncoming traffic as he continued to cross the street.” This characterization of the 30 evidence is undisputed. The question, however, is whether Mr. Mina’s failure to continue observing northbound traffic could support an inference that his conduct failed to meet the required standard of care. We see no error in the trial court’s conclusion that it could not. The evidence demonstrates that Mr. Mina waited at the southeast corner of a marked unsignalized crosswalk for cars to stop before attempting to cross. When Ms. Rigney, driving northbound in the middle lane (the direction of traffic closest to Mr. Mina), stopped to allow Mr. Mina to pass, the two made eye contact, and Mr. Mina smiled and waved before he proceeded to cross. After ensuring that Ms. Rigney had stopped to allow him passage, Mr. Mina began crossing and then looked in the opposite direction, toward the southbound lanes, for oncoming traffic. He looked northbound again after passing Ms. Rigney’s car, at which point Mr. Asal struck him. Mr. Mina reasonably conducted himself under the assumption, grounded on statutory and regulatory requirements, that other drivers would fulfill the rights and duties pertaining to his right-of-way. By looking first toward the northbound traffic closest to him, and then turning to look toward the southbound traffic in the farther lanes, Mr. Mina was not derelict in his duty – warranting a contributory negligence 31 instruction. Section 50-2201.28(a-1) of the D.C. Code requires a driver to stop whenever he or she approaches in an adjacent lane or from behind another vehicle that is stopped “at a marked crosswalk at an unsignalized intersection,” thus giving the right-of-way to pedestrians and ensuring their safety. See also 18 DCMR § 2221.5. Because Mr. Mina confirmed that Ms. Rigney had stopped, he could reasonably assume that other cars driving northbound in the other lanes would also stop to allow him to pass, as required by § 50-2201.28(a-1). He was walking at a normal pace, using reasonable surveillance – looking both ways – to observe traffic, and not otherwise distracted from his goal of crossing the street. In sum, Mr. Mina was where he had a right to be and used reasonable efforts to safely cross the street. See Griffith, 29 F.2d at 438. That Mr. Mina could have kept his eyes toward the northbound traffic (and thus seen Mr. Asal’s car), waited longer to look at the southbound traffic, walked slower, or exhibited even greater care in passing across the northbound lanes of traffic does not create a factual dispute as to whether Mr. Mina’s conduct was reasonable. While such conduct may reflect the greatest of care and might have prevented or mitigated the effects of the collision, that is not the required standard. Mr. Mina’s conduct need only have been reasonable. See Long, 125 A.2d at 687 (finding no contributory negligence as a matter of law even though the vehicle “was 32 there to be seen”); Miller, 109 F.2d at 677-78 (affirming that pedestrian was “required to use only reasonable care,” even though it was possible that “the greatest of care on [the pedestrian’s] part might have prevented the accident”). We conclude that there was but one reasonable inference to be drawn from these facts. There was no legally sufficient evidentiary basis for a reasonable jury to find that Mr. Mina’s conduct breached his duty of care. Therefore, the evidence was clear and unambiguous such that contributory negligence was negated as a matter of law. We find no error in the trial court’s directed verdict in Mr. Mina’s favor on that issue. IV. Non-Economic Damages We are not persuaded by the Asals’ argument that the $275,000 jury award for non-economic damages in the survival action was excessive and should be reversed. The Asals argue that there was no evidence that Mr. Mina experienced any pain and suffering, signaled by an audible indication (e.g., yelling or moaning), in the approximately one-and-a-half seconds between the time Mr. Mina first turned his attention toward Mr. Asal’s vehicle and when he lost consciousness, thus 33 warranting a lower damages award. We disagree that the jury award should be reversed. We review for abuse of discretion the trial court’s grant or denial of a motion for remittitur or new trial for excessiveness of verdict. See Louison v. Crockett, 546 A.2d 400, 403 (D.C. 1988). The scope of this review is “especially narrow” because “the trial court’s unique opportunity to consider the evidence in the context of a living trial coalesces with the deference given to the jury’s determination of such matters of fact as the weight of the evidence.” Campbell-Crane & Assocs., Inc. v. Stamenkovic, 44 A.3d 924, 945 (D.C. 2012) (quoting NCRIC, Inc. v. Columbia Hosp. for Women Med. Ctr., Inc., 957 A.2d 890, 902 (D.C. 2008) (internal quotation marks omitted)). “When a party moves to strike a verdict as excessive, the trial court must consider whether that verdict resulted from passion, prejudice, mistake, oversight, or consideration of improper elements.” Id. (quoting Moss v. Stockard, 580 A.2d 1011, 1013 (D.C. 1990) (internal quotation marks omitted)). In a survival action, circumstantial evidence is sufficient to support an award for the decedent’s pain and suffering. See Doe v. Binker, 492 A.2d 857, 861 (D.C. 1985). Such circumstantial evidence can include inferences drawn from the nature of decedent’s injuries, eyewitness testimony about the moments before and after the 34 injuries, and medical expert testimony. See District of Columbia v. Hawkins, 782 A.2d 293, 304-05 (D.C. 2001); Doe, 492 A.2d at 861. For example, death by “drowning or burning” permits “an inference of conscious pain and suffering.” Doe, 492 A.2d at 861. In Doe, a survival action arising from a fatal automobile collision, this court affirmed a non-economic damages award of $200,000 and concluded that “substantial circumstantial evidence . . . on the issue of pain and suffering” supported the award, specifically testimony from eyewitnesses regarding the moments before and after the collision and from a doctor regarding the cause of the decedent’s death. Id. In Hawkins, another fatal automobile collision case in which the decedent was ejected from her vehicle, landed on concrete, and severed her spinal cord, the decedent experienced pain and suffering for only a few seconds. 782 A.2d at 298, 304-05. There, we affirmed an award of $350,000 in non-economic damages based on the testimony of a medical expert regarding the nature of the decedent’s injuries and the fact that she would have experienced pain for less than a minute, as well as the testimony of an eyewitness who described the decedent as being in “a lot of pain.” Id. at 304-05. Here, there is substantial circumstantial evidence, similar to the evidence presented in Doe, to sustain the non-economic damages award. Testimony from both Mr. Asal and Ms. Rigney, as well as the video footage, conveyed the collision 35 in graphic detail. Dr. Davitt, present near the scene, saw the aftermath of the collision and described Mr. Mina as bleeding, unconscious, and unarousable. Dr. Sarani, Mr. Mina’s treating physician at the emergency room, testified about the gravity of Mr. Mina’s injuries, the exhaustive medical procedures that were attempted to revive him, and the cause of his death. 16 The Asals presented no contrary evidence, instead arguing that there was no evidence that Mr. Mina experienced conscious pain and suffering after hitting Mr. Asal’s windshield. In light of substantial evidence that Mr. Mina was grievously injured immediately upon being thrown by the impact with the vehicle, as well as inferences drawn from the circumstantial evidence of the nature of Mr. Mina’s injuries, we cannot conclude that the $275,000 award resulted from “passion, prejudice, mistake, oversight, or consideration of improper elements” such that it was excessive, Stamenkovic, 44 A.3d at 945 (citation omitted), particularly because it falls within the range of awards previously affirmed by this court in evaluating similar circumstantial evidence. 16 The Asals argue that Dr. Sarani’s testimony concerning Mr. Mina’s injuries and the attempted medical procedures unduly prejudiced the jury, and that this testimony was unnecessary given the parties’ stipulations concerning the medical procedures and the amount of medical bills. They imply that the trial court improperly admitted his testimony over objection. First, appellants do not argue that the trial court abused its discretion in permitting the testimony of Dr. Sarani, and therefore that issue is not before us. Second, testimony by doctors concerning the cause of death constitutes “circumstantial evidence . . . on the issue of pain and suffering.” Doe, 492 A.2d at 861. Therefore, such evidence was properly before the jury to consider in determining an award of non-economic damages. 36 Because we conclude that the evidence was sufficient to sustain the non-economic damages award, we also conclude that the trial court did not abuse its discretion in denying the Asals’ motion for remittitur or for a new trial based on excessive verdict. V. Judgment of Condemnation Nationwide asserts that the trial court erred in granting the Estate’s motion for judgment of condemnation. It argues that the Policy’s benefits are not attachable because they are not property of the Asals, specifically in that the benefits are not yet due because the Asals have not fully complied with a condition precedent to payment: the Policy’s cooperation clause. We conclude first that an injured party who is successful in an underlying suit may garnish the benefits of the judgment debtor’s insurance policy through a writ of attachment. Second, the failure to comply with a cooperation clause, if adequately raised and supported by evidence, serves as an affirmative defense to liability; compliance with a cooperation clause is not, however, a condition precedent to garnishment. For these reasons, we find that the trial court did not abuse its discretion in granting the Estate’s motion for a judgment of condemnation. 37 A. Writ of Attachment In the post-judgment context, a writ of attachment is a means of enforcing a judgment, allowing a judgment creditor “easy access to a debtor’s assets,” John C. Flood of Md., Inc. v. Brighthaupt, 122 A.3d 937, 941-42 (D.C. 2015), i.e., “goods, chattels, and credits,” D.C. Code § 16-544 (2012 Repl.). A judgment creditor can also reach a debtor’s assets that are held by a third party, e.g., “in the hands of a garnishee.” D.C. Code § 16-546 (2012 Repl.); see also Consumers United Ins. Co. v. Smith, 644 A.2d 1328, 1351-52 (D.C. 1994). “Service of the writ on the garnishee creates a valid lien in favor of the judgment creditor on the debtor’s property held by the garnishee.” Smith, 644 A.2d at 1352. Obtaining that property, however, requires the judgment creditor and garnishee to comply with certain procedures. Id. The judgment creditor can recover only by the same right and to the same extent as the judgment debtor because the creditor merely steps into the shoes of the debtor. See, e.g., Smith, 644 A.2d at 1356 & n.34; 38 C.J.S. Garnishment § 120 (2020) (“Generally, in garnishment proceedings, an insured’s judgment creditor may only collect from the insurer if the insured could have enforced the policy.”); cf. Med. Mut. Liab. Ins. Soc. of Md. v. Davis, 883 A.2d 158, 161-62 (Md. 2005) (same, analyzing Maryland law). Thus, attachment reaches only the debtor’s 38 property held by the garnishee at the time the writ is served. See Smith, 644 A.2d at 1356. A post-judgment writ of attachment will issue even though a trial court “has not previously decided the ownership of the asset in question, given that ownership of the property could promptly be questioned in any case involving a third party.” Brighthaupt, 122 A.3d at 942 (discussing the implications of a writ of attachment as applied to assets that were fraudulently conveyed to a third party). Following service of the writ on the garnishee and receipt of a garnishee’s answers to the interrogatories accompanying the writ, the judgment creditor may obtain the judgment debtor’s property held by the garnishee by requesting condemnation by the trial court. See Smith, 644 A.2d at 1352; Super. Ct. Civ. R. 69-I(e). This process also allows the garnishee to contest the judgment debtor’s ownership of the property, and it allows the garnishee to defend against the attachment by filing an answer. See Brighthaupt, 122 A.3d at 942 (citing D.C. Code § 16-551 (2012 Repl.)); Super. Ct. Civ. R. 69-I(d). In reviewing the trial court’s exercise of its discretion in granting a motion for judgment of condemnation, a “critical factor” for this court to consider is “whether the garnishee was in fact indebted to the judgment debtor or possessed any property belonging to the debtor.” Wrecking Corp. of Am., Va., Inc. v. Jersey Welding Supply, Inc., 463 A.2d 678, 680 (D.C. 1983). 39 “The decision to enter a judgment of condemnation, however, lies in the discretion of the trial court, and is therefore reviewable for abuse of that discretion.” Id. (citations omitted). 17 B. Insurance Policies Nationwide argues that the Estate is prohibited from using a writ of attachment to obtain the Asals’ insurance proceeds because the Policy’s benefits are not the Asals’ property. We disagree. We affirm here what has already been implied by our prior decisions: as a general matter, the benefits of an insured’s insurance policy can be garnished through a writ of attachment. See Peterson v. Gov’t Emps. Ins. Co., 434 A.2d 1389, 1391 (D.C. 1981); Coleman v. Aetna Ins. Co, 309 A.2d 306, 307 (D.C. 1973). When a party has been found liable for personal injuries arising out of an auto collision, this court has not questioned the validity of a writ of attachment to seek 17 Although Nationwide argues that a de novo standard of review applies (pointing to cases not applicable to the writ of attachment or garnishment context), Wrecking Corporation of America held unequivocally that this court reviews a trial court’s decision to enter a judgment of condemnation for abuse of discretion. 463 A.2d at 680. 40 the benefits of that party’s insurance policy. For example, in Peterson, a pedestrian- vehicle collision case, the plaintiffs obtained a judgment in a suit for injuries, and they subsequently secured a writ of attachment against the driver’s automobile insurance policy carrier (GEICO) “alleging indebtedness for the amount of the judgment under [the] automobile liability insurance policy.” 434 A.2d. at 1389. In the garnishment action, this court reversed the trial court’s grant of a motion for directed verdict in favor of GEICO, holding that the plaintiffs made out a prima facie case of the insurer’s liability, which was not defeated by the plaintiffs’ failure to introduce the insurance policy itself into evidence. Id. at 1389-91. 18 Implicit in that holding is that the judgment creditors (the pedestrians) were permitted to use a writ of attachment to garnish the benefits of the insurance policy owned by the judgment 18 The court found that the plaintiff proved a prima facie case of GEICO’s liability under the insurance policy because the facts demonstrated: (1) that GEICO issued an automobile liability insurance policy to [the defendant-driver]; (2) that the policy was in effect at the time of the automobile collision; (3) that GEICO assigned a claim number to the incident and undertook the defense of the insured in the Superior Court; and (4) that the judgment entered against the insured was within the liability limits of the insurance policy’s coverage. Appellant also proved the judgment against the insured. Peterson, 434 A.2d. at 1390-91. 41 debtor (the driver). Similarly, in Coleman, a contested garnishment, this court did not question that the appellant-pedestrian had filed “a writ of attachment . . . against credits of the defendants [bus driver and his employer, who had struck them,] in the hands of . . . Aetna Insurance Co. (Aetna-garnishee), their insurer,” 309 A.2d at 307, though it affirmed the trial court’s judgment in favor of the insurer on other grounds. 19 Id. at 308. We find Peninsula Insurance Co. v. Houser, 238 A.2d 95 (Md. 1968), relied upon by the trial court, to be particularly persuasive. In Houser, the plaintiff- passenger, who was injured in an auto collision and obtained a judgment against the driver, brought a writ of attachment against the driver’s insurer and won a judgment of condemnation. Id. at 96-97. The Maryland Court of Appeals affirmed that a writ of attachment was the proper mechanism for the plaintiff-passenger to garnish the benefits of the driver’s insurance policy. Id. at 97-98. The court noted that “[a] respectable majority of jurisdictions permit garnishment of an insurer by an injured person to compel payment of his judgment.” Id. at 97 (citing Appleman, Insurance 19 The court held that the defendants (insured by Aetna) breached the cooperation clause of the insurance policy by failing to appear at a deposition and at trial; therefore, Aetna could deny coverage under the policy, defeating the garnishment claim. Coleman, 309 A.2d. at 308. 42 Law and Practice § 4838 & n.34 (1942), and Restatement of Judgments § 111 cmt b (1942)). In an attachment case, the “general rule” is: [T]he right of the attaching creditor to recover against the garnishee depends upon the subsisting rights between the garnishee and the debtor in the attachment, and the test of the garnishee’s liability is that he has funds, property, or credits in his hands belonging to the debtor for which the latter would have the right to sue; the [creditor] is subrogated, as against the garnishee, to the rights of the debtor, and can recover only by the same right and to the same extent as the debtor might recover if he were suing the garnishee. In other words, the [judgment creditor’s] right to recover under the attachment in this case depends upon and is controlled by the question of whether or not her judgment debtor . . . could successfully maintain a suit against the [garnishee]. Id. at 98 (quoting U.S. Fid. & Guaranty Co. v. Williams, 129 A. 660, 664 (Md. 1925)). Here, Nationwide argues that the benefits of an insurance policy are not goods, chattel, or credits that are subject to a post-judgment writ of attachment. Nationwide contends that Houser is inapplicable because it interprets the Maryland rules regarding garnishment, “which are broader than the District of Columbia’s statute governing” garnishment. The only distinction identified by Nationwide is that the Maryland statute expressly permits “the attachment of credits that have not matured, while District of Columbia does not.” The Houser decision, however, did not turn 43 on whether the benefits of an insurance policy were attachable as an “unmatured credit” (such that they may fall within Maryland’s attachment statute and not the District’s). Rather, the court in Houser stated that attachment was the proper mechanism because the judgment creditor’s “right to recover under the attachment in this case depends upon and is controlled by the question of whether or not her judgment debtor, [the insured], could successfully maintain a suit against the [garnishee, the insurer].” 238 A.2d at 98 (quoting Williams, 129 A. at 664 (quotation marks omitted)). 20 Consistent with Peterson, Coleman, and Houser, we hold that the benefits of an insurance policy may be garnished through a writ of attachment. Upon entry of 20 Moreover, we are unconvinced by Nationwide’s attempt to distinguish between the law of the District and Maryland. It is true that the language of the two statutes differ. Compare D.C. Code § 16-544 (“An attachment may be levied upon the judgment debtor’s goods, chattels, and credits.”), with Houser, 238 A.2d at 97 (“Md. Rule G45[a] provides that ‘(a)ny property, including a credit which has not matured * * * in the hands of another, may be attached’”); and Md. Code Ann., Cts. & Jud. Proc. § 3-305 (West 2020) (“An attachment may be issued against any property or credit, matured or unmatured, which belong to a debtor.”). Under Maryland law, “matured debt” refers to a sum that is certain and due, while “unmatured debt” refers to property or credit in which the sum is certain, but the time for payment has not yet occurred. Consol. Const. Servs., Inc. v. Simpson, 813 A.2d 260, 269 (Md. 2002). This court has held that a writ of attachment “will reach sums which the garnishee unconditionally owes to the debtor at the time the writ is served but which the garnishee has not yet posted to the debtor’s account.” Smith, 644 A.2d at 1356 n.34. Thus, it appears that the District’s attachment statute also reaches an amount that is clearly due, though on a date that has not yet occurred – similar to the unmatured credits identified in Maryland’s statute. 44 judgment against an insured party, the insured party’s status changes to that of judgment debtor and its insurer’s status changes to that of garnishee, such that the benefits of the insurance policy may be eligible for attachment and garnishment. Therefore, the prevailing party, i.e., the judgment creditor, is entitled to recover with an attachment to the same extent to which the judgment debtor could maintain a suit against the garnishee. Other authorities support our conclusion that the benefits of an insurance policy are subject to a writ of attachment and garnishment. See 38 C.J.S. Garnishment § 120 (“The general rules as to the garnishability of property have been applied to various types of insurance policies.”); 6 Am. Jur. 2d Attachment & Garnishment § 135 (2020) (“As a general rule, the right of an insured against an insurance company under a policy of insurance on property is subject to attachment or garnishment at the suit of creditors of the insured . . . .”); id. § 134 (2020) (“A traditional garnishment . . . against an insurer . . . assists in the recovery of an existing judgment. The only question in a traditional garnishment is whether the insurer-garnishee furnished coverage under the insurance policy. If so, a garnisher may garnish that coverage to pay for the underlying judgment already determined in a separate proceeding.” (footnotes omitted)). 45 Here, we conclude that Nationwide sits in the same position as Peninsula Insurance in Houser, in that Nationwide indemnified the Asals against liability: it agreed to “pay damages for bodily injury . . . for which [the Asals] became legally responsible because of an auto accident.” Upon the trial court’s entry of judgment on November 15, 2017, the Asals became legally responsible to the Estate because of an auto accident; thus, the Estate became a judgment creditor under the Policy and was entitled to recover under the Policy by the same right and to the same extent as the Asals. Therefore, the Estate was entitled to use a writ of attachment to garnish the benefits of the Asals’ Policy with Nationwide. C. Cooperation Clause Nationwide also argues that the proceeds of the Policy were not due and owing to the Asals, and therefore not attachable, because the Asals have not yet fully complied with the terms of the Policy’s cooperation clause – and, in fact, cannot fully comply until the entirety of this litigation has run its course. We disagree, and we find no authority to support Nationwide’s position. Contractual rights that become due only upon the passage of time or upon the happening of a certain condition, i.e., contingent debts, are not subject to 46 garnishment. See Shpritz v. District of Columbia, 393 A.2d 68, 70 (D.C. 1978); Cummings Gen. Tire Co. v. Volpe Const. Co., 230 A.2d 712, 713 (D.C. Cir. 1967) (“The rule is well settled that money payable upon a contingency or condition is not subject to garnishment until the contingency has happened or the condition has been fulfilled.” (citation omitted)). But such a contingency must be understood in context: The possibility that a future state of things may arise before the day of payment which will create a defense against the recovery of the debt, which circumstances, however, may never arise, does not render the debt contingent. Thus, a debt is due and garnishable even though it potentially may be defeated by a condition subsequent, whereas a debt is not garnishable where it does not arise until the occurrence of a condition precedent. 38 C.J.S. Garnishment § 101 (2020). This court has consistently held that, under the District’s law, failure to comply with a non-cooperation clause acts as an affirmative defense to garnishment. See, e.g., Nationwide Mut. Ins. Co. v. Burka, 134 A.2d 89, 91 (D.C. 1957) (“The defense of lack of cooperation is an affirmative one and [an] insurer in asserting it has the burden of proceeding.”). As such, an insured’s breach of a non-cooperation clause operates as a defense against garnishment, enabling an insurer to deny coverage under its policy. See Peterson, 434 A.2d at 1391 (“However, once the plaintiff proves a prima facie case, or the defendant admits all the facts necessary to establish the case, the burden shifts to the defendant to prove affirmative defenses such as forfeiture of the policy or breach of some contract 47 provisions by the plaintiff.”); Coleman, 309 A.2d at 308 (affirming denial of coverage under insurance policy in garnishment action because insurer proved that insured breached cooperation clause). In Nationwide Mutual Insurance Co. v. Thomas, 306 F.2d 767, 769 (D.C. Cir. 1962) (per curiam), the court affirmed that Nationwide Mutual Insurance was required to pay the benefits of an insured’s policy to a judgment creditor in a garnishment proceeding, for the reasons stated by the trial court. The trial court began with the premise that the plaintiffs “may only recover from Nationwide, the garnishee, if [the defendant-policyholder] can recover from Nationwide, as they – the plaintiffs – stand in the shoes of the policyholder and enjoy no better rights than he does.” Thomas v. Otis, 199 F. Supp. 1, 3 (D.D.C 1961), aff'd sub nom. Nationwide Mut. Ins. Co. v. Thomas, 306 F.2d 767 (D.C. Cir. 1962) (per curiam). The trial court reasoned that the defendant’s “violation in a substantial manner” of the insurance policy’s cooperation clause may “be prejudicial in effect to the insurer” such that it “relieves the latter of all liability.” 199 F. Supp. at 3. While the court concluded that the defendant had indeed violated the cooperation 48 clause, it ruled that Nationwide had waived the defense by appealing the judgment on its merits without reserving any rights to the defense. Id. at 3-4. 21 Pursuant to Part E of the Policy, Nationwide may deny coverage “if failure to comply with the [cooperation clause] is prejudicial to [it].” Thus, the cooperation clause may bar the Estate from recovering the benefits of the Asals’ Policy if Nationwide can prove that the Asals breached the Policy’s cooperation clause in a 21 It may be that a choice-of-law analysis requires that this question be answered by application of Virginia law. Nationwide delivered the Policy to the Asals in Virginia for a vehicle they owned in Virginia, and therefore Virginia law may govern interpretations of the Policy. See Vaughn v. Nationwide Mut. Ins. Co., 702 A.2d 198, 200-04 (D.C. 1997) (applying Maryland law – pursuant to the District’s choice-of-law analysis – to interpret benefits of automobile liability policy that covered vehicle and policyholder residing in Maryland, even though the underlying collision occurred in the District). In such a circumstance, however, we find Virginia law to be consistent with that of the District. Under Virginia law, an insurer bears the burden of establishing “the affirmative defense of non-cooperation,” and the insurer must prove that the failure to cooperate “prejudiced the insurer in the defense of an action for damages arising from the insured’s operation of a motor vehicle.” State Farm Mut. Auto. Ins. Co. v. Porter, 272 S.E.2d 196, 199 (Va. 1980); see also Erie Ins. Exch. v. Meeks, 288 S.E.2d 454, 456-57 (Va. 1982); RML Corp. v. Assurance Co. of Am., 60 Va. Cir. 269, 2002 WL 32075213, at *2 (Va. Cir. Ct. Oct. 25, 2002). Thus, as under District of Columbia law, Virginia law recognizes non-cooperation as an affirmative defense. By contrast, Virginia courts have characterized other types of contract provisions – including “giving of notice of the accident,” “giving of notice of suit,” and “forwarding of suit papers” – as “conditions precedent” to coverage under a policy, requiring substantial compliance by the insured prior to triggering the insurer’s obligation to defend. Meeks, 288 S.E.2d at 456-57. 49 way that was prejudicial to Nationwide. The cooperation clause is not a condition precedent that requires compliance prior to filing a writ of attachment to garnish the Policy’s benefits; rather, it serves as a mechanism for Nationwide to affirmatively defend against liability. Moreover, Nationwide must establish prejudice. We find no merit to Nationwide’s argument that the Policy’s benefits can only be attached once Nationwide is able to assess the Asals’ cooperation at the end of the underlying suit, after any and all appeals have run their course. Here, Nationwide has neither alleged nor provided evidence of any alleged non-cooperation by the Asals, let alone any prejudice stemming from that non-cooperation. Therefore, Nationwide failed to plead an affirmative defense that would establish a bar to the Estate’s recovery pursuant to the judgment of condemnation. 22 Because the record is devoid of any evidence of the Asals’ non-cooperation that prejudiced Nationwide, we find no abuse of discretion by the trial court in ruling in favor of the Estate on its garnishment claim. 22 Nationwide also argues that Part F of the Policy, prohibiting the Asals from bringing any legal action against Nationwide “until there has been full compliance with all the terms,” prohibits the Estate from garnishing the Policy’s benefits. They argue that at the time the Estate served the writ, “the Asals could not maintain an action against Nationwide, because the ongoing litigation precluded full compliance with the terms of the Asals’ policy.” This argument fails for the same reasons discussed above. 50 VI. Conclusion For the reasons discussed, the trial court’s judgment is hereby affirmed. So ordered. THOMPSON, Associate Judge, dissenting in part: As described in the opinion for the court, at the close of the defense case in this matter, the trial court announced that it would not give a contributory negligence instruction and then directed a verdict in favor of the plaintiff Estate, reasoning that a pedestrian “has a right to assume that the vehicle . . . is going to stop because that’s the law.” Defendants/appellants, the Asals, contend that the trial court erred in failing to submit to the jury the issue of decedent George Mina’s contributory negligence. I agree that this was an issue for the jury. I respectfully dissent from the majority opinion insofar as it holds that no reasonable juror could have concluded that Mr. Mina was contributorily negligent. The majority opinion acknowledges that the law in our jurisdiction is that a pedestrian “has a duty to exercise reasonable care for the protection of his or her own safety[,]” Lyons, 667 A.2d at 322, even when the pedestrian has the right-of-way, which Mr. Mina indisputably had when he crossed Wisconsin Avenue in the 51 crosswalk at its unsignaled intersection with Veazey Street. Supra at 3. My colleagues in the majority also say that they “reject” the Estate’s argument that a pedestrian, once legally crossing within the crosswalk, has “no duty to continually observe for traffic which was legally required to stop in advance of the crosswalk.” Supra at 16. They nevertheless conclude that the trial court did not err in directing a verdict in favor of Mr. Mina’s Estate. They do so even though it is undisputed (and the jury could have found from the video evidence) that Mr. Mina turned his head away from oncoming traffic in the innermost northbound traffic lane he was about to cross, and looked instead toward traffic approaching in the more distant southbound lanes. The court arrives at its conclusion in part by relying on D.C. Code ⸹ 50- 2201.28(a-1), which requires a driver to stop whenever he or she approaches in an adjacent lane, or from behind, another vehicle that is stopped “at a marked crosswalk at an unsignalized intersection,” and which thereby gives the right-of-way to pedestrians. The court concludes that this provision, which is implicated by the situation Mr. Asal faced as he approached the intersection involved here, 23 “informs Mr. Asal testified, however, that from his “low” vehicle he did not see Mr. 23 Mina or any pedestrian in the intersection, and further testified that he thought at the time that the vehicle in the lane to his right (driven by a Ms. Rigney) was slowing to execute a right turn rather than stopped to allow a pedestrian to cross (though he acknowledged that video footage shows that Ms. Rigney’s car had in fact stopped). 52 whether [a pedestrian’s] conduct [in a particular case] is reasonable.” The court also relies on the “general proposition” that a pedestrian in a crosswalk may rely on the expectation of lawful conduct by drivers and need not anticipate or act in such a way that assumes wrongful conduct of others. Supra at 17. For that proposition, the court relies on Stager v. Schneider, 494 A.2d 1307, 1311 (D.C. 1985) (“[A] plaintiff is not bound to anticipate negligent conduct on the part of others[,]” but rather “may assume that others will fulfill their duties.”), and Griffith v. Slaybaugh, 29 F.2d 437, 438 (D.C. Cir. 1928) (stating that a pedestrian with the right-of-way has a “right to presume that he can pass over in safety”). Notably, however, Stager, as well as the only other opinion I have been able to find from our jurisdiction that articulates the proposition about “assum[ing] that others will fulfill their duties,” involved the plaintiff’s reliance on a professional to perform his or her professional obligations, rather than a pedestrian’s reliance on a driver’s adherence to traffic rules. The issue in Stager was whether a patient could rely on the radiologist who interpreted her pre-operative chest x-ray to inform her of the lung abnormality shown on the x-ray, or whether instead, in order not to be contributorily negligent, the patient had a duty to call and obtain the x-ray result. Id. at 1311. This court answered that the patient could rely on the radiologist, explaining first that “[a] reasonable person need not go through life timidly, seeking to guard 53 against that which is only remotely probable and not to be feared except by the overly cautious.” Id. We refused to “transfer[] [the duty] from the health professional to the patient[,]” and we cited the “ordinar[y]” rule that “a patient can rely on a doctor’s informing her if the results of a test are positive.” Id. at 1311-12. We also noted that the patient, who had a family history of lung cancer, had previously had annual x- rays and “was always informed of the results of these x-rays[.]” Id. at 1311. This court’s reasoning was similar in Bell v. Jones, 523 A.2d 982 (D.C. 1986). In that case the plaintiff architect and his company had engaged a professional engineer/surveyor to prepare a plat showing the property lines of a plot on which plaintiffs planned to construct townhouses. Id. at 997. The issue was whether the plaintiffs could rely on the surveyor to show precise angle measurements on the plat. Id. We reasoned that the architect was not bound to anticipate negligence on the part of the professional surveyor, but could reasonably assume that the surveyor would fulfill his duties, including the duty to exercise reasonable care in certifying the angle measurements. Id. I do not believe that either Bell or Stager, with their focus on professional duty, is helpful in resolving the present case. As noted, the majority opinion also cites the D.C. Circuit’s 1928 opinion in Griffith for what my colleagues refer to as its “clear expression of the law” regarding 54 pedestrian right-of-way: that “the one first entering [a street intersection] has the right to presume that he can pass over in safety and is not required to exercise continuous and extra observation to avoid vehicles using such street.” Griffith, 29 F.2d at 438 (quoting Riddel v. Lyon, 213 P. 487, 489 (Wash. 1923)). 24 Actually, the Griffith court referred to the rule it articulated as “a clear expression of the law as announced in many cases touching the right of way of pedestrians at crossings controlled either by a traffic officer or signals.” 29 F.2d at 438 (italics added). Griffith itself involved a signalized crosswalk under the direction of a traffic officer and addressed the issue of whether the pedestrian had a right-of-way to complete his street crossing once the signal changed. See 29 F.2d at 439. The facts of Riddel, the 24 Of the D.C. Circuit opinions cited in the majority opinion, Griffith appears to be the only one that applied an unqualified “general proposition” about a pedestrian’s entitlement to assume that drivers will obey the law in the situation it described. The other cited D.C. Circuit opinions did not do so. In American Ice Co. v. Moorehead, 66 F.2d 792 (D.C. Cir 1933), the D.C. Circuit approved an instruction that “in effect told the jury that, notwithstanding the obligation imposed by the traffic regulation upon the driver of an automobile to be watchful in avoiding injury to pedestrians lawfully using a street intersection, if the pedestrian was himself guilty of any act of negligence -- which the court was careful to tell the jury was the omission to do anything which a reasonable person, guided by those ordinary considerations which regulate human conduct, would do in the circumstances -- such act of negligence would defeat a recovery.” Id. at 793-94. In Miller v. Clark, 109 F.2d 677 (D.C. Cir. 1940), the D.C. Circuit affirmed the trial court’s denial of a motion for a directed verdict on the issue of a pedestrian’s contributory negligence because “reasonable care did not necessarily require [the pedestrian], before or after entering the crosswalk, to look again up [the street] on the chance that a negligent driver might approach swiftly and without warning from around the corner.” Id. at 678 (italics added). 55 1923 Supreme Court of Washington opinion on which Griffith relied, are remarkably similar. See 213 P. at 488. Neither Griffith nor Riddel, says anything about a pedestrian’s duty to look out for traffic mid-crossing when (as was the case here) there is no traffic signal or traffic officer. 25 For these reasons, Griffith is not binding in the present case, and neither Griffith nor Riddel is apposite. In addition, Riddel provides weak support at best for affirming the directed verdict in this case, because its persuasive force has been significantly diminished by several later rulings of the Washington Supreme Court. For example, in Shasky v. Burden, 470 P.2d 544 (Wash. 1970), the Supreme Court of Washington held that “there was substantial evidence requiring the court to submit to the jury the issue of plaintiff’s contributory negligence” where the plaintiff pedestrian, who was struck by a vehicle in a crosswalk, had “walked rapidly with her head turned away from 25 Moreover, as recognized in Long v. Mercer, 125 A.2d 685 (D.C. 1956), even with respect to a signalized crosswalk, Griffith did not foreclose a finding of pedestrian contributory negligence as a matter of law. See 125 A.2d at 686-87 (reasoning that although the pedestrian, who had not finished crossing at a signalized intersection when the traffic light “changed to red against her,” had the right-of-way, “watchfulness in several directions was required of plaintiff for her own safety[,]” such that the trial court did not err in denying directed verdicts; stating that it was “rather plainly a question of fact” whether the plaintiff pedestrian’s negligence was a contributing factor to the accident). 56 oncoming traffic and made no attempt whatever to see if any vehicles were approaching the crosswalk on that dark, rainy night.” Id. at 547. The court stated, Strong as the protection afforded by the crosswalk may be and however unlikely that a pedestrian struck in a crosswalk would be contributorily negligent, there nevertheless remains in the law a legal possibility that a pedestrian, . . . struck by a vehicle while in a marked crosswalk, may have been contributorily negligent. If there is evidence to support the issue, the court must submit the issue of contributory negligence to the jury. Id. at 548. Similarly, in Oberlander v. Cox, 449 P.2d 388 (Wash. 1969), the Washington court considered the evidence that the plaintiff pedestrian, crossing the street during a storm and driving rain, “walked rapidly, but, having looked once, did not look either way again until she was struck by defendants’ car.” 449 P.2d at 389. The court held that the evidence “suppl[ied] some substantial evidence from which a jury could infer contributory negligence[,]” such that the issue should go to the jury. Id. at 391; see also Clements v. Blue Cross of Wash. & Alaska, Inc. 682 P.2d 942, 948 (Wash. 1984) (“There was substantial evidence presented to support defendants’ position that Clements should have known to look for oncoming traffic even though she was legally in the crosswalk. It was error to refuse to instruct the jury on contributory negligence and [instead] to direct a verdict on liability.”). 57 The law as it has evolved in Washington State after Riddel appears to state “[t]he generally accepted” and “quite universal” rule: “that a pedestrian’s failure to keep a constant lookout, or to look again after having determined that he can safely cross ahead of approaching traffic, is not contributory negligence as a matter of law but it is a question for a jury whether he was in the exercise of ordinary care for his own safety.” Moran v. Gatz, 62 N.E.2d 443, 446 (Ill. 1945) (collecting cases). In the present case, my colleagues in the majority conclude that there was no legally sufficient evidentiary basis for a reasonable jury to find that Mr. Mina was contributorily negligent. I conclude to the contrary that there was sufficient evidence in this case for the issue of contributory negligence to be “one for the jury.” Id. First, it was undisputed that Mr. Mina worked in the same block (the 4200 block of Wisconsin Avenue) where the accident occurred. This suggests that he may have been familiar with the practices of drivers at the crosswalk, including whether they reliably stop for pedestrians in the crosswalk. Therefore, one piece of evidence that might have been notable to the jury is the evidence that, before beginning to cross the street, Mr. Mina looked to his left and made eye contact with Ms. Rigney, who brought her car to a stop in the traffic lane closest to him, and only thereafter proceeded to cross. This was “some evidence” from which the jury could infer that 58 Mr. Mina understood that vehicles approaching the intersection might not stop for him despite their legal duty to do so. 26 Abebe v. Benitez, 667 A.2d 834, 836 (D.C. 1995) (per curiam) (“As long as there is some evidence from which jurors could find that the party has met its burden, a trial judge must not grant a directed verdict.”). Second, Mr. Asal testified that he knew the area near the intersection well because he passed through it every day driving to his job at a restaurant located approximately four blocks away. He further testified that, in his experience, many cars make a right turn at the intersection in question in order to park in the rear of a restaurant located there. He testified that most drivers “make a right [turn] from the middle [northbound] lane” because there is usually a “bus stop[ping at the bus stop] or a bike” in the right lane. Mr. Asal also told the jury that he thought that Ms. Rigney’s car was slowing to turn, and that her car “blocked his view of the pedestrian.” Had jurors credited Mr. Asal’s testimony about practices at the intersection in question, that might have influenced their determination about whether Mr. Mina “should have known” of a need for “increased vigilance” at the Veazey Street crosswalk, and about whether he breached his duty to exercise such vigilance by looking away from the traffic in the innermost northbound lane as he 26 See D.C. Code ⸹ 50-2201.28(a) (“The driver of a vehicle shall stop and remain stopped to allow a pedestrian to cross within any marked crosswalk . . . .”). 59 was about to cross that lane. Clements, 682 P.2d at 948. Third, jurors could have evaluated the foregoing evidence in light of their experience. A Washington Post article from October 1988 reported that during an hour-long observation period, “[n]ot one car” stopped at the crosswalk at 16th and Fuller Streets, N.W., to let pedestrians cross. It further reported that “[t]his familiar routine occurs daily around the District[.]” 27 An article and video posted online nearly thirty years later (in 2016) suggest that the problem may have persisted around the time of the incident involved in this case: the video captured what happened when a police officer posing as a pedestrian tried to cross 14th Street near U Street, N.W. The article reported that when a black car approached the officer standing in the crosswalk, the black car “bl[e]w past him.” 28 Jurors may have had their own experiences with or knowledge of similar occurrences, perhaps causing them to understand that, in the District of Columbia, incidents of drivers not stopping at 27 See Kristin Eddy, PEDESTRIANS BEWARE D.C. DRIVERS FAIL TO YIELD TO CROSSWALKS, LAW, The Washington Post (Oct. 11, 1988), https://www.washingtonpost.com/archive/local/1988/10/11/pedestrians-beware-dc- drivers-fail-to-yield-to-crosswalks-law/ae0925ad-d741-40e4-a451-05a7fb8a69a3/ https://perma.cc/LUR9-G9L5 (last visited March 12, 2021). 28 See Dan Taylor, Here’s Why It’s a Bad Idea to Blow Through a Crosswalk in DC [VIDEO], Crime & Safety (Apr. 26, 2016, 4:03 PM), https://patch.com/district-columbia/washingtondc/heres-why-its-bad-idea-blow- through-crosswalk-dc-video https://perma.cc/SDC6-EQME (last visited March 12, 2021). 60 crosswalks to yield the right of way to pedestrians may be expected. Such incidents are not merely “remotely probable[,]” Stager, 494 A.2d at 1311, and jurors’ experience and knowledge regarding the same might have informed their judgment as to whether Mr. Mina acted reasonably in assuming, contrary to (possible) common experience, that any vehicle in the innermost northbound lane would stop at the crosswalk just because its driver saw the vehicle in the adjacent lane slowing to a stop. This discussion shows why it was a jury question whether Mr. Mina’s looking away from oncoming traffic in the lane he was about to cross satisfied his obligation to exercise reasonable care for the protection of his safety. Jurors might reasonably have disagreed with the reasoning of my colleagues that once Mr. Mina confirmed that Ms. Rigney had stopped, he could “reasonably assume that other cars driving northbound in the other lanes would . . . stop to allow him to pass, as required by § 50-2201.28(a-1).” 29 Supra at 31. To be clear, I agree that Mr. Asal had a legal duty to stop regardless of any assumption that the vehicle to his right (Ms. Rigney’s car) was stopping or slowing 29 Cf. Wood v. Bellingham, 813 P.2d 142, 145-46 (Wash. Ct. App. 1991) (reasoning that where the plaintiff pedestrian, who failed to make eye contact with the driver who subsequently hit her, “exercised her right of way as if it were absolute[,]” “a jury could reasonably conclude that [her] action in assuming the vehicle had stopped for her and proceeding to cross . . . without heeding the driver’s apparent inattention constituted a failure to exercise due care[,]” and thus that “the trial court did not err in submitting the issue to the jury”). 61 to execute a turn; the consequence of his failure to do so was tragic and is horrific to watch on the surveillance video that captured the accident. But the evidence and considerations I have described are relevant to whether Mr. Mina exercised reasonable care for the protection of his safety by omitting to do something “which a reasonable person, guided by those ordinary considerations which regulate human conduct, would do in the circumstances.” American Ice Co., 66 F.2d at 793-94. The issue “was for consideration by the factfinder.” Lyons, 667 A.2d at 323.	01-04-2023	03-18-2021
https://www.courtlistener.com/api/rest/v3/opinions/4669073/	[Until this opinion appears in the Ohio Official Reports advance sheets, it may be cited as State ex rel. Hunley v. Wainwright, Slip Opinion No. 2021-Ohio-803.] NOTICE This slip opinion is subject to formal revision before it is published in an advance sheet of the Ohio Official Reports. Readers are requested to promptly notify the Reporter of Decisions, Supreme Court of Ohio, 65 South Front Street, Columbus, Ohio 43215, of any typographical or other formal errors in the opinion, in order that corrections may be made before the opinion is published. SLIP OPINION NO. 2021-OHIO-803 THE STATE EX REL. HUNLEY, APPELLANT, v. WAINWRIGHT, WARDEN, APPELLEE. [Until this opinion appears in the Ohio Official Reports advance sheets, it may be cited as State ex rel. Hunley v. Wainwright, Slip Opinion No. 2021-Ohio-803.] Habeas corpus—Inmate has not yet completed his lawfully imposed sentences— Court of appeals’ dismissal of petition affirmed. (No. 2020-1151—Submitted January 26, 2021—Decided March 18, 2021.) APPEAL from the Court of Appeals for Marion County, No. 9-20-15. _______________________ Per Curiam. {¶ 1} Appellant, Harold Hunley, an inmate at the Marion Correctional Institution, appeals the Third District Court of Appeals’ judgment dismissing his petition for a writ of habeas corpus against appellee, Warden Lyneal Wainwright. We affirm. SUPREME COURT OF OHIO Background {¶ 2} In 1989, Hunley was sentenced to a prison term of 3 to 15 years for robbery. {¶ 3} Hunley was paroled in 1992. Later that year, he was convicted of a second robbery and was sentenced to another prison term of 3 to 15 years for that offense. Although the 1992 sentencing entry did not refer to his 1989 sentence, the parties agree that by operation of law, the sentences were to be served consecutively.1 At that time, Hunley’s maximum prison sentence would have expired on January 27, 2019. {¶ 4} Hunley was paroled a second time in 1997, and in 1999, he was declared a parole violator at large. The parties agree that an additional 34 days of “lost time” were added to his maximum sentence when he returned to prison. {¶ 5} Hunley was paroled a third time in 2000. In 2001, he was convicted of felonious assault, aggravated robbery, and child endangering and sentenced to six years in prison. By that time, there was a statutory presumption in favor of concurrent sentences. See former R.C. 2929.41(A), Am.Sub.S.B. No. 22, 148 Ohio Laws, Part IV, 8353, 8389. Therefore, no additional time was applied to Hunley’s maximum sentence, which was then set to expire on March 2, 2019. {¶ 6} Hunley was paroled for the fourth and final time in 2007. In 2008, he was convicted and sentenced to ten months in prison for forgery, two six-year terms for robbery, and two mandatory three-year terms for related firearm specifications. The sentencing court ordered the forgery and robbery sentences to run concurrently with one another but consecutively to the firearm-specification sentences. The court also ordered the firearm-specification sentences to run 1. At the time Hunley was sentenced in 1992, R.C. 2929.41(B)(3) provided that the sentence imposed for any new felony committed by a parolee was to run consecutively to any other sentence of imprisonment. See Am.Sub.S.B. No. 258, 143 Ohio Laws, Part I, 1308, 1438. 2 January Term, 2021 consecutively to each other. The sentencing entries did not refer to Hunley’s prior criminal sentences. {¶ 7} In May 2020, Hunley filed a petition for a writ of habeas corpus against Wainwright in the Third District. He alleged that the 2008 sentencing court did not order him to serve his firearm-specification sentences consecutively to his 1989 and 1992 robbery sentences and that he should have been released from prison on December 13, 2019. {¶ 8} Wainwright moved to dismiss the petition, arguing that (1) Hunley could have challenged his sentences by directly appealing them and (2) the two mandatory three-year terms imposed for the 2008 firearm specifications added six years to Hunley’s maximum sentence, thereby extending his release date into 2025. The court of appeals granted Wainwright’s motion and dismissed Hunley’s petition. Hunley appealed to this court as of right. Analysis {¶ 9} A writ of habeas corpus “is warranted in certain extraordinary circumstances ‘where there is an unlawful restraint of a person’s liberty and there is no adequate remedy in the ordinary course of law.’ ” Johnson v. Timmerman- Cooper, 93 Ohio St.3d 614, 616, 757 N.E.2d 1153 (2001), quoting Pegan v. Crawmer, 76 Ohio St.3d 97, 99, 666 N.E.2d 1091 (1996). The writ is appropriate if the petitioner is entitled to immediate release from prison. State ex rel. Smirnoff v. Greene, 84 Ohio St.3d 165, 167, 702 N.E.2d 423 (1998). We review de novo the court of appeals’ dismissal of a habeas corpus petition. State ex rel. Norris v. Wainwright, 158 Ohio St.3d 20, 2019-Ohio-4138, 139 N.E.3d 867, ¶ 5. {¶ 10} The court of appeals held that Hunley is not entitled to a writ of habeas corpus for two reasons: (1) he could have challenged his sentences by directly appealing them and (2) he is not entitled to immediate release, because by operation of R.C. 2929.14(C)(1)(a), the three-year sentences for his firearm 3 SUPREME COURT OF OHIO specifications must be served consecutively to each other and to his 1989 and 1992 sentences. {¶ 11} The court of appeals’ first rationale is not correct. It is true that the sentencing errors of a court of competent jurisdiction are not cognizable in habeas corpus. E.g., State ex rel. Wynn v. Baker, 61 Ohio St.3d 464, 465, 575 N.E.2d 208 (1991). However, the court of appeals misconstrued Hunley’s claim. Hunley does not argue that his 2008 sentencing entries are erroneous; he contends that the Bureau of Sentence Computation improperly modified those entries when it ran the sentences for his 2008 firearm specifications consecutively to his 1989 and 1992 sentences. Hunley could not have asserted this claim in a direct appeal, because it did not arise from the 2008 sentencing entries themselves. See State ex rel. Oliver v. Turner, 153 Ohio St.3d 605, 2018-Ohio-2102, 109 N.E.3d 1204, ¶ 12. Therefore, the only issue in this case is whether certain sentences Hunley received in 2008—namely, his two mandatory firearm-specification sentences— are to run consecutively to his 1989 and 1992 sentences. {¶ 12} As the parties agree, Hunley was to serve his 2001 and 2008 sentences for robbery and forgery concurrently with his 1989 and 1992 sentences. R.C. 2929.41(A) creates a presumption that multiple sentences of imprisonment imposed on an offender “shall be served concurrently.” Therefore, the sentencing court’s silence concerning the 1989 and 1992 sentences caused the 2001 and 2008 sentences for robbery and forgery to run concurrently by operation of law. Oliver at ¶ 10. {¶ 13} Hunley contends that the same rule applies to his 2008 mandatory firearm-specification sentences. But R.C. 2929.41(A) states that a presumption favoring concurrent sentences applies “[e]xcept as provided in” R.C. 2929.14(C).2 2. At the time of Hunley’s 2008 sentences, R.C. 2929.41(A) made an exception for sentences imposed under former R.C. 2929.14(E) (now R.C. 2929.14(C)), see Am.Sub.H.B. No. 490, 149 Ohio Laws, Part V, 9484, 9691, and R.C. 2929.14(E)(1)(a) (now R.C. 2929.14(C)(1)(a)) referred 4 January Term, 2021 And R.C. 2929.14(C)(1)(a) provides that if a mandatory prison term is imposed under R.C. 2929.14(B)(1)(a) (for having a firearm while committing a felony), “the offender shall serve any mandatory prison term imposed * * * consecutively to any other prison term or mandatory prison term previously or subsequently imposed upon the offender.” Therefore, Hunley’s 2008 firearm-specification sentences run consecutively to his 1989 and 1992 sentences and extend his release date into 2025. See State ex rel. Herring v. Wainwright, __ Ohio St.3d __, 2020- Ohio-4521, __ N.E.3d __, ¶ 9. {¶ 14} Because Hunley will not complete his lawfully imposed sentences until 2025, he is not entitled to immediate release. We therefore affirm the court of appeals’ judgment dismissing Hunley’s petition for a writ of habeas corpus. Judgment affirmed. O’CONNOR, C.J., and KENNEDY, FISCHER, DEWINE, DONNELLY, STEWART, and BRUNNER, JJ., concur. _________________ Harold Hunley, pro se. Dave Yost, Attorney General, and M. Scott Criss, Assistant Attorney General, for appellee. _________________ to sentences imposed for firearm specifications under former R.C. 2929.14(D) (now R.C. 2929.14(B)), see 2007 Am.Sub.S.B. No. 10. 5	01-04-2023	03-18-2021
https://www.courtlistener.com/api/rest/v3/opinions/4669075/	[Until this opinion appears in the Ohio Official Reports advance sheets, it may be cited as Lorain Cty. Bar Assn. v. Lindon, Slip Opinion No. 2021-Ohio-804.] NOTICE This slip opinion is subject to formal revision before it is published in an advance sheet of the Ohio Official Reports. Readers are requested to promptly notify the Reporter of Decisions, Supreme Court of Ohio, 65 South Front Street, Columbus, Ohio 43215, of any typographical or other formal errors in the opinion, in order that corrections may be made before the opinion is published. SLIP OPINION NO. 2021-OHIO-804 LORAIN COUNTY BAR ASSOCIATION v. LINDON. [Until this opinion appears in the Ohio Official Reports advance sheets, it may be cited as Lorain Cty. Bar Assn. v. Lindon, Slip Opinion No. 2021-Ohio-804.] Attorneys—Misconduct—Violations of the Rules of Professional Conduct and the Rules for the Government of the Bar—No credit for time served under interim felony suspension—Indefinite suspension. (No. 2019-0216—Submitted January 27, 2021—Decided March 18, 2021.) ON CERTIFIED REPORT by the Board of Professional Conduct of the Supreme Court, No. 2016-038. _______________________ Per Curiam. {¶ 1} Respondent, James L. Lindon, of Avon, Ohio, Attorney Registration No. 0068842, was admitted to the practice of law in Ohio in 1997. On January 15, 2010, we publicly reprimanded Lindon after he received a similar sanction from the Michigan Attorney Discipline Board. Disciplinary Counsel v. Lindon, SUPREME COURT OF OHIO 124 Ohio St.3d 1217, 2010-Ohio-507, 921 N.E.2d 651. On June 30, 2016, we suspended his license on an interim basis following his convictions on felony counts of theft, drug possession, and tampering with evidence, and that suspension remains in effect. See In re Lindon, 150 Ohio St.3d 1236, 2016-Ohio- 4671, 79 N.E.3d 554. {¶ 2} In a September 2, 2016 complaint and again in an August 29, 2018 first amended complaint, relator, Lorain County Bar Association, alleged that the conduct underlying Lindon’s criminal convictions violated the professional- conduct rules. The parties submitted stipulations of fact and misconduct and stipulated exhibits. After a hearing, the board issued a report finding that Lindon had engaged in the stipulated misconduct and recommending that we suspend him for two years, with one year stayed on conditions, and that we grant him no credit for the time served under the interim felony suspension. Lindon objected to the board’s recommendation that he receive no credit for the time served under his interim felony suspension and that he be required to participate in the Ohio Lawyers Assistance Program (“OLAP”). We heard oral argument on those objections in September 2019. {¶ 3} While the matter remained pending before this court, relator discovered evidence that Lindon had been suspended on an interim basis and ultimately disbarred in Michigan as a result of his felony convictions in Ohio.1 On January 16, 2020, relator filed an emergency motion asking this court to stay the case and remand it to the board for further proceedings. The next day, disciplinary counsel commenced a reciprocal-discipline case by filing a certified 1. Lindon’s Ohio disciplinary proceedings were stayed for nearly two years while he appealed his criminal conviction. See Gov.Bar R. V(18)(C) (providing that any disciplinary proceeding based on a conviction of an offense shall not be brought to hearing until all direct appeals from the conviction are concluded). Michigan, however, has no rule comparable to Gov.Bar R. V(18)(C). Therefore, Lindon’s Michigan disciplinary proceedings based on his Ohio convictions went forward, despite his appeal. Disbarment in Michigan is not permanent; it is akin to an indefinite suspension in Ohio. Michigan’s disciplinary-procedure rules permit a disbarred attorney to petition for reinstatement after five years. See Mich.Ct.R. 9.123(B). 2 January Term, 2021 copy of the Michigan order of disbarment with the clerk of this court. See Disciplinary Counsel v. Lindon, No. 2020-0093; Gov.Bar R. V(20). On March 25, 2020, we granted relator’s motion, stayed both cases, and remanded the matter to the board for further proceedings. {¶ 4} In a second amended complaint filed on April 7, 2020, relator alleged that Lindon committed three additional ethical violations by giving false testimony about the status of his Michigan law license during the course of these disciplinary proceedings and failing to report his Michigan discipline to the Office of Disciplinary Counsel and the clerk of this court. Lindon stood by his stipulations with respect to the original charges against him, but he denied having engaged in the additional misconduct. {¶ 5} The case is now before us on the February 11, 2019 and October 2, 2020 reports of the Board of Professional Conduct finding that Lindon committed all of the charged misconduct and recommending that he be indefinitely suspended from the practice of law with no credit for the time served under his interim felony suspension. Neither party has objected to the board’s October 2020 report. {¶ 6} Having independently reviewed the record, we adopt the board’s findings of misconduct and indefinitely suspend Lindon from the practice of law in Ohio with no credit for the time served under his interim felony suspension. Facts and Misconduct Lindon’s Criminal Conduct {¶ 7} While working as a pharmacist at the Cleveland Clinic, Lindon was the subject of an internal investigation into the possible theft of drugs from the pharmacy. On June 2, 2015, security personnel reviewed video footage of Lindon removing a bottle of hydrocodone tablets from a basket, dumping something into his hand, and then placing that hand in his pocket. Upon being approached by security personnel, Lindon removed something from his pocket and placed it in 3 SUPREME COURT OF OHIO his mouth. After being asked to empty his pockets, Lindon removed three pills— two were later identified as tramadol and one was later identified as hydrocodone. {¶ 8} Lindon was indicted on felony counts of theft, drug possession, and tampering with evidence. He represented himself at trial, and a jury found him guilty on all counts. The trial court sentenced him to serve two years of community control and ordered him to complete regular drug testing, counseling, and inpatient drug treatment and to pay a fine of $750. As a result of Lindon’s convictions, his Ohio pharmacist license was permanently revoked. {¶ 9} In September 2016, Lindon appealed his convictions to the Eighth District Court of Appeals, challenging the trial court’s denial of his motion to suppress the evidence obtained from his pocket. In June 2017, the court of appeals reversed the trial court’s decision denying Lindon’s motion to suppress and remanded the case to the trial court with instructions to conduct an evidentiary hearing before ruling on the motion to suppress. State v. Lindon, 8th Dist. Cuyahoga No. 104902, 2017-Ohio-4439, ¶ 18. The trial court conducted the hearing and again denied the motion on June 4, 2018. Lindon has since completed his sentence. {¶ 10} In its February 2019 report, the board found that Lindon’s criminal conduct violated Prof.Cond.R. 8.4(b) (prohibiting a lawyer from committing an illegal act that reflects adversely on the lawyer’s honesty or trustworthiness) and 8.4(c) (prohibiting a lawyer from engaging in conduct involving dishonesty, fraud, deceit, or misrepresentation). The board also found that his conduct is sufficiently egregious to warrant a separate finding that he violated Prof.Cond.R. 8.4(h) (prohibiting a lawyer from engaging in conduct that adversely reflects on the lawyer’s fitness to practice law), see Disciplinary Counsel v. Bricker, 137 Ohio St.3d 35, 2013-Ohio-3998, 997 N.E.2d 500, ¶ 21. 4 January Term, 2021 Lindon’s Michigan Discipline {¶ 11} At the July 16, 2020 panel hearing following our remand, relator presented evidence that the Michigan Attorney Discipline Board had suspended Lindon’s law license on an interim basis in June 2016 and disbarred him on February 21, 2017, based on his felony convictions in Ohio. At that hearing, Lindon testified that he had received notice that Michigan had suspended his license on an interim basis as a consequence of his felony convictions, but he stated that he had not received—or did not recall receiving—any correspondence from Michigan regarding the subsequent disbarment proceedings. {¶ 12} However, Lindon also admitted that he had received an April 4, 2018 letter from the United States Patent and Trademark Office (“USPTO”) notifying him that the office had launched an investigation because he had been disbarred in Michigan. In addition, the deputy director of the Michigan Attorney Discipline Board submitted an affidavit to the board in which she averred that she had spoken with Lindon about his disbarment on June 4, 2018. The board therefore determined that Lindon was aware of Michigan’s interim suspension and disbarment orders and the pending USPTO proceeding before his deposition on August 31, 2018. {¶ 13} When asked at that deposition whether he was licensed to practice in any other state, Lindon testified that he was licensed to practice law in Michigan and that that license was “just no longer active.” He acknowledged that he had been publicly reprimanded in Michigan in 2009, but when relator asked him whether there had been “any other disciplinary proceedings in [his] capacity as a lawyer,” he stated that there were “only two incidents that I know of. I mean the present one and the one from * * * 2009 or whatever it was.” {¶ 14} At his July 2020 disciplinary hearing, Lindon argued that his deposition testimony was not false for two reasons. First, he asserted that he had not lied about the status of his Michigan license because, after being publicly 5 SUPREME COURT OF OHIO reprimanded in 2009, he had asked “what was the fastest and easiest way that [he could] be done with the State of Michigan.” He stated that he was told that he could stop paying his dues and go on inactive status, which he did. But even if it was true that his Michigan license was inactive for his failure to pay dues, Lindon also knew that he had been disbarred in Michigan and failed to disclose that fact during his deposition. {¶ 15} Second, Lindon claimed that he had relied on a September 2017 e- mail that was purportedly sent to him and the Michigan Attorney Discipline Board by the assistant deputy administrator of Michigan’s Attorney Grievance Commission (the prosecuting arm of Michigan’s disciplinary process). That e- mail stated: As you are aware, the rules require that a discipline be vacated when the conviction from which it resulted is set aside. Mr. Lindon’s conviction was set aside and the matter remanded for retrial. We will be reopening our file in order to monitor the criminal proceedings. {¶ 16} Although that e-mail suggests that perhaps Lindon’s Michigan disbarment should have been vacated, it is important to note that the e-mail was not issued by the Michigan Attorney Discipline Board (i.e., the entity charged with imposing discipline in that state). And because Lindon had spoken on the telephone with the deputy director of the Michigan board about his disbarment on June 4, 2018—as sworn to by the deputy director in her affidavit—our Board of Professional Conduct found that he could not in good faith rely upon the earlier e- mail from the prosecuting arm of the Michigan disciplinary process to claim that 6 January Term, 2021 he did not understand the status of his Michigan license at the time of his August 2018 deposition. {¶ 17} The board therefore rejected Lindon’s attempts to justify his failure to disclose his Michigan disbarment and found that his conduct violated Prof.Cond.R. 8.4(c) and 8.4(d) (prohibiting a lawyer from engaging in conduct that is prejudicial to the administration of justice) and Gov.Bar R. V(20)(A) (requiring an attorney admitted to the practice of law in Ohio to provide written notification of a disciplinary order issued in another jurisdiction to disciplinary counsel and the clerk of this court within 30 days of its issuance). {¶ 18} We adopt these findings of misconduct. Moreover, we emphasize that whether Lindon affirmatively misrepresented or knowingly omitted material facts regarding his Michigan disbarment, the result is the same—Lindon engaged in conduct that involved dishonesty, fraud, deceit, or misrepresentation not only during relator’s investigation but also in his conduct before the board, which serves as an arm of this court. See, e.g., Miles v. McSwegin, 58 Ohio St.2d 97, 99, 388 N.E.2d 1367 (1979) (“It is well established that an action for fraud and deceit is maintainable not only as a result of affirmative misrepresentations, but also for negative ones, such as the failure of a party to a transaction to fully disclose facts of a material nature where there exists a duty to speak”). Sanction Recommended by the Board {¶ 19} When recommending the sanction to be imposed for attorney misconduct, the board considers all relevant factors, including the ethical duties that the lawyer violated, the aggravating and mitigating factors listed in Gov.Bar R. V(13), and the sanctions imposed in similar cases. {¶ 20} In its original report, the board found that three aggravating factors were present in this case—Lindon’s prior disciplinary record, his dishonest or selfish motive, and his refusal to acknowledge the wrongful nature of his conduct. See Gov.Bar R. V(13)(B)(1), (2), and (7). On remand it also found that Lindon 7 SUPREME COURT OF OHIO failed to cooperate in the disciplinary process and submitted false statements or engaged in other deceptive practices during the disciplinary proceedings. See Gov.Bar R. V(13)(B)(5) and (6). {¶ 21} As mitigating factors, the board originally found that Lindon made full and free disclosure to the board and exhibited a cooperative attitude toward the disciplinary proceedings, submitted evidence of his good character and reputation, was subject to other penalties or sanctions (including criminal sanctions and the revocation of his pharmacist license), engaged in other interim rehabilitation efforts, and harmed no clients. See Gov.Bar R. V(13)(C)(4), (5), (6), and (8). But on remand, the board withdrew its findings regarding Lindon’s cooperation and full and free disclosure because his additional misconduct proved that they were not true. {¶ 22} During his December 2018 disciplinary hearing, Lindon admitted that from 2005 until shortly before his criminal trial, he used opioids prescribed by his physician to treat a medical condition, but he denied that he had ever stolen them. He testified that he was diagnosed with opiate-use disorder after his criminal trial and that he had completed a 30-day inpatient treatment program. However, he did not attempt to establish his substance-use disorder as a mitigating factor under Gov.Bar R. V(13)(C)(7). {¶ 23} Lindon voluntarily entered into a contract with OLAP after his criminal trial and before sentencing. However, he testified that he was terminated from OLAP because he is an atheist, that the program did not offer any secular alternative to Alcoholics Anonymous (“AA”), and that AA encourages its participants to believe in a higher power. Despite his objection to the religious aspects of AA, he had been attending weekly meetings until around the time of his 2018 disciplinary hearing—though he admitted that his attendance ceased sometime before the September 2019 oral argument in this case. 8 January Term, 2021 {¶ 24} In its February 2019 report, the board noted that we have imposed sanctions ranging from two-year partially stayed suspensions to indefinite suspensions on attorneys who have been convicted of drug-related offenses comparable to Lindon’s. See, e.g., Ohio State Bar Assn. v. Peskin, 125 Ohio St.3d 244, 2010-Ohio-1811, 927 N.E.2d 598 (imposing a two-year suspension with 18 months conditionally stayed on an attorney who completed an intervention-in- lieu-of-conviction program that resulted in the dismissal of charges for possession of crack cocaine and resisting arrest). At that time, the board recommended that Lindon be suspended for two years, with one year stayed on several conditions, including that he enter into a two-year drug-related contract with OLAP. The board also recommended that Lindon receive no credit for the time served under his interim felony suspension. {¶ 25} Lindon objected to the board’s recommended sanction, arguing that the recommendations that he receive no credit for the time served under his interim felony suspension and that he be required to participate in OLAP were unjust, excessive, and inconsistent with our precedent. He argued that the failure to credit him for the time served under his interim felony suspension (much of which had then been occasioned by his criminal appeal) would result in an unconstitutional trial tax. He also claimed that his compelled participation in OLAP would violate the Establishment Clause of the First Amendment to the United States Constitution under the mistaken belief that OLAP does not offer any secular alternatives to 12-step programs that promote belief in a higher power. {¶ 26} Given the additional misconduct found on remand, the board now recommends that Lindon be indefinitely suspended from the practice of law and that he receive no credit for the time served under his interim felony suspension. In addition to the requirements set forth in Gov.Bar R. V(25)(D), the board also recommends that Lindon’s reinstatement be subject to the conditions set forth in 9 SUPREME COURT OF OHIO its first recommended sanction—with the exception that he shall not be required to participate in 12-step meetings and the additional requirement that he submit a prognosis from a qualified chemical dependency professional that he is able to return to the competent, ethical, and professional practice of law. {¶ 27} Lindon has not objected to the board’s second report or renewed his objections to the board’s original report. We note, however, that the board’s current recommendation and our decision today expressly state that Lindon shall not be required to participate in the 12-step programs that rendered his OLAP contract objectionable to him. Furthermore, we find no merit in Lindon’s arguments in favor of credit for time served under his interim felony suspension given the additional delay that was occasioned by his own dishonesty regarding his Michigan disbarment. {¶ 28} Lindon’s wrongdoing began with misconduct in his role as a pharmacist that resulted in felony convictions for theft, drug possession, and tampering with evidence but also violated the most basic professional duty of an attorney—to act with honesty and integrity. See, e.g., Cincinnati Bar Assn. v. Newman, 127 Ohio St.3d 123, 2010-Ohio-5034, 937 N.E.2d 81, ¶ 12; Cincinnati Bar Assn. v. Blankemeyer, 109 Ohio St.3d 156, 2006-Ohio-2038, 846 N.E.2d 523, ¶ 12. He continued to violate that duty of honesty and integrity by giving false and misleading testimony in his deposition and in the disciplinary hearing conducted by an arm of this court. We have recognized that a lawyer’s material misrepresentation to a court “ ‘strikes at the very core of a lawyer’s relationship with the court’ ” and that “ ‘[r]espect for our profession is diminished with every deceitful act of a lawyer.’ ” Disciplinary Counsel v. Stafford, 131 Ohio St.3d 385, 2012-Ohio-909, 965 N.E.2d 971, ¶ 68, quoting Disciplinary Counsel v. Fowerbaugh, 74 Ohio St.3d 187, 190, 658 N.E.2d 237 (1995). {¶ 29} In Cleveland Metro. Bar Assn. v. McElroy, 140 Ohio St.3d 391, 2014-Ohio-3774, 18 N.E.3d 1191, we disciplined an attorney who had engaged in 10 January Term, 2021 a pattern of dishonesty that included being convicted of forgery and tampering with evidence; allowing his counsel to make false statements about his criminal record in court without correction; making false statements in an affidavit, in his expungement filing, and in the resulting disciplinary proceedings; and failing to report his felony convictions to a disciplinary authority. Id. at ¶ 10, 13. Like Lindon, McElroy violated Prof.Cond.R. 8.4(c), (d), and (h). Id. at ¶ 14. Instead of failing to report discipline imposed in another jurisdiction as Lindon did, McElroy also violated Prof.Cond.R. 8.3(a) (requiring a lawyer to self-report ethical violations that raise a question about the lawyer’s honesty, trustworthiness, or fitness as a lawyer). Id. In contrast to Lindon, McElroy had no prior disciplinary record and acknowledged the wrongfulness of his conduct. Id. at ¶ 16. Nonetheless, we accepted the panel’s assessment that “[i]f an attorney cannot be trusted to reveal candidly unfavorable facts about his own behavior, we as a panel cannot be sanguine about whether he will be candid in his representations to courts or clients in other contexts.” Id. at ¶ 19. We indefinitely suspended McElroy from the practice of law in Ohio with no credit for the time served under his interim felony suspension. Id. at ¶ 24. We agree with the board that that is the appropriate sanction for Lindon’s misconduct in this case. Conclusion {¶ 30} Accordingly, James L. Lindon is indefinitely suspended from the practice of law in Ohio with no credit for the time served under the interim felony suspension imposed on June 30, 2016. In addition to the requirements set forth in Gov.Bar R. V(25)(D), Lindon’s reinstatement to the practice of law in Ohio shall be subject to the conditions that he (1) remain drug- and alcohol-free, (2) enter into a two-year drug-related contract with OLAP—though he shall not be required to participate in 12-step meetings, (3) submit to random drug screens, (4) participate in mental-health/substance-abuse counseling with a qualified chemical-dependency professional, notify OLAP of that professional’s name and 11 SUPREME COURT OF OHIO address, and execute the necessary waivers to allow the professional to send periodic reports to OLAP, (5) notify his OLAP counselor and his mental- health/substance-abuse counselor of the names and dosages of all drugs prescribed to him and waive the doctor-patient privilege with respect to any prescribing physician for the duration of his suspension, (6) submit proof that he has successfully completed a substance-abuse-treatment program, (7) submit a prognosis from a qualified chemical-dependency professional that he is able to return to the competent, ethical, and professional practice of law, (8) commit no further misconduct, and (9) pay the costs of these disciplinary proceedings. Costs are taxed to Lindon. Judgment accordingly. O’CONNOR, C.J., and KENNEDY, FISCHER, DEWINE, DONNELLY, STEWART, and BRUNNER, JJ., concur. _________________ Wickens, Herzer, Panza and Daniel A. Cook; and O’Toole, McLaughlin, Dooley & Pecora Co., L.P.A., Matthew A. Dooley, and Michael R. Briach, for relator. James L. Lindon, pro se. _________________ 12	01-04-2023	03-18-2021
https://www.courtlistener.com/api/rest/v3/opinions/4624113/	Donald G. Graham and Juanita F. Graham, Petitioners, v. Commissioner of Internal Revenue, RespondentGraham v. CommissionerDocket No. 77126United States Tax Court35 T.C. 273; 1960 U.S. Tax Ct. LEXIS 23; November 16, 1960, Filed 23 Decision will be entered under Rule 50. 1. Held, petitioners incurred a deductible casualty loss in the amount of $ 13,125 occasioned by destruction of rare and unusually fine specimens of ornamental trees, plants, and shrubs on their residential property in an unseasonable freeze.2. Petitioner husband was a partner in a law firm retained as local counsel by a major overseas airline. In 1955, petitioners took a 3-month trip to South America and on their return prepared a travel brochure and showed pictures of the trip to friends and acquaintances. The airline provided overseas transportation. Held, expenses of the trip are not deductible as ordinary and necessary business expenses. Bryant R. Dunn, Esq., and Ben J. Gantt, Jr., Esq., for the petitioners.Norman H. McNeil, Esq., for the respondent. Black, Judge. BLACK 274 Respondent has determined a deficiency in petitioners' income tax for the year 1955 in the amount of $ 8,112.57. The adjustments giving rise to the deficiency are set forth in the statutory notice as follows:(a) It is determined that the casualty loss deduction in the amount of $ 15,000.00 claimed by you on your 1955 return for damage to and destruction of trees and shrubbery on your residential property caused by freezing is excessive and did not in fact exceed $ 4,000.00, which amount has been allowed. Accordingly, your taxable income has been increased to reflect the unallowable amount of claimed casualty loss.(b) The amount of $ 1,573.71 claimed in the itemized deductions of your 1955 return as nonreimbursed business expenses for a trip to South America is disallowed in full.By amended return, claim for refund, and their petition, petitioners claim an increased casualty loss deduction in the amount of $ 17,500. On brief, respondent25 concedes petitioners are entitled to a casualty loss deduction in the amount of $ 9,500. Thus, the issues presented are:1. Whether petitioners are entitled to a casualty loss deduction in excess of $ 9,500 by reason of damage to their residential property due to destruction by freeze of ornamental trees and shrubs.2. Whether petitioners are entitled to deduct petitioner husband's cost of a trip to South America as nonreimbursed business expenses.FINDINGS OF FACT.Petitioners Donald G. Graham and Juanita F. Graham, husband and wife residing in Seattle, Washington, filed a Federal joint income tax return for the calendar year 1955 with the district director of internal revenue at Tacoma, Washington.Petitioners' residence is located in Seattle's Broadmoor district, a tract which was subdivided in 1925 into 400 lots surrounding a golf course and now is regarded as a residential neighborhood of fine homes. Petitioners' land, consisting of 7 lots totaling 1 1/4 acres, was purchased over a period of years by petitioners for a total of $ 22,500, 3 lots in 1929, 3 lots prior to 1935, and 1 lot in 1946. Petitioners' residence, a 13-room house of French design, was built upon 3 lots in26 1930 and 1931 at a cost of $ 40,000.During the process of construction of petitioners' residence in 1930 and 1931, Donald employed a landscape architect to plan the first gardens, after which time his interest in gardening increased to the point where he began to visit nurseries and induced his acquisition of the additional lots to enlarge his garden.275 The garden on petitioners' property evolved over a period of 25 years from a small collection of fairly choice plantings into a large collection, by number and maturity, of plants, shrubs, and trees as well as other landscaping elements, such as two artificial pools, walls, steps, dirt fill, rockeries, lawn area, and a greenhouse and garden house, all of which cost petitioners between $ 50,000 and $ 60,000.Petitioners devoted many hours to gardening and also regularly employed a gardener for an annual wage to maintain the garden. Donald was one of the original founders and a past president of the University of Washington Arboretum, the first president of the Seattle Rhododendron Association, a judge of the Rhododendron Show of Seattle, author of magazine articles, and a member of the Royal Horticultural Society of England. 27 In the early 1930's, Donald found out that certain ornamental plants suited to Seattle's climate were not obtainable in this country due to the restrictions of the Plant Quarantine Act; however, upon a proper showing made, Donald obtained a private grower's import permit and began importing plant material from England and Japan for petitioners' garden.By 1955, a majority of the plants in petitioners' garden had been purchased and some had been growing for 20 years or more. Petitioners never sold plants commercially but they did give them away. Otherwise, petitioners' garden changed from time to time due to petitioners' policy of getting rid of inartistic plant material, occasional remodeling of the garden by a landscape architect who reviewed the landscaping several times a year, and installation of new plants after consultation with the landscape architect.The garden achieved a certain notoriety in the Seattle area and has been the subject of directed tours by distinguished visitors and others interested in private gardens.Prior to November 1955, petitioners' garden consisted of a large, quality collection of broad-leaf evergreen specimens, including mature, uncommon hybrids28 and magnolia trees, making up about 90 per cent of the garden. At least 300 varieties of rhododendrons, 150 varieties of camellias, 25 varieties of magnolias, 10 varieties of stewartia, among many other trees and shrubs, were growing in the garden. Petitioners' garden also contains trees and shrubs native to the Seattle area.During 1955, spring plant growth in Seattle was delayed by record cold spells from March through June 8, 1955, after which time the area experienced a sudden increase in temperatures up to 100 o F. which wilted and burned tender foliage and sent certain plants into a state of temporary dormancy. The month of July 1955, was moist and cool, but August was the driest on record. September, October, 276 and the early part of November 1955 were favorable months for growth and plants were stimulated. On November 11, 1955, a frigid air mass moved into Seattle. The maximum temperature on November 10, 1955, was 54 o F. and the temperature dropped to 15 o F. on November 11, later dropping to as low as 6 o F. above zero on November 15, 1955. The duration of the freeze was 6 to 8 days, with maximum temperatures below freezing for 6 of the 8 days.Because of the29 climatic conditions which prevailed in the summer and fall, trees and shrubs were not prepared to cope with the sudden drop in temperature. The abrupt drop in temperature generally caused in the Seattle area the loss of a substantial number of broadleaf evergreen plants, particularly rhododendrons and camellias, but some native plants also suffered from the freeze. Due to the freeze, 45 per cent to 50 per cent of the broad-leaf evergreens in petitioners' garden, which was composed of 90 per cent of such plant material, were destroyed.Prior to the freeze petitioners' garden was particularly distinguished by the presence of unusually large specimens of certain rare trees which constituted accent points of the landscaping and in the shade of which many large plants and shrubs flourished. Many of the large trees and older plants and shrubs under them were killed by the freeze with the result that after the freeze and even after rearrangement and replacement of plants and trees, petitioners' garden tended toward uniformity of plant size and, although still containing many unusual plants, had lost much of its distinction.The cost of purchasing and replacing plants, shrubs, and trees30 killed by the freeze to restore the garden to the condition it possessed prior to the freeze would have been at least $ 21,000. Adequate replacements for some of the destroyed trees and plants were and are unobtainable.Petitioners have expended at least $ 10,000 in removing trees and plants killed by the freeze, moving existing plants, and purchasing and planting new trees and plants in an effort to restore the garden.The trees, plants, and shrubs on petitioners' property prior to the freeze contributed to its value. The destruction of them by the freeze reduced the fair market value of the property by the amount of $ 13,125. Petitioners were not compensated in any amount by insurance or otherwise for their casualty loss.Donald is senior member of a law firm, a partnership, with offices in Seattle. One of the firm's clients is Pan American World Airways (hereinafter referred to as Pan American) which pays the firm a monthly retainer of $ 416.67. Pan American pays the firm additional amounts for legal services rendered over and above routine services.277 Donald took a leading part in handling the business of Pan American for the firm. He considered that Pan American31 expected the firm to do public relations and sales promotion work in addition to rendering legal services. Donald has encouraged air travel by way of Pan American among his friends and acquaintances and has solicited letters from influential local citizens on Pan American's behalf. On occasion arrangements to fly by way of Pan American were made for friends of Donald through the firm. When Donald has traveled by way of Pan American he has reported to the airline any deficiencies in service he noticed.One of Donald's hobbies is fishing; he is considered by his friends and acquaintances as knowledgeable on the subject of good places for fishing. In 1955, Donald discussed with officials the possibility of increasing air traffic to South America, an area served by Pan American, by bringing tourist attractions of that continent to the attention of the public. Pan American agreed to furnish transportation to petitioners over its facilities. Petitioners' trip to South America covered a 3-month period in 1955, during which they visited Jamaica, Venezuela, Brazil, Uruguay, Argentina, Chile, Peru, and Panama City. Donald spent some time fishing in the lake region of Chile.Upon their32 return to Seattle, petitioners prepared a brochure on their trip, setting forth their itinerary, and information on hotels, shops, and points of interest to tourists. They gave copies of the typed brochure to anyone who evidenced interest in the subject. From time to time they would entertain dinner guests with postprandial showings of pictures taken on their South American trip. Donald gave a talk before the Rhododendron Society in Seattle in which he described South American gardens.On the South American trip petitioners incurred expenses for lodgings, meals, and domestic transportation, and miscellaneous items for which they were not reimbursed by Pan American in the amount of $ 3,147.43, one-half of which ($ 1,573.71) they claimed as an itemized deduction on their 1955 return as nonreimbursed business expenses of Donald. Petitioners were reimbursed by Pan American for their expenses of air travel over its facilities. Petitioners reported business income of $ 55,783.19 on their 1955 return.The expenses of the trip in the amount of $ 1,573.71, or any portion thereof, claimed as a deduction by petitioners were not ordinary and necessary business expenses of Donald.OPINION. 33 Although respondent allowed petitioners a casualty loss of $ 4,000 due to the destruction in their garden, his expert 278 witnesses testified that the fair market value of petitioners' property decreased $ 9,500 as a result of the freeze, and on brief respondent now concedes this sum is an allowable deduction under section 165(a), (b), and (c)( 3), I.R.C. 1954. 134 The parties do not disagree as to the applicable principle of law by which the amount of the loss is to be determined. That rule was stated in Buttram v. Jones, 87 F. Supp. 322">87 F. Supp. 322, 324, thus:The deductible loss is the difference between the value of the estate immediately preceding the casualty and the value after the casualty but not in excess of an amount equal to the adjusted basis of the estate, and in determining such loss the trees and shrubbery should be treated as an integral part of the estate and no separate basis apportioned thereto. [Footnotes omitted.]The question of the extent of the decrease in the value of the property is one of fact. John S. Hall et al., Executors, 16 B.T.A. 71">16 B.T.A. 71. After a careful review of the testimony of expert witnesses introduced by the parties, evidence of the cost of repairing and replacing the damaged portions of petitioners' garden, and all other relevant factors presented in the record, we are satisfied that the fair market value of petitioners' property decreased by the amount of $ 13,125 as a result of the damage wreaked by the freeze, and have so found. Therefore, that 35 amount of casualty loss should be allowed petitioners under Rule 50 instead of the $ 4,000 which the Commissioner allowed in his deficiency notice.The second issue presented is whether petitioners may deduct one-half of the nonreimbursed expenses of their trip to South America as ordinary and necessary business expenses of Donald.While travel expenses incurred by a partner in connection with partnership business are not normally deductible by the partner on his individual return, where partners agree that such expenses are to be borne by each partner, the expenses are deductible by the partner incurring them. Hiram C. Wilson, 17 B.T.A. 976">17 B.T.A. 976; Frederick S. Klein, 25 T.C. 1045">25 T.C. 1045. If the travel expenses here in issue constitute ordinary and necessary business expenses, we have no doubt that petitioners may deduct them.Expenses are ordinary if incurred in pursuing a course of conduct which constitutes a normal and natural response under the specific 279 circumstances in which a taxpayer finds himself. Welch v. Helvering, 290 U.S. 111">290 U.S. 111; Hill v. Commissioner, 181 F.2d 906">181 F.2d 906.36 Donald's situation with regard to expenses claimed as deductible was that he was senior partner of a law firm retained as local counsel by an airline client for an amount totaling approximately $ 5,000 per year. The client paid the law firm additional unspecified sums for legal services rendered beyond the routine. Donald, as the partner who took a leading part in handling the client's affairs, felt the client expected the firm to render promotional and public relations advisory services in addition to legal services. For the year in which the expenses, deduction of which is here sought, were incurred, Donald reported distributable income from the partnership in the amount of $ 55,783.19, or in excess of $ 4,600 per month for a full year. While the client provided Donald with air transportation outside this country, Donald expended $ 1,573.71 for his costs on the trip. He was accompanied on the trip by his wife, no part of whose expenses is claimed as deductible. Donald spent 3 months on the South American trip and away from his partnership office. Except for the overseas transportation provided by the client, neither the firm nor Donald was reimbursed for Donald's expenses37 or paid for his time or efforts. Under the facts in the instant case, we are not convinced that Donald's 3-month trip to South America can be classed as a business trip on behalf of Pan American. He claims a deduction of the entire amount of $ 1,573.71 (one-half of the expenditures incurred and paid on the trip by himself and wife). It seems manifest to us that this cannot be allowed as a deduction under the applicable law and regulations. We hold, therefore, that Donald's expenses of the South American trip are not deductible as nonreimbursed business expenses.Decision will be entered under Rule 50. Footnotes1. SEC. 165. LOSSES.(a) General Rule. -- There shall be allowed as a deduction any loss sustained during the taxable year and not compensated for by insurance or otherwise.(b) Amount of Deduction. -- For purposes of subsection (a), the basis for determining the amount of the deduction for any loss shall be the adjusted basis provided in section 1011 for determining the loss from the sale or other disposition of property.(c) Limitation on Losses of Individuals. -- In the case of an individual, the deduction under subsection (a) shall be limited to -- * * * (3) losses of property not connected with a trade or business, if such losses arise from * * casualty * * *↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4653921/	IN THE SUPREME COURT OF PENNSYLVANIA EASTERN DISTRICT COMMONWEALTH OF PENNSYLVANIA, : No. 262 EAL 2020 : Respondent : : Petition for Allowance of Appeal : from the Order of the Superior Court v. : : : SHAWN JACKSON, : : Petitioner : COMMONWEALTH OF PENNSYLVANIA, : No. 263 EAL 2020 : Respondent : : Petition for Allowance of Appeal : from the Order of the Superior Court v. : : : SHAWN JACKSON, : : Petitioner : ORDER PER CURIAM AND NOW, this 20th day of January, 2021, the Petition for Allowance of Appeal is DENIED.	01-04-2023	01-22-2021
https://www.courtlistener.com/api/rest/v3/opinions/4624055/	J. Albert & Sons, Inc. v. Commissioner.J. Albert & Sons v. CommissionerDocket No. 25024.United States Tax Court1951 Tax Ct. Memo LEXIS 339; 10 T.C.M. (CCH) 86; T.C.M. (RIA) 51025; January 26, 1951339 Nathan Wald, Esq., 1170 Broadway, New York, N. Y., for the petitioner. Thomas R. Charshee, Esq., for the respondent. TURNER Memorandum Findings of Fact and Opinion TURNER, Judge: The respondent determined an income tax deficiency of $894.42 and an excess profits tax deficiency of $2,553.17 against the petitioner for the fiscal year ended January 31, 1946. The issue is whether the respondent properly disallowed as excessive $6,600 paid as officers' salaries by the petitioner for the taxable year. Findings of Fact The petitioner was a corporation organized under the laws of the State of New York, on January 23, 1945, with its principal office in New York City. It filed its amended corporation income and declared value excessprofits tax return for the year ended January 31, 1946, with the Collector of Internal Revenue for the Second District of New York. On February 1, 1945, the petitioner succeeded to the business of a partnership owned and operated by Joseph Albert, his wife, Fannie, and their three sons, Philip, Arnold and Martin. The business was that of manufacturing cheap cardboard boxes and their sale, chiefly to hat manufacturers in the metropolitan area340 of New York City. The business had been established some 50 years earlier, by Joseph Albert's father. The petitioner acquired the business in exchange for 162 1/2 shares of its capital stock, 25 shares being issued to Joseph Albert, 25 shares to Fannie Albert, 50 shares to Philip Albert, 50 shares to Arnold Albert, and 12 1/2 shares to Martin Albert. Arnold Albert became president of the petitioner, Philip Albert, vice president, and Joseph Albert, secretary-treasurer. Of the stockholders and officers of the petitioner, only Joseph and Philip Albert were active in the management and operation of its business. Their salaries were fixed at $100 per week, beginning February 1, 1945. They had received the same compensation from the partnership. The manufacturing operation consisted of the conversion of raw pasteboard into set up boxes. On completion of the boxes, the purchaser.s labels were pasted thereon and the boxes were packaged for delivery. Each morning the boxes were loaded on rented trucks, driven by the petitioner's employees, and delivered to some 70-odd customers in the metropolitan area. The boxes sold for 5 to 10 cents each, and the individual sales ranged from about341 $5 to $40. The work day of Joseph and Philip Albert began at about 7 o'clock each morning. The employees, who numbered from 23 to 28 people, worked from 8:15 A.M. to 5:15 P.M., except for the bookkeeper, whose hours were from 9:00 A.M. to 5:00 P.M. About four nights each week, Joseph and Philip Albert worked after regular closing time. Some years earlier, the buying of the raw material, including pasteboard, wrapping twine and paper, used in the manufacturing process, was done by Herman Albert, another of Joseph Albert's sons, for which he drew a salary of $100 per week. The selling of the finished products had been handled by two salesmen, on a commission basis of between 6 to 8 per cent. In 1942 these commissions approximated $7,000. The salesmen and Herman Albert left the business at the end of 1942, or early in 1943. Attempts to replace these employees were unsuccessful and their duties were assumed and thereafter performed by Joseph and Philip Albert. They continued to perform all of these functions after the petitioner was organized. In addition to these duties and their normal administrative duties, they also busied themselves with the actual mechanics of everyday operations; 342 they labeled, tied and loaded the boxes for shipping. Their night work was largely that of labeling, packing and tying the boxes for delivery the next day. In the performance of these various duties for the petitioner, Joseph and Philip Albert devoted approximately 50 to 60 hours a week. On September 30, 1945, the petitioner sold its plant and equipment to the Variety Paper Box Corporation, hereinafter referred to as Variety, pursuant to an agreement dated September 12, 1945. Negotiations leading to the sale were handled by Joseph and Philip Albert. Pursuant to this agreement, the petitioner's machinery and office equipment were sold for $13,800, and good will, consisting of a list of 77 customers, for $200. The agreement also provided, inter alia, that Philip was to continue in the employ of the purchaser, Variety, for the period of October 1 through December 31, 1945, in the same capacity as employed by the petitioner. For these services, he was to be paid $100 per week. Joseph was employed by Variety for the same period, but only "to render such service as he in his discretion shall see reasonably fit and proper." His compensation was to be 25 per cent of the net profits earned343 by the business during the threemonth employment period. Joseph's share of the net profits and Philip's salary received from Variety, pursuant to the agreement, amounted to $650 and $1,300, respectively. Variety also employed two officers at respective weekly salaries of about $125 and $150. During this period, and continuing throughout the petitioner's taxable year ending January 31, 1946, both Alberts continued to draw salaries of $100 per week from the petitioner. Although they were employed by Variety in the capacities noted above for three of the last four months of petitioner's taxable year, they devoted a portion of their time, beginning about October 1, 1945, to the petitioner's interest. They attended to the various details of liquidating the petitioner's business and collected or attended to the settlement of about 100 accounts receivable owing to the petitioner. In addition, they investigated in the petitioner's behalf possible new location sites for setting up another business in New Jersey. On December 27, 1945, the petitioner's board of directors met, and the single item of business transacted was the execution of a resolution authorizing payment of the sum of $1,500344 each to Joseph and Philip Albert, for additional services rendered by them, which sums were paid within the taxable year. These services were described in the minutes of the meeting as those rendered by the Alberts for the period February 1 to September 30, 1945, during which time the petitioner was understaffed because of the difficulty of obtaining competent help. The petitioner's negotiations for the location and construction of a new plant in New Jersey failed to materialize. On November 25, 1947, the petitioner was dissolved. On its amended corporation income and declared value excess-profits tax return for the fiscal year ended January 31, 1946, the petitioner reported gross sales of goods included in inventories of $90,800.88 and a net income of $2,305.75, of which sum $11,816.66 represented capital gain on the sale of its business to Variety. Among deductions claimed, was compensation paid to officers totaling $13,900, $6,700 each to Philip and Joseph Albert, and $500 to Martin Albert, who was employed for a month prior to the sale of the business. Other wages and salaries totaling $26,330.78 were also listed. The respondent, in his determination of the petitioner's tax345 liability, allowed all the wage deductions with the exception of that portion attributable to salary payments to Joseph and Philip Albert beginning October 1 and continuing through the end of the fiscal year and the $1,500 voted each by the resolution of December 27, 1945. These expenditures were disallowed as deductions, on the basis that they represented excessive compensation payments. They are listed as follows: Paid toDate PaidDescriptionJoseph AlbertPhilip AlbertOctober, 1945Compensation$ 500.00$ 500.00NovemberCompensation400.00400.00DecemberCompensation400.00400.00DecemberAdditional Compensation1,500.001,500.00January, 1946Compensation500.00500.00Totals$3,300.00$3,300.00Opinion The issue is whether the respondent erred in rejecting as excessive the $6,600 total compensation payments made to Joseph and Philip Albert after the petitioner sold its business on September 30, 1945. Two phases of this question are presented under the facts: first, whether the Alberts' services to the petitioner from October 1, 1945, through January 31, 1946, were such as to warrant any compensation payment, and, 346 if so, how much; and second, whether the $1,500 payment to each, for services rendered during the first eight months of the fiscal year ending January 31, 1946, was reasonable as to all, or part, of the amount paid. The question is one of fact. As to the reasonableness of the contested weekly salary payments, it appears that Joseph and Philip Albert did render services of some value to the petitioner during the remaining four months of the taxable year following the September 30th sale. Specifically, they attended to the settlement of some 100 accounts receivable owing to the petitioner and also rendered some service by investigating possible new location sites in New Jersey. However, in view of Philip's full-time duties to Variety during this period, and of Joseph's similar part-time responsibility, it also appears that neither devoted services to the petitioner after the sale commensurate with their activity prior thereto; and on the record made herein, it is only in relation to their pre-sale services that we can properly judge the value of their activity thereafter. This measuring device is necessary, as the petitioner has established no other means for resolving the issue. 347 In view of the above facts, we conclude that the personal services actually rendered by the Alberts to the petitioner during this four-month post-sale period warrant the allowance of a proportionate part of these contested weekly salary payments as a deductible expense. Having no better basis for determining what this proportion is than can be divined from these facts, and recognizing that speculation is required, because of petitioner's inexactitude in the establishment of a more accurate criterion, we are of the opinion that 25 per cent of the weekly payments to the Alberts during this fourmonth period of dual activity represents a reasonable compensation allowance for services rendered. See . We are next concerned with the deductibility of the $1,500 additional compensation paid to each Joseph and Philip Albert, pursuant to the December 27, 1945, resolution of the petitioner's board of directors. The basis for the added payments, as shown by the minutes, was as follows: "Mr. Joseph Albert reported that for the period from February 1 to September 30, 1945 the Company was understaffed, owing to the fact that it was difficult to348 obtain competent help. As a result, thereof, the two active officers, Joseph Albert and Philip Albert, had to take on additional duties, and had to work very long hours." The additional amounts paid to Joseph and Philip Albert pursuant to this resolution had the effect of increasing their individual salaries from $100 weekly to about $144.12, over that 34-week period. The question is whether these added duties merited the additional compensation. The respondent, in his brief, recognizes that a resolution of the board of directors, such as the one authorizing the payment of the additional compensation contested herein, creates an inference that the salary allowances were reasonable, but argues that it is not conclusive and does not by itself establish the reasonableness of the payment. He concludes that no satisfactory corroborative evidence was submitted to substantiate the inference, or to support a finding that the additional compensation was reasonable, and that it is, therefore, rebutted. We agree with the respondent that the resolution did give rise to an inference of reasonablness, but are of the opinion that he erred in his interpretation of the corroborative facts. The349 petitioner was actively engaged in the manufacture and sale of cardboard boxes for only two-thirds of the taxable year ended January 31, 1946, the sale of the business to Variety being effected at the end of eight months. Yet the reported gross sales for this period were $90,800.88. Remembering that these boxes were cheap, and that individual customer sales ranged from about $5 to $40, it is apparent that this total volume of sales represented considerable managerial work in the purchase of raw materials, administration of plant and employees and sales of that volume of the completed product. These phases of the petitioner's operation were handled by Joseph and Philip alone, and, with the exception of their administrative duties, represented additional responsibilities, first assumed by them in early 1943, due to the petitioner's inability to fill vacancies resulting when two salesmen and a purchasing employee left its service. Illustrative of the value of their services is the fact that the two salesmen had earned about $7,000 in commissions in 1942, while the purchasing employee had been paid a salary of $100 per week. Philip and Joseph devoted a total of about 50 to 60 hours each350 per week to the petitioner's business. Joseph was a pioneer in the box industry, having been so occupied for about 30 or 40 years. Philip, also experienced in its operation, had served as vice president in the business as early as 1936. Variety, which purchased the business from petitioner, employed two salaried officers at respective weekly salaries of about $125 and $150. As noted previously, if the contested $1,500 additional compensation paid to each Albert was allocated to the eight-month period in which additional services were rendered, their weekly salary would then be about $144 each. Their salary thus computed, we think, compares favorably with the salaries paid to Variety's officers. At the time of the corporate resolution authorizing the additional compensation, Joseph owned 25 and Philip 50 of the petitioner's 162 1/2 outstanding shares. Although there was a close personal relationship between all stockholders, and even though the resolution was adopted after the sale of the business, as the respondent notes, we conclude that Joseph and Philip Albert's experience, long and successful service, and attention to numerous additional duties in the petitioner's behalf are, *351 under these facts, a reasonable basis for and deserving of the additional compensation. Decision will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624058/	ELIZABETH SIMEONE and JOSEPH SIMEONE, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentSimeone v. CommissionerDocket No. 10032-76.United States Tax CourtT.C. Memo 1978-436; 1978 Tax Ct. Memo LEXIS 76; 37 T.C.M. (CCH) 1821; T.C.M. (RIA) 78436; November 2, 1978, Filed Elizabeth Simeone and Joseph Simeone, pro se. Michael A. Mayhall, for the respondent. GOFFEMEMORANDUM FINDINGS OF FACT AND OPINION GOFFE, Judge: The Commissioner determined deficiencies in petitioners' Federal income tax for the taxable year 1975 in the amount of $ 3,178.20. The issues for our decision are: (1) Whether petitioners are entitled to an ordinary loss deduction in the amount of $ 14,675 for the taxable year in issue; (2) Whether petitioners are entitled78 to an ordinary loss deduction in the amount of $ 12,000 due to their stock in their wholly owned corporation becoming worthless during the taxable year in issue; (3) Whether petitioners' loan of $ 6,775 made to their wholly owned corporation is a nonbusiness bad debt; and, (4) Whether $ 4,100 received by petitioners from their wholly owned corporation represents a reduction of their loans to the corporation. FINDINGS OF FACT Some of the facts were stipulated by the parties during the trial on the merits. The stipulation along with the exhibits corresponding to the stipulation are incorporated by this reference. Joseph Simeone and his wife, Elizabeth Simeone, (herein petitioners) resided at Union City, New Jersey at the time of filing their petition in the instant case. They timely filed their Federal joint income tax return for the taxable year 1975 with the Internal Revenue Service. On September 22, 1973, petitioners and Mr. Michael Soliman entered into a partnership agreement for the purpose of establishing a business related to the manufacture and sale of clothing. Petitioners paid $ 12,000 for their interest in the partnership. Under the partnership agreement79 Mr. Soliman was responsible for the promotion of the business as well as the collection of money from various customers. Petitioners, primarily Mrs. Simeone, were responsible for the day-to-day operations concerning the production of garments. Petitioners and Mr. Soliman decided to incorporate their enterprise which was consummated on October 23, 1973, under the laws of the State of New Jersey. Following incorporation their enterprise was known as E & M Fashions, Inc. (herein E & M). Approximately one month after incorporation, petitioners discovered that Mr. Soliman had embezzled a substantial amount of money from E & M. Mr. Soliman effected the embezzlement by appropriating for his own personal use payments he collected from customers of E & M. During 1974 petitioners attempted to negotiate an arrangement with Mr. Soliman whereby Mr. Soliman would reimburse E & M for the amounts he embezzled. This proved to be unsatisfactory and E & M ceased to actively conduct business due to a lack of adequate financing. Mr. Soliman continued his criminal conduct by entering the premises of E & M and unlawfully removing and appropriating most of the machinery which was vital to the production80 of garments. The theft of the machinery which was worth approximately $ 9,000 caused E & M to cease operating as an active corporation. During this same time Ms. Sherry Biddle, a co-conspirator of Mr. Soliman and employee of E & M, illegally appropriated a substantial amount of clothing from E & M. After charging certain advertising fees to the account of E & M she sold the clothing for her own benefit and to the exclusion of E & M. E & M incurred substantial debt during 1974 due to the activities of Ms. Biddle and Mr. Soliman. It did not have sufficient funds on hand to satisfy all the claims of its creditors and for this reason petitioners borrowed additional money which they deposited in the account of E & M. The money borrowed by petitioners allowed E & M to satisfy all of its creditors. During 1975 petitioners once again decided to enter the business of manufacturing and selling clothing. On February 28, 1975, petitioners organized Elizabeth and Joe Fashions, Inc., under the laws of the State of New Jersey (herein Fashions). Petitioners contributed $ 12,000 to Fashions in the form of machinery and money in return for which each petitioner received 50 percent of the capital81 stock of Fashions. In addition to their capital contributions, petitioners lent Fashions $ 6,775 to meet operating expenses. Due to various factors Fashions proved to be unsuccessful and ceased operations during 1975. It sold its machinery and equipment used in the business at a price of $ 4,100 and recognized an ordinary loss of $ 9,245.45. Fashions then transferred the proceeds of the sale to petitioners. On their Federal joint income tax return for the taxable year in issue, 1975, petitioners reported an ordinary loss of $ 14,675. They computed the loss by taking the difference between the amount they received from Fashions' sale of machinery ($ 4,100) and the basis of their stock which they computed by adding their capital contributions ($ 12,000) and their loan to Fashions in the amount of $ 6,775 ($ 18,775 minus $ 4,100 equals $ 14,675). For the taxable year 1974, petitioners reported ordinary losses on their Federal joint income tax return and the basis for such losses related to the theft of E & M machinery and clothing as well as the debts of E & M which were satisfied with funds borrowed by petitioners and placed in the corporate account of E & M. The Commissioner82 determined that the losses were capital in nature rather than ordinary and, therefore, proposed a deficiency for the taxable year 1974 in the amount of $ 3,196.29. On June 1, 1976, petitioners consented to an immediate assessment and collection of this amount ($ 3,196.29) with the understanding that they would not be able to contest the taxable year of 1974 before the United States Tax Court unless additional deficiencies were determined for that year. No additional deficiencies for the taxable year 1974 have been determined. The Commissioner, in his statutory notice of deficiency, determined that petitioners were not entitled to an ordinary loss in the amount of $ 14,675 for the reason that the loss was capital in nature. Accordingly, the Commissioner allowed petitioners a capital loss in the amount of $ 1,000 in determining their deficiency for the taxable year 1975. OPINION Petitioners first contend that they are entitled to an ordinary loss for the taxable year 1974. They argue that the Commissioner was in error when he determined that their reported loss for the taxable year 1974 was capital in nature rather than ordinary. Petitioners waived the restrictions on assessment83 and collection of the proposed deficiency of the Commissioner for the taxable year 1974 and no statutory notice of deficiency was issued by the Commissioner for the taxable year 1974. Section 6212, Internal Revenue Code of 1954, 1 provides that if the Secretary or his delegate determines that there is a deficiency in respect of any tax imposed by subtitle A or B or chapter 42 or 43 of the Code, he is authorized to send notice of such deficiency to the taxpayer by certified mail or registered mail. Section 6213 provides that within a specified period (90 or 150 days) after the notice of deficiency authorized under section 6212 is mailed, the taxpayer may file a petition with this Court. For this Court to obtain jurisdiction a proper notice of deficiency must be mailed to that taxpayer. Izen v. Commissioner,64 T.C. 919">64 T.C. 919 (1975). We, therefore, hold that we lack jurisdiction with respect to any liability in tax of petitioners for the taxable year 1974 due to the absence of a statutory notice of deficiency. In addition, petitioners contend that they are entitled84 to carry forward their loss incurred during the taxable year 1974 to the taxable year 1975. Petitioners argue that the losses incurred during 1974 are ordinary which is contrary to respondent's characterization of them as capital in his proposed deficiency for the taxable year 1974. On September 22, 1973, petitioners entered into a partnership agreement with Mr. Michael Soliman for the purpose of establishing a clothing manufacturing business. Petitioners contributed $ 9,000 for their interest in the partnership. On October 23, 1973, the partnership business was incorporated under the name of E & M Fashions, Inc. Petitioners contributed an additional $ 3,000 to E & M to cover operating expenses. Following the incorporation of E & M, Mr. Soliman stole machinery and equipment belonging to the corporation and funds belonging to E & M. Petitioners advanced additional funds to E & M to meet its operating expenses because of Mr. Soliman's activities. In spite of petitioners' efforts to assist E & M in its attempt to continue operations, E & M ceased all operations after March 1974 due to a lack of machinery, equipment and operating funds. There can be no question that E & M suffered85 losses during 1974 and respondent concedes this point. Furthermore, the appropriation of its machinery and receipts from its customers played an integral part in its termination which resulted in petitioners' E & M stock becoming worthless during 1974. However, these losses could only be attributed to E & M and not to petitioners. Petitioners chose the way of operating the business in the corporation form and must recognize the disadvantages as well as the advantages of operating in such a manner. Moline Properties, Inc. v. Commissioner,319 U.S. 436">319 U.S. 436 (1943). Petitioners have failed to establish that the losses incurred by E & M during 1974 should inure to their benefit as an ordinary loss deduction. Welch v. Helvering,290 U.S. 111">290 U.S. 111 (1933). Respondent argues that petitioners' losses for the taxable year 1974 are capital and therefore limited to the provisions of section 1212(b) for carryover purposes. We agree with respondent. The record before us indicates that petitioners' losses incurred during 1974 were due to their stock in E & M becoming worthless and the nonbusiness bad debts that arose from petitioners' lending money to E & M for the purpose86 of satisfying claims of creditors and the overall maintenance of business operations. The carry forward of these capital losses to the taxable year 1975, however, will have no affect on petitioners' tax liability for the taxable year 1975 as we will discuss below. With respect to petitioners' taxable year 1975 the issue for our decision is whether petitioners are entitled to deduct $ 14,675 as an ordinary loss arising from the termination of business activities of Fashions. More specifically, we must decide: (1) whether petitioners are entitled to an ordinary loss deduction in the amount of $ 12,000 due to the worthlessness of their stock of a wholly owned corporation (Fashions); (2) whether petitioners' loan of $ 6,775 made to Fashions is a nonbusiness bad debt; and (3) whether $ 4,100 received by petitioners from Fashions represents a reduction of their loan to Fashions. On February 28, 1975 petitioners organized Elizabeth and Joe Fashions, Inc. (Fashions) as a corporation under the laws of New Jersey. They contributed $ 12,000 to Fashions in the form of machinery and money in return for which each received 50 percent of the common stock of Fashions. In addition, petitioners87 lent $ 6,775 to Fashions during 1975. Mrs. Simeone was an employee of Fashions during 1975 and received a salary in the amount of $ 4,315. Mr. Simeone was also employed by Fashions as a part time employee during 1975 and received a salary in the amount of $ 1,515. In addition, Mr. Simeone was a full time employee of Sea-Land Services, Inc. and received a salary of $ 18,860.48 during 1975. Fashions operated as a clothing manufacturer. However, during 1975 the business proved unsuccessful and Fashions ceased its operations. It sold its machinery and equipment for $ 4,100 and transferred these proceeds to petitioners. On their Federal joint income tax return petitioners claimed an ordinary loss in the amount of $ 14,675 which represented the difference between their capital contributions and loan to Fashions and the proceeds received from Fashions. Respondent takes the position that the loss reported by petitioners must be treated as a capital loss subject to the limitations of section 1211. Respondent argues that: (1) the Fashion stock became worthless during 1975 after Fashions ceased operations and therefore petitioners' loss with respect to their stock is controlled and88 limited by section 165(f) and (g); (2) petitioners' loan of $ 6,775 to section 165(f) and (g); (2) petitioners' loan of $ 6,775 to Fashions during 1975 is a nonbusiness bad debt subject to the provisions of section 166(d); and (3) the $ 4,100 received by petitioners from Fashions represents a reduction of their loans to the corporation. We agree with respondent. Petitioners' stock in Fashions became worthless during 1975 due to Fashions' inability to succeed in the clothing manufacturing business. Respondent is correct in asserting that section 165(g) controls the character of losses incurred from worthless stock. A loss due to the worthlessness of stock which is a capital asset is treated as a loss from the sale or exchange of a capital asset. 2 While petitioners contributed $ 12,000 to Fashions in return for stock in Fashions they are limited, as respondent determined, to a $ 1,000 capital loss resulting from their Fashions stock becoming worthless during 1975. Sec. 1211, I.R.C.Culley v. Commissioner,29 T.C. 1076">29 T.C. 1076 (1958). We therefore hold that petitioners are not entitled to an ordinary loss resulting from the worthlessness of their89 Fashions stock. With respect to petitioners' loan of $ 6,775 to Fashions, respondent argues that the worthlessness of this debt must be characterized as a nonbusiness bad debt and thus limited to short-term capital loss treatment. Section 166 allows a deduction for any debt which becomes worthless within the taxable year. However, the extent of the deduction depends upon whether the debt is characterized as business or nonbusiness. Section 166(d)(2) defines a nonbusiness debt as a debt other than a debt created or acquired in connection with a trade or business, or a debt the loss of which is incurred in the taxpayer's trade or business. If the debt comes under this definition it is treated as a short-term capital loss under the provisions of section 166(d)(2). The evidence presented by petitioners does not establish that their loan to Fashions was anything other than the creation of a nonbusiness debt. It is well established that the loss from loans made to a corporation by its organizer90 and controlling shareholder are nonbusiness bad debts. Whipple v. Commissioner,373 U.S. 193">373 U.S. 193 (1963). In addition, petitioners have failed to establish that they were in the trade or business of lending money. Millsap v. Commissioner,46 T.C. 751">46 T.C. 751 (1966), affd. 387 F.2d 420">387 F.2d 420 (8th Cir. 1968). Petitioners were in the trade or business of being employees of Fashions, but there is no evidence before us which would indicate that their loan to Fashions was made to protect their position of an employee. United States v. Generes,405 U.S. 93">405 U.S. 93 (1972). Accordingly, we hold that petitioners are entitled to a short-term capital loss from the worthlessness of their nonbusiness bad debt. The final issue for decision is whether the $ 4,100 received by petitioners from Fashions represents a reduction of their loans to Fashions. Respondent's determination in this regard is presumptively correct and petitioners have the burden of proving an incorrect determination. Welch v. Helvering,290 U.S. 111">290 U.S. 111 (1933). Petitioners have failed in this regard because they presented no evidence to rebut respondent's determination. 91 Therefore, petitioners are not entitled to utilize the worthlessness of their nonbusiness bad debt to the extent of the $ 4,100 reduction. Decision will be entered for the respondent.Footnotes1. All section references are to the Internal Revenue Code of 1954, as amended.↩2. There is no evidence before us which indicates that the Fashions stock held by petitioners comes under the exceptions to the definition of a capital asset provided in section 1221.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624059/	L. JAY WALKER, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentWalker v. CommissionerDocket No. 6583-77.United States Tax CourtT.C. Memo 1983-538; 1983 Tax Ct. Memo LEXIS 250; 46 T.C.M. (CCH) 1267; T.C.M. (RIA) 83538; August 31, 1983. 250 Petitioner was the primary target of an undercover police investigation of an illegal lottery. Based on documentation obtained through police searches, respondent determined that petitioner received unreported income from the operation of an illegal lottery during the years 1972 through 1974 in excess of $550,000; and that the resulting underpayments of tax were due to fraud so that the additions to tax for fraud were applicable. Held, based on petitioner's failure to introduce evidence controverting respondent's allegations, respondent's deficiency determinations are upheld. Held further, respondent's proof linking petitioner to illegal lottery activity is not of sufficient probative value to establish the existence of fraud by clear and convincing evidence. L. Jay Walker, pro se. J. Carlton Howard, Jr., for the respondent. STERRETTMEMORANDUM FINDINGS OF FACT AND OPINION STERRETT, Judge: By notice of deficiency dated April 13, 1977, respondent determined the following deficiencies in, and additions to, petitioner's Federal income taxes: Addition to taxYearDeficiencypursuant to sec. 6653(b)1972$155,150.02$76,575.011973122,708.7061,354.35197473,598.2736,799.13The issues for decision are (1) whether petitioner had unreported income from the operation of an illegal lottery during the years 1972, 1973, and 1974 in the amounts of $236,319.98, $192,448.31, and $123,880.11, respectively; and (2) whether petitioner is liable252 for the additions to tax pursuant to section 6653(b), I.R.C. 1954. 1FINDINGS OF FACT Some of the facts have been stipulated and are so found. The stipulation of facts, together with the exhibits attached thereto, are incorporated herein by this reference. Petitioner, L. Jay Walker, resided in Harrisburg, Pennsylvania at the time of filing the petition herein. He timely filed his Federal income tax returns for the calendar years 1972, 1973, and 1974 with the Internal Revenue Service Center, Philadelphia, Pennsylvania. During the summer of 1974, the Pennsylvania State Police conducted an undercover investigation of an illegal lottery or numbers operation located within the City of Harrisburg. The primary target of this police undercover investigation was petitioner, L. Jay Walker, who was the253 reputed head of the numbers operation. Basically a numbers game is a gambling game where participants bet on a certain number being that day's winning number. In the case of the Harrisburg game in question, the daily winning number was usually based on recetrack results. A player could play a number either "straight" or "boxed" and could bet almost any amount on a given number.If a number was played "straight" the payoff for that particular number would be anywhere from 400-to-1 to 600-to-1; however, if the number was played "boxed," meaning any combination of three digits was being played, then the payoff would be considerably lower. During the course of their investigation, the Pennsylvania State Police obtained information that they believed confirmed their suspicions that petitioner was the head of the Harrisburg numbers game. Much of this information was obtained from Thomas H. Shelar, who was an undercover trooper on the Pennsylvania State Police organized crime strike force. During the investigation, Mr. Shelar was assigned to infiltrate the Harrisburg numbers operation by placing bets. One of the places where Mr. Shelar did a large amount of undercover work was the254 Blue Note Cafe. Mr. Shelar's daily activities there consisted of having a couple of drinks and playing a number or two with Maggie Allen, the owner or operator of the Blue Note. Within 2 or 3 days after infiltrating the Blue Note, Mr. Shelar observed Maggie Allen giving the numbers that she had taken to a man named Dick Mack. Dick Mack was a known numbers runner; that is, a person who picks up numbers from various locations and delivers them to either a "bank," a sub-bank, or another party.The Pennsylvania State Police subsequently began a surveillance of Mr. Mack. During the course of this surveillance, Mr. Shelar observed Mr. Mack using the pay phone in the Blue Note to relay the bets taken by Maggie Allen. On one of these occasions, Mr. Shelar watched from a distance of about 15 to 20 feet as Mr. Mack dialed a phone number he thought to be 233-4477. Petitioner's phone number at that time was 234-4473. Although the numbers were not exact, Mr. Shelar suspected that the call was placed to petitioner. This suspicion was buttressed by the fact that Mr. Mack told him about a millionaire who was redecorating a bar called "The Lounge." When Mr. Shelar inquired about the identity255 of this person, Mr. Mack replied, "The guy, he owns The Lounge and he's the head of this numbers thing." It is stipulated that at all times pertinent to this action petitioner was the titleholder of The Lounge Cafe. As a result of this undercover investigation, the police went before a district Justice of the Peace and obtained warrants to search a number of locations for numbers paraphernalia, betting slips, and related items. Among the places searched were the Blue Note Cafe, petitioner's home, The Lounge, Dick Mack's home, John L. Barbee's home, and John L. Barbee's car. Barbee's residence was believed to be the "bank" for the numbers operation. A bank is the place where all the bets on the street are collected, the money is counted, and a tally is made to make certain that the money on hand equals the amounts of bets received that day.The banker ascertains the winning number for the day and tallies how much is to be paid out on that particular number.Among the evidence collected in the searches that followed on September 19, 1974, the police found three calendars for the years 1972, 1973, and 1974 at the residence of John L. Barbee. These calendars list numbers and numerical256 monetary amounts for each specific day from January 1972 until September 18, 1974. On each date on the calendar three figures are entered. The top number was a dollar figure representing the net amount of money bet on the numbers for that day. This net amount is arrived at by calculating the entire amount bet and then subtracting 25 percent for commissions paid to numbers runners. The three digit number entered in the middle on each day was the winning number for that day. Finally, the bottom number on each day was a dollar figure representing the amounts paid out for winning bets. During their search of Mr. Barbee's house, the police also found several pieces of paper which contained tallies of bets placed on September 17 and September 18, 1974. These slips of paper also contained code numbers relating to the various numbers runners. Petitioner's apartment was also searched and he was arrested during a raid conducted on September 19, 1974.During the search of petitioner's residence several slips of paper were confiscated. One piece of paper contained codes and telephone numbers, one of which was for a known numbers runner. There were also other slips of paper found that257 contained handwritten numbers along with an adding machine tape that contained a list of tallied numbers. There exists a strong correlation, although not exact, between the numbers on the slips of paper found at Mr. Barbee's residence and the numbers on the slips of paper found the same day at petitioner's residence. Petitioner was not convicted as a result of his arrest. Using the information derived from the calendars seized at Mr. Barbee's residence, respondent's agents prepared an analysis of the profits realized from the Harrisburg numbers operation during the years 1972, 1973, and 1974. In preparing this analysis, the agent checked the numbers appearing on the calendars against approximately 50 days of tally sheets found in Mr. Barbee's residence and found the numbers recorded on the calendars to be very accurate. In his statutory notice of deficiency, respondent determined that petitioner realized taxable income from bookmaking operations of $236,319.98, $192,448.31, and $123,880.11 for the years 1972, 1973, and 1974, respectively. These adjustments to income were taken from the total figures on the profit analysis prepared by respondent's agent; however, an additional258 5-percent deduction was allowed for each year based on a prior decision of this Court. OPINION We first address the question of whether petitioner received taxable income from an illegal lottery during the years 1972, 1973, and 1974 equal to the amounts determined by respondent. This issue is purely factual and petitioner bears the burden of proving that respondent's determinations are incorrect. Welch v. Helvering,290 U.S. 111">290 U.S. 111 (1933); Rule 142(a), Tax Court Rules of Practice and Procedure.In the instant case, there is little doubt that there was an illegal lottery being run in Harrisburg during the years in question. Respondent has introduced detailed testimony and documentary evidence concerning the Pennsylvania State Police investigation of such activities during the summer of 1974 that confirms beyond a shadow of a doubt that an illegal numbers operation was indeed in existence. Furthermore, the amounts of income derived therefrom are also not subject to any serious question. Respondent has introduced evidence (the calendars themselves with the net receipts noted thereon) seized at Mr. Barbee's residence along with Mr. Barbee's testimony, which259 establish a solid foundation for his calculations of the profits earned from the illegal numbers operation during the years in question. Thus, the sole dispute with respect to this issue is whether petitioner is the party to whose benefit the entire income in question inured. Respondent bases his case primarily on the evidence obtained by Mr. Shelar in his undercover investigation and the slips of paper seized in the subsequent search of petitioner's residence. Mr. Shelar testified that on one occasion he saw a numbers runner, Dick Mack, dial a phone number similar to petitioner's when he was phoning in bets. Although it may be reasonable to assume that the number dialed was petitioner's and that Mr. Shelar was only slightly mistaken due to the distance he was sitting from the telephone, this testimony is certainly not of a conclusive nature. Mr. Shelar also testified that Dick Mack told him about a millionaire who was redecorating The Lounge and was the same person who was the head of the numbers operation. Although it is true that petitioner was the titleholder of The Lounge Cafe, the statements made by Dick Mack to Mr. Shelar are obviously hearsay and cannot be accepted260 for the truth of the matter asserted. Respondent nevertheless argues that the hearsay statement should be allowed to stand because of petitioner's failure to object to its admission. We disagree. Petitioner in this case was without counsel, and we refuse to hold that a pro se taxpayer has waived his rights by his failure to object to the admission of a hearsay statement. This evidence thus has no probative value with respect to the question of whether the profits in question inurred to petitioner. Undoubtedly, respondent's strongest evidence tending to show petitioner's involvement in the numbers operation is the slips of paper seized in the police search of petitioner's residence. Although the correlation between the numbers contained on these slips and the numbers on the slips of paper obtained from Mr. Barbee's residence is not exact, there are enough similarities to indicate plainly that there was some connection between petitioner and Mr. Barbee. They clearly place petitioner in the numbers business. It is not incumbent upon respondent to show that no one except petitioner received the lottery profits. Rather, it is petitioner's burden to prove that others, and not he261 alone, shared the lottery proceeds. Gerardo v. Commissioner,552 F.2d 549">552 F.2d 549, 556 (3d Cir. 1977), affg. and revg. a Memorandum Opinion of this Court. In summary, the evidence introduced by respondent does raise the obvious possibility that petitioner was the party for whose benefit the income from the numbers operation inured. Furthermore, it is petitioner and not respondent who bears the burden of proof with respect to the alleged deficiency. Petitioner has failed to introduce any evidence other than his self-serving testimony to support his case. We do not find his testimony minimizing his role in the numbers business credible. Furthermore, he has not offered to this Court any explanation with respect to why the numbers on the slips of paper obtained from his residence are so similar to the numbers found in Mr. Barbee's residence. Accordingly, because of petitioner's failure to introduce evidence controverting respondent's allegations, we uphold respondent's deficiency determination. The second issue is whether petitioner is liable for the 50-percent additions to tax for fraud prescribed in section 6653(b). 262 The existence of fraud is a question of fact to be resolved upon consideration of the entire record before us. Gajewski v. Commissioner,67 T.C. 181">67 T.C. 181, 199 (1976), affd. in an unpublished opinion (8th Cir. 1978). Section 7454 of the Code places the burden of proving fraud on respondent, and it must be proven by clear and convincing evidence. Carter v. Campbell,264 F.2d 930">264 F.2d 930, 936 (5th Cir. 1959); Green v. Commissioner,66 T.C. 538">66 T.C. 538, 549 (1976). Our holding with respect to the deficiencies does not require us to find fraud with respect to the understated income. In fact, we decline to find fraud since we do not believe that respondent, by placing petitioner in the numbers game, has thereby established by the requisite clear and convincing burden of proof that petitioner committed fraud in the years before us. Respondent failed to produce any witnesses to describe the degree and extent of petitioner's involvement in the numbers operation in question. Respondent did produce one witness, John L. Barbee, who certainly should have been able to shed some light on petitioner's involvement in the Harrisburg numbers operation. However, *263 respondent inexplicably failed to ask Mr. Barbee any questions regarding his relationship with petitioner. Additionally, respondent failed to reinforce his case by offering any net worth analysis that might confirm petitioner's receipt of the large sums of money at issue in this case. In conclusion, we hold for respondent with respect to the determined deficiencies and for petitioner with respect to the assessed additions to tax for fraud. By reason of the fact that we do not find fraud, it follows that the collection of the deficiency for 1972 is barred by the statute of limitations since the statutory notice of deficiency was mailed over 3 years after the filing of the return for that year. Accordingly, Decision will be entered under Rule 155.Footnotes1. Since respondent mailed the statutory notice of deficiency to petitioner more than 3 years after his 1972 return was filed and has not raised the application of sec. 6501(e)(1), if we find that there was no fraud involved with the filing of such return, then the deficiency for that year is barred by the statute of limitations. Sec. 6501(a) and (c).↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624060/	Appeal of E. A. ARMSTRONG.Armstrong v. CommissionerDocket No. 232.United States Board of Tax Appeals1 B.T.A. 296; 1925 BTA LEXIS 2966; January 13, 1925, decided Submitted December 9, 1924. 2966 Taxpayer held a fifteen-payment life insurance policy containing tontine features by which it might become an endowment and be payable prior to his death. Some of the premiums were paid prior to and some subsequent to March 1, 1913, and the policy matured and the face amount thereof with a small additional sum was paid to the taxpayer in 1920. Held that the difference between the face amount of the policy and (a) the surrender value at completion of premium payment plus (b) accumulated dividends or excess premiums at March 1, 1913, is taxable gain subject to both normal and surtax under the Revenue Act of 1918. The sum received in excess of the face of the policy is subject to taxation as a corporate dividend at surtax rates only. E. A. Armstrong, esq., the taxpayer, pro se.A. H. Fast, Esq. (Nelson T. Hartson, Solicitor of Internal Revenue) for the Commissioner. IVINS296 Before IVINS and MARQUETTE. This appeal came on for hearing on November 21, 1924, upon the pleadings and certain exhibits filed by the parties, from which the Board makes the following FINDINGS OF FACT. In 1901 the taxpayer took out a policy of life insurance2967 with the Union Central Life Insurance Co. in the principal amount of $10,000, under the terms of which he was required to pay annual premiums of $478.40 for 15 years. The policy contained certain tontine features by which it was provided that upon the maturity of the policy it would be effective as an endowment and the principal amount of $10,000 would be paid. The policy was to mature, according to the statement of the taxpayer (that particular portion of the policy being omitted from the exhibit filed by the taxpayer), when the accumulated fund of the particular tontine group should reach a figure sufficient to pay the principal amounts to all remaining members of the group. 297 The taxpayer paid premiums at the rate of $478.40 for 15 years, a total of $7,176, of which $5,740.80 was paid prior to March 1, 1913. The cash surrender value of the policy at the close of the premium-paying period was $5,350, and at that time there had been credited to the taxpayer on account of the policy so-called "dividends" in the aggregate amounting to $2,451.70, but there is no evidence in the record to show what the surrender value or the accumulated dividends were at March 1, 1913. 2968 The policy matured in 1920, and on June 15, 1920, the taxpayer received from the insurance company $10,134.40. Of this amount the Commissioner regarded $2,824 as a gain subject to normal tax and surtax, and $134.40 as corporate dividend subject to surtax only, and determined a deficiency accordingly. The taxpayer appealed from such determination, contending that none of the money so received was taxable income. DECISION. The deficiency should be computed in accordance with the following opinion. Determination will be settled on consent or on 10 days' notice in accordance with Rule 50. OPINION. IVINS: The taxpayer has developed several involved theories of his taxability based principally on statements of what would have happened and what would have been his rights under the policy in certain hypothetical circumstances which did not occur. The facts are that the taxpayer took out a 15-payment life insurance policy containing a tontine feature under which it might mature prior to his death and become payable as an endowment, that he paid premiums for 15 years, and that thereafter the policy matured as an endowment when he received the face amount thereof plus $134.40. 2969 What the taxpayer's right would have been had he surrendered the policy after completing the premium payments; what the rights of the beneficiaries would have been had he died; what his rights would have been if he had transformed the policy into paid-up insurance or had elected to take advantage of any of the other options contained in the policy do not concern us. He had an asset on March 1, 1913, consisting of the cash surrender value of the policy at that date plus any accumulated so-called dividends or excess premiums which had been credited to him and which would have become payable to him upon surrender of the policy. The evidence does not tell us what this policy value was or how much such accumulation may have been. The taxpayer contended in argument that the policy was really worth a lot more than its surrender value on March 1, 1913, because other members of the tontine group had dropped out, etc., and that every time one dropped out the value of the policies of the remaining members increased; but such increased value was entirely contingent upon the taxpayer's remaining in the group until the maturity of his policy. The market or realizable value of the policy was2970 not changed by the occasional elimination of members of the group, though the probable time of maturity may have been advanced - remaining, however, strictly contingent. 298 The Revenue Act of 1918 does not contemplate the computation of gain or loss by reference to contingent values. A taxpayer who owned an asset before March 1, 1913, and disposed of it thereafter is entitled in computing profit to subtract from the selling price the capital value which he held on March 1, 1913 (or the cost to him, if higher), plus any additional cost incurred after March 1, 1913, with proper adjustments for values recovered through depreciation, etc. The capital value so recoverable must be a market value, a realizable value - not a theoretical value computed by reference to some future contingent event. The taxpayer by March 1, 1913, had paid in premiums $5,740.80, but the cash surrender value of the policy on that day was less than that amount - it was only $5,350 on June 15, 1915. The excess of the sum of premiums paid over the cash surrender value does not represent a cost to the taxpayer of his asset in the policy but represents merely the cost of earned insurance - an annually2971 recurring expense. The cost of earned life insurance is not a capital investment any more than the cost of earned fire or marine insurance. It is a current expense, and should not be treated as anything else. The expense, being personal, is not deductible - and the taxpayer may not accomplish the effect of a prohibited deduction by treating an item of current expense as part of the cost of a capital investment. The capital value at March 1, 1913, which the taxpayer is entitled to have returned before he can be said to have had taxable profit will be the cash surrender value of the policy at that date plus any accumulated dividends or excess premiums which had been credited to him in such a way that he could have realized them had he surrendered the policy on March 1, 1913. Any greater value would be purely speculative and contingent, and can not be made the basis for computing taxes. To the value on March 1, 1913, should be added the cost after 1913 of the investment finally realized upon. This cost would be that part of the premiums paid subsequent to March 1, 1913, which are attributable to a capital value in the policy and not to current earned insurance; in other words, 2972 the amount by which the surrender value of the policy was increased by payments made after March 1, 1913. This amount when added to the cash surrender value of the policy proper at March 1, 1913, would total $5,350, the cash surrender value of the policy proper at the termination of the premium-paying period. This $5,350 plus the dividends or excess premiums credited and subject to withdrawal at March 1, 1913, is all that the taxpayer is entitled to treat as recoverable capital. The difference between that sum and the $10,000 face value of the policy constituted a taxable profit when realized and it is taxable as a profit, not as a corporate dividend. The taxpayer did not receive it by way of dividend upon his stockholding in a corporation but under the terms of a contract which very distinctly and definitely fixed the amount which he was to receive upon the maturity of the policy. It is true that the time of maturity was not fixed in the policy, but it was not contingent upon the prosperity of the company as dividends would be. It was contingent upon the way in which the members of the particular tontine group might happen to die or 299 withdraw. We see no basis for2973 holding that this gain should be treated as a corporate dividend. Over and above the amount which the insurance company had contracted to pay upon the maturity of the policy, the taxpayer received $134.40. This was a share of the earnings of the company attributable to this policy, derived during the period between the actual time the policy became mature and its anniversary date upon which it was paid. It was received by the taxpayer as his share of corporate earnings and is taxable as a corporate dividend at surtax retes only. Owing to the absence of exact figures with respect to the accumulated dividends or excess premiums credited to the policy on March 1, 1913, it is impossible for us to compute the taxable gain, but it should be computed by subtracting from $10,000 the sum of $5,350 and the said unknown amount of dividends or excess premiums. The resulting difference is taxable for both normal and surtax, and the sum of $134.40 is subject to surtax only. The deficiency should be recomputed accordingly.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624061/	George L. Sogg v. Commissioner.Sogg v. CommissionerDocket No. 23112.United States Tax Court1950 Tax Ct. Memo LEXIS 84; 9 T.C.M. (CCH) 927; T.C.M. (RIA) 50251; October 4, 1950Theodore W. Kearins, C.P.A., and Dale W. Black, C.P.A., for the petitioner. Thomas V. Lefevere, Esq., for the respondent. HARRON Memorandum Findings of Fact and Opinion HARRON, Judge: The respondent has determined that there is a deficiency in income and victory tax for the year 1943 in the amount of $6,132.28. The year 1942 is involved under the provisions of the Current Tax Payment Act. In determining the petitioner's taxable net income for 1942, the respondent has made two determinations both of which are contested by the petitioner. He has disallowed the carry-over from 1941 of a loss in the amount of $4,614.90 which the petitioner reported in his return for 1941. That loss resulted from a deduction for an alleged partially worthless debt of a corporation known as Federal Wrecking Company of Boston, 85 in the amount of $18,072.71, which deduction was allowed by the respondent. The year 1941 is not before us. But the same indebtedness is now put in issue in this proceeding under the second determination of the respondent which was to disallow deduction of the balance of the alleged indebtedness in the amount of $6,864.45, which the petitioner deducted in 1942 as a bad debt. The respondent's position with respect to an alleged debt of Federal Wrecking Company to the petitioner now is that out of the sums which petitioner advanced to the corporation, in which he owned one-half of the stock, $6,864.45 constituted a contribution to capital rather than a loan. The Federal Wrecking Company was dissolved in 1943, which year is involved. The respondent has given petitioner a capital loss deduction in 1943 in the amount of one-half of what the respondent has determined was petitioner's contribution to the capital of Federal Wrecking Company. The pleadings do not present any question of estoppel, and petitioner makes no contentions on brief with respect to estoppel. The foregoing is set forth in explanation of the way in which the issues for decision have arisen. The petitioner filed86 his returns with the collector for the eighteenth district of Ohio, at Cleveland. Findings of Fact The petitioner resides in Cleveland, Ohio. Since 1910 he has engaged in directly or been associated with corporations or partnerships engaged in the business of wrecking buildings and selling the salvaged materials. These business organizations have been located in Ohio, Maryland, New York, Michigan, Pennsylvaia, Massachusetts, and elsewhere. There were about twelve corporations in which the petitioner owned stock, and there were other unincorporated businesses with which the petitioner was associated. During 1942 the petitioner did not receive income from business organizations in which he had interests excepting as is set forth hereinafter. In 1939 the petitioner owned stock in Cuyahoga Material Corporation which had its office in Cleveland. He was president of the corporation in 1941, 1942, and 1943. He controlled that corporation through stock ownership in himself or members of his family. He received a salary from this corporation in 1941, 1942, and 1943 in the respective amounts of $3,000, $3,900, and $5,200. In 1939 and through 1941, the petitioner conducted a business87 in Cleveland as a sole proprietor under the name of Cuyahoga Wrecking Company. The business was wrecking and the sale of salvaged materials. In 1942 and 1943 this business was conducted under a partnership under the same name. In 1939 the Boston Housing Authority invited bids for the demolition of about 800 buildings in Boston. Petitioner submitted a bid signed "George L. Sogg, Cuyahoga Wrecking Company," and he was the successful bidder. On or about June 30, 1939, he entered into an agreement with the Boston Housing Authority to demolish buildings and houses in a slum clearance project under which the Housing Authority agreed to pay the total amount of $66,666, payable in certain percentages as the demolition work progressed, and petitioner was to have the salvage from the sale of certain materials. Thereafter, the petitioner asked Leon A. Harris, who was in the wrecking business, to join with him in the work under the contract on the basis of sharing profits and loss fifty-fifty. Harris was associated with Harris Wrecking Company, an Ohio corporation. Harris accepted the offer, but it was decided that a corporation should be organized, and that Harris Wrecking Company and the petitioner88 would subscribe to the stock of the corporation in equal amounts. Accordingly, the corporation, Federal Wrecking Company, was organized under the laws of Massachusetts, and petitioner became its president, and Harris became its secretary, and petitioner and Harris Wrecking Company, each, subscribed to $500 of capital stock so that a total of $1,000 was the paid-in capital. Shortly after Federal was organized, petitioner and Harris arranged with a bank, Manufacturers Trading Corporation of Delaware, for loans from the bank to Federal up to $25,000 to meet current expenses of the wrecking work under the contract with the Boston Housing Authority. Federal was a party to the loan agreement. Manufacturers made loans which aggregated $51,000. It was anticipated in 1939 when the contract was obtained from the Boston Housing Authority that the sales of salvaged materials would provide funds to meet the current expenses of the wrecking work, and, also, that a profit would be made under the contract from the sales of salvaged materials. The venture turned out to be unprofitable because the market for salvaged materials went down. Sales were slow and prices were lower than had been expected. 89 Part of the indebtedness to Manufacturers was paid with proceeds from sales, and petitioner and Harris paid part of the debt. Petitioner paid Manufacturers $3,500 in 1940, and $3,192.24 in 1941. An account was set up in petitioner's books with Federal in 1939. The abovementioned payments to Manufacturers were entered in the account as "debits" or amounts owing by Federal to petitioner. At the end of 1939, the total of payments by petitioner of various items charged to Federal in the account was $9,963.24. Included in the total of the payments were cash, $6,000. The account was credited with $1,750, leaving a balance at the end of the year of $8,213.24. During 1940 the net charges to this account amounted to $6,791.46, and the balance owing by Federal totalled $15,004.70. During 1941 there were additional net charges entered in the account in the amount of $3,658.38. To this was added $7,155.08 which petitioner paid to Harris Wrecking Company to equalize his advances to Federal with those of Harris, and then the total owing by Federal to petitioner was, according to the account, $25,818.16. The charges entered in the account in 1940 and 1941 were for expenses of Federal which petitioner90 paid, including some payments on Federal's debt to Manufacturers. Harris Wrecking Company, with which Leon Harris was associated, also made advances to Federal, either directly or through payments of bills of Federal, and these payments were recorded in an account on the books of Harris Wrecking Company with Federal. At the end of 1941, the net amount owing by Federal to Harris Wrecking Company, according to the account, was $32,973.24. At the end of 1941, petitioner and Harris Wrecking Company determined that 70 per cent of the "indebtedness" of Federal, as shown by these accounts, should be charged off as uncollectible, and petitioner charged off $18,072.71, leaving a balance of $7,745.45 as the sum owed to him by Federal. Harris Wrecking Company made a similar charge-off. The petitioner, in his 1941 income tax return, deducted $18,072.71 as a loss from a partially worthless debt. The respondent allowed the deduction, and as a result, petitioner's return for 1941 showed a loss of $4,614.90. At the beginning of 1942, petitioner's account with Federal showed a debit balance of $7,745.45. During 1942 petitioner paid a total of $800 of Federal's expenses. After credits to the91 account during 1942, the balance at the end of 1942 was $7,364.45, owing by Federal to petitioner. Included in this amount was $500, the contribution of petitioner to the capital of Federal. Petitioner charged off the balance at the end of 1942. In his return for 1942 he deducted as a bad debt the amount of $6,864.45. This amount was the difference between petitioner's capital contribution of $500 and the aforesaid balance of the account. Respondent disallowed the deduction. Harris Wrecking Company made a similar charge-off of the balance of Federal's account with it at the end of 1942, and took a bad debt deduction in its return. No note or other evidence of indebtedness was given by Federal to petitioner or Harris Wrecking Company for funds advanced, nor was interest charged or paid therefor. Federal was not indebted to petitioner at the end of 1942 for $6,864.45. Petitioner contributed that amount, at least, to the capital of Federal in addition to the $500 he paid for stock of Federal. The books of Federal showed, as of the end of 1942, assets of $12,265.06. The liabilities were loans payable to petitioner and Harris Wrecking Company of $25,437.16 each, loans payable to92 others amounting to $4,976.41, common stock, $1,000, and accrued interest and taxes, $143.21. In his income tax return for 1941, the petitioner reported income as follows: Salary from Cuyahoga Material Corporation, $3,000; and profits from the partnership doing business as Cuyahoga Wrecking Company, in the amount of $10,728.81, total $13,728.81. No other income for 1941 was reported. No income from Federal Wrecking Company was reported. In his return for 1941, exclusive of the bad debt deduction of $18,072.71 deducted as the partially worthless debt of Federal, petitioner deducted $245 for other bad debts, and $26 for contributions, or a total of $271. Including the bad debt of $18,072.71, petitioner's total deductions for 1941 were $18,343.71. A loss of $4,614.90 was reported in the 1941 return. In his return for 1942, the petitioner deducted $4,614.90 as a net operating loss carry-over from 1941. The respondent disallowed the deduction. On his income tax return for 1943 petitioner reported as other income bad debt recoveries, $2,417.16 received on account of Federal as a result of a refund from the Massachusetts Employment Commission. The respondent eliminated $2,417.16 from93 income for 1943. He determined that petitioner's capital contributed to Federal was $6,864.45, from which he subtracted $2,417.16 as a capital recovery, which left a net balance of $4,447.29 as a contribution to Federal's capital. The respondent allowed petitioner a capital loss deduction of one-half of the above (50 per cent) in 1943, or $2,223.64. Federal was dissolved in 1943. During 1941 a business which was regularly carried on by petitioner was the partnership doing business under the name of Cuyahoga Wrecking Company of Cleveland. During 1941 the petitioner was an officer-employee of the corporation, Cuyahoga Material Corporation of Cleveland, and for his services to this corporation he received a salary of $3,000 for the year. The petitioner's employment in this corporation constituted a trade regularly carried on by the petitioner during 1941. The petitioner received no other income in 1941 than his share of the profits of the partnership and his salary from the corporation. The Federal Wrecking Company of Boston was a separate entity, having its own business. It was not the alter ego of the petitioner and the business of Federal did not constitute a business regularly94 carried on by petitioner. The petitioner was not engaged in the business of loaning money. The loss which the petitioner sustained in 1941 in the amount of $18,072.71 upon charging off a worthless indebtedness of Federal Wrecking Company in 1941 was not a loss sustained in the operation of the business regularly carried on by the petitioner, and it was not attributable to the operation of the business regularly carried on by him. Opinion Issue 1. The alleged bad debt loss of $6,864.45. The question is whether Federal owed petitioner $6,864.45 at the end of 1942. The respondent has determined that there was no indebtedness of that amount, and that amounts aggregating that sum constituted contributions of capital to Federal by petitioner. The evidence shows that the petitioner advanced to Federal much more than $6,864.45 between 1939 and 1942, in excess of $25,000. The petitioner has received a deduction of $18,072.71 as a worthless debt of Federal. That deduction was allowed in 1941. A stockholder can make loans to a corporation in which he owns stock, albeit there must be evidence that there were loans. The effect of the respondent's determinations with respect to petitioner's95 advances to Federal is that the respondent has recognized part of the advances as loans and part as capital contribution. At least, since 1941 is a closed year, that is the practical result of all of the determinations. The question involves, therefore, consideration of whether, in the light of the above, the respondent's determination in 1942, holding that $6,864.45 of the advances did not constitute a loan to Federal is correct. Upon consideration of all of the evidence, it is concluded that the determination is proper, and it has been found as a fact that Federal was not indebted, at the end of 1942, to petitioner for $6,864.45. Federal was organized with a small amount of capital - $1,000 - of which petitioner contributed $500. That amount of capital was inadequate for Federal's operations. Both stockholders made equal amounts of advances to Federal, and therefore, their advances were in proportion to their original capital contributions. That circumstance invites scrutiny of the true nature of the advances by stockholders to a corporation. . Also, there was no evidence of a loan, such as a note. ;96 ; and , affirming . We have recently considered the same question as is presented here in , (promulgated July 27, 1950), in which we have discussed the leading authorities which control the question. The question presented comes squarely under the holding of the Dobkin case, and , aff'd, ; . Federal was inadequately capitalized. The ratio of its paid-in capital of $1,000 to its debt to Manufacturers Trading Corporation was about 50 to 1. In , aff'd, , we held that debenture preferred stock represented a capital investment where the ratio of debt to capital would be 29 to 1 if the debenture stock were treated as a debt. See, also, . The respondent's determination is in accord with an abundance of authority. We sustain his determination. The petitioner relies upon ,97 but that case is clearly not in point. In it, the parties were agreed that a debt was owing to the petitioner. That is not conceded here. The question was whether the debt was a business or a non-business debt under section 23 (k) (4). Our conclusion in the Campbell case is not in conflict with the holdings or the reasoning in the Dobkin and Janeway and similar cases. Furthermore, the question here arises under section 23 (k) (1). Issue 2. The carry-over of loss from 1941 to 1942. The petitioner reported a loss of $4,614.90 in his return for 1941. He contends that this loss was a "net operating loss" within the definition of net operating loss set forth in section 122 of the Code, and that, therefore, he is entitled to carry over to 1942 and deduct from his 1942 income the amount of $4,614.90 under section 23 (s). Section 23 (s) allows deduction of a "net operating loss" computed under section 122, and that computation is made by finding the amount of the excess of deductions over gross income "with the exceptions, additions and limitations provided in subsection (d)." The respondent contends that the exceptions and limitations imposed by subsection (d) (5) of section 12298 leave the petitioner without any "net operating loss" for 1941 to carry over to 1942. He asserts that this results from the fact that the deduction allowed in 1941 for a bad debt loss in the amount of $18,072.71, being the debt of Federal Wrecking Company, was not attributable to the operation of a business regularly carried on by the petitioner, and from the fact that the petitioner did not have gross income from sources outside of the business which he regularly carried on to offset against either $18,072.71, or the total of all of the deductions allowed in 1941 totalling $18,343.71. The provisions of subsection (d) (5) of section 122 are set forth in the margin. 1The respondent has set forth the controlling decisions on the questions of law under this issue on brief. 99 He relies upon the following: , pet. for review dismissed, ; ; , aff'd, ; , and the leading cases; ; and . The petitioner cites no authority which would support a holding by this Court that this issue in this proceeding falls outside of the rationale and holdings of the authorities upon which the respondent relies. The petitioner relies upon In that proceeding there was no issue involving a claim for a net operating loss deduction. It is not in point. The petitioner relies, also, upon , which has been considered but which is distinguishable on the facts from this proceeding. Upon consideration of all of the evidence it has been found as a fact that the petitioner was not engaged in the business of loaning money. A loss from a worthless debt was not therefore a100 loss which was attributable to the business which the petitioner regularly carried on. It has been found as a fact that the business regularly carried on by petitioner in 1941 was his partnership business, Cuyahoga Wrecking Company in Cleveland, and that he regularly carried on a trade as an employee of Cuyahoga Material Corporation. These findings of fact which have been made from all of the evidence are in accord with the standard which is set forth in , and , which has been applied frequently and, in particular, in the cases upon which the respondent relies, which are set forth above. The petitioner elected to create a corporation in 1939 to do the work under the Boston Housing Authority contract - Federal Wrecking Company of Boston. He assigned the contract to Federal. Federal was a separate entity. It was neither wholly owned by petitioner nor was it his alter ego. It is not sufficient that the business of Federal was similar to the business of Cuyahoga Wrecking Company. See ; and The corporation took over business which petitioner101 might have done himself, but that having been done, the Boston business was that of Federal, and petitioner's relation to Federal was that of a stockholder and officer. His loans to Federal were an incident of his relation to Federal as a stockholder and part owner. But since petitioner's regular business was not that of loaning money, loss from loans to Federal cannot be held to constitute loss attributable to the regular trade or business of petitioner. There remains the question whether the limitations provisions of subsection (d) (5) of section 122 leave some part of the excess of petitioner's 1941 deductions over gross income within the definition of "net operating loss." Respondent contends that the petitioner had no "net operating loss" in 1941. He bases this contention upon the assertion that the petitioner "did not have other income in 1941," i.e., "non-business income not derived from such trade or business [regularly carried on business]" within subsection (d) (5). Respondent's contention is correct. Petitioner had no other income in 1941, i.e., "non-business income" outside of what he received from the trade and business regularly conducted by him. Therefore (d) of102 subsection (5) cannot be applied here so as to allow petitioner any amount as a net operating loss deduction. The petitioner's claims under this issue must be denied. Consideration has been given to some evidence relating to petitioner's association with about twelve corporations. The evidence indicates that the association existed before 1941. Also, this evidence is extremely limited. It appears that the petitioner and his family owned stock in all of these corporations. From the limited evidence on this point we have been unable to find that the petitioner was regularly engaged in the business of loaning money. Decision will be entered for the respondent. Footnotes1. SEC. 122. NET OPERATING LOSS DEDUCTION. * * (d) EXCEPTIONS, ADDITIONS, AND LIMITATIONS. * * (5) Deductions otherwise allowed by law not attributable to the operation of a trade or business regularly carried on by the taxpayer shall (in the case of a taxpayer other than a corporation) be allowed only to the extent of the amount of the gross income not derived from such trade or business. * * *↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624062/	Alan Thomas James and Donna James v. Commissioner. Joseph Hrecz v. Commissioner.James v. CommissionerDocket Nos. 93691, 93715.United States Tax CourtT.C. Memo 1964-49; 1964 Tax Ct. Memo LEXIS 288; 23 T.C.M. (CCH) 385; T.C.M. (RIA) 64049; February 28, 1964288 Held, that a portion of amounts expended by two elementary and high school music and band instructors on an organized music and cultural tour in Europe are deductible under section 162(a) of the 1954 Code as ordinary and necessary expenses incurred in maintaining and improving their skills in their respective employments. Marvin R. Adams, and Peter W. Janss, 212 Equitable Bldg., Des Moines, Iowa, for the petitioners. James T. Finlen, Jr., for the respondent. PIERCE Memorandum Findings of Fact and Opinion PIERCE, Judge: Respondent determined deficiencies in income taxes for the year 1959, in the amounts of $226.08 against petitioners Alan Thomas and Donna James, and of $191.06 against petitioner Joseph Hrecz. The cases were consolidated289 for trial. The sole issue for decision is whether a portion of the amounts expended by two elementary and high school music and band instructors on an organized music and cultural tour in Europe are deductible under section 162(a) of the 1954 Code, as ordinary and necessary expenses of maintaining and improving their skills used in their respective employments. Findings of Fact Some of the facts have been stipulated. The stipulation of facts and all exhibits identified therein are incorporated herein by reference. Petitioners Alan Thomas James and Donna James are husband and wife who resided in Monona, Iowa. They filed a joint income tax return for the taxable year involved with the district director of internal revenue for the district of Iowa. The wife Donna is involved herein only because of the filing of the joint return. Petitioner Joseph Hrecz was, during the year involved, an unmarried person who resided in Garnavillo, Iowa. He filed an individual income tax return for said year with the district director of internal revenue for the district of Iowa. Petitioner Alan Thomas James (herein called "James") was graduated from the University of Dubuque in 1952, receiving290 a Bachelor's Degree in Music Education. Also prior to June 1959, he had completed 8 hours of graduate study toward a Master of Arts Degree. He held a teacher's life certificate issued by the State of Iowa, which entitled him to teach music and English in the schools of that state. Since July 1955, he has been employed as a teacher in the Community School located in Monona, Iowa; and during the period here involved, he was employed on a 12-month basis by said school under a contract to act as head of the music department and director of the school bands. As part of said work, he directed a senior band composed of about 175 high school students, directed a junior band composed of about 50 students in the lower grades; gave private music and band lessons to a substantial number of students during school hours; and also conducted band concerts in the city - all as an employee of the school. Petitioner Joseph Hercz graduated from Youngstown University in 1953 and received a Bachelor's Degree in Music with a major in music education. He held a professional teaching certificate from the State of Iowa, which entitled him to teach among other subjects, band and instrumental music. Since about291 1954 he had been employed by the Community School located in Garnavillo, Iowa, as an instructor of band and instrumental music; and during the taxable year involved, he was under a contract with said school which covered the school years 1958-1959 and 1959-1960. During the spring of the taxable year 1959, James was invited by a telegram from Erling Hanson, the band director of the high school in Manchester, Iowa, to participate as a member of a special delegation of band directors and music instructors on a 22-day tour in Europe and the Soviet Union. The telegram stated that the tour was being arranged in conjunction with the United States State Department Cultural Visitation Exchange Program. Hanson was to be the leader of the tour which was to be operated by Maupintour Associates of Lawrence, Kansas; and the members of the tour were to be principally music and band instructors from schools in Iowa and Illinois. The tour program provided for interviews with persons engaged in music education in various European countries, visits to colleges and schools in which music was taught, and opportunities to attend operas and listen to orchestras in the various countries to be visited. The292 telegram also suggested that James bring the invitation to the attention of the school board of the district in which he was employed, for its consideration as to whether it might send him as a delegate from that district. James, after receiving said invitation, discussed the same with the superintendent of the Monona Community School District. The latter regarded the project to be meritorious and "something which too few teachers do." Thereafter the school board granted James leave of absence on full pay for the period that he would be absent on the tour; and also it employed a substitute instructor for that period, at its own expense. Thereupon, James made arrangements to join the tour; and petitioner Hrecz, who as before stated was the instructor of band and instrumental music at the Garnavillo Community Schools, also made arrangements to participate in the tour. The tour group assembled in New York City on June 5, 1959. There were 13 participants, all but one of whom were school band or music instructors, and the other one was employed in the musical field. No wife of any participant accompanied him. The group first met with the United States Government Affairs Commission293 at its office near the United Nations headquarters, where the group received instructions regarding their traveling, particularly in the Soviet Union. The group then left by airplane for England. From there they continued to Stockholm, Sweden; to Helsinki, Finland; to Leningrad and Moscow in the U.S.S.R.; to Prague, Czechoslovakia; and then to Paris, France, before returning to the United States. Among the places they visited on the trip were the following: In England, they visited Stratford-on-Avon and other historical or public places; the Guildhall School of Music and Drama, where they interviewed the principal of the school; and the Neller Hall of Music where army bandsmen are trained, and where they interviewed the Commandant of the school and were permitted to observe the band members individually during a rehearsal. In Sweden, they attended an opera; visited a Swedish high school; visited the United States Embassy, where they met with the press, the Cultural attache, and the Cultural Affairs officer; and they also visited the Royal Academy Conservatory, and Drottingholm Palace. In Helsinki, they visited the Sibelius Conservatory where they heard a concert and interviewed294 the director of the Conservatory. And during one evening, James and Hrecz also attended a concert by an outstanding Russian violinist. In Leningrad, they visited several palaces, cathedrals, and other public buildings; visited the graves of renowned Russian composers; attended an opera; and also visited the House of Composers, where they were given copies of children's folk music and were permitted to talk with some of the composers. In Moscow, they attended several operas; visited the University of Moscow and other public buildings; met the Cultural attache and the Cultural counselor at the United States Embassy; visited the Tchaikovsky Conservatory, where they interviewed the Dean regarding the Russian system of music education, and heard a rehearsal of the Soviet State Orchestra; and visited Tchaikovsky's former home, where they saw the original manuscript of one of his symphonies and the piano which he had used. In Prague, they visited among other things, the National Museum of Musical Instruments; the former homes of Mozart and Beethoven; and the Smetena Museum dedicated to music and items of music. In Paris, they visited various public and historical buildings; the Music295 Conservatory, where they heard young pianists perform; and also visited a large band instrument factory. During spare times, the members of the group did sight-seeing; and James and Hrecz, before returning to the United States, took a 6-day trip into Germany at their own expense. After returning to their respective employments, James and Hrecz had occasion to describe what they had observed on the tour, and to employ in their classes many of the musical techniques they had learned. James and Hrecz each paid $1,413 to Maupintour Associates as the basic cost of the tour - which amount was exclusive of their expenses on the 6-day trip into Germany. Each of them claimed as a deduction on his income tax return for the taxable year involved, 80 percent of said basic charge for the tour (being $1,130) as an expense for maintaining and improving his skills in his employment as a band and music instructor. The Commissioner, in his notices of deficiency herein, disallowed such claimed deduction to each petitioner. Opinion Section 162(a) of the 1954 Code provides, so far as here material, that There shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred296 during the taxable year in carrying on any trade or business, * * And section 1.162-5 of the Income Tax Regulations, which deals particularly with expenses for education, provides in material part: (a) Expenditures made by a taxpayer for his education are deductible if they are for education (including research activities) undertaken primarily for the purpose of: (1) Maintaining or improving skills required by the taxpayer in his employment or other trade or business, * * * The question here presented for decision is, whether the musical and cultural tour in Europe in which the petitioners James and Hrecz were participants, was (in the words of the above Income Tax Regulations) "undertaken primarily for the purpose of * * * maintaining or improving skills" required by them in their respective employments as music and band instructors - so as to entitle each of them to a deduction in an amount equal to 80 percent of the basic charge which he paid for the tour. Questions of this character must be decided on the basis of each particular case; and in our opinion, the question in the instant cases should be answered in the affirmative. In our foregoing297 Findings of Fact, we have reviewed in considerable detail much of the itinerary for the tour; and although we have not attempted to set forth all the places that were visited, we deem it sufficient to state that, after considering and weighing all the evidence (including all testimony and all exhibits of record) we are convinced that the tour was participated in by James and Hrecz, and the expenditures of the tour were incurred by them "primarily for the purpose of * * maintaining or improving skills" required by them in their respective employments. As we have heretofore found as facts, the group tour was arranged in conjunction with the United States State Department Cultural Visitation Exchange Program; at least in the case of James, the school by which he was employed made official and advantageous arrangements for a leave of absence with pay, so that he might participate; all members of the tour group were persons engaged in musical endeavor; the tour was both designed and conducted in such manner as to give emphasis to music and to the historic background for music; and James and Hrecz, upon returning to their employments, found that their observations and the techniques which*298 they had obtained on the trip were beneficial and useful to them in their music and band work. James and Hrecz have frankly conceded that during the trip, they did do some sight-seeing - which might reasonably be expected in the circumstances; and, recognizing that this was personal in character, they made claim on their respective income tax returns to a deduction for only 80 percent of the basic tour charge, and made no claim to any deduction for the expenses which they incurred during their 6-day personal trip into Germany after the group itinerary had been completed. We regard this allocation of expenses to be reasonable and fair; and accordingly we approve the same. Based on all the foregoing, we decide the issue in each case in favor of the petitioner. Decisions will be entered for the petitioners.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624063/	Amory S. Carhart v. Commissioner.Amory v. CommissionerDocket No. 6643.United States Tax Court1946 Tax Ct. Memo LEXIS 159; 5 T.C.M. (CCH) 579; T.C.M. (RIA) 46141; June 20, 1946Frank J. Wideman, Esq., 822 Connecticut Ave., N.W., Washington, D.C., for the petitioner. Walt Mandry, Esq., for the respondent. OPPERMemorandum Opinion OPPER, Judge: By this proceeding petitioner seeks a redetermination of deficiencies in income tax for the years 1940 and 1941 in the amounts of $4,888.07 and $5,874.89, respectively. The sole issue is whether the unexpended, accumulated income of two trusts for the benefit of petitioner's minor children is taxable to petitioner, grantor and co-trustee160 of the trusts, under section 22 (a) of the Internal Revenue Code. All of the facts have been stipulated. They are hereby found accordingly and can be summarized as follows: Petitioner is a resident of Virginia, with an office in New York, New York. His income tax returns for the years involved were filed with the collector of internal revenue for the second district of New York. By trust instrument, dated April 22, 1932, petitioner created two trusts, one for each of his two minor children - Amory Sibley Carhart, Jr., born on December 25, 1919, and Marion Carhart, born on January 24, 1925. Petitioner and his wife Isadora Bliss Carhart, were the trustees. The trustees were to divide the corpus, designated in the instrument as the "Trust Estate," which consisted of stocks and bonds of various utilities, railroads, and industries, into two equal shares, one for the benefit of each child; to collect the income and apply so much of it during the lifetime of petitioner's wife, or until earlier termination of the trusts, to the maintenance, support, and education of each child as the trustees in their discretion deemed necessary and proper until such child should161 attain the age of 21 years. The balance of the income, if any, was to be accumulated and was to be paid over to such child upon the attainment of 21 years of age. Each of the trusts was to terminate upon any of the following contingencies: Petitioner's death, his wife's death, the death of the child before reaching 21 years of age, the child's attainment of 21 years of age. Upon termination, the trustees were directed to pay over to petitioner the corpus of the particular trust. If, however, termination were due to petitioner's death, payment was to be made to the appointees under his will, in default of which to his surviving children in equal shares. The following powers were granted the trustees: 1. To sell at public or private sale, to exchange or otherwise to dispose of all or part of the corpus, upon such terms and conditions as seemed proper to them; 2. To borrow money for certain enumerated purposes and "for any other purpose whatsoever which they in the exercise of their uncontrolled discretion shall deem necessary or desirable * * * it being the Grantor's intention to give the Trustees a general power to borrow money for any purpose whenever they shall deem it advisable162 for the best interests of the Trust Estate so to do"; and in order to secure payment to pledge or mortgage any property of the trust estate. 3. To distribute and divide the trust estate in cash or in kind, to execute proper instruments and to take other necessary steps to accomplish this purpose. 4. To improve, alter or rebuilt any building or erect new buildings on the trust real estate, to join with others in doing so, and to employ competent persons to manage the real estate; 5. To lease any real property in the trust estate and to assign such leases. 6. To retain temporarily or permanently any real estate belonging to the trust estate without being under any obligation to dispose of it, to invest or reinvest in securities of any kind without restriction, saving to the trustees "all the power * * which the Grantor now has with respect thereto" to convert personalty into realty and vice versa. 7. To exercise in person or by proxy all voting privileges upon stocks held by them, to unite with other owners in any plan of renegotiation, merger or consolidation "and generally to exercise with respect to such securities all the rights, powers and privileges which they might163 exercise if they were possessed of such securities in their own right." 8. To invest in bonds at a premium without providing a sinking fund out of income to absorb such premium for the benefit of the remaindermen; to treat cash dividends as income, to divide between life tenants and remaindermen any stock dividends, to hold any securities in the names of nominees. 9. To settle claims of the trust estates without liability for any loss to the trust estate unless occasioned through their gross negligence or wilful malfeasance, and not to be liable for any act done in good faith. The income of each of the trusts consisted of dividends and interest from the securities constituting the original corpus of the trusts and from securities purchased and received by the trustees. The net taxable income from each of the trusts for the years involved is as follows: Amory S. Carhart, Jr., Trust1940Ordinary income$9,406.19Capital gain188.72Total income$9,594.91Marion Carhart Trust19401941Ordinary income$9,021.62$11,884.59Capital gain164.79Total income$9,186.41$11,884.59For the year 1940 the trustees applied from income for164 the maintenance, support, and education of Amory Carhart, Jr., and Marion Carhart, the sums of $4,345.61 and $6,965.17, respectively; for the year 1941, the sum of $3,637.96 was so applied for Marion Carhart. The total sums so applied for the year 1940 were reported as income of petitioner for that year and income tax was paid accordingly. Of the sum of $3,637.96 applied for the year 1941, petitioner reported as income for that year the sum of $3,022.65, and income tax was paid accordingly, but petitioner did not report as income the balance thereof - $615.31. The remaining portions of the respective incomes for 1940 were reported and taxes paid by the trustees as income of the respective trusts for that year. The trustees reported as income of the trusts for 1941 the sum of $8,427.88. No part of the income of the trusts for the years 1940 and 1941, except capital gains and the amounts applied for the maintenance, education, and support of the minor children as hereinabove set forth, was distributed, held, or accumulated for future distribution to petitioner or applied to the payment of premiums upon insurance policies on his life. Upon his attainment of the age of 21 years165 on December 25, 1940, there was distributed to Amory Carhart, Jr., pursuant to the terms of the trust instrument, the accumulated income upon the termination of this trust; the corpus of such trust was delivered to petitioner. Written consents and agreements in duplicate were duly filed in due form by petitioner with respondent, electing to have section 167 (c) of the Internal Revenue Code applied retroactively to the years in question. With respect to the income of these trusts, respondent included in petitioner's income for the year 1940 ordinary income and capital gains aggregating $7,470.54, and for the year 1941 ordinary income of $8,861.94, less a capital loss of $7,776.63. Except that these trusts were originally created for terms which might extend for something less than nine and fourteen years, respectively, this petitioner had every element of a grantor's retained interest which was present in Helvering v. Clifford, 309 U.S. 331">309 U.S. 331. During the years involved, the longer trust had but five or six years left to run. When a grantor has retained the reversion, as he did here, but the term of the trust is comparatively short, the retention166 of administrative control by the grantor is not a requisite of its taxability. In O. G. Richter, 46 B.T.A. 724">46 B.T.A. 724, 726, the trust differed from that in the Clifford case "in that petitioner retained and exercised no control over the trust during its existence. We believe, however, that the short term of the trust (approximately five and one-half years) and the close family relationship of petitioner and the beneficiary are sufficient to cause the trust income to be taxed to petitioner under section 22 (a)." If the trust is substantially longer than the five-year term involved in the Clifford case, the doctrine of that case does not automatically eliminate itself, but instead, elements of control become important. "* * * it appears to us that it is only when the term is longer than six or seven years (as for example ten years, Commissioner v. Jonas, 2 Cir., 122 F.2d 169">122 F.2d 169) that the settlor's legal reservation of control becomes vital, certainly if the settlor and the trustees are not strangers." Helvering v. Elias (C.C.A., 2nd Cir.), 122 Fed. (2d) 171, 173. In the present case petitioner and his wife were the trustees. Control and management were167 complete. They furnish the additional element necessary in dealing with trusts of substantially longer duration, whether we regard the term as for the wife's lifetime, Morton Stein, 41 B.T.A. 994">41 B.T.A. 994, Verne Marshall, 1 T.C. 442">1 T.C. 442, or a fixed period. Sterling Morton, 45 B.T.A. 771">45 B.T.A. 771. See also Joel E. Hall, 4 T.C. 506">4 T.C. 506, reversed (C.C.A., 10th Cir.), 150 Fed. (2d) 304; Commissioner v. O'Keeffe (C.C.A., 1st Cir.), 118 Fed. (2d) 639, reversing Board of Tax Appeals memorandum. For example, the expressly designated powers of the trustees included authority to shift investments. A more pressing concern for safety or increase of principal than for regularity and amount of current yield could well constitute an instance where exercise of that power would affect the respective financial interests of those concerned, including the petitioner himself. If more were needed, the possibility of discretionary use of the income for the discharge of petitioner's legal obligations is a factor which may also be taken into account, notwithstanding the provisions of section 167 (c). Estate of O. M. Banfield, 4 T.C. 29">4 T.C. 29. 168 None of the cases cited by petitioner bears upon the present problem. They deal for the most part with the quantum of control required in non-reversionary cases. E.g., Joel E. Hall, supra; David Small, 3 T.C. 1142">3 T.C. 1142; Frederick Ayer, 45 B.T.A. 146">45 B.T.A. 146; Estate of Benjamin Lowenstein, 3 T.C. 1133">3 T.C. 1133. The extent of the present petitioner's retained interest, in view of all the circumstances including the ultimate return to him of the corpus, the intermediate term of the trusts, the relationship to him of the beneficiaries, and his continued possession of all phases of management and control, bring the present trusts within the primary and original phase of the strict Clifford doctrine. The deficiencies seem to us to have been correctly determined. Decision will be entered for the respondent.	01-04-2023	11-21-2020

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